Philips 2005 Annual Report Download - page 174

Philips Annual Report 2005174
December 31, 2004 December 31, 2005
carrying
amount
estimated fair
value
carrying
amount
estimated fair
value
Assets:
Cash and cash
equivalents 4,349 4,349 5,293 5,293
Accounts
receivable -
current 4,412 4,412 5,155 5,155
Other
nancialassets 876 876 673 673
Accounts
receivable -
non-current 227 224 213 212
Derivative
instruments -
assets 523 523 143 143
Liabilities:
Accounts
payable (3,346) (3,346) (3,856) (3,856)
Debt (4,513) (4,810) (4,487) (4,757)
Derivative
instruments -
liabilities (149) (149) (228) (228)
The following methods and assumptions were used to estimate the fair
valueofnancialinstruments:
Cash, accounts receivable - current and accounts payable
The carrying amounts approximate fair value because of the short
maturity of these instruments.
Cash equivalents
The fair value is based on the estimated market value.
Othernancialassets
Forothernancialassets,fairvalueisbasedupontheestimated
market prices.
Accounts receivable – non-current
Thefairvalueisestimatedonthebasisofdiscountedcashowanalyses.
Debt
The fair value is estimated on the basis of the quoted market prices for
certainissues,oronthebasisofdiscountedcashowanalysesbased
upon Philips’ incremental borrowing rates for similar types of borrowing
arrangements with comparable terms and maturities. Accrued interest
is included under accounts payable and not within the carrying amount
or estimated fair value of debt. At December 31, 2005 the accrued
interest of bonds, which is the main part of the accrual, was EUR 106
million (2004: EUR 121 million).
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Other nancial instruments, derivatives and currency risk
TheCompanydoesnotpurchaseorholdnancialderivative
instruments for trading purposes. Assets and liabilities related to
derivative instruments are disclosed in note 13 respectively note 20.
CurrencyuctuationsmayimpactPhilips’nancialresults.TheCompany
has a limited structural currency mismatch between costs and revenues,limited
as a proportion of its production, administration and research and
development costs is denominated in euros, while a proportion of its
revenues is denominated in US dollars.
The Company is exposed to currency risk in the following areas:
transaction exposures, such as forecasted sales and purchases, and
receivables respectively payables resulting from such transactions;
translation exposure of net income in foreign entities;
translation exposure of investments in foreign entities;
exposure of non-functional-currency-denominated debt;
exposure of non-functional-currency-denominated equity investments.
ItisPhilips’policythatsignicanttransactionexposuresarehedged.The
Philips policy generally requires committed foreign currency exposures
to be hedged fully using forwards. Anticipated transactions are hedged
using forwards or options or a combination thereof. The policy for the
hedging of anticipated exposures specifying the use of forwards/options
and the hedge tenor varies per business and is a function of the ability
toforecastcashowsandthewayinwhichthebusinessescanadaptto
changed levels of foreign exchange rates. As a result, hedging activities
may not eliminate all currency risks for these transaction exposures.
Generally, the maximum tenor of these hedges is less than 18 months.
The Company does not hedge the exposure arising from translation
exposure of net income in foreign entities. Translation exposure of
equityinvestedinconsolidatedforeignentitiesnancedbyequityis
partially hedged. If a hedge is entered into, it is accounted for as a net
investment hedge.
The currency of the external funding of the Company is matched with
therequirednancingofsubsidiarieseitherdirectlybyexternalforeign
currency loans, or by using foreign exchange swaps.
Philips does not currently hedge the foreign exchange exposure arising
from unconsolidated equity investments. The Company uses foreign
exchange derivatives to manage its currency risk. The US dollar (including
related currencies such as the Hong Kong dollar) and Taiwanese dollar
account for a high percentage of the Company’s foreign exchange
derivatives.Apartfromthat,theCompanyhassignicantderivatives
outstanding related to the pound sterling.
Changes in the value of foreign currency accounts receivable/payable as
well as the changes in the fair value of the hedges of accounts receivable/
payable are reported in the income statement under cost of sales. The
hedgesrelatedtoforecastedtransactionsarerecordedascashow
hedges. The results from such hedges are deferred in equity. Currently, a
loss of EUR 45 million before taxes is deferred in equity as a result of
these hedges. The result deferred in equity will mostly be released to
the income statement in 2006 at the time when the related hedged
transactions affect the income statement. During 2005 a net loss of less
than EUR 1 million was recorded in the income statement as a result of
ineffectiveness of transaction hedges.
Changes in the fair value of hedges related to translation exposure of
investmentsinforeignentitiesnancedbydebtarerecognizedinthe
income statement. The changes in the fair value of these hedges related
to foreign exchange movements are offset in the income statement by
changes in the fair value of the hedged items. The Company recorded a
loss of EUR 164 million in other comprehensive income under currency
translation differences as a result of net investment hedges of investments
in foreign subsidiaries. A loss of EUR 1 million was booked to the income
statement as a result of ineffectiveness of net investment hedges.
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Subsequent events
OnJanuary19,2006,Philipsannouncedthatithadsignedadenitive
merger agreement with Lifeline Systems (NASDAQ: LIFE), under which
Philips will acquire Lifeline, a leader in personal emergency response
services. Philips has agreed to acquire Lifeline for USD 47.75 per share
or a total equity value of USD 750 million (equaling an aggregate value
of USD 690 million net of USD 60 million cash and cash equivalents) in
a transaction that has been unanimously approved by the Board of
Directors of Lifeline. Completion of the transaction is subject to the
terms and conditions of the merger agreement, which contains customary
closing conditions and is subject to the approval of Lifeline’s shareholders.
In January 2006, LG.Philips Displays Holding B.V. announced that due to
worsening conditions in the CTR marketplace and unsustainable debt, it
and various companies in the Netherlands, Germany, Slovakia and France
haveledforbankruptcy,whilepartoftheLPDbusinessintheNetherlands
and United Kingdom has been continued. Given the holding company’s
inability to further fund the subsidiaries, its operations in the Czech
Republic,MexicoandtheUSarealsoreviewingtheirnancialposition.
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Groupnancialstatements