Siemens 2012 Annual Report Download - page 236

1 A. To our Shareholders 49 C. Combined Management Report 21 B. Corporate Governance
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Sales from construction contracts: A construction contract is
a contract specifically negotiated for the construction of an as-
set or a combination of assets that are closely interrelated or
interdependent in terms of their design, technology and func-
tion or their ultimate purpose or use. When the outcome of a
construction contract can be estimated reliably, revenues from
construction-type projects are generally recognized under the
percentage-of-completion method, based on the percentage of
costs to date compared to the total estimated contract costs,
contractual milestones or performance. An expected loss on
the construction contract is recognized as an expense immedi-
ately. When the outcome of a construction contract cannot be
estimated reliably () revenue is recognized only to the extent
contract costs incurred are probable of being recoverable, and
() contract costs are recognized as an expense in the period in
which they are incurred.
When a contract covers a number of assets, the construction
of each asset is treated as a separate construction contract
when () separate proposals have been submitted for each as-
set, () each asset has been subject to separate negotiation
and the contractor and the customer have been able to accept
or reject that part of the contract relating to each asset, and ()
the costs and revenues of each asset can be identified. A group
of contracts, whether with a single customer or with several
customers, are treated as a single construction contract when
() the group of contracts is negotiated as a single package, ()
the contracts are so closely interrelated that they are, in effect,
part of a single project with an overall profit margin, and ()
the contracts are performed concurrently or in a continuous
sequence.
During project execution variation orders by the customer for a
change in the scope of the work to be performed under the
contract may be received leading to an increase or a decrease
in contract revenue. Examples of such variations are changes
in the specifications or design of the asset and changes in the
duration of the contract.
Rendering of services: Revenues from service transactions are
recognized as services are performed. For long-term service
contracts, revenues are recognized on a straight-line basis
over the term of the contract or, if the performance pattern is
other than straight-line, as the services are provided, i.e. gen-
erally under the percentage-of-completion method.
Sales from multiple element arrangements: Sales of goods
and services as well as software arrangements sometimes in-
volve the provision of multiple elements. In these cases, the
Company determines whether the contract or arrangement
contains more than one unit of accounting. An arrangement is
separated if () the delivered element(s) has (have) value to
the customer on a stand-alone basis, () there is reliable evi-
dence of the fair value of the undelivered element(s) and (), if
the arrangement includes a general right of return relative to
the delivered element(s), delivery or performance of the unde-
livered element(s) is (are) considered probable and substan-
tially in the control of the Company. If all three criteria are ful-
filled, the appropriate revenue recognition convention is then
applied to each separate unit of accounting. Generally, the to-
tal arrangement consideration is allocated to the separate
units of accounting based on their relative fair values. The hi-
erarchy of fair value evidence is as follows: (a) sales prices for
the component when it is regularly sold on a stand-alone ba-
sis, (b) third-party prices for similar components or, under cer-
tain circumstances, (c) cost plus an adequate business-specific
profit margin related to the relevant element. By this means,
reliable fair values are generally available. However, there
might be cases when fair value evidence according to (a) and
(b) is not available and the application of the cost plus-method
(c) does not create reasonable results because the costs in-
curred are not an appropriate base for the determination of the
fair value of an element. In such cases the residual method is
used, if fair value evidence is available for the undelivered but
not for one or more of the delivered elements, i.e. the amount
allocated to the delivered elements equals the total arrange-
ment consideration less the aggregate fair value of the unde-
livered elements. If the three separation criteria () to () are
not met, revenue is deferred until such criteria are met or until
the period in which the last undelivered element is delivered.
The amount allocable to the delivered elements is limited to
the amount that is not contingent upon delivery of additional
elements or meeting other specified performance obligations.
Interest income: Interest is recognized using the effective
interest method.
Royalties: Royalties are recognized on an accrual basis in
accordance with the substance of the relevant agreement.
Income from lease arrangements: Operating lease income for
equipment rentals is recognized on a straight-line basis over
the lease term. An arrangement that is not in the legal form of
a lease is accounted for as a lease if it is dependent on the use
of a specific asset or assets and the arrangement conveys a
right to use the asset. Receivables from finance leases, in
which Siemens as lessor transfers substantially all the risks
and rewards incidental to ownership to the customer are rec-
ognized at an amount equal to the net investment in the lease.
Finance income is subsequently recognized based on a pattern
reflecting a constant periodic rate of return on the net invest-
ment using the effective interest method. A selling profit
component on manufacturing leases is recognized based on
the policies for outright sales. Profit from sale and leaseback