1 PFLEIDERER AG NINE-MONTH FINANCIAL REPORT 2007

The financial assets reported as long-term loans are governed by IAS 39 and are classified as loans
and receivables. They are measured at amortized cost. Amortized cost is the amount at which the
asset is measured at initial recognition minus principal repayments, plus or minus the cumulative
amortization using the effective interest method of any difference between that initial amount and the
maturity amount, and minus any reduction for impairment or uncollectibility.
Hybrid capital
Pfleiderer AG placed a €275 million hybrid bond on April 27, 2007, resulting in transaction costs of
€5.4 million and deferred tax assets of €1.4 million. The bond is structured as a perpetual bond and
carries a fixed coupon of 7.125% in the first seven years. The structure of the hybrid bond ensures
that it is recognized as a component of equity in accordance with IAS 32. For this reason, the taxdeductible
interest payments are not included in interest expense, but accounted for in the same way
as dividend obligations to shareholders.
Liabilities and financial liabilities
Current and non-current liabilities are recognized at their nominal value or settlement amount. Noncurrent
financial liabilities are measured at amortized cost using the effective interest method.
Provisions for pensions and other post-employment benefits
Provisions for pensions and other post-employment benefits are measured using the projected unit
credit method, which reflects both the pensions and acquired benefits known at the balance sheet
date and expected future increases in salaries and pensions. Differences between the projected
pension obligation and the actual defined benefit obligation (actuarial gains and losses) are only
recognized in profit or loss at the balance sheet date if they lie outside a corridor of plus or minus 10
percent of the total obligation. In this case, they are allocated over the average remaining service
lives of entitled employees, starting in the following year. The net pension costs including interest
expenses are recorded as personnel expenses. Effects from adjustments to the discount rate are
also recognized as personnel expenses.
In accordance with IAS 19, Employee Benefits, the fair value of any plan assets used to fund and
secure pension payments is offset against pension obligations in the consolidated balance sheet. The
pension obligations and plan assets continue to be reported in full and are not offset in the singleentity
financial statements prepared in accordance with German commercial law.
Other provisions
Provisions, including provisions for environmental protection obligations, that represent obligations to
third parties arising due to legal claims, official requirements, or for other reasons, are recognized
once it is probable that they have been incurred and their amount can be reliably determined, i.e.,
there is a legal or constructive obligation. The settlement amount is determined on the basis of the
best estimate. In the case of provisions involving a large population of items, this is the expected
value. Where the effect of the time value of money is material, provisions with a remaining term of
more than one year are discounted applying market interest rates that reflect matching risks and
maturities. The related expense is recorded under the corresponding expense caption.
Use of financial instruments
Financial instruments are contractual arrangements that include rights to cash and cash equivalents.
In accordance with IAS 32 and IAS 39, they include both primary and derivative financial instruments.
31 PFLEIDERER AG NINE-MONTH FINANCIAL REPORT 2007