Unilever 2010 Annual Report Download - page 80

Unilever Annual Report and Accounts 2010 77
Financial statements
1 Accounting information and policies (continued)
Deferred taxation is recognised using the liability method on taxable
temporary differences between the tax base and the accounting base
of items included in the balance sheet of the Group. Certain temporary
differences are not provided for: goodwill not deductible for tax
purposes; the initial recognition of assets or liabilities that affect neither
accounting nor taxable profit; and differences relating to investments
insubsidiaries to the extent that they will probably not reverse in the
forseeable future. The amount of deferred tax provided is based on the
expected manner of realisation or settlement of the carrying amount
ofassets and liabilities, using tax rates prevailing at the year end unless
future rates have been enacted or substantively enacted.
A deferred tax asset is recognised only to the extent that it is probable
that future taxable profits will be available against which the asset can
be utilised. Deferred tax assets are reduced to the extent that it is no
longer probable that the related tax benefit will be realised.
Provisions
Provisions are recognised where a legal or constructive obligation exists
at the balance sheet date, as a result of a past event and where the
amount of the obligation can be reliably estimated.
Business combinations
Business combinations are accounted for using the acquisition
accounting method. This involves recognising identifiable assets and
liabilities of the acquired business at fair value as at the date of
acquisition. Adjustments are made to align accounting policies, and the
fair value of the assets and liabilities of the acquired entity is calculated.
Changes in ownership interest that do not result in a change of control
are accounted for as equity transactions whereby the difference
between the consideration and the non-controlling share of the net
assets acquired is recognised in reserves within shareholders’ equity.
Property, plant and equipment
Property, plant and equipment is stated at cost less depreciation and
impairment. It is initially recognised at cost, including eligible borrowing
costs. Depreciation is provided on a straight-line basis based on the
expected average useful lives of the assets and their residual values.
Residual values are reviewed at least annually. Estimated useful lives
bymajor class of assets are as follows:
Freehold buildings 40 years
(no depreciation on freehold land)
Leasehold buildings 40 years*
Plant and equipment 2-20 years
*or life of lease if less than 40 years
Property, plant and equipment is subject to review for impairment if
triggering events or circumstances indicate that this is necessary. Any
impairment is charged to the income statement as it arises.
Revenue recognition
Turnover comprises sales of goods and services after the deduction of
discounts, sales taxes and estimated returns. It does not include sales
between group companies. Discounts given by Unilever include rebates,
price reductions and incentives given to customers, promotional
couponing and trade communication costs.
Turnover is recognised when the risks and rewards of the underlying
products and services have been substantially transferred to the
customer. Depending on individual customer terms, this can be at
thetime of dispatch, delivery or upon formal customer acceptance.
Revenue from services is recognised as the services are performed.
Foreign currencies
The consolidated financial statements are presented in euros. The
functional currencies of NV and PLC are euros and sterling respectively.
Items included in the financial statements of individual group companies
are recorded in their respective functional currency which is the currency
of the primary economic environment in which each entity operates.
Foreign currency transactions in individual group companies are
translated into the functional currency using the exchange rates
prevailing at the dates of the transactions. Foreign exchange gains and
losses resulting from the settlement of such transactions and from the
translation at year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the income
statement, except when deferred in equity as qualifying hedges.
Foreign exchange gains and losses arising on trading transactions are
taken to operating profit; those arising on cash, financial assets and
financial liabilities are classified as finance income or cost.
In preparing the consolidated financial statements, the balances in
individual group companies are translated from their functional
currency into euros. The income statement, the cash flow statement
and all other movements in assets and liabilities are translated at
average rates of exchange except where the use of such average rates
does not approximate to the exchange rate at the date of the
transaction, in which case the transaction rate is used. 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 hyperinflationary
economies the accounts are adjusted to reflect current price levels and
remove the influences of inflation before being translated into euros.
The ordinary share capital of NV and PLC is translated in accordance
with the Equalisation Agreement. 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 23 on page 113).
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 any
related foreign exchange contracts where 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 date of transition to
IFRS of 1 January 2004 are reported as a separate component of other
reserves (see note 23 on page 114). In the event of disposal or part
disposal of an interest in a group company 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.
Financial instruments
Financial assets
Financial assets are classified into one of four categories. The classification
of financial assets is determined at initial recognition depending on the
purpose for which they were acquired. Any impairment is recognised
inthe income statement as it arises.
Held-to-maturity investments
Held-to-maturity investments are assets with set cash flows and fixed
maturities which Unilever intends to hold to maturity. They are held at cost
plus interest using the effective interest method, less any impairments.
Loans and receivables
Loans and receivables have set payments and are not quoted in an
active market. They arise when the Group provides money, goods or
services. Loans and receivables are included in the balance sheet at
amortised cost.
Short-term loans and receivables are initially measured at original
invoice amount less any impairments.
Financial assets at fair value through profit or loss
Financial assets are in this category if they are intended to be sold in the
short term. They are current assets if they are expected to be realised
within 12 months. Transaction costs related to the purchase of the
assets are expensed as incurred. Derivatives are classified here unless
they are designated as hedges. Gains and losses arising from changes
in value are included in the income statement.