Unilever 2005 Annual Report Download - page 85

82 Unilever Annual Report and Accounts 2005
Notes to the consolidated accounts
Unilever Group
1 Accounting information and policies
Unilever
The two parent companies, NV and PLC, together with their group
companies, operate as a single economic entity (the Unilever Group,
also referred to as Unilever or the Group). NV and PLC have the same
Directors and are linked by a series of agreements, including an
Equalisation Agreement, which are designed so that the position of
the shareholders of both companies is as nearly as possible the same
as if they held shares in a single company.
The Equalisation Agreement provides that both companies adopt the
same accounting principles and requires as a general rule the
dividends and other rights and benefits (including rights on
liquidation) attaching to each Fl.12 (€5.445) nominal of ordinary share
capital of NV to be equal in value at the relevant rate of exchange to
the dividends and other rights and benefits attaching to each £1
nominal of ordinary share capital of PLC, as if each such unit of
capital formed part of the ordinary capital of one and the same
company. For additional information please refer to ‘Corporate
governance’ on page 41.
Basis of consolidation
Due to the operational and contractual arrangements referred to
above, NV and PLC form a single reporting entity for the purposes of
presenting consolidated accounts. Accordingly, the accounts of
Unilever are presented by both NV and PLC as their respective
consolidated accounts. Group companies included in the consolidation
are those companies controlled by NV or PLC. The net assets and
results of acquired businesses are included in the consolidated
accounts from their respective dates of acquisition.
Companies legislation and accounting standards
The consolidated accounts have been prepared in accordance with
International Financial Reporting Standards (IFRSs) as adopted by the
EU, including interpretations from the International Financial
Reporting Interpretations Committee (IFRIC) and the Standing
Interpretations Committee (SIC), and with Book 2 of the Civil Code in
the Netherlands and the United Kingdom Companies Act 1985.
The accounts are prepared under the historical cost convention as
modified by the revaluation of biological assets, financial assets
classified as ‘available-for-sale investments’ and ‘at fair value through
profit or loss’, and derivatives.
Material variations from United States generally accepted accounting
principles (US GAAP) are set out on pages 157 to 161.
OECD Guidelines
In preparing its Annual Review and Annual Report and Accounts
Unilever adheres to disclosure recommendations of the OECD
Guidelines for Multinational Enterprises.
Foreign currencies
Items included in the financial statements of group companies
are measured using the currency of the primary economic
environment in which each entity operates (its functional currency).
The consolidated financial statements are presented in euros.
Exchange differences arising in the accounts of individual companies
are dealt with in their respective income statements. Those arising on
trading transactions are taken to operating profit; those arising on
cash, financial assets and borrowings are classified as finance income
or cost.
In preparing the consolidated financial statements, the income
statement, the cash flow statement and all other movements in assets
and liabilities are translated at annual average rates of exchange. The
balance sheet, other than the ordinary share capital of NV and PLC, is
translated at year-end rates of exchange. In the case of hyper-
inflationary economies, which are those in which inflation exceeds
100% cumulatively over a three-year period, the accounts are
adjusted to reflect current price levels and remove the influences of
inflation before being translated.
The ordinary share capital of NV and PLC is translated at the rate
contained in the Equalisation Agreement of £1 = Fl.12 (equivalent to
€5.445). The difference between the resulting value for PLC and the
value derived by applying the year-end rate of exchange is taken to
other reserves (see note 25 on page 125).
The effects of exchange rate changes during the year on net assets
at the beginning of the year are recorded as a movement in
shareholders’ equity, as is the difference between profit of the year
retained at average rates of exchange and at year-end rates of
exchange. For these purposes net assets include loans between group
companies and related foreign exchange contracts, if any, for which
settlement is neither planned nor likely to occur in the foreseeable
future. Exchange gains/losses on hedges of net assets are also
recorded as a movement in equity.
Cumulative exchange differences arising since the transition date of
1 January 2004 are reported as a separate component of other
reserves (see note 25 on page 125). In the event of disposal of an
interest in a subsidiary either through sale or as a result of a
repayment of capital, the cumulative exchange difference is
recognised in the income statement as part of the profit or loss on
disposal of group companies.
Goodwill
Goodwill (being the difference between the fair value of consideration
paid for new interests in group companies, joint ventures and
associates and the fair value of the Group’s share of their net
identifiable assets and contingent liabilities at the date of acquisition)
is capitalised. Goodwill is not amortised, but is subject to an annual
review for impairment (or more frequently if necessary). Any
impairment is charged to the income statement as it arises.
Intangible assets
On acquisition of group companies, Unilever recognises any
specifically identifiable intangible assets separately from goodwill,
initially measuring the intangible assets at fair value. Separately
purchased intangible assets are initially measured at cost. Finite-lived
intangible assets including software are amortised in the income
statement over the period of their expected useful lives. Periods in
excess of five years are used only where the Directors are satisfied that
the life of these assets will clearly exceed that period. Indefinite-lived
intangible assets are not amortised, but are subject to review for
impairment as described above for goodwill.
IFRSs also require that internally generated intangible assets be
capitalised where certain specific criteria are met. Unilever capitalises
internally generated software where it is clear that the software
development is technically feasible and will be completed and that the
software will generate economic benefits in the future.
Unilever also monitors the level of development costs which may only
be capitalised once the flow of economic benefits is assured. For
Unilever this is evident only shortly before a product is launched into
the market. The level of costs incurred after these criteria have been
met is currently insignificant.