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Notes to the Consolidated Balance Sheets

16. Deferred taxes

Deferred tax assets and liabilities are composed of the following items:

in € millions Dec. 31, 2011 Dec. 31, 2010
Intangible assets -74.0 -27.4
Property, plant and equipment -52.2 -36.8
Inventories 76.3 42.1
Other assets -54.6 19.0
Pension obligations less deferred pension charges 40.5 69.9
Other provisions 86.6 102.5
Indebtedness 80.9 44.6
Other differences 60.0 86.1
Allowable tax credits 12.6 29.0
Tax losses carried forward and limitation of interest deduction 120.4 144.0
Net deferred taxes 296.5 473.0
Deferred tax assets 565.8 680.7
Deferred tax liabilities 269.3 207.7
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Deferred taxes are measured in accordance with IAS 12 at the tax rate applicable for the periods in which they are expected to be realized. Since 2008, there has been a limit on the deductible interest that can be carried forward in Germany; the amount deductible under tax law is limited to 30% of taxable income before depreciation, amortization and interest.

The decline in deferred tax assets on loss carryforwards in the year under review is due to their utilization or expiry in the amount of €316.1 million (PY: €119.3 million). This was offset by the recognition of new loss carryforwards.

In 2011, individual corporation companies and tax groups that reported a loss recognized total deferred tax assets of €263.5 million (PY: €375.6 million), which arose from current losses, loss carryforwards and a surplus of deferred tax assets. Taking into account realizable tax strategies and assuming that future taxable income is expected, it is sufficiently probable that these deferred tax assets can be realized.

As of December 31, 2011, the corporate tax loss carryforwards amounted to €2,536.9 million (PY: €2,463.4 million). The majority of the corporation's tax loss carryforwards relate to foreign subsidiaries and are mostly limited in the period they can be carried forward.

In total, €1,074.6 million (PY: €1,009.5 million) in deferred tax assets were written down as it is currently not deemed sufficiently likely that they will be utilized. €819.0 million (PY: €777.3 million) of this relates to allowances on losses and interest carried forward. In particular, this relates to the U.S.A. (€356.7 million; PY: €395.1 million), Mexico (€44.1 million; PY: €47.6 million) and Italy (€17.4 million; PY: €19.9 million). A further €274.0 million (PY: €256.3 million) relates to the German tax group. €156.1 million (PY: €120.1 million) of this relates to interest carried forward that is currently deemed unlikely to be used in the future, and a further €108.5 million (PY: €108.5 million) in losses and interest carried forward from 2008 that, in the opinion of the German financial authorities, which is not shared by Continental, can no longer be used under Section 8c KStG on account of the change in ownership in 2008 and 2009.

No deferred tax assets were reported for loss carryforwards abroad in the amount of €31.7 million (PY: €31.7 million).

As of December 31, 2011, the interest carried forward in Germany amounted to €589.4 million (PY: €453.4 million).

In addition, allowances of €47.9 million (PY: €37.2 million) were recognized on imputable tax credit in Malaysia as it is currently not deemed sufficiently likely that the credit will be utilized.

The cumulative amount of deferred taxes for items taken directly to equity decreased from €44.2 million in the previous year to €9.2 million.

The deferred tax liabilities from retained earnings of foreign companies amount to a total of €61.2 million (PY: €58.2 million). As it is not expected that amounts will be remitted to the parent company in the short or medium term, the corresponding deferred tax liabilities were not taken into account.

The measurement differences from assets or liabilities held for sale are included in the "Other assets" and "Other differences" items.

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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.