Philips 2010 Annual Report Download - page 157

13 Group financial statements 13.10 - 13.10
Annual Report 2010 157
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income in the countries where the
deferred tax assets originated and during the periods when the deferred
tax assets become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment.
Deferred tax liabilities for withholding taxes are recognized for
subsidiaries in situations where the income is to be paid out as dividend
in the foreseeable future, and for undistributed earnings of
unconsolidated companies to the extent that these withholding taxes
are not expected to be refundable or deductible. Changes in tax rates
are reflected in the period when the change has been enacted or
substantively enacted by the reporting date.
Leases
Leases in which substantially all risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made
under operating leases (net of any incentives received from the lessor)
are recognized in the Statements of income on a straight-line basis over
the term of the lease. Leases in which the Company is the lessee and has
substantially all the risks and rewards of ownership are classified as
finance leases. Finance leases are capitalized at the commencement of
the lease at the lower of the fair value of the leased assets and the
present value of the minimum lease payments. Each lease payment is
allocated between the liability and finance charges. The interest element
of the finance cost is charged to the Statement of income over the lease
period so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period. The corresponding
rental obligations, net of finance charges, are included in other short-
term and other non-current liabilities. 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.
Derivative financial instruments, including hedging
accounting
The Company uses derivative financial instruments principally to
manage its foreign currency risks and, to a more limited extent, for
managing interest rate and commodity price risks. All derivative
financial instruments are classified as current assets or liabilities and are
accounted for at trade date. Embedded derivatives are separated from
the host contract and accounted for separately if the economic
characteristics and risks of the host contract and the embedded
derivative are not closely related. 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. Gains or
losses arising from changes in fair value of derivatives are recognized in
the Statement of income, except for derivatives that are highly effective
and qualify for cash flow or net investment hedge accounting.
Changes in the fair value of derivatives that are designated and qualify as
fair value hedges are recorded in the Statement of income, together
with any changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk. 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 Statement of income over the
remaining life of the asset or liability based on the recalculated effective
yield.
Changes in the fair value of a derivative that is highly effective and that is
designated and qualifies as a cash flow hedge, are recorded in equity,
until the Statement of income is affected by the variability in cash flows
of the designated hedged item. To the extent that the hedge is
ineffective, changes in the fair value are recognized in the Statement of
income.
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 is
expected that a forecasted transaction will not occur, the Company
continues to carry the derivative on the Balance sheet at its fair value,
and gains and losses that were accumulated in equity are recognized
immediately in the Statement of income. If there is a delay and it is
expected that the transaction will still occur, the amount in equity
remains there until the forecasted transaction affects income. 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
Statements of income.
Foreign currency differences arising on the retranslation 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 Statements of income.
Non-derivative financial instruments
Non-derivative financial instruments are recognized initially at fair value
when the Company becomes a party to the contractual provisions of
the instrument.
Regular way purchases and sales of financial instruments are accounted
for at trade date. Dividend and interest income are recognized when
earned. Gains or losses, if any, are recorded in financial income and
expenses.
Cash and cash equivalents
Cash and cash equivalents include all cash balances and short-term
highly liquid investments with an original maturity of three months or
less that are readily convertible into known amounts of cash.
Receivables
Receivables are carried at the lower of amortized cost or the present
value of estimated future cash flows, taking into account discounts given
or agreed. The present value of estimated future cash flows is
determined through the use of allowances for uncollectible amounts.
As soon as individual trade accounts receivable can no longer be
collected in the normal way and are expected to result in a loss, they are
designated as doubtful trade accounts receivable and valued at the
expected collectible amounts. They are written off when they are
deemed to be uncollectible because of bankruptcy or other forms of
receivership of the debtors. The allowance for the risk of non-
collection of trade accounts receivable takes into account credit-risk
concentration, collective debt risk based on average historical losses,
and specific circumstances such as serious adverse economic
conditions in a specific country or region.
In the event of sale of receivables and factoring, the Company
derecognizes receivables when the Company has given up control or
continuing involvement.
The Company derecognizes receivables in case of sale and factoring
when:
•The Company has transferred its rights to receive cash flows from
the receivables or has assumed an obligation to pay the received cash
flows in full without any material delay to a third party under a ‘pass-
through’ arrangement; and
• either (a) the Company has transferred substantially all of the risks
and rewards of the ownership of the receivables, or (b) the Company
has neither transferred nor retained substantially all of the risks and
rewards, but has transferred control of the assets.
However, in case the company neither transfers nor retains
substantially all the risks and rewards of ownership of the receivables
nor transfers control of the receivables, the receivable is recognized to
the extent of the Company’s continuing involvement in the assets. In
which case, the Company also recognizes an associated liability. The
transferred receivable and associated liability are measured on a basis
that reflects the rights and obligations that the Company has retained.
Investments in associates
Associates are all entities over which the group has significant influence
but not control, generally accompanying a shareholding of between 20%
and 50% of the voting rights. Investments in associates are accounted
for using the equity method of accounting and are initially recognized at
cost. The group’s investment in associates includes goodwill identified
on acquisition, net of any accumulated impairment loss.
The Company’s share of the net income of these companies is included
in results relating to associates in the Consolidated statements of
income. When the Company’s share of losses exceeds its interest in an
associate, the carrying amount of that interest (including any long-term
loans) is reduced to nil and recognition of further losses is discontinued
except to the extent that the Company has incurred legal or
constructive obligations or made payments on behalf of an associate.
Unrealized gains on transactions between the Company and its