Unilever 2014 Annual Report Download - page 80

POTENTIAL IMPAT OF RISK MANAEMENT POLIY AND
HEDIN STRATEY
SENSITIVITY TO THE RISK
At 31 December 2014, the unhedged
exposure to the roup from companes
holdng fnancal assets and labltes other
than n ther functonal currency amounted
to 76 mllon (2013 44 mllon)
Exchange rsks related to the prncpal
amounts of the US $ and Swss franc
denomnated debt ether form part of hedgng
relatonshps themselves, or are hedged
through forward contracts
The am of the roup’s approach to
management of currency rsk s to leave the
roup wth no materal resdual rsk Ths
am has been acheved n all years presented
A 10% strengthenng of the euro aganst key
currences to whch the roup s exposed
would have led to approxmately an
addtonal 8 mllon gan n the ncome
statement (2013 4 mllon gan) A 10%
weakenng of the euro aganst these
currences would have led to an equal but
opposte effect
urrency rsk on the Group’s net
investments
The roup s also subject to exchange risk
in relation to the translation of the net
investments of its foreign operations into
euros for inclusion in its consolidated
financial statements.
These net investments include roup
fnancal loans whch are monetary tems
that form part of our net nvestment n
foregn operatons, of 70 bllon (2013
08 bllon), of whch 40 bllon (2013 0)
s denomnated n BP In accordance wth
IAS 21, the exchange dfferences on these
fnancal loans are booked through
reserves
Part of the currency exposure on the
roup’s nvestments s also managed usng
net nvestment hedges wth a nomnal value
of 27 bllon (2013 39 bllon) Most of
these hedges were US $/ contracts
At 31 December 2014, the net exposure of
the net nvestments n foregn currences
amounts to 104 bllon (2013 34 bllon)
Unlever ams to mnmse ths foregn
nvestment exchange exposure by borrowng
n local currency n the operatng companes
themselves In some locatons, however, the
roup’s ablty to do ths s nhbted by local
regulatons, lack of local lqudty or by local
market condtons
Where the resdual rsk from these countres
exceeds prescrbed lmts, Treasury may
decde on a case-by-case bass to actvely
hedge the exposure Ths s done ether
through addtonal borrowngs n the related
currency, or through the use of forward
foregn exchange contracts
Where local currency borrowngs, or forward
contracts, are used to hedge the currency
rsk n relaton to the roup’s net nvestment
n foregn subsdares, these relatonshps
are desgnated as net nvestment hedges for
accountng purposes
A 10% strengthenng of the euro aganst
all other currences would have led to a
946million negative retranslation effect
(2013: €313 million negative retranslation
effect). A 10% weakening of the euro against
those currencies would have led to a
€1,157million positive retranslation effect
(2013: €382 million positive retranslation
effect). In line with accepted hedge
accounting treatment and our accounting
policy for financial loans, the retranslation
differences would be recognised in equity.
III) INTEREST RATE RISK(a)
The Group is exposed to market interest
rate fluctuations on its floating rate debt.
Increases in benchmark interest rates
could increase the interest cost of our
floating-rate debt and increase the cost of
future borrowings. The Group’s ability to
manage interest costs also has an impact
on reported results.
Taking into account the impact of interest
rate swaps, at 31 December 2014, interest
rates were fixed on approximately 70% of
the expected net debt for 2015, and 67%
for 2016 (87% for 2014 and 79% for 2015
at 31December 2013).
The average interest rate on short-term
borrowings in 2014 was 1.2% (2013: 1.0%).
Unilever’s interest rate management
approach aims for an optimal balance
between fixed and floating-rate interest
rate exposures on expected net debt. The
objective of this approach is to minimise
annual interest costs after tax and to
reduce volatility.
This is achieved either by issuing fixed or
floating-rate long-term debt, or by modifying
interest rate exposure through the use of
interest rate swaps.
Furthermore, Unilever has interest rate
swaps for which cash flow hedge accounting
is applied.
Assuming that all other variables remain
constant, a 1.0 percentage point increase
in floating interest rates on a full-year basis
as at 31 December 2014 would have led to
an additional €26 million of finance costs
(2013: €7 million additional finance costs).
A 1.0 percentage point decrease in floating
interest rates on a full-year basis would
have an equal but opposite effect.
Assuming that all other variables remain
constant, a 1.0 percentage point increase
in floating interest rates on a full-year basis
as at 31 December 2014 would have led to
an additional €39 million credit in equity
from derivatives in cash flow hedge
relationships (2013: €36 million credit).
A 1.0 percentage point decrease in floating
interest rates on a full-year basis would
have led to an additional €42 million debit in
equity from derivatives in cash flow hedge
relationships (2013: €39 million debit).
(a) See the split in fixed and floating-rate interest in the following table.
117Unilever Annual Report and Accounts 2014 Financial statements
16B. MANAGEMENT OF MARKET RISK CONTINUED