Unilever 2006 Annual Report Download - page 26

Unilever Annual Report and Accounts 2006 23
Report of the Directors (continued)
Financial review
The Financial review for the year ended 31 December 2006 is
presented below. The Financial review is presented to provide an
overview of key influences on Unilever’s financial performance for
the year and the financial position as at 31 December 2006.
Background sections, such as the overview of Unilever’s critical
accounting policies and non-GAAP measures are included to
provide some additional context.
Critical accounting policies
The accounts presented comply in all material respects with IFRS
and UK and Dutch law. To prepare these accounts, we are
required to make estimates and assumptions, using judgement
based on available information, including historical experience.
These estimates and assumptions are reasonable and are re-
evaluated on an ongoing basis. However, actual amounts and
results could differ. Critical accounting policies are those which
are most important to the portrayal of Unilever’s financial position
and results of operations. Some of these policies require difficult,
subjective or complex judgements from management, the most
important being:
Goodwill and intangible assets
Impairment reviews in respect of goodwill and indefinite-lived
intangible assets are performed at least annually. More regular
reviews, and impairment reviews in respect of other assets, are
performed if events indicate that this is necessary. Examples of
such triggering events would include a significant planned
restructuring, a major change in market conditions or technology,
expectations of future operating losses, or negative cash flows.
Impairment reviews are performed by comparing the carrying
value of the asset concerned to that asset’srecoverable amount
(being the higher of value in use and fair value less costs to sell).
Value in use is a valuation derived from discounted futurecash
flows. Significant assumptions, such as long-term growth rates
and discount rates, are made in preparing these forecast cash
flows; although these are believed to be appropriate, changes
in these assumptions could change the outcomes of the
impairment reviews.
The most significant balances of goodwill and intangible assets
relate to the global savoury and dressings sub-product group.
We have reviewed the carrying value of this cash generating unit
by considering expected future cash flows based on historical
experience and planned growth rates and margins for this
product group. No significant impairment losses have been
identified in 2006.
Please refer also to note 9 on page 88.
Financial instruments
Financial instruments are classified according to the purpose for
which the instruments were acquired. This gives rise to the
following categories: held-to-maturity investments, loans and
receivables, available-for-sale financial assets and financial assets
at fair value through profit or loss. Please refer to note 1 on page
75 for a description of each of these categories.
Derivative financial instruments are reported at fair value, with
changes in fair values booked through profit or loss unless the
derivatives are designated and effective as hedges of future cash
flows, in which case the changes are recognised directly in equity.
At the time the hedged cash flow results in the recognition of an
asset or a liability, 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 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.
Changes in fair value of net investment hedges in relation to
foreign subsidiaries are recognised directly in equity.
Pensions and similar obligations
The assets and liabilities of the plans are recognised at fair values
in the balance sheet.
Pension accounting requires certain assumptions to be made in
order to value our obligations and to determine the charges to
be made to the income statement. These figures are particularly
sensitive to assumptions for discount rates, inflation rates,
mortality rates and expected long-term rates of returnon assets.
Information about sensitivity to certain of these assumptions is
given in note 20 on page 105.
The following table sets out these assumptions (except for
mortality rates), as at 31 December 2006, in respect of the four
largest Unilever pension plans. Further details of assumptions
(including mortality rates) made aregiven in note 20 on pages
103 and 104.
%%%%
Nether- United
UK lands States Germany
Discount rate 5.1 4.6 5.8 4.6
Inflation 2.9 1.9 2.5 1.9
Expected long-term rate of return:
Equities 8.0 7.6 8.3 7.6
Bonds 5.2 4.4 5.2 4.4
Property 6.5 6.1 6.8 6.1
Others 7.2 4.0 4.8 3.0
These assumptions are set by reference to market conditions at
the valuation date. Actual experience may differ from the
assumptions made. The effects of such differences are recognised
through the statement of recognised income and expense.