Philips 2006 Annual Report Download - page 91

Philips Annual Report 2006 91
Warranty and product liability claims against Philips
could cause Philips to incur signifi cant costs and affect
Philips’ results as well as its reputation and relationships
with key customers.
Philips is from time to time subject to warranty and
product liability claims with regard to product performance.
Philips could incur product liability losses as a result of
repair and replacement costs in response to customer
complaints or in connection with the resolution of
contemplated or actual legal proceedings relating to
such claims. In addition to potential losses from claims
and related legal proceedings, product liability claims
could affect Philips’ reputation and its relationships with
key customers, both customers for end products and
customers that use Philips’ products in their production
process. As a result, product liability claims could impact
Philips’ fi nancial results.
Financial risks
Philips is exposed to a variety of fi nancial risks, including
currency risk, interest rate risk, liquidity risk, equity price
risk, commodity price risk, credit risk, country risk and
other insurable risks which may impact Philips’ results.
Philips is a global company and as a direct result the
fi nancial results of the Group may be impacted through
currency fl uctuations. Furthermore, Philips is exposed to
other movements in the fi nancial markets in the form of
interest rate risk, commodity price risk and also equity
price risk as Philips holds minority stakes in a number of
listed companies where market value currently exceeds
the equity investment reported in the fi nancial statements.
A decline in the market value of these investments could
result in a future impairment.
For further analysis, please refer to the section Details
of fi nancial risks presented on the pages hereafter.
Philips has defi ned-benefi t pension plans in a number of
countries. The funded status and the cost of maintaining
these plans is infl uenced by fi nancial market and demographic
developments, creating volatility in Philips’ results.
The majority of employees in Europe and North America
are covered by these plans. The accounting for defi ned-
benefi t pension plans requires management to determine
discount rates, expected rates of compensation and
expected returns on plan assets. Changes in these variables
can have a signifi cant impact on the projected benefi t
obligations and net periodic pension costs. A negative
performance of the fi nancial markets could have a material
impact on funding requirements and net periodic pension
costs and also affect the value of certain fi nancial assets
of the company. For further analysis of pension-related
exposure to changes in fi nancial markets, please refer to
the section Details of fi nancial risks presented on the pages
hereafter, and for quantitative and qualitative disclosure
of pensions, please refer to note 20 to the consolidated
fi nancial statements.
Philips is exposed to a number of different tax uncertainties
which could have a signifi cant impact on local tax results.
Philips is exposed to a number of different tax uncertainties
which could result in double taxation, penalties and interest
payments. These include, amongst others, transfer pricing
uncertainties on internal deliveries of goods and services,
tax uncertainties related to acquisitions and divestments,
tax uncertainties related to the use of tax credits and to
permanent establishments, and tax uncertainties due to
losses carried forward. Those uncertainties may have a
signifi cant impact on local tax results. For further details,
please refer to the section Details of fi nancial risks
presented on the pages hereafter.
Legal proceedings covering a range of matters are
pending in various jurisdictions against the Company
and its (former) group companies. Due to the uncertainty
inherent in litigations, it is diffi cult to predict the fi nal
outcome. An adverse outcome might impact Philips’ results.
The Company, including a certain number of its (former)
group companies, is involved in litigation relating to such
matters as competition issues, commercial transactions,
product liability (including allegations of personal injury
from alleged asbestos exposure), participations and
environmental pollution. Although the ultimate disposition
of asserted claims and proceedings cannot be predicted
with certainty, Philips’ fi nancial position and results of
operations could be affected by an adverse outcome.
Please refer to note 27 to the consolidated fi nancial
statements for additional disclosure relating to specifi c
litigation matters.
Compliance and fi nancial reporting risks
Reliability of reporting, correctness of disclosures
and safeguarding of assets.
The reliability of reporting is important in assuring
management of top-quality data for steering the businesses
and for managing both top-line and bottom-line growth.
Flaws in control systems could adversely affect the fi nancial
results and hamper expected growth. The correctness of
disclosures provides investors and other market professionals
with signifi cant information for a better understanding
54 The Philips sectors 86 Risk management 100 Report of the Supervisory Board 110 Financial Statements