Philips 2010 Annual Report Download - page 166

4 13 Group financial statements 13.11 - 13.11
166 Annual Report 2010
Tax uncertainties on general service agreements and specific
allocation contracts
Due to the centralization of certain activities in a limited number of
countries (such as research and development, centralized IT, corporate
functions and head office), costs are also centralized. As a consequence,
for tax reasons these costs and/or revenues must be allocated to the
beneficiaries, i.e. the various Philips entities. For that purpose, apart
from specific allocation contracts for costs and revenues, general
service agreements (GSAs) are signed with a large number of entities.
Tax authorities review the implementation of GSAs, apply benefit tests
for particular countries or audit the use of tax credits attached to GSAs
and royalty payments, and may reject the implemented procedures.
Furthermore, buy in/out situations in the case of (de)mergers could
affect the tax allocation of GSAs between countries. The same applies
to the specific allocation contracts.
Tax uncertainties due to disentanglements and acquisitions
When a subsidiary of Philips is disentangled, or a new company is
acquired, related tax uncertainties arise. Philips creates merger and
acquisition (M&A) teams for these disentanglements or acquisitions. In
addition to representatives from the involved sector, these teams
consist of specialists from various corporate functions and are formed,
amongst other things, to identify hidden tax uncertainties that could
subsequently surface when companies are acquired and to reduce tax
claims related to disentangled entities. These tax uncertainties are
investigated and assessed to mitigate tax uncertainties in the future as
much as possible. Several tax uncertainties may surface from M&A
activities. Examples of uncertainties are: applicability of the participation
exemption, allocation issues, and non-deductibility of parts of the
purchase price.
Tax uncertainties due to permanent establishments
In countries where e.g. Philips starts new operations or alters business
models, the issue of permanent establishment may arise. This is because
when operations in a country are led from another country, there is a
risk that tax claims will arise in the former country as well as in the latter
country.
4Investments in associates
Results relating to investments in associates
2008 2009 2010
Company’s participation in income 81 23 14
Results on sales of shares (2) − 5
Gains from dilution effects 12 − −
Investment impairment / other charges (72) 53 (1)
19 76 18
Detailed information on the aforementioned individual line items is
provided below.
Company’s participation in income
2008 2009 2010
LG Display 66 − −
Others 15 23 14
81 23 14
Philips’ influence on LG Display’s operating and financial policies
including representation on the LG Display board was reduced in
February 2008. Consequently, the investment in LG Display (at that
date 19.9%) was transferred from Investments in associates to Other
non-current financial assets, as Philips was no longer able to exercise
significant influence.
Results on sales of shares
2008 2009 2010
TPV Technology Ltd. − − 5
Others (2) − −
(2) − 5
Investment impairment/other income and expenses
2008 2009 2010
LG.Philips Displays (9) − −
TPV Technology Ltd. (59) 55 −
Others (4) (2) (1)
(72) 53 (1)
In 2009, the TPV Technology Ltd. impairment charge of 2008 was
reversed (EUR 55 million) based on the 2009 stock price.
In 2008, Philips performed impairment reviews on the book value of the
investment in TPV resulting in an impairment charge of EUR 59 million.
The impairment reviews were triggered by the deteriorating economic
environment of the flat panel industry, the weakening financial
performance of TPV and the stock price performance of TPV. The
valuation as per December 31, 2008 was based on the stock price of
TPV as of that date on the Hong Kong Stock Exchange.
Investments in associates
The changes during 2010 are as follows:
Investments in associates
loans investments total
Balance as of January 1, 2010 7 274 281
Changes:
Acquisitions/additions − 18 18
Sales − (89) (89)
Reclassifications (4) (34) (38)
Share in income/value
adjustments − 18 18
Impairments − (5) (5)
Dividends received − (19) (19)
Translation and exchange rate
differences − 15 15
Balance as of December 31,
2010 3 178 181
Reclassifications mainly relate to the accounting of TPV Technology Ltd.
(TPV). On March 9, 2010 Philips sold 9.4% of the shares in TPV to a third
party for a cash consideration of EUR 98 million. Philips retained 3.0% of
the TPV shares, which were transferred to Other non-current financial
assets, because Philips was no longer able to exercise significant
influence with respect to TPV. The transaction resulted in a gain of EUR
5 million, which was recognized under Results relating to investments in
associates.
Summarized information of investments in associates
(unaudited)
Summarized financial information on the Company’s investments in
associates, on a combined basis, is presented below.
The gradual decline of the amounts stated in the table is due to the
accounting for the investments in LG Display in February 2008 and TPV
in March 2010 as other non-current financial assets. This is based on the
most recent available financial information.