Other financial instruments

The Company uses foreign exchange derivatives such as forwards and/or options to manage currency risk. Changes in the value of foreign currency accounts receivable/payable as well as the changes in the fair value of the hedges of accounts receivable/payable are reported in the Consolidated statements of income under Cost of sales. The hedges related to forecasted transactions, where hedge accounting is applied, are recorded as cash flow hedges. The effective part of the fair value changes from such hedges are deferred within Other comprehensive income in Stockholders’ equity. As of December 31, 2009, a gain of EUR 10 million was deferred in Stockholders’ equity as a result of these hedges and during 2009 a gain of EUR 7 million was recorded in the Consolidated statements of income as a result of ineffectiveness of the cash flow hedges.

Changes in the fair value of hedges related to external and intercompany debt and deposits are recognized within Financial income and expenses in the Consolidated statements of income. The changes in the fair value of these hedges related to foreign exchange movements are largely offset in the Consolidated statements of income by changes in the fair value of the hedged items.

The Company does not hedge the exposure arising from translation exposure of net income in foreign entities. Translation exposure of equity invested in consolidated foreign entities financed by equity is partially hedged. If a hedge is entered into, it is accounted for as a net investment hedge. During 2009, Philips recorded a gain of less than EUR 1 million in Other comprehensive income under currency translation differences as a result. Currently, there are no oustanding net investment hedges.

The Company hedges certain commodity price risks using derivative instruments to minimize significant, unanticipated earnings fluctuations caused by commodity price volatility. The commodity price derivatives that Philips enters into are normally concluded as cash flow hedges to offset forecasted purchases.

Philips has two major embedded derivatives included in two convertible notes. One was issued to Philips in September 2005 by TPV Technology Ltd., the face value of the bond being EUR 146 million and the value of the option at year-end EUR 25 million. Changes in the value of the embedded derivative were reported in Financial income and expenses as EUR 17 million gain in 2009. A further convertible bond was issued to Philips in August 2008 by CBAY, the face value of the bond being EUR 67 million and the value of the option at year-end EUR 2 million. Changes in the value of the embedded derivative were reported in Financial income and expenses as a EUR 2 million gain in 2009.

Please refer to Details of treasury risks for Philips’ risk management policies and further details.