Philips 2013 Annual Report Download - page 184

35 11 Group financial statements 11.9 - 11.9
184 Annual Report 2013
Level 2
The fair value of financial instruments that are not traded in an active
market (for example, over-the-counter derivatives or convertible bond
instruments) are determined by using valuation techniques. These
valuation techniques maximize the use of observable market data where it
is available and rely as little as possible on entity-specific estimates. If all
significant inputs required to fair value an instrument are based on
observable market data, the instrument is included in level 2.
The fair value of derivatives is calculated as the present value of the
estimated future cash flows based on observable interest yield curves,
basis spread and foreign exchange rates.
The valuation of convertible bond instruments uses observable market
quoted data for the options and present value calculations using
observable yield curves for the fair value of the bonds.
Level 3
If one or more of the significant inputs are not based on observable market
data, the instrument is included in level 3.
The arrangement with the UK Pension Fund in conjunction with the sale of
NXP is a financial instrument carried at fair value classified as level 3. At the
end of 2013, the fair value of this instrument is estimated to be EUR 7
million with the changes of fair value recorded to financial income and
expense. Please refer to note 14, Other non-current financial assets for
more details.
Furthermore, deferred consideration and loan extension options to TP
Vision are also included in level 3. On January 20, 2014, Philips has signed
a term sheet to transfer its remaining 30% stake in TP Vision, which will also
impact the above commitments. For further information, please refer to
note 36, Subsequent events.
The table below shows the reconciliation from the beginning balance to
the end balance for fair value measured in Level 3 of the fair value
hierarchy.
financial assets financial liabilities
Balance at January 1, 2013 62 (11)
Total gains and losses
recognized in:
- profit or loss (12) (2)
- other comprehensive
income 11 −
Balance at December 31,
2013 61 (13)
Philips has the following balances related to its derivative activities. These
transactions are subject to master netting and set-o agreements. In case
of certain termination events, under the terms of the Master Agreement,
Philips can terminate the outstanding transactions and aggregate their
positive and negative values to arrive at a single net termination sum (or
close-out amount). This contractual right is subject to the following:
• The right may be limited by local law if the counterparty is subject to
bankruptcy proceedings;
• The right applies on a bilateral basis.
Financial assets subject to osetting, enforceable master netting
arrangements or similar agreements
2012 2013
Derivatives
Gross amounts of recognized financial assets 137 150
Gross amounts of recognized financial liabilities
oset in the statement of financial position − −
Net amounts of financial assets presented in the
statement of financial position 137 150
Related amounts not oset in the statement of
financial position
Financial instruments (67) (85)
Cash collateral received − −
Net amount 70 65
Financial liabilities subject to osetting, enforceable master netting
arrangements or similar agreements
2012 2013
Derivatives
Gross amounts of recognized financial liabilities (517) (368)
Gross amounts of recognised financial assets oset
in the statement of financial position − −
Net amounts of financial liabilities presented in
the statement of financial position (517) (368)
Related amounts not oset in the statement of
financial position
Financial instruments 67 85
Cash collateral received − −
Net amount (450) (283)
35 Details of treasury / other financial risks
Philips is exposed to several types of financial risk. This note further
analyzes financial risks. Philips does not purchase or hold derivative
financial instruments for speculative purposes. Information regarding
financial instruments is included in note 34, Fair value of financial assets
and liabilities.
Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty in meeting
obligations associated with financial liabilities.
Liquidity risk for the group is monitored through the Treasury liquidity
committee which tracks the development of the actual cash flow position
for the group and uses input from a number of sources in order to forecast
the overall liquidity position both on a short and long term basis. Group
Treasury invests surplus cash in money market deposits with appropriate
maturities to ensure sufficient liquidity is available to meet liabilities when
due.
The rating of the Company’s debt by major rating services may improve or
deteriorate. As a result, Philips’ future borrowing capacity may be
influenced and its financing costs may fluctuate. Philips has various
sources to mitigate the liquidity risk for the group. At December 31, 2013,
Philips had EUR 2,465 million in cash and cash equivalents (2012: EUR
3,834 million), within which short-term deposits of EUR 1,714 million (2012:
EUR 3,177 million) and other liquid assets of EUR 18 million (2012: EUR 120
million). Philips pools cash from subsidiaries to the extent legally and
economically feasible; cash not pooled remains available for operational
or investment needs by the Company.