Philips 2014 Annual Report Download - page 75

Risk management 7.6
Annual Report 2014 75
can have a signicant impact on the Dened Benet
Obligation and pension cost. A negative performance
of the nancial markets could have a material impact on
cash funding requirements and pension costs and also
aect the value of certain nancial assets and liabilities
of the company.
Philips is exposed to a number of reporting risks.
A risk rating is assigned for each risk identied, based
on the likelihood of occurrence and the potential
impact of the risk on the nancial statements and
related disclosures. In determining the probability that
a risk will result in a misstatement of a more than
inconsequential amount or material nature, the
following factors are considered to be critical:
complexity of the associated accounting activity or
transaction process, history of accounting and
reporting errors, likelihood of signicant (contingent)
liabilities arising from activities, exposure to losses,
existence of a related party transaction, volume of
activity and homogeneity of the individual transactions
processed and changes to the prior period in
accounting characteristics compared to the previous
period.
For important critical reporting risk areas identied
within Philips we refer to the “Use of estimates” section
in the note 1, Signicant accounting policies, as the
Company assessed that reporting risk is closely related
to the use of estimates and application of judgment.
7.7 Separation risk
Philips is exposed to risks associated with the planned
separation into HealthTech and Lighting Solutions.
In September 2014 Philips announced its plan to
separate into two standalone companies in the
HealthTech and Lighting Solutions, positioning each
one to better capitalize on the highly attractive
HealthTech and Lighting solutions opportunities. This is
a complex process which involves certain risks to
Philips.
The separation into HealthTech and Lightings Solutions
is unlike divestments or carve out transactions that
Philips has implemented in the past, which aected
very specic parts of the business of Philips. The
proposed separation impacts all businesses and
markets as well as all supporting functions and all
assets and liabilities of the Group and will require
complex and time consuming disentanglement eorts.
The design and implementation of the separation
requires the devotion of substantial time and attention
from management and sta. Although Philips has set-
up a dedicated senior project team to work on a
successful separation, the separation eorts could
distract from and have an adverse eect on the conduct
of normal business and our strategy. The separation
could increase the likelihood of occurrence and/or
potential impact of the risks as described in section 7.2,
Risk categories and factors, of this Annual Report, such
as strategic risks (e.g. insucient integration of
acquisitions), operational risks (e.g. delays in
innovation-to-market), compliance risk (e.g. ineective
internal controls) and nancial risks (e.g. reporting risks).
Philips has made no nal decision as to what actions it
may take with respect to Lighting Solutions once it has
become a separate company. Such actions may include
public oerings of ownership stakes in Lighting
Solutions.
The design and implementation of the separation will
involve and depend on support from external legal, tax,
nancial and other professional consultants and as a
result Philips will incur substantial cost. The separation
could take more time than originally anticipated, which
may expose Philips to risks of additional cost and other
adverse consequences.
The separation of businesses, assets, liabilities,
contractual or contingent rights and obligations and
legal entities may require Philips to recognize expenses
and/or incur nancial payments, which otherwise
would not have been incurred.
While it is the rm intention to complete the separation,
Philips has reserved the right not to proceed with the
separation if it determines that it would be in the
Company’s interest not to do so. If it does proceed with
the separation, no assurances can be given that the
separation will ultimately lead to the increased benets
contemplated by Philips currently.