Philips 2007 Annual Report Download - page 137

Philips Annual Report 2007 143
derecognized if and only if they are extinguished. Non-derivative nancial
instruments are accounted for as a sale to the extent that a consideration
other than benecial interests in the transferred assets is received in
exchange. The Company has surrendered control over transferred
assets if and only if: (i) the transferred assets have been isolated from
the Company beyond its reach and its creditor even in bankruptcy
or other receivership, (ii) the transferree has the right to pledge or
exchange the assets it received, and no condition both constrains the
transferee from taking advantage of its right to pledge or exchange
and provides more than a trivial benet to the Company, and (iii) the
Company does not maintain effective control over the transferred assets.
Regular way purchases and sales of 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 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 receivable 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 specic circumstances such as serious
adverse economic conditions in a specic country or region.
In the events of sale of receivables and factoring, the Company
derecognizes the receivables and accounts for them as a sale only
to the extent that the Company has surrended control over the
receivables in exchange for a consideration other than benecial
interest in the transferred receivables.
Long-term receivables are initially recognized at their net present
value using an appropriate interest rate. Any discount is amortized
to income over the life of the receivable using the effective yield.
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 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 nancial and operating
decisions, but does possess the ability to exert signicant inuence, are
accounted for using the equity method. In the absence of demonstrable
proof of signicant in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 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.
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 nancial assets
Other non-current nancial assets include available-for-sale securities,
held-to-maturity securities, loans and cost-method investments.
The Company classi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 nancial income and expense.
All securities not included in trading or held-to-maturity are classied
as available-for-sale. Available-for-sale equity 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 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 are determined on a rst-in,
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 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 of discounts or accretion of premiums 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 nancial income and expenses.
Impairments of nancial assets
A 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 ows of that asset. The Company assesses its
long-term investments accounted for as available-for-sale on a quarterly
basis to determine whether declines in market value below cost are
other-than-temporary, the cost basis for the individual security is
reduced and a loss is realized in the period in which it occurs. When
the decline is determined to be temporary, the unrealized losses are
included in other comprehensive income.
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 their fair value.
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 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 rst-in, 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.
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 during the construction period. Government grants are
Group nancial statements
Signicant accounting policies
Company nancial statements 250 Corporate governance246 Reconciliation of
non-US GAAP information 258 The Philips Group in the last ten years 260
Investor information