Philips 2008 Annual Report Download - page 101

Philips has defined-benefit pension plans in a number
of countries. The funded status and the cost of
maintaining these plans are influenced by financial
market and demographic developments, creating
volatility in Philips’ financials.
The majority of employees in Europe and North
America are covered by defined-benefit pension plans.
The accounting for defined-benefit 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 significant impact on the projected benefit
obligations and net periodic pension costs. A negative
performance of the financial markets could have
a material impact on funding requirements and net
periodic pension costs and also affect the value of
certain financial assets or liabilities of the company.
For further analysis of pension-related exposure
to changes in financial markets, please refer to the
section Details of pension risks that begins on page
106 of this Annual Report and for quantitative and
qualitative disclosure of pensions, please refer to
note 20.
Legal proceedings covering a range of matters are
pending in various jurisdictions against Philips and its
current and former group companies. Due to the
uncertainty inherent in legal proceedings, it is difficult
materially to predict the final outcome. Adverse
outcomes might impact Philips’ financial position
and results.
Philips, including a certain number of its current and
former group companies, is involved in legal proceedings
relating to such matters as competition issues,
commercial transactions, product liability, participations
and environmental pollution. Since the ultimate outcome
of asserted claims and proceedings, or the impact of
any claims that may be asserted in the future, cannot
be predicted with certainty, Philips’ financial position
and results of operations could be affected materially
by adverse outcomes.
Please refer to note 27 for additional disclosure
relating to specific legal proceedings.
Financial risks
Philips is exposed to a variety of treasury risks
including liquidity risk, currency risk, interest rate
risk, equity price risk, commodity price risk, credit
risk, country risk and other insurable risk.
During 2008 Philips re-financed a significant
proportion of its long-term debt commitments,
thereby significantly extending the overall maturity
profile of its funding. Furthermore, additional credit
lines were arranged to act as additional back-up
for the liquidity needs of the group. Nevertheless,
if further negative developments impact the global
liquidity markets this may affect the ability to raise
or re-finance debt in the capital markets, or could
also lead to significant increases in the cost of such
borrowing in the future. Expected or actual downgrades
by rating agencies may increase our cost of borrowing,
may reduce our potential investor base and may
negatively affect our businesses.
Philips is a global company and as a direct result
the financial results of the group may be impacted
through currency fluctuations. The majority of the
currency risk to which Philips is exposed relates to
transaction exposure within the business of on-
balance and forecast foreign currency purchases or
sales and translation exposure of foreign currency
denominated financing positions.
Philips is also exposed to interest rate risk particularly
in relation to its long-term debt position; this risk can
take the form of either fair value or cash flow risk.
Failure to effectively hedge this risk can impact Philips’
financial results.
Philips is exposed to equity price risk through holdings
in publicly listed and other companies. A downturn in
equity markets can materially impact the realizable
value of such securities and can lead to material
financial losses and impairment charges for the Group.
Credit risk of counterparties that have outstanding
payment obligations creates exposure for Philips,
particularly in relation to accounts receivable and
liquid assets and insurance contracts with financial
counterparties. A default by counterparties in such
transactions can have a material and adverse effect
on Philips’ financial condition.
For further analysis, please refer to the section
Details of treasury risks that begins on page 102 of
this Annual Report.
Philips Annual Report 2008 101
122
Performance statements
114
Supervisory Board report
110
Our leadership
94
Risk management
70
Our sector performance