Philips 2010 Annual Report Download - page 158

13 Group financial statements 13.10 - 13.10
158 Annual Report 2010
associates are eliminated to the extent of the Company’s interest in the
associates. Unrealized losses are also eliminated unless the transaction
provides evidence of an impairment of the asset transferred.
Investments in associates include loans from the Company to these
investees.
Accounting for capital transactions of a consolidated
subsidiary or an associate
The Company recognizes dilution gains or losses arising from the sale
or issuance of stock by a consolidated subsidiary or an associate in the
Statement of income, unless the Company or the subsidiary either has
reacquired or plans to reacquire such shares. In such instances, the
result of the transaction will be recorded directly in equity.
Dilution gains and losses arising in investments in associates are
recognized in the Consolidated statements of income under “Results
relating to investments in associates”.
Other non-current financial assets
Other non-current financial assets include held-to-maturity
investments, loans and available-for-sale financial assets and financial
assets at fair value through profit and loss.
Held-to-maturity investments are those debt securities which the
Company has the ability and intent to hold until maturity. Held-to-
maturity debt investments are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts using the
effective interest method.
Loans receivable are stated at amortized cost, less the related
allowance for impaired loans receivable.
Available-for-sale financial assets are non-derivatives financial assets
that are designated as available-for-sale and that are not classified in any
of the other categories of financial assets. Subsequent to initial
recognition, they are measured at fair value and changes therein, other
than impairment losses and foreign currency differences on available for
sale-debt instruments are recognized in other comprehensive income
and presented in the fair value reserve in equity. When an investment is
derecognized, the gain or loss accumulated in equity is reclassified to
the Statements of income.
Available-for-sale financial assets including investments in privately held
companies that are not associates, and do not have a quoted market
price in an active market and whose fair value could not be reliably
determined, are carried at cost.
A financial asset is classified as at fair value through profit or loss if it is
classified as held for trading or is designated as such upon initial
recognition. Financial assets are designated at fair value through profit
or loss if the Company manages such investments and makes purchase
and sale decisions based on their fair value in accordance with the
Company documented risk management or investment strategy.
Attributable transaction costs are recognized in the Statement of
income as incurred. Financial assets at fair value through the Statement
of income are measured at fair value, and changes therein are
recognized as available for sale.
Impairment of financial assets
A financial asset is considered to be impaired if objective evidence
indicates that one or more events have had a negative effect on the
estimated future cash flows of that asset. In case of available-for-sale
financial assets, a significant or prolonged decline in the fair value of the
financial assets below its cost is considered an indicator that the
financial assets are impaired. If any such evidence exists for available-
for-sale financial assets, the cumulative loss - measured as the difference
between the acquisition cost and the current fair value, less any
impairment loss on that financial asset previously recognized in the
Statement of income - is removed from equity and recognized in the
Statement of income.
If objective evidence indicates that financial assets that are carried at
cost need to be tested for impairment, calculations are based on
information derived from business plans and other information available
for estimating their fair value. Any impairment loss is charged to the
Statement of income.
An impairment loss related to financial assets is reversed if in a
subsequent period, the fair value increases and the increase can be
related objectively to an event occurring after the impairment loss was
recognized. The loss is reversed only to the extent that the asset’s
carrying amount does not exceed the carrying amount that would have
been determined, if no impairment loss had been recognized. Reversals
of impairment are recognized in the Statement of income except for
reversals of impairment of available-for-sale equity securities, which are
recognized in other comprehensive income.
Inventories
Inventories are stated at the lower of cost or net realizable value. The
cost of inventories comprises all costs of purchase, costs of conversion
and other costs incurred in bringing the inventories to their present
location and condition. The costs of conversion of inventories include
direct labor and fixed and variable production overheads, taking into
account the stage of completion and the normal capacity of production
facilities. Costs of idle facility and abnormal waste are expensed. The
cost of inventories is determined using the first-in, first-out (FIFO)
method. Inventory is reduced for the estimated losses due to
obsolescence. This reduction is determined for groups of products
based on purchases in the recent past and/or expected future demand.
Property, plant and equipment
Items of property, plant and equipment are measured at cost less
accumulated depreciation and accumulated impairment losses. The
useful lives and residual values are evaluated every year.
Assets manufactured by the Company include direct manufacturing
costs, production overheads and interest charges incurred for
qualifying assets during the construction period. Government grants
are deducted from the cost of the related asset. Depreciation is
calculated using the straight-line method over the useful life of the asset.
Depreciation of special tooling is generally also based on the straight-
line method. Gains and losses on the sale of property, plant and
equipment are included in other business income. Costs related to
repair and maintenance activities are expensed in the period in which
they are incurred unless leading to an extension of the original lifetime
or capacity.
Plant and equipment under finance leases and leasehold improvements
are amortized using the straight-line method over the shorter of the
lease term or the estimated useful life of the asset. The gain realized on
sale and operating leaseback transactions that are concluded based
upon market conditions is recognized at the time of the sale.
The Company capitalizes interest as part of the cost of assets that take a
substantial period of time to become ready for use.
Intangible assets other than goodwill
Acquired definite-lived intangible assets are amortized using the
straight-line method over their estimated useful life. The useful lives are
evaluated every year. Patents and trademarks with a definite useful live
acquired from third parties either separately or as part of the business
combination are capitalized at cost and amortized over their remaining
useful lives. Intangible assets acquired as part of a business combination
are capitalized at their acquisition-date fair value.
The Company expenses all research costs as incurred. Expenditure on
development activities, whereby research findings are applied to a plan
or design for the production of new or substantially improved products
and processes, is capitalized as an intangible asset if the product or
process is technically and commercially feasible and the Company has
sufficient resources and the intention to complete development.
The development expenditure capitalized includes the cost of materials,
direct labor and an appropriate proportion of overheads. Other
development expenditures and expenditures on research activities are
recognized in the Statement of income. Capitalized development
expenditure is stated at cost less accumulated amortization and
impairment losses. Amortization of capitalized development
expenditure is charged to the Statement of income on a straight-line
basis over the estimated useful lives of the intangible assets.
Costs relating to the development and purchase of software for both
internal use and software intended to be sold are capitalized and
subsequently amortized over the estimated useful life.
Impairment of non-financial assets other than goodwill,
inventories and deferred tax assets
Non-financial assets other than goodwill, inventories and deferred tax
assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is recognized