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New Accounting Pronouncements

 

In accordance with EU Regulation No. 1606/2002 in conjunction with Section 315a (1) of the German Commercial Code (Handelsgesetzbuch – HGB) Continental AG has prepared its consolidated financial statements in compliance with the IFRS as adopted by the European Union under the endorsement procedure. Thus IFRS are only required to be applied following endorsement of a new standard by the European Union.

The following endorsed standards, interpretations issued in relation to published standards and amendments that were applicable to Continental AG became effective in 2011 and have been adopted accordingly:

The amendments to IFRIC 14, Prepayments of a Minimum Funding Requirement, clarify the accounting for situations in which prepayments were made and minimum funding requirements exist. The amendments require that the economic benefit of the entity's prepayments which reduce future contributions should be recognized as asset. The amendments are to be applied, at the latest, as from the commencement date of the first financial year starting after December 31, 2010. The amendments had no significant effect on the consolidated financial statements of Continental AG.

IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments, addresses the accounting when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability (debt for equity swaps). IFRIC 19 clarifies the accounting for such situations by the debtor (issuer of the equity instruments). According to that, the equity instruments issued for the purpose of extinguishing all or part of a financial liability are part of consideration paid. The equity instruments are to be measured at their fair value. If the fair value of the equity instrument cannot be reliably measured, the equity instrument is to be measured to reflect the fair value of the financial liability fully or partly extinguished. IFRIC 19 states that any difference between the carrying amount of the financial liability (or part of a financial liability) extinguished, and the initial measurement amount of the equity instruments issued, is to be recognized in profit or loss. The interpretation and the corresponding amendment to IFRS 1, First-time Adoption of International Financial Reporting Standards, are to be applied, at the latest, as from the commencement date of the first financial year starting after June 30, 2010. IFRIC 19 had no effect on the consolidated financial statements of Continental AG.

The amendment to IFRS 1, Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters, clarifies that first time adopters may apply the transition provisions of IFRS 7, Financial Instruments: Disclosures. The amendment to IFRS 1 and the corresponding amendment to IFRS 7 are to be applied at the latest, as from the commencement date of the first financial year starting after June 30, 2010. The amendment had no effect on the consolidated financial statements of Continental AG.

IAS 24 (revised 2009), Related Party Disclosures, provides clarification of the existing IAS 24 rules. One of the main focuses is the revised definition of the term 'related party'. Furthermore, the revised standard includes partial exemptions from the disclosure requirements of IAS 24 for government-related entities (entities that are controlled, jointly controlled or significantly influenced by a government). IAS 24 (revised 2009) and the corresponding amendment to IFRS 8, Operating Segments, are to be applied, at the latest, as from the commencement date of the first financial year starting after December 31, 2010. The revised IAS 24 had no effect on the consolidated financial statements of Continental AG.

The amendment to IAS 32, Financial Instruments: Presentation, addresses the classification of rights, options or warrants to acquire a fixed number of the entity's own equity instruments for a fixed amount of any currency. These rights are to be classified as equity instruments if the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class. The amendment is to be applied, at the latest, as from the commencement date of the first financial year starting after January 31, 2010. The amendment had no effect on the consolidated financial statements of Continental AG.

With the third Annual Improvement Project (Improvements to IFRSs, May 2010) of the IASB, the following amendments became effective:

  • The amendments to IFRS 1, First-time Adoption of International Financial Reporting Standards, clarify for first-time adopters (during the period covered by its first IFRS financial statements) that a change in accounting policies or changes in the use of IFRS 1 exemptions after publishing a set of IAS 34, Interim Financial Reporting, interim financial information result in explanations of those changes and adjustments of the reconciliations (equity and total comprehensive income). Furthermore, the amendments to IFRS 1 extend the scope of the exemption to include a "deemed cost". The deemed cost exemption is therefore extended to revaluations triggered by an event such as initial public offering or privatization that occurs after the date of transition to IFRSs, but during the period covered by the first IFRS financial statements. IFRS first-time adopters which hold items of property, plant and equipment or intangible assets for use in operations subject to rate regulation may elect to use the previous GAAP carrying amount of such items at the date of transition to IFRSs as deemed cost. The exemption will be applied on an item-by-item basis. First-time adopters which use the exemption shall test each item for impairment at the date of transition to IFRSs in accordance with IAS 36, Impairment of Assets. The amendments are required to be applied for annual periods beginning on or after January 1, 2011. The amendments had no effect on the consolidated financial statements of Continental AG.
  • The amendments to IFRS 3, Business Combination, clarify the transitional requirements for contingent consideration from a business combination that occurred before the effective date of IFRS 3 (revised 2008). Furthermore, the amendments define that only non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation are measured at either fair value or the present ownership instruments' proportionate share in the recognized amounts of the acquiree's net identifiable assets. All other components shall be measured at their acquisition-date fair values or other measurement basis required by IFRSs. Furthermore, the amendments clarify that all share-based payment transactions that are part of a business combination are within the scope of the application guidance. For this reason the guidance applies also to share-based payment transactions which are voluntarily replaced or unreplaced. The amendments are required to be applied for annual periods beginning on or after July 1, 2010. The amendments had no effect on the consolidated financial statements of Continental AG.
  • The amendments to IFRS 7, Financial Instruments: Disclosures, include several clarifications and amendments to required disclosures about nature and extent of risks arising from financial instruments. The amendments are required to be applied for annual periods beginning on or after January 1, 2011. The amendments had no significant effect on the consolidated financial statements of Continental AG.
  • The amendments to IFRS 7, Financial Instruments: Disclosures, IAS 32, Financial Instruments: Presentation, and IAS 39, Financial Instruments: Recognition and Measurement, arise as a result of amendments to IFRS 3, Business Combination, (Business Combination Phase II). The transition requirements of the individual standards are adjusted. The amendments are required to be applied for annual periods beginning on or after July 1, 2010. The amendments had no effect on the consolidated financial statements of Continental AG.
  • The amendments to IAS 1, Presentation of Financial Statements, clarify that the analysis of other comprehensive income (OCI) by item (reconciliation between the carrying amount at the beginning and the end of the period for each component of equity) can be presented either in the statement of changes in equity or in the notes. The amendments are required to be applied for annual periods beginning on or after January 1, 2011. The amendments had no effect on the consolidated financial statements of Continental AG.
  • The amendments to IAS 21, The Effects of Changes in Foreign Exchange Rates, IAS 28, Investments in Associates, and IAS 31, Interests in Joint Ventures, arise as a result of amendments to IAS 27, Consolidated and Separate Financial Statements, (Business Combination Phase II). The transition requirements of the individual standards are adjusted. The amendments are required to be applied for annual periods beginning on or after July 1, 2010. The amendments had no effect on the consolidated financial statements of Continental AG.
  • The amendments to IAS 34, Interim Financial Reporting, modify the wording of IAS 34 in order to place greater emphasis on the disclosure principles which determine what information should be disclosed in an interim financial report. Furthermore, examples are added to the list (not exhaustive) of events and transactions for which disclosures would be required if they are significant (i.e. fair value measurements). The amendments are required to be applied for annual periods beginning on or after January 1, 2011. The amendments had no effect on the consolidated financial statements of Continental AG.
  • The amendment to IFRIC 13, Customer Loyalty Programmes, clarifies the term "fair value" for the measurement of award credits. The amendment is required to be applied for annual periods beginning on or after January 1, 2011. The amendment had no effect on the consolidated financial statements of Continental AG.

The following amendments have already been endorsed by the EU but will not take effect until a later date:

The amendments to IFRS 7, Financial Instruments: Disclosures – Transfers of Financial Assets, improve the disclosure requirements of IFRS 7 in order to help users to understand transfer transactions of financial assets and to evaluate the related risk exposures and their effect on the financial position of the entity that transferred the assets. The amendment clarifies, inter alia, that disclosures (qualitative and quantitative information) have to be made about contractual rights or obligations which the entity retains or obtains in the transfer transaction also in the case an entity derecognizes financial assets in their entirety. The amendments are required to be applied for annual periods beginning on or after July 1, 2011. It is not expected that the amendments will have any significant effect on the future consolidated financial statements of Continental AG.

The following standards, interpretations issued in relation to published standards, and amendments are not yet endorsed by the EU and will become effective at a later date:

As a result of the amendments to IFRS 1, First-time Adoption of International Financial Reporting Standards (Severe Hyperinflation and Removal of Fixed Dates for First-time Adopter), existing references to fixed dates (for example January 1, 2004) are replaced with a reference to the "date of transition to IFRS". Furthermore, rules have been included for cases in which an entity is not able to satisfy all IFRS regulations due to hyperinflation. The amendment is required to be applied for annual periods beginning on or after July 1, 2011. It is not expected that the amendments will have any effect on the future consolidated financial statements of Continental AG.

The amendments to IFRS 7, Financial Instruments: Disclosures, introduce additional disclosure requirements in the context of the offsetting of financial assets and financial liabilities. The amendments are required to be applied for annual periods beginning on or after January 1, 2013. The amendments are not expected to have any significant effect on the future consolidated financial statements of Continental AG.

IFRS 9, Financial Instruments, revises the IAS 39, Financial Instruments: Recognition and Measurement, requirements for the classification and measurement of financial assets. The standard represents the completion of the first part of the project to replace IAS 39. IFRS 9 divides all financial assets currently in the scope of IAS 39 into two classifications: 'measured at amortized cost' and 'measured at fair value'. A financial asset is measured at amortized cost if the asset is held within a business model with the objective of holding assets in order to collect contractual cash flows and the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets which do not fulfill both conditions are measured at fair value. IFRS 9 states that an entity shall reclassify all affected financial assets only when it changes its business model for managing financial assets. IFRS 9 restricts the option to designate a financial asset at fair value through profit or loss. An entity may designate if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch'). Furthermore, IFRS 9 introduces an option that, at initial recognition, an entity may irrevocably elect to present in other comprehensive income subsequent changes in the fair value of an investment in an equity instrument within the scope of this IFRS that is not held for trading. If an entity elects to report in this manner, it must recognize in profit or loss dividends from that investment. With regard to embedded derivatives, IFRS 9 adopts the IAS 39 concept only for hosts that are assets outside the scope of IFRS 9. Requirements on classification and measurement of financial liabilities and requirements for derecognition of financial assets and liabilities were added to IFRS 9 in October 2010. The existing requirements of IAS 39, Financial Instruments: Recognition and Measurement, for derecognition were adopted thereby. New requirements affect the accounting of financial liabilities when choosing the fair value option: The portion of the change in the fair value due to changes in the entity's own credit risk should be presented in other comprehensive income (OCI). IFRS 9 (including 2010 supplements) is to be applied to annual periods beginning on or after January 1, 2015. The effective date was rescheduled to 2015 by the amendments to IFRS 9, Financial Instruments (2009 and 2010) and IFRS 7, Financial Instruments: Disclosures, (Mandatory Effective Date and Transition Disclosures). Furthermore, the relief from restating comparative periods and associated disclosures in accordance with IFRS 7 were amended. It is expected that IFRS 9 will have an effect on the future consolidated financial statements of Continental AG.

IFRS 10, Consolidated Financial Statements, describes principles for presentation and preparation of consolidated financial statements when an entity (parent) controls one or more entities. A reporting entity is required to consolidate an investee when that entity controls the investee. Control exists only if the investor has the power over the investee, exposure or rights to variable returns from involvement with the investee, and the ability to use power over the investee to affect the amount of the investor's returns. Besides the introduction of a single consolidation model based on the principle of control, IFRS 10 includes accounting requirements regarding, inter alia, potential voting rights, non-controlling interests and loss of control. The standard supersedes the requirement related to consolidated financial statements in IAS 27, Consolidated and Separate Financial Statements, and SIC-12, Consolidation – Special Purpose Entities. The standard is required to be applied for annual periods beginning on or after January 1, 2013. The standard is not expected to have any significant effect on the future consolidated financial statements of Continental AG.

IFRS 11, Joint Arrangements, describes the principles for financial reporting by entities that have an interest in arrangements that are controlled jointly (i.e. joint arrangements). A joint arrangement is either a joint operation or a joint venture. A joint operator shall recognize assets, liabilities, expense and revenue in relation to its interest in the joint operation. A joint venturer shall recognize its interest in a joint venture as investment and shall account for the investment using the equity method in accordance with IAS 28, Investments in Associates and Joint Ventures. IFRS 11 supersedes IAS 31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities – Non-Monetary Contributions by Venturers. The standard is required to be applied for annual periods beginning on or after January 1, 2013. The standard is not expected to have any effect on the future consolidated financial statements of Continental AG.

IFRS 12, Disclosure of Interests in Other Entities, requires the disclosure of information that enables users of financial statements to evaluate the nature of and risk associated with interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities, and the financial effect of those interests. The standard is required to be applied for annual periods beginning on or after January 1, 2013. IFRS 12 is not expected to have any significant effect on the future consolidated financial statements of Continental AG.

IFRS 13, Fair Value Measurement, defines the fair value, describes the measurement of fair value, and enhances the corresponding disclosures. IFRS 13 is required to be applied for annual periods beginning on or after January 1, 2013. The standard is not expected to have any significant effect on the future consolidated financial statements of Continental AG.

The amendments to IAS 1, Presentation of Financial Statements, deal with the presentation of items of Other Comprehensive Income. The amendments require to group items of the OCI in items that are potentially subsequently reclassifiable to profit and loss, and in items which will not be reclassified. The option of IAS 1 (revised 2007) to present OCI items either before or net of tax will not be changed by the amendments. If presentation before tax is chosen, the tax related to each of the groups (described above) must be shown separately. The amendments are required to be applied for annual periods beginning on or after July 1, 2012. The amendments are not expected to have any significant effect on the future consolidated financial statements of Continental AG.

The amendments to IAS 12, Income Taxes (Deferred Tax: Recovery of Underlying Assets), contain a clarification regarding the treatment of temporary tax differences when using the fair value model in IAS 40, Investment Property. It can be difficult to assess whether recovery will be through use or through sale when the asset is measured using the fair value model in IAS 40. The amendments provide a practical approach in such cases by introducing a rebuttable presumption that an investment property is recovered entirely through sale. The amendments supersede SIC-21, Income Taxes – Recovery of Revalued Non-Depreciable Assets. The amendments are required to be applied for annual periods beginning on or after January 1, 2012. It is not expected that the amendments will have any effect on the future consolidated financial statements of Continental AG.

IAS 19 (revised 2011), Employee Benefits, changes IAS 19 (revised 2008) fundamentally. The recognition of actuarial gains and losses using the corridor method and the recognition of past service cost over the vesting period are eliminated. The revised standard changes the presentation of defined benefit costs and the calculation of net interest. Furthermore, the definition of termination benefits, curtailments, as well as short-term and other long-term benefits are clarified and the disclosures of IAS 19 are enhanced. The revised standard is required to be applied for annual periods beginning on or after January 1, 2013. IAS 19 (revised 2011) is expected to have a significant effect on the future consolidated financial statements of Continental AG.

IAS 27 (revised 2011), Separate Financial Statements, deals with the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates in separate financial statements. IAS 27 requires that investments in subsidiaries, joint ventures and associates be accounted for either at cost or in accordance with IFRS 9, Financial Instruments. The standard is required to be applied for annual periods beginning on or after January 1, 2013. The standard is not expected to have any effect on the future consolidated financial statements of Continental AG.

IAS 28 (revised 2011), Investments in Associates and Joint Ventures, deals with the accounting for investments in associates and the application of the equity method when accounting for investments in associates and joint ventures. Furthermore, IAS 28 clarifies cases in which an investment, or a portion of an investment, in an associate or a joint venture is classified as held for sale in accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. The standard implements a measurement option for investments in associates or joint ventures which are held by, or are held indirectly through, an entity that is a venture capital organization, a mutual fund, unit trust or similar entity including investment-linked insurance funds. IAS 28 supersedes IAS 28 (revised 2003), Investment in Associates, and incorporates rules of SIC-13, Jointly Controlled Entities – Non-Monetary Contributions by Venturers. IAS 28 is required to be applied for annual periods beginning on or after January 1, 2013. The standard is not expected to have any effect on the future consolidated financial statements of Continental AG.

The amendments to IAS 32, Financial Instruments: Presentation, clarify the conditions for the offsetting of financial assets and financial liabilities. The amendments are required to be applied for annual periods beginning on or after January 1, 2014. The amendments are not expected to have any significant effect on the future consolidated financial statements of Continental AG.

IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, deals with the accounting of waste removal costs that are incurred in surface mining activity during the production phase of the mine ("production stripping costs"). The interpretation clarifies the requirements for recognition of production stripping costs as an asset and the corresponding measurement of the stripping activity asset. The interpretation is required to be applied for annual periods beginning on or after January 1, 2013. IFRIC 20 is not expected to have any effect on the future consolidated financial statements of Continental AG.

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Continental Value Contribution (CVC). The CVC represents the absolute amount of additional value created, and the Delta CVC represents the change in absolute value creation over the prior year. This change in the absolute contribution measured by Delta CVC allows us to monitor the extent to which management units generate value-creating growth or resources must be employed more efficiently. The CVC is measured by subtracting the weighted average cost of capital (WACC) from the ROCE and multiplying this by the average operating assets for the fiscal year. The weighted average cost of capital calculated for the Continental Corporation corresponds to the required minimum return. The cost of capital is calculated as the weighted average ratio of the cost of equity and borrowing costs.

Currency swap. Swap of principal payable or receivable in one currency into similar terms in another currency. Often used when issuing loans denominated in a currency other than that of the lender.

Defined Benefit Obligation (DBO). DBO is defined as the present value of all vested and non-vested benefits calculated on the basis of estimated salary levels at retirement. The only actuarial method that may be used to calculate the DBO is the projected unit credit method. DBO corresponds to PBO (projected benefit obligation).

Derivative financial instruments. Transactions used to manage interest rate and/or currency risks.

Dividend payout ratio. The dividend payout ratio is the ratio between the dividend for the fiscal year and the earnings per share.

EBIT. Earnings Before Interest and Taxes. EBIT represents the results of operations. Since 2002, when the amortization of goodwill was discontinued, EBITDA has been equal to EBIT.

EBITA. EBIT before scheduled goodwill amortization.

EBITDA. Earnings before interest, taxes, depreciation and amortization.

Finance lease. Under a finance lease, the lessor transfers the investment risk to the lessee. This means that the lessor bears only the credit risk and any agreed services. The lessee is the beneficial owner of the leased asset. Finance leases are characterized by a fixed basic term during which the lease may not be terminated by the lessee.

Gearing ratio. The gearing ratio represents the net indebtedness divided by total equity, expressed as a percentage.

Hedging. Securing a transaction against risks, such as fluctuations in exchange rates, by entering into an offsetting hedge transaction, typically in the form of a forward contract.

IAS. International Accounting Standards.

IASB. International Accounting Standards Board. The authority that defines the International Financial Reporting Standards.

IFRIC. International Financial Reporting Interpretations Committee. Committee that reviews and determines appropriate treatment of accounting issues within the context of IFRS and IAS.

IFRS. International Financial Reporting Standards. The accounting standards issued by the IASB.

Interest rate cap. An interest rate cap sets an upper limit for a variable interest rate in relation to a notional debt amount. To the extent that the variable interest due on the underlying debt exceeds the cap amount, the holder of the cap receives income as compensation in the amount of the difference to the cap. An up-front premium is paid as consideration for the cap.

Interest rate swap. An interest rate swap is the exchange of interest payments between two parties. For example, this allows variable interest to be exchanged for fixed interest, or vice versa.

Net indebtedness. The net amount of interest-bearing liabilities as recognized in the balance sheet, cash and cash equivalents, the positive fair values of the derivative financial instruments as well as other interest-bearing investments.

Operating assets. Operating assets are the assets less liabilities as reported in the balance sheet, without recognizing the net indebtedness, discounted trade bills, deferred tax assets, income tax receivable and payable, as well as other financial assets and debts.

Operating lease. A form of lease that is largely similar to rental. Leased assets are recognized in the lessor's balance sheet and capitalized.

PPA. Purchase Price Allocation. PPA is the process of breaking down the purchase price and assigning the values to the identified assets, liabilities, and contingent liabilities following a business combination. Subsequent adjustments to the opening balance sheet – resulting from differences between the preliminary and final fair values at the date of initial consolidation – are recognized as "PPA adjustments".

Rating. Standardized indicator for the international finance markets that assesses and classifies the creditworthiness of a debtor. The classification is the result of an economic analysis of the debtor by specialist rating companies.

ROCE. Return On Capital Employed. We define ROCE as the ratio of EBIT to average operating assets for the fiscal year.

SIC. Standing Interpretations Committee (predecessor to the IFRIC).

US GAAP. United States Generally Accepted Accounting Principles. These principles are subdivided into binding and guiding principles.

Weighted Average Cost of Capital (WACC). The WACC represents the weighted average cost of the required return on equity and net interest-bearing liabilities.