Philips 2015 Annual Report Download - page 180

Company nancial statements 13.5
180 Annual Report 2015
Company separation and Finance Transformation
Key audit matter In September 2014 Philips announced its plan to establish two standalone companies focused on the
HealthTech and Lighting opportunities respectively with a scheduled completion of the separation of the
Lighting business in the rst half of 2016. As the separation is expected to impact all businesses, markets and
support functions and expected to impact all assets and liabilities of the Company, we have identied the
separation as a signicant risk for our 2015 audit.
Furthermore, the Company continued to implement its global Accelerate! initiative, which includes a Finance
Transformation program. The Finance Transformation has a signicant impact on the Company’s business
processes, control activities and internal control responsibilities. We focused on the Finance Transformation as
part of our audit because there is a signicant risk that a material misstatement could occur if the program is not
implemented with proper oversight and a focus on maintaining eective internal controls throughout the
process.
Our response Our audit procedures included, amongst others, meeting with the Board of Management and the Audit
Committee of the Supervisory Board on a regular basis during the year to understand and monitor the potential
impact of the scheduled separation of the Company on the assets and liabilities in the 2015 nancial statements.
The potential impact of the separation on the valuation of goodwill and (deferred) tax positions were assessed
as part of the audit procedures on these accounts as further detailed in the key audit matters below.
Furthermore we have used these meetings to understand and monitor the eects of the scheduled separation of
the Company and the Finance Transformation on the Company’s internal control environment, across the
organization. We have also instructed our component auditors to perform procedures designed to provide
reasonable assurance that a material misstatement did not exist in the nancial statements as a result of the
scheduled separation and the Finance Transformation. We also tested monitoring activities executed at dierent
levels of the organization designed to ensure continued eectiveness of the internal control framework during
the separation process and the Finance Transformation.
Acquistions and disposals
Key audit matter The acquisition of Volcano Corporation was signicant to our audit due to the complexity of and signicant
judgments and assumptions involved in the purchase price allocation for Volcano Corporation. At the acquisition
date February 17, 2015, the increase in the intangibles recognized under goodwill and other intangibles related to
Volcano Corporation amounted to EUR 947 million.
The continued classication of the Lumileds and Automotive business as Assets Held for Sale and Discontinued
operations, following the termination of the agreement pursuant to which the consortium led by GO Scale would
have acquired an 80.1% interest in the combined businesses of Lumileds and Automotive, was signicant to our
audit due to the complexity of the assessment process and signicant judgments and assumptions involved.
Our response With respect to the accounting for the Volcano Corporation acquisition, we have, amongst others, read the asset
purchase agreements, conrming the correct accounting treatment has been applied and appropriate disclosure
has been made; assessed the valuation and accounting for the consideration payable and traced payments to
bank statements; audited the identication and fair valuation of the assets and liabilities the Group acquired
including any fair value adjustments; and assessed the valuation assumptions such as discount, tax and royalty
rates by recalculating these, evaluating and challenging assumptions used in such calculations amongst others
based on external evidence.
In doing so we have utilized valuation specialists to assist with the audit of the identication and valuation of the
assets and liabilities acquired. We have also tested the eectiveness of the Company’s internal controls around
the accounting for the acquisition of Volcano.
We have assessed management’s evaluation in relation to the continued classication of the Lumileds and
Automotive business as Assets Held for Sale and Discontinued operations, in accordance with the classication
criteria under EU-IFRS, as this has a material eect on the presentation of the nancial statements. We also
assessed the adequacy of the disclosures in Section 12.9, Note 4 Acquisitions and Divestments (Volcano
Corporation) and Note 3 Discontinued operations and other assets classied as held for sale (Lumileds and
Automotive).