Unilever 2009 Annual Report Download - page 109

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Notes to the consolidated financial statements Unilever Group
106 Unilever Annual Report and Accounts 2009
Financial statements
15 Financial instruments and treasury risk management (continued)
€ million € million € million € million € million € million € million € million
Net
carrying
Due Due Due Due amount as
Due between between between between Due shown in
within 1 and 2 and 3 and 4 and after balance
Undiscounted cash flows 1 year 2 years 3 years 4 years 5 years 5 years Total sheet
2008
Non-derivative financial liabilities:
Financial liabilities excluding related derivatives
and finance lease creditors (4,653) (1,532) (577) (940) (750) (2,387) (10,839) (10,779)
Interest on financial liabilities (343) (313) (210) (197) (157) (1,608) (2,828)
Finance lease creditors including related finance cost (37) (36) (26) (21) (19) (242) (381) (207)
Trade payables and other liabilities
excluding social security and sundry taxes(a) (7,483) (175) ––––(7,658) (7,658)
Issued financial guarantees (44) –––––(44)
(12,560) (2,056) (813) (1,158) (926) (4,237) (21,750)
Derivative financial liabilities:
Interest rate derivatives:
Derivative contracts – receipts – 4 ––––4
Derivative contracts – payments – (4) ––––(4)
Foreign exchange derivatives:
Derivative contracts – receipts 3,510–––––3,510
Derivative contracts – payments (3,772) –––––(3,772)
(262) –––––(262) (262)(b)
31 December (12,822) (2,056) (813) (1,158) (926) (4,237) (22,012)
(a) See note 16 on page 110.
(b) Includes financial liability-related derivatives amounting to €(107) million (2008: €(219) million).
Credit risk on banks and received collateral
Credit risk related to the use of treasury instruments is managed on a group basis. This risk arises from transactions with banks like cash and cash
equivalents, deposits and derivative financial instruments. To reduce the credit risk, Unilever has concentrated its main activities with a limited
group of banks that have secure credit ratings. Per bank, individual risk limits are set based on its financial position, credit ratings, past experience
and other factors. The utilisation of credit limits is regularly monitored. To reduce the credit exposures, netting agreements are in place with
Unilever’s principal banks that allow Unilever, in case of a default, to net assets and liabilities across transactions. To further reduce Unilever’s
credit exposures, Unilever has collateral agreements with Unilever’s principal banks based on which they need to deposit securities and/or cash as
a collateral for their obligations in respect of derivative financial instruments. At 31 December 2009 the collateral received by Unilever amounted
to €208 million (2008: €369 million), of which €14 million was cash and the fair value of the bond securities amounted to €194 million.
Although contractually Unilever has the right to sell or repledge the collateral, it has no intention to do so. As a consequence, the non-cash
collateral has not been recognised as an asset in our balance sheet.
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 84. 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 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.