Unilever 2003 Annual Report Download - page 137

134 Unilever Annual Report & Accounts and Form 20-F 2003
Additional information for US investors
Unilever Group
Goodwill from joint ventures amounting to €4 million (2002: €211 million) primarily relates to the savoury and dressings segment. The goodwill
from associates amounting to €122 million (2002: €154 million) primarily relates to the home care segment.
Intangible assets subject to amortisation
Finite-lived intangible assets principally comprise technologies and have a net book value of €445 million as at 31 December 2003
(2002: €567 million), net of accumulated amortisation of €86 million (2002: €72 million). Amortisation expense recorded in the period in
respect of finite-lived intangible assets was €30 million (2002: €36 million). This expense is not expected to change materially over the next
five years.
Intangible assets not subject to amortisation
Indefinite-lived intangible assets principally comprise trademarks and have a net book value of €6 355 million as at 31 December 2003
(2002: €7 161 million).
Capitalised software
Under UK GAAP as applied by Unilever, certain costs relating to the development and purchase of software for internal use are expensed when
incurred. Under US GAAP, these costs are capitalised and subsequently amortised over the estimated useful life of the software in conformity with
Statement of Financial Position 98-1, ’Accounting for the Cost of Computer Software Developed or Obtained for Internal Use’. During 2003 several
IT projects met the criteria for capitalisation under US GAAP.
Restructuring costs
Under Unilever’s accounting policy, certain restructuring costs relating to employee terminations are recognised when a restructuring plan
has been announced. Under US GAAP, liabilities related to exit costs are recognised when incurred. Employee termination costs are generally
considered to be incurred when the company has a liability to the employee unless further service is required from the employee in which case
costs are recognised as benefits are earned.
Costs related to excess lease costs are reduced by assumed sub-lease income for the periods impacted.
Interest
Unilever treats all interest costs as a charge to the profit and loss account in the current period. Under US GAAP, interest incurred during
the construction periods of tangible fixed assets is capitalised and depreciated over the life of the assets.
Derivative financial instruments
Transition adjustment
Unilever applied the provisions of SFAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’ in this divergence statement as from
1 January 2001. In accordance with the transition provisions of SFAS 133, an adjustment of €6 million (net of tax of €3 million) was recorded
as the cumulative effect of a change in accounting principle to recognise the fair value of all the Group’s derivative financial instruments and
hedge items under US GAAP. In addition, Unilever recorded a one-time unrealised loss of €85 million (net of tax of €37 million) to consolidated
other comprehensive income under US GAAP. During the year ended 31 December 2003, a reclassification of derivative losses from other
comprehensive income to net income of €31 million was recorded as a result of the underlying hedged transactions which impacted earnings.
Hedging policy
Unilever’s accounting policies in respect of derivative financial instruments are described in the accounting information and policies on page 75.
In particular, under its accounting policies, Unilever applies hedge accounting to its portfolio of derivative financial instruments, meaning that
changes in the value of forward foreign exchange contracts are recognised in the results in the same period as changes in the values of the
assets and liabilities they are intended to hedge. Interest payments and receipts arising from interest rate derivatives such as swaps and forward
rate agreements are matched to those arising from underlying debt and investment positions. Payments made or received in respect of the early
termination of derivative instruments are spread over the original life of the instrument so long as the underlying exposure continues to exist.
Under US GAAP, Unilever has not designated any of its derivative instruments as qualifying hedge instruments under SFAS 133 and,
accordingly, under US GAAP, all derivative financial instruments are valued at fair value, and changes in their fair value are reflected in earnings.
All gains and losses arising on derivative financial instruments are recognised immediately; payments made or received in respect of the early
termination of derivative instruments represent cash realisation of these gains and losses and therefore have no further impact on earnings.
Pensions
From 1 January 2003, Unilever has adopted UK Financial Reporting Standard (FRS) 17 as the basis for accounting for retirement benefits.
Full details of this standard are given in note 17 on page 99.
Under FRS 17, the expected costs of providing retirement benefits are charged to the profit and loss account over the periods benefiting from
the employees’ services. Variations from the expected cost are recognised as they occur in the statement of total recognised gains and losses.
The assets and liabilities of pension plans are included in the Group balance sheet at fair value. Under US GAAP, pensions costs and liabilities
are accounted for in accordance with the prescribed actuarial method and measurement principles of SFAS 87. The most significant difference
is that variations from the expected costs are recognised in the profit and loss account over the expected service lives of the employees.
Under US GAAP, an additional minimum liability is recognised and a charge made to other comprehensive income when the accumulated
benefit obligation exceeds the fair value of plan assets to the extent that this amount is not covered by the net liability recognised in the
balance sheet.
With effect from 1 January 2002, and for the purposes of determining the expected return on plan assets for US purposes, Unilever changed
the method of valuing its pension plan assets from a market-related value calculated by smoothing gains and losses over a five-year period to
an actual fair value at the balance sheet date. Management believe that the actual fair value methodology provides a better representation of
the financial position and results of Unilever’s pension plans.