Unilever 2012 Annual Report Download - page 119

116 Unilever Annual Report and Accounts 2012Financial statements
NOTES TO THE ONSOLIDATED FINANIAL STATEMENTS UNILEVER ROUP continued
16 Treasury rsk management
16 Treasury rsk management
Dervatves and hedge accountng
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.
() Far 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 are offset in the income statement to the extent
that the hedge is effective. 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.
() ash 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.
() Net nvestment 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.
(v) Dervatves for whch hedge accountng s not appled
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.
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:
• liquidity risk (see note 16A);
• market risk (see note 16B); and
• credit risk (see note 17B).
16A Management of lqudty rsk
Liquidity risk is the risk that the Group will face difficulty in meeting its obligations associated with its financial liabilities. The Group’s
approach to managing liquidity is to ensure that it will have sufficient funds to meet its liabilities when due without incurring unacceptable
losses. In doing this, management considers both normal and stressed conditions. A material and sustained shortfall in our cash flow
could undermine the Group’s credit rating, impair investor confidence and also restrict the Group’s ability to raise funds.
Given continuing volatility in the financial markets, the Group has maintained a cautious funding strategy, running a positive cash
balance throughout 2012. This has been the result of a strong cash delivery from the business, coupled with the proceeds from bond
issuances in 2012. This cash has been invested conservatively with low risk counter-parties at maturities of less than six months.
Cash flow from operating activities provides the funds to service the financing of financial liabilities on a day-to-day basis. The Group
seeks to manage its liquidity requirements by maintaining access to global debt markets through short-term and long-term debt
programmes. In addition, Unilever has committed credit facilities for general corporate use.
Unilever had US $6,250 million of undrawn committed facilities on 31 December 2012 as follows:
• revolving 364-day bilateral credit facilities of in aggregate US $6,140 million (2011: US $5,950 million) with a 364-day term-out; and
• 364-day bilateral money market commitments of in aggregate US $110 million (2011: US $200 million), under which the underwriting
banks agree, subject to certain conditions, to subscribe for notes with maturities of up to three years.
As part of the regular annual process these facilities will again be renewed in 2013.