Philips 2007 Annual Report Download - page 138

Philips Annual Report 2007144
deducted from the cost of the related asset. Depreciation is calculated
using the straight-line method over the useful 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 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 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 useful lives. Remaining useful lives are evaluated every
year to determine whether events and circumstances warrant a revision
to the remaining period of amortization. Intangible assets that
are expected to generate cash inows during a period without a
foreseeable limit, are regarded as intangibles with an inde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.
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.
Impairment or disposal of long-lived assets other than goodwill
and inde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 ows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated
future undiscounted net cash 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 ows. The review for impairment is
carried out at the level where discrete cash ows occur that are largely
independent of other cash ows. Assets held for sale are reported
at the lower of the carrying amount or fair value, less cost to sell.
Goodwill and indenite lived intangibles
The Company accounts for goodwill and indenite lived tangibles
in accordance with the provisions of SFAS No. 141 ‘Business
Combinations’ and SFAS No. 142 ‘Goodwill and Other Intangible
Assets’. Accordingly, goodwill and indenite lived intangibles are
not amortized but tested for impairment annually 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 nancial information to the Board of Management, which is
usually one level below the division level.
The goodwill impairment test of 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 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 classied as treasury shares and are presented
as a deduction from stockholders’ equity.
Provisions
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 xed or reliably
determinable. 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 bene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 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, ‘Accounting for Costs Associated with Exit or Disposal
Activities’ requires that a liability be recognized for those costs only
when the liability is incurred, i.e. when it meets the de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 bene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 notication period.
Employee termination benets covered by a contract or under an
ongoing benet arrangement continue to be accounted for under
SFAS No. 112, ‘Employer’s Accounting for Postemployment Benets’
and are recognized when it is probable that the employees will be
entitled to the benets and the amounts can be reasonably estimated.
Guarantees
The Company complies with FASB Interpretation No. 45, ‘Guarantor’s
Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others’. In accordance with
this interpretation, the Company recognizes a liability for the fair
value of the obligation incurred for guarantees within the scope of
the recognition criteria of the Interpretation, including minimum
revenue guarantees.
Accounting standards adopted in 2007
Several accounting pronouncements relevant to the Company
were adopted in 2007:
SFAS No. 156 ‘Accounting for Servicing of Financial Assets’
The Company adopted SFAS No. 156 ‘Accounting for Servicing
of Financial Assets’, an amendment to SFAS No. 140 with respect
to the accounting for separately recognized servicing assets and
servicing liabilities, with the effective date January 1, 2007. The
statement requires among others to recognize a servicing liability
upon sale of nancial assets while entering into a servicing contact.
The effects of adopting this standard were not material.
128 Group nancial statements
Signicant accounting policies
188 IFRS information 240 Company nancial statements