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.

Philips Group
Fair value of financial assets and liabilities in millions of EUR
2014
 
Balance as of December 31, 2013
Balance as of December 31, 2014
 
carrying amount
estimated fair value
carrying amount
estimated fair value
Financial assets
 
 
 
 
Carried at fair value:
 
 
 
 
Available-for-sale financial assets - non-current
96
96
115
115
Available-for-sale financial assets - current
10
10
Securities classified as assets held for sale
62
62
38
38
Fair value through profit and loss - non-current
29
29
24
24
Derivative financial instruments
150
150
207
207
Financial assets carried at fair value
347
 
384
 
 
 
 
 
 
Carried at (amortized) cost:
 
 
Cash and cash equivalents
2,465
 
1,873
 
Loans and receivables:
 
 
 
 
Loans - current
 
 
125
125
Non-current loans and receivables
143
143
86
86
Other non-current loans and receivables
129
 
140
 
Loans classified as assets held for sale
30
 
 
Receivables - current
4,678
 
4,723
 
Receivables - non-current
144
144
177
177
Held-to-maturity investments
3
 
2
 
Available-for-sale financial assets
96
 
95
 
Financial assets carried at (amortized) costs
7,688
 
7,221
 
 
 
 
 
 
Financial liabilities
 
 
 
 
Carried at fair value:
 
 
 
Fair value through profit and loss - non-current
(13)
(13)
Derivative financial instruments
(368)
(368)
(857)
(857)
Financial liabilities carried at fair value
(381)
 
(857)
 
 
 
 
 
 
Carried at (amortized) cost:
 
 
 
Accounts payable
(2,462)
 
(2,499)
 
Interest accrual
(57)
 
(56)
 
Debt (Corporate bond and finance lease)
(3,157)
(3,545)
(3,551)
(4,164)
Debt (Bank loans, overdrafts etc.)
(744)
 
(553)
 
Financial liabilities carried at (amortized) costs
(6,420)
 
(6,659)
 

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Philips Group
Fair value hierarchy in millions of EUR
2014
 
level 1
level 2
level 3
total
Balance as of December 31, 2014
 
 
 
 
Available-for-sale financial assets - non-current
51
43
21
115
Securities classified as assets held for sale
1
37
38
Financial assets designated at fair value through profit and loss - non-current
24
24
Derivative financial instruments - assets
207
207
Loans - current
125
125
Non-current loans and receivables
86
86
Receivables - non-current
177
177
Total financial assets
76
638
58
772
 
 
 
 
 
Derivative financial instruments - liabilities
(857)
(857)
Debt
(3,969)
(195)
(4,164)
Total financial liabilities
(3,969)
(1,052)
(5,021)
 
 
 
 
 
Balance as of 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
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)

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

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. In September 2014 the option matured with the changes of fair value of EUR 7 million recorded as financial income and expense.

Deferred consideration and loan extension options to TP Vision were included in level 3 in 2013. In May, 2014 Philips transferred the loans from TP Vision to TPV Technology Limited. As a result, the extension options ceased to exist with the changes of fair value of EUR 13 million recorded in the profit and loss.

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.

Philips Group
Reconciliation of the fair value hierarchy in millions of EUR
2014
 
financial assets
financial liabilities
Balance as of January 1, 2014
61
(13)
Total gains and losses recognized in:
 
 
  • profit or loss
5
13
  • other comprehensive income
(8)
Balance as of December 31, 2014
58

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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.
Philips Group
Financial assets subject to offsetting, enforceable master netting arrangements or similar agreements in millions of EUR
2013 - 2014
 
2013
2014
Derivatives
 
 
Gross amounts of recognized financial assets
150
207
Gross amounts of recognized financial liabilities offset in the balance sheet
Net amounts of financial assets presented in the balance sheet
150
207
 
 
 
Related amounts not offset in the balance sheet
 
 
Financial instruments
(85)
(161)
Cash collateral received
Net amount
65
46

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Philips Group
Financial liabilities subject to offsetting, enforceable master netting arrangements or similar agreements in millions of EUR
2013 - 2014
 
2013
2014
Derivatives
 
 
Gross amounts of recognized financial liabilities
(368)
(857)
Gross amounts of recognized financial assets offset in the balance sheet
Net amounts of financial liabilities presented in the balance sheet
(368)
(857)
 
 
 
Related amounts not offset in the balance sheet
 
 
Financial instruments
85
161
Cash collateral received
Net amount
(283)
(696)

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