Fair value of financial assets and liabilities

The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methods. The estimates presented are not necessarily indicative of the amounts that will ultimately be realized by the Company upon maturity or disposal. The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts.

For cash and cash equivalents, current receivables, accounts payable, interest accrual and short-term debts, the carrying amounts approximate fair value, because of the short maturity of these instruments, and therefore fair value information is not included in the table below.

The fair value of Philips’ debt is estimated on the basis of the quoted market prices for certain issues, or on the basis of discounted cash flow analysis based upon market rates plus Philips’ spread for the particular tenors of the borrowing arrangement. Accrued interest is not included within the carrying amount or estimated fair value of debt.

 
 
December 31, 2012
December 31, 2013
 
carrying amount
estimated fair value
carrying amount
estimated fair value
 
 
 
 
 
Financial assets
 
 
 
 
Carried at fair value:
 
 
 
 
Available-for-sale financial assets - non-current
153
153
96
96
Available-for-sale financial assets - current
10
10
Securities classified as assets held for sale
62
62
Fair value through profit and loss - non-current
47
47
29
29
Derivative financial instruments
137
137
150
150
 
337
337
347
347
 
 
 
 
 
Carried at (amortized) cost:
 
 
Cash and cash equivalents
3,834
 
2,465
 
Loans and receivables:
 
 
 
 
Non-current loans and receivables
140
140
143
143
Other non-current loans and receivables
127
 
129
 
Loans classified as assets held for sale
 
30
 
Receivables - current
4,585
 
4,678
 
Receivables - non-current
176
176
144
144
Held-to-maturity investments
3
 
3
 
Available-for-sale financial assets
79
 
96
 
 
8,944
316
7,688
287
 
 
 
 
 
Financial liabilities
 
 
 
 
Carried at fair value:
 
 
 
Fair value through profit and loss - non-current
(11)
(11)
(13)
(13)
Derivative financial instruments
(517)
(517)
(368)
(368)
 
 
 
 
 
Carried at (amortized) cost:
 
 
 
Accounts payable
(2,839)
 
(2,462)
 
Interest accrual
(75)
 
(57)
 
Debt (Corporate bond and finance lease)
(3,412)
(4,162)
(3,157)
(3,545)
Debt (Bank loans, overdrafts etc.)
(1,122)
 
(744)
 
 
(7,448)
(4,162)
(6,420)
(3,545)

The table below represents categorization of measurement of the estimated fair values of financial assets and liabilities.

Fair value hierarchy
 
level 1
level 2
level 3
total
 
 
 
 
 
December 31, 2013
 
 
 
 
Available-for-sale financial assets - non-current
42
54
96
Available-for-sale financial assets - current
6
4
10
Securities classified as assets held for sale
62
62
Financial assets designated at fair value through profit and loss - non-current
22
7
29
Derivative financial instruments - assets
150
150
Non-current loans and receivables including guarantee deposits
143
143
Receivables - non-current
144
144
Total financial assets
132
441
61
634
 
 
 
 
 
Financial liabilities designated at fair value through profit and loss - non-current
(13)
(13)
Derivative financial instruments - liabilities
(368)
(368)
Debt
(3,345)
(200)
(3,545)
Total financial liabilities
(3,345)
(568)
(13)
(3,926)
 
 
 
 
 
December 31, 2012
 
 
 
 
Available-for-sale financial assets - non-current
110
43
153
Financial assets designated at fair value through profit and loss - non-current
28
19
47
Derivative financial instruments - assets
 
137
137
Non-current loans and receivables including guarantee deposits
140
140
Receivables - non-current
176
176
Total financial assets
138
453
62
653
 
 
 
 
 
Financial liabilities designated at fair value through profit and loss - non-current
(11)
(11)
Derivative financial instruments - liabilities
(517)
(517)
Debt
(3,948)
(214)
(4,162)
Total financial liabilities
(3,948)
(731)
(11)
(4,690)

Specific valuation techniques used to value financial instruments include:

Level 1

Instruments included in level 1 are comprised primarily of listed equity investments classified as available-for-sale financial assets, investees and financial assets designated at fair value through profit and loss.

The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.

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-off 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 offsetting, enforceable master netting arrangements or similar agreements
 
2012
2013
 
 
 
Derivatives
 
 
Gross amounts of recognized financial assets
137
150
Gross amounts of recognized financial liabilities offset in the statement of financial position
Net amounts of financial assets presented in the statement of financial position
137
150
 
 
 
Related amounts not offset in the statement of financial position
 
 
Financial instruments
(67)
(85)
Cash collateral received
 
 
 
Net amount
70
65

Financial liabilities subject to offsetting, enforceable master netting arrangements or similar agreements
 
2012
2013
 
 
 
Derivatives
 
 
Gross amounts of recognized financial liabilities
(517)
(368)
Gross amounts of recognised financial assets offset in the statement of financial position
Net amounts of financial liabilities presented in the statement of financial position
(517)
(368)
 
 
 
Related amounts not offset in the statement of financial position
 
 
Financial instruments
67
85
Cash collateral received
 
 
 
Net amount
(450)
(283)

(0)
(0)
This is an interactive electronic version of the Philips Annual Report 2013 and also contains certain information in summarized form. The contents of this version are qualified in their entirety by reference to the printed version of the full Philips Annual Report 2013. This printed version is available as a PDF file on this website. Information about: forward-looking statements, third-party market share data, fair value information, IFRS basis of presentation, use of non-GAAP information, statutory financial statements and management report, reclassifications and analysis of 2013 compared to 2012.