4. Notes to the consolidated statement of financial position

4.1 Intangible assets

No. 038
in € millions Goodwill Purchased intangible assets Internally generated intangible assets Advance payments Total
Historical cost
Balance as of January 1, 2010 483 998 212 1 1,694
Additions 0 6 15 0 21
Disposals 0 -11 -17 -1 -29
Transfers 0 0 0 0 0
Foreign currency translation 0 4 1 0 5
Balance as of December 31, 2010 483 997 211 0 1,691
Balance as of January 1, 2011 483 997 211 0 1,691
Additions 0 5 10 0 15
Disposals 0 -1 0 0 -1
Transfers 0 0 0 0 0
Foreign currency translation 0 1 0 0 1
Balance as of December 31, 2011 483 1,002 221 0 1,706
Accumulated amortization and impairment losses
Balance as of January 1, 2010 0 968 108 0 1,076
Additions 0 16 32 0 48
Disposals 0 -11 0 0 -11
Transfers 0 0 0 0 0
Foreign currency translation 0 3 0 0 3
Balance as of December 31, 2010 0 976 140 0 1,116
Balance as of January 1, 2011 0 976 140 0 1,116
Additions 0 10 27 0 37
Disposals 0 -1 0 0 -1
Transfers 0 0 0 0 0
Foreign currency translation 0 1 0 0 1
Balance as of December 31, 2011 0 986 167 0 1,153
Net carrying amounts
As of January 1, 2010 483 30 104 1 618
As of December 31, 2010 483 21 71 0 575
As of January 1, 2011 483 21 71 0 575
As of December 31, 2011 483 16 54 0 553

At the end of 2011, intangible assets purchased from third parties have a net carrying amount [--break--]  of EUR 16 m (prior year: EUR 21 m). Additions totaled EUR 5 m (prior year: EUR 6 m) in 2011.

Capitalized development costs included in internally generated intangible assets decreased to EUR 32 m (prior year : EUR 45 m) as a result of EUR 13 m (prior year: EUR 13 m) in amortization in 2011.

Internally generated intangible assets include EUR 22 m (prior year: EUR 26 m) in internally [--break--]  generated software, mainly relating to the implementation of SAP. In 2011, additions of EUR 10 m (prior year: EUR 12 m) are offset by amortization of EUR 14 m (prior year: EUR 19 m).

Amortization of internally generated intangible assets totaling EUR 37 m (prior year: EUR 48 m) was recognized in the following line items in the consolidated income statement: cost of [--break--]  sales EUR 14 m (prior year: EUR 15 m), research and development expenses EUR 3 m (prior [--break--] year: EUR 2 m), selling expenses EUR 5 m (prior year: EUR 5 m), and administrative expenses EUR 15 m (prior year: EUR 26 m).

Internally generated intangible assets with a carrying amount of EUR 10 m (prior year: EUR 13 m) are not yet subject to amortization. They relate to ongoing projects for internally [--break--]  generated software.

Research and development expenses of EUR 495 m (prior year: EUR 467 m) were recognized in the consolidated income statement in 2011.

At December 31, 2011, intangible assets with a carrying amount of EUR 5 m (prior year: EUR 7 m) were pledged as collateral for bank loans.

Goodwill

The Schaeffler Group tests its goodwill for impairment at least annually using the approach described under General Information (Accounting policies). The key assumption in our forecast relates to constant growth rates for the Automotive and Industrial segments exceeding the corresponding assumptions for the market. We are further confident that we can be sufficiently flexible in our cost structure to be able to maintain our EBITDA margin at its current level in [--break--]  the coming years.

For purposes of determining the recoverable amount, cash flows beyond the detailed forecast horizon of 2014 are based on an annual growth rate of 0.5 % (prior year: 0.5 %) for each segment. Depending on the underlying business and its country of operation, Schaeffler uses an assumed pre-tax interest rate of 13.87 % (prior year: 13.05 %) as the weighted average cost of capital for the Automotive segment and 13.89 % (prior year: 13.05 %) for the Industrial segment. This corresponds to a post-tax interest rate of 9.64 % for the Automotive segment (prior year: 9.12 %) and 9.75 % for the Industrial segment (prior year: 9.18 %).

Valuation assumptions are normally identical across cash-generating units.

As the value in use of the cash-generating units exceeds their carrying amount both for the current and the prior year, they are not impaired. Even adjusting an assumption the forecasted cash flows are based upon, e. g. by reducing forecast EBIT by 15 % or increasing cost of capital by 5 %, does not result in an impairment loss.

The carrying amounts of goodwill allocated to the cash-generating units are unchanged from the prior year, amounting to EUR 275 m (prior year: EUR 275 m) (Automotive) and EUR 208 m (prior year: EUR 208 m) (Industrial).

4.2 Property, plant and equipment

No. 039
in € millions Land and buildings Technical equipment and machinery Other equipment Assets under construction Total
Historical cost
Balance as of January 1, 2010 1,987 5,466 824 167 8,444
Additions 16 160 36 153 365
Disposals -12 -188 -72 -10 -282
Transfers 5 92 4 -101 0
Foreign currency translation 57 167 18 6 248
Balance as of December 31, 2010 2,053 5,697 810 215 8,775
Balance as of January 1, 2011 2,053 5,697 810 215 8,775
Additions 1) 32 313 73 413 831
Disposals -6 -119 -42 -2 -169
Transfers 9 100 8 -117 0
Foreign currency translation 0 -20 -3 0 -23
Balance as of December 31, 2011 2,088 5,971 846 509 9,414
Accumulated depreciation and impairment losses
Balance as of January 1, 2010 854 3,788 655 18 5,315
Depreciation 67 414 57 0 538
Impairment losses 0 2 0 0 2
Impairment reversals 0 0 0 -5 -5
Disposals -10 -183 -69 0 -262
Transfers 0 -1 1 0 0
Foreign currency translation 18 113 15 0 146
Balance as of December 31, 2010 929 4,133 659 13 5,734
Balance as of January 1, 2011 929 4,133 659 13 5,734
Depreciation 66 389 62 0 517
Impairment losses 0 0 0 0 0
Impairment reversals 0 0 0 0 0
Disposals -1 -115 -41 0 -157
Transfers 0 -4 4 0 0
Foreign currency translation 2 -9 -2 1 -8
Balance as of December 31, 2011 996 4,394 682 14 6,086
Net carrying amounts
As of January 1, 2010 1,133 1,678 169 149 3,129
As of December 31, 2010 1,124 1,564 151 202 3,041
As of January 1, 2011 1,124 1,564 151 202 3,041
As of December 31, 2011 1,092 1,577 164 495 3,328
1) Including non-cash additions to property, plant and equipment of EUR 58 m (prior year: EUR 19 m) during the reporting period.

At EUR 831 m (prior year: EUR 365 m), the Schaeffler Group made significantly higher capital expenditures in 2011 than in 2010.

The increase in worldwide automobile production, positive developments in engineering and plant construction, and the expansion strategy for the company’s presence in the growth regions led to significant capital expenditures both for expanding existing production capacity and for establishing new production facilities. In addition to Germany, capital expenditures focused on the production facilities in China and Korea, in Slovakia, and in the U.S.

At December 31, 2011, property, plant and equipment with a carrying amount of EUR 1,703 m (prior year: EUR 1,627 m) were pledged as collateral for bank loans.

4.3 Investments in equity-accounted investees

No. 040
in € millions 12/31/2011 12/31/2010
Schaeffler Beteiligungsholding GmbH & Co. KG 1) 4,770 5,248
Other 2 4
Total 4,772 5,252
1) In 2010 Continental AG.

Please refer to the comments in 2.2 Investments in equity-accounted investees for details of changes in investments in equity-accounted investees.

4.4 Deferred tax assets and liabilities

Total deferred tax assets and liabilities result from the following items:

No. 041
in € millions 12/31/2011 12/31/2010
Intangible assets -15 -19
Property, plant and equipment -91 -92
Financial assets -4 -1
Inventories 21 17
Trade receivables and other assets -12 -57
Provisions for pensions and similar obligations 112 106
Other provisions and other liabilities 141 173
Loss carryforwards 25 25
Other 49 21
Deferred taxes, net 226 173
Deferred tax assets 350 289
Deferred tax liabilities -124 -116

In accordance with IAS 12, deferred taxes are calculated using tax rates effective or substantively enacted at the end of the reporting period and expected to apply when the deferred taxes are realized. In 2011, an average trade tax rate of 12.0 % (prior year: 12.0 %) was used for German partnerships, a combined tax rate of 27.9 % (prior year: 27.9 %) including corporation tax, solidarity surcharge, and trade tax was used for German corporations, and the applicable local tax rates were used for foreign entities.

In 2011, certain subsidiaries and tax groups that have suffered losses have recognized net deferred tax assets of EUR 8 m (prior year: EUR 19 m). Recovery of these net deferred tax assets is considered probable since sufficient taxable profits are expected in the future.

At December 31, 2011, Schaeffler had gross loss carryforwards of EUR 140 m (prior year: [--break--]  EUR 160 m) for corporation tax and EUR 48 m (prior year: EUR 32 m) for trade tax, including EUR 77 m (prior year: EUR 70 m) for which no deferred taxes have been recognized. In addition, the group had carryforwards under the interest deduction cap amounting to EUR 481 m (prior year: EUR 303 m) at the end of the reporting period, for which deferred taxes have not been recognized. The majority of the unrecognized loss carryforwards and the interest carryforwards can be utilized indefinitely. Interest expense of EUR 178 m was not tax deductible in 2011 because of the interest deduction cap.

At December 31, 2011, the accumulated amount of deferred taxes recognized in accumulated other comprehensive income is EUR 86 m (prior year: EUR 38 m) and mainly relates to derivatives and pensions and similar obligations.

No Schaeffler Group subsidiary is expected to be disposed of within the foreseeable future. As a result, deferred taxes were only recognized for planned dividends.

4.5 Inventories

No. 042
in € millions 12/31/2011 12/31/2010
Raw materials and supplies 311 283
Work in progress 401 401
Finished goods and merchandise 845 792
Advance payments 5 6
Total 1,562 1,482

In 2011, Schaeffler recognized a valuation allowance of EUR 192 m (prior year: EUR 200 m) on inventories. The allowance includes a provision for slow-moving and obsolete items as well as [--break--]  all evident storage and inventory risks. Inventories of EUR 7,367 m (prior year: EUR 6,423 m) were recognized as an expense in the consolidated income statement during the reporting period.

Inventories of EUR 1,078 m (prior year: EUR 1,035 m) were pledged as collateral for bank loans.

4.6 Trade receivables

No. 043
in € millions 12/31/2011 12/31/2010
Trade receivables 1,607 1,443

All trade receivables are current.

At December 31, 2011, trade receivables of EUR 884 m (prior year: EUR 795 m) were pledged as collateral for bank loans.

The Schaeffler Group recognizes impairment allowances for uncollectible receivables as well as for general credit risks on an individual basis. Impairments are initially recognized in an allowance account unless it is clear at the time the impairment loss occurs that the receivable will be either partially or entirely uncollectible. In that case, the impairment loss is recognized directly against the gross amount of the receivable. Movements in impairment allowances on trade receivables can be reconciled as follows:

Impairment allowances on trade receivables

No. 044
in € millions 2011 2010
Impairment allowances as of January 1 22 25
Additions 3 3
Allowances used to cover write-offs -4 -2
Reversals -3 -4
Impairment allowances as of December 31 18 22

Trade receivables past due are summarized as follows:

Overdue trade receivables

No. 045
in € millions 12/31/2011 12/31/2010
Carrying amount 1,607 1,443
Not past due 1,492 1,355
Past due up to 60 days 109 81
61–120 days 3 5
121–180 days 1 0
181–360 days 1 1
more than one year 1 1

Trade receivables past due, both gross and net of impairment allowances, changed as follows during the year:

Overdue trade receivables gross and net of impairment allowances

No. 046
Past due
in € millions up to
60 days
61–120 days 121–180 days 181–360 days more than one year
December 31, 2011
Gross 110 6 2 3 10
Impairment allowance 1 3 1 2 9
Net 109 3 1 1 1
December 31, 2010
Gross 81 8 1 3 10
Impairment allowance 0 3 1 2 9
Net 81 5 0 1 1

Please refer to 5.5 Related parties for related party receivables.

4.7 Other assets and income tax receivables

No. 047
in € millions 12/31/2011 12/31/2010
Other assets 295 423
Income tax receivables 111 98

At December 31, 2011, income tax receivables amount to EUR 111 m (prior year: EUR 98 m), including non-current balances of EUR 22 m (prior year: nil).

The following summary shows the current and non-current portions of other assets:

Other assets (current/non-current)

No. 048
12/31/2011 12/31/2010
in € millions Non-
current
Current Total Non-
current
Current Total
Pension asset 43 0 43 46 0 46
Marketable securities 4 0 4 3 0 3
Loans receivable and financial receivables 16 0 16 22 0 22
Tax receivables 1 110 111 21 112 133
Derivative financial assets 2 11 13 43 77 120
Miscellaneous assets 29 79 108 31 68 99
Total 95 200 295 166 257 423

Changes in derivative financial assets are primarily due to changes in the fair value of derivative financial instruments used to economically hedge the Schaeffler Group’s interest rate and currency risk. They consist of an interest rate hedging instrument of EUR 2 m (prior year: EUR 43 m) and EUR 11 m (prior year: EUR 77 m) in positive fair values of currency hedging instruments.

Other balances included here primarily comprise value-added tax and other tax receivables, the pension asset and loans receivable and financial receivables.

At December 31, 2011, other assets and income tax receivables of EUR 45 m (prior year: EUR 52 m) were pledged as collateral for bank loans.

4.8 Cash and cash equivalents

At December 31, 2011, cash and cash equivalents amount to EUR 397 m (prior year: EUR 733 m) and consist primarily of bank balances.

At December 31, 2011, cash and cash equivalents of EUR 259 m (prior year: EUR 531 m) were pledged as collateral for bank loans.

4.9 Shareholders’ equity

The Schaeffler Group’s shareholders’ equity consists of the following:

No. 049
in € millions 12/31/2011 12/31/2010
Share capital 500 500
Reserves 1,324 2,801
Accumulated other comprehensive income (loss) -163 -7
Equity attributable to shareholders of the parent company 1,661 3,294
Non-controlling interests 53 47
Total shareholders’ equity 1,714 3,341

Schaeffler AG (until October 13, 2011: Schaeffler GmbH) was founded on September 29, 2009 with EUR 25,000 in share capital. On June 28, 2010, a capital increase in kind (in the form of a hive-down) raised Schaeffler GmbH’s share capital to EUR 500,025,000.

Following the change in legal form of Schaeffler GmbH to Schaeffler AG, Schaeffler AG’s share capital (“Grundkapital”) continues to amount to EUR 500,025,000 at December 31, 2011. It is divided into 500,025,000 registered no-par-value shares, all of which are held by Schaeffler Verwaltungs GmbH. The share capital is fully paid up, Schaeffler AG has no authorized or contingent capital, and there are no resolutions with respect to these types of capital.

Schaeffler GmbH paid dividends of EUR 2,364 m (or EUR 4.73 per share) to its shareholder before it was converted to a stock corporation (“AG”) on October 13, 2011. EUR 400 m of these dividends represent a cash dividend paid on January 5, 2011, and EUR 764 m relate to the distribution of Continental AG shares as a dividend in kind on May 5, 2011. Furthermore, a further dividend payable (EUR 600 m dated July 1, 2011, see 4.10 Current/Non-current financial debt ) was settled by way of an assumption of debt in discharge of the previous debtor, and, finally, another dividend in kind of EUR 600 m was distributed by creating a loan due from Schaeffler AG to Schaeffler Verwaltungs GmbH [--break--]  (dividend in kind dated September 22, 2011, see 4.10 Current/Non-current financial debt ).

A dividend of EUR 300 m will be proposed to the annual general meeting for 2011.

Accumulated other comprehensive income (loss) consists of the following reserves:

Translation reserve [--break--] 

The translation reserve comprises all foreign currency differences arising on translation of [--break--] the financial statements of foreign operations with a functional currency different from the presentation currency.

Hedging reserve [--break--] 

The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments.

Fair value reserve [--break--] 

The fair value reserve comprises all accumulated net changes in the fair value of available-for-sale financial assets incurred until these assets are derecognized or impaired.

Reserve for actuarial gains and losses [--break--] 

Schaeffler immediately recognizes all actuarial gains and losses arising on defined benefit plans in accumulated other comprehensive income (loss).

Expenses of EUR 75 m and income of EUR 76 m were reclassified from the hedging reserve to profit and loss in 2011 (see 4.15 Financial instruments ). Another EUR 13 m were reclassified from accumulated other comprehensive income (loss) to income from equity-accounted investees following the partial disposal of Continental AG shares by distribution as a dividend in kind in May 2011 (see 2.1 Scope of consolidation et seq.).

Non-controlling interests represent interests in the equity of consolidated subsidiaries held by third parties.

4.10 Current/Non-current financial debt

No. 050
12/31/2011 12/31/2010
in € millions Total Due in
up to 1 year
Due in more than 1 year Total Due in
up to 1 year
Due in more than 1 year
Financial debt 7,485 317 7,168 6,477 64 6,413

At December 31, 2011, the Schaeffler Group had financial debt of EUR 7,485 m (prior year: EUR 6,477 m), consisting of EUR 7,168 m (prior year: EUR 6,413 m) in non-current financial [--break--]  debt and EUR 317 m (prior year: EUR 64 m) in current financial debt, both accounted for at [--break--] amortized cost.

The agreement by IHO Group, defined as the consolidated group with the parent company [--break--]  INA-Holding Schaeffler GmbH & Co. KG, and its shareholders with the consortium banks on a comprehensive refinancing of the IHO Group’s debt in late March 2011 has significantly affected the Schaeffler Group’s original acquisition financing arrangement. In particular, Schaeffler AG has assumed debt in discharge of the previous debtor from its parent company Schaeffler Verwaltungs GmbH at the terms underlying the existing Senior Facility Agreement, increasing the Senior Facility Agreement obtained under the refinancing arrangement dated November 20, 2009 by EUR 600 m.

At the reporting date, the SFA principal of EUR 7,743 m (prior year: EUR 7,143 m) consists of a term loan of EUR 6,950 m (prior year: EUR 6,350 m) and a revolver of EUR 793 m (prior year: [--break--]  EUR 793 m). They are due on June 30, 2013 and bear interest at EURIBOR plus 425 basis points. The carrying amount of EUR 6,949 m (prior year: EUR 6,271 m) as at December 31, 2011, which is presented as non-current financial debt, differs from the principal amount due to unamortized transaction costs of EUR 1 m (prior year: EUR 79 m) and because the revolver has not been utilized as at the reporting date.

In addition, Schaeffler obtained an annuity loan to finance the purchase of an interest rate hedging instrument. At year-end, the loan has a carrying amount of EUR 101 m (prior year: EUR 140 m) and is included in non-current financial debt.

A dividend in kind of EUR 600 m was distributed on September 22, 2011 by creating a loan due from Schaeffler AG to Schaeffler Verwaltungs GmbH. Its carrying amount was EUR 417 m at December 31, 2011, consisting of a current portion of EUR 300 m and a non-current portion of EUR 117 m.

The SFA contains certain constraints including a requirement to meet certain financial covenants relating to senior debt leverage, senior interest cover, senior cash flow cover and capital expenditures. The creditors are entitled to call the debt prior to maturity under certain circumstances, including if the covenants are not met, which would result in the debt becoming due immediately.

Extensive security has been provided to the banks in connection with the loan agreement. Where these have to be disclosed, the disclosure is made in the notes for the various assets concerned.

4.11 Provisions for pensions and similar obligations

Employee benefits include both defined contribution plans and defined benefit plans, some of which are funded. While defined contribution plans entail no further obligation beyond the regular contributions included in personnel expense, defined benefit pension plans are presented as follows in the statement of financial position:

No. 051
in € millions 12/31/2011 12/31/2010
Provisions for pensions (liabilities net of related plan assets) 1,215 1,110
Provisions for obligations similar to pensions 2 2
Provisions for pensions and similar obligations 1,217 1,112
Pension asset (plan assets net of related liabilities) 43 46
Net defined benefit obligation 1,174 1,066

Defined benefit obligation and plan assets amount to the following:

Defined benefit obligations

No. 052
in € millions 12/31/2011 12/31/2010
Present value of unfunded obligations 1,145 1,041
Present value of funded obligations 536 501
Present value of defined benefit obligations (total) 1,681 1,542
Fair value of plan assets 509 478
Net pension obligation recognized in the statement
of financial position
1,172 1,064
Other employee benefits similar to pensions 2 2
Net defined benefit obligation 1,174 1,066

The Schaeffler Group grants its employees various types of pension benefits. The defined benefit pension obligations are largely towards beneficiaries in Germany and most of them are unfunded. Exceptions are pension arrangements where employees acquire rights to additional pension benefits by way of deferred compensation. Under these arrangements, Schaeffler agrees to accumulate additional capital using the compensation deferred, which is then paid out to the employee upon retirement, either in full or in installments. Deferred compensation is invested in specific funds.

In addition to the German pension plans, further significant defined benefit pension plans cover employees in the U.S. and the United Kingdom. The Schaeffler Group finances its pension obligations in these countries using external pension funds. At the end of 2011, approximately 86 % (prior year: 90 %) of pension obligations in the U.S. and the United Kingdom were covered by plan assets.

Plan assets consist of the following:

Plan assets

No. 053
in € millions 12/31/2011 12/31/2010
Equity instruments 177 172
Debt instruments 210 183
Real estate 15 14
Cash 2 2
Other (incl. reimbursement insurance) 105 107
Total 509 478

Plan assets do not include real estate used by the Schaeffler Group or any of the Schaeffler Group’s own equity instruments.

The opening and closing balances of the present value of the defined benefit obligation can be reconciled as follows:

Reconciliation of defined benefit obligations

No. 054
in € millions 2011 2010
Defined benefit obligation as of January 1 1,542 1,474
Benefits paid -83 -81
Current service cost 24 25
Interest cost 78 77
Contributions by plan participants 9 9
Transfers in/out 1 -1
Past service cost – vested 0 4
Past service cost – non-vested 0 1
Actuarial gains and losses recognized in other comprehensive income (loss) 100 8
Foreign currency translation 10 26
Defined benefit obligation as of December 31 1,681 1,542

The opening and closing balances of the fair value of plan assets can be reconciled as follows:

Reconciliation of plan assets

No. 055
in € millions 2011 2010
Fair value of plan assets as of January 1 478 385
Benefits paid -22 -20
Expected return on plan assets 26 25
Contributions by employer/employee 33 52

Employer contribution

24 44

Employee contribution

9 8
Transfers in/out -1 -1
Actuarial gains and losses recognized in other comprehensive income (loss) -15 16
Foreign currency translation 10 21
Fair value of plan assets as of December 31 509 478

The actual return on plan assets for 2011 amounts to EUR 11 m (prior year: EUR 41 m).

For 2012, the Schaeffler Group will make contributions to plan assets of EUR 46 m.

The following amounts were recognized in profit or loss:

Net pension cost

No. 056
in € millions 2011 2010
Current service cost 24 25
Interest cost 78 77
Expected return on plan assets -26 -25
Amortization of past service cost 0 4
Net pension cost 76 81

The amounts are included in the following line items of the consolidated income statement:

Net pension cost by functional area

No. 057
in € millions 2011 2010
Cost of sales 14 18
Research and development expenses 3 4
Selling expenses 3 3
Administrative expenses 4 4
Included in EBIT 24 29
Interest cost 78 77
Expected return on plan assets -26 -25
Included in financial result 52 52
Total 76 81

The following expenses are recognized as personnel expense within the appropriate functional expenses:

Total pension cost in personnel expense by type of plan

No. 058
in € millions 2011 2010
Expenses related to defined benefit plans 24 29
Contributions to defined contribution plans 11 12
Total 35 41

The following summarizes the actuarial gains and losses recognized in accumulated other comprehensive income (loss). The amounts presented include related foreign currency translation gains and losses but not deferred tax effects.

Actuarial gains and losses

No. 059
in € millions 2011 2010
Accumulated balance as of January 1 -43 -34
Gains/losses on defined benefit obligations 100 8
Gains/losses on plan assets 15 -17
Accumulated balance as of December 31 72 -43

Assumptions used to arrive at the defined benefit obligations, in particular discount rates, future salary increases and expected long-term rates of return on plan assets, are determined separately for each country.

The principal actuarial assumptions for the Schaeffler Group are as follows:

Actuarial assumptions

No. 060
2011 2010
Discount rate as of December 31 4.9 % 5.3 %
Expected return on plan assets 5.7 % 6.0 %
Future salary increases 3.3 % 3.3 %
Future pension increases 1.7 % 1.7 %

Actuarial assumptions for the major countries are as follows:

Actuarial assumptions: Germany

No. 061
Germany 2011 2010
Discount rate as of December 31 5.0 % 5.3 %
Expected return on plan assets 4.5 % 4.2 %
Future salary increases 3.3 % 3.3 %
Future pension increases 1.5 % 1.5 %

Actuarial assumptions: U.S.A.

No. 062
U.S.A. 2011 2010
Discount rate as of December 31 4.5 % 5.5 %
Expected return on plan assets 7.7 % 8.2 %
Future salary increases n.a. n.a.
Future pension increases n.a. n.a.

Actuarial assumptions: United Kingdom

No. 063
United Kingdom 2011 2010
Discount rate as of December 31 5.0 % 5.5 %
Expected return on plan assets 5.6 % 6.2 %
Future salary increases n.a. n.a.
Future pension increases 3.0 % 3.0 %

The expected total long-term return on plan assets amounts to 5.7 % (prior year: 6.0 %) and is [--break--]  based on the return on the portfolio as a whole and not on the sum of the returns on individual [--break--] asset categories. It has been determined on the basis of historical returns without making adjustments.

Mortality assumptions are based on published statistics and country-specific mortality tables. The mortality tables “Richttafeln 2005 G” by Heubeck are used for the German plans.

Experience adjustments on pension obligations and plan assets have been as follows:

Experience adjustments on defined benefit obligations and plan assets

No. 064
in € millions 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/20071)
Present value of defined benefit obligation 1,681 1,542 1,474 1,292 1,403
Fair value of plan assets 509 478 385 329 405
Net unfunded benefit obligation 1,172 1,064 1,089 963 998
Experience adjustments arising on plan liabilities 7 7 14 10 -13
Experience adjustments arising on plan assets 15 15 20 -74 -5
1) Amounts disclosed represent those in the consolidated IFRS financial statements of IHO Group.

Experience adjustments are caused by differences between actuarial assumptions made at the beginning of the period and those made at the end of the period.

4.12 Provisions

No. 065
in € millions Employee benefits Restruc-
turing
Warranties Other taxes Liability and litigation risks Other Total
Balance as of
January 1, 2010
212 39 47 9 17 117 441
Additions 74 1 36 28 11 110 260
Utilization -86 -13 -14 -2 -7 -78 -200
Changes in scope
of consolidation
0 0 0 0 -1 -2 -3
Reversals -9 -21 -20 0 -3 -16 -69
Interest expense 4 0 0 0 0 1 5
Foreign currency translation 2 1 1 1 1 4 10
Balance as of
December 31, 2010
197 7 50 36 18 136 444
Balance as of
January 1, 2011
197 7 50 36 18 136 444
Additions 34 1 45 6 4 37 127
Utilization -92 -1 -17 -9 -4 -110 -233
Reversals -8 -6 -15 -10 -3 -12 -54
Interest expense 4 0 0 0 0 0 4
Foreign currency translation 0 0 0 0 -1 0 -1
Balance as of
December 31, 2011
135 1 63 23 14 51 287

Provisions have the following current and non-current portions:

Provisions (current/non-current)

No. 066
12/31/2011 12/31/2010
in € millions Non-
current
Current Total Non-
current
Current Total
Employee benefits 66 69 135 117 80 197
Restructuring 0 1 1 0 7 7
Warranties 0 63 63 0 50 50
Other taxes 0 23 23 0 36 36
Liability and litigation risks 0 14 14 0 18 18
Other 13 38 51 10 126 136
Total 79 208 287 127 317 444

Employee benefits and restructuring

Provisions for employee benefits consist primarily of provisions for partial retirement, net of [--break--]  the related plan assets, of EUR 85 m (prior year: EUR 100 m). Obligations under partial retirement arrangements are measured at present value based on actuarial principles. Present values [--break--] are determined using the mortality tables “Richttafeln 2005 G” by Klaus Heubeck. The discount [--break--] rate is 2.75 % (prior year: 2.75 %) at December 31, 2011, and future salary increases were assumed to be 3.25 % (prior year: 3.25 %). The provision for employee benefits also includes obligations arising from the adjustment funds (German Entgeltrahmenabkommen, ERA) based on a collective bargaining agreement with the metalworking and electrical engineering industry in Germany, long-time service awards, as well as other personnel and payroll-related provisions, particularly for early retirement, death and temporary assistance benefits.

At December 31, 2011, restructuring provisions of EUR 1 m (prior year: EUR 7 m) have been [--break--]  recognized primarily for expenses expected in connection with human resources measures.

Warranties

Warranty provisions are recognized on a case-by-case basis for each sales transaction or, in cases involving a large population of items, using the expected value method.

Other taxes

Tax provisions have been recognized for current and prior year taxes other than income taxes. In particular, provisions were recognized in the prior year for land transfer tax incurred in connection with the restructuring of the group in 2010.

Liability and litigation risks

Provisions for liability and litigation risks are recognized if, as a result of a past transaction or event, Schaeffler has a legal or constructive obligation for which an outflow of resources representing economic benefits is probable and which can be reliably estimated. Such provisions are recognized at their expected settlement amount, taking into account all identifiable risks, and are not offset against expected reimbursements.

Other

At the reporting date, other provisions include provisions for environmental risks, document retention and other items to be provided for. The balance decreased mainly as a result of accrued selling costs (particularly customer bonuses, early-payment discounts and rebates), which are presented under other liabilities at December 31, 2011 due to their high level of certainty.

4.13 Trade payables

At December 31, 2011, the Schaeffler Group has trade payables of EUR 873 m (prior year: EUR 729 m), all of which are current. At December 31, 2011, the amount includes EUR 50 m (prior year: EUR 25 m) in notes payable. The Schaeffler Group’s exposure to currency and liquidity risk related to trade payables is disclosed in 4.15 Financial instruments on financial instruments.

4.14 Other liabilities and income tax payables

No. 067
in € millions 12/31/2011 12/31/2010
Other liabilities 933 909
Income tax payables 356 217

At December 31, 2011, income tax payables amount to EUR 356 m (prior year: EUR 217 m), including non-current balances of EUR 172 m (prior year: EUR 102 m).

Other liabilities consist of the following:

Other liabilities (current/non-current)

No. 068
12/31/2011 12/31/2010
in € millions Non-
current
Current Total Non-
current
Current Total
Amounts payable to staff 0 322 322 0 272 272
Social security contributions payable 5 39 44 8 28 36
Advance payments received 0 25 25 0 20 20
Other tax payables 0 81 81 0 74 74
Derivative financial liabilities 245 71 316 409 35 444
Miscellaneous liabilities 11 134 145 6 57 63
Total 261 672 933 423 486 909

Derivative financial instruments include in particular forward exchange contracts and interest rate hedging instruments used to economically hedge the Schaeffler Group’s currency and interest rate risk. The decrease in this balance is primarily due to an adjustment to the hedging portfolio which led to some of the existing interest rate hedging instruments being terminated.

Amounts payable to staff comprise overtime accounts, accrued vacation, as well as profit [--break--]  sharing accruals.

Miscellaneous liabilities consist primarily of provisions for selling costs (customer bonuses, rebates, early-payment discounts).

The Schaeffler Group’s exposure to currency and liquidity risk related to other liabilities is [--break--]  disclosed in 4.15 Financial instruments on financial instruments.

4.15 Financial instruments

The following summarizes the carrying amounts and fair values of financial instruments by [--break--]  balance sheet class and by category per IFRS 7.8. Derivatives designated as hedging instruments are also shown, although they do not fall under any of the IAS 39 measurement categories. No financial instruments were reclassified between categories.

Financial instruments by class and category in accordance with IFRS 7.8

No. 069
12/31/2011 12/31/2010
in € millions Category per
IFRS 7.8
Carrying amount Fair value Carrying amount Fair value
Financial assets, by class
Trade receivables LaR 1,607 1,607 1,443 1,443
Other investments 1) AfS 14 -- 8 --
Other assets

Marketable securities

AfS 4 4 3 3

Other loans receivable 2)

LaR 103 103 107 107

Derivatives designated as hedging instruments

n.a. 0 0 43 43

Derivatives not designated as hedging instruments

HfT 13 13 77 77
Cash and cash equivalents LaR 397 397 733 733
Financial liabilities, by class
Financial debt FLAC 7,485 7,568 6,477 6,555
Trade payables FLAC 873 873 729 729
Other liabilities

Derivatives designated as hedging instruments

n.a. 69 69 4 4

Derivatives not designated as hedging instruments

HfT 247 247 440 440

Other liabilities 2)

FLAC 195 195 83 83
Summary by category
Available-for-sale financial assets (AfS) 18 -- 11 --
Financial assets held for trading (HfT) 13 -- 77 --
Loans and receivables (LaR) 2,107 -- 2,283 --
Financial liabilities at amortized cost (FLAC) 8,553 -- 7,289 --
Financial liabilities held for trading (HfT) 247 -- 440 --
1) Investments accounted for at cost.
2) Includes other assets/liabilities in the scope of IAS 39/IFRS 7.

The carrying amounts of trade receivables, other loans receivable, and cash and cash equivalents are assumed to represent their fair value due to the short maturities of these instruments. Other investments include investments (shares in limited liability companies and cooperatives) for which quoted prices in an active market are not available. As a result, the fair value of these instruments cannot be measured reliably. These investments are therefore accounted for at cost. There were no partial disposals of such investments in 2011, and no (partial) disposals are planned for the foreseeable future. Marketable securities consist almost entirely of equity instruments in the form of shares in investment funds mostly investing in government bonds and money market funds.

Hedge accounting is only applied to derivatives designated as hedges of currency and interest rate risk in cash flow hedges. Schaeffler uses forward exchange contracts, options and swaps as hedging instruments to hedge currency risk. Interest rate risk is hedged using interest rate options and swaps. The fair values of derivatives are shown in the table above and are calculated using valuation models with all significant inputs observable in the market.

The carrying amounts of trade payables and other liabilities are assumed to represent their fair value. The fair value of financial debt is the present value of the expected future cash flows, discounted using risk-adjusted discount rates in effect at the end of the reporting period.

Please refer to the notes on the various balance sheet line items for details of the amount of financial assets pledged as collateral. Financial and non-financial assets of the Schaeffler Group have been pledged on the basis of the Senior Facility Agreement (see 4.10 Current/Non-current financial debt ). Collateral has generally been pledged until maturity of the Senior Facility Agreement and may be realized under the creditors’ right to call the debt before maturity, for instance if defined financial covenants are not complied with.

Financial assets and liabilities measured at fair value have been classified using a fair value hierarchy that reflects the significance of the inputs used in arriving at the measurements (Level 1 – Level 3). The classification is based on the method used to determine fair value. According to the levels of the hierarchy, the fair value of a financial instrument is determined using the following inputs:

  • Level 1: Quoted prices in active markets for identical assets or liabilities. This includes Schaeffler’s marketable securities, whose fair value is derived from the exchange-quoted price at the end of the reporting period.
  • Level 2: Determined using a valuation method for which all significant inputs are based [--break--]  on observable market data. This level includes existing forward exchange contracts and [--break--] currency options as well as interest rate hedging instruments, i. e. interest rate swaps, caps and collars, which are measured using valuation models based on input variables observable in the market.
  • Level 3: Determined using a valuation method for which significant inputs are not based [--break--]  on observable market data. The Schaeffler Group does not have any financial instruments [--break--] in this level.

Fair value hierarchy of financial assets and liabilities

No. 070
in € millions Level 1 Level 2 Total
December 31, 2011
Marketable securities 4 4
Derivatives designated as hedging instruments 0
Derivatives not designated as hedging instruments 13 13
Total financial assets 4 13 17
Derivatives designated as hedging instruments 69 69
Derivatives not designated as hedging instruments 247 247
Total financial liabilities 0 316 316
December 31, 2010
Marketable securities 3 3
Derivatives designated as hedging instruments 43 43
Derivatives not designated as hedging instruments 77 77
Total financial assets 3 120 123
Derivatives designated as hedging instruments 4 4
Derivatives not designated as hedging instruments 440 440
Total financial liabilities 0 444 444

No transfers were made between the various levels of the fair value hierarchy (Level 1-3).

Net gains and losses by category of financial instruments in accordance with IFRS 7.20 are as follows:

Net gains and losses by financial instrument category in accordance with IFRS 7.20

No. 071
Subsequent measurement Net income (loss)
in € millions Interest
and dividends
at fair value impairment loss currency translation 2011 2010
Available-for-sale financial assets 1 1 1
Financial assets and liabilities held for trading -170 130 -40 -320
Loans and receivables 1) 13 0 12 25 55
Financial liabilities at amortized cost -494 -494 -386
Total -650 130 0 12 -508 -650
1) Net income (loss) for 2010 amounting to EUR 55 m includes currency translation effects.The impact of these effects was shown in the 2010 consolidated financial statements.

As shown above, net gains and losses include interest and dividends, changes in fair value recognized in profit or loss, impairment losses and impairment reversals, as well as currency translation effects. Interest income and expense on financial assets and liabilities accounted for at amortized cost is included in interest income on financial assets and interest expense on financial debt, respectively (see 3.5 Financial result ).

The net loss on financial assets and liabilities held for trading of EUR 40 m (prior year: EUR 320 m) relates almost entirely to derivatives. EUR 101 m (prior year: EUR 282 m) of this net loss is included in interest expense on interest rate derivatives, while income of EUR 61 m (prior year: expenses of EUR 38 m) has been recognized in other income and expense. Interest expense [--break--]  on interest rate derivatives of EUR 101 m (prior year: EUR 282 m) includes EUR 69 m in income from fair value changes (prior year: expenses of EUR 30 m) and EUR 170 m in expenses due to compensation payments (prior year: EUR 252 m).

In 2011, Schaeffler incurred net foreign exchange gains of EUR 12 m (prior year: EUR 27 m) on loans and receivables and financial liabilities accounted for at amortized cost. The impairment loss on financial assets classified as loans and receivables consists of an impairment reversal of EUR 3 m (prior year: EUR 8 m) and an impairment loss of EUR 3 m (prior year: EUR 4 m) and relates entirely to the trade receivables class. There was no net effect of impairment losses on financial assets in the other loans receivable class (prior year: EUR 12 m reversal).

Financial risk management

Overview

Due to its global business activities and the resulting financing requirements, the Schaeffler Group is exposed to the following risks from its use of financial instruments:

(1) Credit risk

(2) Liquidity risk

(3) Market risk (currency, interest rate, and other price risk)

The Schaeffler Group’s executive board has overall responsibility for establishing and overseeing [--break--]  the group’s risk management system. The finance organization is responsible for developing and monitoring this risk management system and reports regularly to the CFO on its activities in this area.

Group wide risk management policies are in place to identify and analyze Schaeffler’s risks, [--break--]  to set appropriate risk limits and controls as well as to monitor risks and adherence to limits. Risk management procedures and systems are reviewed regularly to reflect changes in market conditions and Schaeffler’s activities.

See the discussion in 10.4 Financial risks of the group management report for further details on financial risk management.

(1) Credit risk

The risk of financial loss to the Schaeffler Group due to a customer or a counterparty defaulting is referred to as credit risk and arises predominantly from trade receivables and other financial assets. Among Schaeffler’s major customers in the Automotive segment are various OEM’s. Within trade receivables there is a concentration of credit risk with regard to these business relationships ( see 5.4 Segment reporting ).

Credit risk arising on trade receivables is managed by constant monitoring of customers’ financial status, creditworthiness and payment history. Efficient collection procedures and classification of customers in defined risk categories are additional components of Schaeffler’s credit risk management. Appropriate credit limits are set and commercial credit insurance policies further reduce credit risk. Depending on the customer’s creditworthiness, these insurance policies cover up to 80 % of receivables outstanding. All relevant rules are outlined in a Schaeffler Group guideline.

The carrying amounts of financial assets represent the maximum credit exposure at the end of each reporting period as follows:

Maximum credit risk on financial assets

No. 072
Carrying amount
in € millions 12/31/2011 12/31/2010
Trade receivables 1,607 1,443
Other investments 14 8
Other assets

Marketable securities

4 3

Other loans receivable

103 107

Derivatives designated as hedging instruments

0 43

Derivatives not designated as hedging instruments

13 77
Cash and cash equivalents 397 733
Total financial assets 2,138 2,414

The Schaeffler Group’s executive board does not have any indications that the debtors will not meet their payment obligations with respect to trade receivables that are neither past due nor impaired. Management has determined that there are no indications that the counterparties to other financial assets, i. e. marketable securities, other loans and derivative financial assets will be unable to meet their future contractual obligation.

(2) Liquidity risk

The risk that the Schaeffler Group will not be able to meet its financial obligations as they become due is referred to as liquidity risk. The Schaeffler Group’s approach to managing liquidity risk is to ensure that there is always sufficient liquidity available to meet liabilities as they become due, under both normal and stress conditions, without incurring unacceptable losses or risking damage to Schaeffler’s reputation.

Liquidity risk is closely monitored by the finance organization based on a short-term (4 weeks) and medium-term (12 months) rolling timeframe. Both liquidity status and liquidity forecast are reported regularly to the CFO.

The Schaeffler Group ensures its ability to meet the financing requirements of its operations [--break--]  and its financial obligations by using equity, cash pooling arrangements, intercompany loans and existing lines of credit based on the relevant legal and tax regulations.

The Schaeffler Group’s contractual payments of interest and principal on financial debt and derivative financial liabilities are summarized as follows:

Contractual payments of interest and principal on financial debt and derivative liabilities

No. 073
in € millions Carrying amount Contractual cash flows Up to 1 year 1–5 years More than 5 years
December 31, 2011
Non-derivative financial liabilities 8,553 9,126 1,810 7,309 7

Financial debt

7,485 8,058 751 7,307 0

Trade payables

873 873 873 0

Other liabilities

195 195 186 2 7
Derivative financial liabilities 316 320 176 144
Total 8,869 9,446 1,986 7,453 7
December 31, 2010
Non-derivative financial liabilities 7,289 8,820 1,269 7,547 4

Financial debt

6,477 7,993 456 7,537 0

Trade payables

729 744 737 3 4

Other liabilities

83 83 76 7
Derivative financial liabilities 444 433 218 215 0
Total 7,733 9,253 1,487 7,762 4

Contractual cash flows for financial debt include expected interest as well as the settlement amount of the loans.

(3) Market risk

Market risk is defined as the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Schaeffler Group’s net income or the value of its financial instruments. The objective of market risk management is to manage and control market risk within acceptable parameters while optimizing returns.

The Schaeffler Group enters into derivatives in order to manage market risk. All such transactions are carried out within the risk management strategy approved by the executive board. The finance organization closely monitors, actively manages, and reports market risk to the CFO.

Currency risk

The Schaeffler Group is exposed to currency risk on sales, purchases and loans payable and receivable that are denominated in a currency other than the functional currency of the relevant Schaeffler Group entity.

At any point in time the Schaeffler Group hedges a major portion of its estimated currency risks from operations in respect of forecasted sales and purchases over the next twelve months using forward exchange contracts, currency swaps and related options. Where necessary, forward exchange contracts are rolled over at maturity.

Loans between group entities denominated in a currency other than the functional currency of one of the entities involved are fully hedged using forward contracts with the same maturity as the loans. Schaeffler’s investments in subsidiaries are not hedged as those currency exposures are considered to be long-term in nature.

The Schaeffler Group’s significant expected currency risk exposures by currency based on face values as of the end of each reporting period are as follows:

Expected currency risk from operations

No. 074
in € millions USD RON JPY HUF
December 31, 2011
Estimated currency risk from operations 1,062 -190 108 -93
Forward exchange contracts -639 152 -82 76
Currency options -156 0 0 0
Remaining currency risk from operations 267 -38 26 -17
December 31, 2010
Estimated currency risk from operations 852 -198 98 -84
Forward exchange contracts -599 157 -78 67
Currency options -225 0 0 0
Remaining currency risk from operations 28 -41 20 -17

Estimated currency risk from operations represents the currency risk from operating and investing [--break--]  activities within twelve months after the end of each reporting period. The remaining currency risk from operations reflects the combined exposure of all Schaeffler Group entities not subject to local restrictions on foreign exchange transactions with Schaeffler’s finance organization. Thus, this exposure represents the difference between recognized hedged items and hedged items in the form of expected future foreign currency cash flows that have not yet been recognized on the one hand and hedging instruments that have been recognized in the statement of financial position on the other hand. Currency risk in countries with foreign exchange restrictions (e. g. China, Brazil) is monitored by Schaeffler’s finance organization. The most significant currency risk in these countries arises on the USD and amounts to an estimated EUR -314 m (prior [--break--] year: EUR -227 m).

Forward exchange contracts in certain currencies are accounted for as cash flow hedges with nearly perfect effectiveness. Changes in the fair value of these derivatives are recognized in other comprehensive income. Gains and losses on hedging instruments are reclassified to other income or other expense in the consolidated income statement when the hedged transaction (hedged item) affects net income. Both the majority of the forecast transactions and the resulting impact on net income occur within one year of the end of the reporting period.

The portion of the hedging reserve in accumulated other comprehensive income that relates to hedges of currency risk changed as follows:

Roll-forward of cash flow hedging reserve in OCI

No. 075
in € millions 2011 2010
Balance as of January 1 38 8
Additions -170 48
Reclassified to income statement

to other income

84 21

to other expenses

-8 -39
Balance as of December 31 -56 38

Currency risk arising from foreign currency loans is fully hedged economically and does not result in any significant additional currency risk exposure.

The sensitivity analysis for currency risk is based on a hypothetical 10 % weakening of the Euro against each of the significant foreign currencies as of December 31. The analysis covers foreign currency trade receivables and payables as well as derivative financial instruments used to hedge foreign currency risk and assumes that all other variables, particularly interest rates, remain constant.

The following table shows the effect on net income and shareholders’ equity of translating balances at the closing rate and of measurement at fair value:

Sensitivity analysis: change in foreign exchange rates

No. 076
12/31/2011 12/31/2010
in € millions Net income (loss) Shareholders’ equity Net income (loss) Shareholders’ equity
USD 15 -77 -23 -4
JPY -4 -6 -1 0
HUF -5 8 0 0
RON -18 16 1 0

Conversely, a 10 % rise in the Euro against the significant foreign currencies as at December 31 would have had the same but opposite effect, again holding all other variables constant.

Interest rate risk

Schaeffler’s interest-bearing financial instruments can be summarized by type of interest as [--break--]  follows as of each December 31:

Variable and fixed interest financial debt

No. 077
Carrying amount
in € millions 12/31/2011 12/31/2010
Variable interest instruments 6,964 6,304

Financial debt

6,964 6,304
Fixed interest instruments 521 173

Financial debt

521 173

The Schaeffler Group enters into interest rate swaps, caps and collars to minimize its exposure [--break--]  to changes in interest rates on the variable interest debt under the Senior Facility Agreement (SFA). These instruments are used to economically hedge EUR 6,122 m of the principal of the variable rate debt. EUR 3,500 m of the hedges are interest rate swaps, EUR 300 m are interest rate collars and EUR 2,322 m represents an interest rate cap.

The interest rate swaps and the interest rate cap were accounted for using hedge accounting in accordance with IAS 39 (cash flow hedge) in 2011. The effective portion of changes in the fair value of these hedging instruments is thus recognized in other comprehensive income. Gains and losses on hedging instruments are reclassified to interest income or interest expense when the hedged transaction (hedged item) affects net income. As a result, accumulated other comprehensive income includes accumulated expenses of EUR 13 m arising from fair value changes on designated financial instruments as at December 31, 2011. The interest payments hedged will be expensed in 2012 and 2013.

The hedging relationships are proven to be effective both prospectively and retrospectively [--break--]  by regularly performing tests of effectiveness. Retrospective effectiveness is tested using both the dollar offset method, which compares the fair value changes of the hedged item to those of the hedging instrument, and regression analysis, which determines market sensitivities on the basis of a parallel shift in the yield curve by +/- 150 basis points (Bp).

As the test results show effectiveness to be within a range of 80 % – 125 %, the hedging relationship is considered to be highly effective. There was no ineffectiveness related to designated cash flow hedges that would have to be recognized in net income in 2011.

The equity reserve of EUR -286 m accumulated up to November 20, 2009 for the cash flow hedge relationship is being amortized to profit or loss using the effective interest method. In 2011, this resulted in an interest expense of EUR 75 m (prior year: EUR 91 m).

The Schaeffler Group has neither classified any fixed rate financial assets and liabilities as at fair value through profit or loss nor has it designated any derivatives as fair value hedges.

With regard to variable interest instruments a shift in the yield curve of 100 Bp as at [--break--]  December 31, 2011 would affect (increase/decrease) net income and shareholder’s equity by the following amounts. This analysis assumes that all other variables, particularly exchange rates, remain constant and that interest rates cannot fall below 0 %.

Sensitivity analysis: shift in yield curve

No. 078
Net income (loss) Shareholders’ equity
in € millions Plus 100 Bp Minus 100 Bp Plus 100 Bp Minus 100 Bp
As of December 31, 2011
Variable interest instruments -27 27
Interest rate derivatives designated as hedging instruments 16 -2 96 -94
Interest rate derivatives not designated as hedging instruments 5 -5
Total -6 20 96 -94
As of December 31, 2010
Variable interest instruments -65 36
Interest rate derivatives not designated as hedging instruments 260 -213
Total 195 -177 0 0

The impact of variable interest instruments is solely due to an increase or decrease in the interest charge. The change in net income and shareholders’ equity from interest rate derivatives is entirely due to fair value changes. The impact of fair value changes of interest rate derivatives designated as hedging instruments on net income is EUR 16 m and EUR -2 m and the effect on the reserve in accumulated other comprehensive income (loss) is EUR 96 m and EUR -94 m. [--break--]  The impact of interest rate derivatives not designated as hedging instruments on net income is EUR 5 m and EUR -5 m.

Due to the hedging relationship of the variable interest payments under the Senior Facility Agreement, both economic and for accounting purposes, sensitivities for the variable interest [--break--]  instruments have been determined based on the net interest rate risk exposure. In the prior year, the line item variable interest instruments reflected only interest expense on the Senior Facility Agreement. The impact of interest on interest rate derivatives was shown under interest rate derivatives not designated as hedging instruments.

Other price risk

Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices other than those arising from changes in interest rates or exchange rates.

Other price risk required to be disclosed under IFRS 7 normally includes the risk of changes in stock-market prices and stock price indices as well as changes in commodity prices to the extent purchase agreements for commodities are treated as financial instruments due to the requirements of IAS 39, which is not the case for the Schaeffler Group. Commodity price risk is hedged using long-term supply agreements that include price adjustment clauses. Derivative financial instruments are not used in this context.

Risks related to stock-market prices and stock price indices only arise from marketable securities. In light of the size of the Schaeffler Group’s holdings of such financial instruments, the price risk related to these items is considered insignificant.

4.16 Capital structure

At the end of the reporting period, the Schaeffler Group has the following capital structure:

No. 079
in € millions 12/31/2011 12/31/2010
Equity attributable to shareholders of the parent company 1,661 3,294

in % of total capital

18.2 33.7
Non-current financial debt 7,168 6,413
Current financial debt 317 64

in % of total capital

81.8 66.3
Total capital 9,146 9,771

The overriding objective of the Schaeffler Group’s capital management is to ensure that Schaeffler is able to repay its debt and to provide access to sufficient financial resources. The most important instrument in this context is a detailed liquidity management at group company level; it is [--break--]  designed to ensure that sufficient liquidity reserves are available at all times to service the financial debt incurred under the bank financing agreement ( see 4.10 Current/Non-current financial debt ).

This financing agreement subjects the Schaeffler Group to certain financial covenants ( see 4.10 Current/Non-current financial debt ). Compliance with these covenants is continually monitored at group level. The inputs to the calculation of the financial covenants are defined in detail in the loan agreements and cannot be derived directly from the consolidated financial statements.

The Schaeffler Group has complied with the agreed financial covenants both in 2011 and in 2010. Based on the current forecast, the Schaeffler Group also expects to comply with the financial covenants under the agreements entered into in January 2012 in 2012, 2013 and 2014.

In addition to the ratio of EBITDA to interest expense (senior interest cover) and cash flow to debt service (senior cash flow cover), the ratio of net debt to EBITDA (senior debt leverage) is an important indicator for the group. This ratio is defined as follows:

Net financial debt to EBITDA ratio

No. 080
in € millions 12/31/2011 12/31/2010
Current financial debt 317 64
Non-current financial debt 7,168 6,413
Total financial debt 7,485 6,477
Shareholder loans 420 33
Total financial debt excluding shareholder loans 7,065 6,444
Cash and cash equivalents 397 733
Total liquidity 397 733
Total net financial debt 7,088 5,744
Net financial debt excluding shareholder loans 6,668 5,711
EBITDA 2,243 2,097
Net financial debt excluding shareholder loans to EBITDA ratio 3.0 2.7

Capital management objectives, policies and processes for the reporting period are unchanged from the prior year.

4.17 Leases

The Schaeffler Group’s obligations under finance leases are not significant.

Future minimum lease payments under non-cancellable operating rental and lease agreements are due as follows:

No. 081
in € millions 12/31/2011 12/31/2010
Less than one year 44 34
Between one and five years 72 50
More than five years 4 4
Total 120 88

The obligations consist primarily of rental agreements for real estate, leases of company [--break--]  vehicles, and contracts for IT and logistics services.

In 2011, expenses of EUR 57 m (prior year: EUR 50 m) related to operating rental and lease [--break--]  agreements were recognized in the consolidated income statement.