2. Principles of consolidation

2.1 Scope of consolidation

In 2011, the Schaeffler Group includes, in addition to Schaeffler AG, 154 (prior year: 152) fully consolidated subsidiaries; 50 (prior year: 50) companies are domiciled in Germany and 104 (prior year: 102) are foreign entities.

The following changes have occurred since December 31, 2010:

Schaeffler Ukraine GmbH, Kiev (Ukraine), which was founded in late 2010, is consolidated beginning January 1, 2011. The newly founded companies Schaeffler Manufacturing (Thailand) Co., Ltd., Rayong (Thailand), Schaeffler (Nanjing) Co., Ltd., Nanjing City (China) and Schaeffler [--break--]  Finance B.V., Barneveld (Netherlands) are also consolidated for the first time. FAG (UK) Ltd., Sutton Coldfield (UK) and LuK Africa (Proprietary) Limited, Port Elizabeth (South Africa), which no longer had any operations, were wound up during the year and ceased to be consolidated. The number of consolidated companies has increased by two.

Two foreign subsidiaries (prior year: two) are consolidated because Schaeffler AG has the ability to control these companies, although it does not hold the majority of the voting rights.

In the consolidated financial statements as at December 31, 2011, ten (prior year: nine) investments (including three joint ventures (prior year: two)) are accounted for at equity. Schaeffler Beteiligungsholding GmbH & Co. KG, Herzogenaurach was founded in 2011.

Schaeffler AG transferred 12,043,528 Continental AG shares to Schaeffler Verwaltungs GmbH [--break--]  on May 5, 2011, reducing the Schaeffler Group’s interest in Continental AG to 36.14 %.

Schaeffler AG’s shares in Continental AG were transferred to Schaeffler Beteiligungsholding [--break--]  GmbH & Co. KG on September 30, 2011. Schaeffler Beteiligungsholding GmbH & Co. KG is a joint venture as defined in IAS 31 and is accounted for at equity in the consolidated financial statements. As Schaeffler AG is the limited partner and holds 100 % of the shares, the transfer of the Continental AG shares does not change the underlying economics of this investment. For this reason, the accounting treatment and presentation in the consolidated financial statements were continued unchanged ( see 2.2 Investments in equity-accounted investees and 5.5 Related parties ).

See 5.9 List of shareholdings required by section 313 (2) HGB for details of the Schaeffler Group’s investments.

2.2 Investments in equity-accounted investees

In substance, investments in equity-accounted investees represent primarily the indirectly held shares in Continental AG. Schaeffler Beteiligungsholding GmbH & Co. KG holds 72,290,458 shares or 36.14 % of the voting interest in Continental AG as at December 31, 2011.

Continental AG is a leading automotive supplier with worldwide operations, headquartered in Hanover, Germany. The following table provides summarized financial information about the Continental Group:

Financial information Continental AG Group

No. 027
in € millions 2011 2010
Revenue (1/1 – 12/31) 30,505 26,047
Net income 1) (1/1 – 12/31) 1,325 646
Assets (as of 12/31) 26,038 24,391
Liabilities (as of 12/31) 18,495 18,188
1) Including non-controlling interests.

All equity-accounted investees have the same reporting date as Schaeffler AG.

Purchase price allocation

In accordance with the equity method, the acquisition cost of Schaeffler AG’s interest was allocated based on the fair value of the assets and liabilities of Continental AG. The equity-method carrying amount at the time of transfer of the 36.14 % investment in Continental AG to Schaeffler Beteiligungsholding GmbH & Co. KG on September 30, 2011 represented Schaeffler AG’s investment of 100 % of the limited partner shares of Schaeffler Beteiligungsholding GmbH & Co. KG at that time, which is accounted for at equity in the consolidated financial statements.

As Schaeffler AG has indirect influence (via Schaeffler Beteiligungsholding GmbH & Co. KG) over Continental AG and since Schaeffler Beteiligungsholding GmbH & Co. KG does not have any operations except for holding the investment in Continental AG, Schaeffler has maintained both the purchase price allocation and the carrying amount of the investment in Continental AG determined in accordance with IAS 28 for purposes of its equity-method accounting for Schaeffler Beteiligungsholding GmbH & Co. KG subsequent to September 30, 2011.

Share of net income (loss) of equity-accounted investees

The share of net income (loss) of equity-accounted investees is mainly the result of measuring the investment in Continental AG (held indirectly since September 30, 2011) using the equity method. The Schaeffler Group’s share of depreciation, amortization and impairments on fair value adjustments and its share of Continental AG’s net income, including non-recurring items realized through the purchase price allocation and net of offsetting deferred tax effects, result in income after tax of EUR 311 m. The effect on Schaeffler AG’s net income is as follows:

Share of net income (loss) of equity-accounted investees

No. 028
in € millions 2011 2010
Depreciation, amortization and impairments of fair value adjustments -265 -296
Share of net income of Continental AG 477 246
Dilution of ownership interest due to non-participation in Continental AG
capital increase
0 -396
Effect before income taxes 212 -446
Deferred taxes 74 83
Effect on income before special items 1) 286 -363
Special items 1)

Reversal of step down of financial debt recognized at the time of the PPA

0 -5

Reversal of cash flow hedges existing at the time of the PPA

20 12

Recognition of Continental AG pension obligations at fair value

5 8
Effect on income after special items 1) 311 -348
1) Realized through purchase price allocation (PPA).

Special items realized through the purchase price allocation reflect adjustments to transactions that have since been realized by Continental AG.

Due to the partial disposal of the Continental AG shares by distribution as a dividend in kind on May 5, 2011, EUR 13 m of the Schaeffler Group’s share of the accumulated other comprehensive income (loss) of Continental AG were reclassified to the consolidated income statement. This has brought the total income from equity-accounted investees to EUR 324 m.

Share of other comprehensive income (loss) of equity-accounted investees

The Schaeffler Group’s share of other comprehensive income (loss) of Continental AG amounts [--break--]  to EUR 14 m (prior year: EUR 181 m).

An adjustment to reflect the use of uniform methods in accounting for pension obligations [--break--]  of EUR 17 m (prior year: EUR 43 m) and changes in cash flow hedges of EUR 20 m (prior year: EUR 12 m) had an offsetting effect on other comprehensive income (loss). Accumulated other comprehensive income of EUR 13 m (prior year: EUR nil) was reclassified to income as a result [--break--] of the partial disposal of shares in Continental AG.

In total, these items decrease accumulated other comprehensive income (loss) by EUR 36 m after tax (prior year: EUR + 126 m).

In addition, the exercise of share options by certain members of Continental AG management and Schaeffler’s share of the impact of acquisitions in stages by Continental AG have decreased reserves by EUR 2 m (prior year: EUR 6 m) without affecting net income.

Nature and extent of significant restrictions

Debt covenants restrict Continental AG’s ability to pay dividends. Continental AG did not pay any dividends for 2008, 2009 and 2010.

Market capitalization

The fair value of the Continental AG shares held by Schaeffler Beteiligungsholding GmbH & Co. KG [--break--]  (36.14 %) on December 31, 2011 was EUR 3,477 m. On December 31, 2010 the fair value of the Continental AG shares held by the Schaeffler Group (42.17 %) was EUR 4,988 m.