Siemens 2015 Annual Report Download - page 68

Consolidated Financial Statements
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Product-related expenses – Provisions for estimated costs
related to product warranties are recorded in line item Cost of
sales at the time the related sale is recognized.
Research and development costs – Costs of research activi-
ties are expensed as incurred. Costs of development activities
are capitalized when the recognition criteria in IAS  are met.
Capitalized development costs are stated at cost less accumu-
lated amortization and impairment losses with an amortization
period of generally three to ten years.
Earnings per share – Basic earnings per share are computed
by dividing income from continuing operations, income from
discontinued operations and net income, all attributable to or-
dinary shareholders of Siemens AG by the weighted average
number of shares outstanding during the year. Diluted earn-
ings per share are calculated by assuming conversion or exer -
cise of all potentially dilutive securities and share-based pay-
ment plans.
Goodwill – Goodwill is not amortized, but instead tested for
impairment annually, as well as whenever there are events or
changes in circumstances (triggering events) which suggest
that the carrying amount may not be recoverable. Goodwill is
carried at cost less accumulated impairment losses.
The goodwill impairment test is performed at the level of a
cash-generating unit or a group of cash-generating units gen-
erally represented by a segment and for Healthcare one level
below the segment. This is the lowest level at which goodwill
is monitored for internal management purposes.
For the purpose of impairment testing, goodwill acquired in a
business combination is allocated to the cash-generating unit
or the group of cash-generating units that is expected to bene-
fit from the synergies of the business combination. If the carry-
ing amount of the cash-generating unit or the group of
cash-generating units, to which the goodwill is allocated, ex-
ceeds its recoverable amount, an impairment loss on goodwill
allocated to this cash-generating unit or this group of cash-gen-
erating units is recognized. The recoverable amount is the
higher of the cash-generating unit’s or the group of cash-gen-
erating units’ fair value less costs to sell and its value in use. If
either of these amounts exceeds the carrying amount, it is not
always necessary to determine both amounts. These values are
generally determined based on discounted cash flow calcula-
tions. Impairment losses on goodwill are not reversed in future
periods.
The determination of the recoverable amount of a cash-gener-
ating unit or a group of cash-generating units to which good-
will is allocated involves the use of estimates by management.
The outcome predicted by these estimates is influenced e. g. by
the successful integration of acquired entities, volatility of cap-
ital markets, interest rate developments, foreign exchange rate
fluctuations and the outlook on economic trends. In determin-
ing recoverable amounts, 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 man-
agement has based its determination of fair value less costs
to sell and value in use include estimated growth rates and
weighted average cost of capital. These estimates, including
the methodology used, can have a material impact on the
respective values and ultimately the amount of any goodwill
impairment.
Other intangible assets – The Company amortizes intangible
assets with finite useful lives on a straight-line basis over their
respective estimated useful lives. Estimated useful lives for pat-
ents, licenses and other similar rights generally range from
three to five years, except for intangible assets with finite use-
ful lives acquired in business combinations. Intangible assets
acquired in business combinations primarily consist of cus-
tomer relationships and trademarks as well as technology. Use-
ful lives in specific acquisitions ranged from four to  years
for customer relationships and trademarks and from seven to
 years for technology.
Property, plant and equipment – Property, plant and equip-
ment, is valued at cost less accumulated depreciation and im-
pairment losses. Depreciation expense is recognized using the
straight-line method. The following useful lives are assumed:
Factory and office buildings 20 to 50 years
Other buildings 5 to 10 years
Technical machinery & equipment 5 to 10 years
Furniture & office equipment generally 5 years
Equipment leased to others generally 3 to 5 years
Impairment of property, plant and equipment and other
intangible assets – The Company reviews property, plant and
equipment and other intangible assets for impairment when-
ever events or changes in circumstances indicate that the car-
rying amount of an asset may not be recoverable. In addition,
intangible assets not yet available for use are subject to an an-
nual impairment test. Impairment testing of property, plant
and equipment and other intangible assets involves the use of