Accounting and Valuation PrinciplesThe annual financial statements of the subsidiaries included in the Salzgitter Group are prepared in accordance with uniform accounting and valuation principles in compliance with the provisions of the IASB. Assets are capitalized if the Salzgitter Group is entitled to all of the material opportunities and risks associated with their respective use. In principle, assets are valued at amortized cost or production cost or current value. Financing costs are not capitalized. From the financial year 2005 onwards, the changes to IFRS as a result of the IASB improvement project must be observed. For the Group, this has led to the following changes: The application of IAS 1 in the reporting of the improvements project requires the classification of the balance sheet in current and noncurrent assets and debts, as well as equity. The proportion of minority interests must henceforth be reported under equity. According to IAS 2, inventories will no longer be valued using the Lifo method from 2005 onwards. For that reason, inventories have basically been valued individually or using the average method. The adjustment to the valuation method was reported without affecting income in the financial year 2005. In the Steel Division, work in process and finished products were already valued at their moving average in the 2004 financial statements. An adjustment to January 1, 2004, was not made, as the amounts involved could not be ascertained reliably. A considerable expansion of the disclosures in the Notes was necessitated by the application of IAS 24 (Related Party Disclosures) in the reporting of the improvements project.
Estimates and AssumptionsWhen the consolidated financial statements were being prepared, estimates and assumptions were made that impacted the amounts and the reporting of the assets and debts, the earnings and expenditure and the contingent liabilities that are included in the balance sheet. The estimates and assumptions essentially relate to the uniform groupwide determination of economic useful lives, the accounting and valuation of provisions and the realizability of future tax benefits. The assumptions underlying the respective estimates are explained in the individual items in the income statement and the balance sheet. The actual values can deviate from the assumptions and estimates in individual cases. Deviations of this kind are posted to income as of the time when better knowledge becomes available.
Goodwill/Negative Goodwill from Capital ConsolidationThe capitalized goodwill for companies acquired before October 1, 1995, that results from the capital consolidation continues to be offset against retained earnings. Goodwill acquired since October 1, 1995, is capitalized, examined annually for diminutions in value and, if necessary, amortized. The negative difference reported under intangible assets as of December 31, 2004, was reposted to retained earnings neutral to income in accordance with IFRS as of January 1, 2005. Negative goodwill arising after March 31, 2004, will, in accordance with IFRS 3, be recognized immediately with effect on income after the net assets acquired have been revalued.
Intangible AssetsOther intangible assets acquired against payment are reported at acquisition cost and, if their useful lives can be ascertained, amortized on a straight-line basis over the period of their likely economic useful lives. Other intangible assets are usually amortized over a period of five years. Internally generated intangible assets are capitalized if it is probable that their usefulness for the Group is reliable and their acquisition and/or production costs can be assessed reliably. The production costs of internally generated intangible assets are determined on the basis of directly attributable costs that are necessary for the creation, production and development of the asset so that it is in good operational condition for the purposes intended for it by the Group's management. Development costs are capitalized if a newly-developed product or procedure can be clearly defined, is technically feasible and is intended for either the company's own use or marketing. Moreover, capitalization presupposes that development costs will with sufficient probability be covered by future inflows of cash and cash equivalents. As of December 31, 2005, there were no substantial development costs within the Salzgitter Group that satisfied these prerequisites. Research costs are recognized as expenses.
Tangible Fixed AssetsTangible fixed assets are valued at acquisition or production cost less accumulated depreciation and value diminution costs. Any investment grants received are shown as a reduction in the acquisition and production costs. The residual book values and the economic useful lives are examined on every reporting date and adjusted if necessary. If the book value of an asset exceeds its estimated obtainable amount, this amount is written down. If the reasons for a write-down in previous years no longer apply, appropriate reversals of write-downs are carried out. The production costs of internally generated tangible fixed assets are determined on the basis of directly attributable costs and estimated demolition and restoration costs. Financing costs for the production period are not included. The costs of regular maintenance and repair for tangible fixed assets are recognized as expenses. Renewal and maintenance expenses are capitalized as subsequent production costs if they result in a material extension of the useful life or a substantial improvement or an important change in the use of the said tangible fixed assets. Material components of tangible fixed assets that require replacement at regular intervals are capitalized as autonomous assets and depreciated over the course of their economic useful lives. The regular straight-line depreciation is essentially based on the following economic useful lives:
LeasingThe Group operates as both a lessee and a lessor. When leased tangible fixed assets are used, the prerequisites of financial leasing in accordance with IAS 17 are fulfilled if all substantial risks and opportunities associated with ownership were transferred to the respective Group company. If a contract consisting of several components applies, a lease arrangement is then assumed, in accordance with IFRIC 4, if the fulfillment of the contract depends on the utilization of a particular asset and the contract regulates the transfer of this utilization right. In these cases the respective tangible fixed assets are capitalized at acquisition or production cost or at the lower net present value of the minimum leasing payments and are depreciated using the straight-line method over their economic useful lives, or the shorter term of the lease agreement. Future lease payment obligations are discounted as liabilities. If assets are utilized in a financial lease arrangement, the net present value of the lease payments is reported as a leasing receivable. The difference between the gross receivable and the net present value of the receivable is recognized as unrealized financial income. Lease income is reported for the duration of the lease arrangement using the annuity method, which results in a constant interest rate on the leasing receivable. Lease arrangements in which a material part of the benefits and risks inherent in ownership of the leased item remains with the lessor are classified as operating leases. The lease installments to be paid under these lease arrangements are recorded in the income statement for the duration of the lease arrangement using the straight-line method.
Financial AssetsFinancial assets are divided up into a number of categories; how the assets are classified depends on the purpose for which the respective financial assets were acquired. The classification determines how the financial instruments are reported in the balance sheet. The categories used are as follows: a) Financial assets at fair value through profit and lossIn the Salzgitter Group, only those financial assets that were classified from the outset as being held for trading purposes are reported in the balance sheet. Derivatives are classified as held for trading purposes if they are not related to documented hedging arrangements for underlying transactions. b) Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not listed on an active market. They come into being when the Group provides a debtor directly with money, goods or services. Acquired receivables must also be classified under this heading. Loans and receivables are reported in the balance sheet under other receivables and assets. c) Held-to-maturity investmentsHeld-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the positive intention and the ability to hold to maturity. d) Derivatives with documented hedging arrangementsThese financial instruments have no longer been classifiable as “available-for-sale financial assets” since IAS 39 was amended in December 2003, as derivatives from this category are expressly excluded. They therefore constitute an additional category. e) Available-for-sale financial assetsAvailable-for-sale financial assets are non-derivatives that cannot be attributed to any other of the categories described above. The financial instruments are attributed to the noncurrent assets if the management does not intend to sell them within 12 months of the reporting date. In principle, all purchases and sales of financial assets are recognized on the performance date − this is the date on which the asset is delivered to the Group. If the subsequent valuation is carried out at fair value, a change in fair value between the trading date and the performance date must be recognized promptly as of the trading date. Financial assets that do not belong to the “financial assets at fair value through profit and loss” category are initially reported at their fair value plus transaction costs. Financial assets in the “held-to-maturity investments”, “derivatives with documented hedging arrangements” and “at fair value through profit and loss” categories are reported in the subsequent valuation at fair value. The subsequent valuation of “loans and receivables” and “held-to-maturity investments” is carried out at amortized cost using the effective yield method. The fair values of listed shares are determined on the basis of their closing prices in electronic trading. Insignificant non-listed shares are valued at their acquisition cost, as there is no price from an active market and the fair value cannot be ascertained reliably. The forward exchange contracts are valued using the Group's own calculations. The outright rates applicable for the reporting date were determined on the basis of the ECB's reference rates for the respective currency pairings and the interest rate differences between the various terms of the forward exchange contracts. Working on the assumption of standardized terms, the interest rate differences between the actual terms were determined by means of interpolation. The information regarding the standardized terms was obtained from a standard market information system. The difference ascertained between the contractually agreed foreign exchange sum at the forward exchange rate and the cut-off date exchange rate is discounted as of the reporting date using the euro interest rate in accordance with the remaining term to maturity. The other derivatives are valued on the basis of calculations by the issuing banks. Unrealized profits and losses arising from changes in the fair value of financial instruments in the “available-for-sale financial assets” category are posted to equity. If assets in this category are sold, the cumulative adjustments to fair value under equity are posted to income as profits or losses from financial assets in the income statement. The method used to report profits or losses from derivatives depends on whether the derivative was designated as a hedging instrument and, if this was the case, on the item being hedged. The Group designates particular derivatives either as hedging the fair value of an asset reported in the balance sheet or a liability, or as hedging a transaction that is regarded as highly likely (cash flow hedge). Fair value hedgeChanges in the fair value of derivatives that were designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Cash flow hedgeThe effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in equity. The ineffective portion of the changes in fair value, on the other hand, is recognized immediately in the income statement. Amounts recorded in equity are reposted in the income statement in the period when the hedged item is recorded as profit or loss and in which the hedged underlying transaction is posted to income. However, when a hedged future transaction results in the recognition of a non-financial asset (e.g. inventories) or a liability, the profits or losses previously recorded in equity are transferred from equity and included in the initial valuation of the cost of the asset or liability. When a hedging instrument expires or is sold, or when a hedge no longer meets the requirements of hedge accounting, any cumulative profit or loss existing in equity at that time remains in equity and is not recognized in the income statement until the underlying transaction is ultimately recognized. When the forecast transaction is no longer expected to take place, the cumulative profits or losses that were reported directly in equity are immediately transferred to the income statement. Movements in the reserve for cash flow hedges in equity are disclosed in the statement of equity and the schedule of reported income and expenses. Derivatives that do not qualify for hedge accountingCertain derivative financial instruments do not qualify for hedge accounting. Changes in the fair value of such derivatives are recorded immediately in the income statement. For financial instruments that do not belong to the “at fair value through profit and loss” category, it is examined as of each reporting date whether there are any objective indications of a diminution in the value of a financial asset or a group of financial assets. Diminutions in the value of financial instruments in the “loans and receivables” and “held-to-maturity investments” categories are posted to income; write-ups are also recorded with effect on income. In the case of equity instruments that are classified as available-for-sale financial assets, a material or permanent decrease in the fair value is posted to income as a diminution in value. Diminutions in the value of equity instruments that have already been recorded in the income statement are reversed without affecting income. Financial instruments are written off when the rights to payment from the investment have lapsed or been transferred and the Group has essentially transferred all of the risks and opportunities associated with their ownership.
Trade ReceivablesTrade receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective yield method, less diminutions in value. A diminution in value of trade receivables is reported when there is objective evidence that the Group will not be able to collect all of the amounts due. The amount of the value diminution corresponds to the difference between the book value of the receivable and the net present value of the estimated future cash flows from the receivable, discounted at the effective interest rate. The diminution in value is disclosed in the income statement.
InventoriesInventories are stated at acquisition or production cost or the lower net realizable value. They are valued at average costs or individually attributed acquisition or production costs. The production costs are determined on the basis of normal operating capacity. Specifically, the production costs include not only the directly attributable costs, but also the production-related material and production overheads including production-related depreciation. Borrowing costs are not capitalized as part of the acquisition or production costs. Lower values on the reporting date resulting from the decrease in net realizable values are stated. If the net realizable value of previously written-down inventories has increased, the resultant reversal of write-downs is recorded as a reduction in the cost of materials or a change in inventories. All discernible storage and inventory risks that impact the expected net realizable value are taken into account through the suitable application of value adjustments. Work in progress and finished products, as well as internally generated raw materials, are valued at group production cost, which in addition to direct costs include the variable and fixed overhead costs that are calculated systematically or attributed. Rights to emit CO2 gases are reported in the balance sheet under inventories (supplies). Initial ownership of emission rights that were acquired without remuneration are recorded at an acquisition cost of € 0. Emission rights acquired against payment are recorded at acquisition cost. Increases in the value of the capitalized emission rights are realized only in the event of a sale. Diminutions in the value of the capitalized emission rights are recorded when the market price of the emission rights has fallen below the acquisition cost.
Provisions for PensionsThe provisions for pension obligations are formed as a result of commitments to retirement and invalidity pensions and provisions for surviving dependents. These provisions are formed exclusively for defined benefit plans under which the company guarantees that employees will receive a specific scope of provision. The provisions for similar obligations take account of bridging payments in the event of death. The pension commitments are valued on the basis of actuarial assumptions and calculations. The defined benefit obligations are determined using the internationally accepted projected unit credit method. The projected unit credit method takes into account not only pensions and acquired claims that are known on the reporting date, but also the increases in salaries and pensions that may be expected in the future. The current service costs are shown as personnel costs, and the interest component of allocations to provisions is shown as net interest income. Actuarial profits and losses are recorded in full in the provisions for pension obligations. The significant actuarial premises applied at the Salzgitter Group are as follows:
The Heubeck actuarial tables (Richttafeln) from 1998 were used to value the expected mortality of the beneficiaries as of December 31, 2004, and the Heubeck actuarial tables 2005 G were used for the valuation as of December 31, 2005.
Income TaxesIncome tax liabilities are set off against corresponding tax refund claims if they relate to the same area of fiscal jurisdiction and their types and maturities match. The change in the deferred tax liabilities is explained under Note 20. In accordance with IAS 12, deferred taxes are calculated using the balance sheet-oriented liability method. Under this method, tax relief and charges that are likely to arise in future are reported for temporary differences between the book values shown in the consolidated financial statements and the values attributed to assets and liabilities for tax purposes. As of December 31, 2005, the deferred taxes of domestic companies were evaluated with an overall tax rate of 39%. The German companies are subject to an average trade income tax rate of some 17% of trade earnings, which is deductible when corporate income tax is being determined. The corporate income tax rate amounts to a uniform 25%, plus a solidarity surcharge of 5.5% on corporate income tax. The calculation of foreign income taxes is based on the laws and regulations that are valid in the individual countries. The anticipated tax savings resulting from the utilization of losses carried forward whose realization is expected in the future are capitalized. When capitalized assets are valued for the purpose of future tax relief, consideration is given to the probability of the expected tax benefit being realized. Assets deriving from future tax relief include capitalized deferred taxes arising from temporary differences between book values stated in the consolidated balance sheet and values attributed for tax purposes, as well as tax savings resulting from losses carried forward whose realization is anticipated at a future date. Deferred tax claims in a particular area of fiscal jurisdiction are offset against deferred tax liabilities in the same area if the company is entitled to offset actual tax liabilities against tax claims and the taxes are levied by the same tax office; the offsetting is carried out insofar as there is matching maturity.
Sundry ProvisionsProvisions are formed for current obligations to third parties whose occurrence would be likely to burden Group assets. They are reported at their likely performance amount, taking into consideration all the discernible risks involved, and are not offset against recourse claims. Provisions are formed only if they are based on a legal or de facto obligation to third parties.
BorrowingsWhen they are recorded for the first time, borrowings are stated at fair value less transaction costs. In the subsequent periods they are basically valued at amortized cost; every difference between the amount paid out and the repayment amount is then spread over the term of the loan using the effective yield method. Borrowings are classified as current liabilities insofar as the liability is going to be settled within 12 months of the reporting date.
Income and Expense RecognitionSales and other operating earnings are recorded when performance has been rendered or assets have been furnished, and thus when the risk has already been passed. Dividends are collected when the claim has been legally accrued; interest expenses and interest earnings are reported pro rata temporis. Within the scope of the changes in the consolidated group, acquired dividend claims are recorded without effect on income as part of the capital consolidation. In accordance with IAS 20, grants may not be reported in the balance sheet until the necessary prerequisites have been fulfilled and it can be anticipated that the grants will actually be paid out. In principle, grants related to assets are reported as deductions from acquisition or production costs. Insofar as a grant related to income refers to future financial years, it is reported using the accrual method, and the component for future periods is transferred to an accrued item.
Diminutions in Value of Assets (Impairment Test)On every balance sheet date, the Group examines the book values of its intangible and tangible fixed assets to establish whether there are any signs of a diminution in value. If such signs are discernible, the recoverable amount is estimated in order to determine the cost of the diminution in value. If the obtainable amount for the individual asset cannot be estimated, the estimate is made at the level of the cash generating unit to which the asset belongs. Write-downs are carried out if the recoverable amount of the asset is lower than its book value. The recoverable amount of an asset corresponds to the net selling price or the capitalized value, whichever is higher. The capitalized value is determined by the net present value of future cash flows attributable to the asset. If the reason for a previous writedown no longer exists, a write-up is carried out. Noncurrent assets that are classified as available for sale are reported at the book value or the lower fair value, less disposal costs.
Financial Risk ManagementThe Group's business activities expose it to a variety of financial risks: the market risk (includes the currency risk, the fair value interest rate risk and the market price risk), the credit risk, the liquidity risk and the cash flow interest risk. The Group's overall risk management program is focused on the unpredictability of developments on the financial markets and seeks to minimize potential adverse effects on the Group's financial position. Risk management is carried out independently by the subsidiaries and associated companies of Salzgitter AG in accordance with policies approved by the Executive Board. The Executive Board issues written principles for overall risk management as well as guidelines for specific areas such as the foreign exchange risk, the interest rate and credit risk, the use of derivative and non-derivative financial instruments and the investment of excess liquidity. Currency riskThe Group operates internationally and is therefore exposed to a currency risk based on fluctuations in the exchange rates between various foreign currencies. Currency risks arise from expected future transactions and assets and liabilities reported in the balance sheet. The risk arises when transactions are denominated in a currency that is not the functional currency of the company. The Group companies use forward exchange contracts to hedge against such risks. In the Group, the hedging relationship between the hedging instrument and the underlying transaction, the objective of the Group's risk management and the strategy underlying the hedging transactions are documented when the transaction is concluded. In addition, the estimation as to whether the derivatives used in the hedging relationship compensate highly effectively for the changes in the current value or the underlying transaction's cash flow is documented in the Group at the start of the hedging transaction and continuously thereafter. Credit riskThe Group has no significant potential credit risk clusters. It has trading policies and an efficient receivables management program which ensure that products are sold only to customers with an appropriate payment history. Contracts involving derivative financial instruments and financial transactions are restricted to financial institutions with prime creditworthiness. The Group's business policy is to limit the amount of credit exposure to any individual financial institution. Liquidity riskPrudent liquidity risk management includes the maintenance of sufficient reserves of cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the existence of unused credit facilities. Cash flow and fair value interest rate riskThe Group's interest rate risk arises from noncurrent, interest-bearing liabilities. The liabilities with variable interest rates expose the Group to a cash flow interest rate risk. The fixed-interest liabilities give rise to a fair value interest rate risk. 
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