Philips 2007 Annual Report Download - page 136

Philips Annual Report 2007142
2005
Net income
As reported 2,868
Add: Stock-based compensation expenses included in
reported net income, net of related taxes 65
Deduct: stock-based compensation expenses
determined using the fair-value method,
net of related taxes (77)
Pro forma 2,856
Basic earnings per share (in euros):
As reported 2.29
Pro forma 2.28
Diluted earnings per share (in euros):
As reported 2.29
Pro forma 2.28
The fair value of the amount payable to employees in respect of share-
based payments which are settled in cash is recognized as an expense,
with a corresponding increase in liabilities, over the vesting period.
The liability is remeasured at each reporting date and at settlement
date. Any changes in fair value of the liability are recognized as
compensation expense in the income statement.
Research and development
Costs of research and development are expensed in the period
in which they are incurred.
Advertising
Advertising costs are expensed as incurred.
Leases
Leases in which a signicant portion of the risks and rewards of
ownership are retained by the lessor are classied as operating leases.
Payments made under operating leases are recognized in the income
statement on a straight-line basis over the term of the lease.
Leases in which the Company has substantially all the risk and rewards
of ownership are classied as nance leases. Finance leases are
capitalized at the lease’s commencement at the lower of the fair value
of leased property and the present value of the minimum lease payments.
Each lease payment is allocated between the liability and nance charges
so as to achieve a constant rate of interest on the nance balance
liabilities. The property, plant and equipment acquired under nance
leases is depreciated over the shorter of the useful life of the assets
and the lease term.
Income taxes
Income taxes are accounted for using the asset and liability method.
Income tax is recognized in the income statement except to the
extent that it relates to an item recognized directly within stockholders’
equity, including other comprehensive income (loss), in which case
the related tax effect is also recognized there. Current-year deferred
taxes related to prior-year equity items which arise from changes in tax
rates or tax laws are included in income. Current tax is the expected
tax payable on the taxable income for the year, using tax rates enacted
at the balance sheet date, and any adjustment to tax payable in respect
of previous years. Deferred tax assets and liabilities are recognized
for the expected tax consequences of temporary differences between
the tax bases of assets and liabilities and their reported amounts.
Measurement of deferred tax assets and liabilities is based on the
enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered
or settled. Deferred tax assets, including assets arising from loss carry-
forwards, are recognized, net of a valuation allowance, if it is more
likely than not that the asset or a portion thereof will not be realized.
Deferred tax assets and liabilities are not discounted.
Deferred tax liabilities for withholding taxes are recognized for
subsidiaries in situations where the income is to be paid out as
dividends in the foreseeable future, and for undistributed earnings
of unconsolidated companies.
Changes in tax rates are reected in the period in which such change
is enacted.
Uncertain tax position
Income tax benet from an uncertain tax position is recognized only
if it is more likely than not that the tax position will be sustained upon
examination by the relevant taxing authorities, based on the technical
merits of the position. The income tax benet recognized in the nancial
statements from such position is measured based on the largest benet
that is more than 50% likely to be realized upon settlement with a taxing
authority that has full knowledge of all relevant information. The
liability for unrecognized tax benets, including related interest and
penalties, is recorded as other non-current liabilities. Interest is
presented as part of nancial expenses while penalty is classied
as part of current tax expense in the income statement.
Derivative nancial instruments
The Company uses derivative nancial instruments principally for the
management of its foreign currency risks and to a more limited extent
for interest rate and commodity price risks. All derivative nancial
instruments are classied as assets or liabilities and are accounted
for at trade date. The Company measures all derivative nancial
instruments based on fair values derived from market prices of the
instruments or from option pricing models, as appropriate. Changes
in the fair value of a derivative that is highly effective and that is
designated and qualies as a fair value hedge, along with the loss or
gain on the hedged asset, liability or unrecognized rm commitment of
the hedged item that is attributable to the hedged risk, are recorded in
the income statement. Gains or losses arising from changes in fair
value of derivatives are recognized in the income statement, except
for derivatives that are highly effective and qualify for cash ow or
net investment hedge accounting.
Changes in the fair value of a derivative that is highly effective and
that is designated and qualies as a cash ow hedge, are recorded in
accumulated other comprehensive income, until earnings are affected
by the variability in cash ows of the designated hedged item.
Changes in the fair value of derivatives that are highly effective as
hedges and that are designated and qualify as foreign currency hedges
are recorded in either earnings or accumulated other comprehensive
income, depending on whether the hedge transaction is a fair value
hedge or a cash ow hedge.
The Company formally assesses, both at the hedge’s inception and
on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or
cash ows of hedged items. When it is established that a derivative
is not highly effective as a hedge or that it has ceased to be a highly
effective hedge, the Company discontinues hedge accounting
prospectively. When hedge accounting is discontinued because it has
been established that the derivative no longer qualies as an effective
fair value hedge, the Company continues to carry the derivative on
the balance sheet at its fair value, and no longer adjusts the hedged
asset or liability for changes in fair value. When hedge accounting is
discontinued because it is probable that a forecasted transaction will
not occur within a period of two months from the originally forecasted
transaction date, the Company continues to carry the derivative
on the balance sheet at its fair value, and gains and losses that
were accumulated in other comprehensive income are recognized
immediately in the income statement. In all other situations in which
hedge accounting is discontinued, the Company continues to carry
the derivative at its fair value on the balance sheet, and recognizes
any changes in its fair value in the income statement.
Foreign currency differences arising on the translation of a nancial
liability designated as a hedge of a net investment in a foreign
operation are recognized directly as a separate component of equity,
to the extent that the hedge is effective. To the extent that the hedge
is ineffective, such differences are recognized in the income statement.
For interest rate swaps designated as a fair value hedge of an
interest-bearing asset or liability that are unwound, the amount of
the fair value adjustment to the asset or liability for the risk being
hedged is released to the income statement over the remaining life
of the asset or liability based on the recalculated effective yield.
Non-derivative nancial instruments
Non-derivative nancial instruments are recognized initially at
cost or fair value. Financial assets transferred to another party are
derecognized to the extent that the Company surrenders control
over those assets in exchange for a consideration other than benecial
exchange for interest in the transferred assets. Financial liabilities are
128 Group nancial statements
Signicant accounting policies
188 IFRS information 240 Company nancial statements