Unilever 2005 Annual Report Download - page 113

110 Unilever Annual Report and Accounts 2005
Notes to the consolidated accounts
Unilever Group
19 Financial instruments
The Group has comprehensive policies in place, approved by the Boards, covering the use of derivative financial instruments. These instruments
are used for hedging purposes. Established controls are in place covering all financial instruments. These include policies, guidelines, exposure
limits, a system of authorities and independent reporting. Performance is closely monitored with independent reviews undertaken by internal
audit. Hedge accounting principles are described in note 1 on pages 83 and 84. The use of leveraged instruments is not permitted. Details of the
instruments used for interest rate and foreign exchange exposure management, together with information on related exposures, are given below.
Unilever’s interest rate management policy is described in note 2 on pages 86 and 87. The Group’s exposure to interest rates is mainly fixed by
fixed rate long-term debt issues and straightforward derivative financial instruments, such as interest rate swaps. In general, cash is invested
short-term at floating interest rates.
At the end of 2005, interest rates were fixed on approximately 61% of the projected net of cash and borrowing positions for 2006 and 49%
for 2007 (compared with 54% for 2005 and 36% for 2006 at the end of 2004).
From 1 January 2005, Unilever has adopted IAS 39 ‘Financial Instruments: Recognition and Measurement’ which requires the recognition of
derivative financial instruments on the balance sheet at fair value. The derivative financial instruments as recognised in the balance sheet under
trade and other receivables and trade payables and other liabilities are shown in the tables below. The amounts shown in the tables as at
31 December 2004 are the fair values of the underlying derivatives at that date. No restatements have been made to the income statement and
balance sheet for the year ended 31 December 2004.
The separate amounts shown as assets and liabilities are not indicative of the amount of credit risk to which the Group is exposed as we have
netting agreements in place with our principal banks. In case of a default, Unilever is allowed to net the assets and liabilities. There was no
significant concentration of credit risk with any single counterparty. For details of our policy for managing credit risk see note 2 on page 86.
In the assessment of hedge effectiveness the credit risk element on the underlying has been excluded. Hedge ineffectiveness is immaterial,
nothing has been booked to the income statement.
In the 2004 comparatives, prior to the adoption of IAS 39, derivative financial instruments were accounted for on the following basis. Changes
in the value of forward foreign exchange contracts were recognised in results in the same period as changes in the values of the assets and
liabilities they were intended to hedge. Interest payments and receipts arising from interest rate derivatives such as swaps and forward rate
agreements were matched to those arising from underlying debt and investment positions. Payments made or received in respect of the early
termination of derivative financial instruments were spread over the original life of the instrument, so long as the underlying exposure continued
to exist. Further information about our prior year reporting of financial instruments is given at the end of this note.
€ million € million € million € million
Assets Assets Liabilities Liabilities
Fair values of derivatives used as cash flow hedges 2005 2004 2005 2004
Current
Foreign exchange derivatives 22612
Non-current
Interest rate derivatives 3–––
52612
The net fair value gains and losses relating to the above derivatives are €(1) million (2004: €(10) million). For those derivatives for which cash
flow hedge accounting has been applied, the unrealised changes in fair values are included in reserves. If the cash flow hedge of a firm
commitment or forecasted transaction subsequently results in the recognition of an asset or a liability, then, at the time the asset or liability is
recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement
of the asset or liability. For hedged items that do not result in the recognition of an asset or a liability, amounts deferred in equity are recognised
in the income statement in the same period in which the hedged item affects net profit or loss. See note 1 on page 84.
€ million € million € million € million
Assets Assets Liabilities Liabilities
Fair values of derivatives used as fair value hedges 2005 2004 2005 2004
Current
Interest rate derivatives 38 16 ––
Cross currency swaps –1–9
Foreign exchange derivatives 2473
40 21 712
Non-current
Interest rate derivatives 17 48 2–
Cross currency swaps –416 ––
Foreign exchange derivatives –2––
17 466 2–
57 487 912
Of the fair values disclosed above, the fair value of borrowing-related derivatives at 31 December 2005 amounted to €46 million
(2004: €474 million).