Philips 2005 Annual Report Download - page 209

Philips Annual Report 2005 209
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Other nancial instruments, derivatives and currency risk
TheCompanydoesnotpurchaseorholdnancialderivativeinstruments
for speculative purposes. Assets and liabilities related to derivative
instruments are disclosed in note 48 respectively note 53.
CurrencyuctuationsmayimpactPhilips’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 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 fully hedged 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 estimate 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 Company’s external funding 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also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
income from operations within 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 equity under currency translation differences
as a result of net investment hedges of investments in foreign
subsidiaries. A loss of EUR 1 million was recognized in the income
statement as a result of ineffectiveness of the 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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wereconcluded.Therentalpaymentsarexed.Therentalpaymentsfor
ofcertainactivitieswithintheCompany’smonitorsandatTVbusiness.
Fair value of nancial assets and liabilities
Theestimatedfairvalueofnancialinstrumentshasbeendetermined
nancialassets
valueofnancialinstruments:
Othernancialassets
Forothernancialassets,fairvalueisbasedupontheestimated
Thefairvalueisestimatedonthebasisofdiscountedcashowanalyses.
certainissues,oronthebasisofdiscountedcashowanalysesbased
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