Unilever 2007 Annual Report Download - page 101

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Unilever Annual Report and Accounts 2007 99
Financial statements continued
Notes to the consolidated accounts Unilever Group
17 Financial instruments and treasury risk management (continued)
Derivative financial instruments
The Group has comprehensive policies in place, approved by the Boards, covering the use of derivative financial instruments. These instruments are
used for hedging purposes. The Group has an established system of control in place covering all financial instruments; including policies, guidelines,
exposure limits, a system of authorities and independent reporting, that is subject to periodic review by internal audit. Hedge accounting principles
are described in note 1 on page 74. The use of leveraged instruments is not permitted. In the assessment of hedge effectiveness the credit risk
element on the underlying hedged item has been excluded. Hedge ineffectiveness is immaterial.
The Group uses the following types of hedges:
• cash flow hedges used to hedge the risk on future foreign currency cash flows, floating interest rate cash flows, and the price risk on future
purchases of raw materials;
• fair value hedges used to convert the fixed interest rate on financial liabilities into a floating interest rate;
• net investment hedges used to hedge the investment value of our foreign subsidiaries; and
• natural hedges used to hedge the risk on exposures that are on the balance sheet. No hedge accounting is applied.
Details of the various types of hedges are given below.
The fair values of forward foreign exchange contracts represent the unrealised gain or loss on revaluation of the contracts at the year-end forward
exchange rates. The fair values of interest rate derivatives are based on the net present value of the anticipated future cash flows.
Cash flow hedges
The fair values of derivatives hedging the risk on future foreign currency cash flows, floating interest rate cash flows and the price risk on future
purchases of raw materials amount to €85 million (2006: €9 million) of which €88 million relates to commodity contracts (2006: €5 million),
€(10) million to foreign exchange contracts (2006: €2 million) and €7million to interest rate derivatives (2006: €2 million). Of the total fair value
of €85 million, €82 million is due within one year (2006: €7 million).
The following table shows the amounts of cash outflows that are designated as hedged item in the cash flow hedge relations (no cash inflows
are designated as hedged item):
€ million € million € million € million € million
Due Due Due Due Total
within between between between
1 year 1-2 years 2-3 years 3-4 years
2007
Foreign exchange cash flows (235) – – – (235)
Interest rate cash flows (18) (19) (21) – (58)
Commodity contracts cash flows (310) (1) – – (311)
2006
Foreign exchange cash flows (298) – – – (298)
Interest rate cash flows (31) (43) (19) (20) (113)
Commodity contracts cash flows (107) – – – (107)
Fair Value hedges
The fair values of derivatives hedging the fair value interest rate risk on fixed rate debt at 31 December 2007 amounted to €nil million (2006:
€5 million) of which €nil million (2006 €5 million) is included under other financial assets.
Net investment hedges
The following table shows the fair values of derivatives outstanding at year end designated as hedging instruments in hedges of net
investments in foreign operations:
€ million € million € million € million
Assets Assets Liabilities Liabilities
Fair values of derivatives used as hedges of net investments in foreign entities 2007 2006 2007 2006
Current
Foreign exchange derivatives –11 337 350
Of the above mentioned fair values, an amount of €nil million (2006: €11 million) is included under other financial assets and €(337) million
(2006: €(350) million) is included under financial liabilities.
The impact of exchange rate movements on the fair value of forward exchange contracts used to hedge net investments is recognised in
reserves.