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NOTES TO THE CONSOLIDATED BALANCE SHEET12 Intangible assetsChanges in the Group's intangible assets were as follows: The balance as of Sept. 30, 2006 includes gross amounts of €82 million (2005: €294 million) as well as accumulated amortization and impairment losses of €82 million (2005: €290 million) resulting in net amounts of €0 million (2005: €4 million) which relate to disposal groups. Goodwill impairment losses are in included in other operating expenses while impairment losses of other intangible assets are included in cost of sales. Impairment losses recognized in 2004/2005 relate to the disposals of companies. In 2005/2006, a goodwill impairment loss of €34 million was recognized in the Body business unit of the Automotive segment as a result of a weakening economic situation. On January 01, 2005, the Group began to participate in the European Union Emissions Trading Scheme (ets). The Group received notification from the national emissions-trading agency that it is entitled to receive allowances to emit 56.0 million tons in CO2 (one third is allocated to 2005) during the compliance period 2005 to 2007. The majority of the total allowances are allocated to the Steel segment. The rights are capitalized at cost as an intangible asset. If the emissions are expected to exceed the amount covered by the granted allowances, the Group records an obligation for the purchase of additional allowances. GoodwillGoodwill (excluding goodwill of equity method investments) has been allocated to cash generating units within all segments. The recoverable amount of each cash generating unit is determined based on a value in use calculation using after-tax cash flow projections based on bottom-up prepared financial budgets approved by ThyssenKrupp AG's management covering a five-year period. The cash flows beyond the five-year period are determined as the average of the five-year period. No growth rate is taken into account to extrapolate the five-year average. The following after-tax discount rate ranges have been applied to the cash flow projections by segment:
The values in use for the CGUs are generally calculated on the basis of expected price inflation in the country in which the CGU is located and on the basis of estimated sales growth rates. These figures are determined based on both historical data and expected forecast market performance. The values assigned to the key assumptions are generally consistent with external information sources. 45 CGUs were identified in the ThyssenKrupp Group, of which 36 report goodwill. Total goodwill as of October 01, 2005 amounts to €3,878 million. 62% of this goodwill relates to the CGUs Steelmaking, Uhde, Marine and Americas, as shown in the following table: In the case of the CGUs Bauelemente, ThyssenKrupp Nirosta and Chassis Structure, the recoverable amount exceeded the carrying amount of the CGU by less than 10%: A 10% increase in the discount rate would result in an impairment of goodwill in all three cases presented above. However, the Management of ThyssenKrupp believes in the case of all CGUs that no reasonably possible change in any of the key assumptions used in calculating the recoverable amount would cause the carrying amount of the CGU to exceed the respective recoverable amount. The change in the carrying amount of goodwill (excluding goodwill of equity method investments) is as follows: 13 Property, plant and equipmentChanges in the Group's property, plant and equipment were as follows: Table: Property, plant and equipment The balance as of Sept. 30, 2006 includes gross amounts of €516 million (2005: €408 million) as well as accumulated depreciation and impairment losses of €393 million (2005: €379 million) resulting in net amounts of €123 million (2005: €29 million) which relate to the disposal groups. Impairment losses of property, plant and equipment are included in cost of sales. Impairment losses recognized in 2004/2005 related mainly to initiated or completed disposals. In the Steel segment, impairment losses were recognized in the total amount of €57 million for the initiated sale of the Schwerte production site of Hoesch Hohenlimburg GmbH and the completed disposal of Edelstahl Witten Krefeld GmbH, of which €23 million related to land and buildings, €29 million to technical machinery and equipment and €5 million to other equipment. In the Automotive segment, impairment losses of €9 million for land and buildings and €15 million for technical machinery and equipment were recognized in connection with the initiated disposal of ThyssenKrupp Stahl Company. In the Technologies segment, impairment losses were recognized in the total amount of €88 million in connection with the initiated disposals of the MetalCutting business unit and the Turbine Components operating group, mainly relating to land and buildings with €48 million and technical machinery and equipment with €35 million. In all cases, the impairment losses were calculated by comparing the carrying amounts with the fair values less costs to sell. In addition, an impairment of €6 million was recognized in the Steel segment as a result of a fire, relating mainly to technical machinery and equipment. The level of impairment was calculated in cooperation with independent experts. In this context, the segment received insurance compensation of €20 million, calculated on the basis of replacement costs, which are reported in other operating income. In 2005/2006, impairment losses of €35 million were recognized in the Stainless segment as a result of a fire, of which €12 million related to buildings and €23 million to technical machinery and equipment. The level of impairment was determined in cooperation with independent experts. In this context, the segment received insurance compensation of €45 million, calculated on the basis of replacement costs, which are reported in other operating income. In 2005/2006, impairment losses were recognized in the Body business unit of the Automotive segment as a result of the weakening economic situation in the amount of €25 million for buildings, €13 million for technical machinery and equipment and €1 million for other equipment, factory and office equipment; the recoverable amounts used to calculate the impairment losses correspond in each case to the values in use. A discount rate of 8.71% was used to calculate values in use. In addition, asset impairment losses in the total amount of €98 million were recognized in the Automotive segment in connection with the initiated disposal of the North American body and chassis business, relating mainly to technical machinery and equipment. The impairment losses were calculated by comparing the carrying amounts with the fair values less costs to sell. In this context, an impairment of €48 million had already been recognized on the assets of the Canadian Kitchener plant in the 2nd quarter 2005/2006, relating mainly to buildings (€9 million) and technical machinery and equipment (€34 million). The recoverable amount used to calculate the impairment loss is the value in use. Due to the fact that the expected future cash flows are solely negative, a value in use of zero was recognized. Property, plant and equipment include leased buildings, technical machinery and equipment and other equipment that have been capitalized, where the terms of the lease require the Group, as lessee, to assume substantially all of the benefits and risks of use of the leased asset ("finance lease").
Property, plant and equipment has been pledged as security for financial payables of €277 million (2005: €318 million). 14 Investment propertyChanges in the Group's investment property were as follows:
Investment property consists of investments in land and buildings that are held to earn rental income or for capital appreciation, rather than for use in the production or supply of goods or services or for administrative purposes or sale in the ordinary course of business. It is measured at cost and depreciated on a straight-line basis. The fair value of the Group's investment property is determined using various internationally accepted valuation methods such as the gross rental method, discounted cash flow method, asset value method and comparison to current market prices of similar real estate. Investment property located in Germany is primarily determined based on internally prepared valuations using the gross rental method which is regulated in Germany by the "Verordnung über Grundsätze für die Ermittlung der Verkehrswerte von Grundstücken – WertV". Investment property located outside Germany is determined by independent external appraisers. As of September 30, 2006, the total fair value of the Group's investment property is €677 million (2005: €720 million) of which €27 million (2005: €25 million) are based on valuations of independent external appraisers. The lease of investment property resulted in rental income of €46 million (2004/2005: €94 million) and direct operating expense of €27 million (2004/2005: €54 million). Direct operating expense of €11 million (2004/2005: €29 million) resulted from investment property that does not generate rental income. The reduction of the amounts results from the disposal of the Residential Real Estate business in February 2005. 15 Investments accounted for using the equity methodInvestments in associatesAs of September 30, 2006, the fair value of investments in associates accounted for using the equity method for which there are published price quotations was €28 million (2005: €24 million). Summarized financial information of associates accounted for using the equity method is presented in the table below. The information given represents 100% and not the Group's interest in the associates.
In 2005/2006, the unrecognized share of losses of an associate accounted for using the equity method amounts to €0.6 million (2004/2005: €0 million). The unrecognized losses cumulate to €0.9 million. ThyssenKrupp has a significant investment of 20.56% in RAG Aktiengesellschaft. The Group is not able to exert significant influence over the operating and financial policies of RAG because of the Group's inability to obtain timely reviewed IFRS financial information on a quarterly basis. Joint venturesThe following table shows the summarized financial information of the Group's joint ventures. The information given represents the Group's interest in the joint ventures.
The significant joint ventures are included in the list of the Group's major subsidiaries and equity interests which is presented in Note 38. 16 Operating lease as lessorThe Group is the lessor of various commercial real estate under operating lease agreements. The gross value of the assets under lease is €685 million (2005: €710 million) and accumulated depreciation is €216 million (2004/2005: €212 million). As of September 30, 2006, the future minimum lease payments to be received on non-cancelable operating leases are as follows:
The amounts reflected as future minimum lease payments do not contain any contingent rentals. No contingent rentals have been recognized in the consolidated statements of income in 2005/2006 (2004/2005: 0). 17 Financial assets
Impairment losses of €3 million are recognized in the income statement. 18 Inventories
Inventories of €1 million (2005: €1 million) have a remaining term of more than 1 year. Inventories of €39,142 million (2005: €36,196 million) are recognized as an expense during the period. Included in cost of sales are write-downs of inventories of €7 million (2005: €5 million), while €5 million (2005: €1 million) of reversals of write-downs reduced cost of sales. Advance payments received in the amount of €89 million (2005: €279 million) are collateralized by inventories. 19 Trade accounts receivable
Receivables from the sales of goods and services in the amount of €740 million (2005: €825 million) have a remaining term of more than 1 year. In the current period impairment losses of €327 million (2005: €325 million) are recognized for doubtful accounts. Amounts due from customers for construction work are calculated as follows:
Sales from construction contracts of €4,829 million were recognized in the period (2004/2005: €4,780 million). The Group regularly primarily sells credit insured trade accounts receivable under asset backed securitization programs and other programs as well as under one-time transactions. As of September 30, 2006, sales of receivables in the amount of €40 million (2005: €130 million) did not result in a derecognition from the balance sheet because the Group retained substantially all the risks and rewards of ownership. The corresponding liability is included in financial liabilities (see Note 25). The sales resulted in net proceeds in the amount of €40 million (2004/2005: €128 million). The amount of receivables sold and derecognized from the balance sheet as of September 30, 2006, was €989 million (2005: €945 million), resulting in net proceeds in the amount of €959 million (2004/2005: €920 million). In some cases, when the Group sells receivables it retains rights and immaterial obligations; these retained interests mainly consist of servicing as well as providing limited cash reserve accounts and dilution reserves. The recognized assets and provided guarantees which serve as a cash reserve account amounted to €68 million (2005: €58 million) as of September 30, 2006. Continuing involvement primarily resulting from the dilution reserve was €27 million (2005: €23 million) as of September 30, 2006. 20 Other receivables
Other assets include tax refund claims in the amount of €94 million (2005: €41 million) as well as the positive fair values of foreign currency derivatives including embedded derivatives, interest rate and commodity derivatives in the amount of €205 million (2005: €149 million) (see also Note 30). Other receivables in the amount of €70 million (2005: €73 million) have a remaining term of more than 1 year. In the current period impairment losses of €141 million (2005: €127 million) are recognized. 21 Total equityTotal equity and the number of shares outstanding changed as follows: €5 million, €6 million and €6 million of the balance of cumulative income and expense directly recognized in equity result from associates as of Oct. 01, 2004, Sept. 30, 2005 and Sept. 30, 2006, respectively. €0 million (2004/2005: €1 million) of the changes of cumulative income and expense directly recognized in equity result from associates. The following table shows the changes of the foreign currency translation adjustment which is part of cumulative income and expense directly recognized in equity:
Capital stockThe capital stock of ThyssenKrupp AG consists of 514,489,044 no-par-value bearer shares of common stock, all of which have been issued, with 488,764,592 and 499,149,151 outstanding as of September 30, 2006 and 2005, respectively. Each share of common stock has a stated value of €2.56. The stockholders are entitled to receive dividends as declared and are entitled to one vote per share at the stockholders' meetings. Treasury stockOn the basis of the authorization granted by the Annual Stockholders' Meeting on January 27, 2006, the Executive Board of ThyssenKrupp AG resolved on July 03, 2006, to acquire up to a total of 5% of the current capital stock issued. In the period from July 04, 2006 to August 21, 2006, ThyssenKrupp AG purchased a total of 25,724,452 treasury shares, representing almost 5% of the capital stock, at an average price of €27.09. This represents a total amount of €697 Mio €. As of November 21, 2005, 15,339,893 treasury shares were sold at the market price of €17.44 to the Alfried Krupp von Bohlen and Halbach Foundation. This disposal has to be classified as a related party transaction. As a result of this transaction and the sale of employee shares in the 2nd quarter of 2003/2004 and the 3rd quarter of 2004/2005, ThyssenKrupp AG has sold all the treasury shares purchased from the IFIC Holding AG in May 2003. AuthorizationsBy resolution of the Annual Stockholders' Meeting on January 23, 2004, the Executive Board is authorized, subject to the approval of the Supervisory Board, to issue bearer bonds with a total par value up to €500 million and to grant the bond holders the right to convert the bonds into bearer shares of the Company (convertible bonds). The authorization is valid until January 22, 2009. In addition, by resolution of the Annual Stockholders' Meeting on January 27, 2006, ThyssenKrupp is authorized through July 26, 2007, to purchase treasury stock for certain defined purposes up to a total of 10% of the current capital stock issued. Dividend proposalThe Executive Board and Supervisory Board have agreed to propose to the stockholders' meeting a dividend in the amount of €1,00 per share entitled to dividend to be distributed from unappropriated net income of the stand-alone entity ThyssenKrupp AG for fiscal 2005/2006 as determined in conformity with the principles of the German Commercial Code (HGB). This would result in a dividend payout of €489 million in total. 22 Share-based compensation programsManagement incentive plansIn 1999, ThyssenKrupp introduced a performance-based longterm management incentive plan (the "incentive plan") of which Executive Board members as well as selected managerial employees in Germany and foreign countries are eligible to participate. In accordance with the incentive plan, over a period of five years, beneficiaries were granted appreciation rights ("phantom stocks") annually with a performance period of approximately three years for each installment. These appreciation rights were remunerated in cash at the end of each performance period if certain performance hurdles are met. These performance hurdles required that either the market price of ThyssenKrupp stock must have increased at least 15% or that the market price of ThyssenKrupp stock has outperformed the DJ STOXX index during the performance period. If at least one of the two performance hurdles was met, then remuneration was calculated based on the difference between the current market price and the base price of stock. The current market price was calculated based on the average of the first five trading days after the regular stockholders' meeting with which the respective installment of the incentive plan occurs. The base price was derived from the current market price decreased by a market price/index performance deduction and a price change deduction. The market price/index performance deduction was determined by multiplying the percentage of over or underperformance of the ThyssenKrupp stock in relation to the DJ STOXX by the current stock price during the particular performance period. The price change deduction was equal to one-half of the absolute change in ThyssenKrupp stock price during a particular performance period. The two deductions were combined and then deducted from the current stock price to obtain the base price. The remuneration per appreciation right during any performance period was limited to €25. If the performance hurdles were not met at the end of the performance period, the stock appreciation rights expired and no payment or expense was recorded by the Group. In the 2nd quarter of 2004/2005, the 2.7 million appreciation rights granted in the fourth installment of the incentive plan were settled with a payment of €1.4 million and in the 2nd quarter of 2005/2006, the 2.4 million appreciation rights granted in the fifth installment of the incentive plan were settled with a payment of €40.8 million, both as result of the performance hurdles being met at the end of the specific performance period. In total in 2005/2006, the Group recorded compensation expense for the long-term management incentive plan in the amount of €11.5 million (2004/2005: €10.7 million). Because of the completion of the longterm management incentive plan program in 2005/2006, there are no outstanding obligations from the plan as of September 30, 2006, (2005: €29 million). The fair value of the appreciation rights used to calculate the pro-rata liability as of the balance sheet date is based on the Black- Scholes option pricing model modified for the special features of the long-term management incentive plan. As of September 30, 2005, the fair value of the appreciation rights of the 5th installment was €13.09. The following assumptions were used for this calculation:
The risk-free interest rate is based on euribor appropriate to the expiry of the installment being valued. Assumed dividends equal dividends paid. Expected volatilities are based on historical volatility of the ThyssenKrupp stock and the DJ STOXX. In 2003, ThyssenKrupp implemented a performance based mid-term incentive plan which issues stock rights to eligible participants. All Executive Board members of ThyssenKrupp AG are eligible to participate. Starting with the second installment which was issued in 2004, the group of beneficiaries was expanded to include the segment lead companies as well as several other selected executive employees. As of September 30, 2006, 253,823 stock rights were issued in the 2nd installment, 533,418 stock rights in the 3rd installment and 550,334 stock rights in the 4th installment. The number of stock rights issued will be adjusted at the end of each performance period based on the average economic value added (EVA) over the three-year performance period, beginning October 01 of the year the stock rights were granted, compared to the average eva over the previous three fiscal year period. At the end of the performance period the stock rights will be settled in cash based on the average price of ThyssenKrupp stock during the three month period immediately following the performance period. To determine the fair value of the stock rights used to calculate the pro-rata liability as of the balance sheet date forward prices of the ThyssenKrupp stock are calculated. The forward calculation is carried out for predefined periods (averaging periods) taking into account the ThyssenKrupp stock price and the Euro interest rate curve as of the balance sheet date and the dividends assumed to be paid until the maturity of the stock rights. The following assumptions were used for the determination of the fair values as of September 30, 2006 and as of September 30, 2005:
In the 1st quarter of 2005/2006, the 1st installment of the mid-term incentive plan was settled in cash with €17.26 per stock right resulting in a total payment of €4.4 million. In total in 2005/2006, the Group recorded compensation expense for the mid-term incentive plan in the amount of €43.4 million (2004/2005: €14.4 million). The liability arising from the midterm incentive plan amounts to €58 million as of September 30, 2006 (2005: €20 million). In February 2006, the Group implemented a Share Purchase Plan for selected executive employees. Under the plan the beneficiaries are entitled to purchase up to a fixed amount ThyssenKrupp shares at a discount. In 2005/2006 the Group recorded compensation expense from the plan of €2.7 million; €1.4 million were recognized in equity and the remaining amount as an obligation. Employee share purchase programIn the 3rd quarter of 2004/2005 and in the 3rd quarter of 2005/2006, the Group offered eligible members of its domestic and French workforce the right to purchase up to €270 in ThyssenKrupp shares at a 50% discount as part of an employee share purchase program. The program resulted in the Group recording compensation expense of €6.3 million and €8.0 million, respectively. 23 Accrued pension and similar obligations
Pensions and similar obligations in the amount of €7,374 million (2005: €8,250 million) have a remaining term of more than 1 year. Pension plansThe Group maintains defined benefit pension plans and defined contribution plans that cover the majority of the employees in Germany, the USA, Canada and the United Kingdom. In some other countries, eligible employees receive benefits in accordance with the respective local requirements. In Germany, benefits generally take the form of pension payments that are indexed to inflation. Benefits for some senior staff are based on years of service and salary during a reference period, which is generally three years prior to retirement. Other employees receive benefits based on years of service. In addition, ThyssenKrupp offers certain German employees the opportunity to participate in a defined benefit program which allows for the deferral of compensation which earns interest at a rate of 6.00% per year. In the USA and Canada, hourly paid employees receive benefits based on years of service. Salaried employee benefits are typically based on years of service and salary history. In the United Kingdom, employee benefits are based on years of service and an employee's final salary before retirement. Defined benefit obligations and funded statusThe reconciliation of the changes in the defined benefit obligations and the fair value of plan assets are as follows:
As of the balance sheet date, defined benefit obligations related to plans that are wholly unfunded amount to €6,088 million (2005: €6,548 million) and defined benefit obligations that relate to plans that are wholly or partly funded amount to €2,567 million (2005: €2,661 million). Actual return which amounts to €140 million (2005: €216 million) is calculated as the total of expected return on plan assets and actuarial gains and losses, respectively. The following represents the funded status of these plans:
Net periodic pension costThe net periodic pension cost for the defined benefit plans were as follows:
The interest cost and the expected return on plan assets components of net periodic pension cost are included in the line item "Interest expense" and "Interest income", respectively in the Group's consolidated statement of income. AssumptionsThe assumptions for discount rates and the rates of compensation increase on which the calculation of the obligations are based were derived in accordance with standard principles and established for each country as a function of their respective economic conditions. The expected return on plan assets is determined based on detailed studies conducted by the plans' third party investment and actuarial advisors. The studies take into consideration the long-term historical returns and the future estimates of long-term investment returns based on the target asset allocation. The Group applied the following weighted average assumptions to determine benefit obligations:
Plan assetsIn the Group, the majority of reported plan assets associated with the funded pension plans are located in the USA, Canada, the United Kingdom and to a lesser extent in the Netherlands and Germany. The Group invests in diversified portfolios consisting of an array of asset classes that attempt to maximize returns while minimizing volatility. The asset classes include national and international stocks, fixed income government and non-government securities and real estate. Plan assets do not include any direct investments in ThyssenKrupp debt or equity securities. The Group uses professional investment managers to invest plan assets based on specific investment guidelines developed by the plans' Investment Committees. The Investment Committees consist of senior financial management especially from treasury and other appropriate executives. The Investment Committees meet regularly to approve the target asset allocations, and review the risks and performance of the major pension funds and approve the selection and retention of external managers. The Group's target portfolio structure has been developed based on asset-liability studies that were performed for the major pension funds within the Group. The pension plan asset allocation and target allocation are as follows:
Pension plan fundingIn general, the Group's funding policy is to contribute amounts to the plans sufficient to meet the minimum statutory funding requirements relevant in the country in which the plan is located. In the USA and Canada, certain plans require minimum funding based on collective bargaining agreements. The Group may from time to time make additional contributions at its own discretion. ThyssenKrupp's expected contribution in fiscal year 2006/2007 is €127 million related to its funded plans, all of which is expected to be as cash contributions. Pension benefit paymentsIn fiscal year 2005/2006, pension benefit payments to the Group's German and Non-German plans were €415 million (2004/2005: €416 million) and €162 million (2004/2005: €141 million) respectively. The estimated future pension benefits to be paid by the Group's defined benefit pension plans are as follows:
Amounts recognized for the current and the previous periods for defined benefit pension plans are as follows:
Defined Contribution PlansThe Group also maintains domestic and foreign defined contribution plans. Amounts contributed by the Group under such plans are based upon percentage of the employees' salary or the amount of contributions made by the employees. The total cost of such contributions in the current fiscal year was €34 million. In addition, contributions paid to public/state pension insurance institutions amounted to €277 million. Postretirement obligations other than pensionsThe Group provides certain postretirement health care and life insurance benefits to retired employees in the USA and Canada who meet certain minimum requirements regarding age and length of service. The plans primarily relate to the ThyssenKrupp Budd Company and are mainly unfunded. In December 2003, the US government signed into law the Medicare Prescription Drug, Improvement and Modernization Act. This law provides for a federal subsidy to sponsors of retiree health care benefit plans that provide benefit that is at least actuarially equivalent to the benefit established by the law. The Group accounts for these federal subsidies as reimbursement rights in accordance with IAS 19. The changes in accumulated postretirement benefit obligations and reimbursement rights are as follows:
The following represents the unfunded status of these plans:
AssumptionsThe determination of the accumulated postretirement benefit obligations is based on the following weighted average assumptions:
Net periodic postretirement benefit costThe net periodic postretirement benefit cost for health care obligations is as follows:
The interest cost component of net periodic postretirement benefit cost is included in the line item "Interest expense" in the Group's consolidated statement of income. The effects of a one-percentage-point increase or decrease in the assumed health care cost trend rates are as follows:
Amounts recognized for the current and the previous period for postretirement obligations others than pensions are as follows:
Other pension related obligationsSome companies of the Steel segment grant termination benefits to employees on a contractual basis. The termination benefits comprise severance payments that vest based on a formula that considers years of service and certain allowances that are paid to older employees between termination of employment and retirement age. The measurement of the plans was determined on an actuarial basis. The liability reflects benefits earned by the employees from the inception of employment. Future service cost is allocated to the periods in which it is incurred. As of September 30, 2006, the liability was €4 million (2005: €45 million). Some German companies have obligations resulting from partial retirement agreements. Under these agreements, employees work additional time prior to retirement, which is subsequently paid for in installments after retirement. For these obligations, accruals in the amount of €271 million (2005: €259 million) were recognized in accordance with IAS 19 "Employee Benefits". 24 Other provisionsAs of September 30, 2006, €1,604 million (2005: €1,578 million) of the total of other provisions are current, while €652 million (2005: €609 million) are non-current. Provisions of €548 million (2005: €654 million) have a remaining term of more than 1 year. Product warranties and product defects represent the Group's responsibility for the proper functioning of the goods sold (product warranty) as well as the obligation that arise from the use of the products sold (product defect). Provisions for other contractual costs represent pending losses from uncompleted contracts. Provisions for employee compensation and benefit costs primarily represent employment anniversary bonuses and obligations for the management incentive plans, while social plan and related costs pertaining to personnel related structural measures are reflected in the provision for restructuring activities. Pension related obligations for partial retirement agreements and early retirement programs are part of the provision for pensions and similar obligations. The provision for restructurings consists of provisions for employee termination benefits and exit costs which have been established by operating divisions for costs incurred in connection with activities which do not generate any future economic benefits for the Group. Restructurings are being carried out in all segments. The balance as of September 30, 2006, consists of €96 million within the Automotive segment and €46 million within the Services segment. The provision for decommissioning obligations mainly consists of obligations associated with mining activities and recultivating landfills. Obligations associated with mining activities and and recultivating landfills are generally handled over long periods of time, in some cases more than 30 years. The technical parameters are very complex. As a result, uncertainty exists with regard to the timing and concrete amount of the expenses. Provisions for environmental obligations refer primarily to rehabilitating contaminated sites, redevelopment and water protection measures. 25 Financial liabilities
Current financial liabilities include financial liabilities with a remaining term up to one year, while the non-current financial liabilities have a remaining term of more than one year. Financial liabilities in the amount of €277 million (2005: €318 million) are collateralized by real estate. As of September 30, 2006, the financial liabilities reflect a total discount in the amount of €5 million (2005: €8 million) and did not contain any premiums (2005: €0 million). Amortization of discounts of financial liabilities is included in "Financial income/(expense), net".
ThyssenKrupp AG has assumed the unconditional and irrevocable guarantee for the payments pursuant to the terms and conditions of these and all other bonds of ThyssenKrupp Finance Nederland B.V. All bonds and note loans are interest only with principle due at maturity. As of September 30, 2006, the financing structure of liabilites to financial institutions and other loans comprise the following: Table: Payables to financial institutions, Other loans As of September 30, 2006, ThyssenKrupp has available a €2.5 billion syndicated joint credit multi-currency-facility agreement. The agreement fixed in November 2005 expires on July 01, 2011. Next year the facility can be extended by one year with mutual consent. The facility agreement was not utilized as of the balance sheet date. Another component of financial liabilities are revolving credit agreements with banking institutions whereby ThyssenKrupp AG, ThyssenKrupp USA, Inc. or ThyssenKrupp Finance Nederland b.v. can borrow in Euros, u.s. dollars or in British pounds Sterling up to approximately €2,056 million. Of these facilities, 90% have a remaining term of more than 5 years and 10% a remaining term of up to 5 years. As of September 30, 2006, €36 million of cash loans were outstanding at a weighted average interest rate of 3.69%. In total the Group has available unused, committed credit lines in an amount of €4.3 billion. The Group's Commercial Paper Program also provides up to €1.5 billion in additional financing. As of September 30, 2006, the program was not used. As of September 30, 2006, the future minimum lease payments reconcile to their present value (= finance lease obligation) as follows:
Maturities of financial liabilities are as follows:
26 Trade accounts payableTrade accounts payable in the amount of €23 million (2005: €31 million) have a remaining term of more than 1 year. 27 Other liabilities
Other liabilities in the amount of €1,229 million (2005: €1,362 million) have a remaining term of more than 1 year. Other liabilities in the amount of €0 million (2005: €1 million) are collateralized by real property. The liabilities to non-consolidated subsidiaries originated mainly from intercompany financing and from profit and tax sharing agreements. Amounts due to customers for construction work are calculated as follows:
Liabilities from derivative financial instruments refer to the negative fair market values of foreign currency derivatives including embedded derivatives, interest rate derivatives and commodity derivatives (see also Note 30). 28 Commitments and contingenciesGuaranteesThyssenKrupp AG and its segment lead companies as well as – in individual cases – its subsidiaries have issued or have had guarantees issued in favor of customers or lenders. The following table shows obligations under guarantees where the principal debtor is not a consolidated Group company.
Guarantees include €5 million (2005: €4 million) of contingent liabilities of associates and €400 million (2005: €90 million) of contingent liabilities of joint ventures. The terms of these guarantees depend on the type of guarantee and may range from three months to ten years (e.g. rental payment guarantees). The basis for possible payments under the guarantees is always the non-performance of the primary obligor under a contractual agreement, e.g. late delivery, delivery of non-conforming goods under a contract, non-performance with respect to the warranted quality or default under a loan agreement. All guarantees are issued by or issued by instruction of ThyssenKrupp AG or the segment lead companies upon request of principal debtor obligated by the underlying contractual relationship and are subject to recourse provisions in case of default. Is such principal debtor a company owned fully or partially by a foreign third party, then such third party is generally requested to provide additional collateral in a corresponding amount. ThyssenKrupp bears joint and several liability as a member of certain civil law partnerships, ordinary partnerships and consortiums. Special purpose entitiesThyssenKrupp has leased a facility used in the production of coke. The application of the rules of this Interpretation SIC 12 "Consolidation – Special Purpose Entities" to the company acting as operator of this facility resulted in considering this company to be a special purpose entity under the scope of the Interpretation which has to be consolidated. The consolidation of this company does not have a material effect on the results of operations or the financial position of the Group. In addition, upon review of the owner company, that is also considered to be a special purpose entity under the scope of the Interpretation, it was determined that the Group does not control this company and consequently will not include this entity in the consolidated financial statements. The obligations of the Group existing under the leasing and purchasing agreement are included in the future minimum lease payments from operating lease as disclosed below. The Group's maximum exposure to loss from this facility amounts to approximately €45 million and results from the residual value guarantee for the asset at the end of the lease and purchasing agreement which is mainly covered by third parties. Commitments and other contingenciesThe Group is the lessee to property, plant and equipment classified as operating leases. Rental expense in the amount of €221 million (2004/2005: €240 million) resulting from rental contracts, longterm leases and leasing contracts classified as operating leases was incurred in fiscal 2005/2006. It comprises as follows:
The future minimum rental payments, excluding accrued interest from such non-cancelable contracts that have an initial or remaining term of more than one year as of September 30, 2006, are (at face amounts):
The future minimum rental income from non-cancelable sublease contracts in the amount of €6 million (2004/2005: €14 million) is not included in the total of future minimum rental payments. The commitment to enter into investment projects amounts to €1,029 million (2005: €281 million) and relates mainly to the Steel segment. Payment commitments and obligations to make further contributions to corporations and cooperative associations exist in the total amount of €20 million (2005: €4 million). In addition, other financial commitments exist in the amount of €3,904 million (2005: €1,790 million), primarily from the commitments to purchase iron ore, coking coal and lime under long term supply contracts and obligations under ship-charter contracts in the Steel segment as well as purchasing commitments resulting from the outsourcing of it services. On October 11, 2005, the European Commission announced the initiation of administrative fine proceedings against companies of the elevator and escalator industry. This has also affected some European companies of the ThyssenKrupp Group. Previous to the initiation of the administrative fine proceedings, the European Commission had conducted pre-investigations in the beginning of 2004. As part of these pre-investigations, several revisions were carried out at the four major elevator manufacturers in the European Union and at the corresponding associations. Subject of the administrative fine proceedings is that the respective companies are accused of having violated the Euopean antitrust law in connection with the manufacturing and servicing of elevators and escalators as well as the selling of the respective spare parts in certain member states of the European Union. ThyssenKrupp is cooperating with the antitrust authorities. The EU-Commission has not yet declared the amount of any possible administrative fine and therefore ThyssenKrupp is not yet able to estimate the financial consequences of the administrative fine proceedings. On January 26, 2006, ThyssenKrupp AG signed an agreement with Mittal Steel Company n.v. in which ThyssenKrupp has undertaken to acquire up to 100% of the shares in Dofasco if Mittal Steel takes over Arcelor. This may result in a purchase price obligation up to €4 billion. 29 Pending lawsuits and claims for damagesFormer stockholders of Thyssen and of Krupp have petitioned per Art. 305 UmwG (Reorganization Act) for a judicial review of the share exchange ratios used in the merger of Thyssen AG and Fried. Krupp AG Hoesch-Krupp to form ThyssenKrupp AG. The proceedings are pending with the Düsseldorf Regional Court. Should a ruling be made in favor of the petitioners, the Court would require settlement to be made via an additional cash payment plus interest. The additional payment also would be required to all affected stockholders, even if they were not petitioners in the judicial proceedings. However, the Group believes, based on the facts of the case, that an unfavorable outcome is unlikely. As a result of the integration of Thyssen Industrie AG into Thyssen AG, the Group is defendant to court proceedings from minority stockholders of Thyssen Industrie AG to examine the appropriateness of the merger consideration received. If the court rules that the consideration offered was inappropriate, the increased consideration will be granted to all outside stockholders by an additional cash payment. The Group is involved in pending and threatened litigation in connection with the purchase and sale of certain companies, which may lead to partial repayment of purchase price or to the award of damages. In addition, damage claims may be payable to customers, consortium partners and subcontractors under performance contracts. Certain of these claims have proven unfounded or have expired under the statute of limitations. The Group believes, based upon consultation with relevant legal counsel, that the ultimate outcome of these pending and threatened lawsuits will not result in a material impact on the Group's financial condition or results of operations. The Group is subject to various other lawsuits, claims and proceedings related to matters incidental to its business. Based upon the best knowledge of Management, the Group does not believe that the ultimate outcome of such other pending matters will have a material effect on the financial condition or results of operations of ThyssenKrupp AG or its subsidiaries. 30 Financial instrumentsBesides the non-derivative financial instruments the Group uses a variety of derivative financial instruments, including foreign currency forward contracts, foreign currency options, interest rate swaps, cross currency swaps and commodity forward contracts. Derivative financial instruments are used exclusively to hedge existing or anticipated underlying transactions and serve to reduce its exposure to foreign currency, interest rates and commodity price risks. Central foreign currency exchange managementThe international orientation of the Group's business activities entails numerous cash flows in different currencies – in particular in US dollar. Hedging the resulting exchange rate risks is an essential part of our risk management. Group-wide regulations form the basis for the centrally organized foreign currency management of the ThyssenKrupp Group. Principally, all companies of the ThyssenKrupp Group are obliged to hedge foreign currency positions at the time of their inception. All euro zone subsidiaries are obliged to submit unhedged foreign currency positions from trade activities in the major transaction currencies to the clearing office. The positions offered are, depending on the hedging purpose of the derivatives and the resulting treatment in the balance sheet, hedged under a portfolio-hedge approach or directly hedged with banks on a one-to-one basis. The hedging of financial transactions and the transactions undertaken by the Group's subsidiaries outside the euro zone are performed in close cooperation with central Group management. Compliance with the Group's requirements is regularly examined by our Central Internal Audit Department. The intention of currency hedging is to fix prices on the basis of hedging rates as protection against unfavorable future exchange rate fluctuations. When hedging anticipated production related ore, coal and coke purchases, favorable developments of the €/US dollar exchange rate are also systematically exploited. Hedge maturities are generally based on the maturity of the underlying transaction. Foreign currency derivatives usually have maturities of twelve months or less, in exceptional cases significantly longer. Specific hedge maturities apply for hedges of anticipated ore, coal and coke purchases. The specific hedge maturities were set on the basis of the theoretical fair exchange rate (purchasing power parity) and the fluctuation of the US dollar against the Euro according to historical data. In accordance with a set pattern, purchases anticipated for a specific period are hedged with their corresponding maturities whenever defined hedging rates are reached. The maximum period of anticipated ore, coal and coke purchases that can be hedged is 24 months. In accordance with IAS 39, the hedging of foreign currency risk can be accounted for in two different hedge accounting models. Both models are utilized by the ThyssenKrupp Group. Cash flow hedgesForeign currency derivatives that are deemed to hedge future cash flows from foreign currency transactions are hedged with banks on a single transaction basis if they meet the requirements of IAS 39 regarding documentation and effectiveness. These derivatives are accounted for at their fair value. The fluctuations in fair value of these derivatives are directly recognized in equity in the cumulative income and expense position and are released into earnings only when the underlying transaction affects earnings. The fair value changes that are due to the application of the cash flow hedging model for foreign currency derivatives as of September 30, 2006 affect the cumulative income and expense directly recognized in equity in the amount of €(14) million (2005: €33 million) (after tax). The maximum period of time in which cash flows from future transactions are currently hedged is 60 months. During the current fiscal year, an amount of €(11) million (2005: €18 million) was released from cumulative income and expense directly recognized in equity into earnings due to the realization of the corresponding underlying transactions. Additionally €13 million has been removed from cumulative income and expense directly recognized in equity and included in the initial cost of the inventories because the income affective realization of the corresponding underlying transaction is still outstanding. As of September 30, 2006, a net result in the amount of €22 million (2005: €(3) million) is included in sales/cost of sales. This result is due to time value changes that are excluded when measuring the hedge effectiveness of the foreign currency derivatives. The cancellation of cash flow hedges during the current fiscal year led to a reclassification from cumulative income and expense directly recognized in equity into earnings in the amount of €0 million (2005: €1 million). These fluctuations in fair value of foreign currency derivatives were originally treated as not affecting earnings. The reclassification occurred when the realization of the corresponding future transactions was no longer probable. The release of fair value fluctuations currently recognized in cumulative income and expense directly recognized in equity is expected to impact earnings within fiscal year 2006/2007 in the amount of €19 million, in fiscal year 2007/2008 in the amount of €(4) million and in fiscal year 2008/2009 in the amount of €2 million. Fair value hedgesSome of the subsidiaries within the Group are located in countries where the currency exposure cannot be hedged by entering into foreign currency derivatives. Other subsidiaries conduct business with so called soft-currency countries. The foreign currency exposures arising from outstanding receivables in these countries are often hedged by obtaining a loan in that foreign currency. The changes in fair value of the loan, as well as the fluctuations of the corresponding underlying binding contractual relationship, are accounted for in sales/cost of sales. Foreign currency derivatives that hedge realized balance sheet items, or that do not comply with the requirements for hedge accounting under IAS 39, are accounted for at fair value with the changes in fair value directly affecting earnings. Depending on the nature of the underlying hedged transactions, the changes in fair value are recorded as sales, cost of sales or financial income/ (expense), net. Central management of the interest rate sensitivityDue to the international focus of the Group's business activities, the procurement of funds of the ThyssenKrupp Group in international financial and capital markets is effected in different currencies – predominantly in Euro and US dollar – and with various maturities. The resulting financial liabilities as well as our financial investments are partially exposed to risks from changing interest rates. The goal of the Group's central interest rate management is to manage and optimize the risk from changing interest rates. For this purpose, interest rate analyses are prepared regularly as part of the interest rate management. The interest rate analysis is presented in more detail later on. To hedge its interest rate risk the Group uses derivative financial instruments from case to case. These instruments are contracted with the objective of minimizing the interest rate volatility and the financing costs of the underlying basic transactions. The majority of the interest rate derivatives are designated directly and immediately to a specific loan (micro hedge). The changes in fair value of these interest rate derivatives are directly recognized in equity in the cumulative income and expense position and amount to €(5) million (2005: €12 million) (after tax) as of September 30, 2006. These amounts will be released income non-effective against the relevant balance sheet item in the future. The interest expense from the underlying transactions as well as from the interest rate derivatives, which is recognized in the income statement, represents the fixed interest rate from the hedging relationship in total. The release of fair value fluctuations currently recognized in cumulative income and expense directly recognized in equity is expected to impact earnings within fiscal year 2006/2007 and fiscal year 2008/2009 in the amount of €(1) million. Some of the interest rate derivatives are not specifically allocated to an individual loan, but rather hedge a portfolio of loans by means of a macro hedge approach. These macro hedges are also reported at fair value on the balance sheet. The changes in fair value of these interest derivatives are immediately recognized in earnings in the period of occurrence and amount to €0 million (2005: €0 million) as of September 30, 2006. Cross currency swaps have been contracted basically in connection with the financing of the US dollar activities. These instruments are also reported at fair value on the balance sheet. The negative market value of these derivatives is basically a result of the €/US dollar exchange rate that occurred since the beginning of the transaction and is to a large extent compensated by existing foreign currency positions with an opposite effect on earnings (intragroup US dollar receivables) whose market value is also influenced by the €/US dollar exchange rate. Interest rate analysisInterest rate instruments can result in cash flow risks, opportunity effects as well as interest rate risks affecting balance sheet and earnings. Refinancing as well as instruments with variable interest rates are subject to a cash flow risk which expresses the uncertainty of future interest payments. The cash flow risk is measured with a cash flow sensitivity. Opportunity effects arise from non-derivative financial instruments, as these in contrast to interest rate derivatives are not reported at fair value, but at historical cost. This difference, the so-called opportunity effect, has no effect on either balance sheet or earnings. Interest rate risks affecting equity result from the valuation of interest rate derivatives designated as micro hedge. Interest rate risks that affect earnings arise from the remaining interest rate derivatives. Opportunity effects as well as interest rate risks with an effect on balance sheet and earnings are determined by calculating the sensitivity of the fair values and their changes. The interest rate analysis assumes a parallel shift in the yield curves for all currencies by +100/(100) basis points as of September 30, 2006. Such a shift would result in the chances (positive values) and risks (negative values) disclosed in the following table.
Hedging against commodity price riskCertain Group companies use derivative financial instruments in order to minimize commodity price volatility. Hedging is initiated at the local level, subject to strict guidelines, and compliance is checked regularly by our Central Internal Audit Department. Derivatives are limited to marketable instruments. The instruments used are commodity forward contracts, cash transactions in combination with forward contracts, and the purchase of options. Commodity derivatives are reported at their fair value as either other assets or other liabilities. The changes in fair value are in the most cases recognized in sales/cost of sales. Some of the commodity derivatives are designated directly and immediately to a firm commitment (micro hedge). The changes in fair value of these commodity derivatives are directly recognized in equity in the cumulative income and expense position and amount to €5 million (2005: €3 million) (after tax) as of September 30, 2006. The fluctuations in fair value of these derivatives are released into earnings only when the underlying transaction affects earnings. Also in some cases the fair values of certain firm commitments and inventories are hedged by fair value hedges. These commodity derivatives as well as the underlying hedged transactions are reported at their fair value. Depending on the nature of the underlying hedged transactions, the changes in fair value of these commodity derivatives and underlying hedged items are recorded as sales or cost of sales. Risk of defaultWith its financial instruments the ThyssenKrupp Group is subject to risk of default, which can result from possible failure of a counterparty. Therefore a risk of default exists up to the positive fair value of the respective financial instrument. Generally, within the ThyssenKrupp Group financial instruments are only closed with counterparties with very good credit quality, so that the risk of default can be considered low. This risk is taken into account by impairment losses for doubtful accounts. Schemes of derivative and non-derivative financial instrumentsThe values of the Group's derivative financial instruments are as follows:
The carrying amounts of derivative financial instruments equal the fair values. Embedded derivatives result from trade agreements between subsidiaries and foreign customers or suppliers that are performed in a currency that is not the functional currency (local currency) of either of the parties. Of all interest rate derivatives with a total carrying amount of €58 million (2005: €83 million) the Group itself values interest rate derivatives with a carrying amount of €49 million (2005: €75 million). In the year ended Sept. 30, 2006, the resulting effect on earnings was €(18) million (2004/2005: €19 million). Derivative financial instruments that are not contracted in the functional currency are closed by more than 80% in US dollar. The values of the Group's non-derivative financial instruments are as follows:
More than 75% of the financing of the Group is in functional currency. Financial liabilities not in functional currency are for the most part contracted in US dollar. The remaining financial liabilities are spread over more than 20 currencies. Valuation of financial instrumentsThe fair values of the derivative financial instruments represent the price at which one party would assume the rights and obligations of the other party. The fair values were determined on the basis of market conditions – interest rates, foreign currency exchange quotations, commodity prices – existing as of the balance sheet date and by using the valuation methods as explained below. The instruments can experience considerable fluctuations, depending on the volatility of the underlying market conditions. The fair value of derivative financial instruments is generally determined independent of developments from underlying hedged transactions that may exist. The following methods have been applied to determine the fair value of financial instruments: Foreign currency derivatives including embedded derivativesThe fair value of foreign currency forward contracts is calculated on the basis of the average spot foreign currency rates applicable as of the balance sheet date, adjusted for time-related premiums or discounts for the respective remaining term of the contract, compared to the contracted forward rate. The fair value of a currency option is determined using generally accepted option pricing models. The fair market value of an option is influenced not only by the remaining term of the option but also by further determining factors, such as the actual value and volatility of the foreign currency or the implied interest rate levels. Interest rate derivativesThe fair value of interest rate swaps is determined by discounting the anticipated future cash flows. For this purpose, the market interest rates applicable for the remaining term of the contract are used as a basis. The fair value of an interest rate option is calculated in a similar way to the fair value of a foreign currency option. The fair value of cross currency swaps is determined analogously to the fair value of interest rate swaps by discontinuing the future cash flows that result from the contract. Besides the interest rate applicable as of the balance sheet date, the valuation considers exchange rates for all foreign currencies in which cash flows take place. Commodity forward contractsThe fair value of commodity derivatives is based on officially quoted prices of these instruments as well as on external valuations of our financial partners. The fair value represents the estimated amounts that the company would expect to receive or pay to terminate the agreements as of the reporting date. Loans and financial liabilitiesThe fair market value of quoted bonds or notes is based on the stock quotation as of the balance sheet date. The fair market value of fixed interest bearing loans and financial liabilities is calculated as the present value of the anticipated future cash flows. The future interest and repayment amounts are discounted using the prevailing interest rates available as of the balance sheet date. The fair values of the liabilities subject to variable interest approximate their carrying amounts as they reflect current market rates. Trade accounts receivable, net and trade accounts payableThe carrying amounts equal the fair values. Current and non-current securitiesThe fair value of securities is based on the stock quotation as of the balance sheet date. Cash and cash equivalentsThe carrying amounts values equal the fair values. Maturities of financial instrumentsDisclosed below are the maturities of the derivative financial instruments on the basis of carrying amounts: Table: Derivative financial instruments The maturities of non-derivative financial instruments are as follows: loans are classified as non-current while trade accounts receivable and trade accounts payable are classified as current. If trade accounts receivable or trade accounts payable comprise amounts that will be recovered or settled after more than twelve months after the balance sheet date, these amounts will be disclosed in the Notes to the consolidated financial statements. Maturities of financial liabilities are disclosed in Note 25. Cash flows from foreign currency derivatives, interest rate derivatives and commodity derivatives which meet the requirements of IAS 39 regarding hedge accounting are expected to occur within fiscal year 2006/2007 amounting of €1,402 million and within the following years amounting of €995 million and €315 million. 31 Related partiesThe Alfried Krupp von Bohlen und Halbach Foundation holds an interest of 23.71% in ThyssenKrupp AG as of September 30, 2006. Outside the services and considerations provided for in the by-laws (Article 21 of the Articles of Association of ThyssenKrupp AG), there are no other significant delivery and service relations except for the sale of land and properties to the Alfried Krupp von Bohlen und Halbach Foundation in the amount of €2 million resulting in a gain of €0.2 million in fiscal year 2004/2005 and except for the sale of 15,339,893 treasury shares at the market price of €17.44 in fiscal year 2005/2006. To a minor extent, the Group has business relations with nonconsolidated subsidiaries. Transactions with these related parties result from the delivery and service relations in the ordinary course of business. A related party of major importance is Hüttenwerke Krupp- Mannesmann (HKM), in which ThyssenKrupp holds a 50% interest as of September 30, 2005 and 2006 and which is accounted for under the equity method of accounting. Substantial business relations exist with HKM during the current and the previous fiscal year which include the purchase of crude steel (semi-finished continuous casting) and the sale of transport services and coke deliveries. The volume of the transactions is disclosed below:
Furthermore a related party of major importance is Atlas Elektronik, in which ThyssenKrupp holds a 60% interest since August 03, 2006 and which is accounted for under the equity method of accounting. The existing business relations with Atlas Elektronik include the purchase of sensor and sonar systems for conventional submarines. The volume of the transactions is disclosed below:
Compensation of current Executive and Supervisory Board membersThe Group's key management personnel compensation which has to be disclosed in accordance with IAS 24 comprises of the compensation of the current Executive and Supervisory Board members. Compensation of the current Executive Board members is as follows:
Service cost resulting from the pension obligations of the current members of the Executive Board is disclosed as post-employment benefits. The disclosure of share-based compensation refers to the fair value at grant date. In addition, the Executive Board members received payments of €3,769 thousand from the 5th installment of the long-term management incentive plan (LTMI) and payments of €3,416 thousand from the 1st installment of the mid-term incentive plan (MTI) in fiscal 2005/2006. As of September 30, 2006, no loans or advance payments were granted to members of the Executive Board. Compensation of the current Supervisory Board members is as follows:
In addition, members of the Supervisory Board of ThyssenKrupp AG received compensation of €153 thousand in fiscal 2005/2006 (2004/2005: €168 thousand) for supervisory board mandates at Group subsidiaries. As of September 30, 2006, no loans or advance payments were granted to members of the Supervisory Board. For individualized presentation and further details of Executive and Supervisory Board compensation refer to the presentation of the audited compensation report which is part of the "Corporate Governance". Compensation of former Executive and Supervisory Board membersTotal compensation paid to former members of the Executive Board and their surviving dependants amounted to €15.5 million (2004/2005: €13.3 million). Under IFRS an amount of €157.8 million (2005: €159.1 million) is accrued for pension obligations benefiting former Executive Board members and their surviving dependants. Former Supervisory Board members who left the Supervisory Board prior to October 01, 2005 receive a proportional payment from the long-term compensation component in the total amount of €98 thousand. 32 Segment reportingThe segments provide the primary reporting format of the Group. They follow the internal organizational and reporting structure of the Group. As a result of the reorganization of the steel activities of the ThyssenKrupp Group as of October 01, 2005, the Steel and the Stainless segments were created from the former Steel segment. To ensure comparability, Edelstahl Witten-Krefeld GmbH (EWK) which has been disposed of in the meanwhile is presented within Special Materials in the previous year. Prior period presentation has been adjusted accordingly. Based on the products and services provided, the Group's segments are Steel, Stainless, Automotive, Technologies, Elevator and Services as well as the Corporate activities. SteelThis segment produces and sells flat steel in all basic and quality steel grades. The flat steel program includes carbon steel with and without surface finishing and electric strip. StainlessThis segment combines all production and sales functions for flatrolled stainless steel, nickel alloys and titanium. AutomotiveThis segment produces parts, components, sub-assemblies and modules/systems for vehicle chassis, body and drive train/steering of passenger cars and trucks. TechnologiesThe Technologies segment combines the Group's activities in systems business, plant construction, component manufacture, and associated services. These include Plant Technology, Marine Systems, Mechanical Engineering, and Transrapid. Plant Technology provides project management for the engineering and construction of specialized and large-scale plants for the chemical, petrochemical, cement, mining/handling, coke and energy sectors. Marine Systems specializes in building, repair, conversion and service in particular of naval ships, i.e. conventional submarines and surface vessels. Mechanical Engineering develops and manufactures components which are used mainly in the machine-building sector. These include large-diameter bearings and rings, undercarriages and undercarriage components for wind turbines and earthmoving machinery as well as general machine-building applications. The range also includes the development, engineering and production of assembly systems for engines, transmissions and axles. Transrapid is involved in engineering, project management and construction of high-speed maglev train systems. ElevatorThis segment is involved in the construction, modernization, and servicing of elevators, escalators, stair lifts, and passenger boarding bridges. ServicesThe Services segment is a service provider for industrial materials, raw materials and industrial processes. Alongside the distribution and sale of rolled and specialty steel, tubular products, nonferrous metals and plastics, it offers services ranging from primary processing and logistics to warehouse and inventory management and supply chain management. The process services include production support as well as complex maintenance activities. Other capabilities include the worldwide supply of metallurgical raw materials and development of innovative technical system solutions. CorporateCorporate includes the Group's head office and internal service providers as well as inactive companies which could not be assigned to an individual segment. In addition, the non-operating property is managed and utilized centrally by Corporate. Corporate loss before taxes consists of:
ConsolidationConsolidation essentially contains the elimination of intercompany profits in inventories. The elimination of the income from equity investments in which the segments Steel and Services are jointly involved also takes place in the Group consolidation. These jointly owned companies are fully consolidated by the Steel segment in which they are managed. In the Services segment, the equity method of accounting for investments is used. Within Services, results on investments from intra-group joint ventures amount to €11 million (2004/2005: €22 million). Apart from the compensation for expenses outlined above, the accounting principles for the segments are the same as those described for the Group in the summary of significant accounting principles. The measure of segment profit and loss, which is used to evaluate the performance of the operating segments of the Group, is the "Income from continuing operations before income taxes" line item presented in the consolidated statements of income. Inter-segment pricing is determined on an arm's length basis. Table: Information by segments Segment assets and segment liabilities reconcile to total assets and total liabilities (incl. disposal groups) as presented in the balance sheet as follows:
The secondary reporting format of the Group is based on geographical areas. In presenting information for these geographical areas, allocation of sales is based on the location of the customer. Allocation of segment assets and capital expenditures is based on the location of the assets. The geographical segment "Other EU" comprises of all member states of the European Union (besides Germany) as of the current reporting date. European countries which are currently not member of the European Union are part of the "Other countries" segment. The "Americas" segment includes the countries of the NAFTA and of South America. The "Asia/Pacific" segment consists of Asia and Australia. Due to the high volume of customers and the variety of business activities, there are no individual customers that generate sales values that are material to the Group's consolidated net sales.
33 Accounting estimates and judgementsThe preparation of the Group's consolidated financial statements requires management estimates and assumptions that affect reported amounts and related disclosures. All estimates and assumptions are made to the best of management's knowledge and belief in order to fairly present the Groups financial position and results of operations. The following accounting policies are significantly impacted by management's estimates and judgements. Business combinationsAs a result of acquisitions the Group recognized goodwill in its balance sheet. In a business combination, all identifiable assets, liabilities and contingent liabilities acquired are recorded at the date of acquisition at their respective fair value. One of the most significant estimates relates to the determination of the fair value of these asset and liabilities. Land, buildings and equipment are usually independently appraised while marketable securities are valued at market price. If any intangible assets are identified, depending on the type of intangible asset and the complexity of determining its fair value, the Group either consults with an independent external valuation expert or develops the fair value internally, using an appropriate valuation technique which is generally based on a forecast of the total expected future net cash flows. These evaluations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied. GoodwillAs stated in the accounting policy in Note 1, the Group tests annually and in addition if any indicators exist, whether goodwill has suffered an impairment. If there is an indication, the recoverable amount of the cash-generating unit has to be estimated which is the greater of the fair value less costs to sell and the value in use. The determination of the value in use involves making adjustments and estimates related to the projection and discounting of future cash flows (see Note 12). Although management believes the assumptions used to calculate recoverable amounts are appropriate, any unforeseen changes in these assumptions could result in impairment charges to goodwill which could adversely affect the future financial position and operating results. Recoverability of assetsAt each balance sheet date, the Group assesses whether there is any indication that the carrying amounts of its property, plant and equipment, investment property or intangible assets may be impaired. If any such indication exists, the recoverable amount of the asset is estimated. The recoverable amount is the greater of the fair value less costs to sell and the value in use. In assessing the value in use, discounted future cash flows from the related assets have to be determined. Estimating the discounted future cash flows involves significant assumptions, including particularly those regarding future sale prices and sale volumes, costs and discount rates. Although management believes that its estimates of the relevant expected useful lives, its assumptions concerning the economic environment and developments in the industries in which the Group operates and its estimations of the discounted future cash flows are appropriate, changes in the assumptions or circumstances could require changes in the analysis. This could lead to additional impairment charges in the future or to reversal of impairments if the trends identified by management reverse or the assumptions or estimates prove incorrect. Revenue recognition on construction contractsCertain Group entities, particularly in the Technologies and Elevator segments, conduct a portion of their business under construction contracts which are accounted for using the percentage-ofcompletion method, recognizing revenue as performance on the contract progresses. This method requires accurate estimates of the extent of progress towards completion. Depending on the methodology to determine contract progress, the significant estimates include total contract costs, remaining costs to completion, total contract revenues, contract risks and other judgements. The managements of the operating companies continually review all estimates involved in such construction contracts and adjust them as necessary. Income taxesThe Group operates and earns income in numerous countries and is subject to changing tax laws in multiple jurisdictions within the countries. Significant judgements are necessary in determining the worldwide income tax liabilities. Although management believes they have made reasonable estimates about the ultimate resolution of tax uncertainties, no assurance can be given that the final tax outcome of these matters will be consistent with what is reflected in the historical income tax provisions. Such differences could have an effect on the income tax liabilities and deferred tax liabilities in the period in which such determinations are made. At each balance sheet date, the Group assesses whether the realization of future tax benefits is sufficiently probable to recognize deferred tax assets. This assessment requires the exercise of judgement on the part of management with respect to, among other things, benefits that could be realized from available tax strategies and future taxable income, as well as other positive and negative factors. The recorded amount of total deferred tax assets could be reduced if estimates of projected future taxable income and benefits from available tax strategies are lowered, or if changes in current tax regulations are enacted that impose restrictions on the timing or extent of the Group's ability to utilize future tax benefits. See Note 9 for further information on potential tax benefits for which no deferred tax asset is recognized. Employee benefitsThe Group accounts for pension and other postretirement benefits in accordance with actuarial valuations. These valuations rely on statistical and other factors in order to anticipate future events. These factors include key actuarial assumptions including the discount rate, expected return on plan assets, expected salary increases, mortality rates and health care cost trend rates. These actuarial assumptions may differ materially from actual developments due to changing market and economic conditions and therefore result in a significant change in postretirement employee benefit obligations and the related future expense. (See Note 23 for further information regarding employee benefits). Legal ContingenciesThyssenKrupp companies are parties to litigations related to a number of matters as described in Notes 28 and 29. The outcome of these matters may have a material effect on the financial position, results of operations or cash flows. Management regularly analyzes current information about these matters and provides provisions for probable contingent losses including the estimate of legal expense to resolve the matters. For the assessments internal and external lawyers are used. In making the decision regarding the need for loss provisions, management considers the degree of probability of an unfavorable outcome and the ability to make a sufficiently reliable estimate of the amount of loss. The filing of a suit or formal assertion of a claim against ThyssenKrupp companies or the disclosure of any such suit or assertions, does not automatically indicate that a provision of a loss may be appropriate. 34 Subsequent eventsNo reportable events occurred.
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