Unilever 2011 Annual Report Download - page 97

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94
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS UNILEVER GROUP continued
16B. Treasury risk management
The Group has an established system of control in place covering all derivative financial instruments. This system includes guidelines,
exposure limits, authority schedules and independent reporting. The controls are subject to periodic review by internal audit. The use of
leveraged instruments is not permitted.
The Group is exposed to the following risks that arise from its use of financial instruments, the management of which is described in
the following sections:
a) market risk;
b) liquidity risk; and
c) credit risk.
a) Market risk
Market risk arises from fluctuations in market factors, including exchange rates, interest rates and commodity prices. Movements in
these factors may affect the Group’s income and expenses, or the value of its financial instruments. The objective of the Group’s
management of market risk is to maintain this risk within acceptable parameters, whilst optimising returns. Generally, the Group
applies hedge accounting to manage the volatility in profit and loss arising from market risk.
(i) Currency risk
Currency risk on sales, purchases and borrowings
Because of Unilever’s global reach, it is subject to the risk that changes in foreign currency values will impact the Group’s sales,
purchases and borrowings. The Group manages currency exposures within prescribed limits, mainly through forward foreign currency
exchange contracts. Operating companies actively manage foreign exchange exposures within prescribed limits, and regional groups
monitor local compliance.
As shown in note 15B, the Group holds debt in a number of currencies. Exchange risks related to the principal amounts of the US$ and
Swiss franc denominated debt either form part of hedging relationships themselves, or are hedged through forward contracts.
The aim of the Group’s approach to the management of currency risk is to leave the Group with no material residual risk. This aim has
been achieved in all years presented.
At 31 December 2011, the unhedged exposure to the Group from companies holding assets and liabilities other than in their functional
currency amounted to €56 million (2010: €52 million). A 10% strengthening of the euro against key currencies to which the Group is
exposed would lead to approximately an additional €6 million credit in the income statement (2010: €5 million credit). A 10% weakening
of the euro against these currencies would lead to an equal but opposite effect.
Currency risk on the Group’s investments
The Group is also subject to the exchange risk in relation to the translation of the net assets of its foreign operations into euros.
Unilever aims to minimise this foreign exchange exposure by borrowing in local currency wherever possible. In some locations
however, the Group’s ability to do this is inhibited by local regulations, lack of local liquidity or by local market conditions. Where the
residual risk from these countries exceeds prescribed limits, Unilever may decide on a case-by-case basis to actively hedge the
exposure. This is done either through additional borrowings in the related currency, or through the use of forward foreign exchange
contracts. Where local currency borrowings, or forward contracts, are used to hedge the currency risk in relation to the Group’s net
investment in foreign subsidiaries, these relationships are designated as net investment hedges for accounting purposes.
At 31 December 2011 the nominal value of the Group’s designated net investment hedges amounted to €4.1 billion (2010: €4.4 billion),
mainly consisting of US $/€ contracts. A 10% strengthening of the euro against all other key currencies would lead to an additional
€377 million debit being recognised in equity (2010: €395 million debit). A 10% weakening of the euro against these currencies would
have the equal but opposite effect. There would be no impact on the income statement under either of these scenarios.
(ii) Interest rate risk
Unilever’s interest rate management approach aims for an optimal balance between fixed and floating rate interest rate exposures on
expected net debt. The objective of this approach is to minimise annual interest costs after tax and to reduce volatility. This is achieved
either by issuing fixed or floating rate long-term debt, or by modifying interest rate exposure through the use of interest rate swaps.
At 31 December 2011, interest rates were fixed on approximately 73% of the expected net debt for 2012 and 57% for 2013 (66% for 2011
and 63% for 2012 at 31 December 2010). The average interest rate on short-term borrowings in 2011 was 2.5% (2010: 2.4%).
Unilever Annual Report and Accounts 2011
Financial statements