Financial Reporting On The Internet (Case Study: Philips) ✓ Solved

Financial Reporting on the Internet (Case study: Philips) 20

The internet is a good place to get information useful for studying accounting. Philips is a Dutch multinational technology company headquartered in Amsterdam focused on healthcare, founded in Eindhoven in 1891. Use the 2017 Annual report of Philips to answer the following questions:

1. Stakeholders can affect or be affected by the organization's actions, objectives and policies. Discuss at least two types of stakeholders and give examples from the Philips annual report to justify your answer. Also explain the reason of their interest in the financial statements.

2. As learned in Unit 1, Session 3, the major environmental factors impacting an organization can be grouped under political/legal, economic, social/demographic and technological (PEST analysis). Giving examples from the annual report, discuss the impact of each element in the PEST analysis on Philips.

3. In which category of users or stakeholders do the following fit from the Philips Annual report 2017? a. Frans Van Houten b. Audit & Risk committee c. Ernst & Young LLP d. Apollo Global Management LLC

4. IAS 16 Property, plant and equipment identifies and describes two different models of accounting for tangible non-current assets. Discuss the importance of these two models and identify the depreciation methods used by Philips.

5. In preparing financial statements in accordance with IFRS, certain accounting policies require judgment or estimation. Give examples of Philips estimates and assumptions reported in the consolidated financial statements.

6. It is important to classify expenditure as revenue or capital expenditure. Identify the difference between revenue and capital expenditure and provide an example from the Philips annual report for capital expenditure.

7. The going concern concept is fundamental in accounting. Explain why the going concern basis is important in understanding Philips financial statements; support your answer with evidence from the Philips annual report.

8. There are different approaches to valuing inventory allowed by GAAP. Explain the principal methods of valuation required by IAS 2 Inventories and provide evidence from the Philips annual report.

9. Recovery of receivables is not always definite; sometimes debtors are unable to pay. Explain the concept of allowances for irrecoverable receivables and analyze the Philips allowances for receivables information given in the annual report.

10. Revenue recognition determines the conditions under which revenue is recognized. Classify the revenue recognition method(s) used by Philips as discussed in the annual report and explain the rationale underlying their appropriateness.

Paper For Above Instructions

Introduction

This paper uses Philips' 2017 Annual Report (Koninklijke Philips N.V., 2017) to address stakeholder identification, external environment (PEST), stakeholder classification, accounting policy models (IAS 16), key estimates, expenditure classification, going concern, inventory valuation (IAS 2), allowance for receivables, and revenue recognition (IFRS 15). The analysis highlights how disclosures support financial statement users in assessing performance and risk (Philips, 2017).

1. Stakeholders and Their Interest

Two primary stakeholder types are external investors and employees. Investors (equity holders, bondholders) use financial statements to assess profitability, cash flows and return on investment; Philips’ investor disclosures (strategy, segment performance, and dividend policy) directly inform shareholders and creditors (Philips, 2017) (Freeman, 1984). Employees are interested in continued employment, pension security and company prospects; Philips’ disclosures on restructuring, workforce numbers and pension obligations affect employee decisions (Philips, 2017).

2. PEST Analysis Impact on Philips

Political/Legal: Regulatory and healthcare compliance shape Philips’ R&D and market access; the annual report notes regulatory approvals and legal contingencies that influence operations (Philips, 2017). Economic: Global economic conditions and currency volatility affect demand for medical devices and consumer products; Philips reports sensitivity to macroeconomic changes (Philips, 2017). Social/Demographic: Aging populations increase demand for healthcare solutions, a growth driver for Philips Healthcare (Philips, 2017). Technological: Rapid medical technology innovation requires sustained R&D and adoption of digital health platforms, emphasized in Philips’ strategy and capital allocation (Philips, 2017; Gupta, 2013).

3. Stakeholder Classification

a. Frans van Houten — he is the CEO (management/executive stakeholder), responsible for strategy and operations and a primary internal user of financial reporting (Philips, 2017). b. Audit & Risk Committee — governance body representing shareholder oversight and custodianship of financial reporting quality (corporate governance stakeholder). c. Ernst & Young LLP — external auditor, an assurance provider and independent third-party stakeholder. d. Apollo Global Management LLC — an institutional investor/creditor or significant shareholder (external investor stakeholder) (Philips, 2017).

4. IAS 16 Models and Philips’ Depreciation

IAS 16 allows the cost model (asset carried at cost less depreciation and impairment) and the revaluation model (carried at fair value). The choice affects balance sheet valuations and subsequent depreciation reporting (IASB, 2014). Philips primarily uses the cost model for property, plant and equipment and applies straight-line depreciation for major classes with useful lives disclosed in accounting policies (Philips, 2017; EY, 2018).

5. Estimates and Assumptions

Philips discloses significant estimates including useful lives of PPE, residual values, impairment assumptions (discount rates and cash flow forecasts), provisions and warranty obligations, pension actuarial assumptions, and recoverability of deferred tax assets (Philips, 2017). These judgments affect carrying amounts and require management judgment under IFRS (IFRS Foundation, 2018).

6. Revenue vs Capital Expenditure

Revenue expenditure relates to day-to-day operational costs charged to profit; capital expenditure (capex) creates future economic benefits and is capitalized (IASB guidance). Philips’ capex examples include investments in production facilities and medical equipment, disclosed as additions to property, plant and equipment in the cash flow and notes (Philips, 2017).

7. Going Concern Basis

The going concern basis assumes the entity will continue operations for the foreseeable future and underpins asset valuation and liability classification. Philips’ disclosures on liquidity, debt facilities and covenant compliance provide evidence supporting the going concern assumption; absence of material uncertainty is noted in the audit opinion and management commentary (Philips, 2017; KPMG, 2018).

8. Inventory Valuation (IAS 2)

IAS 2 requires inventories to be measured at the lower of cost and net realizable value, with cost determined using FIFO or weighted average. Philips states that inventories are measured at the lower of cost and net realizable value and outlines cost formulas applied (Philips, 2017; IASB, IAS 2).

9. Allowance for Irrecoverable Receivables

Allowance for doubtful accounts (provision for expected credit losses) recognizes that some receivables may not be collectible; entities estimate allowances based on historical loss experience and forward-looking information. Philips provides receivables ageing and impairment provisions, showing movements in the allowance and rationales for levels of provisions tied to customer credit risk (Philips, 2017; PwC, 2018).

10. Revenue Recognition Methods

Philips adopts revenue recognition policies aligned with IFRS 15: revenue is recognized when control transfers to the customer, applying five-step model for contracts. For long-term service contracts and equipment with installation, revenue recognition may be over time where criteria are met; for product sales it is at a point in time. Philips’ disclosures describe performance obligations, variable consideration and judgment applied, supporting the appropriateness of their methods (Philips, 2017; Deloitte, 2018).

Conclusion

Philips’ 2017 Annual Report provides comprehensive disclosures that meet IFRS requirements and support varied stakeholder needs. The report’s treatment of PPE (IAS 16), inventories (IAS 2), revenue (IFRS 15), estimates and going concern information gives users the insight necessary to evaluate financial position and performance (Philips, 2017).

References

  • Koninklijke Philips N.V. (2017). Annual Report 2017. Available at: https://www.results.philips.com/publications/ar17/ (Philips, 2017).
  • International Accounting Standards Board (IASB). (2014). IAS 16 Property, Plant and Equipment. IFRS Foundation. https://www.ifrs.org/
  • International Accounting Standards Board (IASB). IAS 2 Inventories. IFRS Foundation. https://www.ifrs.org/
  • IFRS Foundation. (2014). IFRS 15 Revenue from Contracts with Customers. https://www.ifrs.org/
  • Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Pitman Publishing. (Stakeholder theory).
  • Gupta, S. (2013). Environment & PEST Analysis: An Overview. International Journal of Modern Social Sciences, 2(1), 34-43.
  • PwC. (2018). Accounting for expected credit losses and allowance for receivables. PwC publications. https://www.pwc.com/
  • KPMG. (2018). Guidance on Going Concern and Disclosure Requirements. https://home.kpmg/
  • Deloitte. (2018). Revenue Recognition: Practical guide to IFRS 15. Deloitte Insights. https://www2.deloitte.com/
  • Ernst & Young (EY). (2018). Depreciation methods and disclosures. EY AccountingLink. https://www.ey.com/

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