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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
December 20, 2006
Commission File Number: 1-15174
Siemens Aktiengesellschaft
(Translation of registrant’s name into English)
Wittelsbacherplatz 2
D-80333 Munich
Federal Republic of Germany
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F þ     Form 40-F o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes o     No þ
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes o     No þ
Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes o     No þ
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-
 
 

 


 

IFRS Consolidated
Financial Statements as of
September 30, 2006
(SIEMENS LOGO)

2


 

(SIEMENS LOGO)
Key figures
                 
in millions of euros   2006(1)     2005(1)  
New orders (2)
    84,702       72,786  
Revenue (2)
    76,253       65,137  
Income from continuing operations
    3,107       3,322  
Income (loss) from discontinued operations, net of income taxes
    228       (662 )
Net income
    3,335       2,660  
attributable to
               
Minority interest
    210       160  
Shareholders of Siemens AG
    3,125       2,500  
Net cash from operating and investing activities (2)
    973       (1,689 )
therein: Net cash provided by operating activities
    5,652       3,960  
    Net cash used in investing activities
    (4,679 )     (5,649 )
Equity (September 30)
    26,275       24,181  
attributable to
               
Minority interest
    702       661  
Shareholders of Siemens AG
    25,573       23,520  
 
               
Employees (2) (September 30, in thousands)
    421       388  
 
(1)   Fiscal year from October 1 to September 30
(2)   Continuing operations (excluding the discontinued carrier networks, enterprise networks and mobile devices activities)

3


 

Introduction
     According to the Regulation of the European Parliament and Council on the application of International Financial Reporting Standards (IFRS), publicly traded European Union (EU) companies are required to prepare their Consolidated Financial Statements in accordance with IFRS for fiscal years commencing on or after January 1, 2005. However, Member States may defer mandatory application of IFRS until 2007 for companies that either list debt securities only or which apply internationally accepted standards other than IFRS due to a listing outside the EU. The latter particularly applies to companies listed on the New York Stock Exchange (such as Siemens), which prepare their Consolidated Financial Statements under United States Generally Accepted Accounting Principles (U.S. GAAP). In Germany, the Bilanzrechtsreformgesetz (BilReG), issued in October 2004, implemented the option to defer mandatory IFRS application.
     Accordingly, Siemens’ primary financial reporting for fiscal year 2006 remains based on U.S. GAAP, including the Consolidated Financial Statements prepared under U.S. GAAP to meet the legal requirements of the German Commercial Code (HGB) and the reporting requirements of the U.S. Securities and Exchange Commission (SEC) on Form 20-F. In addition, Siemens has prepared its first IFRS Consolidated Financial Statements as of and for the two years ended September 30, 2006. Our annual report on Form 20-F contains information that is not included in this report. In accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, September 30, 2006 represents the first IFRS reporting date. Therefore, Siemens’ opening IFRS balance sheet is as of October 1, 2004. The first IFRS Consolidated Financial Statements are presented as supplemental information. They serve as a basis for Siemens’ primary IFRS reporting beginning with the first quarter of fiscal 2007.
     The IFRS Consolidated Financial Statements have been prepared in accordance with IFRS and its interpretations issued by the International Accounting Standards Board (IASB), as adopted by the EU. Siemens has applied all standards and interpretations that were effective as of September 30, 2006. In addition, the Company early adopted certain other standards, amendments to standards and interpretations.
Statement of the Managing Board
     The Managing Board of Siemens AG is responsible for preparing the following supplemental Consolidated Financial Statements in accordance with IFRS.
     KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft has audited the Consolidated Financial Statements prepared in accordance with IFRS, and issued an unqualified opinion.
     
Dr. Klaus Kleinfeld
  Joe Kaeser
President and
  Executive Vice President and
Chief Executive Officer
  Chief Financial Officer
of Siemens AG
  of Siemens AG

4


 

Independent Auditors’ Report
The Supervisory Board of Siemens AG:
     We have audited the accompanying consolidated balance sheets of Siemens AG and subsidiaries as of September 30, 2006 and 2005 and the related consolidated statements of income, income and expense recognized in equity and cash flows for the years then ended. These consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union, are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
     We conducted our audits in accordance with International Standards on Auditing (ISA). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
     In our opinion the consolidated financial statements present fairly, in all material respects, the financial position of Siemens AG and subsidiaries as of September 30, 2006 and 2005 and the results of their operations and their cash flows for the years then ended in accordance with International Financial Reporting Standards, as adopted by the European Union.
     Our audits of Siemens AG’s consolidated financial statements were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The accompanying consolidating information appearing on pages 7, 9 and 11 is presented for purposes of additional analysis of the consolidated financial statements rather than to present the balance sheet, and the statements of income and cash flows of Operations, Financing and Real Estate, and Corporate Treasury. The consolidating information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole.
KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft
Wirtschaftsprüfungsgesellschaft
Munich, Germany
December 18, 2006

5


 

SIEMENS
CONSOLIDATED STATEMENTS OF INCOME
For the fiscal years ended September 30, 2006 and 2005
(in millions of , per share amounts in )
                         
            Siemens  
    Note     2006     2005  
Revenue
            76,253       65,137  
Cost of goods sold and services rendered
            (57,291 )     (47,866 )
 
                   
Gross profit
            18,962       17,271  
Research and development expenses
            (3,413 )     (3,019 )
Marketing, selling and general administrative expenses
            (12,668 )     (11,027 )
Other operating income
    5       647       565  
Other operating expense
    6       (265 )     (426 )
Income from investments accounted for using the equity method, net
    7       522       536  
Financial income, net
    8       225       322  
 
                   
Income (loss) from continuing operations before income taxes
            4,010       4,222  
Income taxes(1)
    9       (903 )     (900 )
Income (loss) from continuing operations
            3,107       3,322  
Income (loss) from discontinued operations, net of income taxes
            228       (662 )
 
                   
Net income (loss)
            3,335       2,660  
 
                   
 
                       
Attributable to:
                       
Minority interest
            210       160  
Shareholders of Siemens AG
            3,125       2,500  
 
                       
Basic earnings per share
    33                  
Income from continuing operations
            3.27       3.50  
Income (loss) from discontinued operations
            0.24       (0.69 )
 
                   
Net income
            3.51       2.81  
 
                   
Diluted earnings per share
    33                  
Income from continuing operations
            3.26       3.37  
Income (loss) from discontinued operations
            0.23       (0.66 )
 
                   
Net income
            3.49       2.71  
 
                   
CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE RECOGNIZED IN EQUITY
For the fiscal years ended September 30, 2006 and 2005
(in millions of )
                 
    Siemens  
    2006     2005  
Net income
    3,335       2,660  
Currency translation differences
    (349 )     460  
Available-for-sale financial assets
    (354 )     39  
Derivative financial instruments
    58       (144 )
Actuarial gains and losses on pension plans and similar commitments
    245       (995 )
Revaluation effect related to step acquisitions
    4       25  
 
           
Total income and expense recognized directly in equity, net of tax (2) (3)
    (396 )     (615 )
 
           
Total income and expense recognized in equity
    2,939       2,045  
 
           
 
               
Attributable to:
               
Minority interest
    181       184  
Shareholders of Siemens AG
    2,758       1,861  
 
 
(1)   The income taxes of Eliminations, reclassifications and Corporate Treasury, Operations, and Financing and Real Estate are based on the consolidated effective corporate tax rate applied to income before income taxes.
 
(2)   Includes (50) and 9 in 2006 and 2005, respectively, resulting from investments accounted for using the equity method.
 
(3)   Includes minority interest of (29) and 24 in 2006 and 2005, respectively, relating to currency translation differences.
The accompanying Notes are an integral part of these Consolidated Financial Statements.

6


 

 
 
 
                                             
Eliminations,                        
reclassifications and                     Financing and Real  
Corporate Treasury     Operations     Estate  
2006     2005     2006     2005     2006     2005  
  (1,489 )     (1,312 )     75,402       64,296       2,340       2,153  
  1,489       1,312       (56,768 )     (47,383 )     (2,012 )     (1,795 )
                                 
              18,634       16,913       328       358  
              (3,413 )     (3,019 )            
  (6 )     1       (12,316 )     (10,740 )     (346 )     (288 )
  (77 )     (86 )     474       419       250       232  
        (1 )     (221 )     (393 )     (44 )     (32 )
              469       490       53       46  
  65       454       (20 )     (266 )     180       134  
                                 
  (18 )     368       3,607       3,404       421       450  
  4       (78 )     (812 )     (726 )     (95 )     (96 )
  (14 )     290       2,795       2,678       326       354  
              237       (666 )     (9 )     4  
                                 
  (14 )     290       3,032       2,012       317       358  
                                 
 
                                           

7


 

SIEMENS
CONSOLIDATED BALANCE SHEETS
As of September 30, 2006 and 2005
(in millions of )
                         
            Siemens  
    Note     9/30/06     9/30/05  
ASSETS
                       
Current assets
                       
Cash and cash equivalents
            10,214       8,121  
Available-for-sale financial assets
    10       596       2,233  
Trade and other receivables
    11       15,148       17,129  
Other current financial assets
    12       2,370       3,058  
Intragroup receivables
                   
Inventories
    13       12,790       12,812  
Income tax receivables
            458       432  
Other current assets
    14       1,274       1,472  
Assets classified as held for disposal
            7,164       245  
 
                   
Total current assets
            50,014       45,502  
 
                   
Goodwill
    15       9,689       8,821  
Other intangible assets
    16       3,385       3,317  
Property, plant and equipment
    17       12,072       12,012  
Investments accounted for using the equity method
            2,956       2,812  
Other financial assets
    18       5,042       5,227  
Intragroup receivables
                   
Deferred tax assets
    9       3,860       3,493  
Other assets
            713       628  
 
                   
Total assets
            87,731       81,812  
 
                   
LIABILITIES AND EQUITY
                       
Current liabilities
                       
Short-term debt and current maturities of long-term debt
    21       2,175       3,995  
Trade payables
            8,443       10,168  
Other current financial liabilities
    19       1,035       1,829  
Intragroup liabilities
                   
Current provisions
    23       3,859       4,076  
Income tax payables
            1,487       1,499  
Other current liabilities
    20       16,485       16,439  
Liabilities associated with assets classified as held for disposal
            5,385       289  
 
                   
Total current liabilities
            38,869       38,295  
 
                   
Long-term debt
    21       13,122       8,040  
Pension plans and similar commitments
    22       5,083       5,460  
Deferred tax liabilities
    9       102       213  
Provisions
    23       1,858       2,095  
Other financial liabilities
            248       463  
Other liabilities
    24       2,174       3,065  
Intragroup liabilities
                   
 
                   
Total liabilities
            61,456       57,631  
 
                   
Equity
    25                  
Common stock, no par value(1)
            2,673       2,673  
Additional paid-in capital
            5,662       5,167  
Retained earnings
            17,082       14,909  
Other components of equity
            156       772  
Treasury shares, at cost(2)
                  (1 )
 
                   
Total equity attributable to shareholders of Siemens AG
            25,573       23,520  
 
                   
Minority interest
            702       661  
 
                   
Total equity
            26,275       24,181  
 
                   
Total liabilities and equity
            87,731       81,812  
 
                   
 
 
(1)   Authorized: 1,116,087,241 and 1,113,295,461 shares, respectively.
    Issued: 891,087,241 and 891,085,461 shares, respectively.
 
(2)   415 and 9,004 shares, respectively.
The accompanying Notes are an integral part of these Consolidated Financial Statements.

8


 

 
 
 
                                             
Eliminations,                        
reclassifications and                     Financing and Real  
Corporate Treasury     Operations     Estate  
9/30/06     9/30/05     9/30/06     9/30/05     9/30/06     9/30/05  
                                             
                                             
  9,072       6,603       1,109       1,471       33       47  
  416             160       2,216       20       17  
        (5 )     10,885       12,764       4,263       4,370  
  145       645       1,314       1,542       911       871  
  (15,736 )     (15,494 )     15,680       15,363       56       131  
  (2 )     (4 )     12,735       12,744       57       72  
  2       1       445       420       11       11  
  48       56       1,122       1,320       104       96  
  (21 )           7,180       245       5        
                                 
  (6,076 )     (8,198 )     50,630       48,085       5,460       5,615  
                                 
              9,557       8,690       132       131  
              3,368       3,302       17       15  
              8,310       8,217       3,762       3,795  
              2,738       2,625       218       187  
  215       24       1,232       1,769       3,595       3,434  
  (348 )     (365 )     348       358             7  
  222       97       3,532       3,281       106       115  
  194       73       507       541       12       14  
                                 
  (5,793 )     (8,369 )     80,222       76,868       13,302       13,313  
                                 
                                             
                                             
  1,433       3,045       530       564       212       386  
  28       (2 )     8,140       9,961       275       209  
  508       1,038       483       748       44       43  
  (16,406 )     (16,302 )     9,886       9,318       6,520       6,984  
        2       3,770       4,024       89       50  
  2       24       1,468       1,454       17       21  
  227       146       15,974       16,003       284       290  
  (16 )           5,401       289              
                                 
  (14,224 )     (12,049 )     45,652       42,361       7,441       7,983  
                                 
  11,946       6,535       744       984       432       521  
              5,081       5,460       2        
  (397 )     (406 )     95       202       404       417  
        1       1,761       2,015       97       79  
  19       23       177       289       52       151  
  41       61       2,054       2,928       79       76  
  (3,178 )     (2,534 )     434       351       2,744       2,183  
                                 
  (5,793 )     (8,369 )     55,998       54,590       11,251       11,410  
                                 
                                             
                                             
                                             
                                             
                                             
                                             
                                             
                                             
                                             
                                             
                                 
              24,224       22,278       2,051       1,903  
                                 
  (5,793 )     (8,369 )     80,222       76,868       13,302       13,313  
                                 

9


 

SIEMENS
CONSOLIDATED STATEMENTS OF CASH FLOW
For the fiscal years ended September 30, 2006 and 2005
(in millions of )
                 
    Siemens
    2006     2005  
Cash flows from operating activities
               
Net income (loss)
    3,335       2,660  
Adjustments to reconcile net income to cash provided
               
Amortization, depreciation and impairments
    3,118       3,530  
Income taxes
    809       643  
Interest (income) expense, net
    (142 )     (224 )
(Gains) losses on sales and disposals of businesses and real estate, net
    (113 )     (200 )
(Gains) on sales of investments, net(1)
    (104 )     (49 )
(Gains) on sales and impairments of current available-for-sale financial assets, net
    (466 )     (239 )
(Income) from investments(1)
    (569 )     (635 )
Other non-cash (income) expenses
    372       (39 )
Change in current assets and liabilities
               
(Increase) decrease in inventories
    (2,313 )     (717 )
(Increase) decrease in trade and other receivables
    (1,027 )     24  
(Increase) decrease in other current assets
    572       301  
Increase (decrease) in trade payables
    255       97  
Increase (decrease) in current provisions
    (34 )     (369 )
Increase (decrease) in other current liabilities
    2,053       142  
Supplemental contributions to pension trusts
          (1,496 )
Change in other assets and liabilities
    41       279  
Income taxes paid
    (1,191 )     (1,093 )
Dividends received
    378       343  
Interest received
    685       684  
 
           
Net cash provided by (used in) operating activities — continuing and discontinued operations
    5,659       3,642  
Net cash provided by (used in) operating activities — continuing operations
    5,652       3,960  
Cash flows from investing activities
               
Additions to intangible assets and property, plant and equipment
    (4,052 )     (3,624 )
Acquisitions, net of cash acquired
    (2,055 )     (2,450 )
Purchases of investments(1)
    (389 )     (652 )
Purchases of current available-for-sale financial assets
    (1,489 )     (34 )
(Increase) decrease in receivables from financing activities
    (469 )     (511 )
Proceeds from sales of investments, intangibles and property, plant and equipment(1)
    914       977  
Proceeds from disposals of businesses
    (260 )     34  
Proceeds from sales of current available-for-sale financial assets
    3,104       356  
 
           
Net cash provided by (used in) investing activities — continuing and discontinued operations
    (4,696 )     (5,904 )
Net cash provided by (used in) investing activities — continuing operations
    (4,679 )     (5,649 )
Cash flows from financing activities
               
Purchase of common stock
    (421 )     (219 )
Proceeds from re-issuance of treasury stock
    313       173  
Proceeds from issuance of debt
    6,701        
Repayment of debt
    (1,710 )     (848 )
Change in short-term debt
    (1,762 )     711  
Interest paid
    (596 )     (441 )
Dividends paid
    (1,201 )     (1,112 )
Dividends paid to minority shareholders
    (118 )     (108 )
Intragroup financing
           
 
           
Net cash provided by (used in) financing activities
    1,206       (1,844 )
Effect of exchange rates on cash and cash equivalents
    (76 )     37  
Net increase (decrease) in cash and cash equivalents
    2,093       (4,069 )
Cash and cash equivalents at beginning of period
    8,121       12,190  
 
           
Cash and cash equivalents at end of period
    10,214       8,121  
 
           
 
(1)   Investments include equity instruments either classified as non-current available-for-sale financial assets or accounted for using the equity method.
The accompanying Notes are an integral part of these Consolidated Financial Statements.

10


 

 
 
 
                                             
  Eliminations,                      
  reclassifications and                     Financing and Real
  Corporate Treasury     Operations     Estate
  2006     2005     2006     2005     2006     2005
                                             
  (14 )     290       3,032       2,012       317       358  
                                             
              2,676       3,105       442       425  
  (3 )     78       723       469       89       96  
  (409 )     (308 )     404       222       (137 )     (138 )
              19       (87 )     (132 )     (113 )
              (91 )     (49 )     (13 )      
              (466 )     (239 )            
              (463 )     (531 )     (106 )     (104 )
  276       (149 )     110       97       (14 )     13  
                                             
  (2 )           (2,321 )     (709 )     10       (8 )
  40       120       (1,115 )     (118 )     48       22  
  306       55       79       121       187       125  
  15       (1 )     180       110       60       (12 )
  (2 )     (17 )     (60 )     (321 )     28       (31 )
  321       (200 )     1,734       351       (2 )     (9 )
                    (1,496 )            
  (53 )     (59 )     119       329       (25 )     9  
  (94 )     (75 )     (957 )     (901 )     (140 )     (117 )
              299       253       79       90  
  180       215       159       143       346       326  
                                 
  561       (51 )     4,061       2,761       1,037       932  
  583       (39 )     4,032       3,072       1,037       927  
                                             
              (3,284 )     (2,951 )     (768 )     (673 )
              (2,052 )     (2,369 )     (3 )     (81 )
              (369 )     (631 )     (20 )     (21 )
  (1,409 )     (12 )     (72 )     (8 )     (8 )     (14 )
  (70 )     (53 )                 (399 )     (458 )
              549       641       365       336  
              (260 )     12             22  
  986       20       2,112       321       6       15  
                                 
  (493 )     (45 )     (3,376 )     (4,985 )     (827 )     (874 )
  (493 )     (45 )     (3,359 )     (4,730 )     (827 )     (874 )
                                             
              (421 )     (219 )            
              313       173              
  6,701                                
  (1,600 )     (596 )     (49 )     (231 )     (61 )     (21 )
  (1,244 )     1,065       (419 )     (270 )     (99 )     (84 )
  (388 )     (302 )     (141 )     (76 )     (67 )     (63 )
              (1,201 )     (1,112 )            
              (118 )     (108 )            
  (1,046 )     (4,722 )     1,042       4,597       4       125  
                                 
  2,423       (4,555 )     (994 )     2,754       (223 )     (43 )
  (22 )     3       (53 )     33       (1 )     1  
  2,469       (4,648 )     (362 )     563       (14 )     16  
  6,603       11,251       1,471       908       47       31  
                                 
  9,072       6,603       1,109       1,471       33       47  
                                 

11


 

SIEMENS — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED CHANGES IN EQUITY
For the fiscal years ended September 30, 2006 and 2005
(in millions of )
                         
            Additional          
    Common     paid-in     Retained  
    stock     capital     earnings  
Balance at October 1, 2004
    2,673       5,121       14,491  
 
                 
Income and expense recognized in equity
                1,530  
Dividends
                (1,112 )
Issuance of common stock and share-based payment
          60        
Purchase of common stock
                 
Re-issuance of treasury stock
          (14 )      
Other changes in equity
                 
 
                 
Balance at September 30, 2005
    2,673       5,167       14,909  
 
                 
Income and expense recognized in equity
                3,374  
Dividends
                (1,201 )
Issuance of common stock and share-based payment
          44        
Purchase of common stock
                 
Re-issuance of treasury stock
          (36 )      
Other changes in equity
          487        
 
                 
Balance at September 30, 2006
    2,673       5,662       17,082  
 
                 

12


 

 
 
 
                                                             
Other components of equity                            
        Available-                             Total equity              
Currency     for-sale     Derivative             Treasury     attributable              
translation     financial     financial             shares     to shareholders     Minority     Total  
differences     assets     instruments     Total     at cost     of Siemens AG     interest     equity  
  (25 )     411       55       441             22,726       530       23,256  
                                             
  436       39       (144 )     331             1,861       184       2,045  
                                (1,112 )     (108 )     (1,220 )
                                60             60  
                          (219 )     (219 )           (219 )
                          218       204             204  
                                      55       55  
                                             
  411       450       (89 )     772       (1 )     23,520       661       24,181  
                                             
  (320 )     (354 )     58       (616 )           2,758       181       2,939  
                                (1,201 )     (144 )     (1,345 )
                                44             44  
                          (421 )     (421 )           (421 )
                          422       386             386  
                                487       4       491  
                                             
  91       96       (31 )     156             25,573       702       26,275  
                                             

13


 

SIEMENS — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENT INFORMATION (continuing operations)
As of and for the fiscal years ended September 30, 2006 and 2005
(in millions of )
                                                 
    New orders                     Intersegment
    (unaudited)     External revenue     revenue
    2006     2005     2006     2005     2006     2005  
Operations Groups (5)
                                               
Siemens Business Services (SBS)
    5,014       6,531       3,967       4,316       1,190       1,057  
Automation and Drives (A&D)
    14,108       10,674       11,341       9,073       1,507       1,293  
Industrial Solutions and Services (I&S)
    9,025       7,189       7,830       5,330       989       977  
Siemens Building Technologies (SBT)
    5,235       4,518       4,690       4,314       106       101  
Power Generation (PG)
    12,532       10,964       10,068       8,042       18       19  
Power Transmission and Distribution (PTD)
    8,028       5,283       6,032       3,933       477       317  
Transportation Systems (TS)
    6,173       4,599       4,429       4,146       64       40  
Siemens VDO Automotive (SV)
    10,014       9,787       10,003       9,591       14       19  
Medical Solutions (Med)
    9,334       8,641       8,164       7,577       63       49  
Osram
    4,563       4,300       4,487       4,222       76       78  
Other Operations(6)
    5,115       4,438       4,016       3,432       939       923  
 
                                   
Total Operations Groups
    89,141       76,924       75,027       63,976       5,443       4,873  
Reconciliation to financial statements
                                               
Corporate items, pensions and eliminations
    (5,334 )     (5,021 )     107       104       (5,175 )     (4,657 )
Other interest expense
                                   
Other assets related and miscellaneous reconciling items
                                   
 
                                   
Total Operations (for columns Group profit/Net capital employed, i.e. Income before income taxes/Total assets)
    83,807       71,903       75,134       64,080       268       216  
 
                                   
 
                                       
                                     
                           
Financing and Real Estate Groups
                                               
Siemens Financial Services (SFS)
    645       542       558       476       87       66  
Siemens Real Estate (SRE)
    1,705       1,621       561       581       1,144       1,040  
Eliminations
    (10 )     (10 )                 (10 )     (10 )
 
                                   
Total Financing and Real Estate
    2,340       2,153       1,119       1,057       1,221       1,096  
 
                                   
Eliminations, reclassifications and Corporate Treasury
    (1,445 )     (1,270 )                 (1,489 )     (1,312 )
 
                                   
Siemens
    84,702       72,786       76,253       65,137              
 
                                   
 
 
(1)   Group profit of the Operations Groups is earnings before financing interest, certain pension costs and income taxes.
 
(2)   Net capital employed of the Operations Groups represents total assets less tax assets, provisions and non-interest bearing liabilities other than tax liabilities.
 
(3)   Intangible assets, property, plant and equipment, acquisitions, non-current available-for-sale financial assets and investments accounted for using the equity method.
 
(4)   Includes amortization and impairments of intangible assets, depreciation of property, plant and equipment, and write-downs of non-current available-for-sale financial assets and investments accounted for using the equity method.
 
(5)   The primary business components of Communications (Com) are reported as discontinued operations. Com no longer represents an operating segment and will be dissolved during fiscal 2007.
 
(6)   Other Operations primarily refer to certain centrally-held equity investments and other operating activities not associated with a Group.
 
(7)   Includes cash paid for income taxes according to the allocation of income taxes to Operations, Financing and Real Estate, and Eliminations, reclassifications and Corporate Treasury in the Consolidated Statements of Income. Furthermore, the reclassification of interest payments in the Consolidated Statements of Cash Flow from operating activities into financing activities is shown in Eliminations. Interest payments are external interest paid as well as intragroup interest paid and received.

14


 

 
 
 
                                                                                             
                                                Net cash from                     Amortization,  
                                Net capital     operating and     Capital     depreciation and  
Total revenue     Group profit(1)     employed(2)     investing activities     spending(3)     impairments(4)  
2006     2005     2006     2005     9/30/06     9/30/05     2006     2005     2006     2005     2006     2005  
                                                                                             
  5,157       5,373       (751 )     (701 )     171       224       (679 )     (263 )     284       340       290       516  
  12,848       10,366       1,558       1,269       3,833       3,298       1,043       401       682       1,222       295       272  
  8,819       6,307       282       170       1,279       1,521       175       473       252       70       133       102  
  4,796       4,415       223       185       1,763       1,402       (115 )     121       244       159       110       110  
  10,086       8,061       779       969       1,945       1,546       337       236       603       557       217       198  
  6,509       4,250       315       218       1,701       1,634       139       23       185       163       128       85  
  4,493       4,186       72       43       111       42       12       (551 )     150       185       56       57  
  10,017       9,610       608       619       3,767       3,489       442       341       487       623       415       427  
  8,227       7,626       1,012       919       4,975       3,360       (391 )     393       1,662       1,035       289       278  
  4,563       4,300       456       456       1,976       1,977       413       455       358       311       261       265  
  4,955       4,355       (35 )     84       993       1,418       (128 )     304       210       204       136       262  
                                                                     
  80,470       68,849       4,519       4,231       22,514       19,911       1,248       1,933       5,117       4,869       2,330       2,572  
                                                                                             
  (5,068 )     (4,553 )     (569 )     (650 )     (6,516 )     (4,793 )     (575 )(7)     (3,591 )(7)     182       475       44       29  
              (343 )     (177 )                                                
                          64,224       61,750                                      
                                                                     
                                                                                             
                                                                                             
  75,402       64,296       3,607       3,404       80,222       76,868       673       (1,658 )     5,299       5,344       2,374       2,601  
                                                                     
                                                                                             
                Income before                                            
                income taxes     Total assets                                      
                                                                                             
  645       542       306       319       10,543       10,162       (219 )     (344 )     521       563       250       221  
  1,705       1,621       115       131       3,221       3,490       187       202       270       212       192       203  
  (10 )     (10 )                 (462 )     (339 )     242 (7)     195 (7)                        
                                                                     
  2,340       2,153       421       450       13,302       13,313       210       53       791       775       442       424  
                                                                     
  (1,489 )     (1,312 )     (18 )     368       (5,793 )     (8,369 )     90 (7)     (84) (7)                        
                                                                     
  76,253       65,137       4,010       4,222       87,731       81,812       973       (1,689 )     6,090       6,119       2,816       3,025  
                                                                     

15


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in millions of , except where otherwise stated and per share amounts)
1.  Basis of presentation
     The accompanying Consolidated Financial Statements present the operations of Siemens AG and its subsidiaries (the Company or Siemens) and have been prepared in accordance with International Financial Reporting Standards (IFRS) and its interpretations issued by the International Accounting Standards Board (IASB), as adopted by the European Union (EU). These are the Company’s first Consolidated Financial Statements under IFRS. The effects of the adoption of IFRS on the financial position, results of operations and cash flows of Siemens as presented herein are described below.
     Siemens has prepared and reported its Consolidated Financial Statements in euros (). Siemens is a German based multinational corporation with a balanced business portfolio of activities predominantly in the field of electronics and electrical engineering (for further information see Note 34).
     Siemens’ primary financial reporting for fiscal 2006 continues to be based on United States Generally Accepted Accounting Principles (U.S. GAAP) and includes the Consolidated Financial Statements prepared under U.S. GAAP to meet the legal requirements of the German Commercial Code (HGB) and the reporting requirements of the U.S. Securities and Exchange Commission (SEC) on Form 20-F. Siemens has the option under the German law to defer the application of IFRS until fiscal 2008. However, as significant momentum is developing with respect to the adoption of IFRS, the Company decided to publish full IFRS information earlier than required. The accompanying IFRS Consolidated Financial Statements are presented as supplemental information. As a result, two sets of Consolidated Financial Statements are published for fiscal 2006. These IFRS Consolidated Financial Statements include a reconciliation of equity and net income from U.S. GAAP to IFRS for all balance sheet dates presented, as well as a reconciliation of equity as of October 1, 2004, when IFRS was adopted. The IFRS Consolidated Financial Statements presented herein will serve as a basis for Siemens’ IFRS reporting beginning with the first quarter of fiscal 2007.
     Siemens applied all standards and interpretations issued by the IASB that were effective as of September 30, 2006. In addition, the Company early adopted certain other standards, amendments to standards and interpretations, including the following standards which had a significant impact:
    IAS 19 (Amendment), Actuarial Gains and Losses, Group Plans and Disclosures. This amendment provides for an additional option of recognizing actuarial gains and losses in full in the period in which they occur, outside profit or loss, directly in equity. The actuarial gains and losses are presented in the Consolidated Statements of Income and Expense recognized in Equity and recorded in full in Retained earnings in the period when they arise. Once recorded in equity, these actuarial gains and losses will not be recycled into the Consolidated Statements of Income in future periods. The amendment is effective for fiscal years beginning on or after January 1, 2006.
 
    IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions. This amendment is effective for fiscal years beginning on or after January 1, 2006. It is relevant to the Company, as it allows the Company to continue using cash flow hedge accounting for intragroup transactions, which is also permitted under U.S. GAAP.
 
    IFRS 7, Financial Instruments: Disclosures. This standard requires extensive disclosures about the significance of financial instruments for an entity’s financial position and results of operations, and qualitative and quantitative disclosures on the nature and extent of risks arising from financial instruments. It combines disclosure requirements from IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and adds new disclosure requirements. The standard is effective for reporting periods beginning on or after January 1, 2007. Siemens has decided to early adopt IFRS 7 in its 2006 financial statements and also presents comparative information for 2005 according to IFRS 7. IFRS 7 was also considered in determining the presentation of items on the face of the Consolidated Balance Sheets and the Consolidated Statements of Income.
     The Consolidated Financial Statements were authorised for issue by the Managing Board on December 18, 2006.

16


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
Financial statement presentation
     The presentation of the Company’s worldwide financial data is accompanied by a component model presentation breaking down Siemens’ financial position, results of operations and cash flows into three components (see below). These components contain the Company’s reportable segments (also referred to as Groups). Communications (Com) no longer represents an operating segment and will be dissolved in fiscal 2007 (for further information see Note 4 and Note 34).
    Siemens—Represents the Consolidated Financial Statements of the Company.
 
    Operations—Defined as Siemens’ ten operating Groups and certain operating activities not associated with these Groups, as well as centrally managed items including corporate headquarters, but excluding the activities of the Financing and Real Estate Groups and the Corporate Treasury.
 
    Financing and Real Estate—Siemens’ Financing and Real Estate Groups are responsible for the Company’s international leasing, finance, credit and real estate management activities.
 
    Eliminations, reclassifications and Corporate Treasury—Captures separately the consolidation of transactions among Operations and Financing and Real Estate, as well as certain reclassifications. This component also includes the Company’s Corporate Treasury activities.
     The Company’s presentation of Operations, Financing and Real Estate and Corporate Treasury reflects the management of these components as distinctly different business activities, with different goals and requirements. Management believes that this presentation provides a clearer understanding of the components of the Company’s financial position, results of operations and cash flows. The accounting principles applied to these components are generally the same as those used for Siemens. The Company has allocated shareholders’ equity to the Financing and Real Estate business based on a management approach which takes into consideration the inherent risk evident in the underlying assets. The remaining amount of total shareholders’ equity is shown under Operations. Income taxes are allocated to Eliminations, reclassifications and Corporate Treasury, Operations and Financing and Real Estate by applying the effective tax rate of Siemens to the income before income taxes of each respective component. Deferred income tax assets and liabilities are allocated to these components based on available component specific information and applicable proportions of such amounts to total assets and liabilities of Siemens. The financial data presented for the Operations and Financing and Real Estate and Eliminations, reclassifications and Corporate Treasury components are not intended to purport the financial position, results of operations and cash flows as if they were separate entities under IFRS.
     The information disclosed in these Notes relates to Siemens unless otherwise stated.
Explanation of transition to IFRS
     The most significant change from U.S. GAAP was the adoption of the new option to recognize actuarial gains and losses in equity in the period in which they occur. Thus, actuarial gains and losses were recognized directly in equity as of the date of transition to IFRS as well as in all subsequent periods presented.
     Siemens applied IFRS 1, First-time Adoption of International Financial Reporting Standards in making the transition to IFRS, with October 1, 2004 as the date of transition to IFRS. IFRS 1 requires that all IFRS standards and interpretations that are effective for the first IFRS Consolidated Financial Statements for the year ended September 30, 2006, be applied consistently and retrospectively for all fiscal years presented. However, this standard provides exemptions and exceptions to this general requirement in specific cases. Siemens applied the following exemptions:
a.  Business combinations
     Business combinations that occurred before October 1, 2004, were not restated retrospectively in accordance with IFRS 3, Business Combinations. Within the limits imposed by IFRS 1, the carrying amounts of assets acquired and liabilities assumed as part of past business combinations as well as the amounts of goodwill that arose from such transactions as they were determined under U.S. GAAP, are considered their deemed cost under IFRS at the date of transition.

17


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
b.  Currency translation differences
     Cumulative translation differences as of October 1, 2004, arising from translation into euro of the financial statements of foreign operations whose functional currency is other than euro were reset to zero. Accordingly, the cumulative translation differences were included in Retained earnings in the IFRS opening balance sheet. In the case of subsequent disposal of an entity concerned, no amount of currency translation difference relating to the time prior to the transition date will be included in the determination of the gain or loss on disposal of such entity.
c.  Share-based payment
     As permitted under IFRS 1, IFRS 2, Share-based Payment has not been retrospectively applied to all share-based payment awards. This exemption has been applied for all equity awards which were granted prior to November 7, 2002, as well as those equity awards granted prior to October 1, 2003, which vested before January 1, 2005. All such equity awards exempted from IFRS 2 continue to be accounted for under the intrinsic value approach as under U.S. GAAP.
Changes in presentation of the Consolidated Financial Statements
     The presentation of the Consolidated Financial Statements has been modified to comply with the requirements of IAS 1, Presentation of Financial Statements. Under IFRS, minority interests are presented within equity. As a result of applying the new option provided by IAS 19 to recognize actuarial gains and losses directly in equity, Consolidated Statements of Income and Expense recognized in Equity have been added.
Reconciliation of equity and net income from U.S. GAAP to IFRS
     The following reconciliation describes the effect of major differences between U.S. GAAP and IFRS on the equity as of September 30, 2006 and 2005 and in the opening balance sheet as of October 1, 2004, as well as on net income for fiscal years 2006 and 2005.
                                 
                            Opening  
                            balance sheet  
    Explanatory     September 30,     as of October  
    note     2006     2005     1, 2004  
Equity under U.S. GAAP
            29,306       27,022       26,760  
Change in presentation of minority interest
  a       702       656       529  
 
                         
Equity under U.S. GAAP, including minority interest
            30,008       27,678       27,289  
 
                         
Capitalization of development costs
  b       251       230       217  
Investments accounted for using the equity method
  c       (141 )     (164 )     (182 )
Sale and leaseback transactions
  d       207       186       208  
Financial instruments
  e       252       (266 )     (235 )
Pensions and other post-employment benefits
  f       (1,667 )     (849 )     (1,932 )
Termination benefits
  g       (532 )     (305 )     (347 )
Provisions
  h       (385 )     (234 )     (62 )
Other
            (191 )     (69 )     (36 )
Deferred taxes
  i       (1,527 )     (2,026 )     (1,664 )
 
                         
Total adjustments
            (3,733 )     (3,497 )     (4,033 )
 
                         
 
                               
Equity under IFRS
            26,275       24,181       23,256  
 
                         

18


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
                         
    Explanatory     Year ended
September 30,
 
    note     2006     2005  
Net income under U.S. GAAP
            3,033       2,248  
Change in presentation of minority interest
  a       213       158  
 
                   
Net income under U.S. GAAP, including minority interest
            3,246       2,406  
 
                   
Capitalization of development costs
  b       17       13  
Investments accounted for using the equity method
  c       32       15  
Sale and leaseback transactions
  d       21       (22 )
Financial instruments
  e       (294 )     64  
Pensions and other post-employment benefits
  f       613       552  
Termination benefits
  g       (231 )     42  
Provisions
  h       (148 )     (173 )
Other
            (110 )     (60 )
Deferred taxes
  i       189       (177 )
 
                   
Total adjustments
            89       254  
 
                   
 
                       
Net income under IFRS
            3,335       2,660  
 
                   
a.  Change in presentation of minority interest
     Under IFRS, minority interest is reported as a separate item within equity. U.S. GAAP requires minority interest to be presented separately from equity. Consistent with the balance sheet presentation, under IFRS the minorities’ share of net income is presented as an allocation of net income, whereas, under U.S. GAAP, the minorities’ share is considered in determining net income.
b.  Capitalization of development costs
     Under IFRS, development costs are capitalized, if specified criteria are met, while they are expensed under U.S. GAAP, except for internally generated software. The additional capitalization of product development costs (less related amortization) under IFRS increased equity by 251, 230 and 217 as of September 30, 2006 and 2005, and October 1, 2004, respectively. The resulting increase in net income in 2006 and 2005 was 17 and 13, respectively.
c.  Investments accounted for using the equity method
     IFRS requires that the application of the equity method be based on financial information provided by the associated companies and joint ventures that is in compliance with IFRS. Due to resulting IFRS adjustments relating to investments accounted for using the equity method, equity decreased by 141, 164 and 182 as of September 30, 2006 and 2005, and October 1, 2004, respectively. Net income under IFRS increased by 32 and 15 in 2006 and 2005, respectively, as compared to U.S. GAAP.
d.  Sale and leaseback transactions
     U.S. GAAP and IFRS differ with respect to the accounting for a gain arising from a sale and leaseback transaction. If the leaseback is an operating lease, any gain on sale is deferred over the life of the lease under U.S. GAAP. Under IFRS, the gain is immediately recognized in net income if the sale was established at fair value. Adjustments made in this respect increased equity under IFRS by 207, 186 and 208 as of September 30, 2006 and 2005, and October 1, 2004, respectively. The effect on net income was an increase of 21 in fiscal 2006 and a decrease of 22 in fiscal 2005.
e.  Financial instruments
     Under U.S. GAAP, the conversion feature in debt instruments convertible into shares of the issuer are generally not separated (bifurcated) from the debt instrument and accounted for separately at fair value. Under IFRS, a compound financial instrument with terms and conditions that grant the issuer the right to settle the option in cash upon conversion is divided into separate liability components at inception.

19


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     The conversion right component is considered a derivative instrument and measured at fair value through profit or loss. The residual liability component representing the debt obligation is measured at fair value at inception and is subsequently measured at amortized cost using the effective interest method. In the third quarter of fiscal 2006, Siemens decided to waive the cash settlement option of the convertible bond and reclassified the conversion right component, which is deemed to be an equity component, to Additional paid-in capital. As of September 30, 2006, equity increased by 230 mainly due to this reclassification of the conversion right component. As of September 30, 2005, and October 1, 2004, the bifurcated conversion right component reduced equity by 375 and 350, respectively, due to the consideration of the conversion right as a derivative instrument and its re-measurement to fair value as well as the accretion of the debt component. Net income decreased by 198 and 25 in fiscal 2006 and 2005, respectively, due to the fair value re-measurement of the conversion right and additional interest expense.
     Moreover, the ,,short-cut-method“ that may be applied under U.S. GAAP to hedge interest rate risk, if certain conditions are met, is not allowed under IFRS. As the requirements for the application of hedge accounting under IFRS are more restrictive, hedge accounting related to interest rate risk for certain fixed-rate debt obligations was discontinued. IFRS 1 requires that the corresponding basis adjustments recognized under U.S. GAAP as of September 30, 2004 be carried forward to the IFRS opening balance and deferred over the remaining life of the related instrument. The termination of hedge accounting resulted in a decrease in equity as of September 30, 2006 of 7 and an increase in equity as of September 30, 2005, of 89. The effect on net income was a decrease of 96 in fiscal 2006 and an increase of 89 in fiscal 2005.
     Under U.S. GAAP, equity instruments for which there is no readily determinable market value are recorded at cost. Under IFRS, all equity instruments, including non-exchange traded equity investments are measured at fair value, if reliably measurable, with unrealized gains and losses included in Other components of equity, net of applicable deferred income taxes. Investments for which a fair value is not reliably measurable are recorded at cost. The adjustments increased equity as of September 30, 2006 and 2005, and October 1, 2004, by 29, 20 and 115, respectively. The adjustment of 115 relates primarily to fair value adjustments on shares in Juniper Networks, Inc. (Juniper), which under U.S. GAAP were measured at cost because they were subject to sales restrictions until September 30, 2004.
f.  Pensions and other post-employment benefits
     Under IFRS, actuarial gains and losses resulting from changes in actuarial assumptions used to measure pension plan obligations are recognized directly in equity in the period in which they occur based on the new alternative introduced by IAS 19 (amended), which Siemens decided to apply in connection with the early adoption of this amended standard. As of October 1, 2004 (the date of transition to IFRS), all actuarial gains and losses and vested past service cost previously unrecognized under U.S. GAAP were recorded in Retained earnings. Under U.S. GAAP, unrecognized actuarial gains and losses exceeding the “corridor” continue to be amortized over the average remaining service period of active plan participants. Likewise, unrecognized vested past service cost continues to be amortized over the average remaining service period of active plan participants. As the effect of actuarial gains and losses do not impact the income statement under IFRS, increased net income resulted under IFRS of 602 and 549 in 2006 and 2005, respectively, as compared to U.S. GAAP for which amortization of net unrecognized actuarial losses existed.
     U.S. GAAP defines an accumulated benefit obligation (ABO) that, in contrast to the projected benefit obligation, does not include assumptions about future compensation increases. If the ABO exceeds the fair value of plan assets, a liability at least equal to such difference – referred to as the minimum liability – is recorded on the balance sheet. The difference between the amount recorded on the balance sheet and the minimum liability –referred to as the additional minimum liability (AML) – is recognized either as an intangible pension asset, to the extent that past service cost exists, or within Accumulated Other Comprehensive Income (AOCI) (similar to Other components of equity under IFRS). As the AML recorded by the Company under U.S. GAAP represents a significant portion of the total unrecognized actuarial losses existing at each balance sheet date presented, the reduction in equity compared to U.S. GAAP resulting from pensions was significantly less than the amount of such unrecognized actuarial losses.
     The overall impact associated with these changes was an increase in the unfunded liabilities for pension plans and similar commitments and a decrease in equity of 1,588, 749 and 1,877 as of September 30, 2006 and 2005, and as of October 1, 2004, respectively. Besides pensions, differences in the accounting for other long-term post employment benefits affected equity and net income. Other long-term post-employment benefits are employee benefits that are paid regardless of the reason for the employee’s departure. Differences between the aforementioned amounts and the amounts provided in the tables above resulted primarily from such benefits.

20


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
g.  Termination benefits
     A significant portion of the adjustments resulting from termination benefits relates to the partial retirement program available to Siemens’ employees in Germany. The majority of participants opted for a partial retirement arrangement that is typically composed of a full-time service period and an inactive period, where the employee receives 50% of the salary for each year during the entire partial retirement period. In addition, participants receive an annual bonus and a severance payment at the end of the inactive period. While under U.S. GAAP both the annual bonus to be paid in the inactive period and the severance payment are recognized as expense on a pro rata basis over the service period, IFRS requires that these benefit elements of the partial retirement arrangement are recognized in full as expense immediately when a partial retirement agreement is established. Adjustments to partial retirement obligations reduced equity under IFRS by 213, 296 and 369 as of September 30, 2006 and 2005, and October 1, 2004, respectively, whereas net income increased by 82 and 73 in 2006 and 2005, respectively.
     Another difference between U.S. GAAP and IFRS arises from voluntary termination agreements. Under U.S. GAAP, a liability is recognized only when a voluntary termination agreement has been signed by both the employer and the employee. By contrast, under IFRS, a liability is recognized when the employer has irrevocably committed itself to grant a termination benefit. Such agreements resulted in lower equity under IFRS than under U.S. GAAP by 319, 8 and 5 as of September 30, 2006 and 2005, and October 1, 2004, respectively. Net income decreased by 313 and 3 for the years ended September, 30, 2006 and 2005, respectively.
h.  Provisions
     Under IFRS, provisions generally must be discounted and recognized at present value at each balance sheet date, i.e. the discount rate should be adjusted at each reporting date to reflect current market conditions. In contrast, under U.S. GAAP, discounting of provisions is limited to specific cases, such as to asset retirement obligations, whereby U.S. GAAP requires such obligations be discounted only using the discount rate determined when the provision is initially recognized. With respect to asset retirement obligations, applicable interest rates were therefore different for IFRS compared to U.S. GAAP. Due to a lower discount rate under IFRS, the present values to be recognized under IFRS increased with a negative effect on equity of 85 as of October 1, 2004. A continuing decline in the discount rate in fiscal 2005 led to a significant increase in the present value with a corresponding decrease in equity of 219 as of September 30, 2005 and in net income of 134 in 2005. As of September 30, 2006 equity under IFRS was 157 lower than under U.S. GAAP, whereas net income was 62 higher due to an increase in the discount rate in fiscal 2006 as compared to 2005.
     This reconciling item contains various other differences with respect to recognition and measurement of provisions, such as provisions for vacant property and contingent liabilities with a range of possible outcomes where each point in that range is as likely as any other.
i.  Deferred taxes
     The adjustments as described above resulted in additional differences between the carrying amount of assets and liabilities in the Consolidated Financial Statements and their tax basis. Deferred taxes were recognized on temporary differences, with differences in pension accounting between U.S. GAAP and IFRS having the most significant impact.
     This reconciling item also includes tax effects resulting from differences in accounting for income taxes between U.S. GAAP and IFRS. For the Company, such effects mainly result from calculating deferred taxes on elimination of intragroup profits. According to IFRS, deferred taxes on intragroup profit elimination are calculated with reference to the tax rate of the acquiring company whereas, under U.S. GAAP, the tax rate in the seller’s or manufacturer’s jurisdiction is used.

21


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
Assets held for disposal and discontinued operations
     According to IFRS, a discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale. Under U.S. GAAP, the results of operations of a component of an entity that either has been disposed of or is classified as held for sale shall be reported in discontinued operations if the operations and cash flows have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.
     The results and financial position of the carrier-related business and the enterprise networks business have been presented as discontinued operations under IFRS. These businesses are not presented as discontinued operations under U.S. GAAP due to Siemens’ anticipated continuing involvement in the carrier-related business and the enterprise networks business and therefore have been presented as continuing activities in Siemens’ Consolidated Financial Statements under U.S. GAAP.
Impact on the Consolidated Statements of Cash Flow
     The adjustments made to the Consolidated Statements of Cash Flow only change the allocation of cash flows between operating, investing and financing activities and had no impact on the net change in cash and cash equivalents.
     As described above in b., under IFRS, certain development costs are capitalized as intangible assets in addition to those already capitalized under U.S. GAAP. The corresponding cash outflows are presented within cash flows from investing activities as additions to intangible assets. Therefore, Net cash provided by (used in) investing activities as of September 30, 2006 and 2005, respectively, decreased by 82 and 80 under IFRS compared to U.S. GAAP with a corresponding increase in Net cash provided by (used in) operating activities.
     Under IFRS, the Company has elected to present cash outflows for interest paid within Net cash provided by (used in) financing activities. This decreased Net cash provided by (used in) financing activities by 596 and 441 in 2006 and 2005, respectively, with a corresponding increase in Net cash provided by (used in) operating activities, where interest paid was included under U.S. GAAP.
2.  Summary of significant accounting policies
     Basis of consolidation—The Consolidated Financial Statements include the accounts of Siemens AG and its subsidiaries which are directly or indirectly controlled. Control is generally conveyed by ownership of the majority of voting rights. Additionally, the Company consolidates special purpose entities (SPE ´s) when, based on the evaluation of the substance of the relationship with Siemens, the Company concludes that it controls the SPE. Associated companies—companies in which Siemens has the ability to exercise significant influence over operating and financial policies (generally through direct or indirect ownership of 20% to 50% of the voting rights)—are recorded in the Consolidated Financial Statements using the equity method of accounting. Companies in which Siemens has joint control are also recorded using the equity method.
     Business combinations—All business combinations are accounted for under the purchase method. The cost of an acquisition is measured at the fair value of the assets given and liabilities incurred or assumed at the date of exchange plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities assumed in a business combination (including contingent liabilities) are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Company’s share of the identifiable net assets acquired is recorded as goodwill.
     Foreign currency translation—The assets and liabilities of foreign subsidiaries, where the functional currency is other than the euro, are translated using period-end exchange rates, while the statements of income are translated using average exchange rates during the period. Differences arising from such translations are recognized within equity.

22


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     The exchange rates of the significant currencies of non-euro countries used in the preparation of the Consolidated Financial Statements were as follows:
                                         
            Year-end exchange rate     Annual average rate  
            1 quoted into     1 quoted into  
            currencies specified     currencies specified  
            below     below  
            September 30,     Fiscal year  
Currency   ISO Code     2006     2005     2006     2005  
U.S. Dollar
  USD     1.266       1.204       1.230       1.273  
British pound
  GBP     0.678       0.682       0.685       0.688  
     Revenue recognition—Revenue is recognized for product sales when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the risks and rewards of ownership have been transferred to the customer, the amount of revenue can be measured reliably, and collection of the related receivable is reasonably assured. If product sales are subject to customer acceptance, revenues are not recognized until customer acceptance occurs. Revenues from construction-type projects are generally recognized under the percentage-of-completion method, based on the percentage of costs to date compared to the total estimated contract costs, contractual milestones or performance. Revenues from service transactions are recognized as services are performed. For long-term service contracts, revenues 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. Revenue from software arrangements is recognized at the time persuasive evidence of an arrangement exists, delivery has occurred, the amount of revenue can be measured reliably and collectibility is probable. Revenue from maintenance, unspecified upgrades or enhancements and technical support is allocated using the residual value method and is recognized over the period such items are delivered. If an arrangement to deliver software requires significant production, modification, or customization of software, the entire arrangement is accounted for under the percentage-of-completion method. Operating lease income for equipment rentals is recognized on a straight-line basis over the lease term. Interest income from finance leases is recognized using the effective interest method.
     Sales of goods and services sometimes involve the provision of multiple elements. In these cases, the Company determines whether the contract or arrangement contains more than one unit of accounting. An arrangement is separated if (1) the delivered element(s) has value to the customer on a stand-alone basis, (2) there is objective and reliable evidence of the fair value of the undelivered element(s) and (3), if the arrangement includes a general right of return relative to the delivered element(s), delivery or performance of the undelivered element(s) is considered probable and substantially in the control of the Company. If all three criteria are fulfilled, 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. In cases where there is objective and reliable fair value evidence of the undelivered elements but not for one or more of the delivered elements, the residual method is used, i.e. the amount allocated to delivered elements equals the total arrangement consideration less the aggregate fair value of the undelivered elements. Objective and reliable fair values are sales prices for the component when it is regularly sold on a stand-alone basis or third-party prices for similar components. If the three criteria are not met, revenue is deferred until such criteria are met or until the period in which the last undelivered element is delivered. The amount allocable to the delivered elements is limited to the amount that is not contingent upon delivery of additional elements or meeting other specified performance conditions.
     Product-related expenses and contract losses—Provisions for estimated costs related to product warranties are recorded in Cost of goods sold and services rendered at the time the related sale is recognized, and are established on an individual basis, except for consumer products. The estimates reflect historic trends of warranty costs, as well as information regarding product failure experienced during construction, installation or testing of products. In the case of new products, expert opinions and industry data are also taken into consideration in estimating product warranty provisions. Expected contract losses are recognized in the period when the current estimate of total contract costs exceeds contract revenue.
     Research and development costs—Costs of research activities undertaken with the prospect of gaining new scientific or technical knowledge and understanding are expensed as incurred.
     Costs for development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, are capitalized if development costs can be measured reliably; the product or process is technically and commercially feasible; future economic benefits are probable; and Siemens intends, and has sufficient resources, to complete development and to use or sell the asset. The costs capitalized include the cost of materials, direct labour and directly attributable general overhead expenditure that serves to prepare the asset for use. Such capitalized costs are included in Other intangible assets as other internally generated intangible assets (see Note 16). Other development costs are expensed as incurred. Capitalized development costs are stated at cost less accumulated amortization and impairment losses with an amortization period of generally three to five years.

23


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     Earnings per share—Basic earnings per share is computed by dividing income from continuing operations and net income, both attributable to ordinary shareholders of Siemens AG by the weighted average shares outstanding during the year. Diluted earnings per share is calculated by assuming conversion or exercise of all potentially dilutive securities, stock options and stock awards.
     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 based on cash-generating units, which at Siemens are its divisions. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to the division or divisions that are expected to benefit from the synergies of the business combination in which the goodwill arose. If the carrying amount of the division, to which the goodwill is allocated, exceeds its recoverable amount goodwill allocated to this division must be reduced accordingly. The recoverable amount is the higher of the division’s fair value less costs to sell and its value in use. Siemens generally determines the recoverable amount of a division based on its fair value less costs to sell. These values are generally determined based on discounted cash flow calculations. Impairment losses on goodwill are not reversed in future periods if the recoverable amount exceeds the carrying amount of the cash-generating unit to which the goodwill is allocated. See Note 15 for further information.
     Other intangible assets—Other intangible assets consist of software and other internally generated intangible assets, patents, licenses and similar rights. The Company amortizes intangible assets with finite useful lives on a straight-line basis over their respective estimated useful lives to their estimated residual values. Estimated useful lives for software, patents, licenses and other similar rights generally range from three to five years, except for intangible assets with finite useful lives acquired in business combinations. Intangible assets acquired in business combinations primarily consist of customer relationships and technology. Weighted average useful lives in specific acquisitions ranged from nine to twenty-two years for customer relationships and from seven to twelve years for technology. Intangible assets which are determined to have indefinite useful lives are not amortized, but instead tested for impairment at least annually. See Note 16 for further information.
     Property, plant and equipment—Property, plant and equipment is valued at cost less accumulated depreciation and impairment losses. If the costs of certain components of an item of property, plant and equipment are significant in relation to the total cost of the item, they are accounted for and depreciated separately. Depreciation expense is recognized using the straight-line method. Costs of construction of qualifying long-term assets include capitalized interest, which is amortized over the estimated useful life of the related asset. 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 with finite useful lives—The Company reviews property, plant and equipment and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by the comparison of the carrying amount of the asset to the recoverable amount, which is the higher of the asset’s value in use and its fair value less costs to sell. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their recoverable amount. If the fair value cannot be determined, the assets’ value in use is applied as their recoverable amount. The assets’ value in use is measured by discounting their estimated future cash flows. If there is an indication that the reasons which caused the impairment no longer exist, Siemens would consider the need to reverse all or a portion of the impairment.
     The Company’s property, plant and equipment and other intangible assets to be disposed of are recorded at the lower of carrying amount or fair value less costs to sell and depreciation is ceased.

24


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     Discontinued operations—Discontinued operations are reported when a component of an entity comprising operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity is classified as held for sale or has been disposed of, if the component either (a) represents a separate major line of business or geographical area of operations or (b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or (c) is a subsidiary acquired exclusively with a view to resale.
     Income taxes—The Company applies IAS 12, Income Taxes. Under the asset and liability method of IAS 12, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the income statement, unless related to items directly recognized in equity, in the period the new laws are substantively enacted. Deferred tax assets are recognized to the extent that it is probable that future taxable income will be available against which the deductible temporary differences, unused tax losses and unused tax credits can be utilized.
     Inventories—Inventory is valued at the lower of acquisition or production cost or net realizable value, cost being generally determined on the basis of an average or first-in, first-out method. Production costs comprise direct material and labor and applicable manufacturing overheads, including depreciation charges. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
     Provisions—A provision is recognized in the balance sheet when the Company has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are recognized at present value by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money. Provisions for onerous contracts are measured at the lower of the expected cost of fulfilling the contract and the expected cost of terminating the contract. Additions to provisions are generally recognized in the income statement. The present value of legal obligations associated with the retirement of property, plant and equipment (asset retirement obligations) that result from the acquisition, construction, development or normal use of an asset is added to the carrying amount of the associated asset. The additional carrying amount is depreciated over the life of the asset. If the asset retirement obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement.
     Financial instruments—A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets of the Company mainly include cash and cash equivalents, available-for-sale financial assets, trade receivables, loans receivable, finance lease receivables and derivative financial instruments with a positive fair value. Financial liabilities of the Company mainly comprise notes and bonds, loans from banks, commercial paper, trade payables, finance lease payables and derivative financial instruments with a negative fair value.
     Financial instruments are recognized on the balance sheet when Siemens becomes a party to the contractual obligations of the instrument. For regular way purchases or sales of financial assets, i.e. purchases or sales under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned, the trade date is applied.
     Initially, financial instruments are recognized at their fair value. Transaction costs directly attributable to the acquisition or issue of financial instruments are only recognized in determining the carrying amount, if the financial instruments are not measured at fair value through profit or loss. Subsequently, financial assets and liabilities are measured according to the category — cash and cash equivalents, available-for-sale financial assets, loans and receivables, financial liabilities measured at amortized cost or financial assets and liabilities classified as held for trading — to which they are assigned.
     Cash and cash equivalents—The Company considers all highly liquid investments with less than three months maturity 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 all classified as available-for-sale financial assets. They are accounted for at fair value if reliably measurable, with unrealized gains and losses included in Other components of equity, net of applicable deferred income taxes. Equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are recorded at cost.

25


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     When available-for-sale financial assets incur a decline in fair value below acquisition cost and there is objective evidence that the asset is impaired, the cumulative loss that has been recognized in equity is removed from equity and recognized in the Consolidated Statements of Income. The Company considers all available evidence such as market conditions and prices, investee-specific factors and the duration and the extent to which fair value is less than acquisition cost in evaluating potential impairment of its available-for-sale financial assets. An impairment loss may be reversed in subsequent periods for debt instruments, if the reasons for the impairment no longer exist.
     Loans and receivables—Financial assets classified as loans and receivables are measured at amortized cost using the effective interest method less any impairment losses. Impairment losses on trade and other receivables are recognized using separate allowance accounts. See Note 3 for further information regarding the determination of impairment.
     Financial liabilities—Siemens measures financial liabilities, except for derivative financial instruments, at amortized cost using the effective interest method.
     Derivative financial instruments—Derivative financial instruments, such as foreign currency exchange contracts and interest rate swap contracts, are measured at fair value. Derivative instruments are classified as held for trading unless they are designated as hedging instruments, for which hedge accounting is applied. Changes in the fair value of derivative financial instruments are recognized periodically either in net income or, in the case of a cash flow hedge, in Other components of equity, net of applicable deferred income taxes. Certain derivative instruments embedded in host contracts are also accounted for separately as derivatives.
     Fair value hedges—The carrying amount of the hedged item is adjusted by the gain or loss attributable to the hedged risk. Where an unrecognized firm commitment is designated as the hedged item, the subsequent cumulative change in its fair value is recognized as a separate financial asset or liability with corresponding gain or loss recognized in net income.
     For hedged items carried at amortized cost, the adjustment is amortized such that it is fully amortized by maturity of the hedged item. For hedged firm commitments the initial carrying amount of the assets or liabilities that result from meeting the firm commitments are adjusted to include the cumulative changes in the fair value that were previously recognized as separate financial assets or liabilities.
     Cash flow hedges—The effective portion of changes in the fair value of derivative instruments designated as cash flow hedges are recognized in Other components of equity, net of applicable deferred income taxes, and any ineffective portion is recognized immediately in net income. Amounts accumulated in equity are reclassified into net income in the same periods in which the hedged item affects net income.
     See Note 29, Derivative financial instruments and hedging activities for further information.
     Share-based payment—IFRS 2 distinguishes between cash-settled and equity-settled share-based payment transactions. For both types, the fair value is measured at grant date and the compensation expense is allocated over the period during which the employees become unconditionally entitled to the awards. Cash-settled awards are remeasured at fair value on each reporting date until the award is settled. Siemens uses a Black-Scholes option pricing model to determine the fair value of its share-based payment plans. See Note 31 for further information on share-based payment transactions.

26


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
3.  Management estimates and judgments
     Certain of these accounting policies require critical accounting estimates that involve complex and subjective judgments and the use of assumptions, some of which may be for matters that are inherently uncertain and susceptible to change. Such critical accounting estimates could change from period to period and have a material impact on financial condition or results of operations. Critical accounting estimates could also involve estimates where management reasonably could have used a different estimate in the current accounting period. Management cautions that future events often vary from forecasts and that estimates routinely require adjustment.
     Revenue recognition on construction contracts—The Groups, particularly PG, TS, I&S, PTD and SBT, conduct a significant portion of their business under construction contracts with customers. The Company generally accounts for construction projects using the percentage-of-completion method, recognizing revenue as performance on a contract progresses. This method places considerable importance on accurate estimates of the extent of progress towards completion. Depending on the methodology to determine contract progress, the significant estimates include total contract costs, remaining costs to completion, total contract revenues, contract risks and other judgments. Management of the operating Groups continually reviews all estimates involved in such construction contracts and adjusts them as necessary. The Company also uses the percentage-of-completion method for projects financed directly or indirectly by Siemens. In order to qualify for such accounting, the credit quality of the customer must meet certain minimum parameters as evidenced by the customer’s credit rating or by a credit analysis performed by Siemens Financial Services (SFS), which performs such reviews in support of the Company’s Corporate Executive Committee. At a minimum, a customer’s credit rating must be single B from external rating agencies, or an equivalent SFS-determined rating. In cases where the credit quality does not meet such standards, the Company recognizes revenue for construction contracts and financed projects based on the lower of cash if irrevocably received, or contract completion. The Company believes the credit factors used provide a reasonable basis for assessing credit quality.
     Trade and other receivables—The allowance for doubtful accounts involves significant management judgment and review of individual receivables based on individual customer creditworthiness, current economic trends and analysis of historical bad debts on a portfolio basis. For the determination of the country-specific component of the individual allowance, management also considers country credit ratings, which are centrally determined based on information from external rating agencies. Regarding the determination of the valuation allowance derived from a portfolio-based analysis of historical bad debts, a decline of receivables in volume results in a corresponding reduction of such provisions and vice versa. Siemens also selectively assists customers through arranging financing from various third-party sources, including export credit agencies, in order to be awarded supply contracts. In addition, the Company provides direct vendor financing and grants guarantees to banks in support of loans to Siemens customers when necessary and deemed appropriate.
     Goodwill—Siemens tests at least annually whether goodwill has suffered any impairment, in accordance with its accounting policy. The determination of the recoverable amount of a division to which goodwill is allocated involves the use of estimates by management. The Company uses discounted cash flow based methods. These discounted cash flow calculations use five-year projections that are based on the financial budgets approved by management. Cash flow projections take into account past experience and represent management’s best estimate about future developments. Cash flows after the planning period are extrapolated using individual growth rates. Key assumptions on which management has based its determination of fair value less costs to sell and value in use include estimated growth rates, weighted average cost of capital and tax rates. These estimates, including the methodology used, can have a material impact on the respective values and ultimately the amount of any goodwill impairment.
     Pension plans and similar commitments—Pension benefit costs and benefits are determined in accordance with actuarial valuations, which rely on key assumptions including discount rates and expected return on plan assets. For all pension plans, asset values are based upon the fair value of plan assets at the balance sheet date. This value is the basis for the determination of the return on plan assets. Other post-employment benefit costs and benefits are determined in accordance with actuarial valuations, which rely on key assumptions including applicable discount rates and health care trend rates. The discount rate assumptions reflect the rates available on high-quality fixed-income investments of appropriate duration at the balance sheet date. The expected return on plan assets assumption is determined on a uniform basis, considering long-term historical returns, asset allocation, and future estimates of long-term investment returns. Other key assumptions for pension and other post-employment benefit costs and benefits are based in part on current market conditions. Pension and related other post-employment benefit costs or benefits could change due to variations in these underlying key assumptions. For a discussion of the current funding status and the impact of these critical assumptions, see Note 22.

27


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     Provisions—Significant estimates are involved in the determination of provisions related to contract losses, warranty costs and legal proceedings. A significant portion of the business of certain of the operating Groups is performed pursuant to long-term contracts, often for large projects, in Germany and abroad, awarded on a competitive bidding basis. Siemens records a provision for contract losses when current estimates of total contract costs exceed contract revenue. Such estimates are subject to change based on new information as projects progress toward completion. Loss contracts are identified by monitoring the progress of the project and updating the estimate of total contract costs which also requires significant judgment relating to achieving certain performance standards, for example in the IT service business, and estimates involving warranty costs.
4.  Acquisitions, dispositions and discontinued operations
a)  Acquisitions
     During the years ended September 30, 2006 and 2005, the Company completed a number of acquisitions. These acquisitions have been accounted for under the purchase method and have been included in the Company’s Consolidated Financial Statements since the date of acquisition.
     In fiscal 2006, Siemens signed an agreement to acquire the diagnostics division of Bayer Aktiengesellschaft, Germany for an expected purchase price of approximately 4.2 billion. The acquisition will enable Medical Solutions (Med) to expand its position in the growing molecular diagnostics market. The transaction, which has already received European Union and U.S. regulatory approval, is expected to close in the first half of fiscal 2007.
     aa) Acquisitions in fiscal 2006
     In the fourth quarter of fiscal 2006, Siemens completed the acquisition of the immunodiagnostics provider Diagnostic Products Corporation, USA (DPC). The acquisition, which is integrated into Med, will enable Siemens to expand its existing healthcare solutions portfolio. Preliminary acquisition costs amount to 1,414 (including 94 cash acquired). DPC, now wholly owned by Siemens, was consolidated as of August 2006. The Company has not yet finalized the purchase price allocation. Based on the preliminary purchase price allocation, approximately 260 was allocated to intangible assets subject to amortization and approximately 750 to goodwill.
     In fiscal 2006, the Company acquired a number of other entities, which are not significant individually, including the coal gasification business of the Swiss Sustec-Group, Wheelabrator Air Pollution Control, Inc., USA, a supplier of air pollution control and reduction products and solutions for the coal-fired power and industrial markets, both at Power Generation (PG), Electrium Limited, UK, a vendor of electrical installation systems at Automation and Drives (A&D) and Bewator, Sweden, a supplier of products and systems for access control solutions at Siemens Building Technologies (SBT). The combined preliminary purchase price of these acquisitions amounts to 393.
     ab) Acquisitions in fiscal 2005
     In May 2005, the Company acquired CTI Molecular Imaging, Inc. (CTI), USA. The primary reason for the acquisition was to strengthen the Company’s commitment to molecular imaging development. Siemens previously owned a 49% interest in a joint venture consolidated by CTI before the acquisition of which Siemens was the primary customer. CTI was integrated into Med and consolidated as of May 2005, when it became a wholly owned subsidiary. The acquisition costs amount to 809 (including 60 in cash acquired). Based on the final purchase price allocation, 157 was allocated to intangible assets subject to amortization and 556 to goodwill. Of the 157 intangible assets, 99 was allocated to technology and 44 to customer relationships. Technology and customer relationships are amortized on a straight-line basis over weighted-average useful lives of 9 years.

28


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     In fiscal 2005, the Company acquired, in several steps, the Austrian engineering group VA Technologie AG (VA Tech) for acquisition costs of 1,049 (including 535 cash acquired). The VA Tech business was consolidated as of July 15, 2005, when it became a wholly owned subsidiary of Siemens. VA Tech’s metallurgy, power transmission and distribution, and infrastructure activities were mainly integrated into I&S and PTD to support their global market targets. Smaller portions were integrated into other business activities. In order to comply with a European antitrust ruling, the Company sold the majority of the VA Tech power generation business, including the hydropower activities, to Andritz AG of Austria, in May 2006. No gain or loss was recorded in connection with the sale of this business. The difference between the consideration received upon the sale and the book value of the business resulted in an increase in goodwill. Based on the final purchase price allocation for the VA Tech acquisition, approximately 142 was allocated to intangible assets subject to amortization and 1,054 to goodwill. Of the 142 intangible assets, 55 was allocated to order backlog and 26 to technology. Order backlog and technology are amortized on a straight-line basis over weighted-average useful lives of four and seven years, respectively.
     In July 2005, the Company completed the acquisition of all shares of Flender Holding GmbH, Germany (Flender), a supplier of mechanical and electrical drive equipment, focusing on gear technology. The primary reason for the acquisition was to enable the Company to offer a full drive train (motor, inverter, gear) to customers. The business is being integrated into A&D and was consolidated as of July 2005. The acquisition costs amount to 702. Based on the final purchase price allocation, 409 was allocated to intangible assets subject to amortization and 428 was recorded as goodwill. Of the 409 intangible assets, 264 was allocated to customer relationships and 101 to technology. Customer relationships and technology are amortized over weighted-average amortization periods of 12 years and 10 years, respectively.
     In fiscal 2005, the Company acquired Bonus Energy A/S, Denmark, a supplier of wind energy systems and substantially all of the assets of Robicon Corporation, USA, a manufacturer of medium voltage drives and power controls. The combined purchase price of the two acquisitions amounts to 476.
     The Company made certain other acquisitions during the years ended September 30, 2006 and 2005, which did not have a significant effect on the Consolidated Financial Statements.
b)  Dispositions
     At the beginning of April 2006, Siemens Business Services (SBS) closed the sale of its Product Related Services (PRS) business to Fujitsu Siemens Computers (Holding) BV.
     In the fourth quarter of fiscal 2005, Siemens announced the carve out of the Distribution and Industry Logistics (DI) and Material Handling Products (MHP) divisions, formerly of the Logistics and Assembly Systems Group (L&A), into separate entities (Dematic business). The Dematic business has been reported in Other Operations for all periods presented. In June 2006, Siemens signed an agreement to divest a significant portion of its Dematic business to Triton Managers II Limited based in Jersey. Closing of the transaction occurred on August 31, 2006. The disposal loss on the transaction amounted to 39 and is reported in Other operating expense.
c)  Discontinued operations
     In June 2006, Siemens and Nokia Corporation (Nokia), Finland announced an agreement to contribute the carrier-related operations of Siemens and the Networks Business Group of Nokia into a new company, to be called Nokia Siemens Networks (NSN), in exchange for shares in NSN. Siemens and Nokia will each own an economic share of approximately 50% of NSN. Siemens expects to account for its investment in NSN using the equity method. The transaction is expected to close in the first half of fiscal 2007 and is subject to customary regulatory approvals (European Union approval having been received on November 13, 2006), the completion of closing conditions, and agreement on a number of detailed implementation steps. Siemens expects to realize a gain on this transaction.
     The Company also plans to dispose of its enterprise networks business in fiscal 2007. Both the enterprise networks business and the carrier-related operations are still included in the former operating Group, Com, which no longer represents an operating segment as of September 30, 2006. The Mobile Devices (MD) business was also included in Com prior to its sale, as described below. The remaining business activities of Com that are not held for disposal are currently presented in Other Operations. Except for these businesses, the historical results of Com are presented as discontinued operations in the Company’s Consolidated Statements of Income for the years ended September 30, 2006 and 2005.

29


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     In fiscal 2005, Siemens signed an agreement to sell its MD business to BenQ Corporation (BenQ) based in Taiwan (the Agreement). The Agreement also provided for the sale of MD’s operation included in Siemens Shanghai Mobile Communications Ltd. in the Peoples Republic of China (SSMC), subject to the consent of the Company’s minority shareholders which was obtained in July 2005. The MD transaction, excluding SSMC and activities in certain countries (Deferred Countries), was completed on September 30, 2005. In fiscal 2005, the losses directly attributable to BenQ amounted to 411. The net result of discontinued operations in fiscal 2005 includes additional exit related charges of 131 resulting in a total loss recognized on the sale of MD (excluding SSMC) of 542. As part of the Agreement, Siemens purchased 50 in Global Depositary Receipts (GDR ´s) on common shares in BenQ in December 2005, which at that time represented a 2.4 percent investment in BenQ (see Note 10). All of the MD activities for which the transaction was not completed as of September 30, 2005, including the MD operations of Siemens Shanghai Mobile Communications Ltd. in the Peoples Republic of China, were sold in fiscal 2006. No additional direct gain or loss on the transaction was realized in fiscal 2006. Discontinued operations in fiscal 2006 includes charges pursuant to the terms of the MD disposal transaction, including substantial effects stemming from the insolvency of BenQ Mobile GmbH & Co. OHG, Germany.
     The assets and liabilities of the above transactions were classified on the balance sheet as held for disposal and measured at the lower of their carrying amount or fair value less costs to sell.
     The following amounts of the major classes of assets and liabilities classified as held for disposal as of September 30, 2006 relate to the carrier networks business and the enterprise networks business, and as of September 30, 2005 relate to the MD business:
                 
    September 30,  
    2006     2005  
Trade and other receivables
    2,706       89  
Inventories
    2,135       104  
Goodwill
    369        
Property, plant and equipment
    645       43  
Other assets
    1,309       9  
 
           
Assets classified as held for disposal
    7,164       245  
 
           
 
               
Trade payables
    2,077       228  
Current provisions
    576       45  
Pension plans and similar commitments
    381       1  
Non-current provisions
    121        
Payroll and social security taxes
    450        
Other liabilities
    1,780       15  
 
           
Liabilities associated with assets classified as held for disposal
    5,385       289  
 
           
     The net results of discontinued operations presented in the Consolidated Statements of Income consist of the following components:
                 
    Year ended  
    September 30,  
    2006     2005  
Revenue
    13,428       15,440  
Costs and expenses
    (13,294 )     (15,948 )
Loss on disposal of discontinued operations
          (411 )
 
           
Income (loss) from discontinued operations before income taxes
    134       (919 )
 
           
Income taxes
    94       257  
 
           
Income (loss) from discontinued operations, net of income taxes
    228       (662 )
 
           
     The net income tax benefit for fiscal 2006 related to discontinued operations consists of deferred tax benefits generated on pre-tax losses in jurisdictions with higher statutory income tax rates that were only partially offset by income tax expense generated on pre-tax income in jurisdictions with lower statutory income tax rates.
     Within Net cash provided by (used in) financing activities dividends paid to minority shareholders include 31 and 37, respectively, relating to discontinued operations for the fiscal years ended September 30, 2006 and 2005.

30


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
5.  Other operating income
                 
    Year ended  
    September 30,  
    2006     2005  
Gains on sales of real estate
    208       154  
Gains on disposals of businesses
    54       91  
Other
    385       320  
 
           
 
    647       565  
 
           
     Other in fiscal 2006, includes a gain of 70 related to the settlement of an arbitration proceeding.
6.  Other operating expense
                 
    Year ended  
    September 30,  
    2006     2005  
Impairment of goodwill
          (262 )
Losses on sales of real estate
    (40 )     (27 )
Losses on disposals of businesses
    (109 )     (70 )
Other
    (116 )     (67 )
 
           
 
    (265 )     (426 )
 
           
     Impairment of goodwill of 262 in fiscal 2005 relates to SBS cash-generating unit Operation-Related Services.
     Losses on disposals of businesses in fiscal 2006 includes a pre-tax loss of 39 from the Company’s sale of its Dematic business (see Note 4).
7.  Income from investments accounted for using the equity method, net
                 
    Year ended  
    September 30,  
    2006     2005  
Share of profit, net
    470       516  
Gains on sales, net
    57       34  
Impairment
    (5 )     (14 )
 
           
 
    522       536  
 
           
8.  Financial income, net
                 
    Year ended  
    September 30,  
    2006     2005  
Interest income, net
    142       204  
Income from pension plans and similar commitments, net
    213       87  
Income from available-for-sale financial assets, net
    163       106  
Other financial income, net
    (293 )     (75 )
 
           
 
    225       322  
 
           

31


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     The total amounts of interest income and expense were as follows:
                 
    Year ended  
    September 30,  
    2006     2005  
Interest income
    698       643  
Interest expense
    (556 )     (439 )
 
           
Interest income, net
    142       204  
 
           
Thereof: Interest income (expense) of Operations, net
    (61 )     (64 )
Thereof: Other interest income, net
    203       268  
     Interest income (expense) of Operations, net includes interest income and expense primarily related to receivables from customers and payables to suppliers, interest on advances from customers and advanced financing of customer contracts. Other interest income, net includes all other interest amounts primarily consisting of interest relating to corporate debt and related hedging activities, as well as interest income on corporate assets.
     The components of Income from pension plans and similar commitments, net were as follows:
                 
    Year ended  
    September 30,  
    2006     2005  
Expected return on plan assets
    1,396       1,263  
Interest cost
    (1,183 )     (1,176 )
 
           
Income from pension plans and similar commitments, net
    213       87  
 
           
     Service cost for pension plans and similar commitments are allocated among functional costs (Cost of goods sold and services rendered, Research and development expenses, Marketing, selling and general administrative expenses).
     The components of Income from available-for-sale financial assets, net were as follows:
                 
    Year ended  
    September 30,  
    2006     2005  
Dividends received
    89       116  
Impairment
    (101 )     (75 )
Gains on sales, net
    177       51  
Other
    (2 )     14  
 
           
Income from available-for-sale financial assets, net
    163       106  
 
           
     In fiscal 2006, Gains on sales, net includes gains of 15 and 33, respectively, on the sales of the Company’s remaining interests in Epcos AG (Epcos) and Infineon Technologies AG (Infineon) and a pre-tax gain of 84 related to the sale of the Company’s interest in SMS Demag AG.
     In fiscal 2006 and 2005, impairments of 20 and 4, respectively, relate to current available-for-sale financial assets traded in an active market.
     Other financial income, net mainly includes the interest component from measurement of provisions amounting to 29 and (177) in fiscal 2006 and 2005, respectively. In fiscal 2006 and 2005, a result of (143) and 29, respectively, from the valuation of the conversion right of the convertible notes was included in Other financial income, net.

32


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
9.  Income taxes
     Income from continuing operations before income taxes is attributable to the following geographic regions:
                 
    Year ended  
    September 30,  
    2006     2005  
Germany
    1,275       1,543  
Foreign
    2,735       2,679  
 
           
 
    4,010       4,222  
 
           
     Income tax expense (benefit) consists of the following:
                 
    Year ended  
    September 30,  
    2006     2005  
Current:
               
German corporation and trade taxes
    296       140  
Foreign income taxes
    834       548  
 
           
 
    1,130       688  
 
           
 
               
Deferred:
               
Germany
    (200 )     268  
Foreign
    (27 )     (56 )
 
           
 
    (227 )     212  
 
           
                 
Income tax expense
    903       900  
 
           
     The current tax expense includes adjustments recognized for current tax of prior periods in the amount of 141 and 59 in fiscal 2006 and 2005, respectively.
     Of the deferred tax benefit in fiscal 2006 and the deferred tax expense in fiscal 2005, (145) and 55, respectively, relate to the origination and reversal of temporary differences.
     For fiscal years ended September 30, 2006 and 2005, the Company was subject to German federal corporation tax at a base rate of 25% plus solidarity surcharge of 5.5% on federal corporation taxes payable. As a result, the statutory rate for the year ended September 30, 2006 and 2005 consists of the federal corporate tax rate, including solidarity surcharge, of 26.4%, and trade tax net of federal benefit of 12.6%, for a combined rate of 39%.
     Income tax expense differs from the amounts computed by applying statutory German income tax rates (39% for fiscal years ended September 30, 2006 and 2005) as follows:
                 
    Year ended  
    September 30,  
    2006     2005  
Expected income tax expense
    1,564       1,647  
Increase (decrease) in income taxes resulting from:
               
Non-deductible losses and expenses
    182       173  
Goodwill
    (21 )     (155 )
Tax-free income
    (167 )     (176 )
Tax-free gains from sales of businesses
    (295 )     (122 )
Taxes for prior years
    (120 )     (57 )
Change in judgment of realizability of deferred tax assets
    109       (12 )
Foreign tax rate differential
    (155 )     (226 )
Tax effect of investments accounted for using the equity method
    (187 )     (212 )
Other
    (7 )     40  
 
           
Actual income tax expense
    903       900  
 
           

33


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     Deferred income tax assets and liabilities on a gross basis are summarized as follows:
                 
    September 30,  
    2006     2005  
Assets:
               
Financial assets
    618       578  
Other intangible assets
    73       153  
Property, plant and equipment
    373       295  
Inventories
    529       711  
Receivables
    624       365  
Pension plans and similar commitments
    1,825       2,201  
Provisions
    1,639       1,700  
Liabilities
    1,062       1,800  
Tax loss and credit carryforwards
    2,061       1,826  
Other
    901       371  
 
           
Deferred tax assets
    9,705       10,000  
 
           
Liabilities:
               
Other intangible assets
    477       603  
Property, plant and equipment
    860       770  
Inventories
    1,749       1,750  
Receivables
    1,346       1,951  
Provisions
    526       435  
Liabilities
    403       143  
Other
    586       1,068  
 
           
Deferred tax liabilities
    5,947       6,720  
 
           
Total deferred tax assets, net
    3,758       3,280  
 
           
     In assessing the realizability of deferred tax assets, management considers to which extent it is probable that the deferred tax asset will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable profits during the periods in which those temporary differences and tax loss carryforwards become deductible. Management considers the expected reversal of deferred tax liabilities and projected future taxable income in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is probable the Company will realize the benefits of these deductible differences.
     As of September 30, 2006, the Company had 6,455 of gross tax loss carryforwards. Of the total, 5,694 tax loss carryforwards have unlimited carryforward periods and 761 expire over the periods to 2023. The Company assumes that the future operations will generate sufficient taxable income to realize the deferred tax assets.
     Deferred tax assets have not been recognized in respect of the following items (gross amounts):
                 
    September 30,  
    2006     2005  
Deductible temporary differences
    982       377  
Tax loss carryforwards
    1,135       1,837  
 
           
 
    2,117       2,214  
 
           
     The amount of unrecognized deductible temporary differences as of September 30, 2006, includes an amount of 638 which is related to deductible temporary differences for German trade tax purposes. The corresponding tax effect amounts to 82.
     As of September 30, 2006 and 2005, 323 and 324, respectively, of the unrecognized tax loss carryforwards expire over the periods to 2023.

34


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     The movement in unrecognized tax loss carryforwards in the current year is primarily due to the recognition of tax loss carryforwards related to the initial accounting for business combinations.
     The Company provides for income taxes or foreign withholding taxes on the cumulative earnings of foreign subsidiaries when it is determined that such earnings either will be subject to taxes or are intended to be repatriated. In fiscal year 2006, income taxes on cumulative earnings of 7,595 of foreign subsidiaries have not been provided for because such earnings will either not be subject to any such taxes or are intended to be indefinitely reinvested in those operations. It is not practicable to estimate the amount of the unrecognized deferred tax liabilities for these undistributed foreign earnings.
     Including the items charged or credited directly to equity and the benefit from discontinued operations, the provision (benefit) for income taxes consists of the following:
                 
    Year ended
September 30,
 
    2006     2005  
Continuing operations
    903       900  
Discontinued operations
    (94 )     (257 )
Income and expense recognized directly in equity
    (294 )     (577 )
Other changes in equity*
    316        
 
           
 
    831       66  
 
           
 
*   Tax effect on reclassification of conversion right (see Notes 21 and 25).
10. Available-for-sale financial assets
     The following tables summarize the current portion of the Company’s investment in available-for-sale financial assets:
                                 
    September 30, 2006  
                    Unrealized  
    Cost     Fair Value     Gain     Loss  
Equity instruments
    64       81       17        
Debt instruments
    498       492             6  
Fund shares
    23       23              
 
                       
 
    585       596       17       6  
 
                       
                                 
    September 30, 2005  
                    Unrealized  
    Cost     Fair Value     Gain     Loss  
Equity instruments
    1,752       2,139       388       1  
Debt instruments
    79       80       1        
Fund shares
    14       14              
 
                       
 
    1,845       2,233       389       1  
 
                       
     Proceeds from sales of available-for-sale financial assets traded in an active market for the years ended September 30, 2006 and 2005 were 2,701 and 356, respectively. Gross realized gains on sales of such available-for-sale financial assets for the years ended September 30, 2006 and 2005 were 409 and 243, respectively. Gross realized losses on sales of such available-for-sale financial assets for the years ended September 30, 2006 and 2005 were 7 and —, respectively.
     In April 2006, the Company completed the sale of its remaining interest in Infineon, representing 136.3 million shares, for net proceeds of 1,127. The transaction resulted in a gain of 33 (see Note 8). In connection with the sale, 50 was reclassified from Other components of equity, net of income tax to net income. As a result of the transaction, the Company no longer owns any shares of Infineon. As of September 30, 2005, the Company had an 18.2% ownership interest in Infineon.

35


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     In March 2006, the Company sold its remaining interest in Epcos, representing 8.2 million shares, for net proceeds of 90. The transaction resulted in a pre-tax gain of 15 (see Note 8).
     In fiscal 2006, the Company made total investments of 1,409 in debt instruments. Net proceeds from the sale of debt instruments in fiscal 2006 totaled 986.
     As part of the MD transaction, Siemens purchased 50 in Global Depositary Receipts (GDR’s) on common shares in BenQ in December 2005, which at that time represented a 2.4 percent investment in BenQ. The GDR ´s were impaired by 20 as of September 30, 2006. The related impairment charge is included in Financial income, net.
     In November 2005, the Company’s former operating Group, Com, sold its remaining interest in Juniper, representing 22.8 million shares, for net proceeds of 465. The transaction resulted in a pre-tax gain of 356, included in Income (loss) from discontinued operations, net of income taxes. Fiscal 2005 includes the sale of 13 million shares of Juniper for net proceeds of 263 resulting in a pre-tax gain of 208, reported in Income (loss) from discontinued operations, net of income taxes.
     Available-for-sale financial assets classified as non-current are included in Other financial assets (see Note 18).
11. Trade and other receivables
                 
    September 30,  
    2006     2005  
Trade receivables from the sale of goods and services
    13,620       15,475  
Receivables from finance leases
    1,482       1,488  
Receivables from associated and related companies
    46       166  
 
           
 
    15,148       17,129  
 
           
     Related companies are those in which Siemens has an ownership interest of less than 20% and exercises no significant influence over their operating and financial policies.
     The valuation allowance on the Company’s current and long-term receivables (see Notes 12 and 18) changed as follows:
                 
    Year ended
September 30,
 
    2006     2005  
Valuation allowance as of beginning of fiscal year
    1,199       1,127  
Increase (decrease) in valuation allowances recorded in the income statement in the current period
    167       201  
Write-offs charged against the allowance
    (263 )     (185 )
Recoveries of amounts previously written-off
    40       34  
Foreign exchange translation differences
    (22 )     22  
Reclassification to assets held for disposal
    (165 )      
 
           
Valuation allowance as of fiscal year-end
    956       1,199  
 
           
     Receivables from finance leases are presented in the balance sheet as follows:
                 
    September 30,
    2006   2005
Receivables from finance leases, current
    1,482       1,488  
Receivables from finance leases, long-term portion
    2,969       2,899  

36


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     Minimum future lease payments to be received are as follows:
         
    September 30,  
    2006  
2007
    1,679  
2008
    1,288  
2009
    860  
2010
    540  
2011
    310  
Thereafter
    284  
 
     
Minimum future lease payments
    4,961  
 
     
     The following table shows a reconciliation of minimum future lease payments to the gross and net investment in leases and to the present value of the minimum lease payments receivable:
                 
    September 30,  
    2006     2005  
Minimum future lease payments
    4,961       4,816  
Plus: Unguaranteed residual values
    211       355  
 
           
Gross investment in leases
    5,172       5,171  
 
           
Less: Unearned finance income
    (605 )     (645 )
Less: Allowance for doubtful accounts
    (116 )     (139 )
 
           
Net investment in leases
    4,451       4,387  
 
           
Less: Present value of unguaranteed residual value
    (152 )     (253 )
 
           
Present value of minimum lease payments receivable
    4,299       4,134  
 
           
     The gross investment in leases and the present value of minimum lease payments receivable are due as follows:
                 
    September 30,
    2006     2005  
Gross investment in leases
    5,172       5,171  
Within 1 year
    1,716       1,720  
1 to 5 years
    3,147       3,150  
Thereafter
    309       301  
Present value of minimum lease payments receivable
    4,299       4,134  
Within 1 year
    1,408       1,464  
1 to 5 years
    2,661       2,476  
Thereafter
    230       194  
     Investments in finance leases relate primarily to medical engineering, data processing equipment and industrial and consumer products of third party manufacturers. Actual cash flows will vary from contractual maturities due to future sales of finance receivables, prepayments and write-offs.
     See Note 4 for further information on Trade and other receivables reclassified to Assets classified as held for disposal.
12. Other current financial assets
                 
    September 30,  
    2006     2005  
Derivative financial instruments
    424       784  
Loans receivable
    472       535  
Receivables from associated and related companies
    239       258  
Other
    1,235       1,481  
 
           
 
    2,370       3,058  
 
           

37


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
13. Inventories
                 
    September 30,  
    2006     2005  
Raw materials and supplies
    2,609       2,452  
Work in process
    2,975       2,724  
Costs and earnings in excess of billings on uncompleted contracts
    7,085       7,242  
Finished goods and products held for resale
    2,544       2,696  
Advances to suppliers
    667       558  
 
           
 
    15,880       15,672  
Advance payments received
    (3,090 )     (2,860 )
 
           
 
    12,790       12,812  
 
           
     Costs and earnings in excess of billings on uncompleted contracts relates to construction contracts with net asset balances where contract costs plus recognized profits less recognized losses exceed progress billings. Liabilities from contracts for which progress billings exceed costs and recognized profits less recognized losses are recognized in Other current liabilities.
     The aggregate amount of costs incurred and recognized profits less recognized losses for construction contracts in progress as of September 30, 2006 and 2005 amounted to 37,518 and 31,756, respectively. Advance payments received on construction contracts in progress were 5,421 and 4,294 as of September 30, 2006 and 2005. Revenue from construction contracts amounted to 19,239 and 15,662, respectively for fiscal 2006 and 2005. Information concerning construction contracts does not include disposal groups.
     See Note 4 for further information on Inventories reclassified to Assets classified as held for disposal.
14. Other current assets
                 
    September 30,  
    2006     2005  
Other tax receivables
    722       815  
Prepaid expenses
    269       295  
Other
    283       362  
 
           
 
    1,274       1,472  
 
           

38


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
15. Goodwill
     Goodwill has changed as follows:
                 
    Year ended  
    September 30,  
    2006     2005  
Cost
               
Balance at beginning of year
    10,262       7,615  
Translation differences and other
    (225 )     175  
Acquisitions and purchase accounting adjustments
    1,450       2,497  
Adjustments from the subsequent recognition of deferred tax assets
    (35 )     (20 )
Dispositions and reclassifications to assets held for disposal
    (634 )     (5 )
 
           
Balance at year-end
    10,818       10,262  
 
           
Accumulated impairment losses
               
Balance at beginning of year
    1,441       1,139  
Translation differences and other
    (47 )     23  
Impairment losses recognized during the period
          279  
Dispositions and reclassifications to assets held for disposal
    (265 )      
 
           
Balance at year-end
    1,129       1,441  
 
           
Net book value
               
Balance at beginning of year
    8,821       6,476  
Balance at year-end
    9,689       8,821  
     Impairment losses for the year ended September 30, 2005 include 17 which are reported in Income (loss) from discontinued operations, net of income taxes.
                                                 
                            Dispositions                
                    Acquisitions     and reclassi-                
    Net book     Translation     and purchase     fications to             Net book  
    value as of     differences     accounting     assets held for     Impair-     value as of  
    10/1/2005     and other     adjustments*     disposal     ments     9/30/2006  
Operations
                                               
Communications (Com)
    386       (13 )     (4 )     (369 )            
Siemens Business Services (SBS)
    126             1                   127  
Automation and Drives (A&D)
    926       (10 )     78                   994  
Industrial Solutions and Services (I&S)
    915       (23 )     204                   1,096  
Siemens Building Technologies (SBT)
    444       (9 )     121                   556  
Power Generation (PG)
    1,225       (21 )     211                   1,415  
Power Transmission and Distribution (PTD)
    547       (4 )     58                   601  
Transportation Systems (TS)
    173                               173  
Siemens VDO Automotive (SV)
    1,529       (1 )     2                   1,530  
Medical Solutions (Med)
    2,113       (95 )     775                   2,793  
Osram
    86       (3 )     3                   86  
Other Operations
    220             (32 )                 188  
Financing and Real Estate
                                               
Siemens Financial Services (SFS)
    131       1       (2 )                 130  
Siemens Real Estate (SRE)
                                   
 
                                   
Siemens
    8,821       (178 )     1,415       (369 )           9,689  
 
                                   
 
*   Includes adjustments from the subsequent recognition of deferred tax assets.

39


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
                                                 
                    Acquisitions                        
    Net book     Translation     and purchase                     Net book  
    value as of     differences     accounting     Dispo-     Impair-     value as of  
    10/1/2004     and other     adjustments*     sitions     ments     9/30/2005  
Operations
                                               
Communications (Com)
    315       13       75             17       386  
Siemens Business Services (SBS)
    269       4       115             262       126  
Automation and Drives (A&D)
    388       6       532                   926  
Industrial Solutions and Services (I&S)
    381       7       527                   915  
Siemens Building Technologies (SBT)
    415       8       21                   444  
Power Generation (PG)
    1,027       15       183                   1,225  
Power Transmission and Distribution (PTD)
    320       14       213                   547  
Transportation Systems (TS)
    111             62                   173  
Siemens VDO Automotive (SV)
    1,524             5                   1,529  
Medical Solutions (Med)
    1,514       80       524       5             2,113  
Osram
    78       4       4                   86  
Other Operations
    52       1       167                   220  
Financing and Real Estate
                                               
Siemens Financial Services (SFS)
    82             49                   131  
Siemens Real Estate (SRE)
                                   
 
                                   
Siemens
    6,476       152       2,477       5       279       8,821  
 
                                   
 
*   Includes adjustments from the subsequent recognition of deferred tax assets.
     In fiscal 2006, the net increase in goodwill was 868. The increase of 1,415 related to acquisitions and purchase accounting adjustments was offset by (178) primarily for U.S.$ currency translation differences and (369) of goodwill formerly at Com that was reclassified as part of Assets classified as held for disposal. Med’s acquisition of DPC increased goodwill by 751. For further information on acquisitions, dispositions and discontinued operations see Note 4. No goodwill was impaired or written off in fiscal 2006.
     In fiscal 2005, goodwill increased by 2,345. The increase of 152 in foreign currency translation and other adjustments results primarily from the strengthening of the U.S. $ against the euro. The VA Tech acquisition resulted in additions to goodwill of 920. Med’s acquisition of CTI, and A&D’s acquisition of Flender increased goodwill by 539 and 445, respectively.
     Siemens tests at least annually whether goodwill suffered any impairment, in accordance with the accounting policy stated in Note 2. Key assumptions on which management has based its determinations of the recoverable amount for the divisions carrying goodwill include growth rates up to 3% and after-tax discount rates of 6.5% to 8.5%. Where possible, reference to market prices is made.
     Within the Operations Groups the following divisions are allocated a significant amount of goodwill: Health Services division within Med in an amount of 864 (2005: 906), Industrial Applications division within PG in an amount of 658 (2005: 650) and Interior & Infotainment division within SV in an amount of 626 (2005: 626).
     During the fourth quarter of fiscal 2005, the Company recorded a goodwill impairment of 262, which is included in Other operating expense. Based on the results of the Company’s analysis of projects at SBS’s cash-generating unit Operation-Related Services (ORS) in connection with changing markets, competition in outsourcing business and structural challenges to attaining originally targeted profitability, the Company revised its related business plan and concluded that goodwill of ORS was impaired. Significant cost pressure due to excess capacity, the necessity for restructuring efforts and the need for new investments in order to achieve a competitive market position caused the Company to reassess its estimated future cash flows from its ORS business to a level materially below earlier estimates. The fair value of the cash-generating unit was estimated using the present value of expected future cash flows. The growth rate used in this calculation was 2% and the after-tax discount rate 7.8%.

40


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
16. Other intangible assets
                                                                                 
                                                    Net             Net        
                                                    book             book        
                                                    value     Accumulated     value     Amortization  
            Translation                             Accumulated     as of     amortization     as of     during fiscal  
    10/1/05     differences     Additions     Retirements*     9/30/06     amortization     9/30/06     10/1/05     10/1/05     year 2006  
Software and other internally generated intangible assets
    2,675       (49 )     647       955       2,318       1,320       998       1,585       1,090       427  
Patents, licenses and similar rights
    3,729       (64 )     649       239       4,075       1,688       2,387       1,502       2,227       364  
 
                                                           
Other intangible assets
    6,404       (113 )     1,296       1,194       6,393       3,008       3,385       3,087       3,317       791  
 
                                                           
 
*   Includes Other intangible assets reclassified to Assets classified as held for disposal (see Note 4 for further information).
                                                                                 
                                                    Net             Net        
                                                    book             book        
                                                    value     Accumulated     value     Amortization  
            Translation                             Accumulated     as of     amortization     as of     during fiscal  
    10/1/04     differences     Additions     Retirements*     9/30/05     amortization     9/30/05     10/1/04     10/1/04     year 2005  
Software and other internally generated intangible assets
    2,234       35       560       154       2,675       1,585       1,090       1,121       1,113       522  
Patents, licenses and similar rights
    2,777       32       1,051       131       3,729       1,502       2,227       1,195       1,582       298  
 
                                                           
Other intangible assets
    5,011       67       1,611       285       6,404       3,087       3,317       2,316       2,695       820  
 
                                                           
 
*   Includes Other intangible assets reclassified to Assets classified as held for disposal (see Note 4 for further information).
     Amortization expense for the years ended September 30, 2006 and 2005 includes 131 and 218, respectively, reported in Income (loss) from discontinued operations, net of income taxes.
     Amortization expense on intangible assets is included in Cost of goods sold and services rendered, Research and development expenses or Marketing, selling and general administrative expenses, depending on the use of the asset.
     The estimated amortization expense of Other intangible assets for the next five fiscal years is as follows:
         
Fiscal year        
2007
    538  
2008
    482  
2009
    381  
2010
    290  
2011
    273  

41


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
17. Property, plant and equipment
                                                                       
                                                  Net         Net   Depreciation
                                                  book   Accu-   book   and
                                                  value   mulated   value   impairment
          Translation           Reclassi-                 Accumulated   as of   depreciation   as of   during fiscal
    10/1/05   differences     Additions   fications     Retirements*   9/30/06   depreciation   9/30/06   10/1/05   10/1/05   year 2006
Land and buildings
    9,873     (102 )     584     200       755     9,800     4,807     4,993     4,878     4,995     308
Technical machinery and equipment
    9,758     (119 )     739     342       940     9,780     6,709     3,071     6,757     3,001     694
Furniture and office equipment
    9,895     (122 )     1,151     58       2,576     8,406     6,467     1,939     7,635     2,260     1,043
Equipment leased to others
    1,656     (45 )     672     11       680     1,614     644     970     786     870     196
Advances to suppliers and construction in progress
    891     (15 )     963     (611 )     128     1,100     1     1,099     5     886     1
 
                                               
Property, plant and equipment
    32,073     (403 )     4,109           5,079     30,700     18,628     12,072     20,061     12,012     2,242
 
                                               
 
*   Includes Property, plant and equipment reclassified to Assets classified as held for disposal (see Note 4 for further information).
                                                                     
                                                Net         Net   Depreciation
                                                book   Accu-   book   and
                                                value   mulated   value   impairment
          Translation         Reclassi-                 Accumulated   as of   depreciation   as of   during fiscal
    10/1/04   differences   Additions   fications     Retirements*   9/30/05   depreciation   9/30/05   10/1/04   10/1/04   year 2005
Land and buildings
    9,162     89     987     81       446     9,873     4,878     4,995     4,516     4,646     360
Technical machinery and equipment
    8,690     166     1,206     225       529     9,758     6,757     3,001     5,987     2,703     685
Furniture and office equipment
    9,608     149     1,805     201       1,868     9,895     7,635     2,260     7,498     2,110     1,110
Equipment leased to others
    1,472     56     532     (82 )     322     1,656     786     870     819     653     168
Advances to suppliers and construction in progress
    571     21     768     (425 )     44     891     5     886         571     5
 
                                             
Property, plant and equipment
    29,503     481     5,298           3,209     32,073     20,061     12,012     18,820     10,683     2,328
 
                                             
 
*   Includes Property, plant and equipment reclassified to Assets classified as held for disposal (see Note 4 for further information).
     Depreciation and impairment expense for the years ended September 30, 2006 and 2005 includes 170 and 269, respectively, reported in Income (loss) from discontinued operations, net of income taxes.
     The carrying amount of investment property amounts to 129 and 146 compared to a fair value of 247 and 246 as of September 30, 2006 and 2005, respectively. The fair value is primarily based on a discounted cash flow approach and in rare cases on appraisal values.
     In fiscal 2005, as a result of a corporate-level strategic plan concerning the DI and MHP businesses, updated cash flow projections based on revised operating plans were used to determine whether an impairment was necessary (see also Note 4). As the carrying amounts of the assets and units exceeded their recoverable amounts, an impairment charge of 98 was recorded. The impairment charge is included in Cost of goods sold and services rendered.

42


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
18. Other financial assets
                 
    September 30,  
    2006     2005  
Receivables from finance leases (see Note 11)
    2,969       2,899  
Available-for-sale financial assets
    854       813  
Loans receivable
    452       736  
Trade receivables from sale of goods and services
    282       571  
Derivative financial instruments
    222       28  
Other
    263       180  
 
           
 
    5,042       5,227  
 
           
     Available-for-sale financial assets include interests in other companies that are recorded at cost or at fair value if reliably measurable. Derivative financial instruments included in this item represent the non-current portion of derivatives designated as hedging instruments, for which hedge accounting is applied.
19. Other current financial liabilities
                 
    September 30,  
    2006     2005  
Derivative financial instruments
    397       1,123  
Liabilities to associated and related companies
    318       334  
Accrued interest expense
    157       136  
Other
    163       236  
 
           
 
    1,035       1,829  
 
           
     Derivative financial instruments includes, as of September 30, 2005, an amount of 661 related to the conversion right of convertible notes (see Note 21).
20. Other current liabilities
                 
    September 30,  
    2006     2005  
Billings in excess of costs and estimated earnings on uncompleted contracts and related advances
    6,174       4,752  
Payroll and social security taxes
    1,906       2,423  
Bonus obligations
    1,070       1,202  
Other employee related costs
    2,996       2,837  
Other tax liabilities
    1,263       1,053  
Deferred income
    394       692  
Other
    2,682       3,480  
 
           
 
    16,485       16,439  
 
           
     Other employee related costs primarily includes vacation payments, accrued overtime and service anniversary awards, as well as severance payments.

43


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
21. Debt
                 
    September 30,  
    2006     2005  
Short-term
               
Notes and bonds
    1,149       1,621  
Loans from banks
    659       673  
Other financial indebtedness
    314       1,612  
Obligations under finance leases
    53       89  
 
           
Short-term debt and current maturities of long-term debt
    2,175       3,995  
Long-term
               
Notes and bonds (maturing 2007–2066)
    12,008       6,430  
Loans from banks (maturing 2007–2016)
    342       613  
Other financial indebtedness (maturing 2007–2018)
    508       733  
Obligations under finance leases
    264       264  
 
           
Long-term debt
    13,122       8,040  
 
           
 
    15,297       12,035  
 
           
     As of September 30, 2006, weighted-average interest rates for loans from banks, other financial indebtedness and obligations under finance leases were 5.0% (2005: 4.5%), 4.4% (2005: 4.1%) and 6.0% (2005: 6.1%), respectively. In some countries, the Company has pledged securities and executed promissory notes to secure borrowings in conformity with local practice.
     Commercial paper
     The Company has agreements with financial institutions under which it may issue up to 3.0 billion of commercial paper and U.S.$ 5.0 billion (approximately 3.9 billion) of commercial paper. As of September 30, 2006 and 2005, outstanding commercial paper totaled – and 1,484 (interest rates from 3.00% to 3.87%), respectively.
     Credit facilities
     The credit facilities at September 30, 2006 consisted of approximately 7.6 billion in unused committed lines of credit. These include a U.S.$5.0 billion syndicated multi-currency revolving credit facility expiring March 2012 provided by a syndicate of international banks and a revolving credit facility for an aggregate amount of 450 expiring in September 2012 provided by a domestic bank. In addition, in August 2006, the Company established a U.S.$4.0 billion syndicated multi-currency term loan and revolving credit facility expiring August 2013 provided by a syndicate of international banks. The facility comprises a U.S.$1.0 billion term loan and a U.S.$3.0 billion revolving tranche. Borrowings under these credit facilities bear interest of 0.15% above either EURIBOR (Euro Interbank Offered Rate) in case of a drawdown in euros, or LIBOR (London Interbank Offered Rate) in case of a drawdown in one of the other currencies agreed on. As of September 30, 2006 and 2005, the full amounts of these lines of credit remained unused. Commitment fees for the years ended September 30, 2006 and 2005 totaled approximately 2 and 3, respectively. The facilities are for general business purposes.
     Notes and bonds
     The Company has agreements with financial institutions under which it may issue up to 5.0 billion in medium-term notes. In March 2006, the Company updated its 5.0 billion medium-term note program and issued U.S.$ 1.0 billion under this program comprising U.S.$ 500 million floating rate notes due March 2012, bearing interest of 0.15% above LIBOR and U.S.$ 500 million 5.625% notes due March 2016. As of September 30, 2006 and 2005, approximately 1.7 billion and 1 billion, respectively, were outstanding under this medium-term note program.

44


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     In August 2006, the Company issued U.S.$5.0 billion notes, which are unconditional and irrevocably guaranteed as to payment of principal and interest by Siemens. These notes were issued in four tranches of
    U.S.$750 million Floating Rate Notes (U.S.$ LIBOR + 0.05%) due August 14, 2009,
 
    U.S.$750 million 5.5% Notes due February 16, 2012,
 
    U.S.$1.75 billion 5.75% Notes due October 17, 2016 and
 
    U.S.$1.75 billion 6.125% Notes due August 17, 2026.
     For the floating rate notes the Company may, on or after February 14, 2008, redeem all or some of the Notes at the early redemption amount, according to the conditions of the bond. For the fixed rate notes, the Company may redeem at any time all or some of the notes at the early redemption amount (call) according to the conditions of the bond.
     In September 2006, the Company issued a subordinated Hybrid Capital Bond, which is on a subordinated basis guaranteed by Siemens. The subordinated bond was issued in a EUR tranche of 900 and a British pound tranche of £750 million, both with a legal final maturity on September 14, 2066 and with a call option for Siemens after 10 years or thereafter. The bonds bear a fixed interest rate (5.25% for the EUR tranche and 6.125% for the British pound tranche) until September 14, 2016, thereafter, floating rate interest according to the conditions of the bond.
     Details of the Company’s notes and bonds are as follows:
                                         
    September 30, 2006     September 30, 2005  
  Currency       Currency  
    (notional amount)     *     (notional amount)     *  
5.0% 2001/2006 EUR bonds
                EUR     1,595       1,621  
2.5% 2001/2007 Swiss franc bonds
  CHF     250       158     CHF     250       162  
5.5% 1997/2007 EUR bonds
  EUR     991       991     EUR     991       991  
6% 1998/2008 U.S.$ notes
  USD     970       798     USD     970       864  
U.S.$ LIBOR+0.05% 2006/2009 U.S.$ notes
  USD     750       592                
1.375% 2003/2010 EUR convertible notes
  EUR     2,497       2,252     EUR     2,500       2,194  
11% 2003/2010 EUR senior notes
  EUR     56       61     EUR     74       86  
5.75% 2001/2011 EUR bonds
  EUR     2,000       2,109     EUR     2,000       2,133  
5.5% 2006/2012 U.S.$ notes
  USD     750       599                
U.S.$ LIBOR+0.15% 2006/2012 U.S.$ notes
  USD     500       394                
5.75% 2006/2016 U.S.$ notes
  USD     1,750       1,408                
5.625% 2006/2016 U.S.$ notes
  USD     500       398                
6.125% 2006/2026 U.S.$ notes
  USD     1,750       1,419                
5.25% 2006/2066 EUR bonds
  EUR     900       891                
6.125% 2006/2066 GBP bonds
  GBP     750       1,087                
 
                                   
 
                13,157                   8,051  
 
                                   
 
*   Includes adjustments for fair value hedge accounting.
     In fiscal 2006, Siemens redeemed the outstanding amount of 1.6 billion of the 5% -bond, which was due on July 4, 2006.
     The Company maintains approximately 2.5 billion of convertible notes through its wholly owned Dutch subsidiary, Siemens Finance B.V., which are fully and unconditionally guaranteed by Siemens AG. The convertible notes have a 1.375% coupon and are convertible into approximately 44.5 million shares of Siemens AG at a conversion price of 56.1681 per share, which is subject to change under certain circumstances. The conversion right is contingently exercisable by the holders upon the occurrence of one of several conditions, including, upon the Company’s share price having exceeded 110% of the conversion price on at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of any calendar quarter. This condition was met in the first quarter of fiscal 2004. Due to the cash settlement option the conversion right component is considered a derivative instrument recognized at fair value, which is reported in Other current financial liabilities as of September 30, 2005.

45


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
In fiscal 2006, approximately 3 of convertible notes were exercised and were settled primarily in cash. In the third quarter of fiscal 2006, the Company irrevocably waived its option to pay a cash amount in lieu of the delivery of shares upon exercise of the conversion right. Immediately before notification of such waiver, the derivative component was remeasured for the last time through profit or loss and reclassified to Additional paid-in capital (see Note 25). The Company may, at any time from June 18, 2007, redeem the notes outstanding at their principal amount together with interest accrued thereon, if Siemens’ share price exceeds 130% of the conversion price on any 15 of 30 consecutive trading days before notice of early redemption. Unless previously redeemed, converted or repurchased and cancelled, the notes mature on June 4, 2010.
     In connection with the acquisition of Flender in fiscal 2005 (see Note 4), Siemens assumed a 250, 11% senior note due 2010, of which the Company repurchased approximately 194. The Company has an option to repurchase the remaining 56 outstanding senior note on and after August 1, 2007 at contractually defined prices.
     In fiscal 2005, the Company redeemed and retired the remainder of the Siemens Nederland N.V. 1.0% exchangeable notes into shares of Infineon Technologies AG with a notional amount of 596.
     As of September 30, 2006, the aggregate amounts of indebtedness maturing during the next five years and thereafter are as follows (excluding finance leases which are disclosed separately):
         
Fiscal year        
2007
    2,122  
2008
    1,088  
2009
    637  
2010
    2,307  
2011
    2,223  
Thereafter
    6,603  
 
     
 
    14,980  
 
     
     Other financial indebtedness
     Other financial indebtedness includes 512 and 520, as of September 30, 2006 and 2005, respectively, for the Company’s continuing involvement in certain real estate assets sold or transferred in which Siemens has retained significant risks and rewards of ownership, including circumstances in which Siemens participates directly or indirectly in the change in market value of the property. Therefore, these transactions have been accounted for as financing obligations. These real estate properties are carried on the Company’s Consolidated Balance Sheets and no sale and profit has been recognized.
     Obligations under finance leases
     As of September 30, 2006 and 2005, the finance lease liabilities are as follows:
                                                 
    September 30, 2006     September 30, 2005  
                    Present                     Present  
                    value of                     value of  
    Minimum             minimum     Minimum             minimum  
    lease     Unamortized     lease     lease     Unamortized     lease  
    payment     interest     payment     payment     interest     payment  
Due   obligation     expense     obligation     obligation     expense     obligation  
Within 1 year
    73       20       53       108       19       89  
1 to 2 years
    68       17       51       53       15       38  
2 to 3 years
    40       14       26       47       14       33  
3 to 4 years
    37       14       23       42       13       29  
4 to 5 years
    69       13       56       45       13       32  
Thereafter
    121       13       108       150       18       132  
 
                                   
Total
    408       91       317       445       92       353  
Less: Current portion
                    (53 )                     (89 )
 
                                           
 
                    264                       264  
 
                                           

46


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
22. Pension plans and similar commitments
     Pension benefits provided by Siemens are currently organized primarily through defined benefit pension plans which cover virtually all of the Company’s domestic employees and many of the Company’s foreign employees. To reduce the risk exposure to Siemens arising from its pension plans, the Company has implemented new plans whose benefits are predominantly based on contributions made by the Company. In order to fund Siemens’ pension obligations, the Company’s major pension plans are funded with assets in segregated pension entities. Furthermore, the Company provides other post-employment benefits, which primarily consist of transition payments to German employees after retirement as well as post-employment health care and life insurance benefits to U.S. employees. These predominantly unfunded other post-employment benefit plans qualify as defined benefit plans under IFRS.
     In addition to the above, the Company has foreign defined contribution plans for pensions and other post-employment benefits. The recognition of a liability is not required because the obligation of the Company is limited to the payment of the contributions into these plans.
Accounting for defined benefit plans
Consolidated Balance Sheets
     Defined benefit plans determine the entitlements of their beneficiaries. An employee’s final benefit entitlement at regular retirement age may be higher than the fixed benefits at the balance sheet date due to future compensation or benefit increases. The net present value of this ultimate future benefit entitlement for service already rendered is represented by the Defined Benefit Obligation (DBO), which is actuarially calculated with consideration for future compensation increases.
     In the case of unfunded plans, the recognized pension liability is equal to the DBO adjusted by unrecognized past service cost. In the case of funded plans, the fair value of the plan assets is offset against the benefit obligations. The net amount, after adjusting for the effects of unrecognized past service cost and any asset ceiling, is recognized as pension liability or pension asset.
     The Consolidated Balance Sheets include the following significant components related to pension plans and similar commitments based upon the situation as of September 30, 2006 and 2005:
                 
    September 30,  
    2006     2005  
Principal pension benefit plans
    3,054       3,533  
Principal other post-employment benefit plans
    844       900  
Other
    1,566       1,028  
Reclassification to liabilities held for disposal
    (381 )     (1 )
 
           
Liabilities for pension plans and similar commitments
    5,083       5,460  
 
           
     Consolidated Statements of Income
     The recognized expense related to pension plans and similar commitments in the Consolidated Statements of Income is referred to as net periodic benefit cost (NPBC) and consists of several separately calculated and presented components. NPBC is comprised of the service cost, which is the actuarial net present value of the part of the DBO for the service rendered in the respective fiscal year; the interest cost for the expense derived from the addition of accrued interest on the DBO at the end of the preceding fiscal year on the basis of the identified discount rate; and the expected return on plan assets in the case of funded benefit plans. Past service cost is amortized on a straight-line basis over the average vesting period of the related benefits.
     In the Consolidated Statements of Income, interest cost and the income from the expected return on plan assets are reported as part of Financial income, net. All other components of NPBC are allocated among functional costs (Cost of goods sold and services rendered, Research and development expenses, Marketing, selling and general administrative expenses), according to the function of the employee groups accruing benefits.
     In the Consolidated Statements of Income, NPBC expenses before income taxes for the Company’s principal pension and other post-employment benefits in fiscal 2006 aggregated to 578 compared to 460 in the previous fiscal year. Thereof 68 and 69 related to discontinued operations in fiscal 2006 and 2005, respectively.

47


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     Consolidated Statements of Income and Expense recognized in Equity
     Actuarial gains and losses, resulting for example from an adjustment of the discount rate or from a difference between actual and expected return on plan assets, are recognized in the Consolidated Statements of Income and Expense recognized in Equity in the year in which they occur. They are recorded in their entirety directly in equity.
     Consolidated Statements of Cash Flow
     The Company makes payments directly to the participants in the case of unfunded benefit plans and the payments are included in net cash used in operating activities. For funded pension plans, the participants are paid by the external pension fund and accordingly these payments are cash neutral to the Company. In this case, the Company’s regular funding and supplemental cash contributions result in net cash used in operating activities.
     In the Consolidated Statements of Cash Flow, the Company’s principal pension and other post-employment benefits resulted in net cash used in operating activities of 797 compared to 2,082 in the previous fiscal year.
Principal pension benefits
     The principal pension benefit plans cover approximately 535,000 participants, including 252,000 active employees, 91,000 former employees with vested benefits and 192,000 retirees and surviving dependents. Individual benefits are generally based on eligible compensation levels and/or ranking within the Company hierarchy and years of service. Retirement benefits under these plans vary depending on legal, fiscal and economic requirements in each country. The majority of Siemens’ active employees in Germany participate in a recently introduced pension scheme, the BSAV (Beitragsorientierte Siemens Altersversorgung). The BSAV is a fully funded defined benefit pension plan whose benefits are predominantly based on contributions made by the company and returns earned on such contributions, subject to a minimum return guaranteed by the Company. The BSAV is funded via the BSAV Trust. In connection with the implementation of the BSAV, benefits provided under defined benefit pension plans funded via the Siemens German Pension Trust were modified to substantially eliminate the effects of compensation increases.
     The Company’s principal pension benefit plans are explicitly explained in the subsequent sections with regard to:
    Pension obligations and funded status,
 
    Components of NPBC,
 
    Amounts recognized in the Consolidated Statements of Income and Expense recognized in Equity,
 
    Assumptions used for the calculation of the DBO and NPBC,
 
    Sensitivity analysis,
 
    Plan assets,
 
    Pension plan funding, and
 
    Pension benefit payments.
     The Company did not have any asset ceiling in its principal pension benefit plans, neither in fiscal 2006 nor in 2005.

48


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
Pension benefits: Pension obligations and funded status
     A reconciliation of the funded status of the principal pension benefit plans to the amounts recognized in the Consolidated Balance Sheets is as follows:
                                                 
    September 30, 2006     September 30, 2005  
    Total     Domestic     Foreign     Total     Domestic     Foreign  
Fair value of plan assets
    23,755       15,023       8,732       21,581       14,349       7,232  
Total defined benefit obligation
    26,696       16,372       10,324       24,972       15,932       9,040  
 
                                   
Defined benefit obligation (funded)
    26,481       16,372       10,109       24,763       15,932       8,831  
Defined benefit obligation (unfunded)
    215             215       209             209  
 
                                   
Funded status*
    (2,941 )     (1,349 )     (1,592 )     (3,391 )     (1,583 )     (1,808 )
Germany
    (1,349 )                     (1,583 )                
U.S.
    (559 )                     (689 )                
U.K.
    (733 )                     (797 )                
Other
    (300 )                     (322 )                
Unrecognized past service cost (benefits)
    (84 )           (84 )     (116 )     (24 )     (92 )
 
                                   
Net amount recognized
    (3,025 )     (1,349 )     (1,676 )     (3,507 )     (1,607 )     (1,900 )
 
                                   
 
Amounts recognized in the Consolidated Balance Sheets consist of:
                                               
Pension asset
    29             29       26             26  
Pension liability
    (3,054 )     (1,349 )     (1,705 )     (3,533 )     (1,607 )     (1,926 )
 
                                   
Net amount recognized
    (3,025 )     (1,349 )     (1,676 )     (3,507 )     (1,607 )     (1,900 )
 
                                   
 
*   Funded status: The funded status shows the surplus (deficit) of the DBO relative to the plan assets as of the balance sheet date. The DBO is calculated based on the projected unit credit method and reflects the net present value as of the balance sheet date of the accumulated pension entitlements of active employees, former employees with vested rights and of retirees and their surviving dependents with consideration of future compensation and pension increases.
     A detailed reconciliation of the changes in the DBO for fiscal 2006 and 2005 as well as additional information by country is provided in the following table:
                                                 
    September 30, 2006     September 30, 2005  
    Total     Domestic     Foreign     Total     Domestic     Foreign  
Change in defined benefit obligations:
                                               
Defined benefit obligation at beginning of year
    24,972       15,932       9,040       21,351       13,851       7,500  
Foreign currency exchange rate changes
    (206 )           (206 )     157             157  
Service cost
    715       388       327       594       307       287  
Interest cost
    1,125       679       446       1,123       726       397  
Settlements and curtailment
    (1 )           (1 )                  
Plan participants’ contributions
    49             49       46             46  
Amendments and other
    1,509       443       1,066       (92 )           (92 )
Actuarial (gains) losses
    (179 )     (196 )     17       2,367       1,736       631  
Acquisitions
    146       59       87       562       138       424  
Divestments
    (309 )     (145 )     (164 )     (104 )     (75 )     (29 )
Benefits paid
    (1,125 )     (788 )     (337 )     (1,032 )     (751 )     (281 )
 
                                   
Defined benefit obligation at end of year
    26,696       16,372       10,324       24,972       15,932       9,040  
 
                                   
Germany
    16,372                       15,932                  
U.S.
    3,677                       3,790                  
U.K.
    3,551                       3,153                  
Other
    3,096                       2,097                  
     The total defined benefit obligation at the end of the fiscal year includes approximately 10,812 for active employees, 3,056 for former employees with vested benefits and 12,828 for retirees and surviving dependents.

49


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     In fiscal 2006, the DBO decreased due to an increase in discount rate for the domestic and foreign pension plans. In fiscal 2005, the DBO increased due to a decrease in discount rate for the domestic and foreign pension plans.
     The following table shows the change in plan assets for fiscal year 2006 and 2005 and some additional information concerning pension plans:
                                                 
    September 30, 2006     September 30, 2005  
    Total     Domestic     Foreign     Total     Domestic     Foreign  
Change in plan assets:
                                               
Fair value of plan assets at beginning of year
    21,581       14,349       7,232       17,736       11,965       5,771  
Foreign currency exchange rate changes
    (170 )           (170 )     138             138  
Expected return on plan assets
    1,433       953       480       1,284       896       388  
Actuarial gains (losses) on plan assets
    (67 )     (212 )     145       1,101       700       401  
Acquisitions and other
    1,561       440       1,121       302             302  
Divestments and other
    (237 )     (39 )     (198 )     (28 )           (28 )
Employer contributions (supplemental)
                      1,496       1,380       116  
Employer contributions (regular)
    730       320       410       535       159       376  
Plan participants’ contributions
    49             49       49             49  
Benefits paid
    (1,125 )     (788 )     (337 )     (1,032 )     (751 )     (281 )
 
                                   
Fair value of plan assets at end of year
    23,755       15,023       8,732       21,581       14,349       7,232  
 
                                   
Germany
    15,023                       14,349                  
U.S.
    3,118                       3,101                  
U.K.
    2,818                       2,356                  
Other
    2,796                       1,775                  
     In fiscal 2006, the Company merged a defined contribution plan with a defined benefit plan at a subsidiary in Switzerland. As a result of the merger, the benefits of the defined contribution plan were harmonized with those of the defined benefit plan. Accordingly, the DBO and plan assets of the newly merged plan increased. Such amounts are included in the items Amendments and other and Acquisitions and other in the preceding two tables. Vested past service cost resulting from that merger has been recognized entirely in NPBC.
Pension benefits: Components of NPBC
     The components of the NPBC for the fiscal years ended September 30, 2006 and 2005 are as follows:
                                                 
    Year ended     Year ended  
    September 30, 2006     September 30, 2005  
    Total     Domestic     Foreign     Total     Domestic     Foreign  
Service cost
    715       388       327       594       307       287  
Interest cost
    1,125       679       446       1,123       726       397  
Expected return on plan assets
    (1,433 )     (953 )     (480 )     (1,284 )     (896 )     (388 )
Amortization of past service cost (benefits)
    99       (24 )     123       (17 )     (24 )     7  
 
                                           
Loss (gain) due to settlements and curtailments
    2             2                    
 
                                   
Net periodic benefit cost
    508       90       418       416       113       303  
 
                                   
Germany
    90                       113                  
U.S.
    159                       146                  
U.K
    113                       123                  
Other
    146                       34                  

50


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
Pension benefits: Amounts recognized in the Consolidated Statements of Income and Expense recognized in Equity
     The actuarial gains and losses on defined benefit pension plans recognized in the Consolidated Statements of Income and Expense recognized in Equity for the fiscal years ended September 30, 2006 and 2005 were as follows:
                                                 
    Year ended     Year ended  
    September 30, 2006     September 30, 2005  
    Total     Domestic     Foreign     Total     Domestic     Foreign  
Actuarial losses (gains)
    (112 )     16       (128 )     1,266       1,036       230  
Income tax effect
    (225 )     (266 )     41       (336 )     (255 )     (81 )
 
                                   
Net amount recognized in the Consolidated Statements of Income and Expense recognized in Equity (net of tax)
    (337 )     (250 )     (87 )     930       781       149  
 
                                   
Germany
    (250 )                     781                  
U.S.
    (45 )                     93                  
U.K.
    12                       33                  
Other
    (54 )                     23                  
Pension benefits: Assumptions for the calculation of the DBO and NPBC
     Assumed discount rates, compensation increase rates and pension progression rates used in calculating the DBO together with long-term rates of return on plan assets vary according to the economic conditions of the country in which the retirement plans are situated or where plan assets are invested as well as capital market expectations.
     The weighted-average assumptions used for the actuarial valuation of the DBO as of the balance sheet date were as follows:
                                                 
    Year ended   Year ended
    September 30, 2006   September 30, 2005
    Total   Domestic   Foreign   Total   Domestic   Foreign
Discount rate
    4.7 %     4.5 %     5.0 %     4.6 %     4.35 %     5.1 %
Germany
    4.5 %                     4.35 %                
U.S.
    5.95 %                     5.7 %                
U.K.
    5.0 %                     5.0 %                
Rate of compensation increase
    2.7 %     2.25 %     3.4 %     2.6 %     2.25 %     3.3 %
Germany
    2.25 %                     2.25 %                
U.S.
    3.95 %                     3.25 %                
U.K.
    3.7 %                     3.9 %                
Rate of pension progression
    1.2 %     1.0 %     1.8 %     1.3 %     1.0 %     2.1 %
Germany
    1.0 %                     1.0 %                
U.K.
    2.8 %                     2.8 %                
     The assumptions used for the calculation of the DBO as of the balance sheet date of the preceding fiscal year are used to determine the calculation of interest cost and service cost of the following year. Therefore, the assumptions used for the calculation of the NPBC for fiscal 2007 are already determined. The total expected return for fiscal 2007 will be based on expected rates of return multiplied by the fair value of plan assets at the fiscal 2006 balance sheet date (see table below). The fair value and thus the expected return on plan assets are adjusted for significant events after the balance sheet date, such as a supplemental funding. Due to the implementation of the BSAV, the effect of the compensation increase on the domestic pension plans is substantially eliminated.

51


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     The weighted-average assumptions used for determining the NPBC for the fiscal years ended September 30, 2007, 2006 and 2005 are shown in the following table:
                                                                         
    Year ending     Year ended     Year ended  
    September 30, 2007   September 30, 2006   September 30, 2005
    Total   Domestic   Foreign   Total   Domestic   Foreign   Total   Domestic   Foreign
Discount rate
    4.7 %     4.5 %     5.0 %     4.6 %     4.35 %     5.1 %     5.3 %     5.25 %     5.3 %
Germany
    4.5 %                     4.35 %                     5.25 %                
U.S.
    5.95 %                     5.7 %                     5.9 %                
U.K.
    5.0 %                     5.0 %                     5.4 %                
Expected return on plan assets
    6.5 %     6.5 %     6.5 %     6.7 %     6.7 %     6.7 %     6.7 %     6.75 %     6.7 %
Germany
    6.5 %                     6.7 %                     6.75 %                
U.S.
    6.95 %                     6.95 %                     6.95 %                
U.K.
    6.7 %                     6.75 %                     6.85 %                
Rate of compensation increase
    2.7 %     2.25 %     3.4 %     2.6 %     2.25 %     3.3 %     2.6 %     2.25 %     3.3 %
Germany
    2.25 %                     2.25 %                     2.25 %                
U.S.
    3.95 %                     3.25 %                     3.25 %                
U.K.
    3.7 %                     3.9 %                     3.9 %                
Rate of pension progression
    1.2 %     1.0 %     1.8 %     1.3 %     1.0 %     2.1 %     1.1 %     1.0 %     2.3 %
Germany
    1.0 %                     1.0 %                     1.0 %                
U.K.
    2.8 %                     2.8 %                     2.9 %                
     The discount rate assumptions reflect the rates available on high-quality, fixed-income investments of appropriate duration at the balance sheet date. The expected return on plan assets is determined on a uniform basis, considering long-term historical returns, asset allocation, and future estimates of long-term investment returns. The Company decreased the assumption for the expected return on plan assets for fiscal 2007 for the majority of its principal pension plans due to changes in asset allocation and revised future estimates of long-term investment returns. Other actuarial assumptions not shown in the tables above, such as employee turnover, mortality, disability, etc., remained primarily unchanged in 2006.
     Experience adjustments, which result from differences between the actuarial assumptions and the actual occurrence, did not affect the DBO in fiscal 2006 and increased the DBO by 0.8% in fiscal 2005.
Pension benefits: Sensitivity analysis
     A one-percentage-point change of the established assumptions mentioned above, used for the calculation of the NPBC for fiscal 2007, and a change in the fair value of plan assets of 500, as of September 30, 2006, respectively, would result in the following increase (decrease) of the fiscal 2007 NPBC:
                 
    Effect on NPBC 2007 due to a
    one-percentage-   one-percentage-
    point/500   point/500
    increase   decrease
Discount rate
    (143 )     172  
Expected return on plan assets
    (227 )     227  
Rate of compensation increase
    49       (44 )
Rate of pension progression
    267       (223 )
Fair value of plan assets
    (33 )     33  
     Increases and decreases in the discount rate, rate of compensation increase and rate of pension progression which are used in determining the DBO do not have a symmetrical effect on NPBC primarily due to the compound interest effect created when determining the net present value of the future pension benefit. If more than one of the assumptions were changed simultaneously, the cumulative impact would not necessarily be the same as if only one assumption was changed in isolation.

52


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
Pension benefits: Plan assets
     The asset allocation of the plan assets of the principal pension benefit plans as of the balance sheet date for fiscal 2006 and 2005 as well as the target asset allocation for fiscal year 2007, are as follows:
                                                         
    Target asset   Asset allocation  
    allocation   September 30, 2006     September 30, 2005  
Asset class   September 30, 2007   Total     Domestic     Foreign     Total     Domestic     Foreign  
Equity
    20-50%       33%       26%       44%       31%       25%       44%  
Fixed income
    40-70%       47%       51%       42%       55%       63%       40%  
Real estate
    5-15%       8%       7%       10%       8%       7%       9%  
Cash
    5-15%       12%       16%       4%       6%       5%       7%  
 
                                           
 
            100%       100%       100%       100%       100%       100%  
 
                                           
     The asset allocation represents the plan assets’ exposure to market risk. For example, an equity instrument whose risk is hedged by a derivative is not reported as Equity but under Cash. Current asset allocation is biased towards high quality government and selected corporate bonds.
     Siemens constantly reviews the asset allocation in light of the duration of its pension liabilities and analyzes trends and events that may affect asset values in order to initiate appropriate measures at a very early stage.
     The plan assets include domestic real estate with a fair value of 369 and 406 as of September 30, 2006 and 2005, respectively, which is occupied by the Company.
     The following table shows the actual return on plan assets for fiscal 2006 and 2005:
                                                 
    Year ended     Year ended  
    September 30, 2006     September 30, 2005  
    Total     Domestic     Foreign     Total     Domestic     Foreign  
Actual return on plan assets
    1,366       741       625       2,385       1,596       789  
     The actual return over the last twelve months amounted to 6.4% or 1,366 compared to an expected return of 6.7% or 1,433. The experience adjustment arising on plan assets was (0.3)% in fiscal 2006 (fiscal 2005: 5.1%). For the domestic pension plans, 741 or 5.2% was realized, as compared to an expected return on plan assets of 6.7% or an amount of 953 that was included in the NPBC. For the foreign pension plans, 625 or 8.7% was realized, as compared to an expected return on plan assets of 6.7% or an amount of 480 that was included in the NPBC.
Pension benefits: Pension plan funding
     Contributions made by the Company to its principal pension benefit plans in fiscal 2006 and 2005, as well as those planned in fiscal 2007 are as follows:
                                                                         
    (Unaudited)              
    Year ending     Year ended     Year ended  
    September 30, 2007 (expected)     September 30, 2006     September 30, 2005  
    Total     Domestic     Foreign     Total     Domestic     Foreign     Total     Domestic     Foreign  
Regular funding
    751       317       434       730       320       410       535       159       376  
Supplemental cash Contributions
                                        1,496       1,380       116  
 
                                                     
Total
    751       317       434       730       320       410       2,031       1,539       492  
 
                                                     
     In fiscal 2006, no supplemental cash contributions were made. In fiscal 2005, 1,496 in cash was contributed in October 2004, as follows: 1,380 to the domestic pension plans and 116 to the pension plans in the U.S.
     Regular funding is generally based on the level of service cost incurred. For the BSAV funding corresponds to the contributions to the beneficiaries’ account. Future funding decisions for the Company’s pension plans will be made with due consideration of developments affecting plan assets and pension liabilities, taking into account minimum funding requirements abroad and local tax deductibility.

53


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
Pension benefits: Pension benefit payments
     The following overview comprises pension benefits paid out of the principal pension benefit plans during the years ended September 30, 2006 and 2005, and expected pension payments for the next five years and in the aggregate for the five years thereafter (undiscounted):
                         
    Total     Domestic     Foreign  
Pension benefits paid
                       
2005
    1,032       751       281  
2006
    1,125       788       337  
Expected pension payments
                       
2007
    1,265       829       436  
2008
    1,309       860       449  
2009
    1,353       885       468  
2010
    1,403       907       496  
2011
    1,416       942       474  
2012-2016
    7,885       5,104       2,781  
     As pension benefit payments for Siemens’ principal funded pension benefit plans reduce the DBO and plan assets by the same amount, there is no impact on the funded status of such plans.
Other post-employment benefits
     In Germany, employees who entered into the Company’s employment on or before September 30, 1983, are entitled to transition payments for the first six months after retirement equal to the difference between their final compensation and the retirement benefits payable under the corporate pension plan. Certain foreign companies, primarily in the U.S., provide other post-employment benefits in the form of medical, dental and life insurance. The amount of obligations for other post-employment benefits in the form of medical and dental benefits specifically depends on the expected cost trend in the health care sector. To be entitled to such healthcare benefits participants must contribute to the insurance premiums. Participant contributions are based on specific regulations of cost sharing which are defined in the benefit plans. The Company has the right to adjust the cost allocation at any time, generally this is done on an annual basis. Premiums for life insurance benefits are paid solely by the Company.
     Other post-employment benefits are illustrated in detail in the subsequent sections with regard to:
    Obligations and funded status,
 
    Plan assets,
 
    Components of NPBC for other post-employment benefits,
 
    Amounts recognized in the Consolidated Statements of Income and Expense recognized in Equity,
 
    Assumptions used in the calculation of the DBO and the NPBC for other post-employment benefits,
 
    Sensitivity analysis, and
 
    Benefit payments.
     The Company did not have any asset ceiling in its principal other post-employment benefit plans, neither in fiscal 2006 nor in 2005.

54


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
Other post-employment benefits: Obligations and funded status
     The funded status of plan assets and a reconciliation of the funded status to the amounts recognized in the Consolidated Balance Sheets are as follows:
                                                 
    September 30, 2006     September 30, 2005  
    Total     Domestic     Foreign     Total     Domestic     Foreign  
Fair value of plan assets
    3             3       3             3  
Total defined benefit obligation
    845       429       416       893       394       499  
 
                                   
Defined benefit obligation (funded)
    303             303       319             319  
Defined benefit obligation (unfunded)
    542       429       113       574       394       180  
 
                                   
Funded status
    (842 )     (429 )     (413 )     (890 )     (394 )     (496 )
Unrecognized past service cost (benefits)
    (2 )           (2 )     (10 )           (10 )
 
                                   
Net amount recognized
    (844 )     (429 )     (415 )     (900 )     (394 )     (506 )
 
                                   
     The following table shows a detailed reconciliation of the changes in the benefit obligation for other post-employment benefits for the years ended September 30, 2006 and 2005:
                                                 
    September 30, 2006     September 30, 2005  
    Total     Domestic     Foreign     Total     Domestic     Foreign  
Change in benefit obligations:
                                               
Defined benefit obligation at beginning of year
    893       394       499       980       443       537  
Foreign currency exchange rate changes
    (22 )           (22 )     10             10  
Service cost
    26       15       11       26       14       12  
Interest cost
    45       18       27       51       23       28  
Plan participants’ contributions
                      2             2  
Plan amendments and other
    41       41             (39 )           (39 )
Actuarial (gains) losses
    (14 )     4       (18 )     (75 )     (59 )     (16 )
Divestments
    (57 )     (14 )     (43 )     (7 )     (7 )      
Benefits paid
    (67 )     (29 )     (38 )     (55 )     (20 )     (35 )
 
                                   
Defined benefit obligation at end of year
    845       429       416       893       394       499  
 
                                   
Other post-employment benefits: Plan assets
     The following table shows the change in plan assets for fiscal 2006 and 2005:
                                                 
    September 30, 2006     September 30, 2005  
    Total     Domestic     Foreign     Total     Domestic     Foreign  
Change in plan assets:
                                               
Fair value of plan assets at beginning of year
    3             3       5             5  
Employer contributions
    38             38       31             31  
Plan participants’ contributions
                      2             2  
Benefits paid
    (38 )           (38 )     (35 )           (35 )
 
                                   
Fair value of plan assets at year end
    3             3       3             3  
 
                                   
Other post-employment benefits: Components of NPBC
     The components of the NPBC for other post-employment benefits for the years ended September 30, 2006 and 2005 are as follows:
                                                 
    Year ended     Year ended  
    September 30, 2006     September 30, 2005  
    Total     Domestic     Foreign     Total     Domestic     Foreign  
Service cost
    26       15       11       26       14       12  
Interest cost
    45       18       27       51       23       28  
Amortization of unrecognized past service cost (benefits)
    (1 )           (1 )     (33 )           (33 )
 
                                   
Net periodic benefit cost
    70       33       37       44       37       7  
 
                                   

55


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
Other post-employment benefits: Amounts recognized in the Consolidated Statements of Income and Expense recognized in Equity
     The actuarial gains and losses on other post-employment benefit plans recognized in the Consolidated Statements of Income and Expense recognized in Equity for the fiscal years ended September 30, 2006 and 2005 were as follows:
                                                 
    Year ended
September 30, 2006
    Year ended
September 30, 2005
 
    Total     Domestic     Foreign     Total     Domestic     Foreign  
Actuarial losses (gains)
    (14 )     4       (18 )     (75 )     (59 )     (16 )
Income tax effect
    4       (3 )     7       29       23       6  
 
                                   
Net amount recognized in the Consolidated Statements of Income and Expense recognized in Equity (net of tax)
    (10 )     1       (11 )     (46 )     (36 )     (10 )
 
                                   
Germany
    1                       (36 )                
U.S.
    (11 )                     (10 )                
Other post-employment benefits: Assumptions used in the calculation of the DBO and NPBC
     Discount rates and other key assumptions used for transition payments in Germany are the same as those utilized for domestic pension benefit plans.
     The weighted-average assumptions used in calculating the actuarial values for the post-employment healthcare and life insurance benefits, primarily in the U.S., are as follows:
                 
    Year ended     Year ended  
    September 30, 2006     September 30, 2005  
Discount rate
    5.95%       5.70%  
Medical trend rates (initial/ultimate/year):
               
Medicare ineligible pre-65
    10%/5%/2011       9%/5%/2010  
Medicare eligible post-65
    10%/5%/2011       9%/5%/2010  
Fixed dollar benefit
    4.5%       4.5%  
Dental trend rates (initial/ultimate/year)
    6%/5%/2021       6%/5%/2021  
     Experience adjustments, which result from differences between the actuarial assumptions and the actual occurrence, decreased the DBO by 1.5% and 14.2% in fiscal 2006 and 2005, respectively.
Other post-employment benefits: Sensitivity analysis
     The health care assumptions may be significantly influenced by the expected progression in health care expense. A one-percentage-point change in the healthcare trend rates would have resulted in the following increase (decrease) of the defined benefit obligation and the service and interest cost as of and for the year ended September 30, 2006:
                 
    September 30, 2006  
    One-percentage-point  
    increase     decrease  
Effect on defined benefit obligation
    36       (32 )
Effect on total of service and interest cost components
    3       (3 )

56


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
Other post-employment benefits: Benefit payments
     The following overview comprises benefit payments for other post-employment benefits paid out of the principal other defined benefit post-employment plans during the years ended September 30, 2006 and 2005, and expected pension payments for the next five years and in the aggregate for the five years thereafter (undiscounted):
                         
    Total     Domestic     Foreign  
Payments for other post-employment benefits
                       
2005
    55       20       35  
2006
    67       29       38  
Expected payments for other post-employment benefits
                       
2007
    52       28       24  
2008
    63       40       23  
2009
    66       42       24  
2010
    55       32       23  
2011
    68       35       23  
2012-2016
    367       253       114  
     Since the benefit obligations for other post-employment benefits are generally not funded, such payments will impact the current operating cash flow of the Company.
23. Provisions
     Provisions changed during fiscal 2006 as follows:
                                         
                    Asset              
            Order related     retirement              
    Warranties     losses and risks     obligations     Other     Total  
Balance as of beginning of fiscal year
    2,820       1,511       761       1,079       6,171  
Additions
    1,660       1,288       7       528       3,483  
Usage
    (916 )     (737 )     (26 )     (288 )     (1,967 )
Reversals
    (677 )     (430 )     (8 )     (310 )     (1,425 )
Translation differences
    (26 )     (10 )           (8 )     (44 )
Accretion expense and effect of changes in discount rates
    3             (31 )     (1 )     (29 )
Other changes*
    (236 )     (284 )     1       47       (472 )
 
                             
Balance as of fiscal year-end
    2,628       1,338       704       1,047       5,717  
 
                             
 
 
*   In fiscal 2006 and 2005, Other changes includes 697 and 45, respectively, reclassified to Liabilities associated with assets classified as held for disposal (see Note 4 for further information).
     Warranties
     Warranties mainly relate to products sold. See Note 2 for further information concerning our policy for estimating warranty provisions. Additions to provisions already existing at the beginning of the period amounted to 425 in fiscal 2006.
     Order related losses and risks
     Provisions for order related losses and risks are recognized for anticipated losses on uncompleted construction, sales and leasing contracts.
     Asset retirement obligations
     The Company is subject to asset retirement obligations related to certain items of property, plant and equipment. Such asset retirement obligations are primarily attributable to environmental clean-up costs which amounted to 658, and 718, respectively, as of September 30, 2006 and 2005 (thereof non-current portion of 635, and 680, respectively) and to costs primarily associated with the removal of leasehold improvements at the end of the lease term amounting to 46, and 43, respectively as of September 30, 2006 and 2005 (thereof non-current portion of 31 and 38, respectively).

57


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     Environmental clean-up costs are mainly related to remediation and environmental protection liabilities which have been accrued for the estimated costs of decommissioning facilities for the production of uranium and mixed-oxide fuel elements in Hanau, Germany (Hanau facilities), as well as in Karlstein, Germany (Karlstein facilities). According to the German Atomic Energy Act, when such a facility is closed, the resulting radioactive waste must be collected and delivered to a government-developed final storage facility. In this regard, the Company has developed a plan to decommission the Hanau and Karlstein facilities in the following steps: clean-out, decontamination and disassembly of equipment and installations, decontamination of the facilities and buildings, sorting of radioactive materials, and intermediate and final storage of the radioactive waste. This process will be supported by continuing engineering studies and radioactive sampling under the supervision of German federal and state authorities. The decontamination, disassembly and sorting activities are planned to continue until 2010; thereafter, the Company is responsible for intermediate storage of the radioactive materials until a final storage facility is available. The final location is not expected to be available before approximately 2030. With respect to the Hanau facility, the process of setting up intermediate storage for radioactive waste has neared completion; on September 21, 2006, the Company received official notification from the competent authorities that the Hanau facility has been released from the scope of application of the German Atomic Energy Act and that its further use is unrestricted. The ultimate costs of the remediation are contingent on the decision of the federal government on the location of the final storage facility and the date of its availability. Consequently, the provision is based on a number of significant estimates and assumptions. The Company does not expect any recoveries from third parties and did not reduce the provisions for such recoveries. The Company believes that it has adequately provided for this exposure. As of September 30, 2006 and 2005, the provision totals 658 and 718, respectively, and is recorded net of a present value discount of 1,300, and 1,252, respectively. The total expected payments for each of the next five fiscal years and the total thereafter are 25, 21, 20, 14, 7, and 1,871 (includes 1,811 for the estimated costs associated with final storage in 2033).
     The Company recognizes the accretion of the provision for asset retirement obligations using the effective interest method applying current interest rates prevailing at the balance sheet date. During the year ended September 30, 2006 the Company recognized 35 in accretion expense in Financial income, net. Due to revisions in estimated cash flows, provisions for asset retirement obligations decreased by 1 during fiscal 2006. Changes in discount rates decreased the carrying amount of provisions by 66 as of September 30, 2006.
     See Note 4 for further information on provisions reclassified to Liabilities associated with assets classified as held for disposal.
24. Other liabilities
                 
    September 30,  
    2006     2005  
Liabilities for employee related costs
    952       1,298  
Deferred income
    156       180  
Other
    1,066       1,587  
 
           
 
    2,174       3,065  
 
           
25. Equity
     Common stock and Additional paid-in capital
     As of September 30, 2006, the Company’s common stock totaled 2,673 divided into 891,087 thousand shares with no par value and a notional value of 3.00 per share. Each share of common stock is entitled to one vote.
     As of September 30, 2005, the Company’s common stock totaled 2,673 representing 891,085 thousand shares.
     In fiscal 2006, additional paid-in capital increased by 487, net of applicable deferred income taxes, representing the amount of the derivative component of the convertible notes issued by Siemens reclassified to equity upon waiving the cash settlement option (see Note 21).

58


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     The following table provides a summary of outstanding capital and the changes in authorized and conditional capital for fiscal years 2006 and 2005:
                                                 
    Common stock     Authorized capital     Conditional capital  
    (authorized and issued)     (not issued)     (not issued)  
    in     in     in     in     in     in  
    thousands     thousand     thousands     thousand     thousands     thousand  
    of     shares     of     shares     of     shares  
As of October 1, 2004
    2,673,227       891,076       666,630       222,210       925,516       308,505  
 
                                   
Settlement to former SNI shareholders
    29       9                   (29 )     (9 )
 
                                   
As of September 30, 2005
    2,673,256       891,085       666,630       222,210       925,487       308,496  
 
                                   
Conversion 1.375% 2003/2010 EUR convertible notes
    6       2                   (6 )     (2 )
New approved capital
                75,000       25,000              
Expired capital
                (66,630 )     (22,210 )            
 
                                   
As of September 30, 2006
    2,673,262       891,087       675,000       225,000       925,481       308,494  
 
                                   
     Capital increases
     In fiscal 2006, common stock increased by approximately 6 thousand through the issuance of approximately 2 thousand shares from the conditional capital for the conversion of 0.1 of the Company’s convertible notes. See Note 21 for additional information. No such increase occurred in fiscal 2005.
     In fiscal 2005, common stock increased by 29 thousand through the issuance of 9 thousand shares from the conditional capital as settlement to former shareholders of Siemens Nixdorf Informationssysteme AG (SNI AG). No such increase occurred in fiscal 2006, since the Company repurchased its own common stock to accommodate such settlement.
     Authorized, unissued capital
     On September 30, 2006 and 2005, the Company’s authorized but unissued capital totaled 675 and 667 or 225,000 thousand and 222,210 thousand common shares, respectively.
     On January 26, 2006 the Company’s shareholders authorized the Managing Board to increase, with the approval of the Supervisory Board, capital stock by up to 75 through the issuance of up to 25 million shares of no par value registered in the names of the holders against contributions in cash (Authorized Capital 2006). The authorization may be implemented in installments. Pre-emptive rights of existing shareholders are excluded. The new shares shall be issued under the condition that they are offered exclusively to employees of Siemens AG and its subsidiaries, provided these subsidiaries are not listed companies themselves and do not have their own employee stock schemes. The Managing Board is authorized to determine, with the approval of the Supervisory Board, the further content of the rights embodied in the shares and the terms and conditions of the share issue. Authorized Capital 2006 replaced the outstanding Authorized Capital 2001/II of 67 (representing approximately 22 million shares) and will expire on January 25, 2011.
     On January 22, 2004, the Company’s shareholders authorized the Managing Board to increase, with the approval of the Supervisory Board, capital stock by up to 600 through the issuance of up to 200 million new no par value shares registered in the names of the holders against cash contributions and/or contributions in kind (Authorized Capital 2004). The Managing Board is authorized to determine, with the approval of the Supervisory Board, the further content of the rights embodied in the shares and the conditions of the share issue. The Managing Board is authorized, with the approval of the Supervisory Board, to exclude pre-emptive rights of shareholders in the event of capital increases against contributions in kind and in certain pre-stipulated circumstances against cash. Authorized Capital 2004 replaced Authorized Capital 2001/I of 400 (representing approximately 133 million shares) and Authorized Capital 2003 of 250 (representing 83 million shares) and will expire on January 21, 2009.
     Authorized Capital 1998 of 90 and Authorized Capital 1999 of 210 were replaced by resolution of the Annual Shareholders’ Meeting on January 23, 2003. The Company’s shareholders authorized the Managing Board to increase, with the approval of the Supervisory Board, the common stock by up to 250 through the issuance of up to approximately 83 million shares for which the shareholders’ pre-emptive rights were excluded since these shares were to be issued against contribution in kind (Authorized Capital 2003). The Authorized Capital 2003 was to expire on January 22, 2008. As mentioned above, Authorized Capital 2003 was replaced by resolution of the Annual Shareholders’ Meeting on January 22, 2004.

59


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     On February 22, 2001, the Company’s shareholders authorized the Managing Board to increase, with the approval of the Supervisory Board, capital stock by up to 75 (representing 25 million shares) against contributions in cash until February 1, 2006 for the purpose of issuing them exclusively to employees of the Company and its subsidiaries, provided these subsidiaries are not listed companies themselves and do not have their own employee stock schemes (Authorized Capital 2001/II). Pre-emptive rights of existing shareholders were excluded. The Managing Board was authorized to determine, with the approval of the Supervisory Board, the further content of the rights embodied in the shares and the conditions of the share issue. As mentioned above, the outstanding Authorized Capital 2001/II of 67 (representing approximately 22 million shares) was replaced by resolution of the Annual Shareholders’ Meeting on January 26, 2006.
     On February 22, 2001, the Company’s shareholders authorized the Managing Board to increase, with the approval of the Supervisory Board, common stock by up to 400 through the issuance of up to approximately 133 million shares for offer to existing shareholders until February 1, 2006 (Authorized Capital 2001/I). As mentioned above, Authorized Capital 2001/I was replaced by resolution of the Annual Shareholders’ Meeting on January 22, 2004.
     Conditional capital (unissued)
     Conditional capital to service the 2001 and 1999 Siemens Stock Option Plan amounts to 191, representing 63,797 thousand shares of Siemens AG, in each of the years ended September 30, 2006 and 2005, respectively.
     Conditional capital provided to service the issuance of bonds with conversion rights or warrants amounts to 734 and 734, representing 244,507 thousand and 244,509 thousand shares of Siemens AG as of September 30, 2006 and 2005, respectively.
     By resolution of the Annual Shareholders’ Meeting on January 22, 2004, Conditional Capital 2003 of 267 (representing 89 million shares) was terminated. The Company’s shareholders authorized the Managing Board to issue bonds in an aggregate principal amount of up to 11,250 with conversion rights (convertible bonds) or with warrants entitling the holders to subscribe to up to 200 million new shares of Siemens AG, representing a pro rata amount of up to 600 of the capital stock. Since the Conditional Capital 2003 has partly been utilized, the new Conditional Capital 2004 permits the issuance of shares under the new authorization and the issuance of shares to service bonds issued under the old authorization. Therefore, as of September 30, 2006, total Conditional Capital 2004 allows the issuance of up to 734 representing 244,507 thousand shares of Siemens AG. The authorization will expire on January 21, 2009.
     By resolution of the Annual Shareholders’ Meeting on February 22, 2001, conditional share capital of 147 was approved to service the 2001 Siemens Stock Option Plan (Conditional Capital 2001). In addition, conditional capital amounting to 44 as of September 30, 2006 and 2005, provides to service the 1999 Siemens Stock Option Plan and the 2001 Siemens Stock Option Plan (Conditional Capital 1999).
     As of September 30, 2006 and 2005, conditional capital of 0.6, representing 188 thousand shares of Siemens AG, provides for the settlement offered to former shareholders of SNI AG who had not tendered their SNI share certificates.
     By resolution of the Annual Shareholders’ Meeting on January 23, 2003, the Managing Board was authorized to issue bonds in an aggregate principal amount of up to 5 billion with conversion rights (convertible bonds) or with warrants entitling the holders to subscribe to new shares of Siemens AG. The authorization was to expire on December 31, 2007. The shareholders also approved conditional share capital of 267 for the issuance of up to 89 million shares to service the exercise of the conversion or option rights of holders of these convertible bonds or warrants attached to these bonds (Conditional Capital 2003). As mentioned above, Conditional Capital 2003 as well as the aforementioned authorization were terminated by resolution of the Annual Shareholders’ Meeting on January 22, 2004.
     Treasury stock
     At the January 2006 Annual Shareholders’ Meeting, the Company’s shareholders authorized the Company to repurchase up to 10% of the 2,673 common stock until July 25, 2007. Such stock may be sold via a stock exchange; or (i) retired with the approval of the Supervisory Board, (ii) used to satisfy the Company’s obligations under the 1999 and the 2001 Siemens Stock Option Plans, (iii) offered for purchase to employees or former employees of the Company or any of its subsidiaries within the employee share purchase program or granted and transferred with a holding period of at least two years; or (iv) used to service the conversion or option rights granted by the Company or any of its subsidiaries. In addition, the Supervisory Board shall be authorized to offer repurchased shares to the members of the Managing Board of Siemens AG for purchase as share-based payment under the same terms and conditions as those offered to employees of the Company. Additionally, the Supervisory Board may grant and transfer such shares to members of the Managing Board as share-based payments with a holding period of at least two years.

60


 

SIEMENS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in millions of , except where otherwise stated and per share amounts)
     In fiscal 2006, the Company repurchased a total of 5,925 thousand shares at an average price of 71.11 per share primarily for the purpose of selling them to employees and share-based payment plan participants and as settlement to former SNI stockholders. In fiscal 2006, a total of 5,934 thousand shares of treasury stock were sold. Thereof, 4,166 thousand shares were issued to share-based payment plan participants to accommodate the exercise of stock options. In addition, in fiscal 2006, 1,760 thousand shares were issued to employees under a compensatory employee share purchase program. See Note 31 for additional information on share-based payment. As of September 30, 2006, 415 shares of stock remained in treasury with a carrying amount of 29 thousand (notional value 1 thousand).
     In fiscal 2005, the Company repurchased a total of 3,549 thousand shares at an average price of 61.78 per share to accommodate the Company’s share-based payment plans. In fiscal 2005, 1,691 thousand shares were sold in conjunction with the exercise of stock options and 1,849 thousand shares were issued to employees under a compensatory employee share purchase program. As of September 30, 2005, 9,004 shares of stock remained in treasury with a carrying amount of 575 thousand (notional value 27 thousand).
Other components of equity
     The changes in Other components of equity are as follows:
                                                 
    Year ended     Year ended  
    September 30, 2006     September 30, 2005  
            Tax                     Tax        
    Pretax     effect     Net     Pretax     effect     Net  
Changes in unrealized gains (losses) on available-for-sale financial assets:
                                               
Unrealized holding gains (losses) for the period
    (317 )     8       (309