Philips 2008 Annual Report Download - page 138

Share-based payment
The Company applies SFAS No. 123(R), ‘Share-Based Payment’, using the
modified prospective method. Under the provisions of SFAS No. 123(R),
the Company recognizes the estimated fair value of equity instruments
granted to employees as compensation expense over the vesting period
on a straight-line basis, taking into account estimated forfeitures.
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 significant portion of the risks and rewards of
ownership are retained by the lessor are classified 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 classified as finance 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 finance
charges so as to achieve a constant rate of interest on the recorded
capital lease obligations. The property, plant and equipment acquired
under finance 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 within stockholders’ equity.
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 to the extent that these withholding
taxes are not expected to be refundable and deductible.
Changes in tax rates are reflected in the period in which such
change is enacted.
Uncertain tax positions
Income tax benefit 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 benefit recognized in the
financial statements from such position is measured based on the
largest benefit 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 benefits,
including related interest and penalties, is recorded as other non-current
liabilities. Interest is presented as part of financial expenses while
penalty is classified as part of current tax expense in the statements
of income.
Derivative financial instruments
The Company uses derivative financial 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
financial instruments are classified as assets or liabilities and are
accounted for at trade date. The Company measures all derivative
financial 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 qualifies as a fair value hedge, along with
the loss or gain on the hedged asset, liability or unrecognized firm
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
statements of income, except for derivatives that qualify for cash
flow or net investment hedge accounting to the extent that the
hedge is effective. The ineffective part is recognized in the statements
of income.
Changes in the fair value of a derivative that is designated and qualifies
as a cash flow hedge are recorded in accumulated other comprehensive
income to the extent that the hedge is effective, until earnings are
affected by the variability in cash flows of the designated hedged item.
Changes in the fair value of derivatives 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 flow hedge and
to the extent that the hedge is effective.
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 flows 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 qualifies 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 from the translation of a financial
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.
Philips Annual Report 2008138
180
Sustainability performance
192
IFRS financial statements
244
Company financial statements
124
US GAAP financial statements
Significant accounting policies