Philips 2007 Annual Report Download - page 201

Philips Annual Report 2007 207
loss carry-forwards, are recognized if it is probable that the asset will
be realized. Deferred tax assets are reviewed each reporting date and
reduced to the extent that it is no longer probable that sufcient
taxable income will be available to allow all or part of the asset to
be recovered. 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
dividend in the foreseeable future, and for undistributed earnings of
unconsolidated companies. Changes in tax rates are reected in the
period when the change has been enacted or substantively enacted
by the balance sheet date.
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 risks 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 the
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 outstanding. The corresponding rental obligations, net of
nance charges, are included in other short-term and other non-
current 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.
Derivative nancial instruments
The Company uses derivative nancial instruments principally to
manage its foreign currency risks and, to a more limited extent, for
managing interest rate and commodity price risks. All derivative nancial
instruments are classied as current assets or liabilities based on their
maturity dates and are accounted for at trade date. Embedded
derivatives are separated from the host contract and accounted
for separately if required by IAS 39 Financial Instruments: Recognition
and Measurement. 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. 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 fair value hedge, along with the
loss or gain on the hedged asset, or liability or unrecognized rm
commitment of the hedged item that is attributable to the hedged
risk, are recorded in the income statement.
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 equity,
until prot or loss is affected by the variability in cash ows of the
designated hedged item.
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 expected that a
forecasted transaction will not occur, the Company continues to carry
the derivative on the balance sheet at its fair value, and gains and
losses that were accumulated in equity are recognized immediately in
the income statement. If there is a delay and it is expected that the
transaction will still occur the amount in equity remains there until
the forecasted transaction affects income. 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. 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.
Foreign currency differences arising on the retranslation 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.
Non-derivative nancial instruments
Non-derivative nancial instruments are recognized initially at
fair value when the Company becomes a party to the contractual
provisions of the instrument. They are derecognized if the Company’s
contractual rights to the cash ows from the nancial instruments
expire or if the Company transfers the nancial instruments to another
party without retaining control or substantially all risks and rewards
of the instruments. Regular way purchases and sales of nancial
instruments are accounted for at trade date. 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 known amounts of cash. They
are stated at face value which approximates fair value.
Receivables
Trade accounts receivable are carried at the lower of amortized cost
or the present value of estimated future cash ows, taking into account
discounts given or agreed. The present value of estimated future cash
ows is determined through the use of allowances for uncollectible
amounts. As soon as individual 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 because of 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 event of sale of receivables and factoring, the Company
derecognizes receivables when the Company has given up control
or continuing involvement.
Long-term receivables are initially recognized at their present value
using an appropriate interest rate. Any discount is amortized to
income over the life of the receivable using the effective yield.
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. Generally, 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 its interest in an equity-
accounted investee, the carrying amount of that interest (including any
long-term loans) is reduced to nil and recognition of further losses is
discontinued except to the extent that the Company has incurred
legal or constructive obligations or made payments on behalf of an
associate. Unrealized gains on transactions between the Company
and its equity-accounted investees are eliminated to the extent of the
Company’s interest in the associates. Unrealized losses are also
eliminated unless the transaction provides evidence of an impairment
of the asset transferred.
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 plans to reacquire such shares. In such instances,
the result of the transaction will be recorded directly in 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.
Group nancial statements
Signicant IFRS 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