Unilever 2008 Annual Report Download - page 89

Notes to the consolidated accounts Unilever Group
86 Unilever Annual Report and Accounts 2008
Financial statements
1 Accounting information and policies (continued)
Financial liabilities
Financial liabilities are recognised initially at fair value, net of
transaction costs incurred. Financial liabilities are subsequently stated
at amortised cost unless they are part of a fair value hedge
accounting relationship; any difference between the amount on initial
recognition and the redemption value is recognised in the income
statement over the period of the financial liabilities using the effective
interest method. Those financial liabilities that are part of a fair value
hedge accounting relationship are also recorded on an amortised cost
basis, plus or minus the fair value attributable to the risk being
hedged with a corresponding entry in the income statement.
Short-term financial liabilities are measured at original invoice
amount. Borrowing costs are not capitalised as part of property,
plant and equipment.
Derivative financial instruments
Derivatives are measured on the balance sheet at fair value as at the
balance sheet date. The activities of the Group expose it primarily to
the financial risks of changes in foreign currency exchange rates and
interest rates. The Group uses foreign exchange forward contracts,
interest rate swap contracts and forward rate agreements to hedge
these exposures. The Group also uses commodity contracts to hedge
future requirements for certain raw materials, almost always for
physical delivery. Those contracts that can also be settled in cash are
treated as a financial instrument. The Group does not use derivative
financial instruments for speculative purposes. The use of leveraged
instruments is not permitted.
Changes in the fair value of derivative financial instruments that
do not qualify for hedge accounting are recognised in the income
statement as they arise.
Derivatives embedded in other financial instruments or other host
contracts are treated as separate derivatives when their risks and
characteristics are not closely related to those of host contracts and
the host contracts are carried at fair value with unrealised gains
or losses reported in the income statement.
Cash flow hedges
Changes in the fair value of derivative financial instruments that
are designated and effective as hedges of future cash flows are
recognised directly in equity, and any ineffective portion is recognised
immediately in the income statement. If the cash flow hedge of a firm
commitment or forecasted transaction subsequently results in the
recognition of a non-financial asset or a liability, then, at the time the
non-financial asset or liability is recognised, the associated gains or
losses on the derivative that had previously been recognised in equity
are included in the initial measurement of the non-financial asset or
liability. For hedged items that do not result in the recognition of a
non-financial asset or a liability, amounts deferred in equity are
recognised in the income statement in the same period in which
the hedged item affects profit or loss.
Hedge accounting is discontinued when the hedging instrument no
longer qualifies for hedge accounting. At that time, any cumulative
gain or loss on the hedging instrument recognised in equity is
retained in equity until the forecasted transaction occurs. If a hedged
transaction is no longer expected to occur, the net cumulative gain
or loss recognised in equity is transferred to the income statement.
Fair value hedges
For an effective hedge of an exposure to changes in the fair value
of recognised assets and liabilities, the hedged item is adjusted for
changes in fair value attributable to the risk being hedged with
the corresponding entry in the income statement. Gains or losses
from re-measuring the derivative, or for non-derivatives the foreign
currency component of its carrying amount, are recognised in the
income statement.
Net investment hedges
Changes in fair value of net investment hedges in relation to foreign
subsidiaries are recognised directly in equity. Gains and losses
accumulated in equity are included in the income statement when
the foreign operation is partially disposed of or sold.
Valuation principles
The fair values of quoted investments are based on current bid prices.
For unlisted and for listed securities where the market for a financial
asset is not active the Group establishes fair value using valuation
techniques. These include the use of recent arm’s length transactions,
reference to other instruments that are substantially the same and
discounted cash flow analysis.
Impairment of financial instruments
At each balance sheet date the Group assesses whether there is
objective evidence that a financial asset or a group of financial assets
is impaired. In the case of equity securities classified as available-for-
sale, a significant or prolonged decline in the fair value of the security
below its cost is considered in determining whether the securities are
impaired. If any such evidence exists for available-for-sale financial
assets, the cumulative loss – measured as the difference between the
acquisition cost and the current fair value, less any impairment loss on
that financial asset previously recognised in profit or loss – is removed
from equity and recognised in the income statement. Impairment
losses recognised in the income statement on equity instruments are
not subsequently reversed through the income statement.
Inventories
Inventories are valued at the lower of weighted average cost and net
realisable value. Cost comprises direct costs and, where appropriate,
a proportion of attributable production overheads.
Cash and cash equivalents
For the purpose of preparation of the cash flow statement, cash and
cash equivalents includes cash at bank and in hand, highly liquid
interest bearing securities with original maturities of three months
or less, and bank overdrafts.
Pensions and similar obligations
The operating and financing costs of defined benefit plans are
recognised separately in the income statement. Service costs are
systematically allocated over the service lives of employees, and
financing costs are recognised in the periods in which they arise. The
costs of individual events such as past service benefit enhancements,
settlements and curtailments are recognised immediately in the
income statement. Variations from expected costs, arising from the
experience of the plans or changes in actuarial assumptions, are
recognised immediately in the statement of recognised income
and expense. The assets and liabilities of defined benefit plans
are recognised in the balance sheet at fair value as at the balance
sheet date.
The charges to the income statement for defined contribution plans
are the company contributions payable, and the assets and liabilities
of such plans are not included in the balance sheet of the Group.
All defined benefit plans are subject to regular actuarial review using
the projected unit method, either by external consultants or by
actuaries employed by Unilever. Group policy is that the most
important plans, representing approximately 80% of the defined
benefit liabilities, are formally valued every year; other principal plans,
accounting for approximately a further 15% of liabilities, have their
liabilities updated each year. Group policy for the remaining plans
requires a full actuarial valuation at least every three years. Asset
values for all plans are updated every year.