Unilever 2004 Annual Report Download - page 124

Unilever Annual Report and Accounts 2004 121
Notes to the consolidated accounts
Unilever Group
16 Financial instruments (continued)
Under the Group’s foreign exchange policy, operating and financing transaction exposures, which usually have a maturity of less than one year,
are generally hedged; this is primarily achieved through the use of forward foreign exchange contracts. The market value of these instruments
at the end of 2004 represented a recognised unrealised gain of €440 million (2003: gain of €793 million) which was largely offset by
recognised unrealised losses on the underlying assets and liabilities.
€ million € million
Nominal amounts at 31 Dec
2004 2003
Foreign exchange contracts – buy 3 329 4 909
– sell 9 171 10 350
Total 12 500 15 259
Our policy for financing the net investments in our subsidiaries is discussed in the Financial Review on page 22. At the end of 2004, some 82%
(2003: 90%) of Unilever’s total capital and reserves were denominated in the currencies of the two parent companies, euros and sterling.
Our policy for the management of counterparty exposures is set out on page 51.
Master netting agreements are in place for the majority of interest rate derivative instruments. The risk in the event of default by a counterparty
is determined by the extent to which market prices have moved since the contracts were made. The Group believes that the risk of incurring
such losses is remote.
The following table summarises the fair values and carrying amounts of the various classes of financial instruments as at 31 December:
€ million € million € million € million
Carrying Carrying
Fair value Fair value amount amount
2004 2003 2004 2003
Financial assets
Other fixed investments 161 146 148 143
Current investments 1 016 1 491 1 016 1 491
Cash at bank and in hand 1 587 1 854 1 587 1 854
2 764 3 491 2 751 3 488
Financial liabilities
Bank loans and overdrafts (1 583) (1 834) (1 583) (1 834)
Bonds and other loans (10 907) (14 705) (10 465) (14 066)
Finance lease creditors (218) –(218) –
(12 708) (16 539) (12 266) (15 900)
Derivatives
Interest rate swaps
– assets 104 189 58 113
– liabilities (11) (61) –(1)
Foreign exchange contracts:
– assets 551 984 551 984
– liabilities (111) (191) (111) (191)
The fair values of listed fixed investments are based on their market values. The fair values of unlisted fixed investments and finance leases are
not materially different from their carrying amounts. The carrying amount of current investments is based on their market value. Cash, bank
loans and overdrafts have fair values which approximate to their carrying amounts because of their short-term nature. The fair values of
forward foreign exchange contracts represent the unrealised gain or loss on revaluation of the contracts to year-end exchange rates. The fair
values of bonds and other loans, interest rate swaps and forward rate agreements are based on the net present value of the anticipated future
cash flows associated with these instruments. Short-term debtors and creditors (other than finance lease creditors) and provisions have fair
values which approximate to their carrying values and are therefore not included in the table.
In November 2001, NV entered into a forward purchase contract with a counterparty bank to buy 10 000 000 PLC shares at 559p per share
in November 2006. If the PLC share price falls by more than 5% below 559p, cash collateral for the difference must be placed with the
counterparty bank. At 31 December 2004 €24 million (2003: €20 million) was so deposited and reported under cash at bank with repayment
notice required. At 31 December 2004 the market value of the forward purchase contract was €(14) million (2003: €(11) million). See note 14
on page 117.
Counterparties have deposited securities with a market value of €589 million (2003: €832 million) as collateral for their obligations in respect
of derivative financial instruments. Such collateral is not regarded as an asset of Unilever and is excluded from the balance sheet.
Currency exposures
Unilever’s foreign exchange policies are described on page 51. Compliance with the Group’s policies means that the net amount of monetary
assets and liabilities at 31 December 2004 that are exposed to currency fluctuations is not material.
Commodity contracts
Unilever purchases forward contracts to hedge future requirements for certain raw materials, almost always for physical delivery. Futures
contracts may also be used to hedge future price movements, however the amounts are not material. For further details please refer to
page 50.