Prudent reporting in high performance periods

Prudent reporting in high performance periods – This is a note on the innovative history of Philips’ financial reporting, see the ‘Introduction to a history of innovation in financial reporting‘.

As a starting point a short history of changes in the Philips’ accounting policies is provided: Prudent reporting in high performance periods

Before 1919

conservative accounting based on historical cost, write-off’s to one guilder, silent reserves, depreciation was treated as a distribution of income

1920 – 1939

a reserve for expansion was created containing money generated by additional paid-in capital (1920), in 1924 patents are capitalized


consolidated balance sheet (since 1931), revaluation reserve created, depreciation of capital expenditures charged to reserves


depreciation based on current fixed costs, business cycle equalization reserve introduced for income smoothing, segmental disclosures


introduction current cost accounting (substantialism): capital maintenance in terms of general purchasing power (1950)


excessive technological price falls of inventory is charged to the profit and loss account (1964)


reductions in the value of stocks resulting from technological improvements are charged now to the revaluation account, just as the deferred taxation relating to revaluations


realized revaluation surplus on assets financed by non-equity capital is credited to income (gearing), deferred income taxes over realized revaluations are accounted for as tax expenses, translation exchange differences are charged to shareholders’ interest, provisions for risks of obsolesce Prudent reporting in high performance periods and bad debt are fixed at the level of the estimated risk end of the year (the silent reserve is abolished), goodwill is transferred directly to stockholders’ equity, cost of pension plans will be based on future wage trends and the expected rate of return of pension assets


current value accounting is abolished for reasons of simplicity and a move to US GAAP (1992), creation of high restructuring provisions for income smoothing reasons (1990, 1991).

The size of Philips’ financial statements measured in pages rose from 8 pages (1912) to 216 pages (2004). Prudent reporting in high performance periods

No other Dutch company adopted so many changes in the accounting principals as Philips did. The many changes over time can be explained by Philips’ business surviving policy: reducing book profits and dividends distribution in booming years (1919-1929, 1949-1979) and increasing the profit in crises years (1930-1948, 1980-2004). In the first half of the 20th century Philips used more hidden reserves (write-offs), in the second part more open reserves (revaluations, provisions). The conclusion is that Philips used a smoothing and internal finance (profit) reporting policy.

Prudent reporting in high performance periods

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