Unilever 2005 Annual Report Download - page 160

160 Unilever Annual Report and Accounts 2005
Additional information for US investors (continued)
Unilever Group
Financial Instruments
Under the rules governing the transition to IFRSs, Unilever has adopted IAS 32/39 on financial instruments from 1 January 2005. Unilever’s
accounting policies in respect of derivative financial instruments under IFRSs are described in note 1 on page 83. There are minor differences
between these and the application of US GAAP from 1 January 2005.
In particular, from 1 January 2005, Unilever recognises all derivative financial instruments on balance sheet at fair value and applies hedge
accounting to a portion of its portfolio of derivative financial instruments, meaning that changes in the fair value of derivative financial
instruments that are designated and effective as hedges of future cash flows are recognised directly in equity and any ineffective portion is
recognised immediately in the income statement.
Prior to the adoption of IAS 32/39 on 1 January 2005, Unilever applied hedge accounting to its portfolio of derivative financial instruments,
meaning that changes in the value of forward exchange contracts were recognised in the 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 instruments were spread over the original life of the instrument so long as the underlying exposure
continues to exist.
Prior to 1 January 2005, Unilever had not designated any of its derivative financial instruments as qualifying hedge instruments under US
FAS 133 and accordingly, under US GAAP, all derivative financial instruments were valued at fair value with changes in fair value reflected in
the income statement.
Investments
The adoption of IAS 32/39 eliminates any previous divergence between Unilever’s accounting for non-derivative financial instruments and US
GAAP. A divergence therefore only exists in the 2004 comparative figures.
Prior to 1 January 2005 Unilever accounted for changes in the market value of current investments as interest receivable in the income
statement for the year. Non-current investments, other than interests in joint ventures and associates, are stated at cost less any amounts
written off to reflect a permanent impairment. Under US GAAP, such current asset investments are generally 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 income statement. Unrealised
gains and losses arising from changes in the market values of securities available for sale are not material at 31 December 2004.
Preference shares
Under IAS 32, Unilever recognises preference shares that provide a fixed preference dividend as borrowings with preference dividends
recognised in the income statement. Under US GAAP such preference shares are classified in shareholders’ equity with dividends treated as a
deduction to shareholder’s equity.
Pensions
Under IAS 19, the expected costs of providing retirement benefits are charged to the income statement over the periods benefiting from the
employees’ services. Variations from the expected cost are recognised as they occur in the statement of recognised income and expense . 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 FAS 87. The most significant difference is that
variations from the expected costs are recognised in the income statement 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.
Deferred tax
Under IFRSs, a provision is made on unremitted earnings of controlled group companies to the extent that the distributions are considered
probable. US GAAP requires full provision to be made assuming all earnings will be distributed, unless those earnings can be recovered tax-free
or will be permanently reinvested in the controlled group company.
Under IFRSs, deferred tax on share-based compensation is provided based on the actual tax credit expected to be received using the fair market
value of the share price at the year end (the intrinsic value). The deferred tax is credited to the income statement to the extent of the tax
recognised on the share-based compensation charge with the excess recognised directly in equity. Under US GAAP, deferred tax on the share-
based awards that ordinarily result in future tax deductions is recognised to the extent of the cumulative amount of compensation cost
recognised through the income statement. Tax deductions inherent in the current fair value of the entity’s stock are not taken into account.
Profit or loss on disposal of businesses
Under both IFRSs and US GAAP, Unilever calculates profit or loss on sale of businesses net of goodwill included on the balance sheet and
after the write-back of cumulative currency retranslation differences. Under previous GAAP, goodwill and intangible assets purchased prior to
1 January 1998 were written off in the year of acquisition as a movement in profits retained. Under US GAAP, such goodwill and intangible
assets were capitalised and, prior to 1 January 2002, were amortised over their useful lives. These different accounting treatments give rise to
differences between net profit or loss calculated under IFRSs and that calculated under US GAAP. The additional goodwill and intangibles
recorded under US GAAP for our UCI business means that the US GAAP profit on disposal of this business is €217 million lower than that
reported under IFRSs. Under IFRSs, cumulative currency retranslation differences arising from the transition date to IFRSs of 1 January 2004 are
included in the calculation whereas under US GAAP the profit or loss on disposal includes cumulative currency retranslation differences which
have arisen since the date that the businesses were originally acquired.
Currency Recycling
Under IFRSs, the gain from cumulative translation differences arising from the partial repayment of capital of a subsidiary is recognised within
the income statement. Under US GAAP, currency translation gains and losses are only recycled to the income statement on the sale or upon the
complete or substantially complete liquidation of the investment.