Siemens 2013 Annual Report Download - page 316

92 A. To our Shareholders 117 B. Corporate Governance 155 C. Combined Management Report
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NOTE  Derivative financial instruments
and hedging activities
As part of the Company ’s risk management program, a variety
of derivative financial instruments is used to reduce risks
resulting primarily from fluctuations in foreign currency
exchange rates, interest rates and commodity prices.
The fair values of each type of derivative financial instruments
recorded as financial assets or financial liabilities are as
f ollows:
September 30, 2013 September 30, 2012
(in millions of €) Asset Liability Asset Liability
Foreign currency
exchange contracts 416 331 343 325
Interest rate swaps
and combined
interest/currency swaps 1,637 261 2,577 534
Commodity swaps 35 49 36 27
Embedded derivatives 118 122 208 98
Options 123 281 164 141
Credit Default Swaps – 4 – –
2,330 1,047 3,328 1,125
FOREIGN CURRENCY EXCHANGE RATE
RISK MANAGEMENT
Derivative financial instruments
not designated in a hedging relationship
The Company manages its risks associated with fluctuations in
foreign currency denominated receivables, payables, debt,
firm commitments and forecast transactions primarily through
a Company-wide portfolio approach. Under this approach the
Company-wide risks are aggregated centrally, and various
derivative financial instruments, primarily foreign currency
exchange contracts, foreign currency swaps and options, are
utilized to minimize such risks. Such a strategy does not
qualify for hedge accounting treatment. Accordingly, all such
derivative 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 sale and purchase contracts denominated in
a currency that is neither the functional currency of the
substantial parties to the contract nor a currency which is
commonly used in the economic environment in which the
contract takes place. Gains (losses) relating to such embedded
foreign currency derivatives are reported in line item Cost of
sales in the Consolidated Statements 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
resulting from forecast sales and purchases as well as firm
commitments. This risk results mainly from contracts denomi-
nated in US$ both from Siemens’ operating 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 in-
effective portion of cash flow hedges is not significant individ-
ually 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 30,
2014 2015
2016 to
2018
2019 and
thereafter
(in millions of €)
Expected gain (loss)
to be reclassified from line
item Other comprehensive
income, net of income taxes
into revenue or cost of sales 54 (14) (36) 3
INTEREST RATE RISK MANAGEMENT
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
derivatives such as interest rate swaps, options, interest rate
futures and forward rate agreements.
Derivative financial instruments
not designated in a hedging relationship
For the interest rate risk management relating to the Group
excluding SFS’ business, derivative financial instruments are
used under a portfolio-based approach to manage interest risk
actively relative to a benchmark. The interest rate management