Other Disclosures
[ 28 ] CASH FLOW STATEMENT
The cash and cash equivalents contained in the cash flow statement comprise only cash and cash equivalents reported in the balance sheet.
Cash flows are presented in the cash flow statement classified into cash flows from operating activities, investing activities and financing activities, irrespective of the format of the balance sheet.
Cash flows from operating activities are derived indirectly from profit before tax. Profit before tax is adjusted to eliminate noncash expenses (mainly depreciation and amortization) and income. This results in cash flows from operating activities after accounting for changes in working capital.
Investing activities include additions to property, plant and equipment, and noncurrent financial assets, as well as to capitalized development costs. The changes in leasing and rental assets and in financial services receivables are also included here.
Financing activities include outflows of funds from dividend payments and redemption of bonds, as well as inflows from the issue of bonds and changes in other financial liabilities.
The changes in balance sheet items that are presented in the cash flow statement cannot be derived directly from the balance sheet, as the effects of currency translation and changes in the consolidated Group are noncash transactions and are therefore eliminated.
The changes in cash and cash equivalents due to changes in the consolidated Group structure relate to cash and cash equivalents of initially consolidated and deconsolidated companies.
In 2006, cash flows from operating activities include interest received amounting to €3,879 million and interest paid amounting to €3,184 million. In addition, the share of profits and losses of Group companies accounted for using the equity method (note 5) includes dividends amounting to €139 million.
[ 29 ] FINANCIAL INSTRUMENTS
1. HEDGING POLICY AND FINANCIAL DERIVATIVES
During the course of its operating and financing activities, the Volkswagen Group is exposed to exchange rate and interest rate risk. Corporate policy is to limit or eliminate such risk by means of hedging. All necessary hedging transactions are executed or coordinated centrally by Group Treasury.
2. HEDGING RULES
General rules apply to the Group-wide foreign currency and interest rate hedging policy; these are oriented on the "Minimum Requirements for Risk Management by Credit Institutions". Hedging transactions are entered into with national and international counterparties whose prime creditworthiness is continually assessed by leading rating agencies.
2.1 FOREIGN CURRENCY RISK
Currency forwards, currency options, currency swaps and cross-currency swaps are used to limit the foreign currency risk. These transactions relate to the exchange rate hedging of all cash flows denominated in foreign currencies arising from operating activities, as well as to matching currencies for financing activities.
We hedge expected foreign-currency sales revenue and materials purchases by means of forward exchange transactions and currency options, depending on the market assessment. In 2006, hedging related primarily to the US dollar, sterling, the Swiss franc, the Japanese yen and the Swedish krone.
2.2 INTEREST RATE RISK
Interest rate risk, i.e. possible fluctuations in the value of a financial instrument due to changes in market interest rates, primarily affects medium- and long-term fixedinterest receivables and liabilities. Interest rate swaps, cross-currency swaps and other types of interest rate contracts are entered into to hedge against this risk, depending on market conditions. Interest rate risk is hedged by fair value and cash flow hedges using the hedging instruments described above. Intercompany financing arrangements are normally structured to match the maturities of their refinancing.
2.3 COMMODITY RISK
The Volkswagen Group is exposed to commodity risks relating to sharp price fluctuations and availability. It eliminates or limits these risks by entering into commodity futures transactions. Hedging relates to substantial volumes of the commodities aluminum and copper, as well as the precious metals platinum, rhodium and palladium.
NOTIONAL AMOUNT OF DERIVATIVES
The fair values of the derivatives are estimated using market data at the balance sheet date as well as by appropriate valuation techniques. The following term structures were used for the calculation:
3. LIQUIDITY RISK
A liquidity forecast with a fixed planning horizon, unused lines of credit within the Volkswagen Group and globally available debt issuance programs safeguard liquidity at all times.
4. RISK OF DEFAULT
The risk of default arising from financial assets involves the risk of default by counterparties, and therefore comprises at a maximum the amount of the positive fair value receivable from them. The risk arising from primary financial instruments is accounted for by recognizing bad debt losses. Cash and capital investments and derivatives are only entered into with prime-rated counterparties. Risk is additionally limited by a limit system based on credit assessments by the international rating agencies.
[ 30 ] CONTINGENT LIABILITIES
The liabilities from warranty contracts relate primarily to compensation payments pledged during the course of the sale of the gedas group in the event that gedas does not achieve contractually agreed sales revenues.
In the course of the acquisition of a 100% equity interest in LeasePlan Corporation N.V., Amsterdam, and the subsequent sale of 50% of the shares to two co-investors, Volkswagen AG reached an agreement with the co-investors on put options entitling these investors to sell their shares to Volkswagen AG. These put options can be exercised (a) at any time or (b) under certain conditions within a fixed period. The price of the shares should be the higher of (a) the fair value of the shares as calculated by an expert using a standard valuation method, and (b) the co-investors' initial investment. The fair value of the put options is contained in Other liabilities.
The trust assets and liabilities of the savings and trust entities belonging to the South American subsidiaries not included in the consolidated balance sheet amount to €591 million (previous year: €775 million).
[ 31 ] LITIGATION
Neither Volkswagen AG nor any of its Group companies is party to any legal or arbitration proceedings that may have a material effect on the economic position of the Group, or have had such an effect within the last two years. Equally, no such proceedings are foreseeable. Appropriate provisions are established by the Group company concerned for any potential costs arising from other legal or arbitration proceedings pending, or the company has adequate insurance cover.
[ 32 ] CONTINGENT ASSETS
Current European court tax rulings may result in future benefits for the Group; the amount involved could be in the low hundreds of millions.
[ 33 ] OTHER FINANCIAL OBLIGATIONS
[ 34 ] AUDITORS´ FEES RECOGNIZED AS EXPENSES
Under the provisions of the German Commercial Code (HGB), Volkswagen AG is obliged to disclose the audit fees of the Group auditors in Germany that are recognized as expenses.
[ 35 ] TOTAL EXPENSE FOR THE PERIOD
[ 36 ] AVERAGE NUMBER OF EMPLOYEES DURING THE YEAR
[ 37 ] EVENTS AFTER THE BALANCE SHEET DATE
There were no significant events up to February 20, 2007.
[ 38 ] RELATED PARTY DISCLOSURES IN ACCORDANCE WITH IAS 24
Related parties as defined by IAS 24 are parties that the reporting entity has the ability to control or over which it can exercise significant influence, or parties that have the ability to control or exercise significant influence over the reporting entity.
On November 13, 2006, Dr. Ing. h.c. F. Porsche AG held 27.40% of the voting rights of Volkswagen AG and appointed two members of the Supervisory Board.
On January 20, 2007, the State of Lower Saxony held 20.26% of the voting rights of Volkswagen AG and also appointed two members of the Supervisory Board.
Transactions with private companies owned by the State of Lower Saxony are conducted on an arm's length basis.
All business relationships with unconsolidated subsidiaries, joint ventures and associates are transacted on an arm's length basis.
Members of the Board of Management and Supervisory Board of Volkswagen AG are members of supervisory and management boards of other companies with which Volkswagen AG has relations in the normal course of business. All transactions with these companies are conducted on an arm's length basis.
The majority of the supplies and services transacted between fully consolidated companies of the Volkswagen Group and related parties (unconsolidated subsidiaries, joint ventures, associates, Porsche AG and other related parties) are presented in the following tables, although only material transactions are listed:
RELATED PARTIES
The Board of Management and Supervisory Board of the Volkswagen Group are related parties within the meaning of IAS 24. The following benefits and remuneration were recorded for these persons:
The post-employment benefits relate to additions to pension provisions for current members of the Board of Management. The expenses shown above do not correspond to the definition of remuneration of members of the Board of Management and the Supervisory Board in accordance with the German Corporate Governance Code.