Siemens 2013 Annual Report Download - page 319

253 D. Consolidated Financial Statements 357 E. Additional Information
254 D.1 Consolidated Statements of Income
255 D.2 Consolidated Statements of Comprehensive Income
256 D.3 Consolidated Statements of Financial Position
257 D. Consolidated Statements of Cash Flows
258 D.5 Consolidated Statements of Changes in Equity
260 D.6 Notes to Consolidated Financial Statements
348 D.7 Supervisory Board and Managing Board

Operating units (including SFS) are prohibited from borrowing
or investing in foreign currencies on a speculative basis. Inter-
company financing or investments of operating units are pref-
erably carried out in their functional currency or on a hedged
basis.
Siemens has established a foreign currency exchange rate risk
management system that has an established track record for
years. Each Siemens unit is responsible for recording, assess-
ing, monitoring, reporting and hedging its foreign currency
transaction exposure. The binding guideline for Siemens’ oper-
ating units provides the concept for the identification and
determination of a single net foreign currency position for
each unit and commits the units to hedge this aggregated po-
sition within a narrow band of at least % but no more than
% of their net foreign currency position. In addition, the
guideline provides a framework of the organizational structure
necessary for foreign currency exchange rate risk manage-
ment, proposes hedging strategies and defines the hedging
instruments available to the entities: foreign currency ex-
change contracts, foreign currency put and call options and
stop-loss orders. If there are no conflicting country specific
regulations, hedging activities of the operating units are trans-
acted internally with Corporate Treasury. Hedging transactions
with external counterparties in the global financial markets
are carried out under these limitations by Corporate Treasury.
This includes hedging instruments which qualify for hedge ac-
counting.
Siemens has a Company-wide portfolio approach which gener-
ates a benefit from any potential off-set of divergent cash flows
in the same currency, as well as optimized transaction costs.
The VaR relating to foreign currency exchange rates is calcu-
lated by aggregating the net foreign currency positions after
hedging by the operating units. As of September ,  the
foreign currency exchange rate risk based on historical vola-
tilities and correlations, a ten day holding period and a confi-
dence level of .% resulted in a VaR of € million compared
to a VaR of € million in the year before. Changes in euro val-
ues of future cash flows denominated in foreign currency due
to volatile foreign currency exchange rates might influence
the unhedged portion of revenues, but would also affect the
unhedged portion of cost of materials. Future changes in the
foreign currency exchange rates can impact sales prices and
may lead to margin changes, the extent of which is deter-
mined by the matching of foreign currency revenues and
expenses.
Siemens defines foreign currency exchange rate exposure gen-
erally as items of the Consolidated Statement of Financial Posi-
tion in addition to firm commitments which are denominated
in foreign currencies, as well as foreign currency denominated
cash inflows and cash outflows from forecast transactions for
the following three months. This foreign currency exchange
rate exposure is determined based on the respective function-
al currencies of the exposed Siemens’ entities.
Effects of foreign currency translation
Many Siemens units are located outside the euro zone. Since
the financial reporting currency of Siemens is the euro, the fi-
nancial statements of these subsidiaries are translated into euro
for the preparation of the Consolidated Financial Statements. To
consider the effects of foreign currency translation in the risk
management, the general assumption is that investments in
foreign-based operations are permanent and that reinvestment
is continuous. Effects from foreign currency exchange rate fluc-
tuations on the translation of net asset amounts into euro are
reflected in the Company ’s consolidated equity position.
INTEREST RATE RISK
Siemens’ key consideration with respect to the interest rate
risk management is to mitigate the risk resulting from changes
in the fair value of future cash flows. Risk arises whenever in-
terest terms of financial assets and liabilities are different.
Siemens manages this risk using derivative financial instru-
ments which allow the Company to hedge fair value changes
by swapping fixed rates of interest into variable rates of inter-
est. In order to optimize the Company ’s position with regard to
interest income and interest expenses and to manage the over-
all financial interest rate risk with respect to valuation risk af-
fecting profit and loss and economic risk of changing interest
rates, Corporate Treasury performs a comprehensive corporate
interest rate risk management, under which the interest rate
risk relating to the SFS’ business and to the remaining group
are managed separately.
If there are no conflicting country-specific regulations, all
Siemens operating units generally obtain any required financ-
ing through Corporate Treasury in the form of loans or inter-
company clearing accounts. The same concept is adopted for
deposits of cash generated by the units.
Assuming historical volatilities and correlations, a ten day
holding period and a confidence level of .% the interest
rate VaR was € million as of September , , increasing
from the comparable value of € million as of September ,