Unilever 2004 Annual Report Download - page 101

98 Unilever Annual Report and Accounts 2004
Accounting information and policies
(continued)
Derivative financial instruments
The types of derivative financial instruments used by Unilever are
described in note 16 on page 120, in the Financial review on
page 22 and under Risk management on page 51. Hedge
accounting, as described below, is applied.
Changes in the value of forward foreign exchange contracts are
recognised in results in the same period as changes in the values
of the assets and liabilities they are intended to hedge. Interest
payments and receipts arising from interest rate derivatives such
as swaps and forward rate agreements are matched to those
arising from underlying debt and investment positions.
Payments made or received in respect of the early termination
of derivative financial instruments are spread over the original
life of the instrument so long as the underlying exposure
continues to exist.
Research, development and market support costs
Expenditure on research and development and on market support
costs such as advertising is charged against the profit of the year
in which it is incurred.
Group turnover and Turnover
Group turnover comprises sales of goods and services after
deduction of discounts and sales taxes. It includes sales to joint
ventures and associated companies but does not include sales by
joint ventures and associated companies or sales between group
companies. Turnover includes the Group share of the turnover of
joint ventures, net of the Group share of any sales to the joint
ventures already included in the Group figures, but does not
include Unilever’s share of the turnover of associates.
Discounts given by Unilever include rebates, price reductions and
incentives given to customers in cash or company products. At
each balance sheet date any such expenditure incurred but not
yet invoiced is estimated and accrued.
Revenue is recognised when the risks and rewards of the
underlying products and services have been substantially
transferred to the customer.
Exceptional items
Exceptional items are those items within ordinary activities which,
because of their size or nature, are disclosed to give a proper
understanding of the underlying result for the period. These
include restructuring charges in connection with reorganising
businesses (comprising impairment of fixed assets, costs
of severance, and other costs directly attributable to the
restructuring), and profits and losses on disposal of businesses.
United Kingdom FRS 3 would require profits and losses on
disposal of most businesses to be excluded from operating
profit. However, because business disposals in the period and the
restructuring costs are part of a series of linked initiatives under
the Path to Growth strategy, separate presentation would not
give a true and fair view and therefore all exceptional items
arising from these initiatives have been included on a single line in
operating profit. Costs associated with restructuring, such as
training, are recognised as they arise and are not treated as
exceptional.
Transfer pricing
The preferred method for determining transfer prices for our own
manufactured goods is to use the market price. Where there is no
market price, the companies concerned follow established
transfer pricing guidelines, where available, or else engage in
arm’s length negotiations.
Trademarks owned by the parent companies and used by
operating companies are, where appropriate, licensed in return
for royalties or a fee.
General services provided by central advisory departments,
business groups, divisions and research laboratories are charged
to operating companies on the basis of fees.
Leases
Lease payments are principally in respect of operating leases,
which are charged to the profit and loss account on a straight-
line basis over the lease term, or over the period between rent
reviews where these exist. Assets held under finance leases are
initially capitalised at their fair value and depreciated over the
shorter of the lease term or their useful life. The net present value
of the corresponding finance lease liability is included within
creditors. The finance element is charged to interest as it accrues.
Share-based payments
Unilever reflects the economic cost of awarding shares and share
options to employees by recording a charge in the profit and loss
account equivalent to the fair value of the benefit awarded. The
fair value is determined with reference to option pricing models,
principally adjusted Black-Scholes models or the multinomial
pricing model. The charge is recognised in the profit and loss
account over the vesting period of the award. Share-based
payments are described in more detail in note 30 on pages
138 to 147.
Shares held by employee share trusts
The assets and liabilities of certain PLC trusts, NV and group
companies which purchase and hold NV and PLC shares to satisfy
options granted are included in the Group accounts. The book
value of shares held is deducted from other reserves, and trust
borrowings are included in the Group’s borrowings. The costs of
the trusts are included in the results of the Group. These shares
are excluded from the calculation of earnings per share.