Philips 2012 Annual Report Download - page 93

7 Risk management 7.6 - 7.6
Annual Report 2012 93
7.6 Financial risks
Philips is exposed to a variety of treasury risks including
liquidity risk, currency risk, interest rate risk, commodity
price risk, credit risk, country risk and other insurable
risk.
Negative developments impacting the global liquidity
markets could affect the ability of Philips to raise or re-
finance debt in the capital markets or could lead to
significant increases in the cost of such borrowing in the
future. If the markets expect a downgrade or downgrades
by the rating agencies or if such a downgrade has actually
taken place, it could increase the cost of borrowing,
reduce our potential investor base and adversely affect
our business.
Philips is exposed to fluctuations in exchange rates,
especially between the US dollar and the euro. A high
percentage of its business volume is conducted in the US
but based on exports from Europe, whilst, a considerable
amount of US dollar - denominated imports is also sold in
Europe. A weakening of the US dollar versus the euro
would have an adverse effect on reported earnings of the
company. In addition, Philips is exposed to the fluctuation
in exchange rates of other currencies such as the Japanese
yen and currencies of growth geographies such as China,
India and Brazil.
The credit risk of financial and non-financial
counterparties with outstanding payment obligations
creates exposures for Philips, particularly in relation to
accounts receivable with customers and liquid assets and
fair values of derivatives and insurance receivables
contracts with financial counterparties. A default by
counterparties in such transactions can have a material
adverse effect on Philips’ financial condition and operating
results.
Philips’ supply chain is exposed to fluctuations in energy
and raw material prices. Commodities such as oil are
subject to volatile markets and significant price increases
from time to time. If Philips is not able to compensate for,
or pass on, its increased costs to customers, such price
increases could have an adverse impact on its financial
condition and operating results.
Philips is exposed to interest rate risk, particularly in
relation to its long-term debt position; this risk can take
the form of either fair value or cash flow risk. Failure to
effectively hedge this risk can impact Philips’ financial
condition and operating results.
For further analysis, please refer to note 34, Details of
treasury risks.
Philips is exposed to a number of different fiscal
uncertainties which could have a significant impact on
local tax results.
Philips is exposed to a number of different tax
uncertainties which could result in double taxation,
penalties and interest payments. These include transfer
pricing uncertainties on internal cross-border deliveries
of goods and services, tax uncertainties related to
acquisitions and divestments, tax uncertainties related to
the use of tax credits and permanent establishments, tax
uncertainties due to losses carried forward and tax credits
carried forward and potential changes in tax law that
could result in higher tax expense and payments. Those
uncertainties may have a significant impact on local tax,
results which in turn could adversely affect Philips’
financial condition and operating results.
The value of the losses carried forward is subject to having
sufficient taxable income available within the loss-carried-
forward period, but also to having sufficient taxable
income within the foreseeable future in the case of losses
carried forward with an indefinite carry-forward period.
The ultimate realization of the Company’s deferred tax
assets, including tax losses and credits carried forward, is
dependent upon the generation of future taxable income
in the countries where the temporary differences, unused
tax losses and unused tax credits were incurred and
during the periods in which the deferred tax assets
become deductible. Additionally, in certain instances,
realization of such deferred tax assets is dependent upon
the successful execution of tax planning strategies.
Accordingly, there can be no absolute assurance that all
(net) tax losses and credits carried forward will be
realized.
For further details, please refer to the fiscal risks
paragraph in note 3, Income taxes.
Philips has defined-benefit pension plans in a number of
countries. The funded status and the cost of maintaining
these plans are influenced by movements in financial
market and demographic developments, creating volatility
in Philips’ financials.
The majority of employees in Europe and North America
are covered by defined-benefit pension plans. The
accounting for defined-benefit pension plans requires
management to make estimates on discount rates,
inflation, longetivity and expected rates of compensation.
Changes in these assumptions can have a significant impact
on the projected benefit obligations and net periodic
pension costs. A negative performance of the financial