Unilever 2005 Annual Report Download - page 90

Financial Statements
Unilever Annual Report and Accounts 2005 87
Notes to the consolidated accounts
Unilever Group
2 Financial risk management (continued)
Sensitivity analysis
The analysis below presents the sensitivity of the fair value of the
financial instruments, including derivative financial instruments which
the Group held at 31 December 2005, to hypothetical changes in
interest and foreign exchange rates.
Interest rate sensitivity
The fair values of debt, investments and related hedging instruments
are affected by movements in interest rates. The analysis shows the
sensitivity of the fair value of interest rate sensitive instruments to a
hypothetical 10% change in the interest rates across all maturities.
Foreign exchange rate sensitivity
The values of debt, investments and related hedging instruments,
denominated in currencies other than the functional currency
of the entities holding them, are subject to exchange rate movements.
The analysis shows the income statement sensitivity of these values to
a hypothetical 10% change in foreign exchange rates.
Sensitivity to a
hypothetical 10% change in
rates as at 31 December
€ million € million
2005 2004
Interest rate risk 193 160
Foreign exchange rate risk 30 7
The above-mentioned interest rate sensitivity relates to financial
instruments, including derivative financial instruments, with fair values
amounting to €11 186 million at the end of 2005 (2004: €12 397
million). The above-mentioned foreign exchange rate risk relates to a
value of financial instruments and derivatives of €300 million at the
end of 2005 (2004: €68 million).
Further details on derivatives, foreign exchange exposures and other
related information on financial instruments are given in note 19 on
pages 110 to 113.
Sensitivity to not applying hedge accounting
Derivatives have to be reported at fair value. Those derivatives used
for cash flow hedging for which we do not apply hedge accounting
will cause volatility in the income statement. Such derivatives did not
have a material impact on the 2005 income statement.
Income statement sensitivity to changes in interest rates
As mentioned above on page 86, Unilever has an interest rate
management policy aimed at optimising net interest costs and
reducing volatility. Part of the interest rates on funds and debt are not
fixed and are therefore subject to changes in floating interest rates,
see note 17 on page 105 and note 18 on page 109. The analysis
shows the sensitivity of the income statement to a hypothetical one
percentage point change in floating interest rates over both funds and
debt on a full year basis.
Sensitivity to a hypothetical
one percentage point change in
floating rates as at 31 December
€ million € million
2005 2004
Funds 21 65
Debt (66) (97)
Pensions and similar obligations
Pension assets and liabilities (pre-tax) of €1 036 million and
€6 617 million respectively are held on the Group’s balance sheet as
at 31 December 2005. Movements in equity markets, interest rates
and life expectancy could materially affect the level of surpluses and
deficits in these schemes, and could prompt the need for the Group
to make additional pension contributions in the future. The key
assumptions used to value our pension liabilities are set out in note 22
on pages 115 and 116.
Cash and borrowings
Cash flow provides the funds to service the financing of the business
and enhance shareholder return. A material and sustained shortfall in
our cash flow could undermine our credit rating and overall investor
confidence and could restrict the Group’s ability to raise funding.
Other financial risks
As a result of the share-based compensation plans for employees, we
are exposed to movements in our own share price. In recent years we
have managed this risk by buying Unilever shares in the market when
the share option or award is granted. Going forward, we will take a
more flexible approach to the time at which we buy shares, not
automatically buying shares at grant. In 2001, we entered into a
contract with a bank for the forward purchase of Unilever shares,
further details of which are given in note 19 on page 112. On
15 February 2005, 18 881 587 NV shares of treasury stock were
used for the €0.05 cumulative preference share conversion. Between
February and September 2005, NV shares were purchased in the
market to bring the hedge to an appropriate level. At the year
end, 91% of all outstanding employee share options were hedged;
based on Unilever’s experience we consider this position as being
fully hedged.