Siemens 2014 Annual Report Download - page 236

108 A. To our Shareholders 131 B. Corporate Governance 171 C. Combined Management Report
172 C. Business and economic environment
187 C. Financial performance system
193 C. Results of operations
205 C. Financial position
210 C. Net assets position
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Our financing activities subject us to various risks, includ-
ing credit, interest rate and foreign exchange risk: We pro-
vide our customers with various forms of direct and indirect
financing in connection with large projects. We also finance a
large number of customer orders, for example, the leasing of
medical equipment, mainly through SFS. SFS also bears credit
risk by financing third-party equipment or by taking direct or
indirect participation in financings, such as syndicated loans.
In part, we take a security interest in the assets we finance or
we receive additional collateral. Our business, financial condi-
tion and results of operations may be adversely affected if the
credit quality of our customers deteriorates or if they default on
their payment obligation to us, if the value of the assets in
which we have taken a security interest or additional collateral
declines, if interest rates or foreign exchange rates fluctuate, or
if the projects in which we invest are unsuccessful. Potential
adverse changes in economic conditions could cause a decline
in the fair market values of assets, derivative instruments as
well as collateral, resulting in losses which could have an
adverse effect on our business, financial condition and results
of operations.
Our business, financial condition and results of operations
may be adversely affected by several parameters influenc-
ing the funded status of our pension benefit plans: The
funded status of our pension plans may be affected by an
increase or decrease in the defined benefit obligation (DBO), as
well as by an increase or decrease in the value of plan assets.
A significant increase in the underfunding may have a negative
effect on our rating. Pensions are accounted for in accordance
with actuarial valuations, which rely on statistical and other
factors in order to anticipate future events. These factors
include key pension plan valuation assumptions such as the
discount rate, rate of future compensation increases and
pension progression. Actual developments may differ from
assumptions due to changing market and economic conditions,
thereby resulting in an increase or decrease in the DBO. Signif-
icant movements in financial markets or a change in the port-
folio mix of invested assets could result in corresponding
increases or decreases in the value of plan assets, particularly
equity securities. Also, changes in pension plan assumptions
could affect defined benefit costs. For example, a change in dis-
count rates may result in changes in the defined benefit costs
in the following fiscal year. In order to comply with local pen-
sion regulations in selected foreign countries, we may face a
risk of increasing cash outflows to reduce an underfunding of
our pension plans in these countries, if any.
With respect to sales-related bank guarantees to be issued
in the course of orders or supplies, we are exposed to cer-
tain risks arising from our banks’ rating and its develop-
ment: Frequently customers request from the supplier that
guarantees customary for the business are procured from banks,
such as down-payment or warranty bonds, as part of the order.
Sometimes customers may also set minimum requirements as
to the creditworthiness of acceptable guarantors. Accordingly,
situations may arise with respect to existing orders that, during
the order’s execution phase, customers request the provision of
alternative security upon the deterioration of a guaranteeing
bank’s creditworthiness.
Examinations by tax authorities and changes in tax regula-
tions could adversely affect our business, financial condi-
tion and results of operations: We operate in nearly all coun-
tries of the world and therefore are subject to many different tax
regulations. Changes in tax law in any of these jurisdictions
could result in higher tax expense and payments. Furthermore,
legislative changes could impact our tax receivables and liabil-
ities as well as deferred tax assets and deferred tax liabilities. In
addition, the uncertain tax environment in some regions could
limit our ability to enforce our rights. As a globally operating
organization, we conduct business in countries subject to com-
plex tax rules, which may be interpreted in different ways. Future
interpretations or developments of tax regimes may affect our
business, financial condition and results of operations. We are
regularly examined by tax authorities in various jurisdictions.
For further information on derivative financial instruments,
hedging activities and financial risk management, see NOTE
 AND  in D. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
C... COMPLIANCE RISKS
We are subject to regulatory risks associated with our inter-
national operations: Protectionist trade policies and changes
in the political and regulatory environment in the markets in
which we operate, such as import and export controls, tariffs
and other trade barriers including debarment from certain mar-
kets and price or exchange controls, could affect our business
in several national markets, impact our sales and profitability
and make the repatriation of profits difficult, and may expose
us to penalties, sanctions and reputational damage. In addi-
tion, the uncertainty of the legal environment in some regions
could limit our ability to enforce our rights and subject us to
continually increasing costs related to designing and imple-
menting appropriate compliance programs and protocols.
As a globally operating organization, we conduct business with
customers in countries, such as Iran, Syria, Cuba and countries
in Eastern Europe, that are subject to export control regulations,
embargoes, economic sanctions or other forms of trade restric-
tions imposed by the U.S., the European Union or other coun-
tries or organizations. New or expanded export control regu-
lations, economic sanctions, embargoes or other forms of
trade restrictions imposed on Iran, Syria or on other sanctioned