Provisions

Postemployment benefits and obligatory severance payments

The provision for postemployment benefits covers benefits provided to former or inactive employees after employment but before retirement, including salary continuation, supplemental unemployment benefits and disability-related benefits.

The provision for obligatory severance payments covers the Company’s commitment to pay employees a lump sum upon the employee’s dismissal or resignation. In the event that a former employee has passed away, the Company may have a commitment to pay a lump sum to the deceased employee’s relatives.

Product warranty

The provision for product warranty reflects the estimated costs of replacement and free-of-charge services that will be incurred by the Group with respect to products sold. The Group expects the provision will be utilized mostly within the next two years. The changes in the provision for product warranty are as follows:

Loss contingencies (environmental remediation and product liability)

This provision includes accrued losses recorded with respect to environmental remediation and product liability. Half of this provision is expected to be utilized within the next 10 years. The remaining portion, which relates to longer-term remediation activities, is expected to be utilized over approximately 60 years. The asbestos liability has been settled in 2009, please refer to note (24) Contingent liabilities.

The changes in this provision are as follows:

Restructuring- related provisions

The most significant projects in 2009

• Healthcare initiated various restructuring projects aimed at reduction of the fixed cost structure, mainly impacting Imaging Systems (Netherlands), Home Healthcare Solutions and Clinical Care Systems (various locations in the US).
• Consumer Lifestyle restructuring projects focused on Television (primarily Belgium and France), Peripherals & Accessories (mainly Technology & Development in the Netherlands) and Domestic Appliances (mainly Singapore and China).
• Restructuring projects at Lighting aimed at further increasing organizational effectiveness, and centered on Lamps. The largest restructuring projects were in the Netherlands, Belgium, Poland and various locations in the US.
• In Group Management & Services restructuring projects focused on reducing the fixed cost structure of Corporate Research Technologies, Philips Information Technology, Philips Design, and Corporate Overheads.

In 2009, restructuring provisions of EUR 81 million were released, mainly as a result of transferring employees within the Company and the release of a restructuring provision in conjunction with the sale of Hoffmeister (Lighting).

While all these projects have been communicated, the completion of many of these projects will be during 2010 and early 2011, and will affect approximately 5,000 employees.

The movements in the provisions and liabilities for restructuring in 2009 are presented by sector as follows:

The most significant projects in 2008

• Healthcare’s restructuring projects were undertaken to reduce operating costs and simplify the organization. The projects affected many locations, most notably sites in Hamburg (Germany), Helsinki (Finland) and Andover (US).
• Consumer Lifestyle’s main projects primarily relate to the integration of the former DAP and CE businesses, the exit of TV in North America, the restructuring and subsequent sale of the Television factory in Juarez (Mexico) and the optimization of the European supply footprint within almost all businesses.
• In Lighting, over 60 restructuring projects were active during 2008 and a total amount of EUR 156 million was added to the provision and liability for restructuring. A significant portion of the charge related to actions taken to address the ongoing shift from incandescent bulbs to energy-efficient lighting solutions. Other main projects within the Lighting sector included the closure of lamp phosphor production in Maarheeze (the Netherlands), the consolidation of production activities from Fairmont to Salina (US), the reorganization of the wire & lead coiling activities in Turnhout (Belgium) and Maarheeze (the Netherlands), the reorganization of R&D activities within traditional lighting, mainly in Turnhout (Belgium) and Roosendaal (the Netherlands), and the reorganization and staff reductions of the headquarters in Eindhoven (the Netherlands). Other smaller projects in Lighting, in various locations, were aimed at further increasing organizational effectiveness and reducing the fixed cost base.
• Within Group Management & Services, most of the costs relate to the move of the US country organization headquarters from New York to Andover, initiated in 2007, and the restructuring of Assembleon.

The movements in the provisions and liabilities for restructuring in 2008 are presented by sector as follows:

The most significant projects in 2007

• In Lighting; restructuring of the Oss plant in the Netherlands, from mass manufacturing to competence center, and the closure of fluorescent lamp-based LCD backlighting activities.
• Within Group Management & Services: the US country organization headquarters were moved from New York to Andover.

The movements in the provisions and liabilities for restructuring in 2007 are presented by sector as follows:

Other provisions

Other provisions include provisions for employee jubilee funds totaling EUR 77 million (2008: EUR 76 million), self-insurance liabilities of EUR 65 million (2008: EUR 58 million), liabilities related to business combinations totaling EUR 46 million (2008: EUR nil) and provisions for expected losses on existing projects/orders of EUR 10 million (2008: EUR 13 million). The Group expects to utilize the liabilities related to business combinations and the provision for expected losses on existing projects/orders mainly within the next two years. The provisions for employee jubilee funds, the self-insurance liabilities and all other provisions are expected to be mainly utilized within the next 5 years.