Philips 2015 Annual Report Download - page 181

Company nancial statements 13.5
Annual Report 2015 181
Valuation of goodwill
Key audit matter Under EU-IFRSs, the Company is required to test the amount of goodwill for impairment, both annually and if
there is a trigger for testing. The impairment tests were signicant to our audit due to the complexity of the
assessment process and signicant judgments and assumptions involved which are aected by expected future
market or economic conditions. At December 31, 2015, the goodwill amounted to EUR 8.5 billion.
Our response 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, Image-Guided Therapy, Patient Care & Monitoring Solutions and Home
Monitoring) 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. We have also tested the eectiveness of the Company’s internal
controls around the valuation of goodwill.
We believe the assumptions used are within the acceptable range. 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. Furthermore, we noted that the headroom
for the cash-generating units Professional Lighting Solutions and Home Monitoring is relatively limited. 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
Key audit matter Income tax was signicant to our audit because the assessment process is complex and the amounts involved
are material to the nancial 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, 2015, the net deferred tax assets are valued at EUR 2.8
billion and the other tax liability related to tax uncertainties is valued at EUR 454 million.
Our response We have tested the completeness and accuracy of the amounts reported for current and deferred tax, including
the assessment of disputes with tax authorities, based on the developments in 2015 and the impact of the
scheduled separation of the Company. In this area our audit procedures included, amongst others, assessment
of correspondence with the relevant tax authorities, testing the eectiveness 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 signicant
tax risk. In respect of deferred tax assets, we analyzed and 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 use amongst others budgets, forecasts and tax laws and in
addition we assessed the historical accuracy of management’s assumptions. We believe the assumptions used
are within the acceptable range. 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
Key audit matter 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. Other sales 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 response 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 installation hours reported after recognition of revenue.
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.