Philips 2005 Annual Report Download - page 117

Philips Annual Report 2005 117
Valuation allowances for certain assets
The Company records its inventories at cost and provides
for the risk of obsolescence using the lower of cost or
market principle. The expected future use of inventory is
based on estimates about future demand and past
experience with similar inventories and their usage.
The risk of uncollectibility of accounts receivable is primarily
estimated based on prior experience with, and the past
due status of, doubtful debtors, while large accounts are
assessed individually based on factors that include ability
to pay, bankruptcy and payment history. In addition, debtors
in certain countries are subject to a higher collectibility
risk, which is taken into account when assessing the
overall risk of uncollectibility. Should the outcome differ
from the assumptions and estimates, revisions to the
estimated valuation allowances would be required.
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
The Company has acquired several 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 qualifi ed
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 other than goodwill
are amortized over their economic lives.
Other information
Share repurchase programs
In June 2005, the Company completed a share repurchase
program of up to EUR 750 million which was announced
in January 2005. Under this program, EUR 500 million has
been used for capital reduction purposes and EUR 250
million to hedge long-term incentive and employee stock
purchase programs. In August 2005, the Company initiated
a second share repurchase program for capital reduction
purposes of up to 63 million shares for a maximum
amount of EUR 1.5 billion.
Under these share repurchase programs, a total of
71,679,622 shares were acquired during 2005 for capital
reduction purposes at an average market price of
EUR 22.13 per share, totaling EUR 1.6 billion. In
accordance with Dutch law, the Company has informed
the Netherlands Authority for the Financial Markets that
its holdings of Philips shares has exceeded 5 percent of
the Company’s total outstanding shares. The Company
expects to complete the second share repurchase
program during the fi rst half year of 2006.
Subject to the approval of the 2006 Annual General
Meeting of Shareholders, all shares repurchased for capital
reduction purposes up until then under these programs
will be cancelled, resulting in a reduction of Philips’
outstanding share capital by more than 6%.
MedQuist
As announced earlier, MedQuist, in which Philips holds
70.1% of the common stock and which is consolidated in
Philips’ fi nancial statements, is conducting a review of the
company’s billing practices and related matters. MedQuist
is involved in several litigation matters and is the subject
of an ongoing investigation by the U.S. Securities and
Exchange Commission relating to these practices and
has received a HIPAA subpoena from the U.S. Department
of Justice relating to these practices and other matters.
HIPAA is the Health Insurance Portability and
Accountability Act enacted by the U.S. Congress in 1996.
MedQuist has not been able to complete the audit of its
fi scal years 2003, 2004 and 2005 and has postponed the
fi ling of its annual report for fi scal year 2003 and reports
for subsequent periods. The MedQuist board has
announced that the company’s previously issued fi nancial