Siemens 2013 Annual Report Download - page 264

92 A. To our Shareholders 117 B. Corporate Governance 155 C. Combined Management Report
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Sales from construction contracts: A construction contract is a
contract specifically negotiated for the construction of an asset
or a combination of assets that are closely interrelated or inter-
dependent in terms of their design, technology and function
or their ultimate purpose or use. When the outcome of a con-
struction contract can be estimated reliably, revenues from
construction-type projects are recognized under the percent-
age-of-completion method, based on the percentage of costs
to date compared to the total estimated contract costs. An ex-
pected loss on the construction contract is recognized as an
expense immediately. 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 ex-
pense in the period in which they are incurred.
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. As the scope of work to be performed
changes also in case of contract terminations, such termina-
tions are considered to be a subset of variations. Therefore the
requirements of IAS  relating to variations are applied to con-
tract terminations, irrespective of whether the contract is ter-
minated by the customer, Siemens or both. In accordance with
the requirements of IAS  relating to changes in estimates,
the estimates of the total contract revenue and the total con-
tract costs are adjusted reflecting the reduced scope of work to
be performed, typically leading to a reversal of revenue recog-
nized. This methodology is also applied to contracts for which
it is management’s best estimate that a termination is the
most likely scenario, but which have not yet been terminated.
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. under
the percentage-of-completion method as described above.
Sales from multiple element arrangements: Sales of goods and
services as well as software arrangements sometimes involve
the provision of multiple elements. In these cases, the Compa-
ny determines whether the contract or arrangement contains
more than one unit of accounting. If certain criteria are met,
foremost if the delivered element(s) has (have) value to the
customer on a stand-alone basis, the arrangement is separated
and the appropriate revenue recognition convention is then
applied to each separate unit of accounting. Generally, the
total arrangement consideration is allocated to the separate
units of accounting based on their relative fair values. How-
ever, if in rare cases fair value evidence is available for the un-
delivered but not for one or more of the delivered elements,
the amount allocated to the delivered element(s) equals the
total arrangement consideration less the aggregate fair value
of the undelivered element(s) (residual method). If the criteria
for the separation of units of accounting are not met, revenue
is deferred until such criteria are met or until the period in
which the last undelivered element is delivered.
Interest income: Interest is recognized using the effective in-
terest method.
Royalties: Royalties are recognized on an accrual basis in ac-
cordance 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 re-
wards incidental to ownership to the customer are recognized
at an amount equal to the net investment in the lease. Finance
income is subsequently recognized based on a pattern reflect-
ing a constant periodic rate of return on the net investment us-
ing 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 transactions is
recognized immediately if significant risks and rewards of own-
ership have passed to the buyer, the leaseback results in an
operating lease and the transaction is established at fair value.
Dividends: Dividends are recognized when the right to receive
payment is established.
Functional costs – In general, operating expenses by types
are assigned to the functions following the functional area
of the corresponding profit and cost centers. Expenses relat-
ing to cross-functional initiatives or projects are assigned to
the respective functional costs based on an appropriate allo-
cation principle. Regarding amortization see NOTE  OTHER
INTAN GIBLE ASSETS, regarding depreciation see NOTE  PROP-
ERTY, PLANT AND EQUIPMENT and regarding employee benefit
expenses see NOTE  PERSONNEL COSTS.
Government grants – Government grants are recognized
when there is reasonable assurance that the conditions at-
tached to the grants are complied with and the grants will be