Unilever 2004 Annual Report Download - page 161

158 Unilever Annual Report and Accounts 2004
Derivative financial instruments
Transition adjustment
Unilever applied the provisions of SFAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’ in this divergence statement as from
1 January 2001. In accordance with the transition provisions of SFAS 133, an adjustment of €6 million (net of tax of €3 million) was recorded
as the cumulative effect of a change in accounting principle to recognise the fair value of all the Group’s derivative financial instruments and
hedge items under US GAAP. In addition, Unilever recorded a one-time unrealised loss of €85 million (net of tax of €37 million) to consolidated
other comprehensive income under US GAAP.
Hedging policy
Unilever’s accounting policies in respect of derivative financial instruments are described in the accounting information and policies on page 98.
In particular, under its accounting policies, Unilever applies hedge accounting to its portfolio of derivative financial instruments, meaning that
changes in the value of forward foreign exchange contracts are recognised in the 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 instruments are spread over the original life of the instrument so long as the underlying exposure continues to exist.
Under US GAAP, Unilever has not designated any of its derivative instruments as qualifying hedge instruments under SFAS 133 and,
accordingly, under US GAAP, all derivative financial instruments are valued at fair value, and changes in their fair value are reflected in earnings.
All gains and losses arising on derivative financial instruments are recognised immediately; payments made or received in respect of the early
termination of derivative instruments represent cash realisation of these gains and losses and therefore have no further impact on earnings.
Pensions
Under FRS 17, the expected costs of providing retirement benefits are charged to the profit and loss account over the periods benefiting from
the employees’ services. Variations from the expected cost are recognised as they occur in the statement of total recognised gains and losses.
The assets and liabilities of pension plans are included in the Group balance sheet at fair value. Under US GAAP, pensions costs and liabilities
are accounted for in accordance with the prescribed actuarial method and measurement principles of SFAS 87. The most significant difference
is that variations from the expected costs are recognised in the profit and loss account over the expected service lives of the employees.
Under US GAAP, an additional minimum liability is recognised and a charge made to other comprehensive income when the accumulated
benefit obligation exceeds the fair value of plan assets to the extent that this amount is not covered by the net liability recognised in the
balance sheet.
Investments
Unilever accounts for current investments, which are liquid funds temporarily invested, at their market value, which is consistent with UK GAAP.
Unilever accounts for changes in the market value of current investments as interest receivable in the profit and loss account for the year. Under
US GAAP, such current asset investments are classified as ‘available for sale securities’ and changes in market values, which represent unrealised
gains or losses, are excluded from earnings and taken to stockholders’ equity unless such losses are deemed to be other than temporary at
which time they are recognised through the profit and loss account. Unrealised gains and losses arising from changes in the market values of
securities available for sale are not material.
Unilever accounts for fixed investments other than in joint ventures and associates at cost less any amounts written off to reflect a permanent
impairment. Under US GAAP such investments are held at fair value. The difference is not material.
Dividends
The proposed final ordinary dividends are provided for in the Unilever accounts in the financial year to which they relate. Under US GAAP such
dividends are not provided for until they become irrevocable.
Deferred taxation
Under FRS 19, deferred tax is not recognised on fair value adjustments made to assets acquired; under US GAAP, deferred tax is recorded
on all fair value adjustments and on any differences between the assigned values and tax bases of assets and liabilities. Also, FRS 19 changed
the treatment of deferred tax on tax-deductible goodwill previously written off to reserves. Such goodwill is reinstated, net of amortisation,
under US GAAP, and the tax effect of such restatement has been adjusted accordingly.
Classification differences between UK and US GAAP
Revenue recognition
Under US GAAP, certain sales incentive expenses which have been included in operating costs under Unilever’s accounting would be deducted
from turnover. The decrease in turnover for the years to 31 December 2004, 2003 and 2002 is €1 061million, €1 238 million and
€1 337 million respectively. There is no impact on Unilever’s net profit.
Cash flow statement
Under US GAAP, various items would be reclassified within the consolidated cash flow statement. In particular, interest received, interest
paid and taxation would be part of net cash flow from operating activities, and dividends paid would be included within net cash flow from
financing. In addition, under US GAAP, cash and cash equivalents comprise cash balances and current investments with an original maturity
at the date of investment of less than three months. Under Unilever’s presentation, cash includes only cash in hand or available on demand
less bank overdrafts. Cash flows from movements in bank overdrafts would be classified as part of cash flows from financing activities
under US GAAP. Cash flows from movements in bank overdrafts were €(134) million for the year ended 31 December 2004 (2003: €58 million;
2002: €(86) million). Movements in those current investments which are included under the heading of cash and cash equivalents under
US GAAP form part of the movement entitled ‘Management of liquid resources’ in the cash flow statement. At 31 December 2004, the
balance of such investments was €91 million (2003: €3 million).
Additional information for US investors (continued)
Unilever Group