III. Notes to the Consolidated Balance SheetThe following overview displays the changes in assets and liabilities positions between December 31, 2005, and December 31, 2004. Detailed explanations can be found in the following statements appended to the respective positions: 
15. Movements in consolidated fixed assets (1)
15. Movements in consolidated fixed assets (2)
16. Intangible assets
Intangible assets comprise mainly the program assets activated by purchase price allocation (PPA), and program-independent technologies capitalized as a result of the acquisition as well as – primarly technical – software and the acquired goodwill.
Goodwill represents the amount by which the purchase price exceeded the fair value of net assets of the acquired company at the time of the acquisition. The goodwill is spread over cash generating units for the purpose of the impairment test.
An impairment test has been carried out for the year under review on the basis of the segments. There were no indications of any impairment. Detailed notes to the analysis and determination of the impairment test are shown under text item 35.3.
The increase in intangible assets primarily represents the purchase of software packages PLM2 (€1.6 million), Unigraphics NX (€1.0 million), and a patent right (Casing Treatment Invention €1.1 million).
The carrying value of MTU Maintenance Canada Ltd., Canada, was below the comparable recoverable amount on the balance sheet date. The related impairment of value of €2.4 million reduces the intangible assets proportionately by €0.5 million and is classified under the “Commercial Maintenance, Repair and Overhaul business” market segment (see text item 35). Property, plant, and equipment make up the remaining amount.
All movements in the item ‘‘intangible assets’’ are stated in the list of assets (text item 15).
17. Property, plant and equipment
Major additions in 2005 were: four CNC 5A milling machines (€2.6 million), three CNC milling machines (€1.4 million), two laserdrilling units (€1.6 million), one CND lasercutting unit (€0.7 million), one x-ray goniometer (€0.7 million), special equipment for GP7000 (€3.1 million), and TP400-D6 (€1.7 million), as well as three lease-pool engines (€1.5 million) and data processing hardware (€4.9 million). In addition, advance payments of €33.9 million were made for units under construction, which will be recorded for the corresponding asset group after completion or start of operation.
The carrying value of MTU Maintenance Canada Ltd., Canada, was below the comparable recoverable amount on the balance sheet reference date. The related impairment of value of €2.4 million reduces the property, plant and equipment proportionately by €1.9 million and is classified under the “Commercial Maintenance, Repair and Overhaul business” market segment (see text item 35). Intangible make up the remaining amount.
Land and buildings leased from Silkan Gewerbepark Nord Hannover-Langenhagen GmbH & Co. KG, Munich (an enterprise of the LHI leasing company), have been capitalized because a bargain purchase option has been granted to the company at the end of the leasing period. In addition, the company’s fixed assets also comprise seven leased engine plants. For these assets, the company is required to make an additional payment at the end of the leasing period, if the disposal proceeds of the leasing assets fall below the book value. The liabilities of all leasing assets are recognized at their present value and amortization is applied every year.
Details to the minimum lease payments of the lease contracts are as follows:
The following net book values and lease payments collected applied on the balance sheet reference date for assets capitalized for finance leasing purposes:
A further breakdown of the property, plant, and equipment summarised in the balance sheet as well as related movements in the year under review are included in the movements in consolidated fixed assets (text item 15).
18. Financial assets
The joint venture accounted for with the equity method refers to MTU Maintenance Zhuhai Co. Ltd, Zhuhai, China. The joint ventures and other shares accounted for at cost include primarily non-substantial shares in non-consolidated subsidiaries, non-consolidated equity participations in associated companies, as well as non-consolidated equity participations in joint ventures. Non-consolidated subsidiaries are minor companies for the Group.
The Group has summarised the following shares in the joint ventures and associated companies:
19. Inventories
Inventories are recognized at the lower of cost or net realizable value. The costs of production of unfinished products comprise the costs of raw materials and supplies, direct personnel expenses, other direct costs and overheads which can be allocated to production (based on normal operating capacity). Costs of purchase or production do not include any costs of debt capital. Discounts, bonuses, and concessions have been deducted from the costs of purchase. Advanced payments received are recognized under liabilities. 20. Receivables and other assets
More details to accounts receivables from related companies are disclosed in “Other assets’’ (text item 20). The previous year’s amount of €55.9 million is therefore classified accordingly.
More details to accounts receivables from companies for which an investment relationship exists are disclosed in the chapter ‘‘Relationships with related companies and persons’’. The receivables are netted with the liabilities of the respective company. The market prices for hedging contracts and the Current Non-current Total Current Non-current Total Due within Due in more than one year one year Due within Due in more than one year one year 12/31/2005 12/31/2004 in € million Trade receivables 269.9 269.9 304.9 304.9 Accounts receivable attributable to production and maintenance orders 148.5 148.5 89.7 89.7 418.4 418.4 394.6 394.6 The previous year’s amount of €55.9 million is therefore classified accordingly. market price for interest rate swaps in the amount of €111.9 million and €5.2 million turned negative with €25.2 million and €7.7 million during the past business year due to the change in the dollar exchange rate and are therefore accounted for under “Other liabilities” (text item 28).
21. Cash and cash equivalents
Cash and cash equivalents of €15.9 million (previous year: €28.5 million) include cash in hand, cash at banks, as well as current securities which are settled within three months of acquisition.
22. Deferred taxes
Please see text item 29 concerning income tax assets and liabilities.
23. Prepayments
The prepayments of €5.2 million (previous year: €9.6 million) consist primarily of prepayments for insurance premiums and rents.
24. Equity
Movements in the Equity of the Group are set out in the equity capital list.
Capital reserves
A total of €300.0 million accrued to MTU Aero Engines Holding AG from proceeds of the placement of the shares on the Frankfurt Stock Exchange, after the deduction of the face value of €1.00 per share from the capital increase of 15 million shares (see Principles). After deduction of €20.3 million in direct transaction costs and addition of the €8.2 million in income tax deductions from the transaction costs, this money was placed in capital reserves.
Matching Stock Program (MSP)
In implementing its economic objectives the Group has set up a program for its managers to participate in its share capital as part of a matching stock program, which authorizes the subscription of “phantom stocks”. On the date of subscription to the MSP, participants must have an existing employment relationship with MTU Aero Engines Holding AG or a German company in the MTU Group.
Five tranches of MTU stock options are allocated by the Group to the participants on June 6 of each year, from 2005 to 2009. Each tranche of allocated phantom stocks is subject to a vesting period of 2 years and can be converted to taxable remuneration upon achievement of average exercise thresholds. This remuneration is to be used to acquire stocks in MTU Aero Engines Holding AG. The purchases are made at the market price. The stocks must be held for two years after the options are exercised.
The fair value of the Phantom stocks is carried as an expense on a pro rata basis and simultaneously recorded in the equity (accumulated other equity) up to the options’ maturity (strike date). The total expense which is to be recorded over the period to the strike date is calculated from the fair value of the options granted. Changes in valuations for non-market-related exercise thresholds (such as significant fluctuations in personnel) are considered in the assumptions relating to the expected number of exercisable phantom stocks. Changes in market conditions such as movements in share price performance and price volatility, on the other hand, do not lead to a different fair value.
On the balance sheet date, the company reviews the estimate of the number of options through to the end of the respective exercise period for an allocated tranche for which it is likely that these could be exercised. The impact of any changes to original estimates that may have to be taken into account are taken into account in the income statement and via a corresponding adjustment to equity for the remaining period until they become non-forfeitable. No more changes to valuation are made after the strike date (date on which the options become non-forfeitable). No changes in valuation were made up to the balance sheet date.
Each MSP share acquired from the program authorizes the holder to subscribe for six phantom stocks per tranche. There are a total of five tranches as part of the MSP. As a rule, MSP shares are not subject to any restraints on disposal. MSP shares authorize the holder to participate in dividends and subscription rights.
The exercise threshold has been reached if the strike price of the allocated options (phantom stocks) corresponds to the average, non-weighted closing price of the shares in XETRA trading over the last 60 stock market days on the Frankfurt Stock Exchange prior to the phantom stocks being exercised, and is above the average non-weighted closing price of the shares in XETRA trading over the last 60 stock market days prior to the allocation of the options plus a basic premium of 10%. Options require that the employee work for the company.
A total of 72,671 shares were subscribed within the MSP. This means that after taking into account employee fluctuations of 4% p.a., a maximum of 1,854,774 options (phantom stocks) could be exercised over the duration of the MSP up to the strike date of the last tranche on June 6, 2009.
Disregarding fluctuations, a total of 2,180,130 phantom stocks resulted as of the end of the program on the balance sheet date, stemming from the shares acquired by the program’s participants on June 6, 2005.
The average fair value of a phantom stock equals €2.32 and is determined with the Black-Scholes method. From this, €0.7 million as recognized in income statement for the period under review. Equity increased by the same amount (see Consolidated statement of changes in equity) The assumptions upon which this is based include the following:
Given MTU Aero Engines Holding AG’s admission to official listing during the business year, a peer group of seven listed companies with similar business models was used to determine expected volatility. Dividend payments, however, were not considered in determining the average fair value of a phantom stock.
Accumulated other equity
Accumulated other equity represents the currency translation of financial statements of foreign subsidiaries, profit participation rights granted through the MSP, and the change in the valuation of financial instruments.
25. Pension provisions (Current and non-current)
Pension provisions are established for obligations arising from vested interests and current benefits paid to authorised active and former employees within the MTU Aero Engines Holding AG Group and their surviving dependants. Depending on the legal, financial, and tax circumstances of the particular country, there are various systems of retirement pension plans which, in general, are based on the length of service and remuneration of the employees.
A distinction is made between defined contribution plans and defined benefit plans. In the case of defined contribution plans, the company has no further obligations.
In the case of defined benefit plans, the company has an obligation to fulfill the commitments made to active and former employees (defined benefit plans). These benefits are principally reserved for as provisions in the consolidated financial statements. In Germany, most of the benefit commitments are applicable for MTU Aero Engines GmbH, Munich, MTU Maintenance Hannover GmbH, Langenhagen, as well as MTU Maintenance Berlin-Brandenburg GmbH, Ludwigsfelde. These commitments are reserved for by way of allocations to provisions. There are also benefits financed by employees (retirement and benefit capital as well as pension capital accumulation account).
The estimated pension obligation (defined benefit obligation) has been calculated using actuarial methods based on a number of assumptions. IAS 19 is used for valuation purposes. Apart from life expectancy assumptions, the following assumptions were made:
Future salary trends growth includes expected future salary increases, which are estimated every year on the basis of various factors, including inflation and length of service with the company. Actuarial profits and losses may occur for valuation of benefit obligations, which are caused by such things as changes in calculation parameters or changes in estimates with regard to risk developments of pension obligations. Accrued actuarial profits and losses that do not exceed 10% of the cash value of the obligations are not accounted for. Actuarial losses that lie outside the 10% bandwidth of the scope of obligations for defined benefit pension plans are distributed from the following year over the average remaining lifetime of the staff. As of December 31, 2005, there were accrued actuarial losses of €64.3 million (previous year: €27.0 million).
The current underfunding in Germany is primarily a result of capital-induced changes in the discounting factor. Due to significantly reduced net yields from investments, pension, anniversary, and partial retirement obligations up to December 31, 2005, were discounted by 4.25 %. The following financing status of the pension benefits was produced using the basis for calculation in accordance with IAS 19:
The financial developments of the pension provisions can be derived as follows:
Pension obligations for the MTU Group of €33.4 million (previous year: €27.6 million) result from the defined benefit pension system, composed of the following
components:
The expenses attributable to compounded interest for pension obligations are recognized with financial result in the income statement, whereas expenses attributable to pension obligations in the year under review are included with the costs of the affected function areas.
26. Other provisions (Current and non-current)
Other provisions fall primarily under the following:
Movements in current provisions (due in less than one year) are as follows:
Provisions of €3.8 million (previous year: €5.0 million) for partial retirement and special payments of €34.4 million (previous year: €28.7 million) are contained in the personnel and social obligations.
Other obligations primarily concern €48.3 million (previous year: €35.6 million) in provisions for follow-up costs that mostly pertain to the EJ200 program, sales deductions of €27.9 million (previous year: €10.2 million), as well as €15.8 million (previous year: €31.2 million) in development costs for the GP7000 program.
Management considers that the provisions are sufficient to cover the actual obligations based on historical experience.
Movements in non-current provisions (due in more than one year) are as follows:
The provisions for other obligations relate to development costs for the program GP7000 for the year 2006.
Management considers that the provisions are sufficient to cover the actual obligations based on historical experience.
Obligations due to potential losses relate to risks in the backlog of orders for contracts in commercial maintenance, repair and overhaul business.
27. Financial liabilities (Current and non-current)
All interest-bearing obligations of MTU Aero Engines Holding AG existing at the relevant balance sheet date are recognized under financial liabilities. They are composed of the following:
In addition to the financial liabilities, an additional overdraft facility of €250.0 million is granted to the company. Of this a credit line of more than €130.0 million has been agreed with the consortium of banks. Bilateral credit agreements (ancillary facilities) have been reached with three banks for the remaining €120.0 million.
Of the €250.0 million overdraft facility, €17.0 million have been utilized through current account overdrafts and €22.3 million are bank guarantees drawn for the benefit of a third party.
28. Other liabilities (Current and non-current)
Employee liabilities relate to vacation, flexitime credits as well as obligations arising from pre-retirement part-time work.
The market value of €-25.2 million for forward foreign exchange contracts and the market value of €-7.7 million in interest rate swaps were valued positively in the previous year’s US price, at €111.9 million and €5.2 million, and are therefore included in “Other assets” (text item 20) for the previous year.
29. Income tax obligations
Balances are stated for tax claims and obligations with regard to the same fiscal authorities. Please see text item 12 for details on related current and deferred income tax obligations as well as tax reconciliation of expected to an actual tax expense. | 
