Philips 2004 Annual Report Download - page 106

The FASB issued several pronouncements, of which the following
are applicable to the Company.
In May 2004, FASB Staff Position 106-2, ‘Accounting and
Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003’ was posted.
In 2003, the Company had opted for the one-time election to
defer accounting for the economic effects of the new Medicare
Act under FASB Staff Position 106-1, posted in January 2004, until
authoritative guidance on the accounting for the federal subsidy
was issued. The effects of the Act relating to measures of the
accumulated postretirement benefit obligation or the net periodic
postretirement benefit as mandated by FASB Staff Position 106-2
were not material to the Company.
In November 2004, Statement No. 151, ‘Inventory costs, an
amendment of ARB No. 43, Chapter 4’ was issued. This Statement
clarifies the accounting for abnormal amounts of idle facility
expense and waste and prohibits such costs from being capitalized
in inventory. In addition, this Statement requires that allocation of
fixed production overheads to the inventory cost be based on the
normal capacity of the production facilities. In accordance with the
early adoption provisions of the Statement, the Company will
adopt SFAS No. 151 as from 2005. This Statement is expected to
have no material effect on the Company’s financial statements.
In December 2004, the FASB issued Statement No. 153,
‘Exchanges of Non-monetary Assets’, an amendment of APB
Opinion No. 29. This Statement eliminates the exception in
Opinion No. 29 for non-monetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
non-monetary assets that lack commercial substance. The
Statement will become effective for the Company in 2006 but is
not expected to have a material impact.
SFAS No. 123 (revised 2004), concerning Share-Based Payment
was issued in December 2004. The Statement is a revision of
Statement No. 123, ‘Accounting for Stock-Based Compensation’,
which was adopted by the Company in 2003.
Statement No. 123 (revised 2004), supersedes APB Opinion
No. 25, that allowed the use of the intrinsic value for measuring
stock-based compensation expenses for stock issued to
employees. The revised Statement focuses primarily on accounting
for transactions in which an entity obtains employee services in
share-based payment transactions. The revised Statement contains
certain changes compared with the original pronouncement. The
most relevant for the Company will be the requirement to
estimate forfeitures at the date of grant, whereas the original
Statement permitted accounting for forfeitures as they occur. This
change is not expected to have a material impact on the financial
statements of the Company.
The Company is in the process of investigating whether the use of
a lattice model would result in a better estimation of stock-based
compensation than the Black-Scholes model currently used. The
effects of a change are still being determined by the Company.
The revised Statement will become effective as from the third
quarter in 2005. The Company is likely to adopt the modified
prospective method for the transition to Statement 123 (Revised
2004). The cumulative effect of applying the revised Statement will
be limited to the effects on compensation expense in 2005 for
grants issued with a 3-year vesting period in 2002. Since the vast
majority of grants are issued annually in the second quarter, the
cumulative effect will be limited to the first 2 quarters of 2005
only. The effect on net income is estimated to be approximately
EUR 11 million.
105Philips Annual Report 2004
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