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Unilever Annual Report and Accounts 2006 99
Financial Statements (continued)
Notes to the consolidated accounts Unilever Group
17 Financial instruments and treasury risk management
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 page 74. 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 below. 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 2006, interest rates were fixed on approximately 48% of the projected net of cash and borrowing positions for 2007 and 52%
for 2008 (compared with 61% for 2006 and 49% for 2007 at the end of 2005).
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. Details of our policy for managing credit risk are given below.
In the assessment of hedge effectiveness the credit risk element on the underlying hedged item has been excluded. Hedge ineffectiveness is
immaterial.
Fair values of derivatives used as cash flow hedges, fair value hedges and in connection with purchases of own shares at 31 December 2006
amounted in total to assets of €23 million (2005: €62 million) and liabilities of €9 million (2005: €22 million). Of these amounts, the fair value
of borrowing-related derivatives at 31 December 2006 was €5 million (2005: €46 million).
€million €million €million €million
Assets Assets Liabilities Liabilities
Fair values of derivatives used as hedges of net investments in foreign entities 2006 2005 2006 2005
Current
Foreign exchange derivatives 11 250 350 1
The fair value of borrowing-related derivatives included above at 31 December 2006 amounted to €(339) million (2005: €249 million). The
impact of exchange rate movements on the fair value of forwardexchange contracts used to hedge net investments is recognised in reserves.
€million €million €million €million
Assets Assets Liabilities Liabilities
Fair values of natural hedges(a) 2006 2005 2006 2005
Current
Interest rate derivatives 2712
Cross currency swaps –253 61
Foreign exchange derivatives 371 11 31 282
373 271 38 285
Non-current
Interest rate derivatives ––14
Cross currency swaps ––12 27
––13 31
373 271 51 316
(a) A natural hedge – sometimes known as an economic hedge – is where exposure to a risk is offset, or partly offset, by an opposite exposure
to that same risk. Hedge accounting is not applied to these relationships.
Of the fair values disclosed above, the fair value of borrowing-related derivatives at 31 December 2006 amounted to €323 million
(2005: €(45) million).
Additional information
The fair values of forward foreign exchange contracts represent the unrealised gain or loss on revaluation of the contracts at the year-end
forward exchange rates. The fair values of interest rate derivatives are based on the net present value of the anticipated future cash flows.
Embedded derivatives
In accordance with IAS 39, 'Financial instruments: Recognition and Measurement', Unilever has reviewed all contracts for embedded derivatives
that are required to be separately accounted for if they do not meet specificrequirements set out in the standard; no such embedded
derivatives have been identified.