Koninklijke Philips N.V. Annual Report 2016

Plain-text annual report

Annual Report2016A focused leaderin health technology2Annual Report 2016ContentsIFRS basis of presentationThe financial information included in this document is based on IFRS, asexplained in note 1, Significant accounting policies, of this report, unlessotherwise indicated.Dutch Financial Markets Supervision ActThis document comprises regulated information within the meaning of theDutch Financial Markets Supervision Act (Wet op het financieel toezicht).Statutory financial statements and management reportThe chapters Group financial statements and Company financialstatements contain the statutory financial statements of the Company. Theintroduction to the chapter Group financial statements sets out which partsof this Annual Report form the Management report within the meaning ofSection 2:391 of the Dutch Civil Code (and related Decrees).Significant developmentsIn September 2014, Philips announced its plan to sharpen its strategicfocus by establishing two stand-alone companies focused on theHealthTech and Lighting opportunities respectively. To this end, a stand-alone structure was established for Philips Lighting within the PhilipsGroup, effective February 1, 2016. Then, on May 27, 2016, Philips Lightingwas listed and started trading on Euronext in Amsterdam under the symbol‘LIGHT’. Following the listing of Philips Lighting, Philips retained a 71.225%stake and continued to consolidate Philips Lighting through 2016. OnFebruary 8, 2017, Philips announced that it had successfully completed anaccelerated bookbuild offering to institutional investors and to PhilipsLighting of 26.0 million shares in Philips Lighting, reducing Philips’ stake inPhilips Lighting’s issued and outstanding share capital from 71.225% toapproximately 55.180%. The transaction is in line with Philips’ statedobjective to fully sell down its stake in Philips Lighting over the next severalyears.Philips has signed an agreement to sell an 80.1% interest in the combinedLumileds and Automotive businesses to certain funds managed byaffiliates of Apollo Global Management, LLC. Philips will retain theremaining 19.9% interest. The transaction is expected to be completed inthe first half of 2017, subject to customary closing conditions, including therelevant regulatory approvals.The integration of Volcano, a US-based global leader incatheter-based imaging and measurement solutions forcardiovascular applications, into our Image-GuidedTherapy business group has been successful, helping todrive synergies and improved performance.1Message from the CEO42Group performance72.1Financial performance72.2Social performance182.3Environmental performance232.4Proposed distribution to shareholders293Segment performance303.1Personal Health businesses323.2Diagnosis & Treatment businesses353.3Connected Care & Health Informatics businesses393.4HealthTech Other433.5Lighting473.6Legacy Items504Reconciliation of non-GAAP information515Risk management555.1Our approach to risk management555.2Risk categories and factors595.3Strategic risks595.4Operational risks615.5Compliance risks635.6Financial risks646Management667Supervisory Board678Supervisory Board report688.1Report of the Corporate Governance andNomination & Selection Committee708.2Report of the Remuneration Committee718.3Report of the Audit Committee778.4Report of the Quality & Regulatory Committee789Corporate governance799.1Board of Management and Executive Committee809.2Supervisory Board839.3General Meeting of Shareholders879.4Meeting logistics and other information899.5Investor Relations91Annual Report 2016310Group financial statements9310.1Management’s report on internal control9410.2Report of the independent auditor9410.3Independent auditors’ report on internal controlover financial reporting9510.4Consolidated statements of income9610.5Consolidated statements of comprehensiveincome9710.6Consolidated balance sheets9810.7Consolidated statements of cash flows10010.8Consolidated statements of changes in equity10110.9Notes102General, segment and main countriesinformation1Significant accounting policies1022Information by segment and main country1173Discontinued operations and other assetsclassified as held for sale1194Acquisitions and divestments1205Interests in entities121Notes related to the income statement6Income from operations1237Financial income and expenses1258Income taxes1259Earnings per share129Notes related to the balance sheet10Property, plant and equipment13011Goodwill13112Intangible assets excluding goodwill13313Other financial assets13414Other assets13415Inventories13516Receivables13517Equity13518Debt13819Provisions14020Post-employment benefits14321Accrued liabilities14822Other liabilities148Notes related to the cash flow statement23Cash flow statement supplementaryinformation14924Contractual obligations149Other notes25Contingent assets and liabilities15026Related-party transactions15327Share-based compensation15328Information on remuneration15629Fair value of financial assets and liabilities16030Details of treasury / other financial risks16331Subsequent events16711Company financial statements16811.1Statements of income16911.2Balance sheets before appropriation of results17011.3Statement of changes in equity17111.4Notes172ASales172BOther business income172CSales and costs by nature172DFinancial income and expense172EIncome tax172FEmployees172GIntangible assets172HFinancial fixed assets172IOther financial assets173JReceivables173KShareholders’ equity173LDebt176MOther current liabilities176NContractual obligations and contingentliabilities not appearing in the balance sheet176OSubsequent events177PAppropriation of profits and profitdistributions17711.5Independent auditor’s report17812Sustainability statements18512.1Approach to sustainability reporting18512.2Economic indicators19212.3Social statements19212.4Environmental statements20212.5Assurance report of the independent auditor20813Five-year overview21014Investor Relations21314.1Key financials and dividend21314.2Share information21514.3Philips’ rating21714.4Performance in relation to market indices21714.5Financial calendar22014.6Investor contact22015Definitions and abbreviations22216Forward-looking statements and otherinformation224Message from the CEO14Annual Report 20161Message from the CEO“We have transformed Philips into a focused leader in healthtechnology, delivering innovation to help people managetheir health and to support care providers in delivering careeffectively.” Frans van Houten, CEO Royal PhilipsDear Stakeholder,I am very excited about the future of Philips as afocused leader in health technology, innovating newapproaches to global health challenges. 2016 was adefining year for our company as we celebrated our125th year as an innovation company and continued toadvance our transformation. Our strategic focus isalready delivering results.We have successfully integrated our Volcano acquisition,achieving multiple quarters of double-digit growth,significant growth synergies with our image-guidedtherapy business, and cost synergies well beyond ouroriginal plans.We separated the Lighting business, executing a complexproject on time and below budget. In May we successfullylisted Philips Lighting on the Amsterdam Euronext stockexchange, giving it the opportunity to build on itsleadership position in the exciting Lighting industry. In itsfirst year as a stand-alone company, Philips Lightingdelivered strong LED sales growth and a significantincrease in profitability, demonstrating the continuedprogress that the largest Lighting company in the industryis making. In February 2017 we further reduced our stakein Philips Lighting’s issued and outstanding share capitalto approximately 55%, in line with our stated aim to fullysell down our stake in Philips Lighting over the next severalyears. Separately, in December we signed an agreementto sell the combined Lumileds and automotive Lightingbusinesses, effectively completing our portfoliotransformation.I am pleased with the momentum in the overall businessperformance of our HealthTech portfolio as our healthtechnology businesses posted 5% comparable salesgrowth1) and a significant increase in profitability. At thesame time, we again stepped up our investments inquality, growth initiatives and innovation.Our solutions approach – where we combine suites ofsystems, smart devices, software and services to help ourcustomers improve patient outcomes and productivity –continues to gain traction, as evidenced by 11% solutionsrevenue growth in the year and our winning 15 new long-term strategic partnerships around the world with anaggregate value of approximately EUR 900 million.In 2016, our products and services improved the lives of 2.1billion people around the world. We also launched our newfive-year ‘Healthy people, sustainable planet’ program,supporting the aim of improving the lives of 3 billion peopleper year by 2025 and becoming carbon-neutral in ouroperations by 2020. And at the World Economic Forum inJanuary 2017 the Chairman of our Supervisory Board and Isigned the Compact for Responsive and ResponsibleLeadership, an initiative to promote and align the long-termsustainability of corporations and the long-term goals ofsociety, with an inclusive approach for all stakeholders.Our overall 2016 performance gives me great confidence forthe future as we build upon outstanding positions in thehospital and the home, expand our solutions capability andcontinue to deliver on the promise of digitization and smart,connected care.Transforming the delivery of careAs consumers take a more active role in managing theirhealth, we see professional healthcare and consumer healthconverging. This provides a tremendous opportunity fortechnology to play a role in data-enabled healthcaredelivery, also supporting the shift from hospital care andacute reactive care to more proactive ambulatory and homecare.Through our market-leading propositions in Personal Health,we have natural touchpoints with consumers to promotehealthy lifestyles, which are critical to good health. Forexample, our Dream Family is a comprehensive solutioncomprising sleep therapy devices, a comfortable mask,therapy management software and services to provide agood night’s sleep for people with obstructive sleep apnea.And our connected Sonicare toothbrushes with smart sensortechnology help to improve oral healthcare through real-time feedback and post-brush analytics.In the hospital we are leading in integrated diagnosticsolutions across various disciplines including radiology,pathology and genomics, combining advanced imagingmodalities and clinical decision support aided by artificialintelligence and practice management software.We are leading in image-guided, minimally invasivetherapies which, compared with open surgery, have thebenefits of reduced patient trauma, shorter recovery times1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Message from the CEO1Annual Report 20165and higher productivity. Our suites of interventional imagingtechnologies and navigation software, combined withinterventional devices such as smart catheters, enablecomplex procedures in cardiology and oncology, forexample. Our enterprise patient monitoring informaticssolutions greatly reduce adverse events for patients andlighten the workload for nurses. And we are increasing ourcontribution to improve population health management withdata analytics and targeted programs to improve healthoutcomes of patient cohorts with multiple co-morbiditiesand to reduce costs.HealthSuite, our secure yet open healthcare Internet ofThings cloud platform, connects patients and millions ofdevices with care providers, supported by powerful artificialintelligence. It ‘connects the dots’, enabling the flow of dataneeded to support first-time-right precision diagnoses andto deliver personalized treatments. At Philips, we believe thiswill improve outcomes, reduce costs and increase well-being.Our initiative to build primary care capacity in developingmarkets through the Community Life Centers has passed itsclinical and practical validation tests and will soon be readyfor further roll-out, with the aim of cost-effectively improvingaccess to care for millions of people.Significant opportunities for value creationOur EUR 17 billion health technology portfolio serves marketsthat offer attractive prospects in terms of growth andprofitability.We see a great opportunity to further improve ouroperational performance and to deal forthrightly with thepossible impact of regulatory investigations. We believe weare making progress in improving our customer excellenceprograms and in strengthening margins through productivity.This is a continuation of our Accelerate! program, where thereis considerable scope for ‘self-help’ by applying the PhilipsBusiness System. We will drive higher productivity bylowering the cost of goods, non-manufacturing cost and thecost of non-quality, while at the same time embedding thedigital transformation in everything we do. Digitization is agreat enabler of cutting-edge value propositions, as well asdriving higher levels of customer service, productivity andquality.Second, we see opportunities to boost growth in ourexisting core health technology businesses. We will dothis by executing more effectively on customerpartnerships, further transforming the business modelfrom ‘transactional’ to one of ‘long-term partnerships’,with shared business goals and recurring revenuestreams. Another proven avenue of growth is viageographical adjacencies. This approach has worked wellin our Personal Health businesses, where we have takenproducts that have been successful in the United Statesor Japan, for example, and brought them into emergingeconomies, where there is a huge appetite for innovationand our brand. We anticipate market share gains inseveral of our businesses, including our DiagnosticImaging business, which has largely overcome theincidents of the past.Third, we are driving future growth and profit expansionwith our shift to solutions. We are investing strongly inresearch and development for value-added, integratedsolutions along the health continuum, most notably in theareas of precision diagnostics, cardiology, oncology,respiratory, and population health.Roadmap to winWhatHowResulting inBetter servecustomersand improveproductivityContinue ‘self-help’ journey toimprove quality, operationalexcellence and productivityContinue to lead the digitaltransformation•Productivity: lower costof goods and non-manufacturing costs•Growth enablersin placeBoost growthin core businessCapture geographic growthopportunitiesPivot to consultative customerpartnerships and business models•Mid-single-digitrevenue growth•Operating leverage•Customer loyaltyBuild winningsolutions alongthe healthcontinuumDrive innovative value-added,integrated solutionsPortfolio extensions throughorganic investments, partnerships,and mergers & acquisitions•Gross margin expansion•Future growthMessage from the CEO16Annual Report 2016We do need to navigate carefully the many potentialgeo-political risks that we see today. Given that wehave a balanced footprint across the world, we believethis is manageable. We are also still exposed to certainrisks from legacy issues, which we aim to manage withstrong focus and care.In conclusionI would like to thank all our customers and stakeholdersfor their continued support. I would also like to paytribute to our teams around the world for theiroutstanding work – and the progress they achieved –in the course of the year.With a strong commitment to continuous improvement,we will deliver the meaningful innovation and qualityour customers expect – and take the next steps on ourjourney to reach our goal of improving the lives of 3billion people a year by 2025!Frans van HoutenChief Executive OfficerGroup performance2Annual Report 201672Group performance“Our strategic focus on health technology and the successfulseparation of Lighting has delivered two winning companiesand a significant improvement in Group performance. Ournet income more than doubled to EUR 1.5 billion while ourincome from operations increased to EUR 1.9 billion fromEUR 1.0 billion in the previous year. Improved earnings andtight management of working capital generated EUR 1.9billion of cash from our operating activities.”Abhijit Bhattacharya, CFO Royal Philips2.1Financial performanceManagement summaryThe year 2016•Sales rose to EUR 17.4 billion, a nominal increase of 4%,in our HealthTech portfolio. On a comparable basis1)sales increased by 5% in our HealthTech portfolio, whichcombines our Personal Health businesses, Diagnosis &Treatment businesses, Connected Care & HealthInformatics businesses, HealthTech Other and LegacyItems. Lighting posted a 5% decline on a nominal basisand a 2% decline on a comparable basis1). Overall, Groupsales increased by 1% on a nominal basis and 3% on acomparable basis1), to EUR 24.5 billion.•Our Personal Health businesses’ sales increased toEUR 7,099 million, an increase of 5% on a nominalbasis. The 7% growth on a comparable basis1) wasdriven by double-digit growth in Health & Wellnessand mid-single-digit growth in Personal Care, Sleep& Respiratory Care and Domestic Appliances.•Our Diagnosis & Treatment businesses’ salesamounted to EUR 6,686 million, an increase of 3% ona nominal basis. The 4% growth on a comparablebasis1) was driven by double-digit growth in Image-Guided Therapy and low-single-digit growth inDiagnostic Imaging, while Ultrasound was in line with2015.•Our Connected Care & Health Informatics businesses’sales rose to EUR 3,158 million, an increase of 5% on anominal basis. The 4% growth on a comparable basis1)was driven by mid-single-digit growth in Patient Care &Monitoring Solutions and low-single-digit growth inHealthcare Informatics, Solutions & Services, partlyoffset by a low-single-digit decline in Population HealthManagement.•Lighting’s operational performance continued toimprove year-on-year. Sales in 2016 were EUR 7,094million. Comparable sales1) reflected double-digitgrowth in LED and Home, which was more than offsetby a double-digit decline in Lamps and a low-single-digit decline in Professional.•In line with our mission to improve people’s lives, wehave embedded sustainability at the heart of ourbusiness processes, and Green Revenues, includingproducts and solutions sales, increased to 64% oftotal revenues in 2016. In recognition of oursustainability achievements, Philips was namedindustry group leader in the Capital Goods categoryin the 2016 Dow Jones Sustainability Index.•Net income amounted to EUR 1.5 billion andincreased by EUR 832 million compared to 2015,driven by improved performance in the HealthTechportfolio and in Lighting as well as the Funaiarbitration award, partly offset by higher financialexpenses and tax charges. Net income is notallocated to segments as certain income andexpense line items are monitored on a centralizedbasis.•EBITA1) totaled EUR 2.2 billion, compared to EUR 1.4billion a year earlier. Our three cost savings programsall delivered ahead of plan in 2016. We achieved EUR269 million of gross savings in overhead costs, EURGroup performance2.18Annual Report 2016418 million of gross savings in procurement, and ourEnd2End process improvement program deliveredproductivity savings of EUR 204 million.•Net cash provided by operating activities increased fromEUR 1.2 billion in 2015 to EUR 1.9 billion, mainly due tohigher earnings and lower outflows related to pension de-risking settlements, partly offset by a EUR 280 millionoutflow related to the Masimo agreements and a EUR 91million premium payment related to the October 2016bond redemption.•As of October 20, 2016, Philips had completed the 3-yearEUR 1.5 billion share buy-back program. During the yearPhilips returned EUR 868 million in dividends and sharesrepurchase.Philips GroupKey data in millions of EUR unless otherwise stated2014 - 20162014 2015 2016 Condensed statement ofincome Sales21,391 24,244 24,516 Income from operations (EBIT)486 992 1,882 as a % of sales2.3% 4.1% 7.7% EBITA 1)821 1,372 2,235 as a % of sales3.8% 5.7% 9.1% Financial income and expenses(301)(369)(493)Income tax expense(26)(239)(327)Investments in associates62 30 13 Income from continuingoperations221 414 1,075 Income from Discontinuedoperations - net of income tax190 245 416 Net income411 659 1,491 Other indicators Net income attributable toshareholders per common sharein EUR: basic0.45 0.70 1.58 diluted0.45 0.70 1.56 Net cash provided by operatingactivities1,303 1,167 1,904 Net capital expenditures(806)(842)(831)Employees (FTEs)113,678 112,959 114,731 Continuing operations105,365 104,204 105,223 Discontinued operations8,313 8,755 9,508 2.1.1SalesThe composition of sales growth in percentage terms in2016, compared to 2015, is presented in the tablebelow.Philips GroupSales growth composition in %2016 versus 2015nominalgrowth currencyeffects consoli-dationchanges compa-rablegrowth1)Personal Health5.2 2.0 0.0 7.2 Diagnosis &Treatment3.1 0.9 (0.4)3.6 Connected Care& HealthInformatics4.5 0.1 (0.1)4.5 HealthTech Other(5.0)0.0 0.0 (5.0)Lighting(4.6)2.1 0.2 (2.3)Philips Group1.1 1.4 0.2 2.7 Group sales amounted to EUR 24,516 million in 2016,which represents 1% nominal growth compared to 2015.Adjusted for a 2% negative currency effect andconsolidation impact, comparable sales1) were 3%above 2015.Our Personal Health businesses’ sales amounted toEUR 7,099 million, which was EUR 348 million higherthan in 2015, or 5% higher on a nominal basis. The 7%growth on a comparable basis1) was drive by double-digit growth in Health & Wellness, and mid-single-digitgrowth in Personal Care, Domestic Appliances andSleep & Respiratory Care. From a geographicperspective, on a comparable basis1) both mature andgrowth geographies, achieved high-single-digitgrowth.Our Diagnosis & Treatment businesses’ sales amountedto EUR 6,686 million, which was EUR 202 million higherthan in 2015, or 3% higher on a nominal basis. The 4%growth on a comparable basis1) was driven by double-digit growth in Image-Guided Therapy, low-single-digitgrowth in Diagnostic Imaging, while Ultrasound was inline with 2015. From a geographic perspective,comparable sales1) in growth geographies showeddouble-digit growth, while mature geographies saleswere in line with 2015.Our Connected Care & Health Informatics businesses’sales amounted to EUR 3,158 million, which was EUR136 million higher than in 2015, or 5% higher on anominal basis. The 4% growth on a comparable basis1)reflected mid-single-digit growth in Patient Care &Monitoring Solutions, low-single-digit growth inHealthcare Informatics, Solutions & Services and a low-single-digit decline in Population Health Management.From a geographic perspective, comparable sales1) inmature geographies showed mid-single-digit growth,while growth geographies sales reported low-single-digit growth.Lighting sales amounted to EUR 7,094 million, whichwas EUR 344 million lower than in 2015 and 5% loweron a nominal basis. The 2% decline on a comparablebasis1) reflected double-digit growth in LED and Home,which was more than offset by an anticipated double-digit decline at Lamps and a low-single-digit decline at1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Group performance2.1.2Annual Report 20169Professional. From a geographic perspective,comparable sales1) showed a low-single-digit decline ingrowth and mature geographies.HealthTech Other reported sales of EUR 478 million,which reflected EUR 38 million lower royalty incomedue to the foreseen expiration of licenses, partly offsetby one-time patent license deals and strong double-digit growth in Emerging Businesses.2.1.2EarningsIn 2016, Philips’ gross margin was EUR 10,612 million, or43.3% of sales, compared to EUR 9,856 million, or40.7% of sales, in 2015. Gross margin in 2016 includedEUR 107 million of restructuring and acquisition-relatedcharges, whereas 2015 included EUR 176 million ofrestructuring and acquisition-related charges. 2016also included a EUR 12 million net release of provisionsand EUR 4 million of charges related to the separationof the Lighting business. Gross margin in 2015 alsoincluded charges of EUR 35 million related to thedevaluation of the Argentine peso, a EUR 28 millioncurrency revaluation of the provision for the Masimolitigation and EUR 3 million related to the separation ofthe Lighting business. The year-on-year increase wasdriven by improved performance in the HealthTechportfolio and in Lighting, as well as lower restructuringand acquisition-related charges.Selling expenses increased from EUR 5,815 million in2015 to EUR 5,888 million in 2016. Selling expenses asa % of total sales remained in line with 2015 at 24.0%.Selling expenses in 2016 included EUR 67 million ofrestructuring and acquisition-related charges,compared to EUR 62 million of restructuring andacquisition-related charges in 2015. Selling expenses in2016 included EUR 38 million related to the separationof the Lighting business, while 2015 included charges ofEUR 31 million related to a legal provision and EUR 69million related to the separation of the Lightingbusiness.Research and development costs increased from EUR1,927 million, or 7.9% of sales, in 2015 to EUR 2,021million, or 8.2% of sales, in 2016. Research anddevelopment costs in 2016 included EUR 34 million ofrestructuring and acquisition-related charges,compared to EUR 16 million in 2015. The year-on-yearincrease was mainly due to higher spend in thePersonal Health businesses and Diagnosis & Treatmentbusinesses, as well as higher restructuring andacquisition-related charges.General and administrative expenses amounted to EUR845 million, or 3.4% of sales, in 2016, compared to EUR1,209 million, or 5.0% of sales, in 2015. 2016 includedEUR 5 million of restructuring and acquisition related-charges, compared to EUR 30 million in 2015. 2016 alsoincluded charges of EUR 109 million related to theseparation of the Lighting business, a EUR 26 millionimpairment of real estate assets, as well as a EUR 46million gain from the settlement of a pension-relatedclaim. 2015 also included charges of EUR 345 millionmainly related to settlements for pension de-riskingand EUR 111 million related to the separation of theLighting business.The overview below shows sales, income fromoperations (EBIT) and EBITA1) according to the 2016segment classifications.Philips GroupSales, Income from operations (EBIT) and EBITA1)in millions of EUR unless otherwise stated2015 - 2016Sales Incomefromopera-tions(EBIT) % EBITA1)% 2016 Personal Health7,099 953 13.4% 1,092 15.4% Diagnosis &Treatment6,686 546 8.2% 594 8.9% Connected Care &Health Informatics3,158 275 8.7% 322 10.2% HealthTech Other478 (129) (120) Lighting7,094 432 6.1% 542 7.6% Legacy Items1 (195) (195) Philips Group24,516 1,882 7.7% 2,235 9.1% 2015 Personal Health6,751 736 10.9% 885 13.1% Diagnosis &Treatment6,484 322 5.0% 377 5.8% Connected Care &Health Informatics3,022 173 5.7% 227 7.5% HealthTech Other503 49 64 Lighting7,438 334 4.5% 441 5.9% Legacy Items46 (622) (622) Philips Group24,244 992 4.1% 1,372 5.7% 1)Non-GAAP financial measure. For the definition and reconciliation to themost directly comparable GAAP measure, refer to chapter 4,Reconciliation of non-GAAP information, of this Annual Report.In 2016, income from operations (EBIT) increased byEUR 890 million year-on- year to EUR 1,882 million, or7.7% of sales. Restructuring and acquisition-relatedcharges amounted to EUR 213 million, compared to EUR283 million in 2015. Income from operations (EBIT) in2016 also included EUR 152 million of charges relatedto the separation of the Lighting business, a EUR 26million impairment of real estate assets, a EUR 12 millionnet release of provisions and a EUR 46 million gain fromthe settlement of a pension-related claim. Income fromoperations (EBIT) in 2015 also included charges of EUR183 million related to the separation of the Lightingbusiness, EUR 345 million mainly related to settlementsfor pension de-risking, EUR 35 million related to thedevaluation of the Argentine peso, EUR 31 millionrelating to legal provisions, EUR 28 million related to thecurrency revaluation of the provision for the Masimolitigation, and a EUR 37 million gain related to the saleof real estate assets.Amortization and impairment of intangibles, excludingsoftware and capitalized product development costs,amounted to EUR 350 million in 2016, compared to EUR1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Group performance2.1.310Annual Report 2016380 million in 2015. In 2016, goodwill impairmentcharges amounted to EUR 3 million consisting ofimpairments on divested businesses in Lighting, seenote 11, Goodwill. In 2015 goodwill impairment chargeswere nil.EBITA1) increased from EUR 1,372 million, or 5.7% ofsales, in 2015 to EUR 2,235 million, or 9.1% of sales, in2016. The year-on-year increase was driven byimproved performance at all segments exceptHealthTech Other.Personal Health businessesIn 2016, income from operations (EBIT) totaled EUR 953million, compared to EUR 736 million in 2015. EBITA1)amounted to EUR 1,092 million, or 15.4% of sales,compared to EUR 885 million, or 13.1% of sales, in 2015.EBITA1) included restructuring and acquisition-relatedcharges of EUR 16 million, compared to EUR 37 millionin 2015. EBITA1) in 2015 also included charges of EUR 31million relating to legal provisions and charges of EUR13 million related to the devaluation of the Argentinepeso. The year-on-year increase was mainlyattributable to higher volumes and cost productivity.Diagnosis & Treatment businessesIn 2016, income from operations (EBIT) totaled EUR 546million, compared to EUR 322 million in 2015. EBITA1)amounted to EUR 594 million, or 8.9% of sales,compared to EUR 377 million, or 5.8% of sales, in 2015.EBITA1) included restructuring and acquisition-relatedcharges of EUR 37 million, compared to EUR 131 millionin 2015. 2015 also included charges of EUR 7 millionrelated to the devaluation of the Argentine peso. Theyear-on-year increase was largely driven by Image-Guided Therapy and Diagnostic Imaging, as well aslower restructuring and acquisition-related charges.Connected Care & Health InformaticsbusinessesIn 2016, income from operations (EBIT) totaled EUR 275million, compared to EUR 173 million in 2015. EBITA1)amounted to EUR 322 million, or 10.2% of sales,compared to EUR 227 million, or 7.5% of sales, in 2015.EBITA1) included restructuring and acquisition-relatedcharges of EUR 14 million, compared to EUR 38 millionin 2015. 2016 also included a EUR 12 million net releaseof provisions, while 2015 also included a EUR 28 millioncharge related to the currency revaluation of theMasimo provisions and charges of EUR 1 million relatedto the devaluation of the Argentine peso. The increasewas mainly driven by higher volumes and lowerrestructuring and acquisition-related charges and otheritems, partly offset by higher expenditure oninnovation.HealthTech OtherIn 2016, income from operations (EBIT) totaled EUR(129) million, compared to EUR 49 million in 2015.EBITA1) amounted net cost of EUR 120 million,compared to a gain of EUR 64 million in 2015. EBITA1)included restructuring and acquisition-related chargesof EUR 28 million and a EUR 26 million impairment ofreal estate assets, compared to a net restructuringrelease of EUR 19 million and a EUR 37 million gainrelated to the sale of real estate assets in 2015. Theyear-on-year decrease was mainly attributable tohigher restructuring and acquisition-related chargesand other items, investments in Emerging Businesses,brand campaigns and cyber security.LightingIn 2016, income from operations (EBIT) totaled EUR 432million, compared to EUR 334 million in 2015. EBITA1)amounted to EUR 542 million, or 7.6% of sales, a year-on-year increase of EUR 101 million. Restructuring andacquisition-related charges in 2016 amounted to EUR119 million, compared to EUR 97 million in 2015. EBITA1)in 2016 also included a gain of EUR 14 million related toa release of provisions originating from the separationactivities, compared to EUR 14 million of chargesrelated to the devaluation of the Argentine peso in 2015.The increase was mainly attributable to cost reductionprograms and an increase in gross margin, partly offsetby higher restructuring and acquisition-relatedcharges.Legacy ItemsIncome from operations (EBIT) mainly included EUR 152million of charges related to the separation of theLighting business, a EUR 14 million charge related toprovisions originating from the separation of theLighting business, EUR 9 million of costs of addressinglegacy issues related to environmental provisions, EUR4 million of pension costs, EUR 36 million of strandedcosts related to the combined Lumileds andAutomotive businesses, EUR 11 million of chargesrelated to various provisions, as well as a EUR 46 milliongain from the settlement of a pension-related claim.Income from operations (EBIT) in 2015 included EUR345 million of settlements mainly related to pensionde-risking.2.1.3Advertising and promotionPhilips’ total advertising and promotion expenses wereEUR 1,085 million in 2016, an increase of 9% comparedto 2015. The increase was mainly due to investments inkey mature geographies such as the United States andJapan, as well as Germany. The total advertising andpromotion investment as a percentage of sales was4.4% in 2016, compared to 4.1% in 2015.Philips’ brand value increased by 4% to over USD 11.3billion as measured by Interbrand. In the 2016 listing,Philips is ranked the 41st most valuable brand in theworld.1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Group performance2.1.4Annual Report 201611Philips GroupAdvertising and promotion expenses in millions of EUR2012 - 2016829‘12869‘13913‘141,000‘151,085Advertising and promotionexpenses‘163.7%4.0%4.3%4.1%4.4%As a % of sales2.1.4Research and developmentResearch and development costs increased from EUR1,927 million in 2015 to EUR 2,021 million in 2016.Research and development costs in 2016 included EUR35 million of restructuring and acquisition-relatedcharges, compared to EUR 16 million in 2015. The year-on-year increase was mainly due to higher spend at thePersonal Health businesses and the Diagnosis &Treatment businesses. As a percentage of sales,research and development costs increased from 7.9%in 2015 to 8.2% in 2016.Philips GroupResearch and development expenses in millions of EUR2012 - 20161,724‘121,659‘131,635‘141,927‘152,021Research and developmentexpenses‘167.8%7.5%7.6%7.9%8.2%As a % of salesPhilips GroupResearch and development expenses in millions of EUR2014 - 20162014 2015 2016 Personal Health332 383 412 Diagnosis & Treatment455 596 629 Connected Care & HealthInformatics289 386 388 HealthTech Other153 189 219 Lighting395 365 350 Legacy Items11 8 23 Philips Group1,635 1,927 2,021 2.1.5PensionsIn 2016, the total costs of post-employment benefitsamounted to EUR 53 million for defined-benefit plansand EUR 382 million for defined-contribution plans,compared to EUR 559 million and EUR 293 millionrespectively in 2015.The above costs are reported in Income fromoperations except for the net interest cost componentwhich is reported in Financial expense. The net interestcost for defined-benefit plans was EUR 66 million in2016 (2015: EUR 72 million).2016 included a legal claim settlement gain of EUR 46million related to the UK pension plan, a EUR 8 millionsettlement gain related to de-risking actions in the USand a combined settlement loss of EUR 2 million inother countries. Past-service cost gains of EUR 8 millionwere recognized in 2016 relating to a number of smallplan changes.2015 included settlement costs of EUR 329 millionmainly related to the settlement of the UK plan, resultsof other de-risking actions in the UK prior to thesettlement and the settlement of parts of the USpension plan. Past-service costs of EUR 14 million wererecognized related to de-risking actions taken in the UKprior to the settlement of the plan, including a past-service cost for GMP Equalization in the same UK plan.Some smaller plan changes in other countries resultedin a small past-service cost gain.In 2015, the total costs of post-employment benefitsamounted to EUR 559 million for defined-benefit plansand EUR 293 million for defined-contribution plans,compared to EUR 241 million and EUR 144 millionrespectively in 2014.The overall funded status improved in 2016, mainly dueto contributions of EUR 250 million in the US, partlyoffset by an increase of the defined-benefit obligationdue to lower discount rates. The pension deficitrecognized in the balance sheet decreased for the samereasons.For further information, refer to note 20, Post-employment benefits.2.1.6Restructuring and impairment chargesIn 2016, income from operations (EBIT) included netcharges totaling EUR 173 million for restructuring. Inaddition to the annual goodwill-impairment tests forPhilips, trigger-based impairment tests were performedduring the year, resulting in a goodwill impairment ofEUR 3 million.In 2015, income from operations (EBIT) included netcharges totaling EUR 171 million for restructuring andthe goodwill impairment was nil.For further information on sensitivity analysis, pleaserefer to note 11, Goodwill.Group performance2.1.712Annual Report 2016In 2016, the most significant restructuring projects weremainly related to Lighting and HealthTech Other.Restructuring projects at HealthTech Other were mainlyto overhead cost reduction programs and took place inthe Netherlands. Restructuring projects at Lighting wererelated to manufacturing footprint rationalization andsimplification of the business structure, and mainly tookplace in France and Belgium.In 2015, the most significant restructuring projects wererelated to Lighting, Diagnosis & Treatment businessesand Connected Care & Health Informatics businesses .For further information on restructuring, refer to note 19,Provisions.Philips GroupRestructuring and related charges in millions of EUR2014 - 20162014 2015 2016 Restructuring and related charges persegment: Personal Health16 38 16 Diagnosis & Treatment47 25 6 Connected Care & Health Informatics31 37 9 HealthTech Other58 (20)27 Lighting262 90 115 Legacy Items- 1 - Continuing operations414 171 173 Discontinued operations18 5 5 Cost breakdown of restructuring andrelated charges: Personnel lay-off costs354 194 158 Release of provision(36)(88)(61)Restructuring-related assetimpairment57 46 38 Other restructuring-related costs39 19 38 Continuing operations414 171 173 Discontinued operations18 5 5 2.1.7Financial income and expensesA breakdown of Financial income and expenses ispresented in the table below.Philips GroupFinancial income and expenses in millions of EUR2014 - 20162014 2015 2016 Interest expense (net)(251)(302)(327)Sale of securities60 20 3 Impairments(17)(46)(27)Other(93)(41)(142)Financial income and expenses(301)(369)(493)Net interest expense in 2016 was EUR 25 million higherthan in 2015, mainly driven by higher interest expenseresulting from higher average debt.Impairments amounted to EUR 27 million, mainly dueto Corindus Vascular Robotics.Other financial expense amounted to EUR 142 million in2016, primarily consisting of financial charges related tothe early redemption of USD bonds in October 2016and January 2017.For further information, refer to note 7, Financialincome and expenses.2.1.8Income taxesIncome taxes amounted to EUR 327 million, comparedto EUR 239 million in 2015. The effective income tax ratein 2016 was 23.5%, compared to 38.4% in 2015. Thedecrease was largely due to a change in thegeographical mix of actual profits and one-off taxbenefits in 2016 mainly relating to recognition ofdeferred tax assets.For 2017, we expect our effective tax rate to be around30%. However, the actual rate will depend on thegeographical mix of profits.For further information, refer to note 8, Income taxes.2.1.9Results of investments in associatesResults related to investments in associates decreasedfrom a gain of EUR 30 million in 2015 to a gain of EUR13 million in 2016, mainly reflecting the proceeds fromthe sale of Assembléon Technologies B.V. in 2015.For further information, refer to note 5, Interests inentities.2.1.10Non-controlling interestsNet income attributable to non-controlling interestsincreased from EUR 14 million in 2015 to EUR 43 millionin 2016, mainly as a result of the sale of the 28.775%minority interest in Philips Lighting.2.1.11Discontinued operationsDiscontinued operations consist primarily of thecombined businesses of Lumileds and Automotive, theAudio, Video, Multimedia & Accessories business, andcertain divestments formerly reported as Discontinuedoperations. The results related to these businesses arereported under Discontinued operations in theConsolidated statements of income and Consolidatedstatements of cash flows.In 2014, Philips announced the start of the process tocombine the Lumileds and Automotive Lightingbusinesses into a stand-alone company and explorestrategic options to attract capital from third-partyinvestors for this combined business.In January 2016, Philips announced that the transactionwith Go Scale Capital had been terminated despiteefforts to mitigate the concerns of the Committee onForeign Investment in the United States (‘CFIUS’).Philips announced December 12, 2016 that it has signedan agreement to sell an 80.1% interest in Lumileds, aleading supplier of LED components and automotiveGroup performance2.1.12Annual Report 201613lighting, to certain funds managed by affiliates of ApolloGlobal Management, LLC (NYSE: APO). Philips willretain the remaining 19.9% interest in Lumileds.Philips GroupNet income of Discontinued operationsin millions of EUR unless otherwise stated2014 - 20162014 2015 2016 The combined Lumileds andAutomotive businesses141 246 282 Other49 (1)134 Net income of Discontinuedoperations190 245 416 In 2016, income from Discontinued operationsincreased by EUR 171 million to EUR 416 million. Theyear-on-year increase was mainly due to improvedresults of the combined Lumileds and Automotivebusinesses, which were driven by higher sales andimprovements in Gross margin, and the Funaiarbitration award of EUR 144 million, which includesdisbursements and interest as compensation fordamages.In 2015, income from Discontinued operationsincreased by EUR 55 million to EUR 245 million. Theyear-on-year increase was mainly due to the positiveimpact from the treatment of depreciation andamortization of assets held for sale of the combinedLumileds and Automotive businesses.For further information, refer to note 3, Discontinuedoperations and other assets classified as held for sale.2.1.12Net incomeNet income increased from EUR 659 million in 2015 toEUR 1,491 million in 2016. The increase was largely dueto higher income from operations (EBIT) of EUR 890million and net income from Discontinued operationsof EUR 171 million, partly offset by higher financialcharges of EUR 124 million, higher income tax chargesof EUR 88 million and EUR 17 million lower net incomefrom investments in associates.Basic earnings per common share from net incomeattributable to shareholders increased from EUR 0.70per common share in 2015 to EUR 1.58 per commonshare in 2016.2.1.13Acquisitions and divestmentsAcquisitionsIn 2016, Philips completed two acquisitions, the largestbeing Wellcentive, a leading US-based provider ofpopulation health management software solutions.Acquisitions in 2016 and prior years led to post-mergerintegration charges of EUR 31 million in the Diagnosis &Treatment businesses, EUR 4 million in the ConnectedCare & Health Informatics businesses and EUR 3 millionin Lighting.In 2015, Philips completed four acquisitions, the largestbeing Volcano Corporation, an image-guided therapycompany based in the United States, and Blue JayConsulting, a leading provider of hospital emergencyroom consulting services. Acquisitions in 2015 and prioryears led to post-merger integration charges of EUR 107million, mainly in the Diagnosis & Treatmentbusinesses, and EUR 5 million in Lighting.In 2014, Philips acquired Unisensor, a Danish healthcarecompany, and a 51% interest in General LightingCompany (GLC) based in the Kingdom of Saudi Arabia.Philips also purchased some minor magneticresonance imaging (MRI) activities from Hologic, a UShealthcare company. Acquisitions in 2014 and prioryears led to post-merger integration charges of EUR 1million in the Diagnosis & Treatment businesses, EUR 1million in the Personal Health businesses and EUR 19million in Lighting.DivestmentsIn 2016, Philips completed six divestments, mainlyseveral small businesses within Lighting.In 2015, Philips completed seven divestments, whichincluded, the sale of Assembléon Holding B.V., OEMRemote Controls, Axsun Technologies LLC, and severalsmall businesses within the HealthTech portfolio andLighting.In 2014, Philips completed the divestment of itsLifestyle Entertainment activities to Gibson Brands Inc.Philips also completed two other divestments ofbusiness activities which related to the HealthTechportfolio and Lighting activities.For details, please refer to note 4, Acquisitions anddivestments.2.1.14Performance by geographic clusterIn 2016, sales increased 1% nominally, largely due tounfavorable foreign exchange impacts, and 3% on acomparable basis1), driven by 5% comparable salesgrowth1) in the HealthTech portfolio.Sales in mature geographies were EUR 312 millionhigher than in 2015, or 2% higher on both a nominal andcomparable basis1). Sales in Western Europe were 2%higher than in 2015, with growth in the Diagnosis &Treatment businesses and Personal Health businesses,partly offset by a decline in the Connected Care &Health Informatics businesses and Lighting. Sales inNorth America increased by EUR 166 million, or 2% ona comparable basis1). Comparable sales1) in othermature geographies showed a 2% increase, with growthin the Connected Care & Health Informatics businessesand Personal Health businesses, while Diagnosis &Treatment businesses declined 1% and Lighting was inline with 2015.Group performance2.1.1514Annual Report 2016In growth geographies, sales were flat year-on-year ona nominal basis. The 5% increase on a comparablebasis1)reflected double-digit growth in the Diagnosis &Treatment businesses, high-single-digit growth in thePersonal Health businesses and low-single-digitgrowth in the Connected Care & Health Informaticsbusinesses, partly offset by a low-single digit decline atLighting. The increase was driven by double-digitgrowth in Central & Eastern Europe, high-single-digitgrowth in Latin America and mid-single-digit growth inChina, partly offset by a mid-single-digit decline inMiddle East & Turkey.Philips GroupComparable sales growth by geographic cluster1) in %2014 - 2016(1.3)‘141.5‘151.8‘16mature geographies0‘143.5‘154.5‘16growth geographies(0.9)‘142.2‘152.7‘16Philips Group1)Non-GAAP financial measure. For the definition and reconciliation to themost directly comparable GAAP measure, refer to chapter 4,Reconciliation of non-GAAP information, of this Annual Report.Philips GroupSales by geographic cluster in millions of EUR2014 - 20165,6656,6781,6617,38721,391‘145,8868,0951,8558,40824,244‘155,886Western Europe8,261North America2,001Other mature8,368Growth24,516‘162.1.15Net cash provided by (used for) continuingoperationsNet cash provided by operating activitiesNet cash provided by operating activities amounted toEUR 1,904 million in 2016, which was EUR 737 millionhigher than in 2015, mainly due to higher earnings, netimprovements in accounts payable, accrued liabilitiesand other current liabilities, receivables and othercurrent assets and inventories related inflows and thehigher outflows recorded in 2015 related to CRTlitigation claims and pension de-risking settlements.Philips GroupNet cash provided by operating activities and net capitalexpenditures in millions of EUR2012 - 20161,886(241)‘12912(830)‘131,303(806)‘141,167(842)‘151,904Net cash provided byoperating activities(831)Net capital expenditures‘16Condensed consolidated statements of cash flows forthe years ended December 31, 2014, 2015 and 2016 arepresented below:Philips GroupCondensed consolidated cash flow statements1)in millions of EUR2014 - 20162014 2015 2016 Net cash provided by operatingactivities1,303 1,167 1,904 Net cash used for investingactivities(984)(1,941)(1,167)Net capital expenditures(806)(842)(831)Other investing cash flows(178)(1,099)(336)Net cash provided by (used for)financing activities(1,189)508 (420)Net cash provided by (used for)continuing operations(870)(266)317 Net cash provided by (used for)Discontinued operations193 79 268 Effect of changes in exchange rateson cash and cash equivalents85 80 (17)Total change in cash and cashequivalents(592)(107)568 Cash and cash equivalents at thebeginning of year2,465 1,873 1,766 Cash and cash equivalents at theend of year1,873 1,766 2,334 1)Please refer to section 10.7, Consolidated statements of cash flows, ofthis Annual ReportNet cash used for investing activitiesOther investing cash flowsIn 2016, acquisitions of businesses (includingacquisition of investments in associates) amounted toa cash outflow of EUR 202 million.Net cash proceeds from divestment of businessesamounted to EUR 31 million and were received mainlyfrom divested businesses held for sale.Net cash outflow from non-current financial assets ofEUR 45 million was mainly due to the acquisition ofstakes in investment funds.1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Group performance2.1.16Annual Report 201615EUR 120 million net cash used for derivatives andcurrent financial assets was mainly due to EUR 132million cash paid with respect to foreign exchangederivative contracts related to activities for liquiditymanagement funding.In 2015, acquisitions of businesses (includingacquisition of investments in associates) amounted toa cash outflow of EUR 1,116 million which was mainlyrelated to the acquisition of Volcano.Net cash proceeds from divestment of businessesamounted to EUR 57 million and were received mainlyfrom the divestment of Assembleon Holding B.V., theOEM remote control business and Axsun TechnologiesLLC.Net cash inflow from non-current financial assets ofEUR 32 million was mainly due to the sale of stakes inSilicon & Software Systems and other equity interest.EUR 72 million net cash used for derivatives and currentfinancial assets was mainly due to EUR 193 million cashpaid with respect to foreign exchange derivativecontracts related to activities for liquidity managementfunding, partially offset by EUR 121 million received withrespect to current financial assets mainly related to TPVTechnology Limited loans.Net cash (used for) provided by financingactivitiesNet cash used for financing activities in 2016 was EUR420 million. Philips’ shareholders were given EUR 732million in the form of a dividend, of which the cashportion of the dividend amounted to EUR 330 million.The net impact of changes in debt was a decrease ofEUR 377 million. Additionally, net cash outflows forshare buy-back and share delivery totaled EUR 526million.Net cash provided by financing activities in 2015 wasEUR 508 million. Philips’ shareholders were given EUR730 million in the form of a dividend, of which the cashportion of the dividend amounted to EUR 298 million.The net impact of changes in debt was an increase ofEUR 1,231 million. Additionally, net cash outflows forshare buy-back and share delivery totaled EUR 425million.2.1.16Cash flows from discontinued operationsIn 2016, cash inflow from Discontinued operations asreported within operating activities amounted to EUR268 million, mainly attributable to a cash inflow of EUR148 million from the Automotive and Lumiledsbusinesses and a cash inflow from the Audio, Video,Multimedia & Accessories business of EUR 119 million.In 2015, cash inflow from Discontinued operations asreported within operating activities amounted to EUR79 million, mainly attributable to a cash inflow of EUR115 million from the Automotive and Lumiledsbusinesses, offset by a cash outflow from the Audio,Video, Multimedia & Accessories business of EUR 37million.2.1.17FinancingCondensed consolidated balance sheets for the years2014, 2015 and 2016 are presented below:Philips GroupCondensed consolidated balance sheet1) in millions of EUR2014 - 20162014 2015 2016 Intangible assets10,526 12,216 12,450 Property, plant and equipment2,095 2,322 2,155 Inventories3,314 3,463 3,392 Receivables5,040 5,287 5,636 Assets held for sale1,613 1,809 2,180 Other assets3,891 4,113 4,156 Payables(5,282)(5,604)(6,028)Provisions3)(4,517)(4,243)(3,606)Liabilities directly associatedwith assets held for sale(349)(407)(525)Other liabilities3)(3,132)(3,182)(3,030)Net asset employed13,199 15,774 16,780 Cash and cash equivalents1,873 1,766 2,334 Debt(4,104)(5,760)(5,606)Net debt2)(2,231)(3,994)(3,272)Non-controlling interests(101)(118)(907)Shareholders’ equity(10,867)(11,662)(12,601)Financing(13,199)(15,774)(16,780)1)Please refer to section 10.6, Consolidated balance sheets, of this AnnualReport2)Non-GAAP financial measure. For the definition and reconciliation to themost directly comparable GAAP measure, refer to chapter 4,Reconciliation of non-GAAP information, of this Annual Report.3)Adjusted to reflect a reclassification of net defined-benefit obligationsinto Long-term provisions. See note 1, Significant accounting policies2.1.18Cash and cash equivalentsIn 2016, cash and cash equivalents increased by EUR568 million to EUR 2,334 million at year-end. Theincrease was mainly attributable to cash inflows of EUR1,904 million from net cash provided by operatingactivities, EUR 825 million net proceeds from PhilipsLighting IPO and EUR 268 million from Discontinuedoperations. This was partly offset by cash outflows ofEUR 831 million from net capital expenditures, EUR 526million from treasury share transactions, EUR 377million from decreases in debt, cash dividends paid ofEUR 342 million including EUR 12 million of dividendspaid to non-controlling interest and EUR 263 millionrelated to acquisitions.Group performance2.1.1916Annual Report 2016Philips GroupCash balance movements in millions of EUR20161,7662015+47Divestments+1,904Net cash provided by operatingactivities-831Net capital expenditures-137Other1)-377Debt-263Acquisitions-526Treasury share transaction+825IPO Proceeds, net-342Dividend paid2)+268Discontinued operations2,3342016+5681)Includes cash flow for derivatives and currency effect2)Includes dividends paid to shareholders of Koninklijke Philips N.V and tonon-controlling interests2.1.19Debt positionTotal debt outstanding at the end of 2016 was EUR5,606 million, compared with EUR 5,760 million atthe end of 2015.Philips GroupChanges in debt in millions of EUR2014 - 20162014 2015 2016 New borrowings(69)(1,335)(1,304)Repayments370 104 1,681 Currency effects and consolidationchanges(504)(425)(223)Changes in debt(203)(1,656)154 In 2016, total debt decreased by EUR 154 millioncompared to 2015. New borrowings of EUR 1,304 millionwere mainly due to new loan facilities for PhilipsLighting of EUR 740 million and USD 500 million toreplace intragroup financing from Royal Philips.Repayments amounted to EUR 1,681 million, mainlydue to the repayment of a USD 1,300 million bridge loanused for the Volcano acquisition, as well as the earlyredemption of USD 285 million in aggregate principalamount of USD bonds. Other changes resulting fromconsolidation and currency effects led to an increase ofEUR 223 million.In 2015, total debt increased by EUR 1,656 million. Newborrowings of EUR 1,335 million were mainly due to ashort-term bridging loan with low interest rate used forthe Volcano acquisition, while repayments amountedto EUR 104 million. Other changes resulting fromconsolidation and currency effects led to an increase ofEUR 425 million.At the end of 2016, long-term debt as a proportion ofthe total debt stood at 72% with an averageremaining term of 7.8 years, compared to 71% and 10.7years at the end of 2015.For further information, please refer to note 18, Debt.2.1.20Shareholders’ equityShareholders’ equity increased by EUR 939 million in2016 to EUR 12,601 million at December 31, 2016. Theincrease was mainly a result of EUR 1,491 million netincome, partially offset by EUR 589 million related tothe purchase of shares for the share buy-back program.The dividend payment to shareholders of KoninklijkePhilips N.V. in 2016 reduced equity by EUR 330 millionincluding tax and service charges, while the delivery oftreasury shares increased equity by EUR 74 million.The number of outstanding common shares of RoyalPhilips at December 31, 2016 was 922 million (2015: 917million). At the end of 2016, the Company held 7.2million shares in treasury to cover the future delivery ofshares (2015: 11.8 million shares). This was in connectionwith the 33.5 million rights outstanding at the end of2016 (2015: 39.1 million rights) under the Company’slong-term incentive plans. At the end of 2016, theCompany did not hold any shares for cancellation(2015: 2.2 million shares). In 2016 Philips purchased calloptions on Philips shares matching the majority of theoptions granted to employees until 2013. As ofDecember 31, 2016 Philips held 14.1 million call optionsas a hedge of 15.9 million remaining options granted toemployees.2.1.21Net debt to equityPhilips ended 2016 with a position of EUR 3,272 million,compared to a net debt1) position of EUR 3,994 millionat the end of 2015.Philips GroupNet debt to group equity2) in billions of EUR2012 - 20160.711.2‘126 : 941.411.2‘1311 : 892.211.0‘1417 : 834.011.8‘1525 : 753.3Net debt (cash)2)13.5Group equity1)‘1619 : 81ratio1)Shareholders’ equity and non-controlling interests2)Non-GAAP financial measure. For the definition and reconciliation to themost directly comparable GAAP measure, refer to chapter 4,Reconciliation of non-GAAP information, of this Annual Report2.1.22Liquidity positionAs of December 31, 2016, including the cash position(cash and cash equivalents), as well as its EUR 2.3 billioncommitted revolving credit facilities, the Philips Group1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Group performance2.1.22.1Annual Report 201617had access to available liquidity of EUR 4,634 millionvs. Gross Debt (including short and long-term) of EUR5,606 million.As of December 31, 2015, including the Company’s cashposition (cash and cash equivalents), as well as its EUR1.8 billion committed revolving credit facility, theCompany had access to available liquidity of EUR 3,566million vs. Gross Debt (including short and long-term)of EUR 5,760 million.Philips GroupLiquidity position in millions of EUR2014 - 20162014 2015 2016 Cash and cash equivalents1,873 1,766 2,334 Committed revolving creditfacility/CP program/Bilateral loan1,800 1,800 2,300 Liquidity3,673 3,566 4,634 Available-for-sale financial assetsat fair value75 75 36 Short-term debt(392)(1,665)(1,585)Long-term debt(3,712)(4,095)(4,021)Net available liquidity resources(356)(2,119)(936)Royal Philips has a EUR 1.8 billion committed revolvingcredit facility that can be used for general grouppurposes and as a backstop of its Commercial PaperProgramme and will mature in February 2018. TheCommercial Paper Programme amounts to USD 2.5billion, under which Royal Philips can issue commercialpaper up to 364 days in tenor, both in the US and inEurope, in any major freely convertible currency. Thereis a panel of banks, in Europe and in the US, whichservice the program. The interest is at market ratesprevailing at the time of issuance of the commercialpaper. There is no collateral requirement in theCommercial Paper Programme. Also, there are nolimitations on Philips’ use of funds from the program. Asof December 31, 2016, Royal Philips did not have anyloans outstanding under these facilities.Royal Philips’ existing long-term debt is rated Baa1(with stable outlook) by Moody’s and BBB+ (with stableoutlook) by Standard & Poor’s. Our net debt1) position ismanaged in such a way that we expect to retain a stronginvestment grade credit rating. Furthermore, theGroup’s aim when managing the net debt1) position isdividend stability and a pay-out ratio of 40% to 50% ofcontinuing net income. Royal Philips’ outstanding long-term debt and credit facilities do not contain financialcovenants or cross-acceleration provisions that arebased on adverse changes in ratings. A description ofPhilips’ credit facilities, including any covenants, can befound in note 18, Debt.As at December 31, 2016, Philips had total cash andcash equivalents of EUR 2,334 million. Philips poolscash from subsidiaries to the extent legally andeconomically feasible. Cash not pooled remainsavailable for local operational or investment needs.Philips believes its current liquidity and direct access tocapital markets is sufficient to meet its present financingrequirements.In December 2016, Royal Philips delivered a notice ofredemption to the holders of the outstanding 5.750%Notes due 2018 in the aggregate principal amount ofUSD 1,250 million for redemption in January 2017. Forfurther information, refer to note 31, Subsequent events.2.1.23Cash obligationsContractual cash obligationsPresented below is a summary of the Group’scontractual cash obligations and commitments atDecember 31, 2016.Philips GroupContractual cash obligations1,2) in millions of EUR2016 Payments due by period total lessthan 1year 1-3years 3-5years after 5years Long-termdebt3)5,117 1,290 104 1,297 2,426 Finance leaseobligations307 93 127 54 33 Short-termdebt210 210 - - - Operatingleases942 227 300 195 220 Derivativeliabilities841 280 410 - 151 Interest ondebt4)2,229 184 306 295 1,444 Purchaseobligations5)260 108 73 33 46 Trade and otherpayables2,848 2,848 - - - Contractualcashobligations12,754 5,240 1,320 1,874 4,320 1)Obligations in this table are undiscounted2)This table excludes pension contribution commitments and income taxliabilities in respect of tax risks because it is not possible to make areasonably reliable estimate of the actual period of cash settlement3)Long-term debt includes short-term portion of long-term debt andexcludes finance lease obligations4)Approximately 30% of the debt bears interest at a floating rate.5)Philips has commitments related to the ordinary course of businesswhich in general relate to contracts and purchase order commitmentsfor less than 12 months. In the table, only the commitments for multipleyears are presented, including their short-term portionPhilips has no material commitments for capitalexpenditures.Additionally, Philips has a number of commercialagreements, such as supply agreements, which providethat certain penalties may be charged to the Companyif it does not fulfill its commitments.Certain Philips suppliers factor their trade receivablesfrom Philips with third parties through supplier financearrangements. At December 31, 2016 approximatelyEUR 360 million of the Philips accounts payable wereknown to have been sold onward under sucharrangements whereby Philips confirms invoices.1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Group performance2.1.2318Annual Report 2016Philips continues to recognize these liabilities as tradepayables and will settle the liabilities in line with theoriginal payment terms of the related invoices.Other cash commitmentsThe Company and its subsidiaries sponsor post-employment benefit plans in many countries inaccordance with legal requirements, customs and thelocal situation in the countries involved. For adiscussion of the plans and expected cash outflows,please refer to note 20, Post-employment benefits.The Company had EUR 201 million restructuring-related provisions by the end of 2016, of which EUR 174million is expected to result in cash outflows in 2017.Refer to note 19, Provisions for details of restructuringprovisions.A proposal will be submitted to the upcoming AnnualGeneral Meeting of Shareholders to declare a dividendof EUR 0.80 per common share (up to EUR 745 million),in cash or shares at the option of the shareholder,against the net income for 2016. Further details will begiven in the agenda for the Annual General Meeting ofShareholders, to be held on May 11, 2017.GuaranteesPhilips’ policy is to provide guarantees and other lettersof support only in writing. Philips does not provide otherforms of support. At the end of 2016, the total fair valueof guarantees recognized on the balance sheetamounted to EUR nil (December 31, 2015: EUR nil).Remaining off-balance-sheet business and credit-related guarantees provided on behalf of third partiesand associates decreased by EUR 9 million during 2016to EUR 28 million (December 31, 2015: EUR 37 million).2.1.24Analysis of 2015 compared to 2014 The analysis of the 2015 financial results compared to2014, and the discussion of the critical accountingpolicies, have not been included in this Annual Report.These sections are included in Philips’ Form 20-F forthe financial year 2016, which will be filed electronicallywith the US Securities and Exchange Commission.2.2Social performanceAt Philips we are passionate about improving livesthrough meaningful innovation. Our people find thisaim powerful and inspiring, answering a calling to helpcreate a healthier society. We reflect this aim in all thatwe do, starting with our people, extending to ourstakeholders, as inspiration for new products andservices, and through the community work of thePhilips Foundation.Our peopleAt Philips, we are committed to fostering an ecosystemthat inspires inclusion, enables our employees to thrive,and puts our purpose of improving lives at the heart ofeverything we do. Our people are one of our uniquestrengths and each one of our employees isinstrumental in Philips’ success. Our strategy is basedon the belief that every employee at Philips has talentand can grow and contribute with increasing impact.We take great pride in our Philips culture, which isrooted in innovation, R&D and entrepreneurship. Westrive to hire employees with backgrounds andperspectives that can mirror the diversity of our marketsand customers, fueling insight and innovation acrossour business.During 2016 we successfully split Philips Lighting fromRoyal Philips. This facilitated greater focus and growthin each business, but also necessitated change andadjustment for our people. Throughout this process, ourpeople have demonstrated their significantprofessionalism in making this a smooth transition, fromboth a people and business perspective, ensuringmoments of uncertainty were supported with care.2.2.1Improving people’s livesAt Philips, we strive to make the world healthier andmore sustainable through innovation. Our goal is toimprove the lives of 3 billion people a year by 2025. Toguide our efforts and measure our progress, we take atwo-dimensional approach – social and ecological – toimproving people’s lives. Solutions from our portfoliothat directly support the curative or preventive side ofpeople’s health determine the contribution to the socialdimension. This is also our contribution to the UNSustainable Development Goal 3 (“to ensure healthylives and promote well-being for all at all ages”). Ashealthy ecosystems are also needed for people to livea healthy life, the contribution to the ecologicaldimension is determined by means of our steadilygrowing Green Solutions portfolio, such as our energy-efficient products in our Personal Health businesses.This is our contribution to Sustainable DevelopmentGoal 12 (“to ensure sustainable consumption andproduction patterns”).Through Philips products and solutions that supportpeople’s health, we improved the lives of 908 millionpeople in 2016, driven by our Diagnosis & Treatmentbusinesses and Connected Care & Health Informaticsbusinesses. Additionally, our products that help peoplelive a healthy life improved the lives of 324 millionpeople, and our Green Solutions that contribute to ahealthy ecosystem 1.74 billion people. After theelimination of double counts – people touchedmultiple times – we arrived at 2.1 billion lives. This is anincrease of around 100 million compared to 2015,driven by all segments, mainly in Greater China, NorthAmerica, ASEAN, and the Indian subcontinent.More information on this metric can be found inMethodology for calculating Lives Improved.Lives Improved per marketTo find out about our Lives Improved metric at global,regional and market level, go towww.results.philips.com/interactive-worldmapGroup performance2.2.1Annual Report 201619The following table shows the Lives Improved metricper market.Philips Group Lives Improved per market MarketLives Improved (million)1)Population (million)2)GDP (USD billion)3)Africa54 1,185 2,186 ASEAN and the Pacific246 948 5,765 Benelux28 29 1,301 Central & East Europe86 125 1,399 Germany, Austria and Switzerland94 100 4,548 France60 66 2,519 Greater China395 1,410 12,851 Iberia46 57 1,463 Indian subcontinent213 1,522 2,583 Italy, Israel and Greece55 82 2,392 Japan35 127 4,730 Latin America179 630 5,273 Middle East & Turkey109 346 2,888 Nordics26 27 1,460 North America354 360 20,094 Russia and Central Asia82 285 1,721 UK & Ireland51 70 2,973 1)Source: Philips, double counts eliminated2)Source: The World Bank, CIA Factbook & Wikipedia3)Source: IMF, CIA Factbook & WikipediaPhilips GroupLives improved in billions1.2by PhilipsHealth Productsand Solutions1.7by PhilipsGreen Products1.3by PhilipsLightingTotal: 2.1 billion (double counts eliminated)Double countsConceptual drawing, areas do not reflect actual proportions2.2.2Including, engaging and inspiring our peopleThe ability to capture growth and seize marketopportunities depends on our people – their alignmentwith our vision, a sense of common purpose, and thebelief that their role at Philips is making a positivecontribution.Inclusion and DiversityPhilips recognizes that the best and most innovativesolutions are generated through collaboration betweenpeople who think differently from one another andgenuinely welcome a variety of ideas and viewpoints.Inclusion requires intentional acceptance; a mindsetand workplace where every employee’s ideas,knowledge, perspectives, experiences, and styles arevalued. The conviction that all individuals should betreated fairly and respectfully, have equal access toopportunities and resources, and can contribute fully toour success.Data insights•Gender diversity figures remained stable at 36%overall, with slight increases in the Staff, Professionaland Management categories•Age diversity increased slightly in 2016 with anincrease in the under 25 age group•120+ nationalities bringing a rich diversity ofcapabilities, opinions and perspectives•47% of our employees are located in growthgeographiesPhilips GroupGender diversity in %2014 - 20165842‘145842‘155743‘16Staff7129‘147030‘156931‘16Professionals8020‘147921‘157822‘16Management8218‘148119‘1582Male18Female‘16ExecutivesGroup performance2.2.220Annual Report 2016Philips GroupEmployees per age category in %2014 - 201647‘1434‘1545‘16under 252631‘142630‘152630‘1625-353132‘143132‘153132‘1635-452521‘142523‘152422‘1645-55149‘141511‘1515Male11Female‘16over 55Engagement and InspirationOur employee survey consistently reports high levels ofemployee engagement, above 70% throughout2010-2016, and rising from 71% to 74% favorablebetween 2015 to 2016 for the HealthTech businesses.Details on the Lighting employee engagement resultscan be found in the Philips Lighting Investor Relationswebsite.At Philips, we care for our people and believe that weare at our best when our team are at theirs. Weunderstand work is only one part of life. That is why weoffer a variety of innovative benefits and healthprograms to help keep our people mentally andphysically strong, and foster flexibility to manage life’sunexpected moments at home.By keeping our finger on the pulse of employeesentiment toward the company, listening toemployees’ ideas for improvement, and demonstratingto employees that their feedback is valued, we areworking to ensure that every member of our globalteam has a role in creating lasting value for ourcustomers, shareholders, and other stakeholders.Philips GroupEmployee Engagement Index in %2012 - 201679156‘1275169‘131)721117‘1471227‘152)74Favorable16Neutral10Unfavorable‘163)1)Based on 60 pulse surveys conducted in 20122)Based on My Accelerate! Surveys3)Based on My Accelerate Surveys in HealthTech2.2.3Hiring and acquiring our peopleIn 2016, over 10,000 people were appointed to roleswithin Philips; 69% of executive vacancies were filledby internal candidates, the remainder were externalhires with 60% coming from other healthcare or ITcompanies. In line with previous years, roughly onethird of all roles were filled with internal candidates andthe remainder filled with highly qualified externaltalent.Three successful integrations were completed in 2016,Volcano, PathXL and Wellcentive, also infusing theorganization with additional talent with deep healthtechnology expertise.Philips’ focus on health technology has enabledactivation of more highly targeted recruitmentcampaigns and outreach efforts. As such, Philips hascontinued to strengthen in-house talent acquisitioncapabilities, completing 80% of Executive hires in 2016,and saving EUR 3 million in agency costs.Recruitment campaigns have been customized to raiseawareness and attractiveness of Philips as a tophealthcare technology employer within critical talentsegments, for example Software and Q&R. The Code toCare campaign achieved 340,000 prospects to thesoftware careers page, supporting 77% growth in digitaltalent pipelines. Likewise the Quality Gene campaignresulted in a 35% increase in applications, and a 39%increase in Q&R hires from strategically targetedcompanies.In 2016, Philips was recognized as the best-in-class intalent acquisition by Corporate Executive Board and isin the top 1% of LinkedIn top global talent attractors. Inaddition, Best Place to Work programs helped Philipsboost attractiveness to passive talent in the labormarket in 2016, winning category awards in the UnitedStates, Netherlands, Germany, Spain, and Panama.2.2.4EmploymentThe total number of Philips Group employees(continuing operations) was 105,223 at the end of 2016,compared to 104,204 at the end of 2015. Approximately33% were employed in the Lighting segment, 23% in theDiagnosis & Treatment businesses, 21% in the PersonalHealth businesses, 13% in the HealthTech Othersegment and 10% in the Connected Care & HealthInformatics businesses.Group performance2.2.5Annual Report 201621Philips GroupEmployees per segment in FTEs at year-end2014 - 20162014 2015 2016 Personal Health21,488 21,384 22,530 Diagnosis & Treatment20,104 23,638 23,791 Connected Care & HealthInformatics9,119 10,290 11,033 HealthTech Other13,019 11,493 13,570 Lighting41,635 37,399 34,256 Legacy Items 43 Continuing operations105,365 104,204 105,223 Discontinued operations8,313 8,755 9,508 Philips Group113,678 112,959 114,731 Compared to 2015, the number of employees incontinuing operations increased by 1,019.The increase reflects insourced manufacturing forproducts with critical process capability requirements,increased resources in digital innovation acrossmarketing and software, and growth throughacquisition. This targeted growth was partially offset byindustrial footprint rationalization at Lighting, areduction of traditional sales roles, and a decrease inoperational headcount in central functions.Approximately 53% of the Philips workforce waslocated in mature geographies, and about 47% ingrowth geographies. In 2016, the number of employeesin mature geographies increased by 67, mainly due tothe Wellcentive acquisition in the Connected Care &Health Informatics segment. The number of employeesin growth geographies increased by 952 driven by threefactors: Global Business Services right-shoringsupporting functions, further shift and rationalization inindustrial footprint, and new legislation introduced inChina, which capped contingent workforce size at 10%and prompted insourcing of contingent workers.Philips GroupEmployees per geographic cluster in FTEs at year-end2014 - 20162014 2015 2016 Western Europe29,105 28,590 28,326 North America22,283 23,614 23,839 Other mature geographies3,643 3,908 4,014 Mature geographies55,031 56,112 56,179 Growth geographies50,334 48,092 49,044 Continuing operations105,365 104,204 105,223 Discontinued operations8,313 8,755 9,508 Philips Group113,678 112,959 114,731 Philips GroupEmployment in FTEs at year-end2014 - 20162014 2015 2016 Balance as of January 1116,082 113,678 112,959 Consolidation changes: Acquisitions1,506 1,865 163 Divestments(247)(300)(571)Changes in Discontinuedoperations(2,132)442 753 Other changes(1,531)(2,726)1,427 Balance as of December 31113,678 112,959 114,731 In 2016, employee turnover amounted to 16.0% (ofwhich 9.6% was voluntary) compared to 16.6% (9.7%voluntary) in 2015. 2016 turnover was mainly due to thechanging industrial footprint in Lighting and ouroverhead reduction program.Philips GroupEmployee turnover in %2016Staff Profes-sionals Manage-ment Execu-tives Total Female21.2 12.1 10.8 13.7 17.0 Male23.4 10.3 9.3 10.7 15.4 Philips Group22.4 10.8 9.6 11.2 16.0 Philips GroupVoluntary turnover in %2016Staff Profes-sionals Manage-ment Execu-tives Total Female13.0 8.0 7.5 5.9 10.7 Male13.4 6.3 4.7 4.8 9.0 Philips Group13.2 6.8 5.3 5.0 9.6 2.2.5Developing our peopleAt Philips, we operate with in belief that everyone hastalent and that our people are critical to ourorganizational success. With over 105,000 talented andmotivated employees all over the world, it is our peoplewho continue to turn our strategy into reality. Oursustained growth and long-term success will beachieved by becoming a world-class talent-builder,offering attractive and rewarding work whichcontributes to the careers of our people.Philips UniversityIn 2016, Philips University began implementing atargeted approach to delivering learning, focusing onstrategic needs, identified through strategic plans of thebusiness, strategic workforce planning, and talentreviews. These plans help ensure the effectiveness ofour learning budget. Also, innovative learningtechniques including gamification, video and micro-learning were infused into learning offerings.For more information on our people’s development,please refer to sub-section 12.3.2, Peopledevelopment, of this Annual Report.Group performance2.2.622Annual Report 20162.2.6Health and SafetyAt Philips we strive to make the world healthier andmore sustainable through innovation. A critical aspectof which starts with our own people. We believe we areat our best when our employees are at theirs. A beliefchampioned by our CEO in his recent Financial Timesarticle.Philips strives for an injury-free and illness-free workenvironment, with a sharp focus on reducing thenumber of injuries and improving processes. As of 2016,the Total Recordable Cases (TRC) rate is defined as aKey Performance Indicator (KPI), on which we setyearly targets for the company, Business Groups andindustrial sites. For data comparability reasons, we alsoprovide the Lost Workday Injury Cases (LWIC) rate.We regret to report two fatalities in Philips Lighting in2016. One of our sales officers passed away after atraffic accident in Pakistan. In India a contractor dieddue to injuries sustained at one of our factories. Forboth of these fatalities, a thorough investigation androot cause analysis were conducted. Corrective actionswere implemented, including reminding our employeesof safe driving rules and accelerating our injuryprevention program to prevent such occurrences in thefuture.In 2016, we recorded 174 LWIC, of which 71 in PhilipsLighting. These are occupational injury cases where theinjured person is unable to work one or more days afterthe injury. This represents a significant decreasecompared with 213 in 2015, and continues thedownward trend since 2010. The LWIC rate decreasedto 0.18 per 100 FTEs, compared with 0.21 in 2015. Thenumber of Lost Workdays caused by injuries decreasedby 1,253 days (16%) to 6,728 days in 2016.In 2016, we recorded 395 TRC, of which 156 in PhilipsLighting. These are cases where the injured employeeis unable to work one or more days, or had medicaltreatment or sustained an industrial illness. We willcontinue to monitor this KPI and actively set reductiontargets for all our businesses in 2017.For more information on Health and Safety, pleaserefer to sub-section 12.3.4, Health and Safetyperformance, of this Annual Report.2.2.7General Business PrinciplesThe Philips General Business Principles (GBP)incorporate the fundamental principles for all Philipsbusiness around the world. They set the minimumstandard for business conduct for both individualemployees and for the company and our subsidiaries.Our GBP also stand as a reference for the businessconduct we expect from our business partners andsuppliers. Translations of the text are available in 32languages, allowing almost every employee to read theGBP in their native language. Detailed underlyingpolicies, manuals, training and tools are in place to giveemployees practical guidance on how to apply the GBPin their day-to-day work environments.In addition, there are separate Codes of Ethics thatapply to employees working in specific areas of ourbusiness, i.e. the Procurement Code of Ethics and theFinancial Code of Ethics. Details of these can be foundat www.philips.com/gbp.As part of our unyielding effort to raise GBP awarenessand create engagement throughout the organization onthe different forms acting with integrity can take, eachyear a GBP communications and training plan isdeployed. In 2016 a number of new initiatives wereundertaken through various channels such as ourspotlight article series, Quick Reference Cards for at-a-glance guidance on how to handle a number ofcommon GBP concerns as well as returning programssuch as e-Learnings which were deployed early in theyear. Many of these initiatives contributed to buildingmomentum towards our annual Dialogue Week in thethird quarter, which serves as the highlight of our GBPprogram for the year. During 2016’s Dialogue Weekhundreds of Philips teams held open and frankdiscussions on what Acting with Integrity means tothem, and posted pictures of their sessions on thePhilips social platform using the hashtag,#integritymatters.The GBP form an integral part of labor contracts invirtually every country in which Philips operates. It is theresponsibility of each employee to live up to our GBP,and employees are requested to affirm theircommitment after having completed their GBP e-training. In addition, employees in respectivespecialized areas must sign-off on the Financial andSupply Management Codes of Ethics. Executives arerequested to sign-off on the General BusinessPrinciples to confirm a renewed commitment toawareness of and compliance with the respectivecodes each year.The GBP Review Committee is responsible for theeffective deployment of the GBP and for generallypromoting a culture of compliance and ethics withinPhilips. The GBP Review Committee is a body chairedby the Chief Legal Officer, and its members include theChief HR Officer, the Chief Market Leader and the ChiefFinancial Officer. They are supported in theimplementation of their initiatives by a CommitteeSecretariat, and a network of GBP Compliance Officerswho are appointed in all countries and at all major siteswhere Philips has operations.Related roles and responsibilities are laid down in theCharter of the GBP Review Committee. In 2016, inresponse to external regulatory developments inbusiness ethics and compliance, a revised charter wasdeployed by the GBP Review Committee. This newlyupdated charter impacted the composition of the GBPReview Committee, the roles and responsibilities of itsGroup performance2.2.7Annual Report 201623members as well as the composition, roles andresponsibilities of the GBP Compliance function. Tostrengthen monitoring and oversight of GBPcompliance within Philips, a mandatory annual GBPself-assessment questionnaire was introduced. TheGBP Review Committee Secretariat receives anoverview of the results of this self-assessment and cantake action when deemed necessary. We believe thishas created a more robust network equipped with therequisite skills and support to monitor and enhancecompliance in the increasingly regulated environmentsin which Philips operates.The GBP are supported by established mechanismsthat ensure standardized reporting and escalation ofconcerns. These mechanisms are based on the GBPReporting Policy that urges employees to report anyconcerns they may have regarding business conduct inrelation to the GBP either through a GBP ComplianceOfficer or through the Philips Ethics Line. The PhilipsEthics Line enables employees and also third parties toreport a concern either by telephone or online via a webintake form in a variety of different languages 24/7 allyear round. All concerns raised are registeredconsistently in a single database hosted externally fromPhilips by a third party and are investigated uniformlyin accordance with standardized investigationprocedures.More information on the Philips GBP can be found inchapter 5, Risk management, of this Annual Report. Theresults of the monitoring measures in place are given insub-section 12.3.5, General Business Principles, of thisAnnual Report.2.2.8Working with stakeholdersIn organizing ourselves around customers and markets,we create dialogues with our stakeholders in order toexplore common ground for addressing societalchallenges, building partnerships and jointlydeveloping supporting ecosystems for our innovationsaround the world. To deliver on our vision to make theworld healthier and more sustainable throughinnovation, working with partners is crucial. Anoverview of stakeholders and topics discussed isprovided in chapter 12, Sustainability statements, of thisAnnual Report.For more information on our stakeholder engagementactivities in 2016, please refer to sub-section 12.3.7,Stakeholder Engagement, of this Annual Report.2.2.9Supplier sustainabilityRoyal Philips has a direct business relationship withapproximately 8,500 product and componentsuppliers and 22,000 service providers. In many casesthe sustainability issues deeper in our supply chainrequire us to intervene beyond tier 1 of the chain.Supplier sustainability strategyManaging our large and complex supply chain in asocially and environmentally responsible way requiresa structured and innovative approach while beingtransparent and engaging with a wide variety ofstakeholders. Insights gained through the stakeholderengagement process are used as an input to developour supplier sustainability strategy. We then translatethis strategy into five dedicated programs:1. Supplier sustainability complianceCombination of contractual sustainability commitmentof Philips suppliers defined in two core SupplierSustainability policy documents (SupplierSustainability Declaration (SSD) and RegulatedSubstances List (RSL)) and additional transparencyrequirements to provide information and evidence ontopics mentioned in SSD and RSL.2. Supplier sustainability performanceThis program aims to bring about structural, sustainableimprovement in our supply chain while focusing onhealth and safety, remuneration and benefits, andworkforce turnover. This approach has been designedto replace the Philips audit program and was piloted in2016 on a sample of 93 supplier sites in China.3. Responsible sourcingThis program aims to manage sustainability risksrelated to minerals mined in conflict-affected and high-risk regions. Philips addresses the complexities of theminerals supply chains through continuous duediligence process combined with multi-stakeholderinitiatives to responsible sourcing.4. Circular procurementPhilips’ ambition is to increase its circular businessproposition and it has set a 2020 target to achieve 15%circular revenues. This program identifies howprocurement can contribute to our ambition to be aprovider of circular solutions and services.5. Environmental footprint ChinaThis program serves to reduce the environmentalfootprint of our suppliers’ sites in China. Furthermore,we want to focus on increasing supply chaintransparency in terms of environmental footprint andto drive responsible use of resources through oursupply chain. An example is the collaboration of Philipswith a Chinese NGO, the Institute of Public Environment(IPE).Please refer to sub-section 12.3.8, Supplier indicators,of this Annual Report for more details and to the PhilipsLighting Investor Relations website for details on theLighting Supplier Sustainability program.2.3Environmental performancePhilips has a long sustainability history stretching all theway back to our founding fathers. In 1994, we launchedour first program and set sustainability targets for ourown operations. Next, we launched our secondGroup performance2.324Annual Report 2016program in 1998, which focused on the environmentaldimension of our operations and products. We alsostarted to focus on sustainability in our supply chain in2003. We extended our scope further in 2010 byincluding the social dimension of products andsolutions, which is now reflected in our company vision:We strive to make the world healthier and moresustainable through innovation. Our goal is to improvethe lives of 3 billion people a year by 2025.In 2016, our CEO Frans van Houten launched our newRoyal Philips five-year sustainability program, ‘Healthypeople, sustainable planet’, addressing both social andenvironmental challenges and including associatedtargets to be achieved by 2020.The three pillars of the ‘Healthy people, sustainableplanet’ program are:•Creating value for our customers throughSustainable Solutions•Leading by example in our Sustainable Operations•Multiplying our impact by driving Sustainabilitythrough our supply chainMore details on the new program, as well as the initialresults, have been addressed in this report.Every year, Royal Philips publishes a full IntegratedAnnual Report. Our independent auditor Ernst & Young(EY) has not only audited our financial information buthas also provided reasonable (highest level) assuranceon Sustainability Information in chapter 12,Sustainability statements, of this Annual Report andsections section 2.2, Social performance, of this AnnualReport and section 2.3, Environmental performance, ofthis Annual Report. Please refer to section 12.5,Assurance report of the independent auditor, of thisAnnual Report. With this, Philips is a frontrunner in thisfield.Please refer to the Philips Lighting Investor Relationswebsite for more details on the new Lightingsustainability program and results.In this Environmental performance section an overviewis given of the most important environmentalparameters of the new program. Improving people’slives, Health and Safety, and Supplier Sustainability areaddressed in the Social performance section. Details ofthe ‘Healthy people, sustainable planet’ parameterscan be found in the chapter 12, Sustainabilitystatements, of this Annual Report.2.3.1Green InnovationGreen Innovation is the Research & Developmentspend related to the development of new generationsof Green Products and Solutions and GreenTechnologies.Sustainable Innovation is the Research & Developmentspend related to the development of new generationsof products and solutions that address the UnitedNations’ Sustainable Development Goals 3 (“to ensurehealthy lives and promote well-being for all at all ages”)or 12 (“to ensure sustainable consumption andproduction patterns”). With regard to the latter, Philipsset a target of EUR 7.5 billion (cumulative) for itsHealthTech businesses over the coming five years aspart of the ‘Healthy people, sustainable planet’program.In 2016, Philips invested EUR 558 million in GreenInnovation while the HealthTech businesses investedEUR 1.3 billion in Sustainable Innovation.Philips GroupGreen Innovation per segment in millions of EUR2014 - 201697682221255463‘14991031821254495‘1596Personal Health133Diagnosis & Treatment38Connected Care & Health Informatics10HealthTech Other281Lighting558‘16Diagnosis & Treatment businessesPhilips develops innovative Diagnosis & Treatmentsolutions that enable first-time right diagnosis,precision interventions and therapy, while respectingthe boundaries of natural resources. Investments inGreen Innovation in 2016 amounted to EUR 133 million,a 29% increase compared to 2015. All Philips GreenFocal Areas are taken into account while we aim toreduce environmental impact over the total lifecycle.Energy efficiency is an area of focus, especially for ourlarge imaging systems such as MRI. Closing thematerials loop is another area where our focus ondeveloping upgrading pathways has enabled extendedproduct life and therefore reduced materials use andlower cost. Our Diagnosis & Treatment businessesactively support a voluntary industry initiative toimprove the energy efficiency of medical imagingequipment. Moreover, we are actively partnering withmultiple leading care providers to look together forinnovative ways to reduce the environmental impact ofhealthcare, for example by maximizing energy-efficientuse of medical equipment and optimizing lifecyclevalue.Connected Care & Health Informatics businessesPhilips innovates with connected health IT solutionsthat integrate, collect, combine and deliver quality datafor actionable insights to help improve access to qualitycare, while respecting the boundaries of naturalGroup performance2.3.1Annual Report 201625resources. It is our belief that well-designed e-healthsolutions can reduce the travel-related carbonfootprint of healthcare, and improve access andoutcomes. Investments in Green Innovation in 2016amounted to EUR 38 million, a doubling compared to2015. All Philips Green Focal Areas are taken intoaccount as we aim to reduce environmental impactover the total lifecycle. Energy efficiency and materialreduction are the main areas of focus.Personal Health businessesContinuous high R&D investments at our PersonalHealth businesses are also reflected in GreenInnovation spend, which amounted to EUR 96 millionin 2016, compared with EUR 99 million in 2015. Theinvestments resulted in high Green Revenues in allBusiness Groups. The Personal Health businessescontinued their work on improving the energy efficiencyof their products, closing the materials loop (e.g. byusing recycled materials in products and packaging)and the voluntary phase-out of polyvinyl chloride(PVC), brominated flame retardants (BFR), Bisphenol A(BPA) and phthalates from, among others, food contactproducts. In particular, close to 100% of the Mother &Child Care, Male Grooming and Oral Healthcareproducts are completely PVC/BFR free.LightingPhilips Lighting strives to make the world healthier andmore sustainable through energy-efficient light. With a2016 investment of EUR 281 million in Green Innovation,Lighting invested 11% more compared to 2015.Increasing investments in digital solutions andconnectivity have led to further improvements in thearea of energy efficiency. In 2016, Philip Lightingteamed up with the Dubai Municipality to create theDubai Lamp Initiative, a unique research partnershipthat resulted in the development of the world’s mostenergy-efficient commercially available LED lamp. Byreplacing conventional lamps with the Dubai Lamp –the first commercially available 200 lumen per wattLED lamp – households and enterprises can reduceelectricity used for lighting by more than 90%compared to incandescent technologies. In addition toraising light and energy efficiency to new levels, theDubai Lamp is extremely durable with an averagelifespan of up to 15 times that of conventional lamps.HealthTech OtherHealthTech Other invested EUR 10 million in GreenInnovations, spread over projects focused on globalchallenges related to water, air, energy, food, CircularEconomy, and access to affordable healthcare. TheResearch organization within HealthTech Other usedthe Sustainable Innovation Assessment tool, in whichinnovation projects are evaluated and scored along theenvironmental and social dimensions, in order toidentify those projects that most strongly drivesustainability. Transfers of Research projects include aLives Improved calculation to assess what the project’scontribution will be to Philips’ vision to improve the livesof 3 billion people a year by 2025. Intellectual Property& Standards has developed a Sustainable IP portfoliofor which the spend has been included in the abovetotal for HealthTech Other.At the end of 2016, Philips’ IP portfolio consisted of 5.7%green patent families. All families are labeled with atleast one Green Focal Area. In 2016, 3.3% of our totalnew patent filings were flagged as relating to greenpatent family. As IP is an extension of Philips’innovation efforts, the portfolio percentage related togreen patents is multiplied by our annual patentportfolio costs to determine Philips’ yearly investmentin Green IP.While a product can be classified as green because itincorporates an environmentally friendly technology,such technology cannot always be protected in apatent because of a lack of patentability over the state-of-the-art technology. Therefore, there is notnecessarily a correlation between green patents andGreen Technologies in Green Products and Solutions.Circular EconomyThe transition from a linear to a circular economy isessential to create a sustainable world. A circulareconomy aims to decouple economic growth from theuse of natural resources and ecosystems by using theseresources more effectively. It is a driver of innovation inthe areas of material, component and product re-use,as well as new business models such as systemsolutions and services. In a circular economy, moreeffective (re)use of materials enables the creation ofmore value, both by means of cost savings and bydeveloping new markets or growing existing ones. The‘Healthy people, sustainable planet’ program includesa target to generate 15% of our revenues in 2020 fromCircular Products and Solutions.For more information on our Circular Economyactivities and the progress towards targets in 2016,please refer to sub-section 12.4.1, Circular Economy, ofthis Annual Report. Please refer to the Philips LightingInvestor Relations website for more details on circularproducts and solutions of Philips Lighting.2.3.2Green RevenuesGreen Revenues are generated through products andsolutions which offer a significant environmentalimprovement in one or more Green Focal Areas: Energyefficiency, Packaging, Hazardous substances, Weight,Circularity, and Lifetime reliability. Green Revenues,excluding the Lumileds and Automotive business,increased to EUR 15.7 billion in 2016, or 64.1% of sales(61.0% in 2015), thereby reaching a record level forPhilips.The exclusion of Lumileds and Automotive had a 1%negative impact on the total Green Revenuespercentage.Group performance2.3.226Annual Report 2016Philips GroupGreen Revenues per segment in millions of EUR2014 - 20162,9373,8588564,95212,603‘143,5214,6701,2585,34314,792‘153,951Personal Health4,798Diagnosis & Treatment1,442Connected Care & Health Informatics5,536Lighting15,727‘1658.9%61.0%64.1%As a % of salesThrough our EcoDesign process we aim to createproducts and solutions that have significantly lessimpact on the environment during their whole lifecycle.Overall, the most significant improvements have beenrealized in our energy efficiency Green Focal Area, animportant objective of our program, although there wasalso growing attention for hazardous substances andrecyclability in all segments in 2016, the latter driven byour Circular Economy initiatives.New Green Products and Solutions from each segmentinclude the following examples.Diagnosis & Treatment businessesIn 2016, our Diagnosis & Treatment businessesmaintained the Green Product and Solutions portfoliowith redesigns of various Green Products with furtherenvironmental improvements. These products improvepatient outcomes, provide better value, and helpsecure access to high-quality care, while reducingenvironmental impact. We continued to add an energy-efficient CryoCompressor to our MRI systems, withenergy savings in the various non-scanning modes of30-40%.Connected Care & Health Informatics businessesOur Connected Care & Health Informatics businessesgrew the Green Product and Solutions portfolio withthree new products and solutions which offer bettertechnology and functionality and at the same timereduce environmental impact. Examples include a newpatient monitor GS10/GS20/G30E/G40E series fromour Goldway China site with a 21% reduction in productweight and an 18% reduction in energy usage,compared to the predecessor products. Anotherexample is the patient mask AF541, which has a 33%lower product weight and no longer containspolycarbonate compared to its predecessor mask andthus has no risk of containing bisphenol-A.Personal Health businessesOur Personal Health businesses focuses on GreenProducts and Solutions which meet or exceed ourminimum requirements in the areas of energyconsumption, packaging, and substances of concern.Green Revenues in 2016 surpassed 56% of total sales.All our Green Products with rechargeable batteries (liketoothbrushes, shavers, and grooming products) exceedthe stringent California energy efficiency norm by atleast 10%. We are making steady progress in developingPVC/BFR-free products. More than 55% of sales consistof PVC/BFR-free products, with the exception of thepower cords, for which there are not yet economicallyviable alternatives available. In the remaining 30% ofproduct sales, PVC/BFR has already been phased outto a significant extent, but the products are not yetcompletely free of these substances.Sleep & Respiratory Care (S&RC) launched the SimpleMini Go portable oxygen concentrator (POC), thesmallest and lightest POC ever developed by Philips;compared to its predecessor the product weight hasbeen reduced by 40% and energy efficiency improvedby 20%.LightingGreen Revenues within Lighting increased to 78% in2016. Connected Lighting systems and LED contributedto Green Revenues with solutions in more applicationsand market segments. In Jakarta, Indonesia, 90,000street luminaires were retrofitted this year with energyefficient LED lights connected by the Philips CityTouchlighting management system. Each light point is nowconnected, using sensors that collect performancedata. As a result, city officials can now monitor Jakarta’slighting infrastructure, remotely managing light levels tomatch different needs by district. At the same time,Jakarta can better manage its carbon footprint, reduceenergy expenses and improve public services.2.3.3Sustainable OperationsThe Sustainable Operations programs, in Royal Philipsand Philips Lighting focus on the main contributors toclimate change, recycling of waste, reduction of waterconsumption, and reduction of emissions. Full detailscan be found in chapter 12, Sustainability statements,of this Annual Report.Carbon footprint and energy efficiencyBoth Royal Philips and Philips Lighting are committedto the ambition of becoming carbon-neutral in ouroperations during the COP21 United Nations ClimateSummit in Paris (December 2015). The target we haveset is to be 100% carbon-neutral in our operations by2020 and sourcing all our electricity usage from 100%renewable sources.After achieving our 40% reduction target in 2015compared to our 2007 base year we continued todecrease our carbon emissions in 2016. We achieved a5% carbon reduction compared to 2015, resulting in atotal of 1,344 kilotonnes CO2 emission. This reduction ismainly driven by increasing our renewable electricityshare globally from 56% in 2015 to 62% in 2016. This ledto a 17% carbon reduction in our industrial sites. As ofDecember 2016 we source 100% of our US electricitydemand from the Los Mirasoles windfarm in TexasGroup performance2.3.3Annual Report 201627through a 15-year Power Purchase Agreement.Additionally, Philips created a renewable electricitypurchasing consortium with AkzoNobel, DSM andGoogle, and the four companies closed the first windenergy transaction in the Netherlands in October 2016- the Krammer windfarm in the Zeeland province.Our business travel emissions showed a reduction of4% compared to 2015, driven by a stricter air travelpolicy introduced in the last quarter of 2016. This led toan air travel reduction of 5%. The emissions resultingfrom our lease cars decreased by 4%, slightly offset by anincrease in carbon emissions from our rental cars usage(+6%). In order to further decrease our business travelemissions we will continue to promote videoconferencing as an alternative to travel in 2017.Within our logistics operations we have seen nosignificant changes in the overall carbon emissionscompared to the previous year. Our air freight emissionswent up 6% over the course of 2016 to meet demand inour HealthTech businesses, partially caused by distressat one of our larger ocean freight carriers. This was offsetby significant reductions within Lighting due to a stricterair freight policy and a Royal Philips program to increasethe loading degree of our containers for ocean freight.Our operational energy efficiency improved by 8%, from1.11 terajoules per million euro sales in 2015 to 1.01terajoules per million euro sales in 2016 as a result ofenergy efficiency programs in our industrial sites. During2016, the applied emission factors used to calculate ouroperational carbon footprint have been updated withthe latest DEFRA (UK Department for Environment,Food & Rural Affairs) 2016 emission factors. Philipsreports all its emissions in line with the Greenhouse GasProtocol (GHGP) as further described in chapter 12,Sustainability statements, of this Annual Report.The impact of the exclusion of Lumileds andAutomotive is displayed as discontinued operations inthe next graph; the size of which varies over the years,but averages around 18% over the past five years whereemissions from our non-industrial facilities andbusiness travel have been estimated based on FTEdata. In 2016, Lumileds and Automotive business travelwas based on actuals and non-industrial sites wereextrapolated based on floor area. For our logisticsemissions, the part of discontinued operations has beenestimated using Philips Lighting revenue share as a proxy.Philips GroupOperational carbon footprint in kilotonnes CO2-equivalent2012 - 20167452051175731671,807‘127862181165582201,898‘137202041224751761,697‘147182021033941831,600‘15718Logistics193Business travel106Non-industrial operations327Manufacturing236Discontinued operations1,580‘16Philips GroupOperational carbon footprint by Greenhouse Gas Protocolscopes in kilotonnes CO2-equivalent2012 - 20162012 2013 2014 2015 2016 Scope 1355 361 320 261 229 Scope 2 (marketbased)335 313 277 236 204 Scope 3950 1,004 924 920 911 Philips Group1,640 1,678 1,521 1,417 1,344 Scope 2 (locationbased)584 583 546 496 488 Philips GroupRatios relating to carbon emissions and energy use2012 - 20162012 2013 2014 2015 2016 Operational CO2emissions in kilotonnesCO2-equivalent1,640 1,678 1,521 1,417 1,344 Operational CO2efficiencyin tonnes CO2-equivalent permillion EUR sales74 76 71 58 55 Operationalenergy use in terajoules30,013 30,890 28,741 26,792 24,824 Operationalenergy efficiencyin terajoules permillion EUR sales1.35 1.40 1.34 1.11 1.01 WaterTotal water intake in 2016 was 2.4 million m3, about 11%lower than in 2015. This decrease was mainly due tooperational changes, lower production volumes atmultiple Lighting sites where water is used for coolingpurposes, and water-saving actions at various sites.Lighting represents around 60% of total water usage. AtLighting, water is used in manufacturing as well as fordomestic purposes. In Royal Philips, water is mainlyused for domestic purposes. The exclusion of Lumiledsand Automotive has a significant downward impact onthe water consumption of Philips. In 2016, Lumileds andAutomotive accounted for 1.7 million m3 of water.Group performance2.3.328Annual Report 2016Philips GroupWater intake in thousands of m32012 - 20162012 2013 2014 2015 2016 Personal Health368 652 585 614 613 Diagnosis &Treatment281 311 392 268 269 Connected Care& HealthInformatics75 77 74 94 81 Lighting2,413 2,249 2,052 1,751 1,451 Continuingoperations3,137 3,289 3,103 2,727 2,414 Discontinuedoperations1,720 1,755 1,700 1,684 1,651 Philips Group4,857 5,044 4,803 4,411 4,065 In 2016, 70% of water was purchased and 30% wasextracted from groundwater wells.WasteIn 2016, total waste decreased by some 5% comparedto 2015 to 64.8 kilotonnes, mainly due to operationalchanges, lower production volumes and less packagingwaste at Lighting sites. Lighting contributed 62% of totalwaste, Personal Health businesses 22%, Diagnosis &Treatment businesses 14% and Connected Care &Health Informatics businesses 2%. The reportedincrease in waste in Diagnosis & Treatment businesseswas partially caused by the removal of obsoletecomponents and two newly acquired reporting sites.The exclusion of Lumileds and Automotive had a downward impact on total waste of 6.2 kilotonnes.Philips GroupTotal waste in kilotonnes2012 - 20162012 2013 2014 2015 2016 Personal Health14.6 13.2 13.1 13.8 14.3 Diagnosis &Treatment7.4 6.7 6.8 8.0 9.2 Connected Care& HealthInformatics1.1 1.1 1.2 1.4 1.4 Lighting57.5 54.9 53.9 45.3 39.9 Continuingoperations80.6 75.9 75.0 68.5 64.8 Discontinuedoperations7.0 16.1 5.4 6.4 6.2 Philips Group87.6 92.0 80.4 74.9 71.0 Total waste consists of waste that is delivered forlandfill, incineration or recycling. Materials delivered forrecycling via an external contractor comprised 54kilotonnes, which equals 83% of total waste,comparable to 2015. Of the 17% remaining waste, 81%comprised non-hazardous waste and 19% hazardouswaste. A total of 6.1 kilotonnes of waste was sent tolandfill. Our sites are addressing both the recyclingpercentage as well as waste sent to landfill as part ofboth the new Royal Philips and Philips Lightingsustainability programs.Philips GroupIndustrial waste delivered for recycling in %201625Paper21Glass18Metal10Wood8Chemical waste6Plastics12OtherEmissionsIn the ‘Healthy people, sustainable planet’ program,Royal Philips included new reduction targets for thesubstances that are most relevant for its businesses. Inorder to provide comparable information at Grouplevel, please find the summary of the emissions of theformerly targeted substances below. Emissions ofrestricted substances reduced from 26 kilos in 2015 to7 kilos in 2016, mainly caused by one site in China whichphased out a thinner containing benzene. For the fourthyear in a row, mercury emissions at Lighting were as lowas reasonably achievable, according to our assessment.The level of emissions of hazardous substancesdecreased from 25,101 kilos to 12,412 kilos in 2016(-51%), mainly driven by changes in the lacqueringprocess and product mix in the Personal Healthbusinesses.Philips GroupRestricted and hazardous substances in kilos2012 - 20162012 2013 2014 2015 2016 Restrictedsubstances67 37 29 26 7 Hazardoussubstances67,530 35,118 28,310 25,101 12,412 For more details on emissions from substances, pleaserefer to sub-section 12.4.3, Sustainable Operations, ofthis Annual Report.Group performance2.4Annual Report 2016292.4Proposed distribution toshareholdersPursuant to article 34 of the articles of association ofRoyal Philips, a dividend will first be declared onpreference shares out of net income. The remainder ofthe net income, after reservations made with theapproval of the Supervisory Board, shall be availablefor distribution to holders of common shares subject toshareholder approval after year-end. As of December31, 2016, the issued share capital consists only ofcommon shares; no preference shares have beenissued. Article 33 of the articles of association of RoyalPhilips gives the Board of Management the power todetermine what portion of the net income shall beretained by way of reserve, subject to the approval ofthe Supervisory Board.A proposal will be submitted to the upcoming AnnualGeneral Meeting of Shareholders to declare a dividendof EUR 0.80 per common share (up to EUR 745 million),in cash or in shares at the option of the shareholder,against the net income for 2016.If the above dividend proposal is adopted, the shareswill be traded ex-dividend as of May 12, 2017 and May15, 2017 at the New York Stock Exchange and EuronextAmsterdam, respectively. In compliance with the listingrequirements of the New York Stock Exchange and thestock market of Euronext Amsterdam, the dividendrecord date will be May 16, 2017.Shareholders will be given the opportunity to maketheir choice between cash and shares between May 17,2017 and June 9, 2017. If no choice is made during thiselection period the dividend will be paid in cash. OnJune 9, 2017 after close of trading, the number of sharedividend rights entitled to one new common share willbe determined based on the volume weighted averageprice of all traded common shares Koninklijke PhilipsN.V. at Euronext Amsterdam on June 7, 8 and 9, 2017.The Company will calculate the number of sharedividend rights entitled to one new common share (the‘ratio’), such that the gross dividend in shares will beapproximately equal to the gross dividend in cash. Theratio and the number of shares to be issued will beannounced on June 13, 2017. Payment of the dividendand delivery of new common shares, with settlement offractions in cash, if required, will take place from June14, 2017. The distribution of dividend in cash to holdersof New York Registry shares will be made in USD at theUSD/EUR rate as per WM/ Reuters FX Benchmark 2 PMCET fixing of June 12, 2017.Further details will be given in the agenda for the 2017Annual General Meeting of Shareholders. All datesmentioned remain provisional until then.Dividend in cash is in principle subject to 15% Dutchdividend withholding tax, which will be deducted fromthe dividend in cash paid to the shareholders. Dividendin shares paid out of net income and retained earningsis subject to 15% dividend withholding tax, but only inrespect of the par value of the shares (EUR 0.20 pershare).In 2016, a dividend of EUR 0.80 per common share waspaid in cash or shares, at the option of the shareholder.For 55.0% of the shares, the shareholders elected for ashare dividend resulting in the issue of 17,344,462 newcommon shares, leading to a 1.9% dilution. EUR 330million was paid in cash. See also chapter 14, InvestorRelations, of this Annual Report.The balance sheet presented in this report, as part ofthe Company financial statements for the period endedDecember 31, 2016, is before appropriation of the resultfor the financial year 2016.Segment performance330Annual Report 20163Segment performanceThe health technology landscapeHealth systems around the world are under increasing economic pressure. More people are living longer, and more areliving with chronic conditions – driving healthcare spending to unsustainable levels. Shortages of healthcareprofessionals are also adding to the relentless challenge of delivering better care at lower cost to growing patientpopulations.Fundamental transformative changes are already taking place in the healthcare industry to enable the provision ofaffordable, quality care to those who need it. A shift is under way towards value-based healthcare, which places greateremphasis on results, driving the reduction of waste and inefficiency, increasing access and improving outcomes, whileat the same time reducing costs.Consumers are becoming increasingly engaged in managing their own health, with greater attention being focused onthe benefits of healthy living and home care. Mobile and digital technologies are significant enablers of this trend, leadingto new care delivery models – founded upon integrated care, real-time analytics and personalized solutions andservices – that give patients greater control over, and responsibility for, their health.Philips (NYSE: PHG, AEX: PHIA) is a health technology company focused on improving people’s lives through meaningfulinnovation across the health continuum – from healthy living and prevention to diagnosis, treatment and home care.Applying advanced technologies and deep clinical and consumer insights, Philips partners with customers to deliverintegrated solutions that enable better outcomes at lower cost.Healthy livingPreventionDiagnosisTreatmentHome careConnected care and health informaticsOur structure in 2016Koninklijke Philips N.V. (‘Royal Philips’ or the ‘Company’) is the parent company of the Philips Group (‘Philips’ or the‘Group’), headquartered in Amsterdam, the Netherlands. The Company is managed by the members of the ExecutiveCommittee (comprising the Board of Management and certain key officers) under the supervision of the SupervisoryBoard. The Executive Committee operates under the chairmanship of the Chief Executive Officer and sharesresponsibility for the deployment of Philips’ strategy and policies, and the achievement of its objectives and results.In September 2014, Philips announced its plan to sharpen its strategic focus by establishing two stand-alone companiesfocused on the HealthTech and Lighting opportunities respectively. To this end, a stand-alone structure was establishedfor Philips Lighting within the Philips Group, effective February 1, 2016. Then, on May 27, 2016, Philips Lighting was listedand started trading on Euronext in Amsterdam under the symbol ‘LIGHT’. Following the listing of Philips Lighting, Philipsretained a 71.225% stake and continued to consolidate Philips Lighting, through 2016. On February 8, 2017, Philipsannounced that it had successfully completed an accelerated bookbuild offering to institutional investors and to PhilipsLighting of 26.0 million shares in Philips Lighting, reducing Philips’ stake in Philips Lighting’s issued and outstandingshare capital from 71.225% to approximately 55.180%. The transaction is in line with Philips’ stated objective to fully selldown its stake in Philips Lighting over the next several years.In light of its focus on health technology, effective January 1, 2016, Philips eliminated the former Healthcare andConsumer Lifestyle sector layers in order to drive the convergence of consumer health and professional healthcare, aswell as to reduce overhead costs, and changed the reporting of its health technology activities. At the same time, theformer Innovation, Group & Services was split and allocated to Philips and Philips Lighting respectively.Segment performance3Annual Report 201631In 2016, Philips’ activities in the field of health technology were organized on a segment basis. The reportable segmentsare Personal Health businesses, Diagnosis & Treatment businesses, Connected Care & Health Informatics businessesand Lighting, each being responsible for the management of its business worldwide. Additionally, Philips identifiesHealthTech Other and Legacy Items, as shown below:PhilipsHealthTechPersonalHealthbusinessesHealth & WellnessPersonal CareDomesticAppliances Sleep &Respiratory Care1Diagnosis &TreatmentbusinessesDiagnostic ImagingImage-GuidedTherapyUltrasoundConnected Care &Health InformaticsbusinessesPatient Care &Monitoring SolutionsHealthcareInformatics,Solutions & ServicesPopulation HealthManagementOtherInnovationEmerging BusinessesIP RoyaltiesCentral costsOtherLightingLampsLEDProfessionalHomeOtherLegacyItemsLegacy litigationSeparation costFocus of external reporting1)Previously part of the Healthcare sectorAt the end of 2016, Philips had 82 production sites in 22 countries, sales and service outlets in approximately 100countries, and 105,223 employees.Segment performance3.132Annual Report 20163.1Personal Health businessesThe Chief Business Leader of the Personal Healthbusinesses segment and Chief Marketing Officer, PieterNota, joined Philips in 2010 as CEO of Philips ConsumerLifestyle. Prior to that he was on the Board ofManagement of Beiersdorf AG as Chief Marketing &Innovation Officer. He started his career at Unilever.3.1.1About Personal Health businessesOur Personal Health businesses play an important roleon the health continuum, delivering integrated,connected solutions that support healthier lifestylesand those living with chronic disease.Leveraging our deep consumer expertise and extensivehealthcare know-how, we enable people to live ahealthy life in a healthy home environment, and toproactively manage their own health.Through our various businesses, Personal Health hasdelivered sustained strong growth and marginexpansion in recent years, driven by four main factors:•Innovation at the forefront of digital health, based ondeep consumer insights•Value propositions leveraging consumer data,unlocking recurring revenue streams•High-impact consumer marketing programs•Geographical expansion with proven propositionsThrough 2016, we have driven above-market growthand are stepping up profitability towards the mid-teens, building on a strong track record. PersonalHealth has many distinct product categories andassociated competitors, including Procter & Gamble inPersonal Care and Oral Healthcare, Groupe SEB inDomestic Appliances and ResMed in Sleep &Respiratory Care.In 2016, the Personal Health segment consisted of thefollowing areas of business:•Health & Wellness: mother and child care, oralhealthcare, pain relief•Personal Care: male grooming, beauty•Domestic Appliances: kitchen appliances, coffee, air,garment care, floor care•Sleep & Respiratory Care: sleep, respiratory care,respiratory drug delivery Personal HealthTotal sales by business as a %201620Health & Wellness25Personal Care34Domestic Appliances21Sleep & Respiratory CareThrough our Personal Health businesses, we offer abroad range of products from high to low price/valuequartiles, necessitating a diverse distribution model.We continue to expand our portfolio and increase itsaccessibility, particularly in lower-tier cities in growthgeographies. We are well positioned to capture furthergrowth in online sales and continue to build our digitaland e-commerce capabilities. We are adapting our webfunctionality to offer consumers a better userexperience via smaller screens, driving improvementsfrom conversion to sales. And we continue to roll-outhigh-impact consumer marketing programs in supportof key innovations. The launch of Philips OneBlade, forexample, was accompanied by the deployment of aninnovative Digital Advocacy Marketing Program.The company’s wide portfolio of connected consumerhealth products leverages Philips HealthSuite – acloud-enabled connected health ecosystem ofdevices, apps and digital tools that enablespersonalized health and continuous care.We are leveraging connectivity to engage consumers innew and impactful ways through social media anddigital innovation. For example, in 2016 we launchedthe Philips Sonicare FlexCare Platinum Connectedtoothbrush. With unique smart sensor technologyinside the toothbrush – connecting to the PhilipsSonicare smartphone app via Bluetooth – users receivepersonalized step-by-step coaching, real-timefeedback and post-brush analysis with a visual 3Dmouth map to help improve brushing technique. Via thePhilips HealthSuite digital platform, the app allows datato be shared with dental practices, so hygienists canmark up areas that need special attention.Under normal economic conditions, Philips’ PersonalHealth businesses experience seasonality, with highersales in the fourth quarter.In 2016, Personal Health employed approximately22,530 people worldwide. The global sales and serviceorganization covered more than 50 mature and growthgeographies. In addition, we operated manufacturingand business creation organizations in Argentina,Austria, Brazil, China, India, Indonesia, Italy, theNetherlands, Romania, the UK and the US.Commitment to qualityThe implementation of the Philips Business System isembedding a fundamental commitment to qualityacross all our processes, products, systems andservices. Philips’ Personal Health businesses aresubject to regulatory requirements in the marketswhere they operate. This includes the EuropeanUnion’s Waste from Electrical and ElectronicEquipment (WEEE), Restriction of HazardousSubstances (RoHS), Registration, Evaluation,Authorization and Restriction of Chemicals (REACH),Energy-using Products (EuP) requirements andProduct Safety Regulations. We have a growingportfolio of medically regulated products in our HealthSegment performance3.1.1Annual Report 201633& Wellness and Personal Care businesses. For theseproducts we are subject to the applicable requirementsof the US FDA, the European Medical Device Directive,the CFDA in China and comparable regulations in othercountries. Through our growing beauty, oral healthcareand mother and child care product portfolio the rangeof applicable regulations has been extended to includerequirements relating to cosmetics and, on a very smallscale, pharmaceuticals.With regard to sourcing, please refer to sub-section12.3.8, Supplier indicators, of this Annual Report.3.1.22016 business highlightsPhilips introduced a range of personalized healthprograms at this year’s IFA trade show in Berlin,including the Philips Sonicare FlexCare PlatinumConnected toothbrush and the uGrow medical-gradebaby app. The health programs leverage PhilipsHealthSuite, a cloud-enabled connected healthecosystem of devices, apps and digital tools.Personal Care successfully launched Philips OneBlade– a hybrid styler that can trim, shave and create cleanlines and edges – in France, the UK, Germany and NorthAmerica.Sleep & Respiratory Care launched the cloud-basedPatient Adherence Management Service, whichsupports new patients’ transition to sleep therapy.Building on the success of the integrated Dream Familysolution in the US, Europe and Japan, the PhilipsDreamStation Go portable CPAP solution wasintroduced. DreamStation Go is a compact andlightweight device designed to provide sleep therapyfor travelers with obstructive sleep apnea.Oral Healthcare continued its growth trajectory,supported by a strong performance of the PhilipsSonicare FlexCare Platinum Connected toothbrush,which has built-in sensor technology that enables real-time feedback and coaching to help consumersoptimize their brushing routine.3.1.32016 financial performanceNet income is not allocated to segments as certainincome and expense line items are monitored on acentralized basis.Personal HealthKey data in millions of EUR unless otherwise stated2014 - 20162014 2015 2016 Sales5,948 6,751 7,099 Sales growth % increase, nominal3% 14% 5% % increase, comparable1)6% 5% 7% Income from operations (EBIT)620 736 953 as a % of sales10.4% 10.9% 13.4% EBITA 1)758 885 1,092 as a % of sales12.7% 13.1% 15.4% In 2016, sales amounted to EUR 7,099 million, anominal increase of 5% compared to 2015. Excluding a2% negative currency impact, comparable sales1) were7% higher year-on-year, driven by double-digit growthin Health & Wellness and mid-single-digit growth inPersonal Care, Sleep & Respiratory Care and DomesticAppliances. Green Revenues amounted to EUR 3,951million, or 56% of total segment sales.From a geographic perspective, on a comparablebasis1) both growth geographies and maturegeographies achieved high-single-digit growth. Ingrowth geographies, the increase was mainly driven byCentral & Eastern Europe and Middle East & Turkey.Mature geographies recorded high-single-digit growth,driven by high-single-digit growth in Western Europe,mid-single-digit growth in North America and low-single-digit growth in other mature geographies.Income from operations (EBIT) amounted to EUR 953million, or 13.4% of sales, which included EUR 139million of amortization charges, mainly related tointangible assets at Sleep & Respiratory Care.EBITA1) increased from EUR 885 million, or 13.1% ofsales, in 2015 to EUR 1,092 million, or 15.4% of sales, in2016. Restructuring and acquisition-related chargesamounted to EUR 16 million in 2016, compared to EUR37 million in 2015. EBITA1) in 2015 also included chargesrelated to the devaluation of the Argentine peso of EUR13 million. The increase in EBITA1) was attributable tohigher volumes and cost productivity.Personal HealthSales per geographic cluster in millions of EUR2014 - 20161,6201,4655332,3305,948‘141,6891,7775942,6916,751‘151,800Western Europe1,901North America643Other mature2,755Growth7,099‘161)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Segment performance3.1.334Annual Report 2016Personal HealthIncome from operations (EBIT) and EBITA 1) in millions of EUR2014 - 2016138620758‘14149736885‘15139Amortization andimpairment in value953Income from operations(EBIT) in value1,092EBITA in value1)‘1612.7%13.1%15.4%EBITA as a % of sales1)1)Non-GAAP financial measure. For the definition and reconciliation to themost directly comparable GAAP measure, refer to chapter 4,Reconciliation of non-GAAP information, of this Annual Report3.1.4Healthy people, sustainable planetSustainability continued to play an important role in thePersonal Health businesses in 2016, with the main focuson optimizing the sustainability performance of ourproducts and operations. Green Revenues, sales ofproducts and solutions which meet or exceed ourminimum requirements in the area of energyconsumption, packaging and/or substances ofconcern, accounted for 56% of total sales in 2016. AllGreen Products with rechargeable batteries exceed thestringent California energy efficiency standard by atleast 10%. And over 54% of total sales are PVC- and/orBFR-free products (excluding power cords).As part of our Circular Economy program we havecontinued to increase the use of recycled materials inour products. Over 1,440 tons of recycled plastics wereused in kitchen appliances, vacuum cleaners, irons, airpurification and coffee machines, compared to 900tons in 2015. The revenue from Circular Productsreached over EUR 414 million in 2016, comprised ofturnover generated from performance- and access-based business models in Sleep & Respiratory Care andproducts with recycled plastic materials.As a concrete example of our commitment tosustainability we launched the new Performer Ultimatevacuum cleaner, for which we have created a closed-loop recycling system. Old Philips vacuum cleaners arecollected in Western Europe and recycled separatelyfrom other products and brands. The plastics from theold vacuum cleaners are then mixed with other recycledplastics to create a new recycled plastic that is used toproduce the new Performer Ultimate, which is free ofPVC/BFR, has an A-class energy label and contains36% recycled plastics.In our operations we continue to draw most of ourelectricity from renewable sources, with the ultimateaim of having CO2-neutral production sites by 2020. In2016, 47% of the electricity used in manufacturing sitescame from renewable sources and 85% of the industrialwaste was recycled. We sent 7% of our manufacturingwaste to landfill in 2016 and started a detailed analysisof waste streams that are landfilled by our productionsites. Based on this we will define actions to reach ourgoal of zero waste to landfill in 2020.Segment performance3.2Annual Report 2016353.2Diagnosis & Treatment businessesThe Chief Business Leader of the Diagnosis &Treatment businesses segment, Rob Cascella, joinedPhilips in April 2015. He has more than 30 years ofexperience in the healthcare industry and has servedon the Boards of several companies, including 10 yearsas President and later CEO of Hologic Inc.3.2.1About Diagnosis & Treatment businessesOur Diagnosis & Treatment businesses are foundationalto our health technology strategy, delivering on thepromise of precision medicine and least-invasivetreatment and therapy. We enable our customers torealize the full potential of their ‘triple aim’ – to improveoutcomes, lower the cost of care delivery and enhancethe patient experience – by enabling first-time-rightdiagnosis and treatment. We are focused on providingthe most efficient path to obtaining a definitivediagnosis by integrating multiple sources of informationand combining the data to create a comprehensivepatient view. By bringing together imaging morphology,pathology and genomics, we are able to interrogateand extract the information needed to offer verypersonalized care. Our informatics platform providesthe intelligence to make more consistent decisions, aswell as making it easier to share and collaborate.With our image-guided therapy, clinicians are providedwith the technology necessary to determine thepresence of disease, guide treatment procedures andconfirm effectiveness. Our solutions enable patient-specific treatment planning and selection, simplifycomplex procedures through integrated real-timeguidance, and provide clinically proven treatmentsolutions. We provide image guidance both in ourproprietary products and by partnering with radiationtherapy companies like Elekta and IBA to deliver real-time, precise cancer treatment.In addition to our solutions for clinical pathways, weprovide a range of technologies to help our customersimprove their operational results. This year weintroduced a comprehensive suite of software servicesdesigned to improve radiology department operations– PerformanceBridge is a multi-vendor offering thatprovides practice management, dose management andservice analytics. It can be delivered as a serviceoffering to promote continuous improvement, or as aprofessional service where our people partner with ourcustomers to improve operating effectiveness.The value proposition to our customers is based onleveraging our extensive clinical experience with ourbroad portfolio of technologies – making us uniquelycapable to provide meaningful solutions that ultimatelycan improve the lives of the patients we serve whilelowering the cost of care delivery for our customers.Through our various businesses, Diagnosis & Treatmentis focused on growing market share and profitability by:•continuing to improve business fundamentals inDiagnostic Imaging; we made substantial progress in2016, with, amongst others, the full CT (ComputedTomography) portfolio shipping from Cleveland,Haifa, Suzhou and other facilities•enhancing our offering in oncology and radiologyand expanding our solutions offering, whichcomprises systems, smart devices, software andservices•leveraging the successful integration of Volcano anddriving expansion into devices for treatment•addressing underpenetrated adjacencies in GeneralImaging and Obstetrics/Gynecology in UltrasoundPhilips is one of the world’s leading health technologycompanies (based on sales) along with General Electricand Siemens. The competitive landscape in thehealthcare industry is evolving with the emergence ofnew market players. The United States, our largestmarket, represented 34% of Diagnosis & Treatment’sglobal sales in 2016, followed by China, Japan andGermany. Growth geographies accounted for 33% ofDiagnosis & Treatment’s sales. In 2016, Diagnosis &Treatment had 23,791 employees worldwide .Through 2016 we consistently focused on our value-creation strategy to ensure continued growth andmargin improvement.In 2016, the Diagnosis & Treatment segment consistedof the following areas of business:•Diagnostic Imaging: Magnetic Resonance Imaging,Computed Tomography, Diagnostic X-Ray, whichincludes digital X-ray and mammography, AdvancedMolecular Imaging, and integrated clinical solutions,which include radiation oncology planning, disease-specific oncology solutions and X-Ray dosemanagement•Image-Guided Therapy: interventional X-raysystems, encompassing cardiology, radiology andsurgery, and interventional imaging and therapydevices that include Intravascular Ultrasound (IVUS),Fractional Flow Reserve (FFR) and atherectomy forthe treatment of coronary artery and peripheralvascular disease•Ultrasound: imaging products focused on diagnosis,treatment planning and guidance for cardiology,general imaging, Obstetrics/Gynecology, and point-of-care applications, as well as proprietary softwarecapabilities to enable advanced diagnostics andinterventionSegment performance3.2.136Annual Report 2016Diagnosis & TreatmentTotal sales by business as a %201650Diagnostic Imaging29Image-Guided Therapy21UltrasoundSales at Philips’ Diagnosis & Treatment businesses aregenerally higher in the second half of the year, largelydue to the timing of new product availability andcustomer spending patterns.Sales channels are a mix of a direct sales force,especially in all the larger markets, combined withonline sales portal and distributors – this varies byproduct, market and price segment. Sales are mostlydriven by a direct sales force that has an intimateknowledge of the procedures for which our devices areused, and visits our customer base frequently.Commitment to qualityThe implementation of the Philips Business System isembedding a fundamental commitment to qualityacross all our processes, products, systems andservices. This commitment is of vital importance in theextensively regulated health equipment and systembusiness. We are committed to compliance withregulatory product approval and quality systemrequirements in every market we serve, by addressingspecific requirements of local and national regulatoryauthorities including the US FDA, the CFDA in China andcomparable agencies in other countries, as well as theEuropean Union’s Waste from Electrical and ElectronicEquipment (WEEE), Restriction of HazardousSubstances (RoHS) and Registration, Evaluation,Authorization and Restriction of Chemicals (REACH)regulations.The imaging businesses and image processingapplications are governed by regulatory approvals inthe markets that we serve. In almost all cases, newproducts that we introduce are subject to a regulatoryapproval process (e.g. 510k for FDA approvals in theUSA). Failing to comply with the regulatoryrequirements can have severe consequences. Thenumber and diversity of regulatory bodies in the variousmarkets we operate in globally adds complexity andtime to product introductions. Regulatory approval is aprerequisite for market introduction of medical devices.Further progress was made in 2016 in strengthening theremediated quality management system at our facilityin Cleveland, Ohio, with the ramp-up of production andshipments continuing in 2017.With regard to sourcing, please refer to sub-section12.3.8, Supplier indicators, of this Annual Report.3.2.22016 business highlightsIn line with its strategy of building multi-year strategicpartnerships, Philips signed multiple agreements in2016, including a 10-year EUR 74 million agreementwith Russia’s Expert Group of Companies to providesolutions combining advanced imaging systems withclinical informatics to improve cardiac care. In China,leveraging its expertise in cardiology, Philips signed a5-year interventional cardiology solutions agreementwith DeltaHealth for the new DeltaHealth HospitalShanghai, which will specialize in cardiac care. Theagreement comprises interventional X-ray systems,ultrasound imaging, software and services.Within Image-Guided Therapy, Philips Volcanodelivered a strong performance with comparable salesgrowth1) and continued operational improvements. Thiswas driven by growth across the smart catheter productportfolio, synergies with the Image-Guided TherapySystems business and expansion in therapy solutionsand new geographies.At RSNA 2016, Philips launched new data-driven,intelligent solutions to improve operational efficienciesand enhance diagnostics and patient care. Theseinclude IIlumeo Adaptive Intelligence and IntelliSpacePortal 9.0 – advanced informatics and visual analysissolutions with machine-learning capabilities to supportthe physician.Leveraging its innovation leadership in diagnosticimaging, Philips has installed the Philips IQon SpectralCT across the globe. The system is the world’s first andonly spectral detector computed tomography modalitythat provides clinicians with a comprehensive view ofthe patient’s anatomy, with a single, low-doseexamination. Market success is the result of themodality’s superb image quality and diseaseassessment, in particular for oncology.Demonstrating its continued leadership in ultrasoundimaging solutions, Philips received the ‘2016 Best inKLAS’ award in the Ultrasound category. KLAS, aleading global research firm, recognizes companieswith the Best in KLAS award for outstanding innovationand contributions to improved patient outcomes basedon the past 12 months’ performance ratings.Philips introduced the first commercially available MR-only simulation solution indicated for prostate cancerradiation oncology treatment planning in the UnitedStates. The solution is part of Philips’ Ingenia MR-RTplatform, which supports radiation departments thatwant to rely on MRI as their primary imaging modalityfor prostate cancer treatment planning. 1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Segment performance3.2.3Annual Report 2016373.2.32016 financial performanceNet income is not allocated to segments as certainincome and expense line items are monitored on acentralized basis.Diagnosis & TreatmentKey data in millions of EUR unless otherwise stated2014 - 20162014 2015 2016 Sales5,284 6,484 6,686 Sales growth % increase (decrease),nominal(7)% 23% 3% % increase (decrease),comparable1)(5)% 6% 4% Income from operations(EBIT)349 322 546 as a % of sales6.6% 5.0% 8.2% EBITA 1)374 377 594 as a % of sales7.1% 5.8% 8.9% In 2016, sales amounted to EUR 6,686 million, 3%higher than in 2015 on a nominal basis. Excluding a 1%negative currency effect, comparable sales1) increasedby 4%, driven by double-digit growth in Image GuidedTherapy, low-single-digit growth in Diagnostic Imaging,while Ultrasound was in line with 2015. Green Revenuesamounted to EUR 4,798 million, or 71% of total segmentsales.From a geographic perspective, comparable sales1) ingrowth geographies showed double-digit growth,reflecting double-digit growth in Latin America andIndia and high-single-digit growth in China. Maturegeographies were in line with 2015, driven by low-single-digit growth in Western Europe, partly offset bya low-single-digit decline in other mature geographies.North America was in line with 2015.Income from operations (EBIT) amounted to EUR 546million, or 8.2% of sales, and included EUR 48 million ofamortization charges, mainly related to acquiredintangible assets in Image-Guided Therapy.EBITA1) amounted to EUR 594 million, or 8.9% of sales,compared to EUR 377 million, or 5.8% of sales, in 2015.2016 included restructuring and acquisition- relatedcharges of EUR 37 million, compared to EUR 131 millionin 2015. 2015 also included charges of EUR 7 millionrelated to the devaluation of the Argentine peso. Theimprovement in margin was driven by Image-GuidedTherapy and Diagnostic Imaging, as well as lowerrestructuring and acquisition-related charges.Diagnosis & TreatmentSales per geographic cluster in millions of EUR2014 - 20161,2311,7615951,6975,284‘141,3682,3077202,0896,484‘151,368Western Europe2,340North America763Other mature2,215Growth6,686‘16Diagnosis & TreatmentIncome from operations (EBIT) and EBITA1) in millions of EUR2014 - 201625349374‘1455322377‘1548Amortization andimpairment in value546Income from operations(EBIT) in value594EBITA in value‘167.1%5.8%8.9%EBITA as a % of sales1)1)Non-GAAP financial measure. For the definition and reconciliation to themost directly comparable GAAP measure, refer to chapter 4,Reconciliation of non-GAAP information, of this Annual Report3.2.4Healthy people, sustainable planetA growing and aging population, the rise of chronic andlifestyle-related diseases and global resourceconstraints pose a number of challenges, includingpollution and stressed healthcare systems. Philipscontinues to improve lives around the globe bydeveloping diagnosis and treatment solutions thatenable first-time-right diagnosis, precisioninterventions and therapy, while respecting theboundaries of natural resources.In 2016, Green Revenues in Diagnosis & Treatmentamounted to EUR 4,798 million thanks to a largeportfolio of Philips Green Products and Solutions thatsupport energy efficiency, materials reduction andother sustainability goals. We also actively collaboratewith care providers around the globe to look for waysto minimize the environmental impact of healthcare, forexample by reducing the energy use of medicalequipment.1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Segment performance3.2.438Annual Report 2016Supporting the transition to a circular economy, wehave continued to expand the Diamond Selectrefurbishment program and also the SmartPathupgrading program for all modalities in the Diagnosis &Treatment portfolio.Philips was presented with the ‘Champion for Change’Award by Practice Greenhealth for the third year in arow. This award honors businesses that go beyondtaking steps to improve their own green practices, butalso help hospitals to expand their sustainablepractices.Segment performance3.3Annual Report 2016393.3Connected Care & HealthInformatics businessesThe Chief Business Leader of the Connected Care &Health Informatics businesses segment, Jeroen Tas,has over 30 years of global experience as anentrepreneur and senior executive in the healthcare,information technology and financial servicesindustries. Previously he was CEO of Philips HealthcareInformatics, Solutions & Services, overseeing digitalhealth and clinical informatics, and Group ChiefInformation Officer (CIO), leading IT worldwide. InFebruary 2017, Jeroen Tas was appointed as ChiefInnovation & Strategy Officer and succeeded by CarlaKriwet who joined the Executive Committee as ChiefBusiness Leader of Connected Care & HealthInformatics. Carla Kriwet is also the BG Leader ofPatient Care & Monitoring Solutions and previously wasthe Philips Market Leader of Germany, Austria &Switzerland.3.3.1About Connected Care & Health InformaticsbusinessesSpanning the entire health continuum, the ConnectedCare & Health Informatics businesses aim to empowerconsumers, care givers and clinicians with digitalsolutions that facilitate value-based care by enablingprecision medicine and population healthmanagement, building on Philips’ strengths inconsumer technology, patient monitoring and clinicalinformatics.This requires a common digital framework thatconnects and aligns consumers, patients, payers andhealthcare providers. A framework that aggregates andleverages information from clinical, personal andhistoric data, using analytics to support care providersin first-time-right diagnosis and treatment, and helpsidentify the risk and needs of different groups within apopulation.To this end we have developed Philips HealthSuite – acloud-based connected health ecosystem of devices,apps and digital tools. Applying analytics andalgorithms, we can use data to deliver predictive,personalized insights, for example to help motivatehealthy behavior through digital coaching, to supporthealthcare professionals in making clinical decisions, orto alert medical teams to potential problems, e.g. withelderly patients living independently at home.In 2016, the Connected Care & Health Informaticssegment consisted of the following areas of business:•Patient Care & Monitoring Solutions: Enterprise-wide patient monitoring solutions, from valuesolutions to sophisticated connected solutions, forreal-time clinical information at the patient’sbedside; patient analytics, patient monitoring andclinical decision support systems includingdiagnostic ECG data management for improvedquality of cardiac care; therapeutic care, includingcardiac resuscitation, emergency care solutions,invasive and non-invasive ventilators for acute andsub-acute hospital environments, and respiratorymonitoring devices; consumables across the patientmonitoring and therapeutic care businesses; andcustomer service, including clinical, IT, technical, andremote customer propositions.•Healthcare Informatics, Solutions & Servicescomprises advanced healthcare IT, clinical andadvanced visualization and quantificationinformatics solutions for radiology, cardiology,oncology and neurology departments. It also offersUniversal Data Management solutions, PictureArchiving and Communication Systems (PACS) andfully integrated Electronic Medical Record (EMR)systems to support healthcare enterprises inoptimizing health system performance. The businessgroup also includes a professional services business(Healthcare Transformation Services) spanningconsulting, education, clinical and businessperformance improvement, program managementand system integration services, as well as the PhilipsHealthSuite digital platform. This platform enablesinteroperability, data security, big data andpredictive analytics, optimized workflows and carepathways, rapid application development, enhancedpatient centricity and engagement for the solutionspart of the Philips HealthSuite connected healthecosystem.•Population Health Management: Our services andsolutions leverage our data, analytics and actionableworkflow products, and include: personal healthprograms (app-based with medical grademeasurement devices and coaching) to help peoplemanage their health; technology-enabledmonitoring and intervention (telehealth, remotepatient monitoring, personal emergency responsesystems, and care coordination) to improve agingand chronic condition experiences; actionableprograms to predict risk (including medication andcare compliance, outreach, and fall prediction); andcloud-based solutions for health organizations tomanage population health, driving qualityimprovement and business transformation for thosetransitioning to value-based care.Connected Care & Health InformaticsTotal sales by business as a %201676Patient Care & Monitoring Solutions16Healthcare Informatics,Solutions & Services8Population Health ManagementSales at Philips’ Connected Care & Health Informaticsbusinesses are generally higher in the second half ofthe year, largely due to the timing of new productavailability and customer spending patterns.Segment performance3.3.140Annual Report 2016Sales channels are a mix of a direct sales force,especially in all the larger markets, combined withonline sales portal and distributors – this varies byproduct, market and price segment. Sales are mostlydriven by a direct sales force that has an intimateknowledge of the procedures for which our devices areused, and visits our customer base frequently.Commitment to qualityThe implementation of the Philips Business System isembedding a fundamental commitment to qualityacross all our processes, products, systems andservices. This commitment is of vital importance in theextensively regulated health equipment and systembusiness. We are committed to compliance withregulatory product approval and quality systemrequirements in every market we serve, by addressingspecific requirements of local and national regulatoryauthorities including the US FDA, the CFDA in China andcomparable agencies in other countries, as well as theEuropean Union’s Waste from Electrical and ElectronicEquipment (WEEE), Restriction of HazardousSubstances (RoHS) and Registration, Evaluation,Authorization and Restriction of Chemicals (REACH)regulations.The connected care and health informatics applicationsare governed by regulatory approvals in the marketsthat we serve. In almost all cases, new products that weintroduce are subject to a regulatory approval process(e.g. 510k for FDA approvals in USA, CE Mark in theEuropean Union). Failing to comply with the regulatoryrequirements of the target markets can preventshipment of products. The number and diversity ofregulatory bodies in the various markets we operate inglobally adds complexity and time to productintroductions. Regulatory approval is a prerequisite formarket introduction.Philips’ products and related services are subject tovarious regulations and standards. The Company iscommitted to quality and over the last years madeinvestments to enable significant progress in this area.The Company is currently in advanced discussions onresolving a civil matter with the US Department ofJustice representing the US Food and DrugAdministration (FDA), arising from past inspections bythe FDA in and prior to 2015. The discussions focusprimarily on the Company’s compliance with the FDA’sQuality System Regulations in the Company’sEmergency Care and Resuscitation (ECR) business inthe United States. While discussions have not yetconcluded, the Company anticipates that the actionsnecessary to address the FDA’s compliance concernswill have a meaningful impact on the operations of itsECR business.With regard to sourcing, please refer to sub-section12.3.8, Supplier indicators, of this Annual Report.3.3.22016 business highlightsPhilips launched new data-driven, intelligent solutionsto improve operational efficiencies and enhancediagnostics and patient care. These includePerformanceBridge, a new suite of operationalperformance improvement software and services forradiology departments, and Illumeo AdaptiveIntelligence and IntelliSpace Portal 9.0, advancedinformatics and visual analysis solutions with machine-learning capabilities to support the physician.Philips acquired Wellcentive, a leading US-basedprovider of population health management softwaresolutions. Wellcentive complements Philips’ portfoliowith cloud-based IT solutions to import, aggregate andanalyze clinical, claims and financial data acrosshospital and health systems, to help care providersdeliver coordinated care.In line with its strategy of delivering solutions consistingof smart devices, software and services to addressspecific customer needs, Philips signed a 3-year patientmonitoring solutions agreement with Rush UniversityMedical Center, Chicago. The company also signed amulti-year agreement with the Medical University ofSouth Carolina Health focused on integrated patientmonitoring solutions.Expanding its global leadership in patient monitoringsolutions beyond acute care settings, Philips launchedthe latest version of its IntelliVue Guardian solution inEurope. This solution comprises smart devicesincluding wearable biosensors, clinical decisionsupport software and services. It is designed to aidclinicians in the early recognition of patientdeterioration in the hospital’s general wards, allowingtimely intervention and avoiding adverse events,unplanned transfers back to the ICU and longer lengthsof hospitalization.Building on its expertise in new care models based ontelehealth technologies, Philips enabled MacquarieUniversity’s MQ Health in Sydney, Australia, and EmoryHealthcare in Atlanta, US, to provide continuousnighttime critical care oversight to ICU patients back inAtlanta during daytime hours in Australia.Segment performance3.3.3Annual Report 2016413.3.32016 financial performanceNet income is not allocated to segments as certainincome and expense line items are monitored on acentralized basis.Connected Care & Health InformaticsKey data in millions of EUR unless otherwise stated2014 - 20162014 2015 2016 Sales2,684 3,022 3,158 Sales growth % increase (decrease),nominal(2)% 13% 5% % increase (decrease),comparable1)0% 0% 4% Income from operations(EBIT)(157)173 275 as a % of sales(5.9)% 5.7% 8.7% EBITA1)(106)227 322 as a % of sales(3.9)% 7.5% 10.2% In 2016, sales amounted to EUR 3,158 million, 5% higherthan in 2015 on a nominal basis. The 4% increase on acomparable basis1) was driven by mid-single-digitgrowth in Patient Care & Monitoring Solutions, low-single-digit growth in Healthcare Informatics, Solutions& Services, partly offset by a low-single-digit decline inPopulation Health Management. Green Revenuesamounted to EUR 1,442 million, or 45% of segmentsales.From a geographic perspective, comparable sales1) ingrowth geographies showed high-single-digit growth,and mature geographies recorded low-single-digitgrowth.Income from operations (EBIT) amounted to EUR 275million, or 8.7% of sales, and included EUR 47 million ofamortization charges, mainly related to acquiredintangible assets at Population Health Managementand Patient Care & Monitoring Solutions.EBITA1) amounted to EUR 322 million, or 10.2% of sales,compared to EUR 227 million, or 7.5% of sales, in 2015.EBITA1) in 2016 included restructuring and acquisition-related charges of EUR 14 million compared to EUR 38million in 2015. 2016 EBITA1) also included a net releaseof provisions of EUR 12 million, while in 2015 includedcharges of EUR 28 million related to the currencyrevaluation of the Masimo provision and charges ofEUR 1 million related to the devaluation of the Argentinepeso. The margin increase was mainly driven by highervolumes and lower restructuring and acquisition-related charges and other items, partly offset by higherexpenditure on innovation.Connected Care & Health InformaticsSales per geographic cluster in millions of EUR2014 - 20164651,4512774912,684‘144961,7682714873,022‘15472Western Europe1,906North America311Other mature469Growth3,158‘16Connected Care & Health InformaticsIncome from operations (EBIT) and EBITA 1) in millions of EUR2014 - 201649(157)(106)‘1454173227‘1547Amortization andimpairment in value275Income from operations(EBIT) in value322EBITA in value1)‘16(3.9)%7.5%10.2%EBITA as a % of sales1)1)Non-GAAP financial measure. For the definition and reconciliation to themost directly comparable GAAP measure, refer to chapter 4,Reconciliation of non-GAAP information, of this Annual Report3.3.4Healthy people, sustainable planetA growing and aging population, the rise of chronic andlifestyle-related diseases and global resourceconstraints pose a number of challenges, includingpollution and stressed healthcare systems. Philips iscommitted to addressing these challenges withconnected health IT solutions that integrate, collect,combine and deliver quality data for actionable insightsto help improve access to quality care, while respectingthe boundaries of natural resources.It is our belief that well-designed solutions can reducethe travel-related carbon footprint of healthcare, andimprove access and outcomes.In 2016, Green Revenues increased to EUR 1,442 millionand we continued to expand the portfolio of PhilipsGreen Products that support energy efficiency,materials reduction and other sustainability goals.Supporting the transition to a circular economy, wecontinue to expand innovative ‘access over ownership’service solutions where our customers pay for thingswhere and when required, while Philips can secure highlevels of recycling and materials re-use.1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Segment performance3.3.442Annual Report 2016Philips was presented with the ‘Champion for Change’Award by Practice Greenhealth for the third year in arow. This award honors businesses that go beyondtaking steps to improve their own green practices, butalso help hospitals to expand their sustainablepractices.Segment performance3.4Annual Report 2016433.4HealthTech OtherIn our external reporting on HealthTech Other we reporton the items Innovation, Emerging Businesses, IPRoyalties, Central costs and Other.3.4.1About HealthTech OtherInnovationAt Philips, our innovation efforts are aligned with ourbusiness strategy. The Innovation & Strategy functionfeeds the innovation pipeline, enabling the Philipsoperating businesses to create new business optionsthrough new technologies, new business creation, andintellectual property management and development.Focused research and development improvementactivities drive time-to-market efficiency and increasedinnovation effectiveness.Innovation & Strategy facilitates innovation from ideato product as co-creator and strategic partner for thePhilips businesses and complementary partners. Itdoes so through cooperation between research,design, marketing, strategy and businesses ininterdisciplinary teams along the innovation chain, fromfront-end to first-of-a-kind product development. Inaddition, it opens up new value spaces beyond thedirect scope of current businesses (EmergingBusinesses), manages the Company-funded R&Dportfolio, and creates synergies for cross-segmentinitiatives.Innovation & Strategy includes, among others, the ChiefTechnology Office and Research, the Chief MedicalOffice, Innovation Services, Intellectual Property &Standards, Design, Strategy, and Sustainability. Keylocations include Eindhoven (Netherlands), Cambridge(USA), Bangalore (India) and Shanghai (China). In total,Innovation & Strategy employs some 5,000 professionals around the globe.Innovation & Strategy actively participates in OpenInnovation through relationships with academic,clinical, and industrial partners, as well as via public-private partnerships. It does so in order to improveinnovation effectiveness and efficiency, capture andgenerate new ideas, enhance technology partneringcapabilities, and share the related financial exposure. ResearchResearch focuses on exploration of new technologiesand business ideas, delivering proofs-of-concept andoffering consultancy in technology developmentprojects, particularly for first-of-a-kind products andservices. It aims to improve people’s lives throughtechnology-enabled meaningful innovations – as co-creator and strategic partner of the Philips businesses,markets and Open Innovation ecosystem participants.Research investigates trends and creates concepts forsolutions within strategic Philips domains linked tosocietal challenges, such as the increase incardiovascular diseases and cancer, ageing societies,limited access to healthcare and increasing obesity.The Eindhoven lab is the core lab of Philips Research.It was awarded the Open Innovation 2.0 award from theEuropean Union in 2016 in recognition of its role increating the High Tech Campus as a vibrant innovationecosystem.In the fall of 2015, Philips Research opened anew Innovation Lab in Cambridge, MA (USA), which isnow fully up and running. It is home to approximately100 Philips Research North America employees andanother 150 Philips employees from other innovationfunctions and ventures. Being within close proximity tothe MIT campus and clinical collaboration partnersallows researchers to collaborate easily with MITfaculties and PhD students on jointly defined researchprograms, as well as to participate in Open Innovationprojects.Philips Research China broadened its scope in 2016 byadding a Digital Innovation team focused on thecreation of local digital propositions.With the aim of extending our capabilities in researchfor IT healthcare applications, in 2016 we announcedour intention to open an R&D site at the SkolkovoInnovation Centre in Moscow, Russia. The new Centerwill focus on machine learning, artificial intelligence,and computer and data science.The Philips Africa Innovation Hub in Nairobi, Kenya,creates locally relevant innovations ‘in Africa, forAfrica’, with particular focus on improving access toaffordable healthcare. The Africa Innovation Hub is acollaboration between Philips Research and the Africamarket organization. Based on work from this hub, in2016 Philips and Grand Challenges Canada signed arepayable grant agreement to scale the manufacturingand distribution of the Philips Children’s RespirationMonitor (also known as ChARM) to make it affordableand accessible for community-based health workers inlow-resource settings throughout the world.Coming under the Chief Technology Office for reportingpurposes, Philips Photonics is a global leader in VCSELtechnology. VCSELs are infrared lasers for a rapidlygrowing range of consumer and professionalapplications like gesture control, environmentalsensing, precise scene illumination for surveillancecameras, and ultra-fast data communication. Followinga significant rise in demand for VCSELs, PhilipsPhotonics announced in 2016 that it would doublemanufacturing capacity at its laser-diode facility in Ulm,Germany.Segment performance3.4.144Annual Report 2016Chief Medical OfficeThe Chief Medical Office is responsible for clinicalinnovation and strategy, health economics and marketaccess, and medical thought leadership. This includesengaging with stakeholders across the care continuumto build Philips’ leadership in health technology andacting with agility on new value-based reimbursementmodels that benefit the patient and care provider.Leveraging the knowledge and expertise of the medicalprofessional community across Philips, the ChiefMedical Office includes many healthcare professionalswho practice in the world’s leading health systems.Supporting the company’s objectives across the healthcontinuum, its activities include strategic guidance,leveraging clinical and scientific knowledge, fosteringpeer-to-peer relationships in relevant medicalcommunities, liaising with medical regulatory bodies,and supporting clinical and marketing evidencedevelopment.Innovation ServicesInnovation Services offers a wide range of expertservices in development, realization and consulting. Itsskills are leveraged by Philips businesses, markets andInnovation & Strategy in all regions.Innovation Campus BangalorePhilips Innovation Campus Bangalore (PIC) hostsactivities from most of our operating businesses,Research, Design, IP&S and IT. R&D activities at the PICinclude Diagnostic Imaging, Patient Care & MonitoringSolutions, Sleep & Respiratory Care, Personal Health,and Healthcare Informatics, Solutions & Services.PIC plays a key role in Philips’ digital transformationjourney. Originally a software center, today PIC is abroad product development center includingmechanical, electronics, and supply chain capabilities.PIC works with growth geographies to build market-specific solutions, and several businesses have alsolocated business organizations focusing on growthgeographies at PIC.Philips DesignPhilips Design is the global design function for thecompany, ensuring that innovations are meaningful,people-focused and locally relevant. Design is alsoresponsible for ensuring that the Philips brandexperience is differentiating, consistently expressed,and drives customer preference.Philips Design partners with the Philips businesses,Innovation & Strategy, markets and functions,championing a multidisciplinary co-create approachthat brings teams together to understand the differentfactors that influence how a new product or solution willappear, perform and behave.Increasingly we leverage our design capabilities andprocesses to work directly with our customers and ourcustomer-facing teams. Innovating directly with ourcustomers enables Philips Design to deliver people-focused solutions that optimize the user and patientexperience and the overall performance of theirhealthcare systems across the health continuum.Emerging BusinessesEmerging Businesses is a group dedicated toidentifying, developing and bringing to marketbreakthrough products and services that will helpshape the future of healthcare. The group focuses oninnovating at the intersection between supportivetechnologies and current care models that driveimproved outcomes, higher patient satisfaction/engagement and reductions in overall cost of care.One of the businesses is Digital Pathology Solutions,which empowers pathologists with a completeconnected digital pathology solution that is designedto optimize productivity and workflow, and ultimatelyimprove the quality of diagnosis. In June 2016, Philipsacquired Northern Ireland-based PathXL, an innovatorin digital pathology image analysis, workflow softwareand educational tools, to further expand its DigitalPathology Solutions offering and leadership inComputational Pathology.Another business is Handheld Diagnostics, with itsMinicare proposition launched in May 2016, whichprovides direct point-of-care diagnostic information atthe patient’s bedside, enabling physicians to makemedical decisions on the spot. Based on innovativetechnologies, we have designed easy-to-use, patient-centric IVD (in-vitro diagnostics)-enabled solutions andconnected services that have the potential torevolutionize health management and improve existingworkflows. A third business is Light & Health, a pioneer in photodermatology. Leveraging its advanced understandingof the biological effects of light, the team of Philips Light& Health researchers, collaborating with leadingresearch institutions and hospitals, has developed anumber of products, for instance Philips BlueControl fortreating patients with psoriasis, which feature LED lightand offer proven medical benefits.Finally, a fourth team in Emerging Businesses is workingon computational neurology, neuro-mapping andneuro-monitoring. IP RoyaltiesPhilips Intellectual Property & Standards proactivelypursues the creation of new Intellectual Property (IP) inclose co-operation with Philips’ operating businessesand Innovation & Strategy. IP&S is a leading industrialIP organization providing world-class IP solutions toPhilips’ businesses to support their growth,competitiveness and profitability.Segment performance3.4.1Annual Report 201645Royal Philips’ total IP portfolio currently consists of79,000 patent rights, 49,000 trademarks, 86,000design rights and 4,400 domain names. Philips filed1,690 patents in 2016, with a strong focus on the growthareas in health and well-being.IP&S participates in the setting of standards to createnew business opportunities for the Philips operatingbusinesses. A substantial portion of revenue and costsis allocated to the operating businesses. Philipsbelieves its business as a whole is not materiallydependent on any particular patent or license, or anyparticular group of patents and licenses.Central costsThe central cost organization supports the creation ofvalue, connecting Philips with key stakeholders,especially our employees, customers, governmentsand society. It includes the Executive Committee, BrandManagement, Sustainability, New Venture Integration,the Group functions related to strategy, humanresources, legal and finance, as well as country andregional management. It also includes functionalservices to businesses in areas such as IT, Real Estateand Accounting, thereby helping to drive global costefficiencies.3.4.22016 business highlightsStrengthening its Digital Pathology business, Philipsacquired PathXL, an innovator in digital pathologyimage analysis, workflow software and educationaltools. Philips also signed a licensing agreement withVisiopharm to offer their breast cancer panel softwarealgorithms with Philips’ IntelliSite digital pathologysolution to support pathologists in providing anobjective diagnosis of breast cancer.In the 2016 Interbrand annual ranking of the world’smost valuable brands, Philips’ ranking improved to #41from #47, with a total estimated brand value ofapproximately USD 11.3 billion.Philips rose to first place in the European Patent Office’s2015 ranking of patent applicants for patents filed at theEPO. In addition, the company ranked first in three ofthe ten leading fields of technology: MedicalTechnology; Electrical machinery, apparatus, energy;and Measurement.Building on its commitment to sustainability, Philipslaunched its new 5-year ‘Healthy people, sustainableplanet’ program to improve the lives of 2.5 billionpeople per year, increase its Green Revenues to 70% ofsales, generate 15% of its sales from Circular Revenuesand become carbon-neutral in its operations by 2020.Philips became the Industry Group Leader in the CapitalGoods category in the 2016 Dow Jones SustainabilityIndex, achieving the highest possible scores in threesections, including climate strategy and operationaleco-efficiency.Philips Design received 158 design awards, includingbecoming the #1 ranked company in the prestigiousinternational iF ranking for design.Segment performance3.4.346Annual Report 20163.4.32016 financial performanceNet income is not allocated to segments as certainincome and expense line items are monitored on acentralized basis.HealthTech OtherKey data in millions of EUR unless otherwise stated2014 - 20162014 2015 2016 Sales487 503 478 Income from operations (EBIT)37 49 (129)EBITA of: 1) IP Royalties299 284 286 Emerging businesses(38)(63)(98)Innovation(92)(118)(127)Central costs(105)(31)(173)Other(13)(8)(8)EBITA 1)51 64 (120)In 2016, sales amounted to EUR 478 million andreflected EUR 38 million lower royalty income due tothe foreseen expiration of licenses, partly offset by newpatent license agreements and strong double-digitgrowth in Emerging Businesses.In 2016, income from operations (EBIT) totaled to EUR(129) million compared to EUR 49 million in 2015.EBITA1) amounted to a net cost of EUR 120 million,compared to net gain of EUR 64 million in 2014. EBITA1)in 2016 included restructuring and acquisition-relatedcharges of EUR 28 million and a EUR 26 millionimpairment of real estate assets. EBITA1) in 2015included a net restructuring release of EUR 19 millionand a EUR 37 million gain related to the sale of realestate assets. The year-on-year decrease was mainlyattributable to higher restructuring and acquisition-related charges and other items, investments inEmerging Businesses, brand campaigns and cybersecurity.1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Segment performance3.5Annual Report 2016473.5LightingPhilips Lighting is led by Eric Rondolat, who has heldthe position of Chief Executive Officer since thecompany was listed on the Euronext Amsterdam stockexchange (ticker symbol: LIGHT) on May 27, 2016. Priorto that, he was Chief Executive Officer of Lighting atRoyal Philips from April 2012 to May 27, 2016.Following the listing of Philips Lighting, Philips retaineda 71.225% stake and continued to consolidate PhilipsLighting through 2016, with the aim of fully selling downover the next several years. On February 8, 2017, Philipsannounced that it had successfully completed anaccelerated bookbuild offering to institutional investorsand to Philips Lighting of 26.0 million shares in PhilipsLighting, reducing Philips’ stake in Philips Lighting’sissued and outstanding share capital from 71.225% toapproximately 55.180%. The transaction is in line withPhilips’ stated objective to fully sell down its stake inPhilips Lighting over the next several years.3.5.1Lighting landscapeA number of trends and transitions are affecting thelighting industry and changing the way people use andexperience light.Philips Lighting serves a large and attractive market thatis driven by the need for more light, the need forenergy-efficient lighting, and the need for digital andconnected lighting.The world’s population is forecast to grow from 7 billiontoday to over 10 billion by 2050. At the same time, weare witnessing rapid urbanization, with about two-thirds of the world’s population expected to live inurban areas by 2050. These trends will increasedemand for light. In addition, in the face of resourceconstraints and climate change, the world needs thatlight to be energy-efficient. At the same time, thelighting industry is moving from conventional to LEDlighting, which is changing the way people use,experience and interact with light. Digital technologiesenable connectivity and seamless integration insoftware architectures, systems and services.Connected lighting allows light points to be used asinformation pathways, opening up new functionalitiesand services based on the transmission and analysis ofdata.3.5.2About LightingPhilips Lighting is a global market leader withrecognized expertise in the development, manufactureand application of innovative, energy-efficient lightingproducts, systems and services that improve people’slives. It has pioneered many of the key breakthroughsin lighting over the past 125 years, laying the basis forits current strength and leading position in the digitaltransformation to connected lighting.Philips Lighting has a firm strategy which is based uponsix priorities:•Optimize cash from conventional products to fundour growth•Innovate in LED products commercially andtechnologically to outgrow the market•Lead the shift to systems, building the largestconnected installed base•Capture adjacent value through new servicesbusiness models•Be our customers’ best business partner locally,leveraging our global scale•Accelerate! on our operational excellenceimprovement journeyThe work Philips Lighting did in 2016 saw it extend itslighting leadership into the Internet of Things andallowed it to unlock new experiences and value forcustomers. It announced many connected lightinginnovations, and new customers and partnerships, forstreet lighting, retail, offices and homes. The company aims to further invest to support itsleadership in LED and connected lighting systems andservices while at the same time capitalizing on its broadportfolio, distribution and brand in conventionallighting by successful implementation of its ‘last manstanding’ strategy.Philips Lighting addresses people’s lighting needsacross a full range of market segments. Indoors, it offerslighting products, systems and services for homes,shops, offices, schools, hotels, factories and hospitals.Outdoors, it offers products, systems and services forroads, streets, public spaces, residential areas andsports arenas, as well as solar-powered LED off-gridlighting. In addition, it addresses the desire for light-inspired experiences through architectural projects.Finally, it offers specific applications of lighting inspecialized areas, such as entertainment, horticulture,and water purification. In 2016, Philips Lighting spanned a full-service lightingvalue chain – from lamps, luminaires, electronics andcontrols to connected and application-specific systemsand services – through the business groups Lamps,LED, Professional and Home.LightingTotal sales by business as a %201638Professional8Home21LED33LampsSegment performance3.5.248Annual Report 2016Philips Lighting is one of the few companies in the worldto offer solutions across the lighting value chain –including software, controls, luminaires, light sources,and modules. It will build on its global reach with currentcommercial activities that cover approximately 180countries. Philips Lighting has operationalmanufacturing plants in 22 countries in all major regionsof the world, and more than 70 sales offices worldwide. Commitment to qualityThe implementation of the Philips Business System isembedding a fundamental commitment to qualityacross all Philips Lighting’s processes, products,systems and services. Lighting is subject to significantregulatory requirements in the markets where itoperates. These include the European Union’s Wastefrom Electrical and Electronic Equipment (WEEE),Restriction of Hazardous Substances (RoHS),Registration, Evaluation, Authorization and Restrictionof Chemicals (REACH), Energy-related Products (ErP)and Energy Performance of Buildings (EPBD)directives.3.5.32016 business highlightsPhilips Lighting is actively building partnerships for itsconnected lighting systems for both professional andconsumer markets. The company announced apartnership with US company Aisle411 for digitalmapping of retail stores. It also teamed up with AmazonAlexa, Google Home and with Huawei’s OceanConnectfor the interoperability of the Philips Hue connectedlighting system, making this the first connected lightingsystem that can be used with all leading smart homeplatforms.Philips Lighting’s partnership with Cisco resulted inPower-over-Ethernet connected lighting systems forthe headquarters of Smartworld in Dubai, Intel’s newresearch campus in Bangalore and Infinorsa’s TorreEuropa building in Madrid.In the retail segment Philips Lighting implemented itsfirst connected lighting indoor positioning system in theMiddle East with United Arab Emirates-based retaileraswaaq, one of the world’s most innovativesupermarkets and community malls. The new systemuses lights that act as a positioning system and allowscustomers to use smartphones to access location-based services.Philips Lighting also extended the number ofconnected street lighting contracts, supplying nearly90,000 connected street luminaires in Jakarta as oneof its biggest projects to date. The system will bemanaged by the Philips CityTouch street lightingmanagement system, which has been installed in morethan 700 projects across 35 countries since its inceptionin 2012.The range of LED lighting was extended with PhilipsSceneSwitch, which combines multiple light settings inone lamp, enabling users to select the right light for theirneeds using an existing wall switch. It also introduced arange of spots and decorative bulbs that useWarmGlow for dimming, meaning the more you dim,the warmer the light effect. With Dubai Municipality thecompany developed the Dubai lamp, the world’s mostenergy-efficient commercially available lamp. Thisfamily of six lamps and two spots covers 80% of thelight sockets in the city.The company broadened the appeal of its Philips Hueconnected lighting system for the home by adding aninnovative motion sensor, which allows users to switchtheir Philips Hue lights on and off simply by walking inor leaving a room.The Philips Hue range was also extended with PhilipsHue white ambiance, providing users with every shadeof white light. Philips Lighting expanded the number of sportsstadiums using its Philips ArenaVision dynamic LEDpitch lighting, adding the Amsterdam Arena, theJuventus Stadium in Turin, the Volkswagen Arena inWolfsburg and the indoor stadium in Cairo. Thecompany also provided pitch, façade and office lightingfor Atletico Madrid. Philips Lighting is responsible forthe pitch lighting of over 65% of stadiums involved inmajor international sports events.3.5.42016 financial performanceNet income is not allocated to segments as certainincome and expense line items are monitored on acentralized basis.LightingKey data in millions of EUR unless otherwise stated2014 - 20162014 2015 2016 Sales6,874 7,438 7,094 Sales growth % increase (decrease),nominal(4)% 8% (5)% % increase (decrease),comparable1)(3)% (3)% (2)% Income from operations (EBIT)25 334 432 as a % of sales0.4% 4.5% 6.1% EBITA 1)133 441 542 as a % of sales1.9% 5.9% 7.6% In 2016, sales amounted to EUR 7,094 million, 5%decrease on a nominal basis. Excluding a 3% negativecurrency effect and portfolio changes, comparablesales1) decreased by 2%, reflecting double-digit growthin LED and Home, a low-single-digit declineProfessional and a double-digit decline in Lamps.Green Revenues amounted to EUR 5,536 million, or78% of total segment sales.Income from operations (EBIT) amounted to EUR 432million, or 6.1% of sales, which included EUR 110 millionof amortization charges, mainly related to acquiredintangible assets at Professional.Segment performance3.5.4Annual Report 201649EBITA1) increased from EUR 441 million, or 5.9% of sales,in 2015 to EUR 542 million, or 7.6% of sales in 2016.Restructuring and acquisition-related charges wereEUR 119 million, compared to EUR 97 million in 2015.EBITA1) in 2016 also included a gain of EUR 14 millionrelated to a release of provisions originating from theseparation activities. EBITA1) in 2015 also included EUR14 million of charges related to the devaluation of theArgentine peso. The increase was mainly attributable tocost reduction programs and an increase in grossmargin, partly offset by higher restructuring andacquisition-related charges.LightingSales per geographic cluster in millions of EUR2014 - 20162,2101,7791982,6876,874‘142,2122,0322082,9867,438‘152,130Western Europe1,982North America208Other mature2,774Growth7,094‘16LightingIncome from operations (EBIT) and EBITA1) in millions of EUR2014 - 201610825133‘14107334441‘15110Amortization andimpairment in value432Income from operations(EBIT) in value542EBITA in value1)‘161.9%5.9%7.6%EBITA as a % of sales1)1)For a reconciliation to the most directly comparable GAAP measures,see chapter 4, Reconciliation of non-GAAP information, of this AnnualReport3.5.5Brighter Lives, Better WorldDuring Climate Week NYC, Eric Rondolat launchedPhilips Lighting’s new sustainability program ‘BrighterLives, Better World’, building on the long legacy ofPhilips’ EcoVision programs. The new program is builton two pillars: Green Revenues and Sustainableoperations. With 78% of 2016 sales coming fromsustainable products, systems and services (72% in2015), Green Revenues reached a record level forPhilips Lighting.In 2016, approximately 15% of the world’s electricity isstill being used for lighting. Through its digital LEDtechnology, Philips Lighting offers light that is up to 80%more energy-efficient than conventional technologies,which are still commonly used globally. For this reason,the company has pledged to cumulatively sell 2 billionLED light bulbs by 2020, for which it has already sold628 million units thus far. In addition, Philips Lightingeffectively reduced its operational carbon footprintyear-on-year by 20%, also increasing the share ofrenewable electricity to 67%. Its solutions to effectivelyreduce, recycle, and re-use the waste in its sites asmuch as possible resulted in 85% of its total industrialwaste being recycled, as part of its journey towardszero waste to landfill.3.5.6Separation of LightingIn September 2014, Philips announced its plan tosharpen its strategic focus by establishing two stand-alone companies focused on the HealthTech andLighting opportunities respectively. Before the listing ofPhilips Lighting on Euronext in May 2016, a stand-alonestructure was established for Philips Lighting within thePhilips Group, effective February 1, 2016. To effectuatethe separation and to provide a framework for therelationship between the two companies after theseparation, Philips and Philips Lighting entered into aseparation agreement and a set of ancillary agreements(collectively, the “Separation Agreement”). TheSeparation Agreement allocated assets, liabilities,employees and contracts of the Philips Group betweenthe current groups of Philips and Philips Lighting. Theseparation was guided by the principle that the PhilipsLighting group comprises substantially all of Philips’former lighting business, related assets and liabilities,employees and contracts, as well as allocated activitiesfrom the former Innovation, Group & Services sector.Furthermore, certain historical exposures and liabilitiesof the Philips Group were allocated to each of thegroups of Philips and Philips Lighting, which areunrelated to their respective businesses.Upon the listing of Philips Lighting in May 2016, Philipsand Philips Lighting also entered into a relationshipagreement (the “Relationship Agreement”) to managethe continuing relationship between Philips Lightingand Philips as a large shareholder of Philips Lightingupon such listing. The Relationship Agreement willterminate when the stake of Philips falls below 10%(with the exception of certain specific provisions).1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Segment performance3.650Annual Report 20163.6Legacy ItemsLegacy Items consists mainly of separation costs,legacy legal items, legacy pension costs, environmentalprovisions and stranded costs.3.6.12016 financial performanceLegacy ItemsKey data in millions of EUR unless otherwise stated2014 - 20162014 2015 2016 Separation costs (183)(152)Other(388)(439)(43)Income from operations (EBIT)(388)(622)(195)Income from operations (EBIT) mainly included EUR 152million of charges related to the separation of theLighting business, a EUR 14 million charge related toprovisions originating from the separation of theLighting business, EUR 9 million of costs of addressinglegacy issues related to environmental provisions, EUR4 million of pension costs, EUR 36 million of strandedcosts related to the combined Lumileds andAutomotive businesses, EUR 11 million of chargesrelated to various provisions, as well as a EUR 46 milliongain from the settlement of a pension-related claim.Income from operations (EBIT) in 2015 included EUR345 million of settlements mainly related to pensionde-risking.Reconciliation of non-GAAP information4Annual Report 2016514Reconciliation of non-GAAPinformationKoninklijke Philips N.V. (the ‘Company’) believes that anunderstanding of sales performance, capital efficiency,financial strength and its funding requirements isenhanced by introducing certain Non-GAAP measures,such as Comparable sales growth, Adjusted incomefrom operations / EBITA and Net debt. In this chapterthese measures are further explained and reconciled toGAAP measures.Non-GAAP measures referred to in this report are crossreferenced to this chapter.Comparable sales growthComparable sales exclude the effects of currencymovements and changes in consolidation. As indicatedin the note 1, Significant accounting policies, sales andincome are translated from foreign currencies into theCompany’s reporting currency, the euro, at theexchange rate on transaction dates during therespective years. As a result of significant currencymovements during the years presented, the effects oftranslating foreign currency sales amounts into euroscould have a material impact. Therefore, these impactshave been excluded in arriving at the comparable salesin euros. Currency effects have been calculated bytranslating previous years’ foreign currency salesamounts into euros at the following year’s exchangerates in comparison with the sales in euros ashistorically reported. The years under review werecharacterized by a number of acquisitions anddivestments, as a result of which activities wereconsolidated or deconsolidated. The effect ofconsolidation changes has also been excluded inarriving at the comparable sales. For the purpose ofcalculating comparable sales, when a previouslyconsolidated entity is sold or contributed to a venturethat is not consolidated by the Company, relevant salesare excluded from impacted prior-year periods.Similarly, when an entity is acquired, relevant sales areexcluded from impacted periods.Philips GroupSales growth composition per segment in %2014 - 2016nominal growth currency effects consolidationchanges comparablegrowth 2016 versus 2015 Personal Health5.2 2.0 0.0 7.2 Diagnosis & Treatment3.1 0.9 (0.4)3.6 Connected Care & Health Informatics4.5 0.1 (0.1)4.5 HealthTech Other(5.0)0.0 0.0 (5.0)Lighting(4.6)2.1 0.2 (2.3)Philips Group1.1 1.4 0.2 2.7 2015 versus 2014 Personal Health13.5 (8.6)0.0 4.9 Diagnosis & Treatment22.7 (10.9)(5.7)6.1 Connected Care & Health Informatics12.6 (12.2)0.0 0.4 HealthTech Other3.3 (0.3)(1.9)1.1 Lighting8.2 (8.5)(2.2)(2.5)Philips Group13.3 (9.4)(1.7)2.2 2014 versus 2013 Personal Health3.0 2.7 0.2 5.9 Diagnosis & Treatment(6.6)1.5 0.5 (4.6)Connected Care & Health Informatics(2.2)1.7 0.3 (0.2)HealthTech Other(8.5)0.0 (3.7)(12.2)Lighting(3.9)2.2 (1.0)(2.7)Philips Group(2.7)2.0 (0.2)(0.9)Reconciliation of non-GAAP information452Annual Report 2016Philips GroupSales growth composition per geographic cluster in %2014 - 2016nominal growth currency effects consolidationchanges comparablegrowth 2016 versus 2015 Western Europe0.0 1.6 0.2 1.8 North America2.1 (0.3)(0.1)1.7 Other mature geographies7.9 (5.5)(0.4)2.0 Mature geographies2.0 (0.2)0.0 1.8 Growth geographies(0.5)4.6 0.4 4.5 Philips Group1.1 1.4 0.2 2.7 2015 versus 2014 Western Europe3.9 (1.9)(0.7)1.3 North America21.2 (18.4)(1.4)1.4 Other mature geographies11.7 (5.3)(3.7)2.7 Mature geographies13.1 (10.2)(1.4)1.5 Growth geographies13.8 (7.9)(2.4)3.5 Philips Group13.3 (9.4)(1.7)2.2 2014 versus 2013 Western Europe(0.3)(0.4)(0.2)(0.9)North America(3.0)0.9 0.3 (1.8)Other mature geographies(5.6)4.7 0.0 (0.9)Mature geographies(2.2)0.8 0.1 (1.3)Growth geographies(3.7)4.4 (0.7)0.0 Philips Group(2.7)2.0 (0.2)(0.9)EBITAThe Company uses the terms EBIT and EBITA toevaluate the performance of the Philips Group and itsoperating segments. The term EBIT has the samemeaning as Income from operations and the termEBITA has the same meaning as Adjusted income fromoperations. EBITA represents income from operationsbefore amortization and impairment on intangibleassets (excluding software and capitalizeddevelopment expenses). Referencing EBITA isconsidered appropriate as the Company uses it as oneof its strategic drivers to increase profitability throughre-allocation of its resources towards opportunitiesoffering more consistent and higher returns and it willmake the underlying performance of our businessesmore transparent as it will not be distorted by theunpredictable effects of future, unidentifiedacquisitions.EBITA is not a financial measure in accordance withIFRS. Below is a reconciliation of EBITA to the mostdirectly comparable IFRS measure, Net income, for theyears indicated. Net income is not allocated tosegments as certain income and expense line items aremonitored on a centralized basis, resulting in thembeing shown on a Philips Group level only.Reconciliation of non-GAAP information4Annual Report 201653Philips GroupNet income to EBITA in millions of EUR2014 - 2016PhilipsGroup PersonalHealth Diagnosis &Treatment ConnectedCare &HealthInformatics HealthTechOther Lighting LegacyItems 2016 Net Income1,491 Discontinued operations, net ofincome taxes(416) Investments in associates, net ofincome taxes(13) Income tax expense327 Financial expenses569 Financial income(76) Income from operations (EBIT)1,882 953 546 275 (129)432 (195)Amortization of intangible assets1)350 139 48 47 9 108 (1)Impairment of goodwill3 - - - - 2 1 EBITA2,235 1,092 594 322 (120)542 (195)Sales24,516 7,099 6,686 3,158 478 7,094 EBITA as a % of sales9.1% 15.4% 8.9% 10.2% 7.6% 2015 Net Income659 Discontinued operations, net ofincome taxes(245) Investments in associates, net ofincome taxes(30) Income tax expense239 Financial expenses467 Financial income(98) Income from operations (EBIT)992 736 322 173 49 334 (622)Amortization of intangible assets1)380 149 55 54 15 107 - Impairment of goodwill- - - - - - - EBITA1,372 885 377 227 64 441 (622)Sales24,244 6,751 6,484 3,022 503 7,438 EBITA as a % of sales5.7% 13.1% 5.8% 7.5% 5.9% 2014 Net Income411 Discontinued operations, net ofincome taxes(190) Investments in associates, net ofincome taxes(62) Income tax expense26 Financial expenses415 Financial income(114) Income from operations (EBIT)486 620 349 (157)37 25 (388)Amortization of intangible assets1)332 138 25 50 14 106 (1)Impairment of goodwill3 - - 1 - 2 - EBITA821 758 374 (106)51 133 (389)Sales21,391 5,948 5,284 2,684 487 6,874 EBITA as a % of sales3.8% 12.7% 7.1% (3.9)% 1.9% 1)Excluding amortization of software and product development.Reconciliation of non-GAAP information454Annual Report 2016Net debtNet debt is defined as the sum of long- and short-termdebt minus cash and cash equivalents. The net debtposition as a percentage of the sum of group equity(shareholders’ equity and non-controlling interests)and net debt is presented to express the financialstrength of the Company. This measure is used byTreasury management of the Company and investmentanalysts and is therefore included in the disclosure.Philips GroupComposition of net debt and group equity in millions of EUR unless otherwise stated2014 - 20162014 2015 2016 Long-term debt3,712 4,095 4,021 Short-term debt392 1,665 1,585 Total debt4,104 5,760 5,606 Cash and cash equivalents1,873 1,766 2,334 Net debt1)2,231 3,994 3,272 Shareholders’ equity10,867 11,662 12,601 Non-controlling interests101 118 907 Group equity10,968 11,780 13,508 Net debt and group equity13,199 15,774 16,780 Net debt divided by net debt and group equity (in %)17% 25% 19% Group equity divided by net debt and group equity (in %)83% 75% 81% Net debt and group equity ratio17:83 25:75 19:81 1)Total debt less cash and cash equivalentsRisk management5Annual Report 2016555Risk management5.1Our approach to risk managementThe Executive Committee, supported by the RiskManagement Support Team, oversees and managesenterprise risk. The Risk Management Support Teamconsists of a number of functional experts covering thevarious categories of enterprise risk and supports byincreasing the understanding of the Enterprise Riskprofile and continuously working to improve theenterprise risk management framework. Managementis the primary responsible for identifying the criticalrisks and for the implementation of appropriate riskresponses.Philips believes risk management is a value creatingactivity and as such it is an integral element of thePhilips Business System (PBS). Risk managementsupports us in taking sound risk-reward strategicdecisions to maximize value creation, it supportssustainable results on our Path to Value, it protects ourkey strengths (Capabilities, Assets, and Positions) andit supports process excellence.Philips’ risk management focuses on the following riskcategories: Strategic, Operational, Compliance andFinancial risks. The main risks within these categoriesare further described in section 5.2, Risk categories andfactors, of this Annual Report. The overview highlightsthe material risks known to Philips, which could hinderit in achieving its strategic and financial businessobjectives. The risk overview may, however, not includeall the risks that may ultimately affect Philips. Somerisks not yet known to Philips, or currently believed notto be material, could ultimately have a major impact onPhilips’ businesses, objectives, revenues, income,assets, liquidity or capital resources.All forward-looking statements made on or after thedate of this Annual Report and attributable to Philipsare expressly qualified in their entirety by the factorsdescribed in the cautionary statement included inchapter 16, Forward-looking statements and otherinformation, of this Annual Report and the overview ofrisk factors described in section 5.2, Risk categories andfactors, of this Annual Report.Risk Management FrameworkRisk management and control forms an integral part ofthe Philips business planning and performance reviewcycle. The company’s risk and control policy is designedto provide reasonable assurance that objectives aremet by integrating risk assessment in the strategicplanning process, integrating management control intothe daily operations, ensuring compliance with legalrequirements and safeguarding the integrity of thecompany’s financial reporting and its relateddisclosures. It makes management responsible foridentifying the critical business risks and for theimplementation of appropriate risk responses. Philips’risk management approach is embedded in the areasof Corporate Governance, elements of the PhilipsBusiness System (Strategic Investment DecisionMaking, Asset Protection, Operational Excellence,Planning & Performance Cycle), Philips BusinessControl Framework and Philips General BusinessPrinciples. The Risk Management Support Teamsupports management by assessing the Enterprise Riskprofile and continuously working to improve theenterprise risk management framework. Structured riskassessments take place according to the Philipsprocess standard for managing risk.Philips’ risk management process addresses risksrelated to different categories: Strategic, Operational,Compliance and Financial risks. The ExecutiveCommittee and management consider risk appetitewhen taking decisions and seek to manage risksconsistently within the risk appetite. Risk appetite isdifferent for the various risk categories:•Strategic risks and opportunities may affect Philips’strategic ambitions. Strategic risks include economicand political developments and the need toanticipate and respond timeously to marketcircumstances. Philips is prepared to takeconsiderable strategic risks given the necessity toinvest in research & development and manage theportfolio of businesses, including acquisitions anddivestments, in a highly uncertain global political andeconomic environment.•Operational risks include adverse unexpecteddevelopments resulting from internal processes,people and systems, or from external events that arelinked to the actual running of each business(examples are solution and product creation andsupply chain management). Philips aims to minimizedownside risks due to the need for high quality of itsproducts and services, reliable IT systems andsustainability commitments.•Compliance risks cover unanticipated failures toimplement, or comply with, appropriate laws,regulations, policies and procedures. Philips has azero tolerance policy towards non-compliance inrelation to breaches of its General BusinessPrinciples.•Financial risk include risks related to Treasury,Accounting and Reporting, Pensions and Tax. Philipsis prudent with regard to financial risks and the riskappetite is described in various chapters of thisannual report, including note 30, Details of treasury /other financial risks.Philips does not classify these risk categories in orderof importance.Risk management5.156Annual Report 2016Corporate GovernanceCorporate governance is the system by which acompany is directed and controlled. Philips believesthat good corporate governance is a critical factor inachieving business success. Good corporategovernance derives from, among other things, effectiveinternal controls and high ethical standards. The qualityof Philips’ system of risk management, business controland other findings of internal and external audits arereported to and discussed by the Audit Committee ofthe Supervisory Board. Internal auditors monitor thequality of risk management and business controlsthrough risk-based operational audits, inspections offinancial reporting controls and compliance audits.Audit & Risk committees at Group level, BusinessGroups, Markets and key Functional areas meetquarterly, chaired by first line leadership, to addressweaknesses in risk management and business controlsstructure as reported by internal and external auditorsor revealed by self-assessment of management and totake corrective action where necessary. These Audit &Risk committees are also involved in company-wideinternal audit planning as approved by the AuditCommittee of the Supervisory Board. In addition to theAudit Committee, the Quality and Regulatory (Q&R)Committee of the Supervisory Board assists theSupervisory Board in fulfilling its oversightresponsibilities particularly in respect of the quality ofthe Company’s products, systems, services andsoftware and the development, testing, manufacturing,marketing and servicing thereof, and regulatoryrequirements relating thereto. As such, the Q&RCommittee supports the Company’s risk managementin the relevant risk areas. An in-depth description ofPhilips’ corporate governance structure can be found inchapter 9, Corporate governance, of this AnnualReport.Risk ManagementTaking risks is an inherent part of entrepreneurialbehavior and well-structured risk management allowsmanagement to take risks in a controlled manner. Inorder to provide a comprehensive view of Philips’ risks,structured risk assessments take place according to thePhilips process standard for risk management,combining elements of a top-down and bottom-upapproach. The process is supported by workshops withmanagement at Business, Market and Group Functionlevels. During 2016, several risk managementworkshops were held.Establish riskmanagementenvironmentIdentify riskAnalyze riskRespond to askMonitor riskReporting andcommunicationSupervisory BoardExecutive CommitteeBusinessgroupsMarketsFunctionsRisk diagramKey elements of the Philips risk management processare:•Annual risk assessment for the Group, BusinessGroups, Markets and key Functions as part of theannual update of the strategic plan. Risks areassessed and prioritized on their impact onobjectives, likelihood of occurrence andeffectiveness of controls. Management isaccountable for the timely development of effectiverisk responses.•Developments in the risk profile and management’sinitiatives to improve risk responses are explicitlydiscussed and monitored during the quarterly Audit& Risk Committees and in the Quarterly PerformanceReviews (QPR).•As an integral part of the strategy review, theExecutive Committee annually assesses theenterprise risk profile, including appropriate riskscenarios and sensitivity analysis, and reviews thepotential impact of the enterprise risk profile versusthe Group’s risk appetite. This risk assessment isbased on the latest annual risk assessments of theGroup, Business Groups, Markets and key Functionsand changes to these, if any, as reported during theperiodic review meetings, findings from PhilipsInternal Audit, Legal and Insurance, the Materialityanalysis as described in chapter 12, SustainabilityRisk management5.1Annual Report 201657statements, of this Annual Report, views from keystakeholders, external analysis, and risks reported inthe annual certification statement on RiskManagement and Business Controls.•Developments in the Enterprise Risk profile andmanagement’s initiatives to improve risk responsesare discussed and monitored during the quarterlyGroup Audit & Risk Committee.•The Executive Committee reviews at least annuallythe Philips risk management approach and improvesthe process as required.•The Philips risk profile and the risk managementapproach are discussed at least annually with theSupervisory Board.Examples of measures taken to further strengthen therisk management framework include:•Definition and execution of the Enterprise RiskManagement (ERM) improvement roadmap;•Process standardization for Risk Management,Internal Control, Compliance and Audit processes aspart of the Philips Excellence Process Framework(PEPF) to drive efficiency and continuousimprovement;•The establishment of an Information Security Officeand Program in light of the increasing exposure tocybercrime and information security requirementsresulting from digitalization and a focus on theHealthcare industry;•The development of risk management related tolong-term strategic partnership given the growingimportance of service-based business models.Philips Business Control FrameworkThe Philips Business Control Framework (BCF) sets thestandard for risk management and business control inPhilips. The objectives of the BCF are to maintainintegrated management control of the company’soperations, in order to ensure the integrity of thefinancial reporting, as well as compliance with laws andregulations. Philips has designed its BCF based on the“Internal Control-Integrated Framework (2013)”established by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).Philips continuously evaluates and improves its BCF toalign with business dynamics and good practice.As part of the BCF, Philips has implemented a globalstandard for internal control over financial reporting(ICS). ICS, together with Philips’ established accountingprocedures, is designed to provide reasonableassurance that assets are safeguarded, that the booksand records properly reflect transactions necessary topermit preparation of financial statements, that policiesand procedures are carried out by qualified personneland that published financial statements are properlyprepared and do not contain any materialmisstatements. ICS has been deployed in all materialreporting units, where business process ownersperform an extensive number of controls, documentthe results each quarter, and take corrective actionwhere necessary. ICS supports business and functionalmanagement in a quarterly cycle of assessment andmonitoring of its control environment. The findings ofmanagement’s evaluation are reported to theExecutive Committee and the Supervisory Boardquarterly.As part of the Annual Report process, management’saccountability for business controls is enforced throughthe formal issuance of a Statement on BusinessControls and a Letter of Representation by BusinessGroup, Market and Functional management to theExecutive Committee. Any deficiencies noted in thedesign and operating effectiveness of controls overfinancial reporting which were not completelyremediated are evaluated at year-end by the Board ofManagement. The Board of Management’s report,including its conclusions regarding the effectiveness ofinternal control over financial reporting, can be foundin section 10.1, Management’s report on internalcontrol, of this Annual Report.Philips General Business PrinciplesThe Philips General Business Principles (GBP)incorporate the fundamental principles for all Philipsbusinesses around the globe. They set the minimumstandard for business conduct, both for individualemployees and for the company and our subsidiaries.Our GBP also stand as a reference for the businessconduct we expect from our business partners andsuppliers. Translations of the text are available in 32languages, allowing almost every employee to read theGBP in their native language. Detailed underlyingpolicies, manuals, training and tools are in place to giveemployees practical guidance on how to apply the GBPin their day-to-day work environments.In addition, there are separate Codes of Ethics thatapply to employees working in specific areas of ourbusiness, i.e. the Procurement Code of Ethics and theFinancial Code of Ethics. Details can be found at:www.philips.com/gbp.As part of our unyielding effort to raise GBP awarenessand create engagement throughout the organization,each year a GBP communications and training plan isdeployed. In 2016, a number of new initiatives wereundertaken through various channels such as QuickReference Cards for at-a-glance guidance on how tohandle a number of common GBP concerns, as well asreturning programs such as e-Learnings for selectedhigh-risk audiences. Many of these initiativescontributed to building momentum toward our nowannual GBP Dialogue Week in October. During 2016’sDialogue Week, hundreds of Philips teams held openand frank discussions on what Acting with Integritymeans to them, and posted pictures of their sessions onthe Philips social platform using the hashtag#integritymatters.Risk management5.158Annual Report 2016The GBP form an integral part of labor contracts invirtually every country in which Philips operates. It is theresponsibility of each employee to live up to our GBP,and employees are requested to affirm theircommitment after completing their GBP e-training. Inaddition, employees in the respective specialized areasmust sign off on the Financial and Supply ManagementCodes of Ethics. Executives are requested to sign off onthe GBP each year to reaffirm their awareness of andcompliance with them.The GBP Review Committee is responsible for theeffective deployment of the GBP and for generallypromoting a culture of compliance and ethics withinPhilips. The GBP Review Committee is chaired by theChief Legal Officer, and its members include the ChiefHR Officer, the Chief Market Leader and the ChiefFinancial Officer. They are supported in theimplementation of their initiatives by a CommitteeSecretariat, and a network of GBP Compliance Officers,who are appointed in all markets, countries and at allmajor sites where Philips has operations.Related roles and responsibilities are laid down in theCharter of the GBP Review Committee. In 2016, inresponse to external regulatory developments inbusiness ethics and compliance, a revised charter wasdeployed by the GBP Review Committee. This newlyupdated charter impacted the composition of the GBPReview Committee, the roles and responsibilities of itsmembers as well as the composition, roles andresponsibilities of the GBP Compliance function. Tostrengthen monitoring and oversight of GBPcompliance within Philips, the mandatory annual GBPself-assessment questionnaire, part of our InternalControl framework, was completely renewed. The GBPReview Committee Secretariat receives an overview ofthe results of this self-assessment and can take actionwhen deemed necessary. We believe this has createda more robust network equipped with the requisiteskills and support to monitor and enhance compliancein the increasingly regulated environments in whichPhilips operates.The GBP are supported by established mechanismsthat ensure standardized reporting and escalation ofconcerns. These mechanisms are based on the GBPReporting Policy that urges employees to report anyconcerns they may have regarding business conduct inrelation to the GBP, either through a GBP ComplianceOfficer or through the Philips Ethics Line. The PhilipsEthics Line enables employees and also third parties toreport a concern either by telephone or online in avariety of different languages 24/7 all year round. Allconcerns raised are registered consistently in a singledatabase hosted outside Philips by a third party and areinvestigated systematically in accordance withstandardized investigation procedures.Financial Code of EthicsThe Company recognizes that its businesses haveresponsibilities within the communities in which theyoperate. The Company has a Financial Code of Ethicswhich applies to the CEO (the principal executiveofficer) and CFO (the principal financial and principalaccounting officer), and to the senior management inthe Philips Finance Leadership Team who head theFinance departments of the Company. The Companyhas published its Financial Code of Ethics within theinvestor section of its website located atwww.philips.com. No changes were considerednecessary and no changes have been made to theFinancial Code of Ethics since its adoption and nowaivers have been granted therefrom to the officersmentioned above in 2016.For more information, please refer to sub-section 2.2.7,General Business Principles, of this Annual Report.Risk management5.2Annual Report 2016595.2Risk categories and factorsIn order to provide a comprehensive view of Philips’enterprise risks, structured risk assessments take placein accordance with the Philips process standard tomanage risk as described in section 5.1, Our approachto risk management, of this Annual Report. As a resultof this process, amongst others, the following actionswere performed during 2016:•Philips completed the separation of its Lightingbusiness and subsequently listed Philips Lighting onthe Amsterdam stock exchange and sold a portion ofits ownership. This separation has eliminated theseparation risk discussed in the 2015 Annual Report.Until the completion of the sale of its entireownership in Philips Lighting, Philips remainsexposed to risks with regard to the value of PhilipsLighting.•The challenging global political and economicdevelopments had an impact on our results. Eventhough the management of risks related to thesedevelopments has not changed compared to 2015,we continuously monitor the impact on our riskprofile.Philips describes the risk factors within each riskcategory in order of Philips’ current view of expectedsignificance, to give stakeholders an insight into whichrisks and opportunities it considers more prominentthan others at present. The risk overview highlights themain risks and opportunities known to Philips, whichcould hinder it in achieving its strategic and financialbusiness objectives. The risk overview may, however,not include all the risks that may ultimately affectPhilips. Describing risk factors in their order of expectedsignificance within each risk category does not meanthat a lower listed risk factor may not have a materialand adverse impact on Philips’ business, strategicobjectives, revenues, income, assets, liquidity, capitalresources or achievement of Philips’ goals.Furthermore, a risk factor described after other riskfactors may ultimately prove to have more significantadverse consequences than those other risk factors.Over time Philips may change its view as to the relativesignificance of each risk factor.5.3Strategic risksPhilips may be unable to adapt swiftly to changes inindustry or market circumstances, which could have amaterial adverse impact on its financial condition andresults.Fundamental shifts in the Healthcare and/or Lightingindustries, like the transition towards digital, maydrastically change the business environment. If Philipsis unable to recognize these changes in good time, islate in adjusting its business models, or if circumstancesarise such as pricing actions by competitors, then thiscould have a material adverse effect on Philips’ growthambitions, financial condition and operating result.As Philips’ business is global, its operations are exposedto economic and political developments in countriesacross the world that could adversely impact itsrevenues and income.Philips’ business environment is influenced by politicaland economic conditions in individual and globalmarkets. Philips experienced the impact from changesin macro-economic development in variousgeographies during 2016. Economic growth in Chinawas markedly lower compared to average growth overthe last two decades. The economic growth of countrieswhich are highly dependent on revenues from energy,raw materials and commodities remains adverselyaffected by the slowdown of growth in China, moststrongly in emerging market countries. Low revenuesfrom oil also affected countries in the Middle Eastwhere public spending has been dramatically reduced.Monetary interventions by the European Central Bankdid not result in any increase of inflation nor in strongereconomic growth in the European Union in 2016. Theconsensus economic outlook for Great Britain as wellas for the European Union has become less favorableas a result of the Brexit vote in June 2016. Although theUS economy continued to perform well during 2016, theresult of the US presidential election and potentialchanges in US economic and monetary policies (i.e.expected further rate hikes) may have an impact notonly on US dollar but also on a range of emergingmarket currencies. Both Brexit and the policies of theRisksStrategic•Changes in industry/market•Macroeconomic changes•Focus on Health Technology•Growth of emergingmarkets•Joint ventures•Acquisitions•Intellectual property rightsOperational•Product quality and liability•IT•Transformation programs•Supply chain•Innovation process•People•Intellectual Property•Reputation and brandCompliance•Product safety/Data privacy•Regulatory•Market practices•Legal•General Business Principles•Internal controlsFinancial•Philips Lighting•Treasury•Tax•Pensions•Lumileds•Accounting and reportingCorporate GovernancePhilips Business Control FrameworkPhilips General Business PrinciplesRisk management5.360Annual Report 2016new US administration may have significant impact oninternational trade tariffs and customs laws. Thedisparate macroeconomic outlook for the maingeographies, political conflicts and the unknownimpact of Eurozone monetary policy continue to createuncertainty as to the levels of (public) capitalexpenditures in general, unemployment levels andconsumer and business confidence, which couldadversely affect demand for products and servicesoffered by Philips. These economic conditions mayhave an adverse effect on financial markets, whichcould affect the ability of Philips to make strategicdivestments at reasonable price levels or within areasonable period of time.The general global political environment remainsunfavorable for the business environment due to a risein political conflicts and terrorism. Numerous otherfactors, such as sustained lower levels of energy andraw material prices, regional political conflicts in theMiddle East, Turkey, Russia and Ukraine and otherregions, as well as large-scale (in)voluntary migrationand profound social instability could continue to impactmacroeconomic factors and the international capitaland credit markets. The new US administration mayimplement changes in, among others, US foreign policy,healthcare, trade and tax laws, the impact of whichcannot be predicted. Uncertainty on the timing and thenature of Brexit may adversely affect economic growthand the business environment in the United Kingdomand the rest of the European Union. Elections in anumber of key European countries during 2017, whichcould trigger additional exits from the European Union,may have a similar adverse impact. Economic andpolitical uncertainty may have a material adverseimpact on Philips’ financial condition or results ofoperations and can also make it more difficult for Philipsto budget and forecast accurately. Philips mayencounter difficulty in planning and managingoperations due to the lack of adequate infrastructureand unfavorable political factors, including unexpectedlegal or regulatory changes such as foreign exchangeimport or export controls, increased healthcareregulation, nationalization of assets or restrictions onthe repatriation of returns from foreign investments.Given that growth in emerging market countries iscorrelated to US and European economic growth andthat such emerging market countries are increasinglyimportant in Philips’ operations, the above-mentionedrisks are also expected to grow and could have amaterial adverse effect on Philips’ financial conditionand operating results.Philips’ overall risk profile will be changing as a result ofthe focus on Health Technology.The risk profile of Philips will change as and whenPhilips Lighting is sold and deconsolidated. The riskprofile is expected to shift towards risks generallyassociated to Health Technology companies.Philips’ overall performance in the coming years isexpected to depend on the realization of its growthambitions in growth geographies.Growth geographies are becoming increasinglyimportant in the global market. In addition, Asia is animportant production, sourcing and design center forPhilips. Philips faces strong competition to attract thebest talent in tight labor markets and intensecompetition from local companies as well as otherglobal players for market share in growth geographies.Philips needs to maintain and grow its position ingrowth geographies, invest in data driven services,invest in local talent, understand developments in end-user preferences and localize the portfolio in order tostay competitive. If Philips fails to achieve theseobjectives, then this could have a material adverseeffect on growth ambitions, financial condition andoperating result.The growth ambitions of Philips may be adverselyaffected by economic volatility inherent in growthgeographies and the impact of changes inmacroeconomic circumstances on growth economies.Philips may not control joint ventures or associatedcompanies in which it invests, which could limit theability of Philips to identify and manage risks.Philips has invested and may invest in joint venturesand associated companies in which Philips will have anon-controlling interest. In these cases, Philips haslimited influence over, and limited or no control of, thegovernance, performance and cost of operations ofjoint ventures and associated companies. Some ofthese joint ventures and associated companies mayrepresent significant investments and potentially alsouse Philips’ brand. The joint ventures and associatedcompanies that Philips does not control may makebusiness, financial or investment decisions contrary toPhilips’ interests or may make decisions different fromthose that Philips itself may have made. Additionally,Philips partners or members of a joint venture orassociated company may not be able to meet theirfinancial or other obligations, which could exposePhilips to additional financial or other obligations, aswell as having a material adverse effect on the value ofits investments in those entities or potentially subjectPhilips to additional claims. Lumileds and PhilipsLighting are examples of companies in which Philipsmay continue to have a significant (residual) interest butmay not have control.Acquisitions could expose Philips to integration risksand challenge management in continuing to reduce thecomplexity of the company.Philips’ acquisitions may expose Philips in the future tointegration risks in areas such as sales and service forceintegration, logistics, regulatory compliance,information technology and finance. Integrationdifficulties and complexity may adversely impact theRisk management5.3Annual Report 201661realization of an increased contribution fromacquisitions. Philips may incur significant acquisition,administrative and other costs in connection with thesetransactions, including costs related to the integrationof acquired businesses.Furthermore, organizational simplification expected tobe implemented following an acquisition and theresulting cost savings may be difficult to achieve.Acquisitions may also lead to a substantial increase inlong-lived assets, including goodwill. Write-downs ofthese assets due to unforeseen business developmentsmay have a material adverse effect on Philips’ earnings(see also note 11, Goodwill).Philips’ inability to secure and maintain intellectualproperty rights for products, whilst maintaining overallcompetitiveness, could have a material adverse effecton its results.Philips is dependent on its ability to obtain andmaintain licenses and other intellectual property (IP)rights covering its products and its design andmanufacturing processes. The IP portfolio is the resultof an extensive patenting process that could beinfluenced by a number of factors, including innovation.The value of the IP portfolio is dependent on thesuccessful promotion and market acceptance ofstandards developed or co-developed by Philips. Thisis particularly applicable to Personal Health wherethird-party licenses are important and a loss orimpairment could have a material adverse impact onPhilips’ financial condition and operating results.5.4Operational risksFailure to comply with quality standards andregulations can trigger warranty and product liabilityclaims against Philips and can lead to financial lossesand adversely impact Philips’ reputation, market shareand brand.Philips is required to comply with the highest standardsof quality in the manufacture of its medical devices.Philips hereto is subject to the supervision of variousnational regulatory authorities. Conditions imposed bysuch national regulatory authorities could result inproduct recalls or a temporary ban on products and/orproduction facilities. In addition such quality issuesand/or liability claims could affect Philips’ reputationand its relationships with key customers (bothcustomers for end products and customers that usePhilips’ products in their production process). As aresult, depending on the product and manufacturingsite concerned and the severity of the objection, thiscould lead to financial losses through lost revenue andcosts of any required remedial actions, and have furtherimpacts on Philips’ reputation, market share and brand.Philips has observed a global increase in IT securitythreats and higher levels of sophistication in computercrime, posing a risk to the confidentiality, availabilityand integrity of data and information.The global increase in security threats and higher levelsof professionalism in computer crime have increasedthe importance of effective IT security measures,including proper identity management processes toprotect against unauthorized systems access.Nevertheless, Philips’ systems, networks, products,solutions and services remain vulnerable to attacks,which could lead to the leakage of confidentialinformation, improper use of its systems and networksor defective products, which could in turn have amaterial adverse effect on Philips’ financial conditionand operating results. In recent years, the risks that weand other companies face from cyber-attacks haveincreased significantly. The objectives of these cyber-attacks vary widely and may include, among things,disruptions of operations including provision of servicesto customers or theft of intellectual property or othersensitive information belonging to us or other businesspartners. Successful cyber-attacks may result insubstantial costs and other negative consequences,which may include, but are not limited to, lost revenues,reputational damage, remediation costs, and otherliabilities to customers and partners. Furthermore,enhanced protection measures can involve significantcosts. Although we have experienced cyber-attacksand to date have not incurred any significant damageas a result and did not incur significant monetary costin taking corrective action, there can be no assurancethat in the future Philips will be as successful in avoidingdamages from cyber-attacks, which could lead tofinancial losses. Additionally, the integration of newcompanies and successful outsourcing of businessprocesses are highly dependent on secure and wellcontrolled IT systems.Diversity in information technology (IT) could result inineffective or inefficient business management. IToutsourcing and off-shoring strategies could result incomplexities in service delivery and contractmanagement.Philips continuously seeks to create a more open,standardized and cost-effective IT landscape, includingthrough further outsourcing, off-shoring,commoditization and ongoing reduction in the numberof IT systems. These changes create risk with regard tothe delivery of IT services, the availability of IT systemsand the scope and nature of the functionality offeredby IT systems.Transformation programsIn 2011, Philips began a transformation program(Accelerate!) designed to unlock Philips’ full potential.In 2014, as a next phase in the Accelerate!transformation program, Philips announced its plan tosharpen its strategic focus by establishing two stand-alone companies focused on the HealthTech andLighting opportunities respectively. The Lightingbusiness was separated in 2016, with Philips selling aportion of its ownership stake and Philips Lightingbecoming listed on the Amsterdam Stock Exchange.Risk management5.462Annual Report 2016Failure to achieve the objectives of any transformationprogram may have a material adverse effect on themid-term and long-term financial targets.In addition, any transformation program in relation tothe Finance function may expose Philips to adversechanges in the quality of its systems of internal control.If Philips is unable to ensure effective supply chainmanagement, e.g. facing an interruption of its supplychain, including the inability of third parties to deliverparts, components and services on time, and if it issubject to rising raw material prices, it may be unableto sustain its competitiveness in its markets.Philips is continuing the process of creating a leanersupply base with fewer suppliers, while maintainingdual/multiple sourcing strategies where possible. Thisstrategy very much requires close cooperation withsuppliers to enhance, among other things, time tomarket and quality. In addition, Philips is continuing itsinitiatives to replace internal capabilities with lesscostly outsourced products and services. Theseprocesses may result in increased dependency onexternal suppliers and providers. Although Philipsworks closely with its suppliers to avoid supply-relatedproblems, there can be no assurance that it will notencounter supply problems in the future or that it willbe able to replace a supplier that is not able to meet itsdemand sufficiently quickly to avoid disruptions.Shortages or delays could materially harm its business.Most of Philips’ activities are conducted outside of theNetherlands, and international operations bringchallenges. For example, Philips depends partly on theproduction and procurement of products and partsfrom Asian countries, and this constitutes a risk thatproduction and shipping of products and parts could beinterrupted by regional conflicts, a natural disaster orextreme weather events resulting from climatechanges. A general shortage of materials, componentsor subcomponents as a result of natural disasters alsoposes the risk of unforeseeable fluctuations in pricesand demand, which could have a material adverseeffect on Philips’ financial condition and operatingresults.Businesses purchase raw materials, including so-calledrare earth metals, copper, steel, aluminum, noble gasesand oil-related products, which exposes them tofluctuations in energy and raw material prices. In recenttimes, commodities have been subject to volatilemarkets, and such volatility is expected to continue. IfPhilips is not able to compensate for increased costs orpass them on to customers, price increases could havea material adverse impact on Philips’ results. Incontrast, in times of falling commodity prices, Philipsmay not fully benefit from such price decreases, sincePhilips attempts to reduce the risk of rising commodityprices by several means, including long-termcontracting or physical and financial hedging.Failure to achieve improvements in Philips’ solutionand product creation process and/or increased speedin innovation-to-market could hamper Philips’profitable growth ambitions.Further improvements in Philips’ solution and productcreation process, ensuring timely delivery of newsolutions and products at lower cost and improvementin customer service levels to create sustainablecompetitive advantages, are important in realizingPhilips’ profitable growth ambitions. The emergence ofnew low-cost competitors, particularly in Asia, furtherunderlines the importance of improvements in theproduct creation process. The success of new solutionand product creation, however, depends on a numberof factors, including timely and successful completionof development efforts, market acceptance, Philips’ability to manage the risks associated with newproducts and production ramp-up issues, the ability ofPhilips to attract and retain employees with theappropriate skills, the availability of products in theright quantities and at appropriate costs to meetanticipated demand and the risk that new products andservices may have quality or other defects in the earlystages of introduction. Accordingly, Philips cannotdetermine in advance the ultimate effect that newsolutions and product creations will have on its financialcondition and operating results. If Philips fails to createand commercialize products or fails to ensure that end-user insights are translated into solution and productcreations that improve product mix and consequentlycontribution, it may lose its market share andcompetitiveness, which could have a material adverseeffect on its financial condition and operating results.Because Philips is dependent on its personnel forleadership and specialized skills, the loss of its ability toattract and retain such personnel would have anadverse effect on its business.The attraction and retention of talented employees insales and marketing, research and development,finance and general management, as well as of highlyspecialized technical personnel, especially intransferring technologies to low-cost countries, iscritical to Philips’ success particularly in times ofeconomic recovery. The loss of specialized skills couldalso result in business interruptions. There can be noassurance that Philips will be successful in attractingand retaining highly qualified employees and keypersonnel needed in the future.Risk of unauthorized use of intellectual property rights.Philips produces and sells products and services whichincorporate technology protected by intellectualproperty rights. Philips develops and acquiresintellectual property rights on a regular basis. Philips isexposed to the risk that a third party may claim to ownthe intellectual property rights on technology appliedin Philips products and services and that in the eventRisk management5.4Annual Report 201663that their claims of infringement of these intellectualproperty rights are successful, they may be entitled todamages and Philips could incur a fine.Any damage to Philips’ reputation could have anadverse effect on its businesses and brand.Philips is exposed to developments which could affectits reputation. Such developments could be of anenvironmental or social nature, connected to thebehavior of individual employees or suppliers, or couldrelate to adherence to regulations related to labor,health and safety, environmental and chemicalmanagement. Reputational damage could materiallyimpact Philips’ brand value, financial condition andoperating results.5.5Compliance risksPhilips is exposed to non-compliance with productsafety laws and data privacy.Philips’ brand image and reputation would beadversely impacted by non-compliance with variousproduct safety laws and data protection. In light ofPhilips’ digital strategy, data privacy laws areincreasingly important. Also, Diagnosis & Treatmentand Connected Care & Health Informatics are subject tovarious (patient) data protection and safety laws. InDiagnosis & Treatment and Connected Care & HealthInformatics, privacy and product safety and securityissues may arise, especially with respect to remoteaccess or monitoring of patient data or loss of data onour customers’ systems. Philips is exposed to the riskthat its products, including components or materialsprocured from suppliers, may prove to be not compliantwith safety laws, e.g. chemical safety regulations. Suchnon-compliance could result in a ban on the sale or useof these products.Philips operates in a highly regulated product safetyand quality environment. Philips’ products are subjectto regulation by various government agencies,including the FDA (US) and comparable foreignagencies. Obtaining their approval is costly and timeconsuming, but a prerequisite for introducing productsin the market. A delay or inability to obtain thenecessary regulatory approvals for new products couldhave a material adverse effect on business. The riskexists that product safety incidents or user concernscould trigger FDA business reviews which, if failed,could lead to business interruption which in turn couldadversely affect Philips’ financial condition andoperating results. For example the voluntarysuspension in 2014 of new production at our Healthcarefacility in Cleveland, Ohio targeted to further strengthenmanufacturing process controls after certain issues inthis area were identified during an ongoing FDAinspection.Philips’ global presence exposes the company toregional and local regulatory rules, changes to whichmay affect the realization of business opportunities andinvestments in the countries in which Philips operates.Philips has established subsidiaries in over 80countries. These subsidiaries are exposed to changes ingovernmental regulations and unfavorable politicaldevelopments, which may affect the realization ofbusiness opportunities or impair Philips’ localinvestments. Philips’ increased focus on the healthcaresector increases its exposure to highly regulatedmarkets, where obtaining clearances or approvals fornew products is of great importance, and where thereis a dependency on the available funding for healthcaresystems. In addition, changes in governmentreimbursement policies may affect spending onhealthcare.Philips is exposed to governmental investigations andlegal proceedings with regard to possible anti-competitive market practices.National and European authorities are increasinglyfocused on possible anti-competitive market practices.Philips’ financial position and results could bematerially affected by an adverse final outcome ofgovernmental investigations and litigation, as well asany potential related claims.Legal proceedings covering a range of matters arepending in various jurisdictions against Philips and itscurrent and former group companies. Due to theuncertainty inherent in legal proceedings, it is difficultto predict the final outcome.Philips, including a certain number of its current andformer group companies, is involved in legalproceedings relating to such matters as competitionissues, commercial transactions, product liability,participations and environmental pollution. Since theultimate outcome of asserted claims and proceedings,or the impact of any claims that may be asserted in thefuture, cannot be predicted with certainty, Philips’financial position and results of operations could beaffected materially by adverse outcomes.Please refer to note 25, Contingent assets andliabilities, for additional disclosure relating to specificlegal proceedings.Philips is exposed to non-compliance with businessconduct rules and regulations.Philips’ attempts to realize its growth ambitions couldexpose it to the risk of non-compliance with businessconduct rules and regulations, such as anti-briberyprovisions. This risk is heightened in growthgeographies as the legal and regulatory environment isless developed in growth geographies compared tomature geographies. Examples include commissionpayments to third parties, remuneration payments toRisk management5.564Annual Report 2016agents, distributors, consultants and the like, and theacceptance of gifts, which may be considered in somemarkets to be normal local business practice (See alsonote 25, Contingent assets and liabilities).Defective internal controls would adversely affect ourfinancial reporting and management process.The reliability of reporting is important in ensuring thatmanagement decisions for steering the businesses andmanaging both top-line and bottom-line growth arebased on reliable data. Flaws in internal controlsystems could adversely affect the financial positionand results and hamper expected growth.Accurate disclosures provide investors and othermarket professionals with significant information for abetter understanding of Philips’ businesses.Imperfections or lack of clarity in disclosures couldcreate market uncertainty regarding the reliability of thedata presented and could have a negative impact onthe Philips share price.The reliability of revenue and expenditure data is keyfor steering the business and for managing top-line andbottom-line growth. The long lifecycle of healthcaresales, from order acceptance to accepted installation,together with the complexity of the accounting rules forwhen revenue can be recognized in the accounts,presents a challenge in terms of ensuring there isconsistency of application of the accounting rulesthroughout Philips’ global business.5.6Financial risksPhilips is exposed to uncertainty on the timing andproceeds of a sale of Philips LightingIn 2016, Philips separated its Lighting business and onMay 27, 2016, Philips Lighting was listed on theAmsterdam Stock Exchange. Since then Philips Lightingoperates as a separate listed company. Philips hassubsequently sold down part of its ownership in PhilipsLighting. Philips’ overall objective is to fully divest itsownership of Philips Lighting. The nature or form, timingand the level of proceeds from this divestment processare uncertain. The timing and level of proceeds willdepend on general market conditions and investorappetite for companies of this size and nature. Duringthis process Philips may lose control over PhilipsLighting and deconsolidate the assets, liabilities andfinancial results of Philips Lighting.Philips is exposed to a variety of treasury risks and otherfinancial risks including liquidity risk, currency risk,interest rate risk, commodity price risk, credit risk,country risk and other insurable risk.Negative developments impacting the liquidity ofglobal capital markets could affect the ability of Philipsto raise or re-finance debt in the capital markets orcould lead to significant increases in the cost of suchborrowing in the future. If the markets expect adowngrade or downgrades by the rating agencies or ifsuch a downgrade has actually taken place, this couldincrease the cost of borrowing, reduce our potentialinvestor base and adversely affect our business.Philips operates in over 100 countries and its earningsand equity are therefore inevitably exposed tofluctuations in exchange rates of foreign currenciesagainst the euro. Philips’ sales are sensitive in particularto movements in the US dollar, Japanese yen and awide range of other currencies from developed andemerging markets. Philips’ sourcing and manufacturingspend is concentrated in the Eurozone, United Statesand China. Income from operations is sensitive tomovements in currencies from countries where theGroup has no manufacturing/sourcing activities or onlyhas manufacturing/sourcing activities on a small scalesuch as Japan, Canada, Australia and Great Britain andin a range of emerging markets such as Russia, Korea,Indonesia, India and Brazil.The credit risk of financial and non-financialcounterparties with outstanding payment obligationscreates exposures for Philips, particularly in relation toaccounts receivable with customers and liquid assetsand fair values of derivatives and insurance receivablescontracts with financial counterparties. A default bycounterparties in such transactions can have a materialadverse effect on Philips’ financial condition andoperating results.Philips’ supply chain is exposed to fluctuations inenergy and raw material prices. Commodities such asoil are subject to volatile markets and significant priceincreases from time to time. If Philips is not able tocompensate for, or pass on in good time, its increasedcosts to customers, such price increases could have anadverse impact on its financial condition and operatingresults.Philips is exposed to interest rate risk, particularly inrelation to its long-term debt position; this risk can takethe form of either fair value or cash flow risk. Failure toeffectively hedge this risk can impact Philips’ financialcondition and operating results.For further analysis, please refer to note 30, Details oftreasury / other financial risks.Philips is exposed to tax uncertainties, which couldhave a significant financial impact.Philips is exposed to tax uncertainties, which couldresult in double taxation, penalties and interestpayments. These include transfer pricing uncertaintieson internal cross-border deliveries of goods andservices, tax uncertainties related to acquisitions anddivestments, tax uncertainties related to the use of taxcredits and permanent establishments, taxuncertainties relating to tax loss and tax credits carriedforward and potential changes in tax law that couldresult in higher tax expenses and payments. TheRisk management5.6Annual Report 201665uncertainties may have a significant impact on localfinancial tax results which in turn could adversely affectPhilips’ financial condition and operating results.The value of the tax losses carried forward is subject toavailability of sufficient taxable income within the taxloss-carry-forward period, but also availability ofsufficient taxable income within the foreseeable futurein the case of tax losses carried forward with anindefinite carry-forward period. The ultimaterealization of the Company’s deferred tax assets,including tax losses and tax credits carried forward, isdependent upon the generation of future taxableincome in the countries where the temporarydifferences, unused tax losses and unused tax creditswere incurred and on periods during which the deferredtax assets become deductible. Additionally, in certaininstances, realization of such deferred tax assets isdependent upon the successful execution of taxplanning strategies. Accordingly, there can be noabsolute assurance that all (net) tax losses and creditscarried forward will be realized.For further details, please refer to the tax risksparagraph in note 8, Income taxes.Philips has defined-benefit pension plans and otherpost-retirement plans in a number of countries. Thefunded status and the cost of maintaining these plansare influenced by movements in financial market anddemographic developments, creating volatility inPhilips’ financials.A significant proportion of (former) employees inEurope and North and Latin America is covered bydefined-benefit pension plans and other post-retirement plans. The accounting for such plansrequires management to make estimates onassumptions such as discount rates, inflation, longevity,expected cost of medical care and expected rates ofcompensation. Movements (e.g. due to the movementsof financial markets) in these assumptions can have asignificant impact on the Defined Benefit Obligationand net interest cost. A negative performance of thefinancial markets could have a material impact on cashfunding requirements and net interest cost and alsoaffect the value of certain financial assets and liabilitiesof the company.Philips is exposed to uncertainty on the timing andproceeds of the sale of Lumileds.On January 22, 2016, Philips announced thetermination of its agreement with GO Scale Capital tosell a stake of 80.1% in Lumileds due to the inability tomitigate regulatory concerns in the US. Philipssubsequently engaged with other parties and onDecember 12, 2016, Philips announced that it hadsigned an agreement to sell an 80.1% interest inLumileds to certain funds managed by affiliates ofApollo Global Management, LLC. Subject to regulatoryapprovals and completion of other closing obligationsPhilips expects to receive cash proceeds, before taxand transaction-related costs, of approximately USD1.5 billion and participating preferred equity. As part ofthe agreement, Philips will retain a 19.9% interest in theequity of Lumileds by means of common shares for aminimum period of three years following completion ofthe transaction, subject to the customary drag-alongand tag-along conditions or an IPO. There are no votingrights associated with the participating preferred equityheld by Philips.Philips is exposed to a number of reporting risks.A risk rating is assigned for each risk identified, basedon the likelihood of occurrence and the potentialimpact of the risk on the financial statements andrelated disclosures. In determining the probability thata risk will result in a misstatement of a more thaninconsequential amount or of a material nature, thefollowing factors are considered to be critical:complexity of the associated accounting activity ortransaction process, history of accounting andreporting errors, likelihood of significant (contingent)liabilities arising from activities, exposure to losses,existence of a related party transaction, volume ofactivity and homogeneity of the individual transactionsprocessed, and changes in accounting characteristics inthe prior period compared to the period before that.For important critical reporting risk areas identifiedwithin Philips we refer to the “Use of estimates” sectionin note 1, Significant accounting policies, as theCompany assessed that reporting risk is closely relatedto the use of estimates and application of judgment.Management666Annual Report 20166ManagementKoninklijke Philips N.V. is managed by an ExecutiveCommittee which comprises the members of the Boardof Management and certain key officers from functions,businesses and markets.The Executive Committee operates under thechairmanship of the Chief Executive Officer and sharesresponsibility for the deployment of Philips’ strategyand policies, and the achievement of its objectives andresults.Under Dutch Law, the Board of Management isaccountable for the actions of the Executive Committeeand has ultimate responsibility for the managementand external reporting of Koninklijke Philips N.V. and isanswerable to shareholders at the Annual GeneralMeeting of Shareholders. Pursuant to the two-tiercorporate structure, the Board of Management isaccountable for its performance to a separate andindependent Supervisory Board.The Rules of Procedure of the Board of Managementand Executive Committee are published on theCompany’s website (www.philips.com/investor).Corporate governanceA full description of the Company’s corporategovernance structure is published in chapter 9,Corporate governance, of this Annual Report.Frans van HoutenBorn 1960, DutchChief Executive Officer (CEO)Chairman of the Board of Management since April 2011Responsibilities: Chairman of the Executive Committee, BusinessTransformation, Internal Audit, Quality and Regulatory, ParticipationsFor a full résumé, click hereAbhijit BhattacharyaBorn 1961, IndianExecutive Vice President & Chief Financial Officer (CFO)Member of the Board of Management since December 2015Responsibilities: Finance, Capital structure, Mergers & Acquisitions,Investor Relations, Information Technology, Global Business Services,ParticipationsFor a full résumé, click hereSophie BechuBorn 1960, French/AmericanExecutive Vice PresidentResponsibilities: Chief of Operations, Order to Cash Excellence,Procurement, Global Services, Quality and RegulatoryFor a full résumé, click hereJean Botti1)Born 1957, FrenchExecutive Vice PresidentResponsibilities: Chief Innovation and Strategy officer, Innovation,Strategy & Alliances, Design, Intellectual Property, Sustainability,Medical Affairs, Innovation-to-Market ExcellenceRob CascellaBorn 1954, AmericanExecutive Vice PresidentResponsibilities: Diagnosis & Treatment BusinessesFor a full résumé, click hereMarnix van GinnekenBorn 1973, Dutch/AmericanExecutive Vice PresidentResponsibilities: Chief Legal Officer, General Secretary, Compliance For a full résumé, click hereDenise Haylor2)Born 1964, English/AmericanExecutive Vice PresidentResponsibilities: Chief Human Resources Officer, CultureFor a full résumé, click hereAndy HoBorn 1961, ChineseExecutive Vice PresidentResponsibilities: Greater China MarketFor a full résumé, click hereRonald de Jong3)Born 1967, DutchExecutive Vice PresidentResponsibilities: Global Markets (all except Greater China & NorthAmerica), Government Affairs, Market-to-Order ExcellenceFor a full résumé, click herePieter NotaBorn 1964, DutchExecutive Vice President Member of the Board of Management since April 2011Responsibilities: Personal Health Businesses; Chief Marketing OfficerFor a full résumé, click hereBrent ShaferBorn 1957, AmericanExecutive Vice PresidentResponsibilities: North American MarketFor a full résumé, click hereJeroen Tas4)Born 1959, DutchExecutive Vice PresidentResponsibilities: Connected Care & Health Informatics BusinessesFor a full résumé, click here1)Left Philips in February 2017 and was succeeded by Jeroen Tas.2)Will leave Philips in March 2017 and will be succeeded by Ronald de Jong.3)Will take the role of Chief Human Resources Officer in April 2017.4)Took the role of Chief Strategy & Innovation Officer in February 2017 and was succeeded by Carla Kriwet.Supervisory Board7Annual Report 2016677SupervisoryBoardThe Supervisory Board supervises the policies of theexecutive management and the general course ofaffairs of Koninklijke Philips N.V. and advises theexecutive management thereon. The SupervisoryBoard, in the two-tier corporate structure under Dutchlaw, is a separate and independent corporate body.The Rules of Procedure of the Supervisory Board arepublished on the Company’s website. For details on theactivities of the Supervisory Board, see chapter 8,Supervisory Board report, of this Annual Report andsection 9.2, Supervisory Board, of this Annual Report.Jeroen van der VeerBorn 1947, Dutch 2),3)ChairmanChairman of the Corporate Governance and Nomination & Selection CommitteeMember of the Supervisory Board since 2009; second term expires in 2017Former Chief Executive and Non-executive Director of Royal DutchShell and currently Chairman of the Supervisory Board of ING Group.Member of the Supervisory Board of Concertgebouw N.V., RoyalBoskalis Westminster N.V. and Statoil ASA. Also a senior advisor toMazarine B.V.Neelam DhawanBorn 1959, Indian 1)Member of the Supervisory Board since 2012; second term expires in 2020Currently Vice President - Asia Pacific & Japan - Global Industriesand Strategic Alliances Hewlett Packard Enterprise.Orit GadieshBorn 1951, Israeli/American 1)Member of the Supervisory Board since 2014; first term expires in 2018Currently Chairman of Bain & Company and Member of theFoundation Board of the World Economic Forum (WEF). Also serveson the Supervisory Board of Renova AG and is a member of theUnited States Council of Foreign Relations.Christine PoonBorn 1952, American 2),3),4)Vice-chairman and SecretaryChairman of the Quality & Regulatory CommitteeMember of the Supervisory Board since 2009; second term expires in 2017Former Vice-Chairman of Johnson & Johnson’s Board of Directorsand Worldwide Chairman of the Pharmaceuticals Group and formerdean of Ohio State University’s Fisher College of Business. Currentlymember of the Board of Directors of Prudential and Regeneron andSherwin Williams.Heino von ProndzynskiBorn 1949, German/Swiss 2),3),4)Chairman of the Remuneration CommitteeMember of the Supervisory Board since 2007; third term expires in 2019Former member of the Corporate Executive Committee of the F.Hofmann-La Roche Group and former CEO of Roche Diagnostics.Currently Chairman of the Supervisory Board of Epigenomics AG,member of the Supervisory Board of HTL Strefa and Lead Director ofQuotient Ltd.David PyottBorn 1953, British 1),4)Member of the Supervisory Board since 2015; first term expires in 2019Former Chairman and Chief Executive Officer of Allergan, Inc. (since2001 and 1998, respectively, until 2015). Currently Director of AveryDennison Corporation and its Lead Independent Director (since 1999and 2010, respectively). Member of the Board of Directors of AlnylamPharmaceuticals Inc., of BioMarin Pharmaceutical Inc. and ofprivately-held Rani Therapeutics, an InCube Labs company. Alsomember of the Governing Board of the London Business School,President of the International Council of Ophthalmology Foundationand member of the Advisory Board of the Foundation of theAmerican Academy of Ophthalmology.Jackson TaiBorn 1950, American 1),4)Chairman of Audit CommitteeMember of the Supervisory Board since 2011; second term expires in 2019Former Vice-Chairman and CEO of DBS Group and DBS Bank Ltdand former Managing Director at J.P. Morgan &Co. Incorporated.Currently a member of the Boards of Directors of Eli Lilly andCompany HSBC Holdings PLC and MasterCard. Also Non-ExecutiveDirector of privately-held Russell Reynolds Associates and CanadaPension Plan Investment Board.1)member of the Audit Committee2)member of the Remuneration Committee3)member of the Corporate Governance and Nomination & Selection Committee4)member of the Quality & Regulatory CommitteeSupervisory Board report868Annual Report 20168Supervisory Board reportIntroductionWe as members of the Supervisory Board are fullycommitted to our role and responsibility in respect ofthe proper functioning of the corporate governance ofPhilips. The Supervisory Board supervises and advisesthe Board of Management and Executive Committee inperforming their management tasks and setting thedirection of the business of the Philips Group. TheSupervisory Board acts, and we as individual membersof the Board act, in the interests of Koninklijke PhilipsN.V., its business and all its stakeholders. This reportincludes a more speciﬁc description of the SupervisoryBoard’s activities during the ﬁnancial year 2016 andother relevant information on its functioning.Activities of the Supervisory BoardThe overview below indicates a number of matters thatwe reviewed and/or discussed during meetingsthroughout 2016:•The performance of the Philips Group and itsunderlying businesses and ﬁnancial headroom;•The strategic options for Philips Lighting, including aproposed sale and, as pursued and completed inMay 2016, the initial public offering of shares inPhilips Lighting. The Supervisory Board alsoreviewed potential scenarios for the envisaged sell-down of the remaining stake in Philips Lighting;•The strategic priorities for Philips to improve businessperformance and capture higher growth in the healthtechnology market;•Philips’ annual management commitment andannual operating plan for 2017;•Capital allocation, including the M&A framework, thedividend policy and the share buyback program(which was completed in October 2016);•Quality and regulatory systems and processes,including the remedial efforts in Cleveland and othersites. Please also refer to the description of theactivities of the Quality & Regulatory Committeegiven later in this Supervisory Board report;•Significant mergers, acquisitions and divestments,including the announcement (in December 2016) ofthe agreement to sell an 80.1% interest in thecombined Lumileds and Automotive business tocertain funds managed by affiliates of Apollo GlobalManagement, LLC; which transaction is expected tobe completed in the first half 2017 (subject tocustomary closing conditions);•Philips brand, including the brand performance,brand strategy, communication strategy andengagement strategy;•Enterprise risk management, which included anannual risk assessment and discussion of thechanging nature of the risks faced by Philips and thepossible impact of such risks. Such risks included theimpact of negative market conditions, disruptivecompetition, information security (including productsecurity), ineffective transition to new businessmodels and quality & regulatory non-compliance;•Changes in the composition of the ExecutiveCommittee;•Significant civil litigation claims and publicinvestigations against or into Philips; and•A review of Philips’ new five-year sustainabilityprogram that will run throughout 2016-2020, andincludes targets for Philips’ solutions, operations andsupply chain.The Supervisory Board conducted “deep dives” on arange of topics including:•Long-term strategic partnerships, covering theinternal governance, risk dynamics and profitabilityof long-term strategic partnerships; and•Strategic priorities of Philips in health technology,including definitive diagnosis and guided therapy.The Supervisory Board also reviewed Philips’ annualand interim ﬁnancial statements, including non-ﬁnancial information, prior to publication thereof.Supervisory Board meetings and attendanceIn 2016, the Supervisory Board convened for eightregular meetings and two extraordinary meetings.Moreover, we collectively and individually interactedwith members of the Executive Committee and withsenior management outside the formal SupervisoryBoard meetings. The Chairman of the SupervisoryBoard and the CEO met regularly for bilateraldiscussions about the progress of the Company on avariety of matters. The Supervisory Board also heldbilateral meetings with several members of theExecutive Committee to discuss a variety of topics.The Supervisory Board meetings were well attended in2016. The attendance level at these meetings includingthe committee meetings - was again high (in excess of95%). The Supervisory Board visited the Company’s sitein Cambridge, the United States, and toured itsInnovation Labs, to view demonstrations of itsinnovations in the health technology market and meetwith employees. The Supervisory Board also visited theCompany’s Research & Design facility in Eindhoven, theNetherlands, and met with researchers. Thecommittees of the Supervisory Board also convenedregularly (see the separate reports of the committeesbelow) and all of the committees regularly reportedback on their activities to the full Supervisory Board. Inaddition to the formal meetings of the Board and itsCommittees, the Board members also held privatemeetings. We, as members of the Board devotedSupervisory Board report8Annual Report 201669sufﬁcient time to engage (proactively if thecircumstances so required) in our supervisoryresponsibilities.Composition, diversity and self-evaluationby the Supervisory BoardThe Supervisory Board is a separate corporate bodythat is independent of the Board of Management (andthe Executive Committee). Its independence is alsoreﬂected in the requirement that a member of theSupervisory Board cannot be a member of the Board ofManagement, a member of the Executive Committee oran employee of Philips. The Supervisory Boardfurthermore considers all its members to beindependent pursuant to the Dutch CorporateGovernance Code. We will continue to pay closeattention to applicable independence criteria.The Supervisory Board currently consistsof seven members.In 2016, there were a number of changes to themembership of the Board. The term of appointment ofEwald Kist expired at the end of the Annual GeneralMeeting held on 12 May 2016, after he had served threeconsecutive terms on the Board. We are grateful toEwald for his years of service, which included him beingChairman of the Audit Committee, and for hisdedication and the wisdom that he brought to theSupervisory Board’s discussions and decisions. As of 31May 2016, Kees van Lede resigned from theSupervisory Board of Philips to become a SupervisoryBoard member of Philips Lighting. Kees joined ourBoard in 2003 and served as member of the AuditCommittee and as Chairman to the RemunerationCommittee and the Separation Committee. We wouldlike to thank Kees for his valuable contributions as amember of the Supervisory Board.In 2016, Neelam Dhawan was reappointed as a memberof the Supervisory Board.The agenda for the upcoming 2017 Annual GeneralMeeting of Shareholders will include proposals toreappoint Jeroen van der Veer and Christine Poon asmembers of the Supervisory Board, each for anadditional term of four years.The proﬁle of the Supervisory Board aims for anappropriate combination of knowledge and experienceamong its members, encompassing marketing,manufacturing, technology, ﬁnancial, economic, social,quality & regulatory and legal aspects of internationalbusiness, government and public administration inrelation to the global and multi- product character ofPhilips’ businesses. The Supervisory Board attachesgreat value to diversity in its composition. Morespecifically, it aims to have members with bothEuropean and non-European backgrounds(nationality, working experience or otherwise) and oneor more members who have held an executive or similarposition in business or society.In addition, we support Philips’ policy to appoint a well-balanced mix of women and men to its Board ofManagement, Executive Committee and SupervisoryBoard, including the policy of having at least 30% of theseats on the Board of Management and the SupervisoryBoard held by women and at least 30% of the seats heldby men. Currently, the Supervisory Board’s genderdiversity is within these criteria. We note that there maybe various pragmatic reasons – such as other relevantselection criteria and the availability of suitablecandidates – that could play a role in the achievementof our diversity targets.In 2016, the members of the Supervisory Board againeach completed a questionnaire to verify compliancewith the applicable corporate governance rules and itsown Rules of Procedure. The outcome of this surveywas satisfactory.In addition, we each submitted to the Chairmanresponses to a questionnaire designed to self-evaluatethe functioning of the Supervisory Board. As in previousyears, the questionnaire covered topics such as thecomposition and competence of the Supervisory Board(for example, the Board’s size and the education andtraining requirements of its members), access toinformation, the frequency and quality of the meetings,quality and timeliness of the meeting materials, thenature of the topics discussed during meetings and thefunctioning of the Supervisory Board’s committees.The responses to the questionnaire were aggregatedinto a report, which was discussed by the SupervisoryBoard in a private meeting. Certain areas wereidentiﬁed that could be improved and it was decidedthat the Chairman would follow up with individualmembers to address speciﬁc issues. This resulted in anumber of suggestions to improve the quality of thediscussion in Board meetings, which will beimplemented in 2017. Members of the SupervisoryBoard had a “one-to-one” discussion with theChairman, and the Chairman was evaluated by theVice-Chairman. The responses provided by theSupervisory Board members indicated that the Boardcontinues to be a well-functioning team and we believea diversity of experience and skills is represented on theBoard. The Board has spent time throughout 2016considering its composition and it will continue todevote attention to this topic during 2017. Thefunctioning of the Supervisory Board committees wasconsidered to be commendable and speciﬁc feedbackwas addressed by the Chairman of each committeewith its members.The use of an external evaluator to measure thefunctioning of the Supervisory Board may beconsidered in the future.Supervisory Board committeesThe Supervisory Board has assigned certain of its tasksto the three long-standing committees, also referred toin the Dutch Corporate Governance Code: theSupervisory Board report870Annual Report 2016Corporate Governance and Nomination & SelectionCommittee, the Remuneration Committee and theAudit Committee. In 2015, the Supervisory Board alsoestablished the Quality & Regulatory Committee. Theseparate reports of these committees are part of thisSupervisory Board report and are published below.The function of all of the Board’s committees is toprepare the decision-making of the full SupervisoryBoard, and the committees currently have noindependent or assigned powers. The full Board retainsoverall responsibility for the activities of its committees.Separation CommitteeIn 2015, the Supervisory Board additionally establishedthe Separation Committee, following the decision toseparate the Lighting business from the Company. InJanuary 2016, the Separation Committee met on oneoccasion and conducted a final review of the separationprocess, focusing on the status of the separation acrossall Lighting businesses and Markets, and the separationof items including intellectual property, informationtechnology infrastructure, real estate and legacyliabilities. The Separation Committee was abolishedfollowing the establishment of a stand-alone structurewithin the Philips Group effective February 1, 2016(which was followed by the initial public offering ofshares in Philips Lighting in May 2016).Supervisory Board remunerationThe agenda for the upcoming 2017 Annual GeneralMeeting of Shareholders will include a proposal toincrease the Annual Fixed Fee level and CommitteeMeeting Fees of the Supervisory Board. The agenda willalso include a proposal to amend the RemunerationPolicy and LTI Plan for the Board of Management. Seethe section 8.2, Report of the RemunerationCommittee, of this Annual Report.Financial Statements 2016The ﬁnancial statements of the company for 2016, aspresented by the Board of Management, have beenaudited by Ernst & Young Accountants LLP, theindependent external auditor appointed by the GeneralMeeting of Shareholders. Its reports have beenincluded in section 11.5, Independent auditor’s report,of this Annual Report. We have approved theseﬁnancial statements, and all individual members of theSupervisory Board (together with the members of theBoard of Management) have signed these documents.We recommend to shareholders that they adopt the2016 ﬁnancial statements. We likewise recommend toshareholders that they adopt the proposal of the Boardof Management to make a distribution of EUR 0.80 percommon share (up to EUR 745 million), in cash or inshares at the option of the shareholder, against the netincome for 2016.Finally, we would like to express our thanks to themembers of the Executive Committee and all otheremployees for their continued contribution during theyear.February 21, 2017The Supervisory BoardJeroen van der Veer Christine PoonNeelam DhawanOrit GadieshDavid PyottHeino von Prondzynski Jackson TaiFurther informationTo gain a better understanding of the responsibilities ofthe Supervisory Board and the internal regulations andprocedures governing its functioning and that of itscommittees, please refer to chapter 9, Corporategovernance, of this Annual Report and to the followingdocuments published on the Company’s website:•Articles of Association•Rules of Procedure Supervisory Board, including theCharters of the Board committees•Rules of Conduct with respect to Inside InformationChanges and re-appointmentsSupervisory Board and committees2016•Neelam Dhawan was re-appointed as memberof the Supervisory Board.•Ewald Kist and Kees van Lede resigned asmembers of the Supervisory Board.Proposed re-appointmentsSupervisory Board 2017•It is proposed to re-appoint Jeroen van der Veerand Christine Poon as members of theSupervisory Board.8.1Report of the Corporate Governanceand Nomination & SelectionCommitteeThe Corporate Governance and Nomination & SelectionCommittee is chaired by Jeroen van der Veer and itsother members are Christine Poon and Heino vonProndzynski. The Committee is responsible for thereview of selection criteria and appointmentprocedures for the Board of Management, theExecutive Committee, certain other key managementpositions, as well as the Supervisory Board.Supervisory Board report8.1Annual Report 201671In 2016, the Committee met four times and devotedtime on the appointment or reappointment ofcandidates to ﬁll current and future vacancies on theSupervisory Board, Board of Management andExecutive Committee. Following those consultations itprepared decisions and advised the Supervisory Boardon candidates for appointment.This resulted in the proposal to re-appointment, at theupcoming 2017 Annual General Meeting ofShareholders, Jeroen van der Veer and Christine Poonas members of the Supervisory Board.This also resulted in the appointment of Sophie Bechuas Chief Operations in September 2016.The Committee reviewed the implications of theseparation of the Company into two companies forgovernance, succession and talent development. Thisresulted in Jeroen Tas and Rob Cascella joining theExecutive Committee as leaders for the ConnectedCare & Health Informatics businesses and Diagnosis &Treatment businesses, respectively, as of 1 July 2016.As per the same date, Brent Shafer and Andy Ho joinedthe Executive Committee as Market Leaders NorthAmerica and China, respectively.Eric Rondolat left the Executive Committee in view ofthe listing of Philips Lighting.Early 2017, there were a number of changes in theExecutive Committee that the Committee discussed.Jeroen Tas was appointed as Chief Innovation &Strategy Officer, replacing Jean Botti, who left Philips.Carla Kriwet joined the Executive Committee as ChiefBusiness Leader of Connected Care & HealthInformatics, succeeding Jeroen Tas in that role. TheCommittee further discussed the appointment ofRonald de Jong as Chief Human Resources Officerfollowing the decision by Denise Haylor to leave Philipsin March 2017.As indicated in its report above, the Supervisory Boardbelieves it is making good progress in implementing apolicy of gender diversity. The Committee strives tocontinue this trend and give appropriate weight to thediversity policy in the nomination and appointmentprocess for future vacancies, while taking into accountthe overall proﬁle and selection criteria for theappointments of suitable candidates to the SupervisoryBoard, Board of Management and ExecutiveCommittee.Under its responsibility for the selection criteria andappointment procedures for Philips’ seniormanagement, the Committee reviewed the successionplans for the top 70 positions and emergencycandidates for key roles in the Company.With respect to corporate governance matters, theCommittee discussed relevant developments andlegislative changes. The Committee discussed therevised EU Market Abuse Regulation, the EU Directiveand Regulation on audits of annual accounts and therevised EU Transparency Directive. The revised DutchCorporate Governance code, which will come intoeffect for the financial year 2017, was also discussed inthe Committee.8.2Report of the RemunerationCommitteeIntroductionThe Remuneration Committee is chaired by Heino vonProndzynski. Its other members are Jeroen van der Veerand Christine Poon. The Committee is responsible forpreparing decisions of the Supervisory Board on theremuneration of individual members of the Board ofManagement and the Executive Committee. Inperforming its duties and responsibilities theRemuneration Committee is assisted by an externalconsultant and in-house remuneration expert acting onthe basis of a protocol which ensures that he acts onthe instructions of the Remuneration Committee.Currently, no member of the Remuneration Committeeis a member of the management board of another listedcompany. In line with applicable statutory and otherregulations, this report focuses on the terms ofengagement and remuneration of the members of theBoard of Management. The Committee met seventimes in 2016.8.2.1Remuneration policyThe objective of the remuneration policy for membersof the Board of Management, as adopted by thegeneral meeting of shareholders, is in line with that forexecutives throughout the Philips Group. That is, toattract, motivate and retain qualified senior executivesof the highest caliber with an international mindset andthe background essential for the successful leadershipand effective management of a large global company.The Board of Management remuneration policy isbenchmarked regularly against companies in thegeneral industry and aims at the median marketposition.One of the goals behind the policy is to focus onimproving the performance of the company and toenhance the value of the Philips Group. Consequently,the remuneration package includes a variable part inthe form of an annual cash incentive and a long-termincentive consisting of performance shares. The policydoes not encourage inappropriate risk-taking.The performance targets for the members of the Boardof Management are determined annually at thebeginning of the year. The Supervisory Boarddetermines whether performance conditions havebeen met and can adjust the payout of the annual cashincentive and the long-term incentive grant upward ordownward if the predetermined performance criteriawere to produce an inappropriate result inextraordinary circumstances. The authority for suchadjustments exists on the basis of contractual ultimum-Supervisory Board report8.2.172Annual Report 2016remedium and claw-back clauses. In addition, pursuantto Dutch legislation effective January 1, 2014, incentivesmay, under certain circumstances, be amended orclawed back pursuant to statutory powers. For moreinformation please refer to chapter 9, Corporategovernance, of this Annual Report. Further informationon the performance targets is given in the chapters onthe Annual Incentive (see sub-section 8.2.6, 2016Annual Incentive, of this Annual Report) and the Long-Term Incentive Plan (see sub-section 8.2.7, 2016 Long-Term Incentive Plan, of this Annual Report)respectively.Key features of our Board of ManagementCompensation ProgramThe list below highlights Philips’ approach toremuneration, in particular taking into accountCorporate Governance practices in the Netherlands.What we do•We pay for performance•We conduct scenario analyses•We have robust stock ownership guidelines•We have claw-back policies incorporated into ourincentive plans•We have a simple and transparent remunerationstructure in placeWhat we do not do•We do not pay dividend equivalents on stock options,or restricted share units and performance share unitsthat do not vest•We do not offer executive contracts with longer than12 months’ separation payments•We do not have a remuneration policy in place thatencourages our Board of Management to take anyinappropriate risks or to act in their own interests•We do not reward failing members of the Board ofManagement upon termination of contract•We do not grant loans or give guarantees to membersof the Board of Management8.2.2Contracts for the provision of servicesBelow, the main elements of the contracts for theprovision of services of the members of the Board ofManagement are included.Term of appointmentThe members of the Board of Management areengaged for a period of 4 years, it being understoodthat this period expires no later than at the end of thefollowing AGM held in the fourth year after the year ofappointment.Philips GroupContract terms for current membersend of term F.A. van HoutenAGM 2019 A. BhattacharyaAGM 2019 P.A.J. NotaAGM 2019 Notice periodTermination of the contract for the provision of servicesis subject to six months’ notice for both parties.Severance paymentThe severance payment is set at a maximum of oneyear’s base compensation.Share ownershipSimultaneously with the introduction of the currentLong-Term Incentive Plan (LTI) in 2013, the guideline formembers of the Board of Management to hold a certainnumber of shares in the Company was increased to thelevel of at least 200% of annual base compensation(300% for the CEO). Until this level has been reachedthe members of the Board of Management are requiredto retain all after-tax shares derived from any long-termincentive plan.Both Frans van Houten and Pieter Nota have reachedthe required share ownership level. AbhijitBhattacharya is at 96% of his target (i.e., 192% of annualbase compensation).8.2.3Scenario analysisThe Remuneration Committee conducts a scenarioanalysis annually. This includes the calculation ofremuneration under different scenarios, wherebydifferent Philips performance assumptions andcorporate actions are examined. The Supervisory Boardconcluded that the current policy has proven tofunction well in terms of a relationship between thestrategic objectives and the chosen performancecriteria and believes that the Annual and Long-TermIncentive Plans support this relationship.8.2.4Remuneration costsThe following table gives an overview of the costsincurred by the Company in the financial year in relationto the remuneration of the Board of Management. Costsrelated to performance shares and restricted share rightgrants are taken by the Company over a number ofyears. As a consequence, the costs mentioned below inthe performance shares and restricted share rightscolumns are the accounting cost of multi-year Long-Term Incentive grants given to members of the Boardof Management.Supervisory Board report8.2.4Annual Report 201673Philips GroupRemuneration Board of Management1) in EUR2016 Costs in the year annual basecompen-sation2)basecompen-sation realizedannualincentive perfor-manceshares restrictedshare rights pensionallowances pensionschemecosts othercompen-sation F.A. van Houten1,205,000 1,197,500 1,354,227 1,423,538 12,041 536,195 24,838 126,703 A. Bhattacharya650,000 650,000 540,072 362,758 3,341 201,524 24,838 73,642 P.A.J. Nota710,000 702,500 619,745 683,101 9,251 277,649 24,838 56,558 2,550,000 2,514,044 2,469,397 24,633 1,015,368 74,514 256,903 1)Reference date for board membership is December 31, 20162)Base compensation as of April 1, 2016For further details on the pension allowances andpension costs see sub-section 8.2.8, Pensions, of thisAnnual Report.8.2.5Annual base compensationThe annual compensation of the members of the Boardof Management has been reviewed in April 2016 as partof the regular remuneration review. The annualcompensation of Frans van Houten has been increasedper April 1, 2016, from EUR 1,175,000 to EUR 1,205,000.The annual compensation of Pieter Nota has beenincreased from EUR 680,000 to EUR 710,000.Both increases were made to move base compensationlevels closer to market levels. The annualcompensation of the CFO, Abhijit Bhattacharya,remained unchanged at EUR 650,000, given hisappointment as CFO on December 18, 2015.8.2.62016 Annual IncentiveEach year, a variable cash incentive (Annual Incentive)can be earned, based on the achievement of specificand challenging targets. The Annual Incentive criteriaare made up for 80% of the financial indicators of theCompany and for 20% of the team targets comprising,among others, targets as part of our sustainabilityprogram.The on-target Annual Incentive percentage in 2016 isset at 80% of the annual base compensation for theCEO and at 60% of the annual base compensation forother members of the Board of Management. Themaximum Annual Incentive achievable is 160% of theannual base compensation for the CEO and 120% of theannual base compensation for members of the Boardof Management.To support the performance culture, the financialtargets we set are at Group level for Frans van Houtenand Abhijit Bhattacharya and a combination of Groupand business level for Pieter Nota. The 2016 payouts,shown in the table below, reflect the above targetperformance of all three metrics (i.e., Comparable salesgrowth1), EBITA1) and cash flow based) at Group andbusiness levels that apply to Board of Management.Philips GroupAnnual Incentive realization in EUR2016 (payout in 2017)realized annualincentive as a % of basecompensation(2016) F.A. van Houten1,354,227 112.4% A. Bhattacharya540,072 83.1% P.A.J. Nota619,745 87.3% 8.2.72016 Long-Term Incentive PlanGrants made to Board of Management under the 2016LTI Plan consist of performance shares only.Grant sizeThe annual grant size is set by reference to a multipleof base compensation. For the CEO the annual grantsize in 2016 is set at 120% of base compensation and forthe other members of the Board of Management at100% of base compensation. The actual number ofperformance shares to be awarded is determined byreference to the average of the closing price of thePhilips share on the day of publication of the firstquarterly results and the four subsequent dealing days.Vesting scheduleDependent upon the achievement of the performanceconditions, cliff-vesting applies three years after thedate of grant. During the vesting period, the value ofdividends will be added to the performance shares inthe form of shares. These dividend-equivalent shareswill only be delivered to the extent that the awardactually vests.Performance conditionsVesting of the performance shares is based on twoequally weighted performance conditions:•50% Adjusted Earnings per Share growth (“EPS”) and•50% Relative Total Shareholder Return (“TSR”)EPSEPS growth is calculated by applying the simple point-to-point method at year end. Earnings are the incomefrom continued operations attributable toshareholders, as reported in the Annual Report.1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Supervisory Board report8.2.774Annual Report 2016The following performance-incentive zone applies forEPS:Philips GroupPerformance-incentive zone for EPS in %Belowthreshold Threshold Target Maximum Payout0 40 100 200 The EPS targets are set annually by the SupervisoryBoard. Given that these targets are considered to becompany sensitive, disclosure will take placeretrospectively at the end of the performance period.EPS targets and the achieved performance arepublished in the Annual Report after the relevantperformance period. For realization of the 2014 grant,see the table on vesting 2014 awards at the end of thissection.TSRMedtronic acquired Covidien on January 26, 2015 andfollowing this Covidien was excluded from the 2016peer group. As a result, the TSR peer group for the 2016LTI Plan consists of the following 20 companies:Philips GroupTSR peer groupABBHoneywell Int. Procter & Gamble DanaherJohnson Controls Schneider Electric EatonJohnson & Johnson Siemens ElectroluxLegrand Smiths Group Emerson ElectricLG Electronics Toshiba General ElectricMedtronic 3M HitachiPanasonic A ranking approach to TSR applies with Philips itselfexcluded from the peer group to permit interpolation.Following Johnson Controls merger with TycoInternational in September 2016, the Supervisory Boardadopted the approach of recognizing Johnson Controlsperformance through the merger date and as a proxyfor future performance assumed reinvestment in anindex of the remaining 19 peer companies.The performance incentive-zone is outlined in the tablebelow:Philips GroupPerformance-incentive zone for TSR in %Position≥20-13 ≥12 ≥11 ≥10 ≥9 ≥8 ≥7 ≥6-1 Payout0 60 80 120 140 160 180 200 Under the LTI Plan members of the Board ofManagement were granted 115,047 performance sharesin 2016.The following tables provide an overview at endDecember 2016 of stock option grants andperformance share grants. The reference date for boardmembership is December 31, 2016.Supervisory Board report8.2.7Annual Report 201675Philips GroupStock optionsgrant date number of stock options value at grant date1)end of lock-up period value at end of lock-up period1)F.A. van Houten20132)55,000 242,534 2016 167,178 P.A.J. Nota20132)38,500 169,773 2016 117,025 1)Value based on Black & Scholes value2)Accelerate! GrantPhilips GroupPerformance shares1)grant date number ofperformancesharesoriginallygranted value at grant date end ofvestingperiod number ofperformancesharesvested in 2016 value at vestingdate in 2016 F.A. van Houten2013 62,559 1,320,000 2016 53,175 1,263,438 2014 59,075 1,380,000 2017 n.a. n.a. 2015 54,877 1,410,000 2018 n.a. n.a. 2016 59,287 1,446,000 2019 n.a. n.a. A. Bhattacharya2013 11,848 250,000 2016 10,071 239,287 2014 10,702 250,000 2017 n.a. n.a. 2015 11,676 300,000 2018 n.a. n.a. 2016 26,650 650,000 2019 n.a. n.a. P.A.J. Nota2013 29,621 625,000 2016 25,178 598,229 2014 27,825 650,000 2017 n.a. n.a. 2015 26,465 680,000 2018 n.a. n.a. 2016 29,110 710,000 2019 n.a. n.a. 1)Dividend performance shares not includedFor more details of the LTI Plan see note 27, Share-based compensation.Realization of 2014 performance share grantThe 3-year performance period of the 2014performance share grant ended on December 31, 2016.The payout results are explained below.TSR (50% weighting)On January 26, 2015, Medtronic completed theacquisition of Covidien. To address the delisting ofCovidien the Supervisory Board adopted the approachof recognizing Covidien’s performance through thedelisting date and as a proxy for future performance,assumed reinvestment in an index of the remaining 20peer companies, therefore, effectively a peer group of21 companies.The TSR achieved by Philips during the performanceperiod was 18.66% This positioned Philips between the10th and 11th ranked company in the peer group shownin the table below, resulting in an achievement of105.8%.TSR results Philips LTI Plan 2014 grants Koninklijke Philips:18.66%Total Shareholder Return ranking per December 31, 2016Start date: December 2013End date: December 2016Companytotal returnrank numberCovidien77.27% 1 Electrolux48.10% 2 Medtronic46.91% 3 3M46.21% 4 Danaher43.80% 5 Honeywell International38.51% 6 Legrand38.21% 7 Johnson & Johnson36.39% 8 Siemens27.42% 9 General Electric27.33% 10 Procter & Gamble15.15% 11 Smiths Group13.24% 12 Schneider Electric12.37% 13 Panasonic11.13% 14 ABB5.90% 15 Johnson Controls3.18% 16 Eaton1.85% 17 Toshiba(5.74)% 18 Emerson Electric(11.02)% 19 Hitachi(12.33)% 20 LG Electronics(27.91)% 21 Supervisory Board report8.2.776Annual Report 2016Adjusted EPS growth (50% weighting)The EPS payouts and targets set at the beginning of theperformance period were as follows: belowthreshold threshold target maximum EPS(euro)<1.45 1.45 1.62 ≥1.90 Payout0% 40% 100% 200% EPS is based on the underlying income from continuingoperations attributable to shareholders, as included inthe Annual Report, adjusted for changes in accountingprinciples. Furthermore, the Supervisory Board has alsodeemed it appropriate to make adjustments relating tocertain other items that were not contemplated whenthe targets were set in 2014. These relate to the profitand loss impact of acquisitions and discontinuedoperations, impairments and restructuring costs, bondredemption fees, and impact of foreign exchangevariations versus plan. In addition, we have added backthe non-controlling interests related to Philips Lightingsince contributions from this business were included inthe original EPS targets.The resulting EPS achievement was determined by theSupervisory Board as 107.1%.In view of the above, the following performanceachievement and vesting levels have been determinedby the Supervisory Board in respect of the 2014 grantof performance shares:metricachievement weighting vesting level TSR105.8% 50% 52.9% EPS107.1% 50% 53.6% total 106.5% 8.2.8PensionsEffective January 1, 2015 pension plans which allowpension accrual based on a pensionable salaryexceeding an amount in 2016 of EUR 101,519 are, forfiscal purposes, considered to be non-qualifyingschemes. For this reason the Executive Pension Plan inthe Netherlands has been terminated.The following pension arrangement is in place for thecurrent members of the Board of Management workingunder a Dutch contract:•Flex Pension Plan in the Netherlands, which is aCollective Defined Contribution plan with a fixedcontribution of 26.2% up to the maximumpensionable salary of EUR 101,519. The Flex Plan hasa target retirement age of 67 and a target accrual rateof 1.85%;•A gross Pension Allowance equal to 25% of the basecompensation exceeding EUR 101,519;•A temporary gross Transition Allowance, for amaximum period of 8 years (first 5 years in full; year6: 75%; year 7: 50%, year 8: 25%) for members of theBoard who were participants of the former ExecutivePension Plan. The level of the allowance is based onthe age and salary of the Board member onDecember 31, 2014.The total pension cost of the Company related to thisnew pension arrangement (including the temporaryTransition Allowance) is at a comparable level over aperiod of time to the pension cost under the formerExecutive Pension Plan.8.2.9Additional arrangementsIn addition to the main conditions as stipulated in thecontracts for the provision of services, a number ofadditional arrangements apply to members of theBoard of Management. These additional arrangements,such as expense and relocation allowances, medicalinsurance, accident insurance and company cararrangements, are in line with those for Philipsexecutives in the Netherlands. In the event ofdisablement, members of the Board of Managementare entitled to benefits in line with those for otherPhilips executives in the Netherlands.Unless the law provides otherwise, the members of theBoard of Management and of the Supervisory Boardshall be reimbursed by the Company for various costsand expenses, like reasonable costs of defendingclaims, as formalized in the Articles of Association.Under certain circumstances, described in the Articlesof Association, such as an action or failure to act by amember of the Board of Management or a member ofthe Supervisory Board that can be characterized asintentional (“opzettelijk”), intentionally reckless(“bewust roekeloos”) or seriously culpable (“ernstigverwijtbaar”), there will be no entitlement to thisreimbursement. The Company has also taken outliability insurance (D&O - Directors & Officers) for thepersons concerned.8.2.10Remuneration of the Supervisory BoardA revised remuneration structure for Supervisory Boardmembers was approved at the 2015 GeneralShareholders’ meeting. The table below provides anoverview of the current remuneration structure.Supervisory Board report8.2.10Annual Report 201677Philips GroupRemuneration Supervisory Board1) in EUR2016Chairman Vice Chairman Member Supervisory Board135,000 90,000 80,000 Audit Committee22,500 n.a. 13,000 RemunerationCommittee15,000 n.a. 10,000 CorporateGovernance andNomination &Selection Committee15,000 n.a. 7,500 Quality & RegulatoryCommittee15,000 n.a. 10,000 Attendance fee perinter-European trip2,500 2,500 2,500 Attendance fee perintercontinental trip5,000 5,000 5,000 Entitlement toPhilips productarrangement2,000 2,000 2,000 1)For more details, see note 28, Information on remuneration8.2.11Year 20172017 is the first full year as a Company focused onHealthTech opportunities. Subject to appropriateapprovals we will implement changes to ourRemuneration Policy, Long-Term Incentive Plans, andSupervisory Board fee structures that are more closelyaligned to our key business and talent competitors.8.3Report of the Audit CommitteeThe Audit Committee is chaired by Jackson Tai, and itsother members are Neelam Dhawan, Orit Gadiesh andDavid Pyott. Jeroen van der Veer also regularlyparticipated in Audit Committee meetings. TheCommittee assists the Supervisory Board in fulﬁlling itssupervisory responsibilities for, among other things,ensuring the integrity of the Company’s ﬁnancialstatements and reviewing the Company’s internalcontrols.The Audit Committee met six times during 2016,including an education session, and reported itsﬁndings to the plenary Supervisory Board. The CEO, theCFO, the Chief Legal Officer, the Head of Internal Audit,the Group Chief Accountant and the external auditor(Ernst & Young Accountants LLP) attended all regularmeetings.As decided by the 2015 Annual General Meeting ofShareholders, Ernst & Young Accountants LLP wereappointed as the company’s new external auditoreffective January 1, 2016. Ernst & Young AccountantsLLP and the previous external accountant, KMPGAccountants N.V., each reported that the transitionbetween auditors has been completed successfullyand without any interruption.Furthermore, for each meeting, the Committee metseparately with each of the CEO, the CFO, the ChiefLegal Officer, the Head of Internal Audit and theexternal auditor. In addition, the Audit Committee chairmet one-on-one with the Group Treasurer, the GroupChief Accountant, the Head of Legal Compliance andthe Chief Information Security Officer prior to eachCommittee meeting.The overview below indicates some of the matters thatwere discussed during meetings throughout 2016:•The Company’s 2016 annual and interim ﬁnancialstatements, including non-ﬁnancial information,prior to publication thereof. The Committee alsoassessed in its quarterly meetings the adequacy andappropriateness of internal control policies andinternal audit programs and their ﬁndings.•Matters relating to accounting policies, ﬁnancial risksand compliance with accounting standards.Compliance with statutory and legal requirementsand regulations, particularly in the ﬁnancial domain,was also reviewed. Important ﬁndings, Philips’ majorareas of risk (including the internal auditor’s reportingthereon, and the Chief Legal Officer’s review oflitigation and other claims) and follow-up actionsand appropriate measures were examinedthoroughly. Each quarter, the Committee reviewedthe Company’s cash ﬂow generation, liquidity andheadroom, capital structure throughout the year andthe implications for the Company’s credit ratings andits ability to undertake its ﬁnancial commitments,including the Company’s share repurchase program,dividend policy, payment of dividends, as well asimplications of contemplated restructurings,dispositions and acquisitions. The Committee alsoreviewed the goodwill impairment test performed inthe second and fourth quarter, risk management,information security, the commercial policy, legalcompliance and developments in regulatoryinvestigations as well as legal proceedings includingantitrust investigations and related provisions.•Specific finance topics included Philips Capital,including its target portfolio risk profile, the progressin the pension de-risking plan and the Company’sdebt financing strategy.•The Committee reviewed information security,including targeted end state, situation readiness andcapabilities within the team, and timetable to achievethe end state.•With regard to the internal audit, the Committeereviewed and, if required, approved the internal auditcharter, audit plan, audit scope and its coverage inrelation to the scope of the external audit, as well asthe stafﬁng, independence and organizationalstructure of the internal audit function. Theseparation of the audit function for Royal Philips andPhilips Lighting, including staffing capabilities and itsmanagement succession, was also discussed.•With regard to the external audit, the Committeereviewed the proposed audit scope, approach andfees, the independence of the external auditor, non-audit services provided by the external auditor inconformity with the Philips Auditor Policy, as well asany changes to this policy. The Committee alsoreviewed the key audit matters, focusing on revenueSupervisory Board report8.378Annual Report 2016recognition, Company separation, valuation ofgoodwill, taxes, contingent liabilities and accountingfor Discontinued operations.•The Committee reviewed the independence as wellas the professional ﬁtness and good standing of theexternal auditor and its engagement partners. Forinformation on the fees of Group auditor, please referto the table ‘Fees’ in note 6, Income from operations.•The Committee convened an education session oncompliance, examining changes in regulatoryrequirements and heighten expectations. Thesession was led by the Head of Legal Complianceand Chief Legal Officer.•The Company’s policy on business controls, legalcompliance and the General Business Principles(including the deployment thereof). The Committeewas informed on, and discussed and monitoredclosely the Company’s internal control certiﬁcationprocesses, in particular compliance with section 404of the US Sarbanes-Oxley Act and its requirementsregarding assessment, review and monitoring ofinternal controls. It also discussed on a regular basisthe developments in and findings resulting frominvestigations into alleged violations of the GeneralBusiness Principles and, if required, any measurestaken.During each Audit Committee meeting, the Committeereviewed the report from the external auditor in whichthe auditor set forth its ﬁndings and attention pointsduring the relevant period. The Committee alsoassessed the overall performance of the externalauditor, as required by the Auditor Policy. TheCommittee also reviewed its own Charter andconcluded that it was satisfactory.8.4Report of the Quality & RegulatoryCommitteeThe Supervisory Board established the Quality andRegulatory Committee in 2015 in view of the continuedrelevance of the quality of the Company’s products,systems, services, and software and the development,testing, manufacturing, marketing, and servicingthereof, and regulatory requirements relating thereto.The Q&R Committee assists the Supervisory Board infulfilling its oversight responsibilities in this area whilstrecognizing that the Audit Committee assists theSupervisory Board in the oversight of other areas ofregulatory, compliance, and legal matters. Its membersare Heino von Prondzynski, David Pyott and JacksonTai, and it is chaired by Christine Poon.The Q&R Committee met five times in 2016. Theoverview below indicates some of the matters that werediscussed during meetings throughout 2016:•The culture of quality and measures taken toenhance the quality culture and awareness in theCompany through inter alia communication by seniormanagement, mandatory quality awarenesstrainings and quality-specific target-setting inpeople performance management;•Quality and regulatory dashboards, which displaykey performance indicators for business groups andmarkets, the status of ongoing internal and externalaudits, and any remediation actions underway orcompleted;•Product quality, including a review of the internalassessment that was conducted on product qualityand supply base improvements;•Regulatory developments, covering (amongstothers) changes in healthcare regulations in the US,EU, and China;•The standardization of the Quality System acrossPhilips which will lead to consistently robust qualityand compliance;•Deployment of performance management thatprovides a framework for continuous improvement;and•Talent development and adequacy of resources forthe Quality and Regulatory team in order to providea platform for continued growth and stability.Members of the Q&R Committee also visited theAndover and San Diego sites in the United States andreviewed their quality systems.Corporate governance9Annual Report 2016799Corporate governanceCorporate governance of the Philips Group -IntroductionKoninklijke Philips N.V., a company organized underDutch law, is the parent company of the Philips Group.The Company, which started as a limited partnershipwith the name Philips & Co in Eindhoven, theNetherlands, in 1891, was converted into thecompany with limited liability N.V. Philips’Gloeilampenfabrieken on September 11, 1912. TheCompany’s name was changed to Philips ElectronicsN.V. on May 6, 1994, to Koninklijke Philips ElectronicsN.V. on April 1, 1998, and to Koninklijke Philips N.V. onMay 15, 2013. Its shares have been listed on theAmsterdam Stock Exchange, Euronext Amsterdam,since 1912. The shares have been traded in the UnitedStates since 1962 and have been listed on the New YorkStock Exchange since 1987.Over the last decades the Company has pursued aconsistent policy to improve its corporate governancein line with Dutch, US and international (codes of) bestpractices. The Company has incorporated a fairdisclosure practice in its investor relations policy, hasstrengthened the accountability of its executivemanagement and its independent supervisorydirectors, and has increased the rights and powers ofshareholders and the communication with investors.The Company is required to comply with, inter alia,Dutch corporate governance rules, the US Sarbanes-Oxley Act, other US securities laws and relatedregulations (including applicable stock exchange rules),insofar as applicable to the Company. A summary ofsigniﬁcant differences between the Company’scorporate governance practice and the New York StockExchange corporate governance standards ispublished on the Company’s website(www.philips.com/investor).In this report, the Company addresses its overallcorporate governance structure and states to whatextent and how it applies the principles and bestpractice provisions of the Dutch Corporate GovernanceCode (of December 10, 2008; the ‘Dutch CorporateGovernance Code’). On December 8, 2016, a revisedCode was published, which will apply in respect of thefinancial year 2017. This report also includes theinformation which the Company is required to disclosepursuant to the Dutch governmental Decree on Article10 Takeover Directive and the governmental Decree onCorporate Governance. Deviations from aspects of thecorporate governance structure of the Company, whendeemed necessary in the interests of the Company, willbe disclosed in the Annual Report. Substantial changesin the Company’s corporate governance structure andin the Company’s compliance with the Dutch CorporateGovernance Code, if any, will be submitted to theGeneral Meeting of Shareholders for discussion undera separate agenda item. The Supervisory Board and theBoard of Management, which are responsible for thecorporate governance structure of the Company, are ofthe opinion that the principles and best practiceprovisions of the Dutch Corporate Governance Codethat are addressed to the Board of Management andthe Supervisory Board, interpreted and implemented inline with the best practices followed by the Company,are being applied.Corporate governance9.180Annual Report 20169.1Board of Management andExecutive CommitteeIntroductionThe Board of Management is entrusted with themanagement of the Company. Certain key ofﬁcers havebeen appointed to manage the Company together withthe Board of Management. The members of the Boardof Management and these key ofﬁcers togetherconstitute the Executive Committee. Under thechairmanship of the President/Chief Executive Ofﬁcer(CEO), the members of the Executive Committee shareresponsibility for the deployment of its strategy andpolicies, and the achievement of its objectives andresults. The Executive Committee has, for practicalpurposes, adopted a division of responsibilitiesindicating the functional and business areas monitoredand reviewed by the individual members. For thepurpose of this corporate governance report, where theExecutive Committee is mentioned this also includesthe Board of Management unless the context requiresotherwise.The Board of Management remains accountable for theactions and decisions of the Executive Committee andhas ultimate responsibility for the Company’smanagement and the external reporting and isanswerable to shareholders of the Company at theAnnual General Meeting of Shareholders.All resolutions of the Executive Committee are adoptedby majority vote comprising the majority of themembers of the Board of Management present orrepresented, such majority comprising the vote of theCEO. The Board of Management retains the authorityto, at all times and in all circumstances, adoptresolutions without the participation of the othermembers of the Executive Committee. In discharging itsduties, the Executive Committee shall be guided by theinterests of the Company and its afﬁliated enterprise,taking into consideration the interests of theCompany’s stakeholders.The Executive Committee is supervised by theSupervisory Board and provides the latter with allinformation the Supervisory Board needs to fulﬁll itsown responsibilities. Major decisions of the Board ofManagement and Executive Committee require theapproval of the Supervisory Board; these includedecisions concerning (a) the operational and ﬁnancialobjectives of the Company, (b) the strategy designed toachieve the objectives, (c) if necessary, the parametersto be applied in relation to the strategy and (d)corporate social responsibility issues that are relevantto the Company.The Executive Committee follows the Rules ofProcedure of the Board of Management and ExecutiveCommittee, which set forth procedures for meetings,resolutions and minutes. These Rules of Procedure arepublished on the Company’s website.(Term of) Appointment and conflicts ofinterestsMembers of the Board of Management as well as theCEO are appointed by the General Meeting ofShareholders upon a binding recommendation drawnup by the Supervisory Board after consultation with theCEO. This binding recommendation may be overruledby a resolution of the General Meeting of Shareholdersadopted by a simple majority of the votes cast andrepresenting at least one-third of the issued sharecapital. If a simple majority of the votes cast is in favorof the resolution to overrule the bindingrecommendation, but such majority does not representat least one-third of the issued share capital, a newmeeting may be convened at which the resolution maybe passed by a simple majority of the votes cast,regardless of the portion of the issued share capitalrepresented by such majority. In the event a bindingrecommendation has been overruled, a new bindingrecommendation shall be submitted to the GeneralMeeting of Shareholders. If such second bindingrecommendation has been overruled, the GeneralMeeting of Shareholders shall be free to appoint aboard member.Members of the Board of Management and the CEO areappointed for a term of four years, it being understoodthat this term expires at the end of the General Meetingof Shareholders to be held in the fourth year after theyear of their appointment. Reappointment is possiblefor consecutive terms of four years or, if applicable, untila later retirement date or other contractual terminationdate in the fourth year, unless the General Meeting ofShareholders resolves otherwise. Members may besuspended by the Supervisory Board and by theGeneral Meeting of Shareholders and dismissed by thelatter. Individual data on the members of the Board ofManagement and Executive Committee are publishedin chapter 6, Management, of this Annual Report.The other members of the Executive Committee areappointed, suspended and dismissed by the CEO,subject to approval by the Supervisory Board.The acceptance by a member of the Board ofManagement of a position as a member of asupervisory board or a position of non-executivedirector in a one-tier board (Non-ExecutiveDirectorship) at another company requires theapproval of the Supervisory Board. The SupervisoryBoard is required to be notiﬁed of other importantpositions (to be) held by a member of the Board ofManagement. Under the Dutch Corporate GovernanceCode, no member of the Board of Management shallhold more than two Non-Executive Directorships atlisted companies, or serves as chairman of asupervisory board or one-tier board, other than of aGroup company or participating interest of theCompany. Dutch legislation provides for furtherlimitations on the Non-Executive Directorships. Nomember of the Board of Management shall hold morethan two Non-Executive Directorships at ‘large’Corporate governance9.1Annual Report 201681companies (naamloze vennootschappen or beslotenvennootschappen) or ‘large’ foundations (stichtingen)as deﬁned under Dutch law and no member of theBoard of Management shall hold the position ofchairman of another one-tier board or the position ofchairman of another supervisory board. In order for acompany or foundation to be regarded as large, it mustmeet at least two of the following criteria: (i) the valueof the assets according to the balance sheet withexplanatory notes, considering the acquisition ormanufacturing price, exceeds EUR 20 million; (ii) the netturnover exceeds EUR 40 million; or (iii) the averagenumber of employees equals or exceeds 250. Duringthe ﬁnancial year 2016 all members of the Board ofManagement complied with the limitations on Non-Executive Directorships described above.Since 2013, Dutch legislation on board diversityprovided that the Company must pursue a policy ofhaving at least 30% of the seats on the Board ofManagement held by men and at least 30% of the seatsheld by women. The relevant rule ceased to have effecton January 1, 2016, but a bill aimed at reintroducing therule was adopted by the Dutch House ofRepresentatives (Tweede Kamer) in February 2017. Formore details on board diversity please refer to section8.1, Report of the Corporate Governance andNomination & Selection Committee, of this AnnualReport.Dutch legislation on conﬂicts of interests provides thata member of the Board of Management may notparticipate in the adoption of resolutions if he or shehas a direct or indirect personal conﬂict of interest withthe Company or related enterprise. If all members of theBoard of Management have a conﬂict, the resolutionconcerned will be adopted by the Supervisory Board.The Company’s corporate governance includes rules tospecify situations in which a (potential) conﬂict mayexist, to avoid (potential) conﬂicts of interests as muchas possible, and to deal with such conﬂicts should theyarise. The rules on conﬂicts of interests apply to theother members of the Executive Committeecorrespondingly.Relevant matters relating to conﬂicts of interests, if any,shall be mentioned in the Annual Report for theﬁnancial year in question. No such matters haveoccurred during the ﬁnancial year 2016.Amount and composition of theremuneration of the Board of ManagementThe remuneration of the individual members of theBoard of Management is determined by theSupervisory Board on the proposal of theRemuneration Committee of the Supervisory Board,and must be consistent with the policy thereon asadopted by the General Meeting of Shareholders. Thecurrent remuneration policy applicable to the Board ofManagement was adopted by the 2013 Annual GeneralMeeting of Shareholders, and is published on theCompany’s website. A full and detailed description ofthe composition of the remuneration of the individualmembers of the Board of Management is included insection 8.2, Report of the Remuneration Committee, ofthis Annual Report.Pursuant to Dutch legislation, the implementation ofthe remuneration policy during the financial year mustbe included as a separate agenda item in the conveningnotice for a General Meeting of Shareholders and mustbe dealt with before the meeting can proceed toconsider and adopt the Annual Accounts.The remuneration structure of the Company, includingseverance pay, is such that it promotes the interests ofthe Company in the medium and long-term, does notencourage members of the Board of Management toact in their own interests and neglect the interests of theCompany, and does not reward failing members of theBoard of Management upon termination of theiremployment. The level and structure of remunerationshall be determined in the light of factors such as theresults, the share price performance and otherdevelopments relevant to the Company. Deviations onelements of the remuneration policy in extraordinarycircumstances, when deemed necessary in theinterests of the Company, will be disclosed in theAnnual Report or, in case of an appointment, in goodtime prior to the appointment of the person concerned.All current members of the Board of Management areengaged by means of a services agreement(overeenkomst van opdracht), as Dutch legislationprohibits a member of the Board of Management to beemployed by means of a contract of employment. Incase of the appointment or re-appointment of amember of the Board of Management, the mainelements of the services agreement - including theamount of the ﬁxed base compensation, the structureand amount of the variable compensation component,any severance plan, pension arrangements and thegeneral performance criteria - shall be made public nolater than at the time of issuance of the noticeconvening the General Meeting of Shareholders inwhich a proposal for (re-)appointment of that memberof the Board of Management has been placed on theagenda. In compliance with the Dutch CorporateGovernance Code, the term of the services agreementof the members of the Board of Management is set atfour years and, in case of termination, severancepayment is limited to a maximum of one year’s basecompensation. From 2003 until 2013, Philipsmaintained a Long-Term Incentive Plan (LTI Plan)consisting of a mix of restricted shares rights and stockoptions for members of the Board of Management,Philips executives and other key employees. Since thefull revision in 2013 of the LTI Plan applicable tomembers of the Board of Management, the planconsists of performance shares only, with a three yearpost-grant performance measurement. For moredetails please refer to section 8.2, Report of theRemuneration Committee, of this Annual Report.Corporate governance9.182Annual Report 2016The so-called ultimum-remedium clause and claw-back clause of best practice provisions II.2.10 and II.2.11of the Dutch Corporate Governance Code areapplicable to Annual Incentive payments and LTI grantsfor the year 2009 onwards to all members of the Boardof Management. In respect of the LTI grants, theultimum remedium clause can be applied to theperformance-related actual number of stock options,restricted share rights and/or performance shares thatis granted. In addition, pursuant to Dutch legislation(effective January 1, 2014), the Supervisory Board isauthorized to change unpaid bonuses awarded tomembers of the Board of Management if payment ordelivery of the bonus would be unacceptable accordingto the principles of reasonableness and fairness. TheCompany, which in this respect may also berepresented by the Supervisory Board or a specialrepresentative appointed for this purpose by theGeneral Meeting of Shareholders, may also claimrepayment of bonuses paid or delivered (afterDecember 31, 2013) insofar as these have been grantedon the basis of incorrect information on the fulﬁllmentof the relevant performance criteria or other conditions.Bonuses are broadly deﬁned as ‘non-ﬁxed’remuneration, either in cash or in the form of share-based compensation, that is conditional in whole or inpart on the achievement of certain targets or theoccurrence of certain circumstances. The explanatorynotes to the balance sheet shall report on anymoderation and/or claim for repayment of boardremuneration. No such moderation or claim forrepayment has occurred during the financial year 2016.Dutch legislation also provides for an obligation for theCompany to reduce the remuneration of a member ofthe Board of Management, if and to the extent the valueof such member’s share-based remuneration wouldhave increased as a result of the announcement of alarge transaction (requiring shareholder approval) or apublic offer for the Company.Members of the Board of Management hold shares inthe Company for the purpose of long-term investmentand are required to refrain from short-term transactionsin Philips securities. According to the Philips Rules ofConduct on Inside Information, members of the Boardof Management are only allowed to trade in Philipssecurities (including the exercise of stock options)during ‘windows’ of twenty business days following thepublication of annual and quarterly results (providedthe person involved has no ‘inside information’regarding Philips at that time unless an exemption isavailable). Furthermore, the Rules of Procedure of theBoard of Management and Executive Committeecontain provisions concerning ownership of andtransactions in non-Philips securities by members ofthe Board of Management. Members of the Board ofManagement are prohibited from trading, directly orindirectly, in securities of any of the companiesbelonging to the peer group, during one weekpreceding the disclosure of Philips’ annual or quarterlyresults. The rules referred to above in this paragraphapply to members of the Executive Committeecorrespondingly. Transactions in shares in theCompany carried out by members of the Board ofManagement or members of the Supervisory Board andother Insiders (if applicable) are notiﬁed to theNetherlands Authority for the Financial Markets (AFM)in accordance with the European Market AbuseRegulation and, if necessary, to other relevantauthorities.Indemnification of members of the Board ofManagement and Supervisory BoardUnless the law provides otherwise, the members of theBoard of Management and of the Supervisory Boardshall be reimbursed by the Company for various costsand expenses, such as the reasonable costs ofdefending claims, as formalized in the Articles ofAssociation. Under certain circumstances, described inthe Articles of Association, such as an act or failure toact by a member of the Board of Management or amember of the Supervisory Board that can becharacterized as intentional (opzettelijk), intentionallyreckless (bewust roekeloos) or seriously culpable(ernstig verwijtbaar), there will be no entitlement to thisreimbursement unless the law or the principles ofreasonableness and fairness require otherwise. TheCompany has also taken out liability insurance (D&O -Directors & Ofﬁcers) for the persons concerned.In line with regulatory requirements, the Company’spolicy forbids personal loans to and guarantees onbehalf of members of the Board of Management or theSupervisory Board, and no loans and guarantees havebeen granted and issued, respectively, to suchmembers in 2016, nor are any loans or guaranteesoutstanding as of December 31, 2016.The aggregate share ownership of the members of theBoard of Management and the Supervisory Boardrepresents less than 1% of the outstanding ordinaryshares in the Company.Risk management approachWithin Philips, risk management forms an integral partof business management. The Company hasimplemented a risk management and internal controlsystem that is designed to provide reasonableassurance that strategic objectives are met by creatingfocus, by integrating management control over theCompany’s operations, by ensuring compliance withapplicable laws and regulations and by safeguardingthe reliability of the ﬁnancial reporting and itsdisclosures. The Executive Committee reports on andaccounts for internal risk management and controlsystems to the Supervisory Board and its AuditCommittee. The Company has designed its internalcontrol system based on the “Internal Control-Integrated Framework (2013)” established by theCommittee of Sponsoring Organizations of theTreadway Commission (COSO).Corporate governance9.1Annual Report 201683The Company’s risk management approach isembedded in the periodic business planning andreview cycle and forms an integral part of businessmanagement. On the basis of risk assessments,management determines the risks and appropriate riskresponses related to the achievement of businessobjectives and critical business processes. Risk factorsand the risk management approach, as well as thesensitivity of the Company’s results to external factorsand variables, are described in more detail in chapter 5,Risk management, of this Annual Report. Signiﬁcantchanges and improvements in the Company’s riskmanagement and internal control system have beendiscussed with the Supervisory Board’s AuditCommittee and the external auditor and are disclosedin that section as well.With respect to ﬁnancial reporting a structured self-assessment and monitoring process is used company-wide to assess, document, review and monitorcompliance with internal control over ﬁnancialreporting. Internal representations received frommanagement, regular management reviews, reviews ofthe design and effectiveness of internal controls andreviews in Group and Business Group, Market andFunction Audit & Risk committees are integral parts ofthe Company’s risk management approach. On thebasis thereof, the Board of Management conﬁrms thatinternal controls over ﬁnancial reporting provide areasonable level of assurance that the ﬁnancialreporting does not contain any material inaccuracies,and conﬁrms that these controls have properlyfunctioned in 2016. The ﬁnancial statements fairlyrepresent the ﬁnancial condition and result ofoperations of the Company and provide the requireddisclosures.It should be noted that the above does not imply thatthese systems and procedures provide certainty as tothe realization of operational and ﬁnancial businessobjectives, nor can they prevent all misstatements,inaccuracies, errors, fraud and non-compliances withrules and regulations.In view of the above, the Board of Managementbelieves that it is in compliance with the requirementsof recommendation II.1.4. of the Dutch CorporateGovernance Code. The above statement on internalcontrols should not be construed as a statement inresponse to the requirements of section 404 of the USSarbanes-Oxley Act. The statement as to compliancewith section 404 is set forth in section 10.1,Management’s report on internal control, of this AnnualReport.Next to the Philips General Business Principles (GBP),the Company has a Financial Code of Ethics whichadditionally applies to designated senior executives,including the CEO and the CFO, and employeesworking in the Finance and Accounting departments.The GBP and the Financial Code of Ethics have beenpublished on the Company’s website.The Company, through the Supervisory Board’s AuditCommittee, also has appropriate procedures in placefor the receipt, retention and treatment of complaintsreceived by the Company regarding accounting,internal accounting controls or auditing matters and theconﬁdential, anonymous submission by employees ofconcerns regarding questionable accounting orauditing matters. The Company’s whistleblowermechanisms furthermore allow employees and, sinceMay 2015, external parties to confidentially andanonymously report grievances to the Company, alsoon other topics than those that relate to questionableaccounting or auditing matters. The Company does nottolerate retaliation against (internal) whistleblowerswho report a concern in good faith. More informationon GBP governance and our whistleblower procedurescan be found in chapter 12, Sustainability statements,of this Annual Report and chapter 5, Riskmanagement, of this Annual Report.In view of the requirements under the US SecuritiesExchange Act, procedures are in place to enable theCEO and the CFO to provide certiﬁcations with respectto the Annual Report on Form 20-F.A Disclosure Committee is in place, which advises thevarious ofﬁcers and departments involved, includingthe CEO and the CFO, on the timely review, publicationand ﬁling of periodic and current (ﬁnancial) reports. Inaddition to the certiﬁcation by the CEO and the CFOunder US law, each individual member of the Board ofManagement and the Supervisory Board must, underDutch law, sign the Group and Company ﬁnancialstatements being disclosed and submitted to theGeneral Meeting of Shareholders for adoption. If one ormore of their signatures is missing, this shall be stated,and the reasons given for this. The members of theBoard of Management issue the responsibilitystatement as referred to in chapter 10, Group financialstatements, of this Annual Report, as required byapplicable Dutch company law and securities law.9.2Supervisory BoardIntroductionThe Supervisory Board supervises the policies of theBoard of Management and Executive Committee andthe general course of affairs of Philips and advises theexecutive management thereon. The SupervisoryBoard, in the two-tier corporate structure under Dutchlaw, is a separate body that is independent of the Boardof Management. Its independent character is alsoreﬂected in the requirement that members of theSupervisory Board can be neither a member of theBoard of Management nor an employee of theCompany. The Supervisory Board considers all itsmembers to be independent pursuant to the DutchCorporate Governance Code and under the applicableUS Securities and Exchange Commission standards.Corporate governance9.284Annual Report 2016The Supervisory Board, acting in the interests of theCompany and the Group and taking into account therelevant interest of the Company’s stakeholders,supervises and advises the Board of Management andExecutive Committee in performing its managementtasks and setting the direction of the Group’s business,including (a) the Group’s performance, (b) the Group’sgeneral strategy and the risks connected to its businessactivities, (c) the operational and ﬁnancial objectives,the parameters to be approved in relation to thestrategy, (e) corporate social responsibility issues (f) thestructure and management of the systems of internalbusiness controls, (g) the ﬁnancial reporting process, (h)the compliance with applicable laws and regulations, (i)the Company/shareholder relationship, and (j) thecorporate governance structure of the Company. TheGroup’s strategy and major management decisions arediscussed with and approved by the Supervisory Board.For a description of further responsibilities and tasks ofthe Supervisory Board please refer to the SupervisoryBoard’s Rules of Procedure which are published on theCompany’s website.In its report, the Supervisory Board describes thecomposition and functioning of the Supervisory Boardand its committees, the activities of the board and itscommittees in the ﬁnancial year 2016, the number ofcommittee meetings and the main items discussed.Rules of Procedure of the Supervisory BoardThe Supervisory Board’s Rules of Procedure set forth itsown governance rules (including meetings, items to bediscussed, resolutions, appointment and re-election,committees, conﬂicts of interests, trading in securities,proﬁle of the Supervisory Board). Its compositionfollows the proﬁle, which aims for an appropriatecombination of knowledge and experience among itsmembers encompassing marketing, technological,manufacturing, ﬁnancial, economic, social and legalaspects of international business and government andpublic administration in relation to the global and multi-product character of the Group’s businesses. TheSupervisory Board attaches great importance todiversity in its composition. More particularly, it aims athaving members with a European and a non-Europeanbackground (nationality, working experience orotherwise) and one or more members with an executiveor similar position in business or society no longer than5 years ago.Since 2013, Dutch legislation on board diversityprovided that the Company must pursue a policy ofhaving at least 30% of the seats on the SupervisoryBoard held by men and at least 30% of the seats heldby women. The relevant rule ceased to have effect onJanuary 1, 2016, but a bill aimed at reintroducing therule was adopted by the Dutch House ofRepresentatives (Tweede Kamer) in February 2017. Formore details on board diversity please refer to section8.1, Report of the Corporate Governance andNomination & Selection Committee, of this AnnualReport.The Rules of Procedure of the Supervisory Board arepublished on the Company’s website. They include thecharters of its committees as mentioned in the DutchCorporate Governance Code, to which the plenarySupervisory Board, while retaining overallresponsibility, has assigned certain tasks: the CorporateGovernance and Nomination & Selection Committee,the Audit Committee, the Remuneration Committeeand (since 2015) the Quality & Regulatory Committee.Each committee reports to, and submits its minutes forinformation to the Supervisory Board. Please refer tochapter 8, Supervisory Board report, of this AnnualReport for more information on the composition andactivities of these committees.In line with US and Dutch best practices, the Chairmanof the Supervisory Board must be independentpursuant to the Dutch Corporate Governance Code andunder the applicable US standards. Furthermore, theDutch Corporate Governance Code allows a maximumof one member of each Supervisory Board committeenot to be independent (as deﬁned by the Code). Asmentioned in the introduction to this section 11.2 above,the Supervisory Board considers all its members to beindependent.The Supervisory Board is assisted by the GeneralSecretary of the Company. The General Secretary seesto it that correct procedures are followed and that theSupervisory Board acts in accordance with its statutoryobligations and its obligations under the Articles ofAssociation. Furthermore, the General Secretary assiststhe Chairman of the Supervisory Board in the actualorganization of the affairs of the Supervisory Board(information, agenda, evaluation, introductoryprogram) and is the contact person for interestedparties who want to make concerns known to theSupervisory Board. The General Secretary shall beappointed, either on the recommendation of theSupervisory Board or otherwise, and may be dismissedby the Board of Management, after the approval of theSupervisory Board has been obtained.(Term of) Appointment, individual data andconflicts of interestsThe Supervisory Board consists of at least ﬁve members(currently seven), including a Chairman, Vice-Chairmanand Secretary. The Dutch ‘large company regime’ doesnot apply to the Company itself. Members are currentlyappointed by the General Meeting of Shareholders forﬁxed terms of four years, upon a bindingrecommendation from the Supervisory Board.According to the Company’s Articles of Association, thisbinding recommendation may be overruled by aresolution of the General Meeting of Shareholdersadopted by a simple majority of the votes cast andrepresenting at least one-third of the issued sharecapital. If a simple majority of the votes cast is in favorof the resolution to overrule the bindingrecommendation, but such majority does not representat least one-third of the issued share capital, a newCorporate governance9.2Annual Report 201685meeting may be convened at which the resolution maybe passed by a simple majority of the votes cast,regardless of the portion of the issued share capitalrepresented by such majority. In the event a bindingrecommendation has been overruled, a new bindingrecommendation shall be submitted to the GeneralMeeting of Shareholders. If such second bindingrecommendation has been overruled, the GeneralMeeting of Shareholders shall be free to appoint aboard member.There is no age limit applicable, and members areeligible for re-election twice (unless the SupervisoryBoard resolves to deviate in a specific case). The dateof expiration of the terms of Supervisory Boardmembers is published on the Company’s website.Individual data on the members of the SupervisoryBoard are published in the Annual Report, and updatedon the Company’s website. Members may besuspended and dismissed by the General Meeting ofShareholders. In the event of inadequate performance,structural incompatibility of interests, and in otherinstances in which resignation is deemed necessary inthe opinion of the Supervisory Board, the SupervisoryBoard shall submit to the General Meeting ofShareholders a proposal to dismiss the respectivemember of the Supervisory Board.After their appointment, all members of the SupervisoryBoard shall follow an introductory program, whichcovers general ﬁnancial and legal affairs, ﬁnancialreporting by the Company, any speciﬁc aspects that areunique to the Company and its business activities, andthe responsibilities of a Supervisory Board member.Any need for further training or education of memberswill be reviewed annually, also on the basis of anannual evaluation survey.Under the Dutch Corporate Governance Code, nomember of the Supervisory Board shall hold more thanﬁve supervisory board memberships of Dutch listedcompanies, the chairmanship of a supervisory boardcounting as two regular memberships. In addition,Dutch legislation provides that no member of theSupervisory Board shall hold more than ﬁve Non-Executive Directorships at ‘large’ companies orfoundations as deﬁned under Dutch law (see section9.1, Board of Management and Executive Committee,of this Annual Report),with a position as chairman counting for two. Duringthe ﬁnancial year 2016 all members of theSupervisory Board complied with the limitations onNon-Executive Directorships described above.Dutch legislation on conﬂicts of interests provides thata member of the Supervisory Board may not participatein the adoption of resolutions if he or she has a director indirect personal conﬂict of interest with theCompany or related enterprise. If all members of theSupervisory Board have a conﬂict, the resolutionconcerned will be adopted by the General Meeting ofShareholders. The Company’s corporate governanceincludes rules to specify situations in which a (potential)conﬂict may exist, to avoid (potential) conﬂicts ofinterests as much as possible, and to deal with suchconﬂicts should they arise.Relevant matters relating to conﬂicts of interests, if any,shall be mentioned in the Annual Report for theﬁnancial year in question. No decisions to enter intomaterial transactions in which there are conﬂicts ofinterest with members of the Supervisory Board weretaken during the ﬁnancial year 2016.Meetings of the Supervisory BoardThe Supervisory Board meets at least six times per year,including a meeting on strategy. The Supervisory Board,on the advice of its Audit Committee, also discusses, inany event at least once a year, the main risks of thebusiness, and the result of the assessment of thestructure and operation of the internal riskmanagement and control systems, as well as anysigniﬁcant changes thereto. The members of theExecutive Committee attend meetings of theSupervisory Board except in matters such as thedesired proﬁle, composition and competence of theSupervisory Board and the Executive Committee, aswell as the remuneration and performance of individualmembers of the Executive Committee and theconclusions that must be drawn on the basis thereof. Inaddition to these items, the Supervisory Board, beingresponsible for the quality of its own performance,discusses, at least once a year on its own, without themembers of the Executive Committee being present, (i)both its own functioning and that of the individualmembers, and the conclusions that must be drawn onthe basis thereof, as well as (ii) both the functioning ofthe Board of Management and that of the individualmembers, and the conclusions that must be drawn onthe basis thereof. The CEO and other members of theExecutive Committee have regular contacts with theChairman and other members of the Supervisory Board.The Executive Committee is required to keep theSupervisory Board informed of all facts anddevelopments concerning Philips that the SupervisoryBoard may need in order to function as required and toproperly carry out its duties, to consult it on importantmatters and to submit certain important decisions to itfor its prior approval. The Supervisory Board and itsindividual members each have their own responsibilityto request from the Executive Committee and theexternal auditor all information that the SupervisoryBoard needs in order to be able to carry out its dutiesproperly as a supervisory body. If the SupervisoryBoard considers it necessary, it may obtain informationfrom ofﬁcers and external advisers of the Company. TheCompany provides the necessary means for thispurpose. The Supervisory Board may also require thatcertain ofﬁcers and external advisers attend itsmeetings.Corporate governance9.286Annual Report 2016The Chairman of the Supervisory BoardThe Supervisory Board’s Chairman will see to it that: (a)the members of the Supervisory Board follow theirintroductory program, (b) the members of theSupervisory Board receive in good time all informationwhich is necessary for the proper performance of theirduties, (c) there is sufﬁcient time for consultation anddecision-making by the Supervisory Board, (d) thecommittees of the Supervisory Board function properly,the performance of the Executive Committee membersand Supervisory Board members is assessed at leastonce a year, and (f) the Supervisory Board elects a Vice-Chairman. The Vice-Chairman of the Supervisory Boardshall deputize for the Chairman when the occasionarises. The Vice-Chairman shall act as the point ofcontact for individual members of the SupervisoryBoard or the Board of Management concerning thefunctioning of the Chairman of the Supervisory Board.Remuneration of the Supervisory Board andshare ownershipThe remuneration of the individual members of theSupervisory Board, as well as the additionalremuneration for its Chairman and the members of itscommittees is determined by the General Meeting ofShareholders. The remuneration of a Supervisory Boardmember is not dependent on the results of theCompany. Further details are published in theSupervisory Board report.Shares or rights to shares shall not be granted to aSupervisory Board member. In accordance with theRules of Procedure of the Supervisory Board, anyshares in the Company held by a Supervisory Boardmember are long-term investments. The SupervisoryBoard has adopted a policy on ownership of andtransactions in non-Philips securities by members ofthe Supervisory Board. This policy is included in theRules of Procedure of the Supervisory Board.The Corporate Governance and Nomination& Selection CommitteeThe Corporate Governance and Nomination & SelectionCommittee consists of at least the Chairman and Vice-Chairman of the Supervisory Board. The Committeereviews the corporate governance principles applicableto the Company at least once a year, and advises theSupervisory Board on any changes to these principlesas it deems appropriate. It also (a) draws up selectioncriteria and appointment procedures for members ofthe Supervisory Board, the Board of Management andthe Executive Committee; (b) periodically assesses thesize and composition of the Supervisory Board, theBoard of Management and the Executive Committee,and makes the proposals for a composition proﬁle ofthe Supervisory Board, if appropriate; (c) periodicallyassesses the functioning of individual members of theSupervisory Board, the Board of Management andthe Executive Committee, and reports on this tothe Supervisory Board. The Committee also consultswith the CEO and the Executive Committee oncandidates to fill vacancies on the Supervisory Board,the Board of Management and the ExecutiveCommittee, and advises the Supervisory Board on thecandidates for appointment. It further supervises thepolicy of the Executive Committee on the selectioncriteria and appointment procedures for PhilipsExecutives.The Remuneration CommitteeThe Remuneration Committee meets at least twice ayear and is responsible for preparing decisions of theSupervisory Board on the remuneration of individualmembers of the Board of Management and theExecutive Committee.The Remuneration Committee prepares an annualremuneration report. The remuneration report containsan account of the manner in which the remunerationpolicy has been implemented in the past ﬁnancial year,as well as an overview of the implementation of theremuneration policy planned by the Supervisory Boardfor the next year(s). The Supervisory Board aims to haveappropriate experience available within theRemuneration Committee. No more than one memberof the Remuneration Committee shall be an executiveboard member of another Dutch listed company.In performing its duties and responsibilities, theRemuneration Committee is assisted by an externalconsultant and an in-house remuneration expert actingon the basis of a protocol ensuring that the expert actson the instructions of the Remuneration Committee andon an independent basis in which conﬂicts of interestsare avoided.The Audit CommitteeThe Audit Committee meets at least four times a year,before the publication of the annual, semi-annual andquarterly results. All of the members of the AuditCommittee are considered to be independent underthe applicable US Securities and Exchange Commissionrules and at least one of the members of the AuditCommittee, which currently consists of four membersof the Supervisory Board, is a financial expert, as set outin the Dutch Corporate Governance Code, and eachmember is financially literate. In accordance with thiscode, a financial expert has relevant knowledge andexperience of financial administration and accountingat the company in question. None of the members ofthe Audit Committee is designated as an AuditCommittee financial expert, as defined under theregulations of the US Securities and ExchangeCommission. The Supervisory Board considers the factof being compliant with the Dutch CorporateGovernance Code, in combination with the expertiseand experience available in the Audit Committee, aswell as the possibility to take advice from internal andexternal experts and advisors, to be sufficient for thefulfillment of the tasks and responsibilities of the AuditCommittee. The Audit Committee may not be chairedby the Chairman of the Supervisory Board or by a(former) member of the Board of Management.Corporate governance9.2Annual Report 201687The tasks and functions of the Audit Committee, asdescribed in its charter, which is published on theCompany’s website as part of the Rules of Procedureof the Supervisory Board, include the dutiesrecommended in the Dutch Corporate GovernanceCode. More speciﬁcally, the Audit Committee assiststhe Supervisory Board in fulﬁlling its oversightresponsibilities for the integrity of the Company’sﬁnancial statements, the ﬁnancial reporting process,the system of internal business controls and riskmanagement, the internal and external audit process,the internal and external auditor’s qualiﬁcations, itsindependence and its performance, as well as theCompany’s process for monitoring compliance withlaws and regulations and the General BusinessPrinciples (GBP). It reviews the Company’s annual andinterim ﬁnancial statements, including non-ﬁnancialinformation, prior to publication and advises theSupervisory Board on the adequacy andappropriateness of internal control policies and internalaudit programs and their ﬁndings.In reviewing the Company’s annual and interimstatements, including non-ﬁnancial information, andadvising the Supervisory Board on internal controlpolicies and internal audit programs, the AuditCommittee reviews matters relating to accountingpolicies and compliance with accounting standards,compliance with statutory and legal requirements andregulations, particularly in the ﬁnancial domain.Important ﬁndings and identiﬁed risks are examinedthoroughly by the Audit Committee in order to allowappropriate measures to be taken. With regard to theinternal audit, the Audit Committee, in cooperation withthe external auditor, reviews the internal audit charter,audit plan, audit scope and its coverage in relation tothe scope of the external audit, stafﬁng, independenceand organizational structure of the internal auditfunction.With regard to the external audit, the Audit Committeereviews the proposed audit scope, approach and fees,the independence of the external auditor, itsperformance and its (re-)appointment, audit andpermitted non-audit services provided by the externalauditor in conformity with the Philips Policy on AuditorIndependence, as well as any changes to this policy.The Audit Committee also considers the report of theexternal auditor and its report with respect to theannual ﬁnancial statements. According to theprocedures, the Audit Committee acts as the principalcontact for the external auditor if the auditor discoversirregularities in the content of the ﬁnancial reports. Italso advises on the Supervisory Board’s statement toshareholders in the annual accounts. The AuditCommittee periodically discusses the Company’spolicy on business controls, the GBP including thedeployment thereof, overviews on tax, IT, litigation andlegal proceedings, environmental exposures, ﬁnancialexposures in the area of treasury, real estate, pensions,and the Group’s major areas of risk. The Company’sexternal auditor, in general, attends all AuditCommittee meetings and the Audit Committee meetsseparately at least on a quarterly basis with each of theCEO, the CFO, the internal auditor and the externalauditor.The Quality & Regulatory CommitteeThe Quality & Regulatory Committee has beenestablished by the Supervisory Board in view of thecontinued relevance of the quality of the Company’sproducts, systems, services and software and thedevelopment, testing, manufacturing, marketing andservicing thereof, and regulatory requirements relatingthereto. The Quality & Regulatory Committee assiststhe Supervisory Board in fulfilling its oversightresponsibilities in this area, whilst recognizing that theAudit Committee assists the Supervisory Board in theoversight of other areas of regulatory, compliance andlegal matters.The Quality & Regulatory Committee consists of at leasttwo members and meets as often as is necessary ordesirable for the performance of its duties.9.3General Meeting of ShareholdersIntroductionA General Meeting of Shareholders is held at least oncea year to discuss the Annual Report, including the reportof the Board of Management, the annual ﬁnancialstatements with explanatory notes thereto andadditional information required by law, and theSupervisory Board report, any proposal concerningdividends or other distributions, the (re-)appointmentof members of the Board of Management andSupervisory Board (if any), important managementdecisions as required by Dutch law, and any othermatters proposed by the Supervisory Board, the Boardof Management or shareholders in accordance with theprovisions of the Company’s Articles of Association.The Annual Report, the ﬁnancial statements and otherregulated information such as deﬁned in the Dutch Acton Financial Supervision (Wet op het financieeltoezicht), will solely be published in English. As aseparate agenda item and in application of Dutch law,the General Meeting of Shareholders discusses thedischarge of the members of the Board of Managementand the Supervisory Board from responsibility for theperformance of their respective duties in the precedingﬁnancial year. However, this discharge only coversmatters that are known to the Company and theGeneral Meeting of Shareholders when the resolutionis adopted. The General Meeting of Shareholders isheld in Eindhoven, Amsterdam, Rotterdam, The Hague,Utrecht or Haarlemmermeer (including SchipholAirport) no later than six months after the end of theﬁnancial year.Meetings are convened by public notice, via theCompany’s website or other electronic means ofcommunication, and registered shareholders arenotified by letter or by the use of electronic means ofCorporate governance9.388Annual Report 2016communication, at least 42 days prior to the(Extraordinary) General Meeting of Shareholders.Extraordinary General Meetings of Shareholders maybe convened by the Supervisory Board or the Board ofManagement if deemed necessary and must be held ifshareholders jointly representing at least 10% of theoutstanding share capital make a written request to thateffect to the Supervisory Board and the Board ofManagement, specifying in detail the business to bedealt with. The agenda of a General Meeting ofShareholders shall contain such business as may beplaced thereon by the Board of Management or theSupervisory Board, and agenda items will be explainedwhere necessary in writing. The agenda shall list whichitems are for discussion and which items are to be votedupon.Material amendments to the Articles of Association andresolutions for the appointment of members of theBoard of Management and Supervisory Board shall besubmitted separately to the General Meeting ofShareholders, it being understood that amendmentsand other proposals that are connected in the contextof a proposed (part of the) governance structure maybe submitted as one proposal. In accordance with theArticles of Association and Dutch law, requests fromshareholders for items to be included on the agendawill generally be honored, subject to the Company’srights to refuse to include the requested agenda itemunder Dutch law, provided that such requests are madein writing at least 60 days before a General Meeting ofShareholders to the Board of Management and theSupervisory Board by shareholders representing atleast 1% of the Company’s outstanding capital or,according to the ofﬁcial price list of EuronextAmsterdam, representing a value of at least EUR 50million. Written requests may be submittedelectronically and shall comply with the procedurestipulated by the Board of Management, whichprocedure is posted on the Company’s website.Pursuant to Dutch legislation, shareholders requestingan item to be included on the agenda, have anobligation to disclose their full economic interest (i.e.long position and short position) to the Company. TheCompany has the obligation to publish such disclosureson its website.Main powers of the General Meeting ofShareholdersAll outstanding shares carry voting rights. The mainpowers of the General Meeting of Shareholders are toappoint, suspend and dismiss members of the Board ofManagement and of the Supervisory Board, to adoptthe annual accounts, declare dividends and todischarge the Board of Management and theSupervisory Board from responsibility for theperformance of their respective duties for the previousﬁnancial year, to appoint the external auditor asrequired by Dutch law, to adopt amendments to theArticles of Association and proposals to dissolve orliquidate the Company, to issue shares or rights toshares, to restrict or exclude pre-emptive rights ofshareholders and to repurchase or cancel outstandingshares. Following common corporate practice in theNetherlands, the Company each year requests limitedauthorization to issue (rights to) shares, to restrict orexclude pre-emptive rights and to repurchase shares.In compliance with Dutch law, decisions of the Board ofManagement that are so far-reaching that they wouldgreatly change the identity or nature of the Companyor the business require the approval of the GeneralMeeting of Shareholders. This includes resolutions to:(a) transfer the business of the Company, or almost theentire business of the Company, to a third-party (b)enter into or discontinue long-term cooperation by theCompany or a subsidiary with another legal entity orcompany or as a fully liable partner in a limitedpartnership or ordinary partnership, if this cooperationor its discontinuation is of material signiﬁcance to theCompany or (c) acquire or dispose of a participatinginterest in the capital of a company to the value of atleast one-third of the amount of the assets accordingto the balance sheet and notes thereto or, if theCompany prepares a consolidated balance sheet,according to the consolidated balance sheet and notesthereto as published in the last adopted annualaccounts of the Company, by the Company or one ofits subsidiaries. Thus the Company applies principle IV.1 of the Dutch Corporate Governance Code within theframework of the Articles of Association and Dutch lawand in the manner as described in this corporategovernance report.The Board of Management and Supervisory Board arealso accountable, at the Annual General Meeting ofShareholders, for the policy on the additions to reservesand dividends (the level and purpose of the additionsto reserves, the amount of the dividend and the type ofdividend). This subject is dealt with and explained as aseparate agenda item at the Annual General Meeting ofShareholders. A resolution to pay a dividend is dealtwith as a separate agenda item at the General Meetingof Shareholders.The Board of Management and the Supervisory Boardare required to provide the General Meeting ofShareholders with all requested information, unless thiswould be prejudicial to an overriding interest of theCompany. If the Board of Management and theSupervisory Board invoke an overriding interest inrefusing to provide information, reasons must be given.If a serious private bid is made for a business unit or aparticipating interest and the value of the bid exceedsa certain threshold (currently one-third of the amountof the assets according to the balance sheet and notesthereto or, if the Company prepares a consolidatedbalance sheet, according to the consolidated balancesheet and notes thereto as published in the lastadopted annual accounts of the Company), and suchbid is made public, the Board of Management shall, atits earliest convenience, make public its position on thebid and the reasons for this position.Corporate governance9.3Annual Report 201689A resolution to dissolve the Company or change itsArticles of Association can be adopted at a GeneralMeeting of Shareholders by at least three-quarters ofthe votes cast, at which meeting more than half of theissued share capital is represented. If the requisite sharecapital is not represented, a further meeting shall beconvened, to be held within eight weeks of the ﬁrstmeeting, to which no quorum requirement applies.Furthermore, the resolution requires the approval of theSupervisory Board. If the resolution is proposed by theBoard of Management, the adoption needs an absolutemajority of votes and no quorum requirement appliesto the meeting.Repurchase and issue of (rights to) sharesAt the 2016 Annual General Meeting of Shareholders itwas resolved to authorize the Board of Management,subject to the approval of the Supervisory Board, toacquire shares in the Company within the limits of theArticles of Association and within a certain price rangeup to and including November 11, 2017. The maximumnumber of shares the company may hold, will notexceed 10% of the issued share capital as of May 12,2016, which number may be increased by 10% of theissued capital as of that same date in connection withthe execution of share repurchase programs for capitalreduction programs.In addition, at the 2016 Annual General Meeting ofShareholders it was resolved to authorize the Board ofManagement, subject to the approval of theSupervisory Board, to issue shares or grant rights toacquire shares in the Company as well as to restrict orexclude the pre-emption right accruing to shareholdersup to and including November 11, 2017. Thisauthorization is limited to a maximum of 10% of thenumber of shares issued as of May 12, 2016 plus 10% ofthe issued capital in connection with or on the occasionof mergers, acquisitions and/or strategic alliances.9.4Meeting logistics and otherinformationIntroductionPursuant to Dutch law, the record date for the exerciseof voting rights and rights relating to General Meetingsof Shareholders is set as the 28th day prior to the dayof the meeting. Shareholders registered on such dateare entitled to attend the meeting and to exercise theother shareholder rights (in the meeting in question)notwithstanding subsequent sale of their sharesthereafter. This date will be published in advance ofevery General Meeting of Shareholders.Information which is required to be published ordeposited pursuant to the provisions of company lawand securities law applicable to the Company andwhich is relevant to the shareholders, is placed andupdated on the Company’s website, or hyperlinks areestablished. The Board of Management andSupervisory Board shall ensure that the GeneralMeeting of Shareholders is informed of facts andcircumstances relevant to proposed resolutions inexplanatory notes to the agenda and, if deemedappropriate, by means of a ‘shareholders circular’published on the Company’s website.Resolutions adopted at a General Meeting ofShareholders shall be recorded by a civil law notary andco-signed by the chairman of the meeting; suchresolutions shall also be published on the Company’swebsite within 15 days after the meeting. A draftsummary of the discussions during the General Meetingof Shareholders, in the language of the meeting, ismade available to shareholders, on request, no laterthan three months after the meeting. Shareholders shallhave the opportunity to respond to this summary forthree months, after which a ﬁnal summary is adoptedby the chairman of the meeting in question. Such ﬁnalsummary shall be made available on the Company’swebsite.Registration, attending meetings and proxyvotingHolders of common shares who wish to exercise therights attached to their shares in respect of a GeneralMeeting of Shareholders, are required to register forsuch meeting. Shareholders may attend a GeneralMeeting of Shareholders in person, or may grant apower of attorney to a third-party to attend the meetingand to vote on their behalf. Holders of common sharesin bearer form will also be able to give votinginstructions via the internet (assuming the agenda forsuch meeting includes voting items). In addition, theCompany will distribute a voting instruction form for aGeneral Meeting of Shareholders. By giving votinginstructions via Internet or by returning the form,shareholders grant power to an independent proxyholder who will vote according to the instructionsexpressly given on the voting instruction form. Alsoother persons entitled to vote shall be given thepossibility to give voting proxies or instructions to anindependent third-party prior to the meeting. Detailson the registration for meetings, attendance and proxyvoting will be included in the notice convening aGeneral Meeting of Shareholders.Preference shares and the StichtingPreferente Aandelen PhilipsAs a means to protect the Company and itsstakeholders against an unsolicited attempt to obtain(de facto) control of the Company, the General Meetingof Shareholders in 1989 adopted amendments to theCompany’s Articles of Association that allow the Boardof Management and the Supervisory Board to issue(rights to) preference shares to a third-party. As a result,Stichting Preferente Aandelen Philips (the Foundation)was created, which was granted the right to acquirepreference shares in the Company. The merenotiﬁcation that the Foundation wishes to exercise itsrights, should a third-party ever seem likely in thejudgment of the Foundation to obtain (de facto) controlof the Company, will result in the preference sharesCorporate governance9.490Annual Report 2016being effectively issued. The Foundation may exercisethis right for as many preference shares as there areordinary shares in the Company outstanding at thattime. No preference shares have been issued as ofDecember 31, 2016. In addition, the Foundation has theright to ﬁle a petition with the Enterprise Chamber ofthe Amsterdam Court of Appeal to commence aninquiry procedure within the meaning of section 2:344Dutch Civil Code.The object of the Foundation is to represent theinterests of the Company, the enterprises maintainedby the Company and its afﬁliated companies within theGroup, in such a way that the interests of Philips, thoseenterprises and all parties involved with them aresafeguarded as effectively as possible, and that theyare afforded maximum protection against inﬂuenceswhich, in conﬂict with those interests, may underminethe autonomy and identity of Philips and thoseenterprises, and also to do anything related to theabove ends or conducive to them. In the event of (anattempt at) a hostile takeover or other attempt to obtain(de facto) control of the Company this arrangement willallow the Company and its Board of Management andSupervisory Board to determine its position in relationto the third-party and its plans, seek alternatives anddefend Philips’ interests and those of its stakeholdersfrom a position of strength. The members of the self-electing Board of the Foundation are Messrs P.A.F.W.Elverding, M.W. den Boogert and F.J.G.M. Cremers. NoPhilips board members or ofﬁcers are represented onthe board of the Foundation.The Company does not have any other anti-takeovermeasures in the sense of other measures whichexclusively or almost exclusively have the purpose offrustrating future public bids for the shares in the capitalof the Company in case no agreement is reached withthe Board of Management on such public bid.Furthermore, the Company does not have measureswhich speciﬁcally have the purpose of preventing abidder who has acquired 75% of the shares in the capitalof the Company from appointing or dismissingmembers of the Board of Management andsubsequently amending the Articles of Association ofthe Company. It should be noted that also in the eventof (an attempt at) a hostile takeover or other attempt toobtain (de facto) control of the Company, the Board ofManagement and the Supervisory Board are authorizedto exercise in the interests of Philips all powers vestedin them.Annual financial statementsThe annual ﬁnancial statements are prepared by theBoard of Management and reviewed by theSupervisory Board upon the advice of its AuditCommittee, taking into account the report of theexternal auditor. Upon approval by the SupervisoryBoard, the accounts are signed by all members of boththe Board of Management and the Supervisory Boardand are published together with the opinion of theexternal auditor. The Board of Management isresponsible, under the supervision of the SupervisoryBoard, for the quality and completeness of suchpublicly disclosed ﬁnancial reports. The annualﬁnancial statements are presented for discussion andadoption at the Annual General Meeting ofShareholders, to be convened subsequently. TheCompany, under US securities regulations, separatelyﬁles its Annual Report on Form 20-F, incorporatingmajor parts of the Annual Report as prepared under therequirements of Dutch law. Internal controls and disclosure policiesComprehensive internal procedures, compliance withwhich is supervised by the Supervisory Board, are inplace for the preparation and publication of the AnnualReport, the annual accounts, the quarterly ﬁgures andad hoc ﬁnancial information. As from 2003, the internalassurance process for business risk assessment hasbeen strengthened and the review frequency has beenupgraded to a quarterly review cycle, in line with bestpractices in this area.As part of these procedures, a Disclosure Committeehas been appointed by the Board of Management tooversee the Company’s disclosure activities and toassist the Executive Committee in fulﬁlling itsresponsibilities in this respect. The Committee’spurpose is to ensure that the Company implements andmaintains internal procedures for the timely collection,evaluation and disclosure, as appropriate, ofinformation potentially subject to public disclosureunder the legal, regulatory and stock exchangerequirements to which the Company is subject. Suchprocedures are designed to capture information that isrelevant to an assessment of the need to disclosedevelopments and risks that pertain to the Company’svarious businesses, and the effectiveness of thoseprocedures for this purpose will be reviewedperiodically.Auditor informationIn accordance with the procedures laid down in thePhilips Auditor Policy and as mandatorily required byDutch law, the external auditor of the Company isappointed by the General Meeting of Shareholders onthe proposal of the Supervisory Board, after the latterhas been advised by the Audit Committee and theBoard of Management. Under this Auditor Policy, asupdated in 2013, the Supervisory Board and the AuditCommittee assess the functioning of the externalauditor. The main conclusions of this assessment shallbe communicated to the General Meeting ofShareholders for the purposes of assessing thenomination for the appointment of the external auditor.The current auditor of the Company, Ernst & YoungAccountants LLP (EY), was appointed at the 2015Annual General Meeting of Shareholders, for a term offour years starting January 1, 2016. Mr C.B. Boogaart isthe current partner of EY in charge of the audit dutiesfor Philips.Corporate governance9.4Annual Report 201691The external auditor attends, in principle, all meetingsof the Audit Committee. The ﬁndings of the externalauditor, the audit approach and the risk analysis arealso discussed at these meetings. The external auditorattends the meeting of the Supervisory Board at whichthe report of the external auditor with respect to theaudit of the annual accounts is discussed, and at whichthe annual accounts are approved. In its audit report onthe annual accounts to the Board of Management andthe Supervisory Board, the external auditor refers to theﬁnancial reporting risks and issues that were identiﬁedduring the audit, internal control matters, and any othermatters, as appropriate, requiring communicationunder the auditing and other standards generallyaccepted in the Netherlands and the US.The external auditor shall attend the Annual GeneralMeeting of Shareholders. Questions may be put to himat the meeting about his report. The Board ofManagement and the Audit Committee of theSupervisory Board shall report on their dealings withthe external auditor to the Supervisory Board on anannual basis, particularly with regard to the auditor’sindependence. The Supervisory Board shall take thisinto account when deciding upon its nomination for theappointment of an external auditor.Auditor policyDutch law requires the separation of audit and non-audit services, meaning the Company’s external auditoris no longer allowed to provide non-audit services. Inlight of this legislation, the Auditor Policy was updatedin 2013. The policy is published on the Company’swebsite. The policy is also in line with US Securities andExchange Commission rules under which theappointed external auditor must be independent of theCompany both in fact and appearance.The Auditor Policy includes rules for the pre-approvalby the Audit Committee of all services to be providedby the external auditor. Proposed services may be pre-approved at the beginning of the year by the AuditCommittee (annual pre-approval) or may be pre-approved during the year by the Audit Committee inrespect of a particular engagement (speciﬁc pre-approval). The annual pre-approval is based on adetailed, itemized list of services to be provided,designed to ensure that there is no managementdiscretion in determining whether a service has beenapproved and to ensure the Audit Committee isinformed of each services it is pre-approving. Unlesspre-approval with respect to a speciﬁc service has beengiven at the beginning of the year, each proposedservice requires speciﬁc pre-approval during the year.Any annually pre-approved services where the fee forthe engagement is expected to exceed pre-approvedcost levels or budgeted amounts will also requirespeciﬁc pre-approval. The term of any annual pre-approval is 12 months from the date of the pre-approvalunless the Audit Committee states otherwise. During2016, there were no services provided to the Companyby the external auditor which were not pre-approvedby the Audit Committee.9.5Investor RelationsIntroductionThe Company is continually striving to improverelations with its shareholders. In addition tocommunication with its shareholders at the AnnualGeneral Meeting of Shareholders, Philips elaborates itsﬁnancial results during (public) conference calls, whichare broadly accessible. It publishes informative annual,semi-annual and quarterly reports and press releases,and informs investors via its extensive website. TheCompany is strict in its compliance with applicable rulesand regulations on fair and non-selective disclosureand equal treatment of shareholders.From time to time the Company communicates withinvestors via road shows, broker conferences and aCapital Markets Day, announced in advance on theCompany’s website. Shareholders can follow in realtime, by means of webcasting or telephone lines, themeetings and presentations organized by theCompany. Thus the Company applies recommendationIV.3.1 of the Dutch Corporate Governance Code, whichin its perception and in view of market practice does notextend to less important analyst meetings andpresentations. It is Philips’ policy to post presentationsto analysts and shareholders on the Company’swebsite. These meetings and presentations will nottake place shortly before the publication of annual,semi-annual and quarterly ﬁnancial information.Furthermore, the Company engages in bilateralcommunications with investors. These take place eitherat the initiative of the Company or at the initiative ofinvestors. The Company is generally represented by itsInvestor Relations department during theseinteractions, however, on a limited number of occasionsthe Investor Relations department is accompanied byone or more members of the senior management. Thesubject matter of the bilateral communications rangesfrom individual queries from investors to moreelaborate discussions following disclosures that theCompany has made, such as its annual and quarterlyreports. Also here, the Company is strict in itscompliance with applicable rules and regulations onfair and non-selective disclosure and equal treatmentof shareholders.The Company shall not, in advance, assess, commentupon or correct, other than factually, any analyst’sreports and valuations. No fee(s) will be paid by theCompany to parties for the carrying-out of research foranalysts’ reports or for the production or publication ofanalysts’ reports, with the exception of credit-ratingagencies.Corporate governance9.592Annual Report 2016Major shareholders and other information forshareholdersThe Dutch Act on Financial Supervision imposes anobligation on persons holding certain interests todisclose (inter alia) percentage holdings in the capitaland/or voting rights in the Company when suchholdings reach, exceed or fall below 3, 5, 10, 15, 20, 25,30, 40, 50, 60, 75 and 95 percent (as a result of anacquisition or disposal by a person, or as a result of achange in the company’s total number of voting rightsor capital issued). Certain derivatives (settled in kind orin cash) are also taken into account when calculatingthe capital interest. The statutory obligation to disclosecapital interest does not only relate to gross longpositions, but also to gross short positions. Requireddisclosures must be made to the Netherlands Authorityfor the Financial Markets (AFM) without delay. The AFMthen notiﬁes such disclosures to the Company andincludes them in a register which is published on theAFM’s website. Furthermore, an obligation to disclose(net) short positions is set out in the EU Regulation onShort Selling.The AFM register shows the following notification ofsubstantial holdings and/or voting rights at or abovethe 3% threshold: BlackRock, Inc.: substantial holding of5.03% and 6.19% of the voting rights (January 5, 2017).As per December 31, 2016, approximately 90% of thecommon shares were held in bearer form andapproximately 10% of the common shares wererepresented by registered shares of New York Registryissued in the name of approximately 1,081 holders ofrecord, including Cede & Co. Cede & Co acts as nomineefor the Depository Trust Company holding the shares(indirectly) for individual investors as beneﬁciaries.Citibank, N.A., 388 Greenwich Street, New York, NewYork 10013 is the transfer agent and registrar.Only bearer shares are traded on the stock market ofEuronext Amsterdam. Only shares of New York Registryare traded on the New York Stock Exchange. Bearershares and registered shares may be exchanged foreach other. Since certain shares are held by brokers andother nominees, these numbers may not berepresentative of the actual number of United Statesbeneﬁcial holders or the number of Shares of New YorkRegistry beneﬁcially held by US residents.The provisions applicable to all corporate bonds thathave been issued by the Company in March 2008 and2012 contain a ‘Change of Control Triggering Event’.This means that if the Company experienced such anevent with respect to a series of corporate bonds theCompany might be required to offer to purchase thebonds of that series at a purchase price equal to 101%of their principal amount, plus accrued and unpaidinterest, if any.Corporate seat and head officeThe statutory seat of the Company is Eindhoven, theNetherlands, and the statutory list of all subsidiariesand afﬁliated companies, prepared in accordance withthe relevant legal requirements (Dutch Civil Code, Book2, Sections 379 and 414), forms part of the notes to theconsolidated ﬁnancial statements and is deposited atthe ofﬁce of the Commercial Register in Eindhoven, theNetherlands (ﬁle no. 17001910).The executive ofﬁces of the Company are located at thePhilips Center, Amstelplein 2, 1096 BC Amsterdam, theNetherlands, telephone +31-20-59 77 777.Compliance with the Dutch CorporateGovernance CodeIn accordance with the governmental Decree ofDecember 10, 2009, the Company fully complies withthe Dutch Corporate Governance Code and applies allits principles and best practice provisions that areaddressed to the Board of Management or theSupervisory Board. The full text of the Dutch CorporateGovernance Code can be found at the website of theMonitoring Commission Corporate Governance Code(www.commissiecorporategovernance.nl).February 21, 2017Group financial statements10Annual Report 20169310Group financial statementsIntroductionThis section of the Annual Report contains the auditedconsolidated financial statements including the notesthereon that have been prepared in accordance withInternational Financial Reporting Standards (IFRS) asendorsed by the European Union (EU) and with thestatutory provisions of Part 9, Book 2 of the Dutch CivilCode. All standards and interpretations issued by theInternational Accounting Standards Board (IASB) andthe IFRS Interpretations Committee effective year-end2015 have been endorsed by the EU, except that the EUdid not adopt some paragraphs of IAS 39 applicable tocertain hedge transactions. Philips has no hedgetransactions to which these paragraphs are applicable.Consequently, the accounting policies applied byPhilips also comply fully with IFRS as issued by theIASB.Together with the section Company financialstatements, this section contains the statutory financialstatements of the Company.The following sections and chapters:•chapter 2, Group performance, of this Annual Report•chapter 3, Segment performance, of this AnnualReport•chapter 5, Risk management, of this Annual Report•chapter 8, Supervisory Board report, of this AnnualReport•section 8.1, Report of the Corporate Governance andNomination & Selection Committee, of this AnnualReport•section 8.2, Report of the Remuneration Committee,of this Annual Report•chapter 9, Corporate governance, of this AnnualReport•chapter 16, Forward-looking statements and otherinformation, of this Annual Reportform the Management report within the meaning ofsection 2:391 of the Dutch Civil Code (and relatedDecrees).The sections Group performance and Segmentperformance provide an extensive analysis of thedevelopments during the financial year 2016 and theresults. The term EBIT has the same meaning as Incomefrom operations, and is used to evaluate theperformance of the business. These sections alsoprovide information on the business outlook,investments, financing, personnel and research anddevelopment activities.For ‘Additional information’ within the meaning ofsection 2:392 of the Dutch Civil Code, please refer tosection 11.5, Independent auditor’s report, of thisAnnual Report.Please refer to chapter 16, Forward-looking statementsand other information, of this Annual Report for moreinformation about forward-looking statements, third-party market share data, fair value information, andrevisions and reclassifications.The Board of Management of the Company herebydeclares that, to the best of our knowledge, the Groupfinancial statements and Company financialstatements give a true and fair view of the assets,liabilities, financial position and profit or loss of theCompany and the undertakings included in theconsolidation taken as a whole and that themanagement report referred to above gives a true andfair view concerning the position as per the balancesheet date, the development and performance of thebusiness during the financial year of the Company andthe undertakings included in the consolidation taken asa whole, together with a description of the principalrisks that they face.Board of Management Frans van Houten Abhijit Bhattacharya Pieter NotaFebruary 21, 2017Group financial statements10.194Annual Report 201610.1Management’s report on internalcontrolManagement’s report on internal controlover financial reporting pursuant to section404 of the US Sarbanes-Oxley ActThe Board of Management of Koninklijke Philips N.V.(the Company) is responsible for establishing andmaintaining an adequate system of internal controlover financial reporting (as such term is defined in Rule13a-15(f) under the US Securities Exchange Act).Internal control over financial reporting is a process toprovide reasonable assurance regarding the reliabilityof our financial reporting for external purposes inaccordance with IFRS as issued by the IASB.Internal control over financial reporting includesmaintaining records that, in reasonable detail,accurately and fairly reflect our transactions; providingreasonable assurance that transactions are recorded asnecessary for preparation of our financial statements;providing reasonable assurance that receipts andexpenditures of company assets are made inaccordance with management authorization; andproviding reasonable assurance that unauthorizedacquisition, use or disposition of company assets thatcould have a material effect on our financial statementswould be prevented or detected on a timely basis.Because of its inherent limitations, internal control overfinancial reporting is not intended to provide absoluteassurance that a misstatement of our financialstatements would be prevented or detected. Also,projections of any evaluation of the effectiveness ofinternal control over financial reporting to futureperiods are subject to the risk that the controls maybecome inadequate because of changes in conditions,or that the degree of compliance with the policies orprocedures may deteriorate.The Board of Management conducted an assessmentof the Company’s internal control over financialreporting based on the “Internal Control- IntegratedFramework (2013)” established by the Committee ofSponsoring Organizations of the TreadwayCommission (COSO). Based on that assessment, theBoard of Management concluded that, as of December31, 2016, the Company’s internal control over Groupfinancial reporting is considered effective.The effectiveness of the Company’s internal controlover financial reporting as of December 31, 2016, asincluded in this section Group financial statements, hasbeen audited by Ernst & Young Accountants LLP, anindependent registered public accounting firm, asstated in their report which follows hereafter.Board of Management Frans van Houten Abhijit Bhattacharya Pieter NotaFebruary 21, 201710.1.1Changes in internal control over financialreportingDuring the second quarter, under the supervision andwith the participation of our management, wecompleted the separation of Royal Philips and PhilipsLighting. As part of the separation Philips Lighting waspublicly listed and began trading on the Euronextexchange in Amsterdam.Royal Philips retained a 71.255% stake in PhilipsLighting, as per December 31, 2016. Subsequently, onFebruary 8, 2017 Royal Philips reduced its stake inPhilips Lighting to 55.180%. Philips Lighting continuesto be consolidated and fully included in the InternalControl over Financial Reporting framework of RoyalPhilips. However, due to the separation, Royal Philipsand Philips Lighting have altered and implementedcertain control activities which support the newstructure. There were no other changes in our InternalControl over Financial Reporting during 2016 that havematerially affected, or are reasonably likely tomaterially affect, our Internal Control over FinancialReporting.10.2Report of the independent auditorManagement’s report on internal control over financialreporting is set out in section 10.1, Management’s reporton internal control, of this Annual Report. The report setout in section section 10.3, Independent auditors’ reporton internal control over financial reporting, of thisAnnual Report, is provided in compliance withstandards of the Public Company Accounting OversightBoard in the US and includes an opinion on theeffectiveness of internal control over financial reportingas at December 31, 2016.Ernst & Young Accountants LLP has also issued a reporton the consolidated financial statements and thecompany financial statements, in accordance withDutch law, including the Dutch standards on auditing,of Koninklijke Philips N.V., which is set out in section 11.5,Independent auditor’s report, of this Annual Report.Ernst & Young Accountants LLP has also issued a reporton the consolidated financial statements in accordancewith the standards of the Public Company AccountingOversight Board in the US, which will be included in theAnnual Report on Form 20-F expected to be filed withthe US Securities and Exchange Commission onFebruary 21, 2017.Group financial statements10.3Annual Report 20169510.3Independent auditors’ report oninternal control over financialreportingReport of Independent Registered PublicAccounting FirmTo: The Supervisory Board and Shareholders ofKoninklijke Philips N.V.We have audited Koninklijke Philips N.V.’s internalcontrol over financial reporting as of December 31, 2016,based on criteria established in Internal Control —Integrated Framework issued by the Committee ofSponsoring Organizations of the TreadwayCommission (2013 framework) (the COSO criteria).Koninklijke Philips N.V.’s management is responsiblefor maintaining effective internal control over financialreporting, and for its assessment of the effectiveness ofinternal control over financial reporting included in theaccompanying section 10.1 Management’s report oninternal control, of this Annual Report. Ourresponsibility is to express an opinion on thecompany’s internal control over financial reportingbased on our audit.We conducted our audit in accordance with thestandards of the Public Company Accounting OversightBoard (United States). Those standards require that weplan and perform the audit to obtain reasonableassurance about whether effective internal control overfinancial reporting was maintained in all materialrespects. Our audit included obtaining anunderstanding of internal control over financialreporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessedrisk, and performing such other procedures as weconsidered necessary in the circumstances. We believethat our audit provides a reasonable basis for ouropinion.A company’s internal control over financial reporting isa process designed to provide reasonable assuranceregarding the reliability of financial reporting and thepreparation of financial statements for externalpurposes in accordance with generally acceptedaccounting principles. A company’s internal controlover financial reporting includes those policies andprocedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets ofthe company; (2) provide reasonable assurance thattransactions are recorded as necessary to permitpreparation of financial statements in accordance withgenerally accepted accounting principles, and thatreceipts and expenditures of the company are beingmade only in accordance with authorizations ofmanagement and directors of the company; and (3)provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have amaterial effect on the financial statements.Because of its inherent limitations, internal control overfinancial reporting may not prevent or detectmisstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the riskthat controls may become inadequate because ofchanges in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.In our opinion, Koninklijke Philips N.V. maintained, in allmaterial respects, effective internal control overfinancial reporting as of December 31, 2016, based onthe COSO criteria.We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board(United States), the consolidated balance sheet ofKoninklijke Philips N.V. as of December 31, 2016, andthe related consolidated statements of income,comprehensive income, cash flows and changes inequity for the year then ended, and our report datedFebruary 21, 2017 expressed an unqualified opinionthereon.Amsterdam, The NetherlandsFebruary 21, 2017Ernst & Young Accountants LLPGroup financial statements10.496Annual Report 201610.4Consolidated statements of incomePhilips GroupConsolidated statements of income in millions of EUR unless otherwise statedFor the years ended December 312014 2015 2016 6Sales21,391 24,244 24,516 Cost of sales(13,185)(14,388)(13,904)Gross margin8,206 9,856 10,612 Selling expenses(5,124)(5,815)(5,888)General and administrative expenses(747)(1,209)(845)Research and development expenses(1,635)(1,927)(2,021)Impairment of goodwill(3)- (3)6Other business income63 137 68 6Other business expenses(274)(50)(41)6Income from operations486 992 1,882 7Financial income114 98 76 7Financial expenses(415)(467)(569)Income before taxes185 623 1,389 8Income tax expense(26)(239)(327)Income after taxes159 384 1,062 Investments in associates, net of income taxes62 30 13 Income from continuing operations221 414 1,075 3Discontinued operations, net of income taxes190 245 416 Net income411 659 1,491 Attribution of net income Net income attributable to Koninklijke Philips N.V. shareholders415 645 1,448 Net income attributable to non-controlling interests(4)14 43 Philips GroupEarnings per common share attributable to Koninklijke Philips N.V. shareholders in EUR unless otherwise statedFor the years ended December 312014 2015 2016 Basic earnings per common share in EUR 9Income from continuing operations attributable to shareholders0.25 0.44 1.12 9Net income attributable to shareholders0.45 0.70 1.58 Diluted earnings per common share in EUR 9Income from continuing operations attributable to shareholders0.24 0.43 1.11 9Net income attributable to shareholders0.45 0.70 1.56 The accompanying notes are an integral part of these consolidated financial statements.Group financial statements10.5Annual Report 20169710.5Consolidated statements of comprehensive incomePhilips GroupConsolidated statements of comprehensive income in millions of EUR unless otherwise statedFor the years ended December 312014 2015 2016 Net income for the period411 659 1,491 20Pensions and other post-employment plans: Remeasurements(972)(101)(96)8Income tax effect on remeasurements289 9 28 Revaluation reserve: Release revaluation reserve(10)(9)(4)Reclassification directly into retained earnings10 9 4 Total of items that will not be reclassified to Income Statement(683)(92)(68) 3Currency translation differences: Net current period change, before tax600 643 219 8Income tax effect203 187 2 Reclassification adjustment for gain realized(5)(1)- 13Available-for-sale financial assets: Net current period change, before tax30 33 (44)8Income tax effect(4)- - Reclassification adjustment for loss (gain) realized(54)(4)24 Cash flow hedges: Net current period change, before tax(40)(38)3 8Income tax effect10 - (9)Reclassification adjustment for loss (gain) realized(7)63 5 Total of items that are or may be reclassified to Income Statement733 883 200 Other comprehensive income for period50 791 132 Total comprehensive income for the period461 1,450 1,623 Total comprehensive income attributable to: Shareholders of Koninklijke Philips N.V.465 1,436 1,550 Non-controlling interests(4)14 73 The accompanying notes are an integral part of these consolidated financial statements.Group financial statements10.698Annual Report 201610.6Consolidated balance sheetsPhilips GroupConsolidated balance sheets in millions of EUR unless otherwise statedAs of December 312015 2016 Non-current assets 21024Property, plant and equipment: -At cost7,217 7,064 -Less accumulated depreciation(4,895) (4,909) 2,322 2,155 211Goodwill 8,523 8,898 212Intangible assets excluding goodwill: -At cost9,251 9,782 -Less accumulated amortization(5,558) (6,230) 3,693 3,552 16Non-current receivables 191 155 5Investments in associates 181 190 13Other non-current financial assets 489 335 29Non-current derivative financial assets 58 59 8Deferred tax assets 2,758 2,792 14Other non-current assets 68 92 Total non-current assets 18,283 18,228 Current assets 15Inventories 3,463 3,392 13Current financial assets 12 101 14Other current assets 444 486 29Current derivative financial assets 103 101 8Income tax receivable 114 154 1626Receivables: -Accounts receivable4,727 4,992 -Accounts receivable from related parties16 33 -Other current receivables239 302 4,982 5,327 3Assets classified as held for sale 1,809 2,180 30Cash and cash equivalents 1,766 2,334 Total current assets 12,693 14,075 Total assets 30,976 32,303 Group financial statements10.6Annual Report 20169920151)2016 Equity 17Shareholders’ equity: Preference shares, par value EUR 0.20 per share: -Authorized: 2,000,000,000 shares (2015: 2,000,000,000 shares),issued none Common shares, par value EUR 0.20 per share: -Authorized: 2,000,000,000 shares (2015: 2,000,000,000 shares) -Issued and fully paid: 929,644,864 shares (2015: 931,130,387 shares)186 186 Capital in excess of par value2,669 3,083 Retained earnings8,040 8,233 Revaluation reserve4 - Currency translation differences1,058 1,234 Available-for-sale financial assets56 36 Cash flow hedges12 10 Treasury shares, at cost 7,208,301 shares (2015: 14,026,801 shares)(363) (181) 11,662 12,601 17Non-controlling interests 118 907 Group equity 11,780 13,508 Non-current liabilities 1824Long-term debt 4,095 4,021 29Non-current derivative financial liabilities 695 590 1920Long-term provisions1) 3,471 2,926 8Deferred tax liabilities 164 66 22Other non-current liabilities1) 812 719 Total non-current liabilities 9,237 8,322 Current liabilities 1824Short-term debt 1,665 1,585 29Derivative financial liabilities 238 283 8Income tax payable 116 146 2426Accounts and notes payable: -Trade creditors2,669 2,845 -Accounts payable to related parties4 3 2,673 2,848 21Accrued liabilities1) 2,815 3,034 1920Short-term provisions1) 772 680 3Liabilities directly associated with assets held for sale 407 525 22Other current liabilities 1,273 1,372 Total current liabilities 9,959 10,473 Total liabilities and group equity 30,976 32,303 The accompanying notes are an integral part of these consolidated financial statements.1)Adjusted to reflect a reclassification of net defined-benefit obligations into Long-term provisions. See note 1, Significant accounting policiesGroup financial statements10.7100Annual Report 201610.7Consolidated statements of cash flowsPhilips GroupConsolidated statements of cash flows in millions of EUR unless otherwise statedFor the years ended December 3120141)20151)2016 Cash flows from operating activities Net income411 659 1,491 Discontinued operations, net of income taxes(190)(245)(416)Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, amortization, and impairments of fixed assets1,187 1,281 1,267 Impairment of goodwill and other non-current financial assets21 48 29 Net gain on sale of assets(83)(110)(15)Interest income(39)(48)(49)Interest expense on debt, borrowings and other liabilities231 278 310 Income taxes26 239 327 Investments in associates, net of income taxes(62)(10)(13)Decrease (increase) in working capital1)304 29 394 Decrease (increase) in receivables and other current assets(75)161 (220)Decrease (increase) in inventories(77)22 44 Increase (decrease) in accounts payable, accrued and other current liabilities 1)456 (154)570 Decrease (increase) in non-current receivables, other assets and other liabilities1)(573)65 (147)19Increase (decrease) in provisions1)809 (440)(759)Other items(242)(99)120 Interest paid(232)(265)(311)Interest received38 48 48 Dividends received from investments in associates41 17 48 Income taxes paid(344)(280)(420)Net cash provided by (used for) operating activities1,303 1,167 1,904 Cash flows from investing activities Net capital expenditures(806)(842)(831)Purchase of intangible assets(114)(121)(108)Expenditures on development assets(295)(314)(318)Capital expenditures on property, plant and equipment(437)(522)(443)3Proceeds from sales of property, plant and equipment40 115 38 23Net proceeds from (cash used for) derivatives and current financial assets(7)(72)(120)23Purchase of other non-current financial assets(81)(21)(61)23Proceeds from other non-current financial assets107 53 16 Purchase of businesses, net of cash acquired(177)(1,116)(202)3Proceeds from sale of interests in businesses, net of cash disposed of(20)57 31 Net cash used for investing activities(984)(1,941)(1,167)Cash flows from financing activities 18Proceeds from issuance (payments) of short-term debt(37)1,241 (1,319)18Principal payments on short-term portion of long-term debt(333)(104)(362)18Proceeds from issuance of long-term debt69 94 1,304 17Re-issuance of treasury shares117 81 80 17Purchase of treasury shares(713)(506)(606)5IPO Philips Lighting proceeds 863 5IPO Philips Lighting transaction costs paid (38)17Dividends paid to shareholders of Koninklijke Philips N.V.(292)(298)(330)Dividends paid to non-controlling interests (12)Net cash provided by (used for) financing activities(1,189)508 (420)Net cash provided by (used for) continuing operations(870)(266)317 Cash flows from discontinued operations Net cash provided by (used for) operating activities105 79 268 Net cash provided by (used for) investing activities88 Net cash provided by (used for) discontinued operations193 79 268 Net cash provided by (used for) continuing and discontinued operations(677)(187)585 Effect of changes in exchange rates on cash and cash equivalents85 80 (17)Cash and cash equivalents at the beginning of the year2,465 1,873 1,766 Cash and cash equivalents at the end of the year1,873 1,766 2,334 The accompanying notes are an integral part of these consolidated financial statements. For a number of reasons, principally the effects of translation differencesand consolidation changes, certain items in the statements of cash flows do not correspond to the differences between the balance sheet amounts for therespective items.1)Adjusted to reflect a reclassification of net defined-benefit obligations into (Long-term) provisions. See note 1, Significant accounting policiesGroup financial statements10.7Annual Report 201610110.8Consolidated statements of changes in equityPhilips GroupConsolidated statements of changes in equity in millions of EUR unless otherwise statedFor the year ended December 31common sharecapital in excess of par valueretained earningsrevaluation reservecurrency translation differences1)available-for-sale financial assetscash flow hedgestreasury shares at costtotal shareholders’ equitynon-controlling interestsGroup equityBalance as of Jan. 1,2014188 1,796 10,415 23 (569)55 24 (718)11,214 13 11,227 Total comprehensiveincome (loss) (258)(10)798 (28)(37)- 465 (4)461 Dividend distributed3 433 (729) (293) (293)Movement in non-controlling interests -Other - - 92 92 Cancellation oftreasury shares(4) (529) 533 - - Purchase of treasuryshares (26) (688)(714) (714)Re-issuance oftreasury shares (127)(83) 326 116 116 Share-basedcompensation plans 88 88 88 Income tax share-based compensationplans (9) (9) (9)Balance as of Dec. 31,2014187 2,181 8,790 13 229 27 (13)(547)10,867 101 10,968 Total comprehensiveincome (loss) 562 (9)829 29 25 - 1,436 14 1,450 Dividend distributed3 429 (730) (298) (298)Movement in non-controlling interests -Other 3 3 Cancellation oftreasury shares(4) (513) 517 - - Purchase of treasuryshares (12) (495)(507) (507)Re-issuance oftreasury shares (23)(57) 162 82 82 Share-basedcompensation plans 101 101 101 Income tax share-based compensationplans (19) (19) (19)Balance as of Dec. 31,2015186 2,669 8,040 4 1,058 56 12 (363)11,662 118 11,780 Total comprehensiveincome (loss) 1,384 (4)191 (20)(1) 1,550 73 1,623 Dividend distributed4 398 (732) (330) (330)IPO Philips Lighting 125 (15) (1) 109 716 825 Cancellation oftreasury shares(4) (446) 450 Purchase of treasuryshares (589)(589) (589)Re-issuance oftreasury shares (122)(35) 231 74 74 Share call options (103) 90 (13) (13)Share-basedcompensation plans 119 119 119 Income tax share-based compensationplans 19 19 19 Balance as of Dec. 31,2016186 3,083 8,233 1,234 36 10 (181)12,601 907 13,508 The accompanying notes are an integral part of these consolidated financial statements.1)Cumulative translation adjustments related to Investments in associates were EUR 40 million at December 31, 2016 (2015: EUR 34 million, 2014: EUR 19 million).Group financial statements10.81102Annual Report 201610.9NotesNotes to the Consolidated financial statements ofthe Philips Group1Significant accounting policiesThe Consolidated financial statements in the Groupfinancial statements section have been prepared inaccordance with International Financial ReportingStandards (IFRS) as endorsed by the European Union(EU) and with the statutory provisions of Part 9, Book 2of the Dutch Civil Code. All standards andinterpretations issued by the International AccountingStandards Board (IASB) and the IFRS InterpretationsCommittee effective 2016 have been endorsed by theEU, except that the EU did not adopt some of theparagraphs of IAS 39 applicable to certain hedgetransactions. Koninklijke Philips N.V. (hereafter: the‘Company’ or ‘Philips’) has no hedge transactions towhich these paragraphs are applicable. Consequently,the accounting policies applied by Philips also complywith IFRS as issued by the IASB. These accountingpolicies have been applied by group entities.The Consolidated financial statements have beenprepared under the historical cost convention, unlessotherwise indicated. The Consolidated financialstatements are presented in euro, which is thepresentation currency.On February 21, 2017, the Board of Managementauthorized the Consolidated financial statements forissue. The Consolidated financial statements aspresented in this report are subject to adoption by theAnnual General Meeting of Shareholders, to be held onMay 11, 2017.Use of estimatesThe preparation of the Consolidated financialstatements in conformity with IFRS requiresmanagement to make judgments, estimates andassumptions that affect the application of accountingpolicies and the reported amounts of assets, liabilities,income and expenses. These estimates inherentlycontain a degree of uncertainty. Actual results maydiffer from these estimates under different assumptionsor conditions.In the process of applying the accounting policies,management has made estimates and assumptionsconcerning the future and other key sources ofestimation uncertainty at the reporting date, that havea significant risk of causing a material adjustment to thereported amounts of assets and liabilities within thenext financial year, as well as to the disclosure ofcontingent liabilities at the date of the Consolidatedfinancial statements, and the reported amounts ofrevenues and expenses during the reporting period.The Company evaluates these estimates andjudgments on an ongoing basis and bases the estimateson historical experience, current and expected futureoutcomes, third-party evaluations and various otherassumptions that Philips believes are reasonable underthe circumstances. Existing circumstances andassumptions about future developments may changedue to circumstances beyond the Company’s controland are reflected in the assumptions if and when theyoccur. The results of these estimates form the basis formaking judgments about the carrying values of assetsand liabilities as well as identifying and assessing theaccounting treatment with respect to commitments andcontingencies. The Company revises material estimatesif changes occur in the circumstances or there is newinformation or experience on which an estimate was orcan be based.The areas where the most significant judgments andestimates are made are goodwill, deferred tax assetrecoverability, impairments, financial instruments, theaccounting for an arrangement containing a lease,revenue recognition (multiple element arrangements),assets and liabilities from employee benefit plans, taxrisks and other contingencies, classification of assetsand liabilities held for sale and the presentation ofitems of profit and loss and cash flows as continued ordiscontinued, as well as when determining the fairvalues of acquired identifiable intangible assets basedon an assessment of future cash flows. For furtherdiscussion on these significant judgements andestimates, reference is made to the respective noteswithin these consolidated financial statements thatrelate to the above topics.Further judgment is applied when analyzingimpairments of goodwill and intangible assets not yetready for use that are performed annually andwhenever a triggering event has occurred to determinewhether the carrying value exceeds the recoverableamount. These analyses generally are based onestimates of future cash flows. Furthermore, theCompany applies judgment when actuarialassumptions are established to anticipate future eventsthat are used in calculating post-employment benefitexpenses and liabilities. These factors includeassumptions with respect to interest rates, rates ofincrease in healthcare costs, rates of futurecompensation increases, turnover rates and lifeexpectancy.Changes in presentation from the prior yearThe accounting policies set out in this section havebeen applied consistently for all periods presented inthese consolidated financial statements, except for thepresentation of the items mentioned below. Prior-yearamounts have been reclassified to conform to thecurrent year presentation.Reclassification of net defined-benefit obligationsTo enhance transparency, the Company presents allnet defined-benefit post-employment plan obligationsunder Long-term provisions in the balance sheet asfrom this year. Up to 2015, the net defined-benefit post-employment plan obligations were presented underAccrued liabilities and Other non-current liabilities forGroup financial statements10.9Annual Report 2016103funded plans and under Short-term and Long-termprovisions for unfunded plans. The retrospectivereclassifications from these liability captions to Long-term provisions are as follows:Reclassification of net defined-benefit obligations to Long-termprovisionsin millions of EURDecember 31,2015 December 31, 2016 From Accrued liabilities(48)(34)Other non-current liabilities(970)(809)Short-term provisions(61)(58)To Long-term provisions(1,079)(901)Consequential changes were processed in note 21,Accrued liabilities and note 22, Other liabilities.Corresponding retrospective reclassifications wereprocessed and explained in the Consolidatedstatements of cash flows. Information on net defined-benefit obligation can be found in note 20, Post-employment benefits.Change in Segment reportingIn 2016, Philips established two stand-alonecompanies focused on the HealthTech and Lightingopportunities.As part of this separation, Philips has changed the wayit allocates resources and analyzes its performancebased on a new segment structure.Accordingly, from 2016 the operational reportablesegments for the purpose of the disclosures required byIFRS 8 Operating Segments are Personal Healthbusinesses, Diagnosis & Treatment businesses,Connected Care & Health Informatics businesses andLighting, each being responsible for the managementof its business worldwide. Additionally, HealthTechOther and Legacy Items are included in the note 2,Information by segment and main country. The newsegment structure has no impact in the cash-generatingunits disclosed in note 11, Goodwill. Consequentialchanges to comparative segment disclosures wereprocessed in note 14, Other assets, note 16,Receivables, and note 19, Provisions.Prior-period segment results have been reclassifiedaccording to the new reporting structure.Segment information can be found in note 2,Information by segment and main country.Specific choices within IFRSSometimes IFRS allows alternative accountingtreatments for measurement and/or disclosure. Philipshas adopted one of the treatments as appropriate tothe circumstances of the Company. The most importantof these alternative treatments are mentioned below.Tangible and intangible fixed assetsUnder IFRS, an entity shall choose either the cost modelor the revaluation model as its accounting for tangibleand intangible fixed assets. In this respect, items ofproperty, plant and equipment are measured at costless accumulated depreciation and accumulatedimpairment losses. The useful lives and residual valuesare evaluated annually. Furthermore, the Companychose to apply the cost model meaning that costsrelating to product development, the development andpurchase of software for internal use and otherintangible assets are capitalized and subsequentlyamortized over the estimated useful life. Furtherinformation on Tangible and Intangible fixed assets canbe found in note 10, Property, plant and equipmentandnote 12, Intangible assets excluding goodwillrespectively.Employee benefit accountingIFRS does not specify how an entity should present itsservice costs related to pensions and net interest on thenet defined-benefit liability (asset) in the Statement ofincome. With regards to these elements, the Companypresents service costs in Income from operations andthe net interest expenses related to defined-benefitplans in Financial expense.Furthermore, when accounting for the settlement ofdefined-benefit plans the Company made theaccounting policy choice to adjust the amount of theplan assets transferred for the effect of the asset ceiling.Further information on employee benefit accountingcan be found in note 20, Post-employment benefits.Cash flow statementsUnder IFRS, an entity shall report cash flows fromoperating activities using either the direct method(whereby major classes of gross cash receipts and grosscash payments are disclosed) or the indirect method(whereby profit or loss is adjusted for the effects oftransactions of a non-cash nature, any deferrals oraccruals of past or future operating cash receipts orpayments, and items of income or expense associatedwith investing or financing cash flows). In this respect,the Company chose to prepare the cash flowstatements using the indirect method.Furthermore, interest cash flows are presented in cashflows from operating activities rather than in cash flowsfrom financing or investing activities, because theyenter into the determination of profit or loss. TheCompany chose to present dividends paid toshareholders of Koninklijke Philips N.V. as a componentof cash flows from financing activities, rather than topresent such dividends as cash flows from operatingactivities which is an allowed alternative under IFRS.Consolidated statements of cash flows can be found insection 10.7, Consolidated statements of cash flows, ofthis Annual Report.Group financial statements10.9104Annual Report 2016Policies that are more critical in natureRevenue recognitionRevenue from the sale of goods in the course of theordinary activities is measured at the fair value of theconsideration received or receivable, net of returns,trade discounts and volume rebates. Revenue for saleof goods is recognized when the significant risks andrewards of ownership have been transferred to thebuyer, recovery of the consideration is probable, theassociated costs and possible return of the goods canbe estimated reliably, there is no continuinginvolvement with goods, and the amount of revenuecan be measured reliably. If it is probable that discountswill be granted and the amount can be measuredreliably, then the discount is recognized as a reductionof revenue as the sales are recognized.Transfer of risks and rewards varies depending on theindividual terms of the contract of sale. For consumer-type products in the segments Personal Healthbusinesses and Lighting these criteria are met at thetime the product is shipped and delivered to thecustomer and title and risk have passed to the customer(depending on the delivery conditions) and acceptanceof the product has been obtained. Examples of deliveryconditions are ‘Free on Board point of delivery’ and‘Costs, Insurance Paid point of delivery’, where thepoint of delivery may be the shipping warehouse or anyother point of destination as agreed in the contract withthe customer and where title and risk for the goods passto the customer.Revenues of transactions that have separatelyidentifiable components are recognized based on theirrelative fair values. These transactions mainly occur inthe segments Diagnosis & Treatment businesses andConnected Care & Health Informatics businesses andinclude arrangements that require subsequentinstallation and training activities in order to becomeoperable for the customer. However, since payment forthe equipment is contingent upon the completion ofthe installation process, revenue recognition isgenerally deferred until the installation has beencompleted and the product is ready to be used by thecustomer in the way contractually agreed.Revenues are recorded net of sales taxes, customerdiscounts, rebates and similar charges. For products forwhich a right of return exists during a defined period,revenue recognition is determined based on thehistorical pattern of actual returns, or in cases wheresuch information is not available, revenue recognitionis postponed until the return period has lapsed. Returnpolicies are typically based on customary returnarrangements in local markets.In case of loss under a sales agreement, the loss isrecognized immediately.Expenses incurred for shipping and handling of internalmovements of goods are recorded as cost of sales.Shipping and handling related to sales to third partiesare recorded as selling expenses. When shipping andhandling is part of a project and billed to the customer,then the related expenses are recorded as cost or sales.Shipping and handling billed to customers isrecognized as revenues. Service revenue related torepair and maintenance activities for goods sold isrecognized ratably over the service period or as servicesare rendered.A provision for product warranty is made at the time ofrevenue recognition and reflects the estimated costs ofreplacement and free-of-charge services that will beincurred by the Company with respect to the products.For certain products, the customer has the option topurchase an extension of the warranty, which issubsequently billed to the customer. Revenuerecognition occurs on a straight-line basis over theextended warranty contract period.Revenue from services is recognized when theCompany can reliably measure the amount of revenueand the associated cost related to the stage ofcompletion of a contract or transaction, and therecovery of the consideration is considered probable.Royalty income from intellectual property rights, whichis generally earned based upon a percentage of salesor a fixed amount per product sold, is recognized on anaccrual basis based on actual or reliably estimatedsales made by a licensees. Royalty income from anagreement with lump-sum consideration is recognizedon accrual basis based on the contractual terms andsubstance of the relevant agreement with a licensee. Grants from the government are recognized at their fairvalue where there is a reasonable assurance that thegrant will be received and the Company will complywith all attached conditions. Government grantsrelating to costs are deferred and recognized in theStatement of income as a reduction of the related costsover the period necessary to match them with the coststhat they are intended to compensate. Grants relatedto assets are deducted from the cost of the asset andpresented net in the Statement of financial position.Income taxesIncome taxes comprises current and deferred tax.Income taxes is recognized in the Statement of incomeexcept to the extent that it relates to items recognizeddirectly within equity or in Other comprehensiveincome. Current taxes is the expected taxes payable onthe taxable income for the year, using tax rates enactedor substantively-enacted at the reporting date, and anyadjustment to tax payable in respect of previous years.Tax liabilities are recognized when it is consideredprobable that there will be a future outflow of funds toa taxing authority. In such cases, provision is made forthe amount that is expected to be settled, where thiscan be reasonably estimated. This assessment relies onGroup financial statements10.9Annual Report 2016105estimates and assumptions and may involve a series ofjudgments about future events. New information maybecome available that causes the Company to changeits judgment regarding the adequacy of existing taxliabilities; such changes to tax liabilities will impact theincome tax expense in the period that such adetermination is made.Deferred tax assets and liabilities are recognized, usingthe balance sheet method, for the expected taxconsequences of temporary differences between thecarrying amounts of assets and liabilities and theamounts used for taxation purposes. Deferred tax is notrecognized for the following temporary differences: theinitial recognition of goodwill; the initial recognition ofassets and liabilities in a transaction that is not abusiness combination and that affects neitheraccounting nor taxable profit; and differences relatingto investments in subsidiaries, joint ventures andassociates where the reversal of the respectivetemporary difference can be controlled by theCompany and it is probable that it will not reverse in theforeseeable future. Deferred taxes are measured at thetax rates that are expected to be applied to temporarydifferences when they reverse, based on the laws thathave been enacted or substantively enacted by thereporting date. Deferred tax assets and liabilities areoffset if there is a legally enforceable right to offsetcurrent tax liabilities and assets, and they relate toincome taxes levied by the same tax authority on thesame taxable entity or on different tax entities, but theyintend to settle current tax liabilities and assets on a netbasis or their tax assets and liabilities will be realizedsimultaneously.A deferred tax asset is recognized for unused tax losses,tax credits and deductible temporary differences, to theextent that it is probable that future taxable profits willbe available against which they can be utilized. Theultimate realization of deferred tax assets is dependentupon the generation of future taxable income in thecountries where the deferred tax assets originated andduring the periods when the deferred tax assetsbecome deductible. Management considers thescheduled reversal of deferred tax liabilities, projectedfuture taxable income and tax planning strategies inmaking this assessment.Deferred tax liabilities for withholding taxes arerecognized for subsidiaries in situations where theincome is to be paid out as dividend in the foreseeablefuture and for undistributed earnings of unconsolidatedcompanies to the extent that these withholding taxesare not expected to be refundable or deductible.Changes in tax rates are reflected in the period whenthe change has been enacted or substantively enactedby the reporting date.Further information on income tax can be found innote 8, Income taxes.ProvisionsProvisions are recognized if, as a result of a past event,the Company has a present legal or constructiveobligation, the amount can be estimated reliably, andit is probable that an outflow of economic benefits willbe required to settle the obligation. Provisions aremeasured at the present value of the expendituresexpected to be required to settle the obligation using apre-tax discount rate that reflects current marketassessments of the time value of money. The increasein the provision due to passage of time is recognized asinterest expense. The accounting and presentation forsome of the Company’s provisions is as follows:•Product warranty – A provision for warranties isrecognized when the underlying products or servicesare sold. The provision is based on historical warrantydata and a weighing of possible outcomes againsttheir associated probabilities.•Environmental provisions – Measurement ofliabilities associated with environmental obligations,is based on current legal and constructiverequirements. Liabilities and expected insurancerecoveries, if any, are recorded separately. Thecarrying amount of environmental liabilities isregularly reviewed and adjusted for new facts andchanges in law.•Restructuring-related provisions – The provision forrestructuring relates to the estimated costs ofinitiated restructurings, the most significant of whichhave been approved by the Executive Committee,and which generally involve the realignment ofcertain parts of the industrial and commercialorganization. When such restructurings requirediscontinuance and/or closure of lines of activities,the anticipated costs of closure or discontinuance areincluded in restructuring provisions. A liability isrecognized for those costs only when the Companyhas a detailed formal plan for the restructuring andhas raised a valid expectation with those affectedthat it will carry out the restructuring by starting toimplement that plan or announcing its main featuresto those affected by it. Before a provision isestablished, the Company recognizes anyimpairment loss on the assets associated with therestructuring.•Litigation provisions – In relation to legal claimprovisions and settlements, the relevant balances aretransferred to Other liabilities at the point the amountand timing of cash outflows are no longer uncertain.Settlements which are agreed for amounts in excessof existing provisions are reflected as increases ofOther liabilities.Further information on provisions can be found innote 19, Provisions.Group financial statements10.9106Annual Report 2016GoodwillThe measurement of goodwill at initial recognition isdescribed under Basis of consolidation note. Goodwillis subsequently measured at cost less accumulatedimpairment losses. Further information on goodwill canalso be found in note 11, Goodwill. Intangible assets other than goodwillAcquired finite-lived intangible assets are amortizedusing the straight-line method over their estimateduseful life. The useful lives are evaluated annually.Intangible assets are initially capitalized at cost, withthe exception of intangible assets acquired as part of abusiness combination, which are capitalized at theiracquisition date fair value.The Company expenses all research costs as incurred.Expenditure on development activities, wherebyresearch findings are applied to a plan or design for theproduction of new or substantially improved productsand processes, is capitalized as an intangible asset ifthe product or process is technically and commerciallyfeasible, the Company has sufficient resources and theintention to complete development and can measurethe attributable expenditure reliably.The development expenditure capitalized comprises ofall directly attributable costs (including the cost ofmaterials and direct labor). Other developmentexpenditures and expenditures on research activitiesare recognized in the Statement of income. Capitalizeddevelopment expenditure is stated at cost lessaccumulated amortization and impairment losses.Amortization of capitalized development expenditureis charged to the Statement of income on a straight-linebasis over the estimated useful lives of the intangibleassets.Further information on intangible assets other thangoodwill can be found in note 12, Intangible assetsexcluding goodwill.Discontinued operations and non-current assets heldfor saleNon-current assets (disposal groups comprising assetsand liabilities) that are expected to be recoveredprimarily through sale rather than through continuinguse are classified as held for sale.Non-current assets classified as held for sale and theassets of a disposal group classified as held for sale arepresented separately from the other assets in thebalance sheet. The liabilities of a disposal groupclassified as held for sale are presented separately fromother liabilities in the balance sheet.A discontinued operation is a component of an entitythat either has been disposed of, or that is classified asheld for sale, and (a) represents a separate major lineof business or geographical area of operations; (b) is apart of a single coordinated plan to dispose of aseparate major line of business or geographical area ofoperations; or (c) is a subsidiary acquired exclusivelywith a view to sell.Non-current assets held for sale and discontinuedoperations are carried at the lower of carrying amountor fair value less cost of disposal. Any gain or loss fromdisposal, together with the results of these operationsuntil the date of disposal, is reported separately asdiscontinued operations. The financial information ofdiscontinued operations is excluded from therespective captions in the Consolidated financialstatements and related notes for all periods presented.Comparatives in the balance sheet are not re-presented when a non-current asset or disposal groupis classified as held for sale. Comparatives are re-presented for presentation of discontinued operationsin the Statement of cash flow and Statement of income.Adjustments in the current period to amountspreviously presented in discontinued operations thatare directly related to the disposal of a discontinuedoperation in a prior period are classified separately inDiscontinued operations. Circumstances to which theseadjustments may relate include resolution ofuncertainties that arise from the terms of the disposaltransaction, such as the resolution of purchase priceadjustments and indemnifications, resolution ofuncertainties that arise from and are directly related tothe operations of the component before its disposal,such as environmental and product warrantyobligations retained by the Company, or the settlementof employee benefit plan obligations provided that thesettlement is directly related to the disposaltransaction.Further information on discontinued operations andnon-current assets held for sale can be found in note 3,Discontinued operations and other assets classified asheld for sale.ImpairmentImpairment of goodwill and intangible assets not yetready for useGoodwill and intangible assets not yet ready for use arenot amortized but tested for impairment annually andwhenever impairment indicators require. In most casesthe Company identified its cash generating units forgoodwill at one level below that of an operatingsegment. Cash flows at this level are substantiallyindependent from other cash flows and this is thelowest level at which goodwill is monitored by theExecutive Committee. In 2016 the Company performedand completed annual impairment tests in the secondquarter, in line with all years presented in the Statementof income, and in the fourth quarter. The additionalimpairment test at year-end was performed in view ofthe change in the date of test from second quarter tofourth quarter, as from 2017, to better align it withplanning and forecasting cycles. An impairment loss isrecognized in the Statement of income whenever andGroup financial statements10.9Annual Report 2016107to the extent that the carrying amount of a cash-generating unit exceeds the unit’s recoverable amount,which is the greater of its value in use and fair value lesscost of disposal. Value in use is measured as the presentvalue of future cash flows expected to be generated bythe asset.Further information on impairment of goodwill andintangible assets not yet ready for use can be found innote 11, Goodwill.Impairment of non-financial assets other thangoodwill, intangible assets not yet ready for use,inventories and deferred tax assetsNon-financial assets other than goodwill, intangibleassets not yet ready for use, inventories and deferredtax assets are reviewed for impairment wheneverevents or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable.Recoverability of assets to be held and used is assessedby a comparison of the carrying amount of an asset withthe greater of its value in use and fair value less cost ofdisposal. Value in use is measured as the present valueof future cash flows expected to be generated by theasset. Fair value less cost of disposal is measured as theamount obtained from a sale of an asset in an arm’slength transaction, less costs of disposal. If the carryingamount of an asset is deemed not recoverable, animpairment charge is recognized in the amount bywhich the carrying amount of the asset exceeds therecoverable amount. The review for impairment iscarried out at the level where cash flows occur that areindependent of other cash flows.Impairment losses recognized in prior periods areassessed at each reporting date for any indications thatthe loss has decreased or no longer exists. Animpairment loss is reversed if and to the extent therehas been a change in the estimates used to determinethe recoverable amount. The loss is reversed only to theextent that the asset’s carrying amount does notexceed the carrying amount that would have beendetermined, net of depreciation or amortization, if noimpairment loss had been recognized. Reversals ofimpairment are recognized in the Statement of income.Impairment of financial assetsA financial asset is considered to be impaired ifobjective evidence indicates that one or more eventshave had a negative effect on the estimated future cashflows of that asset. In case of available-for-salefinancial assets, a significant or prolonged decline in thefair value of the financial assets below its cost isconsidered an indicator that the financial assets areimpaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured asthe difference between the acquisition cost and thecurrent fair value, less any impairment loss on thatfinancial asset previously recognized in the Statementof income - is reclassified from the fair value reserve inequity (through Other comprehensive income) to theStatement of income.If objective evidence indicates that financial assets thatare carried at cost, such as loans and receivables, needto be tested for impairment, calculations are based oninformation derived from business plans and otherinformation available for estimating their fair value,which is based on estimated future cash flowsdiscounted at the asset’s original effective interest rate.Any impairment loss is charged to the Statement ofincome.An impairment loss related to financial assets isreversed if in a subsequent period, the fair valueincreases and the increase can be related objectively toan event occurring after the impairment loss wasrecognized. The loss is reversed only to the extent thatthe asset’s carrying amount does not exceed thecarrying amount that would have been determined if noimpairment loss had been recognized. Reversals ofimpairment are recognized in the Statement of incomeexcept for reversals of impairment of available-for-saleequity securities, which are recognized in Othercomprehensive income.Further information on business combinations can befound in note 13, Other financial assets.Other policiesBasis of consolidationThe Consolidated financial statements comprise thefinancial statements of Koninklijke Philips N.V. and allsubsidiaries that the Company controls, i.e. when it isexposed, or has rights, to variable returns from itsinvolvement with the investee and has the ability toaffect those returns through its power over the investee.The existence and effect of potential voting rights areconsidered when assessing whether the Companycontrols another entity. Subsidiaries are fullyconsolidated from the date that control commencesuntil the date that control ceases. All intercompanybalances and transactions have been eliminated in theConsolidated financial statements. Unrealized lossesare eliminated in the same way as unrealized gains, butonly to the extent that there is no evidence ofimpairment.Business combinationsBusiness combinations are accounted for using theacquisition method. Under the acquisition method, theidentifiable assets acquired, liabilities assumed and anynon-controlling interest in the acquiree are recognizedat the acquisition date, which is the date on whichcontrol is transferred to the Company.The Company measures goodwill at the acquisitiondate as:•the fair value of the consideration transferred; plus•the recognized amount of any non-controllinginterest in the acquiree; plusGroup financial statements10.9108Annual Report 2016•if the business combination is achieved in stages, thefair value of the existing equity interest in theacquiree; less•the net recognized amount (generally fair value) ofthe identifiable assets acquired and liabilitiesassumed.Costs related to the acquisition, other than thoseassociated with the issue of debt or equity securities,that the Company incurs are expensed as incurred.Any contingent consideration payable is recognized atfair value at the acquisition date and initially ispresented as Long-term provisions. When the timingand amount of the consideration become more certain,it is reclassified to Accrued liabilities. If the contingentconsideration that meets the definition of a financialinstrument is classified as equity, it is not remeasuredand settlement is accounted for within equity.Otherwise, subsequent changes to the fair value of thecontingent consideration are recognized in theStatement of income.Non-controlling interests are measured at theirproportionate share of the acquiree’s identifiable netassets at the date of acquisition.Further information on business combinations can befound in note 4, Acquisitions and divestments.Acquisitions of and adjustments to non-controllinginterestsAcquisitions of non-controlling interests are accountedfor as transactions with owners in their capacity asowners and therefore no goodwill is recognized.Adjustments to non-controlling interests arising fromtransactions that do not involve the loss of control arebased on a proportionate amount of the net assets ofthe subsidiary.Loss of controlUpon the loss of control, the Company derecognizesthe assets and liabilities of the subsidiary, any non-controlling interests and the other components ofequity related to the subsidiary. Any surplus or deficitarising on the loss of control is recognized in theStatement of income. If the Company retains anyinterest in the previous subsidiary, then such interest ismeasured at fair value at the date the control is lost.Subsequently it is accounted for as either an equity-accounted investee (associate) or as an available-for-sale financial asset, depending on the level of influenceretained.Investments in associatesAssociates are all entities over which the Company hassignificant influence, but no control. Significantinfluence is presumed with a shareholding of between20% and 50% of the voting rights. Investments inassociates are accounted for using the equity methodof accounting and are initially recognized at cost. Thecarrying amount of an investment includes the carryingamount of goodwill identified on acquisition. Animpairment loss on such investment is allocated to theinvestment as a whole.The Company’s share of the net income of thesecompanies is included in Results relating toinvestments in associates in the Statement of income,after adjustments to align the accounting policies withthose of the Company, from the date that significantinfluence commences until the date that significantinfluence ceases. Dilution gains and losses arising frominvestments in associates are recognized in theStatement of income as part of Other results relating toinvestments in associates. When the Company’s shareof losses exceeds its interest in an associate, thecarrying amount of that interest (including any long-term loans) is reduced to zero and recognition of furtherlosses is discontinued except to the extent that theCompany has incurred legal or constructive obligationsor made payments on behalf of the associate.Unrealized gains on transactions between theCompany and its associates are eliminated to theextent of the Company’s interest in the associates.Unrealized losses are also eliminated unless thetransaction provides evidence of an impairment of theasset transferred. Remeasurement differences of anequity stake resulting from gaining control over theinvestee previously recorded as associate are recordedunder investments in associates.Further information on investments in associates canbe found in note 5, Interests in entities.Foreign currenciesForeign currency transactionsThe financial statements of all group entities aremeasured using the currency of the primary economicenvironment in which the entity operates (functionalcurrency). The euro (EUR) is the functional currency ofthe Company and presentation currency of the Groupfinancial statements. Foreign currency transactions aretranslated into the functional currency using theexchange rates prevailing at the dates of thetransactions or valuation where items are remeasured.Foreign exchange gains and losses resulting from thesettlement of such transactions and from thetranslation at year-end exchange rates of monetaryassets and liabilities denominated in foreign currenciesare recognized in the Statement of income, exceptwhen deferred in Other comprehensive income asqualifying cash flow hedges and qualifying netinvestment hedges.Foreign currency differences arising from translationsare recognized in the Statement of income, except foravailable-for-sale equity investments which arerecognized in Other comprehensive income. If there isan impairment which results in foreign currencydifferences being recognized, then these differencesare reclassified from Other comprehensive income tothe Statement of income.Group financial statements10.9Annual Report 2016109All exchange difference items are presented as part ofCost of sales, with the exception of tax items andfinancial income and expense, which are recognized inthe same line item as they relate in the Statement ofincome.Non-monetary assets and liabilities denominated inforeign currencies that are measured at fair value areretranslated to the functional currency using theexchange rate at the date the fair value wasdetermined. Non-monetary items in a foreign currencythat are measured based on historical cost aretranslated using the exchange rate at the transactiondate.Foreign operationsThe assets and liabilities of foreign operations,including goodwill and fair value adjustments arising onacquisition, are translated to euro at exchange rates atthe reporting date. The income and expenses of foreignoperations are translated to euro at exchange rates atthe dates of the transactions.Foreign currency differences arising on translation offoreign operations into euro are recognized in Othercomprehensive income, and presented as part ofCurrency translation differences in Equity. However, ifthe operation is a non-wholly owned subsidiary, thenthe relevant proportionate share of the translationdifference is allocated to Non-controlling interests.When a foreign operation is disposed of such thatcontrol, significant influence or joint control is lost, thecumulative amount in the Currency translationdifferences related to the foreign operation isreclassified to the Statement of income as part of thegain or loss on disposal. When the Company disposesof only part of its interest in a subsidiary that includesa foreign operation while retaining control, therespective proportion of the cumulative amount isreattributed to Non-controlling interests. When theCompany disposes of only part of its investment in anassociate or joint venture that includes a foreignoperation while retaining significant influence or jointcontrol, the relevant proportion of the cumulativeamount is reclassified to the Statement of income.Financial instrumentsNon-derivative financial instrumentsNon-derivative financial instruments are recognizedinitially at fair value when the Company becomes aparty to the contractual provisions of the instrument.Regular way purchases and sales of financial assets areaccounted for at the trade date. Dividend and interestincome are recognized when earned. Gains or losses, ifany, are recorded in Financial income and expense.Non-derivative financial instruments comprise cashand cash equivalents, receivables, other non-currentfinancial assets, debt and other financial liabilities thatare not designated as hedges.Cash and cash equivalentsCash and cash equivalents include all cash balancesand short-term highly liquid investments with anoriginal maturity of three months or less that are readilyconvertible into known amounts of cash.Further information on cash and cash equivalents canbe found in note 30, Details of treasury / other financialrisks.ReceivablesReceivables are carried at the lower of amortized costor the present value of estimated future cash flows,taking into account discounts given or agreed. Thepresent value of estimated future cash flows isdetermined through the use of value adjustments foruncollectible amounts. As soon as individual tradeaccounts receivable can no longer be collected in thenormal way and are expected to result in a loss, theyare designated as doubtful trade accounts receivableand valued at the expected collectible amounts. Theyare written off when they are deemed to beuncollectible because of bankruptcy or other forms ofreceivership of the debtors. The allowance for the riskof non-collection of trade accounts receivable takesinto account credit-risk concentration, collective debtrisk based on average historical losses, and specificcircumstances such as serious adverse economicconditions in a specific country or region.Philips derecognizes receivables on entering intofactoring transactions if Philips has transferredsubstantially all risks and rewards or if Philips does notretain control over receivables.Further information on receivables can be found innote 16, Receivables.Other non-current financial assetsOther non-current financial assets include held-to-maturity investments, loans receivable and available-for-sale financial assets and financial assets at fairvalue through profit or loss.Held-to-maturity investments are those debt securitieswhich the Company has the ability and intent to holduntil maturity. Held-to-maturity debt investments arerecorded at amortized cost, adjusted for theamortization or accretion of premiums or discountsusing the effective interest method.Loans receivable are stated at amortized cost, lessimpairment.Available-for-sale financial assets are non-derivativefinancial assets that are designated as available-for-sale and that are not classified in any of the otherGroup financial statements10.9110Annual Report 2016categories of financial assets. Subsequent to initialrecognition, they are measured at fair value andchanges therein, other than impairment losses andforeign currency differences on available for sale-debtinstruments are recognized in Other comprehensiveincome and presented in the fair value reserve in equity.When an investment is derecognized, the gain or lossaccumulated in equity is reclassified to the Statementof income.Available-for-sale financial assets includinginvestments in privately-held companies that are notassociates, and do not have a quoted market price inan active market and whose fair value could not bereliably determined, are carried at cost.A financial asset is classified as fair value through profitor loss if it is classified as held for trading or isdesignated as such upon initial recognition. Financialassets are designated as fair value through profit or lossif the Company manages such investments and makespurchase and sale decisions based on their fair value inaccordance with the Company’s documented riskmanagement or investment strategy. Financial assets atfair value through profit or loss are measured at fairvalue, and changes therein are recognized in theStatement of income. Attributable transaction costs arerecognized in the Statement of income as incurred.Further information on other non-current financialassets can be found in note 13, Other financial assets.EquityCommon shares are classified as equity. Incrementalcosts directly attributable to the issuance of shares arerecognized as a deduction from equity. Where theCompany purchases the Company’s equity sharecapital (treasury shares), the consideration paid,including any directly attributable incrementaltransaction costs (net of income taxes), is deductedfrom equity attributable to the Company’s equityholders until the shares are cancelled or reissued.Where such ordinary shares are subsequently reissued,any consideration received, net of any directlyattributable incremental transaction costs and therelated income tax effects, is included in equityattributable to the Company’s equity holders.Call options on own shares are treated as equityinstruments in accordance with International FinancialReporting Standards criteria.Dividends are recognized as a liability in the period inwhich they are declared and approved byShareholders. The income tax consequences ofdividends are recognized when a liability to pay thedividend is recognized.The ‘Stichting Preferente Aandelen Philips’ has beengranted the right to acquire preference shares in theCompany. Such right has not been exercised. As ameans to protect the Company and its stakeholdersagainst an unsolicited attempt to acquire (de facto)control of the Company, the General Meeting ofShareholders in 1989 adopted amendments to theCompany’s articles of association that allow the Boardof Management and the Supervisory Board to issue(rights to acquire) preference shares to a third party. Asof December 31, 2016, no preference shares have beenissued.Further information on equity can be found in note 17,Equity.Debt and other liabilitiesDebt and liabilities other than provisions are stated atamortized cost.Derivative financial instruments, including hedgeaccountingThe Company uses derivative financial instrumentsprincipally to manage its foreign currency risks and, toa more limited extent, for managing interest rate andcommodity price risks. All derivative financialinstruments are accounted for at the trade date andclassified as current or non-current assets or liabilitiesbased on the maturity date or the earlier terminationdate. Embedded derivatives are separated from thehost contract and accounted for separately if theeconomic characteristics and risks of the host contractand the embedded derivative are not closely related.The Company measures all derivative financialinstruments at fair value derived from market prices ofthe instruments, or calculated as the present value ofthe estimated future cash flows based on observableinterest yield curves, basis spread, credit spreads andforeign exchange rates, or from option pricing models,as appropriate. Gains or losses arising from changes infair value of derivatives are recognized in the Statementof income, except for derivatives that are highlyeffective and qualify for cash flow or net investmenthedge accounting.Changes in the fair value of a derivative that is highlyeffective and that is designated and qualifies as a cashflow hedge, are recorded in Other comprehensiveincome, until the Statement of income is affected by thevariability in cash flows of the designated hedged item.To the extent that the hedge is ineffective, changes inthe fair value are recognized in the Statement ofincome.The Company formally assesses, both at the hedge’sinception and on an ongoing basis, whether thederivatives that are used in hedging transactions arehighly effective in offsetting changes in fair values orcash flows of hedged items. When it is established thata derivative is not highly effective as a hedge or that ithas ceased to be a highly effective hedge, the Companydiscontinues hedge accounting prospectively. Whenhedge accounting is discontinued because it isexpected that a forecasted transaction will not occur,the Company continues to carry the derivative on theBalance sheet at its fair value, and gains and losses thatGroup financial statements10.9Annual Report 2016111were accumulated in Other comprehensive income arerecognized immediately in the same line item as theyrelate to in the Statement of income.Foreign currency differences arising on theretranslation of financial instruments designated as ahedge of a net investment in a foreign operation arerecognized directly as a separate component of equitythrough Other comprehensive income, to the extentthat the hedge is effective. To the extent that the hedgeis ineffective, such differences are recognized in theStatement of income.Offsetting and master netting agreementsThe Company presents financial assets and financialliabilities on a gross basis as separate line items in theConsolidated balance sheet.Master netting agreements may be entered into whenthe Company undertakes a number of financialinstrument transactions with a single counterparty.Such an agreement provides for a net settlement of allfinancial instruments covered by the agreement in theevent of default or certain termination events on any ofthe transactions. A master netting agreement maycreate a right of offset that becomes enforceable andaffects the realization or settlement of individualfinancial assets and financial liabilities only following aspecified termination event. However, if this contractualright is subject to certain limitations then it does notnecessarily provide a basis for offsetting unless both ofthe offsetting criteria are met, i.e. there is a legallyenforceable right and an intention to settle net orsimultaneously.Property, plant and equipmentThe costs of property, plant and equipment compriseall directly attributable costs (including the cost ofmaterial and direct labor).Depreciation is generally calculated using the straight-line method over the useful life of the asset. Gains andlosses on the sale of property, plant and equipment areincluded in Other Business Income. Costs related torepair and maintenance activities are expensed in theperiod in which they are incurred unless leading to anextension of the original lifetime or capacity.Plant and equipment under finance leases andleasehold improvements are amortized using thestraight-line method over the shorter of the lease termor the estimated useful life of the asset. The gainrealized on sale and operating leaseback transactionsthat are concluded based upon market conditions isrecognized at the time of the sale in Other BusinessIncome, in the Consolidated statements of income.Further information on property, plant and equipmentcan be found in note 10, Property, plant and equipment.Leased assetsLeases in which the Company is the lessee and hassubstantially all the risks and rewards of ownership areclassified as finance leases. Finance leases arecapitalized at the commencement of the lease at thelower of the fair value of the leased assets and thepresent value of the minimum lease payments. Eachlease payment is allocated between the liability andfinance charges. The interest element of the financecost is charged to the Statement of income over thelease period so as to produce a constant periodic rateof interest on the remaining balance of the liability foreach period. The corresponding rental obligations, netof finance charges, are included in other short-term andother non-current liabilities. The property, plant andequipment acquired under finance leases isdepreciated over the shorter of the useful life of theassets and the lease term.Leases in which the Company is the lessee and in whichsubstantially all risks and rewards of ownership areretained by the lessor are classified as operating leases.Payments made under operating leases (net of anyincentives received from the lessor) are recognized inthe Statement of income on a straight-line basis overthe term of the lease.InventoriesInventories are stated at the lower of cost or netrealizable value. The cost of inventories comprises allcosts of purchase, costs of conversion and other costsincurred in bringing the inventories to their presentlocation and condition. The costs of conversion ofinventories include direct labor and fixed and variableproduction overheads, taking into account the stage ofcompletion and the normal capacity of productionfacilities. Costs of idle facility and abnormal waste areexpensed. The cost of inventories is determined usingthe first-in, first-out (FIFO) method. Inventory isreduced for the estimated losses due to obsolescence.This reduction is determined for groups of productsbased on sales in the recent past and/or expectedfuture demand.Further information on inventories can be found innote 15, Inventories.Employee benefit accountingA defined-contribution plan is a post-employmentbenefit plan under which an entity pays fixedcontributions into a separate entity and will have nolegal or constructive obligation to pay further amounts.Obligations for contributions to defined-contributionpension plans are recognized as an employee benefitexpense in the Statement of income in the periodsduring which services are rendered by employees.A defined-benefit plan is a post-employment benefitplan other than a defined-contribution plan. Plans forwhich the Company has no legal or constructiveobligation to pay further amounts, but to which it doespay non-fixed contributions, are also treated as aGroup financial statements10.9112Annual Report 2016defined-benefit plan. The net pension asset or liabilityrecognized in the Consolidated balance sheets inrespect of defined-benefit post-employment plans isthe fair value of plan assets less the present value of theprojected defined-benefit obligation at the balancesheet date. The defined-benefit obligation is calculatedannually by qualified actuaries using the projected unitcredit method. Recognized assets are limited to thepresent value of any reductions in future contributionsor any future refunds. The net pension liability ispresented as a long-term provision, no distinction ismade for the short-term portion.For the Company’s major plans, a full discount ratecurve of high-quality corporate bonds is used todetermine the defined-benefit obligation. The curvesare based on Towers Watson’s RATE:Link methodologywhich uses data of corporate bonds rated AA orequivalent. For the other plans a single point discountrate is used based on corporate bonds for which thereis a deep market and the plan’s maturity. Plans incountries without a deep corporate bond market use adiscount rate based on the local sovereign curve andthe plan’s maturity.Pension costs in respect of defined-benefit post-employment plans primarily represent the increase ofthe actuarial present value of the obligation for post-employment benefits based on employee serviceduring the year and the interest on the net recognizedasset or liability in respect of employee service inprevious years.Remeasurements of the net defined-benefit asset orliability comprise actuarial gains and losses, the returnon plan assets (excluding interest) and the effect of theasset ceiling (excluding interest). The Companyrecognizes all remeasurements in Othercomprehensive income.The Company recognizes gains and losses on thesettlement of a defined-benefit plan when thesettlement occurs. The gain or loss on settlement is thedifference between the present value of the defined-benefit obligation being settled, as determined on thedate of settlement, and the settlement price, includingany plan assets transferred and any payments madedirectly by the Company in connection with thesettlement. In this respect, the amount of the planassets transferred is adjusted for the effect of the assetceiling. Past service costs following from theintroduction of a change to the benefit payable undera plan or a significant reduction of the number ofemployees covered by a plan (curtailment), arerecognized in full in the Statement of income.Short-term employee benefit obligations are measuredon an undiscounted basis and are expensed as therelated service is provided. The Company recognizes aliability and an expense for bonuses and incentivesbased on a formula that takes into consideration theprofit attributable to the Company’s shareholders aftercertain adjustments.The Company’s net obligation in respect of long-termemployee benefits is the amount of future benefit thatemployees have earned in return for their service in thecurrent and prior periods, such as jubilee entitlements.That benefit is discounted to determine its presentvalue. Remeasurements are recognized in theStatement of income in the period in which they arise.Further information on employee benefit accountingcan be found in note 20, Post-employment benefits.Share-based paymentEquity-settled transactionsThe cost of equity-settled transactions is determinedby the fair value at the date when the grant is madeusing an appropriate valuation model, further details ofwhich are given in note 27, Share-based compensation.The grant-date fair value of equity-settled share-based payment awards granted to employees isrecognized as personnel expense, with acorresponding increase in equity, over the vestingperiod of the award. The cumulative expenserecognized for equity-settled transactions at eachreporting date until the vesting date reflects the extentto which the vesting period has expired and theCompany’s best estimate of the number of equityinstruments that will ultimately vest. The expense orcredit in the statement of profit or loss for a periodrepresents the movement in cumulative expenserecognized as at the beginning and end of that period.Service and non-market performance conditions arenot taken into account when determining the grant-date fair value of awards, but the likelihood of theconditions being met is assessed as part of theCompany’s best estimate of the number of equityinstruments that will ultimately vest. Marketperformance conditions are reflected within the grant-date fair value.No expense is recognized for awards that do notultimately vest because non-market performance and/or service conditions have not been met. Where awardsinclude a market or non-vesting condition, thetransactions are treated as vested irrespective ofwhether the market or non-vesting condition issatisfied, provided that all other performance and/orservice conditions are satisfied.When an award is cancelled by the entity or by thecounterparty, any remaining element of the fair valueof the award is expensed immediately through profit orloss.Group financial statements10.9Annual Report 2016113The dilutive effect of outstanding options is reflected asadditional share dilution in the computation of dilutedearnings per share (further details are given innote 9,Earnings per share).Financial income and expensesFinancial income comprises interest income on fundsinvested (including available-for-sale financial assets),dividend income, net gains on the disposal of available-for-sale financial assets, net fair value gains on financialassets at fair value through profit or loss, net gains onthe remeasurement to fair value of any preexistingavailable-for-sale interest in an acquiree, and net gainson foreign exchange impacts that are recognized in theStatement of income.Interest income is recognized on accrual basis in theStatement of income, using the effective interestmethod. Dividend income is recognized in theStatement of income on the date that the Company’sright to receive payment is established, which in thecase of quoted securities is normally the ex-dividenddate.Financial expenses comprise interest expenses onborrowings, unwinding of the discount on provisionsand contingent consideration, losses on disposal ofavailable-for-sale financial assets, net fair value losseson financial assets at fair value through profit or loss,impairment losses recognized on financial assets (otherthan trade receivables), net interest expenses relatedto defined-benefit plans and net losses on foreignexchange impacts that are recognized in the Statementof income.Further information on financial income and expensescan be found in note 7, Financial income and expenses.Financial guaranteesThe Company recognizes a liability at the fair value ofthe obligation at the inception of a financial guaranteecontract if it is probable that an outflow of resourcesembodying economic benefits will be required to settlethe obligation. The guarantee is subsequentlymeasured at the higher of the best estimate of theobligation or the amount initially recognized.Cash flow statementsCash flows arising from transactions in a foreigncurrency are translated in the Company’s functionalcurrency using the exchange rate at the date of the cashflow. Cash flows from derivative instruments that areaccounted for as cash flow hedges are classified in thesame category as the cash flows from the hedged items.Cash flows from other derivative instruments areclassified as investing cash flows.Segment informationOperating segments are components of the Company’sbusiness activities about which separate financialinformation is available that is evaluated regularly bythe chief operating decision maker (the ExecutiveCommittee of the Company). The Executive Committeedecides how to allocate resources and assessesperformance. Reportable segments comprise theoperating segments Personal Health businesses,Diagnosis & Treatment businesses, Connected Care &Health Informatics businesses and Lighting.HealthTech Other and Legacy Items are segments butnot separate reportable segments and hold, amongothers, the Emerging Businesses and Innovationbusinesses, headquarters overhead, regional/countryorganization expenses and separation costs. Segmentaccounting policies are the same as the accountingpolicies applied by the Company.Earnings per ShareThe Company presents basic and diluted earnings pershare (EPS) data for its common shares. Basic EPS iscalculated by dividing the Net income (loss)attributable to shareholders by the weighted averagenumber of common shares outstanding during theperiod, adjusted for own shares held. Diluted EPS isdetermined by adjusting the Net income (loss)attributable to shareholders and the weighted averagenumber of common shares outstanding during theperiod, adjusted for own shares held, for the effects ofall dilutive potential common shares, which comprisesof restricted shares, performance shares and shareoptions granted to employees.Further information on earnings per share can be foundin note 9, Earnings per share.New standards and interpretationsIFRS accounting standards adopted as from 2016Changes to policies, following from amendments tostandards, interpretations and the annual improvementcycles, effective 2016, did not have a material impact onthe Group financial statements.IFRS accounting standards to be adopted as from2017 and onwardsA number of new standards and amendments toexisting standards have been published and aremandatory for the Company beginning on or afterJanuary 1, 2017 or later periods, and the Company hasnot early adopted them. Those which may be the mostrelevant to the Company are set out below. Changes toother standards, following from amendments and theannual improvement cycles, are not expected to havea material impact on the Company’s financialstatements.IFRS 9 Financial InstrumentsIFRS 9 Financial Instruments brings together theclassification and measurement, impairment and hedgeaccounting phases of the IASB’s project to replace IAS39 Financial Instruments: Recognition andMeasurement.Group financial statements10.9114Annual Report 2016IFRS 9 adds a new expected loss impairment modeland amendments to classification and measurementfor financial assets. The impairment model is based onthe concept of providing for expected losses atinception of a contract, except in the case of purchasedor originated credit-impaired financial assets, whereexpected credit losses are incorporated into theeffective interest rate.The standard supersedes all previous versions of IFRS9 and is effective for periods beginning on or afterJanuary 1, 2018. It is endorsed by the EU. The Companyis currently in the process of implementing the newStandard, and based on its current assessment of thepotential impact of adoption of IFRS 9 based on itspositions at 31 December 2016 and hedgingrelationships designated during 2016 under IAS 39, thefollowing is noted:ClassificationAt this moment the Company does not believe that thenew classification requirements will have a materialimpact on its accounting for trade receivables, loans,investments in debt securities and investments inequity securities that are managed on a fair value basis.At 31 December 2016, the Company had equityinvestments classified as available-for-sale with a fairvalue of approximately EUR 140 million that are held forlong-term strategic purposes. The Company did notmake a decision yet as to classify these investments asfair-value-through-other-comprehensive-income(FVOCI) or fair-value-through-profit-or-loss (FVTPL)financial assets, assuming these investments continueto be held for the same purpose at initial application ofIFRS 9.On the classification of financial liabilities under IFRS 9the Company’s current assessment did not indicate anymaterial impact.ImpairmentIFRS 9 requires the Company to record expected creditlosses on all of its debt securities, loans and tradereceivables, either on a 12-month or lifetime basis.While the group has not yet undertaken a detailedassessment of how its impairment provisions would beaffected by the new model, it may result in an earlierrecognition of credit losses.Hedge accountingThe Company’s current plan is that it will elect to applythe new hedge accounting requirements of IFRS 9rather than to make the accounting policy choice tocontinue the IAS 39 requirements.Under IFRS 9 the Company should ensure that hedgeaccounting relationships are aligned with theCompany’s risk management objectives and strategyincluding a more qualitative and forward-lookingapproach to assessing hedge effectiveness. Under thenew model, it is possible that more risk managementstrategies, particularly those involving hedging a riskcomponent (other than foreign currency risk) of a non-financial item, will be likely to qualify for hedgeaccounting. The Company currently does notundertake hedges of such risk components.Under IAS 39, the change in fair value of the forwardelement of the forward exchange contracts (“forwardpoints”) is recognized immediately in profit or loss. Onadoption of IFRS 9, the Company may elect for theforward points to be separately accounted for as a costof hedging. In this case, they would be recognized inOther comprehensive income and accumulated in acost of hedging reserve as a separate component withinequity and accounted for subsequently like gains andlosses accumulated in the cash flow hedge reserve.The Company’s current assessment indicated that thetypes of hedge accounting relationships that theCompany currently designates should be capable ofmeeting the requirements of IFRS 9 if the Companycompletes certain planned changes to its internaldocumentation and monitoring processes. While theCompany will have to finalize the detailed assessment,it would appear that the Company’s current hedgerelationships would qualify as continuing hedges uponthe adoption of IFRS 9. Accordingly, the Company doesnot expect a significant impact on the accounting for itshedging relationships.TransitionChanges in accounting policies resulting from theadoption of IFRS 9 will generally be appliedretrospectively, however the guidance allows certainexemptions on retrospective application. TheCompany has not made a decision yet in relation to theexemptions and elections that IFRS 9 allows.IFRS 15 Revenue from Contracts with CustomersIFRS 15 specifies how and when revenue is recognizedas well as prescribing more informative and relevantdisclosures. The standard supersedes IAS 18 Revenue,IAS 11 Construction Contracts and a number of revenuerelated interpretations.The new standard provides a single, principles-basedfive-step model to be applied to all contracts withcustomers. Furthermore, it provides new guidance onwhether revenue should be recognized at a point intime or over time. The standard also introduces newguidance on costs of fulfilling and obtaining a contract,specifying the circumstances in which such costsshould be capitalized. Costs that do not meet thecriteria must be expensed when incurred.Group financial statements10.9Annual Report 2016115The Company has completed an initial assessment ofthe potential impact of the adoption of IFRS 15 on itsconsolidated financial statements. The main aspects ofthe impact assessment are mentioned below:GeneralRevenues of transactions that have separatelyidentifiable components are currently recognizedbased on the relative fair value of the components andmainly occur in the segments Diagnosis & Treatmentbusinesses and Connected Care & Health Informaticsbusinesses. Under IFRS 15, the total consideration of asale transaction will be allocated to the differentelements based on their relative stand-alone sellingprices. These prices will be determined based on thecountry list prices (including standard discounts whereapplicable) at which the Company sells the elements inseparate transactions. If these country list prices are notavailable Philips will use either the adjusted marketassessment approach or the expected costs plus amargin approach. The residual approach is onlypermissible in limited circumstances.The Company performed an initial comparison of thefair value and the stand-alone selling prices of theidentified components. Based on the initial assessment,these amounts are broadly the same, therefore theCompany at this stage does not anticipate materialdifferences in the revenue recognition under multiplecomponent accounting.Sale of goodsFor the sale of products in the segments PersonalHealth businesses and Lighting, revenue is currentlyrecognized when goods are delivered to the customer,which is the point in time at which the customer acceptsthe goods and the related risks and rewards ofownership are transferred. Revenue is only recognizedat this moment after other requirements are also met,such as no continuing management involvement withgoods, revenue and costs can be reliably measured andprobable recovery of the considerations. Under IFRS 15,revenue will be recognized when a customer obtainscontrol of the goods. The overall revenue recognitionrequirements are captured in the steps of the five-stepmodel.Based on the initial assessment, the Company did notidentify material differences for the mentionedsegments, between the transfer of control and thecurrent transfer of risk and rewards. As such, at thisstage the Company does not anticipate materialdifferences in the timing of revenue recognition for thesale of products.Rendering of servicesEspecially within the segments Diagnosis & Treatmentbusinesses and Connected Care & Health Informaticsbusinesses, the Company currently recognizes revenuefrom services when the inflow of the amounts involvedare deemed probable and revenue and associatedcosts related to the stage of completion of a contract ortransaction can be reliably measured. Furthermore,revenue from services is deferred and recognized in theStatement of income over the period during which theservice is rendered. Under IFRS 15, revenue will berecognized when a customer obtains control of theservices, which can be at a point in time or over time.For each performance obligation satisfied over time,revenue needs to be recognized by measuring theprogress towards complete satisfaction of thatperformance obligation at the end of each reportingperiod.Based on the initial assessment, the Company did notidentify material differences between its currentaccounting treatment and IFRS 15, with respect to thetiming of revenue recognition of service revenues.Royalty incomeCurrently the Company recognizes revenue fromintellectual property (IP) royalties, which is normallygenerated based upon a percentage of sales or a fixedamount per product sold, on an accrual basis based onactual or reliably estimated sales made by thelicensees. Revenue generated from an agreement withlump-sum consideration is recognized on accrual basisbased on the contractual terms and substance of therelevant agreement with a licensee. Under IFRS 15,revenues from the license of intellectual propertyshould be recognized based on a right to access theintellectual property or a right to use the intellectualproperty approach. Under the first option revenueshould be recognized over time while under the secondoption revenue should be recognized at a point in time.Based on the initial assessment, the Company hasidentified a potential impact on revenues originatingfrom its IP royalties (Segment HealthTech Other). Thepotential impact is mainly related to a change in timingof revenue recognition which, under IFRS 15, could berecognized in the Statement of income at an earlierpoint in time rather than over time under the currentmethodology.The Company is currently performing a detailedanalysis on a contract by contract basis, to assess therelated impact.Costs of obtaining a contractUnder IFRS 15, the incremental costs of obtaining acontract with a customer are recognized as an asset ifthe entity expects to recover them. Under the currentguidance these costs are expensed when incurred.The Company identified certain sales commissions thatare typical for transactions in the segments Diagnosis &Treatment businesses and Connected Care & HealthInformatics businesses to be incremental costs ofobtaining a contract. The Company is currentlyassessing the exact amounts involved as well as theappropriate time in which capitalized contract costsshould be amortized.Group financial statements10.9116Annual Report 2016The Company has significant commission costs that arecurrently expensed as incurred, hence the IFRS 15guidance means a change to current practice.TransitionThe Company plans to adopt IFRS 15 in its consolidatedfinancial statements for the year ending December 31,2018, using the modified retrospective transitionapproach upon initial adoption of IFRS 15, applying thestandard only to contracts that are not completed as ofthe date of initial application. This would mean thatcomparative figures will not be restated and thatadditional clarifying disclosures will be presented in theAnnual Report 2018.IFRS 15 must be applied for periods beginning on orafter January 1, 2018. It is endorsed by the EU (exceptfor the Clarifications to IFRS 15 issued by the IASB inApril 2016).IFRS 16 LeasesFor lessees, IFRS 16 requires most leases to berecognized on-balance (under a single model),eliminating the distinction between operating andfinance leases. Lessor accounting however remainslargely unchanged and the distinction betweenoperating and finance leases is retained. IFRS 16supersedes IAS 17 Leases and related interpretations.Under IFRS 16 a lessee recognizes a right-of-use assetand a lease liability. The right-of-use asset is treatedsimilarly to other non-financial assets and isdepreciated accordingly. The lease liability is initiallymeasured at the present value of the lease paymentspayable over the lease term, discounted at the rateimplicit in the lease if that can be readily determined. Ifthe interest rate implicit in the lease cannot be readilydetermined then the incremental borrowing rate shouldbe used for discounting. The liability accrues interest.As with current IAS 17, under IFRS 16 lessors classifyleases as operating or finance in nature.IFRS 16 must be adopted for periods beginning on orafter January 1, 2019, with earlier adoption permitted ifthe abovementioned IFRS 15 has also been adopted.IFRS 16 is not yet endorsed by the EU.The Company is currently assessing the impact of thenew standard. So far, the most significant impactidentified is that the Company will recognize assets andliabilities for its operating leases of real estate, whilefurther assessment is ongoing for other operatingleases. In this respect, the Company identified almostEUR 1 billion of off-balance operating lease obligations(undiscounted) per December 31, 2016. In addition, thenature of expenses related to those leases will nowchange as IFRS 16 replaces the straight-line operatinglease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. Nosignificant impact is expected for the Company’sfinance leases.The Company has not yet determined whether to earlyadopt or not and which transition approach to apply,and has not yet decided whether it will use any of theoptional exemptions.2Group financial statements10.9Annual Report 20161172Information by segment and main countryPhilips GroupInformation on income statement in millions of EUR unless otherwise stated2014 - 2016sales sales including intercompany depreciation and amorti-zation1)EBITA1)2016 Personal Health7,099 7,119 (385)1,092 Diagnosis & Treatment6,686 6,741 (229)594 Connected Care & Health Informatics3,158 3,213 (184)322 HealthTech Other478 620 (177)(120)Lighting7,094 7,115 (291)542 Legacy Items1 6 (1)(195)Inter-segment eliminations (298) Philips Group24,516 24,516 (1,267)2,235 2015 Personal Health6,751 6,764 (375)885 Diagnosis & Treatment6,484 6,531 (249)377 Connected Care & Health Informatics3,022 3,080 (198)227 HealthTech Other503 657 (156)64 Lighting7,438 7,481 (309)441 Legacy Items46 84 6 (622)Inter-segment eliminations (353) Philips Group24,244 24,244 (1,281)1,372 2014 Personal Health5,948 5,958 (334)758 Diagnosis & Treatment5,284 5,304 (177)374 Connected Care & Health Informatics2,684 2,717 (168)(106)HealthTech Other487 627 (123)51 Lighting6,874 6,932 (382)133 Legacy Items114 154 (3)(389)Inter-segment eliminations (301) Philips Group21,391 21,391 (1,187)821 1)Includes all depreciation and amortization. For the definition of EBITA and for the amortization not included in EBITA, refer to table belowIn 2016, Philips established two stand-alonecompanies focused on the HealthTech and Lightingopportunities. As part of this separation, Philips haschanged the way it allocates resources and analyzes itsperformance based on a new segment structure.Accordingly, from 2016 the reportable segments for thepurpose of the disclosures required by IFRS 8Operating Segments are Personal Health businesses,Diagnosis & Treatment businesses, Connected Care &Health Informatics businesses and Lighting, each beingresponsible for the management of its businessworldwide. Additionally, HealthTech Other and LegacyItems are included.The internal management report provided to the chiefoperating decision maker (the Executive Committee ofthe Company) has had changes in 2016. Accordinglythe disclosure in this note has been updated. The keysegmental performance measure provided in theinternal management report to the chief operatingdecision maker (the Executive Committee of theCompany) is EBITA1). Management believes it is themost relevant measure to evaluate the results of thesegments.The Company uses the terms EBIT and EBITA1) toevaluate the performance of the Philips Group and itsoperating segments. The term EBIT has the samemeaning as Income from operations and the termEBITA1) has the same meaning as Adjusted income fromoperations1). EBITA1) represents income from operationsbefore amortization and impairment on intangibleassets (excluding software and capitalizeddevelopment expenses). Referencing EBITA1) isconsidered appropriate as the Company uses it as oneof its strategic drivers to increase profitability throughre-allocation of its resources towards opportunitiesoffering more consistent and higher returns and it willmake the underlying performance of our businessesmore transparent as it will not be distorted by theunpredictable effects of future, unidentifiedacquisitions.EBITA1) is not a financial measure in accordance withIFRS. Below is a reconciliation of EBITA1) to the mostdirectly comparable IFRS measure, Net income, for theyears indicated. Certain income and expense line itemsGroup financial statements10.9118Annual Report 2016are monitored on a centralized basis and are notallocated to segments, resulting in them being shownon a Philips Group level only.Transactions between the segments mainly related toservices provided by HealthTech Other to the othersegments. The pricing of such transactions was at costor determined on an arm’s length basis.Philips has no single external customer that represents10% or more of sales.Philips GroupNet income to EBITA in millions of EUR2014 - 2016PhilipsGroup PersonalHealth Diagnosis &Treatment ConnectedCare &HealthInformatics HealthTechOther Lighting LegacyItems 2016 Net Income1,491 Discontinued operations, net of incometaxes(416) Investments in associates, net ofincome taxes(13) Income tax expense327 Financial expenses569 Financial income(76) Income from operations (EBIT)1,882 953 546 275 (129)432 (195)Amortization of intangible assets1)350 139 48 47 9 108 (1)Impairment of goodwill3 - - - - 2 1 EBITA2,235 1,092 594 322 (120)542 (195) 2015 Net Income659 Discontinued operations, net of incometaxes(245) Investments in associates, net ofincome taxes(30) Income tax expense239 Financial expenses467 Financial income(98) Income from operations (EBIT)992 736 322 173 49 334 (622)Amortization of intangible assets1)380 149 55 54 15 107 - Impairment of goodwill- - - - - - - EBITA1,372 885 377 227 64 441 (622) 2014 Net Income411 Discontinued operations, net of incometaxes(190) Investments in associates, net ofincome taxes(62) Income tax expense26 Financial expenses415 Financial income(114) Income from operations (EBIT)486 620 349 (157)37 25 (388)Amortization of intangible assets1)332 138 25 50 14 106 (1)Impairment of goodwill3 - - 1 - 2 - EBITA821 758 374 (106)51 133 (389)1)Excluding amortization of software and product development.1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to below.3Group financial statements10.9Annual Report 2016119Philips GroupMain countries in millions of EUR2014 - 2016sales1)tangible and intangible assets2)2016 Netherlands688 1,007 United States7,713 9,425 China2,811 1,167 Germany1,372 201 Japan1,134 492 France833 45 India804 121 Other countries9,161 2,147 Total main countries24,516 14,605 2015 Netherlands639 970 United States7,522 9,291 China2,774 1,194 Germany1,357 170 Japan992 455 France806 48 India845 134 Other countries9,309 2,276 Total main countries24,244 14,538 2014 Netherlands594 937 United States6,160 7,649 China2,362 1,135 Germany1,351 153 Japan908 379 France839 52 United Kingdom722 594 Other countries8,455 1,722 Total main countries21,391 12,621 1)The sales are reported based on country of destination.2)Includes Property plant and equipment, Intangible assets excluding goodwill and Goodwill3Discontinued operations and other assetsclassified as held for saleDiscontinued operations included in the Consolidatedstatements of income and cash flows consist of thecombined Lumileds and Automotive businesses, theAudio, Video, Multimedia & Accessories business andcertain divestments formerly reported as discontinuedoperations.Discontinued operations: Combined Lumileds andAutomotive businessesThe combined businesses of Lumileds and Automotivewere reported as discontinued operations in theConsolidated statements of income and Consolidatedstatements of cash flows, with the related assets andliabilities as per the end of November 2014 included asAssets classified as held for sale and Liabilities directlyassociated with assets held for sale in the Consolidatedbalance sheet.In January 2016, Philips announced that the transactionwith Go Scale Capital has been terminated despiteefforts to mitigate the concerns of the Committee onForeign Investment in the United States (‘CFIUS’).Philips announced December 12, 2016 that it has signedan agreement to sell an 80.1% interest in Lumileds, aleading supplier of LED components and automotivelighting, to certain funds managed by affiliates of ApolloGlobal Management, LLC (NYSE: APO). Philips willretain the remaining 19.9% interest in Lumileds.The following table summarizes the results of thecombined businesses of Lumileds and Automotiveincluded in the Consolidated statements of income asdiscontinued operations.Group financial statements10.94120Annual Report 2016Philips GroupResults of combined Lumileds and Automotive Lightingbusinesses in millions of EUR2014 - 20162014 2015 2016 Sales1,416 1,619 1,711 Costs and expenses(1,202)(1,320)(1,376)Income before taxes214 299 335 Income tax expense(73)(53)(53)Results from discontinuedoperations141 246 282 Upon disposal, the associated currency translationdifferences, part of Shareholders’ equity, will berecognized in the Consolidated statement of income. AtDecember 31, 2016, the estimated release amounts to aEUR 63 million gain.The following table presents the assets and liabilities ofthe combined Lumileds and Automotive business, asAssets classified as held for sale and Liabilities directlyassociated with assets classified as held for sale in theConsolidated balance sheet as from 2015.Philips GroupAssets and liabilities of combined Lumileds and AutomotiveLighting businesses in millions of EUR2015 - 20162015 2016 Property, plant and equipment762 909 Intangible assets including goodwill379 450 Inventories285 289 Accounts receivable314 323 Other assets34 69 Assets classified as held for sale1,774 2,040 Accounts payable(192)(183)Provisions(39)(56)Other liabilities(170)(269)Liabilities directly associated withassets held for sale(401)(508)Discontinued operations: OtherCertain results of other divestments, reported asdiscontinued operations are included, with a net gainof EUR 134 million in 2016 (2015: a net loss of EUR 1million; 2014: a net gain of EUR 49 million).The main result in 2016 related to the court decision infavor of Philips in an arbitration case against FunaiElectric Co., Ltd. Philips started the arbitration after itterminated the agreement to transfer the Audio, Video,Media & Accessories business to Funai following abreach of contract by Funai. As a consequence thecourt ordered Funai to pay EUR 144 million, whichincludes disbursements and interest, as compensationfor damages. The amount was received in Q2 2016.Other assets classified as held for saleAssets and liabilities directly associated with assetsheld for sale relate to property, plant and equipment foran amount of EUR 87 million (December 31, 2015: EUR1 million) and businesses’ net assets classified as heldfor sale amounted to EUR 36 million at December 31,2016 (December 31, 2015 EUR 28 million).In 2016 assets held for sale of property, plant andequipment had an impairment of EUR 25 million andbusinesses’ net assets classified as held for sale had agoodwill impairment of EUR 2 million.In 2016, divested property, plant and equipment assetsheld for sale amounted to EUR 7 million, with proceedsof EUR 19 million. Businesses divested net assetsclassified as held for sale amounted to EUR 41 million.The businesses divested had proceeds of EUR 44million.In 2015, divested property, plant and equipment assetsheld for sale amounted to EUR 43 million, withproceeds of EUR 88 million. Other non-current financialassets divested classified as held for sale amounted toEUR 20 million, with proceeds of EUR 20 million.Businesses divested net assets classified as held forsale amounted to EUR 9 million. The businessesdivested had proceeds of EUR 59 million.4Acquisitions and divestments2016AcquisitionsPhilips completed two acquisitions in 2016. Theseacquisitions involved an aggregated net cash outflowof EUR 168 million.DivestmentsPhilips completed six divestments during 2016. The sixdivestments involved an aggregated cashconsideration of EUR 43 million.2015AcquisitionsPhilips completed four acquisitions in 2015. Theseacquisitions involved an aggregated net cash outflowof EUR 1,116 million, with Volcano Corporation(Volcano) being the most notable acquisition.On February 17, 2015, Philips completed the acquisitionof Volcano for a total cash consideration of EUR 1,250million. This amount involved the purchase price ofshares (EUR 822 million), the payoff of certain debt(EUR 405 million) and the settlement of outstandingstock options (EUR 23 million). The overall cash positionof Volcano on the transaction date was EUR 158 million,resulting in a net cash outflow related to this acquisitionof EUR 1,092 million.Volcano is a US-based global leader in catheter-basedimaging and measurement solutions for cardiovascularapplications and is very complementary to the Philipsvision, strategy, and portfolio in image-guided therapy.Transaction-related costs that were recognized inGeneral and administrative expenses amounted to EUR15 million. As of February 17, 2015, Volcano was 100%consolidated as part of the Diagnosis & Treatment5Group financial statements10.9Annual Report 2016121businesses segment. The condensed balance sheet ofVolcano, immediately before and after the acquisitionwas as follows:VolcanoBalance sheet in millions of EUR2015beforeacquisition date after acquisitiondate Goodwill133 627 Other intangible assets87 320 Property, plant and equipment105 105 Other assets80 50 Other liabilities(41)(142)Working Capital112 156 Cash158 158 Total assets and liabilities634 1,274 Group Equity(219)(1,250)Loans(415)(24)Financed by(634)(1,274)The goodwill was primarily related to synergiesexpected to be achieved from integrating Volcanowithin the Diagnosis & Treatment businesses segment.The goodwill was not tax-deductible. Other intangibleassets were comprised of the following:VolcanoOther intangible assets in millions of EUR2015amount amortizationperiod in years Installed base62 6 Developed technology - Systems155 15 Developed technology - Disposables58 15 Developed technology - PeripheralTherapeutics26 15 IPR&D6 n/a Trade names13 10 Total other intangible assets320 For the period from February 17, 2015, Volcanocontributed sales of EUR 286 million and a loss fromoperations of EUR 113 million, which includesacquisition related costs of EUR 103 million.DivestmentsPhilips completed seven divestments during 2015, withthe sale of the 20% interest in Assembléon Holding B.V.and the sale of the Remote Control activities being themost notable divestments. The seven divestmentsinvolved an aggregated cash consideration of EUR 59million.5Interests in entitiesIn this section we discuss the nature of, and risksassociated with, the Company’s interests in itsconsolidated entities and associates, and the effects ofthose interests on the Company’s financial position andfinancial performance.IPO Philips LightingIn May and June 2016, the Company sold 28.775% of itsinterest in Philips Lighting (a wholly owned subsidiaryof the Company) through an IPO (involving 28.75% ofthe shares) and transactions with the CEO and CFO ofPhilips Lighting (involving 0.025% of the shares),reducing its remaining interest in Philips Lighting to71.225%. This transaction involved cash proceeds ofEUR 863 million and EUR 38 million transaction costsspend. This partial divestment transaction did notimpact the profit and loss account of the Company, asPhilips Lighting continues to be fully consolidated.The transactions had a positive impact onShareholders’ equity of the Company of EUR 109million. This amount is based on:•the difference between the proceeds and thecarrying value of the 28.775% stake in Philips Lighting(gain of EUR 163 million);•costs related to the IPO which were directlyrecognized in Shareholders’ equity (loss of EUR 38million) and;•certain reallocations of Other comprehensive incomeitems to Non-controlling interests (loss of EUR 16million).As a result of the IPO, Non-controlling interestsincreased by EUR 716 million. Please refer also tonote 17, Equity. This amount is based on:•the carrying value of the 28.775% stake in PhilipsLighting (increase of EUR 700 million) and;•certain reallocations of Other comprehensive incomeitems from Shareholders’ equity (increase of EUR 16million).Prior to the IPO, the Company completed an internallegal restructuring whereby all Lighting activities wereconcentrated in Philips Lighting. This legal restructuringresulted in an increase of consolidated legal entitiesfrom 450 as of December 31, 2015 to 465 as ofDecember 31, 2016.Sales and Income from operations of Philips Lightingare reflected in the Lighting segment informationincluded in note 2, Information by segment and maincountry. Certain differences exist between the Lightingsegment information reported by the Company andPhilips Lighting’s stand-alone Annual Report publishedon February 21, 2017. Differences in income fromoperations mainly relate to separation costs (EUR 62million) that Philips Lighting recognizes in Income fromoperations, whereas these costs are reflected in thesegment Legacy Items by Royal Philips.Group companiesSet out below is a list of material subsidiaries as perDecember, 31 2016 representing greater than 5% ofeither the consolidated group sales, income fromoperations or net income (before any intra-groupeliminations). All of the entities are fully consolidated inGroup financial statements10.9122Annual Report 2016the group accounts of the Company. Entities that are100% owned by Philips Lighting are consequently71.225% owned by Koninklijke Philips N.V. Theremaining entities are 100% owned by the Company.It is noted that Philips reduced its interest in PhilipsLighting to approximately 55.180% as per February 8,2017. Please refer to note 31, Subsequent eventsPhilips GroupInterests in group companies in alphabetical order2016Legal entity namePrincipal country ofbusiness Invivo CorporationUnited States Lifeline Systems CompanyUnited States Lumileds International B.V.Netherlands Lumileds LLCUnited States Lumileds Malaysia Sdn. Bhd.Malaysia Philips (China) Investment Company, Ltd.China Philips Consumer Lifestyle B.V.Netherlands Philips Electronics Hong Kong LimitedHong Kong Philips Electronics Nederland B.V.Netherlands Philips Electronics North America CorporationUnited States Philips GmbHGermany Philips Holding USA Inc.United States Philips International B.V.Netherlands Philips Lighting B.V.1)Netherlands Philips Lighting Holding B.V.1)Netherlands Philips Lighting Hong Kong Limited1)Hong Kong Philips Lighting North America Corporation1)United States Philips Medical Systems (Cleveland), Inc.United States Philips Medical Systems Nederland B.V.Netherlands Philips Medizin Systeme Böblingen GmbHGermany Philips Oral Healthcare, LLCUnited States Philips Ultrasound, Inc.United States RIC Investments, LLCUnited States The Genlyte Group Incorporated1)United States Volcano CorporationUnited States 1)Owned by Philips LightingInformation related to Non-controllinginterests (NCI)In total, five consolidated subsidiaries are not whollyowned by the Company. Group companies that havesignificant Non-controlling interests are Philips Lighting(NCI 28.775%) and General Lighting Company (GLC, NCI49%). The following is combined summarized financialinformation for Philips Lighting and GLC. Theinformation is before inter-company eliminations withother companies in the Group.Philips GroupSummarized financial information for Philips Lighting and GLCin millions of EUR20162016 PhilipsLighting GLC Sales to thirds7,115 203 Net income185 (11) Current assets3,660 183 Non-current assets3,795 239 Current liabilities(2,357)(126)Non-current liabilities(2,290)(206)Net assets2,808 90 Cashflow from operating activity505 22 Cashflow from investment activity(62)(5)Cashflow from financing activity506 (16)Net increase in cash and cash equivalents949 1 Investments in associatesPhilips has investments in a number of associates, noneof them are regarded as individually material.The changes during 2016 are as follows:Philips GroupInvestments in associates in millions of EUR2016Total investments Balance as of January 1, 2016181 Changes: Acquisitions/additions34 Share in income19 Share in other comprehensive income(1)Dividends declared(48)Other5 Balance as of December 31, 2016190 Involvement with unconsolidated structuredentitiesPhilips founded three Philips Medical Capital (PMC)entities, in the United States, France and Germany, inwhich Philips holds a minority interest. Philips MedicalCapital, LLC in the United States is the most significantentity. PMC entities provide healthcare equipmentfinancing and leasing services to Philips customers fordiagnostic imaging equipment, patient monitoringequipment, and clinical IT systems.The Company concluded that it does not control, andtherefore should not consolidate the PMC entities. Inthe United States, PMC operates as a subsidiary of DeLage Landen Financial Services, Inc. The same set upand treatment is applied to the PMC entities in the othercountries, with other majority shareholders. Operatingagreements are in place for all PMC entities, wherebyacceptance of sales and financing transactions resideswith the respective majority shareholder. Afteracceptance of a transaction by PMC, Philips transferssignificant risk and rewards and does not retain anyobligations towards PMC or its customers.6Group financial statements10.9Annual Report 2016123At December 31, 2016, Philips’ stake in Philips MedicalCapital, LLC amounted to EUR 25 million (December 31,2015: EUR 30 million). Philips sold equipment and non-recourse third-party receivables to PMC US amountingto EUR 250 million in 2016 (2015: EUR 255 million; 2014:EUR 220 million).6Income from operationsFor information related to Sales on a segment andgeographical basis, see note 2, Information by segmentand main country.Philips GroupSales and costs by nature in millions of EUR2014 - 20162014 2015 2016 Sales21,391 24,244 24,516 Costs of materials used(7,296)(8,446)(8,045)Employee benefit expenses(6,080)(7,107)(7,005)Depreciation and amortization(1,187)(1,281)(1,267)Shipping and handling(741)(806)(772)Advertising and promotion(913)(1,000)(1,085)Lease expense 1)(318)(324)(324)Other operational costs 2)(4,156)(4,375)(4,160)Impairment of goodwill(3) (3)Other business income (expenses)(211)87 27 Income from operations486 992 1,882 1)Lease expense includes EUR 39 million (2015: EUR 35 million, 2014: EUR35 million) of other costs, such as fuel and electricity, and taxes to bepaid and reimbursed to the lessor2)Other operational costs contain items which are dissimilar in nature andindividually insignificant in amount to disclose separately. These costscontain among others expenses for outsourcing services, mainly in ITand HR, 3rd party workers, consultants, warranty, patents, costs fortravelling, external legal services and EUR 95 million government grantsrecognized in 2016 (2015: EUR 66 million, 2014: EUR 45 million). Thegrants mainly relate to research and development activities andbusiness development.Sales compositionPhilips GroupSales composition in millions of EUR2014 - 20162014 2015 2016 Goods17,972 20,659 20,740 Services2,948 3,080 3,263 Royalties471 505 513 Sales21,391 24,244 24,516 Costs of materials usedCost of materials used represents the inventoryrecognized in cost of sales.Employee benefit expensesPhilips GroupEmployee benefit expenses in millions of EUR2014 - 2016 2014 2015 2016 Salaries and wages1)5,018 5,533 5,832 Post-employment benefits costs326 780 369 Other social security and similarcharges: -Required by law623 664 676 -Voluntary113 130 128 Employee benefit expenses6,080 7,107 7,005 1)Salaries and wages includes Share-based compensation expenses.The employee benefit expenses relate to employeeswho are working on the payroll of Philips, both withpermanent and temporary contracts.For further information on post-employment benefitcosts, see note 20, Post-employment benefits.For details on the remuneration of the members of theBoard of Management and the Supervisory Board, seenote 28, Information on remuneration.EmployeesThe average number of employees by category issummarized as follows:Philips GroupEmployees in FTEs2014 - 20162014 2015 2016 Production48,110 46,869 46,114 Research and development11,714 11,462 11,380 Other32,684 34,011 34,841 Employees92,508 92,342 92,335 3rd party workers12,562 13,314 12,045 Continuing operations105,070 105,656 104,380 Discontinued operations9,222 8,556 9,192 Employees consist of those persons working on thepayroll of Philips and whose costs are reflected in theEmployee benefit expenses table. 3rd party workersconsist of personnel hired on a per-period basis, viaexternal companies.Philips GroupEmployees per geographical location in FTEs2014 - 2016 2014 2015 2016 Netherlands14,042 14,020 14,569 Other countries91,028 91,636 89,811 Continuing operations105,070 105,656 104,380 Discontinued operations9,222 8,556 9,192 Philips Group114,292 114,212 113,572 Group financial statements10.9124Annual Report 2016Depreciation and amortizationDepreciation of property, plant and equipment andamortization of intangible assets, includingimpairments, are as follows:Philips GroupDepreciation and amortization1) in millions of EUR2014 - 20162014 2015 2016 Depreciation of property, plant andequipment592 582 606 Amortization of software32 48 56 Amortization of other intangible assets332 380 352 Amortization of development costs231 271 253 Depreciation and amortization1,187 1,281 1,267 1)Includes impairmentsDepreciation of property, plant and equipment isprimarily included in cost of sales. Amortization of thecategories of other intangible assets are reported inselling expenses for brand names and customerrelationships and are reported in cost of sales fortechnology based and other intangible assets.Amortization of development cost is included inresearch and development expenses.Shipping and handlingShipping and handling costs are included in cost ofsales and selling expenses in section 10.4, Consolidatedstatements of income, of this Annual Report. Furtherinformation on when costs are to be reported to cost ofsales or selling expenses can be found in note 1,Significant accounting policies.Advertising and promotionAdvertising and promotion costs are included in sellingexpenses in section 10.4, Consolidated statements ofincome, of this Annual Report.Audit feesThe table below shows the fees attributable to the fiscalyears 2014, 2015 and 2016 for services rendered by therespective Group auditors.Philips GroupFees in millions of EUR2014 - 20162014 2015 2016 Audit fees14.9 15.3 16.8 -consolidated financial statements9.6 9.8 12.1 -statutory financial statements5.3 5.5 4.7 Audit-related fees3.9 4.9 2.3 -acquisitions and divestments2.4 3.6 0.9 -sustainability assurance0.6 0.6 0.7 -other0.9 0.7 0.7 Tax fees0.2 1.1 0.0 -tax compliance services0.2 1.1 0.0 All other fees0.0 0.0 0.0 -other0.0 0.0 0.0 Fees 1)19.0 21.3 19.1 1)Fees charged by the Dutch organization of the Philips Group auditorwere EUR 9.8 million in 2016Impairment of goodwillIn 2016, goodwill impairment charges amounted to EUR3 million and mainly related to divested businesses inLighting. In 2015 and 2014, goodwill impairment chargesamounted to EUR nil million and EUR 3 million,respectively. Further information on goodwillmovement can be found in note 11, Goodwill.Other business income (expenses)Other business income (expenses) consists of thefollowing:Philips GroupOther business income (expenses) in millions of EUR2014 - 20162014 2015 2016 Result on disposal of businesses: -income7 4 4 -expense(2)(5)(7)Result on disposal of fixed assets: -income18 79 21 -expense(1)(9)(6)Result on other remaining business: -income38 54 43 -expense(271)(36)(28)Other business income (expenses)(211)87 27 Total other business income63 137 68 Total other business expense(274)(50)(41)In 2016 and 2015, the result on disposal of businesseswas mainly due to divestment of non-strategicbusinesses.In 2016 and 2015, the result on disposal of fixed assetswas mainly due to sale of real estate assets.In 2016 and 2015, the result on other remainingbusinesses mainly relates to non-core revenue andvarious legal matters.In 2014 remaining business expense mainly relates tocertain parts of the Cathode Ray Tube antitrustlitigation as mentioned in note 25, Contingent assetsand liabilities for which the Company concluded it wasable to make a reliable estimate of the cash outflow orwas able to reach a settlement with the relevantplaintiffs. For more details reference is made to note 19,Provisions - litigation provisions and note 25,Contingent assets and liabilities - legal proceedings.78Group financial statements10.9Annual Report 20161257Financial income and expensesPhilips GroupFinancial income and expenses in millions of EUR2014 - 20162014 2015 2016 Interest income39 48 49 Interest income from loans andreceivables22 21 17 Interest income from cash andcash equivalents17 27 32 Dividend income from available forsale financial assets4 6 4 Net gains from disposal of financialassets60 20 3 Net change in fair value of financialassets at fair value through profit orloss- 4 - Other financial income11 20 20 Financial income114 98 76 Interest expense(290)(350)(376)Interest on debt and borrowings(224)(271)(303)Finance charges under financelease contract(7)(7)(7)Interest expenses - pensions(59)(72)(66)Provision-related accretion andinterest(80)(35)39 Net foreign exchange losses(1)(11)(16)Impairment loss of financial assets(17)(46)(27)Net change in fair value of financialassets at fair value through profit orloss(6)- (4)Net change in fair value of financialliabilities at fair value through profitor loss(2)- - Other financial expenses(19)(25)(185)Financial expense(415)(467)(569)Financial income and expenses(301)(369)(493)Net financial income and expense showed a EUR 493million expense in 2016, which was 124 million higherthan in 2015. Net interest expense in 2016 was EUR 25million higher than in 2015, mainly driven by higherinterest expense resulting from higher average debt.The impairment charges in 2016 amounted to EUR 27million mainly due to Corindus Vascular Robotics.Lower provision-related accretion and interest in 2016is primarily due to the release of accrued interest as aresult of the settlement of the Masimo litigation. Otherfinancial expenses included financial charges related tothe early redemption of USD bonds in October 2016and January 2017 of EUR 91 million and EUR 62 millionrespectively.Interest expense in 2015 was EUR 60 million higher thanin 2014, mainly due to a weaker EUR against USD inrelation to interest expenses on USD bonds. The gainfrom disposal of financial assets in 2015 amounted toEUR 20 million, mainly from Assembléon, Silicon &Software Systems and other equity interest. In 2015impairment charges amounted to EUR 46 million.Provision-related accretion and interest in 2015primarily consisted of interest expense related to thejury verdict in the Masimo litigation, and accretionexpense associated with other discounted provisionsand other tax liabilities.Net financial income and expense showed a EUR 301million expense in 2014. Total financial income of EUR114 million included EUR 39 million of interest income.8Income taxesThe income tax expense of continuing operationsamounted to EUR 327 million (2015: EUR 239 million,2014: EUR 26 million).The components of income before taxes and incometax expense are as follows:Philips GroupIncome tax expense in millions of EUR2014 - 20162014 2015 2016 Netherlands665 229 119 Foreign(480)394 1,270 Income before taxes of continuingoperations185 623 1,389 Netherlands: Current tax (expense) benefit(12)8 10 Deferred tax (expense) benefit(29)- (95)Total tax (expense) benefit ofcontinuing operations (Netherlands)(41)8 (85)Foreign: Current tax (expense)(250)(242)(307)Deferred tax (expense) benefit265 (5)65 Total tax (expense) benefit ofcontinuing operations (foreign)15 (247)(242)Income tax expense of continuingoperations(26)(239)(327)Income tax expense of continuing operations excludesthe tax expense of the discontinued operations of EUR57 million (2015: EUR 54 million, 2014: EUR 11 million).The components of income tax expense of continuingoperations are as follows:Philips GroupCurrent income tax expense in millions of EUR2014 - 20162014 2015 2016 Current year tax (expense) benefit(241)(244)(302)Prior year tax (expense) benefit(21)10 5 Current tax (expense)(262)(234)(297)Group financial statements10.9126Annual Report 2016Philips GroupDeferred income tax expense in millions of EUR2014 - 20162014 2015 2016 Recognition of previouslyunrecognized tax loss and creditcarryforwards18 7 44 Tax loss and credit carryforwardsunrecognized(65)(86)(85)Tax assets relating to temporarydifferences recognized(unrecognized)(47)(31)85 Prior year tax (expense) benefit34 (7)2 Tax (expense) benefit due to tax ratechanges12 (19)3 Deferred tax (expense) benefitrelating to origination and reversal oftemporary differences, tax lossesand tax credits284 131 (79)Deferred tax (expense) benefit236 (5)(30)Philips’ operations are subject to income taxes invarious foreign jurisdictions. The statutory income taxrates varies up to 40.0%, which results in a differencebetween the weighted average statutory income taxrate and the Netherlands’ statutory income tax rate of25.0% (2015: 25.0%; 2014: 25.0%).A reconciliation of the weighted average statutoryincome tax rate to the effective income tax rate ofcontinuing operations is as follows:Philips GroupEffective income tax rate in %2014 - 20162014 2015 2016 Weighted average statutory incometax rate in %7.9 29.8 26.0 Increase (Decrease) in tax rateresulting from: -recognition of previouslyunrecognized tax loss and creditcarryforwards(9.6)(1.2)(3.2)-tax loss and credit carryforwardsunrecognized34.9 13.7 6.1 -tax assets relating to temporarydifferences (recognized)unrecognized25.5 4.9 (6.1)Non-deductible impairment charges1.8 0.1 0.1 Non-taxable income and taxincentives(107.5)(31.4)(7.4)Non-deductible expense51.6 20.5 8.2 Withholding and other taxes13.4 4.9 4.5 Tax rate changes(6.3)3.0 (0.2)Prior year tax expense (benefit)(30.8)(0.4)(0.5)Tax expense (benefit) due to othertax liabilities5.6 (5.9)(2.7)Others, net27.6 0.4 (1.3)Effective income tax rate14.1 38.4 23.5 The effective income tax rate was lower than theweighted average statutory income tax rate in 2016,mainly due to recognition of deferred tax assets andnon-taxable income, largely attributable to favorabletax regulations relating to R&D investments. Theseeffects were partly offset by non-deductible expenses.Deferred tax assets and liabilitiesNet deferred tax assets relate to the following balancesheet captions and tax loss carryforwards (including taxcredit carryforwards), of which the movements duringthe years 2016 and 2015 respectively are presented inthe tables below.Deferred tax assets are recognized for temporarydifferences, unused tax losses, and unused tax creditsto the extent that realization of the related tax benefitsis probable. The ultimate realization of deferred taxassets is dependent upon the generation of futuretaxable income in the countries where the deferred taxassets originated and during the periods when thedeferred tax assets become deductible. Managementconsiders the scheduled reversal of deferred taxliabilities, projected future taxable income, and taxplanning strategies in making this assessment.The net deferred tax assets of EUR 2,726 million (2015:EUR 2,594 million) consist of deferred tax assets of EUR2,792 million (2015: EUR 2,758 million) and deferred taxliabilities of EUR 66 million (2015: EUR 164 million). Thebelow table presents the amounts before and afterappropriate offsetting. Of the total deferred tax assetsof EUR 2,726 million at December 31, 2016 (2015: EUR2,758 million), EUR 2,054 million (2015: EUR 2,119million) is recognized in respect of entities in variouscountries where there have been tax losses in thecurrent or preceding period. Management’s projectionssupport the assumption that it is probable that theresults of future operations will generate sufficienttaxable income to utilize these deferred tax assets.At December 31, 2016 and 2015 the temporarydifferences associated with investments, includingpotential income tax consequences on dividends, forwhich no deferred tax liabilities are recognized,aggregate to EUR 685 million (2015: EUR 739 million).At December 31, 2016, available tax loss carryforwardsexpire as follows:Philips GroupExpiry years of net operating loss carryforwards in millions of EURTotal2017 2018 2019 2020 2021 2021/2025 later un-limi-ted 5,56410 - 56 132 31 2,492 809 2,034 The Company also has available tax creditcarryforwards, which expire as follows:Philips GroupExpiry years of tax credit carryforwards in millions of EURTotal2017 2018 2019 2020 2021 2021/2025 later un-limi-ted 2345 4 2 5 6 43 127 42 Group financial statements10.9Annual Report 2016127At December 31, 2016, net operating loss and tax creditcarryforwards for which no deferred tax assets havebeen recognized in the balance sheet, expire as follows:Philips GroupNet operating loss and tax credit carryforwards for which nodeferred tax asset has been recognized in millions of EURTotal2017 2018 2019 2020 2021 2021/2025 later un-limited 2,179- - 7 - 3 469 - 1,700 At December 31, 2016, the amount of deductibletemporary differences for which no deferred tax assethas been recognized in the balance sheet was EUR 868million (2015: EUR 139 million).Philips GroupDeferred tax assets and liabilities in millions of EUR2016Balance as ofJanuary 1, 2016 recognized inincomestatement other1)Balance as ofDecember 31,2016 Assets Liabilities Intangible assets(1,089)450 (37)(676)543 (1,219)Property, plant and equipment19 1 (10)10 64 (54)Inventories354 24 11 389 395 (6)Prepaid pensions(3)3 - - - - Other receivables51 21 43 115 128 (13)Other assets17 12 (6)23 33 (10)Provisions: - - - - -pensions569 (104)73 538 538 - -guarantees3 4 (1)6 6 - -termination benefits70 (34)(7)29 29 - -other postretirement benefits70 (2)(38)30 30 - -other provisions785 (11)58 832 881 (49)Other liabilities195 (26)(18)151 221 (70)Deferred tax assets on tax losscarryforwards (including tax creditcarryforwards)1,553 (368)94 1,279 1,279 - Set-off deferred tax positions- - - - (1,355)1,355 Net deferred tax assets2,594 (30)162 2,726 2,792 (66)1)Other includes the movements of assets and liabilities recognized in OCI, which includes foreign currency translation differences, and acquisitions anddivestments.Philips GroupDeferred tax assets and liabilities in millions of EUR2015Balance as ofJanuary 1, 2015 recognized inincomestatement other1)Balance as ofDecember 31,2015 Assets Liabilities Intangible assets(980)131 (240)(1,089)195 (1,284)Property, plant and equipment73 (50)(4)19 63 (44)Inventories311 10 33 354 360 (6)Prepaid pensions98 (142)41 (3)- (3)Other receivables49 - 2 51 57 (6)Other assets24 13 (20)17 31 (14)Provisions: -pensions562 (23)30 569 569 - -guarantees4 (1)- 3 3 - -termination benefits109 (40)1 70 71 (1)-other postretirement benefits71 1 (2)70 70 - -other provisions783 (3)5 785 805 (20)Other liabilities209 (33)19 195 216 (21)Deferred tax assets on tax losscarryforwards (including tax creditcarryforwards)1,040 132 381 1,553 1,553 - Set-off deferred tax positions (1,235)1,235 Net deferred tax assets2,353 (5)246 2,594 2,758 (164)1)Other includes the movements of assets and liabilities recognized in OCI, which includes foreign currency translation differences, and acquisitions anddivestments.Group financial statements10.9128Annual Report 2016Classification of the income tax payable and receivableis as follows:Philips GroupIncome tax payables and receivables in millions of EUR2015 - 20162015 2016 Income tax receivables114 154 Income tax receivables - under non-currentreceivables- - Income tax payables(116)(146)Income tax payables - under non-currentliabilities- - Tax risksPhilips is exposed to tax uncertainties. With regard tothese uncertainties a liability is recognized if, as a resultof a past event, Philips has an obligation that can beestimated reliably and it is probable that an outflow ofeconomic benefits will be required to settle theobligation. These uncertainties are presented as Othertax liabilities in note 22, Other liabilities and include,among others, the following:Transfer pricing uncertaintiesPhilips has issued transfer pricing directives, which arein accordance with international guidelines such asthose of the Organization of Economic Co-operationand Development. In order to reduce the transferpricing uncertainties, monitoring procedures are carriedout by Group Tax to safeguard the correctimplementation of the transfer pricing directives.Tax uncertainties on general and specificservice agreements and licensingagreementsDue to the centralization of certain activities (such asresearch and development, IT and group functions),costs are also centralized. As a consequence, thesecosts and/or revenues must be allocated to thebeneficiaries, i.e. the various Philips entities. For thatpurpose, service contracts such as intra-group serviceagreements and licensing agreements are signed witha large number of group entities. Tax authorities reviewthese intra-group service and licensing agreements,and may reject the implemented intra-group charges.Furthermore, buy in/out situations in the case of(de)mergers could affect the cost allocation resultingfrom the intragroup service agreements betweencountries. The same applies to the specific serviceagreements.Tax uncertainties due to disentanglementsand acquisitionsWhen a subsidiary of Philips is disentangled, or a newcompany is acquired, tax uncertainties may arise.Philips creates merger and acquisition (M&A) teams forthese disentanglements or acquisitions. In addition torepresentatives from the involved business, theseteams consist of specialists from various groupfunctions and are formed, among other things, toidentify tax uncertainties and to reduce potential taxclaims related to disentangled entities. Examples of taxuncertainties are: applicability of participationexemptions, cost allocation issues, and issues relatedto (non-)deductibility.Tax uncertainties due to permanentestablishmentsA permanent establishment may arise when operationsin a country involve a Philips organization in anothercountry, there is a risk that tax claims will arise in theformer country as well as in the latter country;potentially leading to double taxation.9Group financial statements10.9Annual Report 20161299Earnings per sharePhilips GroupEarnings per share in millions of EUR unless otherwise stated1)2014 - 20162014 2015 2016 Income from continuing operations 221 414 1,075 Income (loss) attributable to non-controlling interest (4) 14 43 Income from continuing operations attributable toshareholders 225 400 1,032 Income from Discontinued operations 190 245 416 Net income attributable to shareholders 415 645 1,448 Weighted average number of common sharesoutstanding (after deduction of treasury shares) duringthe year 915,192,683 916,086,943 918,015,863 Plus incremental shares from assumed conversions of: Options4,617,109 3,565,682 2,456,616 Performance shares614,010 2,479,923 6,985,509 Restricted share rights2,290,472 1,491,960 1,331,163 Dilutive potential common shares 7,521,591 7,537,565 10,773,289 Diluted weighted average number of shares (afterdeduction of treasury shares) during the year 922,714,274 923,624,508 928,789,152 Basic earnings per common share in EUR2) Income from continuing operations attributable toshareholders 0.25 0.44 1.12 Net income attributable to shareholders 0.45 0.70 1.58 Diluted earnings per common share in EUR2,3,4) Income from continuing operations attributable toshareholders 0.24 0.43 1.11 Net income attributable to shareholders 0.45 0.70 1.56 Dividend distributed per common share in euros 0.80 0.80 0.80 1)Shareholders in this table refer to shareholders of Koninklijke Philips N.V.2)The effect on income of convertible debentures affecting earnings per share is considered immaterial3)In 2016, 2015 and 2014, respectively 9 million, 12 million and 19 million securities that could potentially dilute basic EPS were not included in the computation ofdilutive EPS because the effect would have been antidilutive for the periods presented4)The dilutive potential common shares are not taken into account in the periods for which there is a loss, as the effect would be antidilutiveGroup financial statements10.910130Annual Report 201610Property, plant and equipmentPhilips GroupProperty, plant and equipment in millions of EUR2016land and buildings machinery andinstallations other equipment prepayments andconstruction inprogress total Balance as of January 1, 2016: Cost1,864 3,260 1,873 220 7,217 Accumulated depreciation(951)(2,525)(1,419)- (4,895)Book value913 735 454 220 2,322 Change in book value: Capital expenditures14 142 101 318 575 Assets available for use112 108 137 (357)- Depreciation(80)(257)(191)- (528)Impairments1)(25)(40)(13)- (78)Transfer (to) from assets classified asheld for sale1)(92)(4)(2)(2)(100)Translation differences and other12 (8)(40)- (36)Total changes(59)(59)(8)(41)(167)Balance as of December 31, 2016: Cost1,766 3,222 1,897 179 7,064 Accumulated depreciation(912)(2,546)(1,451)- (4,909)Book value854 676 446 179 2,155 1)For more information please refer to note 3, Discontinued operations and other assets classified as held for sale.Philips GroupProperty, plant and equipment in millions of EUR2015land and buildings machinery andinstallations other equipment prepayments andconstruction inprogress total Balance as of January 1, 2015: Cost1,803 3,127 1,745 169 6,844 Accumulated depreciation(931)(2,520)(1,298)- (4,749)Book value872 607 447 169 2,095 Change in book value: Capital expenditures13 113 62 387 575 Assets available for use59 139 140 (338)- Acquisitions- 107 2 - 109 Depreciation(83)(252)(196)- (531)Impairments(8)(27)(16)- (51)Transfer to assets classified as heldfor sale26 (10)- (2)14 Translation differences and other34 58 15 4 111 Total changes41 128 7 51 227 Balance as of December 31, 2015: Cost1,864 3,260 1,873 220 7,217 Accumulated depreciation(951)(2,525)(1,419)- (4,895)Book value913 735 454 220 2,322 Land with a book value of EUR 73 million at December31, 2016 (2015: EUR 142 million) is not depreciated.Property, plant and equipment includes financial leaseassets with a book value of EUR 271 million at December31, 2016 (2015: EUR 203 million).The expected useful lives of property, plant andequipment are as follows:Philips GroupUseful lives of property, plant and equipment in yearsBuildingsfrom 5 to 50 years Machinery and installationsfrom 3 to 20 years Other equipmentfrom 1 to 10 years 11Group financial statements10.9Annual Report 201613111GoodwillThe changes in 2015 and 2016 were as follows:Philips GroupGoodwill in millions of EUR2015 - 20162015 2016 Balance as of January 1: Cost9,151 10,704 Amortization and impairments(1,993)(2,181)Book value7,158 8,523 Changes in book value: Acquisitions644 140 Translation differences and other721 235 Balance as of December 31: Cost10,704 11,151 Amortization and impairments(2,181)(2,253)Book value8,523 8,898 In 2016, goodwill increased by EUR 124 million due tothe acquisition of Wellcentive and PathXL. The increaseof EUR 235 million is mainly due to translationdifferences which impacted the goodwill denominatedin USD.In 2015, goodwill increased by EUR 627 million due tothe acquisition of Volcano. The increase of EUR 721million is due to translation differences which impactedthe goodwill denominated in USD.For impairment testing, goodwill is allocated to (groupsof) cash-generating units (typically one level belowsegment level), which represent the lowest level atwhich the goodwill is monitored internally formanagement purposes.Goodwill allocated to the cash-generating units Image-Guided Therapy, Patient Care & Monitoring Solutions,Sleep & Respiratory Care and Professional isconsidered to be significant in comparison to the totalbook value of goodwill for the Group at December 31,2016. The amounts associated as of December 31, 2016,are presented below:Philips GroupGoodwill allocated to the cash-generating units in millions of EUR2015 - 20162015 2016 Sleep & Respiratory Care1,884 1,958 Image-Guided Therapy1,066 1,106 Patient Care & Monitoring Solutions1,452 1,506 Professional1,626 1,671 Other (units carrying a non-significantgoodwill balance)2,495 2,657 Book value8,523 8,898 The basis of the recoverable amount used in the annualimpairment tests for the units disclosed in this note isthe value in use. In the annual impairment testperformed in the fourth quarter of 2016, the estimatedrecoverable amounts of the cash-generating unitstested approximated or exceeded the carrying value ofthe units, therefore no impairment loss was recognized.Key assumptions - generalKey assumptions used in the impairment tests for theunits were sales growth rates, EBITA1) and the rates usedfor discounting the projected cash flows. These cashflow projections were determined using the RoyalPhilips and Philips Lighting managements’ internalforecasts that cover an initial period from 2017 to 2019.Projections were extrapolated with stable or declininggrowth rates for a period of 5 years, after which aterminal value was calculated. For terminal valuecalculation, growth rates were capped at a historicallong-term average growth rate.The sales growth rates and EBITA1) used to estimatecash flows are based on past performance, externalmarket growth assumptions and industry long-termgrowth averages. EBITA1) in all units mentioned in thisnote is expected to increase over the projection periodas a result of volume growth and cost efficiencies.Key assumptions and sensitivity analysis relating tocash-generating units to which a significant amountof goodwill is allocatedCash flow projections of Image-Guided Therapy,Patient Care & Monitoring Solutions, Sleep &Respiratory Care and Professional are based on the keyassumptions included in the table below, which wereused in the annual impairment test performed in thefourth quarter:Philips GroupKey assumptions in %2016compound sales growth rate1) initialforecastperiod extra-polationperiod2)used tocalculateterminalvalue3)pre-taxdiscountrates Image-GuidedTherapy7.1 5.6 2.7 12.1 Patient Care &MonitoringSolutions6.4 4.6 2.7 14.3 Sleep & RespiratoryCare6.8 4.6 2.7 12.6 Professional5.0 4.3 2.7 13.9 1)Compound sales growth rate is the annualized steady growth rate overthe forecast period2)Also referred to later in the text as compound long-term sales growthrate3)The historical long-term growth rate is only applied to the first year afterthe 5 year extrapolation period, after which no further growth isassumed for the terminal value calculation1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Group financial statements10.9132Annual Report 2016The assumptions used for the 2015 cash flowprojections were as follows:Philips GroupKey assumptions in %2015compound sales growth rate1) initialforecastperiod extra-polationperiod2)used tocalculateterminalvalue3)pre-taxdiscountrates Image-GuidedTherapy3.0 2.4 2.7 12.2 Patient Care &MonitoringSolutions6.0 4.8 2.7 13.4 Sleep & RespiratoryCare6.9 5.6 2.7 11.5 Professional5.0 5.1 2.7 15.1 1)Compound sales growth rate is the annualized steady growth rate overthe forecast period2)Also referred to later in the text as compound long-term sales growthrate3)The historical long-term growth rate is only applied to the first year afterthe 5 year extrapolation period, after which no further growth isassumed for the terminal value calculationAmong the units mentioned, in 2016 Professional hadthe lowest excess of the recoverable amount over thecarrying amount. The headroom of Professional wasestimated at EUR 50 million. The following changescould, individually, cause the value in use to fall to thelevel of the carrying value:Philips GroupSensitivity analysis2016increase inpre-taxdiscount rate,basis points decrease incompoundlong-termsales growthrate, basispoints decrease interminal valueamount, % Professional20 60 2.6 The results of the annual impairment test of Image-Guided Therapy, Patient Care & Monitoring Solutionsand Sleep & Respiratory Care indicate that a reasonablypossible change in key assumptions would not causethe value in use to fall to the level of the carrying value.Additional information relating to cash-generatingunits to which a non-significant amount relative tothe total goodwill is allocatedIn addition to the significant goodwill recorded at theunits mentioned above, Home Monitoring is sensitiveto fluctuations in the assumptions as set out above.Based on the most recent impairment test, it was notedthat the headroom for the cash-generating unit HomeMonitoring was EUR 50 million. An increase of 160points in the pre-tax discounting rate, a 390 basispoints decline in the compound long-term sales growthrate or a 22% decrease in terminal value would,individually, cause its value to fall to the level of itscarrying value. The goodwill allocated to HomeMonitoring at December 31, 2016 amounts to EUR 34million.12Group financial statements10.9Annual Report 201613312Intangible assets excluding goodwillThe changes were as follows:Philips GroupIntangible assets excluding goodwill in millions of EUR2016other intangibleassets productdevelopment productdevelopmentconstruction inprogress software total Balance as of January 1, 2016: Cost6,539 1,668 522 522 9,251 Amortization/ impairments(3,993)(1,167)(31)(367)(5,558)Book value2,546 501 491 155 3,693 Changes in book value: Additions46 - 318 56 420 Acquisitions37 - - - 37 Amortization(351)(229)- (55)(635)Impairments(1)(20)(4)(2)(27)Assets available for use- 270 (270)- - Translations differences37 15 7 5 64 Total changes(232)36 51 4 (141)Balance as of December 31, 2016: Cost6,725 1,899 578 580 9,782 Amortization/ impairments(4,411)(1,362)(36)(421)(6,230)Book value2,314 537 542 159 3,552 Philips GroupIntangible assets excluding goodwill in millions of EUR2015other intangibleassets productdevelopment productdevelopmentconstruction inprogress software total Balance as of January 1, 2015: Cost5,721 1,447 406 446 8,020 Amortization/ impairments(3,371)(946)(18)(317)(4,652)Book value2,350 501 388 129 3,368 Changes in book value: Additions50 - 315 70 435 Acquisitions316 - - - 316 Amortization(372)(230)- (45)(647)Impairments(8)(26)(15)(3)(52)Assets available for use- 226 (226)- - Translations differences210 30 29 4 273 Total changes196 - 103 26 325 Balance as of December 31, 2015: Cost6,539 1,668 522 522 9,251 Amortization/ impairments(3,993)(1,167)(31)(367)(5,558)Book value2,546 501 491 155 3,693 The additions for 2016 contain internally generatedassets of EUR 52 million (2015: EUR 56 million) forsoftware. The acquisitions through businesscombinations in 2016 mainly consist of the acquiredintangible assets of Wellcentive.The amortization of intangible assets is specified innote 6, Income from operations.Group financial statements10.91314134Annual Report 2016Other intangible assets consist of:Philips GroupAmortization of other intangible assets in millions of EUR2015 -2016Balance as of December31, 2015 Balance as of December31, 2016 gross amortization/impairments gross amortization/impairments Brand names1,102 (582)1,088 (633)Customerrelationships3,324 (1,925)3,429 (2,188)Technology1,977 (1,373)2,074 (1,491)Other136 (113)134 (99)Otherintangibles6,539 (3,993)6,725 (4,411)The estimated amortization expense for otherintangible assets for each of the next five years is:Philips GroupEstimated amortization expense for other intangible assetsin years2017363 2018329 2019314 2020273 2021248 The expected useful lives of the intangible assetsexcluding goodwill are as follows:Philips GroupExpected useful lives of intangible assets excluding goodwillin yearsBrand names2-20 Customer relationships2-25 Technology3-20 Other1-8 Software1-10 Product development3-7 The weighted average expected remaining life of otherintangible assets is 7.9 years as of December 31, 2016(2015: 8.4 years).At December 31, 2016 the carrying amount of customerrelationships of Sleep & Respiratory Care was EUR 427million with a remaining amortization period of 7.2 years(2015: EUR 466 million; 8.2 years).13Other financial assetsThe changes during 2016 were as follows:Philips GroupOther non-current financial assets in millions of EUR2016availa-ble-for-sale fi-nancialassets loansand re-ceiva-bles held-to-ma-turityinvest-ments finan-cial as-sets atfair val-uethroughprofit orloss total Balance as ofJanuary 1, 2016232 222 2 33 489 Changes: Reclassifica-tions(56)(100) - (156)Acquisitions/additions44 26 - 3 73 Sales/redemptions(3)(22) (1)(26)Impairment(27)- - (27)Valueadjustments(19)(2) (8)(29)Other1 10 - - 11 Balance as ofDecember 31,2016172 134 2 27 335 Available-for-sale financial assetsThe Company’s investments in available-for-salefinancial assets mainly consist of investments incommon shares of companies in various industries. Theline Acquisitions/additions mainly relates to capitalcalls for certain investment funds.Loans and receivablesThe reclassification line represents loans transferred toCurrent financial assets and mainly related to loans toTPV Technology Limited for the amount of EUR 91million.14Other assetsOther non-current assetsOther non-current assets in 2016 relates to prepaidpension costs of EUR 1 million (2015: EUR 3 million) andprepaid expenses of EUR 91 million (2015: EUR 65million).Other current assetsOther current assets include EUR 228 million (2015: EUR214 million) accrued income, mainly related toDiagnosis & Treatment businesses and Connected Care& Health Informatics businesses, and EUR 258 million(2015: EUR 230 million) prepaid expense mainly relatedto Diagnosis & Treatment businesses and ConnectedCare & Health Informatics businesses.151617Group financial statements10.9Annual Report 201613515InventoriesInventories are summarized as follows:Philips GroupInventories in millions of EUR2015 - 20162015 2016 Raw materials and supplies1,068 1,040 Work in process475 446 Finished goods1,920 1,906 Inventories3,463 3,392 The write-down of inventories to net realizable valuewas EUR 108 million in 2016 (2015: EUR 170 million). Thewrite-down is included in cost of sales.16ReceivablesNon-current receivablesNon-current receivables are associated mainly withcustomer financing in Diagnosis & Treatmentbusinesses amounting to EUR 47 million (2015: EUR 58million) and insurance receivables in Legacy Items inthe US amounting to EUR 55 million (2015: EUR 59million).Current receivablesThe accounts receivable, net, per segment are asfollows:Philips GroupAccounts receivables-net in millions of EUR2015 - 20162015 2016 Personal Health1,143 1,266 Diagnosis & Treatment1,454 1,476 Connected Care & Health Informatics604 664 HealthTech Other78 81 Lighting1,448 1,477 Legacy Items- 28 Accounts receivable-net4,727 4,992 The aging analysis of accounts receivable, net, is set outbelow:Philips GroupAging analysis in millions of EUR2015 - 20162015 2016 Current4,003 4,273 Overdue 1-30 days237 267 Overdue 31-180 days337 310 Overdue > 180 days150 142 Accounts receivable-net4,727 4,992 The above net accounts receivable represent currentand overdue but not impaired receivables.The changes in the allowance for doubtful accountsreceivable are as follows:Philips GroupAllowance for doubtful accounts receivable in millions of EUR2014 - 20162014 2015 2016 Balance as of January 1204 227 301 Additions charged to expense48 78 76 Deductions from allowance1)(46)(25)(64)Other movements21 21 5 Balance as of December 31227 301 318 1)Write-offs for which an allowance was previously providedThe allowance for doubtful accounts receivable hasbeen primarily established for receivables that are pastdue.Included in the above balances as per December 31,2016 are allowances for individually impairedreceivables of EUR 289 million (2015: EUR 272 million;2014: EUR 200 million).17EquityCommon sharesAs of December 31, 2016, the issued and fully paid sharecapital consists of 929,644,864 common shares, eachshare having a par value of EUR 0.20. (December 31,2015: 931,130,387; December 31, 2014: 934,819,413).Options, restricted and performance sharesThe Company has granted stock options on its commonshares and rights to receive common shares in thefuture (see note 27, Share-based compensation).Treasury sharesIn connection with the Company’s share repurchaseprograms, shares which have been repurchased andare held in treasury for (i) delivery upon exercise ofoptions, performance and restricted share programs,and (ii) capital reduction purposes, are accounted for asa reduction of shareholders’ equity. Treasury shares arerecorded at cost, representing the market price on theacquisition date. When issued, shares are removedfrom treasury shares on a first-in, first-out (FIFO) basis.When treasury shares are reissued under theCompany’s option plans, the difference between thecost and the cash received is recorded in retainedearnings. When treasury shares are reissued under theCompany’s share plans, the difference between themarket price of the shares issued and the cost isrecorded in retained earnings, the market price isrecorded in capital in excess of par value.Dividend withholding tax in connection with theCompany’s purchase of treasury shares for capitalreduction purposes is recorded in retained earnings.The following table shows the movements in theoutstanding number of shares over the last three years:Group financial statements10.9136Annual Report 2016Philips GroupOutstanding number of shares in number of shares2014 - 20162014 2015 2016 Balance as of January 1913,337,767 914,388,869 917,103,586 Dividend distributed18,811,534 17,671,990 17,344,462 Purchase of treasury shares(28,537,921)(20,296,016)(25,193,411)Re-issuance of treasury shares10,777,489 5,338,743 13,181,926 Balance as of December 31914,388,869 917,103,586 922,436,563 The following transactions took place resulting from employee option and share plans:Philips GroupEmployee option and share plan transactions2014 - 20162014 2015 2016 Shares acquired7,254,606 8,601,426 Average market priceEUR 24.53 EUR 24.73 Amount paidEUR 178 million EUR 213 million Shares delivered10,777,489 5,338,743 13,181,926 Average price (FIFO)EUR 30.26 EUR 30.35 EUR 25.86 Cost of delivered sharesEUR 326 million EUR 162 million EUR 341 million Total shares in treasury at year-end17,127,544 11,788,801 7,208,301 Total costEUR 470 million EUR 308 million EUR 181 million In order to reduce share capital, the following transactions took place:Philips GroupShare capital transactions2014 - 20162014 2015 2016 Shares acquired21,283,315 20,296,016 16,591,985 Average market priceEUR 23.95 EUR 24.39 EUR 23.84 Amount paidEUR 510 million EUR 495 million EUR 396 million Reduction of capital stock (shares)21,837,910 21,361,016 18,829,985 Reduction of capital stockEUR 533 million EUR 517 million EUR 450 million Total shares in treasury at year-end3,303,000 2,238,000 Total costEUR 77 million EUR 55 million Share purchase transactions related to employeeoption and share plans, as well as transactions relatedto the reduction of share capital, involved a cashoutflow of EUR 606 million, which includes the impactof taxes. A cash inflow of EUR 80 million from treasuryshares mainly includes settlements of share-basedcompensation plans.Share call optionsDuring 2016 Philips bought EUR and USD-denominated call options to hedge commitmentsunder share-based compensation plans.For EUR-denominated call options, option premiumsamounting to EUR 64 million (involving 9,393,779options) were deducted from Retained earnings andwere settled in Royal Philips shares held by theCompany representing a historical cost of EUR 77million based on a FIFO method (involving 2,667,203shares).For USD-denominated call options, option premiumsamounting to EUR 35 million (involving 5,635,360options) were deducted from Retained earnings andwere settled in Royal Philips shares held by theCompany representing a historical cost of EUR 32million based on a FIFO method (involving 1,375,803shares).The difference between the option premiums and thehistorical cost of Royal Philips shares was recorded inRetained earnings. Subsequently, in 2016, theCompany sold 837,913 EUR-denominated call optionsagainst the same number of Royal Philips shares andan additional EUR 13 million cash payment to the buyerof the call options.Group financial statements10.9Annual Report 2016137Philips GroupOutstanding call options2016exercise priceoptions intrinsicvalue inmillions weightedaverageremainingcontractualterm EUR-denominated 10-152,530,968 37 4.6 yrs 15-201,063,968 15 5.1 yrs 20-254,960,930 30 3.3 yrs Outstanding sharecall options8,555,866 82 3.9 yrs USD-denominated 15-201,896,597 22 4.6 yrs 20-25424,322 4 5.0 yrs 25-301,822,875 2 4.3 yrs 30-351,491,566 - 3.0 yrs Outstanding sharecall options5,635,360 28 4.1 yrs Dividend distribution2016In June 2016, Philips settled a dividend of EUR 0.80 percommon share, representing a total value of EUR 732million including costs. Shareholders could elect for acash dividend or a share dividend. Approximately 55%of the shareholders elected for a share dividend,resulting in the issuance of 17,344,462 new commonshares. The settlement of the cash dividend involved anamount of EUR 330 million (including costs).A proposal will be submitted to the 2017 AnnualGeneral Meeting of Shareholders to pay a dividend ofEUR 0.80 per common share, in cash or shares at theoption of the shareholders, against the net income ofthe Company for 2016.2015In June 2015, Philips settled a dividend of EUR 0.80 percommon share, representing a total value of EUR 730million including costs. Shareholders could elect for acash dividend or a share dividend. Approximately 59%of the shareholders elected for a share dividend,resulting in the issuance of 17,671,990 new commonshares. The settlement of the cash dividend involved anamount of EUR 298 million (including costs).2014In June 2014, Philips settled a dividend of EUR 0.80 percommon share, representing a total value of EUR 729million including costs. Shareholders could elect for acash dividend or a share dividend. Approximately 60%of the shareholders elected for a share dividend,resulting in the issuance of 18,811,534 new commonshares. The settlement of the cash dividend involved anamount of EUR 293 million (including costs).Limitations in the distribution ofshareholders’ equityAs at December 31, 2016, pursuant to Dutch law, certainlimitations exist relating to the distribution ofshareholders’ equity of EUR 2,181 million. Suchlimitations relate to common shares of EUR 186 million,as well as to legal reserves required by Dutch lawincluded under retained earnings of EUR 715 million,unrealized currency translation differences of EUR1,234 million, available-for-sale financial assets of EUR36 million and unrealized gains related to cash flowhedges of EUR 10 million.The legal reserve required by Dutch law of EUR 715million included under retained earnings relates to anylegal or economic restrictions on the ability of affiliatedcompanies to transfer funds to the parent company inthe form of dividends.As at December 31, 2015, these limitations indistributable amounts were EUR 2,274 million andrelated to common shares of EUR 186 million, as well asto legal reserves required by Dutch law included underretained earnings of EUR 958 million, revaluationreserve of EUR 4 million, unrealized currencytranslation differences of EUR 1,058 million, available-for-sale financial assets of EUR 56 million andunrealized gains related to cash flow hedges of EUR 12million.Non-controlling interestsNon-controlling interests relate to minority stakes heldby third parties in consolidated group companies. As ofDecember 31, 2016, Non-controlling interests mainlyrelate to Philips Lighting (Non-controlling interest28.775%) and General Lighting Company (Non-controlling interest 49%). For further details referenceis made to note 5, Interests in entities.Net income attributable to Non-controlling interestsamounted to EUR 43 million (2015: EUR 14 million).Objectives, policies and processes formanaging capitalPhilips manages capital based upon the GAAPmeasures, net cash provided by operating activities andnet cash used for investing activities and, the non-GAAP measures net operating capital (NOC) and netdebt1). The definition of these non-GAAP measures anda reconciliation to the GAAP measures is includedbelow. The Company believes that an understanding of thePhilips Group’s financial condition is enhanced by thedisclosure of NOC, as this figure is used by Philips’management to evaluate the capital efficiency of thePhilips Group and its operating segments. NOC isdefined as: total assets excluding assets classified asheld for sale less: (a) cash and cash equivalents, (b)deferred tax assets, (c) other non-current financialassets and current financial assets, (d) investments inassociates, and after deduction of: (e) long-termGroup financial statements10.918138Annual Report 2016provisions and short-term provisions, (f) accounts andnotes payable, (g) accrued liabilities, (h) income taxpayable, (i) non-current derivative financial liabilitiesand current derivative financial liabilities and (j) othernon-current liabilities and other current liabilities.Net debt1) is defined as the sum of long and short-termdebt minus cash and cash equivalents. The net debt1)position as a percentage of the sum of group equity(shareholders’ equity and non-controlling interests)and net debt1) is presented to express the financialstrength of the Company. This measure is used byTreasury management of the Company and investmentanalysts and is therefore included in the disclosure. Ournet debt1) position is managed in such a way that weexpect to retain a strong investment grade credit rating.Furthermore, the Group’s aim when managing the netdebt1) position is dividend stability and a pay-out ratioof 40% to 50% of continuing net income.Philips GroupNet operating capital composition in millions of EUR2014 - 20162014 2015 2016 Intangible assets10,526 12,216 12,450 Property, plant and equipment2,095 2,322 2,155 Remaining assets1)9,041 9,423 9,766 Provisions(4,517)(4,243)(3,606)Other liabilities2)(8,307)(8,622)(8,992)Net operating capital8,838 11,096 11,773 1)Remaining assets are comprised of non-current receivables, non-current derivative financial assets, other non-current assets, inventories, other current assets,current derivative financial assets, income tax receivable and receivables.2)Other liabilities are comprised of non-current derivative financial liabilities, other non-current liabilities, derivative financial liabilities, income tax payable,accounts and notes payable, accrued liabilities and other current liabilities.Philips GroupComposition of net debt and group equity2) in millions of EUR unless otherwise stated2014 - 20162014 2015 2016 Long-term debt3,712 4,095 4,021 Short-term debt392 1,665 1,585 Total debt4,104 5,760 5,606 Cash and cash equivalents1,873 1,766 2,334 Net debt1)2,231 3,994 3,272 Shareholders’ equity10,867 11,662 12,601 Non-controlling interests101 118 907 Group equity10,968 11,780 13,508 Net debt and group equity2)13,199 15,774 16,780 Net debt divided by net debt and group equity (in %)2)17% 25% 19% Group equity divided by net debt and group equity (in %)2)83% 75% 81% Net debt and group equity ratio2)17:83 25:75 19:81 1)Total debt less cash and cash equivalents2)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparable GAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual ReportThe decline in net debt1) in 2016, was mainly driven byan improved cash position of the Company. In 2015,total debt increased by EUR 1,656 million. Newborrowings of EUR 1,335 million were mainly due to ashort-term bridge loan used for the Volcano acquisitionwhile repayments amounted to EUR 104 million. Otherchanges resulting from consolidation and currencyeffects led to an increase of EUR 425 million.18DebtRoyal Philips has a USD 2.5 billion Commercial PaperProgramme and a EUR 1.8 billion committed revolvingcredit facility that can be used for general grouppurposes and as a backstop of its Commercial PaperProgramme and will mature in February 2018. As ofDecember 31, 2016, Royal Philips did not have anyloans outstanding under either facility. Royal Philips’debt instruments and the conditions applicablethereto, which include, but are not limited to, theaforementioned undrawn revolving credit facility,certain bank facilities, the aforementioned CommercialPaper Programme and the indentures applicable to theUSD Bonds contain customary and general conditions.These conditions apply to Royal Philips and itssubsidiaries (entities which are (in)directly controlledby Royal Philips or of which Royal Philips (in)directlyowns more than 50% of the voting stock). In someinstances, such conditions are limited to materialsubsidiaries of Royal Philips (i.e. subsidiaries thatexceed certain quantitative thresholds). As per 311)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparableGAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Group financial statements10.9Annual Report 2016139December 2016, Philips Lighting and/or its subsidiariesdo, in some instances, qualify as such (material)subsidiaries covered by such conditions. An example ofsuch condition is the prohibition to any subsidiary ofRoyal Philips, including Philips Lighting and itssubsidiaries, from incurring any financial indebtednessoutside of the group, subject to a so-called “generalbasket” exemption of 30% of shareholders’ equity. Amaterial violation of this condition constitutes an eventof default under the aforementioned credit/ bankfacilities.Furthermore, nonpayment on the due date oracceleration of financial indebtedness of a materialsubsidiary, such as Philips Lighting with respect to theIPO Financing or cancellation or suspension of anycommitment thereunder as a result of an event ofdefault, in each case of at least EUR 40 million (in caseof the undrawn revolving credit facility) or EUR 50million (in case of a EUR 200 million drawn bank facility)also constitutes an event of default under thosefacilities.As per 31 December 2016 Royal Philips was not inbreach of the aforementioned conditions.In May 2016, Philips Lighting entered into a five-yearterm loan facility agreement. The amounts of the termfacility are EUR 740 million and USD 500 million andhave been fully drawn to replace intra-group financingfrom Royal Philips.In addition, Philips Lighting has a five-year committedrevolving credit facility of EUR 500 million which willmature in May 2021. As of December 31, 2016, PhilipsLighting did not have any amounts outstanding underthis facility.Philips Lighting’s Term and Revolving Credit FacilitiesAgreement include a financial covenant which providesthat Philips Lighting must maintain a net leverage rationot greater than 3:1 for any test period ending on or afterDecember 31, 2016. As at 31 December 2016, this ratiowas 0.5 which is compliant with the conditions of thecovenant. In addition, the Term and Revolving CreditFacilities Agreement also contains customaryundertakings. These undertakings include, amongothers, a negative pledge that provides that (subject tocertain exceptions) no member of the Philips Lightinggroup may grant security over Philips Lighting’s assetswithout the consent of the lenders, and a restriction onsubsidiaries of Philips Lighting (other than the obligors)incurring additional financial indebtedness. There arealso restrictions (subject to certain exceptions andthresholds) on engaging in acquisitions, disposals andreorganizations. The facilities are guaranteed by PhilipsLighting and certain subsidiaries of Philips Lightingincorporated in Belgium, France, Germany, Hungary,the Netherlands, the People’s Republic of China,Poland, Spain, the United Kingdom and the UnitedStates.Long-term debtPhilips GroupLong-term debt in millions of EUR unless otherwise stated2015 - 2016(range of)interest rates average rateof interest amountoutstandingin 2016 amount duein 1 year amount dueafter 1 year amount dueafter 5 years averageremainingterm (inyears) amountoutstandingin 2015 USD bonds3.8 - 7.8% 5.5% 3,608 1,184 2,424 2,424 9.6 3,733 Bank borrowings0.0-11.0% 1.0% 1,470 69 1,401 1 4.3 259 Other long-termdebt0.0 - 7.0% 4.0% 39 37 2 1 1.3 42 Institutionalfinancing 5,117 1,290 3,827 2,426 4,034 Finance leases0 - 21.1% 3.0% 279 85 194 28 3.5 211 Long-term debt 4.1% 5,396 1,375 4,021 2,454 7.8 4,245 Correspondingdata of previousyear 5.2% 4,245 150 4,095 2,831 10.7 3,860 Group financial statements10.919140Annual Report 2016The following amounts of long-term debt as ofDecember 31, 2016, are due in the next five years:Philips GroupLong-term debts due in the next five years in millions of EUR2015 - 201620171,375 2018115 2019106 202078 20211,268 Long term debt2,942 Corresponding amount of previous year1,414 Philips GroupUnsecured USD Bonds in millions of EUR unless otherwise stated2015 - 2016 effectiverate 2015 2016 Due 5/15/25; 7 3/4%7.429% 91 60 Due 6/01/26; 7 1/5%6.885% 152 130 Due 5/15/25; 7 1/8%6.794% 94 80 Due 3/11/18; 5 3/4%1)2)6.066% 1,144 1,187 Due 3/11/38; 6 7/8%2)7.210% 915 758 Due 3/15/22; 3 3/4%2)3.906% 915 949 Due 3/15/42; 5%2)5.273% 458 475 Adjustments3) (36)(31)Unsecured USD Bonds 3,733 3,608 1)In December 2016, Royal Philips has delivered a notice of redemptionfor the bond due in 2018 in the aggregate principal amount of USD 1,250million for redemption in January 2017.2)The provisions applicable to these bonds, issued in March 2008 and inMarch 2012, contain a ‘Change of Control Triggering Event’. If theCompany would experience such an event with respect to a series ofcorporate bonds, the Company may be required to offer to purchase thebonds of the series at a purchase price equal to 101% of the principalamount, plus accrued and unpaid interest, if any.3)Adjustments relate to issued bond discounts, transaction costs and fairvalue adjustments for interest rate derivativesIn October 2016, the principal amounts of USD bondsdue 2025, 2026, 2038 were partially redeemed, whichinvolved an aggregated amount of USD 285 million.This resulted in financial charges of EUR 91 million paidin 2016.In December 2016, Royal Philips delivered a notice ofredemption to the holders of the outstanding 5.750%Notes due 2018 in the aggregate principal amount ofUSD 1,250 million for redemption in January 2017. Thisresulted in financial charges of EUR 62 million in 2016.For further information, refer to note 31, SubsequenteventsShort-term debtPhilips GroupShort-term debt in millions of EUR2015 - 20162015 2016 Short-term bank borrowings1,510 207 Other short-term loans5 3 Current portion of long-term debt150 1,375 Short-term debt1,665 1,585 During 2016, the weighted average interest rate on thebank borrowings was 5.4% (2015: 1.6%). The increasewas mainly driven by the repayment of the bridge loanwith low interest rate used for the Volcano acquisition.19ProvisionsPhilips GroupProvisions in millions of EUR2015 - 20162015 2016 long-term short-term total long-term short-term total Post-employmentbenefit(see note 20)1)2,140 - 2,140 1,996 - 1,996 Productwarranty67 222 289 66 193 259 Environmentalprovisions278 57 335 252 69 321 Restructuring-relatedprovisions69 228 297 27 174 201 Litigationprovisions518 60 578 40 56 96 Otherprovisions399 205 604 545 188 733 Provisions3,471 772 4,243 2,926 680 3,606 1)Adjusted to reflect a reclassification of net defined-benefit obligationsinto Long-term provisions as referred to in note 1, Significant accountingpolicies.Product warrantyThe provisions for product warranty reflect theestimated costs of replacement and free-of-chargeservices that will be incurred by the Company withrespect to products sold. The Company expects theprovisions to be utilized mainly within the next year.Philips GroupProvisions for product warranty in millions of EUR2014 - 20162014 2015 2016 Balance as of January 1266 302 289 Changes: Additions332 327 325 Utilizations(316)(357)(357)Translation differences and other20 17 2 Balance as of December 31302 289 259 Environmental provisionsThe environmental provisions include accrued costsrecorded with respect to environmental remediation invarious countries. In the United States, subsidiaries ofthe Company have been named as potentiallyresponsible parties in state and federal proceedings forthe clean-up of certain sites.Provisions for environmental remediation can changesignificantly due to the emergence of additionalinformation regarding the extent or nature of thecontamination, the need to utilize alternativetechnologies, actions by regulatory authorities as wellas changes in judgments and discount rates.Group financial statements10.9Annual Report 2016141Philips GroupEnvironmental provisions in millions of EUR2014 - 20162014 2015 2016 Balance as of January 1311 360 335 Changes: Additions29 27 18 Utilizations(23)(24)(24)Releases(15)(36)(36)Changes in discount rate30 (7)11 Accretion8 7 7 Translation differences and other20 8 10 Balance as of December 31360 335 321 The release of the provisions in 2016 originates fromadditional insights in relation to factors like theestimated cost of remediation, changes in regulatoryrequirements and efficiencies in completion of varioussite work phases.For more details on the environmental remediationreference is made to note 25, Contingent assets andliabilities.Approximately half of these provisions are expected tobe utilized within the next five years. The remainingportion relates to longer-term remediation activities.Restructuring-related provisionsPhilips GroupRestructuring-related provisions in millions of EUR2016Jan. 1,2016 addi-tions uti-liza-tions relea-ses otherchanges1)Dec.31,2016 PersonalHealth32 7 (29)(2)(3)5 Diagnosis &Treatment28 11 (19)(6)(1)13 ConnectedCare &HealthInformatics21 11 (14)(6)1 13 HealthTechOther38 35 (16)(19)(1)37 Lighting178 95 (118)(27)5 133 LegacyItems- (1)(1)(1)3 - PhilipsGroup297 158 (197)(61)4 201 1)Other changes primarily relate to translation differences andreclassifications to liabilities associated with assets held for sale.In 2016, restructuring projects at HealthTech Othermainly took place in the Netherlands.In 2016 the most significant restructuring projects wererelated to manufacturing footprint rationalization andsimplification of the business structure in Lighting. Therestructuring projects mainly took place in France andBelgium. The release of the provisions mainly originatesfrom lower than expected severance payments fromthe manufacturing footprint rationalization projects.The Company expects the provisions will be utilizedmainly within the next year.2015The movements in the provisions for restructuring in2015 by segment are presented as follows:Philips GroupRestructuring-related provisions in millions of EUR2015Jan. 1,2015 addi-tions uti-liza-tions relea-ses otherchanges1)Dec.31,2015 PersonalHealth13 30 (7)(4)- 32 Diagnosis &Treatment29 30 (24)(7)- 28 ConnectedCare &HealthInformatics16 20 (12)(3)- 21 HealthTechOther87 25 (32)(41)(1)38 Lighting235 89 (114)(33)1 178 LegacyItems- - - - - - PhilipsGroup380 194 (189)(88)- 297 1)Other changes primarily relate to translation differences and transfersbetween segmentsIn 2015, restructuring projects at Diagnosis & Treatmentbusinesses, Connected Care & Health Informatics andHealthTech Other mainly took place in the US andFrance.Personal Health restructuring projects were mainly inItaly.The most significant restructuring projects were mainlyrelated to the industrial footprint rationalizationprojects in Lighting, the largest of which took place inFrance and Indonesia.HealthTech Other restructuring projects were mainlyrelated to Group and Regional organizations andcentered primarily in France and the Netherlands.The release mainly results from unforeseen changes tothe IT restructuring plan in 2015.Group financial statements10.9142Annual Report 20162014The movements in the provisions for restructuring in2014 are presented by segment as follows:Philips GroupRestructuring-related provisions in millions of EUR2014Jan. 1,2014 addi-tions uti-liza-tions relea-ses otherchanges1)Dec.31,2014 PersonalHealth22 9 (11)(7)- 13 Diagnosis &Treatment10 39 (15)(6)1 29 ConnectedCare &HealthInformatics6 24 (10)(4)- 16 HealthTechOther19 83 (12)(4)1 87 Lighting146 209 (94)(17)(9)235 LegacyItems- - - 1 (1)- PhilipsGroup203 364 (142)(37)(8)380 1)Other changes primarily relate to translation differences and transfersbetween segmentsIn 2014, restructuring projects at Diagnosis & Treatmentbusinesses and Connected Care & Health Informaticsbusinesses mainly took place in the US and theNetherlands.Personal Health businesses restructuring projects weremainly in the Netherlands.The most significant restructuring projects related toLighting and HealthTech Other and were driven byindustrial footprint rationalization and the Accelerate!transformation program.Restructuring projects at Lighting mainly took place inBelgium, the Netherlands and France.HealthTech Other restructuring projects were mainlyrelated to IT and group and country overheads andcentered primarily on the Netherlands, US and Belgium.Litigation provisionsThe Company and certain of its group companies andformer group companies are involved as a party in legalproceedings, including regulatory and othergovernmental proceedings.Philips GroupLitigation provisions in millions of EUR2014 - 20162014 2015 2016 Balance as of January 1236 653 578 Changes: Additions563 66 31 Utilizations(32)(25)(297)Releases(23)(25)(98)Reclassifications(138)(161)(141)Changes in discount rate- 8 5 Accretion6 12 8 Translation differences41 50 10 Balance as of December 31653 578 96 The most significant proceedingsThe majority of the movements in the above schedulerelated to the Masimo Corporation (Masimo) patentlitigation and Cathode Ray Tube (CRT) antitrustlitigation.Masimo Corporation (Masimo) patent litigationOn October 1, 2014, a jury awarded USD 467 million toMasimo Corporation (Masimo) in a trial held before theUnited States District Court for the District of Delaware.The decision by the jury completed an initial phase ofa three-phase trial regarding a first lawsuit started byMasimo against the Company in 2009. A secondlawsuit was started by Masimo against the Company in2016. Between the two lawsuits, claims were raised bythe parties against each other relating to patentinfringement and antitrust violations in the field of pulseoximetry.On November 5, 2016, the Company and Masimoentered into a wide-ranging, multi-year businesspartnership involving both companies’ innovations inpatient monitoring and therapy solutions, ending allpending lawsuits between the two companies,including releasing the Company from paying the USD467 million jury verdict.The Company and Masimo also have agreed to:•a USD 300 million cash payment by Philips toMasimo;•a one-time donation to the Masimo Foundation ofUSD 5 million to support the Masimo Foundation’sproject on patient safety and better outcomes;•commitments of the Company with respect to salestargets, marketing and product integration over thecoming years of about USD 136 million.Entering into the agreements resulted in a payment ofUSD 305 million (EUR 280 million) in November 2016, arelease of litigation provisions of USD 86 million (EUR79 million) and a liability reclassification from litigationprovisions to other provisions of USD 136 million (EUR125 million).20Group financial statements10.9Annual Report 2016143The additions in 2014 and utilizations andreclassifications in 2016 mainly related to Masimo.Reclassifications include reclassification from litigationprovisions to other provisions.Cathode Ray Tube (CRT) antitrust litigationIn 2014, the majority of the remaining additions andremaining ending balance as of December 31, 2014related to certain parts of the CRT antitrust litigation forwhich the Company concluded it was able to make areliable estimate of the cash outflow or was able toreach a settlement.In 2014, the reclassifications in the schedule aboverelated to certain parts of the CRT antitrust litigationwhere the Company was able to reach a settlement.Settlements in excess of provisions recognizedpreviously were recognized as an increase of othercurrent liabilities. These settlements weresubsequently paid out in 2015.In 2014, as a result of the aforementioned changes inestimates for the CRT antitrust litigation, the results ofother business expenses of EUR 271 million mainlyrelated to certain parts of the CRT antitrust litigation forwhich the Company concluded it was able to make areliable estimate of the cash outflow or where theCompany was able to reach a settlement.In 2015, the majority of reclassifications related to thetransfer to other liabilities for certain parts of the CRTantitrust litigation for which the Company was able toreach a settlement. These settlements weresubsequently paid out in 2015.In 2016, the remaining reclassifications relate to thetransfer to other liabilities for several small CRT casesfor which the Company was able to reach a settlement.These settlements were subsequently partially paid outin 2016.For more details reference is made to note 25,Contingent assets and liabilities.OtherThe translation differences in the schedule above aremainly explained by the movements in the USD/EURrate which impacted the litigation provisionsdenominated in USD.The Company expects to use the provisions mainlywithin the next three years.Other provisionsPhilips GroupOther provisions in millions of EUR2014 - 20162014 2015 2016 Balance as of January 1519 575 604 Changes: Additions213 198 183 Utilizations(153)(186)(167)Releases(37)(35)(61)Reclassification17 14 142 Accretion6 7 8 Translation differences and other10 31 24 Balance as of December 31575 604 733 The main elements of other provisions are:•provisions for possible taxes/social security of EUR131 million (2015: EUR 99 million);•onerous contract provisions for unfavorable supplycontracts as part of divestment transactions, onerous(sub)lease contracts and expected losses on existingprojects /orders totaling EUR 85 million (2015: EUR106 million);•provisions for employee jubilee funds EUR 84 million(2015: EUR 71 million);•self-insurance provisions of EUR 77 million (2015:EUR 70 million);•provisions for decommissioning costs of EUR 48million (2015: EUR 52 million);•provisions for rights of return of EUR 46 million (2015:EUR 52 million);•provisions for other employee benefits andobligatory severance payments of EUR 38 million(2015: EUR 47 million);•a reclassification from litigation provisions which islinked to the agreement with Masimo (see Litigationprovisions in this note).Other provisions are expected to be utilized mainlywithin the next five years, except for:•provisions for employee jubilee funds of which lessthan half are expected to be utilized within the nextfive years;•provisions for rights of return to be utilized mainlywithin the next year;•provisions for contingent consideration to be utilizedwithin the next year.20Post-employment benefitsEmployee post-employment plans have beenestablished in many countries in accordance with thelegal requirements, customs and the local practice inthe countries involved.Most employees that take part in a Company pensionplan are covered by defined-contribution (DC) pensionplans. The Company also sponsors a number ofdefined-benefit (DB) pension plans. The benefitsprovided by these plans are based on employees’ yearsGroup financial statements10.9144Annual Report 2016of service and compensation levels. The Company alsosponsors a limited number of DB retiree medical plans.The benefits provided by these plans typically cover apart of the healthcare costs after retirement.The largest DB pension plans in 2016 are in the UnitedStates and Germany.These plans account for approximately 80% of the totaldefined-benefit obligation (DBO) and plan assets.The United StatesThe US defined-benefit pension plans are closed planswithout further pension accrual. Indexation of benefitsis not mandatory. The Company pays contributions tocover a deficit. The assets of the US funded pensionplans are in Trusts governed by Trustees. The excesspension plans that covered accrual above themaximum salary of the funded plan are unfunded. De-risking contributions to the funded plans in 2016amounted to EUR 242 million.During 2016, in line with the split of the Company, twonew Trusts were created covered by ERISA section4044, which ensures an appropriate split of the planassets, among others based on the maturity of therespective plans. A group of active employees whoopted for a settlement of their rights via a lump sum orvia the purchase of an insured annuity contractremained in the original Trust. To enable thesettlements the Company provided for additionalfunding to the original Trust of EUR 14 million on top ofthe de-risking contributions. The difference betweenthe related DBO and the lump sums paid and theannuity purchase price at transfer date was a EUR 2million gain which is recognized as a settlement incomein the income statement.In 2016 the Company adopted the new mortality tableRP2014-MP2016 for all US plans except for theunfunded excess plan where RP2006-MP2016 + whitecollar adjustment is the new table adopted. The newtables lowered the DBO by EUR 45 million. The newtable published by the US Society of Actuaries adds 5years of extra observation compared to MP2014 (theprevious mortality table) and reconfirmed that theactual improvement in longevity is lower than assumedearlier.GermanyThe Company has several DB plans in Germany whichfor the largest part are unfunded, meaning that afterretirement the Company is responsible for the annuitypayments to retirees.Due to the relatively high level of social security, theCompany pension plans mainly provide benefits for thehigher earners. Although the benefit design is of a DCtype the German plans even when externally fundedare accounted for as DB plans due to a minimum returnrequirement.Company pension commitments in Germany arecovered against employer bankruptcy via the“Pensions Sicherungs Verein” which charges a fee to allcompanies providing pension promises in a year a claimis paid.Philips is one of the sponsors of Philips PensionskasseVVaG in Germany, which is a multi-employer plan. Theplan is accounted for as a DC plan.Pension-related claim in the UKIn 2016 the UK Trustees and the Company succeededin settling a pension-related legal claim against thirdparties. The Company and the Fund in the financing ofthe buy-out in 2015 already anticipated a future claimbeing awarded. As a result of this settlement theCompany received EUR 46 million, recognized as apension settlement gain in 2016.This legal settlement did not affect part or all of thebenefits provided under the respective plans, as allfurther legal or constructive obligations for thesebenefits were already eliminated during the plansettlements in 2015.Significant events in 20152015 included settlement costs of EUR 329 millionmainly related to the settlement of the UK plan, resultsof other de-risking actions in the UK prior to thesettlement and the settlement of parts of the USpension plan. Past-service costs of EUR 14 million wererecognized related to de-risking actions taken in the UKprior to the settlement of the plan, including a past-service cost for GMP Equalization in the same UK plan.Some smaller plan changes in other countries resultedin a small past-service cost gain.The classification of the pension plan in theNetherlands changed in 2015 from a DB plan into a DCplan, triggering a settlement of the plan which at thetime had a surplus of EUR 20 million. As the surplus wasnot recognized on the balance sheet due to the assetceiling and because no further payments were madedirectly related to the settlement, as per the Company’saccounting policy, the Company did not recognize asettlement result in the income statement but inremeasurements for pensions in the Consolidatedstatements of Comprehensive Income.Risks related to defined-benefit plansThe remaining defined-benefit plans expose theCompany to various demographic and economic riskssuch as longevity risk, investment risks, currency andinterest rate risk and in some cases inflation risk. Thelatter plays a role in the assumed wage increase butmore importantly in some countries like Germanywhere indexation of pensions is mandatory. Pensionfund Trustees are responsible for and have fulldiscretion over the investment strategy of the planassets. In general Trustees manage pension fund risksby diversifying the investments of plan assets and by(partially) matching interest rate risk of liabilities.Group financial statements10.9Annual Report 2016145The Company has an active de-risking strategy in whichit constantly looks for opportunities to reduce the risksassociated with its defined-benefit plans. Liability-driven investment strategies, lump sum cash-outoptions, buy-ins, buy-outs and a change to DC areexamples of the strategy.The larger plans are either governed by independentBoards or by Trustees who have a legal obligation toevenly balance the interests of all stakeholders andoperate under the local regulatory framework.Investment policy in our largest pensionplansThe trustees of the Philips pension plans areresponsible for and have full discretion over theinvestment strategy of the plan assets.The plan assets of the Philips pension plans in the USare invested in well diversified portfolios. The interestrate sensitivity of the fixed income portfolio is closelyaligned to that of the plan’s pension liabilities. Anycontributions from the sponsoring company are used tofurther increase the fixed income part of the assets. Aspart of the investment strategy, any additionalinvestment returns of the return portfolio are used tofurther decrease the interest rate mismatch betweenthe plan assets and the pension liabilities.Balance sheet positionsThe net balance sheet position presented in this notecan be explained as follows:•The surplus in our plan in Brazil is not recognized asa net defined-benefit asset because in Brazil theregulatory framework prohibits refunds to theemployer.•The deficits of the externally funded US defined-benefit plans and the unfunded plans in the US andGermany account for the largest part of the netbalance sheet position.The measurement date for all DB plans is December 31.Summary of pre-tax costs for post-employment benefits and reconciliationsThe below table contains the total of current and pastservice costs, administration costs and settlementresults as included in Income from operations and theinterest cost as included in Financial expenses.Philips GroupPre-tax costs for post-employment benefits in millions of EUR2014 - 20162014 2015 2016 Defined-benefit plans245 561 53 included in income fromoperations182 487 (13)1)included in financial expense59 72 66 included in Discontinuedoperations4 2 - Defined-contribution plans includingmulti-employer plans148 299 382 included in income fromoperations144 293 382 included in Discontinuedoperations4 6 - 1)The net income mainly relates to the settlement of the pension relatedlegal claim in the UK as described earlier in the note.Group financial statements10.9146Annual Report 2016Reconciliations for the net liabilities and assets for post-employment defined-benefit plans:Philips GroupDefined-benefit obligations in millions of EUR2015 - 20162015 2016 Pensions Retireemedical total Pensions Retireemedical total Balance as of January 127,081 241 27,322 4,527 230 4,757 Service cost137 - 137 43 1 44 Interest cost465 12 477 177 12 189 Employee contributions9 - 9 5 - 5 Actuarial (gains) / losses -demographic assumptions- - - (42)(3)(45)-financial assumptions1,525 (2)1,523 195 13 208 -experience adjustment(149)(17)(166)8 (15)(7)(Negative) past service cost14 - 14 (8)- (8)Acquisitions- - - - - - Divestments(12)- (12)- - - Settlements(24,390)- (24,390)(85)- (85)Benefits paid(787)(13)(800)(303)(12)(315)Exchange rate differences635 9 644 185 8 193 Miscellaneous(1)- (1)51 - 51 Balance as of December 314,527 230 4,757 4,753 234 4,987 Present value of funded obligations atDecember 313,635 - 3,635 3,850 - 3,850 Present value of unfunded obligationsat December 31892 230 1,122 903 234 1,137 Philips GroupPlan assets in millions of EUR2015 - 20162015 2016 Pensions Retireemedical total Pensions Retireemedical total Balance as of January 125,863 - 25,863 2,710 - 2,710 Interest income on plan assets434 - 434 137 - 137 Admin expenses paid(9)- (9)(3)- (3)Return on plan assets excluding interestincome918 - 918 41 - 41 Employee contributions9 - 9 5 - 5 Employer contributions547 - 547 246 - 246 Divestments(7)- (7)- - - Settlements(24,840)- (24,840)(33)- (33)Benefits paid(725)- (725)(239)- (239)Exchange rate differences520 - 520 180 - 180 Miscellaneous- - - 51 - 51 Balance as of December 312,710 - 2,710 3,095 - 3,095 - - Funded status(1,817)(230)(2,047)(1,658)(234)(1,892)Unrecognized net assets(90)- (90)(105)- (105)Net balance sheet position(1,907)(230)(2,137)(1,763)(234)(1,997)Group financial statements10.9Annual Report 2016147The classification of the net balance is as follows:Philips GroupNet balance of defined-benefit pension plans in millions of EUR2015 - 20162015 2016 Pensions Retireemedical total Pensions Retireemedical total Prepaid pension costs under other non-current assets3 - 3 1 - 1 Provision for pensions under provisions1)(1,910)(230)(2,140)(1,762)(234)(1,996)Provision for pensions under AHFS (2)- (2)Net balance of defined-benefit plans(1,907)(230)(2,137)(1,763)(234)(1,997)1)Adjusted to reflect a reclassification of net defined-benefit obligations into Long-term provisions. See note 1, Significant accounting policiesPhilips GroupChanges in the effect of the asset ceiling in millions of EUR2015 - 20162015 2016 Balance as of January 1792 90 Interest on unrecognized assets29 14 Remeasurements(733)(21)Exchange rate differences2 22 Balance as of December 3190 105 Plan assets allocationThe asset allocation in the Company’s pension plans atDecember 31 was as follows:Philips GroupPlan assets allocation in millions of EUR2015 - 20162015 2016 -Debt securities1,523 1,646 -Equity securities740 902 -Real estate9 2 -Other438 545 Total assets2,710 3,095 The assets in 2016 contain 58% (2015: 51%) unquotedassets. Plan assets in 2016 do not include propertyoccupied by or financial instruments issued by theCompany.AssumptionsThe mortality tables used for the Company’s majorschemes are:•US: RP2014 HA/EE Fully Generational scaled withMP2016; RP2006-MP2016 + white collar adjustmentfor the unfunded excess plans.•Germany: Richttafeln 2005 Generational K.HeubeckThe weighted averages of the assumptions used tocalculate the defined-benefit obligations as ofDecember 31 were as follows:Philips GroupAssumptions used for defined-benefit obligations in %2015 - 20162015 2016 Discount rate4.0% 3.8% Inflation rate2.4% 2.6% Rate of compensation increase2.7% 3.3% The average duration of the defined-benefit obligationof the pension plans is 11 years (2015: 10 years).Cost trend rates retiree medical plansAssumed healthcare cost trend rates at December 31:Philips GroupAssumed healthcare cost trend rates in %2015 - 20162015 2016 Healthcare cost trend rate assumed for nextyear7.5% 8.4% Rate that the cost trend rate will gradually reach5.3% 5.4% Year of reaching the rate at which it is assumedto remain2025 2028 The average duration of the defined-benefit obligationof the retiree medical plans is 9 years (2015: 8 years).Cash flows and costs in 2017The Company expects considerable cash outflows inrelation to post-employment benefits which areestimated to amount to EUR 506 million in 2017,consisting of:•EUR 49 million employer contributions to funded DBpension plans (US: EUR 15 million, DE: EUR 23 million,Other: EUR 11 million);•EUR 382 million employer contributions to DCpension plans (NL: EUR 204 million, US: EUR 114million, Other: EUR 64 million);•EUR 57 million cash outflows in relation to unfundedDB pension plans (US: EUR 8 million, DE: EUR 37million, Other: EUR 12 million) and•EUR 18 million in relation to unfunded retiree medicalplans (US: EUR 12 million, Other EUR 6 million).For the funding of the deficit in the US plan the Groupadheres to the minimum funding requirements of theUS Pension Protection Act.The service and administration cost for 2017 is expectedto amount to EUR 41 million fully for defined-benefitpension plans. The interest expense for 2017 isexpected to amount to EUR 62 million, consisting ofEUR 50 million for DB pension plans and EUR 12 millionfor DB retiree medical plans. The cost for DC pensionplans in 2017 is equal to the DC cash flow.Group financial statements10.92122148Annual Report 2016Sensitivity analysisThe table below illustrates the approximate impact onthe DBO from movements in key assumptions. The DBOwas recalculated using a change in the assumptions of1% which overall is considered a reasonably possiblechange. The impact on the DBO because of changes indiscount rate is normally accompanied by offsettingmovements in plan assets, especially when usingmatching strategies.Philips GroupSensitivity of key assumptions in millions of EUR2016Defined benefit obligation Pensions Retiree medical Increase Discount rate (1% movement)(524)(20)Wage change (1% movement)27 Inflation (1% movement)139 Longevity (see explanation)134 10 Healthcare cost trend (1% increase) 19 Decrease Discount rate (1% movement)622 22 Wage change (1% movement)(23) Inflation (1% movement)(126) Philips GroupSensitivity of key assumptions in millions of EUR2015Defined benefit obligation Pensions Retiree medical Increase Discount rate (1% movement)(468)(18)Wage change (1% movement)23 Inflation (1% movement)115 Longevity (see explanation)80 7 Healthcare cost trend (1% increase) 13 Decrease Discount rate (1% movement)550 20 Wage change (1% movement)(20) Inflation (1% movement)(104) The mortality table (i.e. longevity) also impacts theDBO. The above sensitivity table illustrates the impacton the DBO of a further 10% decrease in the assumedrates of mortality for the Company’s major schemes. A10% decrease in assumed mortality rates equalsimprovement of life expectancy by 0.5 - 1 year.Changes in assumed healthcare cost trend rates canhave a significant effect on the amounts reported for theretiree medical plans. A 1%-point increase in thehealthcare cost trend rate is therefore included in theabove table as a likely scenario.21Accrued liabilitiesAccrued liabilities are summarized as follows:Philips GroupAccrued liabilities in millions of EUR2015 - 20162015 2016 Personnel-related costs: -Salaries and wages567 684 -Accrued holiday entitlements180 154 -Other personnel-related costs148 108 Fixed-asset-related costs: -Gas, water, electricity, rent and other53 52 Communication and IT costs46 75 Distribution costs107 123 Sales-related costs: -Commission payable20 22 -Advertising and marketing-related costs168 183 -Other sales-related costs54 55 Material-related costs147 142 Interest-related accruals69 68 Deferred income932 957 Other accrued liabilities1)324 411 Accrued liabilities2,815 3,034 1)Adjusted to reflect a reclassification of net defined-benefit obligationsinto Long-term provisions. See note 1, Significant accounting policiesDeferred income is mainly related to Diagnosis &Treatment businesses and Connected Care & HealthInformatics businesses, in both 2016 and 2015.22Other liabilitiesOther non-current liabilitiesOther non-current liabilities are summarized as follows:Philips GroupOther non-current liabilities in millions of EUR2015 - 20162015 2016 Deferred income257 251 Other tax liability454 395 Other liabilities101 73 Other non-current liabilities 1)812 719 1)Adjusted to reflect a reclassification of net defined-benefit obligationspreviously reported as Accrued pension costs into Long-term provisions.See note 1, Significant accounting policiesFor further details on tax related liabilities refer tonote 8, Income taxes.Other current liabilitiesOther current liabilities are summarized as follows:Philips GroupOther current liabilities in millions of EUR2015 - 20162015 2016 Accrued customer rebates that cannot be offsetwith accounts receivables for those customers544 593 Advances received from customers on ordersnot covered by work in process375 451 Other taxes including social security premiums177 208 Other liabilities177 120 Other current liabilities1,273 1,372 2324Group financial statements10.9Annual Report 2016149The other liabilities per December 31, 2016 includereclassifications from litigation provisions to liabilitiesdue to settlements reached. For more details referenceis made to Litigation provisions in note 19, Provisionsand to Legal proceedings in note 25, Contingent assetsand liabilities. The decrease of the balance of otherliabilities as per December 31, 2016 mainly relates topay-out of these liabilities as per December 31, 2015.23Cash flow statement supplementaryinformationCash used for derivatives and current financial assetsIn 2016, a total of EUR 132 million cash was paid withrespect to foreign exchange derivative contractsrelated to activities for liquidity management andfunding (2015: EUR 193 million outflow; 2014: EUR 13million outflow).Purchase and proceeds from non-current financialassetsIn 2016, the net cash outflow of EUR 45 million wasmainly due to the acquisition of stakes in Abraaj GrowthMarkets Fund.In 2015, the net cash inflow of EUR 32 million was mainlydue to the sale of stakes in Silicon & Software Systemsand other equity interests.In 2014, the net cash inflow of EUR 26 million wasmainly due to the sale of stakes in Neusoft, ChimeiInnolux, and Sapiens, offset by loans provided to TPVTechnology Limited.Bank errorOn December 30, 2016 a financial institutionerroneously transferred EUR 150 million of cash to thePhilips Lighting bank account. On January 2, 2017 thetransfer was reversed by all parties involved for the fullamount with retrospective effect to December 30, 2016.As the transaction lacks economic substance andPhilips Lighting never had any exposure or benefit, thetransaction has not been accounted for in thesefinancial statements.24Contractual obligationsPhilips GroupContractual cash obligations1,2) in millions of EUR2016 payments due by period total lessthan 1year 1-3years 3-5years after 5years Long-term debt3)5,117 1,290 104 1,297 2,426 Finance leaseobligations307 93 127 54 33 Short-term debt210 210 - - - Operating leaseobligations942 227 300 195 220 Derivativeliabilities841 280 410 - 151 Interest on debt4)2,229 184 306 295 1,444 Purchaseobligations5)260 108 73 33 46 Trade and otherpayables2,848 2,848 - - - Contractual cashobligations12,754 5,240 1,320 1,874 4,320 1)Obligations in this table are undiscounted2)This table excludes pension contribution commitments and income taxliabilities in respect of tax risks because it is not possible to make areasonably reliable estimate of the actual period of cash settlement3)Long-term debt includes short-term portion of long-term debt andexcludes finance lease obligations4)Approximately 30% of the debt bears interest at a floating rate5)Philips has commitments related to the ordinary course of businesswhich in general relate to contracts and purchase order commitmentsfor less than 12 months. In the table, only the commitments for multipleyears are presented, including their short-term portionPhilips GroupContractual cash obligations1,2) in millions of EUR2015 payments due by period total lessthan 1year 1-3years 3-5years after 5years Long-term debt3)4,034 84 1,152 1 2,797 Finance leaseobligations242 72 92 36 42 Short-term debt1,515 1,515 - - - Operating leaseobligations952 243 280 162 267 Derivativeliabilities995 253 383 156 203 Interest on debt4)2,767 221 438 334 1,774 Purchaseobligations5)175 68 69 30 8 Trade and otherpayables2,673 2,673 - - - Contractual cashobligations13,353 5,129 2,414 719 5,091 1)Obligations in this table are undiscounted2)This table excludes pension contribution commitments and income taxliabilities in respect of tax risks because it is not possible to make areasonably reliable estimate of the actual period of cash settlement3)Long-term debt includes short-term portion of long-term debt andexcludes finance lease obligations4)Approximately 32% of the debt bears interest at a floating rate. Majorityof the interest payments on variable interest rate loans in the tableabove reflect market forward interest rates at the period end and theseamounts may change as market interest rate changes5)Philips has commitments related to the ordinary course of businesswhich in general relate to contracts and purchase order commitmentsfor less than 12 months. In the table, only the commitments for multipleyears are presented, including their short-term portionGroup financial statements10.925150Annual Report 2016Certain Philips suppliers factor their trade receivablesfrom Philips with third parties through supplier financearrangements. At December 31, 2016 approximatelyEUR 360 million of the Philips accounts payable wereknown to have been sold onward under sucharrangements whereby Philips confirms invoices.Philips continues to recognize these liabilities as tradepayables and will settle the liabilities in line with theoriginal payment terms of the related invoices.The Company has entered into contracts with venturecapitalists where it committed itself to make, undercertain conditions, capital contributions to itsinvestment funds to an aggregated amount of EUR 90million (2015: EUR 22 million) until June 30, 2021. As atDecember 31, 2016 capital contributions already madeto these investment funds are recorded as available-for-sale financial assets within Other non-currentfinancial assets.The operating lease obligations are mainly related tothe rental of buildings. A number of these leasesoriginate from sale-and-leaseback arrangements.Operating lease payments under sale-and-leasebackarrangements for 2016 totaled EUR 36 million (2015:EUR 36 million).The remaining minimum payments under sale-and-leaseback arrangements included in operating leaseobligations above are as follows:Philips GroupOperating lease - minimum payments under sale-and-leasebackarrangements in millions of EUR2016201736 201834 201933 202029 202127 Thereafter91 Finance lease liabilitiesThe below table discloses the reconciliation betweenthe total of future minimum lease payments and theirpresent value.Philips GroupFinance lease liabilities in millions of EUR2015 - 20162015 2016 futuremini-mumleasepay-ments inter-est presentvalueof min-imumleasepay-ments futuremini-mumleasepay-ments inter-est presentvalueof min-imumleasepay-ments Lessthan oneyear72 6 66 93 8 85 Betweenone andfiveyears128 17 111 181 15 166 Morethan fiveyears42 8 34 33 5 28 Financelease242 31 211 307 28 279 25Contingent assets and liabilitiesContingent assetsZollIn June 2010, Philips filed a patent infringement lawsuitagainst Zoll Medical Corporation claiming that itsdefibrillator related patents were infringed by Zoll’sAutomatic External Defibrillator (AED) products. Zollfiled a countersuit claiming patent infringement byPhilips’ Advanced Life Support (ALS) products and amethod for testing defibrillator electrodes.In December 2013, the liability phase of the Zoll lawsuitwas tried before a jury in the United States District Courtfor the District Massachusetts. Philips and Zoll wereboth held to infringe each other’s patents. The Zollliability judgment was appealed by both parties to theUnited States Court of Appeal for the Federal Circuit(CAFC) in August 2014. In a July 28, 2016 decision, theliability judgment was affirmed-in-part, reversed-in-part and vacated-in-part by the CAFC. In view of theCAFC decision, Philips continues to expect a netdifference in damages in its favor. Resolution of theamount ultimately owed to Philips is contingent upona damages trial now scheduled to begin on July 24,2017.Contingent liabilitiesGuaranteesPhilips’ policy is to provide guarantees and other lettersof support only in writing. Philips does not stand byother forms of support. At the end of 2016, the total fairvalue of guarantees recognized on the balance sheetamounted to EUR nil million (December 31, 2015: EURnil million). Remaining off-balance-sheet business andcredit-related guarantees provided on behalf of thirdparties and associates decreased by EUR 9 millionduring 2016 to EUR 28 million (December 31, 2015: EUR37 million).Group financial statements10.9Annual Report 2016151Environmental remediationThe Company and its subsidiaries are subject toenvironmental laws and regulations. Under these laws,the Company and/or its subsidiaries may be requiredto remediate the effects of certain chemicals on theenvironment.Legal proceedingsThe Company and certain of its group companies andformer group companies are involved as a party in legalproceedings, regulatory and other governmentalproceedings, including discussions on potentialremedial actions, relating to such matters ascompetition issues, commercial transactions, productliability, participations and environmental pollution.While it is not feasible to predict or determine theultimate outcome of all pending or threatened legalproceedings, regulatory and governmentalproceedings, the Company is of the opinion that thecases described below may have, or have had in therecent past, a significant impact on the Company’sconsolidated financial position, results of operationsand cash flows.Cathode Ray Tubes (CRT)On November 21, 2007, the Company announced thatcompetition law authorities in several jurisdictions hadcommenced investigations into possibleanticompetitive activities in the Cathode Ray Tubes, orCRT industry. On December 5, 2012, the EuropeanCommission issued a decision imposing fines on(former) CRT manufacturers including the Company.The European Commission imposed a fine of EUR 313million on the Company and a fine of EUR 392 millionjointly and severally on the Company and LGElectronics, Inc. In total a payable of EUR 509 millionwas recognized in 2012 and the fine was paid in the firstquarter of 2013. The Company appealed the decision ofthe European Commission with the General Courtwhich appeal was denied on September 9, 2015. OnNovember 23, 2015 the Company lodged an appealagainst the decision of the General Court with theEuropean Court of Justice.United StatesSubsequent to the public announcement of theseinvestigations in 2007, certain Philips Group companieswere named as defendants in class action antitrustcomplaints by direct and indirect purchasers of CRTsfiled in various federal district courts in the UnitedStates. These actions alleged anticompetitive conductby manufacturers of CRTs and sought treble damageson a joint and several liability basis. In addition, sixteenindividual plaintiffs, principally large retailers of CRTproducts who opted out of the direct purchaser class,filed separate complaints against the Company andother defendants based on the same substantiveallegations. All these actions have been consolidatedfor pre-trial proceedings in the United States DistrictCourt for the Northern District of California.The Company reached settlements with both the directpurchaser plaintiffs and indirect purchaser plaintiffsfully resolving all claims of the direct and indirectpurchaser class. The direct purchaser settlement wasapproved by the court in 2012, while the indirectpurchaser settlement was approved by the UnitedStates District Court for the Northern District ofCalifornia in 2016 and is now pending before the NinthCircuit Court of Appeals. In the past years the Companyalso reached settlements with a number of theindividual plaintiffs resolving all claims by thoseretailers on a global basis. The settlements reached todate represent the vast majority of CRT sales attributedto the Company by the individual plaintiffs. In effect, allcases originally scheduled for trial in the NorthernDistrict of California have now been resolved, leavingunresolved certain of the cases that were consolidatedin the California case for pre-trial purposes that have tobe transferred back to their original venue for furtherproceedings. Trial dates have not yet been set for thosecases.In addition, the state attorneys general of California,Florida, Illinois, Oregon and Washington filed actionsagainst the Company and other defendants seeking torecover damages on behalf of the states and, acting asparens patriae, their consumers. In 2012 the Floridacomplaint was withdrawn. In 2013 a settlementagreement was reached with the state attorney generalof California that has been approved subject to reviewby the California Court of Appeal. In 2016, settlementswere reached with the state attorneys general of Illinoisand Oregon which settlements are awaiting finalapproval in their respective state courts. The actionbrought by the state attorney of Washington is pending;a trial date has not been set.CanadaIn 2007, certain Philips Group companies were alsobeing named as defendants in proposed classproceedings in Ontario, Quebec and British Columbia,Canada, along with numerous other participants in theindustry. After years of inactivity, in 2014, plaintiffs in theOntario action initiated the class certificationproceedings leading to class certification in the secondhalf of 2016.Other civil claims related to CRTIn 2014, the Company was named as a defendant in aconsumer class action lawsuit filed in Israel in whichdamages are claimed against several defendants basedon alleged anticompetitive activities in the CRTindustry. In addition, an electronics manufacturer fileda claim against the Company and several co-defendants with a court in the Netherlands, alsoseeking compensation for the alleged damagesustained as a result from the alleged anticompetitiveactivities in the CRT industry. In 2015, the Companybecame involved in further civil CRT antitrust litigationwith previous CRT customers in the United Kingdom,Germany, Brazil and Denmark. In all cases the samesubstantive allegations about anticompetitive activitiesGroup financial statements10.9152Annual Report 2016in the CRT industry are made and damages are sought.The Company has received indications that more civilclaims may be filed in due course.Except for what has been provided or accrued for asdisclosed in note 19, Provisions and note 22, Otherliabilities, the Company has concluded that due to theconsiderable uncertainty associated with certain ofthese matters, on the basis of current knowledge,potential losses cannot be reliably estimated withrespect to these matters.Optical Disc Drive (ODD)On October 27, 2009, the Antitrust Division of theUnited States Department of Justice confirmed that ithad initiated an investigation into possibleanticompetitive practices in the Optical Disc Drive(ODD) industry. Philips Lite-On Digital Solutions Corp.(PLDS), a joint venture owned by the Company andLite-On IT Corporation, as an ODD market participant,is included in this investigation. PLDS and the Companyhave been accepted under the Corporate Leniencyprogram of the US Department of Justice and havecontinued to cooperate with the authorities in theseinvestigations. On this basis, the Company expects tobe immune from governmental fines.In July 2012, the European Commission issued aStatement of Objections addressed to (former) ODDsuppliers including the Company and PLDS. TheEuropean Commission granted the Company and PLDSimmunity from fines, conditional upon the Company’scontinued cooperation. The Company responded tothe Statement of Objections both in writing and at anoral hearing. On October 21, 2015 the EuropeanCommission issued its fining decisions in which itgranted immunity to the Company, Lite-On ITCorporation and PLDS.The antitrust authority in one remaining jurisdiction isstill investigating the matter.Subsequent to the public announcement of theseinvestigations in 2009, the Company, PLDS and Philips& Lite-On Digital Solutions USA, Inc. (PLDS USA),among other industry participants, were named asdefendants in numerous class action antitrustcomplaints filed in various federal district courts in theUnited States. These actions allege anticompetitiveconduct by manufacturers of ODDs and seek trebledamages on behalf of direct and indirect purchasers ofODDs and products incorporating ODDs. These actionshave been consolidated for pre-trial proceedings in theUnited States District Court for the Northern District ofCalifornia. Initially the plaintiffs’ applications forcertification of both the direct and indirect purchaserclasses were denied.In September 2015, PLDS entered into a settlementagreement with the direct purchaser plaintiffs underwhich the Company was released from the directpurchaser claims. In December 2016, PLDS reached asettlement with the indirect purchaser plaintiffs whichis subject to court approval. Under the settlement, theCompany will be released from the indirect purchaserclaims.In addition, various individual entities have filedseparate actions against the Company, PLDS, PLDSUSA and other defendants. The allegations containedin these individual complaints are substantiallyidentical to the allegations in the direct purchaser classcomplaints. All of these matters have beenconsolidated into the action in the Northern District ofCalifornia for pre-trial purposes and discovery is beingcoordinated.Also, in June 2013, the State of Florida filed a separatecomplaint in the Northern District of California againstthe Company, PLDS, PLDS USA and other defendantscontaining largely the same allegations as the class andindividual complaints. Florida seeks to recoverdamages sustained in its capacity as a buyer of ODDsand, in its parens patriae capacity, on behalf of itscitizens. In December 2016, PLDS reached a settlementwith the state attorney general of Florida, whichsettlement is subject to court approval. Pursuant to thesettlement agreement, the Company is also releasedfrom the Florida state attorney general’s claim.The Company and certain Philips Group companieshave also been named as defendants, in proposedclass proceedings in Ontario, Quebec, British Columbia,Manitoba and Saskatchewan, Canada along withnumerous other participants in the industry. Thesecomplaints assert claims against various ODDmanufacturers under federal competition laws as wellas tort laws and may involve joint and several liabilityamong the named defendants. Philips intends tovigorously defend these lawsuits. Plaintiffs in the BritishColumbia case have proceeded with their applicationto certify that proceeding as a class action. The hearingwas held in January 2015. The Court’s decision on classcertification is still pending.Furthermore, in the second half of 2016 the Companywas named as defendant in a class action in Israelbased on allegations similar to the class actions in theUnited States.Due to the considerable uncertainty associated withthese matters, on the basis of current knowledge, theCompany has concluded that potential losses cannotbe reliably estimated with respect to these matters.Consumer Electronics products and small DomesticAppliancesSeveral companies, among which the Company, areinvolved in an investigation by the EuropeanCommission into alleged restrictions of online sales ofconsumer electronic products and small domesticappliances. This investigation commenced inDecember 2013 when Philips was one of the companiesthat was inspected by officials of the European2627Group financial statements10.9Annual Report 2016153Commission. In February 2017, the EuropeanCommission opened its formal proceedings. Philips isfully cooperating with the European Commission.Due to the considerable uncertainty associated withthis matter, on the basis of current knowledge, theCompany has concluded that potential losses cannotbe reliably estimated with respect to these matters.MiscellaneousAs part of the divestment of the Television and Audio,Video, Multimedia & Accessories businesses in 2012and 2014, the Company transferred economicownership and control in some legal entities or divisionsthereof, while retaining (partial) legal ownership.Considering the current challenging businessenvironment, the Company might face employee andoperational liabilities in case of certain adverse events.Given the uncertain nature of the relevant events andliabilities, it is not practicable to provide information onthe estimate of the financial effect, if any, or timing. Theoutcome of the uncertain events could have a materialimpact on the Company’s consolidated financialposition, results of operations and cash flows.The Company is currently in advanced discussions onresolving a civil matter with the US Department ofJustice representing the US Food and DrugAdministration (FDA), arising from past inspections bythe FDA in and prior to 2015. The discussions focusprimarily on the Company’s compliance with the FDA’sQuality System Regulations in the Company’sEmergency Care and Resuscitation (ECR) business inthe United States. While discussions have not yetconcluded, the Company anticipates that the actionsnecessary to address the FDA’s compliance concernswill have a meaningful impact on the operations of itsECR business.26Related-party transactionsIn the normal course of business, Philips purchases andsells goods and services from/to various related partiesin which Philips typically holds a 50% or less equityinterest and has significant influence. Thesetransactions are generally conducted with termscomparable to transactions with third parties.For details of these parties in which Philips typicallyholds a 50% or less equity interest, refer to theInvestments in associates section of note 5, Interests inentities.Philips GroupRelated-party transactions in millions of EUR2014 - 20162014 2015 2016 Sales of goods and services215 222 207 Purchases of goods and services85 87 81 Receivables from related parties14 16 33 Payables to related parties4 4 3 In addition to the table above, as part of its operationsin the US, Philips sold non-recourse third-partyreceivables to PMC US amounting to EUR 139 million in2016 (2015: EUR 129 million; 2014: EUR 123 million).In light of the composition of the Executive Committee,the Company considers the members of the ExecutiveCommittee and the Supervisory Board to be the keymanagement personnel as defined in IAS 24 ‘Relatedparties’.For remuneration details of the Executive Committee,the Board of Management and the Supervisory Boardsee note 28, Information on remuneration.For employee benefit plans see note 20, Post-employment benefits.27Share-based compensationThe purpose of the share-based compensation plans isto align the interests of management with those ofshareholders by providing incentives to improve theCompany’s performance on a long-term basis, therebyincreasing shareholder value.The Company has the following plans:•performance shares: rights to receive common sharesin the future based on performance and serviceconditions;•restricted shares: rights to receive common shares inthe future based on a service condition; and•options on its common shares, including the 2012 and2013 Accelerate! grant.Since 2013 the Board of Management and othermembers of the Executive Committee are only grantedperformance shares. Restricted shares are granted toexecutives, certain selected employees and newemployees. Prior to 2013 options were also granted.Furthermore, as part of the Accelerate! program, theCompany has granted options (Accelerate! options) toa group of approximately 500 key employees belowthe level of Board of Management in January 2012 andto the Board of Management in January 2013.Under the terms of employee stock purchase plansestablished by the Company in various countries,employees are eligible to purchase a limited number ofPhilips shares at discounted prices through payrollwithholdings.Share-based compensation costs were EUR 119 million(2015: EUR 99 million, 2014: EUR 85 million). Thisincludes the employee stock purchase plan of 5 million,which is not a share-based compensation that affectsequity. The share-based compensation costs for staffbelonging to the combined businesses of Lumileds andAutomotive of EUR 6 million are included inDiscontinued operations. In the consolidatedstatements of changes in equity EUR 119 million isGroup financial statements10.9154Annual Report 2016recognized in 2016 related to the share-basedcompensation plans. The amount recognized as anexpense is adjusted for forfeiture. USD-denominatedperformance shares, restricted shares and options aregranted to employees in the United States only.Performance sharesThe performance is measured over a three-yearperformance period. The performance shares have twoperformance conditions, relative Total Shareholders’Return compared to a peer group of 20 companies(2015: 21 companies, 2014: 21 companies) and adjustedEarnings Per Share growth. The performance sharesvest three years after the grant date. The number ofperformance shares that will vest is dependent onachieving the two performance conditions, which areequally weighted, and provided that the grantee is stillemployed with the Company.The amount recognized as an expense is adjusted foractual performance of adjusted Earnings Per Sharegrowth since this is a non-market performancecondition. It is not adjusted for non-vesting or extravesting of performance shares due to a relative TotalShareholders’ Return performance that differs from theperformance anticipated at the grant date, since this isa market-based performance condition.The fair value of the performance shares is measuredbased on Monte-Carlo simulation, which takes intoaccount dividend payments between the grant dateand the vesting date by including reinvested dividends,the market conditions expected to impact relative TotalShareholders’ Return performance in relation toselected peers, and the following weighted-averageassumptions:Philips GroupAssumptions used in Monte-Carlo simulation for valuation in %20162016 EUR-denominated Risk-free interest rate(0.45)% Expected dividend yield3.4% Expected share price volatility26% USD-denominated Risk-free interest rate(0.45)% Expected dividend yield3.4% Expected share price volatility29% The assumptions were used for these calculations onlyand do not necessarily represent an indication ofManagement’s expectation of future developments forother purposes. The Company has based its volatilityassumptions on historical experience measured over aten-year period.A summary of the status of the Company’s performanceshare plans as of December 31, 2016 and changesduring the year are presented below:Philips GroupPerformance share plans2016shares1)weightedaveragegrant-datefair value EUR-denominated Outstanding at January 1, 20168,394,982 24.83 Granted2,589,991 24.86 Vested/Issued2,272,590 23.54 Forfeited910,120 24.80 Outstanding at December 31, 20167,802,263 25.21 USD-denominated Outstanding at January 1, 20165,774,700 30.35 Granted1,673,886 28.36 Vested/Issued1,660,640 30.79 Forfeited669,017 30.34 Outstanding at December 31, 20165,118,929 29.56 1)Excludes dividend declared on outstanding shares between grant dateand vesting date that will be issued in shares (EUR-denominated:548,830 shares and USD-denominated: 362,334 shares).At December 31, 2016, a total of EUR 124 million ofunrecognized compensation costs relate to non-vestedperformance shares. These costs are expected to berecognized over a weighted-average period of 1.8years.Restricted sharesThe fair value of restricted shares is equal to the shareprice at grant date.The Company issues restricted shares that, in general,have a 3 year cliff-vesting period. For grants up to andincluding January 2013 the Company granted 20%additional (premium) shares, provided the grantee stillholds the shares after three years from the delivery dateand the grantee is still with the Company on therespective delivery dates. As of December 31, 2016 allrestricted share plans granted before 2013 have vestedexcept their premium shares.Group financial statements10.9Annual Report 2016155A summary of the status of the Company’s restrictedshares as of December 31, 2016 and changes during theyear are presented below:Philips GroupRestricted shares2016shares1)2)weightedaveragegrant-datefair value EUR-denominated Outstanding at January 1, 20161,008,675 25.023)Granted1,171,449 24.09 Vested/Issued436,326 24.95 Forfeited76,838 24.67 Outstanding at December 31, 20161,666,960 24.40 USD-denominated Outstanding at January 1, 2016758,409 28.793)Granted1,297,750 27.38 Vested/Issued201,062 28.81 Forfeited143,194 28.09 Outstanding at December 31, 20161,711,903 27.78 1)Excludes dividend declared on outstanding shares between grant dateand vesting date that will be issued in shares (EUR-denominated:79,499 shares and USD-denominated: 73,292 shares).2)Excludes premium shares on Restricted shares granted before 2013.(20% additional (premium) shares that may be received if sharesdelivered under the plan are not sold for a three-year period).3)The weighted average grant-date fair value was updated foroutstanding shares at January 1, 2016 due to an update in the fair valuecalculation of restricted shares.At December 31, 2016, a total of EUR 42 million ofunrecognized compensation costs relate to non-vestedrestricted shares. These costs are expected to berecognized over a weighted-average period of 1.5years.Option plansThe Company granted options that expire after 10years. These options vest after 3 years, provided thatthe grantee is still employed with the Company. Alloutstanding options have vested as of December 31,2016.The following tables summarize information about theCompany’s options as of December 31, 2016 andchanges during the year:Philips GroupOptions on EUR-denominated listed share2016options weightedaverageexercise price Outstanding at January 1, 201611,647,314 22.23 Exercised2,784,387 18.69 Forfeited501,159 27.59 Expired1,309,703 26.27 Outstanding at December 31, 20167,052,065 22.49 Exercisable at December 31, 20167,052,065 22.49 The exercise prices range from EUR 12.63 to EUR 32.04.The weighted average remaining contractual term foroptions outstanding and options exercisable atDecember 31, 2016, was 2.9 years. The aggregateintrinsic value of the options outstanding and optionsexercisable at December 31, 2016, was EUR 49 million.The total intrinsic value of options exercised during2016 was EUR 20 million (2015: EUR 21 million, 2014:EUR 11 million).Philips GroupOptions on USD-denominated listed share2016options weightedaverageexercise price Outstanding at January 1, 20169,676,807 30.62 Exercised724,260 19.79 Forfeited387,222 34.71 Expired840,104 32.04 Outstanding at December 31, 20167,725,221 31.27 Exercisable at December 31, 20167,725,221 31.27 The exercise prices range from USD 16.76 to USD 44.15.The weighted average remaining contractual term foroptions outstanding and options exercisable atDecember 31, 2016, was 2.9 years. The aggregateintrinsic value of the options outstanding and optionsexercisable at December 31, 2016, was USD 22 million.The total intrinsic value of options exercised during2016 was USD 6 million (2015: USD 8 million, 2014: USD9 million).At December 31, 2016 there were no unrecognizedcompensation costs related to outstanding options.Cash received from exercises under the Company’soption plans amounted to EUR 65 million in 2016 (2015:EUR 72 million, 2014: EUR 77 million). The actual taxdeductions realized as a result of option exercisestotaled approximately EUR 2 million in 2016 (2015: EUR3 million, 2014: EUR 3 million).Group financial statements10.928156Annual Report 2016The outstanding options as of December 31, 2016 arecategorized in exercise price ranges as follows:Philips GroupOutstanding options2016exercise priceoptions intrinsicvalue inmillions weightedaverageremainingcontractualterm EUR-denominated 10-151,784,149 26 4.7 yrs 15-2055,530 1 4.8 yrs 20-253,573,585 22 3.3 yrs 25-301,683 0.1 yrs 30-351,637,118 0.3 yrs Outstanding options7,052,065 49 2.9 yrs USD-denominated 15-201,679,475 20 4.6 yrs 20-25106,797 1 4.7 yrs 25-301,762,125 2 4.3 yrs 30-351,470,263 2.9 yrs 35-401,337,625 1.2 yrs 40-551,368,936 0.3 yrs Outstanding options7,725,221 23 2.9 yrs The aggregate intrinsic value in the tables and textabove represents the total pre-tax intrinsic value (thedifference between the Company’s closing share priceon the last trading day of 2016 and the exercise price,multiplied by the number of in-the-money options)that would have been received by the option holders ifthe options had been exercised on December 31, 2016.The following table summarizes information about theCompany’s Accelerate! options as of December 31,2016 and changes during the year:Philips GroupAccelerate! options2016options weightedaverageexercise price EUR-denominated Outstanding at January 1, 20161,304,500 16.08 Exercised439,200 16.20 Forfeited5,000 15.24 Outstanding at December 31, 2016860,300 16.02 Exercisable at December 31, 2016860,300 16.02 USD-denominated Outstanding at January 1, 2016347,800 20.02 Exercised90,000 20.02 Forfeited- Outstanding at December 31, 2016257,800 20.02 Exercisable at December 31, 2016257,800 20.02 The exercise prices of the Accelerate! options are EUR15.24 and EUR 22.43 for EUR-denominated options andis USD 20.02 for USD-denominated options. Theweighted average remaining contractual term for EUR-denominated Accelerate! options outstanding andexercisable at December 31, 2016 was 5.2 years. Theweighted average remaining contractual term for USD-Accelerate! options outstanding and exercisable atDecember 31, 2016 was 5.1 years. The aggregateintrinsic value of the EUR-denominated Accelerate!options outstanding and exercisable at December 31,2016, was EUR 11 million. The aggregate intrinsic valueof the USD-denominated Accelerate! optionsoutstanding and exercisable at December 31, 2016, wasUSD 3 million.The total intrinsic value of Accelerate! optionsexercised during 2016 was EUR 4 million for EUR-denominated options (2015: EUR 5 million) and USD 1million for USD-denominated options (2015: USD 1million).Cash received from exercises for EUR-denominatedand USD-denominated Accelerate! options amountedto EUR 9 million in 2016 (2015: EUR 9 million). The actualtax deductions realized as a result of Accelerate! USDoptions exercises totaled approximately EUR 0.3million in 2016 (2015: EUR 0.3 million).28Information on remunerationRemuneration of the Executive CommitteeIn 2016, the total remuneration costs relating to themembers of the Executive Committee (consisting of 12members, including the members of the Board ofManagement) amounted to EUR 22,433,827 (2015: EUR15,098,023, 2014: EUR 16,878,909) consisting of theelements in the table below.Group financial statements10.9Annual Report 2016157Philips GroupRemuneration costs of the Executive Committee1) in EUR2014 - 20162014 2015 2016 Base salary/Base compensation6,513,027 5,974,928 6,388,667 Annual incentive2)1,526,658 2,705,560 5,746,347 Performance shares3)3,357,142 2,740,004 5,943,782 Stock options3)583,755 88,775 − Restricted share rights3)409,809 91,339 764,311 Pension allowances4)− 2,193,409 1,854,129 Pension scheme costs2,458,759 209,462 180,077 Other compensation5)2,029,759 1,094,546 1,556,514 1)The Executive Committee consisted of 12 members as per December 31, 2016 (2015: 8 members; 2014: 9 members)2)The annual incentives are related to the performance in the year reported which are paid out in the subsequent year3)Costs of performance shares, stock options and restricted share rights are based on accounting standards (IFRS) and do not reflect the value of stock options atthe end of the lock up period and the value of performance shares and restricted share rights at the vesting/release date4)Pension allowances are gross taxable allowances paid to the Executive Committee members in the Netherlands. These allowances are part of the pensionarrangement5)The stated amounts mainly concern (share of) allowances to members of the Executive Committee that can be considered as remuneration. In a situation wheresuch a share of an allowance can be considered as (indirect) remuneration (for example, private use of the company car), then the share is both valued andaccounted for here. The method employed by the fiscal authorities is the starting point for the value stated.At December 31, 2016, the members of the Executive Committee (including the members of the Board of Management)held 750,631 (2015: 843,461; 2014: 1,050,080) stock options at a weighted average exercise price of EUR 21.17 (2015: EUR18.67; 2014: EUR 18.53).Remuneration of the Board of ManagementIn 2016, the total remuneration costs relating to the members of the Board of Management amounted to EUR 8,904,859(2015: EUR 6,612,092; 2014: EUR 6,635,334), see table below.At December 31, 2016, the members of the Board of Management held 476,200 stock options (2015: 479,881; 2014:586,500) at a weighted average exercise price of EUR 19.47 (2015: EUR 19.52; 2014: EUR 19.60).Philips GroupRemuneration costs of individual members of the Board of Management in EUR2014 - 2016base compen-sation/salary annual incentive1)performanceshares2)stock options2)restric-ted share rights2)pensionallowances3)pensionschemecosts othercompen-sation4)totalcosts 2016 F.A. van Houten1,197,500 1,354,227 1,423,538 − 12,041 536,195 24,838 126,703 4,675,042 A. Bhattacharya650,000 540,072 362,758 − 3,341 201,524 24,838 73,642 1,856,175 P.A.J. Nota702,500 619,745 683,101 − 9,251 277,649 24,838 56,558 2,373,642 2,550,000 2,514,044 2,469,397 − 24,633 1,015,368 74,514 256,903 8,904,859 2015 F.A. van Houten1,168,750 768,920 1,273,940 17,713 28,279 529,387 25,241 78,035 3,890,265 A. Bhattacharya23,551 11,937 8,968 − 183 7,315 886 998 53,838 R.H. Wirahadiraksa664,583 239,250 (652,049)12,045 (37,210)290,772 24,002 29,477 570,870 P.A.J. Nota672,500 383,112 605,749 12,045 21,964 270,529 26,302 104,918 2,097,119 2,529,384 1,403,219 1,236,608 41,803 13,216 1,098,003 76,431 213,428 6,612,092 2014 F.A. van Houten1,137,500 349,600 860,564 101,344 76,951 − 485,655 86,554 3,098,168 R.H. Wirahadiraksa712,500 156,600 446,337 68,914 52,965 − 298,995 35,909 1,772,220 P.A.J. Nota643,750 258,180 406,358 68,914 57,200 − 267,037 63,507 1,764,946 2,493,750 764,380 1,713,259 239,172 187,116 − 1,051,687 185,970 6,635,334 1)The annual incentives are related to the performance in the year reported which are paid out in the subsequent year. For more details on the annual incentives,see sub-section 8.2.6, 2016 Annual Incentive, of this Annual Report2)Costs of performance shares, stock options and restricted share rights are based on accounting standards (IFRS) and do not reflect the value of stock options atthe end of the lock up period and the value of performance shares and restricted share rights at the vesting/release date3)Pension allowances are gross taxable allowances paid to members of the Board of Management. These allowances are part of the pension arrangement asagreed upon in the services contracts.4)The stated amounts mainly concern (share of) allowances to members of the Board of Management that can be considered as remuneration. In a situationwhere such a share of an allowance can be considered as (indirect) remuneration (for example, private use of the company car), then the share is both valuedand accounted for here. The method employed by the fiscal authorities is the starting point for the value statedFor further information on remuneration costs, see sub-section 8.2.4, Remuneration costs, of this Annual Report.Group financial statements10.9158Annual Report 2016The tables below give an overview of the performance share plans and the stock option plans of the Company, held bythe members of the Board of Management:Philips GroupNumber of performance shares (holdings) in number of shares2016January 1, 2016 awarded 2016 awarded dividend shares 2016 realized 2016 December 31,2016 vesting date F.A. van Houten69,097 − − 58,732 − 05.03.2016 63,117 − 2,182 − 65,299 04.28.2017 56,677 – 1,959 − 58,636 05.05.2018 – 59,287 2,049 – 61,336 04.29.2019 A. Bhattacharya13,0861)− − 11,123 − 05.03.2016 11,4341)− 396 − 11,830 04.28.2017 12,0591)– 417 − 12,476 05.05.2018 – 26,650 921 − 27,571 04.29.2019 P.A.J. Nota32,717 − − 27,809 − 05.03.2016 29,729 − 1,028 − 30,757 04.28.2017 27,333 – 945 − 28,278 05.05.2018 – 29,110 1,006 – 30,116 04.29.2019 Performance shares (holdings)315,249 115,047 10,903 97,664 326,299 1)Awarded before date of appointment as a member of the Board of ManagementPhilips GroupStock options (holdings) in number of shares2016January 1,2016 granted exercised expired December31, 2016 grant price (in euros) share(closing)price onexercisedate expiry date F.A. van Houten20,4001)− − − 20,400 22.88 − 10.18.2020 75,000 – − − 75,000 20.90 − 04.18.2021 75,000 − − − 75,000 14.82 − 04.23.2022 55,000 − − − 55,000 22.43 − 01.29.2023 A. Bhattacharya3,6811)− − 3,6811)− 26.28 − 04.18.2016 16,5001)− − − 16,500 22.88 − 10.18.2020 16,5001)− − − 16,500 20.90 − 04.18.2021 20,0001)− − − 20,000 15.24 − 01.30.2022 16,5001)− − − 16,500 14.82 − 04.23.2022 P.A.J. Nota40,8001)− − − 40,800 22.88 − 10.18.2020 51,000 – − − 51,000 20.90 − 04.18.2021 51,000 − − − 51,000 14.82 − 04.23.2022 38,500 − − − 38,500 22.43 − 01.29.2023 Stock options (holdings)479,881 − − 3,681 476,200 1)Awarded before date of appointment as a member of the Board of ManagementUnder the Long-Term Incentive Plan operative until2013, members of the Board of Management weregranted restricted share rights. During 2015 the lastrelease of these restricted share rights took place.However, if the shares from the restricted share rightsrelease were kept for another 3 years, members of theBoard of Management received so-called ‘premiumshares’. As at December 31, 2016, awarded premiumshares amounted to 4,002 for F.A. van Houten, 419 forA. Bhattacharya and 1,797 for P.A.J. Nota (all to bereleased in 2017 and 2018). The premium shares to A.Bhattacharya result from restricted share rights grantsawarded before date of appointment as a member ofthe Board of Management.See note 27, Share-based compensation for furtherinformation on performance shares, stock options andrestricted share rights as well sub-section 8.2.7, 2016Long-Term Incentive Plan, of this Annual Report.Group financial statements10.9Annual Report 2016159The accumulated annual pension entitlements and thepension costs of individual members of the Board ofManagement are as follows (in EUR):Philips GroupAccumulated annual pension entitlements and pension-relatedcosts in EUR2016age atDecember 31,2016 accumulatedannualpension as ofDecember 31,20161)total pension related costs2)F.A. van Houten56 293,351 561,033 A. Bhattacharya55 23,882 226,362 P.A.J. Nota52 44,062 302,487 Pension costs 1,089,882 1)Total of entitlements under Philips pension scheme, including - ifapplicable - transferred pension entitlements under pension scheme(s)of previous employer(s)2)Cost related to period of board membership and include paid pensionallowances as well as pension premium paid by employer to CollectiveDefined Contribution planWhen pension rights are granted to members of theBoard of Management, necessary payments (if insured)and all necessary provisions are made in accordancewith the applicable accounting principles. In 2016, no(additional) pension benefits were granted to formermembers of the Board of Management.Remuneration of the Supervisory BoardThe remuneration of the members of the SupervisoryBoard amounted to EUR 1,037,209 (2015: EUR1,083,667; 2014: EUR 816,668). Former membersreceived no remuneration.At December 31, 2016 the members of the SupervisoryBoard held no stock options.The individual members of the Supervisory Boardreceived, by virtue of the positions they held, thefollowing remuneration (in EUR):Philips GroupRemuneration of the Supervisory Board in EUR2014 - 2016membership committees other compensation1)total 20162) J.A. van der Veer135,000 26,667 7,000 168,667 C. Poon90,000 32,500 22,000 144,500 C.J.A. van Lede (Jan.-May)3)33,333 4,375 2,000 39,708 E. Kist (Jan.-May)40,000 4,167 2,000 46,167 H. von Prondzynski80,000 25,000 19,500 124,500 J.P. Tai80,000 34,167 32,000 146,167 N. Dhawan80,000 13,000 27,000 120,000 O. Gadiesh80,000 13,000 19,500 112,500 D.E.I. Pyott80,000 23,000 32,000 135,000 698,333 175,876 163,000 1,037,209 20152) J.A. van der Veer135,000 31,667 7,000 173,667 C. Poon90,000 17,500 15,000 122,500 C.J.A. van Lede80,000 14,333 7,000 101,333 E. Kist80,000 10,000 2,000 92,000 H. von Prondzynski80,000 26,833 19,500 126,333 J.P. Tai80,000 29,167 35,000 144,167 N. Dhawan80,000 13,000 20,000 113,000 O. Gadiesh80,000 13,000 17,000 110,000 D.E.I. Pyott (May-Dec.)80,000 8,667 12,000 100,667 785,000 164,167 134,500 1,083,667 20142) J.A. van der Veer110,000 20,500 2,000 132,500 J.J. Schiro (Jan.-Aug.)65,000 12,334 2,000 79,334 C. Poon65,000 14,000 17,000 96,000 C.J.A. van Lede65,000 10,000 2,000 77,000 E. Kist65,000 8,000 2,000 75,000 H. von Prondzynski65,000 15,167 2,000 82,167 J.P. Tai65,000 15,000 23,000 103,000 N. Dhawan65,000 10,000 23,000 98,000 O. Gadiesh (May-Dec.)65,000 6,667 2,000 73,667 630,000 111,668 75,000 816,668 1)The amounts mentioned under other compensation relate to the fee for intercontinental travel, inter-European travel (effective 2015) and the entitlement of EUR 2,000 underthe Philips product arrangement2)As of 2013, part of the remuneration of members of the Supervisory Board living in the Netherlands is subject to VAT. The amounts mentioned in this table are excluding VAT3)After the separation of the Company, Mr van Lede joined the Supervisory Board of Philips Lighting.Group financial statements10.929160Annual Report 2016Supervisory Board members’ and Board ofManagement members’ interests in PhilipssharesMembers of the Supervisory Board and of the Board ofManagement are not allowed to hold any derivatives ofPhilips securities.Philips GroupShares held by Board members1) in number of shares2016December31, 2015 December31, 2016 J. van der Veer18,366 18,366 H. von Prondzynski3,633 3,758 J.P. Tai3,716 3,844 F.A. van Houten121,762 189,824 A. Bhattacharya29,415 42,913 P.A.J. Nota66,133 89,798 1)Reference date for board membership is December 31, 201629Fair value of financial assets and liabilitiesThe estimated fair value of financial instruments hasbeen determined by the Company using availablemarket information and appropriate valuationmethods. The estimates presented are not necessarilyindicative of the amounts that will ultimately berealized by the Company upon maturity or disposal.The use of different market assumptions and/orestimation methods may have a material effect on theestimated fair value amounts.For cash and cash equivalents, current receivables,accounts payable, interest accrual and short-termdebts, the carrying amounts approximate fair valuebecause of the short maturity of these instruments, andtherefore fair value information is not included in thetable below.The fair value of Philips’ debt is estimated on the basisof the quoted market prices for certain issues, or on thebasis of discounted cash flow analysis based uponmarket rates plus Philips’ spread for the particulartenors of the borrowing arrangement. Accrued interestis not included within the carrying amount or estimatedfair value of debt.The following table shows the carrying amounts andfair values of financial assets and financial liabilities,including their levels in the fair value hierarchy. It doesnot include fair value information for financial assetsand financial liabilities not measured at fair value if thecarrying amount is a reasonable approximation of fairvalue.Group financial statements10.9Annual Report 2016161Philips GroupFair value of financial assets and liabilities in millions of EUR2015 - 2016Balance as of December 31, 2015 Balance as of December 31, 2016 carrying amount estimated fair value carrying amount estimated fair value Financial assets Carried at fair value: Available-for-sale financial assets232 232 172 172 Securities classified as assets held for sale(1)(1)1 1 Fair value through profit and loss33 33 27 27 Derivative financial instruments161 161 160 160 Financial assets carried at fair value425 360 Carried at (amortized) cost: Cash and cash equivalents1,766 2,334 Loans and receivables: Loans - current12 101 101 Non-current loans and receivables88 88 Other non-current loans and receivables134 134 Loans classified as assets held for sale2 Receivables - current4,982 5,327 Receivables - non-current191 155 Held-to-maturity investments2 2 Financial assets carried at (amortized) costs7,177 8,053 Financial liabilities Carried at fair value: Derivative financial instruments(933)(933)(873)(873)Financial liabilities carried at fair value(933) (873) Carried at (amortized) cost: Accounts payable(2,673) (2,848) Interest accrual(69) (68) Debt (Corporate bond, finance lease and bank loans)(3,944)(4,294)(5,095)(5,474)Debt (Other bank loans, overdrafts etc.)(1,816) (511) Financial liabilities carried at (amortized) costs(8,502) (8,522) Philips GroupFair value hierarchy in millions of EUR2016level 1 level 2 level 3 total Balance as of December 31, 2016 Available-for-sale financial assets36 29 107 172 Securities classified as assets held for sale- - 1 1 Financial assets designated at fair value through profit and loss- 24 3 27 Derivative financial instruments - assets- 160 - 160 Current loans and receivables- 101 - 101 Total financial assets36 314 111 461 Derivative financial instruments - liabilities- (873)- (873)Debt(3,990)(1,484)- (5,474)Total financial liabilities(3,990)(2,357)- (6,347) Balance as of December 31, 2015 Available-for-sale financial assets76 68 88 232 Securities classified as assets held for sale(1)- - (1)Financial assets designated at fair value through profit and loss- 33 - 33 Derivative financial instruments - assets- 161 - 161 Non-current loans and receivables- 88 - 88 Total financial assets75 350 88 513 Derivative financial instruments - liabilities- (933)- (933)Debt(4,084)(210)- (4,294)Total financial liabilities(4,084)(1,143)- (5,227)Group financial statements10.9162Annual Report 2016The table above represents categorization ofmeasurement of the estimated fair values of financialassets and liabilities.Specific valuation techniques used to value financialinstruments include:Level 1Instruments included in level 1 are comprised primarilyof listed equity investments classified as available-for-sale financial assets, investees and financial assetsdesignated at fair value through profit and loss.The fair value of financial instruments traded in activemarkets is based on quoted market prices at thebalance sheet date. A market is regarded as active ifquoted prices are readily and regularly available froman exchange, dealer, broker, industry group, pricingservice, or regulatory agency, and those pricesrepresent actual and regularly occurring markettransactions on an arm’s length basis.Level 2The fair value of financial instruments that are nottraded in an active market (for example, over-the-counter derivatives or convertible bond instruments)are determined by using valuation techniques. Thesevaluation techniques maximize the use of observablemarket data where it is available and rely as little aspossible on entity-specific estimates. If all significantinputs required to fair value an instrument are based onobservable market data, the instrument is included inlevel 2.The fair value of derivatives is calculated as the presentvalue of the estimated future cash flows based onobservable interest yield curves, basis spread andforeign exchange rates.The valuation of convertible bond instruments usesobservable market quoted data for the options andpresent value calculations using observable yieldcurves for the fair value of the bonds.Level 3If one or more of the significant inputs are not based onobservable market data, such as third-party pricinginformation without adjustments, the instrument isincluded in level 3.The table below shows the reconciliation from thebeginning balance to the end balance for fair valuemeasured in Level 3 of the fair value hierarchy.Philips GroupReconciliation of the fair value hierarchy in millions of EUR2016financial assets Balance as of January 1, 201688 Gains and losses recognized in: -in profit or loss(3)-in other comprehensive income(18)Purchase47 Sales(3)Balance as of December 31, 2016111 The section below elaborates on transactions inderivatives. Transactions in derivatives are subject tomaster netting and set-off agreements. In the case ofcertain termination events, under the terms of theMaster Agreement, Philips can terminate theoutstanding transactions and aggregate their positiveand negative values to arrive at a single net terminationsum (or close-out amount). This contractual right issubject to the following:•The right may be limited by local law if thecounterparty is subject to bankruptcy proceedings;•The right applies on a bilateral basis.Philips GroupFinancial assets subject to offsetting, enforceable master nettingarrangements or similar agreements in millions of EUR2015 - 20162015 2016 Derivatives Gross amounts of recognized financial assets161 160 Gross amounts of recognized financial liabilitiesoffset in the balance sheet- - Net amounts of financial assets presented inthe balance sheet161 160 Related amounts not offset in the balance sheet Financial instruments(81)(92)Cash collateral received- - Net amount80 68 Philips GroupFinancial liabilities subject to offsetting, enforceable masternetting arrangements or similar agreements in millions of EUR2015 - 2016 2015 2016 Derivatives Gross amounts of recognized financial liabilities(933)(873)Gross amounts of recognized financial assetsoffset in the balance sheet- - Net amounts of financial liabilities presented inthe balance sheet(933)(873) Related amounts not offset in the balance sheet Financial instruments81 92 Cash collateral received- - Net amount(852)(781)30Group financial statements10.9Annual Report 201616330Details of treasury / other financial risksPhilips is exposed to several types of financial risks. Thisnote further analyzes financial risks. Philips does notpurchase or hold derivative financial instruments forspeculative purposes. Information regarding financialinstruments is included in note 29, Fair value of financialassets and liabilities.Liquidity riskLiquidity risk is the risk that an entity will encounterdifficulty in meeting obligations associated withfinancial liabilities.Liquidity risk for the group is monitored through theTreasury liquidity committee, which tracks thedevelopment of the actual cash flow position for thegroup and uses input from a number of sources in orderto forecast the overall liquidity position on both a shortand long-term basis. Group Treasury invests surpluscash in money market deposits with appropriatematurities to ensure sufficient liquidity is available tomeet liabilities when due.The rating of the Company’s debt by major ratingservices may improve or deteriorate. As a result, Philips’future borrowing capacity may be influenced and itsfinancing costs may fluctuate. Philips has varioussources to mitigate the liquidity risk for the group. AtDecember 31, 2016, Philips had EUR 2,334 million incash and cash equivalents (2015: EUR 1,766 million),within which short-term deposits of EUR 1,299 million(2015: EUR 855 million) and other liquid assets of EUR53 million (2015: EUR 171 million). Philips pools cashfrom subsidiaries to the extent legally andeconomically feasible; cash not pooled remainsavailable for Company’s operational or investmentneeds.Furthermore, Royal Philips has a USD 2.5 billionCommercial Paper Program and a EUR 1.8 billionrevolving credit facility that can be used for generalgroup purposes and as a backstop for its commercialpaper program. In January 2013 the EUR 1.8 billionfacility was extended by 2 years until February 18, 2018.As of December 31, 2016, Royal Philips did not have anyamounts outstanding under any of these facilities. Adescription of Philips’ credit facilities, including anycovenants, can be found in note 18, Debt.Additionally, Philips also held EUR 36 million of equityinvestments in available-for-sale financial assets (fairvalue at December 31, 2016).Currency riskCurrency risk is the risk that reported financialperformance or the fair value or future cash flows of afinancial instrument will fluctuate because of changesin foreign exchange rates. Philips operates in manycountries and currencies and therefore currencyfluctuations may impact Philips’ financial results.Philips is exposed to currency risk in the followingareas:•Transaction exposures, related to anticipated salesand purchases and on-balance-sheet receivables/payables resulting from such transactions•Translation exposure of foreign-currencyintercompany and external debt and deposits•Translation exposure of net income in foreign entities•Translation exposure of foreign-currency-denominated equity invested in consolidatedcompanies•Translation exposure to equity interests in non-functional-currency investments in associates andavailable-for-sale financial assets.It is Philips’ policy to reduce the potential year-on-yearvolatility caused by foreign-currency movements on itsnet earnings by hedging the anticipated net exposureof foreign currencies resulting from foreign-currencysales and purchases. In general, net anticipatedexposures for the Group are hedged during a period of15 months in layers of 20% up to a maximum hedge of80%, using forwards and currency options. Philips’policy requires significant committed foreign currencyexposures to be fully hedged, generally using forwards.However, not every foreign currency can or shall behedged as there may be regulatory barriers orprohibitive hedging cost preventing Philips fromeffectively and/or efficiently hedging its currencyexposures. As a result, hedging activities cannot andwill not eliminate all currency risks for anticipated andcommitted transaction exposures.During 2015 Philips has changed its hedging policy withregard to anticipated transaction exposures. Theprevious hedging policy focused on protecting againstchanges in value of forecasted individual transactionsand cash flows. Under the previous policy the hedgingratio and period were set by individual businessesbased on their ability to forecast cash flows, the timehorizon for the cash flows and their ability to adapt tochanging levels of foreign currency rates.Group financial statements10.9164Annual Report 2016The following table outlines the estimated nominalvalue in millions of EUR for committed and anticipatedtransaction exposure and related hedges for Philips’most significant currency exposures consolidated as ofDecember 31, 2016:Philips GroupEstimated transaction exposure and related hedgesin millions of EUR2016Receivables Payables exposure hedges exposure hedges Balance as ofDecember 31,2016 Exposure currency USD1,330 (869)(804)629 JPY843 (375)(7)7 GBP367 (203)(20)20 AUD309 (160)- - CAD281 (129)(10)10 CHF151 (70)- - PLN127 (65)(23)23 SEK99 (45)(1)1 CZK56 (27)- - CNY92 (73)(744)524 Others556 (396)(155)130 Total 20164,211 (2,412)(1,764)1,344 Total 20154,215 (2,949)(1,959)1,528 The derivatives related to transactions are, for hedgeaccounting purposes, split into hedges of on-balance-sheet accounts receivable/payable and forecastedsales and purchases. Changes in the value of on-balance-sheet foreign-currency accounts receivable/payable, as well as the changes in the fair value of thehedges related to these exposures, are reported in theincome statement under costs of sales. Hedges relatedto forecasted transactions, where hedge accounting isapplied, are accounted for as cash flow hedges. Theresults from such hedges are deferred in othercomprehensive income within equity to the extent thatthe hedge is effective. As of December 31, 2016, a gainof EUR 10 million was deferred in equity as a result ofthese hedges. The result deferred in equity will bereleased to earnings mostly during 2017 at the timewhen the related hedged transactions affect theincome statement. During 2016, a net loss of EUR 5million was recorded in the consolidated statement ofincome as a result of ineffectiveness on certainanticipated cash flow hedges.The total net fair value of hedges related to transactionexposure as of December 31, 2016, was an unrealizedasset of EUR 15 million. An instantaneous 10% increasein the value of the EUR against all currencies would leadto an increase of EUR 98 million in the value of thederivatives; including a EUR 46 million increase relatedto foreign exchange transactions of the USD against theEUR, a EUR 18 million increase related to foreignexchange transactions of the JPY against the EUR, aEUR 10 million increase related to foreign exchangetransactions of the GBP against the EUR and a EUR 5million increase related to foreign exchangetransactions of the AUD against the EUR.The EUR 98 million increase includes a gain of EUR 18million that would impact the income statement, whichwould largely offset the opposite revaluation effect onthe underlying accounts receivable and payable, andthe remaining gain of EUR 80 million would berecognized in equity to the extent that the cash flowhedges were effective.The total net fair value of hedges related to transactionexposure as of December 31, 2015, was an unrealizedasset of EUR 17 million. An instantaneous 10% increasein the value of the EUR against all currencies would leadto an increase of EUR 66 million in the value of thederivatives; including a EUR 25 million increase relatedto foreign exchange transactions of the USD against theEUR, a EUR 18 million increase related to foreignexchange transactions of the GBP against the EUR, aEUR 14 million increase related to foreign exchangetransactions of the JPY, and a EUR 7 million increaserelated to PLN. This was partially offset by a EUR 34million decrease related to foreign exchangetransactions of the EUR against the USD.Foreign exchange exposure also arises as a result ofinter-company loans and deposits. Where theCompany enters into such arrangements, the financingis generally provided in the functional currency of thesubsidiary entity. The currency of the Company’sexternal funding and liquid assets is matched with therequired financing of subsidiaries, either directlythrough external foreign currency loans and deposits,or synthetically by using foreign exchange derivatives,including cross currency interest rate swaps and foreignexchange forward contracts. In certain cases wheregroup companies may also have external foreigncurrency debt or liquid assets, these exposures are alsohedged through the use of foreign exchangederivatives. Changes in the fair value of hedges relatedto this exposure are either recognized within financialincome and expenses in the statements of income,accounted for as cash flow hedges, or where such loanswould be considered part of the net investment in thesubsidiary, net investment hedging would be applied.Translation exposure of foreign-currency equityinvested in consolidated entities may be hedged. If ahedge is entered into, it is accounted for as a netinvestment hedge. Net current-period change, beforetax, of the currency translation reserve of EUR 1,234million relates to the positive impact of the weaker EURagainst the foreign currencies of countries in whichPhilips’ operations are located, partially offset by netinvestment hedging instruments. The change incurrency translation reserve was mostly related todevelopment of the USD.As of December 31, 2016, cross-currency interest rateswaps with a fair value liability of EUR 726 million andexternal bond funding for a nominal value of USD 3,774Group financial statements10.9Annual Report 2016165million were designated as net investment hedges ofour financing investments in foreign operations. During2016 a total gain of EUR 0.2 million was recognized inthe income statement as ineffectiveness on netinvestment hedges. The total net fair value of thesefinancing derivatives as of December 31, 2016, was aliability of EUR 728 million. An instantaneous 10%increase in the value of the EUR against all currencieswould lead to an increase of EUR 53 million in the valueof the derivatives, including a EUR 62 million increaserelated to the USD.As of December 31, 2015, cross-currency interest rateswaps and foreign exchange forward contracts with afair value liability of EUR 812 million and external bondfunding for a nominal value of USD 4,059 millionwere designated as net investment hedges of ourfinancing investments in foreign operations. During2015 a total gain of EUR 0.1 million was recognized inthe income statement as ineffectiveness on netinvestment hedges. The total net fair value of thesefinancing derivatives as of December 31, 2015, was aliability of EUR 794 million. An instantaneous 10%increase in the value of the EUR against all currencieswould lead to an increase of EUR 187 million in the valueof the derivatives, including a EUR 210 million increaserelated to the USD.Philips does not currently hedge the foreign exchangeexposure arising from equity interests in non-functional-currency investments in associates andavailable-for-sale financial assets.Interest rate riskInterest rate risk is the risk that the fair value or futurecash flows of a financial instrument will fluctuatebecause of changes in market interest rates. Philips hadoutstanding debt of EUR 5,606 million, which createdan inherent interest rate risk. Failure to effectivelyhedge this risk could negatively impact financial results.At year-end, Philips held EUR 2,334 million in cash andcash equivalents, and had total long-term debt of EUR4,021 million and total short-term debt of EUR 1,585million. At December 31, 2016, Philips had a ratio offixed-rate long-term debt to total outstanding debt ofapproximately 70%, compared to 68% one year earlier.A sensitivity analysis conducted as of January 2017shows that if long-term interest rates were to decreaseinstantaneously by 1% from their level of December 31,2016, with all other variables (including foreignexchange rates) held constant, the fair value of thelong-term debt would increase by approximately EUR260 million. If there was an increase of 1% in long-terminterest rates, this would reduce the market value of thelong-term debt by approximately EUR 259 million.If interest rates were to increase instantaneously by 1%from their level of December 31, 2016, with all othervariables held constant, the annualized net interestexpense would decrease by approximately EUR 7million. This impact was based on the outstanding netcash position at December 31, 2016.A sensitivity analysis conducted as of January 2016shows that if long-term interest rates were to decreaseinstantaneously by 1% from their level of December 31,2015, with all other variables (including foreignexchange rates) held constant, the fair value of thelong-term debt would increase by approximately EUR303 million. If there was an increase of 1% in long-terminterest rates, this would reduce the market value of thelong-term debt by approximately EUR 302 million.If interest rates were to increase instantaneously by 1%from their level of December 31, 2015, with all othervariables held constant, the annualized net interestexpense would increase by approximately EUR 1million. This impact was based on the outstanding netcash position at December 31, 2015.Equity price riskEquity price risk is the risk that the fair value or futurecash flows of a financial instrument will fluctuatebecause of changes in equity prices.Philips is a shareholder in some publicly listedcompanies, including Corindus Vascular Robotics. As aresult, Philips is exposed to potential financial lossthrough movements in their share prices. The aggregateequity price exposure in such financial assetsamounted to approximately EUR 35 million at year-end2016 (2015: EUR 75 million). Philips does not holdderivatives in its own shares or in the above-mentionedlisted companies. Philips also has shareholdings inseveral privately-owned companies amounting to EUR105 million. As a result, Philips is exposed to potentialvalue adjustments.Commodity price riskCommodity price risk is the risk that the fair value orfuture cash flows of a financial instrument will fluctuatebecause of changes in commodity prices.Philips is a purchaser of certain base metals, preciousmetals and energy. Philips hedges certain commodityprice risks using derivative instruments to minimizesignificant, unanticipated earnings fluctuations causedby commodity price volatility. The commodity pricederivatives that Philips enters into are accounted for ascash flow hedges to offset forecasted purchases. As ofDecember 2016, Philips does not have any outstandingcommodity derivatives.As of December 2015, a loss of EUR 0.2 million wasdeferred in equity as a result of these hedges. A 10%increase in the market price of all commodities as ofDecember 31, 2015, would increase the fair value of thederivatives by less than EUR 0.1 million.Group financial statements10.9166Annual Report 2016Credit riskCredit risk represents the loss that would be recognizedat the reporting date, if counterparties failedcompletely to perform their payment obligations ascontracted. Credit risk is present within Philips tradereceivables. To have better insights into the creditexposures, Philips performs ongoing evaluations of thefinancial and non-financial condition of its customersand adjusts credit limits when appropriate. In instanceswhere the creditworthiness of a customer is determinednot to be sufficient to grant the credit limit required,there are a number of mitigation tools that can beutilized to close the gap, including reducing paymentterms, cash on delivery, pre-payments and pledges onassets.Philips invests available cash and cash equivalents withvarious financial institutions and is exposed to creditrisk with these counterparties. Philips is also exposedto credit risks in the event of non-performance byfinancial institutions with respect to financial derivativeinstruments. Philips actively manages concentrationrisk and on a daily basis measures the potential lossunder certain stress scenarios, should a financialinstitution default. These worst-case scenario lossesare monitored and limited by the Company.The Company does not enter into any financialderivative instruments to protect against default byfinancial institutions. However, where possible theCompany requires all financial institutions with which itdeals in derivative transactions to complete legallyenforceable netting agreements under an InternationalSwap Dealers Association master agreement orotherwise prior to trading, and whenever possible, tohave a strong credit rating from Standard & Poor’s andMoody’s Investor Services. Philips also regularlymonitors the development of the credit risk of itsfinancial counterparties. Wherever possible, cash isinvested and financial transactions are concluded withfinancial institutions with strong credit ratings or withgovernments or government-backed institutions.The table below shows A-rated financial instructionswith which Philips has cash at hand and short-termdeposits above EUR 25 million as of December 31, 2016.The remaining cash at hand and deposits are mainlywith BBB+ counterparty banks.Philips GroupCredit risk with number of A-rated counterpartiesfor deposits above EUR 25 million201625-100 million 100-500million 500 millionand above A rated bankcounterparties3 3 1 3 3 1 For an overview of the overall maximum creditexposure of the group’s financial assets, please refer tonote 29, Fair value of financial assets and liabilities fordetails of carrying amounts and fair value.Country riskCountry risk is the risk that political, legal, or economicdevelopments in a single country could adverselyimpact our performance. The country risk per country isdefined as the sum of the equity of all subsidiaries andassociated companies in country cross-bordertransactions, such as intercompany loans, accountsreceivable from third parties and intercompanyaccounts receivable. The country risk is monitored on aregular basis.As of December 31, 2016, the Company had country riskexposure of EUR 10.5 billion in the United States, EUR1.8 billion in China (including Hong Kong), EUR 1.3 billionin Netherlands and EUR 756 million in Singapore. Othercountries higher than EUR 500 million are Germany(EUR 775 million), Japan (EUR 671 million), UnitedKingdom (EUR 625 million), Belgium (EUR 523 million)and Poland (EUR 508 million). Countries where the riskexceeded EUR 300 million but was less than EUR 500million are Malaysia, Saudi Arabia and India. Thedegree of risk of a country is taken into account whennew investments are considered. The Company doesnot, however, use financial derivative instruments tohedge country risk.Other insurable risksPhilips is covered for a broad range of losses by globalinsurance policies in the areas of property damage/business interruption, general and product liability,transport, directors’ and officers’ liability, employmentpractice liability, crime and cyber security. Thecounterparty risk related to the insurance companiesparticipating in the above-mentioned global insurancepolicies is actively managed. As a rule, Philips onlyselects insurance companies with an S&P credit ratingof at least A-. Throughout the year the counterparty riskis monitored on a regular basis.To lower exposures and to avoid potential losses,Philips has a global Risk Engineering program in place.The main focus of this program is on property damageand business interruption risks including companyinterdependencies. Regular on-site assessments takeplace at Philips locations and business-criticalsuppliers by risk engineers of the insurer in order toprovide an accurate assessment of the potential lossand its impact. The results of these assessments areshared across the Company’s stakeholders. On-siteassessments are carried out against the predefined RiskEngineering standards which are agreed betweenPhilips and the insurers. Recommendations are madein a Risk Improvement report and are monitoredcentrally. This is the basis for decision-making by thelocal management of the business as to whichrecommendations will be implemented.For all policies, deductibles are in place, which varyfrom EUR 0.25 million to EUR 5 million per occurrenceand this variance is designed to differentiate betweenthe existing risk categories within Philips. Above thisfirst layer of working deductibles, Philips operates its31Group financial statements10.9Annual Report 2016167own re-insurance captive, which during 2016 retainedEUR 2.5 million per occurrence for property damageand business interruption losses and EUR 5 million inthe aggregate per year. For general and product liabilityclaims, the captive retained EUR 1.5 million per claimand EUR 6 million in the aggregate. New contracts weresigned on December 31, 2016, for the coming year,whereby the re-insurance captive retentions remainedunchanged.31Subsequent eventsNew credit facilityIn January 2017, Philips entered into a USD 1 billion andEUR 300 million credit facility with a consortium ofinternational banks. Under this credit facility Philipsdrew USD 1 billion in January; the facility was used forthe early redemption of 5.750% Notes due 2018 in theaggregate principal amount of USD 1,250 million. Thematurity date of the new facility is December 29, 2017,however Philips expects to prepay this facility in thecourse of 2017.Offering of Philips Lighting sharesOn February 9, 2017 Royal Philips completed anaccelerated book build offering to institutionalinvestors of 26 million shares in Philips Lighting at aprice of EUR 23.40 per share realizing total proceeds ofEUR 608 million. This transaction reduced RoyalPhilips’ stake in Philips Lighting’s outstanding sharecapital from 71.225% to 53.892%.As part of this transaction, Philips Lighting repurchased3.5 million shares in the offering and intends to cancelthese shares. After cancellation of the 3.5 million sharesthat Philips Lighting has acquired in the offering, RoyalPhilips’ shareholding in Philips Lighting is expected torepresent 55.180% of Philips Lighting’s outstandingshare capital.Company financial statements11168Annual Report 201611Company financialstatementsIntroductionStatutory financial statementsThe sections Group financial statements and Companyfinancial statements contain the statutory financialstatements of Koninklijke Philips N.V. (the Company).A description of the Company’s activities and groupstructure is included in the Group financial statements.Accounting policies appliedThe financial statements of the Company included inthis section are prepared in accordance with Part 9 ofBook 2 of the Dutch Civil Code. Section 2:362 (8) of theDutch Civil Code, allows companies that apply IFRS asendorsed by the European Union in their consolidatedfinancial statements to use the same measurementprinciples in their company financial statements. TheCompany has prepared these Company financialstatements using this provision.The accounting policies are described in note 1,Significant accounting policies of the Group financialStatements and are deemed incorporated andrepeated herein by reference.Investments in group companies in the Companyfinancial statements are accounted for using the equitymethod.Presentation of Company financialstatementsThe structure of the Company balance sheets andCompany statements of income are aligned as much aspossible with the Consolidated statements in order toachieve optimal transparency between the Groupfinancial statements and the Company financialstatements. Consequently, the presentation of theCompany statements deviates from Dutch regulations.The Company balance sheet has been prepared beforethe appropriation of result.Additional informationFor ‘Additional information’ within the meaning ofSection 2:392 of the Dutch Civil Code, please refer tosection 11.5, Independent auditor’s report, of thisAnnual Report.Company financial statements11.1Annual Report 201616911.1Statements of incomeKoninklijke Philips N.V.Statements of income in millions of EURFor the year ended December 312015 2016 ASales489 422 Cost of sales(38)(34)Gross margin451 388 Selling expenses(26)(17)General and administrative expenses(26)(21)Impairment of goodwill3 - BOther business income102 65 Other business expenses3 (6)CIncome from operations507 409 DFinancial income472 448 DFinancial expenses(317)(466)Income before taxes662 391 EIncome tax expense26 (142)Income after tax688 249 Results relating to investments in associates23 4 Net income (loss) from affiliated companies(66)1,195 Net income645 1,448 Company financial statements11.2170Annual Report 201611.2Balance sheets before appropriation of resultsKoninklijke Philips N.V.Balance sheets in millions of EUR unless otherwise statedAs of December 312015 2016 Assets Non-current assets: Property, plant and equipment1 1 GIntangible assets81 80 HFinancial fixed assets21,176 22,067 Non-current receivables88 79 Deferred tax assets766 548 IOther non-current financial assets279 148 Total non-current assets 22,391 22,923 Current assets: Current financial assets10 91 JReceivables8,298 8,458 Cash and cash equivalents730 756 Total current assets 9,038 9,305 Total assets 31,429 32,228 Liabilities and shareholders’ equity KShareholders’ equity: Preference shares, par value EUR 0.20 per share: -Authorized: 2,000,000,000 shares (2015: 2,000,000,000 shares) -Issued: none Common shares, par value EUR 0.20 per share: -Authorized: 2,000,000,000 shares (2015: 2,000,000,000 shares) -Issued and fully paid: 929,644,864 shares (2015: 931,130,387 shares)186 186 Capital in excess of par value2,669 3,083 Legal reserve: revaluation4 - Legal reserve: available-for-sale financial assets56 36 Legal reserve: cash flow hedges12 10 Legal reserve: affiliated companies958 715 Legal reserve: currency translation differences1,058 1,234 Retained earnings6,437 6,070 Net income1)645 1,448 Treasury shares, at cost: 7,208,301 shares (2015: 14,026,801 shares)(363) (181) Total equity 11,662 12,601 Non-current liabilities: LLong-term debt3,933 2,602 Long-term provisions5 7 Deferred tax liabilities12 11 Other non-current liabilities789 667 Total non-current liabilities 4,739 3,287 Current liabilities: LShort-term debt14,528 15,815 MOther current liabilities500 525 Total current liabilities 15,028 16,340 Liabilities and shareholders’ equity 31,429 32,228 1)Prepared before appropriation of resultsCompany financial statements11.3Annual Report 201617111.3Statement of changes in equityKoninklijke Philips N.V.Statement of changes in equity in millions of EUR unless otherwise statedFor the year ended December 31common sharescapital in excess of par valuerevaluationavailable-for-sale financial assetscash flow hedgesaffiliated companiescurrency translation differencesretained earningsnet incometreasury sharesshareholders’ equity legal reserves Balance as of January 1, 2016186 2,669 4 56 12 958 1,058 6,437 645 (363)11,662 Appropriation of prioryear result 645 (645) Net income 1,448 1,448 Release revaluation reserve (4) 4 - Net current period change 1) (44)2 (243)174 300 189 Income tax on net current period change - (9) 2 (7)Reclassification intoincome 24 5 - 29 Dividend distributed4 398 (732) (330)Cancellation of treasuryshares(4) (446) 450 - Purchase of treasuryshares (589)(589)Re-issuance of treasury shares (122) (35) 231 74 Share call options (103) 90 (13)Share-based compensation plans 119 119 Income tax on share-based compensation plans 19 19 Balance as of December 31, 2016186 3,083 - 36 10 715 1,234 6,070 1,448 (181)12,601 1)The net current period change includes the impact of the IPO of Philips Lighting, which had a positive impact on Shareholders’ equity of EUR 109 million.Company financial statements11.4ABCDEFGH172Annual Report 201611.4NotesNotes to the Company financial statementsASalesSales relates to external sales and mainly compriseslicense income from intellectual property rights ownedby the Company.BOther business incomeOther business income mainly relates to income fromtransactions with group companies regarding overheadservices and brand license agreements.CSales and costs by natureKoninklijke Philips N.V.Sales and costs by nature in millions of EUR2015 - 20162015 2016 Sales489 422 Costs of materials used(7)(6)Employee benefit expenses(14)(13)Depreciation and amortization(23)(14)Advertising and promotion(11)(7)Other operational costs(36)(31)Impairment of goodwill3 - Other business income (expenses)106 58 Income from operations507 409 For a summary of the audit fees related to the PhilipsGroup, please refer to the Group Financial statementsnote 6, Income from operations, which is deemedincorporated and repeated herein by reference.DFinancial income and expenseFinancial income mainly consists of interest receivedfrom intercompany financing transactions. Interestreceived from third parties was EUR 21 million (2015:EUR 20 million).Financial expense mainly relates to interest charges onexternal debt (please refer to note L, Debt). In 2016,there are also included financial expenses related to theearly redemption of USD bonds in October 2016 andJanuary 2017 of EUR 91 million and EUR 62 millionrespectively.EIncome taxKoninklijke Philips N.V. is head of the fiscal unity thatexists for Dutch corporate income tax purposes.The income tax expense of EUR 142 million reported inthe Company Statements of income represents theconsolidated amount of current and deferred taxexpense for all members of the fiscal unity. Theeffective tax rate increased in 2016 compared to 2015,mainly due to changes in the contribution of income ofmembers of the fiscal unity to the total taxable result ofthe fiscal unity, compared to the Company’scontribution.At December 31, 2016, net operating loss and tax creditcarryforwards for which no deferred tax assets havebeen recognized in the balance sheet amount to EUR29 million.FEmployeesThe number of persons employed by the Company atthe year-end 2016 was 8 (2015: 7). For the remunerationof past and present members of both the Board ofManagement and the Supervisory Board, please referto note 28, Information on remuneration, which isdeemed incorporated and repeated herein byreference.GIntangible assetsIntangible assets includes mainly licenses and patents.The changes during 2016 are as follows;Koninklijke Philips N.V.Intangible assets in millions of EUR2016Balance as of January 1, 2016: Cost131 Amortization/ impairments(50)Book value81 Changes in book value: Reclassifications(19)Additions32 Amortization(14)Total changes(1)Balance as of December 31, 2016: Cost113 Amortization/ impairments(33)Book value80 HFinancial fixed assetsThe investments in group companies and associatesare presented as financial fixed assets in the balancesheet using the equity method. Goodwill paid uponacquisition of investments in group companies orassociates is included in the net equity value of theinvestment and is not shown separately on the face ofthe balance sheet.Loans provided to group companies are stated atamortized cost, less impairment.A list of investments in group companies, prepared inaccordance with the relevant legal requirements (DutchCivil Code, Book 2, Sections 379 and 414), is depositedat the Chamber of Commerce in Eindhoven,Netherlands.IJKCompany financial statements11.4Annual Report 2016173Koninklijke Philips N.V.Financial fixed assets in millions of EUR2016investmentsin groupcompanies investmentsin associates loans total Balance as ofJanuary 1, 201611,834 73 9,269 21,176 Changes: Acquisitions/additions4,099 3 48 4,150 Sales/redemptions(2,966)- (1,427)(4,393)Net income fromaffiliatedcompanies1,195 4 - 1,199 Dividendsreceived(493)(27)- (520)Translationdifferences277 4 174 455 Balance as ofDecember 31,201613,946 57 8,064 22,067 Prior to the IPO of Philips Lighting, the Companycompleted an internal legal restructuring whereby alllighting activities were concentrated in Philips Lighting.The movements in Acquisitions/additions and Sales/redemptions reflect the impact of this restructuring. Therestructuring qualifies as a transaction under commoncontrol and therefore did not affect results or equity ofthe Company.Included in Sales/redemptions is the divestment of28.775% of the shares of Philips Lighting during the IPOcompleted in May and June 2016, representing anamount of EUR 700 million. Please refer to note 5,Interests in entities.IOther financial assetsThe changes during 2016 were as follows:Koninklijke Philips N.V.Other non-current financial assets in millions of EUR2016available-for-salefinancialassets loans andreceivables financialassets atfair valuethroughprofit andloss total Balance as ofJanuary 1, 2016132 138 9 279 Changes: Reclassifications(4)(100)- (104)Acquisitions/additions40 - - 40 Sales/redemptions/reductions(3)(15)- (18)Impairments(27)- - (27)Value adjustments(20)7 (9)(22)Balance as ofDecember 31,2016118 30 - 148 Available-for-sale financial assetsThe Company’s investments in available-for-salefinancial assets mainly consist of investments incommon shares of companies in various industries. Theline additions/acquisitions mainly relates to capitalcalls for certain investment funds.Loans and receivablesThe reclassification line represents loans transferred toCurrent financial assets and mainly relates to loans toTPV Technology Limited in the amount of EUR 91million.JReceivablesKoninklijke Philips N.V.Receivables in millions of EUR2015 - 20162015 2016 Trade accounts receivable91 86 Affiliated companies7,966 8,176 Other receivables64 50 Advances and prepaid expenses19 12 Derivative instruments - assets158 134 Receivables8,298 8,458 KShareholders’ equityCommon sharesAs of December 31, 2016, the issued and fully paid sharecapital consists of 929,644,864 common shares, eachshare having a par value of EUR 0.20.The following table shows the movements in theoutstanding number of shares:Koninklijke Philips N.V.Outstanding number of shares in number of shares2015 - 20162015 2016 Balance as of January 1914,388,869 917,103,586 Dividend distributed17,671,990 17,344,462 Purchase of treasury shares(20,296,016)(25,193,411)Re-issuance of treasury shares5,338,743 13,181,926 Balance as of December 31917,103,586 922,436,563 Preference sharesThe ‘Stichting Preferente Aandelen Philips’ has beengranted the right to acquire preference shares in theCompany. Such right has not been exercised. As ameans to protect the Company and its stakeholdersagainst an unsolicited attempt to (de facto) take overcontrol of the Company, the General Meeting ofShareholders in 1989 adopted amendments to theCompany’s articles of association that allow the Boardof Management and the Supervisory Board to issue(rights to acquire) preference shares to a third party. Asof December 31, 2016, no preference shares have beenissued.Company financial statements11.4174Annual Report 2016Options, restricted and performance sharesThe Company has granted stock options on its commonshares and rights to receive common shares in thefuture. Please refer to note 27, Share-basedcompensation, which is deemed incorporated andrepeated herein by reference.Treasury sharesIn connection with the Company’s share repurchaseprograms, shares which have been repurchased andare held in treasury for (i) delivery upon exercise ofoptions, performance and restricted share programs,and (ii) capital reduction purposes, are accounted for asa reduction of shareholders’ equity. Treasury shares arerecorded at cost, representing the market price on theacquisition date. When issued, shares are removedfrom treasury shares on a FIFO basis.When treasury shares are reissued under theCompany’s option plans, the difference between thecost and the cash received is recorded in retainedearnings. When treasury shares are reissued under theCompany’s share plans, the difference between themarket price of the shares issued and the cost isrecorded in retained earnings, the market price isrecorded in capital in excess of par value.Dividend withholding tax in connection with theCompany’s purchase of treasury shares for capitalreduction purposes is recorded in retained earnings.The following transactions took place resulting fromemployee option and share plans:Koninklijke Philips N.V.Employee option and share plan transactions2015 - 20162015 2016 Shares acquired 8,601,426 Average market price EUR 24.73 Amount paid EUR 213 million Shares delivered5,338,743 13,181,926 Average price (FIFO)EUR 30.35 EUR 25.86 Cost of delivered sharesEUR 162 million EUR 341 million Total shares in treasuryat year-end11,788,801 7,208,301 Total costEUR 308 million EUR 181 million In order to reduce share capital, the followingtransactions took place:Koninklijke Philips N.V.Share capital transactions2015 - 20162015 2016 Shares acquired20,296,016 16,591,985 Average market priceEUR 24.39 EUR 23.84 Amount paidEUR 495 million EUR 396 million Reduction of capitalstock (shares)21,361,016 18,829,985 Reduction of capitalstockEUR 517 million EUR 450 million Total shares in treasuryat year-end2,238,000 Total costEUR 55 million Share purchase transactions related to employeeoption and share plans, as well as transactions relatedto the reduction of share capital involved a cash outflowof EUR 606 million, which includes the impact of taxes.Settlements of share-based compensation plansinvolved a cash inflow of EUR 80 million.Share call optionsDuring 2016 Philips bought EUR and USD-denominated call options to hedge commitmentsunder share-based compensation plans.For EUR-denominated call options, option premiumsamounting to EUR 64 million (involving 9,393,779options) were deducted from Retained earnings andwere settled in Royal Philips shares held by theCompany representing a historical cost of EUR 77million based on a FIFO method (involving 2,667,203shares).For USD-denominated call options, option premiumsamounting to EUR 35 million (involving 5,635,360options) were deducted from Retained earnings andwere settled in Royal Philips shares held by theCompany representing a historical cost of EUR 32million based on a FIFO method (involving 1,375,803shares).The difference between the option premiums and thehistorical cost of Royal Philips shares was recorded inRetained earnings. Subsequently, in 2016 the Companysold 837,913 EUR call options against the same numberof Royal Philips shares and an additional EUR 13 millioncash payment to the buyer of the call options.Company financial statements11.4Annual Report 2016175Koninklijke Philips N.V.Outstanding call options2016exercise priceoptions intrinsicvalue inmillions weightedaverageremainingcontractualterm EUR-denominated 10-152,530,968 37 4.6 yrs 15-201,063,968 15 5.1 yrs 20-254,960,930 30 3.3 yrs Outstanding sharecall options8,555,866 82 3.9 yrs USD-denominated 15-201,896,597 22 4.6 yrs 20-25424,322 4 5.0 yrs 25-301,822,875 2 4.3 yrs 30-351,491,566 - 3.0 yrs Outstanding sharecall options5,635,360 28 4.1 yrs Dividend distributionIn June 2016, Philips settled a dividend of EUR 0.80 percommon share, representing a total value of EUR 732million including costs. Shareholders could elect for acash dividend or a share dividend. Approximately 55%of the shareholders elected for a share dividend,resulting in the issuance of 17,344,462 new commonshares. The settlement of the cash dividend involved anamount of EUR 330 million (including costs).Legal reservesAs of December 31, 2016, legal reserves relate tounrealized gains on available-for-sale financial assetsof EUR 36 million (2015: EUR 56 million), unrealizedgains on cash flow hedges of EUR 10 million (2015: EUR12 million unrealized losses), ‘affiliated companies’ ofEUR 715 million (2015: EUR 958 million) and unrealizedcurrency translation gains of EUR 1,234 million (2015:EUR 1,058 million unrealized losses). Last year’s legalreserves also included EUR 4 million related to therevaluation of assets and liabilities of acquiredcompanies in the context of multi-stage acquisitions,which were nil as of December 31, 2016.The item ‘affiliated companies’ relates to the ‘wettelijkereserve deelnemingen’, which is required by Dutch law.This reserve relates to any legal or economicrestrictions on the ability of affiliated companies totransfer funds to the parent company in the form ofdividends.Limitations in the distribution ofshareholders’ equityPursuant to Dutch law, limitations exist relating to thedistribution of shareholders’ equity of EUR 2,181 millionas at December 31, 2016. Such limitations relate tocommon shares of EUR 186 million, as well as available-for-sale financial assets of EUR 36 million, unrealizedgains related to cash flow hedges of EUR 10 million,unrealized currency translation gains of EUR 1,234million and ‘affiliated companies’ of EUR 715 million.As at December 31, 2015 the limitations on distributableamounts were EUR 2,274 million and related commonshares of EUR 186 million, as well as legal reservesincluded under ‘revaluation’ of EUR 4 million, available-for-sale financial assets of EUR 56 million, unrealizedgains related to cash flow hedges of EUR 12 million,unrealized currency gains of EUR 1,058 million and‘affiliated companies’ of EUR 958 million.Company financial statements11.4LMN176Annual Report 2016LDebtLong-term debtKoninklijke Philips N.V.Long-term debt in millions of EUR, unless otherwise stated2015 - 2016(range of)interestrates averageinterest rate amountoutstandingin 2016 amount duein 1 year amount dueafter 1 year amount dueafter 5 years averageremainingterm (inyears) amountoutstandingin 2015 USD bonds3.8 - 7.8% 5.5% 3,608 1,184 2,424 2,424 10 3,733 Intercompanyfinancing0.6 - 4.3% 3.2% 584 584 1,660 Bank borrowings0.9 - 1.1% 1.1% 200 22 178 3 200 Other long-term debt1.7 - 7.0% 4.2% 37 37 1 39 4,429 1,827 2,602 2,424 5,632 Corresponding dataprevious year 5,632 1,699 3,933 2,795 6,623 The following amounts of the long-term debt as ofDecember 31, 2016, are due in the next five years:Koninklijke Philips N.V.Long-term debt due in the next five years in millions of EUR201620171,827 201844 201944 202045 202145 Long -term debt2,005 Corresponding amount previous year2,837 In October 2016, the principal amounts of USD bondsdue 2025, 2026, 2038 were partially redeemed, whichinvolved an aggregated amount of USD 285 million.This resulted in financial charges of EUR 91 million paidin 2016.In December 2016, Royal Philips delivered a notice ofredemption to the holders of the outstanding 5.750%Notes due 2018 in the aggregate principal amount ofUSD 1,250 million for redemption in January 2017. Thisresulted in financial charges of EUR 62 million in 2016.Please refer to note 18, DebtFor further information, refer to note O, Subsequentevents.Short-term debtShort-term debt mainly relates to the current portion ofoutstanding external and intercompany long-term debtof EUR 1,827 million (2015: EUR 1,699 million), otherdebt to group companies totaling EUR 13,976 million(2015: EUR 11,578 million) and short-term bankborrowings of EUR 7 million (2015: EUR 1,245 million).MOther current liabilitiesKoninklijke Philips N.V.Other current liabilities in millions of EUR2015 - 20162015 2016 Other short-term liabilities59 12 Accrued expenses127 181 Derivative instruments - liabilities314 332 Other current liabilities500 525 NContractual obligations and contingentliabilities not appearing in the balance sheetThe Company has entered into contracts with venturecapitalists where it committed itself to make, undercertain conditions, capital contributions to theirinvestment funds to an aggregated amount of EUR 90million (2015: EUR 22 million) until June 30, 2021. As atDecember 31, 2016 capital contributions already madeto this investment funds are recorded as available-for-sale financial assets within Other non-current financialassets.General guarantees as referred to in Section 403, Book2, of the Dutch Civil Code, have been given by theCompany on behalf of several group companies in theNetherlands. The liabilities of these companies to thirdparties and investments in associates totaled EUR 1,170million as of year-end 2016 (2015: EUR 1,374 million).Guarantees totaling EUR 667 million (2015: EUR 698million) have also been given on behalf of other groupcompanies. As at December 31, 2016 there have beenno credit guarantees given on behalf of unconsolidatedcompanies and third parties (2015: nil).The Company is the head of a fiscal unity that containsthe most significant Dutch wholly-owned groupcompanies. The Company is therefore jointly andseverally liable for the tax liabilities of the tax entity asa whole. For additional information, please refer tonote 25, Contingent assets and liabilities, which isdeemed incorporated and repeated herein byreference.OPCompany financial statements11.4Annual Report 2016177OSubsequent eventsNew credit facilityIn January 2017, Philips entered into a USD 1 billion andEUR 300 million credit facility with a consortium ofinternational banks. Under this credit facility Philipsdrew USD 1 billion in January; the facility was used forthe early redemption of 5.750% Notes due 2018 in theaggregate principal amount of USD 1,250 million. Thematurity date of the new facility is December 29, 2017,however Philips expects to prepay this facility in thecourse of 2017.Offering of Philips Lighting sharesOn February 9, 2017 Royal Philips completed anaccelerated book build offering to institutionalinvestors of 26 million shares in Philips Lighting at aprice of EUR 23.40 per share realizing total proceeds ofEUR 608 million. This transaction reduced RoyalPhilips’ stake in Philips Lighting’s outstanding sharecapital from 71.225% to 53.892%.As part of this transaction, Philips Lighting repurchased3.5 million shares in the offering and intends to cancelthese shares. After cancellation of the 3.5 million sharesthat Philips Lighting has acquired in the offering, RoyalPhilips’ shareholding in Philips Lighting is expected torepresent 55.180% of Philips Lighting’s outstandingshare capital.PAppropriation of profits and profitdistributionsPursuant to article 34 of the articles of association ofthe Company, a dividend will first be declared onpreference shares out of net income. The remainder ofthe net income, after reservations made with theapproval of the Supervisory Board, shall be availablefor distribution to holders of common shares subject toshareholder approval after year-end. As of December31, 2016, the issued share capital consists only ofcommon shares. No preference shares have beenissued. Article 33 of the articles of association of theCompany gives the Board of Management the power todetermine what portion of the net income shall beretained by way of reserve, subject to the approval ofthe Supervisory Board.A proposal will be submitted to the 2017 AnnualGeneral Meeting of Shareholders to pay a dividend ofEUR 0.80 per common share, in cash or shares at theoption of the shareholders, against the net income ofthe Company for 2016.Company financial statements11.5178Annual Report 201611.5Independent auditor’s reportTo: The Supervisory Board and Shareholders ofKoninklijke Philips N.V.Report on the audit of the financialstatements 2016Our opinionWe have audited the financial statements 2016 ofKoninklijke Philips N.V. (the Company), based inEindhoven, the Netherlands. The financial statementsinclude the consolidated financial statements and thecompany financial statements.In our opinion:•the accompanying consolidated financial statementsgive a true and fair view of the financial position ofKoninklijke Philips N.V. as at December 31, 2016 andof its result and its cash flows for 2016 in accordancewith International Financial Reporting Standards asadopted by the European Union (EU-IFRS) and withPart 9 of Book 2 of the Dutch Civil Code;•the accompanying company financial statementsgive a true and fair view of the financial position ofKoninklijke Philips N.V. as at December 31, 2016 andof its result for 2016 in accordance with Part 9 of Book2 of the Dutch Civil Code.The consolidated financial statements comprise:•the consolidated balance sheet as at December 31,2016;•the following statements for 2016: the consolidatedstatements of income, comprehensive income, cashflows and changes in equity; and•the notes comprising a summary of the significantaccounting policies and other explanatoryinformation.The company financial statements comprise:•the company balance sheet as at December 31, 2016;•the company statements of income and changes inequity for 2016; and•the notes comprising a summary of the accountingpolicies and other explanatory information.Basis for our opinionWe conducted our audit in accordance with Dutch law,including the Dutch Standards on Auditing. Ourresponsibilities under those standards are furtherdescribed in the ‘Our responsibilities for the audit of thefinancial statements’ section of our report.We are independent of Koninklijke Philips N.V. inaccordance with the “Verordening inzake deonafhankelijkheid van accountants bij assurance-opdrachten” (ViO, code of Ethics for ProfessionalAccountants, a regulation with respect toindependence) and other relevant independenceregulations in the Netherlands. Furthermore, we havecomplied with the “Verordening gedrags- enberoepsregels accountants” (VGBA, Dutch Code ofEthics).We believe the audit evidence we have obtained issufficient and appropriate to provide a basis for ouropinion.MaterialityMaterialityEUR 60 million Benchmarkapplied5% income before taxes ExplanationBased on our professional judgment we consider anearnings-based measure as the most appropriatebasis to determine materiality. We have assessed thebenchmark amount, taken into account the impact ofcertain items such as Philips Lighting separation costsand effects of certain claim settlements on incomebefore taxes. Based on the actual result themateriality exceeds the initial planning materiality ofEUR 60 million as set in the course of our planningphase. We continued to apply the materiality initiallyset. We have also taken misstatements into account and/orpossible misstatements that in our opinion are materialfor the users of the financial statements for qualitativereasons.We agreed with the Supervisory Board thatmisstatements in excess of EUR 3 million, which areidentified during the audit, would be reported to them,as well as smaller misstatements that in our view shouldbe reported on qualitative grounds.Scope of the group auditKoninklijke Philips N.V. (the Company) is at the head ofa group of entities. The consolidated financialstatements of Koninklijke Philips N.V. represents thefinancial information of this group.Following our assessment of the risk of materialmisstatement to Koninklijke Philips N.V.’s consolidatedfinancial statements, we have selected 12 componentswhich required an audit of the complete financialinformation (Full Scope Components) and 36components requiring audit procedures on specificaccount balances or specified audit procedures that weconsidered had the potential for the greatest impact onthe significant accounts in the financial statementseither because of the size of these accounts or their riskprofile (Specific- or Specified Scope Components). Weperformed audit procedures on certain accountingareas managed centrally, such as goodwill. In addition,the central team has been involved in the auditprocedures on revenue recognition, tax and legalclaims, litigation and contingencies.Where this did not give adequate quantitative coverageof significant account balances, we used our judgmentto scope additional procedures on account balances orrequested the component auditors to performadditional specified procedures (SpecifiedProcedures). As a result of our scoping of the completeCompany financial statements11.5Annual Report 2016179financial information, specific account balances and theperformance of audit procedures at different levels inthe organization, our actual coverage varies peraccount balance and the depth of our audit proceduresper account balance varies depending on our riskassessment.Of the remaining components, we performed selectedother procedures, including analytical review anddetailed testing to respond to any potential risks ofmaterial misstatements to the financial statements.Accordingly, our audit coverage per account balanceincluded in the key audit matters stated below, can besummarized as follows:Goodwill in %100Full scopeDeferred tax assets in %24Full scope55Specific scope13Specified procedures8Other proceduresOther tax liability in %35Full scope49Specific scope12Specified procedures4Other proceduresLegal claims, litigation and contingencies in %38Full scope10Specific scope52Specified proceduresRevenue in %23Full scope41Specific scope18Specified procedures18Other proceduresInvolvement with component teamsComponent materiality was determined by ourjudgment, based on the relative size of the componentand our risk assessment. Component materiality did notexceed EUR 30 million and the majority of ourcomponent auditors applied a component materialitythat is significantly less than this threshold.Component auditors visited the Netherlands in 2016 toattend our global audit conference, to discuss theGroup audit, risks, audit approach and instructions. Inaddition, we sent detailed instructions to all componentauditors, covering the significant areas that should becovered and set out the information required to bereported to us. Based on our risk assessment, we visitedcomponent locations in the U.S.A., China, theNetherlands, Japan, Panama, Hong Kong, Germany,Russia, Italy, India, and Singapore. These visitsencompassed some, or all, of the following activities:co-developing the significant risk area audit approach,reviewing key local working papers and conclusions,meeting with local and regional leadership teams,obtaining an understanding of key control processesincluding centralised entity level control processes andattending closing meetings. We interacted regularlywith the component teams where appropriate duringvarious stages of the audit, attended in person or viaconference call, Full Scope Component and certainSpecific Scope Component closing meetings, reviewedkey working papers and were responsible for the scopeand direction of the audit process. For the audit ofLumileds and the Automotive businesses, classified asdiscontinued operations, we have used the work ofnon-EY auditors.By performing the procedures mentioned above atgroup entities, together with additional procedures atgroup level, we have been able to obtain sufficient andappropriate audit evidence about the Group’s financialinformation to provide an opinion on the consolidatedfinancial statements.Our key audit mattersKey audit matters are those matters that, in ourprofessional judgment, were of most significance in ouraudit of the financial statements. We havecommunicated the key audit matters to the SupervisoryBoard. The key audit matters are not a comprehensivereflection of all matters discussed.Key audit matters were addressed in the context of ouraudit of the financial statements as a whole and informing our opinion thereon, and we do not provide aseparate opinion on these matters.Company financial statements11.5180Annual Report 2016Company separationKey audit matterIn 2016 the Company established two separate entities focused on HealthTech and Lighting. To accomplishthe separation, businesses, assets and liabilities of Lighting have been transferred from HealthTech legalentities to new or existing Lighting legal entities and vice versa. This occurred through several legal transactionsteps, including local business transfers and legal demergers. Following the separation, the reporting structureof the Company changed resulting into revised segment reporting. At the same time, the former Innovation,Group Services segment was split and allocated between Philips and Philips Lighting.There is an increased risk in relation to the proper accounting of the separation, such as the impact ofpotential local tax consequences, completeness and measurement of transaction costs as expenses andcorrect allocation of Innovation, Group Services segment to the new segments. Further reference is made tonote 5, Interests in entities. Our auditapproachOur audit procedures included, amongst others, meetings with project management to understand theseparation process and its impact on the Company’s assets, liabilities and equity. Furthermore we assessedthe appropriateness of the accounting of the separation and the related transaction costs based onsupporting documentation, including the master separation agreement and underlying service levelagreements. We also verified the reconciliation of the total assets and liabilities to the allocated assets andliabilities per the respective entities and segments and tested the appropriate accounting of the separationbased on the local business transfer agreement.We assessed the impact of the separation on (deferred) tax positions as part of our audit procedures on theseaccounts as further detailed in the related key audit matter below. Valuation of goodwillKey audit matterAt December 31, 2016, the total carrying value of goodwill amounted to EUR 8,898 million, representing 27.5%of the group’s total assets. Goodwill is allocated to (groups of) Cash Generating Units (CGU’s) for whichmanagement is required to test the carrying value of goodwill for impairment annually or more frequently ifthere is a triggering event for testing. We focused on this area given the significant judgement and complexityof valuation methodologies used to determine whether the carrying value of goodwill is appropriate, whichincludes the assumptions used within models to support the recoverable amount of goodwill. Furtherreference is made to note 11, Goodwill. Our auditapproachAs part of our audit we assessed and tested the assumptions, methodologies and data used by the Companyin their valuation model, by comparing them to external data such as expected inflation rates, discount ratesand implied growth rates. Additionally, we validated that the cash flow projections used in the valuation areconsistent with the information approved by the Executive Committee and have evaluated the historicalaccuracy of management’s estimates that drive the assessment, such as business plans and expected growthrates. We performed sensitivity analysis by stress testing key assumptions in the model to consider the degreeto which these assumptions would need to change before an impairment charge would have to berecognized. We included in our team a valuation expert to assist us in these audit activities. These procedureswere performed for all CGU’s.Our main focus was on the CGU’s Sleep & Respiratory Care (Personal Health businesses), Image GuidedTherapy (Diagnosis & Treatment businesses), Patient Care & Monitoring Solutions (Connected Care & HealthInformatics businesses) and Professional (Lighting) as these represent the majority of the goodwill balance ofthe Group at December 31, 2016.We have also tested the effectiveness of the Company’s internal controls around the valuation of goodwill.We also assessed the adequacy of the Company’s disclosure around goodwill as included in note 11, Goodwill. Company financial statements11.5Annual Report 2016181Taxes - Valuation of deferred tax assets and liability for tax risksKey audit matterThe accounting for deferred tax assets and tax risk liabilities were significant to our audit since the Companyhas extensive international operations and makes judgements and estimates in relation to the realization ofdeferred tax assets and tax risk positions resulting in the recognition of other tax liabilities. In addition to theassessment of the realization of deferred tax assets and recognition of tax liabilities in the normal course ofbusiness, the value of the deferred tax assets and liabilities is also impacted by the Philips Lightingseparation.At December 31, 2016, the deferred tax assets are valued at EUR 2,792 million and the other tax liabilityrelated to tax risks is valued at EUR 395 million. Further reference is made to note 8, Income taxes andnote 22, Other liabilities. Our audit approachWith the involvement of our tax experts we evaluated the tax accounting in various jurisdictions in which theCompany operates, taking into account the impact of the local tax jurisdiction and including effects resultingfrom the separation.With regard to deferred tax assets, we tested management’s assumptions used to determine the probabilitythat deferred tax assets recognized in the balance sheet will be recovered. This is based upon forecastedtaxable income in the countries where the deferred tax assets originated and the periods when the deferredtax assets can be utilized. We used, amongst others, forecasts and tax laws. The forecasts were evaluated byus and we assessed the historical accuracy of management’s assumptions.We evaluated and challenged the Company’s judgements in respect of estimates of tax exposures,considering ongoing local tax authority audits, legislative developments and relevant historical and recentjudgements. We tested the Company’s internal controls around the recording and continuous re-assessmentof the deferred tax assets and tax liabilities.We compared information provided by management to corroborative or contradictory information wherepossible, such as previous history in certain countries. We also assessed the adequacy of the Company’sdisclosures included in note 8, Income taxes and note 22, Other liabilities. Revenue recognition – multiple element sales contracts and sales promotionsKey audit matterSales contracts for certain transactions primarily entered into in the Diagnosis & Treatment businesses andthe Connected Care & Health Informatics businesses involve multiple elements. Those multiple elements, orseparately identifiable components, are recognized based on their relative fair value and achievement ofrevenue recognition criteria. This gives rise to the risk that sales could be misstated due to the complexity ofthe multi-element contracts and the incorrect determination of the relative fair value elements and timing ofthe related revenue recognition.In addition, primarily in the Personal Health businesses the Company has sales promotions relatedagreements with distributors and retailers whereby discounts and rebates are provided according to thequantity of goods sold and promotional and marketing activity performed. The agreements of these salespromotions can include a number of characteristics that require judgement to be applied in determining theappropriate accounting treatment based on the terms of respective agreements. Management must estimatethe sales related accruals (rebates, marketing and promotional support, coupon and stock protection) as atthe balance sheet date based on forecast information over the term of the promotion. There may also beincentives to change the timing of when sales related accruals within the Personal Health businesses arerecognized to meet internal targets. Further reference is made to note 2, Information by segment and maincountry. Our audit approachOur audit procedures included, amongst others, assessing the appropriateness of the Company’s revenuerecognition accounting policies and testing the effectiveness of the Company’s controls over the fair valuedetermination of multi-element sales contracts and sales promotions to assess the correct value and timingof revenue recognition. Furthermore, we assessed the accuracy of the sales recorded by inspection ofselected sales contracts, external confirmations, review of installation hours reported after recognition ofrevenue and inspection of hand over certificates.With respect to the sales related accruals, our procedures included testing management’s controls around thecompleteness and accuracy of the sales promotions agreements recognized in the accounting system,challenging management’s assumptions used in determining the sales related accruals through discussionswith management and performing specific substantive procedures, including:-On a sample basis agreed the recorded amounts to contractual evidence;-Performed a retrospective review of actual expenses verifying there were no significant differences to priorperiod sales related accruals; and-Tested cut-off through assessing the sales promotion obligations around the year-end.We also assessed the adequacy of the sales disclosures contained in note 2, Information by segment andmain country. Company financial statements11.5182Annual Report 2016Contingent liabilities and provisions from (legal) claims, proceedings and investigationsKey audit matterThe Company and certain of its group companies and former group companies are involved as a party inlegal proceedings, including regulatory and other governmental proceedings as well as investigations byauthorities, such as for example the patent infringement lawsuit by Masimo Corporation, several CRT antitrustlitigations and a civil matter with the US Department of Justice relating to the external defibrillator business inthe US.This area is significant to our audit, since the accounting and disclosure for (contingent) legal liabilities iscomplex and judgmental (due to the difficulty in predicting the outcome of the matter and estimating thepotential impact if the outcome is unfavorable), and the amounts involved are, or can be, material to thefinancial statements as a whole. Further reference is made to note 19, Provisions and note 25, Contingentassets and liabilities. Our audit approachOur audit procedures included, amongst others, testing the effectiveness of the Company’s internal controlsaround the identification and evaluation of claims, proceedings and investigations at different levels in thegroup, and the recording and continuous re-assessment of the related (contingent) liabilities and provisionsand disclosures. We inquired with both legal and financial staff in respect of ongoing investigations or claims,proceedings and investigations, inspected relevant correspondence, inspected the minutes of the meetings ofthe Audit Committee, Supervisory Board and Executive Committee, requested a confirmation letter from thegroup’s in-house legal counsel and obtained external legal confirmation letters from a selection of externallegal counsels. For claims settled during the year, such as Medsage and Masimo, we vouched the cashpayments, as appropriate and read the related settlement agreements in order to verify whether thesettlements were properly accounted for.We also assessed the adequacy of Company’s disclosure regarding (contingent) liabilities from legalproceedings and investigations as contained in note 19, Provisions and note 25, Contingent assets andliabilities. Accounting for Discontinued operationsKey audit matterFollowing the planned sale of the majority interest of Lumileds and future sell-down of Philips Lightingshares, the accounting of discontinued operations has been an attention area in our audit. The Lumiledsbusiness is accounted for as discontinued operation since the fourth quarter of 2014 and Philips Lightingcould potentially become a discontinued operation once loss of control is highly probable in the near future.Further reference is made to note 3, Discontinued operations and other assets classified as held for sale. Our audit approachOur audit procedures included, amongst others, testing the effectiveness of the Company’s internal controlsaround the appropriate accounting, assessing the appropriateness of the Company’s accounting policies inrelation to discontinued operations and assessment of compliance with the respective accounting policies.We met with the Board of Management and Audit Committee of the Supervisory Board and other executivemanagement representatives on a regular basis to understand the status of the planned sale of the majorityinterest of Lumileds and the future sell-down of Philips Lighting shares. We assessed management’sevaluation of continued classification as discontinued operations of Lumileds and the accounting of Lightingincluding the adequacy of Company’s disclosure included in note 3, Discontinued operations and other assetsclassified as held for sale. Initial audit engagementKey audit matterThere are additional considerations involved in performing initial audit engagements. Additional planningactivities and considerations are required to establish an appropriate audit strategy and audit plan. Our audit approachAfter being appointed as the Company’s auditors effective for the year 2016, we developed a comprehensivetransition plan in October 2015, which included specific planning activities, to ensure an effective transitionfrom the predecessor auditor. The specific planning activities included, but were not limited to, obtaining aninitial understanding of the Company and its business, including background information, strategy, businessrisks, IT landscape and its financial reporting and internal controls framework, to assist us in performing ourrisk assessment procedures. We have assessed the opening balances and the selection and consistentapplication of accounting policies by discussing the audit with the predecessor auditor and reviewing thepredecessor auditor’s file. Furthermore, in January 2016, we attended closing meetings and Audit Committeemeetings related to the 2015 audit. The foregoing has been used as a basis for our 2016 audit plan. Wediscussed and agreed our 2016 audit plan with the Audit Committee and Executive Committee of KoninklijkePhilips N.V. in April 2016 and have provided status updates, progress reports and key audit matters from ouraudit process on a regular basis. Report on other information included in theannual reportIn addition to the financial statements and our auditor’sreport thereon, the annual report contains otherinformation that consists of:•The management board’s report•Other information pursuant to Part 9 of Book 2 of theDutch Civil Code•Sustainability statements•Five year key financial and sustainability information•Investor relations informationCompany financial statements11.5Annual Report 2016183Based on the following procedures performed, weconclude that the other information:•Is consistent with the financial statements and doesnot contain material misstatements•Contains the information as required by Part 9 ofBook 2 of the Dutch Civil CodeWe have read the other information. Based on ourknowledge and understanding obtained through ouraudit of the financial statements or otherwise, we haveconsidered whether the other information containsmaterial misstatements. By performing theseprocedures, we comply with the requirements of Part 9of Book 2 of the Dutch Civil Code and the DutchStandard 720. The scope of the procedures performedon the other information is less than the scope of thoseperformed in our audit of the financial statements.Management is responsible for the preparation of theother information, including the management board’sreport in accordance with Part 9 of Book 2 of the DutchCivil Code and other information pursuant to Part 9 ofBook 2 of the Dutch Civil Code.Report on other legal and regulatoryrequirementsEngagementFollowing the appointment by the Annual GeneralMeeting of Shareholders on May 7, 2015, we wereengaged by the Supervisory Board on October 22, 2015as auditor of Koninklijke Philips N.V. as of the audit forthe year 2016 and have operated as statutory auditorsince that date.Description of responsibilities for the financialstatementsResponsibilities of the Board of Management and theSupervisory Board for the financial statementsThe Board of Management is responsible for thepreparation and fair presentation of the financialstatements in accordance with EU-IFRS and Part 9 ofBook 2 of the Dutch Civil Code. Furthermore, the Boardof Management is responsible for such internal controlas the Board of Management determines is necessaryto enable the preparation of the financial statementsthat are free from material misstatement, whether dueto fraud or error.As part of the preparation of the financial statements,management is responsible for assessing theCompany’s ability to continue as a going concern.Based on the financial reporting frameworksmentioned, the Board of Management should preparethe financial statements using the going concern basisof accounting unless the Board of Management eitherintends to liquidate the Company or to ceaseoperations, or has no realistic alternative but to do so.The Board of Management should disclose events andcircumstances that may cast significant doubt on theCompany’s ability to continue as a going concern in thefinancial statements.The Supervisory Board is responsible for overseeing theCompany’s financial reporting process.Our responsibilities for the audit of the financialstatementsOur objective is to plan and perform the auditassignment in a manner that allows us to obtainsufficient and appropriate audit evidence for ouropinion.Our audit has been performed with a high, but notabsolute, level of assurance, which means we may nothave detected all material errors and fraud.Misstatements can arise from fraud or error and areconsidered material if, individually or in the aggregate,they could reasonably be expected to influence theeconomic decisions of users taken on the basis of thesefinancial statements. The materiality affects the nature,timing and extent of our audit procedures and theevaluation of the effect of identified misstatements onour opinion.We have exercised professional judgment and havemaintained professional scepticism throughout theaudit, in accordance with Dutch Standards on Auditing,ethical requirements and independence requirements.Our audit included:•Identifying and assessing the risks of materialmisstatement of the financial statements, whetherdue to fraud or error, designing and performing auditprocedures responsive to those risks, and obtainingaudit evidence that is sufficient and appropriate toprovide a basis for our opinion. The risk of notdetecting a material misstatement resulting fromfraud is higher than for one resulting from error, asfraud may involve collusion, forgery, intentionalomissions, misrepresentations, or the override ofinternal control.•Obtaining an understanding of internal controlrelevant to the audit in order to design auditprocedures that are appropriate in thecircumstances.•Evaluating the appropriateness of accountingpolicies used and the reasonableness of accountingestimates and related disclosures made bymanagement.•Concluding on the appropriateness ofmanagement’s use of the going concern basis ofaccounting, and based on the audit evidenceobtained, whether a material uncertainty existsrelated to events or conditions that may castsignificant doubt on the Company’s ability tocontinue as a going concern. If we conclude that amaterial uncertainty exists, we are required to drawattention in our auditor’s report to the relatedCompany financial statements11.5184Annual Report 2016disclosures in the financial statements or, if suchdisclosures are inadequate, to modify our opinion.Our conclusions are based on the audit evidenceobtained up to the date of our auditor’s report.However, future events or conditions may cause acompany to cease to continue as a going concern.•Evaluating the overall presentation, structure andcontent of the financial statements, including thedisclosures.•Evaluating whether the financial statementsrepresent the underlying transactions and events ina manner that achieves fair presentation.Because we are ultimately responsible for the opinion,we are also responsible for directing, supervising andperforming the group audit. In this respect we havedetermined the nature and extent of the auditprocedures to be carried out for group entities.Depending on the size and/or the risk profile, theorganisation of the group and the effectiveness ofgroup-wide controls, changes in the businessenvironment and other relevant factors, we selectedgroup entities for which an audit or review had to becarried out on the complete set of financial informationor specific items.We communicate with the Supervisory Boardregarding, among other matters, the planned scope andtiming of the audit and significant audit findings,including any significant findings in internal control thatwe identify during our audit.We provide the Supervisory Board with a statementthat we have complied with relevant ethicalrequirements regarding independence, and tocommunicate with them all relationships and othermatters that may reasonably be thought to bear on ourindependence, and where applicable, relatedsafeguards.From the matters communicated with the SupervisoryBoard, we determine those matters that were of mostsignificance in the audit of the financial statements ofthe current period and are therefore the key auditmatters. We describe these matters in our auditor’sreport unless law or regulation precludes publicdisclosure about the matter or when, in extremely rarecircumstances, not communicating the matter is in thepublic interest.Amsterdam, The NetherlandsFebruary 21, 2017Ernst & Young Accountants LLPC.B. BoogaartSustainability statements12Annual Report 201618512Sustainability statements12.1Approach to sustainability reportingPhilips has a long tradition of sustainability reporting,beginning with our first environmental Annual Reportpublished in 1999. This was expanded in 2003, with thelaunch of our first sustainability Annual Report. As anext step, in 2008, we decided to publish an integratedfinancial, social and environmental report. For moreinformation, please refer to the company’s website.This is our ninth annual integrated financial, social andenvironmental report which has been prepared in linewith the International Integrated Reporting Council(IIRC) Integrated Reporting (IR) framework and includesa visualization of our value creation process.Philips Lighting’s results are consolidated in this reportbut are also available in their Annual Report.Royal Philips and Philips Lighting publish theirintegrated Annual Report with the highest (reasonable)assurance level on the financial, social andenvironmental performance. With that overallreasonable assurance level Philips is a frontrunner inthis field.12.1.1Tracking trendsWe follow external trends continuously to determinethe issues most relevant for our company and where wecan make a positive contribution to society at large. Inaddition to our own research, we make use of a varietyof sources, including the United Nations EnvironmentalProgramme (UNEP), World Bank, World EconomicForum, World Health Organization, and the WorldBusiness Council for Sustainable Development(WBCSD). Our work also involves tracking topics ofconcern to governments, non-governmentalorganizations (NGO), regulatory bodies, academia, andfollowing the resulting media coverage.12.1.2StakeholdersWe derive significant value from our diversestakeholders across all our activities and engage with,listen to and learn from them. Working in partnershipsis crucial in delivering on our vision to make the worldhealthier and more sustainable through innovation. Weincorporate their feedback on specific areas of ourbusiness into our planning and actions. In addition, weparticipate in meetings and task forces as a member oforganizations including the World Economic Forum,WBCSD, Electronic Industry Citizenship Coalition(EICC), the Ellen MacArthur Foundation, and theEuropean Partnership for Responsible Minerals.A multi-stakeholder project with the Sustainable TradeInitiative (IDH), a number of NGOs, and electronicscompanies was started in 2011 and expanded in 2014and 2015 to include suppliers in the Yangtze river delta.The program focuses on improving working conditionsin the electronics industry in China.Furthermore, we engaged with the leading Dutch laborunion (FNV) and a number of NGOs, including Enough,GoodElectronics, MakeITfair, the Chinese Institute ofPublic and Environmental Affairs, SOMO, AmnestyInternational, Greenpeace and Friends of the Earth aswell as a variety of investors and analysts.Our sustainability e-mail account(philips.sustainability@philips.com) enablesstakeholders to share their issues, comments andquestions with the sustainability team. The table belowprovides an overview of the different stakeholdergroups, examples of those stakeholders and the topicsdiscussed, used for our materiality analysis.Stakeholder overview (non-exhaustive)Examples Processes Employees-European Works Council-Individual employeesRegular meetings, quarterly My Accelerate! Surveys, employee development process,quarterly update webinars. For more information refer to section 2.2, Social performance,of this Annual Report. Customers-Hospitals-Retailers-ConsumersJoint (research) projects, business development, Lean value chain projects, consumerpanels, Net Promoter Scores, Philips Customer Care centers, Training centers, social media Suppliers-Chinese suppliers in theSupplier Developmentprogram-HP, RandstadSupplier development activities (including topical training sessions), supplier forums,supplier website, participation in industry working groups like COCIR and EICC. For moreinformation refer to sub-section 12.3.8, Supplier indicators, of this Annual Report. Governments,municipalities, etc.-European Union-Authorities in Indonesia,SingaporeTopical meetings, annual Innovation Experience, research projects, policy and legislativedevelopments, business development NGOs-UNICEF, International RedCross-Friends of the Earth,GreenpeaceTopical meetings, cross-segment (multi-stakeholder) projects, joint (research) projects,social investment program and Philips Foundation Investors-Mainstream investors-ESG investorsWebinars, roadshows, capital markets day, investor relations and sustainability accounts Sustainability statements12.1.3186Annual Report 201612.1.3Reporting standardsWe have prepared the integrated annual report in linewith the International Integrated Reporting Council(IIRC) Integrated Reporting framework.For the sustainability information included in theintegrated annual report we followed the GlobalReporting Initiative (GRI) Standards-OptionComprehensive. A detailed overview of the GRIComprehensive indicators can be found in the GRIcontent index on our sustainability website. Next, wedeveloped additional company specific indicators. Theinformation on definition and measurement can befound in this chapter.We signed on to the United Nations Global Compact inMarch 2007 to advance 10 universal principles in theareas of human rights, labor, the environment and anti-corruption. Our General Business Principles,Sustainability and Environmental Policies, and ourSupplier Sustainability Declaration are thecornerstones that enable us to live up to the standardsset by the Global Compact. This is closely monitoredand reported, as illustrated throughout this report,which is also our annual Communication on Progress(COP) submitted to the UN Global Compact Office.At the World Economic Forum in January 2017 Philipssigned the Compact for Responsive and ResponsibleLeadership. The Compact is an initiative to promote andalign the long-term sustainability of corporations andthe long-term goals of society, with an inclusiveapproach for all stakeholders.We use this report to communicate on our progresstowards the relevant Sustainable Development Goals(SDGs), in particular SDG 3 (“Ensure healthy lives andpromote well-being for all at all ages”) and SDG 12(“Ensure sustainable consumption and productionpatterns”). Please refer to sub-section 12.3.7,Stakeholder Engagement, of this Annual Report formore details.More information about Philips Lighting’scommitments to the SDGs can be found in their AnnualReport.12.1.4Material topics and our focusWe identify the environmental, social, and governancetopics which have the greatest impact on our businessand the greatest level of concern to stakeholders alongour value chain. Assessing these topics enables us toprioritize and focus upon the most material topics andeffectively address these in our policies and programs.Our materiality assessment is based on an ongoingtrend analysis, media search, and stakeholder input.The results for Royal Philips are reflected in themateriality matrix below. Those for Philips Lighting canbe found in the Philips Lighting Annual Report. Thescores are based on Philips’ assessment. Ourmateriality assessment has been conducted in thecontext of the GRI Sustainable Reporting Standardsand the results have been reviewed and approved bythe Philips Sustainability Board. As a result of theexclusion of Philips Lighting, a number of aspects havechanged in terms of materiality in the table below(compared to 2015), for example, health relatedaspects have become more material.Sustainability statements12.1.4Annual Report 2016187Materiality matrixImportance toStakeholdersBusiness impacthighmediumlowmediumhighEconomicdownturn andrestructuringBig dataand PrivacyResourcescarcityResponsibleTax policyLivingwageStakeholder activismand transparencyBio-diversityConflictmineralsWaterscarcityGeo-politicalissuesEnergysecurityCircularEconomyPartnerships andco-creationExpanding middleclass in growthgeographiesEmployee healthand safetyResponsibleSupply ChainsProduct responsibilityand regulationUrbanizationMetrics beyondfinancialsRising healthcarecostsBusiness ethics andGeneral BusinessPrinciplesEnergyefficiencyHealthyLivingDiversityPollutionClimatechangeAgingpopulationChronic and lifestylerelated diseasesEnvironmental topicsSocial topicsGovernance topicsKey material topicsReference1) Environmental Boundaries -Climate changechapter 1, Message from the CEO, of this Annual Reportsection 2.3, Environmental performance, of this Annual Reportsection 12.4, Environmental statements, of this Annual Report Supply chain, operations, use phase -Energy efficiencysub-section 2.3.1, Green Innovation, of this Annual Reportsection 2.3, Environmental performance, of this Annual Reportsection 12.4, Environmental statements, of this Annual Report Supply chain, operations, use phase -Circular Economysub-section 2.3.1, Green Innovation, of this Annual Reportsection 2.3, Environmental performance, of this Annual Reportsub-section 12.3.8, Supplier indicators, of this Annual Report Supply chain, operations, use phase Sustainability statements12.1.4188Annual Report 2016Reference1) Societal Boundaries -Rising healthcare costschapter 1, Message from the CEO, of this Annual Reportsub-section 3.2.1, About Diagnosis & Treatment businesses,of this Annual Reportsub-section 3.3.1, About Connected Care & HealthInformatics businesses, of this Annual Report Use phase -Healthy Livingchapter 1, Message from the CEO, of this Annual Reportsub-section 3.2.1, About Diagnosis & Treatment businesses,of this Annual Reportsub-section 3.3.1, About Connected Care & HealthInformatics businesses, of this Annual Reportsub-section 3.1.1, About Personal Health businesses, of thisAnnual Report Use phase -Chronic and lifestyle related diseaseschapter 1, Message from the CEO, of this Annual Reportsub-section 3.2.1, About Diagnosis & Treatment businesses,of this Annual Reportsub-section 3.3.1, About Connected Care & HealthInformatics businesses, of this Annual Reportsub-section 3.1.1, About Personal Health businesses, of thisAnnual Report Use phase -Aging populationchapter 1, Message from the CEO, of this Annual Reportsub-section 3.2.1, About Diagnosis & Treatment businesses,of this Annual Reportsub-section 3.1.1, About Personal Health businesses, of thisAnnual Report Use phase -Responsible Supply Chainssection 2.2, Social performance, of this Annual Reportchapter 12, Sustainability statements, of this Annual Report Supply chain -Employee health and safetysub-section 2.2.6, Health and Safety, of this Annual Report Supply chain, operations -Conflict mineralssub-section 12.3.8, Supplier indicators, of this AnnualReport Supply chain Reference1) Governance Boundaries -Business ethics and General BusinessPrinciplessection 5.5, Compliance risks, of this Annual Reportsub-section 2.2.7, General Business Principles, of thisAnnual Report Supply chain, operations, use phase -Partnerships and co-creationsub-section 3.4.1, About HealthTech Other, of this AnnualReportchapter 12, Sustainability statements, of this Annual Report Supply chain, use phase -Metrics beyond financialssection 2.2, Social performance, of this Annual Reportsection 2.3, Environmental performance, of this AnnualReportchapter 12, Sustainability statements, of this Annual Report Supply chain, operations, use phase -Product responsibility and regulationsection 5.5, Compliance risks, of this Annual Reportsub-section 3.1.1, About Personal Health businesses, of thisAnnual Reportsub-section 3.2.1, About Diagnosis & Treatment businesses,of this Annual Reportsub-section 3.3.1, About Connected Care & HealthInformatics businesses, of this Annual Report Supply chain, operations, use phase -Big data and Privacysection 5.4, Operational risks, of this Annual Reportsub-section 3.1.1, About Personal Health businesses, of thisAnnual Reportsub-section 3.2.1, About Diagnosis & Treatment businesses,of this Annual Reportsub-section 3.3.1, About Connected Care & HealthInformatics businesses, of this Annual Report Supply chain, operations, use phase 1)With the exception of section 2.2, Social performance, of this Annual Report, section 2.3, Environmental performance, of this Annual Report, and chapter 12,Sustainability statements, of this Annual Report, the sections and chapters referred to are not included in the scope of the assurance engagementSustainability statements12.1.5Annual Report 201618912.1.5Programs and targetsRoyal Philips HealthTech businessesSustainability commitments2016baseline year2015 target 2020 2016 actual Lives Improved2.0 billion 2.5 billion 2.1 billion Circularrevenues7% 15% 9% Green revenues56% 70% 59% Operationalcarbon footprint757 Ktonnes 0 Ktonnes 821 Ktonnes Operationalwaste recycling78% 90% 79% -Hazardoussubstancesemissions1,419 kilos 50% reduction 1,099 kilos -TotalRecordableCase (TRC)rate0.39 0.29 0.37 SupplierSustainability33% RSLcompliant 85% RSLcompliant 59% RSLcompliant SupplierSustainability 1)Newdevelopmentprogramtested 300companies indevelopmentprogram 93 companiesin developmentprogram 1)For more information see sub-section 12.3.8, Supplier indicators, of thisAnnual ReportWith the new 5-year ‘Healthy people, sustainableplanet’ program, new sustainability commitments wereintroduced, more detailed targets can be found in therespective sections.More details on the Philips Lighting sustainabilityprogram can be found in their report.All of our programs are guided by the Philips GeneralBusiness Principles, which provide the framework for allof our business decisions and actions.12.1.6Boundaries of sustainability reportingOur sustainability performance reporting encompassesthe consolidated Philips Group activities in the Socialand Environmental Performance sections, followingthe consolidation criteria detailed in this section. As aresult of impact assessments of our value chain wehave identified the material topics, determined theirrelative impact in the value chain (supply chain, ourown operations, and use phase of our products) andreported for each topic on the relevant parts of thevalue chain. More details are provided in the relevantsections in these Sustainability Statements and in thePhilips Lighting Investor Relations website.The consolidated selected financial information in thissustainability statements section has been derivedfrom the Group Financial Statements, which are basedon IFRS.12.1.7Comparability and completenessWe used expert opinions and estimates for some partsof the Key Performance Indicator calculations. There istherefore an inherent uncertainty in our calculations.The figures reported are Philips’ best estimate. As ourinsight increases, we may enhance the methodology inthe future.Social data cover all employees, including temporaryemployees, but exclude contract workers. Due to theimplementation of new HRM systems, we are able toprovide more specific exit information on Philipsemployees from 2014 onwards.Until 2016, Philips reported on Green Product sales.Due to the change in our businesses, we changed thisin 2016 to Green Revenues, which includes productsand solutions (refer to the definition in 12.1.8). Revenuesfor 2014 and 2015 have been restated to reflect thischange.In 2016, emission factors for CO2 were not updated. In2015 however, the emission factor set for consumedelectricity was updated to the IEA 2015 publications.Also, the emission factors for natural gas wereimplemented according to DEFRA (UK Department ofEnvironment, Food and Rural Affairs). Lastly, all scope3 emission factors for business travel and logistics wereupdated from a bespoke emission factor set to DEFRAguidance as well. The latter has had an upward effecton our scope 3 emissions, ranging from 15% to 32% inthe years 2007-2015.The emissions of substances data is based onmeasurements and estimates at manufacturing sitelevel. The figures reported are Philips’ best estimate.The integration of newly acquired activities isscheduled according to a defined integration timetable(in principle, the first full reporting year after the year ofacquisition) and subject to the integration agenda. Datafor activities that are divested during the reporting yearare not included in full-year reporting. Environmentaldata are reported for manufacturing sites with morethan 50 industrial employees.In line with the Discontinued operations presentation inthe Group financial statements regarding the Lumiledsand Automotive business, we have excluded this datafrom the consolidated Sustainability data. Where theimpact of the exclusion was material, we clearlydisclosed the impact.12.1.8Data definitions and scopeLives improved and materialsThe Key Performance Indicators on ‘lives improved’and ‘materials’ and the scope are defined in therespective methodology documents that can be foundat Methodology for calculating Lives Improved. Weused opinions from Philips experts and estimates forsome parts of the Lives Improved calculations. There istherefore an inherent uncertainty in our calculations.The figures reported are Philips’ best possible estimate.Sustainability statements12.1.8190Annual Report 2016Health and safetyHealth and safety data is reported by sites with over 50FTEs (full-time equivalents) and is voluntary for smallerlocations. Health and safety data are reported andvalidated each month via an online centralized IT tool.As of 2016, the Total Recordable Cases (TRC) rate isdefined as a KPI, cases where the injured employee isunable to work one or more days, or had medicaltreatment or sustained an industrial illness. For datacomparability reasons, we also provide the LostWorkday Injury Cases (LWIC) rate, work-related injuriesand illnesses that predominantly occur inmanufacturing operations and Field ServicesOrganizations where the incident leads to at least onelost workday. Fatalities are reported for staff,contractors and visitors.General Business PrinciplesAlleged GBP violations are registered in our intranet-based reporting and validation tool.Supplier auditsSupplier audits are primarily focused on identified risksuppliers, based on identified risk countries and on aspend of more than EUR 1 million (new suppliers EUR100,000 and no threshold for high risk suppliers).•Based on the Maplecroft Human Rights Risk Indexes,risk countries for Supply Management in 2016 were:Brazil, China, India, Indonesia, Mexico, Russia andUkraine.•Suppliers of new ventures are included to the extentthat the integration process of these ventures hasbeen finalized. The normative integration period istwo years after closure of the new venture.Green RevenuesGreen Revenues are revenues generated throughproducts or solutions that offer a significantenvironmental improvement in one or more GreenFocal Areas: Energy efficiency, Packaging, Hazardoussubstances, Weight, Circularity and Lifetime reliability.The lifecycle approach is used to determine a product’soverall environmental improvement. It calculates theenvironmental impact of a product over its total lifecycle (raw materials, manufacturing, product use anddisposal).Green products and solutions need to prove leadershipin at least one Green Focal Area compared to industrystandards, which is defined by a specific peer group.This is done either by outperforming reference products(which can be a competitor or predecessor product inthe particular product family) by at least 10%,outperforming product-specific eco-requirements orby being awarded a recognized eco-performancelabel. Because of different product portfolios, segmentshave specified additional criteria for Green productsand solutions, including product-specific minimumrequirements where relevant.Circular RevenuesCircular Revenues are defined by revenues generatedthrough products and solutions that meet specificCircular Economy requirements, for example bycontaining at least 30% recycled plastics (PersonalHealth), where Philips remains the owner, or where theproduct has been refurbished.Sustainable InnovationSustainable Innovation is the Research & Developmentspend related to the development of new generationsof products and solutions that address the UnitedNations Sustainable Development Goals 3 (“to ensurehealthy lives and promote well-being for all at all ages”)or 12 (“to ensure sustainable consumption andproduction patterns”).Green InnovationGreen Innovation is a subset of Sustainable Innovationand is defined as all R&D activities directly contributingto the development of Green Products and Solutions orGreen Technologies; it contributes to SDG 12. Thismeans all products, systems or services thatdemonstrate a measurable positive impact on energyefficiency (10% or greater than previous products orlegal requirements), and preferably also in one or moregreen focal areas: Circularity, Weight & Materials,Packaging, and Substances. Green Innovation forLighting is calculated by multiplying the total R&Dspend by percentages for sustainable innovation perBusiness Group (LED 100%, Professionals 95%, Homeis 97% and Lamps 15%). These percentages are anassessment of the contribution of R&D projects tosustainable innovation and are calculated based onprior-year innovation budgets. As part of thisassessment we applied the assumptions that the prior-year percentages are still applicable for this reportingyear and that all innovation in LED and LED-relatedproducts and services are considered as sustainable.Environmental dataAll environmental data from manufacturing operations,except process chemicals, are reported on a quarterlybasis in our sustainability reporting and validation tool,according to company guidelines that includedefinitions, procedures and calculation methods.Process chemicals are reported on a half-yearly basis.Internal validation processes have been implementedand peer audits performed to ensure consistent dataquality and to assess the robustness of data reportingsystems.These environmental data from manufacturing aretracked and reported to measure progress against ourSustainable Operations targets.Reporting on ISO 14001 certification is based onmanufacturing units reporting in the sustainabilityreporting system.Sustainability statements12.1.8Annual Report 2016191Operational carbon footprintPhilips reports in line with the Greenhouse Gas Protocol(GHGP). The GHGP distinguishes three scopes, asdescribed below. The GHGP requires businesses toreport on the first two scopes to comply with the GHGPreporting standards. As per the updated GHGP Scope 2reporting guidance, from 2015 onward our scope 2emissions reporting includes both the market-basedmethod and the location-based method. The market-based method of reporting will serve as our referencefor calculating our total operational carbon footprint.•Scope 1 – direct CO2 emissions – is reported on in full,with details of direct emissions from our industrialand non-industrial sites. Emissions from industrialsites, which consist of direct emissions resulting fromprocesses and fossil fuel combustion on site, arereported in the sustainability reporting system.Energy use and CO2 emissions from non-industrialsites are based on actual data where available. If thisis not the case, they are estimated based on averageenergy usage per square meters, taking thegeographical location and building type of the siteinto account.•Scope 2 – indirect CO2 emissions – is reported on infull, with details of indirect emissions from ourindustrial and non-industrial sites. CO2 emissionsresulting from purchased electricity, steam, heat andother indirect sources are reported in thesustainability reporting system. The indirectemissions of sites not yet reporting are calculated inthe same manner as described in Scope 1.•The location-based method of scope 2 reportingreflects the average emissions intensity of grids onwhich energy consumption occurs (using mostlygrid-average emission factor data). For thismethod our emission factors derive from theInternational Energy Agency (IEA) 2015 and arebased on grid averages.•The market-based method of scope 2 reportingallows use of an emission factor that is specific tothe energy purchased. Emissions intensity ofconsumed energy can differ based on contractualinstruments used. For example, so-called ‘greenelectricity contracts’ guarantee the purchaser willbe supplied with electricity coming fromrenewable sources which typically loweremissions per energy unit generated. In themarket-based method Philips will account forrenewable electricity with an emission factor of 0grams CO2 per kWh. All renewable electricityclaimed by Philips is sourced from the same energymarket where the electricity-consumingoperations are located, and is tracked andredeemed, retired, or cancelled solely on behalf ofPhilips. All certificates were obtained throughprocurement of Green-e certified RenewableEnergy Certificates (RECs) in the United States andEuropean Guarantees of Origin from theAssociation of Issuing Bodies (AIB) of the EuropeanEnergy Certificate System (EECS).•Scope 3 – other CO2 emissions related to activitiesnot owned or controlled by the Group – is reportedon for our business travel and distribution activities.The Philips operational carbon footprint (Scope 1, 2 and3) is calculated on a quarterly basis and includes theemissions from our:•Industrial sites – manufacturing and assembly sites•Non-industrial sites – offices, warehouses, IT centersand R&D facilities•Business travel – lease and rental cars and airplanetravel•Logistics – air, ocean and road transportAll emission factors used to transform input data (forexample, amount of tonne-kilometers transported) intoCO2 emissions have been updated from the previouslyused DEFRA (UK Department for Environment, Food &Rural Affairs) 2007 and bespoke emission factors to theapplicable DEFRA 2015 emission factors for each yearrespectively. The total CO2 emission resulting fromthese calculations serve as input for scope 1, 2 and 3.Commuting by our employees, upstream distribution(before suppliers ship to us), outsourced activities andemissions resulting from product use by our customersare not included in our operational carbon footprint.The calculations for business travel by lease car arebased on actual fuel usage and for travel by rental carthey are based on distance travelled. Taxis andchauffeur driven cars used for business travel are notincluded in the calculations. Emissions from businesstravel by airplane are calculated by the supplier basedon mileage flown and emission factors from DEFRA,distinguishing between short, medium and long-haulflights. Furthermore, emissions from air freight fordistribution are calculated based on the amount oftonne-kilometers transported between airports(distinguishing between short, medium and long-haulflights), including an estimate (based on actual data ofthe lanes with the largest volumes) for trucking fromsites and distribution centers to airports and vice versa.Express shipments are generally a mix of road and airtransport, depending on the distance.It is therefore assumed that shipments across over lessthan 600 km are transported by road and the rest byair (those emissions by air are calculated in the sameway as air freight). For sea transport, only data ontransported volume were available so an estimate hadto be made about the average weight of a container.Transportation to and from ports is not registered. Thisfore and aft part of sea transport was estimated to bearound 3% of the total distance (based on actual dataof the lanes with the largest volumes), consisting of amix of modalities, and was added to the total emissionsaccordingly. CO2 emissions from road transport werealso calculated based on tonne-kilometers. Returntravel of vehicles is not included in the data for sea androad distribution.Sustainability statements12.1.8192Annual Report 2016Employee Engagement Index (EEI)The Employee Engagement Index (EEI) is the singlemeasure of the overall level of employee engagementat Philips. It is a combination of perceptions andattitudes related to employee satisfaction,commitment and advocacy.The reported 2016 figure is based on My AccelerateSurvey in Royal Philips HealthTech businesses. Thissurvey is conducted by Expert Training Systems (ETS).The total score of the employee engagement is anaverage of quarterly results of the survey. The resultsare calculated by taking the average of the answeredquestions of the surveys.12.1.9Sustainability governanceSustainability is strongly embedded in our corebusiness processes, like innovation (EcoDesign),sourcing (Supplier Sustainability Program),manufacturing (Sustainable Operations) and Logistics(Green Logistics) and projects like the Circular Economyinitiative.In Royal Philips, the Sustainability Board is the highestgoverning sustainability body and is chaired by theChief Strategy and Innovation Officer and member ofthe Executive Committee. Three other ExecutiveCommittee members sit on the Sustainability Boardtogether with segment and functional executives. TheSustainability Board convenes four times per year,defines Philips’ sustainability strategy and programs,monitors progress and takes corrective action whereneeded.Progress on Sustainability is communicated internallyon a quarterly basis to Philips employees and at leastannually in the Executive Committee and SupervisoryBoard. Please refer to the Philips Lighting AnnualReport to learn about their sustainability governance.12.1.10External assuranceEY has provided reasonable assurance on whether theinformation in chapter 12, Sustainability statements, ofthis Annual Report and section 2.2, Socialperformance, of this Annual Report and section 2.3,Environmental performance, of this Annual Reportpresents fairly, in all material respects, thesustainability performance in accordance with thereporting criteria. Please refer to section 12.5, Assurancereport of the independent auditor, of this AnnualReport.12.2Economic indicatorsThis section provides summarized information oncontributions made on an accruals basis to the mostimportant economic stakeholders as a basis to driveeconomic growth. For a full understanding of each ofthese indicators, see the specific financial statementsand notes in this report.Philips GroupDistribution of direct economic benefits in millions of EUR2014 - 20162014 2015 2016 Suppliers: goods and services13,185 14,388 13,904 Employees: salaries and wages5,018 5,533 5,832 Shareholders: distribution fromretained earnings729 730 732 Government: corporate income taxes26 239 327 Capital providers: net interest251 302 327 Total purchased goods and services as included in costof sales amounted to EUR 13.9 billion, representing 57%of total revenues of the Philips Group. Of this amount,approximately 69% was spent with global suppliers, theremainder with local suppliers.In 2016, salaries and wages totaled EUR 5.8 billion. Thisamount is some EUR 300 million higher than in 2015,mainly caused by the increased number of employeesand currency effects. See note 6, Income fromoperations for more information.Philips’ shareholders were given EUR 732 million in theform of a dividend, the cash portion of which amountedto EUR 330 million.Income taxes amounted to EUR 327 million, comparedto EUR 239 million in 2015. The effective income tax ratewas lower than the weighted average statutory incometax rate in 2016, mainly due to recognition of deferredtax assets and non-taxable income, largely attributableto favorable tax regulations relating to R&Dinvestments. These effects were partly offset by non-deductible expenses.For a further understanding, see note 8, Income taxes.Philips supports global initiatives of the OECD(Organization for Economic Cooperation andDevelopment) and UN (United Nations) to promote taxtransparency and responsible tax management, takinginto account the interest of various stakeholders, suchas governments, shareholders, customers and thecommunities in which Philips operates. For moreinformation, please refer to Philips’ Tax Principles.12.3Social statementsIn 2016, both Royal Philips HealthTech businesses andPhilips Lighting launched their next 5-yearsustainability programs. This section providesadditional information on (some of) the Socialperformance parameters reported in section 2.2, Socialperformance, of this Annual Report.12.3.1Building employabilityOther programsAt Philips, our vision to offer the best place to work forpeople who share our passion is not limited toemployees on our payroll. In the Netherlands, forexample, we run a special employment program, WGPSustainability statements12.3.1Annual Report 2016193(Werkgelegenheidsplan, or Philips EmploymentScheme), to offer vulnerable groups of externaljobseekers a work experience placement, usuallycombined with training. Since the scheme’s launch in1983, nearly 13,000 people have participated, andaround 70% found a regular job after taking part in theprogram. In 2016, Philips employed 140 people via theWGP program, including 25 people with autism. As wemove into 2017, we will continue to offer anenvironment for all of our people to thrive and grow.12.3.2People developmentOur talent development focuses on all aspects of the70:20:10 learning framework.70% Learning through critical career experiencesPhilips is on a multi-year journey to evolve our cultureto focus on experience-based career development,giving our people the opportunity to identify and gainthe experiences necessary to support our healthtechnology strategy and strengthen theiremployability. By identifying the roles and experiencescritical to our business strategy, we clarify developmentareas and transferrable skills in support of cross-functional, lateral, traditional, as well as non-traditionalcareer opportunities for our people.As of 2016, our people are able to view the successionplans in which they are included. In 2017 we willcontinue on our journey towards an experience-basedcareers culture through:•Enabling and empowering our people with real-time,integrated tools and resources to plan and managetheir career•Building awareness of experience-based careers forour people through stories and communications,prioritizing critical roles and capabilities that aredirectly in support of our health technology strategy•Facilitated ‘gig-board’ of extra-curricular roles toincrease flexible teaming across organizationstructures and provide opportunity for furtherdevelopment within existing roles20% Guidance through coaching and mentoringIn 2016, Philips University launched a program forleaders to help them get the most out of our people,help them grow, and have meaningful careerconversations. In 2017 we will drive further initiativesfocused on:•Strengthening the employee-and-manager careerpartnership with clear accountabilities•Equipping managers as effective career coaches whowill have transparent career dialogues with theirteam, with differentiated development for deepspecialists and broad leaders10% Learning through formal learningIn 2016, more than 1,900 new courses were madeavailable by Philips University. By year-end, over86,000 employees had enrolled for courses withPhilips University. In total, some 1.2 million hours werespent on training through Philips University in 2016,with some 580,000 training completions.12.3.3Employee volunteeringIn North America, the Philips Cares program providesways for employees to work together to improvepeople’s lives by creating healthy, sustainablecommunities. This can take many forms: from helping achild to excel in math, or providing safety and energy-efficient home improvements for the disadvantaged, toraising awareness about the importance of cardiachealth. In 2016 alone, more than 9,500 employeevolunteers participated in community outreachprojects that suited their needs, schedules, andpassions individually as well as through partnershipswith organizations such as the American HeartAssociation, International Medical EquipmentCollaborative (IMEC), and the March of Dimes.Since Q4 2016, all of our employees are now able totake 1 day per year to support charitable endeavorsthrough volunteering. For example, in the Benelux 70of our people were trained in resuscitation (CPR) by theDutch Hartstichting (heart foundation), enabling themto provide support in the critical first period of a cardiacarrest.12.3.4Health and Safety performanceIn 2016, we recorded 174 LWIC, i.e. occupational injurycases where the injured person is unable to work oneor more days after the injury. This represents asignificant decrease compared with 213 in 2015. TheLWIC rate decreased to 0.18 per 100 FTEs, comparedwith 0.21 in 2015. The number of Lost Workdays causedby injuries decreased by 1,253 days (16%) to 6,728 daysin 2016.Additionally, in 2016, we recorded 395 TRC’s, i.e. caseswhere the injured employee is unable to work one ormore days, or had medical treatment or sustained anindustrial illness.In 2016, we focused our efforts not only on traditionalprocess and equipment safety improvements, but alsoon a proactive cultural transformation through BehaviorBased Safety (BBS). BBS requires a fundamental shiftin how we think and act about Health and Safety beforean injury occurs. Our new company program, based onan internal best practice, was deployed andimplemented globally across many factories in 2016including those in China, Asia Pacific and the USA. Webelieve this program will continue to drive down ourworkplace injuries and be a key pillar towards reachingour goal of a 25% reduction in total injuries by 2020.Sustainability statements12.3.4194Annual Report 2016Philips GroupLost workday injuries per 100 FTEs2012 - 20162012 2013 2014 2015 2016 Personal Health0.39 0.33 0.16 0.16 0.15 Diagnosis &Treatment0.22 0.23 0.27 0.20 0.36 Connected Care &Health Informatics0.16 0.05 0.18 0.16 0.15 HealthTech Other0.14 0.12 0.11 0.13 0.10 Lighting0.47 0.42 0.37 0.34 0.22 Continuing operations0.31 0.27 0.23 0.21 0.18 Discontinuedoperations0.55 0.37 0.25 0.27 0.32 Philips Group0.31 0.28 0.23 0.22 0.19 Philips GroupTotal recordable cases per 100 FTEs20162016 Personal Health0.33 Diagnosis & Treatment0.65 Connected Care & Health Informatics0.67 HealthTech Other0.27 Lighting0.50 Continuing operations0.41 Discontinued operations0.44 Philips Group0.41 Diagnosis & Treatment businessesIn the Diagnosis & Treatment businesses segmentHealth and Safety showed a decrease in performancein 2016 with 40 LWIC compared to 21 in 2015. The LWICrate increased to 0.36 compared to 0.20 in 2015. Thetotal number of recordable cases for the Diagnosis &Treatment businesses segment was 73 in 2016.Connected Care & Health Informatics businessesHealth and Safety performance in the Connected Care& Health Informatics businesses segment continued toimprove in 2016 with 5 LWIC in 2016 compared to 6 in2015. Correspondingly, the LWIC rate decreased to 0.15in 2016 compared to 0.16 in 2015. This was primarilydriven by our global patient monitoring businesses. Thetotal number of recordable cases for the ConnectedCare & Health Informatics businesses segment was 23in 2016.Personal Health businessesThe Personal Health businesses segment showedstable performance in Health and Safety with 21 LWICin 2016, the same number as in 2015. The LWIC rateimproved from 0.16 in 2015 to 0.15 in 2016. The PersonalHealth businesses segment had 46 recordable cases in2016.LightingLighting showed an overall improvement whilerecording 71 LWIC compared to 119 in 2015. As a resultthe LWIC rate improved to 0.22 (0.34 in 2015). In 2016,Lighting had 156 reportable cases. Lighting introduceda new safety program in 2015 focusing on preventinginjuries.12.3.5General Business PrinciplesA total of 503 concerns were reported over the courseof 2016 via the Philips Ethics Line and through ournetwork of GBP Compliance Officers, of which 164related to Philips Lighting. The previous reportingperiod (2015) saw a total of 447 concerns, 135 of whichrelated to Philips Lighting. Overall, we saw an increaseof 13% in the total number of reports (11% for RoyalPhilips versus 21% for Philips Lighting).This is a continuation of the upward trend reportedsince 2014, the year in which Philips updated its GeneralBusiness Principles and deployed the relatedcommunication campaign, although the overallincrease in the number of complaints reported hasslightly declined year-on-year (2015: 14%). We believethis trend is in line with our multi-year efforts toencourage our employees to speak up, and we are nowapproaching a normalized level of reported concernsannually. The relatively larger increase in the number ofconcerns that relate to Philips Lighting is expected torelate, at least in part, to the separation event and therelated corporate activities.The upward trend in the number of concerns canprimarily be attributed to significantly more concernsbeing reported in the North American (NA) region,making up 38% of the total number of reports in 2016(2015: 31%). The number of concerns reported in LatinAmerica once again declined year-on-year to 19% ofthe total number of complaints, compared with 25% in2015. In percentage terms, Europe, Middle East & Africa(EMEA) and Asia Pacific (APAC) remained quite stable,representing 20% and 23% of the total number ofcomplaints respectively (2015: 21% and 20%).In keeping with a trend that became visible in 2015, weagain saw a more even distribution in reporting acrossthe four regions. While the Americas were historicallydominant in terms of number of cases reported, EMEAand APAC have now reached the same level as LatinAmerica. We believe this to be as a result of significantcommunication efforts in addition to our Global GBPCommunications campaign, especially in the APACregion, improving employees’ awareness of their rightswith regard to the GBP, and the reporting facilitiesavailable to them.Sustainability statements12.3.5Annual Report 2016195Philips GroupBreakdown of reported GBP concerns in number of reports2013 - 20162013 2014 2015 2016 Health & Safety3 10 9 16 Treatment of employees203 203 242 276 -Collective bargaining5 - - 2 -Equal and fairtreatment80 72 44 73 -Employeedevelopment4 - 2 15 -Employee privacy1 3 8 4 -Employee relations5 6 - 20 -Respectful treatment84 93 111 107 -Remuneration15 11 9 11 -Right to organize- - - - -Working hours3 5 2 8 -HR other6 13 66 36 Legal9 30 35 32 Business Integrity109 110 138 144 Supply management5 6 6 13 IT6 7 4 10 Other- 27 13 12 Total335 393 447 503 Most common types of concerns reportedTreatment of employeesAs in previous years, the most commonly reported typeof concern related to the category Treatment ofemployees. In 2016 there were 276 reports in thiscategory, compared to 242 in 2015. This represents 55%of the total number of concerns, which is a slightincrease from 2015 (54%).Two subcategories, Respectful treatment and Equaland fair treatment, make up just over 65% of theconcerns related to Treatment of employees. TheRespectful treatment category generally relates toconcerns about verbal abuse, (sexual) harassment, andhostile work environments. Equal and fair treatmentprimarily addresses favoritism, and matters ofdiscrimination and unfair treatment in the workplace.79% of the cases in these categories originated from theAmericas, which is slightly more than in 2015 (76%).Business integrityThe second most reported type of concern relates toBusiness Integrity, which made up 29% of the totalcases reported. This is slightly less than in 2015, whenthe percentage was 31%. These concerns originatedfrom the APAC region (45%), followed by EMEA (33%),Latin America (14%) and North America (8%).Substantiated/unsubstantiated concernsOf the 503 cases reported in 2016, 137 are still pendingclosure, in particular those that were filed towards theend of the year. The table below gives an overview ofthe number of reported concerns that weresubstantiated (i.e. found to constitute a breach of ourGeneral Business Principles) by the subsequentinvestigation.Of the 366 reports investigated (267 in 2015), 115 weresubstantiated, which represents 31% of the totalreported and closed (34% in 2015). This is also shown inthe table below. Notably, while in 2015 39% of theTreatment of employee cases were substantiated, thispercentage dropped to 28% in 2016 (2014: 22%, 2013:20%). On the other hand, 40% of the Business Integrityreports were closed as substantiated in 2016, comparedwith 21% in 2015 (2014: 36%, 2013: 50%).In addition to the above, 174 concerns that were stillopen at the end of 2015 were closed during 2016. 37%of these concerns were substantiated afterinvestigation.Of the 179 closed concerns that were substantiated, 100were followed up with disciplinary measures varyingfrom termination of employment and written warningsto training and coaching. In other cases, correctiveaction was taken, which varied from strengthening thebusiness processes to increasing awareness of theexpected standard of business conduct.12.3.6The Philips FoundationThe Philips Foundation was established in 2014 and isa registered charity that strives to improve the lives ofpeople in communities in need. The Philips Foundationseeks to make use of the expertise of partners,visionaries and innovators and the innovationcapabilities of Philips to create lasting impact. In 2016,the Philips Foundation continued to build its portfolioof projects and partners in the areas of communityPhilips GroupClassification of the new concerns investigated in number of reports2014 - 20162014 2015 2016 substantiated unsubstantiated substantiated unsubstantiated substantiated unsubstantiated Health & Safety1 7 3 4 3 4 Treatment of employees32 112 62 95 64 164 Legal4 9 4 9 5 14 Business Integrity25 45 16 62 38 56 Supply Management1 - - 1 1 7 IT2 - - 2 1 3 Other4 18 1 8 3 3 Total69 191 86 181 115 251 Sustainability statements12.3.6196Annual Report 2016development and social entrepreneurship, as well as inour approach towards disaster relief. Royal Philips andPhilips Lighting supported the program of the PhilipsFoundation with a donation of EUR 10 million in 2016and provided the operating staff, payment in-kind andthe expert support of skilled employees who supportthe Foundation’s program for part of their time.A highlight of the year was the launch of a partnershipwith Ashoka, one of the world’s largest networks ofsocial entrepreneurs, that identifies and invests in socialentrepreneurs helping them to bring their ideas forsolving social problems to scale. Through a six month‘globalizer’ program, 12 social entrepreneurs weresupported by advisory teams – involving 24 Philipsvolunteers to build their impact scaling plan. Thisculminated in a three-day summit where the socialentrepreneurs were able to pitch their impact plans toa large group of senior experts, such as social investors,public sector representatives and Philips executives.We additionally worked on strengthening ourpartnerships with the Red Cross and UNICEF. Thepartnership with the Red Cross focuses on exploringinnovations that could assist in providing immediaterelief to people in regions affected by humanitariancrises including natural disasters. We are working withthe Netherlands Red Cross and the Ivory Coast RedCross on a project in Ivory Coast to strengthen theresilience of a community in the Blolequin region witha focus on the health of mothers and children. ThePhilips Foundation and UNICEF have partnered todevelop healthcare innovations for the first 1,000 daysof children’s lives. We are supporting UNICEF’s GlobalInnovation Center and are a lead partner in the KenyaMaker for Maternal, Newborn and Child Health Projectin Nairobi, which focuses on developing and deployingsolutions that improve access to healthcare for mothersand their children in low-resource settings.In addition, 36 local projects have been approved to beset up throughout the world. These projects areorganized via the local Philips organization and NGOpartner and funded by the Philips Foundation. Theseprojects offer employee engagement opportunitiesincluding skilled expert volunteering. Employeedonations were also a large part of the PhilipsFoundation’s response to the earthquakes in Ecuador,Japan and Italy as well as Hurricane Matthew in theUSA. Along with our co-creation projects we were ableto respond to disasters around the world via ourpartnership with the Red Cross and global fundraisers,through which we raised a total of more than EUR80,000 – a combination of employee donations andfoundation matching.More information about the Philips Foundation, itspurpose and scope as well as the Philips FoundationAnnual Report 2015 can be found here .Examples of innovation projects supportedby the Philips FoundationThe Philips Foundation, CurArte Foundation andHospital Vall d’Hebrón teamed up to create ‘Imatgina’,an advanced patient-centric initiative in pediatricradiology that aims to improve the experience childrenhave during diagnostic imaging tests. The goal of theinitiative is to enhance the experience for children bycreating a friendly atmosphere that dispels theuncertainty and fear usually associated with thesetypes of procedures. It is estimated that the project willimprove the lives of over 7,000 children on an annualbasis.Every day in rural Uganda, 555 birth complicationsoccur, which lead to the death of over 6,000 Ugandanwomen a year. Although ultrasound has proven to beinstrumental in the early identification of thesecomplications, its high cost and the lack of trainedpersonnel mean that it is not widely available in ruralareas. The Philips Foundation and Philips teamed upwith Imaging the World (ITW) to identify and implementsustainable business models in the healthcareecosystem of rural Uganda. Establishing sustainableand increased sources of funding will allow ITW tocreate new health clinics and impact the lives of anadditional 35,000 Ugandan women and babies a year.12.3.7Stakeholder EngagementOur engagements with various partners andstakeholders is essential to our vision of making theworld healthier and sustainable through innovation.Some of our partnership engagements are describedbelow.Global partnershipsWorld Economic ForumPhilips is proud to continue as a strategic partner andactive member of the World Economic Forum (WEF), anindependent international organization committed toimproving the state of the world by engaging leaders inpartnerships to shape global, regional and industryagendas. We supported and participated in a widerange of initiatives and projects through the year –regional WEF events, as well as the participation inInternational Business Council of the World EconomicForum.Further to our various engagements with WEF, Fransvan Houten has been selected to serve as aStewardship Board Member of a key WEF initiative onshaping the “Future of Health and Healthcare”. Theinitiative will focus on managing the risk and impact offuture epidemics addressing the shortfall in the world’sability to respond to public health emergencies bydeveloping a multifaceted cross-industry, cross-sectorial approach.Sustainability statements12.3.7Annual Report 2016197Global Alliance for Vaccines and ImmunizationPhilips and the Global Alliance for Vaccines andImmunization (Gavi), are partnering to improve thequality of immunization data and its collection inprimary and community healthcare. The partnershipwill be piloting the project in Uganda. The goal of thepartnership is to gather accurate data which bothorganizations believe is essential to improve patientoutcomes, provide access to care and reduce costs.Good data is key to strengthening health systemsaround the world.World Heart FederationPhilips announced a new partnership with the WorldHeart Federation (WHF) in 2016 to help people bettermanage their heart health. Aligned with the WHF’s‘power your life’ campaign, Philips aims to encouragepeople to take personal responsibility for leadingheart-healthy lives and to raise awareness aboutcardiovascular disease.Thought leadershipFuture Health IndexPhilips launched a new report, the Future Health Index(FHI) in 2016, an extensive global study which exploreshow 13 countries around the world are positioned tomeet long-term global health challenges throughintegration and connected care technologies. TheFuture Health Index measures readiness to addressthese challenges by examining perceptions about theaccessibility and level of integration of healthcareservices, and the adoption of connected caretechnology throughout national healthcare systems.Digital transformation of health and carePhilips is a champion of the EU Blueprint on digitaltransformation of health and care for the ageingsociety. Philips will continue its engagement in theBlueprint through deploying digital innovation acrossthe EU. We believe that this will contribute todevelopment of value-based care models for thebenefit of citizens/patients and sustainability of healthsystems.Working on global issuesSustainable Development GoalsPhilips aspires to be a major private sector contributorto the Sustainable Development Goals (SDGs) thatwere launched during the UN General Assembly in NewYork in September 2015. The United NationsSustainable Development Goals 3 (“’to ensure healthylives and promote well-being for all at all ages”) and 12(“to ensure sustainable consumption and productionpatterns”) are drivers and outcomes of sustainabledevelopment and Philips is committed to workingclosely with all relevant stakeholders to developsolutions to address these.Strengthening primary care and enabling communitydevelopmentWorking in collaboration with the United NationsPopulation Fund (UNFPA), Royal Philips plans toinaugurate a Community Life Center (CLC) in Mandera,a County in North-Eastern Kenya with one of theworld’s highest maternal mortality rates - 3,795 per100,000 live births. The project supported by theCounty Government of Mandera is the second of itskind in the world; Philips inaugurated the first CLC inKiambu County, Kenya in 2014. The CLC will delivercrucial primary healthcare and enhance communitydevelopment in Mandera.Access to primary healthcare in Africa is a complex andcomplicated issue, therefore a sustainable solutionneeds to address a wide range of issues collectively.Issues range from unavailability of qualified healthcareworkers to the lack of electricity, water and basichealthcare technology. The creation of the CLC conceptenabled Philips to realize its vision to drasticallyimprove primary healthcare in Africa.Grand Challenges Canada on childhood pneumoniaPhilips and Grand Challenges Canada (GCC) arecollaborating on an innovative project to aid andimprove the diagnosis of childhood pneumonia in lowresource settings.Royal Philips received a repayable grant to scale themanufacturing and distribution of the Philips Children’sAutomated Respiration Monitor (also known asChARM) to make it affordable and accessible forcommunity-based health workers in low-resourcesettings throughout the world. ChARM has the potentialto assist community health workers in establishing amore accurate measurement of a sick child’s breathingrate to help improve the diagnosis of pneumonia andpotentially prevent some of the 922,000 childhooddeaths caused by pneumonia each year.Global Financing FacilityIn 2016 Philips committed to supporting the GlobalFinancing Facility (GFF) through our expertise ininnovation and our core competencies in growingprimary-care capacity. The GFF brings together a broadrange of partners to promote the sustainable solutionsneeded to achieve universal coverage of health care.By creating the right financial and technical conditionsfor innovation, as a common objective we believe ourinvolvement will achieve greater impact and betterhealth outcomes through collaboration.12.3.8Supplier indicatorsPhilips has a direct business relationship withapproximately 8,500 product and componentsuppliers and 22,000 service providers, and in manycases the sustainability issues deeper in our supplychain require us to intervene beyond tier 1 of the chain.Sustainability statements12.3.8198Annual Report 2016Supplier sustainability strategyThrough a structured annual strategic processcombined with a multi-stakeholder dialogue weidentified our key focus areas as described below:1How do we seeourselves? What areour strengths andweaknesses?2How does the outsideworld see us? e.g.external benchmarks3How does the worlddevelop around us?Trends >opportunities/threats4What does thismean for us inthe future?TodayOutTomorrowInConfrontationStrategic directionGap analysisThis process resulted in 2016 into five strategicprograms for our Sustainable Supply Chain: EICC pillars: mgt systems, ethics, labor, health & safety, environment stakeholders and partners owner KPIsDifferentiator programMust do programKey programs1 Supplier sustainability compliance2 Supplier sustainability performance3 Responsible sourcing4 Circular procurement5 Environmental footprint China(SSC)(SSP)(RS)(CP)(EFP)EnablersONE database and dashboardStandardized metrics (KPIs)Communication planMulti-stakeholder dialogueIndustry collaborationTraining planRisk mapping (BOM, materials, suppliers)1. Supplier Sustainability ComplianceTwo core policy documents form the basis of suppliersustainability compliance: the Supplier SustainabilityDeclaration (SSD) and the Regulated Substances List(RSL).Supplier Sustainability Declaration (SSD)The SSD sets out the standards and behaviors Philipsrequires from its suppliers. The SSD is based on theElectronics Industry Citizenship Coalition (EICC) Codeof Conduct and covers the topics Health & Safety,Labor, Environment, Ethics and Management systems.Regulated Substances List (RSL)The RSL specifies which chemical substances areregulated by legislation. Suppliers are required tofollow all the requirements stated in the RSL.Substances can either be marked as restricted ordeclarable.Following the SSD and RSL, Philips further specifiescontractual and transparency requirements. Suppliersare obliged to contractually commit to the SSD and RSLand upon request provide additional information andevidence.2. Supplier Sustainability Performance (SSP)Since 2006, our supplier sustainability audits havebeen executed by third party auditors.Due to insights gained through a thorough analysis ofthe audit program and the data it generated in the past10 years our main conclusions were:•The audit process consists of a third party audit toverify the SSD compliance, it focuses on closing theidentified “Non Conformities” and repeats every 3years. The frequency of checks is not sufficient andthe system does not lead to long lastingimprovements of the sustainability performance orcompliance rate of our suppliers.•Training and capacity-building programs are focusedon general sharing of information and not necessarilyon driving change or improvements. They do notalways meet individual supplier needs.•To secure business continuity, suppliers try to passthe audit with the least possible effort rather thanmaking lasting improvements.•Years of an audit culture which did not focus on long-lasting improvements has led to audit fatigue due totoo many audits demanded by other customers.Based on the above conclusions, Philips identified aneed for change and developed a new “beyond audit”approach which:•Understands that suppliers may have initialdeviations from the SSD and RSL.•Accepts that suppliers each have their ownorganizational – and sustainability maturity level andneed an individual improvement plan.Sustainability statements12.3.8Annual Report 2016199•Is continuous and creates a cultural change leadingtoward long-term improvements.•Ultimately leads to one-cross-industry standard forsupplier sites and will therefore remove the auditburden.The new SSP approach has been piloted in 2016 on asample of 93 suppliers in China with the following results:•90% of the suppliers completed a Self-AssessmentQuestionnaire (SAQ), 57% of which were validated byPhilips sustainability experts.•Followed by a site assessment at 20 supplier sites.•Through joint efforts an improvement Plan (IP) wasdeveloped and agreed upon with these 20 suppliers.•These 20 suppliers started executing theImprovement Plan, while Philips provides supportand monitors progress on a regular basis.The following observations were made after analyzingthe first phase of the pilot:•Higher level of commitment and ownership fromsuppliers (also at top management level).•Change in mindset towards continuous improvementand transparency.•Suppliers are disclosing more areas for improvementthan it would be possible to identify through an auditonly.•Suppliers are moving away from quick fixes andtowards lasting improvements.Three key focus areas of SSPWe are primarily focusing on 3 areas: Health and Safety,remuneration and benefits, and workforce turnover.Process ChemicalsPhilips is an active member of the EICC project team onprocess chemicals, for further details on the strategyand approach of this project see the EICC positionpaper. In addition to this project team we haveaddressed the topic of process chemicals in the newSSP approach and we aim to identify if and how themanufacturing sites are managing process chemicals.Summary of 2016 Sustainability Audit ProgramIn 2016, we audited 226 of our current risk suppliers,including 150 continued conformance audits withsuppliers that we had already audited in 2013. As inprevious years, the majority of the audits were done inChina. With these audits we directly or indirectlyimpacted almost 180,000 workers employed at theproduction sites that were audited.Philips GroupNumber of initial and continual conformance audits201642Brazil50113China1215India47Indonesia4Initial12Continued conformanceMexicoOn top of the audits with current risk suppliers, we alsoaudited 28 potential suppliers during the supplierselection process. These potential suppliers need toclose any zero-tolerance issues before they can startdelivering to Philips.To track improvements Philips measures the‘compliance rate’ for the identified risk suppliers, beingthe percentage of risk suppliers audited within the last3 years who do not have or have resolved all major NCs.During 2016 we achieved a compliance rate of 90%(2015: 86%).Audit findingsThe table below shows the results of the full scopeaudits done during 2016; potential suppliers are notincluded. Most frequent areas of non-compliance in2016:•Certified Management System (ISO9001, ISO14001,and OHSAS18001)•Emergency Preparedness•Wages and BenefitsPhilips GroupSummary of 2016 audit findings per region China Asiaexcl.China LATAM EMEA Total No. of audits163 38 22 3 226 Initial audits50 16 8 2 76 Continuedconformanceaudits113 22 14 1 150 Averagenumber of non-compliances peraudit9 20 13 3 12 Workersemployed atsites audited154,309 8,394 14,165 2,295 179,163 More information on the Supplier Sustainability AuditProgram can be found here.Sustainability statements12.3.8200Annual Report 20163. Responsible Sourcing of MineralsThe supply chains of minerals are long and complex.There are typically 7+ tiers between the end-usercompanies like Philips and the mines where theminerals are being extracted.Philips does not directly source minerals from mines inin the conflict-affected and high-risk regions, and thesupply chain for these metals consists of many tiers,including traders, exporters, smelters, refiners, alloyproducers and component manufacturers, beforereaching Philips’ direct suppliers.Mining in these regions often takes place in an artisanalform which often means it is informal and unregulated.Artisanal miners can become victims to exploitation byvarious militia and armed groups. This increases the riskof human rights violations (forced labor, child labor orwidespread sexual violence), unsafe workingconditions or environmental concerns.Philips addresses the complexities of the mineralssupply chains through a continuous due diligenceprocess combined with multi-stakeholder initiatives forresponsible sourcing of minerals.1Establishstrong companymanagementsystems2Identifyand assess risksin the supplychain3Analyzeand designa strategy4Independentthird-partyaudit5Report onsupply chaindue diligenceStakeholder DialogueConnectingsupply & demandSharing knowledge& best practicesIn-region projects forresponsible miningSupply chains forresponsible sourcingSupplyDemandResponsible Sourcing approach of PhilipsDue diligence approachOECD Five-Step Framework for Risk-Based Due Diligence in the Mineral Supply ChainMulti-stakeholder initiativesWorking together with other stakeholders to apply leverageConflict minerals due diligencePhilips annually investigates its supply chain to identifysmelters of tin, tantalum, tungsten and gold in its supplychain and we have committed not to purchase rawmaterials, subassemblies, or supplies which are foundto contain conflict minerals.Philips applies collective cross-industry leveragethrough active engagement via Conflict Free SourcingInitiative (CFSI). The Conflict-Free Smelter Program(CFSP) identifies smelters that can demonstratethrough an independent third-party audit that theminerals they procure are conflict free. Philips isactively directing its supply chain towards thesesmelters. See www.conflictfreesmelter.org for moredetails.The Philips Conflict Minerals due diligence framework,measures and outcomes are described in the ConflictMinerals Report that we file annually with SEC. TheReport is audited by an independent third party andmade publicly available on Philips’ website.Multi-stakeholder initiatives for responsible sourcingof mineralsWe believe that a multi-stakeholder collaboration inresponsible sourcing of minerals is the most viableapproach in addressing the complexities of mineralsvalue chains.European Partnership for Responsible Minerals(EPRM)EPRM is a five-year multi-stakeholder partnershipbetween governments, companies, and civil societyactors working toward more sustainable mineralsSustainability statements12.3.8Annual Report 2016201supply chains. Philips became a strategic, foundingpartner of EPRM in May 2016, being the firstrepresentative of the private sector to join the initiative.Tin mining in IndonesiaIndonesia produces roughly one-third of the world’s tinsupply, of which the vast majority comes from theislands Bangka and Belitung.In 2015, a Roadmap to sustainable tin mining wascreated in collaboration with the local industry andgovernment, defining improvement areas for onshoreland reclamation and offshore low-impact mining.In 2016, the first implementation pilot projects of theRoadmap were kicked off, governed by the localsteering committee.Dutch Covenant on GoldLeaders of different industries using gold in TheNetherlands together with the Dutch government andNGOs look for ways to make gold supply chains moreresponsible. Through 2016, the group has engaged inknowledge sharing to understand all specifics of thegold supply chain and to identify the right approach forthe parties to address the most severe issues.Mica Working GroupMica is mainly used as a pearlescent pigment incoatings and cosmetics, and in the electronics sector itis used as an electrical insulator.In 2016, Terre des Hommes in collaboration with SOMOpublished a report “Beauty and a Beast” which showedthe widespread problem in the mica industry inJharkhand/Bihar (India) and gaps in the due diligenceof end user companies.Philips decided to team up with Terre des Hommes inorder to bring other mica users from all industriestogether to start a Mica Working Group with Terre desHommes, Philips, the Dutch Ministry of Foreign Affairsand a group of 15 companies.“Terre des Hommes Netherlands is pleased to partnerwith Philips in order to set up the Mica WorkingGroup. Our report “Beauty and a Beast, child laborin India for sparkling cars and cosmetics” shows thechallenges of mica mining and the need forimmediate interventions. Philips became aware ofthe issue and immediately demonstrated itsleadership in CSR by taking the initiative to bringpartners from various industries together. Philips’engagement in other responsible sourcing initiativesdefinitely supported the Mica Working Group tomove forward. We are confident that this multi-stakeholder initiative will lead to a transparent,traceable and child labor free mica supply chain”Terre des HommesNGO4. Circular ProcurementPhilips’ ambition is to increase its circular valueproposition and it has set a 2020 target of 15% circularrevenues. Procurement can play a leading role inPhilips’ transition towards a circular economy in orderto achieve the 2020 target or even exceed this.Topics where Procurement is actively involved are:•Circular procurement in the procurement policy. Thenext step is to define a circular procurement strategyand a clear long-term ambition.•The implementation of a governance structurebeyond the procurement organization to cover thewhole value chain is part of the internal CircularEconomy Excellence network.•Execution of an analysis of internal and externalcircular service models to improve collaboration.“In 2016 Philips and HP have further strengthenedtheir business relationship by specifying anddelivering an IT pay-per-device model which willcover more than 100,000 IT assets across 50countries. This device-as-a-service solutionsupports both companies’ efforts towards a sharedcircular economy. Philips stands out in trulyunderstanding the importance of managing its ITrequirements in order to realise both maximumvalue and minimize environmental impact from ITproducts. HP is proud to be Philips’ partner ofchoice for IT asset management and will continue tocollaborate on shared circular economyobjectives.”Dr. Kirstie McIntyreHP Social and Environmental ResponsibilityDirector Sustainability statements12.3.8202Annual Report 2016HP Case StudyPhilips has used HP Asset Recovery Services since2011 to comprehensively manage end of life ITassets worldwide, with data wiping, remarketingand recycling to mitigate security and privacy riskand ensure compliance. Over that time HP AssetRecovery Services have managed 80,000 assetsacross 24 countries, remarketing 90% of them.5. Environmental Footprint ChinaIn order to minimize our impact, we are supporting ourChinese suppliers to reduce their environmentalfootprint and at the same time to contribute to Philips’sustainability strategy.Achievements in 2016•Environmental footprint training for 120 suppliers byPhilips Supplier Sustainability team.•Philips actively participated in the Sino-DutchSustainable Supply Chain Management Programheld by the Dutch Consulate in Zhejiang and Jiangsuprovince.•Customer engagement (Starbucks) the supplier hasestablished a new waste water treatment facility toensure waste water discharging in accordance withregulatory requirements.•Environmental footprint data reported for improvingperformance by 20 suppliers as part of the SSP on-site development.•Energy savings via Supplier Development program -energy savings will be achieved uponimplementation of the identified improvementactions.Collaboration with IPE, a ChineseNGOThe Institute of Public and Environmental Affairs(IPE) is a registered non-profit organization basedin Beijing. IPE has developed two pollutiondatabases (water and air) to monitor corporateenvironmental performance and to facilitate publicparticipation in environmental governance. Formore information please refer to IPE website.SA is a Philips supplier located in Shenzhen . InApril 2016, environmental issues were identified inthe waste water discharge system of this supplier.This was reported via the IPE Pollution Map.Philips experts immediately contacted the supplieraccount manager, an IPE expert and the supplierto identify the root-cause and work out animprovement plan. With multi-stakeholderengagement, SA had the IPE Green ChoiceAlliance audit and closed the issue with 50environmental protection NGOs as witnesses.12.4Environmental statementsThis section provides additional information on (someof) the environmental performance parametersreported in section 2.3, Environmental performance, ofthis Annual Report.12.4.1Circular EconomyThe transition from a linear to a circular economy isessential to create a sustainable world. A circulareconomy aims to decouple economic growth from theuse of natural resources and ecosystems by using theseresources more effectively.The circular economy programThe circular economy program at Philips ran for thefourth year in 2016 and consists of four strategic pillars:1.Connect to stakeholders outside Philips2.Internal employee engagement3.Create proof points and metrics4.Embed circular economy in Philips processesPhilips leverages partnerships with the Ellen MacArthurFoundation, Circle Economy Netherlands, WorldEconomic Forum, US Chamber of CommerceFoundation and The Guardian. For example, throughthe leadership of our CEO and supported by the circulareconomy program, Philips teamed up with the WorldEconomic Forum to establish a public-private platformto accelerate the circular economy, launched in Davosin January 2017.In many Philips Business Groups circular economyprojects have started. These are either linked tocustomer access over ownership (pay for performance),business model innovations (from transactions toSustainability statements12.4.1Annual Report 2016203relationships via service and solution models) orreverse cycles (remanufacturing, refurbishment andparts harvesting).Circular RevenuesIn 2016, at Royal Philips, a new internal KPI wasdeveloped and deployed: Circular Revenues. TheCircular Revenues percentage captures our revenues ofvalidated circular products, services, and solutions, asa % of total Philips revenues. The validation is doneagainst the following Philips circularity requirementswhich might be further refined in the future:1. Performance and Access-based modelsRevenues from contracts that include the condition thatPhilips has individual end-of-life responsibility for theproduct2. Refurbished, Reconditioned & Remanufacturedproducts/systemsRevenues from selling refurbished, reconditioned orremanufactured products/systems with re-usedcomponents >30% by total weight of product/ system3. Refurbished, Reconditioned & RemanufacturedcomponentsRevenue from harvested components that have eitherbeen refurbished, reconditioned or remanufactured.The harvested component must contain >30% re-usedparts or materials by total component weight. Thecomponent can either be a standalone component orpart of a new product/system. The commercial value ofthe components is considered irrespective of whetherit is part of a service, warranty or a sale.4. Upgrades/refurbishment on site or remoteRevenue from upgrades of existing hardware andsoftware either on site or remotely5. Products with recycled plastics contentRevenues from products with a recycled plasticscontent of >25% by total weight of eligible plasticsWe set the ambition that by 2020 a total of 15% of ourrevenues will come from circular propositions. This isdouble the rate of 7% baseline achieved in 2015. Theresult for 2016 is 9%. The main contributing revenuestreams are for:Personal Health businessesRevenues from our B2C products that contain a largeamount of recycled plastics, such as our businesses incoffee and domestic appliancesDiagnosis & Treatment businessesOur Diamond Select offer of refurbished imagingsystems for sale, upgrading of systems at customerpremises to enhance performance and extend lifetime,repair and reuse of spare partsConnected Care & Health Informatics businessesA number of Philips businesses based on subscriptionmodels, such as for example the Philips Lifelinebusiness and othersClosing material loopsIn addition to tracking circular revenue, we are alsofurther working to gain transparency over the materialflows connected with the Philips businesses. In 2016Philips put a total of some 242,000 tonnes of productson the market. This assessment is based on sales datacombined with product-specific weights. 85% of thetotal product weight was delivered through our B2Cbusinesses in Personal Health and 15% through our B2Bbusinesses (Diagnosis & Treatment businesses andConnected Care & Health Informatics businesses).We can account for some 19,000 tonnes orapproximately 10% of those products being collected,re-used or recycled globally in 2015. Europe hasadvanced collection systems in place. In thesecountries we have an average return rate of around40-50%. National legislation is required to create thelevel playing field needed to set up efficient recyclingsystems beyond the EU. The main pathways andquantities for material re-use in 2015 were:•Trade-in and return for resale as refurbishedproducts and for spare parts harvesting (Diagnosis &Treatment and Connected Care & Health Informatics)some 2,400 tonnes, largely unchanged from 2014.•Collective collection and recycling schemesaccording to the EU Waste Electrical and ElectronicEquipment (WEEE) collection schemes. Thoseproducts are broken down into the main materialfractions and provided to the market via our recyclingpartners•800 tonnes from Diagnosis & Treatment andConnected Care & Health Informatics field returns,following the WEEE category 8 classification,indicating a slight decrease compared to theprevious year (900 tonnes)•16,000 tonnes from Personal Health, following theWEEE category 2 classificationOn the demand side, the Personal Health businesseshave re-integrated significantly more recycled plasticsin new products than last year, closing the material loopfor some 1,440 tonnes of plastics, up from 900 tonnesin 2015.More information can be found on the circular economywebsite.At Philips Lighting, circular economy activities arecovered as part of their Green Revenues.Sustainability statements12.4.2204Annual Report 201612.4.2BiodiversityPhilips recognizes the importance of healthyecosystems and rich biodiversity for our company, ouremployees, and society as a whole. We aim to minimizeany negative impacts and actively promote ecosystemrestoration activities.The Philips Biodiversity policy was issued in 2014 andprogress was made on biodiversity management, bothon sites (e.g. impact measurement), on natural capitalvaluation and at management level. Most initiativeswere led by the environmental coordinators at our sites,for example at our Best and Drachten sites in TheNetherlands, which serve as role models on the topic ofbiodiversity.Philips participated in 2015 in the development of theNatural Capital Protocol and volunteered as a pilotcompany. These activities continued in 2016. Theenvironmental impact of the Royal Philips sites islimited as they are not very energy-intensive and donot emit large quantities of high-impact substances.The impact of our supply chain however is significantlyhigher than our own impact. For this reason, we usedthe identified hot-spots in our supply chain as input forour CDP Supply Chain program. More information onthat program can be found in sub-section 12.3.8,Supplier indicators, of this Annual Report.12.4.3Sustainable OperationsThe Royal Philips HealthTech businesses and PhilipsLighting Sustainable Operations programs related toimproving the environmental performance of ourmanufacturing facilities focus on most contributors toclimate change, but also address water, recycling ofwaste and chemical substances.For an overview of Philips’ industrial sites, please visit:Philips industrial sites.Royal Philips HealthTech businessesGreen Operations2016baseline year2015 target 20201)2016 actual Total CO2 frommanufacturing84 Ktonnes 0 Ktonnes 85 Ktonnes Water978,500 m3 10% reduction 963,000 m3 Zero waste tolandfill3.2 kilotonnes 0 tonnes 2.9 kilotonnes Operationalwaste recycling78% 90% 79% Hazardoussubstancesemissions1,419 kilos 50% reduction 1,099 kilos VOC emissions169 tonnes 10% reduction 129 tonnes 1)Against the base year 2015Energy use in manufacturingTotal energy usage in manufacturing amounted to8,987 terajoules in 2016, a decrease of 7% compared to2015. Philips Lighting consumed about 66% of the totaland realized a 13% year-on-year reduction, which wasmainly driven by a reduction of energy-intensiveoperations and energy efficiency improvements in thefactories. The Connected Care & Health Informaticsbusinesses realized a decrease in energy consumptionof 5% due to operational changes. Energy consumptionin the Diagnosis & Treatment businesses increased by8%, which was mainly due to the inclusion of two newlyacquired sites. In the Personal Health businesses, siteexpansions and changed demand caused an increasein energy consumption, which was partly offset byenergy efficiency improvements. The energy ofdiscontinued operations amounted to 2,231 terajoulesin 2016 (2015: 2,179 terajoules).Philips GroupTotal energy consumption in manufacturing in terajoules2012 - 20162012 2013 2014 2015 2016 Personal Health1,329 1,369 1,352 1,389 1,436 Diagnosis &Treatment1,248 1,238 1,202 1,214 1,316 Connected Care &Health Informatics325 329 334 336 318 Lighting9,112 9,027 8,369 6,763 5,917 Philips Group12,014 11,963 11,257 9,702 8,987 Operational carbon footprint and energyefficiency - 2016 detailsBecoming carbon-neutral in our operations by 2020 isone of the key targets, after already reducing ouroperational carbon footprint very significantly duringthe past years (40% decrease in CO2 emissions in 2015compared to our 2007 base year). Our carbon footprintdecreased by 5% compared to 2015, resulting in a totalof 1,344 kilotonnes CO2.The 2016 results can be attributed to several factors:•Accounting for 24% of the total footprint, totalCO2 emissions from manufacturing decreased by 17%due to operational changes resulting in decreasedenergy usage and a lower load (mainly in PhilipsLighting); additionally the share coming fromrenewable sources increased.•CO2 emissions from non-industrial operations(offices, warehouses, etc.), representing 8% of thetotal emissions, increased this year due to increasedoverall floor space in our non-industrial real estateportfolio. This resulted in a 3% carbon emissionincrease compared to 2015. In 2017, we will continueto focus on the most efficient use of facility space andincrease the share of purchased electricity fromrenewable sources.•The total CO2 emissions related to business travel,accounting for 14% of our carbon footprint, showed adecrease of 4% compared to 2015. The reductionsachieved with business flights and our lease cars waspartially mitigated by an increase in our rental caremissions.•Overall CO2 emissions from logistics, representing53% of the total, showed no overall changecompared to 2015. We recorded an increase inemissions from air and road freight in Royal Philips,which was mitigated by a decrease in Philips Lighting.Sustainability statements12.4.3Annual Report 2016205This increase in air freight combined with reducedemissions from parcel, road and ocean freightresulted in no overall change in our logisticsemissions.Philips GroupOperational carbon footprint for logisticsin kilotonnes CO2-equivalent2012 - 20162012 2013 2014 2015 2016 Air transport366 385 348 429 448 Road transport169 174 164 118 117 Ocean transport210 227 208 171 153 Philips Group745 786 720 718 718 Carbon emissions in manufacturingThe greenhouse gas emissions of our manufacturingoperations totaled 323 kilotonnes CO2-equivalent in2016, 13% lower than in 2015. This was the result ofdecreased energy usage in manufacturing andoperational changes. Direct CO2 emissions represented56% of the total, which decreased by 10%. Indirect CO2emissions represented 38%, an decrease of 18% due tolower electricity consumption. The carbon emissions ofdiscontinued operations amounted to 175 kilotonnesCO2-equivalent in 2016 (2015: 145 kilotonnes CO2-equivalent).Philips GroupTotal carbon emissions in manufacturingin kilotonnes CO2-equivalent2012 - 20162012 2013 2014 2015 2016 Direct CO2 1)278 276 253 200 181 Indirect CO2252 208 185 148 122 Other greenhousegases6 7 6 6 4 From glass production27 27 24 17 16 Philips Group2)563 518 468 371 323 1)From energy2)Excluding non-reporting industrial sites therefore different fromOperational carbon footprintPhilips GroupTotal carbon emissions in manufacturing per segmentin kilotonnes CO2-equivalent2012 - 20162012 2013 2014 2015 2016 Personal Health54 50 45 49 59 Diagnosis &Treatment52 35 31 28 22 Connected Care &Health Informatics14 9 8 7 4 Lighting443 424 384 287 238 Philips Group563 518 468 371 323 CO2 emissions decreased significantly at PhilipsLighting due to reduced energy usage resulting fromoperational changes and energy efficiencyimprovements. Emissions at the Diagnosis & Treatmentbusinesses decreased due to an increase in use ofelectricity generated by renewable sources, partiallyoffset by two newly acquired sites. The Connected Care& Health Informatics businesses segment decreased itsCO2 emissions due to lower energy consumption. At thePersonal Health businesses, CO2 emissions increaseddue to a decrease in the use of electricity generated byrenewable sources. In December 2016, the LosMirasoles windfarm in the US started to produceelectricity. As a result, all our US operations will bepowered by wind energy in 2017, a clear step towardsour ambition to become carbon-neutral in ouroperations by 2020.Hazardous substances emissionsIn the ‘Healthy people, sustainable planet’ program,new chemical reduction targets have been defined, onthe most relevant categories of substances for RoyalPhilips, being hazardous substance emissions as wellas VOC (Volatile Organic Compounds) emissions. Aspart of the deployment of the new program, reductiontargets at our industrial sites are being agreed. For moreinformation on Philips Lighting’s emissions please referto their Annual Report.Royal Philips HealthTech businessesHazardous substances emissions in kilos2015 - 20162015 2016 Personal Health789 642 Diagnosis & Treatment604 428 Connected Care & Health Informatics26 29 HealthTech1,419 1,099 In 2016, emissions of hazardous substances decreasedby 23%, mainly caused by reduced usage of harmfulchemicals at a Diagnosis & Treatment businesses siteand a Personal Health businesses site and changingprocesses at multiple sites in all segments.VOC emissionsRoyal Philips HealthTech businessesVOC emissions in tonnes2015 - 20162015 2016 Personal Health138 92 Diagnosis & Treatment29 35 Connected Care & Health Informatics2 2 HealthTech169 129 VOC emissions reduced significantly in 2016 (by 24%)to 129 tonnes. This decrease was mainly driven by anumber of industrial sites in the Personal Healthbusinesses segment, which changed their lacqueringprocesses, as well as changes in the product mix. Thiswas slightly offset by the inclusion of two newlyacquired industrial sites in the Diagnosis & Treatmentbusinesses segment.ISO 14001 certificationMost of the Royal Philips manufacturing sites arecertified under the umbrella certificates for theDiagnosis & Treatment, Connected Care & HealthInformatics and Personal Health businesses segments.Philips Lighting also has an umbrella certificate. In 2016,82% of reporting manufacturing sites were certified, a4% increase compared to 2015. Two sites were newlySustainability statements12.4.3206Annual Report 2016certified this year in the Personal Health businessessegment, and the two sites in the Diagnosis & Treatmentbusinesses segment that started to report were not yetcertified.Philips GroupISO 14001 certification as a % of all reporting organizations2012 - 20162012 2013 2014 2015 2016 Philips Group69 79 79 78 82 Environmental incidentsIn 2016, the Personal Health businesses reported oneenvironmental incident with noise and four non-compliances. One was related to noise, followed by atechnical project to meet the requirements; two wererelated to waste water and storm water permits whichwere followed-up by corrective actions; and oneadministrative incident was related to waste. TheDiagnosis & Treatment businesses reported oneenvironmental incident with an oil spill which did notresult in soil pollution. The Connected Care & HealthInformatics businesses reported one environmentalnon-compliance which was related to waste water.Philips Lighting did not experience any environmentalincidents but reported four non-compliances, of whichone resulted in a non-material fine (manufacturing siteexceeding the usage limit of its emergency generator).Sustainability statements12.4.3Annual Report 2016207Sustainability world mapTo find out about our Health and Safety, Waste, Water and Emissions metrics at global, regional and market level, goto www.results.philips.com/interactive-worldmapPhilips GroupTotal wasteEmissions 2)MarketManufacturingsitesTotal recordablecase rate1)CO2 emitted(Tonnes CO2)Waste(Tonnes)Recycled (%)Water (m3)Hazardoussubstances(kg)VOC(Tonnes)Africa- 0.00 - - - - - - ASEAN and the Pacific1 0.12 21,307 1,463 91% 74,738 5 25 Benelux6 0.22 10,757 8,726 80% 235,372 157 12 Central & EasternEurope7 0.30 61,274 7,019 81% 243,260 92 20 Germany, Austria andSwitzerland4 0.50 7,616 3,050 89% 53,264 389 6 France2 0.76 1,284 5,123 95% 182,370 - - Greater China11 0.14 75,592 6,663 90% 977,947 311 27 Iberia2 0.66 2,398 2,042 82% 47,291 - - Indian Subcontinent5 0.10 65,148 2,552 96% 57,174 6 4 Italy, Israel and Greece4 0.53 6,829 2,117 76% 22,529 15 5 Japan- 0.20 - - - - - - Latin America11 0.35 12,927 8,107 82% 173,474 - 8 Middle East & Turkey3)3 0.27 - - - - - - Nordics- 0.20 - - - - - - North America24 0.94 48,193 16,799 76% 337,998 47 18 Russia and Central Asia- 0.00 - - - - - - UK & Ireland2 0.06 9,096 1,102 85% 8,501 77 4 1)Includes manufacturing and non-manufacturing sites2)HealthTech3)Three manufacturing sites did not start to report environmental data yetSustainability statements12.5208Annual Report 201612.5Assurance report of the independentauditorTo: The Supervisory Board and Shareholders ofKoninklijke Philips N.V.Our OpinionWe have audited the Sustainability Information in theannual report of Koninklijke Philips N.V. (the Company),based in Eindhoven, the Netherlands for the yearended December 31, 2016. The scope of our auditengagement is described in Section “Our Scope”. Anaudit engagement is aimed at obtaining reasonableassurance.In our opinion, the Sustainability Information in theannual report 2016 presents, in all material respects, areliable and adequate view of:•the policy and business operations with regard tosustainability; and•the thereto related events and achievements for theyear ended December 31, 2016in accordance with the GRI Standards of GlobalReporting Initiative (GRI) (option Comprehensive) andthe supplemental internally applied reporting criteria asdisclosed in section 12.1 Approach to sustainabilityreporting in chapter 12 Sustainability statements of theannual report 2016.Basis for our opinionWe have performed our audit on the SustainabilityInformation in accordance with Dutch law, includingDutch Standard 3810N “Assurance engagementsrelating to sustainability reports”. Dutch Standard3810N is a subject specific standard under theInternational Standard on Assurance Engagements(ISAE) 3000 “Assurance Engagements Other ThanAudits or Reviews of Historical Financial Information”.Our responsibilities under this standard are furtherdescribed in the Section “Our responsibilities for theaudit of the Sustainability Information”.We believe that the audit evidence we have obtainedis sufficient and appropriate to provide a basis for ouropinion.Our IndependenceWe are independent of the Company in accordancewith the “Verordening inzake de onafhankelijkheid vanaccountants bij assurance-opdrachten” (ViO) (Code ofEthics for Professional Accountants, a Dutch regulationwith respect to independence) and other relevantindependence regulations in the Netherlands. Thisincludes that we do not perform any activities thatcould result in a conflict of interest with ourindependent assurance engagement. Furthermore, wehave complied with the “Verordening gedrags- enberoepsregels accountants” (VGBA, Dutch Code ofEthics).Our ScopeThe Sustainability Information comprises chapter 12Sustainability statements and sections 2.2 Socialperformance and 2.3 Environmental performance ofthe annual report 2016 and provides a representationof the Company’s policy, the related businessoperations, events and achievements relating tosustainability during 2016.The Sustainability Information includes prospectiveinformation such as ambitions, strategy, plans,expectations and estimates. Inherent to thisinformation is that the actual results may differ in thefuture and are therefore uncertain. We do not provideany assurance on the achievability and feasibility of thisprospective information.The references, excluding “Methodology for calculatingLives Improved” and “GRI content index”, in theSustainability Information (www.philips.com, externalwebsites, interviews and other documents) are outsidethe scope of our assurance engagement.We have read the information on sustainability in therest of the annual report 2016 and to the extent we canidentify this information is consistent with theSustainability Information in scope of our audit.Responsibilities of management for theSustainability Information Management of the Company is responsible for thepreparation of the Sustainability Information inaccordance with the GRI Standards (optionComprehensive) and the supplemental internallyapplied reporting criteria as disclosed in section 12.1Approach to sustainability reporting in chapter 12Sustainability statements of the annual report 2016.This responsibility includes the identification ofstakeholders and the determination of materialaspects. The choices made by management regardingthe scope of the Sustainability Information and thereporting policy of the Company is summarized insection 12.1 Approach to sustainability reporting. Furthermore, management is responsible for suchinternal control as it determines is necessary to enablethe preparation of the Sustainability Information that isfree from material misstatement, whether due to fraudor errors.Our responsibilities for the audit of the SustainabilityInformationOur responsibility is to plan and perform the auditengagement in a manner that allows us to obtainsufficient and appropriate audit evidence for ouropinion.Reasonable assurance is a high, but not absolute levelof assurance, which means we may not have detectedall material errors and fraud. Misstatements can arisefrom fraud or errors and are considered material if,individually or in the aggregate, they could reasonablySustainability statements12.5Annual Report 2016209be expected to influence the economic decisions ofusers taken on the basis of the SustainabilityInformation. The materiality affects the nature, timingand extent of our audit procedures and the evaluationof the effect of identified misstatements on our opinion.We apply the “Nadere voorschriftenaccountantskantoren ter zake van assuranceopdrachten (RA/AA)” and accordingly maintain acomprehensive system of quality control includingdocumented policies and procedures regardingcompliance with ethical requirements, professionalstandards and applicable legal and regulatoryrequirements.We have exercised professional judgement and havemaintained professional skepticism throughout theaudit, in accordance with the Dutch Standard 3810N,ethical requirements and independence requirements.Our audit included amongst others:•Evaluating the appropriateness of the reportingpolicy, its consistent application, including theevaluation of the results of the stakeholders’dialogue, the reasonableness of management’sestimates and the related disclosures made bymanagement.•Performing an external environment analysis andobtaining insight into relevant social themes andissues and the characteristics of the organization.•Identifying and assessing the risks of materialmisstatement of the Sustainability Information,whether due to errors or fraud, designing andperforming audit procedures responsive to thoserisks, and obtaining audit evidence that is sufficientand appropriate to provide a basis for our opinion.The risk of not detecting a material misstatementresulting from fraud is higher than for one resultingfrom errors, as fraud may involve collusion, forgery,intentional omissions, misrepresentations, or theoverride of internal control.•Interviewing management and relevant staffresponsible for the sustainability’s strategy, policyand achievements.•Interviewing relevant staff at corporate levelresponsible for providing the information in theSustainability Information, carrying out internalcontrol procedures on the data and consolidating thedata in the Sustainability Information.•Evaluating the design and implementation andtesting the operating effectiveness of the reportingsystems and processes related to the SustainabilityInformation.•Evaluating the underlying transactions and events.•Visits to production sites to evaluate the source dataand to evaluate the design and implementation ofcontrol, including validation procedures, at locallevel.•Testing relevant data and internal and externaldocumentation, on a sample basis, to determine thereliability of the Sustainability Information.•An analytical review of the data and trends submittedfor consolidation at corporate level.•Evaluating the overall presentation, structure andcontent of the Sustainability Information.Amsterdam, The NetherlandsFebruary 21, 2017 Ernst & Young Accountants LLPSubject matter expert sustainabilityJ. NiewoldIndependent auditorC.B. BoogaartFive-year overview13210Annual Report 201613Five-year overviewPhilips GroupGeneral data in millions of EUR unless otherwise stated2012 - 20162012 2013 2014 2015 2016 Sales22,234 21,990 21,391 24,244 24,516 % increase over previous year12% (1)% (3)% 13% 1% Income from operations (EBIT) (loss)592 1,855 486 992 1,882 Financial income and expenses - net(329)(330)(301)(369)(493)Income (loss) from continuing operations(166)1,034 221 414 1,075 Income (loss) from continuing operations attributable to shareholders(171)1,031 225 400 1,032 Income (loss) from Discontinued operations136 138 190 245 416 Net income (loss)(30)1,172 411 659 1,491 Net income (loss) attributable to shareholders(35)1,169 415 645 1,448 Net assets11,185 11,227 10,968 11,780 13,508 Total employees at year-end (FTEs)118,087 116,082 113,678 112,959 114,731 Philips GroupIncome in millions of EUR unless otherwise stated2012 - 20162012 2013 2014 2015 2016 Income from operations (EBIT)592 1,855 486 992 1,882 as a % of sales2.7% 8.4% 2.3% 4.1% 7.7% EBITA 1)1,003 2,276 821 1,372 2,235 as a % of sales4.5% 10.4% 3.8% 5.7% 9.1% Income taxes(218)(466)(26)(239)(327)as a % of income before taxes(82.9)% (30.6)% (14.1)% (38.4)% (23.5)% Income (loss) from continuing operations(166)1,034 221 414 1,075 Net income (loss)(30)1,172 411 659 1,491 1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparable GAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual ReportPhilips GroupCapital employed in millions of EUR unless otherwise stated2012 - 20162012 2013 2014 2015 2016 Cash and cash equivalents3,834 2,465 1,873 1,766 2,334 Receivables and other current assets5,128 5,220 5,591 5,655 6,169 Assets classified as held for sale43 507 1,613 1,809 2,180 Inventories3,495 3,240 3,314 3,463 3,392 Non-current financial assets/investments in associates726 657 619 670 525 Non-current receivables/assets2,217 1,924 2,721 3,075 3,098 Property, plant and equipment2,959 2,780 2,095 2,322 2,155 Intangible assets10,679 9,766 10,526 12,216 12,450 Total assets29,081 26,559 28,352 30,976 32,303 Property, plant and equipment: Capital expenditures for the year479 482 437 522 443 Depreciation for the year588 521 592 582 606 Capital expenditures: depreciation0.8 0.9 0.7 0.9 0.7 Inventories as a % of sales1)14.1% 13.7% 15.3% 14.3% 13.8% Outstanding trade receivables, in days sales2)50 53 56 56 57 1)Calculated based upon values excluding inventories and sales related to acquisitions and divestments for 2015 and 20162)Calculated based upon the values excluding accounts receivable and sales related to acquisitions, divestments and Discontinued operationsFive-year overview13Annual Report 2016211Philips GroupFinancial structure in millions of EUR unless otherwise stated2012 - 20162012 2013 2014 2015 2016 Other liabilities1)9,208 7,713 8,414 8,786 9,058 Liabilities directly associated with assets held for sale27 348 349 407 525 Debt4,534 3,901 4,104 5,760 5,606 Provisions1)4,127 3,370 4,517 4,243 3,606 Total provisions and liabilities17,896 15,332 17,384 19,196 18,795 Shareholders’ equity11,151 11,214 10,867 11,662 12,601 Non-controlling interests34 13 101 118 907 Group equity and liabilities29,081 26,559 28,352 30,976 32,303 Net debt: group equity ratio2)3)6:94 11:89 17:83 25:75 19:81 Market capitalization at year-end18,200 24,340 22,082 21,607 26,751 1)Adjusted to reflect a reclassification of net defined-benefit obligations into Long-term provisions. See note 1, Significant accounting policies.2)For details on the calculation of net debt and group equity ratio, refer to note 17, Equity.3)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparable GAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report.Philips GroupKey figures per share in EUR unless otherwise stated2012 - 20162012 2013 2014 2015 2016 Sales per common share24.11 24.14 23.37 26.46 26.71 Weighted average amount of shares outstanding: -basic1)922,101 911,072 915,193 916,087 918,016 -diluted1)927,222 922,072 922,714 923,625 928,789 Basic earnings per common share: Income (loss) from continuing operations attributable toshareholders per share(0.19)1.13 0.25 0.44 1.12 Net income (loss) attributable to shareholders(0.04)1.28 0.45 0.70 1.58 Diluted earnings per common share: Income (loss) from continuing operations attributable toshareholders per share(0.19)1.12 0.24 0.43 1.11 Net income (loss) attributable to shareholders(0.04)1.27 0.45 0.70 1.56 Dividend distributed per common share0.75 0.75 0.80 0.80 0.80 Total shareholder return per common share4.37 7.50 (1.70)0.21 6.24 Shareholders’ equity per common share12.19 12.28 11.88 12.72 13.66 Price/earnings ratio(104.74)23.58 96.60 53.55 25.89 Share price at year-end19.90 26.65 24.15 23.56 29.00 Highest closing share price during the year20.33 26.78 28.10 27.65 29.07 Lowest closing share price during the year13.76 20.26 20.98 20.79 20.95 Average share price16.92 23.33 24.00 24.51 24.75 Amount of common shares outstanding at year-end1)914,591 913,338 914,389 917,104 922,437 1)In thousands of sharesFive-year overview13212Annual Report 2016Philips GroupSustainability2012 - 20162012 2013 2014 2015 2016 Lives improved, in billions1.6 1.7 1.9 2.0 2.1 Green Revenues, as a % of total sales46% 50% 59% 61% 64% Green Innovation, in millions of euros453 405 463 495 558 Operational carbon footprint, in kilotonnes CO2-equivalent1,640 1,678 1,521 1,417 1,344 Operational energy efficiency, in terajoules per million euro sales1.35 1.40 1.34 1.11 1.01 Total energy consumption in manufacturing, in terajoules1)12,014 11,963 11,257 9,702 8,987 Total carbon emissions in manufacturing, in kilotonnes CO2-equivalent563 518 468 371 323 Water intake, in thousands m33,137 3,289 3,103 2,727 2,414 Total waste, in kilotonnes1)80.6 75.9 75.0 68.5 64.8 Materials provided for recycling via external contractor per total waste, in %77% 79% 80% 83% 83% Restricted substances, in kilos67 37 29 26 7 Hazardous substances, in kilos67,530 35,118 28,310 25,101 12,412 ISO 14001 certification, as a % of all reporting organizations1)69% 79% 79% 78% 82% Employee Engagement Index, % favorable79% 75% 72% 71% 74% Female executives, in % of total14% 15% 18% 19% 18% Lost Workday Injuries, per 100 FTEs0.31 0.27 0.23 0.21 0.18 Fatalities7 3 1 - 2 Initial and continual conformance audits, number of audits159 200 203 195 226 Suppliers audits, compliance rate, in %75% 77% 86% 86% 89% 1)In manufacturing excluding new acquisitionsInvestor Relations14Annual Report 201621314Investor Relations14.1Key financials and dividendKey financialsNet income attributable to shareholders of KoninklijkePhilips N.V. in 2016 was EUR 1,448 million, or EUR 1.56per common share (diluted; basic EUR 1.58 per commonshare). This compares to EUR 645 million, or EUR 0.70per common share (diluted; basic EUR 0.70 percommon share), in 2015.Philips GroupNet income attributable to shareholders in millions of EUR2012 - 2016(35)‘121,169‘13415‘14645‘151,448Net income attributableto shareholders‘16(0.04)1.270.450.701.56Per common share ineuros - dilutedPhilips GroupIncome from operations (EBIT) and EBITA 1) in millions of EUR2012 - 20165924111,003‘121,8554212,276‘13486335821‘149923801,372‘151,882Income from operations (EBIT)353Amortization and impairment2,235EBITA 1)‘161)Non-GAAP financial measure. For the definition and reconciliation to themost directly comparable GAAP measure, refer to chapter 4,Reconciliation of non-GAAP information, of this Annual ReportPhilips GroupTotal of Net cash provided by operating activities and Netcapital expenditures in millions of EUR2012 - 20161,886(241)‘12912(830)‘131,303(806)‘141,167(842)‘151,904Net cash provided byoperating activities(831)Net capital expenditures‘16Dividend policyPhilips’ dividend policy is aimed at dividend stabilityand a pay-out ratio of 40% to 50% of net income afteradjustments.Net income after adjustments is the base figure used tocalculate the dividend pay-out for the year. For 2016,the key exclusions to arrive at net income afteradjustments are the following: the results that areshown as Discontinued operations, income from apension settlement, a charge related to the currencyrevaluation of the provision for the Masimo litigation,financial charges related to bond redemptions, and arelease in financial income and expense related to theMasimo settlement. Restructuring, acquisition-relatedand separation related charges are also excluded.Proposed distributionA proposal will be submitted to the Annual GeneralMeeting of Shareholders, to be held on May 11, 2017, todeclare a distribution of EUR 0.80 per common share(up to EUR 745 million), in cash or shares at the optionof the shareholder, against the net income for 2016.If the above dividend proposal is adopted, the shareswill be traded ex-dividend as of May 12, 2017 and May15, 2017 at the New York Stock Exchange and EuronextAmsterdam, respectively. In compliance with the listingrequirements of the New York Stock Exchange and thestock market of Euronext Amsterdam, the dividendrecord date will be May 16, 2017.Shareholders will be given the opportunity to maketheir choice between cash and shares between May 17,2017 and June 9, 2017. If no choice is made during thiselection period the dividend will be paid in cash. OnJune 9, 2017 after close of trading, the number of sharedividend rights entitled to one new common share willbe determined based on the volume-weighted averageInvestor Relations14.1214Annual Report 2016price of all traded common shares of Koninklijke PhilipsN.V. at Euronext Amsterdam on June 7, 8 and 9, 2017.The company will calculate the number of sharedividend rights entitled to one new common share (theratio), such that the gross dividend in shares will beapproximately equal to the gross dividend in cash. Theratio and the number of shares to be issued will beannounced on June 13, 2017. Payment of the dividendand delivery of new common shares, with settlement offractions in cash, if required, will take place from June14, 2017. The distribution of dividend in cash to holdersof New York Registry shares will be made in USD at theUSD/EUR rate as per WM/ Reuters FX Benchmark 2 PMCET fixing of June 12, 2017.Further details will be given in the agenda for the 2017Annual General Meeting of Shareholders. All datesmentioned remain provisional until then.Dividend in cash is in principle subject to 15% Dutchdividend withholding tax, which will be deducted fromthe dividend in cash paid to the shareholders. Dividendin shares paid out of net income and retained earningsis subject to 15% dividend withholding tax, but only inrespect of the par value of the shares (EUR 0.20 pershare). Shareholders are advised to consult their taxadvisor on the applicable situation with respect to taxeson the dividend received.In 2016, a dividend of EUR 0.80 per common share waspaid in cash or shares, at the option of the shareholder.For 55.0% of the shares, the shareholders elected for ashare dividend, resulting in the issue of 17,344,462 newcommon shares, leading to a 1.9% dilution. EUR 330million was paid in cash. See also section 2.4, Proposeddistribution to shareholders, of this Annual Report.ex-dividenddate record date payment date EuronextAmsterdamMay 15, 2017 May 16, 2017 June 14, 2017 New YorkStockExchangeMay 12, 2017 May 16, 2017 June 14, 2017 Philips GroupDividend and dividend yield per common share2007 - 20170.60‘070.70‘080.70‘090.70‘100.75‘110.75‘120.75‘130.80‘140.80‘150.80‘160.802)Dividend pershare in EUR‘172.1%2.4%5.1%3.4%3.3%4.6%3.8%3.0%3.3%3.4%2.8%Yield in %1)1)Dividend yield % is as of December 31 of previous year2)Subject to approval by the Annual General Meeting of Shareholders in2017Information for investors in New YorkRegistry shares programDividends and distributions per common shareThe following table sets forth in euros the grossdividends on the common shares in the fiscal yearsindicated (from prior-year profit distribution) and suchamounts as converted into US dollars and paid toholders of shares of the New York Registry:Philips GroupGross dividends on the common shares2012 - 20162012 2013 2014 2015 2016 in EUR0.75 0.75 0.80 0.80 0.80 in USD0.94 0.98 1.09 0.89 0.90 Exchange rates USD : EURThe following two tables set forth, for the periods anddates indicated, certain information concerning theexchange rate for US dollars into euros based on theNoon Buying Rate in New York City for cable transfersin foreign currencies as certified for customs purposesby the Federal Reserve Bank of New York (the “NoonBuying Rate”). The Noon Buying Rate on February 10,2017 was EUR 0.9389 per USD 1.Exchange rate (based on the “Noon Buying Rate”)EUR per USD2012 - 2016period end average high low 20120.7584 0.7782 0.8290 0.7428 20130.7257 0.7532 0.7828 0.7238 20140.8264 0.7533 0.8264 0.7180 20150.9209 0.9018 0.9502 0.8323 20160.9477 0.9037 0.9639 0.8684 Investor Relations14.1Annual Report 2016215Exchange rate per month (based on the “Noon BuyingRate”) EUR per USD2016 - 2017highest rate lowest rate August, 20160.9027 0.8823 September, 20160.8962 0.8872 October, 20160.9203 0.8919 November, 20160.9470 0.8992 December, 20160.9639 0.9295 January, 20170.9601 0.9264 Unless otherwise stated, for the convenience of thereader, the translations of euros into US dollarsappearing in this section have been made based on theclosing rate on December 31, 2016 (USD 1 = EUR0.9495). This rate is not materially different from theNoon Buying Rate on such date (USD 1 = EUR 0.9477).The following table sets out the exchange rate for USdollars into euros applicable for translation of Philips’financial statements for the periods specified.Exchange rate (based on Philips’ consolidation rate)EUR per USD2012 - 2016period end average high low 20120.7582 0.7776 0.8166 0.7500 20130.7255 0.7527 0.7805 0.7255 20140.8227 0.7527 0.8227 0.7201 20150.9151 0.9007 0.9410 0.8796 20160.9495 0.9078 0.9495 0.8812 14.2Share informationMarket capitalizationPhilips’ market capitalization was EUR 26.8 billion atyear-end 2016. On December 31, 2016, the closing pricefor shares in Amsterdam was EUR 29.00 and thenumber of common shares outstanding (afterdeduction of treasury shares) amounted to 922 million.Philips GroupMarket capitalization in billions of EUR2012 - 201613.9Q114.5Q216.8Q318.2Q4‘1220.9Q119.2Q221.8Q324.3Q4‘1323.3Q121.4Q223.2Q322.1Q4‘1424.1Q121.1Q219.4Q321.6Q4‘1522.9Q120.8Q224.4Q326.8Q4‘16Share capital structureDuring 2016, Philips’ issued share capital decreased byapproximately 1 million common shares toapproximately 930 million common shares. The mainreasons for this are the cancellation of 18,829,985Philips shares acquired pursuant to the EUR 1.5 billionshare repurchase program (which was completed inOctober 2016) and the issuance of 17,344,462 sharesrelated to the elective dividend. The number ofcommon shares issued and outstanding increased from917 million at December 31, 2015 to 922 million onDecember 31, 2016. On December 31, 2016, the sharesheld in treasury amounted to approximately 7million, all of which are held by Philips to cover long-term incentive and employee stock purchase plans.The Dutch Act on Financial Supervision imposes anobligation on persons holding certain interests todisclose (inter alia) percentage holdings in the capitaland/or voting rights in the Company when suchholdings reach, exceed or fall below 3, 5, 10, 15, 20, 25,30, 40, 50, 60, 75 and 95 percent (as a result of anacquisition or disposal by a person, or as a result of achange in the company’s total number of voting rightsor capital issued). Certain derivatives (settled in kind orin cash) are also taken into account when calculatingthe capital interest. The statutory obligation to disclosecapital interest does not only relate to gross longpositions, but also to gross short positions. Requireddisclosures must be made to the Netherlands Authorityfor the Financial Markets (AFM) without delay. The AFMthen notifies the Company of such disclosures andincludes them in a register which is published on theAFM’s website. Furthermore, an obligation to disclose(net) short positions is set out in the EU Regulation onShort Selling.The AFM register shows the following notification ofsubstantial holdings and/or voting rights at or abovethe 3% threshold: BlackRock, Inc.: substantial holding of5.03% and 6.19% of the voting rights (January 5, 2017).The following shareholder portfolio information isbased on information provided by several largecustodians and a survey conducted in December 2016.Philips GroupShareholders by region (approximated)1) in %201645North America15United Kingdom11France6Netherlands16Rest of Western Europe2)7Other1)Split based on identified shares in shareholder identification2)Includes countries in Western Europe with a shareholding of less than5 %Investor Relations14.2216Annual Report 2016Philips GroupShareholders by style (approximated)1) in %201630Growth19Value12Index12GARP2)6SWF3)4Yield3Retail14Other1)Split based on identified shares in shareholder identification2)Growth at a reasonable price3)Sovereign Wealth FundsShare repurchase programsShare repurchases for capital reduction purposesOn September 17, 2013, Royal Philips announced a EUR1.5 billion share repurchase program. This programstarted on October 21, 2013 and was completed byOctober 20, 2016. The shares repurchased under thisprogram were held by Philips as treasury shares untilthey were cancelled. As of December 31, 2016 alltreasury shares that were repurchased under thisprogram were cancelled.Share repurchases related to Long-Term Incentive(LTI) and employee stock purchase programsTo cover outstanding obligations resulting from pastand present long-term incentive (LTI) programs, Philipsrepurchases Philips shares from time to time, onEuronext Amsterdam or otherwise. The sharesrepurchased to such LTI positions will be held by Philipsas treasury shares until these are distributed toparticipants. In order to repurchase shares for coveringLTI programs, Philips may enter into discretionarymanagement agreements with one or more bankswithin the limits of relevant laws and regulations (inparticular the EU Market Abuse Regulation and Philips’Articles of Association.In 2016, Philips repurchased a total of 8.6 million sharesfor LTI coverage. During 2017, Philips may continue withadditional repurchases, the size of which will dependon the movement of the Philips share price.Further details on the share repurchase programs canbe found on the Investor Relations website. For moreinformation see chapter 9, Corporate governance, ofthis Annual Report.In 2016 Philips purchased call options on Philips’ sharesmatching the majority of the options granted toemployees until 2013. As of December 31, 2016 Philipsheld 14.1 million call options as a hedge of 15.9 millionremaining options granted to employees.A total of 7,208,301 shares were held in treasury by theCompany at December 31, 2016 (2015: 14,026,801shares). As of that date, a total of 33.5 million rightsunder long-term incentive plans were outstanding(2015: 39.1 million).Philips GroupImpact of share repurchases on share count in thousands of shares2012 - 20162012 2013 2014 2015 2016 Shares issued957,133 937,846 934,820 931,131 929,645 Shares in treasury42,542 24,508 20,431 14,027 7,208 Shares outstanding914,591 913,338 914,389 917,104 922,437 Shares repurchased46,871 27,811 28,538 20,296 25,193 Shares cancelled82,365 37,779 21,838 21,361 18,830 Philips GroupTotal number of shares repurchased2016sharerepurchasesrelated to capitalreductionprogram average pricepaid per share inEUR sharerepurchasesrelated to LTIprogram average pricepaid per share inEUR total number ofsharesrepurchased average pricepaid per share inEUR January, 20161,648,906 22.79 57,094 23.92 1,706,000 22.83 February, 20161,974,965 22.67 1,014,035 22.63 2,989,000 22.65 March, 20161,703,020 24.42 1,059,980 24.31 2,763,000 24.38 April, 20162,195,278 24.35 1,158,953 24.32 3,354,231 24.34 May, 20161,474,221 23.27 480,216 23.23 1,954,437 23.26 June, 20162,121,090 22.69 593,910 22.69 2,715,000 22.69 July, 20162,047,077 23.25 929,385 22.76 2,976,462 23.10 August, 20161,171,365 24.92 643,418 25.00 1,814,783 24.95 September, 20161,200,653 25.94 439,347 25.94 1,640,000 25.94 October, 20161,055,410 26.34 634,088 26.54 1,689,498 26.41 November, 2016- - 679,000 27.16 679,000 27.16 December, 2016- - 912,000 28.39 912,000 28.39 1)The program was completedInvestor Relations14.3Annual Report 201621714.3Philips’ ratingPhilips’ existing long-term debt is rated BBB+ (withstable outlook) by Standard & Poor’s and Baa1 (withstable outlook) by Moody’s. As part of its capitalallocation policy, Philips is committed to a stronginvestment grade credit rating. There is no assurancethat Philips will be able to achieve this goal. Ratings aresubject to change at any time. Adverse changes in theCompany’s ratings will not trigger any acceleration inthe outstanding long-term debt nor automaticwithdrawal of the committed credit facilities.Philips GroupCredit rating summary2016long-term short-term outlook Standard & Poor’sBBB+ A-2 Stable Moody’sBaa1 P-2 Stable 14.4Performance in relation to marketindicesThe common shares of the Company are listed on thestock market of Euronext Amsterdam. The New YorkRegistry Shares of the Company, representing commonshares of the Company, are listed on the New YorkStock Exchange. The principal market for the commonshares is Euronext Amsterdam. For the New YorkRegistry Shares it is the New York Stock Exchange.The following table shows the high and low closingprices of the common shares on the stock market ofEuronext Amsterdam as reported in the Official PriceList and the high and low closing prices of the New YorkRegistry Shares on the New York Stock Exchange:Philips GroupHigh and low closing price of common shares2012 - 2017 Euronext Amsterdam (EUR) New York Stock Exchange (USD) high low high low January, 2017 29.40 27.14 30.74 29.10 December, 2016 29.07 26.60 30.57 28.22 November, 2016 27.90 26.50 30.55 28.61 October, 2016 27.73 26.12 30.19 28.43 September, 2016 26.70 25.25 29.97 28.34 August, 2016 26.18 23.51 29.11 26.28 20164th quarter 29.07 26.12 30.57 28.22 3rd quarter 26.70 21.58 29.97 24.05 2nd quarter 25.20 21.01 28.58 23.29 1st quarter 25.13 20.95 28.58 23.68 20154th quarter 25.88 21.09 27.29 23.66 3rd quarter 25.71 20.79 28.23 23.19 2nd quarter 27.65 22.82 30.08 25.46 1st quarter 27.40 23.16 30.31 27.54 20144th quarter 24.68 20.98 31.02 26.36 3rd quarter 25.27 22.11 32.39 29.80 2nd quarter 25.86 22.22 35.95 30.35 1st quarter 28.10 23.88 38.36 33.13 20134th quarter 26.78 23.17 36.97 31.36 3rd quarter 25.32 20.89 33.60 27.28 2nd quarter 23.48 20.36 30.65 26.75 1st quarter 23.67 20.26 31.72 26.60 2012 20.33 18.27 26.81 23.52 Investor Relations14.4218Annual Report 2016Euronext AmsterdamPhilips GroupShare price development in Euronext Amsterdam in EUR2015 - 2016PHIAJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016High24.50 24.33 25.13 25.20 24.33 24.11 24.39 26.18 26.70 27.73 27.90 29.07 Low22.15 20.95 23.56 23.55 22.57 21.01 21.58 23.51 25.25 26.12 26.50 26.60 Average22.98 22.47 24.37 24.50 23.34 22.80 23.15 25.05 26.08 26.67 27.20 28.18 Average dailyvolume1)10.58 8.31 6.81 5.96 5.58 6.67 5.94 5.41 5.92 5.73 6.94 5.27 2015 High26.80 26.77 27.40 27.65 25.44 24.94 25.32 25.71 23.29 24.59 25.88 25.49 Low23.16 24.54 25.98 25.66 24.24 22.82 22.38 21.94 20.79 21.09 24.40 23.19 Average24.49 25.45 26.64 26.96 24.96 23.94 23.97 24.19 22.11 22.71 25.05 24.06 Average dailyvolume1)9.26 5.64 5.86 7.66 6.96 8.79 7.30 6.88 6.75 6.00 6.08 6.05 1)In millions of sharesNew York Stock ExchangePhilips GroupShare price development in New York Stock Exchange in USD2015 - 2016PHGJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016High26.68 26.57 28.58 28.58 27.62 27.11 26.74 29.11 29.97 30.19 30.55 30.57 Low24.04 23.68 26.08 26.74 24.97 23.29 24.05 26.28 28.34 28.43 28.61 28.22 Average24.94 24.98 27.21 27.76 26.29 25.67 25.58 28.04 29.20 29.35 29.31 29.70 Average dailyvolume1)1.72 1.73 1.71 1.26 1.00 1.23 1.98 1.92 1.41 1.10 1.41 1.45 2015 High30.31 30.10 29.80 30.08 28.77 27.99 27.81 28.23 25.86 26.94 27.29 27.14 Low27.54 27.80 27.83 28.57 27.29 25.46 24.87 24.79 23.19 23.66 26.05 25.41 Average28.49 28.96 28.85 29.17 27.90 26.83 26.35 26.84 24.75 25.50 26.82 26.21 Average dailyvolume1)1.34 0.80 0.77 1.56 1.16 1.73 2.04 1.77 1.60 1.21 0.93 0.90 1)In millions of sharesPhilips GroupShare informationShare listingsAmsterdam, New York Ticker codePHIA, PHG No. of shares issued at Dec. 31, 2016930 million No. of shares outstanding issued at Dec. 31, 2016922 million Market capitalization at year-end 2016EUR 26.8 billion Industry classification MSCI: Capital Goods20105010 ICB: Medical Equipment4535 Members of indicesAEX, NYSE, DJSI, and others Investor Relations14.4Annual Report 2016219Philips GroupRelative performance: Philips and AEX (indexed)2016monthly traded volume in Philips onEuronext Amsterdam, in millionsPhilips Amsterdam closing shareprice indexAEXJan ‘16Dec ‘167587.5100112.5125100130160190220Philips GroupRelative performance: Philips and Dow Jones Industrial Average (indexed)2016monthly traded volume in Philips onNew York Stock Exchange, inmillionsPhilips NY closing share price indexDow Jones Industrial AverageJan ‘16Dec ‘167587.5100112.51251020304050Philips GroupRelative performance: Philips and unweighted peer group index (indexed)1)2016Philips Amsterdam closing share price indexPhilips peer group2)Jan ‘16Dec ‘167587.5100112.51251)The peer group companies are separately indexed, and then an unweighted average of these indexed values is used.2)The peer group consists of: 3M, ABB, Danaher, Eaton, Electrolux, Emerson, General Electric, Hitachi, Honeywell, JohnsonControl, Johnson & Johnson, Legrand, LG Electronics, Medtronic, Panasonic, Procter & Gamble, Schneider, Siemens,Smiths Group, Toshiba. The index shows the unweighted average closing share prices of the peer group. This graph is notlinked to the TSR performance calculation as part of the Long-Term Incentive Plan.Investor Relations14.5220Annual Report 201614.5Financial calendarFinancial calendarAnnual General Meeting of Shareholders Record date Annual General Meeting ofShareholdersApril 13, 2017 Annual General Meeting of ShareholdersMay 11, 2017 Quarterly reports First quarter results 2017April 24, 2017 Second quarter results 2017July 24, 2017 Third quarter results 2017October 23, 2017 Fourth quarter results 2017January 23, 20181)1)Subject to final confirmation14.6Investor contactShareholder servicesHolders of shares listed on Euronext AmsterdamNon-US shareholders and other non-US interestedparties can make inquiries about the Annual Report2016 to:Royal Philips Annual Report Office Philips Center, HBT 12P.O. Box 779001070 MX Amsterdam, The Netherlands E-mail: annual.report@philips.comCommunications concerning share transfers, lostcertificates, dividends and change of address should bedirected to:ABN AMRO Bank N.V. Department Equity Capital Markets/Corporate BrokingHQ7050 Gustav Mahlerlaan 10, 1082 PP Amsterdam The Netherlands Telephone: +31-20-34 42000 Fax: +31-20-62 88481 E-mail: corporate.broking@nl.abnamro.comHolders of New York Registry sharesHolders of New York Registry shares and otherinterested parties in the US can make inquiries aboutthe Annual Report 2016 to:Citibank Shareholder Service P.O. Box 43077 Providence, Rhode Island 02940-3077 Telephone: 1-877-CITI-ADR (toll-free) Telephone: 1-781-575-4555 (outside of US) Fax: 1-201-324-3284 Website: www.citi.com/dr E-mail: citibank@shareholders-online.comCommunications concerning share transfers, lostcertificates, dividends and change of address should bedirected to Citibank. The Annual Report on Form 20-Fis filed electronically with the US Securities andExchange Commission.International direct investment programPhilips offers a dividend reinvestment and direct sharepurchase plan designed for the US market. Thisprogram provides existing shareholders and interestedinvestors with an economical and convenient way topurchase and sell Philips New York Registry shares andto reinvest cash dividends. Philips does not administeror sponsor the program and assumes no obligation orliability for the operation of the plan. For furtherinformation on this program and for enrollment forms,contact:Citibank Shareholder Service Telephone: 1-877-248-4237 (1-877-CITI-ADR) Monday through Friday 8:30 AM EST through 6:00 PM EST Website www.citi.com/drE-mail: citibank@shareholders-online.comor by writing to:Citibank Shareholder Service International Direct Investment Program P.O. Box 2502, Jersey City, NJ 07303-25022017 Annual General Meeting ofShareholdersThe Agenda and the explanatory notes to the Agendafor the Annual General Meeting of Shareholders on May11, 2017, will be published on the Company’s website.For the 2017 Annual General Meeting of Shareholders,a record date of April 13, 2017 will apply. Those personswho, on that date, hold shares in the Company, and areregistered as such in one of the registers designated bythe Board of Management for the Annual GeneralMeeting of Shareholders, will be entitled to participatein, and vote at, the meeting.Investor Relations activitiesFrom time to time the Company communicates withinvestors via road shows, broker conferences and aCapital Markets Day, announced in advance on theCompany’s website. The purpose of theseengagements is to inform the market of the results,strategy and decisions made, as well as to receivefeedback from shareholders. Furthermore, theCompany engages in bilateral communications withinvestors. These take place either at the initiative of theCompany or at the initiative of investors. The Companyis generally represented by its Investor Relationsdepartment during these interactions, however, on alimited number of occasions the Investor Relationsdepartment is accompanied by one or more membersof the senior management. The subject matter of thebilateral communications ranges from individualqueries from investors to more elaborate discussionsfollowing disclosures that the Company has made, suchas its annual and quarterly reports. Also here, theCompany is strict in its compliance with applicable rulesand regulations on fair and non-selective disclosureand equal treatment of shareholders.Investor Relations14.6Annual Report 2016221More information on the activities of Investor Relationscan be found in chapter 9, Corporate governance, ofthis Annual Report.Analysts’ coveragePhilips is covered by approximately 24 analysts whofrequently issue reports on the company. For a list ofour current analysts, please refer to: www.philips.com/a-w/about/investor/shareholder-info/analyst-coverage.htmlHow to reach usThe registered office of Royal Philips isHigh Tech Campus 55656 AE Eindhoven, The Netherlands Switch board, telephone: +31-40-27 91111Investor Relations contactRoyal Philips Philips Center P.O. Box 77900 1070 MX Amsterdam, The Netherlands Telephone: +31-20-59 77222 Website: www.philips.com/investor E-mail: investor.relations@philips.comPim Preesman Head of Investor Relations Telephone: +31-20-59 77222Ksenija GonciarenkoInvestor Relations Manager Telephone: +31-20-59 77055Sustainability contactPhilips Group Sustainability High Tech Campus 5 (room 2.67) 5656 AE Eindhoven, The Netherlands Telephone: +31-40-27 83651 Website: www.philips.com/sustainability E-mail: philips.sustainability@philips.comGroup Press Office contactRoyal Philips Philips Center, HBT 19 Amstelplein 21096 BC Amsterdam, The Netherlands E-mail: group.communications@philips.com For media contacts please refer to:www.newscenter.philips.com/main/standard/news/contactsDefinitions and abbreviations15222Annual Report 201615Definitions and abbreviationsBMCBusiness Market Combination - As a diversified technology group, Philipshas a wide portfolio of categories/business innovation units which aregrouped in business groups based primarily on technology or customerneeds. Philips has physical market presence in over 100 countries, whichare grouped into 17 market clusters. Our primary operating modus is theBusiness Market matrix comprising Business Groups and Markets. TheseBusiness Market Combinations (BMCs) drive business performance on agranular level at which plans are agreed between global businesses andlocal market teams.Brominated flame retardants (BFR)Brominated flame retardants are a group of chemicals that have aninhibitory effect on the ignition of combustible organic materials. Of thecommercialized chemical flame retardants, the brominated variety aremost widely used.CO2-equivalentCO2-equivalent or carbon dioxide equivalent is a quantity that describes,for a given mixture and amount of greenhouse gas, the amount of CO2 thatwould have the same global warming potential (GWP), when measuredover a specified timescale (generally 100 years).Circular economyA circular economy aims to decouple economic growth from the use ofnatural resources and ecosystems by using those resources moreeffectively. By definition it is a driver for innovation in the areas ofmaterial-, component- and product reuse, as well as new businessmodels such as solutions and services. In a Circular Economy, the moreeffective use of materials enables to create more value, both by costsavings and by developing new markets or growing existing ones.Dividend yieldThe dividend yield is the annual dividend payment divided by Philips’market capitalization. All references to dividend yield are as of December31 of the previous year.Electronic Industry Citizenship Coalition (EICC)The Electronic Industry Citizenship Coalition was established in 2004 topromote a common code of conduct for the electronics and informationand communications technology (ICT) industry. EICC now includes morethan 100 global companies and their suppliers.Employee Engagement Index (EEI)The Employee Engagement Index (EEI) is the single measure of the overalllevel of employee engagement at Philips. It is a combination ofperceptions and attitudes related to employee satisfaction, commitmentand advocacy.Energy-using Products (EuP)An energy-using product is a product that uses, generates, transfers ormeasures energy (electricity, gas, fossil fuel). Examples include boilers,computers, televisions, transformers, industrial fans and industrialfurnaces.Full-time equivalent employee (FTE)Full-time equivalent is a way to measure a worker’s involvement in aproject. An FTE of 1.0 means that the person is equivalent to a full-timeworker, while an FTE of 0.5 signals that the worker works half-time.Global Reporting Initiative (GRI)The Global Reporting Initiative (GRI) is a network-based organization thatpioneered the world’s most widely used sustainability reportingframework. GRI is committed to the framework’s continuous improvementand application worldwide. GRI’s core goals include the mainstreaming ofdisclosure on environmental, social and governance performance.Green InnovationGreen Innovation comprise all R&D activities directly contributing to thedevelopment of Green Products or Green Technologies.Green ProductsGreen Products offer a significant environmental improvement in one ormore Green Focal Areas: Energy efficiency, Packaging, Hazardoussubstances, Weight, Recycling and disposal and Lifetime reliability. Thelife cycle approach is used to determine a product’s overall environmentalimprovement. It calculates the environmental impact of a product over itstotal life cycle (raw materials, manufacturing, product use and disposal).Green Products need to prove leadership in at least one Green Focal Areacompared to industry standards, which is defined by a sector specific peergroup. This is done either by outperforming reference products (which canbe a competitor or predecessor product in the particular product family)by at least 10%, outperforming product specific eco-requirements or bybeing awarded with a recognized eco-performance label. Because ofdifferent product portfolios, sectors have specified additional criteria forGreen Products, including product specific minimum requirements whererelevant.Growth geographiesGrowth geographies are the developing geographies comprising of AsiaPacific (excluding Japan, South Korea, Australia and New Zealand), LatinAmerica, Central & Eastern Europe, the Middle East (excluding Israel) andAfrica.Hazardous substancesHazardous substances are generally defined assubstances posing imminent and substantial danger to public health andwelfare or the environment.Income from operations (EBIT)Income from operations (earnings before interest and tax) represents netincome, less discontinued operations net of income taxes, investments inassociates net of income taxes, income tax expense, financial income andfinancial expense.Income from continuing operationsNet income from continuing operations, or net income excludingdiscontinued operations.Initiatief Duurzame Handel (IDH)IDH is the Dutch Sustainable Trade Initiative. It brings togethergovernment, frontrunner companies, civil society organizations and laborunions to accelerate and up-scale sustainable trade in mainstreamcommodity markets from the emerging countries to Western Europe.International Standardization Organization (ISO)The International Standardization Organization (ISO) is the world’s largestdeveloper and publisher of International Standards. ISO is a network ofthe national standards institutes of more than 160 countries, one memberper country, with a Central Secretariat in Geneva, Switzerland, thatcoordinates the system. ISO is a non-governmental organization thatforms a bridge between the public and private sectors.Light-Emitting Diode (LED)Light-Emitting Diode (LED), in electronics, is a semiconductor device thatemits infrared or visible light when charged with an electric current. VisibleLEDs are used in many electronic devices as indicator lamps, inautomobiles as rear-window and brake lights, and on billboards and signsas alphanumeric displays or even full-color posters. Infrared LEDs areemployed in autofocus cameras and television remote controls and alsoas light sources in fiber-optic telecommunication systems.Lives improved by PhilipsTo calculate how many lives we are improving, market intelligence andstatistical data on the number of people touched by the productscontributing to the social or ecological dimension over the lifetime of aproduct are multiplied by the number of those products delivered in ayear. After elimination of double counts – multiple different producttouches per individual are only counted once – the number of livesimproved by our innovative solutions is calculated. We established our2012 baseline at 1.6 billion a year.Mature geographiesMature geographies are the highly developed markets comprising ofWestern Europe, North America, Japan, South Korea, Israel, Australia andNew Zealand.Non-Governmental Organization (NGO)A non-governmental organization (NGO) is any non-profit, voluntarycitizens’ group which is organized at a local, national or international level.Definitions and abbreviations15Annual Report 2016223OEMOriginal Equipment Manufacturer.Operational carbon footprintA carbon footprint is the total set of greenhouse gas emissions caused byan organization, event, product or person; usually expressed in kilotonnesCO2-equivalent. The Philips operational carbon footprint is calculated ona half-year basis and includes industrial sites (manufacturing andassembly sites), non-industrial sites (offices, warehouses, IT centers andR&D facilities), business travel (lease and rental cars and airplane travel)and logistics (air, sea and road transport).Polyvinyl chloride (PVC)Polyvinyl chloride, better known as PVC or vinyl, is an inexpensive plasticso versatile it has become completely pervasive in modern society. Thelist of products made from polyvinyl chloride is exhaustive, ranging fromphonograph records to drainage and potable piping, water bottles, clingfilm, credit cards and toys. More uses include window frames, rain gutters,wall paneling, doors, wallpapers, flooring, garden furniture, binders andeven pens.REACHRegistration, Evaluation, Authorization and Restriction of Chemicals(REACH) is a European Union regulation dated 18 December 2006. REACHaddresses the production and use of chemical substances, and theirpotential impacts on both human health and the environment.Regulation on Hazardous Substances (RoHS)The RoHS Directive prohibits all new electrical and electronic equipmentplaced on the market in the European Economic Area from containinglead, mercury, cadmium, hexavalent chromium, poly-brominatedbiphenyls (PBB) or polybrominated diphenyl ethers (PBDE), except incertain specific applications, in concentrations greater than the valuesdecided by the European Commission. These values have beenestablished as 0.01% by weight per homogeneous material for cadmiumand 0.1% for the other five substances.VOCVolatile organic compounds (VOCs) are organic chemicals that have a highvapor pressure at ordinary room temperature. Their high vapor pressureresults from a low boiling point, which causes large numbers of moleculesto evaporate or sublimate from the liquid or solid form of the compoundand enter the surrounding air, a trait known as volatility.Voluntary turnoverVoluntary turnover covers all employees who resigned of their ownvolition.Waste Electrical and Electronic Equipment (WEEE)The Waste Electrical and Electronic Equipment Directive (WEEE Directive)is the European Community directive on waste electrical and electronicequipment which became European Law in February 2003, settingcollection, recycling and recovery targets for all types of electrical goods.The directive imposes the responsibility for the disposal of waste electricaland electronic equipment on the manufacturers of such equipment.Weighted Average Statutory Tax Rate (WASTR)The reconciliation of the effective tax rate is based on the applicablestatutory tax rate, which is a weighted average of all applicablejurisdictions. This weighted average statutory tax rate (WASTR) is theaggregation of the result before tax multiplied by the applicable statutorytax rate without adjustment for losses, divided by the group result beforetax.Forward-looking statements and other information16224Annual Report 201616Forward-looking statementsand other informationForward-looking statementsThis document contains certain forward-lookingstatements with respect to the financial condition,results of operations and business of Philips and certainof the plans and objectives of Philips with respect tothese items. Examples of forward-looking statementsinclude statements made about our strategy, estimatesof sales growth, future EBITA and future developmentsin our business. Forward-looking statements can beidentified generally as those containing words such as“anticipates”, “assumes”, “believes”, “estimates”,“expects”, “should”, “will”, “will likely result”, “forecast”,“outlook”, “projects”, “may” or similar expressions. Bytheir nature, forward-looking statements involve riskand uncertainty because they relate to future eventsand circumstances and there are many factors thatcould cause actual results and developments to differmaterially from those expressed or implied by theseforward-looking statements.These factors include, but are not limited to, domesticand global economic and business conditions,developments within the euro zone, the successfulimplementation of our strategy and our ability to realizethe benefits of this strategy, our ability to develop andmarket new products, changes in legislation, legalclaims, changes in exchange and interest rates,changes in tax rates, pension costs and actuarialassumptions, raw materials and employee costs, ourability to identify and complete successful acquisitionsand to integrate those acquisitions into our business,our ability to successfully exit certain businesses orrestructure our operations, the rate of technologicalchanges, political, economic and other developmentsin countries where Philips operates, industryconsolidation and competition, and the state ofinternational capital markets as they may affect thetiming and nature of the dispositions by Philips of itsinterests in the Lighting business and the Lumileds andAutomotive business.As a result, Philips’ actual future results may differmaterially from the plans, goals and expectations setforth in such forward-looking statements. For adiscussion of factors that could cause future results todiffer from such forward-looking statements, see alsochapter 5, Risk management, of this Annual Report.Third-party market share dataStatements regarding market share, contained in thisdocument, including those regarding Philips’competitive position, are based on outside sourcessuch as specialized research institutes, industry anddealer panels in combination with managementestimates. Where full-year information regarding 2016is not yet available to Philips, those statements mayalso be based on estimates and projections preparedby outside sources or management. Rankings arebased on sales unless otherwise stated.Fair value informationIn presenting the Philips Group’s financial position, fairvalues are used for the measurement of various itemsin accordance with the applicable accountingstandards. These fair values are based on market prices,where available, and are obtained from sources that aredeemed to be reliable. Readers are cautioned thatthese values are subject to changes over time and areonly valid at the balance sheet date. When quotedprices or observable market values do not exist, fairvalues are estimated using valuation models, which webelieve are appropriate for their purpose. They requiremanagement to make significant assumptions withrespect to future developments which are inherentlyuncertain and may therefore deviate from actualdevelopments. Critical assumptions used are disclosedin the financial statements. In certain cases,independent valuations are obtained to supportmanagement’s determination of fair values.IFRS basis of presentationThe audited consolidated financial statements as ofDecember 31, 2016 and 2015, and for each of the yearsin the three-year period ended December 31, 2016 havebeen prepared in accordance with InternationalFinancial Reporting Standards (IFRS) as endorsed bythe European Union (EU). All standards andinterpretations issued by the International AccountingStandards Board (IASB) and the IFRS InterpretationsCommittee effective year-end 2016 have beenendorsed by the EU, except that the EU did not adoptcertain paragraphs of IAS 39 applicable to certainhedge transactions. Philips has no hedge transactionsto which these paragraphs are applicable.Consequently, the accounting policies applied byPhilips also comply with IFRS as issued by the IASB.Use of non-GAAP informationIn presenting and discussing the Philips Group’sfinancial position, operating results and cash flows,management uses certain non-GAAP financialmeasures. These non-GAAP financial measures shouldnot be viewed in isolation as alternatives to theequivalent IFRS measure and should be used inconjunction with the most directly comparable IFRSmeasures. Non-GAAP financial measures do not havestandardized meaning under IFRS and therefore maynot be comparable to similar measures presented byForward-looking statements and other information16Annual Report 2016225other issuers. A reconciliation of these non-GAAPmeasures to the most directly comparable IFRSmeasures is contained in this document. Reference ismade in Reconciliation of non-GAAP information, ofthis report.Statutory financial statements and managementreportThe chapters Group financial statements and Companyfinancial statements contain the statutory financialstatements of the Company. The introduction to the chapter Group financialstatements sets out which parts of this Annual Reportform the management report within the meaning ofSection 2:391 of the Dutch Civil Code (and relatedDecrees).www.philips.com/annualreport2016© 2017 Koninklijke Philips N.V.All rights reserved

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