Philips 2006 Annual Report Download - page 128

Philips Annual Report 2006128
Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation. Assets manufactured by the Company include direct
manufacturing costs, production overheads and interest charges
incurred during the construction period. Government grants are
deducted from the cost of the related asset. Depreciation is calculated
using the straight-line method over the expected economic life of
the asset. Depreciation of special tooling is generally based on the
straight-line method. Gains and losses on the sale of property, plant
and equipment are included in other business income. Costs related
to repair and maintenance activities are expensed in the period in
which they are incurred unless they lead to an extension of the
economic life or capacity of the asset. Plant and equipment under
capital leases are initially recorded at the present value of future
minimum lease payments. These assets and leasehold improvements
are amortized using the straight-line method over the shorter of
the lease term or the estimated useful life of the asset.
Under the provisions of SFAS No. 143, ‘Accounting for Asset Retirement
Obligations’, the Company recognizes the fair value of an asset
retirement obligation in the period in which it is incurred, while an
equal amount is capitalized as part of the carrying amount of the long-
lived asset and subsequently depreciated over the useful life of the asset.
Intangible assets
Intangible assets are amortized using the straight-line method over
their estimated economic lives. Economic lives are evaluated every
year. Intangible assets that are expected to generate cash infl ows
during a period without a foreseeable limit, are regarded as intangibles
with an indefi nite useful life. These assets are not amortized, but
tested for impairment annually and whenever an impairment trigger
indicates that the asset may be impaired. In-process research and
development with no alternative use is written off immediately upon
acquisition. Patents, trademarks and other intangibles acquired from
third parties are capitalized at cost and amortized over their remaining
useful lives.
Certain costs relating to the development and purchase of software
for internal use are capitalized and subsequently amortized over the
estimated useful life of the software in conformity with Statement of
Position (SOP) 98-1, ‘Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use’.
Eligible costs relating to the production of software intended to be
sold, leased or otherwise marketed are capitalized and subsequently
amortized over the estimated useful life of the software in accordance
with SFAS No. 86, ‘Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed’.
Impairment or disposal of long-lived assets other than
goodwill and indefi nite-lived intangibles
The Company accounts for long-lived assets in accordance with
the provisions of SFAS No. 144, ‘Accounting for the Impairment or
Disposal of Long-Lived Assets’. This Statement requires that long-lived
assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured
by a comparison between the carrying amount of an asset and the
future undiscounted net cash fl ows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated
future undiscounted net cash fl ows, an impairment charge is recognized
in the amount by which the carrying amount of the asset exceeds the
fair value of the asset. The Company determines the fair value based
on discounted projected cash fl ows. The review for impairment is
carried out at the level where discrete cash fl ows occur that are largely
independent of other cash fl ows. Assets held for sale are reported at
the lower of the carrying amount or fair value, less cost to sell.
Goodwill and indefi nite lived intangibles
The Company accounts for goodwill in accordance with the provisions
of SFAS No. 141 ‘Business Combinations’ and SFAS No. 142 ‘Goodwill
and Other Intangible Assets’. Accordingly, goodwill and indefi nite lived
intangibles is not amortized but tested for impairment annually in the
second quarter and whenever impairment indicators require so.
An impairment loss is recognized to the extent that the carrying
amount exceeds the asset’s fair value. This determination is made at
the reporting unit level, which has been determined by the Company
to be the level of an entity that reports discrete fi nancial information
to the Board of Management, which is usually one level below the
division level. The impairment test consists of two steps. First, the
Company determines the carrying value of each reporting unit by
assigning the assets and liabilities, including the goodwill and intangible
assets, to those reporting units. Furthermore, the Company determines
the fair value of each reporting unit and compares it to the carrying
amount of the reporting unit. If the carrying amount of a reporting
unit exceeds the fair value of the reporting unit, the Company performs
the second step of the impairment test. In the second step, the
Company compares the implied fair value of the reporting unit’s
goodwill with the carrying amount of the reporting unit’s goodwill.
The implied fair value of goodwill is determined by allocating the fair
value of the reporting unit to all of the assets (recognized and
unrecognized) and liabilities of the reporting unit in a manner similar
to a purchase price allocation upon a business combination in
accordance with SFAS No. 141. The residual fair value after this
allocation is the implied fair value of the reporting unit’s goodwill.
The Company generally determines the fair value of the reporting
units based on discounted projected cash fl ows.
Share capital
Incremental costs directly attributable to the issuance of shares are
recognized as a deduction from equity. When share capital recognized
as equity is repurchased, the amount of the consideration paid, including
directly attributable costs, is recognized as a deduction from equity.
Repurchased shares are classifi ed as treasury shares and are presented
as a deduction from stockholders’ equity.
Provisions and accruals
The Company recognizes provisions for liabilities and probable losses
that have been incurred as of the balance sheet date and for which the
amount is uncertain but can be reasonably estimated.
Provisions of a long-term nature are stated at present value when
the amount and timing of related cash payments are fi xed or reliably
determinable unless the timing of the cash fl ows is too uncertain to
allow discounting. Short-term provisions are stated at face value.
The Company applies the provisions of SOP 96-1, ‘Environmental
liabilities’ and SFAS No. 5, ‘Accounting for Contingencies’ and accrues
for losses associated with environmental obligations when such losses
are probable and reasonably estimatable. Additionally, in accordance
with SOP 96-1, the Company accrues for certain costs such as
compensation and benefi ts for employees directly involved in the
remediation activities. Measurement of liabilities is based on current
legal requirements and existing technology. Liabilities and probable
insurance recoveries, if any, are recorded separately. The carrying
amount of liabilities is regularly reviewed and adjusted for new facts
or changes in law or technology.
Restructuring
The Company applies SFAS No. 146, ‘Accounting for Costs Associated
with Exit or Disposal Activities’.
The provision for restructuring relates to the estimated costs of
initiated reorganizations that have been approved by the Board of
Management. When such reorganizations require discontinuance
and/or closure of lines of activities, the anticipated costs of closure
or discontinuance are included in restructuring provisions.
SFAS No. 146 requires that a liability be recognized for those costs
only when the liability is incurred, i.e. when it meets the defi nition of
a liability. SFAS No. 146 also establishes fair value as the objective for
initial measurement of the liability.
Liabilities related to one-time employee termination benefi ts are
recognized ratably over the future service period if those employees
are required to render services to the Company, if that period exceeds
60 days or a longer legal notifi cation period.
112 Group fi nancial statements
Accounting policies
172 IFRS information 218 Company fi nancial statements