Philips 2004 Annual Report Download - page 15

Within the context of our Towards One Philips program we have
devoted a lot of attention to simplifying and improving all our
processes, including our financial processes. Harmonization and
standardization of processes and data have been the key drivers of
the improvements and have also enabled a significant reduction in
the number of IT systems. At the same time we saw many changes
in the regulatory environment: increased governance and control
requirements, like the Sarbanes-Oxley Act in the United States
and the Dutch Code on Corporate Governance (‘Tabaksblat’) in
the Netherlands, as well as the introduction of the new IFRS
reporting standards in Europe.
Instead of just building additional processes and systems to comply
with the new requirements we made the new regulatory
requirements an integral part of the redesign of our financial
processes and have embedded the improvements in reporting and
control standards deep in the organization.
Jan Hommen
Chief Financial Officer
Financial reporting
In 2004 the Company completed the implementation of a standard
chart of accounts in all main Enterprise Resource Planning (ERP),
systems ensuring the same definitions are used consistently in all
our units. This chart has been defined such that on the lowest
possible aggregation level the information to generate US GAAP,
IFRS and local GAAP is captured and stored.
The Company’s primary reporting is on a US GAAP basis; starting
with 2005 the Company will also report on an IFRS basis. Given
the level of similarity between IFRS and US GAAP, the adaptation
required in our internal reporting systems was limited. In the first
half of 2003 the Company conducted an extensive gap analysis to
determine the relevant differences between US GAAP and IFRS.
On the basis of this analysis a project was started to define
additional reporting requirements, adjust accounting policies, train
staff and implement supplementary IFRS reporting. During 2004
the reporting was started internally and the audit of the additional
IFRS information was organized in order to be able to publish a
restatement of the 2004 financial information to comparable IFRS
figures before the publication of the report on the first quarter of
2005. The most important differences affecting Philips relate to the
capitalization of certain product development costs as required
under IFRS, which will be a recurring item, and the one-time
elimination of unrecognized pension gains and losses in the IFRS
opening balance sheet.
Approach to risk management and business
controls
The Company’s risk and control policy is designed to provide
reasonable assurance that strategic objectives are met. It makes
management responsible for identifying the critical business risks
and the implementation of fit-for-purpose risk responses. The risk
management approach is embedded in the periodic business
planning and review cycle. The Philips Business Control
Framework (BCF), derived from the leading COSO framework on
internal control, sets the standard for risk management and
business control in the Company. The BCF addresses financial
reporting, business processes and compliance. With respect to
financial reporting, a structured, quarterly self-assessment and
monitoring process is used company-wide to assess compliance
with the Company’s standard on internal control over financial
reporting. These controls are the cornerstone of the internal
assurance process that allows the management of the Company to
attest the reliability of the financial information of the Company
and the timeliness and completeness of the disclosures.
14 Philips Annual Report 2004
Reporting and Control