Philips 2004 Annual Report Download - page 85

Warranty costs
The Company provides for warranty costs based on historical
trends in product return rates and the expected material and labor
costs to provide warranty services. If it were to experience an
increase in warranty claims compared with historical experience,
or costs of servicing warranty claims were greater than the
expectations on which the accrual had been based, income could
be adversely affected.
Intangible assets acquired in business
combinations
Over the past few years the Company has acquired several other
entities in business combinations that have been accounted for by
the purchase method, resulting in recognition of substantial
amounts of in-process research and development, goodwill and
other intangible assets. The amounts assigned to the acquired
assets and liabilities are based on assumptions and estimates about
their fair values. In making these estimates, management typically
consults independent qualified appraisers. A change in assumptions
and estimates would change the purchase price allocation, which
could affect the amount or timing of charges to the income
statement, such as write-offs of in-process research and
development and amortization of intangible assets. In-process
research and development is written off immediately upon
acquisition, whereas intangible assets (and prior to 2002 also
goodwill) are amortized over their economic lives. As a result of
Philips’ adoption of SFAS No. 142 ‘Goodwill and Other Intangible
Assets’ as of January 1, 2002, goodwill ceased to be amortized as
from that date but instead is tested for impairment at least
annually.
84 Philips Annual Report 2004
Operating and financial review and prospects