Unilever 2010 Annual Report Download - page 82

Unilever Annual Report and Accounts 2010 79
Financial statements
1 Accounting information and policies (continued)
Share-based payments
The fair value of the share awards and the share options at the grant date
is determined by option pricing models, principally adjusted Black-Scholes
models or a multinomial pricing model. The fair value of the share awards
and the share options is charged to the income statement over the
vesting period. The value of the charge is adjusted to reflect expected
and actual levels of awards vesting, except where the failure to vest is
as a result of not meeting a market condition. Cancellations of equity
instruments are treated as an acceleration of the vesting period and
anyoutstanding charge is recognised in the income statement
immediately.
Shares held by employee share trusts
Certain PLC trusts, NV and group companies purchase and hold NV
and PLC shares to satisfy options granted. Their assets and liabilities are
included in the consolidated financial statements. The book value of
shares held is deducted from other reserves, and trusts’ borrowings are
included in the Group’s liabilities. The costs of the trusts are included in
the results of the Group. These shares are excluded from the calculation
of earnings per share.
Critical accounting estimates and judgements
Estimates and judgements are continually evaluated and are based on
historical experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
The preparation of financial statements requires management to
makeestimates and assumptions concerning the future. The resulting
accounting estimates will, by definition, seldom equal the related actual
results. The estimates and assumptions that have a significant risk of
causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year are discussed below.
Income statement presentation
On the face of the income statement, costs and revenues relating to
restructuring, business disposals and impairments are disclosed. In
addition, individual items judged to be significant are disclosed
separately. These are material in terms of nature and amount. IAS 1,
Presentation of Financial Statements, provides no definitive guidance as
to the format of the income statement, but states key lines which should
be disclosed. It also encourages the disclosure of additional line items and
the re-ordering of items presented on the face of the income statement
when appropriate. These disclosures are given in order to provide
additional information to help users better understand financial
performance.
Goodwill and intangible assets
The Group recognises goodwill and intangible assets which have
arisenthrough acquisitions. The most significant balances of goodwill
and intangible assets relate to the regional savoury and dressings
sub-product groups.
These assets are subject to impairment reviews to ensure that the
assets are not carried above their recoverable amounts: for goodwill
and indefinite-lived intangible assets, reviews are performed at least
annually or more frequently if events or circumstances indicate that this
is necessary; for other intangible assets, reviews are performed if events
or circumstances indicate that this is necessary.
Impairment reviews are performed by comparing the carrying value
ofthe cash generating unit concerned to that cash generating unit’s
recoverable amount, being the higher of value in use and fair value
lesscosts to sell. Value in use is a valuation derived from the discounted
future cash flows of cash generating units. The most important
estimates in these forecast cash flows are the long-term growth rates
used to calculate revenue growth in perpetuity and the discount
rateswhich are applied to the future cash flows. These estimates
arereviewed at least annually and are believed to be appropriate.
However, changes in these estimates could change the outcomes of
theimpairment reviews and therefore affect future financial results.
The effects would be recognised in the income statement, through
operating profit.
The Group has reviewed the carrying value of the cash generating units
by considering expected future cash flows based on historical
experience and planned growth rates and margins for the product
groups.
Please refer also to note 9 on pages 87 and 88.
Pensions and similar obligations
The Group operates a number of pension plans, including defined
benefit plans. The defined benefit plan surplus or deficit in the balance
sheet comprises the total for each plan of the fair value of plan assets
less the present value of the defined benefit obligation (using a
discount rate based on high-quality corporate bonds).
Pension accounting requires certain assumptions to be made in order
tovalue our obligations and to determine the charges to be made
tothe income statement. These figures are particularly sensitive
toassumptions for discount rates, inflation rates, mortality rates
andexpected long-term rates of return on assets. Information about
sensitivity to certain of these assumptions is given in note 19 on page
108.
The following table sets out these assumptions (except for mortality
rates), as at 31 December 2010, in respect of the four largest Unilever
pension plans. Further details of assumptions (including mortality rates)
made are given in note 19 on pages 108 and 109.
% % % %
Nether- United
UK lands States Germany
Discount rate 5.4 4.7 5.2 4.7
Inflation 3.1 1.8 2.3 1.8
Expected long-term rate of return:
Equities 7.7 7.0 7.4 7.0
Bonds 4.6 4.3 4.4 4.2
Property 6.2 5.5 5.9 5.5
Others 7.1 5.6 1.7 5.5
These assumptions are set annually by reference to market conditions at
the valuation date. Actual experience may differ from the assumptions
made. The effects would be recognised in the statement of
comprehensive income.
Demographic assumptions, such as mortality rates, are set having
regard to the latest trends in life expectancy, plan experience and other
relevant data. The assumptions are reviewed annually and updated
asnecessary as part of the periodic actuarial valuation of the pension
plans.
Provisions
The Group records provision for matters where a legal or constructive
obligation exists at the balance sheet date, as a result of a past event
and a reliable estimate can be made of the obligation. These matters
might include restructuring projects, legal matters, disputed indirect
taxes and other items. These obligations may not be settled for a
number of years and a reliable estimate has to be made of the likely
outcome of each of these matters.
These provisions represent our best estimate of the costs that will
beincurred but actual experience may differ from the estimates made
and therefore affect future financial results. The effects would be
recognised in the income statement, primarily through operating profit
and finance costs. See also note 18 on page 106.