Unilever 2011 Annual Report Download - page 101

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS UNILEVER GROUP continued
16C. Financial instruments fair value risk continued
Fair value hierarchy
These fair values shown above have been classified into three categories depending on the inputs used in the valuation technique. The
categories used are as follows:
• Level 1: quoted prices for identical instruments;
• Level 2: directly or indirectly observable market inputs, other than Level 1 inputs; and
• Level 3: inputs which are not based on observable market data.
For assets and liabilities which are carried at fair value, the classification of fair value calculations by category is summarised below:
€ million
Level 1
2011
€ million
Level 1
2010
€ million
Level 2
2011
€ million
Level 2
2010
€ million
Level 3
2011
€ million
Level 3
2010
€ million
Total fair
value
2011
€ million
Total fair
value
2010
Assets at fair value
Other cash equivalents 15A ––102 696 ––102 696
Available-for-sale financial assets 15A 236 197 482 314 222 720 533
Financial assets at fair value
through profit or loss:
Derivatives 16D ––266 497 ––266 497
Other 15A 71 56 –17 –47 71 120
Liabilities at fair value
Bonds and other loans 15B ––(2,330) (2,331) ––(2,330) (2,331)
Derivatives 16D ––(197) (366) ––(197) (366)
During the reporting period ending 31 December 2011, there were no transfers from Level 2 to Level 1 (2010: €nil). There were no
transfers into, or out of, Level 3 (2010: €nil).
Calculation of fair values
The fair values of the financial assets and liabilities are defined as being the amounts at which the instruments could be exchanged or
liability settled in an arm’s length transaction between knowledgeable, willing parties. The following methods and assumptions have
been used to estimate the fair values:
Assets and liabilities carried at fair value
• The fair values of quoted investments falling into Level 1 are based on current bid prices.
• The fair values of unquoted available-for-sale financial assets, which fall into Level 2, are based on recent trades in liquid markets,
observable market rates and statistical modelling techniques such as Monte Carlo simulation.
• Derivatives are valued using valuation techniques with market observable inputs. The models incorporate various inputs including
the credit quality of counterparties, foreign exchange spot and forward rates, interest rate curves and forward rate curves of the
underlying commodities.
• For listed securities where the market is not liquid, and for unlisted securities, valuation techniques are used. These include the use
of recent arm’s length transactions, reference to other instruments that are substantially the same and discounted cash flow
calculations.
Other financial assets and liabilities (fair values for disclosure purposes only)
• Cash and cash equivalents, trade and other current receivables, bank loans and overdrafts, trade payables and other current
liabilities have fair values that approximate to their carrying amounts due to their short-term nature.
• The fair values of preference shares and listed bonds are based on their market value.
• Non-listed bonds and other loans are based on the net present value of the anticipated future cash flows associated with these
instruments using rates currently available for debt on similar terms, credit risk and remaining maturities.
• Fair values for finance lease creditors have been assessed by reference to current market rates for comparable leasing
arrangements.
16D. Derivatives and hedging
The Group uses derivative financial instruments, such as foreign exchange forward contracts, interest rate swap contracts and forward
rate agreements, to hedge its exposure to interest rate and foreign currency risk. The Group also uses commodity contracts to hedge
the price of some raw materials. The Group does not use derivative financial instruments for speculative purposes.
Unilever Annual Report and Accounts 2011
Financial statements