Siemens 2012 Annual Report Download - page 291

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

for hedge accounting treatment. Accordingly, all such deriva-
tive financial instruments are recorded at fair value on the
Consolidated Statements of Financial Position, either in line
items Other current financial assets (liabilities) or line items
Other financial assets (liabilities); changes in fair values are
charged to net income (loss).
The Company also has foreign currency derivatives, which are
embedded in certain sale and purchase contracts denominated
in a currency that is neither the functional currency of the sub-
stantial parties to the contract nor a currency which is com-
monly used in the economic environment in which the con-
tract takes place. Gains (losses) relating to such embedded
foreign currency derivatives are reported in line item Cost of
goods sold and services rendered in the Consolidated State-
ments of Income.
Hedging activities
The Company ’s operating units apply hedge accounting for
certain significant forecast transactions and firm commit-
ments denominated in foreign currencies. Particularly, the
Company has entered into foreign currency exchange con-
tracts to reduce the risk of variability of future cash flows re-
sulting from forecast sales and purchases as well as firm com-
mitments. This risk results mainly from contracts denominat-
ed in US$ both from Siemens’ business units entering into
long-term contracts, e.g. project business, and from the stan-
dard product business.
Cash flow hedges – As of September ,  and , the
ineffective portion of cash flow hedges is not significant indi-
vidually or in aggregate.
Periods in which the hedged forecast transactions or the firm
commitments denominated in foreign currency are expected
to impact profit or loss:
Year ended September ,
 
 to

 and
thereafter
(in millions of €)
Expected gain (loss) to
be reclassified from line
item Other comprehensive
income, net of tax into
revenue or cost of goods
sold and services rendered (14) (21) (35) (6)
Fair value hedges – As of September ,  and , the
Company hedged firm commitments using foreign currency
exchange contracts that were designated as hedging instru-
ments in foreign currency fair value hedges of future sales re-
lated primarily to the Company ’s project business and, to a
lesser extent, future purchases. Financial assets (liabilities) re-
sulting from those hedging transactions as well as resulting
gains and (losses) from changes in fair values of foreign cur-
rency exchange contracts were not significant individually or
in aggregate.
   
Interest rate risk arises from the sensitivity of financial assets
and liabilities to changes in market interest rates. The Compa-
ny seeks to mitigate that risk by entering into interest rate de-
rivatives such as interest rate swaps, options, interest rate fu-
tures and forward rate agreements.
Derivative financial instruments not designated
in a hedging relationship
For the interest rate risk management relating to the Group ex-
cluding SFS business, derivative financial instruments are
used under a portfolio-based approach to manage interest risk
actively relative to a benchmark. The interest rate manage-
ment relating to the SFS business remains to be managed sep-
arately, considering the term structure of SFS’ financial assets
and liabilities on a portfolio basis. Both approaches do not
qualify for hedge accounting treatment. Accordingly, all inter-
est rate derivatives held in this relation are recorded at fair val-
ue, either in line items Other current financial assets (liabili-
ties) or in line items Other financial assets (liabilities), and
changes in the fair values are charged to line item Other finan-
cial income (expense), net. Net cash receipts and payments re-
lating to interest rate swaps used in offsetting relationships
are also recorded in line item Other financial income (ex-
pense), net.
Fair value hedges of fixed-rate debt obligations
Under the interest rate swap agreements outstanding during
the years ended September ,  and , the Company
has agreed to pay a variable rate of interest multiplied by a no-
tional principle amount, and receives in return an amount
equal to a specified fixed rate of interest multiplied by the
same notional principal amount. These interest rate swap
agreements offset an impact of future changes in interest rates
on the fair value of the underlying fixed-rate debt obligations.
The interest rate swap contracts are recorded at fair value in
the Company ’s Consolidated Statements of Financial Position
and the related portion of fixed-rate debt being hedged is re-
corded at an amount equal to the sum of its carrying amount
plus an adjustment representing the change in fair value of
the debt obligations attributable to the interest rate risk being