Basic accounting principles

Accounting standards and interpretations, and amended accounting standards and interpre- tations, applied for the first time

The following standards and interpretations issued by the IASB were effective and applied for the first time in the financial year 2009:

New and revised/amended standards and interpretations

Standard Title Date of

issuance by the IASB Effective date1) EU endorse- ment New standards and interpretations

IFRS 8 Operating Segments Nov. 30, 2006 Jan. 1, 2009 Nov. 22, 2007

IFRIC 13 Customer Loyalty Programs June 28, 2007 July 1, 2008 Dec. 17, 2008

IFRIC 15 Agreements for the Construction of Real Estate July 3, 2008 Jan. 1, 2009 July 23, 2009 IFRIC 16 Hedges of a Net Investment in a Foreign Operation July 3, 2008 Oct. 1, 2008 June 5, 2009 IFRIC 18 Transfers of Assets from Customers Jan. 29, 2009 July 1, 20092) _{Dec. 1, 2009}

Revisions and amendments to standards and interpretations

IAS 23 Borrowing Costs Mar. 29, 2007 Jan. 1, 2009 Dec. 17, 2008

IAS 1 Presentation of Financial Statements Sep. 6, 2007 Jan. 1, 2009 Dec. 18, 2008

IFRS 2 Share-based Payment (vesting

conditions and cancellations) Jan. 17, 2008 Jan. 1, 2009 Dec. 17, 2008

IAS 32 Financial Instruments: Presentation

(puttable financial instruments) Feb. 14, 2008 Jan. 1, 2009 Jan. 22, 2009 Various Improvements to IFRSs (annual

improvements projects 2006 – 2008) May 22, 2008 Jan. 1, 2009 Jan. 24, 2009 IFRS 1

IAS 27

Cost of investments in subsidiaries,

jointly controlled entities, and associates May 22, 2008 Jan. 1, 2009 Jan. 24, 2009

IFRS 7 Financial Instruments: Disclosures Mar. 5, 2009 Jan. 1, 2009 Dec. 1, 2009

IAS 39 / IFRIC 9

Financial Instruments: Recognition and Measure-

ment / Reassessment of Embedded Derivatives Mar. 12, 2009

June 30,

20093) _{Dec. 1, 2009}

Various Improvements to IFRSs (annual improvements

projects 2007 – 2009) Apr. 16, 2009 various4)

expected Q1 2010

1) _{for annual periods beginning on or after this date} 2) _{for transfers received by an entity on or after this date} 3) _{for annual periods ending on or after this date}

In the interests of efficient reporting practice, the following descriptions of standards and interpre- tations are limited to those that had an impact on the methods of accounting, measurement or reporting used by MTU or the disclosures included in the consolidated financial statements as at December 31, 2009, or which will possibly or probably have an impact in future reporting periods, based on the information on hand at the present time.

These standards and interpretations have been applied in the financial year 2009 in compliance with the respective effective dates and recommendations for early adoption. Unless another form of presentation is explicitly required by individual standards or interpretations, their application is retrospective, i.e. the statements are presented as if the new accounting and measurement methods had always been applied in this way. Amounts stated in respect of previous periods are adjusted accordingly.

IFRS 8 ‘Operating Segments’

IFRS 8 was issued by the IASB in November 2006. This standard replaces IAS 14 and, in particular, prescribes the application of a ‘management approach’ when reporting on the business performance of segments. An operating segment is a component of an entity whose operating results are reviewed regularly by a chief decision-maker to serve as a basis for decisions concerning the allocation of resources to the segment, and for which discrete financial information is available. An explanation of how this actually affects MTU’s financial reporting can be found in Part V. (Segment Information). Revisions to IAS 23 ‘Borrowing Costs’

The main change in this standard is the removal of the option that permitted borrowing costs directly attributable to the acquisition, construction or production of a qualified asset to be immediately re- cognized as an expense. Entities are now required to capitalize borrowing costs that form part of the cost of the qualified asset. In this context, a qualified asset is defined as an asset that takes a substan- tial period of time to get ready for sale or its intended use. The revised standard does not require the borrowing costs to be capitalized for assets measured at fair value, or for inventories that are manufac- tured or produced in large quantities on a repetitive basis, even if they take a substantial period of time to get ready for use or sale. The revised version of IAS 23 applies to borrowing costs relating to qualified assets for which the commencement date for capitalization is on or after January 1, 2009.

The first-time adoption of the revised standard had no effect on MTU’s consolidated financial state- ments for the financial year 2009, because the group did not possess any qualified assets for which the commencement date for capitalization was on or after January 1, 2009. However, in subsequent years, the revised standard will have an impact on MTU in respect of the measurement of contract costs for construction contracts in accordance with IAS 11.18. The effect of including borrowing costs in the contract costs, as now required, will be to increase the contract costs and contract revenues of construction contracts accounted for using the zero-profit method and to improve the financial result. EBIT will thereby remain unchanged and earnings after tax will improve by the amount of the improve- ment in the financial result. In the case of construction contracts accounted for using the percentage- of-completion method, the financial result will be improved and EBIT reduced by an equivalent amount, resulting in unchanged earnings after tax. In view of MTU’s good financing structure and hence the

Revisions to IAS 1 ‘Presentation of Financial Statements’

One of the changes brought about by the revised IAS 1 is the introduction of a ‘statement of compre- hensive income’ to replace or supplement the income statement in IFRS financial statements. The aim of this statement, which recognizes income and expenses directly in equity, is to enable readers to distinguish between changes in the company’s equity resulting from transactions with owners and non-owner changes. Companies are given the option of presenting items of income and expense and components of other comprehensive income either in a single statement of comprehensive income with subtotals or in two separate statements. MTU has elected to employ the socalled ‘two-statement approach’ and present both an income statement and a statement of comprehensive income. Moreover, in certain cases, the revised IAS 1 requires the presentation of a balance sheet as at the beginning of the earliest comparative period. MTU has not changed the titles of the constituent parts of its financial statements.

Improvements to IFRSs – a collection of amendments to various different International Financial Reporting Standards resulting from the annual improvements projects 2006 – 2008 These amendments are the result of the IASB’s first annual improvements process (AIP) project. The AIP project is divided into two parts:

Part I contains amendments to individual standards that result in accounting changes affecting the recognition, measurement or presentation of specific transactions. The amendments in Part II can be regarded as relatively immaterial, since they relate to terminological or editorial changes. In total, amendments were made to 19 standards. Four of these are found in both Part I and Part II (see chart below). IFRS 5 IAS 1 IAS 16 IAS 19 IAS 23 IAS 27 IAS 28 IAS 36 IAS 38 IAS 39 IAS 7 IAS 8 IAS 10 IAS 18 IAS 34 IAS 20 IAS 29 IAS 40 IAS 41 Improvements to IFRS 2008 Part I

Recognition, presentation, measurement

Part II Editorial changes

In view of MTU’s business model and on the basis of the currently available knowledge of business transactions within the MTU group, the amendments concerning the following standards may have an impact on the consolidated financial statements in the future:

Amendment to IAS 1 – Presentation of current financial assets and liabilities

An amendment in IAS 1 ‘Presentation of Financial Statements’ (revised 2007) clarified the point that financial assets and liabilities classified as held-for-trading in accordance with IAS 39 ‘Financial Instruments: Recognition and Measurement’ do not automatically lead to their presentation under current assets or liabilities (IAS 1.68 and 1.71). The existing wording had led to some confusion, especially in the case of stand-alone derivatives. The factor that determines whether a financial asset or liability is considered to be non-current or current is whether it is held by the company for more or less than 12 months. The classification as ‘held-for-trading’ in accordance with IAS 39.9 thus only determines the measurement, and not the presentation of the financial instruments in question. Amendment to IAS 19 – Curtailments

A change has been introduced in the accounting treatment of defined benefit plans with respect to past service costs. The amendment clarifies the point that, in cases where changes to a plan result in a reduction in benefits, only the effect of the reduction for future services should be treated as a curtailment according to IAS 19. All other effects are to be treated as (negative) past service cost, because they are related to the benefits for past service. This distinction has an impact on financial statements, because curtailments are recognized immediately in the income statement whereas past service cost is spread over the period up to the date on which it becomes non-forfeitable.

Amendment to IAS 20 – Accounting for government loans at below-market rates of interest Prior to the amendment, IAS 20.37 stated that the benefit of a government loan with a below-market rate of interest should not be quantified on the basis of the calculated interest. This is inconsistent with IAS 39.43 ‘Financial Instruments: Recognition and Measurement’, which requires financial liabilities to be measured at fair value at first recognition, i.e. including the interest benefit of a below-market rate of interest. IAS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’ has therefore been amended accordingly. Paragraph 37 has been deleted and replaced by a new paragraph 10A, which makes it mandatory to recognize and measure government loans with a below-market rate of interest according to the requirements of IAS 39. The difference between the proceeds received and the initial carrying amount of the loan must be accounted for as a loan benefit according to the require- ments of IAS 20.

Amendment to IAS 23 – Components of borrowing costs

The amendment to IAS 23 ‘Borrowing Costs’ involves the replacement of paragraphs 6(a)-(c) in the list of possible components of borrowing costs with a reference to the guidance in IAS 39 ‘Financial Instruments: Recognition and Measurement’ on the calculation of interest expense using the effective interest method. This amendment averts the risk of possible inconsistencies between the methods applied when calculating borrowing costs according to IAS 23 and IAS 39 respectively. For more general information on the possible impact of amendments to IAS 23 on EBIT, financial result and earnings after tax (EAT), please refer back to the earlier section on revisions to IAS 23.

Amendment to IAS 39 – Reclassification of financial instruments

The amendments to IAS 39 ‘Financial Instruments: Recognition and Measurement’ concern exceptions to the basic principle specified in IAS 39.50 – reassessed in October 2008 in the light of the financial crisis – that prohibits the reclassification of financial instruments out of the ‘at fair value through profit or loss’ (FvTpL) category into any other category for as long as they are held. It has now been clarified in IAS 39.50A that cases where a financial instrument classified in the FVTPL category is designated for the first time as a cash flow hedge derivative, or where it becomes necessary to end the cash flow hedging relationship because the purpose for which it was designated no longer applies, are not considered to be reclassifications for this purpose.

Amendments to IFRS 5 – Non-current assets held for sale and discontinued operations The amendment to IFRS 5 concerning non-current assets held for sale and discontinued operations relates to situations in which a company is committed to a planned sale of part of its interest in a subsidiary involving a loss of control while retaining a non-controlling interest. IFRS 5 now clearly states that, in such situations, all assets and liabilities of the subsidiary must be classified as ‘held for sale’ if the planned sale meets the criteria set out in IFRS 5. The amendment is founded on the circumstance that the company will no longer have a controlling interest in the company after the planned sale. If, on the other hand, the planned sale does not involve a loss of control, the requirements of IFRS 5 do not apply. In this case, the assets and liabilities of the subsidiary representing the part of the company’s interest that it intends to sell should be recognized and measured in accordance with the relevant existing IFRSs. The amendments to IFRS 5 are effective for annual periods beginning on or after July 1, 2009.

Amendments to IFRS 7

In March 2009, the IASB issued amendments to IFRS 7 ‘Financial Instruments: Disclosures’ under the title ‘Improving Disclosures about Financial Instruments’. The amendments call for additional disclosures about the fair value measurement of financial instruments and the associated liquidity risk. The amended standard is effective for annual periods beginning on or after January 1, 2009. Comparative disclosures are not required in the first year of application. The amended standard’s first-time adoption by MTU will not entail any major additional disclosures in the notes.

Issued but not yet effective standards, interpretations and amendments/revisions The following IASB accounting standards, which have been issued but were not yet effective for the financial year 2009, have not been applied in advance of their effective date:

MTU does not intend to apply any of these standards and interpretations in advance of their effective date.

Standard Title Date of

issuance by the IASB Effective date1) EU endorse- ment New standards and interpretations

IFRIC 17 Distribution of Non-cash Assets to Owners Nov. 27, 2008 July 1, 2009 Nov. 27, 2009

IFRS for SMEs IFRS for Small and Medium-sized Entities July 9, 2009 - unknown

IFRS 9 Financial Instruments: ultimately to entirely replace existing standards for classifying and measuring

financial assets and liabilities Nov. 12, 2009 Jan. 1, 2013 unknown

IFRIC 19 Extinguishing Financial Liabilities

with Equity Instruments Nov. 26, 2009 July 1, 2010

expected Q2 2010 Revisions and amendments to standards and interpretations

IFRS 3 Business Combinations Jan. 10, 2008 July 1, 2009 June 12, 2009

IAS 27 Consolidated and Separate Financial Statements Jan. 10, 2008 July 1, 2009 June 12, 2009 IAS 39 Financial Instruments: Recognition and

Measurement (eligible hedged items) July 31, 2008 July 1, 2009 Sep. 16, 2009 IFRS 1 Restructured version of the standard Nov. 27, 2008 July 1, 2009 Nov. 26, 2009 various Improvements to IFRSs (annual improvements

projects 2007 – 2009) Apr. 16, 2009 various2)

expected Q1 2010 IFRS 2 Share-based payment (group-cash-settled

share-based payment transactions) June 18, 2009 Jan 1, 2010

expected Q1 2010 IFRS 1 Additional exemptions for

first-time adopters July 23, 2009 Jan 1, 2010

expected Q2 2010 IAS 32 Financial Instruments: Presentation

(classification of rights issues) Oct. 8, 2009 Feb. 1, 2010

expected Q4 2009 IAS 24 Related Party Disclosures

Nov. 4, 2009 Jan. 1, 2011

expected Q2 2010 IFRIC 14 The Limit on a Defined Benefit Asset,

Minimum Funding Requirements and their Interaction (Prepayments of a

Minimum Funding Requirement) Nov. 26, 2009 Jan. 1, 2011

expected Q2 2010

1) _{for annual periods beginning on or after this date}

2) _{earliest adoption for annual periods beginning on or after Jan. 1, 2009}

In the interests of efficient reporting practice, the following descriptions of standards and interpretations are limited to those that, in view of MTU’s business model and on the basis of the currently available knowledge of business transactions within the MTU group, will very probably have an impact on the methods of accounting, measurement or reporting used and the disclosures included in the consolidated financial statements in future reporting periods.

IFRS 9 ‘Financial Instruments’

IFRS 9 is intended to replace the existing standard IAS 39 in three phases up to the end of 2010. Work on the project to completely revise IAS 39 was launched in 2005 as a joint initiative with the Financial Accounting Standards Board (FASB), the U.S. counterpart to the IASB. The aim of the long-term joint project was to improve the accounting and disclosure of financial instruments according to IFRS and US-GAAP requirements, and to reduce complexity. After the publication of the exposure draft in July 2009, the finalized standard IFRS 9 was issued in November 2009, containing revised requirements for the classification and measurement of financial instruments. Given the complexity of the subject matter, it is not yet possible to make any reliable detailed statements regarding the impact of the new standard. From today’s standpoint, it is unlikely that the standard will become applicable any earlier than the financial year 2013.

Revisions to IFRS 3 ‘Business Combinations’ and IAS 27 ‘Consolidated and Separate Financial Statements’

On January 10, 2008, the IASB concluded the second phase of its long-running, much-debated ‘Business Combinations’ project and published two revised standards:

IFRS 3 Business Combinations (rev. 2008)

IAS 27 Consolidated and Separate Financial Statements (rev. 2008)

The revised standards contain substantial amendments concerning the accounting treatment of business combinations, transactions with companies in which the entity holds a non-controlling interest, and loss of control of a subsidiary. IFRS 3 (rev. 2008) is a particularly lengthy document, which deals with many complex accounting issues. Since no transactions with other companies were planned at the reporting date, it is not yet possible to assess the possible impact of the revisions to IFRS 3 and IAS 27 in future reporting periods.

Improvements to IFRSs – a collection of amendments to various different International Financial Reporting Standards resulting from the annual improvements projects 2007 – 2009 The IASB issued a new set of ‘Improvements to IFRSs’ on April 16, 2009. This is the second time that such amendments have been issued as a result of the annual improvements process (AIP) project. The latest Improvements to IFRSs contain 15 separate amendments to twelve existing IFRSs. As at Decem- ber 31, 2009, these amendments had not yet been endorsed by the European Union for promulgation as European law. The purpose of the AIP project is to deal with minor, non-urgent but necessary changes to existing standards, which are not covered by another, larger project. Unless otherwise specified, the amendments are effective for annual periods beginning on or after January 1, 2010, with earlier adoption permitted.

Moreover, MTU is currently examining the consequences of the amendments to IAS 17, although to our knowledge this would not result in any changes to the present classification of lease arrangements. On present knowledge, MTU does not expect any of the amendments to other standards in the improvements project to impact the group’s accounting, measurement or reporting methods.

MTU Aero Engines GmbH, Munich, which is a consolidated affiliated company of MTU Aero Engines Holding AG, Munich, and for which the consolidated financial statements of MTU Aero Engines Holding AG, Munich, constitute the exempting consolidated financial statements, has invoked the provision of Section 264 (3) of the German Commercial Code (HGB) exempting the company from the obligation to prepare disclosure notes and a management report. The official notice of the company’s invocation of the exemption was published in the electronic version of the Federal Gazette (Bundesanzeiger) in the name of MTU Aero Engines GmbH, Munich, on November 23, 2009.

The following table presents the evolution of the shareholder structure and the corresponding equity investments:

The item ‘Construction contract receivables’ mainly relates to the manufacture of military engines and will continue to be presented in the balance sheet under current assets. Depending on the engine program, the manufacturing phase can extend over a protracted period. This nevertheless represents