1. General information
1.1 Reporting entity
Schaeffler AG (until October 13, 2011: Schaeffler GmbH), Herzogenaurach, is a corporation [--break--] domiciled in Germany with its registered office located at Industriestrasse 1 – 3, 91074 Herzogenaurach. The company was founded as at September 29, 2009 and is registered in the Commercial Register of the Fuerth Local Court (HRB No. 13202). The consolidated financial statements of Schaeffler AG as at December 31, 2011 comprise Schaeffler AG and its subsidiaries, investments in associated companies and joint ventures (together referred to as “Schaeffler” or “Schaeffler Group”). Schaeffler is a supplier to automotive, aerospace and other manufacturing customers with operations worldwide.
1.2 Basis of preparation and presentation
The consolidated financial statements of the Schaeffler Group for the year ended December 31, [--break--] 2011 have been prepared voluntarily in accordance with International Financial Reporting [--break--] Standards ( IFRS) as adopted by the European Union (EU) and the additional requirements of [--break--] German commercial law pursuant to section 315a (1) HGB (German Commercial Code). The [--break--] term IFRS includes all International Financial Reporting Standards and International Account [--break--] ing Standards ( IAS) in effect as well as all interpretations and amendments issued by the International Financial Reporting Interpretations Committee ( IFRIC) and the former Standing Interpretations Committee ( SIC).
As permitted by section 315a (3) HGB, the company has chosen to prepare its consolidated financial statements under IFRS.
Presentation of comparative information
The ultimate Group parent company INA-Holding Schaeffler GmbH & Co. KG (“IHO Group”) implemented an extensive reorganization of the group’s legal structure in 2009 and 2010 in order to establish a structure suitable for the capital markets, with Schaeffler AG functioning as holding company of the sub-group. The change of the legal form to a stock corporation (“Aktiengesellschaft”) became effective when it was entered in the Commercial Register on October 13, 2011.
For legal purposes, the Schaeffler Group was created upon the entry of a hive-down and assumption of investments and contractual relationships from Schaeffler Verwaltungs GmbH in the Commercial Register on June 28, 2010. As a result, part of the comparative reporting period ending on December 31, 2010 occurred before the current structure of the Schaeffler Group legally existed.
Financial data for the periods prior to June 28, 2010 have been derived from the consolidated IFRS financial statements of the IHO Group (carve-out). The operations of the Schaeffler Group are presented as if the legal structure created by the hive-down had already existed before [--break--] June 28, 2010.
Assets, liabilities, expenses and income allocated to the Schaeffler Group were transferred from the consolidated IFRS financial statements of the IHO Group (predecessor accounting) at their carrying values. For the periods prior to the legal creation of the Schaeffler Group, the assets and liabilities transferred to the Schaeffler Group were recognized and measured in accordance with IFRS, IAS and the interpretations issued by the IFRIC as well as the former SIC, as adopted by the EU and effective at the end of each of the reporting periods.
Assets, liabilities, expenses and income were generally allocated to the Schaeffler Group based on the hive-down agreement dated May 25, 2010. In addition, certain financial statement line items were allocated appropriately based on certain assumptions, estimates and the principle of substance over form. The assumptions and estimates made affect the recognition, measurement and presentation of assets and liabilities as well as the amounts and presentation of the corresponding items of income and expense. The Schaeffler Group’s executive board considers the allocation methods applied to be appropriate and justifiable.
Please refer to the 2010 consolidated financial statements of the Schaeffler Group for a detailed description of the carve-out.
New accounting pronouncements
In 2011, the new Standards and Interpretations and amendments to Standards and Interpretations adopted by the EU as European law and summarized below were required to be applied for the first time. This initial application had no effect.
New accounting pronouncements
|Standard/Interpretation||Effective date||Subject of Standard/Interpretation or amendment|
|IFRS 1, IFRS 7||7/1/2010||Elimination of certain comparative IFRS 7 disclosures upon first-time adoption of IFRS|
Clarification of the definition of a related party and of the disclosure requirements regarding transactions; exemptions for entities controlled, jointly controlled, or significantly influenced
by the state
|IAS 32||2/1/2010||Rights issues in foreign currency|
|IFRIC 14||1/1/2011||Prepayments of a minimum funding requirement|
|IFRIC 19||7/1/2010||Extinguishing financial liabilities with equity instruments|
|Annual Improvements 2010|
|IFRS 1||1/1/2011||Minor amendments|
|IFRS 3||7/1/2010||Amendments of revised IFRS 3 with respect to measuring non-controlling interests, share-based payment and contingent consideration|
|IFRS 7||1/1/2011||Amendments to various disclosures on risks arising from financial instruments|
|IAS 1||1/1/2011||Clarification regarding the statement of changes in shareholders’ equity|
|IAS 21, IAS 28, IAS 31||7/1/2010||Prospective application of amendments of revised IAS 27|
|IAS 34||1/1/2011||Changed wording with respect to significant events and transactions|
|IFRIC 13||1/1/2011||Additional interpretive guidance (application guidance, basis for conclusions)|
The International Accounting Standards Board ( IASB) has issued the following amendment [--break--] to IFRS 7. Application of this amendment is contingent on adoption by the EU under its IFRS endorsement process, which occurred in November 2011. The Schaeffler Group will initially apply the amendment in its 2012 financial year. Assuming that the Schaeffler Group will continue to not be party to transactions affected by this amendment in the future, the amendment will have no impact on the Schaeffler Group.
Changed standard – IFRS 7
|Standard/Interpretation||Effective date||Subject of Standard/Interpretation or amendment|
|IFRS 7||7/1/2011||Disclosure requirements related to transfers of financial assets|
In addition, the IASB has issued new Standards and amendments to existing Standards and Interpretations which have not yet been adopted by the EU as at the date these consolidated financial statements were authorized for issue by Schaeffler Group management. The Schaeffler Group has not applied any of the following new Standards or amendments to existing Standards and Interpretations early:
New standards and amendments to existing standards and interpretations
|Standard/Interpretation||Effective date||Subject of Standard/Interpretation or amendment||
on the Schaeffler Group
Aspects of first-time adoption of IFRS with respect
to financial instruments and hyperinflation
|IFRS 7||1/1/2013||Disclosures on financial assets and liabilities that are offset||none|
Accounting for financial instruments: Classification,
measurement, impairment, hedge accounting
|Accounting for financial instruments 1)|
Consolidated financial statements; replaces the
corresponding guidance in IAS 27
|IFRS 11||1/1/2013||Joint arrangements; replaces IAS 31||none|
|IFRS 12||1/1/2013||Disclosure of interests in other entities||Expanded disclosures regarding investments and unconsolidated structured entities|
|IFRS 13||1/1/2013||Fair value measurement||Expanded disclosures on fair values of financial instruments|
|IAS 1||7/1/2012||Presentation of other comprehensive income||Changes to the presentation of the consolidated statement of comprehensive income|
Deferred taxes on investment property measured at
fair value through profit or loss
|IAS 19||1/1/2013||Changes resulting from IAS 19 rev. 2011||
Accounting for obligations under partial
retirement arrangements; extent of disclosures
Guidance on separate financial statements;
elimination of guidance on consolidation (IFRS 10)
|IAS 28||1/1/2013||Integration of accounting for joint ventures and relocation of disclosure requirements to IFRS 12||none|
|IAS 32||1/1/2014||Offsetting financial assets and liabilities||none|
|IFRIC 20||1/1/2013||Stripping costs in the production phase of a surface mine||none|
1) Detailed statements regarding the extent of the impact are not yet possible.
Basis of preparation
These consolidated financial statements are presented in Euros, the functional and presentation currency of the Schaeffler Group. Unless stated otherwise, all amounts are in millions of Euros (EUR m).
Schaeffler classifies assets as current if they are expected to be realized within twelve months after the end of the reporting period or within its normal operating cycle. Similarly, liabilities [--break--] are classified as current if they are expected to be settled within the normal operating cycle [--break--] or if Schaeffler is contractually required to settle them within twelve months after the end of the reporting period.
As amounts (in millions of Euros) and percentages have been rounded, rounding differences [--break--] may occur.
Except for the following, these consolidated financial statements have generally been prepared on the historical cost basis:
- derivative financial instruments,
- financial instruments recorded at fair value through profit or loss, and
- available-for-sale financial assets.
These instruments were measured at fair value.
Estimation uncertainty and management judgment
In the preparation of financial statements in accordance with IFRS, management exercises [--break--] judgment in making appropriate estimates and assumptions affecting the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual amounts may differ from these estimates.
Both estimates and the basis on which assumptions are made are reviewed regularly. Changes in estimates are recognized in the period in which the changes are made as well as in all subsequent periods affected by the changes.
The following issues affected by estimation uncertainty in the application of accounting policies have the most significant impact on amounts recognized in the consolidated financial statements:
- determination of the useful lives of intangible assets and property, plant and equipment,
- determination of valuation allowances on inventories,
- impairment tests of goodwill and non-current assets, including determination of recoverable amounts and the underlying assumptions (e. g. discount rate),
- accounting for employee benefits, including actuarial assumptions,
- recognition and measurement of other provisions,
- assessment of the recoverability of deferred tax assets, and
- measurement of financial instruments with respect to assessing recoverability and determining fair values.
The following issues in particular are affected by the application of management’s professional judgment:
- identification of cash-generating units and
- classification of lease agreements as finance or operating leases.
In 2011, there was no significant impact from changes in assumptions made in the past or the resolution of previously existing uncertainties related to the above items.
1.3 Accounting policies
The accounting policies set out below have been applied consistently by all Schaeffler Group entities for all periods presented in these consolidated financial statements. The financial [--break--] statements of all Schaeffler Group entities have been prepared as of the same date as these consolidated financial statements.
Subsidiaries are entities Schaeffler controls. Control exists if Schaeffler has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Potential voting rights that are currently exercisable are taken into account when assessing control. In accordance with SIC 12 “Consolidation – Special Purpose Entities”, Schaeffler’s consolidated financial statements also include companies that Schaeffler controls without holding a majority of the voting rights, e. g. where Schaeffler in substance retains the majority of the residual or ownership risks related to the special purpose entity or its assets in order to obtain benefits from its activities. Subsidiaries’ financial statements are included in the consolidated financial statements from the date Schaeffler obtains control until the date Schaeffler loses control.
Associated companies are those entities over which Schaeffler has significant influence, but not control, over the financial and operating policy decisions of the investee. Significant influence is presumed to exist if Schaeffler holds, directly or indirectly, between 20 % and 50 % of the voting power of an investee. Where Schaeffler’s direct or indirect holdings represent less than 20 % of the voting rights, significant influence is presumed not to exist unless such influence can be clearly demonstrated.
Investments in associated companies and joint ventures are accounted for using the equity method. Under this method, the investment is initially recognized at cost. The carrying amount of Schaeffler’s investments in associated companies includes goodwill identified on acquisition of an associated company. After initial recognition, the carrying amount of the investment is increased or decreased by the investor’s share of the investee’s net income or loss and other comprehensive income (loss) from the date that significant influence commences until the date significant influence ceases. If Schaeffler’s share of losses of an associated company reaches [--break--] or exceeds the amount of the investment, the carrying amount of that investment is reduced [--break--] to zero and no further losses are recognized except to the extent that Schaeffler has incurred [--break--] a legal or constructive obligation to make payments or has made payments on behalf of the associated company.
Balances and transactions with consolidated subsidiaries and any related income and expenses are completely eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with associated companies are eliminated against the carrying amount of the investment in the associated company to the extent of Schaeffler’s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent there is no evidence of impairment. Deferred taxes on temporary differences related to the elimination of such balances and transactions are measured at the tax rate of the acquiring entity.
Foreign currency translation
Foreign currency transactions
Upon initial recognition, purchases and sales denominated in foreign currencies are translated at the exchange rate applicable at the time of the transaction. Since receivables and payables denominated in foreign currencies arising from these transactions are monetary items within the scope of IAS 21, they are translated into the functional currency of the applicable group company at the exchange rate as at the end of the reporting period and when they are realized. The resulting exchange gains and losses are recognized in the entity’s separate and in the consolidated income statement of Schaeffler Group.
Translation of foreign currency financial statements
The Schaeffler Group presents its financial statements in Euros, the functional currency of Schaeffler AG. Assets and liabilities of subsidiaries whose functional currency is not the Euro are translated at the spot rate at the end of the reporting period. The components of equity are translated at historical rates, and items in the consolidated income statement are translated at the weighted average rate for each reporting period. The resulting translation differences are recognized in accumulated other comprehensive income and reclassified to the income statement upon disposal of the subsidiary.
The following table illustrates the most significant exchange rates used in preparing the consolidated financial statements:
Foreign exchange rates
|Currencies||Closing rate||Average rate|
|1 € in||12/31/2011||12/31/2010||2011||2010|
Revenues from the ordinary business activities of the Schaeffler Group are shown as revenue and recognized at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates based on the general terms and conditions. Other revenues such as from equipment sales and rental income are included in other income.
Revenue from the sale of goods is recognized when, based on the arrangement with the customer, (1) the significant risks and rewards of ownership of the goods sold have been transferred to the buyer, (2) it is sufficiently probable that the economic benefits from the sale will flow to Schaeffler, (3) the costs associated with the sale and possible return of goods can be estimated reliably, (4) Schaeffler has no continuing managerial involvement with the goods, and (5) the amount of revenue can be measured reliably. Depending on specific customer contracts and purchase orders, revenue is normally recognized at the date of delivery, provided that the conditions listed above are met.
Product-related expenses comprise all direct costs attributable to the process of producing goods and rendering services as well as allocated production-related overheads.
Costs incurred for advertising, sales promotion and other selling related activities are expensed as incurred. Warranty provisions are recognized on a case-by-case basis or, in cases involving [--break--] a large population of items, using the expected value method taking into account the related specific legal and contractual agreements.
Research and development expenses
Research and development expenses include costs incurred for research and development and expenditures for customer-specific applications, prototypes, and testing.
Expenditures on research activities undertaken with the prospect of gaining new scientific or technical knowledge are recognized as expenses as incurred.
Development activities involve the application of research results or other knowledge to a production plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services. Related development costs are only capitalized as intangible assets if (1) technical feasibility can be demonstrated, (2) Schaeffler intends to complete the intangible asset and use or sell it, (3) Schaeffler has the ability to use or sell the intangible asset, (4) future economic benefits from sale or use of the intangible asset can be demonstrated to exist, (5) adequate technical, financial and other resources are available to complete the development and for the subsequent sale or use, and (6) the expenditure attributable to the intangible asset during its development can be measured reliably.
Capitalized costs include costs directly attributable to the development process and development-related overheads. Capitalized development expenditures are measured at cost less [--break--] accumulated amortization and impairment losses. Amortization is recognized in profit or loss on a straight-line basis over the average expected useful life of six years beginning when the intangible asset is ready for use. Amortization expense is presented in cost of sales. In contrast to costs of developing new or substantially improved products, advance development costs and costs incurred to produce customer-specific applications (i. e. to customize existing products without substantial improvement) are not capitalized, but instead expensed as incurred.
Goodwill results from the acquisition of a subsidiary. It is calculated as the excess of the aggregate of (1) the fair value of consideration transferred, (2) the amount of non-controlling interests, and, (3) in a business combination achieved in stages, the fair value of the acquirer’s previously held equity interest in the acquiree over the net fair values of the identifiable assets acquired and liabilities assumed. Non-controlling interests in the acquired company are measured either at fair value (full goodwill method) or at the non-controlling interest’s proportionate share of the fair value of identifiable net assets.
Goodwill is not amortized, but is instead tested for impairment at least annually and when an indication exists. It is measured at cost less accumulated impairment losses. For associated companies, goodwill is included in the carrying amount of the investment in the associated company and, therefore, is tested for impairment as part of the investment when an indication exists.
Other intangible assets
Purchased intangible assets including software and patents are capitalized at acquisition cost, internally generated intangible assets meeting the requirements of IAS 38 regarding capitalization, including software and development projects, at production cost. Intangible assets with a determinable useful life are amortized on a straight-line basis over their estimated useful lives of three years for software, six years for development costs and ten years for patents. Amortization commences when the asset is in the location and condition necessary for it to be capable of operating in the manner intended by management. Other intangible assets are tested for impairment when there is an indication that the asset may be impaired. The Schaeffler Group does not have any intangible assets with indefinite useful lives.
Subsequent expenditures are only capitalized when they meet the recognition criteria for an intangible asset, i. e. it is probable that the future economic benefits attributable to the asset will flow to the entity and the cost of the asset can be measured reliably. All other expenditures, including expenditures for internally generated goodwill and brands, are expensed as incurred.
Amortization expense and impairment losses related to an intangible asset are presented in the consolidated income statement within the functional area in which the intangible asset is utilized.
Property, plant and equipment
Property, plant and equipment is measured at cost less accumulated depreciation and impairment losses.
The cost of an item of property, plant and equipment includes all costs directly attributable [--break--] to the acquisition of the asset. Self-constructed assets are initially measured at the directly attributable construction cost that is necessary to bring the asset to the location and condition necessary for it to be capable of operating in the manner intended.
Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the consideration received with the carrying amount of the asset. They are presented net in other income or other expenses, respectively.
Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful life of the asset. Estimated useful lives range from 15 to 25 years for buildings and outside facilities, from 2 to 10 years for technical equipment and machinery and from 3 to 8 years for other equipment. Assets held under finance leases are depreciated over the shorter of the lease term and the asset’s useful life. Land is not depreciated. Depreciation expense and impairment losses are presented in the consolidated income statement under the appropriate functional area.
Depreciation methods, useful lives and residual values are reviewed at the end of each reporting period. Useful lives are determined by estimating the period during which the assets will generate revenue and are based to a large extent on historical experience of usage and technological developments.
Leases that transfer substantially all risks and rewards of ownership to Schaeffler are classified as finance leases. The leased asset is initially recognized at an amount equal to the lower of [--break--] its fair value and the present value of the minimum lease payments. A liability is recognized at the same amount. Minimum lease payments made under finance leases are apportioned between finance cost and the reduction of the outstanding liability. Financing costs are allocated over the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Leases under which the lessor retains substantially all risks and rewards of ownership are classified as operating leases, and the related lease payments are expensed on a straight-line basis over the lease term.
Financial assets are tested for impairment individually at the end of each reporting period and when objective evidence of impairment exists. Schaeffler has established group-wide guidelines to help determine the relative amount of the impairment (such as commencement of judicial collection procedures, compulsory enforcement) when analyzing evidence that impairment exists. Group companies apply these guidelines taking into account the circumstances specific to the financial asset being considered. Impairment losses in respect of a financial asset measured at amortized cost are calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted using the effective interest rate originally determined at initial recognition (discounted cash flow method). An impairment loss in respect of an available-for-sale financial asset is calculated based on the asset’s fair value.
All impairment losses are recognized in profit or loss. If an impairment is recognized in respect of an available-for-sale financial asset, any cumulative losses previously recognized in other comprehensive income related to that asset are reclassified from accumulated other comprehensive income to profit or loss.
An impairment loss is reversed if the reversal of the impairment loss can be related objectively to an event occurring after the impairment was recognized. For financial assets measured at amortized cost and available-for-sale financial assets that are debt securities the reversal is [--break--] recognized in profit or loss. For available-for-sale financial assets that are equity securities the reversal is recognized in other comprehensive income.
IAS 36 requires the carrying amounts of non-financial assets to be tested for impairment on [--break--] the basis of individual assets or the smallest unit with largely independent cash inflows (cash-generating units). The Schaeffler Group’s cash-generating units are its segments, Automotive and Industrial.
If there is an indication of impairment, intangible assets and property, plant and equipment [--break--] are tested for impairment during the year. Goodwill and intangible assets not yet available for use are also tested annually for impairment at the end of the reporting period.
Recoverable amount is the higher of fair value less costs to sell and value in use. Initially, Schaeffler determines recoverable amount under the value in use concept using the discounted cash flow method. If value in use does not exceed the carrying amount of the cash-generating unit, the second step taken is to determine recoverable amount using fair value less costs to sell.
Expected cash flows of the cash-generating units are based on a three-year-forecast and future projections which are reviewed regularly by the Schaeffler Group management. The medium-term forecast is based on specific assumptions regarding macroeconomic indicators, external sales expectations and internal assessments of demand and projects, as well as sales prices, commodity price trends, and capital expenditures. Projections beyond the detailed forecast horizon are made using a growth rate for each segment.
An impairment loss is recognized when the carrying amount of an asset or cash-generating unit exceeds its recoverable amount. If the circumstances giving rise to previously recognized impairment losses no longer exist, impairment losses (except on goodwill) are reversed up to the carrying amount that would have been determined had no impairment loss been recognized in the past.
If the resulting impairment loss exceeds the amount of recognized goodwill, goodwill is fully impaired first. The remaining impairment loss is allocated to the other assets in the cash-generating unit.
The discount rate reflects current market expectations and the risks specific to the asset.
At the end of each reporting period, the Schaeffler Group assesses whether there is any indication that its equity method investments may be impaired. If such an indication exists, Schaeffler is required to test that equity method investment for impairment. An equity method investment is impaired when its carrying amount exceeds the higher of its value in use and fair value less costs to sell.
In accordance with IAS 32 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 instruments include (1) non-derivative financial instruments and (2) derivative financial instruments. Normal sales and purchases of financial assets are recognized using settlement date accounting.
Please refer to 4.15 Financial instruments for an analysis of the Schaeffler Group’s financial instruments by class as required by IFRS 7.6.
(1) Non-derivative financial instruments
Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and receivables, and trade and other payables. Non-derivative financial instruments are initially measured at fair value. Transaction costs directly attributable to the acquisition or issue of a financial instrument are only included in the carrying amount if the financial instrument is not measured at fair value through profit or loss. Subsequent measurement depends on how the financial instrument is categorized.
Schaeffler classifies its financial instruments in one of the following categories as defined in IAS 39:
Available-for-sale financial assets
Except for investments in associated companies (IAS 28), Schaeffler classifies its investments in equity securities as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein – other than impairment losses and exchange differences on available-for-sale monetary assets – are recognized in other comprehensive income (including related deferred taxes). Fair values are derived from market prices unless no quoted prices are available or there is no active market; in these cases, fair value is determined using valuation techniques such as the discounted cash flow method. Investments in equity instruments that do not have a quoted price in an active market and whose fair value cannot be measured reliably are recognized at cost.
When an available-for-sale financial asset is derecognized, the cumulative gain or loss previously recognized in accumulated other comprehensive income is reclassified to profit or loss.
Loans and receivables
Loans and receivables are measured at amortized cost less any impairment losses. Trade and other receivables within this category are carried at face value. Impairment losses on trade and other receivables are recognized in profit or loss unless the receivable is covered by credit insurance. Non-interest bearing receivables with a maturity of more than one year are discounted. Loans and receivables sold to third parties are derecognized if and when substantially all risks and rewards associated with the loans and receivables sold have been transferred.
This category also includes cash and cash equivalents. Schaeffler considers all liquid investments with a maturity of less than three months from the date of acquisition to be cash equivalents. Since they are subject to an insignificant risk of changes in value, cash and cash equivalents are measured at cost.
With the exception of derivative financial instruments, Schaeffler measures all financial liabilities at amortized cost, which includes any transaction costs attributable to the liability. [--break--] Obligations under finance leases are initially measured at an amount equal to the lower of the fair value of the leased asset and the present value of minimum lease payments.
(2) Derivative financial instruments
Schaeffler holds derivative financial instruments to hedge its currency and interest rate risk exposures inherent in assets and liabilities and in future cash flows.
In accordance with IAS 39, derivatives are initially recognized as an asset or liability at fair value; attributable transaction costs are expensed as incurred. Except for derivatives designated as hedging instruments in cash flow hedges, all derivatives are measured at fair value through profit or loss and classified as financial assets/liabilities held for trading ( HfT). [--break--] The Schaeffler Group does not have any fair value hedges or hedges of a net investment in a foreign operation.
Gains and losses arising on changes in the fair value of derivatives designated as hedging instruments are recognized in accumulated other comprehensive income to the extent that the hedge is effective. The ineffective portion is recognized in profit or loss.
If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in accumulated other comprehensive income remains in equity until the forecast transaction occurs or is no longer expected to occur. Otherwise, the amount is reclassified to profit or loss in the same period in which the hedged item affects profit or loss.
Inventories are measured at the lower of cost and net realizable value. Acquisition cost of raw materials, supplies and purchased merchandise is determined using the moving average cost method. Work in progress and manufactured finished goods (including goods in transit) are valued at production cost, consisting of direct material and labor costs as well as production-related overheads. Net realizable value is defined as the estimated selling price in the ordinary course of business less estimated costs of completion and estimated necessary selling costs.
Income tax expense for the period includes current and deferred tax expense. Income taxes are recognized in profit or loss, except for income taxes relating to items recognized directly in equity or in accumulated other comprehensive income, which are also recognized in equity or in accumulated other comprehensive income.
Current taxes are calculated based on local tax rules and regulations effective at the end of the reporting period or shortly thereafter in the countries in which the subsidiaries and associated companies operate and generate taxable income. Management regularly reviews tax returns, mainly with respect to issues subject to interpretation, and, where appropriate, recognizes provisions based on amounts expected to be payable to taxation authorities.
Under IAS 12 “Income Taxes”, deferred taxes are recognized based on temporary differences between the carrying amounts of assets and liabilities in the statement of financial position and their tax bases. Deferred tax assets and liabilities are recognized on temporary differences that will result in taxable or deductible amounts in determining taxable profit of future periods, unless the differences are the result of the initial recognition of an asset or a liability in a transaction which is not a business combination and at the time of the transaction has affected neither pre-tax profit or loss nor taxable profit (initial differences). IAS 12 also requires the recognition of deferred tax assets on tax loss carryforwards and tax credits.
Deferred tax assets are recognized only to the extent that it is probable that taxable profit will [--break--] be available against which deductible temporary differences and tax loss carryforwards can be utilized. Group entities are assessed individually with respect to whether it is probable that future taxable profit will be available.
Deferred tax liabilities arising on temporary differences associated with investments in subsidiaries and associated companies are recognized unless the group is able to control the timing [--break--] of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future as a result of this control.
Deferred taxes are measured using tax rates (and tax laws) enacted or substantively enacted [--break--] at the end of the reporting period and that are expected to apply to the period when the deferred tax asset is expected to be realized or the deferred tax liability is expected to be settled. The effects of changes in tax rates or tax laws on deferred tax assets and liabilities are recognized in profit or loss unless the deferred tax assets and liabilities were originally recognized outside profit or loss.
Deferred tax assets and liabilities are offset if a legally enforceable right of offset exists and when the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or on different taxable entities which intend to settle net.
Provisions for pensions and similar obligations
Employee benefits include both defined benefit plans and defined contribution plans.
The Schaeffler Group’s obligations under defined benefit plans are calculated annually using the projected unit credit method separately for each plan based on an estimate of the amount of future benefits that employees have earned in return for their service in current and prior periods. Estimating the obligations and costs related to pensions and accrued vested rights involves the use of assumptions based on market assessments of expected return on plan assets and anticipated future compensation increases. The present value of the defined benefit obligation is determined by discounting estimated future cash outflows using interest rates of high-quality [--break--] corporate bonds. The provision for pensions and similar obligations recognized in the statement of financial position is the present value of the defined benefit obligation at the end of the reporting period less, for funded defined benefit obligations, the fair value of plan assets. If plan assets exceed the related pension obligation, the net pension asset is presented under other assets to the extent Schaeffler is entitled to a refund or reduction of future contributions to the fund.
Schaeffler immediately recognizes all actuarial gains and losses arising from defined benefit plans in accumulated other comprehensive income. Interest expense on provisions for pensions and similar obligations and the expected return on plan assets are included in interest income and interest expense.
For defined contribution plans, Schaeffler pays fixed contributions to a third party without [--break--] any legal or constructive obligation to make additional contributions. The contributions are [--break--] recognized as personnel expense within the appropriate functional expenses.
A provision is recognized if, as a result of a past event, Schaeffler has a present legal or constructive obligation that can be reliably estimated, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the recognition criteria for provisions are not met, a contingent liability is disclosed in the notes to the financial statements provided certain criteria are met.
Estimating future costs is subject to a large degree of uncertainty, particularly for restructuring measures involving several parties and extending over a long period of time.
Non-current provisions are recognized at present value by discounting expected future cash outflows using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Interest, including effects of changes in interest rates, is shown in financial result.