Siemens 2012 Annual Report Download - page 243

135 D. Consolidated Financial Statements 239 E. Additional Information
140 D. Consolidated Statements of Changes in Equity
142 D. Notes to Consolidated Financial Statements
232 D. Supervisory Board and Managing Board
136 D. Consolidated Statements of Income
137 D. Consolidated Statements of Comprehensive Income
138 D. Consolidated Statements of Financial Position
139 D. Consolidated Statements of Cash Flow
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  Critical accounting estimates
Siemens’ Consolidated Financial Statements are prepared in ac-
cordance with IFRS as issued by the IASB and as adopted by the
EU. Siemens’ significant accounting policies, as described in
       are es-
sential to understanding the Company ’s results of operations,
financial positions and cash flows. Certain of these accounting
policies require critical accounting estimates that involve com-
plex and subjective judgments and the use of assumptions,
some of which may be for matters that are inherently uncertain
and susceptible to change. Such critical accounting estimates
could change from period to period and have a material impact
on the Company ’s results of operations, financial positions and
cash flows. Critical accounting estimates could also involve es-
timates where management reasonably could have used a dif-
ferent estimate in the current accounting period. Management
cautions that future events often vary from forecasts and that
estimates routinely require adjustment.
Revenue recognition on construction contracts – The
Company ’s Sectors, particularly Energy, Industry and Infra-
structure & Cities, conduct a significant portion of their busi-
ness under construction contracts with customers. The
Company generally accounts for construction projects using
the percentage-of-completion method, recognizing revenue as
performance on contract progresses. Certain long-term service
contracts are accounted for under the percentage-of-comple-
tion method as well. This method places considerable impor-
tance on accurate estimates of the extent of progress towards
completion and may involve estimates on the scope of deliver-
ies and services required for fulfilling the contractually defined
obligations. Depending on the methodology to determine con-
tract progress, the significant estimates include total contract
costs, remaining costs to completion, total contract revenues,
contract risks, including technical, political and regulatory
risks, and other judgments. Management of the operating
Divisions continually reviews all estimates involved in such
construction contracts, including commercial feasibility, and
adjusts them as necessary. Under the percentage-of-comple-
tion method, such changes in estimates may lead to an in-
crease or decrease of revenues in the respective reporting pe-
riod. The Company also uses the percentage-of-completion
method for projects financed directly or indirectly by Siemens.
In order to qualify for such accounting, the credit quality of the
customer must meet certain minimum parameters as evi-
denced by the customer’s credit rating or by a credit analysis
performed by Financial Services (SFS). At a minimum, a cus-
tomer’s credit rating must be single B or B respectively from
external rating agencies or an equivalent SFS-determined rat-
ing. In cases the inflow of economic benefits is not probable
due to customer related credit risks the revenue is restricted to
the amount of payments irrevocably received. The Company
believes the credit factors used provide a reasonable basis for
assessing credit quality.
Trade and other receivables – The allowance for doubtful
accounts involves significant management judgment and re-
view of individual receivables based on individual customer
creditworthiness, current economic trends including the de-
velopments of the European sovereign debt crisis and analysis
of historical bad debts on a portfolio basis. For the determina-
tion of the country-specific component of the individual allow-
ance, we also consider country credit ratings, which are cen-
trally determined based on information from external rating
agencies. Regarding the determination of the valuation allow-
ance derived from a portfolio-based analysis of historical bad
debts, a decline of receivables in volume results in a corre-
sponding reduction of such provisions and vice versa. As of
September ,  and , Siemens recorded a total valua-
tion allowance for trade and other receivables of €, million
and €, million, respectively.
Impairment – Siemens tests at least annually whether good-
will has incurred any impairment, in accordance with its ac-
counting policy. The determination of the recoverable amount
of a cash-generating unit or a group of cash-generating units
to which goodwill is allocated involves the use of estimates by
management. The outcome predicted by these estimates is in-
fluenced e.g. by the successful integration of acquired enti-
ties, volatility of capital markets, interest rate developments,
foreign exchange rate fluctuations and the outlook on eco-
nomic trends. The recoverable amount is the higher of the
cash-generating unit’s or the group of cash-generating units’
fair value less costs to sell and its value in use. The Company
generally uses discounted cash flow based methods to deter-
mine these values. These discounted cash flow calculations
use five-year projections that are based on financial plannings.
Cash flow projections take into account past experience and
represent management’s best estimate about future develop-
ments. Cash flows after the planning period are extrapolated
using individual growth rates. Key assumptions on which
management has based its determination of fair value less
costs to sell and value in use include estimated growth rates,
weighted average cost of capital and tax rates. These esti-
mates, including the methodology used, can have a material
impact on the respective values and ultimately the amount of
any goodwill impairment. In fiscal , the Company assessed
the current commercial feasibility of its solar and hydro busi-
ness, the level at which goodwill is monitored from the group
perspective, as part of the Renewable Energy Division of the
Energy Sector and recorded a goodwill impairment loss. Fur-
ther impairments were recorded in fiscal . These impair-
ments are presented in discontinued operations.