E_mg_GB_03_vorne-29_3_04

MANAGEMENT SHARE STRATEGY SPECIAL SECTION MANAGEMENT REPORT FINANCIAL STATEMENTS FURTHER INFORMATION
Consolidated Balance Sheets • Statements of Income • Statements of Cash Flows • Statements of Changes in shareholders’ Equity • Fixed Assets Schedule • Notes • Independent Auditors’ Report
Long-Term Construction Contracts
Long-term construction-type contracts are those that take at least six months to complete, calculated
from the date when the contract is awarded until the point at which the contract has essentially
been completed.
For long-term construction contracts, the HGB and Germany’s generally accepted accounting
principles basically only permit profits to be realized once the entire contract has been supplied and
accepted or partially billed, i.e. not until contractually agreed delivery has been largely completed
and the residual risks are insignificant (completed-contract method).
U.S. GAAP (SOP 81-1 and ARB 45), however, allow profits on long-term contracts to be partially
recognized prior to completion, provided a sufficiently reliable computation of the total proceeds,
aggregate costs, and percentage of completion is possible. The percentage of completion is defined
within the Group as the ratio of contract costs incurred at fiscal year-end to total estimated costs
for the entire contract (cost-to-cost method).
Marking-to-Market
The imparity principle of the HGB states that unrealized losses have to be accounted for, but not
unrealized profits. Under U.S. GAAP, however, unrealized profits are also reported, which is reflected
in the following items:
Under the HGB, assets and liabilities denominated in foreign currency are valued at the lower of
cost or market at the balance sheet date. Under U.S. GAAP SFAS 52 (‘Foreign Currency Translation’),
however, all assets and liabilities denominated in foreign currency have to be translated at their
market rate at the balance sheet date, so that unrealized profits are recognized in income.
While under the HGB, securities are accounted for at the lower of cost or market at the balance
sheet date, their accounting treatment under U.S. GAAP (SFAS 115 ‘Accounting for Certain Investments
in Debt and Equity Securities’) depends on their classification. Available-for-sale securities are always
reported at fair value at the balance sheet date, with adjustments resulting from this mark-to-market
valuation being recorded as other comprehensive income unless an impairment is not merely temporary.
Trading securities, which are held solely for dealing or speculative purposes, are reported at
fair value at the balance sheet date and recognized in income. Held-to-maturity securities are reported
at amortized cost under U.S. GAAP.
Factoring and ABS Transactions
For accounting treatment under the German Commercial Code, statement IdW RS HFA 8 of October 1,
2002 stipulates with respect to ABS and similar transactions that assets sold are no longer to be
reported on the seller’s balance sheet only if beneficial ownership of these assets has passed to the
buyer. The decisive criterion for determining whether beneficial ownership has passed to the buyer
is whether the latter bears the credit risk attaching to the assets.
Under U.S. GAAP, however, sales of assets reduce the carrying amount of assets if the seller has
relinquished control over the assets sold. Under SFAS 140 (‘Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities’), this is the case if the following three conditions
are met: the seller and its creditors no longer have access to the receivables (isolation); the
buyer can pledge or exchange the receivables; and the seller no longer has any (effective) power
of disposal over the receivables owing to a right to repurchase them.
153