General information to the Consolidated financial statements (Policies)
Dec. 31, 2025
The Consolidated financial statements are:
•prepared in accordance with International Financial Reporting Standards (IFRS) Accounting Standards as
adopted by the European Union (EU) and comply with the statutory provisions of Part 9, Book 2 of the
Dutch Civil Code. All standards and interpretations issued by the International Accounting Standards Board
(IASB) and the IFRS Interpretations Committee effective in 2025 have been endorsed by the EU. As a result,
Philips’ accounting policies also fully comply with IFRS Accounting Standards as issued by the IASB. These
accounting policies have been applied by group entities
•authorized for issue by the Board of Management of Royal Philips on February 19, 2026
•prepared under the historical cost convention, unless otherwise indicated
•prepared on a going concern basis
•presented in euro, which is the presentation currency
•rounded to the nearest million euro unless stated otherwise
•subject to rounding, whereby amounts may not add up precisely to the totals provided
The preparation of these financial statements requires management to make a number of estimates and
judgments that affect the application of accounting policies and the reported amounts of assets and liabilities,
revenues and expenses, and the disclosure of contingent assets and liabilities. Amounts recognized are based
on factors that are by default associated with uncertainty. Actual results may therefore differ from estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revision to estimates are recognized
prospectively. Where applicable, the estimates and judgments of specific financial statement items are
described in the respective note to the consolidated financial statements.
The areas involving a higher degree of judgment and complexity in applying accounting principles and for
which changes in the assumptions and estimates could result in significantly different results than those
recorded in the consolidated financial statements are the following:
•judgment applied in determining reportable segments involves evaluating the information reviewed by the
Chief Operating Decision-Maker (the Board of Management) to assess performance and allocate resources
•for acquisitions, the identification and valuation of acquired assets and liabilities including contingent
•determination of deferred tax assets for losses carried forward and uncertain tax positions (Income taxes)
•assessments of exposure to credit risk of financial instruments (Other financial assets, Receivables, Debt, Fair
•actuarial assumptions of future events that are used in calculating post-employment benefit expenses and
•estimates and assumptions regarding the timing and the amount of outflow of resources, as well as
estimating the likelihood of a potential outflow of resources and the ability to make a reliable estimate of
The company regularly updates its significant assumptions and estimates to support the reported amounts of
assets, liabilities, income and expenses.
Climate change
In preparing the consolidated financial statements, management has considered the impact of climate
change, specifically the financial impact of Philips meeting its internal and external climate-related aims, the
potential impact of climate-related risks, and the costs incurred to pro-actively manage such risks. These
considerations did not have a material impact on the financial reporting judgments, estimates or assumptions.
The financial impacts considered include specific climate mitigation measures, such as the use of lower-carbon
energy sources, the cost of developing more sustainable product offerings, and expenses incurred to mitigate
against the impact of extreme weather conditions. To meet its long-term Science Based Targets and reduce its
full value chain emissions in line with a 1.5 °C global warming scenario, Philips has entered into a number of
Power Purchase Agreements. Philips uses 100% electricity from renewable sources, mainly through long-term
Power Purchase Agreements, thereby mitigating the impact of carbon taxes. The development of more
sustainable products are covered through our EcoDesign program and already included in our R&D expenses.
The physical risk related to climate change on our sites resulting from our Task Force on Climate-Related
Financial Disclosures assessment is currently considered limited.
Accounting estimates and judgmentsDetermining reportable segments requires significant judgment and involves evaluating the information that
is reviewed by the Chief Operating Decision-Maker (the Board of Management) to assess performance and
allocate resources, in accordance with IFRS 8 'Operating Segments'.
Accounting estimates and judgmentsThe determination of the fair value less costs of disposal involves the use of estimates and assumptions that
tend to be uncertain. Circumstances to which these adjustments may relate include resolution of uncertainties
that arise from the terms of the disposal transaction, such as the resolution of purchase price adjustments and
indemnifications, resolution of uncertainties that arise from and are directly related to the operations of the
component before its disposal, such as environmental and assurance-type product warranty obligations
retained by the company, and the settlement of employee benefit plan obligations provided that the
settlement is directly related to the disposal transaction.
Accounting estimates and judgmentsIntangible assets acquired in a business acquisition and the financial liability related to non-controlling
interest are measured at fair value at the date of the acquisition.
To determine the fair value of intangible assets at the acquisition date, estimates and assumptions are
required. The valuation of the identifiable intangible assets involves estimates of expected sales, earnings and/
or future cash flows and require use of key assumptions, such as discount rate, royalty rate and growth rates.
Estimates are also applied when determining the fair value of legal cases and tax positions in the acquired entity.
The fair value is based on estimates of the likelihood, the expected timing and the amount of the potential cash
outflow. Contingent liabilities relating to legal cases and non-income tax positions of the acquired entity are
recognized at fair value at the acquisition date in accordance with IFRS 3, irrespective of whether an outflow will
be required to settle the obligation. After initial recognition and until the liability is settled, cancelled or expired,
the liability is measured at the higher of the amount that would be recognized in accordance with IAS 37
'Provisions, contingent liabilities and contingent assets' and the initial liability amount. For income tax positions,
the company applies IAS 12 'Income taxes', which requires recognition of provisions only when the likelihood of
cash outflow is considered probable.
Accounting estimates and judgments
Sales-related accruals
The company has sales promotions-related agreements with distributors and retailers designed to promote
the sale of products. Among the programs are arrangements under which rebates and discounts can be
earned by the distributors and retailers by attaining agreed upon sales levels, or for participating in specific
marketing programs. Management estimates the sales-related accruals associated with these arrangements
based on a combination of historical patterns and future expectations regarding which promotional targets
are expected to be met by distributors and retailers. These estimated amounts are recorded as a reduction to
revenue when the related product or service sales are recognized. Accrued customer rebates are presented as
other current liabilities, unless there is a right to offset against the respective accounts receivable.
Accounting estimates and judgments
Deferred tax recoverability
Deferred tax assets are recognized to the extent that it is probable that there will be future taxable profits
against which these can be utilized. Significant judgment is involved in determining whether such profits are
probable. Management determines this on the basis of expected taxable profits arising from the reversal of
recognized deferred tax liabilities, on appropriate tax planning opportunities to support business goals and
on the basis of forecasts.
Uncertain tax positions
Uncertain tax positions are recognized as current tax liabilities when it is probable that additional income
taxes will be payable and the amount can be reliably measured. Liability is measured at the amount expected
to be paid to the tax authorities, using either the most likely amount or the expected value, depending on
which method better predicts the resolution of the uncertainty.
Accounting estimates and judgments
Impairment of owned and right-of-use assets
Judgments are required, not only to determine whether there is an indication that an asset may be impaired,
but also whether indications exist that impairment losses previously recognized may no longer exist or may
have decreased (impairment reversal). After indications of impairment have been identified, estimates and
assumptions are used in the determination of the recoverable amount of a fixed asset. These involve estimates
of expected future cash flows (based on future growth rates and remaining useful life) and residual value
assumptions, as well as discount rates to calculate the present value of the future cash flows.
Owned assets
Estimates are required to determine the (remaining) useful lives of fixed assets. Useful lives are determined
based on an asset's age, the frequency of its use, repair and maintenance policy, technology changes in
production and expected restructuring. The company estimates the expected residual value per asset item.
The residual value is the higher of the asset's expected sales price (based on recent market transactions of
similar sold items) and its material scrap value.
Right-of-use assets
Judgment is required to determine the lease term. The assessment of whether the company is reasonably
certain to exercise extension options impacts the lease term, which could affect the amount of lease liabilities
and right-of-use assets recognized.
Accounting estimates and judgmentsThe cash flow projections used in the value in use calculations for goodwill impairment testing contain various
judgments and estimations as described in the ‘key assumptions’ section.
Accounting estimates and judgments
The cash flow projections used in the value in use calculations for intangible assets excluding goodwill contain
various judgments and estimations. For intangible assets excluding goodwill, estimates are required to
determine the (remaining) useful lives.
Accounting estimates and judgments
The determination of fair value is subject to estimates for investments that are not publicly traded. Refer to
Financial assets classified at amortized cost and at fair value through OCI are subject to impairment
assessment. The calculation of expected credit losses requires the company to apply significant judgment and
make estimates and assumptions that involve significant uncertainty at the time they are made. Changes to
these estimates and assumptions can result in significant changes to the timing and amount of expected credit
losses to be recognized.
Accounting estimates and judgmentsInventory is reduced for the estimated losses due to obsolescence. This reduction is determined for groups of
products based on sales in the recent past and/or expected future demand.
Accounting estimates
Receivables are subject to impairment assessment, which involves estimating expected credit losses. Refer to
Other financial assets for accounting policies on impairment of financial assets.
Accounting estimates and judgmentsBy their nature, the recognition of provisions requires estimates and assumptions regarding the timing and
the amount of outflow of resources. The main estimates include:
•Product warranty provisions: the provisions for assurance-type product warranty reflect the estimated costs
of replacement and free-of-charge services that will be incurred by the company with respect to products
sold and include costs to execute quality remediation and related field actions (including the Respironics
field action). These require management to make estimates and assumptions about items such as quantities
and the portion of products to be remediated through replacement, repair or (partial) refund.
•Environmental provisions: provisions for environmental remediation can change significantly due to the
emergence of additional information regarding the extent or nature of the contamination, the need to
utilize alternative technologies, actions by regulatory authorities as well as changes in judgments and
discount rates. The impact of climate change is also considered when assessing whether Philips has a
present legal or constructive obligation, particularly in relation to fines, penalties and commitments to
reduce greenhouse gas emissions.
•Legal provisions: provisions for legal claims and investigations reflect the best estimate of the outflow of
resources, supported by internal and external legal counsel, when it is probable that such outflow of
resources will be required to settle an obligation.
Accounting estimates and judgments
To make the actuarial calculations for the valuation of defined benefit obligations, assumptions are needed
for discount rates, healthcare cost increases, future salary increases, future pension increases, life expectancy
and employee turnover rates. The actuarial calculations are made by external actuaries based on inputs from
observable market data, such as corporate bond yield curves to determine the discount rates, mortality tables
to determine life expectancy and inflation rates to determine future salary increases and future pension
increases.
Significant judgment is required to determine the likelihood of a potential outflow of resources. In addition,
judgment is involved in determining whether the amount of an obligation can be measured with sufficient
reliability. Contingencies involve inherent uncertainties including, but not limited to, court rulings,
negotiations between affected parties, governmental actions, tax and environmental remediation.
Contingent assets require management to apply judgment, especially to estimate the likelihood of the inflow
of economic benefits and timing of recognition.
Accounting estimates and judgments
The use of a valuation model to determine market-based performance share fair value requires estimates for
the expected volatility of the Philips share price and correlation among input variables.
At each reporting date, Philips calculates the expected realization of the non-market-based performance
targets and revises the expected share-based compensation expense. The cumulative effect is recorded in the
consolidated statement of income with a corresponding adjustment in equity.
No expense is recognized for awards that do not ultimately vest because non-market performance and/or
service conditions have not been met.
Accounting estimates and judgmentsDetermining the fair value of financial instruments requires the use of estimates according to the method
applied for each type of financial asset of liability. 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.
Specific valuation techniques used to value financial instruments include:
Level 1
Instruments included in level 1 are composed primarily of listed equity investments classified as financial assets
carried at fair value through profit or loss or carried at fair value through other comprehensive income (OCI).
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) is 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.
The fair value of debt is estimated on the basis of the quoted market prices for certain issuances, or on the
basis of discounted cash flow analysis using 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.
Level 3
If one or more of the significant inputs are not based on observable market data, such as third-party pricing
information without adjustments, the instrument is included in level 3.
For financial instruments measured at Level 3, where quoted market prices are not available, Philips applies
valuation techniques such as discounted cash flow (DCF) models and market multiple approaches. These
valuation techniques reflect current market conditions at the reporting date and incorporate the best
available data. Significant unobservable inputs used in these valuations may include assumptions regarding
revenue growth, discount rates, credit risk adjustments, capture rates, forward prices, earnings multiples, and
liquidity discounts.
Contingent consideration represents the fair value of expected payments to former shareholders of an
acquired company, conditional upon the occurrence of specified future events or the fulfillment of certain
conditions – such as achieving regulatory or commercial milestones. The terms of each acquisition agreement
define these milestones, which may trigger additional payments if met. The fair value of contingent
consideration is generally determined using a probability-weighted and risk-adjusted approach to estimate
the likelihood of achieving future milestones. For commercial milestones, the discount rates applied in the
risk-adjusted approach reflect the inherent risks associated with their achievement, while both regulatory and
commercial milestones are discounted for the time value of money at risk-free rates. Contingent consideration
can fluctuate significantly, driven by changes in the estimated probability of milestone achievement and
adjustments to discount rates. Changes in the fair value of the contingent consideration liability are
recognized in other business income (expenses). The measurement of fair value is based on management’s
estimates and assumptions, and accordingly classified as Level 3 in the fair value hierarchy.
Accounting estimates and judgments
Financial assets are subject to impairment assessment, which involves estimating expected credit losses. Refer
The material accounting policies as generally applied throughout the financial statements are described in
subsequent sections. Material accounting policies relating to specific financial statement items are described in
the respective notes to the financial statements.
The Consolidated financial statements comprise the financial statements of Koninklijke Philips N.V. and all
subsidiaries that the company controls on a consolidated basis. Control exists when the company is exposed or
has rights to variable returns from its involvement with the investee and the company has the ability to affect
those returns through its power over the investee. Generally, there is a presumption that a majority of voting
rights results in control. To support this presumption and in cases where Philips has less than a majority of the
voting or similar rights of an investee, Philips considers all relevant facts and circumstances in assessing
whether it has power over an investee, including the contractual arrangement(s) with the other vote holders
of the investee, rights arising from other contractual arrangements and the company’s voting rights and
potential voting rights. Subsidiaries are fully consolidated from the date that control commences until the
date that control ceases. All intercompany balances and transactions have been eliminated in the
Consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but
only to the extent that there is no evidence of impairment.
The financial statements of all group entities are measured using the currency of the primary economic
environment in which the entity operates (functional currency). The euro (EUR) is the functional currency of
the company and the presentation currency of the consolidated financial statements. Foreign currency
transactions are converted into the functional currency using the exchange rates prevailing at transaction date
or the valuation date in cases where items are remeasured. Gains and losses resulting from the settlement of
foreign currency transactions and those resulting from the conversion of foreign currency denominated
monetary assets and liabilities at period-end exchange rates are recognized in the Consolidated statements of
income, except for qualifying cash flow hedges, qualifying net investment hedges and equity investments
measured at fair value through OCI which are recognized in other comprehensive income.
All foreign exchange differences are presented as part of Cost of sales, apart from tax items and financial
income and expense, which are recognized in the same line item as they relate to in the Consolidated
statements of income.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are
retranslated to the functional currency using the exchange rate at the date the fair value was determined.
Non-monetary items in a foreign currency that are measured based on historical cost are translated using the
exchange rate at the transaction date.
Foreign operations
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on
acquisition, are translated to euros at the exchange rates prevailing at the reporting date. The income and
expenses of foreign operations are translated to euros at the exchange rates prevailing at the dates of the
transactions.
Foreign currency differences arising upon translation of foreign operations into euros are recognized in Other
comprehensive income and presented as part of Currency translation differences in Equity. However, if the
operation is not a wholly-owned subsidiary, the proportionate share of the translation difference is allocated
to Non-controlling interests.
When a foreign operation is disposed of such that control, significant influence or joint control is lost, the
cumulative amount in the Currency translation differences related to the foreign operation is reclassified to
the Consolidated statements of income as part of the gain or loss on disposal. When the company disposes of
only part of its interest in a subsidiary that includes a foreign operation while retaining control, the respective
proportion of the cumulative amount is reattributed to Non-controlling interests. When the company disposes
of only part of its investment in an associate or joint venture that includes a foreign operation while retaining
significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to the
Consolidated statements of income.
No new IFRS accounting standards or amendments to existing standards, effective in 2025, had a significant
impact on the consolidated financial statements.
New accounting policies effective after 2025
The IASB has issued several IFRS accounting standards, or amendments to standards, with an effective date
after 2025. Considerations relating to IFRS 18 Presentation and Disclosure in Financial Statements are set out
below. The company has not early-adopted any standards or amendments to existing standards. The company
does not anticipate that the application of any other standards, or amendments to standards, will have a
significant impact on the consolidated financial statements upon adoption.
IFRS 18 Presentation and Disclosure in Financial Statements
IFRS 18 was issued in April 2024 and is endorsed by the EU. It will supersede IAS 1, Presentation of Financial
Statements. IFRS 18 introduces new requirements for presentation within the Consolidated statement of
income, including specified totals and subtotals. Even though the new standard will not impact the
recognition and measurement of items in the financial statements, the new standard requires entities to use
defined subtotals in the Consolidated statement of income, make disclosures about management-defined
performance measures, and adds new principles for aggregation and disaggregation of information.
IFRS 18 is effective for reporting periods beginning on or after January 1, 2027. Retrospective application is
required; therefore, upon adoption, comparative information will be restated in accordance with IFRS 18. The
company is currently assessing the implications of applying the new standard.
Changes in presentation from the prior year
Accounting policies have been applied consistently for all periods presented in these consolidated financial
statements. Certain prior-year amounts have been reclassified to conform to the current year presentation
due to combining insignificant balances and immaterial organizational changes. In 2025, uncertain tax
liabilities were reclassified from non-current tax liabilities to current income tax liabilities, and non-current
derivative financial assets were combined into other non-current financial assets.
Segment accounting policies are the same as the accounting policies applied by the company. Operating
segments are components of the company’s business activities for which separate financial information is
available that is evaluated regularly by the Chief Operating Decision-Maker (the Board of Management of the
company). The Board of Management decides how to allocate resources and assesses performance.
Reportable segments comprise the operating segments Diagnosis & Treatment, Connected Care and Personal
Health. Besides these reportable segments, segment Other comprises Philips’ central Innovation & Design, IP
royalty activities, corporate central costs, and other minor items not allocated to the operating segments.
Assets classified as held-for-sale
Non-current assets (or disposal groups) are classified as held-for-sale if their carrying amounts are expected to
be recovered through a sale transaction rather than through continuing use. Non-current assets (or disposal
groups) classified as held-for-sale are measured at the lower of their carrying amount or the fair value less
costs of disposal. Depreciation or amortization of an asset ceases when it is classified as held-for-sale. When
non-current assets (or disposal groups) are classified as held-for-sale, comparative balances prior to such date
are not represented in the Consolidated balance sheets.
Discontinued operations
A discontinued operation is a component of the company that has either been disposed of or is classified as
held-for-sale and represents a separate major line of business or geographical area of operations or is a part
of a single coordinated plan to dispose of a separate major line of business or geographical area of
operations. Any gain or loss from disposal, together with the results of these operations until the date of
disposal, are reported separately as discontinued operations in the Consolidated statements of income.
The financial information of discontinued operations is excluded from the respective captions in the
Consolidated financial statements and related notes for all periods presented. Comparatives are re-presented
for presentation of discontinued operations in the Consolidated statements of income and Consolidated
statements of cash flows.
Acquisitions
The company accounts for business combinations using the acquisition method when control is transferred to
the group. The consideration transferred in the acquisition is generally measured at fair value, as are the
identifiable net assets acquired and the liabilities assumed. Transaction costs are expensed as incurred. Any
contingent consideration is measured at fair value at the acquisition date. Subsequent changes in the fair
value of the contingent consideration are recognized in the consolidated statements of income. Changes to
the initial fair value of the acquired assets and liabilities, based on new information about the circumstances
at the acquisition date, can be made up to 12 months after the acquisition date.
Divestments
Upon loss of control, the company derecognizes the assets and liabilities of the subsidiary, any non-controlling
interests and the other components of equity related to the subsidiary. Any surplus or deficit arising from the loss of
control is recognized in the Consolidated statements of income. If the company retains any interest in the previous
subsidiary, such interest is measured at fair value at the date the control is lost. Subsequently it is accounted for as
either an equity-accounted investee (associate) or as a financial asset, depending on the level of influence retained.
Further information on loss of control can be found in Discontinued operations and assets classified as held for sale.
Associates are all entities over which the company has significant influence, meaning the power to participate
in the financial and operating policy decisions of the investee without the power to control or jointly control
those procedures. Significant influence is presumed for entities in which the company holds between 20% and
50% of the voting power. This presumption may be rebutted if evidence demonstrates that significant
influence does not exist, or conversely, that it exists despite voting rights of less than 20%. These assessments
involve significant judgment and may require consideration of qualitative factors in addition to quantitative
thresholds. Changes in these factors could lead to reassessment of significant influence and impact the
classification and measurement of the investment.
Investments in associates are accounted for using the equity method of accounting and are initially
recognized at cost. The carrying amount of an investment in an associate includes the carrying amount of
goodwill identified on acquisition. An impairment loss on such investment is allocated to the investment as a
whole.
The company’s share of the net income of these associates is included in Results of associates, in the Consolidated
statements of income, after adjustments to align the accounting policies with those of the company. In addition,
gains or losses from changes in ownership (dilution), impairments, and disposals of associates are recognized
within the same line item. When the company’s share of losses exceeds its interest in an associate, the carrying
amount of that interest is reduced to zero and recognition of further losses is discontinued except to the extent
that the company has an obligation or made payments on behalf of the associate.
Revenue recognition
Goods include consumer-type products in the Personal Health segment, equipment in the Diagnosis &
Treatment and Connected Care segments, and software-related offerings treated as goods. Services include
preventative and corrective maintenance services, as well as related parts and labor, extended warranties,
training, and other service-type offerings (including software). The company recognizes a contract with a
customer when a legally enforceable agreement exists, the rights of both parties are established, the contract
has commercial substance, and the consideration is probable to be collected. Revenue is recognized in the
period when the performance obligation is satisfied and the customer obtains control of the underlying
goods or services, allowing the customer the ability to direct the use of, and obtain substantially all of, the
remaining benefits of such product or service. The revenue reflects the consideration (i.e., transaction price) to
which the company expects to be entitled in exchange for the good or service. The consideration expected by
the company may include fixed and/or variable amounts which can be impacted by sales returns, trade
discounts, volume rebates, credits or Group Purchasing Organization (GPO) fees. The company adjusts the
consideration for the time value of money if the period between the transfer of the promised goods or
services to the customer and payment by the customer exceeds six months. Revenue is either recognized at a
point in time or over time.
Revenues from transactions relating to distinct goods or services are accounted for separately based on their
relative stand-alone selling prices. The stand-alone selling price is the price that would be charged for the
goods or service in a separate transaction under similar conditions to similar customers. The transaction price
is determined (considering variable considerations) and allocated to performance obligations based on their
relative stand-alone selling prices. These transactions mainly occur in the segments Diagnosis & Treatment and
Connected Care and include arrangements that require delivery of goods with subsequent installation and
training activities or future goods and services. Depending on the terms of the contract sale, the installation
and training activities could be considered part of the equipment sales. Revenue is recognized when the
performance obligation is satisfied, i.e., when the installation has been completed and the equipment is ready
to be used by the customer in the way contractually agreed.
Variable consideration is included in the transaction price to the extent that it is highly probable that a
significant reversal in the amount of cumulative revenue recognized will not occur once associated
uncertainties are resolved. Such assessment is performed on each reporting date to check whether it is
constrained. For products for which a right of return exists during a defined period, revenue recognition is
determined based on the historical pattern of actual returns, or in cases where such information is not
available, revenue recognition is postponed until the return period has lapsed. Return policies are typically
based on customary return arrangements in local markets. A provision is recognized for assurance-type
product warranty at the time of revenue recognition and reflects the estimated costs of replacement and free-
of-charge services that will be incurred by the company with respect to the products sold. For certain products,
the customer has the option to purchase the warranty separately, which is considered a separate performance
obligation on top of the assurance-type product warranty. For such warranties which provide distinct service,
revenue recognition occurs on a straight-line basis over the extended warranty contract period. Occasionally,
the company may offer a full or partial refund of consideration previously paid. A provision is recognized for
the amounts expected to be refunded to customers, and remeasured at each reporting date to reflect changes
in the estimated refunds, with a corresponding adjustment to revenue.
In the case of loss under a sales agreement, the loss is recognized immediately. Expenses incurred for sales
commissions that are considered incremental to the contracts are recognized immediately in the consolidated
statements of income as selling expenses as a practical expedient under IFRS 15 Revenue from Contracts with
Customers.
The company receives payments from customers based on a billing schedule or credit period, as established in
our contracts. Credit periods are determined based on standard terms, which vary according to local market
conditions. Amounts posted in deferred revenue for which the goods or services have not yet been
transferred to the customer and amounts that have either been received or are due, are presented as Contract
liabilities in the Consolidated balance sheets. Payment terms typically do not exceed 90 days after invoice.
Revenue from sale of goods
Revenues are recognized at either point in time or over time when control of the goods passes to the buyer,
based on the allocation of the transaction price to the performance obligation.
Revenue from services
Revenues are recognized over time as the company transfers control of the services to the customer, which is
demonstrated by the customer simultaneously receiving and consuming the benefits provided by the company.
The amount of revenues is measured by reference to the progress made toward complete satisfaction of the
performance obligation, which in general is evenly over time. Service revenue related to repair and
maintenance activities for goods sold is recognized ratably over the service period or as services are rendered.
Sales from other sources
Revenue includes consideration received from customers under lease arrangements in which the company acts
as lessor. Lease contracts are classified as either finance leases or operating leases.
Finance leases: When substantially all risks and rewards incidental to ownership of the underlying asset are
transferred to the lessee, the lease is classified as a finance lease. For such leases, revenue is recognized at a
point in time.
Operating leases: When the company retains substantially all risks and rewards incidental to ownership, the
lease is classified as an operating lease. Revenue from operating leases is recognized on a straight-line basis
over the lease term.
Income from royalties
Royalty income from brand license arrangements and from intellectual property rights, such as technology
licenses or patents, is recognized on an accrual basis in accordance with the substance of the relevant
agreement and can be over time or point in time.
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the
related service is provided. The company recognizes a liability and an expense for bonuses and incentives
based on a formula that takes into consideration the profit attributable to the company’s shareholders after
certain adjustments.
Accounting policiesDefined contribution plans
A defined contribution plan is a post-employment benefit plan for which the company pays fixed
contributions into a separate entity and will have no legal or constructive obligation to pay further amounts.
Obligations for contributions to defined contribution pension plans are recognized as an employee benefit
expense in the Consolidated statements of income in the periods during which services are rendered by
employees.
Defined benefit plans
A defined benefit plan is a post-employment benefit plan that is not a defined contribution plan. Defined
benefit plans define an amount of pension benefit that an employee will receive after retirement. That
pension benefit typically depends on several factors such as years of service, age and salary.
The net pension asset or liability recognized in the Consolidated balance sheets in respect of defined benefit
plans is the fair value of plan assets less the present value of the projected defined benefit obligation at the
balance sheet date. The defined benefit obligation is calculated annually by qualified actuaries using the
projected unit credit method. Recognized assets are limited to the present value of any reductions in future
contributions or any future refunds. The net pension liability is presented as a long-term provision; no
distinction is made for the short-term portion.
For the company’s major plans, a full discount rate curve of high-quality corporate bonds is used to determine
the defined benefit obligation, where available. The curves are based on the Mercer Yield Curve
methodology, which uses data of corporate bonds rated AA or equivalent. For the other plans, a single point
on the Mercer Yield Curve is used corresponding to the average maturity of the defined benefit obligation. In
countries without a deep corporate bond market, the discount rate is based on government bonds.
Pension costs with respect to defined benefit plans primarily represent the increase of the actuarial present
value of the obligation for post-employment benefits based on employee service during the year and the
interest on the net recognized asset or liability with respect to employee service in previous years.
Remeasurements of the net defined benefit asset or liability comprise actuarial gains and losses, the return on
plan assets (excluding interest) and the effect of the asset ceiling (excluding interest). The company recognizes
all remeasurements in Other comprehensive income.
Past service costs arising from the introduction of a change to the benefit payable under a plan or a
significant reduction of the number of employees covered by a plan (curtailment) are recognized in full in the
Consolidated statements of income.
The company’s net obligation with respect to other long-term employee benefits is the amount of future
benefit that employees have earned in return for their service in the current and prior periods, such as jubilee
entitlements. That benefit is discounted to determine its present value. Remeasurements are recognized in
the Consolidated statements of income in the period in which they arise.
Further information on other long-term employee benefits can be found in Provisions in the Other provisions
section.
Expenses incurred for shipping and handling are mainly recorded as cost of sales. When shipping and
handling are part of a project and billed to the customer, then the related expenses are recorded as cost of
sales. Shipping and handling related to sales to third parties are partly recorded as selling expenses. When
shipping and handling billed to customers are considered a distinct and separate performance obligation, the
fees are recognized as revenue and costs included in cost of sales.
Other business income (expenses) includes gains and losses on the sale of property, plant and equipment,
gains and losses on the sale of businesses, and other gains and losses not related to the company’s operating
activities.
Grants from governments are recognized at their fair value when there is a reasonable assurance that the
grant will be received and the company will comply with the conditions. Grants related to costs are deferred
in the consolidated balance sheet and recognized in the consolidated statement of income as a reduction of
the related costs that they are intended to compensate. Grants related to assets are deducted from the cost of
the asset and presented net in the consolidated balance sheets.
Financial income and expenses are recognized on the accrual basis in the Consolidated statements of income.
Interest income and expense are measured using the effective interest method. Dividend income is recognized
in the consolidated statements of income on the date that the company’s right to receive payment is
established, which in the case of quoted securities is normally the ex-dividend date.
Income taxes comprise current, non-current and deferred tax. Income tax is recognized in the Consolidated
statements of income except to the extent that it relates to items recognized directly within equity or in other
comprehensive income. Current tax is the expected taxes payable on the taxable income for the year, using
tax rates enacted or substantively enacted by the reporting date, and any adjustment to tax payable in respect
of previous years.
In cases where it is concluded it is not probable that tax authorities will accept a tax treatment, the effect of
the uncertainty is reflected in the recognition and measurement of tax assets and liabilities or, alternatively, a
provision is made for the amount that is expected to be settled, where this can be reasonably estimated. This
assessment relies on estimates and assumptions and may involve a series of judgments about future events.
New information may become available that causes the company to change its judgment regarding the
adequacy of existing tax assets and liabilities. Such changes to tax assets and liabilities will impact the income
tax expense in the period during which such a determination is made.
Deferred tax assets and liabilities are recognized, using the consolidated balance sheet method, for the
expected tax consequences of temporary differences between the carrying amounts of assets and liabilities
and the amounts used for taxation purposes. Deferred tax liabilities are not recognized for the following
temporary differences: (a) the initial recognition of goodwill; or (b) the initial recognition of an asset or
liability in a transaction which: (i) is not a business combination, (ii) at the time of transaction, affects neither
accounting profit nor taxable profit (tax loss), (iii) at the time of the transaction, does not give rise to equal
amounts of taxable and deductible differences; or (c) differences relating to investments in subsidiaries, joint
ventures and associates where the reversal of the respective temporary difference can be controlled by the
company and it is probable that it will not reverse in the foreseeable future. Deferred taxes are measured at
the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws
that have been enacted or substantively enacted by the end of the reporting date. Deferred tax assets and
liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they
relate to income taxes levied by the same tax authority on the same taxable entity or on different taxable
entities, but the company intends to settle current tax liabilities and assets on a net basis or their tax assets
and liabilities will be realized simultaneously.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to
the extent that it is probable that there will be future taxable profits against which they can be utilized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the
countries where the deferred tax assets originated and during the periods when the deferred tax assets
become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment.
Deferred tax liabilities are recognized for taxable temporary differences arising from investments in
subsidiaries when those differences are expected to reverse in the foreseeable future, whether due to
withholding taxes or other non-exempt tax consequences. Changes in tax rates and tax laws are reflected in
the period when the change was enacted or substantively enacted by the reporting date. In case of a
subsequent adjustment to a tax asset or liability that originated from a past event for which no specific
arrangements were made at the time of divestment, due to a change in the tax base or its measurement, this
adjustment is allocated back to the component that gave rise to the original component (i.e., backward
tracing). Any subsequent change to the recognition of deferred tax assets is allocated to the component in
which the taxable gain is or will be recognized. The above principles are applied to the extent the
‘discontinued operations’ are sufficiently separable from continuing operations.
Consistent with the IAS 12 amendment regarding Pillar Two taxation as issued by the IASB and adopted by
the EU, Philips does not recognize deferred taxes arising from tax laws that implement Pillar Two model rules
published by the Organisation for Economic Co-operation and Development.
Owned assets
The cost of property, plant and equipment comprise all directly attributable costs (including the cost of
material and direct labor).
Depreciation is generally calculated using the straight-line method over the useful life of the asset. Land and
assets under construction are not depreciated. When assets under construction are ready for their intended
use, they are transferred to the relevant asset category and depreciation starts. All other property, plant and
equipment items are depreciated over their estimated useful lives to their estimated residual values.
The estimated useful lives of property, plant and equipment are:
Philips Group
Useful lives of property, plant and equipment
Buildings | from 5 to 50 years |
Machinery and installations | from 3 to 20 years |
Other equipment | from 1 to 10 years |
Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances
indicate that the book value of the assets concerned may not be recoverable. An impairment loss is
recognized for the amount by which the asset's book value exceeds their recoverable amount. Impairments
are reversed if and to the extent that the impairment no longer exists. The recoverable amount is defined as
the higher of the asset’s fair value less costs of disposal and its value in use.
Gains and losses on the sale of property, plant and equipment are included in other business income. Costs
related to repair and maintenance activities are expensed in the period in which they are incurred unless they
extend the asset's original lifetime or capacity.
Right-of-use assets
The company leases various items of real estate, vehicles and other equipment. The company determines
whether an arrangement constitutes or contains a lease based on the substance of the arrangement at the
lease inception. The arrangement constitutes or contains a lease if fulfillment is dependent on the use of a
specific asset and the arrangement conveys a right to use the asset, even if that asset is not explicitly specified
in the arrangement.
Company as a lessee
The company recognizes right-of-use assets and lease liabilities for leases with a term of more than 12 months
if the underlying asset is not of low value. Payments for short-term and low-value leases are expensed over
the lease term. Extension options are included in the lease term if their exercise is reasonably certain. Right-of-
use assets are measured at cost less accumulated depreciation and impairment losses, adjusted for any
remeasurements. Right-of-use assets are depreciated using the straight-line method over the shorter of the
lease term and the useful life of the underlying assets.
Company as a lessor
When the company acts as a lessor, it determines at lease inception whether a lease is a finance lease or an
operating lease. Leases in which the company does not transfer substantially all the risks and rewards
incidental to ownership of an asset are classified as operating leases. The company recognizes lease payments
received under operating leases as income on a straight-line basis over the lease term in the Consolidated
statement of income.
Accounting policies
The measurement of goodwill at initial recognition is described in the Acquisitions and divestments note.
Goodwill is subsequently measured at cost, less accumulated impairment losses.
Goodwill is not amortized but is instead tested for impairment annually in the fourth quarter, or more
frequently if indicators of potential impairment exist. Internal and external sources of information are
considered to assess if there are indicators that an asset or groups of cash-generating units (CGUs) may be
impaired. Goodwill is allocated to groups of CGUs and tested for impairment at the Business level (one level
below segment), which represents the lowest level at which goodwill is monitored internally for management
purposes. An impairment loss is recognized in the Consolidated statements of income whenever and to the
extent that the carrying amount of a group of CGUs exceeds the recoverable amount for the group of CGUs,
whichever is the greater, its value in use or its fair value less cost of disposal. Value in use is measured as the
present value of future cash flows expected to be generated by the asset. Fair value less cost of disposal is
measured as the amount obtained from the sale of an asset in an arm’s length transaction, less costs of
disposal.
Acquired finite-lived intangible assets are amortized using the straight-line method over their estimated
useful life. The useful lives are evaluated annually. Intangible assets are initially capitalized at cost, with the
exception of intangible assets acquired as part of a business combination, which are capitalized at their
acquisition date fair value.
The company expenses all research costs as incurred. Expenditure on development activities, whereby research
findings are applied to a plan or design for the production of new or substantially improved products and
processes, is capitalized as an intangible asset if the product or process is technically and commercially
feasible, the company has sufficient resources and the intention to complete development and can measure
the attributable expenditure reliably.
The capitalized development expenditure comprises of all directly attributable costs (including the cost of
materials and direct labor). Other development expenditures and expenditures on research activities are
recognized in the Consolidated statements of income. Capitalized development expenditure is stated at cost
less accumulated amortization and impairment losses. Amortization of capitalized development expenditure
is charged to the Consolidated statements of income on a straight-line basis over the estimated useful lives of
the intangible assets.
Philips Group
Expected useful lives of intangible assets excluding goodwill in years
Brand names | 2-20 |
Customer relationships | 2-25 |
Technology | 3-20 |
Other | 1-10 |
Software | 1-10 |
Product development | 3-10 |
The weighted average expected remaining life of brand names, customer relationships, technology and other
intangible assets is 8.2 years as of December 31, 2025 (2024: 8.5 years).
Impairment of intangible assets not yet ready for use
Intangible assets not yet ready for use are not amortized but are tested for impairment annually and whenever
impairment indicators require. In the case of intangible assets not yet ready for use, either internal or external
sources of information are considered to assess if there are indicators that an asset or a CGU may be impaired.
Impairment of non-financial assets other than goodwill, intangible assets not yet ready for use, inventories
and deferred tax assets
Non-financial assets other than goodwill, intangible assets not yet ready for use, inventories and deferred tax
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is assessed by a
comparison of the carrying amount of an asset with the greater of its value in use and fair value less cost of
disposal. Value in use is measured as the present value of future cash flows expected to be generated by the
asset. Fair value less cost of disposal is measured as the amount obtained from a sale of an asset in an arm’s
length transaction, less costs of disposal. If the carrying amount of an asset is deemed not recoverable, an
impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the
recoverable amount. The review for impairment is carried out at the level where cash flows occur that are
independent of other cash flows.
Impairment losses recognized in prior periods for intangible assets other than goodwill are assessed at each
reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is
reversed if and to the extent that there has been a change in the estimates used to determine the recoverable
amount. The loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying
amount that would have been determined, net of depreciation or amortization, if no impairment loss had
been recognized. Reversals of impairment are recognized in the Consolidated statements of income.
Classification and measurement of financial assets
The company applies IFRS 9 in classifying and measuring financial assets. Classification and measurement
depend on the characteristics of the financial asset’s contractual cash flows and the company’s business model
for managing the assets.
The company initially measures a financial asset at its fair value plus, in the case of financial assets other than
those designated at fair value through profit or loss, transaction costs.
For the purposes of subsequent measurement, financial assets are classified into four categories:
•Financial assets at amortized cost: debt instruments held with the objective to collect contractual cash flows,
provided that the cash flows represent solely payments of principal and interest.
•Financial assets at fair value through other comprehensive income (FVTOCI): debt instruments held with the
objective to collect contractual cash flows and sell the financial asset, provided that the cash flows represent
solely payments of principal and interest. Changes in fair value are recognized in OCI and recycled to profit
or loss upon derecognition.
•Financial assets at FVTOCI: equity instruments for which the company made an irrevocable election to
present subsequent changes in their fair value in OCI given that the short-term fair value fluctuations of
these long-term, equity investments are not considered representative of the company’s performance.
Gains and losses are not recycled to profit or loss upon derecognition; however, dividends are recognized in
profit or loss.
•Financial assets at fair value through profit or loss (FVTPL): debt instruments that do not meet the criteria
for amortized cost or FVTOCI, and equity instruments not designated at FVTOCI, are measured at FVTPL.
Changes in fair value are recognized in profit or loss.
Impairment of financial assets
The company recognizes a loss allowance for expected credit losses (ECL) for trade receivables, contract assets,
lease receivables, and debt instruments measured at amortized cost or at FVTOCI.
At each reporting date, the company assesses the credit risk of its financial assets. If, at the reporting date, the
credit risk on a debt instrument has not increased significantly since initial recognition, the company measures
the loss allowance for the financial asset at an amount equal to 12 months of expected credit losses. If, at the
reporting date, the credit risk on a debt instrument has increased significantly since initial recognition, the
company measures the loss allowance for the financial asset at an amount equal to the lifetime-expected
credit losses. For all trade receivables, contract assets and lease receivables the company measures the loss
allowance at an amount equal to lifetime-expected credit losses.
The company recognizes contract assets for revenue earned from installation services because the receipt of
consideration is conditional on successful completion of the installation. Upon completion of the installation
and acceptance by the customer, the amount recognized as contract assets is reclassified to trade receivables.
Other assets are measured at amortized cost minus any impairment losses.
Accounting policies
Inventories are stated at the lower of cost or net realizable value. The cost of inventories comprises all costs of
purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and
condition. The costs of conversion of inventories include direct labor and fixed and variable production
overheads, considering the stage of completion and the normal capacity of production facilities. Costs of idle
facility and abnormal waste are expensed. The cost of inventories is determined using the first-in, first-out
(FIFO) method. The write-down of inventories to net realizable value is included in cost of sales.
Receivables are initially measured at fair value and are subsequently measured at amortized cost if held
within a business model with the objective to collect the contractual cash flows, or at fair value through OCI if
held within a business model with the objective of both holding to collect contractual cash flows and selling.
Receivables are measured less any impairment losses.
Receivables are de-recognized when the company has transferred substantially all risks and rewards, which
includes transactions in which the company enters into factoring transactions, or if the company does not
retain control over the receivables.
Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are
recognized as a deduction from equity. Where the company repurchases the company’s equity share capital
(treasury shares), the consideration paid, including any directly attributable incremental transaction costs (net
of income taxes), is deducted from shareholders’ equity until such treasury shares are cancelled or reissued.
Where such treasury shares are subsequently reissued, any consideration received, net of any directly
attributable incremental transaction costs and the related income tax effects, is included in shareholders’
equity.
Call options on own shares are treated as equity instruments.
Dividends are recognized as a liability in the period in which they are declared and approved by shareholders.
The income tax consequences of dividends are recognized when a liability to pay the dividend is recognized.
Debt
Debt is initially measured at fair value net of directly attributable transaction costs. Subsequently, debt is
measured at amortized cost using the effective interest rate method. Amortized cost is calculated by taking
into account any discount or premium on acquisition and fees or costs that are an integral part of the
effective interest rate. Debt is derecognized when the obligation under the liability is discharged, cancelled or
has expired.
Lease liabilities
Lease liabilities are measured at the present value of the lease payments due over the lease term, generally
discounted using the incremental borrowing rate. Lease liabilities are subsequently measured at amortized
cost using the effective interest rate method. Lease liabilities are remeasured in case of modifications or
reassessments of the lease.
A provision is a liability of uncertain timing or amount. Provisions are recognized if, as a result of a past event,
the company has a present legal or constructive obligation, it is probable that an outflow of economic
benefits will be required to settle the obligation, and the amount can be estimated reliably. Provisions are
measured at the present value of the expenditures expected to be required to settle the obligation using a
pre-tax discount rate that reflects current market assessments of the time value of money. The increase in the
provision due to passage of time (accretion) is recognized as interest expense. Provisions include contingent
consideration and defined benefit obligations (DBO), which represent financial liabilities characterized by
uncertainty regarding their timing or amount.
Restructuring-related provisions
Provisions for severance and termination benefits are recognized for those costs only when the company has a
detailed formal plan for the restructuring and has raised a valid expectation with those affected that it will
carry out the restructuring by starting to implement that plan or announcing its main features to those
affected by it. Before a provision is established, the company recognizes any impairment loss on the assets
associated with the restructuring.
Accrued liabilities are initially measured at fair value and subsequently at amortized cost and are de-
recognized when the obligation under the liability is discharged, cancelled or has expired.
Other liabilities are initially measured at fair value and subsequently at amortized cost and are derecognized
when the obligation under the liability is discharged, cancelled or has expired.
The company recognizes contract liabilities if a payment is received or a payment is due (whichever is earlier)
from a customer before the company transfers the related goods or services. Contract liabilities are
recognized as revenue when the company performs under the contract (i.e., transfers control of the related
goods or services to the customer).
Cash and cash equivalents
Cash and cash equivalents include all cash balances, certain money market funds and short-term highly liquid
investments with an original maturity of three months or less that are readily convertible into known amounts
of cash. Bank overdrafts are included in borrowings in current liabilities.
Cash flow statements
The cash flow statement is prepared using the indirect method. Cash flows related to interest and tax are
included in operating activities. Assets and liabilities acquired as part of a business combination are included
in investing activities (net of cash acquired). Dividends paid to shareholders are included in financing activities.
Dividends received are included in operating activities.
Cash flows arising from transactions in a foreign currency are translated into the company’s functional
currency using the exchange rate at the date of the cash flow. Cash flows from derivative instruments that are
accounted for as cash flow hedges are classified in the same category as the cash flows from the hedged
items. Cash flows from other derivative instruments are classified as investing cash flows.
Contingent liabilities
A contingent liability is a liability of uncertain timing and amount. Contingencies are not recognized in the
balance sheet because they are dependent on the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the company or because the risk of loss is estimated to be
possible but not probable or because the amount cannot be measured reliably.
Contingent assets
Contingent assets are disclosed if the inflow of economic benefits is probable, but not virtually certain. If the
inflow of economic benefits becomes virtually certain, the asset would no longer be contingent and its
recognition appropriate.
Financial guarantees
Philips’ policy is to provide guarantees and other letters of support only in writing. Philips does not stand by
other forms of support. The company recognizes a liability at the fair value of the obligation at the inception
of a financial guarantee contract. The guarantee is subsequently measured at the higher of the best estimate
of the obligation or the amount initially recognized less, when appropriate, cumulative amortization.
Philips’ share-based compensation is an equity-settled plan made of restricted and performance shares. The
restricted shares are subject to a three-year service condition and the performance shares include both market
and non-market-based performance conditions, in addition to a three-year service condition. These shares are
awarded to the Executive Committee and senior management.
The grant date fair value of market-based performance shares is determined through a Monte Carlo valuation
model. The grant date fair value of non-market-based performance shares and restricted shares is determined
as the share price at the grant date as participants receive notional dividends throughout the vesting period.
The costs of share-based compensation plans are revised for expected performance (non-market-based
performance shares) and forfeiture and are spread evenly over the service period.
Share-based compensation is recognized over the service period as personnel expense in the consolidated
statement of income, with a corresponding increase to equity.
Fair value hierarchy
For financial reporting purposes, financial instruments are categorized into Level 1, 2 or 3, based on the
degree to which the inputs to the fair value measurements are observable and the significance of the inputs
to the fair value measurement in its entirety, which are as follows:
•Level 1: inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets that the
company can access at the measurement date
•Level 2: all significant inputs (other than quoted prices included within Level 1) are observable for the asset
or liability, either directly (as prices) or indirectly (derived from prices)
•Level 3: one or more of the significant inputs are not based on observable market data, such as third-party
pricing information without adjustments, for the asset or liability
Transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy are recognized at the end of the
reporting period in which the change occurred. Transfers are made when there is a change in the
observability of inputs, such as:
•Into Level 1: When quoted prices in active markets become available.
•Out of Level 1: When quoted prices are no longer available or markets become inactive.
•Into or out of Level 3: When significant inputs become observable or unobservable.
There were no transfers between levels during the years ended December 31, 2025, and December 31, 2024.
Offsetting and master netting agreements
Financial assets and liabilities are offset and the net amount is reported in the balance sheet when, and only
when, the company currently has a legally enforceable right to set-off the amounts and the group intends
either to settle them on a net basis or to realize the asset and settle the liability simultaneously.
Derivative financial instruments, including hedge accounting
The company uses derivative financial instruments principally to manage its foreign currency risks and, to a
more limited extent, interest rate and commodity price risks. All derivative financial instruments are
accounted for at the trade date and classified as current or non-current assets or liabilities based on the
maturity date or the early termination date. The company measures all derivative financial instruments at fair
value that is derived from the market prices of the instruments, calculated on the basis of the present value of
the estimated future cash flows based on observable interest yield curves, basis spread, credit spreads and
foreign exchange rates, or derived from option pricing models, as appropriate. Gains or losses arising from
changes in fair value of derivatives are recognized in the Consolidated statements of income, except for
derivatives that are highly effective and qualify for cash flow or net investment hedge accounting.
Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash
flow hedge are recorded in other comprehensive income (OCI) until the Consolidated statements of income
are affected by the variability in cash flows of the designated hedged item. To the extent that the hedge is
ineffective, changes in the fair value are recognized in the Consolidated statements of income.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in
the Consolidated statements of income, together with any changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk. The gain or loss relating to the effective portion of interest
rate swaps hedging fixed-rate borrowings is recognized in the Consolidated statements of income, together
with changes in the fair value of the hedged fixed-rate borrowings attributable to interest rate risk. If the
hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged
item for which the effective interest rate method is used is amortized to profit or loss over the period to
maturity using a recalculated effective interest rate.
The company formally assesses, both at the hedge’s inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or
cash flows of hedged items. When it is established that a derivative is not highly effective as a hedge or that it
has ceased to be a highly effective hedge, the company discontinues hedge accounting prospectively. When
hedge accounting is discontinued because a forecasted transaction is expected not to occur, the company
continues to carry the derivative on the Consolidated balance sheets at its fair value, and gains and losses that
were accumulated in OCI are recognized immediately in the same line item as they relate to in the
Consolidated statements of income.
Foreign currency differences arising upon retranslation of financial instruments designated as a hedge of a
net investment in a foreign operation are recognized directly in the currency translation differences reserve
through OCI, to the extent that the hedge is effective. To the extent that the hedge is ineffective, such
differences are recognized in the Consolidated statements of income.