Annual Report 2005/06 THE WORLD OF SOUND - Sonova

Short-term debtsShort-term debts consist of short-term bank debts andall other interest bearing debts with a maturity of 12 months orless.ProvisionsProvisions are recognized when the Group has a presentobligation (legal or constructive) as a result of a past event, whereit is probable that an outflow of resources will be required tosettle the obligation, and where a reliable estimate can be madeof the amount of the obligation. If the effect of the time valueof money is material, provisions are determined by discountingthe expected future cash flows. The Group recognizes provisionsfor warranty costs to cover any costs arising from the warrantygiven on the sale of its products. The provision is calculatedusing historical and projected data on warranty rates, servicecosts, remaining warranty period and number of hearing aidson which the warranty is still active. Short-term portions ofwarranty provisions are reclassified to short-term provisionsat each reporting date.Income taxesIncome taxes include current and deferred income taxes.Phonak is subject to income taxes in numerous jurisdictions andsignificant judgement is required in determining the worldwideprovision for income taxes. The multitude of transactions andcalculations imply estimates and assumptions. The Group recognizesliabilities based on estimates of whether additional taxeswill be due.Where the final tax outcome is different from the amountsthat were initially recorded, such differences will impact theincome tax and deferred tax provisions in the period in whichsuch determination is made.Deferred tax is recorded on the valuation differences(temporary differences) between the tax bases of assets andliabilities and their carrying values in the consolidated balancesheet. Deferred tax assets relating to tax loss carry-forwardsare recognized only to the extent that it is probable thattaxable income will be available against which the tax lossescan be offset.Provision is made for non-recoverable withholding taxesonly on anticipated dividend distributions from subsidiaries.No provision is made in respect of possible future dividend distributionsfrom undistributed earnings, as the parent is ableto control the timing of the reversal of the temporary differenceand such amounts are considered to be permanently reinvested.Revenue recognitionSales are recognized net of sales taxes and discounts upondelivery of products and reasonably assured collectibility ofthe related receivables. Probable returns of products are estimatedand the related revenue is deferred. Intercompany salesare eliminated.Sales of services are recognized in the accounting period inwhich the services are rendered.Segment reportingA business segment is a group of assets and operationsengaged in providing products or services that are subject to risksand returns that are different from those of other businesssegments. A geographical segment is engaged in providing productsor services within a particular economic environmentthat are subject to risks and returns that are different from thoseof segments operating in other economic environments.ImpairmentPhonak assesses at each reporting date whether there is anyindication that an asset may be impaired. If any such indicationexists, the recoverable amount of the asset is estimated.The recoverable amount of an asset or a cash-generating unitis the higher of its fair value less selling costs and its value in use.Value in use is the present value of the future cash flowsexpected to be derived from an asset or cash-generating unit.If the recoverable amount is lower than the carrying amount,an impairment loss is recognized. Impairment of financial assetsis described under the section on financial instruments.For goodwill, an annual impairment test is performed inthe first half of each financial year, even if there is no indicationof impairment (see “business combinations and goodwill” onpage 53).Related partiesA party is related to an entity if the party directly or indirectlycontrols, is controlled by, or is under common controlwith the entity, has an interest in the entity that gives it significantinfluence over the entity, has joint control over the entityor is an associate or a joint venture of the entity. In addition,members of the key management personnel of the entity or closemembers of their family are also considered related parties asare post-employment benefit plans for the benefit of employeesof the entity. No related party exercises control over the Group.54Consolidated Financial Statements