Philips 2006 Annual Report Download - page 188

Philips Annual Report 2006188
Realized gains and losses from the sale of available-for-sale securities
or the transfer to the held-for-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 the income statement
rather than in equity.
Held-to-maturity securities are those debt securities in which the
Company has the ability and intent to hold the security 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 that are not equity-accounted
investees, are carried at cost.
Impairment 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.
An impairment loss related to fi nancial assets is reversed if and to the
extent there has been a change in the estimates used to determine
the recoverable amount. The loss is reversed only to the extent that
the asset’s carrying amount does not exceed the carrying amount that
would have been determined, net of depreciation or amortization, if
no impairment loss had been recognized. Reversals of impairment are
recognized in net income except for reversals of impairment of
available-for-sale equity securities, which are recognized in equity.
Inventories
Inventories are stated at the lower of cost or net realizable value,
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. 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. This reduction is determined for groups
of products based on purchases in the recent past and/or expected
future demand.
Property, plant and equipment
Property, plant and equipment is stated at cost, less accumulated
depreciation. Assets manufactured by the Company include direct
manufacturing costs, production overheads and interest charges incurred
for qualifying assets 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 also 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 leading to an extension of the original
lifetime or capacity.
Plant and equipment under fi nance leases are initially recorded at
the lower of their fair value or the present value of 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. The gain realized on sale and
operating leaseback transactions that are concluded at market
conditions is recognized at the time of the sale.
The Company capitalizes interest as part of the cost of assets that
necessarily take a substantial period of time to get ready for use.
Intangible assets other than goodwill
Acquired defi nite-lived intangible assets are amortized using the
straight-line method over their estimated useful life. The useful lives
are evaluated every year. Brands acquired from third parties that
are expected to generate cash infl ows during a period without a
foreseeable limit, are regarded as intangible assets with an indefi nite
useful life. These brands are not amortized, but tested for impairment
annually or whenever an impairment trigger indicates that the asset
may be impaired. Patents and trademarks acquired from third parties
are capitalized at cost and amortized over their remaining useful lives.
Under IAS 38 ‘Intangible Assets’ all research costs are expensed
when incurred. Expenditure on development activities, whereby
research fi ndings are applied to a plan or design for the production
of new or substantially improved products and processes, is capitalized
as an intangible asset if the product or process is technically and
commercially feasible and the Company has suffi cient resources
to complete development.
The development capitalized expenditure includes the cost of
materials, direct labor and an appropriate proportion of overheads.
Other development expenditure and expenditure on research activities
is recognized in the income statement as an expense as incurred.
Capitalized development expenditure is stated at cost less accumulated
amortization and impairment losses. Amortization of capitalized
development expenditure is charged to the income statement on
a straight-line basis over the estimated useful lives of the intangible
assets. The useful lives for the intangible development assets are
3 – 5 years.
Costs relating to the development and purchase of software for both
internal use and software intended to be sold are capitalized and
subsequently amortized over the estimated useful life of the software.
Impairment of non-fi nancial assets other than goodwill,
inventories and deferred tax assets
Non-fi nancial assets other than goodwill, inventories and deferred
tax 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
recognized and measured by a comparison of the carrying amount of
an asset with the greater of its value in use and its fair value less cost
to sell. Value in use is measured as the present value of future cash
fl ows expected to be generated by the asset. If the carrying amount
of an asset is not recoverable, an impairment charge is recognized in
the amount by which the carrying amount of the asset exceeds the
recoverable amount. The review for impairment is carried out at the
level where discrete cash fl ows occur that are independent of other
cash fl ows.
An impairment loss related to intangible assets other than goodwill,
tangible fi xed assets, inventories and within unconsolidated companies
is reversed if and to the extent there has been a change in the estimates
used to determine the recoverable amount. The loss is reversed only
to the extent that the asset’s carrying amount does not exceed the
carrying amount that would have been determined, net of depreciation
or amortization, if no impairment loss had been recognized. Reversals
of impairment are recognized in net income except for reversals of
impairment of available-for-sale equity securities which are recognized
in equity.
Goodwill
Under the provisions of IFRS 3 ‘Business Combinations’ the Company
initially determines the amount of goodwill. Goodwill is measured at
cost less accumulated impairment losses. In respect of equity-accounted
investees, the carrying amount of goodwill is included in the carrying
amount of the investment.
Impairment of goodwill
Goodwill is not amortized but tested for impairment annually in the
second quarter and whenever impairment indicators require so. In
accordance with IFRS 3 the Company identifi ed its cash generating
units as one level below that of an operating sector. Cash fl ows on
112 Group fi nancial statements 172 IFRS information
IFRS accounting policies
218 Company fi nancial statements