Philips 2009 Annual Report Download - page 166

11.11 Significant 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 2009 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 as 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
Consolidated statements of income and Consolidated 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 financial assets denominated in foreign
currency classified as available-for-sale financial assets 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 the Statement of income, 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
financial assets are included in other reserves in equity.
Use of estimates
The preparation of Consolidated 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 judgments 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.
Reclassifications
Certain items previously reported under specific financial statement
captions have been reclassified to conform to the current year
presentation.
Discontinued operations and non-current assets held for sale
Non-current assets (disposal groups comprising assets and liabilities)
that are expected to be recovered primarily through sale rather than
through continuing use are classified as held for sale.
A discontinued operation is a component of an entity that either has
been disposed of, or that is classified as held for sale, and (a) represents
a separate major line of business or geographical area of operations; and
(b) is a part of a single coordinated plan to dispose of a separate major
line of business or geographical area of operations; or (c) is a subsidiary
acquired exclusively with a view to resale.
Non-current assets held for sale and discontinued operations are
carried at the lower of carrying amount or fair value less costs to sell.
Any gain or loss from disposal of a business, together with the results of
these operations until the date of disposal, is reported separately as
discontinued operations. The financial information of discontinued
operations is excluded from the respective captions in the
Consolidated financial statements and related notes for all years
presented.
Cash flow statements
Cash flow statements are prepared using the indirect method. Cash
flows in foreign currencies have been translated into euros using the
weighted average rates of exchange for the periods involved. Cash
flows from derivative instruments that are accounted for as fair value
hedges or cash flow hedges are classified in the same category as the
cash flows from the hedged items. Cash flows from other derivative
instruments are classified consistent with the nature of the instrument.
11 Group financial statements 11.11 - 11.11
166 Philips Annual Report 2009