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100 Unilever Annual Report and Accounts 2006
Financial Statements (continued)
17 Financial instruments and treasury risk management (continued)
Fair values of financial assets and financial liabilities
The following table summarises the fair values and carrying amounts of the various classes of financial assets and financial liabilities. All trade
and other receivables and trade payables and other liabilities (other than finance lease creditors) and provisions have been excluded from the
analysis below and from the interest rate and currency profiles in note 15 on page 95 and note 16 on page 96, as their carrying amounts are
areasonable approximation of their fair value, because of their short-term nature.
€million €million €million €million
Fair Fair Carrying Carrying
value value amount amount
2006 2005 2006 2005
Financial assets
Other non-current assets 784 757 771 757
Cash and cash equivalents 1039 1529 1039 1529
Other financial assets 237 335 237 335
Derivatives related to borrowings –250 –250
2060 2871 2047 2871
Financial liabilities
Bank loans and overdrafts (1 307) (1 456) (1 307) (1 456)
Bonds and other loans (7 402) (11 255) (7 170) (10 819)
Finance lease creditors (192) (225) (187) (217)
Preference shares (122) (124) (124) (124)
Derivatives related to borrowings (11) –(11) –
(9 034) (13 060) (8 799) (12 616)
The fair values and the carrying amount of listed investments included in financial assets and preference shares included in financial liabilities are
based on their market values. Cash and cash equivalents, other financial assets, bank loans and overdrafts have fair values that approximate to
their carrying amounts because of their short-term nature. The fair values of listed bonds are based on their market value; non-listed bonds and
other loans are based on the net present value of the anticipated future cash flows associated with these instruments. Fair values for finance
lease creditors have been assessed by reference to current market rates for comparable leasing arrangements.
Collateral
Counterparties have deposited securities with a market value of €2 million (2005: €275 million) as collateral for their obligations in respect of
derivative financial instruments. Such collateral is not regarded as an asset of Unilever and is excluded from the balance sheet.
Commodity contracts
Unilever purchases forward contracts to hedge future requirements for certain raw materials, almost always for physical delivery. Futures
contracts may also be used to hedge future price movements.
Treasury risk management
Unilever manages a variety of market risks, including the effects of changes in foreign exchange rates, interest rates, liquidity and counterparty risks.
Unilever has an interest rate management policy aimed at optimising net interest cost and reducing volatility. This is achieved by modifying the
interest rate exposure of debt and cash positions through the use of interest rate swaps.
Fixed rate investments and borrowings give rise to a fair value interest rate risk. The floating amounts give rise to a cash flow interest rate risk.
Because of Unilever’s broad operational reach, it is subject to risks from changes in foreign currency values that could affect earnings. As a
practical matter, it is not feasible to fully hedge these fluctuations. Additionally, Unilever believes that most currencies of major countries in
which it operates will equalise against the euro over time. Unilever does have a foreign exchange policy that requires operating companies to
manage trading and financial foreign exchange exposures within prescribed limits. This is achieved primarily through the use of forward foreign
exchange contracts. Regional groups monitor compliance with this policy. At the end of 2006, there was no material exposure from companies
holding assets and liabilities other than in their functional currency.
In addition, as Unilever conducts business in many foreign currencies but publishes its financial statements and measures its performance in
euros, it is subject to exchange risk due to the effects that exchange rate movements have on the translation of the underlying net assets of its
foreign subsidiaries. Unilever aims to minimise its foreign exchange exposure in operating companies by borrowing in the local currency, except
where inhibited by local regulations, lack of local liquidity or local market conditions. For those countries that, in the view of management, have
asubstantial retranslation risk, Unilever may hedge such net investment. Nevertheless, from time to time, currency revaluations on unhedged
investments will trigger exchange translation movements in the balance sheet.
Notes to the consolidated accounts Unilever Group