Philips 2014 Annual Report Download - page 185

Company nancial statements 13.5
Annual Report 2014 185
assessment process and signicant judgments and
assumptions involved which are aected by expected
future market or economic conditions. At December 31,
2014, the goodwill amounted to EUR 7.2 billion.
Our audit procedures included, amongst others, the
involvement of a valuation expert to assist us in
evaluating the assumptions and methodologies used
by the Company, in particular those relating to the
compound sales growth rate and pre-tax discount rate.
The cash ow projections, mainly for Healthcare cash-
generating units – Respiratory Care & Sleep
Management, Imaging Systems, and Patient Care &
Monitoring Solutions and Lighting cash-generating
units - Professional Lighting Solutions and Consumer
Luminaires have been assessed and challenged by us,
and includes an assessment of the historical accuracy
of management’s estimates and evaluation of business
plans. Based on the impairment test, it was noted that
with regard to the headroom for cash-generating unit
Consumer Luminaires, the estimated recoverable
amount approximates the carrying value of the cash-
generating unit. We also assessed the adequacy of the
disclosures in Section 12.9, Note 11 Goodwill relating to
those assumptions to which the outcome of the
impairment test is most sensitive, that is, those that
have the most signicant eect on the determination of
the recoverable amount of goodwill.
Accounting for income tax positions
Income tax was significant to our audit because the
assessment process is complex and the amounts involved
are material to the financial statements as a whole. The
Company has extensive international operations and in the
normal course of business makes judgments and estimates
in relation to tax issues and exposures resulting in the
recognition of other tax liabilities. At December 31, 2014, the
net deferred tax assets are valued at EUR 2.4 billion and the
other tax liability related to tax uncertainties is valued at EUR
499 million.
We have tested the completeness and accuracy of the
amounts reported for current and deferred tax including
the assessment of disputes with tax authorities. In this
area our audit procedures included, amongst others,
assessment of correspondence with the relevant tax
authorities, testing the effectiveness of the Company’s
internal controls around the recording and continuous re-
assessment of the other tax liabilities, and the
involvement of our local component auditors including
tax specialists in those components determined to be the
regions with significant tax risk. In respect of deferred tax
assets, we tested management’s assumptions used to
determine the probability that deferred tax assets
recognized in the balance sheet will be recovered through
taxable income in the countries where the deferred tax
assets originated and during the periods when the
deferred tax assets become deductible. During our
procedures, we used amongst others budgets, forecasts
and tax laws and in addition we assessed the historical
accuracy of management’s assumptions. We also
assessed the adequacy of the Company’s disclosure
included in Section 12.9, Note 8 Income taxes in respect
of income tax positions and uncertain tax positions.
Revenue recognition
Sales contracts for certain projects in the Healthcare
and Lighting sectors typically involve multi-element
contracts, for example a single sales transaction that
combines the delivery of goods and rendering of
services, and involve separately identiable
components that are recognized based on relative fair
value. This gives rise to the risk that sales could be
misstated due to the complexity of the multi-element
contracts and the incorrect valuation of the relative fair
value elements. Sales in the remaining sectors are
generally recognized when the risks and rewards of the
underlying products have been transferred to the
customer and tend not to have multiple deliverable
elements. There is a risk that sales may be deliberately
overstated as a result of management override resulting
from the pressure management may feel to achieve
planned results. The management of the Group focuses
on sales as a key performance measure which could
create an incentive for sales to be recognized before
the risks and rewards have been transferred.
Our audit procedures included, amongst others,
assessing the appropriateness of the Company’s
revenue recognition accounting policies including
those relating to multi-element contracts and assess
compliance with the policies in terms of EU-IFRS. We
tested the eectiveness of the Company’s controls over
calculation of rebates, fair value determination of
multi-element sales contracts, and the correct timing of
revenue recognition. We also assessed sales
transactions taking place before and after year-end to
ensure that revenue was recognized in the correct
period and assessed the accuracy of the sales
recorded, based amongst others on inspection of sales
contracts, hand over certicates and hours reported
after recognition of revenue. We have assessed the
appropriateness of management’s response to
indications of improper revenue recognition and
performed additional work where considered
necessary. We also assessed the adequacy of the sales
disclosures contained in Section 12.9, Note 2
Information by sector and main country and Note 6
Income from operations.
Contingent liabilities and provisions from claims,
proceedings and investigations
The Company and certain of its group companies and
former group companies are involved as a party in legal
proceedings, including regulatory and other
governmental proceedings as well as investigations by
authorities. Since the ultimate disposition of asserted
claims and proceedings and investigations cannot be
predicted with certainty, an adverse outcome could
have a material adverse eect on the nancial position,
results of operations and cashows, resulting in the
identication of a signicant nancial statement risk.