Philips 2005 Annual Report Download - page 106

Philips Annual Report 2005106
Philips is exposed to a number of different tax risks, which
could have a signifi cant impact on local tax results.
Philips is exposed to a number of different tax risks, which
amongst others could result in double taxation, penalties
and interest payments. These tax risks include transfer
pricing risks on internal deliveries of goods and services
(including benefi t tests and requirements to prove the
arm’s length character of internal transactions), due to
General Service Agreements (GSA), tax risks related to
disentanglements and acquisitions, tax risks related to the
use of tax credits and to permanent establishments, and
tax risks due to losses carried forward. Those risks may
have a signifi cant impact on local tax results. For further
details, please refer to the section Details of fi nancial risks
presented on the pages hereafter.
Legal proceedings covering a range of matters are pending
in various jurisdictions against the Company and its
subsidiaries. Due to the uncertainty inherent in litigation,
it is diffi cult to predict the fi nal outcome. An adverse
outcome might impact Philips’ results.
The Company, including a certain number of its subsidiaries,
is involved in litigation relating to such matters as competition
issues, commercial transactions, product liability (involving
allegations of personal injury from alleged asbestos
exposure), participations and environmental pollution.
Although the fi nal outcome of matters in litigation cannot
be determined due to a number of variables, the Company’s
fi nancial position and results of operations could be affected
by an adverse outcome. Please refer to note 29 to the
consolidated fi nancial statements for additional disclosure
relating to specifi c litigation matters.
MedQuist, a consolidated entity in which Philips holds
70.1% of the common stock, is involved in several litigation
matters, including putative class action proceedings, in
connection with its past billing practices and related
matters. It is also the subject of an ongoing investigation
by the US Securities and Exchange Commission relating
to these practices and has received a subpoena from the
US Department of Justice relating to these practices and
other matters. The putative class action litigation matters
pending against MedQuist are not yet resolved. For further
information, please refer to the section Other information
on page 117 to 119.
Compliance and fi nancial reporting risks
Reliability of reporting, correctness of disclosures and
safeguarding of assets
The reliability of reporting is important in assuring
management of top-quality data for steering the businesses
and for managing both top-line and bottom-line growth.
Philips makes a great effort to continuously improve control
procedures and to educate professionals in key fi nancial
positions. Flaws in control systems could adversely affect
the fi nancial results and hamper expected growth. The
correctness of disclosures provides investors and other
market professionals with signifi cant information for a
better understanding of Philips’ businesses. Imperfections
in the disclosures could create uncertainty regarding the
reliability of the data presented. Compliance procedures
are adopted by management to ensure that the resource
use is consistent with laws, regulations and policies and
that resources are safeguarded against waste, loss and
misuse. Ineffective compliance procedures relating to the
safeguarding of assets could have an undesirable effect on
the income generation process.
Should unforeseen events complicate the processes
towards Sarbanes-Oxley section 404 compliance, this
could challenge management.
By the end of 2006, Philips expects to comply with
section 404 of the Sarbanes-Oxley Act. Unforeseen
setbacks in this process could pose additional challenges
to management to ensure timely completion.
Details of fi nancial risks
This section provides further details of the fi nancial
risks, which are categorized along the lines of the
corporate processes.
Treasury
Philips is, as mentioned before, exposed to several types
of fi nancial risk. This section will further analyze fi nancial
risks that relate to treasury activities. The Company does
not purchase or hold fi nancial derivative instruments for
speculative purposes.
Currency risk
Currency fl uctuations may impact Philips’ fi nancial results.
The Company has a limited structural currency mismatch
between costs and revenues, as a proportion of its
production, administration and research and development
Management discussion and analysis