Philips 2011 Annual Report Download - page 132

12 Group financial statements 12.10 - 12.10
132 Annual Report 2011
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.
Leased assets
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.
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 Statement of income on a straight-line basis over
the term of the lease.
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.
Provisions
Provisions are recognized if, as a result of a past event, the Company
has a present legal or constructive obligation that can be estimated
reliably, and it is probable that an outflow of economic benefits will be
required to settle the obligation. Provisions are measured at the
present value of the expenditures expected to be required to settle the
obligation using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the
obligation. The increase in the provision due to passage of time is
recognized as interest expense.
A provision for warranties is recognized when the underlying products
or services are sold. The provision is based on historical warranty data
and a weighing of possible outcomes against their associated
probabilities.
The Company accrues for losses associated with environmental
obligations when such losses are probable and can be estimated reliably.
Measurement of liabilities is based on current legal and constructive
requirements. Liabilities and expected insurance recoveries, if any, are
recorded separately. The carrying amount of liabilities is regularly
reviewed and adjusted for new facts and changes in law.
The provision for restructuring relates to the estimated costs of
initiated reorganizations, the most significant of which have been
approved by the Board of Management, and which generally involve the
realignment of certain parts of the industrial and commercial
organization. When such reorganizations require discontinuance and/
or closure of lines of activities, the anticipated costs of closure or
discontinuance are included in restructuring provisions. A liability is
recognized for those costs only when the Company has a detailed
formal plan for the restructuring and has raised a valid expectation with
those affected that it will carry out the restructuring by starting to
implement that plan or announcing its main features to those affected
by it.
Provisions on onerous contracts represent the lesser of the
unavoidable costs of either fulfilling or exiting the related contract, and
in which the costs to fulfill the contract exceed the benefits expected
to be received under such contract. In determining the cost of fulfilling
the contract, the payments due in the period in which the contract
cannot be cancelled are considered. If there is an option to cancel the
contract and pay a penalty, then the present value of the amount to be
paid on cancellation of the contract is also considered, and the contract
is measured at the lowest net cost to exit. Generally, the unavoidable
cost of meeting the obligations under the contract are only costs that
are directly variable with the contract and therefore incremental to the
performance of the contract, do not include allocated or shared costs
that will be incurred regardless of whether the entity fulfills the contract
or not, and cannot be avoided by future actions. Before a provision is
established, the Company recognizes any impairment loss on the assets
associated with that contract.
Impairment
Value in use is measured as the present value of future cash flows
expected to be generated by the asset. If the carrying amount of an
asset is deemed not recoverable, an impairment charge is recognized
in the amount by which the carrying amount of the asset exceeds the
recoverable amount. The review for impairment is carried out at the
level where discrete cash flows occur that are independent of other
cash flows.
Impairment of goodwill
Goodwill is not amortized but tested for impairment annually and
whenever impairment indicators require. In most cases the Company
identified its cash generating units as one level below that of an
operating segment. Cash flows at this level are substantially
independent from other cash flows and this is the lowest level at which
goodwill is monitored by the Board of Management. The Company
performed and completed annual impairment tests in the same quarter
of all years presented in the Consolidated Statements of income. A
goodwill impairment loss is recognized in the Statement of income
whenever and to the extent that the carrying amount of a cash-
generating unit exceeds the unit’s recoverable amount, which is the
greater of value in use and fair value less cost to sell. An impairment
loss on an investment in associates is not allocated to any asset,
including goodwill, that forms part of the carrying amount of the
investment in associates.
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
and measured by a comparison of the carrying amount of an asset with
the greater of its value in use and its fair value less cost to sell.
Impairment losses recognized in prior periods are assessed at each
reporting date for any indications that the loss has decreased or no
longer exists. An impairment loss is reversed if and to the extent there
has been a change in the estimates used to determine the recoverable
amount. 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, net of depreciation or amortization, if no impairment loss
had been recognized. Reversals of impairment are recognized in the
Statement of income.
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