Unilever 2005 Annual Report Download - page 87

84 Unilever Annual Report and Accounts 2005
Notes to the consolidated accounts
Unilever Group
1 Accounting information and policies (continued)
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. 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.
For an effective hedge of an exposure to changes in the fair value, the
hedged item is adjusted for changes in fair value attributable to the
risk being hedged with the corresponding entry in profit or loss. Gains
or losses from re-measuring the derivative, or for non-derivatives the
foreign currency component of its carrying amount, are recognised in
profit or loss.
Changes in fair value of net investment hedges in relation to foreign
subsidiaries are recognised directly in equity.
Changes in the fair value of derivative financial instruments that do
not qualify for hedge accounting are recognised in the income
statement as they arise.
Hedge accounting is discontinued when the hedging instrument no
longer qualifies for hedge accounting. At that time, any cumulative
gain or loss on the hedging instrument recognised in equity is
retained in equity until the forecasted transaction occurs. If a hedged
transaction is no longer expected to occur, the net cumulative gain or
loss recognised in equity is transferred to the income statement.
Derivatives embedded in other financial instruments or other host
contracts are treated as separate derivatives when their risks and
characteristics are not closely related to those of host contracts and
the host contracts are not carried at fair value with unrealised gains or
losses reported in the income statement.
Valuation principles
The fair values of quoted investments are based on current bid prices.
For unlisted and for listed securities where the market for a financial
asset is not active the Group establishes fair value using valuation
techniques. These include the use of recent arm’s length transactions,
reference to other instruments that are substantially the same and
discounted cash flow analysis.
Impairment of financial instruments
At each balance sheet date the Group assesses whether there is
objective evidence that a financial asset or a group of financial assets
is impaired. In the case of equity securities classified as available-for-
sale, a significant or prolonged decline in the fair value of the security
below its cost is considered in determining whether the securities are
impaired. If any such evidence exists for available-for-sale financial
assets, the cumulative loss – measured as the difference between the
acquisition cost and the current fair value, less any impairment loss on
that financial asset previously recognised in profit or loss – is removed
from equity and recognised in the income statement. Impairment
losses recognised in the income statement on equity instruments are
not subsequently reversed through the income statement.
Inventories
Inventories are valued at the lower of weighted average cost and fair
value less cost to sell. Cost comprises direct costs and, where
appropriate, a proportion of attributable production overheads.
Cash and cash equivalents
For the purpose of preparation of the cash flow statement, cash and
cash equivalents includes cash at bank and in hand, highly liquid
interest bearing securities with original maturities of three months or
less, and bank overdrafts.
Pensions and similar obligations
The operating and financing costs of defined benefit plans are
recognised separately in the income statement. Service costs are
systematically spread over the service lives of employees, and
financing costs are recognised in the periods in which they arise. The
costs of individual events such as past service benefit enhancements,
settlements and curtailments are recognised immediately in the
income statement. Variations from expected costs, arising from the
experience of the plans or changes in actuarial assumptions, are
recognised immediately in the statement of recognised income and
expense. The assets and liabilities of defined benefit plans are
recognised at fair value in the balance sheet. The charges to the
income statement for defined contribution plans are the company
contributions payable, and the assets of such plans are not included in
the balance sheet of the Group.
Deferred taxation
Deferred taxation is recognised using the liability method on all taxable
temporary differences between the tax base and the accounting base of
items included in the balance sheet of the Group. Deferred tax is
recognised at the rates of tax prevailing at the year end unless future
rates have been enacted or substantively enacted.
Provision is made for taxation which will become payable if retained
profits of group companies are distributed to the parent companies only
to the extent that such distributions are considered probable.
Provisions
Provisions are recognised when either a legal or constructive
obligation, as a result of a past event, exists at the balance sheet date
and where the amount of the obligation can be reliably estimated.
Segment information
Segmental information is provided on the basis of geographical
segments and product categories. The primary format, geographic
regions, is based on the management structure of the Group, which
operates in three main geographical regions.
Turnover
Turnover comprises sales of goods and services after deduction of
discounts and sales taxes. It does not include sales between group
companies. Discounts given by Unilever include rebates, price
reductions and incentives given to customers, promotional couponing
and trade communication costs. At each balance sheet date any
expenditure incurred but not yet invoiced is estimated and accrued.
Turnover is recognised when the risks and rewards of the underlying
products and services have been substantially transferred to the
customer.
Research and market support costs
Expenditure on research and market support such as advertising is
charged to the income statement of the year in which it is incurred.
Leases
Leases are classified as finance leases whenever the terms of the lease
transfer substantially all the risks and rewards of ownership to the
lessee. All other leases are classified as operating leases.
Assets held under finance leases are recognised as non-current assets
of the Group at their fair value at the date of commencement of the
lease or, if lower, at the present value of the minimum lease
payments. The corresponding liability to the lessor is included in the
balance sheet as a finance lease obligation. Lease payments are
apportioned between finance charges and reduction of the lease
obligation so as to achieve a constant rate of interest on the
remaining balance of the liability. Finance charges are charged directly
against income.
Profits or losses are recognised from sale and leaseback transactions at
fair value. Where the transaction results in an operating lease, the
profit or loss arising is immediately recognised in the income
statement, and for those that result in a finance lease they are
deferred over the lease term.