Unilever 2011 Annual Report Download - page 96

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93
16. Capital and treasury risk management
Derivatives and hedge accounting
Derivatives are measured at fair value with any related transaction costs expensed as incurred. The treatment of changes in the
value of derivatives depends on their use as explained below.
(i) Fair value hedges
Certain derivatives are held to hedge the risk of changes in value of a specific bond or other loan. In these situations, the Group
designates the liability and related derivative to be part of a fair value hedge relationship. The carrying value of the bond is adjusted
by the fair value of the risk being hedged, with changes going to the income statement. Gains and losses on the corresponding
derivative are also recognised in the income statement. The amounts recognised offset in the income statement. When the
relationship no longer meets the criteria for hedge accounting, the fair value hedge adjustment made to the bond is amortised to
the income statement using the effective interest method.
(ii) Cash flow hedges
Derivatives are also held to hedge the uncertainty in timing or amount of future forecast cash flows. Such derivatives are classified
as being part of cash flow hedge relationships. For an effective hedge, gains and losses from changes in the fair value of derivatives
are recognised in equity. Any ineffective elements of the hedge are recognised in the income statement. If the hedged cash flow
relates to a non-financial asset, the amount accumulated in equity is subsequently included within the carrying value of that asset.
For other cash flow hedges, amounts deferred in equity are taken to the income statement at the same time as the related cash
flow.
When a derivative no longer qualifies for hedge accounting, any cumulative gain or loss remains in equity until the related cash flow
occurs. When the cash flow takes place, the cumulative gain or loss is taken to the income statement. If the hedged cash flow is no
longer expected to occur, the cumulative gain or loss is taken to the income statement immediately.
(iii) Net investment hedges
Certain derivatives are designated as hedges of the currency risk on the Group’s investment in foreign subsidiaries. The accounting
policy for these arrangements is set out in note 1.
(iv) Derivatives for which hedge accounting is not applied
Derivatives not classified as hedges are held in order to hedge certain balance sheet items and commodity exposures. No hedge
accounting is applied to these derivatives, which are carried at fair value with changes being recognised in the income statement.
16A. Capital management
Unilever considers the following components of its balance sheet to be capital: short-term debt, long-term debt (bank loans, overdrafts,
bonds and other loans) and equity (mainly common and preferred stock).
Finance and liquidity
The Group’s financial strategy provides the financial flexibility to meet strategic and day-to-day needs. Our current long-term credit
rating is A+/A1 and our current short-term credit rating is A1/P1. We aim to maintain a competitive balance sheet which we consider to
be the equivalent of a credit rating of A+/A1 in the long term. This provides us with:
• appropriate access to equity and debt markets;
• sufficient flexibility for acquisitions;
• sufficient resilience against economic and financial uncertainty ensuring ample liquidity; and
• optimal weighted average cost of capital, given the constraintsabove.
Unilever monitors the qualitative and quantitative factors utilised by the rating agencies. This information is publicly available and is
updated by the credit rating agencies on a regular basis.
The capital structure of Unilever is based on management’s judgement of the appropriate balancing of all key elements of its financial
strategy in order to meet its strategic and day-to-day needs. We consider the amount of capital in proportion to risk and manage the
capital structure and make adjustments to it in the light of changes in economic conditions and the risk characteristics of the
underlying assets. Unilever will take appropriate steps in order to maintain, or if necessary adjust, the capital structure.
Unilever is not subject to covenants in any of its significant financing agreements.
Unilever Annual Report and Accounts 2011
Financial statements