III. Notes to the Consolidated Balance Sheet
18. Analysis of changes in intangible assets, property, plant and equipment, and financial assets 2011
19. Intangible assets
Intangible assets mainly comprise program assets capitalized as part of the purchase price allocation (PPA), program-independent technologies and software (the latter mostly for engineering applications), and acquired goodwill.
The depreciation/amortization expense on intangible assets is included in the presentation of the following line items: cost of sales € 46.8 million (2010: € 45.3 million), research and development expenses € 2.8 million (2010: € 3.0 million), selling expenses € 1.4 million (2010: € 1.4 million), and general administrative expenses € 1.7 million (2010: € 1.2 million).
In the financial year 2011, additions to intangible assets totaled € 92.0 million (2010: € 24.6 million). The following is a breakdown of the main capital expenditure on intangible assets by engine program or operating segment:
PW1100G engine program
Expenditure of € 69.3 million was incurred in the financial year 2011 (2010: € 0.0 million) in connection with MTU’s 18 % stake in the PW1100G, the new engine for the A320 family. Of this amount, € 55.5 million (2010: € 0.0 million) related to development assets acquired in return for payment, while € 13.8 million (2010: € 0.0 million) related to internally generated development costs.
GEnx engine program
MTU holds a 6.65 % stake in the GEnx engine program for the Boeing 787 and 747-8 through a cooperation agreement between the General Electric Company and MTU Aero Engines GmbH, Munich. In the financial year 2011, internally generated development costs amounting to € 3.5 million (2010: internal, € 7.1 million) were capitalized for this engine program.
GE38 engine program
In 2008, MTU was conferred development responsibility for the power turbine of the General Electric GE38 helicopter engine, and thus for an important module of a U.S. military engine program. Internally generated development costs amounting to € 8.7 million (2010: € 6.9 million) were capitalized for this program in 2011.
The commercial maintenance business (MRO) has developed special repair techniques designed to reduce the cost and increase the efficiency of engine maintenance, allowing intangible assets totaling € 3.4 million (2010: € 5.1 million) to be capitalized.
20. Property, plant and equipment
Through its capital expenditure on property, plant and equipment for the OEM segment, 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.
In the financial year 2011, the group’s total capital expenditure on property, plant and equipment amounted to € 113.7 million (2010: € 84.8 million). This increase compared with the previous year was mainly due to additions to advance payments and construction in progress for the new production facility at the Munich plant, which rose by € 27.8 million to € 56.6 million. The depreciation/amortization expense on property, plant and equipment is included in the presentation of the following line items: cost of sales € 74.4 million (2010: € 71.3 million), research and development expenses € 4.6 million (2010: € 5.3 million), selling expenses € 1.2 million (2010: € 0.9 million) and general administrative expenses € 2.5 million (2010: € 2.5 million).
Technical equipment, plant and machinery
The capital expenditure on technical equipment, plant and machinery totaling € 15.6 million (2010: € 24.1 million) relates mainly to the purchase of CNC lathes and grinding/milling machines.
Other equipment, operational and office equipment
The capital expenditure on other equipment, operational and office equipment, which mainly comprises special tools and equipment, fixtures and other tools for new and ongoing programs, was within normal limits in the year under review.
Advance payments and construction in progress
Additions to this item in the financial year 2011 totaling € 56.6 million (2010: € 28.8 million) relate to work in progress on technical equipment, plant and machinery at the German sites, mainly for new engine programs, the modernization of a test rig in Munich, and the construction of a new facility for blisk manufacturing, including blisk milling machines, also in Munich.
Capitalized assets under finance lease agreements are based on the following components:
The reduction in the future minimum lease payments is due to the exercise on December 31, 2011 of a purchase option agreed with Silkan Gewerbepark Nord Hannover-Langenhagen GmbH & Co. KG for the industrial site at Münchener Strasse 31, Langenhagen, which was previously leased and capitalized. The acquisition of the land and buildings was documented in a declaration of acceptance and certified by a notary (doc. no. 253/2010). Further, the rights of ownership as well as the benefits and obligations in connection with the property were transferred to MTU Maintenance Hannover GmbH, Langenhagen, with effect from December 31, 2011. On payment of the purchase price, all debts outstanding under the finance lease agreement were extinguished.
The following carrying amounts resulted from the capitalized assets under finance lease agreements at the balance sheet date:
21. Financial assets
The following table shows the carrying amounts of financial assets included in the consolidated financial statements:
At the balance sheet date, unrealized gains on available-for-sale financial assets totaling € 0.2 million (2010: unrealized losses of € -0.2 million) were recognized in other comprehensive income, net of related tax effects. The carrying amounts also include accrued interest of € 0.1 million (2010: € 0.5 million).
The derivative financial assets can be broken down as follows:
The following amounts have been recognized in respect of the assets, liabilities, income and expenses of joint ventures and associated companies, with the exception of MTU Maintenance Zhuhai Co. Ltd., Zhuhai, China:
Inventories comprise the following components:
The change in inventories attributable to write-downs on raw materials and supplies and work in progress is as follows:
In line with the group’s business model, the write-down method represents the best possible means of estimating the net realizable value of inventories held by MTU.
23. Trade receivables
Transactions with related companies are presented in more detail in Note 43.1.1. (Business with related companies).
The valuation allowances on trade receivables changed as follows:
The net expense for bad debts on trade receivables written off as uncollectable offset against income from bad debts recovered amounted to € -2.3 million (2010: € -0.8 million).
All expense and income amounts arising from valuation allowances and the write-off of uncollectable bad debts on trade receivables are recognized as selling expenses.
24. Construction contract receivables
Interest-free advance payments received for construction contracts directly attributable to an engine project are offset against the corresponding receivables. If the amount of the directly attributable advance payments received exceeds the amount of the receivables, the balance is recognized under construction contract payables.
Income from construction contracts in the financial year 2011 amounted to € 27.2 million (2010: € 75.7 million). Contract-related costs to be offset against this income amounted to € 21.7 million (2010: € 97.7 million). The amount of € 469.5 million for construction contract receivables at December 31, 2011 (2010: € 424.3 million) includes advance payments received amounting to € 332.7 million (2010: € 286.1 million). No amounts were retained for partial settlement of construction contract receivables.
For disclosures relating to construction contract receivables that have been offset against directly attributable advance payments received, please refer to Note 35. (Construction contract payables).
The following table shows the carrying amounts and a breakdown of the past due dates of unimpaired trade and construction contract receivables at the balance sheet date:
25. Other assets
Other assets comprise the following items:
The other taxes totaling € 15.8 million (2010: € 16.0 million) solely comprise input taxes (2010: € 15.6 million) and transaction taxes amounting to € 0.4 million incurred in 2010 in respect of foreign group companies.
The sundry other assets totaling € 19.5 million (2010: € 9.1 million) groups together a variety of different assets. These include the surplus of the plan assets of MTU Maintenance Canada Ltd., Richmond, Canada, amounting to € 4.3 million (2010: € 3.5 million). Please refer to Note 30. (Pension provisions) for further information on the calculation of the surplus plan assets.
The table below shows the carrying amounts and a breakdown of the past due dates of the unimpaired loans and receivables stated in other assets at the balance sheet date:
26. Cash and cash equivalents
The cash and cash equivalents of € 198.8 million (2010: € 111.9 million) comprise cash in hand, bank deposits and securities with an original maturity of three months or less. This item also includes foreign currency holdings amounting to € 108.0 million (2010: € 73.2 million).
MTU is not free to dispose of cash and cash equivalents in the amount of € 11.6 million (2010: € 15.9 million) held by MTU Maintenance Zhuhai Co. Ltd., Zhuhai, China.
27. Income tax claims
Income tax claims in the financial year 2011 amounted to € 5.8 million (2010: € 0.0 million).
The prepayments of € 4.1 million (2010: € 6.0 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.
29.1. Subscribed capital
The company’s subscribed capital (capital stock) is unchanged and amounts to € 52.0 million, divided into 52.0 million registered non-par shares.
29.2. Authorized capital
The Board of Management is authorized until April 21, 2015 to increase the company’s capital stock by up to € 5.2 million, with the prior approval of the Supervisory Board, by issuing, either in a single step or in several steps, new registered non-par-value shares in return for cash contributions
(Authorized capital I 2010).
The Board of Management is further authorized until April 21, 2015 to increase the company’s capital stock by up to € 15.6 million, with the prior approval of the Supervisory Board, by issuing, either in a single step or in several steps, new registered non-par-value shares in return for cash contributions (Authorized capital II 2011).
In addition, the Board of Management is authorized until April 21, 2015 to increase the company’s capital stock by up to € 5.2 million, with the prior approval of the Supervisory Board, by issuing, either in a single step or in several steps, new registered non-par-value shares in return for cash and/or non-cash contributions (Authorized capital III 2011).
29.3. Conditional capital
Convertible bonds and bonds with warrants
At the Annual General Meeting on April 22, 2010, the Board of Management was authorized until April 21, 2015 to issue conditional capital increases with the prior approval of the Supervisory Board:
- The company’s capital stock may be conditionally increased by up to € 3.64 million through the issue of up to 3,640,000 new registered non-par-value 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.
- The company’s capital stock may be conditionally increased by up to € 22.36 million through the issue of up to 22,360,000 new registered non-par-value shares, each corresponding to a proportional amount (one euro) of the company’s total capital stock (conditional capital). 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 April 22, 2010. 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.
- The Board of Management is authorized until April 21, 2015 to issue, in a single step or in several steps and with the prior approval of the Supervisory Board, bearer convertible bonds and/or bonds with warrants (collectively referred to as ‘securities’), with or without maturity date, with a total nominal value of up to € 500 million, and to grant the owners of convertible bonds and/or bonds with warrants the right, obligation or option to convert them into registered non-par-value shares of the company representing a share in the capital stock of up to € 22.36 million under the conditions established for the issue of convertible bonds or bonds with warrants. The securities may be issued in return for cash contributions only. They may be issued in euros or – to an equivalent value – in any other legal currency, for instance that of an OECD country. They may also be issued by an affiliated company in which MTU holds a controlling interest (group company). In such cases, and subject to the prior approval of the Supervisory Board, the Board of Management is authorized to act as guarantor for the securities, and to grant the owners of the securities the right, obligation or option to convert them into new registered non-par-value shares in MTU.
29.4. Capital reserves
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 Share Matching Plan, and an allocation of € 1.0 million (2010: deduction of € 0.2 million) representing the difference between the proceeds of shares sold under the MAP employee stock option program and their original acquisition cost. 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 33. (Financial liabilities).
Matching Stock Program (MSP)
To strengthen the motivation to meet business targets, the group has set up the MSP, an incentive and risk-sharing instrument allowing management-level employees to participate in its share capital. The MSP authorizes the subscription of phantom stocks. When the program was launched on June 6, 2005, the group granted a defined quantity of phantom stocks 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. MSP shares are not subject to any restraints on disposal and entitle the holder to participate in dividend and subscription rights. Each tranche of allocated phantom stock is subject to a vesting period of two 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. The shares are purchased at the market price on the strike date (exercise date). They must be held for two years after the strike date.
In the financial year 2011, after the average exercise price of € 49.79 per phantom stock was reached, managers for the last time converted 222,846 phantom stocks (2010: 241,794) into compensation, while members of the Board of Management for the last time converted 144,936 phantom stocks (2010: 144,936) into compensation.
Share Matching Plan (SMP)
MTU’s Board of Management
For a description of the SMP we refer you to the management compensation report, which forms part of the corporate governance report. At the end of the four-year PSP assessment period, the members of the Board of Management have the option to convert the payment under the Performance Share Plan (PSP) into shares of MTU Aero Engines Holding AG, which must then be held for a further three years. At the end of the vesting period, these shares are matched on the basis of a Share Matching Plan (SMP), with each Board of Management member being awarded one additional free share for every three MTU shares acquired in this way. The entitlement to additional free shares is deemed to have expired once the corresponding number of such shares has been transferred to the member of the Board of Management. The total value of the free shares allocated at the end of the vesting period is limited to three times the purchase price of the shares originally acquired through the PSP.
The number of future matching shares depends on the amount of benefits payable under the Performance Share Plan (PSP). For an explanation of the PSP we refer you to the corresponding section of Note 32. (Other provisions). In order to determine the fair value, a combined Monte Carlo simulation and Black-Scholes pricing model was used. The expected payout was determined on the basis of the exact same assumptions used to value the PSP. The payout calculated serves as a basis for valuing the SMP in accordance with the Black-Scholes pricing model. The fair value of this forward option at the time the option is granted is recognized in the balance sheet taking into account the conditions of exercise. The vesting period of the forward option is 52 months.
The number of options granted to members of the Board of Management under the SMP is determined on the basis of the performance-related compensation approved by the Supervisory Board, and must in turn be approved by the Personnel Committee. The compensation for senior managers is linked to the performance-related compensation awarded to the Board of Management. The options do not confer dividend or voting rights on the holder.
Senior managers of MTU
With effect from January 1, 2011, MTU expanded the Share Matching Plan (SMP) it had introduced in the previous year for members of the Board of Management to include the top two tiers of senior managers (OFK and FK) at the company and its subsidiaries.
Tier-1 senior managers (OFK)
In accordance with the conditions of the plan, tier-1 senior managers may, after expiry of each threeyear PSP vesting period, use the benefits payable under the PSP (LTI) and the Annual Performance Bonus (STI) to invest in shares of MTU Aero Engines Holding AG, which must then be held for a further two years under the terms of this supplementary plan, the Share Matching Plan (SMP). At the end of this supplementary vesting period, on condition that the SMP participant is still employed by MTU, this investment is matched by a cash payment corresponding to one-third of the amount invested in MTU shares. The total investment qualifying tier-1 senior managers to receive a matching payment under the SMP is limited to a maximum of € 60,000 per eligible manager.
Tier-2 senior managers (FK)
In accordance with the conditions of the plan, tier-2 senior managers may, after expiry of each twoyear PSP vesting period, use the benefits payable under the PSP (LTI) and the Annual Performance Bonus (STI) to invest in shares of MTU Aero Engines Holding AG, which must then be held for a further two years under the terms of this supplementary plan, the Share Matching Plan (SMP). At the end of this supplementary vesting period, on condition that the SMP participant is still employed by MTU, this investment is matched by a cash payment corresponding to one-third of the amount invested in MTU shares. The total investment qualifying tier-2 senior managers to receive a matching payment under the SMP is limited to a maximum of € 30,000 per eligible manager.
The fair values of the forward options were determined at the grant date on the basis of the following parameters and assumptions:
The following table shows the number of performance shares that had been granted under the Share Matching Plan (SMP) at the beginning and end of the reporting period, and the number of performance shares not yet exercisable at year-end:
The total expense incurred in the financial year 2011 for share-based compensation settled by issuance of equity instruments amounted to € 0.4 million (2010: € 0.2 million). The total expense incurred for share-based compensation settled by cash payment is presented in Note 32. (Other provisions).
MAP employee stock option program
In the financial year 2011, the Board of Management of MTU Aero Engines Holding AG, Munich, again invited group employees to purchase shares under the MAP employee stock option program, which runs for a period of two years in each case. Under this program, MTU offers to match each participant’s investment at the end of a two-year vesting period with a taxable cash payment of an amount corresponding to 50 % of the amount invested by the employee in MTU shares at the beginning of the program.
The number of shares sold to group employees under the terms of the MAP employee stock option program since the financial year 2008 is as follows:
The total expense for the matching exercise in connection with the MAP in the financial year 2011 amounted to € 2.1 million (2010: € 1.7 million) and was recognized in the income statement on a pro rata basis over the duration of the respective tranche. At December 31, 2011, the liability amounted to € 2.4 million (2010: € 2.0 million).
The purchase price for the fourth tranche of MTU shares distributed in the financial year 2011 was based on the lowest share price on April 13, 2011 (purchase date) and amounted to € 48.10 per share. The shares transferred to the employees, valued at the average acquisition cost, were removed from the equity item ‘treasury shares’. The difference between the proceeds of the sale and the original acquisition cost amounted to a total of € 1.0 million and was allocated to capital reserves (2010: € 0.2 million deduction from capital reserves).
29.5. Revenue reserves
Revenue reserves comprise the post-acquisition and non-distributed earnings of consolidated group companies.
29.6. Treasury shares
Purchase of treasury shares in accordance with the authorizations granted by the Annual General Meeting on April 22, 2010
The Board of Management of MTU Aero Engines Holding AG, Munich, has been authorized by resolution of the Annual General Meeting to buy back shares. 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.
The authorization to buy back shares granted to the company by resolution of the Annual General Meeting on May 26, 2009 expired on November 26, 2010 and was replaced by a new authorization. Pursuant to Section 71(1) item 8 of the German Stock Corporation Act (AktG) as amended by the German Act of July 30, 2009 implementing the EU’s Shareholders’ Rights Directive (ARUG), the authorization may now be granted for a period of up to five years.
The Board of Management of MTU was thus authorized to purchase treasury shares with an aggregate nominal value not exceeding 10 % of the company’s issued capital stock, as applicable on the date of the resolution, during the period from April 23, 2010 through April 22, 2015, pursuant to Section 71 (1) item 8 of the German Stock Corporation Act (AktG). At no point in time may the value of the acquired shares, together with other treasury shares in the company’s possession or which are assigned to it pursuant to Section 71a et seq. of the German Stock Corporation Act (AktG), exceed 10 % of the company’s capital stock.
Purchase of treasury shares
In the financial year 2011, the company purchased 200,000 shares (2010: 300,000 shares) for a total price of € 9.4 million (2010: € 13.6 million). The average acquisition cost for the shares purchased was € 47.07 (2010: € 45.55) per share. The shares were purchased in order to meet contractual obligations attached to the convertible bond issue, to issue shares to group employees under the fifth and final tranche of the Matching Stock Program (MSP) and under the MAP employee stock option program, and to make provision for the future issue of matching shares to the Board of Management under the Share Matching Plan (SMP). The following table shows shares acquired through share buybacks in 2010 and 2011.
Reconciliation of average weighted number of outstanding shares
At December 31, 2011, MTU held 3,187,512 treasury shares (2010: 3,247,593 shares). This represents 6.1 % of the company’s capital stock (2010: 6.2%).
At December 31, 2011, a total of 48.812.488 MTU shares (2010: 48,752,407 shares), each with a par value of one euro, were in issue and entitled to receive a dividend.
Issue of shares to employees under employee stock option schemes
In the financial year 2011, a total of 104,763 treasury shares (2010, fourth tranche: 68,086 shares) were issued to the Board of Management and other executive managers under the fifth tranche of the Matching Stock Program.
A total of 154,165 shares (2010: 59,096 shares) were sold to group employees in the finanical year 2011 under the MAP employee stock option program.
29.7. Other comprehensive income (OCI)
In 2011, other comprehensive income decreased by € -11.7 million to a negative balance of € -9.0 million (2010: increased by € 5.1 million to a positive balance of € 2.7 million), principally as a result of translation differences arising from the financial statements of international subsidiaries and the change in fair value of derivative financial instruments.
The table below shows the income and expenses recognized in other comprehensive income, including fair value changes, both before and after income tax:
29.8. Disclosures relating to capital management
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.
Consequently, the group’s capital management activities are focused on optimizing the ratio between equity and net financial debt, and on improving the equity ratio.
30. Pension provisions
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 fulfill commitments to current and former employees. For group companies in Germany, these benefits are financed primarily by provisions recognized in the financial statements, which are only covered to a minor extent by plan assets. In contrast, MTU Maintenance Canada Ltd., Richmond, Canada, has a fund-financed retirement benefit plan.
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’ is governed by Section 1 (1) sentence 3 of the German Law on Retirement Pensions (BetrAVG). For financial reporting purposes, the term ‘defined benefit plans’ is required to be interpreted on the basis of the underlying economic substance of the arrangements. Insofar as the MTU group has no further obligations beyond its so-called ultimate liability once the contributions have been paid to state and private retirement funds, these plans are classified as defined contribution plans. Current contributions are recognized as expenses in the period in which payments are made.
30.1. Defined contribution plans
Since January 1, 2007, no new pension benefits have been granted to new employees in Germany. Instead MTU pays contributions to a company-sponsored external fund for employees who joined the company after that date. Other plans that exist within the MTU group are direct insurance contracts funded by employee contributions.
Employer’s contributions to the state pension scheme in the financial year 2011 totaled € 34.5 million (2010: € 34.1 million). In addition, contributions of € 0.1 million (2010: € 0.1 million) were made to the company-sponsored external fund.
30.2. Defined benefit plans
The pension obligations of MTU 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 and pension plans, such as stock-flow adjustments. The provision for defined benefit plans recognized in the balance sheet corresponds to the present value of the benefits payable for current and past service (the defined benefit obligation) of beneficiaries less the fair value of plan assets at the balance sheet date and adjusted for cumulative unrecognized actuarial gains and losses. Extensive actuarial reviews and computations are carried out annually for each pension plan by independent actuaries.
Actuarial gains or losses can result from increases or decreases either in the present value of the defined benefit obligations 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.
Present value and funding status of the defined benefit obligation:
In the financial year 2011, the current and past service cost amounted to € 14.2 million (2010: € 11.0 million), the contributions for the plan subscribers amounted to € 5.1 million (2010: € 4.8 million), and the interest cost was € 23.6 million (2010: € 24.4 million). The pension benefit payments and one-off payments made in the financial year 2011 totaled € 21.0 million (2010: € 19.1 million). Consequently, after experience adjustments of € 3.0 million (2010: € 0.3 million) to take account of the effects of the divergence between previous actuarial assumptions and actual development, the total pension obligation under defined benefit plans rose by € 24.1 million (2010: € 60.6 million) to € 558.0 million (2010: € 533.9 million). By contrast, no effects resulting from changes in actuarial assumptions had to be taken into account in the financial year 2011 (2010: € 37.9 million).
Of the total pension obligation of € 558.0 million (2010: € 533.9 million), an amount of € 531.9 million (2010: € 510.9 million) relates to group companies in Germany; this represents 95.3 % (2010: 95.7 %) of the total amount.
The following weighted parameters were applied to measure the pension obligations at December 31 of the respective year and to measure the pension plan expense in the respective year under review:
The market yields on high-quality corporate bonds have fallen compared to the previous year. For this reason, obligations for pensions were discounted at December 31, 2011 using a discount rate of 4.50 % as in 2010. The biometric tables issued by Prof. Dr. Heubeck (RT 2005G) were used for the purpose 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 expected salary trend refers to the expected rate of salary increase, which is estimated depending on inflation and the length of service of employees within the group.
Employee turnover, mortality and disability rates were estimated on the basis of statistical data. For the effects of the experience adjustments, reference is made to the table showing the funding status and the experience adjustments at the end of the financial year presented near the end of this note.Based on otherwise constant assumptions, a change of 25 basis points in the discount rate would have had the following effects on the pension obligations at the end of 2011:
In the following table, the defined benefit obligation and plan assets are reconciled to the recognized pension provision:
Fair value of plan assets
The total amount of 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 amounting to € 27.0 million (2010: € 28.9 million). The expected return on the fund-financed plan assets of MTU Maintenance Canada Ltd., Richmond, Canada, amounted to € 1.3 million. The uncertainty prevailing in the capital markets gave rise to a deficit of € 1.9 million, resulting in an overall loss of € 0.6 million for the plan assets of MTU Maintenance Canada Ltd., Richmond, Canada, in the financial year 2011. The actual return on the loan-financed plan assets of MTU Aero Engines GmbH, Munich, at € 0.1 million (2010: € 0.2 million), matched the expected return, resulting in an overall loss of € 1.9 million (2010: € 0.1 million) deriving from the measurement of the fair value of these plan assets. Employer contributions raised the plan assets by € 1.2 million (2010: € 1.2 million), while pension benefit payments reduced them by € 2.9 million (2010: € 2.6 million), resulting in an overall reduction in the plan assets of € 1.9 million (2010: increase of € 2.4 million).
Cumulative unrecognized actuarial losses
While, on the one hand, unrecognized actuarial losses attributable to amortization charges decreased by € 2.0 million in the financial year 2011, this change was offset by increases in experience adjustments amounting to € 3.0 million (2010: 0.3 million plus € 37.9 million owing to changes in actuarial assumptions), by translation differences amounting to € 0.1 million, and by the deficit of € 1.9 million (2010: 0.1 million) in the plan assets.
In total, therefore, unrecognized actuarial losses increased by € 3.0 million.
The defined benefit obligation developed as follows:
The fair value of plan assets developed as follows:
In the financial year 2011, pension benefit payments amounting to € 2.9 million (2010: € 2.6 million) were granted out of the plan assets. Payments of € 1.4 million (2010: € 1.3 million) and € 1.5 million (2010: € 1.3 million) were made by MTU Muünchen Unterstützungskasse and by MTU Maintenance Canada respectively. The actual loss on plan assets totaled € 0.5 million in the financial year 2011 (2010: a gain of € 1.4 million).
The expense from defined benefit plans and similar obligations comprises the following components:
Fund-financed plan assets
The fund-financed plan assets relate to MTU Maintenance Canada Ltd., Richmond, Canada, and do not include any securities pertaining to MTU group entities or any assets used by the MTU group.
The composition of plan assets to cover pension obligations is as follows at the respective balance sheet dates:
The expected return determined for each category of assets took account of generally available information concerning capital market forecasts. The future expected return on fixed-income securities is based on the maturities of securities held and on the past record of average yields achieved for these investment classes with maturities between 10 and 20 years.
The expected return on share investments reflects the long-term expectation of yields on the stock markets. An expected return of 6.5 % (2010: 7.0 %) was applied to measure the fair value of fundfinanced plan assets. A return of 6.5 % is assumed for the financial year 2012.
Loan-financed plan assets
Loan-financed plan assets relate to a loan issued by MTU München Unterstützungskasse, Munich, to MTU Aero Engines GmbH, Munich, representing a receivable amount of € 6.5 million at December 31, 2011 (2010: € 7.8 million). The loan is subject to interest at the three-month Euribor rate plus 50 basis points.
Funding status and experience adjustments
To calculate the experience adjustments and the effects of changes to actuarial assumptions, the DBO was determined at the current balance sheet date based on the assumptions made at the beginning of the financial year. As a result, the experience adjustments correspond to the difference between the expected DBO and the DBO – with changes that had actually occurred at the balance sheet date – calculated based on the actuarial assumptions at the beginning of the year.
Unrecognized actuarial gains and losses resulting from the experience adjustments increased pension obligations by € 3.0 million in the financial year 2011 (2010: reduction of € 0.3 million). The following table shows not only the net pension obligation, but also the effects of divergences between previous actuarial assumptions and actual development over a five-year period:
Expected future pension benefit payments
In addition to the employer’s contributions to plan assets, the company is expecting the following pension benefit payments in the coming years:
Employer’s contributions to fund-financed plan assets for the financial years 2012–2013 are expected to amount to € 1.2 million each.
As a result of switching to the new ‘MTU kapitalPlus 2006’ pension plan, in place since the financial year 2006, a life-long pension to group employees was converted into an immediate cash payment. In individual cases and after consultation with the company, it is also possible to grant a ten-year payment by installments or continue to make pension payments indexed by 1 % each year. The group’s expectations regarding the annual spread of pension benefit payments under the new pension plan are based on the assumption that an immediate cash payment will be made as soon as the end of the contribution period is reached.
31. Income tax payable
The income tax payable amounting to € 10.0 million (2010: € 71.2 million) comprises corporation and municipal trade tax amounting to € 7.8 million (2010: € 70.7 million) and taxes on the income of foreign group companies amounting to € 2.2 million (2010: € 0.5 million).
The income tax liabilities are due for payment within one year.
32. Other provisions
At the balance sheet date, other provisions comprised the following items:
Warranty obligations and risks from pending losses on onerous contracts
Risks from pending losses on onerous contracts primarily contain provisions for pending losses on onerous contracts, and legal disputes, and relate to current obligations in respect of probable third-party claims for which the likely expense can be reliably estimated. 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.
In the commercial maintenance business, MTU has identified onerous contracts for the maintenance of engines for which the unavoidable costs of fulfilling contractual obligations are higher than the expected economic benefits. Expenses exceeding the economic benefits in the amount of € 26.4 million (2010: € 25.2 million) were set aside as expense and are included in the warranty obligations and risks from pending losses on onerous contracts. It was not necessary to recognize impairment losses on assets relating to the contracts in 2011 or 2010, or they were already recognized in previous financial years.
The personnel obligations comprise provisions allocated for profit-sharing and performance-related bonuses amounting to € 36.6 million (2010: € 31.0 million), provisions for long-service awards amounting to € 5.3 million (2010: € 5.8 million), and provisions for restructuring measures following the introduction of single-status pay agreements (ERA) amounting to € 1.9 million (2010: € 2.8 million).
TV FlexÜ, a collective agreement on flexible transition into retirement, came into effect in the German collective bargaining regions in the financial year 2010. In addition, each of the MTU group companies in Germany entered into a supplementary agreement with the Works Council, effective until December 31, 2016, which sets down upper limits for the number of employees – both those covered by the collective agreement and those with freely negotiated contracts – who can assert a claim to a preretirement part-time employment contract.
Whereas all available places on the scheme at MTU Aero Engines GmbH in Munich had been taken up by the spring of 2011, the uptake at MTU Maintenance GmbH Hannover in Langenhagen was below the set limit when the closing date for applications was reached in spring 2011. The employees of MTU Maintenance Berlin-Brandenburg in Ludwigsfelde are not subject to any time limit for applications, and the set limit had not yet been reached at that location on December 31, 2011.
Implementation of the individual pre-retirement part-time working contracts concluded with employees will be spread over the period to 2016 for all German group companies. On the basis of the agreements made with group employees, provisions to cover unfunded pension liabilities amounting to € 0.7 million (2010: € 3.0 million) – net of corresponding plan assets of € 6.0 million – were recognized in the financial year 2011. Within the scope of the agreed terms for pre-retirement part-time working arrangements, agreements on top-up and severance payments were concluded with group employees. Reference is also made to Note 36.2. (Other liabilities).
Annual performance bonus (APB) for the Board of Management
For more detailed explanatory comments concerning the annual performance bonus (APB), please refer to the management compensation report in the Corporate Governance section of this Annual Report. One half of the annual performance bonus is paid in the calendar year following the financial year in which it was earned. The withheld portion of the annual performance bonus (the remaining 50 %) is paid in two equal portions in the two subsequent years. The deferred components of the 2011 and 2010 annual performance bonus (APB Deferral 1 and 2) were agreed for the first time with effect from January 1, 2010. The ultimate amount to be paid depends on the level of goal achievement attained in respect of the two key performance indicators at group level and on the discretionary factor applied in the financial years 2012 and 2013.
Annual performance bonus (APB) for senior managers
A portion of the annual performance bonus for senior managers – 70 % for tier-1 (OFK) and 80 % for tier-2 (FK) – is paid in the calendar year following the financial year in which it was earned. Payment of the remaining 30 % (OFK) or 20 % (FK) is deferred to the subsequent year. The deferred components of the 2011 annual performance bonus were agreed for the first time with effect from January 1, 2011. Here too, the ultimate amount to be paid depends on the level of goal achievement attained in respect of the two key performance indicators at group level in the financial year 2012.
Performance Share Plan (PSP) for the Board of Management and senior managers
The long-term compensation awarded to members of the Board of Management and to the top two tiers of senior managers includes annual tranches granted within the framework of the Performance Share Plan (PSP).
On January 1, 2011, and on January 1, 2010 or July 1, 2010 respectively, the Board of Management and – for the first time with effect from January 1, 2011 – the top two tiers of senior managers were alloted phantom stocks of MTU Aero Engines Holding AG (so-called performance shares) on an individual basis. In the case of the Board of Management, these stocks may be converted into cash or shares after a vesting period of four years; in the case of senior managers, the vesting period is three years for the first tier and two years for the second.
The number of performance shares that may be settled in cash or shares at the end of the respective vesting period depends both on the number of performance shares initially allocated and on the MTU share price performance during the respective period compared with that of other key MDAX companies. Depending on whether the performance thresholds are reached, the participants can expect to receive a payment equivalent to between 25 % (minimum) and 150 % (maximum) of the value of the individually allocated performance shares. If the minimum performance threshold – ranking at least 45th within the peer group – is not achieved, the participants receive no payment. The amount paid out is capped at three times the individual participant’s Long-Term Incentive (LTI) target amount assigned at the grant date.
The fair value of all the performance shares granted but not yet exercised was estimated at the end of the financial year. The following table shows the number of performance shares held by the participants when each PSP tranche was granted. These form the base value for calculating the performance-related payment at the end of the vesting period for the each tranche of the PSP:
The fair values of the PSP tranches were reduced to make allowance for the residual probability of expiry. The calculation therefore incorporated an assumed fluctuation rate of 4 % p.a. Given that a collective method of calculation was used, no individual departure probabilities based on age or years of service were factored in.
At January 1, 2011, the fair value per performance share of the second tranche of the PSP granted for the financial year 2011 amounted to € 31.26 for the Board of Management, € 34.40 for tier-1 senior managers (OFK), and € 37.25 for tier-2 senior managers (FK), taking into account a fluctuation rate of 4%.
The comparative figures for the financial year 2010 were as follows:
The fair value per performance share of the first tranche of the PSP granted for the financial year 2010 amounted to € 22.96 at January 1, 2010 and € 27.13 at July 1, 2010 respectively, taking into account a fluctuation rate of 4 %.
Share-based compensation gave rise to the following expenses:
Contingent liabilities arising from business combinations
The obligations arising under engine programs absorbed in the purchase price allocation 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. from the then DaimlerChrysler AG. The contingent liabilities are measured according to IFRS 3.56. Reference is made to further comments in Note 5.24. (Discretionary scope, measurement uncertainties and sensitivity) for sensitivity assumptions and other estimating parameters in respect of the measurement of contingent liabilities.
Losses arising from the settlement of accounts
Losses arising from the settlement of accounts relate to retrospective price adjustments or special conditions agreed with end customers by the consortium leader, expected cancellations by end customers leading to loss of revenues as well as disputed amounts from contracts already invoiced between the consortium leaders and end customers, and potential reimbursement claims asserted by public-sector customers.
Provisions for other obligations cover a multitude of identifiable individual risks and contingent liabilities.
Other tax obligations
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 in 2011 and previous financial years.
Non-current other provisions developed as follows:
The following cash outflows are expected from the carrying amounts of non-current other provisions:
MTU expects that the stated personnel obligations will become due within the next one to five years.
Current other provisions developed as follows:
The cash outflows resulting from the carrying amounts of current other provisions are expected to be realized in the calendar year following the reporting period.
33. Financial liabilities
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, Munich. 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, Munich. 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 an initial conversion price of € 49.50 fixed at the issue date. 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 to proceed with the repayment of the convertible bond on or after February 15, 2010.
MTU was furthermore authorized to call all remaining outstanding units of the convertible bond for early repayment in the event that the total par value of the outstanding units 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 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 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 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 financial year 2008, MTU repurchased units of its own convertible bond on the market with a total nominal volume of € 27.2 million. The total value of these securities at that time amounted to € 21.9 million. In addition, on June 23, 2010, one holder of the convertible bond exercised their conversion option, converting a nominal amount of € 100,000 – recognized at amortized cost at the conversion date – into 2,020 shares.
Following the repurchase of units of the convertible bond in 2008 and the conversion in 2010, the associated conversion rights theoretically corresponded at the end of the financial year 2011 to approximately 3.1 million (2010: 3.1 million) non-par-value shares of conditional capital. If these conversion rights had been exercised in the financial year 2011, earnings per share would have been reduced to € 0.08 (2010: € 0.07).
More detailed explanatory comments concerning the conditional capital increase are provided in Note 29.3. (Conditional capital). Information on the dilutive effect of the potential issue of shares through the exercise of conversion rights is provided in Note 16. (Earnings per share). For information on the partial conversion of the bond in January 2012, see Part VI of these Notes (Events after the balance sheet date).
Liabilities to banks
On June 3, 2009 MTU placed four promissory notes for a total nominal note amount of € 65.0 million. Through these promissory notes, consisting of four tranches with fixed maturity dates as listed below, the group aimed to further diversify its sources of financing:
The promissory notes were recognized at their fair value on the date of acquisition, which corresponds to the nominal note amount, less transaction costs amounting to € 0.4 million. The promissory notes are measured at amortized cost.
Revolving Credit Facility
MTU meets its financing requirements in its functional currency, the euro, principally through the uptake of loans, its convertible bond issue, and credit arrangements with banks (revolving credit facility). The group has access to overdraft facilities amounting to € 100.0 million made available by two banks. On December 1, 2010 MTU renegotiated the existing revolving credit facility, extending its term by five years. Of this line of credit, a total of € 12.4 million had been drawn down as bank guarantees in favor of third parties at December 31, 2011 (December 31, 2010: € 29.0 million). Other than this, as in 2010, the group did not draw down any further funds under its revolving credit facility.
Any credit actually utilized is subject to interest at market index average rates plus an additional margin. Unused credit facilities are subject to a loan commitment fee.
MTU has undertaken to ensure that certain financial indicators (see below) remain within defined boundaries both for the revolving credit facility and throughout the contractual period of the promissory notes, and until all final amounts payable in connection with those notes have been settled in full: MTU’s debt-equity ratio at the end of each quarter during the contractual period of each promissory note shall not exceed 2.5; the times interest earned ratio at the end of each quarter during the contractual period of each promissory note shall not lie below 4.0.
The financial indicators are calculated according to the following formulae:
- Times interest earned ratio = EBITDA adjusted / consolidated net interest expense
- Debt-equity ratio = Consolidated net financial debt / EBITDA adjusted (earnings before interest, tax, depreciation and amortization)
The financial indicators that MTU has undertaken to observe at the end of each quarter are obtained from the quarterly interim financial reports.
In the financial years 2011 and 2010, MTU met all loan repayment and other obligations arising from financing arrangements.
Other liabilities to banks
The other liabilities to banks amounting to € 34.4 million (2010: € 34.4 million) relate to third-party loans provided to subsidiaries.
Other financial liabilities
Finance lease liabilities represent obligations under finance lease arrangements that are capitalized and amortized using the effective interest method; see Note 20.
Derivative financial liabilities
Derivative financial liabilities amounting to € 41.4 million (2010: € 24.9 million) relate principally to changes in the fair value of forward foreign exchange contracts and currency option transactions.
34. Trade payables
The total amount of trade payables is due within one year.
35. Construction contract payables
Liabilities arising from construction contracts primarily concern advance payments for construction contracts for specific engine programs.
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.
36. Other liabilities
Liabilities to employees
Amounts due for social security principally comprise contributions to social insurance against occupational accidents amounting to € 1.9 million (2010: € 1.5 million) and amounts due to health insurers totaling € 0.7 million (2010: € 0.6 million).
TV FlexÜ, a collective agreement on flexible transition into retirement, came into effect in the German collective bargaining regions in the financial year 2010. In addition, each of the MTU group companies in Germany entered into a supplementary agreement with the Works Council, effective until December 31, 2016, which supersedes the collective bargaining agreement. Whereas all available places on the scheme at MTU Aero Engines GmbH in Munich had been taken up by the spring of 2011, the uptake at MTU Maintenance GmbH Hannover in Langenhagen was below the set limit when the closing date for applications was reached in spring 2011. The employees of MTU Maintenance Berlin-Brandenburg in Ludwigsfelde are not subject to any time limit for applications, and the set limit had not yet been reached at that location on December 31, 2011. Implementation of the individual pre-retirement parttime working contracts concluded with employees will be spread over the period to 2016 for all German group companies. Within the scope of the agreed terms for pre-retirement part-time working arrangements, agreements on top-up and severance payments were concluded with group employees. At December 31, 2011, the liabilities associated with these obligations amounted to € 23.0 million (2010: € 20.5 million). For the potential effects of amendments to IAS 19 on the accounting treatment of top-up amounts for pre-retirement part-time working agreements, please refer to Note 1.1. (Amendments to IAS 19).
Other liabilities to employees are composed of unclaimed vacation entitlements, flexitime credits, obligations arising from pre-retirement part-time working arrangements and obligations arising from efficiency-improvement programs in prior periods. This item also includes liabilities to group employees under the MAP employee stock option program amounting to € 2.4 million (2010: € 2.0 million). Additional information concerning the MAP employee stock option program is provided in Note 29.4. (Capital reserves).
Accrued interest expense
Long-term advance payments received for construction contracts 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 rate expenses relate to advance payments received for long-term military construction contracts amounting to € 16.6 million (2010: € 18.7 million).
Outstanding maintenance work on returned operate-lease engines
These non-current liabilities relate to outstanding maintenance work on the present fleet of five operate-lease engines.
Repayment of grants to ward development costs
In the financial years from 1976 to 1991, MTU received grants from the German Federal Ministry of Economics and Technology toward the internally generated costs of developing the PW2000 engine, which were recognized in the income statement. Once the contractually agreed sales figures of PW2000 production engines have been reached for the Boeing 757 and C-17, MTU is obliged to pay back the grants (government subsidy of development costs) within a timeframe of ten years. Owing to strong demand for engines in the C-17 military application, this threshold was reached, and a liability was recognized as an expense for the first time in 2010. This liability was amortized in the financial year 2011. In addition, the first installment of the repayment amounting to € 0.7 million was made in the financial year 2011. The second installment is expected to become due in early 2012.
Sundry other liabilities
The increase in sundry other liabilities to € 97.6 million is mainly attributable to external development costs incurred in connection with the PW1524G engine program for the CSeries regional jet amounting to € 19.3 million (2010: € 0.0 million), the PW1217G engine for the MRJ amounting to € 15.5 million (2010: € 0.0 million), and liabilities arising from the stake in the PW1100G program for the A320neo amounting to € 46.5 million (2010: € 0.0 million), plus a multitude of minor individual obligations.
The tax liabilities amounting to € 6.5 million (2010: € 8.6 million) concern payable wage and church taxes, solidarity surcharges and transactional taxes.
Payment cash flows for financial liabilities
The following tables list the contractually agreed undiscounted payments of interest and principle on the non-derivative financial liabilities and derivative financial instruments held by MTU, measured at fair value through profit or loss:
The statement includes all instruments in the portfolio at December 31, 2011 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, 2011. Financial liabilities with no fixed repayment date and contingent liabilities 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 42. (Contingent liabilities and other financial obligations).
37. Additional disclosures relating to financial instruments
Carrying amounts, measurement/recognition methods and fair values aggregated by category
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 IAS 39. The information presented 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. Note 5.14. (Financial instruments) provides 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 year 2010.
Cash and cash equivalents, trade receivables and construction contract 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 construction contract 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 liability component of the convertible bond at December 31, 2011 is virtually identical to its present value owing to the short term remaining until conversion or repayment in January 2012.
The fair value of the convertible bond at December 31, 2010 (€ 173.3 million) was obtained by multiplying the par value of exercisable convertible bonds at that date, totaling € 152.7 million, by the factor of 113.49 %, representing the quoted share price at the balance sheet date. Based on prevailing market assumptions at December 31, 2010 relating to risk-free interest rates for the remaining term of the convertible bond, on the conversion price, the share price at that date, the expected dividend payment and volatility of the MTU share, a proportional value of € 7.00 was calculated per exercised conversion option. The equity component of the convertible bond amounted to € 21.6 million, based on the then outstanding total of 3,084,849 exercisable conversion options. Accordingly, the fair value of the equity component amounted to € 151.7 million at the December 31, 2010. Taking into account the separately recognized interest of € 3.8 million accrued over the eleven months up to December 31, 2010, the fair value inclusive of interest amounted to € 155.5 million. The carrying amount inclusive of accrued interest over eleven months amounted to € 152.4 million.
Classification of fair value measurements of financial assets and liabilities according to the fair value hierarchy
In order to evaluate the significance of the factors used as input when measuring financial assets and liabilities at their fair value, MTU assigns these assets and liabilities to three levels of a fair value hierarchy.
The three levels of the fair value hierarchy are described below, together with their utilization when measuring financial assets and liabilities:
|Quoted prices in active markets for identical assets or liabilities (unadjusted input)|
|Level 2:||Directly observable market inputs other than Level 1 inputs, i.e. input factors that can be related directly (price) or indirectly (derived from price) to the financial assets or liabilities|
|Level 3:||Input factors used to measure assets and liabilities that are not based on observable market
data (unobservable input factors)
In the following table, financial assets and liabilities measured at fair value are allocated to the three levels of the fair value hierarchy:
The result of applying the fair value hierarchy to the fair value measurement of financial assets and liabilities in the prior year is shown in the following table:
Explanatory comments relating to net gain/loss on financial instruments by category
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 component of financial instruments is recognized under net interest expense (see Note 12. Interest result). Other components of net income or loss are recorded in MTU’s financial statements in the financial result on other items (Note 14. Financial result on other items), 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.
Explanatory comments relating to net interest expense
The net interest expense on financial liabilities classified as financial liabilities measured at amortized cost (an expense of € 16.5 million) mainly comprises interest expenses attributable to the convertible bond, finance lease liabilities and credit agreements with banks.
Explanatory comments relating to measurement subsequent to initial recognition
Measurement of fair value
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.
Gains from the currency translation of financial instruments classified as loans and receivables amounting to € 11.7 million (2010: losses amounting to € 5.6 million) are mainly attributable to exchange rate gains and losses arising from the measurement of trade receivables.
The following table provides comparative information on the effect of transactions involving financial instruments, aggregated by category.
38. Deferred tax liabilities
Deferred tax assets and liabilities were created for assets and liabilities and for measurement differences on the equity component of the convertible bond, for available-for-sale assets that are not measured at fair value through profit or loss, and for derivative financial instruments. Income tax assets were also recognized for tax credits and losses available for carry-forward.
Reference is made to Note 15. (Income taxes) 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.
Deferred tax assets were recognized for deferred tax losses/credits available for carry-forward in the case of the following group companies:
In the financial year 2011, MTU Aero Engines North America Inc., Newington, U.S., and Vericor Power Systems LLC., Atlanta, U.S., made no use of loss carry-forwards for tax purposes. No deferred tax assets are recognized for these companies because the unused tax losses amounting to € 18.9 million were fully written down in previous years through valuation allowances. In the United States, tax losses can be carried forward for 20 years.
Since 2006, it has been possible to carry forward tax losses for a period of up 20 years. In view of the fact that MTU Maintenance Canada Ltd., Richmond, Canada, generated positive taxable income in the financial year 2011, the loss carry-forward of € 7.4 million was fully utilized.
The tax credits of € 4.7 million relate to the production site of MTU Aero Engines Polska Sp. z.o.o., Rzeszów, 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.
Temporary differences for which no deferred tax assets were recognized totaled € 3.6 million in the financial year 2011 (2010: € 3.5 million) and related to MTU Aero Engines North America. The resulting potential tax impact of € 1.8 million (2010: € 1.6 million) was therefore not taken into account in the computation of income tax expense.
Applying the same accounting treatment of deferred taxes as when the convertible bond was issued, the deferred tax liabilities of € 5.1 million (2010: liabilities of € 5.1 million) relating to the equity component of the convertible bond are presented in capital reserves. Deferred taxes on cash flow hedges and securities are presented in other comprehensive income.
Deferred tax liabilities for taxable temporary differences arising from investments in subsidiaries and joint ventures
In accordance with IAS 12, deferred tax liabilities were not recognized for temporary differences amounting to € 147.2 million (2010 adjusted: € 109.0 million) that arose in connection with investments in subsidiaries and joint ventures. If these differences were to lead to the creation of deferred tax liabilities, they would result in a tax liability amounting to € 5.1 million (2010 adjusted: € 3.5 million), based on the current provisions of Section 8b of the German Corporate Income Tax Act (KStG).