Unilever 2006 Annual Report Download - page 104

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Unilever Annual Report and Accounts 2006 101
Financial Statements (continued)
Notes to the consolidated accounts Unilever Group
17 Financial instruments and treasury risk management (continued)
Liquidity risk is managed by maintaining access to global debt markets through an infrastructure of short-term and long-term debt programmes.
In addition to this, Unilever has committed credit facilities in place to support its commercial paper programmes and for general corporate
purposes. See note 16 on page 96 for further details of these credit facilities.
Counterparty exposures are minimised by restricting dealing counterparties to a limited number of financial institutions that have secure credit
ratings, by working within agreed counterparty limits, by obtaining collateral for outstanding positions and by setting limits on the maturity of
exposures. Counterparty credit ratings are closely monitored and concentration of credit risk with any single counterparty is avoided. There was
no significant concentration of credit risk with any single counterparty as at the year end.
Master netting agreements are in place for the majority of interest rate derivative instruments. The risk in the event of default by a counterparty
is determined by the extent to which market prices have moved since the contracts were made. The Group believes that the risk of incurring
such losses is remote.
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.
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 2006, 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, aresubject 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
2006 2005
Interest rate risk 167 193
Foreign exchange rate risk 16 30
The above-mentioned interest rate sensitivity relates to financial instruments, including derivative financial instruments, with fair values
amounting to €7408 million at the end of 2006 (2005: €11 186 million). The above-mentioned foreign exchange rate risk relates to a
value of financial instruments and derivatives of €164 million at the end of 2006 (2005: €300 million).
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 2006 income statement.
Income statement sensitivity to changes in interest rates
As mentioned above on page 100, 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. 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
2006 2005
Funds 24 21
Debt (59) (66)