Philips 2006 Annual Report Download - page 127

Philips Annual Report 2006 127
retaining control or substantially all risks and rewards of the asset.
Purchases and sales of fi nancial instruments are accounted for at trade
date, i.e., the date that the Company commits itself to purchase or
sell the instrument. Dividend and interest income are recognized
when earned. Gains or losses, if any, are recorded in fi nancial income
and expenses.
Cash and cash equivalents
Cash and cash equivalents include all cash balances and short-term
highly liquid investments with an original maturity of three months
or less that are readily convertible into cash. They are stated at face
value, which approximates their fair value.
Receivables
Trade accounts receivables are carried at face value, net of allowances
for doubtful accounts. As soon as trade accounts receivable can no
longer be collected in the normal way and are expected to result in
a loss, they are designated as doubtful trade accounts receivable and
valued at the expected collectible amounts. They are written off when
they are deemed to be uncollectible due to bankruptcy or other
forms of receivership of the debtors.
The allowance for the risk of non-collection of trade accounts receivable
takes into account credit-risk concentration, collective debt risk based
on average historical losses and specifi c circumstances such as serious
adverse economic conditions in a specifi c country or region.
In the events of sale of receivables and factoring, the Company
derecognizes receivables if substantially all risks are transferred and
the Company has given up both control and continuing involvement.
Long-term receivables are discounted to their net present value.
Debt and other liabilities
Debt and liabilities other than provisions are stated at amortized cost.
However, loans that are hedged under a fair value hedge are
remeasured for the changes in the fair value that are attributable
to the risk that is being hedged.
Currently, the Company does not have any fi nancial instruments
that are affected by SFAS No. 150 ‘Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity’.
Investments in equity-accounted investees
Investments in companies in which the Company does not have the
ability to directly or indirectly control the fi nancial and operating
decisions, but does possess the ability to exert signifi cant infl uence, are
accounted for using the equity method. In the absence of demonstrable
proof of signifi cant infl uence, it is presumed to exist if at least 20% of
the voting stock is owned. The Company’s share of the net income
of these companies is included in results relating to equity-accounted
investees in the consolidated statements of income. When the
Company’s share of losses exceeds the carrying amount of an
investment accounted for by the equity method, the Company’s
carrying amount of that investment is reduced to zero and recognition
of further losses is discontinued unless the Company has guaranteed
obligations of the investee or is otherwise committed to provide
further fi nancial support to the investee.
Investments in equity-accounted investees include loans from the
Company to these investees.
Accounting for capital transactions of a consolidated subsidiary
or an equity-accounted investee
The Company recognizes dilution gains or losses arising from the
sale or issuance of stock by a consolidated subsidiary or an equity-
accounted investee in the income statement, unless the Company or
the subsidiary either has reacquired or has plans to reacquire such
shares. In such instances, the result of the transaction will be recorded
directly in stockholders’ equity as a non-operating gain or loss.
The dilution gains or losses are presented on a separate line in the
income statement if they relate to consolidated subsidiaries. Dilution
gains and losses related to equity-accounted investees are presented
under Results relating to equity-accounted investees.
Other non-current fi nancial assets
Other non-current fi nancial assets include available-for-sale securities,
held-to-maturity securities, loans and cost-method investments.
The Company classifi es its investments in equity securities that have
readily determinable fair values as either available-for-sale or for trading
purposes. Trading securities are acquired and held principally for the
purpose of selling them in the short term and are presented as ‘Other
current assets’. Trading securities are recorded at fair value with
changes in the fair value going to fi nancial income and expense. All
securities not included in trading or held-to-maturity are classifi ed
as available-for-sale. Available-for-sale securities are recorded at fair
value with changes going through other comprehensive income in
stockholders’ equity. Unrealized holding gains and losses, net of the
related tax effect, on available-for-sale securities are excluded from
earnings and are reported as a separate component of other
comprehensive income within stockholders’ equity until realized.
Realized gains and losses from the sale of available-for-sale securities
or transfer to the trading portfolio are determined on a fi rst-in, fi rst-
out basis. For available-for-sale securities hedged under a fair value
hedge, the changes in the fair value that are attributable to the risk
which is being hedged are recognized in earnings rather than in other
comprehensive income.
Held-to-maturity securities are those debt securities in which
the Company has the ability and intent to hold until maturity.
Held-to-maturity debt securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or
discounts using the effective interest method.
Loans receivable are stated at amortized cost, less the related
allowance for impaired loans receivable.
Investments in privately-held companies are carried at cost, or
estimated fair value, if an other-than-temporary decline in value
has occurred.
Dividend and interest income are recognized when earned. Gains
or losses, if any, are recorded in fi nancial income and expenses.
Impairments of fi nancial assets
A fi nancial asset is considered to be impaired if objective evidence
indicates that one or more events have had a negative effect on the
estimated future cash fl ows of that asset. A decline in the market value
of any available-for-sale security or held-to maturity security below
cost that is deemed to be signifi cant or prolonged, results in a reduction
of the carrying amount to fair value. If objective evidence indicates
that cost-method investments need to be tested for impairment,
calculations are based on information derived from business plans
and other information available for estimating its fair value. The
impairment is charged to the income statement.
Inventories
Inventories are stated at the lower of cost or market, less advance
payments on work in progress. The cost of inventories comprises
all costs of purchase, costs of conversion and other costs incurred
in bringing the inventories to their present location and condition.
The costs of conversion of inventories include direct labor and fi xed
and variable production overheads, taking into account the stage
of completion and the normal capacity of the production facilities.
Costs of idle facility and waste are expensed. The cost of inventories
is determined using the fi rst-in, fi rst-out (FIFO) method. Inventory
is reduced for the estimated losses due to obsolescence, which
establishes a new cost basis. This reduction is determined for groups
of products based on purchases in the recent past and/or expected
future demand.
226 Corporate governance224 Reconciliation of
non-US GAAP information
234 The Philips Group
in the last ten years
236 Investor information