Philips 2004 Annual Report Download - page 44

Introduction
The following discussion is based on the consolidated financial
statements and should be read in conjunction with those
statements and the other financial information contained herein,
including the information set forth under ‘Information on the
Philips Group’.
The consolidated financial statements of Koninklijke Philips
Electronics N.V. (the ‘Company’) have been prepared in
accordance with generally accepted accounting principles in the
United States (US GAAP) and are discussed in the consolidated
financial statements contained in this report. These accounting
principles differ in some respects from generally accepted
accounting principles in the Netherlands (Dutch GAAP). In
addition to the US GAAP consolidated financial statements, Dutch
GAAP financial statements on a consolidated and single company
basis are provided. A reconciliation of material differences
between the two is provided in the separate section entitled
‘Dutch GAAP information’ on pages 176 and 177 of this Annual
Report. For purposes of Dutch corporate law, the Company’s
balance sheet under Dutch GAAP is determinative of the amount
available for distribution to shareholders.
The Company believes that an understanding of sales performance
is enhanced when the effects of currency and acquisitions and
divestitures (changes in consolidation) are excluded. Accordingly,
in addition to presenting ‘nominal growth’, ‘comparable growth’ is
also provided.
Comparable sales levels exclude currency and consolidation
effects.
As indicated in the Accounting Policies, sales and income are
translated from foreign currencies into the reporting currency of
the Company, the euro, at weighted average exchange rates during
the respective years. As a result of the significant currency
fluctuations during the years presented, the effects of translating
foreign currency sales amounts into euros had a material impact
that has been excluded in arriving at the comparable sales level in
euros. Currency effects have been calculated by translating
previous years’ foreign currency sales amounts into euros at the
following year’s exchange rates in comparison with the sales in
euros as historically reported.
Years under review were characterized by a number of
acquisitions and divestments, as a result of which activities were
consolidated or deconsolidated as disclosed in note 1 to the
consolidated financial statements of the Philips Group on
pages 106 to 112 of this Annual Report. The effect of
consolidation changes has also been excluded in arriving at the
comparable sales level.
The Company stops consolidating an entity (‘deconsolidation’)
when it no longer maintains a direct or indirect controlling
interest through voting rights or other qualifying variable interests.
On sale of a controlling interest in a subsidiary to unrelated
parties, the sold entity is excluded from the consolidated results
prospectively from the date of sale. On contribution of a
previously consolidated subsidiary to a joint venture, consolidation
is discontinued as of the formation of the joint venture.
The Company believes that an understanding of the Philips
Group’s financial condition is enhanced by the disclosure of net
operating capital (NOC), as this figure is used by Philips’
management to evaluate the capital efficiency of the Philips Group
and its operating segments. NOC is defined as: intangible assets;
property, plant and equipment; non-current receivables; current
assets excluding cash and cash equivalents, securities and deferred
tax positions; after deduction of provisions; and other liabilities.
The Company believes that financial strength can be measured by a
ratio expressing the total net debt position as a percentage of the
sum of total group equity (stockholders’ equity and minority
interests) and net debt.
The Company believes that the separate indicator cash flows
before financing activities, being the sum total of net cash provided
by operating activities and net cash provided by investing activities,
improves the understanding of the cash flow statement.
A reconciliation of non-GAAP information, as set out above, to
the most directly comparable GAAP financial measure is given on
pages 210 and 211 of this Annual Report.
43Philips Annual Report 2004
Operating and financial review and prospects
all amounts are expressed in millions of euros unless otherwise stated