Siemens 2015 Annual Report Download - page 67

Consolidated Financial Statements 
cash equivalents are translated at the spot exchange rate at the
end of the reporting period.
Foreign currency transaction – Transactions that are de-
nominated in a currency other than the functional currency of
an entity, are recorded at that functional currency applying the
spot exchange rate at the date when the underlying transac-
tions are initially recognized. At the end of the reporting
period, foreign currency-denominated monetary assets and lia-
bilities are revalued to functional currency applying the spot
exchange rate prevailing at that date. Gains and losses arising
from these foreign currency revaluations are recognized in net
income. Those foreign currency-denominated transactions
which are classified as non-monetary are remeasured using the
historical spot exchange rate.
Revenue recognition – Under the condition that persuasive
evidence of an arrangement exists revenue is recognized to the
extent that it is probable that the economic benefits will flow to
the Company and the revenue can be reliably measured, re-
gardless of when the payment is being made. In cases where
the inflow of economic benefits is not probable due to cus-
tomer related credit risks the revenue recognized is subject to
the amount of payments irrevocably received.
Sale of goods: Revenue is recognized when the significant risks
and rewards of ownership of the goods have passed to the
buyer, usually on delivery of the goods.
Sales from construction contracts: 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
incurred to date compared to the total estimated contract costs.
An expected loss on the construction contract is recognized as
an expense immediately. Siemens applies the requirements of
IAS  regarding contract variations to contract terminations,
since contract terminations are also changes to the agreed de-
livery and service scope.
The percentage-of-completion method places considerable im-
portance on accurate estimates of the extent of progress to-
wards completion 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
technical, political and regulatory risks, and other judgments.
Under the percentage-of-completion method, changes in esti-
mates may lead to an increase or decrease of revenue. The cred-
itworthiness of our customers is taken into account in estimat-
ing the probability that economic benefits associated with a
contract will flow to the Company. In addition, we need to
assess whether the contract is expected to continue or to be
terminated. In determining whether the continuation or termi-
nation 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 col-
lectability ceases to be probable are recognized as an expense.
For contracts expected to be terminated, including termina-
tions 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 contracts
are revised accordingly, typically resulting in a decrease of rev-
enue in the respective reporting period.
Rendering of services: for long-term service contracts, reve-
nues 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 per-
centage-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 Com-
pany determines whether the contract or arrangement con-
tains 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 sepa-
rated 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. If the
criteria for the separation of units of accounting are not met,
revenue is deferred until such criteria are met or until the pe-
riod in which the last undelivered element is delivered.
Income from interest: interest is recognized using the effective
interest method.
Income from royalties: royalties are recognized on an accrual
basis in accordance with the substance of the relevant agree-
ment.
Income from operating leases: operating lease income for
equipment rentals is recognized on a straight-line basis over
the lease term.
Functional costs – In general, operating expenses by types
are assigned to the functions following the functional area of
the corresponding profit and cost centers. Amortization, depre-
ciation and impairment of intangible assets and property, plant
and equipment are included in functional costs depending on
the use of the assets.