Philips 2010 Annual Report Download - page 198

34 13 Group financial statements 13.11 - 13.11
198 Annual Report 2010
As part of the sale of shares in NXP to Philips Pension Trustees Limited
there is an arrangement that may entitle Philips to a cash payment from
the UK Pension Fund on or after September 7, 2014 if the value of the
NXP shares has increased by this date to a level in excess of a
predetermined threshold, which at the time of the transaction was
substantially above the transaction price, and the UK Pension Fund is in
surplus (on the regulatory funding basis) on September 7, 2014.
Commodity price risk
Commodity price risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate because of changes in commodity
prices.
Philips is a purchaser of certain base metals, precious metals and energy.
Philips hedges certain commodity price risks using derivative
instruments to minimize significant, unanticipated earnings fluctuations
caused by commodity price volatility. The commodity price derivatives
that Philips enters into are accounted for as cash flow hedges to offset
forecasted purchases. As of December 2010, a gain of less than EUR 1
million was deferred in equity as a result of these hedges. A 10%
increase in the market price of all commodities as of December 31,
2010 would increase the fair value of the derivatives by less than EUR 1
million.
Credit risk
Credit risk represents the loss that would be recognized at the
reporting date, if counterparties failed completely to perform their
payment obligations as contracted. Credit risk is present within Philips
trade receivables. To have better insights into the credit exposures,
Philips performs ongoing evaluations of the financial and non-financial
conditions of its customers and adjusts credit limits when appropriate.
In instances where the creditworthiness of a customer is determined
not to be sufficient to grant the credit limit required, there are a number
of mitigation tools that can be utilized to close the gap including
reducing payment terms, cash on delivery, pre-payments and pledges on
assets.
Philips invests available cash and cash equivalents with various financial
institutions and is exposed to credit risk with these counterparties.
Philips is also exposed to credit risks in the event of non-performance
by financial institutions with respect to financial derivative instruments.
Philips actively manages concentration risk and on a daily basis
measures the potential loss under certain stress scenarios, should a
financial institution default. These worst-case scenario losses are
monitored and limited by the company.
The company does not enter into any financial derivative instruments to
protect against default by financial institutions. However, where
possible the company requires all financial institutions with whom it
deals in derivative transactions to complete legally enforceable netting
agreements under an International Swap Dealers Association master
agreement or otherwise prior to trading, and whenever possible, to
have a strong credit rating from Standard & Poor’s and Moody’s
Investor Services. Philips also regularly monitors the development of
the credit risk of its financial counterparties. Wherever possible, cash is
invested and financial transactions are concluded with financial
institutions with strong credit ratings or with governments or
government-backed institutions.
Below table shows the credit ratings of the financial institutions with
which Philips had short-term deposits above EUR 25 million as of
December 31, 2010:
Credit risk with number of counterparties
for deposits above 25 million
25-100
million 100-500 million 500-2,000
million
AAA-rated governments - - 1
AAA-rated government banks - - 2
AAA-rated bank counterparties - - 1
AA-rated bank counterparties 1 2 -
A-rated bank counterparties - 2 -
1 4 4
For an overview of the overall maximum credit exposure of the group’s
financial assets, please refer to note 32 for details of carrying amounts
and fair value.
Country risk
Country risk is the risk that political, legal, or economic developments
in a single country could adversely impact our performance. The
country risk per country is defined as the sum of the equity of all
subsidiaries and associated companies in country cross-border
transactions, such as intercompany loans, accounts receivable from
third parties and intercompany accounts receivable. The country risk is
monitored on a regular basis.
As of December 31, 2010, the company had country risk exposure in
the United States of EUR 10 billion, and in Belgium of EUR 9.4 billion,
EUR 1 billion in China (including Hong Kong). Other countries higher
than EUR 500 million are Japan EUR 752 million, and United Kingdom of
EUR 678 million. Countries where the risk exceeded EUR 300 million
but was less than EUR 500 million are Netherlands, Germany, Poland,
Italy and Canada. The degree of risk of a country is taken into account
when new investments are considered. The company does not,
however, use financial derivative instruments to hedge country risk.
Other insurable risks
Philips is covered for a broad range of losses by global insurance policies
in the areas of property damage, business interruption, general and
product liability, transport, directors’ and officers’ liability, employment
practice liability, crime, and aviation product liability.
The counterparty risk related to the insurance companies participating
in the above mentioned global insurance policies are actively managed.
As a rule Philips only selects insurance companies with a S&P credit
rating of at least A-. Throughout the year the counterparty risk is
monitored on a regular basis.
To lower exposures and to avoid potential losses, Philips has a
worldwide Risk Engineering program in place. The main focus in this
program is on property damage and business interruption risks, which
also include interdependencies. Philips sites, and also a limited number
of sites of key suppliers, are inspected on a regular basis by the Risk
Engineering personnel of the insurer. Inspections are carried out against
predefined Risk Engineering standards which are agreed between
Philips and the insurers. Recommendations are made in a Risk
Management report and are reviewed centrally. This is the basis for
decision-making by the local management of the business as to which
recommendations will be implemented. For all policies, deductibles are
in place, which vary from EUR 250,000 to EUR 2,500,000 per
occurrence and this variance is designed to differentiate between the
existing risk categories within Philips. Above this first layer of working
deductibles, Philips operates its own re-insurance captive, which during
2010 retained EUR 2.5 million per occurrence for the property damage
and business interruption losses and EUR 5 million in the aggregate per
year. For general and product liability claims, the captive retained EUR
1.5 million per claim and EUR 6 million in the aggregate. New contracts
were signed on December 31, 2010, for the coming year, whereby the
reinsurance captive retentions remained unchanged.
34 Subsequent events
Acquisition of Optimum Lighting LLC
On January 5, 2011, Philips announced that it acquired Optimum
Lighting LLC, a privately owned company domiciled in the US,
specialized in customized energy-efficient lighting solutions for the
office, industry and retail segments.
Acquisition of Preethi business
On January 24, 2011, Philips announced that it has agreed to acquire the
assets of the Preethi business, a kitchen appliances company in India.
Upon closing of this transaction, which is subject to certain contractual
and other conditions such as regulatory approval, Preethi will become
part of the Domestic Appliances business group within Philips’
Consumer Lifestyle sector.