Philips 2013 Annual Report Download - page 101

6 Risk management 6.6 - 6.6
Annual Report 2013 101
6.6 Financial risks
Philips is exposed to a variety of treasury risks and other
financial 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 aect 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 aect 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 eect 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 eect 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
eectively hedge this risk can impact Philips’ financial
condition and operating results.
For further analysis, please refer to note 35, Details of
treasury / other financial risks.
Philips is exposed to a number of dierent fiscal
uncertainties which could have a significant impact on
local tax results.
Philips is exposed to a number of dierent 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 aect
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 dierences, 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 5, 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.
A significant proportion of employees in Europe and
North America is covered by defined-benefit pension
plans. The accounting for defined-benefit pension
plans requires management to make estimates on
discount rates, inflation, longevity and expected rates
of compensation. Movements (e.g. due to the
movements of financial markets) in these assumptions