Annual report 2008

Intangible assets mainly comprise program assets capitalized by purchase price allocation (PPA), program-independent technologies and software (the latter mostly for engineering applications), and acquired goodwill.

Through the cooperation agreement dated December 19, 2008 between the General Electric Company and MTU Aero Engines GmbH, MTU acquired a 6.65 % stake in the GEnx (General Electric next generation) engine program for the Boeing 787 and 747-8. The investment in this new engine program amounting to € 126.1 million has been recognized under program assets.

The new software and logistics system introduced at the Hannover site to optimize production-related processes and reduce manufacturing costs went into productive operation in January 2008. This permitted cumulated expenditure amounting to € 27.0 million to be transferred to the item “Rights and licenses”. The disposals amounting to a total of € 11.6 million relate to a multitude of no-longer-used software packages dating from 2004.

Goodwill represents the amount by which the cost of the acquired entity exceeded the fair value of the group’s identifiable net assets at the date of acquisition. The goodwill is allocated to the segments for the purpose of the impairment test. The tax field audit covering the period up to the date of MTU’s acquisition from DaimlerChrysler AG (since renamed) was completed during the financial year 2008. The resulting retrospective purchase price adjustment led to an increase of € 15.0 million in goodwill. The segments were tested for impairment in 2008. There were no indications of any impairment. Explanatory comments on the measurement of the amounts used in the impairment test are provided in Note 40.

Additions to intangible assets in the financial year 2008 included development costs attributable to MTU’s share in the GE38 military engine program for the Sikorsky Aircraft Corporation’s CH-53K heavy-lift helicopter amounting to € 45.2 million. Internally generated development costs for the same program amounting to € 2.8 million were also capitalized.

Finally, the commercial maintenance business has developed special repair processes capable of increasing the efficiency of engine maintenance. The recognition criteria for these new technologies were met in the financial year 2008, allowing intangible assets totaling € 3.4 million (2007: € 4.3 million) to be recognized.

A detailed presentation of changes in intangible assets can be found in the table headed “Analysis of changes in intangible assets, property, plant and equipment, and financial assets” (Note 18.).

Through its capital expenditure on property, plant and equipment for the OEM business, MTU aims to consolidate and extend its position as a leading engine manufacturer, improve efficiency, and modernize equipment and machinery to state-of-the-art standards.

Land and buildings leased by MTU Maintenance Hannover from Silkan Gewerbepark Nord Hannover-Langenhagen GmbH & Co. KG, Munich (owned by the LHI leasing company) have been capitalized because an attractive purchase option has been granted to the company at the end of the leasing period.

Capital expenditure on technical equipment, plant and machinery amounted to a total of € 14.7 million (2007: € 10.0 million). Newly purchased items include a welding system, a combined laser drilling and ablation system, an ultrasonic shot peening system, a tool-grinding machine, a wet-blasting plant, a wire-erosion machining plant, a vacuum furnace and a number of CNC grinding and milling machines.

Five leased engines and one gas turbine are furthermore recognized in the item “Property, plant and equipment”. For these assets, the company is required to make an additional payment at the end of the leasing period if the proceeds from the disposal of the lease assets are lower than the carrying amount. The liabilities arising from all lease assets are recognized at the present value of the minimum lease payments and amortized on a yearly basis.

Additions to this item in 2008, totaling € 59.8 million (2007: € 49.6 million), comprise € 21.6 million for unfinished construction work on the manufacturing facilities of MTU Aero Engines Polska Sp. z.o.o., Rzeszów, Poland, € 24.7 million relating to work in progress on technical equipment, plant and machinery for new engine programs at the German sites, and € 13.5 million relating to construction costs for the new engine test rig in Hannover, which is expected to be completed by March 2009. The existing test cell in Langenhagen had reached its capacity limit and offered no possibility for expansion. Work on the construction of the new engine test rig commenced in March 2007. The new facility will enable the company to test very large engines such as those powering the Airbus A380 (GP7000). The originally planned date for the test rig’s entry into service, which was mid-2008, has been delayed by almost a year due to technical problems originating with the supplier of the test rig.

A detailed presentation of changes in property, plant and equipment can be found in the table headed “Analysis of changes in intangible assets, property, plant and equipment, and financial assets” (Note 18.).

Finance lease assets are accounted as follows:

The following carrying amounts resulted from the capitalized assets under finance lease agreements at the balance sheet date:

A more detailed presentation of the property, plant and equipment items stated in the balance sheet and the corresponding changes in 2008 can be found in the table headed “Analysis of changes in intangible assets, property, plant and equipment, and financial assets” (Note 18.).

The table below presents the carrying amounts of financial assets included in the consolidated financial statements:

The financial asset accounted for using the equity method is the joint venture Pratt & Whitney Canada Customer Service Centre Europe GmbH, Ludwigsfelde. The joint ventures and other financial assets accounted for at cost mainly comprise non-significant investments in non-consolidated subsidiaries, non-consolidated equity investments in associated companies, and other non-consolidated equity investments in joint ventures. MTU defines nonconsolidated subsidiaries as companies that have no significant impact on the group’s net assets, financial situation or operating results.

The following amounts have been recognized in respect of the assets, debt, income and expenses of other joint ventures and associated companies:

The financial assets measured at fair value relate to derivative financial instruments utilized as cash flow hedges, and comprise the following items:

Derivative financial assets include forward foreign exchange contracts and currency options used to hedge cash flows are measured at their fair value. The fair value of currency options mainly consists of premiums for currency option transactions. This type of transaction enables MTU to sell a defined quantity of U.S. dollars at agreed euro exchange rates on a range of different dates. Further explanatory comments on derivative financial instruments are provided in Note 42. (Risk management and financial derivatives).

Inventories are recognized at the lower of cost or net realizable value. Acquisition costs of inventories comprise the purchase price, customs charges and other taxes, transportation and administrative costs, and other miscellaneous costs directly attributable to the purchase of finished products, materials and services.

Construction costs of work in progress comprise direct costs of raw materials and supplies, wages for industrial staff, as well as fixed and variable overheads (based on normal utilization of production capacity). Acquisition and construction costs do not include any borrowing costs. Acquisition costs are net of trade discounts and concessions and customer loyalty awards.

The change in inventories attributable to write-downs on raw materials and supplies and work in progress is as follows:

Trade receivables comprise the following items:

The valuation allowances on trade receivables changed as follows:

In the following table, the expense for bad debts on trade receivables written off as uncollectible is offset against the income from bad debts recovered:

All expense and income amounts arising from valuation allowances and the write-off of uncollectible bad debts on trade receivables are recognized as selling expenses.

These receivables relate to construction contracts with specific customers in respect of specific engine programs. Interest-free advance payments received for production contracts directly attributable to an engine project are offset against the corresponding accounts receivable. If the amount of the directly attributable advance payments received exceeds the amount of the accounts receivable, the balance is recognized under contract production payables. The interest accrued on long-term advance financing of production contracts is accounted for as a liability over the duration of financing and recognized as revenue when the engine component is delivered to the customer.

In the financial year 2008, revenues totaling € 18.3 million were generated by contract production (2007: € 116.6 million). Contract-related costs to be offset against these revenues amounted to € 12.2 million (2007: € 101.1 million), resulting in contract production earnings of € 6.1 million (2007: € 15.5 million). The amount of € 386.2 million for contract receivables at December 31, 2008 (2007: € 367.5 million) includes advance payments received amounting to € 247.3 million (2007: € 196.4 million). Retained amounts for partial settlement of contract production receivables did not arise in 2008. Note 5.8. provides more detailed information on the accounting treatment, and more particularly on the methods used to determine the revenues to be recognized in respect of ongoing contract production projects and their percentage of completion.

For disclosures relating to contract production receivables that have been offset against directly attributable advance payments received, please refer to Note 36.

The table below shows the carrying amounts of trade and contract production receivables at the balance sheet date together with a breakdown of these amounts according to the impairment status of not-yet-overdue trade and contract production receivables and the time windows within which they will become overdue:

Other assets comprise the following items:

The item “Other taxes” amounting to € 26.6 million (2007: € 14.3 million) comprises an amount of € 23.3 million (2007: € 13.5 million) relating to input taxes and an amount of € 3.3 million (2007: € 0.8 million) relating to receivables of foreign group companies due to transaction taxes.

The item “Sundry other assets” amounting to € 8.2 million (2007: € 7.9 million) groups together a variety of different assets. These include the surplus plan assets of MTU Maintenance Canada Ltd., Canada, amounting to € 1.9 million (2007: € 1.0 million). Please refer to Note 31. for further information on the calculation of the surplus plan assets.

The table below shows the carrying amounts of other assets at the balance sheet date together with a breakdown of these amounts according to the impairment status of not-yet-overdue other assets and the time windows within which they will become overdue:

The cash and cash equivalents of € 69.9 million (2007: € 67.3 million) comprise checks, cash in hand, and bank deposits with an original maturity of three months or less. At the balance sheet date, this item also included foreign currency holdings translated at an amount of € 37.3 million (2007: € 77.8 million).

Income tax claims amounting to € 1.0 million (2007: € 2.7 million) relate to claimed reimbursements of corporation tax and municipal trade tax predating the incorporation of the company amounting to € 1.0 million (2007: € 1.0 million). The figure for 2007 additionally includes an amount of € 1.5 million relating to capital gains tax and an amount of € 0.2 million relating to foreign taxes.

Please refer to Note 39. for explanatory comments concerning income tax assets and liabilities.

The prepayments of € 3.3 million (2007: € 5.0 million) consist primarily of prepayments for insurance premiums and rents.

Changes in group equity are set out in the consolidated statement of changes in equity.

The company’s capital stock amounts to € 52.0 million (2007: € 55.0 million), divided into 52 million (2007: 55 million) registered non-par shares. At the Annual General Meeting on April 27, 2007, the Board of Management was authorized, with the prior approval of the Supervisory Board and without any requirement for a further resolution to be passed by the Annual General Meeting, to withdraw part of all of the purchased treasury shares. By a resolution of the Board of Management and the Supervisory Board with effect of March 18, 2008, this authorization was exercised to withdraw 3,000,000 shares and to reduce the company’s stock capital by € 3.0 million from € 55.0 million to € 52.0 million.

The Board of Management is authorized until May 29, 2010 to increase the company’s capital stock, with the prior approval of the Supervisory Board, by up to € 5.5 million by issuing, either in a single step or in several steps, new registered shares in return for cash contributions, whereby the subscription rights of existing shareholders may be excluded (Authorized Capital I 2005).

The Board of Management is also authorized until May 29, 2010 to increase the company’s capital stock, with the prior approval of the Supervisory Board, by up to € 19.25 million by issuing, either in a single step or in several steps, new registered shares in return for cash and/or non-cash contributions, whereby the subscription rights of existing shareholders may be excluded (Authorized Capital II 2005).

The company’s capital stock may be increased by up to € 19.25 million through the issue of up to 19.25 million new registered shares. The purpose of this conditional capital increase is to issue shares to owners or creditors of convertible bonds and/or bonds with warrants in accordance with the authorization granted to the company’s Board of Management under a resolution passed by the Annual General Meeting on May 30, 2005.

Shares may be issued at a conversion price or warrant exercise price determined on the basis of the conditions laid down in the relevant authorization. Use was made of this authorization for a conditional capital increase on January 23, 2007 to issue a convertible bond with a total volume of € 180.0 million (see Note 34.). The conditional capital increase is implemented only to the extent that owners or creditors of conversion rights or warrants attached to convertible bonds and/or bonds with warrants issued between May 30, 2005 and May 29, 2010 by the company or one of its direct or indirect affiliates make use of their conversion rights or warrants on the basis of a resolution passed by an extraordinary shareholders’ meeting, or that owners or creditors of conversion obligations attached to convertible bonds issued by the company or one of its direct or indirect affiliates between May 30, 2005 and May 29, 2010 satisfy their conversion obligation on the basis of a resolution passed by an extraordinary shareholders’ meeting, and to the extent that treasury shares are not used for this purpose. Shares issued under these conditions are entitled to participate in the distribution of profits starting in the financial year in which the conversion rights or warrants were exercised or the conversion obligations were satisfied.

Capital reserves include premiums from the issue of shares, the equity component (net of taxes) and proportional transaction costs of the issued convertible bond, the fair value of shares granted under the Matching Stock Program (MSP) and an amount of € 3.3 million representing the excess over the sale proceeds from the shares sold under the MAP employee stock option program. The purchase price for the 3,000,000 withdrawn treasury shares, based on averages, amounted to € 104.4 million. Capital reserves were accordingly reduced by the amount of the premium, € 101.4 million. For information on the equity component of the convertible bond and the associated deferred tax assets/liabilities, transaction costs, and income tax reductions, please read the explanatory comments under Note 34. The following section provides disclosures relating to the Matching Stock Program (MSP) and the MAP employee stock option program, including information on measurement and effects.

To strengthen the motivation to meet business targets, the group has set up an incentive and risk-sharing instrument allowing management-level employees to participate in its share capital as part of a Matching Stock Program (MSP), which authorizes the subscription of phantom stocks. On the date of subscription to the MSP, participants must have an existing employment contract with MTU Aero Engines Holding AG or a German company in the MTU group.

When the program was launched on June 6, 2005, the group granted a defined quantity of equity instruments (phantom stock) to the participants for the duration of five years, for allocation in equal tranches over this period. In order to be granted phantom stock, it was a condition at the start of the program that MSP participants should hold their own investment in the company’s share capital. Each MSP share acquired from the program authorizes the holder to subscribe for six phantom stocks per allocated tranche. As a rule, MSP shares are not subject to any restraints on disposal. MSP shares entitle the holder to participate in dividend and subscription rights.

Each tranche of allocated phantom stock is subject to a vesting period of 2 years and can be converted to taxable compensation upon achievement of the average exercise price. It is a mandatory condition that this compensation must be used to purchase shares in MTU Aero Engines Holding AG. The shares are purchased at the market price on the strike date (exercise date). They must be held for 2 years after the strike date.

A tranche of phantom stock allocated under the Matching Stock Program can be exercised when the average, nonweighted closing price of the shares in XETRA trading on the Frankfurt Stock Exchange over the 60 trading days prior to the exercise date of the phantom stocks exceeds the average, non-weighted closing price of the shares over the 60 trading days prior to the allocation of the phantom stock plus a premium of 10% (basis price). The allocation of phantom stock is tied to the condition that the subscriber is an employee of the company.

If the group pays a dividend to its shareholders during the period between the allocation and exercise of a tranche of phantom stock, it is entitled to reduce the basis price (exercise price) for a tranche of the Matching Stock Program by the amount of dividend paid during the duration of the tranche. The reduction in the basis price correspondingly increases the gain on the exercise. The Board of Management and Supervisory Board invoked this option for all not yet exercisable tranches of the Matching Stock Program through a resolution passed on May 23, 2007. As a consequence of this change, a new basis price for the respective tranches – reduced by the amount of the dividend – was determined (repricing).

The fair value of the phantom stock is carried as a personnel expense on a pro rata basis and simultaneously recognized in equity (capital reserves) up to the stock’s maturity (exercise date). The total expense to be recorded over the period to the exercise date is calculated from the fair value of the granted shares of phantom stock. Equity increased as planned through additions arising from the measurement of the Matching Stock Program and the additional personnel expenses arising from the adjusted fair value of the not yet exercisable tranches based on the modified exercise price.

To account for the modification of the basis price (repricing), the original planning assumptions were adjusted in May 2007. After adjustment, the following program duration assumptions were applied:

When the program was launched in June 2005, the expected volatility was determined from the average volatility of shares in comparable listed (peer-group) companies with similar business models, given that MTU did not yet have any capital market history of its own at that time. When the new basis prices were established in May 2007, the expected volatility was adjusted on the basis of the meanwhile available MTU capital market data.

Changes in valuations for non-market-related exercise thresholds (such as significant fluctuation in personnel) are considered in the assumptions relating to the expected number of exercisable shares of phantom stock. In the event that there is significant deviation between the exercise conditions assumed at the start of the program and those existing at the end of a financial year, these conditions are adjusted so that the fair value is based on the number of ultimately exercisable equity instruments. At each balance sheet date, the company reviews the estimate of the number of shares of phantom stock 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 is 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 in valuation are made after the strike date. No changes in valuation were made up to December 31, 2008.

Changes in market conditions such as variations in share price performance and price volatility, on the other hand, do not lead to a different fair value.

If a new basis price (exercise price) is determined during the vesting period, an adjustment must be made to account for the difference arising in the period from the modification date to the date on which the stock becomes exercisable, in addition to the expense that was originally recorded on the basis of the fair value of the phantom stock and allocated proportionately over the full program duration. The reduction in the previously determined basis price of the allocated tranches in the financial year 2007 led to an increase in personnel expenses over those recognizable under the original conditions, reflecting the higher gain on the exercise. This additional expense is recognized from the date of repricing onward.

The additional expense is calculated on the basis of the higher gain on the exercise (difference between the average, non-weighted closing price of the shares over the 60 trading days prior to the exercise date and the original basis price less the dividend payment) for the not yet exercisable tranches of phantom stock. The additional expense resulting from repricing increased personnel expenses in the financial year 2007 by € 1.2 million. In the financial year 2008, an amount of € 0.5 million (2007: € 0.9 million) was recognized in personnel expenses.

The second tranche of phantom stock granted in 2006 was unable to be exercised and lapsed because the average exercise price (basis price) of € 28.89 was not reached. The actual exercise price on the exercise date for the phantom stock was € 27.40. In the financial year 2008, a further 399,966 shares of phantom stock with a vesting period running until June 5, 2010 were allocated to participants of the Matching Stock Program upon allocation of the fourth tranche.

The table below shows the changes in granted equity instruments and the number of not yet exercisable shares of phantom stocks at December 31, 2008.

The 1,154,208 phantom stocks not yet exercisable at the end of the financial year 2008 relate to the third and fourth tranches of the Matching Stock Program, which were allocated in 2007 and 2008 respectively. The corridor of average exercise prices for the third tranche allocated in 2007 ranges between € 46.00 and € 46.50, depending on the dividend payment for the financial year 2008. Assuming that the dividend payment for the financial year 2009 remains the same as that in 2007 and 2008, the corridor for the fourth tranche allocated in 2008 ranges between € 28.00 and € 28.50. Deviations from the forecast corridors of exercise prices for the third and fourth tranches are possible, however, given that a tranche has a duration of two years and therefore a dividend payment has had to be estimated for each year of this period. At December 31, 2008, the weighted average remaining duration of contracts under the Matching Stock Program was 1.5 years (December 31, 2007: 2 years). No exercise price or corridor of possible exercise prices has yet been determined for the fifth and final tranche of the Matching Stock Program, to be allocated in the financial year 2009, because these prices are calculated on the basis of the average closing share price (in XETRA trading) 60 trading days prior to the allocation date.

In 2008, the average fair value of a granted equity instrument, after application of the new rules for determining the exercise price, was € 3.30 (2007: € 3.40) and was calculated for the remaining duration of the program using the Black-Scholes pricing method. The repricing in the financial year 2007 had less effect on tranches three to five of the Matching Stock Program than it did on tranches one and two, which were either shortly before the allocation date or shortly before the exercise date when the repricing took effect. The fair value of a phantom stock thus decreased by € 0.10 to € 3.30.

In the second quarter of 2008, the Board of Management of MTU Aero Engines Holding AG (MTU) launched the new MAP employee stock option program for group employees, which will run for two years until June 2010. Staff of all categories (paid under collective bargaining agreements and freely negotiated contracts) who are employed, paid and deployed by the group in Germany are eligible to join the program. The purchase price for the registered shares of MTU Aero Engines Holding AG is based on the lowest share price on April 18, 2008 (purchase date) and therefore amounted to € 25.19 per share. Under the MAP employee stock option program, MTU offers to “match” each participant’s investment at the end of a two-year vesting period. In other words, at the end of the program, each MAP participant will receive a taxable cash payment of an amount corresponding to 50 % of the amount he or she invested in MTU shares at the beginning of the program. The benefit of this “matching” payment is classified without exception as income, on which the applicable taxes and social security contributions must be paid. Instead of receiving the net matching payment in cash, MAP participants have the option of converting it into MTU shares. In this case, the purchase price is based on the closing price of the MTU share in XETRA trading on the first trading day after the two-year vesting period.

Employees purchased a total of 192,959 shares at a price of € 25.19 per share from MTU under the terms of the employee stock option program. The disposal value of the shares distributed to employees was measured, using the first-in-first-out (FIFO) method, at a total value of € 8.2 million, or an average value per share of € 42.28. The proceeds of the sale of shares to employees amounted to € 4.9 million, making it necessary to reduce the capital reserve by the difference, which amounted to € 3.3 million (2007: € 0.0 million).

Revenue reserves comprise the post-acquisition and non-distributed earnings of consolidated group companies. Revenue reserves increased during the year by 69.5 % to € 325.3 million (2007: € 191.9 million). They were increased in 2008 by the amount of the net profit for the year of € 179.7 million (2007: € 154.1 million) and were reduced by the payment of the dividend for the financial year 2007 amounting to € 46.3 million (financial year 2006: € 43.6 million).

The Board of Management of MTU Aero Engines Holding AG is authorized to buy back shares in accordance with the authorizations mentioned below. These shares may be purchased on the stock market or by means of a public offering addressed to all shareholders. The purchase price paid in consideration of these shares must not exceed or undercut the market value by more than 10%, net of any supplementary transaction fees.

At the MTU Annual General Meeting on April 27, 2007, the Board of Management was authorized to purchase treasury shares with a par value of up to 10 % of the company’s capital stock, as applicable on the date of the resolution, and, without any requirement for a further resolution by the Annual General Meeting, withdraw the purchased treasury shares. This authorization was valid until October 27, 2008. In the period up to March 18, 2008, the Board of Management exercised this authorization to purchase a total of 5,369,663 shares (9.8 % of the company’s capital stock prior to the capital reduction on March 18, 2008).

At the MTU Annual General Meeting on April 30, 2008, the Board of Management was authorized to purchase treasury shares with a par value of up to 10 % of the company’s capital stock, as applicable on the date of the resolution, during the period from May 2, 2008 through October 30, 2009, pursuant to Section 71 (1) item 8 of the German Stock Corporation Act (AktG). After the capital reduction in which 3,000,000 shares were withdrawn, the Board of Management exercised the authorization granted on April 30, 2008 to buy back further 1,164,963 shares during the period from May 2, 2008 to December 31, 2008.

Exercising the authorizations it had been granted to purchase and use treasury shares pursuant to Section 71 (1) item 8 of the German Stock Corporation Act (AktG), the Board of Management bought back a total of 6,534,626 shares on the stock exchange for a total price of € 217.8 million up to December 31, 2008. Averaged over the total quantity of shares purchased from the time the buyback exercise started in the financial year 2006 up to the end of the financial year 2008, the average acquisition cost amounted to € 33.33 per share.

The total amount of each year’s expenditure on the purchase of treasure shares is recognized directly in equity in the item “Treasury shares” in the respective year of purchase. More information on the balance of treasury shares at December 31, 2008, and on changes in treasury shares and subscribed capital, is provided elsewhere in this Note.

In 2008, the company purchased a total of 2,151,604 treasury shares (2007: 2,732,139 shares) for a total price of € 56.4 million (2007: € 118.7 million). The average acquisition cost amounted to € 26.19 per share (2007: € 43.46 per share).

The shares were purchased in order to meet contractual obligations attached to the convertible bond issue and in order to issue shares to group employees under the Matching Stock Program (MSP).

Out of the total volume of purchased shares, 112,612 shares were issued to members of the Board of Management and other executive managers in connection with the first tranche of the Matching Stock Program (MSP) in the financial year 2007.

A total of 192,959 shares were sold to group employees in May 2008 for a total price of € 4.9 million (€ 25.19 per share) under the MAP employee stock option program. The average original acquisition cost of the shares sold to group employees under the MAP program amounted to € 8.2 million, which was deducted from the equity item “Treasury shares”. The difference between the proceeds of the sale and the original acquisition cost amounted to a total of € 3.3 million and was added to capital reserves. More details are provided in the consolidated statement of changes in equity and in Note 30.4. (Capital reserves).

As a result of the resolution by the Board of Management and the Supervisory Board dated March 18, 2008 to reduce the company’s capital stock by withdrawing 3,000,000 shares, MTU’s holding of treasury shares was reduced to 3,229,055 shares at December 31, 2008. The amount presented in the “Treasury shares” of the consolidated statement of changes in equity reflects the reduction attributable to the acquisition cost of the purchased treasury shares. The transaction costs incurred in connection with the purchase of treasury shares – net of the attributable income tax benefits – were deducted from equity. Recognition of the average acquisition cost of the withdrawn shares led to an increase in the item “Treasury shares” in the consolidated statement of changes in equity of € 104.4 million (2007: € 0.0 million).

The table below shows the change in the share buyback volume, the number of shares issued to employees under the stock option programs, the holding of treasury shares and the amount of subscribed capital:

Out of the total of 6,534,626 treasury shares purchased by the group, 112,612 shares were issued to employees under the Matching Stock Program in June 2007, given that the agreed exercise conditions for the first tranche allocated in June 2005 had been met or exceeded.

By a resolution of the Board of Management and the Supervisory Board with effect of March 18, 2008, the decision was taken to reduce the company’s capital stock by withdrawing 3,000,000 shares. This reduced the capital stock by € 3.0 million.

A further 192,959 shares were sold to group employees in May 2008 under the new MAP employee stock option program. The sale of treasury shares is reported in a separate line of the consolidated statement of changes in equity.

At December 31, 2008, MTU’s holding of treasury shares – after the issue of shares in connection with Matching Stock Program (MSP), the sale of treasury shares in connection with the MAP employee stock option program, and the withdrawal of shares in connection with the capital reduction – amounted to 3,229,055 (2007: 4,270,410) shares. This represents 6.2 % of the company’s capital stock (2007: 7.8 % of the capital stock prior to the capital reduction).

As a result of the share buyback exercise, the average weighted number of outstanding shares in 2008 amounted to 49,353,648 shares (2007: 52,295,450). At December 31, 2008, a total of 48,770,945 MTU Aero Engines Holding AG shares (2007: 50,729,590 shares), each with a par value of one euro, were in issue and entitled to receive a dividend.

The table below shows the change in the number of bought-back shares, the number of shares issued in June 2008 to group employees under the MAP employee stock option program, the balance at the beginning and end of each month, and the average number of outstanding shares:

In 2008, other comprehensive income was reduced overall by € 25.7 million to a negative balance of € 14.3 million (2007: a positive balance of € 11.4 million), principally as a result of fair value losses on derivative financial instruments.

Other comprehensive income comprises effects arising from fair value measurement of derivative financial instruments in 2008, which were recognized directly in equity, amounting to total losses of € 29.1 million (2007: total gains of € 2.1 million), and differences arising from the currency translation of the financial statements of foreign subsidiaries, which were also recognized directly in equity, resulting in an addition of € 3.4 million (2007: a reduction of € 3.6 million). The change in derivative financial instruments includes deferred tax assets recognized directly in equity amounting to € 14.1 million (2007: € 1.9 million).

The following chart illustrates the gross changes in cash flow hedges together with the changes in the deferred tax assets and liabilities recognized under other comprehensive income (OCI) and the net changes (net of taxes) in cash flow hedges over the past three years. Changes in the fair value of cash flow hedges net of deferred taxes are presented in the consolidated statement of changes in equity under other comprehensive income.

In 2008, the gross fair value of the cash flow hedges recognized under other comprehensive income (before tax) decreased by a total of € 43.2 million (2007: increased by € 0.2 million). After offsetting deferred tax assets amounting to € 14.1 million (2007: € 1.9 million), the net change in the fair value of these cash flow hedges amounted to a reduction of € 29.1 million (2007: an increase of € 2.1 million).

Consequently, the fair value of derivative financial instruments recognized directly in equity under other comprehensive income (OCI) at December 31, 2008 decreased to a net liability of € 17.1 million (2007: a net asset of € 26.1 million). The balance of deferred tax assets and liabilities attributable to the cash flow hedges at the end of 2008 thus amounted to an asset of € 5.6 million (2007: a liability of € 8.5 million). Note 39. provides more information on the deferred tax assets and liabilities recognized in other comprehensive income.

MTU strives to maintain a strong financial profile in the interests of carrying out the company’s business within a flexible financing framework and in order to generate confidence on the part of its shareholders.

One of the goals pursued by MTU in connection with capital management is to keep a strong credit rating with the institutional rating agencies. In addition to a range of non-financial factors, credit ratings are based on a variety of performance indicators including equity ratio, profitability, liquidity and relative indebtedness.

MTU makes every effort to keep its corporate credit rating within a desirable band. At present, MTU’s long-term credit rating with Standard & Poor’s is BB+ (outlook stable) and Ba1 with Moody’s (outlook stable).

Consequently, the group’s capital management activities are focused on optimizing the ratio between EBITDA adjusted and gross financial liabilities (financial liabilities plus pension obligations), the ratio between equity and net financial liabilities (gross financial liabilities less pension obligations, derivative financial receivables, cash and cash equivalents) and improving the equity ratio.

The figures for gross interest-bearing financial liabilities, net financial liabilities, and equity at December 31, 2008 are presented in the following table:

The ratio of gross interest-bearing financial liabilities to EBITDA adjusted has remained unchanged. Financial liabilities (before the addition of pension obligations) principally comprised liabilities in connection with the convertible bond issue amounting to € 145.4 million (2007: € 167.3 million) and the utilized part of the revolving credit facility amounting to € 61.2 million (2007: € 69.6 million). The convertible bond issued in 2007 has a maturity of five years with a fixed interest rate of 2.75 % per annum. The effective interest rate on the liability component of the convertible bond is 5.425 % per annum. The quantity of shares required to meet contractual obligations in respect of conversion rights for the convertible bond had already been repurchased on the market at the end of 2008 (see Note 30.6.).

Equity increased by € 55.4 million (9.9 %) to € 617.4 million. The equity ratio increased by 1.1 percentage points to 19.3 % (2007: 18.2 %). Gearing deteriorated slightly despite the increase in equity, as a result of the increase of € 31.3 million (14.0 %) in net financial liabilities due to changes in the fair value of derivative financial instruments.

Defined benefit and defined contribution plans are in place for MTU employees. In the case of defined contribution plans, the company has no further obligations beyond the payment of fixed contributions to the plan. In the case of defined benefit plans, the company has an obligation to fulfil commitments to current and former employees. These benefits are financed primarily by provisions recognized in the financial statements.

In some cases, it is difficult to differentiate between defined contribution and defined benefit plans. In Germany, for example, a minimum level of benefits is guaranteed for defined contribution plans, such that, even when the plan is organized via an external fund or insurance company, it is still the employer that remains liable (the so-called “ultimate liability of employer” pursuant to § 1 (1) sentence 3 of the German Law on Retirement Pensions). Technically therefore, it could be argued that these forms of pension plans represent defined benefit plans. For financial reporting purposes, however, the term “defined benefit plans” is required to be interpreted on the basis of the underlying economic substance of the arrangements. Having given consideration to IFRIC D 9 Interpretation (Employee Benefit Plans with a Promised Return on Contributions or Notional Contributions), which has not yet been formally approved, MTU currently considers that plans such as those that exist within the MTU group (i.e. organized via an insurance company or via an external welfare fund fully covered by insurance contracts) represent defined contribution plans both from a legal point of view and in terms of the underlying economic substance of the arrangements. A provision would only be required to be recognized by MTU in the event of a shortfall, i.e. if the present value of the guaranteed benefits or minimum benefits were not covered by the assets of the external fund. In the unlikely case that this should happen or if the IFRIC should change its interpretation with respect to the classification of the type of plan existing within the MTU group, this could result in changes in accounting treatment. From today’s perspective, the impact would not be material for the net assets, financial position and results of operations of the MTU group. It could, however, result in a considerably greater scope of disclosures in accordance with IAS 19.120 ff.

Employees in Germany receive benefits from the state social insurance scheme, contributions for which are paid in to the scheme as part of an employee’s income. From January 1, 2007 onwards, contributions for employees who have joined the company since that date, have been paid by MTU to a company-sponsored external fund. This type of fund – in MTU’s case a welfare fund – is a separate legal entity with its own “tied“ assets to pay benefits. The benefits owed by the welfare fund are protected against insolvency. Other plans that exist within the MTU group are direct insurance contracts (funded by employee contributions) and benefits granted by MTU Unterstützungskasse München GmbH. Since no further liability arises for the group once the contributions have been paid to either the state or private retirement fund, these plans are treated as defined contribution plans. Current contributions are recognized as an expense in the period for which the payments are made.

Employer’s contributions to the state pension scheme in the financial year 2008 totaled € 32.0 million (2007: € 31.9 million). In addition, contributions of € 0.6 million (2007: € 0.2 million) were made to the company-sponsored welfare fund (fully funded via insurance contracts).

The provision for defined benefit plans recognized in the balance sheet corresponds to the fair value of the benefits payable for current and past service (the defined benefit obligation) – taking account of future increases in benefits – less the fair value of plan assets and adjusted for cumulative unrecognized actuarial gains and losses. The defined benefit obligation is computed annually by an independent actuary using the projected unit credit method. Extensive actuarial reviews and computations are carried out annually for each pension plan.

Actuarial gains or losses can result from increases or decreases either in the present value of the defined benefit obligation or in the fair value of the plan assets. Causes of actuarial gains or losses include the effect of changes in the measurement parameters, changes in the assessment of risks on pension obligations and differences between the actual and expected return on plan assets. The interest rates used to calculate present values are usually determined by reference to high-quality corporate bonds with similar maturities.

Cumulative actuarial gains and losses are not recognized unless they exceed 10% of the present value of the defined benefit obligation or 10 % of the fair value of relevant plan assets, whichever is higher. Actuarial gains or losses that exceed the 10 % corridor are recognized from the beginning of the following financial year as income or expense over the expected average remaining working lives of the employees in the relevant pension plan.

The pension obligations of MTU Aero Engines Holding AG and other group companies in Germany are measured using the projected unit credit method in accordance with IAS 19 taking account of future salary and pension increases and other adjustments expected to be made to benefits. With effect from the beginning of 2007, no new direct pension benefits have been granted to new employees (closed defined benefit plans). The group has a number of fund-financed pension plans outside Germany which are either fully or partially covered by plan assets.

MTU’s defined benefit pension obligations to its employees result from the following: the employer financed “Versorgungsordnung VO97” pension plan (in place until December 31, 2005); the “MTU kapitalPlus (Basiskonto)” pension plan introduced with effect from January 1, 2006 and the “Pension Capital (Basiskonto)” pension plan.

In addition to the basic pension, MTU employees also have the option to accumulate their own individual employeefunded capital account (the “Pension Capital Aufbaukonto”). As part of the reorganization of the pension system, the voluntary scheme “Versorgungskapital zur Wahl” self-financed by employees was replaced with effect from January 1, 2008 by the new “MTU kapitalPlus Aufbaukonto” without any impact on profit or loss. The obligation to finance the pension entitlements remains with MTU. For this reason, pension plans involving the accumulation of funds in capital accounts are treated as defined benefit plans.

The funding status of defined benefit pension obligations is as follows:

The following actuarial assumptions were applied for the purposes of measuring pension obligations:

The market yields on high-quality corporate bonds have risen compared to the previous year. For this reason, obligations for pensions and long-service awards were discounted at December 31, 2008 using a discount rate of 5.75 % (2007: 5.25 %). The biometric tables issued by Dr. Heubeck (RT 2005G) were used for the purposes of measuring the obligations of pension plans in Germany. In the case of foreign group companies, up-to-date biometric assumptions for each relevant country were applied. The employee fluctuation probabilities applied were estimated on the basis of age and gender. The expected salary trend refers to the expected rate of salary increase which is estimated annually depending on inflation and the period of service of employees within the group.

In the following tables, the defined benefit obligation and plan assets are reconciled to the reported pension provision:

Of the total amount of the defined benefit obligation for pension and similar plans totaling € 434.2 million (2007: € 423.9 million), an amount of € 418.5 million (2007: € 403.7 million) relates to group companies in Germany; this represents approximately 96.4 % (2007: 95.2 %) of the total obligation.

The defined benefit obligation (measured using the projected unit credit method) is reduced by the fair value of the plan assets of one fund-financed and one loan-financed pension plan totaling € 25.1 million (2007: € 29.8 million).

Cumulative actuarial losses at December 31, 2008 amounted to € 20.8 million (2007: € 18.5 million). Despite the higher salary and pension trends, revised biometric assumptions and lower employee fluctuation rates applied, an actuarial gain initially arose for the financial year 2008 due to the fact that the discount factor used to measure the defined benefit obligation was 0.5 percentage points higher than planned. Actuarial losses on plan assets, however, totaled € 3.5 million, with the consequence that cumulative unrecognized actuarial losses increased by € 2.3 million (+12.4 %) at December 31, 2008.

The fair value of the plan assets of MTU Maintenance Canada Ltd., Canada, exceeds the pension obligations of that entity. In accordance with IAS 19, the surplus of € 1.9 million (2007: € 1.0 million) is reported within “Other assets”, since it is probable that economic resources will flow to the group in the form of reimbursements.

The defined benefit obligation developed as follows:

The actuarial gains arising in 2008 resulted mainly from the change in the discount factors applied for pension plans of group companies outside Germany.

The switch from the “VO97” plan to the “MTU kapitalPlus Basiskonto” plan in the previous year resulted in a decrease in the pension obligation as a result of the recognition of a negative past service cost of € 24.0 million (recognized via the income statement). This came about as a result of the use of different interest rates and structure-related changes in assumptions applied to vested benefits.

The total expense from pension obligations comprised the following components:

The interest expense and expected return on plan assets from fund and loan financed pension plans are reported in “Financial result on other items”.

The fair value of plan assets developed as follows:

The fund-financed plan assets relate to MTU Maintenance Canada Ltd., Canada and do not include any securities pertaining to MTU group entities nor any assets used by the MTU group. During the financial year 2008, there was a very small shift in the composition of plan assets away from stocks towards fixed-income securities. Plan assets comprised the following:

The expected return determined for each category of assets took account of generally available information concerning capital market forecasts. The expected return on fixed-income securities is based on the maturities of securities held and yields achievable at the end of the reporting period. The expected return on equity investments reflects the long-term expectation of yields on the stock markets. Overall, therefore, an expected return of 7.25 % was applied, as in the previous year, to measure the fair value of fund-financed plan assets. Fund-financed plan assets are “tied” and comprise mainly equity investments and fixed-income securities.

Loan-financed plan assets relate to a loan receivable by MTU München Unterstützungskasse GmbH from the plan sponsor company, MTU München GmbH, totaling €11.4 million (2007: €10.8 million) at the end of the reporting period. MTU München Unterstützungskasse GmbH meets the criteria for plan assets set out in IAS 19.7 with effect from the financial year 2007.

The experience adjustment made to the defined benefit obligation (DBO) corresponds to the difference between the DBO at the balance sheet date measured using assumptions made at the beginning of the period and the DBO at the balance sheet date measured using current assumptions but still using the discount factor applicable at the beginning of the period.

The experience adjustment made to plan assets corresponds to the actuarial gains and losses resulting on plan assets during the financial year.

Employer contributions to fund-financed plan assets for the financial year 2009 are expected to amount to between € 1.0 million and € 1.2 million.

The income tax payable in 2008 for the financial years 2007 and 2008 amounting to € 23.0 million (2007: € 38.8 million) comprises corporation tax amounting to € 15.5 million (2007: € 25.7 million), municipal trade tax amounting to € 7.3 million (2007: € 13.0 million) and taxes on the income of foreign group companies amounting to € 0.2 million (2007: € 0.1 million).

Income tax payable has developed as follows:

Other provisions comprise other tax obligations, personnel obligations, pending losses on onerous contracts, warranty obligations, and other obligations, which mainly consist of identified and measured contingent liabilities arising from the purchase price allocation.

The table below presents information on each of these items:

With the exception of the contingent liabilities for engine programs identified and measured at the time of the company’s acquisition and recognized under other obligations, MTU expects that, under normal circumstances, the majority of these provisions will be utilized within one to five years.

Other tax obligations relate to probable obligations in respect of trade taxes and other taxes on business operations, for which provisions have been allocated to cover payments due for 2008 and previous financial years.

The personnel obligations comprise provisions allocated for profit-sharing and performance-related bonuses amounting to € 32.2 million (2007: € 32.3 million), provisions for part-time early retirement working arrangements amounting to € 1.7 million (2007: € 3.9 million), provisions for long-service awards amounting to € 5.6 million (2007: € 5.7 million) and provisions for restructuring measures following the introduction of single-status pay agreements (ERA) amounting to € 15.5 million (2007: € 16.4 million). Provisions for long-service awards and for part-time early retirement working arrangements are discounted and recognized under liabilities at their present value.

Warranty obligations, contractual obligations, and pending losses on onerous contracts relate to current obligations in respect of probable third-party claims for which the likely expense can be reliably estimated. Provisions are accrued on the basis of past experience data, bearing in mind the conditions prevailing at the balance sheet date.

MTU has allocated provisions for pending losses on onerous contracts in respect of maintenance contracts in the commercial maintenance business amounting to € 9.9 million (2007: € 14.2 million).

Besides the general business risks, MTU has specifically identified risks in the TP400-D6 engine program for the new Airbus military transporter A400M. MTU is a member of a consortium comprising four European companies in which each partner is required to finance unexpected additional development and manufacturing costs using its own resources, in proportion to its share in the program. A provision has been allocated for possible contractual obligations to cover part of this possible future expense.

Provisions for warranties mainly consist of obligations in connection with product entry into service, products that have been sold and for which accounts have been settled, and a variety of other services.

Provisions for other obligations cover a multitude of identifiable individual risks and contingent liabilities.

Current provisions for other obligations include provisions for follow-up costs amounting to € 53.5 million (2007: € 48.5 million), losses arising from the settlement of accounts amounting to € 79.1 million (2007: € 63.1 million), and contingent liabilities under risk- and revenue-sharing partnerships (Note 43.1.). Current provisions for other obligations increased by a total of € 12.5 million (9.5 %).

Non-current provisions for other obligations relate to the amortized measurement of contingent liabilities for engine programs identified and measured in connection with the acquisition of the company by Kohlberg Kravis Roberts & Co. (KKR) from the then DaimlerChrysler AG. The contingent liabilities are measured according to IFRS 3.48, taking cash flows into account. As in the past, obligations arising from contingent liabilities are measured on the basis of a life of between 9 and 15 years. In total, contingent liabilities decreased by € 27.5 million (-11.6 %).

The following tables show the changes in current provisions and non-current provisions (presented separately) in 2008 and in each of the two previous years:

All liabilities arising from derivative and non-derivative financial instruments held by MTU Aero Engines Holding AG and its affiliated companies, existing at the balance sheet date, are recognized under financial liabilities. They consist of the following components:

On January 23, 2007, MTU Aero Engines Finance B.V., Amsterdam, Netherlands, issued a convertible bond with a par value of € 180.0 million and an effective date of February 1, 2007, guaranteed by MTU Aero Engines Holding AG. The convertible bond is divided into 1,800 units each with a par value of € 100,000 and its term to maturity runs until February 1, 2012.

The bond is convertible into registered non-par value common shares of MTU Aero Engines Holding AG. Bondholders are entitled to exercise the conversion right at any time between March 13, 2007 and January 18, 2012 in accordance with the “bond features” at a conversion price fixed at issue date of € 49.50 (not including any possible dilution of the share capital resulting from a capital increase due to conversion of capital reserves or revenue reserves, the splitting or grouping of shares, the reduction of capital or a change of control). The coupon rate is 2.75 % p.a., payable yearly on February 1 starting on February 1, 2008. Depending on changes in the share price, the bond features authorize MTU Aero Engines Holding AG to proceed with the early repayment of the convertible bond on or after February 15, 2010 – after giving the appropriate notice – at par value plus interest accrued up to the repayment date.

MTU Aero Engines Holding AG is furthermore authorized to call all remaining outstanding parts of the convertible bond for early repayment at par value plus interest accrued up to the repayment date in the event that the total par value of the outstanding parts of the convertible bond should at any time fall below the threshold of 10 % of the total par value of the originally issued bond.

The company’s capital stock may be increased by up to € 19.25 million through the issue of up to 19.25 million new registered shares. The purpose of this conditional capital increase is to issue shares to owners or creditors of convertible bonds and/or bonds with warrants in accordance with the authorization granted to the company’s Board of Management under a resolution passed by the Annual General Meeting on May 30, 2005.

The convertible bond was split according to its substance into liability and equity components for the purpose of initial recognition, in accordance with the definitions of IAS 32.11. The liability component was measured at fair value, whereby transaction costs directly attributable to the bond issue were included in the calculation.The present value of all future cash flows arising from the contractual obligation (convertible bonds underwriting agreement dated January 23, 2007) was determined by applying a discount at the market interest rate of 5.425 % p.a., which corresponds to the rate that MTU would have had to pay at the bond issue date for a non-convertible bond.

In subsequent periods, the liability component was measured at amortized cost using the effective interest method, so that the expense over the life of the convertible bond agreement represents the reversal of the discounting at the applied rate.

The original equity component of the convertible bond issue, amounting to € 17.6 million, was recognized directly in equity, taking deferred taxes into account. The proportionate amount of transaction costs allocated to the equity component, less the corresponding income tax reductions, was deducted from the equity component.

In the period from September 17 to October 31, 2008, MTU repurchased units of its own convertible bond on the market with a total nominal volume of € 27.2 million (approximately 15.1 % of the original nominal volume of € 180.0 million at the issue date) prior to their final maturity. The total price paid for these securities amounted to € 21.9 million (including transaction costs but excluding interest at the coupon rate), which corresponds to an average of 80.7 % of the bond units’ nominal value.

The repurchase expense was split into an equity component and a liability component according to IAS 32.AG 33, applying the same allocation method as that applied when the bond was issued, according to the requirements of IAS 32.28-32. By way of simplification, and in order to account for the materiality of the exercise, costs were aggregated for the bond units repurchased in September 2008 and October 2008 respectively and the resulting sum in each case was split into an equity component and a liability component, instead of doing so for each repurchase transaction individually. The average repurchase price paid for the bond units repurchased in September 2008, which had a nominal value of € 7.0 million, corresponded to 81.9 % of their nominal value. For the bond units repurchased in October 2008, which had a nominal value of € 20.2 million, the average repurchase price corresponded to 80.3 % of their nominal value.

The costs arising from the bond repurchase exercise in September 2008 amounted to an effective total of € 5.7 million, of which € 5.2 million was allocated to liabilities and € 0.5 million to equity. The difference between the fair value of the liability component and its amortized cost, amounting to € 1.2 million, was recognized in the income statement under the financial result, according to IAS 32.AG34 (a). The equity component (net of taxes), determined according to IAS 32.AG34 (b), was recognized directly in equity as a deduction from capital reserves.

The costs arising from the bond repurchase exercise in October 2008 amounted to an effective total of € 16.2 million, of which € 14.8 million was allocated to liabilities and € 1.4 million to equity. The difference between the fair value of the liability component and its amortized cost, amounting to € 3.8 million, was recognized in the income statement under the financial result, according to IAS 32.AG34 (a). The equity component (net of taxes), determined according to IAS 32.AG34 (b), was recognized directly in equity as a deduction from capital reserves.

The separation of the costs of the repurchase exercise into an equity and a liability component is a matter of judgement, given that, in MTU’s estimation, credit spreads have considerable widened as a result of the financial market crisis, to the extent that they no longer adequately reflect MTU’s continuing good creditworthiness. If measurements based on credit spreads were used to separate the costs of the repurchase exercise into an equity and a liability component at either the upper or the lower limit of the observed market parameters, the figures included in the income statement for the repurchase of bond units in September 2008 would have been € 0.4 million higher or € 0.5 million lower, and the corresponding income for bond units repurchased in October 2008 would have been either € 1.4 million higher or € 1.4 million lower.

Following the repurchase, prior to final maturity, of units of the convertible bond with a total nominal volume of € 27.2 million, the associated conversion rights theoretically corresponded at the end of the financial year 2008 to approximately 3.1 million (2007: 3.6 million) nonpar value shares of conditional capital. If these conversion rights had been exercised in the financial year 2008, earnings per share would have been reduced to € 0.10 (2007: € 0.11) – see Note 16. More detailed explanatory comments concerning the conditional capital increase can be found under Note 30.3.

MTU meets its financing requirements in its functional currency, the euro, principally through the above-mentioned convertible bond, long-term loans, and a revolving credit facility. On the basis of this revolving credit facility, the group has access to overdraft facilities amounting to € 250.0 million made available by a consortium of banks. Within this framework, direct credit facility arrangements have been agreed with three banks, each for an amount of € 40.0 million (ancillary facilities).

At December 31, 2008 the group had drawn down € 61.2 million (2007: € 69.6 million) out of the € 120.0 million available under these bilateral banking credit facilities. Of the remaining total line of credit amounting to € 188.8 million at the balance sheet date, € 16.9 million (2007: € 16.5 million) had been drawn down as bank guarantees in favor of third parties. Any credit actually utilized is subject to interest at market index average rates plus an additional margin. Unused credit facilities are subject to a modest loan commitment fee.

As at December 31, 2008, MTU and its affiliates had met all loan repayment and other obligations (covenants) arising from financing agreements.

Other liabilities to banks amounting to € 21.3 million (2007: € 26.5 million) relate to loans and overdraft facilities agreed by subsidiaries in favour of third parties.

Finance lease liabilities represent obligations under finance lease arrangements that are capitalized and amortized using the effective interest method. For information on the accounting treatment of lease assets and a summary of capitalized lease assets, please refer to Notes 5.6. and 20.

The tax field audit covering the period 2000 to 2003 was completed during the financial year 2008. Since tax pooling arrangements had been in place during that period with the company that is now Daimler AG, the tax audit findings were taken into account in tax assessments at the level of Daimler AG. The additional tax expense resulting from the tax field audit triggered a retrospective adjustment to the purchase price (originally agreed in 2003) for the MTU group (goodwill). Further explanatory comments are provided in Note 19.

The loan from the province of British Columbia to MTU Maintenance Canada Ltd., Canada, is recognized at amortized cost. The change compared with 2007 is mainly attributable to movements in the exchange rate parity between the euro (€) and the Canadian dollar (CAD).

Derivative financial liabilities amounting to € 48.4 million (2007: € 8.9 million) relate principally to changes in the fair value of forward foreign exchange transactions used to hedge cash flows and forward commodity sales contracts for nickel.

The following two tables provide an overview of financial liabilities in previous years for comparison:

The total amount of trade payables is due within one year. Refer to Note 42.1.1. for details of trade accounts payable to associated companies.

Liabilities arising from production contracts primarily concern advance payments for contract production for specific engine programs.

Advance payments received for contract production and accounts receivable for contract production can be attributed to specific engine programs. To better reflect their economic value, accounts receivable for contract production are offset against the corresponding advance payments. For this reason, advanced payments received for contract production, totalling € 247.3 million (2007: € 196.4 million), were transferred in the financial year 2008 to receivables from contract production (Note 24) and offset by the economically relevant amount of these receivables.

Advance payments received which exceed the amount of accounts receivable due in more than 12 months are measured at fair value by application of a discount rate.

The following tables show the comparative values of contract production liabilities for the financial years 2007 and 2006.

Other liabilities are broken down into the following categories:

The taxes due amounting to € 16.5 million (2007: € 1.2 million) concern payable wage and church taxes, solidarity surcharges and transactional taxes. Amounts due for social security principally comprise contributions to social insurance against occupational accidents amounting to € 1.3 million (2007: € 1.6 million) and amounts due to health insurers totalling € 0.5 million (2007: € 0.5 million).

Liabilities towards employees are composed of unused vacation entitlements, flexitime credits, obligations arising from part-time early retirement working arrangements and obligations arising from efficiency-improvement programs in prior periods. Liabilities arising from employee profit-sharing plans and management bonuses, a portion of part-time early retirement arrangements, as well as organizational measures within the scope of introducing the single-status pay agreement (ERA) are recognized in other provisions, as further described in Note 33.

Long-term advance payments received for contract production are discounted at the prevailing market rate over the duration of financing and recognized under “other liabilities” until the engine is delivered to the customer. The interest expenses relate to advance payments received for long-term contract production, amounting to € 11.5 million (2007: 8.5 million) as well as to advanced payments of € 3.2 million (2007: € 1.6 million) received for long-term engine programs in the commercial engine business. Further explanations are given in Note 5.8).

Non-current sundry other liabilities principally comprise liabilities arising from finance lease agreements for replacement engines that are made available to airlines to bridge over the period in which an engine is undergoing maintenance. Sundry other liabilities cover a multitude of minor individual obligations.

The tables below provide comparative information on other liabilities for 2007 and 2006.

The following tables list the contractually agreed (undiscounted) payments of interest and principle on the original financial liabilities and derivative financial instruments measured at fair value through profit or loss to MTU:

The statement includes all instruments in the portfolio at December 31, 2008 for which payment terms had been contractually agreed. It does not include planned estimates for future new liabilities. Amounts denominated in a foreign currency are translated at the exchange rate prevailing on the respective balance sheet date. The variable-rate interest payments on the financial instruments are based on the most recent interest rate fixed prior to December 31, 2008. Financial liabilities with no fixed repayment date and contingent liabilities (contingent liabilities arising from RRSPs and guarantees) are always assigned to cash flows on the basis of the earliest likely repayment dates. For further information concerning the stated carrying amounts, please refer to Note 43.1.

In the following tables, the carrying amounts of financial instruments are aggregated by category, regardless of how they are recognized and irrespective of whether or not the instruments fall within the scope of IFRS 7 or IAS39. The presented information also includes separate amounts for each category as a function of the measurement/recognition method applied. Finally, the carrying amounts are set opposite the fair values for comparison. Notes 5.10. and 5.12. provide explanatory material on the categories of financial instruments as defined in the International Financial Reporting Standards and the accounting policies applied.

Financial instruments not within the scope of either IFRS 7 or IAS 39 mainly comprise pension provisions or plan assets and other liabilities arising from employee benefits accounted for in accordance with IAS 19.

The table below provides comparative information on the carrying amounts, measurement/recognition methods and fair values aggregated by category for the financial years 2007 and 2006.

Cash and cash equivalents, trade receivables and contract production receivables are generally due within a relatively short time. For this reason, their carrying amounts at the balance sheet date are approximated to the fair value.

As a rule, trade payables and contract production payables are due within a relatively short time; the amounts carried in the balance sheet are approximated to the fair value.

The fair value of the convertible bond, amounting to € 128.4 million (2007:€ 192.6 million), is obtained by multiplying the par value of exercisable convertible bonds, totalling € 152.8 million (2007: € 180 million), by the factor of 84 % (2007:107 %), representing the quoted share price at the balance sheet date. Based on prevailing market assumptions on the balance sheet date relating to risk-free interest rates for the remaining term of the convertible bond, conversion price, share price, expected dividend payments and volatility of the MTU share, a proportional value of € 4.46 (2007: € 9.12) was calculated per exercised conversion option.

The equity component of the convertible bond amounts to € 13.8 million (2007: € 33.1 million), based on a total of 3,086,869 (2007: 3,636,363) exercisable conversion options.

Accordingly, the fair value of the equity component amounted to € 114.6 million (2007: € 159.5 million) at the balance sheet date. Taking into account the separately recognized interest of € 3.9 million (2007:4.5 million) accrued over the 11 months up to December 31, 2008, the fair value inclusive of interest amounts to € 118.5 million (2007: 164.0 million). The carrying amount inclusive of interest accrued over 11 months amounts to € 145.4 million (2007:167.3 million).

The table below shows the gains/losses arising from transactions involving financial instruments, aggregated by category. Interest income and expense in connection with financial assets and liabilities, which are recognized in the income statement at fair value, are not included here:

The interest portion of financial instruments is recognized under net interest expense (see Note 11.). Other components of net income or loss are recorded in MTU‘s financial statements under financial result on other items (Note 13.), with the exception of the expense for allowances on trade receivables, which comes under the category of loans and receivables and is recognized under selling expenses, and gains/losses arising from translation differences on trade receivables and payables, which are recognized under revenues or cost of sales respectively. The loss of € -1.0 million (2007: € -2.3 million) generated by the joint venture Pratt & Whitney Canada Customer Service Centre Europe GmbH, which is accounted for using the equity method, is recognized under “profit/loss of companies accounted for using the equity method” (Note 12.).

The net interest expense on financial liabilities classified as financial liabilities measured at amortized cost (a negative expense of € -10.5 million) mainly comprises interest expenses attributable to the convertible bond and other financial liabilities. It also includes interest income from the discounting of loan commitments.

The financial result on other items includes profit/loss of companies accounted for using the equity method (Note 13.) in addition to profit/loss of other related companies accounted for at cost (Note 14.).

Financial instruments measured at fair value mainly comprise securities transactions, exchange rate gains and losses on ineffective currency hedging transactions, and losses arising from the measurement of interest rate derivatives.

Losses from the currency translation of financial instruments classified as loans and receivables amounting to € -1.1 million are mainly attributable to exchange rate gains and losses arising from the measurement of trade receivables and payables.

The exchange rate losses stated for financial instruments not within the scope of IFRS 7 or IAS 39 are largely attributable to the translation of currency holdings denominated in U.S. dollars.

The following table provides comparative information on the effect of transactions involving financial instruments, aggregated by category, in 2007.

Expense relating to the early repayment of the high yield bond is included in the interest result for the financial year 2007. The disposal made in 2007 classified under financial liabilities held for trading relates to securities sold in the financial year 2007 classified under financial assets held for trading.

Deferred taxes reflect temporary differences resulting from differences in the tax base of assets and liabilities and their carrying amounts for IFRS accounting purposes. Deferred taxes are recognized directly in equity if the tax relates to items that are also recognized in equity. The future impact of tax losses and credits available for carryforward is also taken into account in the computation of deferred taxes.

Deferred tax assets and deferred tax liabilities relate to the following balance sheet and other items:

The valuation allowance on deferred tax assets is based on management’s assessment of the degree of future recoverability. The current assessment of the recoverability of temporary differences, unused tax losses and tax losses available for carry-forward may change as a result of the future earnings of group entities, thus making it necessary to increase or decrease the valuation allowance.

Reference is made to Note 15. for further information relating to current and deferred tax assets and liabilities resulting from the balance sheet and other items listed above and to the reconciliation between expected and actual tax expense.

Deferred tax assets and liabilities are only offset if the balances relate to income taxes levied by the same taxation authority and with similar maturities.

No deferred tax claims were recognized for the following deferred tax losses/credits available for carry-forward:

The tax credits of € 10.5 million relate to the new production site of MTU Aero Engines Polska Sp.z.o.o., Poland. These credits are available to the Polish company to promote business investments due to the fact that the production site is located in a free trade zone. The actual utilization of the tax credits depends on the level of investment and actual taxable profits through to the financial year 2017.

Tax losses can be carried forward in the USA and Canada for 20 years.

In Germany, corporation and municipal tax losses can be carried forward without time restriction. The tax losses of group companies in Germany were fully utilized by the end of the financial year 2008.

Deferred tax assets changed during the year as follows:

No deferred taxes were recognized on the following temporary differences.

Temporary differences for which no deferred tax assets were recognized totaled € 12.3 million (2007: € 11.6 million) at the end of the reporting period and related to MTU Maintenance Canada, Canada, and MTU Aero Engines North America Inc., USA. The resulting potential tax impact of € 4.9 million (2007: € 4.4 million) was therefore not taken into account in the computation of income tax expense.

Deferred taxes recognized directly in equity (in other comprehensive income) comprise the following:

Similar to the treatment of deferred taxes arising on the issue of the convertible bond, the deferred tax asset of € 5.1 million (2007: € 5.7 million) relating to the equity component of the convertible bond is presented in capital reserves. Deferred taxes on cash flow hedges are presented in other comprehensive income.

Reference is made to the comments on other comprehensive income provided in Note 30.7. regarding the deferred tax asset of € 5.1 million on the equity component of the convertible bond (2007: deferred tax asset of € 5.7 million) and the deferred tax asset of € 5.6 million on cash flow hedges (2007: deferred tax liabilities of € 8.5 million).