Accounting Principles

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									Manual/Procedure                       Accounting Principles
1. GENERAL..............................................................................................3
2. BASIC PRINCIPLES OF US GAAP ………………................................4
3. BALANCE SHEET .................................................................................5
3.1 Non current assets (fixed assets) ........................................................................... 5
3.1.1 Property, plant and equipment (standard tools, - test and other equipment).................... 6
3.1.2 Intangible assets and goodwill ......................................................................................... 7
3.1.3 Financial assets ............................................................................................................... 7

3.2 Current Assets ........................................................................................................ 8
3.2.1 Capitalization of industrialization and system integration costs ....................................... 8
3.2.1.1 Capitalization of industrialization costs.......................................................................... 8
3.2.1.2 Capitalization of system integration costs …………...................................................... 9
3.2.2 Capitalization of costs for prototype tooling.................................................................... 10
3.2.3 Capitalization of costs for production tools and equipment............................................. 11
3.2.4 Regular materials (stock)................................................................................................ 12
3.2.5 Obsolete material ..................................................................................................... ...... 13
3.2.5.1 Instruction for handling of obsolete materials............................................................... 14
3.2.6 Scrap .............................................................................................................................. 14

3.3 Trade Receivables ................................................................................................ 16
3.3.1 Intercompany accounts .................................................................................................. 17
3.3.2 Evaluation of trade receivables ...................................................................................... 17
3.3.3 Write off of trade receivables........................................................................................... 17

3.4 Payables and other liabilities ................................................................................ 18
3.4.1 Intercompany accounts .................................................................................................. 18

3.5 Other receivables .................................................................................................. 19

3.6 Provisions .............................................................................................................. 19
3.6.1 Expected future losses ……………………………………………....………....................... 19
3.6.2 Warranties ............................................................................................................ .......... 19
3.6.3 Penalties ......................................................................................................................... 20

4. CURRENCY CONVERSION ................................................................21

4.1 CURRENCY CONVERSION FOR GROUP FINANCIAL STATEMENTS ..............21
4.2 Currency exchange for single companies ............................................................ 21

5.FACTORING...........................................................................................23

6.DOCUMENTS LINKED WITH THIS STANDARD ..................................24

7.ABBREVIATIONS ..................................................................................24
 Manual/Procedure          Accounting Principles
8.CONTACT PERSON ..............................................................................24




Prepared by:          Date:
Approved by:          Date:
Released by:          Date:




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  Manual/Procedure           Accounting Principles
1. General
The CO. Accounting Principles (AP) are applicable to all consolidated entities within the CO. Group.

The AP are devised to ensure the uniform preparation of commercial financial statements (annual
financial statements HB I and the revaluation and conversion into group standard HB II) of the individual
companies within the CO. consolidation group. The principles are based on German GAAP (HGB) and
are to be used in connection with the General Chart of Accounts and other implemented regulations
(CES, corporate CF/BA homepage); they are not an accounting manual. The AP will not touch on all
single items of the balance sheet; they will concentrate on special topics of interest to CO..

Based on these principles, the companies will themselves prepare the financial statements with their
adjustments and revaluations, which are required for the consolidated financial statements of the CO.
group.

All doubts and amendment proposals arising in connection with financial statements and these principles
must be submitted to corporate CF/BA.

The AP are binding for future financial processes. Issues from the past that have already been accepted
and testified by the local auditor, will not be affected.




Changes will be released at least once a year and published in the Intranet.




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  Manual/Procedure           Accounting Principles
2. Basic Principles of US GAAP

Generally accepted accounting principles, commonly abbreviated as US GAAP or simply GAAP, are
accounting rules used to prepare, present, and report financial statements for a wide variety of entities,
including publicly-traded and privately-held companies, non-profit organizations, and governments.
Generally GAAP includes local applicable Accounting Framework, related accounting law, rules and
Accounting Standard.

Similar to many other countries practicing under the common law system, the United States government
does not directly set accounting standards, in the belief that the private sector has better knowledge and
resources. US GAAP is not written in law, although the U.S. Securities and Exchange Commission (SEC)
requires that it be followed in financial reporting by publicly-traded companies. Currently, the Financial
Accounting Standards Board (FASB) is the highest authority in establishing generally accepted
accounting principles for public and private companies, as well as non-profit entities. For local and state
governments, GAAP is determined by the Governmental Accounting Standards Board (GASB), which
operates under a set of assumptions, principles, and constraints, different from those of standard private-
sector GAAP. Financial reporting in federal government entities is regulated by the Federal Accounting
Standards Advisory Board (FASAB).

The US GAAP provisions differ somewhat from International Financial Reporting Standards, though
former SEC Chairman Chris Cox set out a timetable for all U.S. companies to drop GAAP by 2016, with
the largest companies switching to IFRS as early as 2009.




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  Manual/Procedure             Accounting Principles
3. Balance Sheet

3.1 Non current assets (fixed assets)

Definition
Fixed assets are only such items, which are intended for permanent use in the business.

The criterion of distinction between fixed assets and current assets is the utilization of an asset and the
intention of the company. Assets which are intended for permanent use in the business are fixed assets.
“Permanent use” means, that the asset is integrated into operations and is available for repeated
operational utilization for several years. An additional criterion is the need on acquisition. Both criteria
must be secured to capitalize a fixed asset.

Contributions and Subsidies
Contributions to production costs by customer or other parties are deducted from amount to be
capitalized in the year of capitalization and prior to start of depreciation. Contributions granted in later
financial years and after start of depreciation will be capitalized as a negative addition to this asset item,
the future depreciation must be calculated for the remaining life. Is the amount granted for each single
asset higher than net book value, the difference between net book value and granted amount must be
taken into the result.

For capitalization of tools in fixed assets or current assets please see the position “capitalization of
expenses for production tools” under current assets.

Subsidies must always be deducted from the original amount capitalized. Has the subsidies been granted
at a later period than the period of capitalization, the deduction of acquisition cost and the correction of
depreciation have to be made retroactive.

Examples
Contribution prior to capitalization

Acquisition cost 150, contribution 50, useful life 10 years
150 – 50 = 100 => annual depreciation 10

Contribution one year after capitalization and start of depreciation

Acquisition cost 150, useful life 10 years => annual depreciation 15 in first year
Net book value at end of first period = 135
Contribution 50 in second year, 135 – 50 = 85 => new annual depreciation 85/9 = 9,44

Subsidies, Subvention one year after capitalization and start of depreciation

Acquisition cost 150, useful life 10 years => annual depreciation 15 in first year
Subvention 50 in second year => new total acquisition cost 100
New annual depreciation 10 starting second year.
Correction of depreciation of first year will be made in second year.

Labeling of fixed assets
Fixed assets must be labeled for identification purpose. The process of fixed assets additions will be
adopted to the accounting principles.




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  Manual/Procedure             Accounting Principles
Self developed fixed assets
Self developed fixed assets are not fixed assets, they must be charged to the income statement and the
capitalization in fixed assets is permitted.

Tools and customer specific equipment
Tools and equipment owned by CO. must be capitalized in fixed assets and valuated at acquisition
(excluding VAT) or production cost.

Depreciation and useful life
Depreciation of fixed assets is calculated according to the useful life of the assets.

Goodwill          project life, max 15 years
Software                    4 years Industrial buildings     25 years Machinery and technical fittings *)
          7-10 years Vehicles       5 years Office furniture 10 years Computer and other hardware 3-5
years
*) or to the maximum of cockpit life, if no multiple usage is possible

Low value items (LVI) currently under USD 410 acquisition cost are fully depreciated in the year of
addition. It is required to perform an annual physical count of all fixed assets.

3.1.1 Property, plant and equipment (standard tools, - test and other equipment)


Property and plant
The investments in these fixed assets are not regular business of CO. and need special treatment. All
new property and plant additions need approval for posting by corporate CF/BA

Standard tools and equipment
Standard tools are standardized tools and fixtures not related to a specific work piece and can be used for
several customer orders.

Standard test equipment and other equipment
Standard test equipment includes devices and machines required in manufacturing operations as well as
quality assurance, research and development for measuring and testing of materials, parts and
operations and, consequently, for monitoring quality, quantity properties and functions of products.
Standard test equipment also covers devices and machines used for displaying, computing, storing and
sorting test results and measurements if they are fixed accessory or are connected to the test equipment
in asingle structural unit.
This equipment is not related to specific production orders from customers.

Standard tools, standard test equipment and other equipment.

Principle

Tools are kept under non-current assets and have to be recorded as single economic goods.

Standard tools and standard test equipment are tools, which are used in standard production and
assembly processes within CO.. For these tools and equipment it is characteristic that they can be used
directly for several customer orders or indirectly after slight technical adjustments for further customer
orders.

Capitalization



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  Manual/Procedure            Accounting Principles
The amount to be capitalized must represent the acquisition cost. Internal CO. costs cannot be
capitalized.
Contributions and subsidies must be deducted from the amount to be capitalized, see also above chapter
“Contribution and Subsidies”.
Due to the long-term intended use of these tools and test equipment, they have to be recorded under
non- current assets.
Ownership
The purchase of these tools and test equipment is the responsibility of CO.. CO. is economical and legal
owner of these tools and test equipment.
The useful life and depreciation has to be booked according to the chart of accounts.

Changes of CO. owned tools
For tools that have already been capitalized to fixed assets it has to be decided, are the costs repair costs
that are charged to the result or are these costs increasing the value of the tool essentially, than they can
also be capitalized.
A major problem with tooling changes is, that many production orders are given verbally and sometimes
retroactive. To ensure a proper handling of tooling change costs, it is important to keep a good
documentation and to confirm verbally given orders in writing.

Changes of customer owned tools
Changes of customer owned tools are reported under current assets.

3.1.2 Intangible assets and goodwill


Intangible assets
include the following assets which have to be capitalized after the purchase: Concessions are official
permits to carry on a certain business or use public properties. Industrial and similar rights are protected
by law, like designs or trademarks.

Licences
Are the rights acquired for usage of software or manufacturing processes i.e. that are protected by law.
CO.’s major focus is on software. The replacement of an existing version of software must be capitalized;
the former version must be fully written off and charged to income statement. Simple updates of existing
software without major changes are not capitalized, they are charged directly to income statement.

The acquired right for usage of CO. developed software for the JIS - System that is or will be used in the
future by CO. companies abroad, is not and will not be capitalized. The monthly payments of the users
will be charged directly to result.

Goodwill is the difference between the purchase-price paid for a company is and the current value of the
individual assets minus existing liabilities. It is not permitted to capitalize a negative goodwill.

Self developed software
Self developed software is not an intangible asset, it is charged to income statement; the capitalization in
fixed assets is not permitted. (See also under Licences above)

3.1.3 Financial assets


Financial assets
Are shares in other companies, loans and long term investments to the extent that they are designated to
durably serve the company in its conduct of business.
Participations




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  Manual/Procedure            Accounting Principles
Are shares in affiliated companies to serve the own company’s conduct of business. Participations have
to be capitalized with the total acquisition cost of shares, including the foundation and registration in
company house / commercial register or the registration of increase of share capital cost. They can be
valuated at acquisition price incl. acquisition cost less depreciation. The acquisition cost includes the
initial cost such as notary fees, stock transfer tax, commissions and charges.
Companies in which participation is more than 50 % of the share capital must be consolidated.
Companies in which participation is 50% or less, are consolidated at equity.



Loans
Are long-term financial receivables that have resulted from lending of capital. They are reimbursed after a
stipulated period of time and are generally interest-bearing. All loans are contracted originally for a period
of 4 years or more and are considered long-term loans. Short-term loans (original term less than 4 years)
are not included in loans.

For any changes in financial assets, please contact corporate CF/BA.

Capital expenditures guidelines (has not yet been established)

Total investments
Namely the regular planned annual investments and the special investments are approved individually by
the Corporate Management of CO.. Investments, rental and leasing projects are treated in an identical
manner.

Capital expenditures
Are the investments in fixed assets, in standard tools and equipment with the intention of permanent use
in the company. All investments in special tools, special equipment and other customer specific items like
capitalization of engineering costs etc. are current assets and capitalized under inventories.

An investment guideline of the company describes the procedure involved in application for tangible and
intangible fixed assets, hiring, leasing and rental contracts. The separate guideline applies to all group
companies of CO. after being established.


3.2 Current Assets

General
The OEM issues a nomination letter to a supplier (CO.). Legally this nomination letter is an offer to be
accepted by CO., to become a binding contract.

A typical nomination letter includes the following issues, depending on the given order: cost contribution
for development, prototype tooling cost, production tooling cost, price per part, lifetime conditions, tooling
cost contribution, quality standards, timetable, market risk and tooling changes.

Current assets are all these assets that are not fixed assets and are not intended for permanent use in
the company.

3.2.1 Capitalization of industrialization and system integration costs


3.2.1.1 Capitalization of industrialization costs




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  Manual/Procedure            Accounting Principles
A new contract for the allocation of industrialization costs has been drafted and will be implemented
shortly after approval.

Definition
This position is strictly for new business in new locations in new countries in new legal entities. Costs for
the start up of new business include the costs for building up an organization of the company, designing
and establishing a production process as well as the necessary sales and overhead organization to
support the success of this entity.

If CO. has been nominated as the supplier for two new different cars and both have been nominated
separately or have been differentiated in the nomination letter, both product lines can be treated
separately. However, it is necessary that the restrictions are fulfilled in regard to new location, new
business and new country.
Not included in the above mentioned process and permitted for capitalization are any costs in regard to
the foundation of the company, i.e. incorporation cost, legal cost, company house cost or cost for the
raising of equity.

The start up period ends at the latest with SOP plus 3 months.

The expansion of existing production facilities or lines (e.g. new projects in existing plants) is not
understood as start up in this regard.

Quantities
For security reasons, a 20% deduction of quantity has to be calculated. The costs will be amortized over
80%
of the planned production quantities.

Included costs
Costs that can be capitalized mainly include the costs that are charged due to development and
industrialization from CO. to other outside locations.

Amortization / depreciation
The amortization / depreciation of these start up costs is related to the nomination letter and restricted to
a quantity produced.

Past
Start up costs capitalized in the past that have already been accepted and testified by the local auditor
will not be affected.

3.2.1.2 Capitalization of system integration costs


A capitalization of system integration costs in fixed assets is due to legal restriction not possible in US
GAAP; they need to be capitalized as current assets.

Definition
System integration costs can be capitalized as production costs in inventory of finished or semi-finished
goods. A condition on capitalization of these costs as production costs is, that the first products coming
out of production would be over-proportionally charged and that a mass production is planned and an
amortization of the expenses will be amortized over product- or project-life. A security deduction of 20% is
required.

However, accumulated expenses prior to receiving a production order cannot be capitalized and must be
charged to production costs. A retro-active capitalization of expenses of prior periods is not allowed. The
capitalization of system integration costs of the reporting period must be posted under position semi-
finished goods of inventory.


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  Manual/Procedure            Accounting Principles
After verbal or written confirmation of nomination for a new product, project accounts have to be opened
and project costs can be captured for capitalization (approval by corporate CF/BA required).

Capitalization and reimbursement
Part of the contract between OEM and supplier is an agreement on participation of the OEM on system
integration costs. Two ways are common, total reimbursement of these costs or partial takeover of
expenses. However the payment of the reimbursement can be up front lump sum, split over a period of
time or linked to quantities or amortized by a mark-up on the piece price.

In case of a combined development and production order, only direct cost and direct project related
overhead costs can be capitalized. If an order can be split into development order and production order,
only then it is possible to charge overhead costs to development costs as well.

In order to achieve correct results for the period, it is necessary to separate development and production
orders already in the negotiations of the OEM customer order.

The start up period ends at the latest with SOP plus 3 months.

Quantities
For security reasons, a 20% deduction of quantity has to be calculated. The costs will be amortized over
80% of the planned production quantities.

Amortization
In the years after capitalization of systems integration costs, they have to be spread and allocated to the
years, in which the income from product sales will be realized. The realization should be based on
quantities in regard to total quantity planned. An impairment test in regard to the latest customer forecast
on volume has to be done once a year. A reduction in sales price due to amortization should also be
reflected.

Ownership
The ownership of capitalized systems integration costs should be regulated in the nomination letter to
avoid complications. Also the general purchase guidelines of the OEM are part of this nomination letter
and must be followed.

If contracts are not available the following principles have to be applied: goods or services that have been
ordered by a customer, that have been fully paid by the customer, that have been approved and made
available to the customer or the production for the customer, these goods or services are owned by the
customer. The payments by the customer can be single payments, cost-contributions or amortization or
the combination of these possibilities.

Until a final payment has been made by the customer, these goods and services are capitalized in current
assets.

3.2.2 Capitalization of costs for prototype tooling


Definition
Also part of the nomination letters are regulations in regard to prototype tooling. Soft-tools mainly include
sampling tools for pressing, stamping and moulded forms. Prototype tools are produced for testing and
demonstration purposes to prove process functions.

Product life
The life of the tools is limited. A formal approval of tools based on parts out of these tools will not take
place. The tools are not designed for long-term use in the production process and are obsolete after



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  Manual/Procedure           Accounting Principles
official start of production. The usage of these prototype tools will end with approval of the regular
production tools.

Ownership
The ownership of prototype tools is normally with CO., depending on the nomination letter or other
agreements. The capitalization in current assets is valuated at acquisition cost or production cost.

Payment terms
The payment terms for prototype tooling are regulated in the nomination letter or prototype tooling
agreement. Only when the payment terms are finalized, the way of taking over of costs by the customer is
ensured. It is common, that products out of prototype tools are sold to the customer at a very high price
that includes the amortization of the prototype tools.




3.2.3 Capitalization of costs for production tools and equipment


Definition

Ownership CO.
In principle it covers the following groups: standard tools/ standard test equipment or standard equipment
are fixed assets and capitalized under fixed assets. The ownership is with CO.. A long-term permanent
usage in the company is planned. Please see fixed assets above.

Ownership OEM-Customer
Special tools/ special test equipment and special equipment are customer specific items that can not be
used for other customers or can only be used after major changes. These specific tools and equipment
are not in the CO. ownership, the ownership is with the customer. They are capitalized only in inventory
under semi- or finished goods in current assets.

Special tools/ special test equipment and special other equipment
Special tools and special test equipment are customer specific, work piece-related tools and test
equipment designed for the manufacturing or testing of a specific work piece.

This includes special tools, special fixtures, casting models and patterns are used for shaping and/or
joining/ separating as well as handling and positioning of work pieces and materials either by hand or by
means of machines.

Special tools are also regarded as power-driven tools, if tool and drive from an integrated unit and if the
tool accounts for the major share of the cost of the assembly line.

Special tools, special test equipment and special equipment

The term of customized tools and test equipment is synonymous with that of special tools, special test
equipment and special equipment.

Principle
Special tools and special test equipment are capitalized under current assets. Typical for these special
tools and test equipment are the exclusive usage for manufacturing of a certain customer order. The tools
and test equipment were made regarding the specification of the customized order and product. The
customized tools and test equipment represent unique types that can only be used at substantial



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  Manual/Procedure           Accounting Principles
technical change for producing other customer orders. This form of tool and equipment distinguishes itself
due to its special condition from standard tools and standard test equipment.

Capitalization
Special tools have to be broken down into single economic goods and capitalized on that level. Due to
specific usage for customer orders only these goods are capitalized as current assets only in inventory.

Lump sum contributions and subsidies must be deducted from the initial amount to be capitalized, see
also above chapter “Contributions and Subsidies”.

The reduction of value for utilization is based on quantities amortized over a period of time, as agreed in
the nomination letter. The amortization is not depreciation, the amortized amount is charged to production
costs.

The amount to be capitalized is based on production costs. This includes direct acquisition cost of goods
and parts, direct labor and direct production costs.

Procedure
For this type of tool and test equipment the customer usually grants a subsidy. This subsidy represents a
payment in return of receiving services or products to reduce initial piece price.

The reduced manufacturing costs of tools have to be shown under inventories.

Customer tools under construction are capitalized as semi-finished products in inventory. The valuation is
based on purchase and production costs.

Customer specific tools with suppliers

Principle
Customer specific tools and equipment can be located at CO. or at a supplier of CO.. Generally they are
handled the same way as tools are handled between customer and CO..

Capitalization
Customer specific tools will be capitalized at supplier under current assets in inventory and amortized
over a given quantity. Subsidies must be reduced from initial cost as described in paragraph
“contributions and subsidies”.

Ownership
The ownership of the tools is negotiated or fixed in the nomination letter or corresponding agreements.
The ownership can be with the CO.-customer (OEM), with CO. or with the supplier of CO.. In most cases
it will be with the customer of CO. or with the supplier.

Tools owned by the customer or supplier and that are fully paid by customer or supplier are not
capitalized in the CO. books. Even if the tools are owned by the customer, but the tools are located at
CO.. The legal ownership is with the OEM customer, he also has the right to get the tools handed out on
request in the case of termination of the production contract.

Each contract must be carefully checked for conditions of ownership.

Termination of Tooling
Has a production order been terminated, the tools have to be returned to owner.

Before tools are handed out to the tool-owner it is important to remember that development costs for
developing a tool are normally not included in the tool price that were capitalized. These costs must be
charged to the customer prior to handing out the tools. Please see also 3.2.1.1 “capitalization of
industrialization costs” for details.


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  Manual/Procedure              Accounting Principles
Changes of customer owned tools
The development of a car takes several years. During this development process changes are necessary.
Initially finalized parameters or production processes can be changed, due to change reasons, which are
requested by the customer.

No changes to customer-tools can be made without a purchase or change order of the customer for each
single change. This order must also state the payment of the cost of the tool change. The cost can be
paid as a lump sum payment or as a change to the piece price and amortized over a quantity of parts.

In both cases a project has to be opened for the single change. This can be a new project number for
already finished and paid projects or a sub-number for unfinished projects. It must be assured, that these
additional costs will be fully collected and will be paid by the customer. Changes without order of
customer will be charged directly to the responsible department and will flow into P&L for that month.

Changes of CO. owned tools
CO. owned tools are reported under fixed assets.

3.2.4 Regular materials (stock) Definition


It is regulated that inventories are valuated at purchase price or production cost. Raw material, supplies,
parts and consumables are capitalized at purchase price. Self developed or produced but not sold item s
of current assets are to be capitalized as unfinished or finished goods, valuated at production cost.
Included in production costs are the following costs components:

Direct material costs           mandatory
Direct production labor costs   mandatory
Direct costs of production      mandatory

Direct sales costs      not permitted
Indirect sales costs    not permitted


In principle the average days of stocks are between 3-5 working days; a market evaluation in addition to
acquisition costs is not necessary.

Raw materials and parts are the main substances of the goods to be produced. Supplies are materials
which are merged into the product without becoming its essential substance. Consumables are items
needed for production without becoming part of the product.

Inventory count
A full physical inventory count must be performed at year end. However when the auditors have proofed
and agreed that the permanent cycle count method is sufficient accurate a plant or company may switch
to cycle count only after approval of C-CF/BA.

Valuation
Usage of material is valuated by the FIFO method. The valuation is based on last purchase prices and
acquisition costs. The principle of lower of costs or markets is adopted. All parts and components are
valuated separately for future usage, no moving materials and parts are 100% written off.

For detailed information see “Inventory Guideline”

3.2.5 Obsolete material



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  Manual/Procedure             Accounting Principles
Inventory guideline is fully valid in this regard. The target is described below:

Definition of OEM-parts
CO. creates services (assembly, logistics, others), imbedded between suppliers of parts and OEM-
customers. In general CO. assembles cockpit modules for the automotive industry “just-in-sequence”.
According to this, the cockpits are only produced based on released production orders by the customer.
The suppliers were selected by the OEM. To be able to produce just in sequence it is necessary to have
a fixed period prior to production time, to order and receive the required production material and parts.

Definition of CO. sourced parts
The difference between OEM parts and CO. sourced parts is that CO. has taken over the responsibility
for design and / or for supplier selection. All other conditions are generally the same, especially the
release of material to produce just-in-sequence for a fixed period prior to production time, to order and
receive the required production material and parts.

Conclusion
Due to these general conditions, it is not possible to have any obsolete material out of production
process. Purchase orders to suppliers are only given after having received a fixed production order from
the customer.
Consequently all materials that were ordered to fulfill the customer orders must be charged to the
customer even when they were not needed for production, due to model change, change in parts etc.
Excess stock cannot be created due to fixed production orders or due to fixed material release.



Quality issues
Material that does not meet the contractual standards is not accepted by incoming inspection of quality
control and rejected. It has to be returned to the supplier and will not be part of the ownership of CO..

Rejected material that was already in the production process and in the ownership of CO. has to be taken
out of production and into a special blocked warehouse to be returned to the supplier. Debit notes must
be issued right away and deducted from next payment to supplier.

Critical area
Critical areas in general are: mistakes in the ordering process of CO., material with minimum quantities,
changing process and products at the end of a life cycle. A very detailed planning is required and must be
agreed upon with and by the customer.

3.2.5.1 Instruction for handling of obsolete materials


Currently obsolete materials are handled as follows:

Obsolete materials
Obsolete inventory has to be taken out of regular stock and booked into obsolete inventory stock.
Obsolete inventory can be sold to the customer based on material release, for spare parts or based on
purchase orders, it can be reclassified to a new part number, it also can be retuned to the suppliers or it
can be scrapped due to mistakes by CO.. Until a decision or agreement has been reached, obsolete
inventory will be kept in obsolete inventory stock.

Returns to suppliers
Logistics enters the exit of materials into the logistics-system with the code “returns to suppliers”. A copy
of the entry form and the shipping papers must be given to accounting, to generate a debit-note and to
deduct the debit amount from the next payment.

Shipment of material (not finished goods) to customer


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  Manual/Procedure             Accounting Principles
Logistics enters the exit of materials into the logistics-system with the code “sales to customer”. A copy of
the entry form and the shipping papers must be given to accounting, to generate a manual invoice.

Reclassification of material
When a reclassification of materials takes place after approval of the customer to a new part- number, the
parts have to be taken out of stock by logistics by the old part-number and returned with the new part-
number.
The latest purchase price has to be used. This procedure will not have an effect on result.

Rework by customer
CO. will be debited with the cost of rework by the customer and will charge the cost to the responsible
cost- center Quality of the CO. production plant. Rework caused by a supplier has to be charged and
debited to the supplier account and deducted from next payment.

Rework at CO.
Rework costs will be charged to the cost-centre quality of the responsible production plan.

Rework at supplier
If the supplier reworks at CO. location, rental costs will be debited to supplier and deducted from next
payment.

3.2.6 Scrap


Scrap
(in reference to procedure S45 and S78 control of nonconforming components and modules)

Introduction
To install a guideline for the handling of scrap it is important to differentiate scrap from other possibilities
to handle materials, especially from obsolete materials.

Obsolete materials are materials with no customer demand, which is property of CO.. Under obsolete are
materials understood that are not used for production anymore. The reasons for the obsolete materials
have to be investigated and the costs have to be charged out to the accountably origin. Obsolete
materials are not part of this guideline.

Scrap are materials with no customer demand or usage, which is property of CO.. Scrap is produced or
generated in the process within CO. between receiving materials on the incoming side and the shipping of
products on the sales side. In this process, scrap can also be detected that was caused by a supplier and
will be charged to the supplier.


It is the major interest of CO. to distribute costs, who ever is responsible for it. Costs that will stay with
CO. must be reduced to a minimum and will have direct negative result effect.

Definition
All materials that can be sold or charged to OEMs or to suppliers are not scrap out of the view of CO.,
they are sellable valid moving materials.

Only materials that can not be sold or charged to OEMs or suppliers can be charged to CO. caused scrap
costs. It can be identified in quarantine store, production process or in the logistic chain.

An exception is scrap in production or quarantine caused by supplier. This is scrap identified in
quarantine or production process that can or must not be used for production.




                                                                                                             15
  Manual/Procedure            Accounting Principles
Scrap caused by a supplier must be charged to the supplier. Scrap that was caused by CO. can not be
charged out and must be carried by CO.

CO. can scrap only materials that are property of CO., in the case of supplier caused scrap, only in the
order and on costs of the supplier.

Scrap that has been identified according to this guideline must be immediately fully written off, the
scrapping process must be directly started.

Scrap caused by suppliers
Scrap caused by suppliers can be identified in the production process. It can be materials that was sent to
quarantine store or materials of poor quality that was identified in production.

In both cases quality department is responsible for the correct entry. The entry must include the piece
part price, the scrapping cost as well as the handling fee. The piece price is valuated at acquisition or
weighted average costs, what ever is more reasonable.


Materials are booked out of quarantine store:

The entry will be:
Debit:           Receivables                 (balance sheet)
                 Material consumption        (income statement)
Credit:          Quarantine store            (balance sheet)
                 Other income                (income statement)

Entry code:      “scrap caused by supplier”



Materials will be taken out of production:

The entry will be:

Debit:           Receivables                 (balance sheet)
                 Material consumption        (income statement)
Credit:          Work in process store       (balance sheet)
                 Other income                (income statement)

Entry code:“scrap caused by supplier”

Scrap caused by CO.
Scrap caused by CO. can be identified in the process between receiving department, incoming
inspection, warehouse, production and shipping department.

In all cases quality department is responsible for the correct entry. The entry must include only the piece
part price valuated at weighted average cost.

Materials will be taken out of production:

The entry will be:

Debit:           Material consumption        (income statement)
Credit:          Work in process store       (balance sheet)

Entry code:      “scrap caused by CO.”


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  Manual/Procedure            Accounting Principles
Material responsibility and ownership can be according to contracts “ex works” at supplier. Due to this,
receiving and incoming inspection have to ensure that transportation damages have to be identified at
first point of possession of materials. The costs for damages must be charged to the transportation
company, they are not scrap of CO..

At customer side the risk of ownership is handed over to the customer at the latest point of possession of
the goods. This can also include transportation to the customer. Freight damages must also be charged
to the transportation company, they are not scrap of CO..


3.3 Trade Receivables

Definition
Receivables and other assets are:

        Trade receivables
        Receivables from consolidated group companies
        Receivables from non-consolidated companies
        Receivables from shareholders
        Other assets

Ledger requirements
The receivable ledger must state the status of accounts, name and address of debtor and the amount of
each single receivable including date due for payment. To ensure proper valuation and currency
conversion, areceivable should be reported in contractual currency as well as in local currency.

Valuation
Receivables and other assets must be reported at nominal value. Non-payment risk, discounts and
interest portions must be covered by individual write downs and value adjustments. A reserve for overall
credit risk (bad debt provision) does not exist. Due to the special business CO. is in, a bad debt provision
is not required.

Receivables are valuated at nominal value or on lower of cost or market value, what ever is less. Write
downs or value adjustments will be additionally deducted from the valid valuation value.

The currency conversion is a separate paragraph after the chapter “Balance Sheet”.

Off set permission
Receivables and other assets are permitted to off set against liabilities, even if the contracting party is
identical.

3.3.1 Intercompany accounts


Receivables from consolidated group-companies are to be reported in intercompany accounts. It is
booked under the principle: who books first is right. Transactions of one group- company have also to be
made in the other group-company. This is mandatory and regardless from being accepted or correct.

A reconciliation of intercompany accounts must be performed on a monthly basis. The company that has
the receivable has to take the initiative for reconciliation. A reconciliation has to be performed based on
contractual currency.




                                                                                                         17
  Manual/Procedure            Accounting Principles
Any bad debt provisions or write downs for group companies are not accepted and need to be reversed
on a single company level already for financial statements.

Intercompany payables will be handled respectively.

3.3.2 Evaluation of trade receivables


Receivables and other assets are valuated at acquisition cost (nominal value) or market price, whatever
is less. The method of lower of cost or market is applicable.

Receivables that are secured (each individual matching receivable) by a currency forward contract must
be valuated at the exchange rate of such related contract, however the method of lower of cost or
markets still applies.

Matching hedge contracts to secure a receivable must have the same nominal value and the same
maturity date, as well as no risk of delays. Hedge contracts to secure future cash-flows do not meet these
criteria of matching single contracts.

3.3.3 Write off of trade receivables


Due to the special business CO. is in with customers and suppliers, CO. should not have any need for
lump sum write off of regular trade receivables. Supplies to the customers are only made on customer
request and purchase order. However single write off of receivables are possible and necessary,
whenever reasonable justifiable doubts on the collection are existing. Write offs have to be deducted from
the nominal amount of the receivable.


3.4 Payables and other liabilities

Definition
Payables are differentiated in:

        Trade payables
        Payables to consolidated group companies
        Payables to non-consolidated companies
        Payables to shareholders
        Other liabilities

Payable ledger
The payables ledger must state the status of accounts, name and address of debtor and the amount of
each single receivable including due date. To ensure proper valuation and currency conversion, a
payable should be reported in contractual currency as well as in local currency.

Payables and other liabilities are not permitted to off set against assets, even if the contracting party is
identical.

3.4.1 Intercompany accounts


Payables from consolidated group companies are to be reported in intercompany accounts. It is booked
under the principle: who books first is right. Transactions of one group company have also to be made in
the other group company.


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  Manual/Procedure            Accounting Principles
A reconciliation of intercompany accounts must be performed on a monthly basis. The company that has
the receivable has to take the initiative for reconciliation. A reconciliation has to be performed based on
contractual currency.

This is mandatory and regardless from being accepted or correct. Intercompany receivables will be
handled respectively.

Valuation
Payables and other liabilities have to be valuated at initial costs and spot rate of day. Is the exchange rate
favorable at closing date, no adjustment will be made. However, is the exchange rate negative for CO.,
unrealized exchange losses have to be reserved.

Payables that are secured (each individual matching receivable) by a currency forward contract must be
valuated at the exchange rate of such related contract, however the method of lower of cost or markets
still applies.

Matching hedge contracts to secure a payable must have the same nominal value and the same maturity
date as well as no risk of delays. Hedge contracts to secure future cash-flows do not meet these criteria
of matching single contracts.


3.5 Other receivables

Here must be shown all asset items which cannot be classified under any other asset group. These are
mainly prepayment of taxes and charges, payment on account (not for stock) and claims for tax refund.


3.6 Provisions

Typical standard provisions are common knowledge and will not be named separately, following are
provisions that need special attention.

3.6.1 Expected future losses


Principle
The principle of lower of cost or markets is also relevant for the valuation of running and future business
of the company and profits that are generated by the products that will be sold in future. The target is to
reserve today for losses out of regular business that will be generated in the future.

Valuation
In general a valuation of each single business has to be performed. For the business of CO. however not
a valuation based on single parts is relevant but the valuation of systems that will be sold to our
customers and the prices that will be archived for the systems in future. The nomination letter is in many
cases the only legal document that is available between CO. and customer.

Based on the nomination letter CO. has the obligation to deliver not only cockpit modules but also
engineering, development and system integration services, prototypes and customer specific production
tools, production and testing equipment. All these deliveries and services are bundled in one nomination
letter and supply agreement. Contributions and subsidies have to be deducted. On this basis it has to be
evaluated and calculated the profitability or loss situation of an order of a nomination letter. It has to be
properly documented.


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  Manual/Procedure            Accounting Principles
3.6.2 Warranties


Principle
According to US GAAP, incidents have to be accrued when CO. has an obligation to reimburse the
customer to solve these problems. Basis of these obligations are nomination letters or supply orders and
other contracts and agreements between CO. and the customer. This must include also reimbursement
for goodwill and fair dealing.

Additionally American law and regulations makes a supplier directly responsible for supplies to OEM
customers. The warranty is legally fixed to a minimum of 2 years for the final user. Claims of recourses
can be made up to 5 years.

Valuation of single risk
It has to be reserved for all single risk separately. A careful estimation has to be made including the part
and system costs as well as all costs that could occur out of the replacement at the customer or in the
field.

Due to the business CO. is in, CO. can only be made responsible for its own working content, which is
strictly limited to assembly of cockpit modules, logistics and other services. In cases of CO. sourced parts,
an additional risk for the development of the parts may exist; the risk of the part itself is covered by the
supplierof the part.


Valuation of general risk
In general a reserve for general risk due to the special business of CO. is not necessary.

3.6.3 Penalties


A part of the nomination letter covers the topic penalties. Penalties are fines to be paid for non
performance. Provisions for penalties have to be made in the moment of identification.




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  Manual/Procedure            Accounting Principles
4. Currency conversion

4.1 Currency conversion for group financial statements

Target and Scope
These guidelines serve the uniform conversion of foreign financial statements into Euro.

Companies abroad have to submit the annual financial statements in accordance with this guideline in the
group currency Euro (€). Monthly financial statements and budget / plan statements must also be
reported in Euro.

Exchange rates for annual financial statements are provided by corporate CF / BA and entered into the
reporting system HFM. Exchange rates for monthly financial statements and budget / plan reports are
also available in the HFM reporting tool and will be published in the intranet.

Principles
A conversion is to be made using a uniform procedure and differentiated exchange rates according to the
reference times for the respective balance sheet and result items. A distinction is made between the
followingexchange rates:

Exchange rate at balance sheet date of the financial year (Spot rate) (average rate of buying and sellin g
as at 31.12.)

Historical rate
(Average rate of the year of addition)

Monthly average rate is the calculated average of the daily spot rates based on onda.com. The yearly
average rate is the calculated average of the 12 monthly average rates.

Balance sheet
All positions (not equity) of the balance sheet are converted by the average rate of buying and selling as
at 31.12. (Spot rate). The exchange rate will be published by corporate CF/BA in the Intranet.

The equity capital, valuation reserve and profit / loss carried forward are converted by the historical
exchange rate. The exchange difference resulting out of spot and average rate will be charged result
neutral against capital reserve.

Income statements (yearly accumulated accounts)
All positions of the income statements are converted by the sales weighted average rate of the year.
Material issues are valuated by the acquisition cost and average exchange rate.

Monthly reporting (monthly accounts MTD, accumulated months YTD)
For monthly reporting purposes it will be checked to rework existing conversion method to eliminate
exchange rate effects of prior reporting months in the actual month. A change in method will be
communicated when the new method is established.


4.2 Currency exchange for single companies

In general all positions of the balance sheet are valuated by the principle of lower of cost or market; no
other valuation is possible.


                                                                                                       21
  Manual/Procedure            Accounting Principles
However is possible to valuate foreign exchange positions with a basic exchange rate of a forward or
hedge contract, if they match in amount and maturity and if there is no risk due to delays. Today it is also
a general understanding that anticipated exchange losses that will never happen economically must not
be realized.

Fixed assets
Fixed assets are capitalized with acquisition costs. Asset purchases in foreign currencies are converted
with the exchange rate that was relevant for payment of the invoice or by the spot rate of the day of
purchase.

Inventory
Inventory is converted with the spot rate of day of purchase or lower of cost or market.

Receivables and other assets
In general all positions of the balance sheet are converted at the lower of cost or market.

Receivables and other assets are valuated at acquisition costs (nominal value) or market price, what ever
is less.Receivables that have been secured by matching hedge contract are valuated at acquisition cost.
According to US GAAP an unrealized currency exchange profit cannot be realized.

Intercompany accounts, loans
Intercompany accounts and loans are converted at acquisition cost or at lower of costs or markets.

Bank account and bank loans
Currency bank account and loan movements are entered at spot rate and valuated at lower of cost or
market, what ever is less.

Payables
Payables and other liabilities have to be valuated at initial spot rate of day. Is the exchange rate favorable
at closing date, no adjustment will be made. However, is the exchange rate negative for CO., unrealized
exchange losses have to be reserved for.

Special situation on currency conversion

CO. receives customer payments fully or partially in foreign currencies that need to be paid to suppliers
for purchases in the same currencies. Background is to avoid currency risk for CO..

Situation:
The added value of CO. to a cockpit is a relatively small portion of the total price of a cockpit. The margin
generated by CO. is strictly calculated on the added value, the calculation is not based on the sales price
of a cockpit.

CO.’s margin is not able to carry any currency risk resulting out of the purchase volume of the business.
Therefore it is accepted by the OEM-customer to take over the currency risk. Payments of the OEM-
customers to CO. are made in the currency and amounts which will be needed by CO. for the payment to
the suppliers.

According to this, incoming currencies and outgoing currencies should nearly net, VAT and the
compensation for the added value could be the difference. This method of payment was designed to
eliminate currency risks for CO..

Strictly applying the valuation method of lower of costs or markets does not serve the initial intention. The
elimination of currency risk for CO. is essential. Generating currency losses on a monthly basis due to a
wrong understanding of the business model by strictly applying the valuation rule is not serving the
business; these currency losses will economically never be realized.


                                                                                                           22
  Manual/Procedure            Accounting Principles
Therefore CO. companies will enter into the monthly financial statements for payables and for receivables
the unrealized exchange losses and unrealized exchange gains on separate accounts, which will be
netted / eliminated for reporting reasons. Detailed instructions will be given in a separate note.

5. Factoring

Definition
Factoring is a financing instrument to sell receivables to create cash. CO. is using this asset swap by
selling trade receivables to a bank to receive a discounted cash amount. The usage for the elimination of
debtor risk and for debtor management is not relevant for CO..

CO. is only dealing with true sales factoring on a non-recourse basis. The definition “true sales” has to be
audited by the local auditor in regard to US GAAP regulations.

Factoring method
The factoring method used within CO. is called in-house factoring. CO. is using the financing instrument
but not the debtor management or debtor risk elimination. In doing so, CO. is selling receivables as true
sales to a bank.

Credit lines
There is no usage of CO. own credit lines with banks. True sales factoring has not to be booked as loans
from banks, it is a sale of receivables.

Permanent actualization process
Due to the short payment terms with the customers of maximum three months, factoring is a revolving
process. To keep the factoring amount stabile a permanent actualization of factored invoices has to take
place to ensure the minimum amount of invoiced sales volume is permanently available to the bank.

Approval and responsibility
Factoring is organized by corporate CF/BA. Companies perform their own factoring under general
approval and control of corporate CF/BA.




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 Manual/Procedure         Accounting Principles
6.        Documents linked with this Standard

Accounting Principles


7.        Abbreviations

8.        Contact Person

Phone:
mailto:




                                                24
  Manual/Procedure          Accounting Principles

Revision Status

Revision                       00

S/P/T                          P

List of S/P/T/F/D              X

Control of Records             X


Summary Change Description
Establish

Change Reason
XXX

Process Adjustments (Interfaces)
XXX

Approved: Name/Date XXX/30.12.2009
Released: Name/Date XXX/30.12.2009

Communication Date     30.12.2009

Implementation Date    30.12.2009




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