Philips 2010 Annual Report Download - page 154

13 Group financial statements 13.10 - 13.10
154 Annual Report 2010
13.10 Significant accounting policies
The Consolidated financial statements in this section have been
prepared in accordance with International Financial Reporting
Standards (IFRS) as endorsed by the European Union (EU). All
standards and interpretations issued by the International Accounting
Standards Board (IASB) and the IFRS Interpretations Committee
effective year-end 2010 have been endorsed by the EU, except that the
EU did not adopt some paragraphs of IAS 39 applicable to certain hedge
transactions. Philips has no hedge transactions to which these
paragraphs are applicable. 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.
From January 1, 2010 the Company has applied IFRS 3 Business
Combinations (2008) in accounting for business combinations. The
change in accounting policy has been applied prospectively; reference is
made to the subparagraph ‘IFRS accounting standards adopted as from
2010’ included in this section.
Business combinations are accounted for using the acquisition method.
Under the acquisition method, the identifiable assets acquired, liabilities
assumed and any non-controlling interest in the acquiree are
recognized as at the acquisition date, which is the date on which control
is transferred to the Company. Control is the power to govern the
financial and operating policies of an entity so as to obtain benefits from
its activities. In assessing control, the Company takes into consideration
potential voting rights that currently are exercisable.
Acquisitions on or after January 1, 2010
For acquisitions on or after January 1, 2010, the Company measures
goodwill at the acquisition date as:
• The fair value of the consideration transferred; plus
• The recognized amount of any non-controlling interest in the
acquiree; plus if the business combination is achieved in stages, the
fair value of the existing equity interest in the acquiree; less
• The net recognized amount (generally fair value) of the identifiable
assets acquired and liabilities assumed.
The consideration transferred does not include amounts related to the
settlement of pre-existing relationships. Such amounts are generally
recognized in the Statement of income.
Costs related to the acquisition, other than those associated with the
issue of debt or equity securities, that the Company incurs in
connection with a business combination are expensed as incurred.
Any contingent consideration payable is recognized at fair value at the
acquisition date. If the contingent consideration is classified as equity, it
is not remeasured and settlement is accounted for within equity.
Otherwise, subsequent changes to the fair value of the contingent
consideration are recognized in the Statement of income.
Acquisitions between January 1, 2004 and January 1, 2010
For acquisitions between January 1, 2004 and January 1, 2010, goodwill
represents the excess of the cost of the acquisition over the Company’s
interest in the recognized amount (generally fair value) of the
identifiable assets, liabilities and contingent liabilities of the acquiree.
Transaction costs, other than those associated with the issue of debt or
equity securities, that the Company incurred in connection with
business combinations were capitalized as part of the cost of the
acquisition.
Loss of control
Upon the loss of control, the Company derecognizes the assets and
liabilities of the subsidiary, any non-controlling interests and the other
components of equity related to the subsidiary. Any surplus or deficit
arising on the loss of control is recognized in profit of loss. If the
Company retains any interest in the previous subsidiary, then such
interest is measured at fair value at the date the control is lost.
Subsequently it is accounted for as an investment in associate or as an
available-for-sale financial asset depending on the level of influence
retained.
Use of estimates
The preparation of the Consolidated financial statements in conformity
with IFRS requires management to make judgment, estimates and
assumptions that affect the application of accounting policies and the
reported amounts of assets, liabilities, income and expenses.
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 may differ from these estimates.
Estimates significantly impact goodwill and other intangibles acquired,
tax on activities disposed, impairments, financial instruments, the
accounting for an arrangement containing a lease, revenue recognition
(multiple elements arrangement), 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.
Foreign currencies
The Consolidated financial statements are presented in euros, which is
the Company’s functional and presentation currency.
Foreign currency transactions
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions or valuation where items are remeasured. Foreign
exchange gains and losses resulting from the settlement of such
transactions and from the translation at year-end exchange rates of
monetary assets and liabilities denominated in foreign currencies are
recognized in the Statement of income, except when deferred in other
comprehensive income as qualifying cash flow hedges and qualifying net
investment hedges.
Changes in the fair value of financial assets denominated in foreign
currency classified as available for sale are analyzed between 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 amortized cost are recognized in the
Statement of income, and other changes in carrying amount are
recognized in other comprehensive income.