Unilever 2010 Annual Report Download - page 81

78 Unilever Annual Report and Accounts 2010
Financial statements
Notes to the consolidated financial statements Unilever Group
1 Accounting information and policies (continued)
Available-for-sale financial assets
Available-for-sale financial assets are assets that are designated in this
category or not classified in any of the other categories. They are
non-current assets unless the Group intends to dispose of them within
12 months. Changes in value are recognised in equity until the
investment is sold or impaired, when they are included in the income
statement.
Interest on available-for-sale securities is calculated using the effective
interest method and recognised within other income. Dividends on
equity investments are also recognised within other income.
Financial liabilities
Financial liabilities are recognised initially at fair value, net of transaction
costs. They are subsequently held at amortised cost unless they are part
of a fair value hedge. Any difference between the amount on initial
recognition and the redemption value is recognised in the income
statement using the effective interest method.
Short-term financial liabilities are measured at original invoice amount.
Derivatives
Derivatives are measured on the balance sheet at fair value and are
used primarily to manage the risks of changes in exchange and interest
rates. The Group uses derivatives such as foreign exchange forward
contracts, interest rate swap contracts and forward rate agreements
tohedge these exposures. The Group also uses commodity contracts
tohedge some raw materials. Contracts that can be settled in cash
aretreated as financial instruments. The Group does not use derivative
financial instruments for speculative purposes.
Changes in the fair value of derivatives that do not qualify for hedge
accounting and any hedge ineffectiveness are recognised in the income
statement as they arise.
Cash flow hedges
Changes in the value of derivatives used as hedges of future cash flows
are recognised in equity with any ineffective portion recognised in the
income statement. If the cash flow hedge results in the recognition of
anon-financial asset or a liability the gain or loss on the derivative is
included in the initial measurement of that asset or liability. For other
cash flow hedges amounts deferred in equity are taken to the income
statement when the hedged item affects profit or loss.
When a hedging instrument no longer qualifies for hedge accounting,
any cumulative gain or loss is retained in equity until the forecasted
transaction occurs. If a hedged transaction is no longer expected to
occur, the cumulative gain or loss is transferred to the income
statement.
Fair value hedges
In an effective fair value hedge, the hedged item is adjusted for
changes in fair value, with the corresponding entry in the income
statement. Gains and losses on the hedging instrument are recognised
in the income statement. In a fully effective hedge the adjustments
tothe income statement are of equal and opposite value. For
non-derivatives only the foreign currency element can be a hedging
instrument.
Net investment hedges
Net investment hedges are hedges of exchange risks from investments
in foreign subsidiaries. Gains and losses are recognised in equity. The
accumulated gains and losses are taken to the income statement when
the foreign operation is sold or partially disposed.
Valuation principles
The fair values of quoted investments are based on current bid prices.
For listed securities where the market is not liquid, and for unlisted
securities, the Group uses 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 calculations.
Impairment of financial instruments
At each balance sheet date the Group assesses whether there is
evidence that financial assets are impaired. A significant or prolonged
fall in value below cost is considered in determining whether an asset
isimpaired. For available-for-sale financial assets the cumulative loss is
removed from equity and recognised in the income statement. Any
subsequent reversals of impairment losses on available-for-sale equity
instruments are not recognised in the income statement.
Cash and cash equivalents
In the cash flow statement, cash and cash equivalents includes cash at
bank and in hand, short-term highly liquid interest-bearing securities
with original maturities of three months or less, investments in money
market funds that are readily convertible into cash with insignificant risk
of changes in value, and bank overdrafts.
Other non-current assets
Joint ventures are undertakings in which the Group has an interest
andwhich are jointly controlled by the Group and one or more other
parties. Associates are undertakings where the Group has an
investment in which it does not have control or joint control but can
exercise significant influence.
Interests in joint ventures and associates are accounted for using the
equity method and are stated in the consolidated balance sheet at cost,
adjusted for the movement in the Group’s share of their net assets and
liabilities. The Group’s share of the profit or loss after tax of joint
ventures and associates is included in the Group’s consolidated profit
before taxation.
Segment information
Segment information is provided based on the geographic segments
ofthe management structure of the Group. Additional information is
provided by product area.
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.
Assets held for sale
Assets and groups of assets and liabilities which comprise disposal
groups are classified as ‘held for sale’ when all of the following criteria
are met: a decision has been made to sell; the assets are available for
sale immediately; the assets are being actively marketed; and a sale
hasbeen or is expected to be concluded within twelve months of the
balance sheet date. Assets and disposal groups held for sale are valued
at the lower of book value or fair value less disposal costs. Assets held
for sale are not depreciated.
Leases
Leases are classified as finance leases whenever the terms of the lease
transfer substantially all the risks and rewards of ownership to the
lessee. All other leases are classified as operating leases.
Assets held under finance leases are recognised as non-current
assetsof the Group at the lower of their fair value at the date of
commencement of the lease and at the present value of the minimum
lease payments. These assets are depreciated on a straight-line basis
over the shorter of the useful life of the asset and the lease term. The
corresponding liability to the lessor is included in the balance sheet as
afinance lease obligation. Lease payments are apportioned between
finance costs in the income statement and reduction of the lease
obligation so as to achieve a constant rate of interest on the remaining
balance of the liability.
Lease payments under operating leases are charged to the income
statement on a straight-line basis over the term of the lease.
Research and market support costs
Expenditure on research and market support, such as advertising,
ischarged to the income statement when incurred.