Philips 2005 Annual Report Download - page 115

Philips Annual Report 2005 115
Critical accounting policies
The preparation of Philips’ fi nancial statements requires us
to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities
at the date of our fi nancial statements. The policies that
management considers both to be most important to the
presentation of Philips’ fi nancial condition and results of
operations and to make the most signifi cant demands on
management’s judgments and estimates about matters that
are inherently uncertain are discussed below. Management
cautions that future events often vary from forecasts and
that estimates routinely require adjustment. A complete
description of Philips’ accounting policies appears in the
section Accounting policies that begins on page 134.
Accounting for pensions and other
postretirement benefi ts
Retirement benefi ts represent obligations that will be
settled in the future and require assumptions to project
benefi t obligations and fair values of plan assets. Retirement
benefi t accounting is intended to refl ect the recognition
of future benefi t costs over the employee’s approximate
service period, based on the terms of the plans and the
investment and funding decisions made by the Company.
The accounting requires management to make assumptions
regarding variables such as discount rate, rate of
compensation increase, return on assets, and future
healthcare costs. Management consults with outside
actuaries regarding these assumptions at least annually.
Changes in these key assumptions can have a signifi cant
impact on the projected benefi t obligations, funding
requirements and periodic cost incurred. For a discussion
of the current funded status and a sensitivity analysis
with respect to pension plan assumptions, please refer
to note 22 to the consolidated fi nancial statements. For
a sensitivity analysis with respect to changes in the
assumptions used for postretirement benefi ts other than
pensions, please refer to note 23 to the consolidated
fi nancial statements.
Contingent liabilities
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 often diffi cult to predict the fi nal outcome. The cases
and claims against the Company often raise diffi cult and
complex factual and legal issues which are subject to many
uncertainties and complexities, including but not limited to
the facts and circumstances of each particular case and
claim, the jurisdiction in which each suit is brought and the
differences in applicable law.
In the normal course of business, management consults
with legal counsel and certain other experts on matters
related to litigation. The Company accrues a liability when
it is determined that an adverse outcome is probable and
the amount of the loss can be reasonably estimated. If
either the likelihood of an adverse outcome is only
reasonably possible or an estimate is not determinable,
the matter is disclosed provided it is material.
Judicial proceedings have been brought in the United
States, relating primarily to the activities of a subsidiary
prior to 1981, involving allegations of personal injury from
alleged asbestos exposure. The claims generally relate to
asbestos used in the manufacture of unrelated companies’
products in the US and frequently involve claims for
substantial ompensatory and punitive damages. The
methodology used to determine the level of liability
requires signifi cant judgments and estimates regarding the
costs of settling asserted claims. The estimated liability is
established based upon recent settlement experience for
similar types of claims. For asserted claims where the
exact type and the extent of the alleged illness is not yet
known, the accrual for loss contingencies is established
based upon a ‘low end of range’ estimate. The resolution
of each case is generally based upon claimant-specifi c
information, much of which is not available until shortly
before the scheduled trial date. Accordingly, variances
between the actual and estimated costs of settlements
may occur. The Company cannot reasonably predict the
number of claims that may be assessed in the future.
Accordingly, an estimated liability with respect to
unasserted claims has not been recorded.
The Company and its subsidiaries are subject to
environmental laws and regulations. Under these laws, the
Company and its subsidiaries may be required to remediate
the effects of the release or disposal of certain chemicals
on the environment.
The methodology for determining the level of liability
requires a signifi cant amount of judgment regarding
assumptions and estimates. In determining the accrual
for losses associated with environmental remediation