2011 Annual Report - OTCIQ.com

82 Notes
Recognition takes place at the beginning of the lease term
at the lower of the fair value of the leased property or the
present value of the minimum lease payments.
The leased property is depreciated over its useful economic
life or, if it is shorter, the term of the lease. The liability is subsequently
measured using the effective interest method.
All other transactions in which E.ON is the lessee are classified
as operating leases. Payments made under operating leases
are generally expensed over the term of the lease.
Leasing transactions in which E.ON is the lessor and substantially
all the risks and rewards incident to ownership of the
leased property are transferred to the lessee are classified as
finance leases. In this type of lease, E.ON records the present
value of the minimum lease payments as a receivable. Payments
by the lessee are apportioned between a reduction of the
lease receivable and interest income. The income from such
arrangements is recognized over the term of the lease using
the effective interest method.
All other transactions in which E.ON is the lessor are treated
as operating leases. E.ON retains the leased property on its
balance sheet as an asset, and the lease payments are generally
recorded on a straight-line basis as income over the term
of the lease.
Financial Instruments
Non-Derivative Financial Instruments
Non-derivative financial instruments are recognized at fair
value on the settlement date when acquired. Unconsolidated
equity investments and securities are measured in accordance
with IAS 39, “Financial Instruments: Recognition and Measurement”
(“IAS 39”). E.ON categorizes financial assets as held for
trading, available for sale, or as loans and receivables. Management
determines the categorization of the financial assets
at initial recognition.
Securities categorized as available for sale are carried at fair
value on a continuing basis, with any resulting unrealized
gains and losses, net of related deferred taxes, reported as a
component of equity (other comprehensive income) until
realized. Realized gains and losses are determined by analyzing
each transaction individually. If there is objective evidence of
impairment, any unrealized gains and losses previously recognized
in other comprehensive income are instead recognized
in financial results. When estimating a possible impairment
loss, E.ON takes into consideration all available information,
such as market conditions and the length and extent of the
impairment. If the value on the balance sheet date of the equity
instruments classified as available for sale and of similar
long-term investments is more than 20 percent below their
cost, or if the value has, on average, been more than ten percent
below its cost for a period of more than twelve months,
this constitutes objective evidence of impairment. For debt
instruments, objective evidence of impairment is deemed present
if ratings have deteriorated from investment-grade to
non-investment-grade. Reversals of impairment losses relating
to equity instruments are recognized exclusively in equity,
while reversals relating to debt instruments are recognized
entirely in income.
Loans and receivables (including trade receivables) are nonderivative
financial assets with fixed or determinable payments
that are not traded in an active market. Loans and receivables
are reported on the balance sheet under “Receivables and
other assets.” They are subsequently measured at amortized
cost. Valuation allowances are provided for identifiable individual
risks.
Non-derivative financial liabilities (including trade payables)
within the scope of IAS 39 are measured at amortized cost,
using the effective interest method. Initial measurement takes
place at fair value, with transaction costs included in the measurement.
In subsequent periods, the amortization and accretion
of any premium or discount is included in financial results.
Derivative Financial Instruments and Hedging
Transactions
Derivative financial instruments and separated embedded
derivatives are measured at fair value as of the trade date at
initial recognition and in subsequent periods. IAS 39 requires
that they be categorized as held for trading as long as they are
not a component of a hedge accounting relationship. Gains
and losses from changes in fair value are immediately recognized
in net income.