Unilever 1999 Annual Report Download - page 29

Unilever Group Notes to the consolidated accounts
32 Financial instruments
As outlined in the ‘Unilever Annual Review 1999’, in the Financial Review section on page 35, there are comprehensive policies in place,
approved by the directors, covering the use of straightforward derivative financial instruments. These instruments are used only for
hedging purposes. The accounting policies governing these instruments are in line with generally accepted practice and follow hedge
accounting principles described in the accounting policies on page 8. 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.
Except for the description of Unilever’s currency exposures, all debtors and trade and other creditors have been excluded from the
analysis below and from the interest rate and currency profiles in notes 14 and 15 on pages 16 and 18 either due to the exclusion of
short-term items, as permitted by United Kingdom Financial Reporting Standard 13, or because the amounts are not material.
The reduction in the portion of fixed investments and fixed rate debt during 1999 and the position at the year end is in line with
Unilever’s interest rate management policy. Unilever operates an interest rate management policy aimed at optimising net interest and
reducing volatility. In general, cash is invested short-term, at floating interest rates. The interest payable on debt is in general also
floating, but depending on the Group’s financial position, part may be fixed up to five years. This is achieved by using fixed rate
long-term debt issues and derivative financial instruments such as interest rate swaps and forward rate agreements.
At the end of 1999 interest rates were fixed on approximately 22% of the projected debt for 2000 and 21% for 2001 (compared to 72%
for 1999 and 50% for 2000 at the end of 1998). Interest receivable was fixed on approximately 34% of projected funds for 2000 and
15% for 2001 (compared to 31% for 1999 and 16% for 2000 at the end of 1998). Nominal values of interest rate derivative instruments
are shown in the table below. These nominal values when compared to the nominal value of the underlying debt and investments do not
reflect the actual level of use of financial instruments. This is because certain financial instruments have consecutive strike and maturity
dates in the same underlying investments in different periods. Derivatives are primarily used to swap fixed interest long-term debt into
floating rate debt or to swap floating rate investments into fixed rate investments. Whilst the nominal amounts reflect the volume of
activity, they do not therefore properly reflect the amount of credit risk to which the Group is exposed. The market value of these interest
rate instruments at the end of 1999 represented an unrealised and unrecognised loss of Fl. 60 million (1998: gain of Fl. 243 million). In
1998 losses of Fl. 47 million were deferred on the balance sheet. Of these derivative financial instruments 44% (1998: 50%) will mature
within one year, 92% (1998: 93%) within five years and the balance within ten years.
Fl. million Nominal amounts at 31 December
1999 1998
Interest rate swaps 8 278 11 280
Forward rate agreements 2 641 —
Total 10 919 11 280
Under the Group’s foreign exchange policy, exposures with a maximum of one year maturity are generally hedged; this is achieved
through the use of forward foreign exchange contracts. The market value of these instruments at the end of 1999 represented a
recognised unrealised loss of Fl. 284 million (1998: Fl. 190 million) which was largely offset by recognised unrealised gains on the
underlying assets and liabilities.
Fl. million Nominal amounts at 31 December
1999 1998
Foreign exchange contracts – buy 3 889 9 872
– sell 7 849 17 642
Total 11 738 27 514
29 Unilever Annual Accounts 1999