Annual Report 2005/06 THE WORLD OF SOUND - Sonova

equity method, the investment in an associate is initially recognizedat cost and the carrying amount is increased or decreasedto recognize Phonak’s share of profit or loss of the acquired companyafter the acquisition date.The Group’s share of equity in associated companies, consolidatedusing the equity method, is shown in the balancesheet as “Investments in associates/joint ventures”, and its shareof the results of operations for the year is shown in the incomestatement as “Share of (loss)/gain in associates/joint ventures”.Associates acquired during the year are accounted for as“Investments in associates/joint ventures” from the date onwhich significant influence over the acquired company is transferredto the Group, and derecognized from that position asof the date Phonak ceases to have significant influence over anassociate.Investments in joint venturesInvestments in joint ventures are accounted for using theequity method of accounting. These are contractual arrangementswhereby two or more parties undertake an economic activitythat is subject to joint control. Joint control is the contractuallyagreed sharing of control over an economic activity, and existsonly when the strategic financial and operating decisions relatingto the activity require the unanimous consent of the partiessharing control. Under the equity method, the investment in ajoint venture is initially recognized at cost and the carryingamount is increased or decreased to recognize Phonak’s share ofprofit or loss of the jointly controlled entity after the acquisitiondate.The Group’s share of equity in joint ventures consolidatedusing the equity method is shown in the balance sheet as“Investments in associates/joint ventures,” and its share of theresults of operations for the year is shown in the income statementas “Share of (loss)/gain in associates/joint ventures”.Joint ventures established during the year are accounted foras “Investments in associates/joint ventures” from the date onwhich joint control of the joint venture is transferred to the Groupand derecognized from that position as of the date Phonakceases to have joint control.3.2 Currency translationThe consolidated financial statements are expressed in SwissFrancs (“CHF”), which is the company’s functional and presentationcurrency. The functional currency of each Group companyis based on the local economic environment to which an entityis exposed, which is normally the local currency.Transactions in foreign currencies are accounted for atthe rates prevailing at the dates of the transactions. The resultingexchange differences are recorded in the local incomestatements of the Group companies and included in net income.Monetary assets and liabilities of Group companies whichare denominated in foreign currencies are translated using yearendexchange rates. Exchange differences are recorded as anincome or expense. Non-monetary assets and liabilities are translatedat historical exchange rates. Exchange differences arisingon inter-company loans that are considered part of the net investmentin a foreign entity are recorded in equity.When translating foreign currency financial statements intoSwiss Francs, year-end exchange rates are applied to assetsand liabilities, while average annual rates are applied to incomestatement accounts. Translation differences arising from thisprocess are recorded as a separate component of equity. On disposalof a subsidiary, the related cumulative translation adjustmentis transferred from equity and included in the profit or losson disposal in the income statement.3.3 Accounting and valuation principlesCash and cash equivalentsThis item includes cash in hand and at banks, time depositsand other short-term highly liquid investments with originalmaturities of 3 months or less, as well as bank overdrafts. Thecash flow statement summarizes the movements on cash andcash equivalents. Free cash flow is the net amount of the cashflow from operating and from investing activities.Trade receivablesTrade receivables are recorded at original invoice amount lessprovision made for impairment of these receivables. A provisionfor impairment of trade receivables is established when there isobjective evidence that the Group will not be able to collect allamounts due according to the original terms of the invoice. Theamount of the provision is the difference between the carryingamount and the recoverable amount, being the present value ofexpected cash flows.InventoriesPurchased raw materials, components and finished goodsare valued at the lower of cost or net realizable value. To evaluatecost, the standard cost method is applied, which approximateshistorical cost determined on a first-in first-out basis. Standardcosts take into account normal levels of materials, supplies,labor, efficiency and capacity utilization. Standard costs areregularly reviewed and, if necessary, revised in the light ofcurrent conditions. At each period end, any production or purchase52Consolidated Financial Statements