4 Accounting and valuation policies Principles of consolidation  The consolidated financial statements include the annual financial statements of Allianz AG and all principal subsidiaries. All the finan- cial statements included are uniformly prepared in conformity with IFRS accounting and valuation standards as of December 31, 2003. We have used interim financial statements for those entities whose fiscal year ends are other than December 31, 2003. Equity consolidation is carried out on the basis of the benchmark method in conformity with IAS 22. The acquisition costs are offset against the Group’s proportion of the shareholders’ equity in the subsidiaries at the date of acquisition. Any net assets and liabilities attributable to the Allianz Group are carried at their fair value at the date of acquisition of subsidiary enterprises; for the proportion attributable to minority interests, the pre-acquisition carrying amounts are used. When foreign subsidiaries are consolidated for the first time, their net assets are translated at the exchange rates in force on the date of their acquisition.  Positive differences arising on first-time consolidation are capi- talized as goodwill and amortized over their estimated useful life. In the case of acquisitions prior to January 1, 1995, such differences have been recorded directly in revenue reserves within sharehold- ers’ equity in accordance with the transitional provisions in force un- der IAS 22. The earnings generated by subsidiaries after their first-time con- solidation or, where appropriate their acquisition adjusted for con- solidation effects, are allocated to revenue reserves of the Group based on the Group’s ownership percentage in the subsidiaries. The proportion of net income or losses attributable to minority interests has been calculated on the basis of the consolidated net in- come or losses of the relevant enterprises for the year. Intra-Group receivables and payables, income and expenses, and profits have been eliminated. Allianz AG’s reporting currency is the euro ( ¤ ). Foreign currency is translated in accordance with IAS 21 by the method of functional cur- rency. The functional currencies for Group companies are usually the local currencies of the relevant companies, e.g. the prevailing cur- rency in the environment where the enterprise carries out its ordi- nary activities. In accordance with the functional currency method, assets and liabilities are translated at the closing rate on the balance sheet date, and expenses and income are translated at an annual av- erage rate for financial statements of subsidiaries not reporting in  ¤ . Any translation differences, including those arising in the process of equity consolidation, are recorded directly in shareholders’ equity without affecting earnings. Foreign currency translation  Assets and liabilities of the Group’s insurance companies which are subject to exchange rate fluctuations are normally safeguarded against such fluctuations by the fact that individual foreign sub- sidiaries have most of their assets and liabilities in the same cur- rency. Currency gains/losses arising from foreign currency transac- tions (transactions in a currency other than the functional currency of the entity) are reported in other income or other expenses. ALLIANZ GROUP 116