Unilever 2001 Annual Report Download - page 71

Unilever Annual Report & Accounts and Form 20-F 2001
NOTES TO THE CONSOLIDATED ACCOUNTS
Unilever Group
>68
15 Financial instruments
The Group has comprehensive policies in place, approved by the
directors, covering the use of straightforward derivative financial
instruments. These instruments are used for hedging purposes only.
Established controls are in place covering all financial instruments.
These include policies, guidelines, exposure limits, a system of
authorities and independent reporting. Performance is closely
monitored with independent reviews undertaken by internal audit.
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 53. 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
note 14 on page 67 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.
Unilever operates an interest rate management policy aimed at
optimising net interest and reducing volatility. The Group’s financial
position is largely fixed by fixed rate long-term debt issues and
derivative financial instruments such as interest rate swaps.
In general, cash is invested short-term at floating interest rates.
At the end of 2001 interest rates were fixed on approximately
54% of the projected debt for 2002 and 47% for 2003 (compared
with 67% for 2001 and 57% for 2002 at the end of 2000).
Interest receivable was fixed on approximately 57% of the projected
cash for 2002 and 16% for 2003 at the end of 2001 (compared
with no fixing at the end of 2000).
Nominal values of interest rate derivative instruments are shown in
the table below. These nominal values when compared with the
nominal value of the underlying debt do not reflect the actual level
of use of financial instruments. This is because certain financial
instruments have consecutive strike and maturity dates on the same
underlying debt in different periods. Derivatives are primarily used
to swap floating interest mid-term debt into fixed rate debt.
Whilst the nominal amounts reflect the volume of activity, they do
not properly reflect the amount of credit risk to which the Group
is exposed.
million million
Nominal amounts
at 31 December
2001 2000
Interest rate swaps 21 360 19 603
The following tables show the extent to which the Group has off-
balance sheet (unrecognised) and on-balance sheet (deferred) gains
and losses in respect of interest rate instruments at the beginning
and end of the year. With respect to the deferred gains and losses
it also shows the amount which has been included in the profit
and loss account for the year and those gains and losses which are
expected to be reflected in the profit and loss account in 2002 or
in subsequent years.
million million million
Total net
gains/
Gains Losses (losses)
Unrecognised gains and losses:
Balances 1 January 52 (95) (43)
Brought forward balance
recognised in current year 2 (23) (21)
Brought forward balance not
recognised in current year 50 (72) (22)
Current year items not recognised
in current year 101 (221) (120)
Balances 31 December 2001 151 (293) (142)
Expected to be dealt with next year 61 (234) (173)
Expected to be dealt with later 90 (59) 31
Deferred gains and losses:
Balances 1 January 17 (112) (95)
Brought forward balance
recognised in current year 7 (30) (23)
Brought forward balance not
recognised in current year 10 (82) (72)
Current year items not recognised
in current year –––
Balances 31 December 2001 10 (82) (72)
To be recognised in the profit and
loss account for next year 5 (29) (24)
To be recognised in the profit and
loss account later 5 (53) (48)
Under the Group’s foreign exchange policy, transaction 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
2001 represented a recognised unrealised loss of 157 million
(2000: gain of 158 million) which was largely offset by recognised
unrealised gains on the underlying assets and liabilities.
million million
Nominal amounts
at 31 December
2001 2000
Foreign exchange contracts – buy 6 053 6 814
– sell 13 812 12 318
Total 19 865 19 132
Our policy for financing the net investments in our subsidiaries is
discussed in the Financial Review on page 31. At the end of 2001
some 67% (2000: 56%) of Unilever’s total capital and reserves were
denominated in the currencies of the two parent companies, euros
and sterling.
Credit risk exposures are minimised by dealing only with a limited
range of financial institutions with secure credit ratings, and by
working within agreed counterparty limits. Counterparty credit
ratings are regularly monitored and there is no significant
concentration of credit risk with any single counterparty.
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.