Siemens 2013 Annual Report Download - page 272

92 A. To our Shareholders 117 B. Corporate Governance 155 C. Combined Management Report
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involve estimates where management reasonably could have
used a different estimate in the current accounting period.
Management cautions that future events often vary from fore-
casts 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 Com-
pany accounts for construction projects using the percent-
age-of-completion method, recognizing revenue as perfor-
mance on contract progresses. Certain long-term service con-
tracts are accounted for under the percentage-of-completion
method as well. This method places considerable importance
on accurate estimates of the extent of progress towards com-
pletion and may involve estimates on the scope of deliveries
and services required for fulfilling the contractually defined
obligations. These significant estimates include total contract
costs, total contract revenues, contract risks, including techni-
cal, political and regulatory risks, and other judgments. Under
the percentage-of-completion method, changes in estimates
may lead to an increase or decrease of revenue. The creditwor-
thiness of our customers is taken into account in estimating
the probability that economic benefits associated with a con-
tract will flow to the Company. In addition, we need to assess
whether the contract is expected to continue or to be termi-
nated. In determining whether the continuation or termina-
tion of a contract is expected to be the most likely scenario, all
relevant facts and circumstances relating to the contract are
considered on an individual basis. For contracts expected to
be continued, amounts already included in revenue for which
collectability ceases to be probable are recognized as an ex-
pense. For contracts expected to be terminated, including ter-
minations due to expected payment defaults of our customers
or terminations due to force majeure events, the estimates on
the scope of deliveries and services provided under the con-
tracts are revised accordingly, typically resulting in a decrease
of revenue in the respective reporting period. Management of
the operating Divisions continually reviews all estimates in-
volved in such construction contracts and adjusts them as
necessary.
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, Siemens also consider country credit ratings, which are
centrally determined based on information from external rat-
ing agencies. Regarding the determination of the valuation
allowance 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 forecasts.
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. Likewise, whenever property, plant
and equipment, other intangible assets and investments ac-
counted for using the equity method are tested for impair-
ment, the determination of the assets’ recoverable amount in-
volves the use of estimates by management that can have a
material impact on the respective values and ultimately the
amount of any impairment.
Non-current assets and disposal groups classified as
held for disposal – Assets held for disposal and disposal
groups are measured at the lower of their carrying amount
and their fair value less costs to sell. The determination of the
fair value less costs to sell includes the use of management
estimates and assumptions that tend to be uncertain.
Employee benefit accounting – Post-employment benefits –
Obligations for pension and other post-employment benefits
and related net periodic benefit costs are determined in accor-
dance with actuarial valuations. These valuations rely on key
assumptions including discount rates, expected compensation
increases, rate of pension progression and mortality rates. The