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equity method, the investment in an associate is initially recognized<br />
at cost and the carrying amount is increased or decreased<br />
to recognize Phonak’s share of profit or loss of the acquired company<br />
after the acquisition date.<br />
The Group’s share of equity in associated companies, consolidated<br />
using the equity method, is shown in the balance<br />
sheet as “Investments in associates/joint ventures”, and its share<br />
of the results of operations for the year is shown in the income<br />
statement as “Share of (loss)/gain in associates/joint ventures”.<br />
Associates acquired during the year are accounted for as<br />
“Investments in associates/joint ventures” from the date on<br />
which significant influence over the acquired company is transferred<br />
to the Group, and derecognized from that position as<br />
of the date Phonak ceases to have significant influence over an<br />
associate.<br />
Investments in joint ventures<br />
Investments in joint ventures are accounted for using the<br />
equity method of accounting. These are contractual arrangements<br />
whereby two or more parties undertake an economic activity<br />
that is subject to joint control. Joint control is the contractually<br />
agreed sharing of control over an economic activity, and exists<br />
only when the strategic financial and operating decisions relating<br />
to the activity require the unanimous consent of the parties<br />
sharing control. Under the equity method, the investment in a<br />
joint venture is initially recognized at cost and the carrying<br />
amount is increased or decreased to recognize Phonak’s share of<br />
profit or loss of the jointly controlled entity after the acquisition<br />
date.<br />
The Group’s share of equity in joint ventures consolidated<br />
using the equity method is shown in the balance sheet as<br />
“Investments in associates/joint ventures,” and its share of the<br />
results of operations for the year is shown in the income statement<br />
as “Share of (loss)/gain in associates/joint ventures”.<br />
Joint ventures established during the year are accounted for<br />
as “Investments in associates/joint ventures” from the date on<br />
which joint control of the joint venture is transferred to the Group<br />
and derecognized from that position as of the date Phonak<br />
ceases to have joint control.<br />
3.2 Currency translation<br />
The consolidated financial statements are expressed in Swiss<br />
Francs (“CHF”), which is the company’s functional and presentation<br />
currency. The functional currency of each Group company<br />
is based on the local economic environment to which an entity<br />
is exposed, which is normally the local currency.<br />
52<br />
Consolidated Financial Statements<br />
Transactions in foreign currencies are accounted for at<br />
the rates prevailing at the dates of the transactions. The resulting<br />
exchange differences are recorded in the local income<br />
statements of the Group companies and included in net income.<br />
Monetary assets and liabilities of Group companies which<br />
are denominated in foreign currencies are translated using yearend<br />
exchange rates. Exchange differences are recorded as an<br />
income or expense. Non-monetary assets and liabilities are translated<br />
at historical exchange rates. Exchange differences arising<br />
on inter-company loans that are considered part of the net investment<br />
in a foreign entity are recorded in equity.<br />
When translating foreign currency financial statements into<br />
Swiss Francs, year-end exchange rates are applied to assets<br />
and liabilities, while average annual rates are applied to income<br />
statement accounts. Translation differences arising from this<br />
process are recorded as a separate component of equity. On disposal<br />
of a subsidiary, the related cumulative translation adjustment<br />
is transferred from equity and included in the profit or loss<br />
on disposal in the income statement.<br />
3.3 Accounting and valuation principles<br />
Cash and cash equivalents<br />
This item includes cash in hand and at banks, time deposits<br />
and other short-term highly liquid investments with original<br />
maturities of 3 months or less, as well as bank overdrafts. The<br />
cash flow statement summarizes the movements on cash and<br />
cash equivalents. Free cash flow is the net amount of the cash<br />
flow from operating and from investing activities.<br />
Trade receivables<br />
Trade receivables are recorded at original invoice amount less<br />
provision made for impairment of these receivables. A provision<br />
for impairment of trade receivables is established when there is<br />
objective evidence that the Group will not be able to collect all<br />
amounts due according to the original terms of the invoice. The<br />
amount of the provision is the difference between the carrying<br />
amount and the recoverable amount, being the present value of<br />
expected cash flows.<br />
Inventories<br />
Purchased raw materials, components and finished goods<br />
are valued at the lower of cost or net realizable value. To evaluate<br />
cost, the standard cost method is applied, which approximates<br />
historical cost determined on a first-in first-out basis. Standard<br />
costs take into account normal levels of materials, supplies,<br />
labor, efficiency and capacity utilization. Standard costs are<br />
regularly reviewed and, if necessary, revised in the light of<br />
current conditions. At each period end, any production or purchase
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