SAR’s Universe of Risk

SAP’s universe of risk is wide. The company face a host of other risks including economic and market risks. The nature of the IT industry which driven by projects management also bring strategic planning, human capital and organizational or governance–related risks. SAP is a conglomerate with many offices spread across many countries. This create communication and information risks. The launch, pre and post sales create product and other operational risk. The company has developed a quantifiable threshold, which is reached would threatened SAP existence. In 2006, none of the quantifiable risks identified within the firm’s risk management system exceeded the thresholds (€150 million expected loss).

However, in 2006, as in 2005, project risks and product risks were the categories with the highest percentage scores in the overall risk distribution profile. Strategic planning risks ranked equal third with other operational risks. Those four categories plus our human capital risk and market risks together account for 84% as a portion of all risks in the profile. All of the other categories of risk remain relatively insignificant to SAP.

Financial Risk Management at SAP AG

SAP reporting currency has traditionnaly been the Euro since January 1, 1999. However the company is present in many countries and conducts business many other currency as more than 35,000 companies in over 120 countries use its software. This is creates exposure than can significantly affect reported revenue and income. When the Euro appreciates relative to another currency, there is a negative effect while depreciation of the euro has a positive effect. Since 2006 the Euro has been rising particularly against the U.S. dollar and the Japanese yen had an adverse impact on our financial results.

Monitoring exposure to currency fluctuation risks based on balance–sheet items and expected cash flows is a continuous task. It uses financial derivatives when necessary as part of a Group–wide foreign exchange risk management strategy. The company quantifies the risk positions from the exchange rates of the most relevant currencies (in particular, the U.S. dollar, UK GRP, Japanese yen, Swiss franc, Canadian dollar, & Australian dollar) using the value–at–risk standard. SAP calculates the possible loss of income from foreign currency influences for a holding period of 10 days and a confidence level of 99%.

Compensation Policy

The compensation of the executive is performance-based. It has three elements: (a) a fixed element or salary; (b) a performance–related element or directors profit sharing; and (c) a long term incentive element (stock options). Along with the regular stock–based compensation plan, the supervisory board is also awarded additional non–recurring stock–based compensation in the form of stock appreciation rights (STARs) in the context of the Incentive Plan 2010. However it will not pay out unless SAP’s market capitalization increased at least 50% over a five–year period.

Accounting Policy

SAP has developed follows Accounting policy that is designed to fulfill the challenges of an ever changing reporting environment. Through December 31, 2005, the Company accounted for stock–based compensation based on the intrinsic–value–based method prescribed by Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees ("APB 25"), and related interpretations. Under this method, compensation expense is recorded only if on the date of grant the current market price of the underlying stock exceeds the exercise price or the exercise price is not fixed at the grant date. After a transitional period, SAP adopted SFAS 123 as of January 1, 2006.

Hedging

SAP uses derivative instruments to hedge the anticipated cash flows in connection with SAP’s employee stock appreciation rights (STAR) plan. However, there can be no assurance that the benefits achieved from hedging the STAR plan will exceed the costs of hedging the STAR plan.

SAP uses a number of financial instruments. These includes for example forward exchange to reduce the foreign currency exchange risk, primarily of anticipated cash flows from transactions with subsidiaries denominated in currencies other than the euro. It may use call options to hedge its anticipated cash flow exposure attributable to changes in the market value of stock appreciation rights under various plans.

SAP accounts for derivatives and hedging activities in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), as amended, which requires that all derivative financial instruments be recorded on the balance sheet at their fair value. The effective portion of the realized and unrealized gain or loss on derivatives designated as cash flow hedges is reported net of tax, as a component of other comprehensive income.

The portion of gains or losses on derivatives is reclassified from other comprehensive income into earnings in the same period or periods during which the hedged forecasted transaction affects earnings, or in the period the derivative contract is terminated, if earlier.

The ineffective portion of gains or losses on derivatives designated as cash flow hedges are reported in earnings when the ineffectiveness occurs. In measuring the effectiveness of foreign currency related cash flow hedges, SAP excludes differences resulting from time value (that is, spot rates versus forward rates for forward contracts). Changes in value resulting from the excluded component are recognized in earnings immediately. Foreign currency exchange derivatives entered into by SAP to offset exposure to anticipated cash flows that do not meet the conditions for hedge accounting are recorded at fair value in the Consolidated Balance Sheets with changes in fair value included in earnings (See Financial Report 2005, 2006 for more details).