Philips 2008 Annual Report Download - page 209

Significant IFRS accounting policies
The consolidated financial statements in this section have been
prepared in accordance with International Financial Reporting
Standards (IFRS) as adopted by the European Union (EU). All standards
and interpretations issued by the International Accounting Standards
Board (IASB) and the International Financial Reporting Interpretations
Committee (IFRIC) effective year-end 2008 have been adopted by the
EU, except that the EU carved out certain hedge accounting provisions
of IAS 39. Philips does not utilize this carve-out permitted by the EU.
Consequently, the accounting policies applied by Philips also comply
fully with IFRS issued by the IASB.
The consolidated financial statements have been prepared under
the historical cost convention, unless otherwise indicated.
Basis of consolidation
The consolidated financial statements include the accounts of
Koninklijke Philips Electronics N.V. (‘the Company’) and all subsidiaries
that fall under its power to govern the financial and operating policies
of an entity so as to obtain benefits from its activities. The existence
and effect of potential voting rights that are currently exercisable are
considered when assessing whether the Company controls another
entity. Subsidiaries are fully consolidated from the date that control
commences until the date that control ceases. All intercompany
balances and transactions have been eliminated in the consolidated
financial statements. Unrealized losses are eliminated in the same way
as unrealized gains, but only to the extent that there is no evidence
of impairment.
The purchase method of accounting is used to account for the
acquisition of subsidiaries by the Company. The cost of an acquisition
is measured as the fair value of the assets given, equity instruments
issued and liabilities incurred or assumed at the date of exchange, plus
costs directly attributable to the business combination, irrespective
of the extent of any minority interest. The excess of the cost of
acquisition over the fair value of the Company’s share of the identifiable
net assets of the subsidiary acquired is recognized as goodwill. The
minority interests are disclosed separately in the consolidated
statements of income as part of profit allocation and in the
consolidated balance sheets as a separate component of equity.
Foreign currencies
The consolidated financial statements are presented in euros, which
is the Company’s functional and presentation currency. The financial
statements of entities that use a functional currency other than the
euro, are translated into euros. Assets and liabilities are translated
using the exchange rates on the respective balance sheet dates.
Items in the statements of income and statements of cash flows are
translated into euros using the average rates of exchange for the
periods involved. The resulting translation adjustments are recorded
as a separate component of equity. Cumulative translation adjustments
are recognized as income or expense upon partial or complete disposal
or liquidation of a foreign entity. The functional currency of foreign
entities is generally the local currency, unless the primary economic
environment requires the use of another currency. Gains and losses
arising from the translation or settlement of foreign currency-
denominated monetary assets and liabilities into the functional
currency are recognized in income in the period in which they arise.
However, currency differences on intercompany loans that have the
nature of a permanent investment are accounted for as translation
differences in a separate component of equity. Changes in the fair
value of monetary securities denominated in foreign currency
classified as available for sale are split into translation differences
resulting from changes in the amortized cost of the security and
other changes in the carrying amount of the security. Translation
differences related to changes in the amortized cost are recognized
in profit or loss, and other changes in the carrying amount are
recognized in equity.
Translation differences on non-monetary financial assets and liabilities
such as equities held at fair value through profit or loss are reported
as part of the fair value gain or loss. Translation differences on
non-monetary financial assets such as equities classified as available
for sale are included in other reserves in equity.
Use of estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the
consolidated financial statements in order to conform to IFRS. These
estimates and assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingent liabilities at the date of
the consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. We evaluate these
estimates and judgments on an ongoing basis and base our estimates
on experience, current and expected future conditions, third-party
evaluations and various other assumptions that we believe are
reasonable under the circumstances. The results of these estimates
form the basis for making judgements about the carrying values of
assets and liabilities as well as identifying and assessing the accounting
treatment with respect to commitments and contingencies. Actual
results could differ materially from the estimates and assumptions.
Estimates significantly impact goodwill and other intangibles acquired,
tax on activities disposed, impairments, financial instruments, assets
and liabilities from employee benefit plans, other provisions and tax
and other contingencies. The fair values of acquired identifiable
intangibles are based on an assessment of future cash flows. Impairment
analyses of goodwill and indefinite-lived intangible assets are performed
annually and whenever a triggering event has occurred to determine
whether the carrying value exceeds the recoverable amount. These
analyses are based on estimates of future cash flows.
The fair value of financial instruments that are not traded in an active
market is determined by using valuation techniques. The Company
uses its judgment to select from a variety of common valuation
methods including the discounted cash flow method and option
valuation models and to make assumptions that are mainly based
on market conditions existing at each balance sheet date.
Actuarial assumptions are established to anticipate future events and
are used in calculating pension and other postretirement benefit
expense and liability. These factors include assumptions with respect
to interest rates, expected investment returns on plan assets, rates of
increase in health care costs, rates of future compensation increases,
turnover rates, and life expectancy.
Accounting changes
In the absence of explicit transition requirements for new accounting
pronouncements, the Company accounts for any change in accounting
principle retrospectively.
Change in accounting policy
As of January 1, 2008, the Company changed its pension accounting
policy by adopting the option available under IAS 19 ‘Employee
Benefits’, paragraph 93A. Under this option, actuarial gains and losses
are recorded directly in equity and disclosed in the Statements of
Recognized Income and Expense and therefore recognized immediately
on the balance sheet. The Company believes that recognizing actuarial
gains and losses when they occur, results in a better presentation of
the financial position of the pension obligation in the balance sheet
since the amount recognized as a provision at balance sheet date
reflects the best estimate of the present obligation. The Company
also believes that recognizing the actuarial gains and losses directly
in equity provides more relevant information.
In addition, Philips early-adopted IFRIC Interpretation 14 ‘Limit
on a Defined Benefit Asset’ on January 1, 2008.
The impact of the change of accounting policy has been retrospectively
applied in accordance with IAS 8 ‘Accounting Policies, Changes in
Accounting Estimates and Errors.’ The financial quantification of
this change is disclosed in note 56.
Philips Annual Report 2008 209
254
Corporate governance
250
Reconciliation of
non-US GAAP information
262
Ten-year overview
266
Investor information