Unilever 2003 Annual Report Download - page 78

Unilever Annual Report & Accounts and Form 20-F 2003 75
Accounting information and policies
Deferred taxation
Full provision is made for deferred taxation on all significant
timing differences arising from the recognition of items for
taxation purposes in different periods from those in which they
are included in the Group accounts. Full provision is made at the
rates of tax prevailing at the year end unless future rates have
been enacted or substantively enacted. Deferred tax assets and
liabilities have not been discounted.
Provision is made for taxation which will become payable if
retained profits of group companies and joint ventures are
distributed to the parent companies only to the extent that
we are committed to such distributions.
Provisions
Provisions are recognised when either a legal or constructive
obligation, as a result of a past event, exists at the balance
sheet date and where the amount of the obligation can be
reasonably estimated.
Derivative financial instruments
The types of derivative financial instruments used by Unilever are
described in note 15 on page 97, in the Financial review on page
20 and under Risk management on page 46. Hedge accounting,
as described below, is applied.
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 financial instruments are spread over the original
life of the instrument so long as the underlying exposure
continues to exist.
Research, development and market support costs
Expenditure on research and development and on market support
costs such as advertising is charged against the profit of the year
in which it is incurred.
Group turnover and Turnover
Group turnover comprises sales of goods and services after
deduction of discounts and sales taxes. It includes sales to joint
ventures and associated companies but does not include sales by
joint ventures and associated companies or sales between group
companies. Turnover includes the Group share of the turnover of
joint ventures, net of the Group share of any sales to the joint
ventures already included in the Group figures, but does not
include our share of the turnover of associates.
Discounts given by Unilever include rebates, price reductions
and incentives given to customers in cash or company products.
At each balance sheet date the degree of expenditure incurred
but not yet invoiced is estimated and accrued.
Revenue is recognised when the risks and rewards of the
underlying products and services have been substantially
transferred to the customer.
Exceptional items
Exceptional items are those items within ordinary activities which,
because of their size or nature, are disclosed to give a proper
understanding of the underlying result for the period. These
include restructuring charges in connection with reorganising
businesses (comprising impairment of fixed assets, costs
of severance, and other costs directly attributable to the
restructuring), and profits and losses on disposal of businesses.
United Kingdom FRS 3 would require profits and losses on
disposal of most businesses to be excluded from operating
profit. However, because the business disposals in the period and
the restructuring costs are part of a series of linked initiatives,
separate presentation would not give a true and fair view and
therefore all exceptional items arising from these initiatives have
been included on a single line in operating profit. Costs
associated with restructuring, such as training, are recognised
as they arise and are not treated as exceptional.
Transfer pricing
The preferred method for determining transfer prices for our own
manufactured goods is to take the market price. Where there is
no market price, the companies concerned follow established
transfer pricing guidelines, where available, or else engage in
arm’s length negotiations.
Trademarks owned by the parent companies and used by
operating companies are, where appropriate, licensed in return
for royalties or a fee.
General services provided by central advisory departments,
business groups, divisions and research laboratories are charged
to operating companies on the basis of fees.
Leases
Lease payments, which are principally in respect of operating
leases, are charged to the profit and loss account on a straight-
line basis over the lease term, or over the period between rent
reviews where these exist.
Share-based payments
From 1 January 2003, Unilever has reflected the economic cost
of awarding shares and share options to employees by recording
a charge in the profit and loss account equivalent to the fair value
of the benefit awarded. The fair value is determined with
reference to option pricing models, principally adjusted Black-
Scholes models or the multinomial pricing model. The charge is
recognised in the profit and loss account over the vesting period
of the award. Figures for prior years have been restated on the
same basis. Share-based payments are described in more detail in
note 29 on page 116.
Shares held by employee share trusts
Unilever’s accounting policy for the treatment of its own shares
has always followed the requirements of Netherlands law.
The recently issued United Kingdom Urgent Issues Task Force
Abstracts 37 and 38 (UITF 37 and UITF 38) regarding the
treatment of own shares is now consistent with Netherlands law
and therefore Unilever has adopted UITF 37 and UITF 38 with no
effect on the consolidated financial statements.
The assets and liabilities of certain PLC trusts, NV and group
companies which purchase and hold NV and PLC shares to satisfy
options granted are included in the Group accounts. The book
value of shares held is deducted from other reserves, and trust
borrowings are included in the Group’s borrowings. The costs of
the trusts are included in the results of the Group. These shares
are excluded from the calculation of earnings per share.