Siemens 2015 Annual Report Download - page 70

Consolidated Financial Statements
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Actuarial valuations rely on key assumptions including dis-
count rates, expected compensation increases, rate of pension
progression and mortality rates. Discount rates used are deter-
mined by reference to yields on high-quality corporate bonds of
appropriate duration and currency at the end of the reporting
period. In case such yields are not available discount rates are
based on government bonds yields. Due to changing market,
economic and social conditions the underlying key assump-
tions may differ from actual developments.
Provisions – A provision is recognized in the Statement of
Financial Position when it is probable that the Company has a
present legal or constructive obligation as a result of a past
event, it is probable that an outflow of economic benefits will
be required to settle the obligation and a reliable estimate can
be made of the amount of the obligation. If the effect is mate-
rial, provisions are recognized at present value by discounting
the expected future cash flows at a pretax rate that reflects cur-
rent market assessments of the time value of money. When a
contract becomes onerous, the present obligation under the
contract is recognized as a provision.
Significant estimates are involved in the determination of pro-
visions related to onerous contracts, warranty costs, asset re-
tirement obligations, legal and regulatory proceedings as well
as governmental investigations (Legal Proceedings). Siemens
records a provision for onerous sales contracts when current
estimates of total contract costs exceed expected contract rev-
enue. Onerous sales contracts are identified by monitoring the
progress of the project and updating the estimate of total con-
tract costs which also requires significant judgment relating to
achieving certain performance standards as well as estimates
involving warranty costs and estimates regarding project de-
lays including the assessment of responsibility splits between
the contract partners for these delays. Uncertainties regarding
asset retirement obligations include the estimated costs of de-
commissioning and final storage because of the long time
frame over which future cash outflows are expected to occur
including the respective interest accretion. Amongst others,
the estimated cash outflows could alter significantly if, and
when, political developments affect the government’s plans to
develop the final storage.
Legal Proceedings often involve complex legal issues and are
subject to substantial uncertainties. Accordingly, considerable
judgment is part of determining whether it is probable that
there is a present obligation as a result of a past event at the
end of the reporting period, whether it is probable that such a
Legal Proceeding will result in an outflow of resources and
whether the amount of the obligation can be reliably esti-
mated. Internal and external counsels are generally part of the
determination process. Due to new developments, it may be
necessary, to record a provision for an ongoing Legal Proceed-
ing or to adjust the amount of a previously recognized provi-
sion. Upon resolution of a Legal Proceeding, Siemens may incur
charges in excess of the recorded provisions for such matters.
The outcome of Legal Proceedings may have a material effect
on Siemens’ financial position, its results of operations and / or
its cash flows.
Termination benefits – Termination benefits are provided as
a result of an entity’s offer made in order to encourage volun-
tary redundancy before the normal retirement date or from an
entity’s decision to terminate the employment. Termination
benefits in accordance with IAS , Employee Benefits, are rec-
ognized as a liability and an expense when the entity can no
longer withdraw the offer of those benefits.
Financial instruments – A financial instrument is any con-
tract that gives rise to a financial asset of one entity and a fi-
nancial liability or equity instrument of another entity. Siemens
does not use the category held to maturity and does not use
the option to designate financial assets or financial liabilities at
fair value through profit or loss at inception (Fair Value Option).
Based on their nature, financial instruments are classified as
financial assets and financial liabilities measured at cost or
amortized cost and financial assets and financial liabilities
measured at fair value and as receivables from finance leases.
Regular way purchases or sales of financial assets are ac-
counted for at the trade date. Initially, financial instruments are
recognized at their fair value. Transaction costs are only in-
cluded in determining the carrying amount, if the financial in-
struments are not measured at fair value through profit or loss.
Receivables from finance leases are recognized at an amount
equal to the net investment in the lease. Subsequently, finan-
cial assets and liabilities are measured according to the cate-
gory to which they are assigned-cash and cash equivalents,
available-for-sale financial assets, loans and receivables, finan-
cial liabilities measured at amortized cost or financial assets
and liabilities classified as held for trading.
Cash and cash equivalents – The Company considers all
highly liquid investments with less than three months matu-
rity from the date of acquisition to be cash equivalents. Cash
and cash equivalents are measured at cost.
Available-for-sale financial assets – Investments in equity
instruments, debt instruments and fund shares are measured
at fair value, if reliably measurable. Unrealized gains and
losses, net of applicable deferred income tax expenses, are rec-
ognized in line item Other comprehensive income, net of in-
come taxes. Provided that fair value cannot be reliably deter-
mined, Siemens measures available-for-sale financial assets at
cost. This applies to equity instruments that do not have a