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Notes to the Consolidated Balance Sheets

26. Provisions for Other Risks and Obligations

 

in € millions December 31, 2011 December 31, 2010
  Current Non-current Current Non-current
Restructuring provisions 117.8 47.8 311.7 —
Litigation and environmental risks 77.2 110.2 — 153.6
Flexible early retirement contracts — 61.2 — 68.2
Anniversary and other long-service benefits — 56.6 — 61.9
Warranties 557.8 9.9 658.4 —
Other provisions 152.3 36.1 193.9 41.7
Provisions for other risks 905.1 321.8 1,164.0 325.4
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The provisions changed during the year as follows:

in € millions Restructuring provisions Litigation and environ-
mental risks		 Flexible early retirement contracts Anniversary and other long-service benefits Warranties Other provisions
At January 1, 2011 311.7 153.6 68.2 61.9 658.4 235.6
Additions 62.6 85.5 41.4 3.8 303.9 104.1
Utilization -169.1 -58.5 -40.5 -1.7 -264.5 -80.3
Reclassification — 16.9 — — — -16.9
Net changes in the scope of consolidation 0.0 0.0 — — 1.2 0.1
Reversals -39.9 -15.8 -7.9 -7.3 -132.8 -55.8
Interest 0.7 3.6 — 0.0 — 0.4
Foreign currency translation -0.4 2.1 0.0 -0.1 1.5 1.2
At December 31, 2011 165.6 187.4 61.2 56.6 567.7 188.4
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The additions to the restructuring provisions mainly relate to further restructuring expenses for the closures of the locations in Dortmund, Germany, and Coslada, Spain. Please see Note 6.

Utilizations primarily relate to the implementation of restructuring measures decided in previous years – in particular at the locations in Clairoix, France, and Huntsville, U.S.A.

As in the previous year, the additions to the provisions for litigation and environmental risks relate in particular to product liability risks from the tire activities in the U.S.A. The further additions and the reclassification relate primarily to the antitrust proceedings against Dunlop Oil & Marine Ltd., Grimsby, U.K.

In particular, utilizations relate to the product liability risks from tire activities mentioned above and payments in connection with the rulings by the antitrust authorities against Dunlop Oil & Marine Ltd., Grimsby, U.K. The reversals mainly relate to expired patent risks in the Automotive Group.

Provisions for the flexible early retirement contracts are measured using a discount rate of 2.5% (PY: 2.5%). In accordance with the option under IAS 19, the interest component was not separately shown in net interest expense, but included in compensation costs as part of the cost categories as classified in the income statement.

Provisions for anniversary and other long-service benefits were measured using a discount rate of 5.5% (PY: 4.7%). In accordance with the option under IAS 19, the interest component was not separately shown in net interest expense, but included in compensation costs as part of the cost categories as classified in the income statement; it includes the effect of the change in the interest rate of 0.8 percentage points.

The changes in provisions for warranties include utilizations amounting to €264.5 million (PY: €301.4 million), as well as reversals amounting to €132.8 million (PY: €123.0 million), partially offset by additions of €303.9 million (PY: €387.4 million), in particular for specific provisions in the Automotive Group.

Please see Note 5 for information on changes in the scope of consolidation.

The other provisions also comprise provisions for risks from operations, partially in connection with fixed supply and acceptance agreements.

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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.