6 Currency translation

The financial statements of consolidated companies prepared in foreign currencies are translated into euros (€) in accordance with IAS 21 using the functional currency method. The functional currency of foreign companies is determined by the primary economic environment in which they mainly generate and use cash. Within the Group, the functional currency is predominantly the local currency. In the consolidated financial statements, assets and liabilities are therefore translated at the closing rates, whilst income and expenses are generally translated at the monthly closing rates. The resulting currency translation differences are taken directly to equity. In financial year 2008, currency translation differences amounting to €500 million (previous year: €446 million) were recognised directly in equity (see also the statement of changes in equity).

Goodwill arising from business combinations after 1 January 2005 is treated as an asset of the acquired company and carried in the functional currency of the acquired company accordingly.

The exchange rates for the currencies that are significant for the Group were as follows:

The carrying amounts of non-monetary assets recognised in the case of consolidated companies operating in hyperinflationary economies are generally indexed in accordance with IAS 29 and thus reflect the current purchasing power at the balance sheet date.

In accordance with IAS 21, receivables and liabilities in the single-entity financial statements of consolidated companies that have been prepared in local currencies are translated at the closing rate as at the balance sheet date. Currency translation differences are recognised in other operating income and expenses in the income statement. In financial year 2008, income of €269 million (previous year: €262 million) and expenses of €269 million (previous year: €266 million) resulted from currency translation differences. In contrast, currency translation differences relating to net investments in a foreign operation are recognised in equity.

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