Principles of Consolidation

Consolidation includes both fully consolidated subsidiaries and associated companies and joint ven-

tures accounted for at equity. All material companies over which mg technologies ag directly or indi- rectly exerts control are consolidated under the purchase method of accounting. mg technologies ag is deemed to exert control wherever it either directly or indirectly owns a majority of the voting rights and can therefore exert a controlling influence. Material equity investments on which a significant influence can be exerted (“associated companies”) as well as joint ventures are accounted for using the equity method. All other investments are accounted for at cost.

Consolidated companies with a different balance sheet date from that of the parent company have prepared interim financial statements as of September 30.

In consolidating the investment in subsidiaries (capital consolidation) under the purchase method, the purchase price is offset against the value of interest held in subsidiaries’ shareholders’ equity at the time of acquisition after the pro rata hidden reserves and hidden liabilities have been disclosed. Any excess purchase price over fair market value of assets acquired and liabilities assumed is capitalized as goodwill. Under the new rules of SFAS 142 (“Goodwill and Other Intangible Assets”), this goodwill is no longer amortized over its estimated useful life, but is tested for impairment at least once a year and, where necessary, written down. Any shortfall in purchase price over fair market value of assets acquired and liabilities assumed (negative goodwill) is deducted from the carrying amount of certain non-current assets acquired. Under SFAS 141 (“Business Combinations”), any further shortfall is reported as extraordinary income or, in exceptional cases (“contingent considerations”), recognized as deferred income.

Companies on which significant influence can be exerted (associated companies) and joint ventures are valued using the equity method. This is principally in instances where the mg Group holds between 20 % and 50 % of the voting rights. Investments valued at equity are reported at the interest held in shareholders’ equity. Recognized changes in the associated company’s shareholders’ equity, including any necessary goodwill amortization and any necessary depreciation, amortization or releases of allocated hidden reserves or liabilities, are recognized as net income from investments.

All material intercompany gains and losses, receivables, liabilities, revenues, expenses and income are consolidated as part of the elimination of intercompany gains and losses and the consolidation of

debts, expenses and income.

The consolidation of debts essentially means that receivables and liabilities between consolidated Group companies are offset against each other, since the Group—which, according to the entity point of view, constitutes a theoretical single legal entity—cannot report any receivables or liabilities with respect to itself.

The main purpose of consolidating expenses and income is to offset all expenses and income between fully consolidated subsidiaries against each other. The consolidated statements of income may only report expenses and income resulting from transactions with non-Group entities.

The purpose of eliminating intercompany gains and losses is to eliminate intercompany profits and losses resulting from goods and services supplied by one consolidated subsidiary to another, as the Group can only recognize gains or losses if the goods or services were supplied to external third par- ties, i.e. to non-consolidated companies. If, for example, a consolidated company supplies assets at a value exceeding their acquisition or manufacturing cost to another consolidated company, this gives rise to an intercompany gain. If the company that purchased these goods or services is still accounting for them as an asset at the balance sheet date, the asset must be written down by the amount of the intercompany gain (the difference between the asset value reported by the purchasing company and the (Group’s) acquisition or manufacturing cost). This method ensures that assets resulting from goods or services supplied by one consolidated company to another are shown in the consolidated financial statements at the amount that would be reported if the Group were a single company. This intercompany gain is recognized in the future if the asset in question is sold to a non-Group entity or written off. A similar procedure is applied to companies reported at equity.

The financial statements of consolidated foreign subsidiaries are translated according to the report-

ing currency concept. The financial statements of those foreign subsidiaries whose reporting cur-

rency is not the euro are translated at modified exchange rates as of the balance sheet date. Foreign companies’ financial statements not denominated in euros are translated as follows:

– Investments in affiliated, consolidated companies and the shareholders’ equity are reported at historical rates, while goodwill, other assets, accrued and other liabilities, and deferred items are shown at mid-rates as of the balance sheet date.

– Revenues and expenses are translated at average rates of exchange in effect during the year. – Resulting translation adjustments are accumulated as a separate component of shareholders’

equity (Accumulated other comprehensive income).

Foreign subsidiaries based in countries with hyperinflation report in euros. Resulting translation adjustments are reported in the income statement of the subsidiary. A country is deemed to suffer from hyperinflation if its cumulative inflation rate over the past three years exceeds 100 %. This applied to Turkey during the year under review.

The exchange rates of the non-euro currencies that have a material impact on the consolidated financial statements are as follows: