Unilever 2010 Annual Report Download - page 103

100 Unilever Annual Report and Accounts 2010
Financial statements
Notes to the consolidated financial statements Unilever Group
15 Financial instruments and treasury risk management (continued)
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. The carrying amount of financial assets best represents the Group’s
exposure of credit risk at the reporting date without taking account of any collateral held or other credit enhancements. 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
2010 the collateral received by Unilever amounted to€58 million (2009: €208 million), of which €38 million (2009: €14 million) was cash and the
fair value of the bond securities amounted to €20 million (2009: €194 million). Although contractually Unilever has the right to sell or re-pledge
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 an established system of control in place covering all derivative financial instruments; including guidelines, exposure limits, a system
of authorities and independent reporting, that is subject to periodic review by internal audit. These instruments areused for hedging purposes.
Hedge accounting principles are described in note 1 on page 78. 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
• derivatives for which hedge accounting is not 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.
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 €35 million (2009: €(10) million) of which €59 million relates to commodity contracts
(2009:€7million), €(14) million to foreign exchange contracts (2009: €(19) million) and €(9) million to interest rate derivatives (2009: €2 million).
Ofthetotalfair value of €35 million (2009: €(10) million), €45 million is due within one year (2009: €(12) million).
The following table shows the amounts of cash flows that are designated as hedged items in the cash flow hedge relations:
€ million € million € million € million € million € million € million
Due Due Due Due Due Due
within between between between between after
1 year 1 and 2 years 2 and 3 years 3 and 4 years 4 and 5 years 5 years Total
2010
Foreign exchange cash inflows 844 – – – – – 844
Foreign exchange cash outflows (411) – – – – – (411)
Interest rate cash flows – (27) (37) (51) (51) (88) (254)
Commodity contracts cash flows (317) – – – – – (317)
2009
Foreign exchange cash inflows 797 – – – – – 797
Foreign exchange cash outflows (304) – – – – – (304)
Interest rate cash flows – – (9) (9) (9) (17) (44)
Commodity contracts cash flows (125) – – – – – (125)
Fair value hedges
The fair values of derivatives hedging the fair value interest rate risk on fixed rate debt at 31 December 2010 amounted to €114 million
(2009:€92million) which 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 2010 2009 2010 2009
Current
Foreign exchange derivatives 125 38 76 100
Of the above-mentioned fair values, an amount of €125 million (2009: €38 million) is included under other financial assets and €(76) million
(2009:€(100) million) is included under financial liabilities.