Unilever 2013 Annual Report Download - page 126

POTENTIAL IMPAT OF RISK MANAEMENT POLIY AND HEDIN
STRATEY SENSITIVITY TO THE RISK
At 31 December 2013, the unhedged
exposure to the Group from companies
holding financial assets and liabilities other
than in their functional currency amounted
to €44 million (2012: €45 million).
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
management of currency risk is to leave the
Group with no material residual risk. This
aim has been achieved in all years presented.
A 10% strengthening of the euro against key
currencies to which the Group is exposed
would have led to approximately an
additional €4 million gain in the income
statement (2012: €4 million gain). A 10%
weakening of the euro against these
currencies would have led to an equal but
opposite effect.
urrency rsk on the Group’s nvestments
The Group is also subject to the exchange
risk in relation to the translation of the net
assets of its foreign operations into euros
for inclusion in its consolidated financial
statements.
At 31 December 2013, the nominal value of
the Group’s designated net investment
hedges amounted to €3.9 billion (2012:
€4.2billion). Most of these arrangements
were in relation to US $/€ contracts.
Unilever aims to minimise this foreign
investment exchange exposure by borrowing
in local currency in the operating companies
themselves. 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, Treasury 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.
A 10% strengthening of the euro against all
other key currencies would have led to an
additional €356 million loss being
recognised in equity (2012: €382 million
loss). 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.
III) INTEREST RATE RISK(a)
The Group is exposed to market interest
rate fluctuations on its floating rate debt.
Increases in benchmark interest rates
could increase the interest cost of our
floating-rate debt and increase the cost of
future borrowings. The Group’s ability to
manage interest costs also has an impact
on reported results.
Taking into account the impact of interest
rate swaps, at 31 December 2013, interest
rates were fixed on approximately 87% of
the expected net debt for 2014, and 79% for
2015 (91% for 2013 and 90% for 2014 at
31December 2012).
The average interest rate on short-term
borrowings in 2013 was 1.0% (2012: 1.5%).
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.
Furthermore, Unilever has interest rate
swaps for which cash flow hedge accounting
is applied.
Assuming that all other variables remain
constant, a 1.0 percentage point increase in
floating interest rates on a full-year basis
as at 31 December 2013 would have led to
an additional €7 million of finance costs
(2012: €3 million additional finance costs).
A 1.0 percentage point decrease in floating
interest rates on a full-year basis would
have an equal but opposite effect.
Assuming that all other variables remain
constant, a 1.0 percentage point increase in
floating interest rates on a full-year basis
as at 31 December 2013 would have led to
an additional €36 million credit in equity
from derivatives in cash flow hedge
relationships (2012: €102 million credit). A
1.0 percentage point decrease in floating
interest rates on a full-year basis would
have led to an additional €39 million debit in
equity from derivatives in cash flow hedge
relationships (2012: €111 million debit).
(a) See the split in fixed and floating-rate interest in the following table.
123Unlever Annual Report and Accounts 2013 Fnancal statements
16B. MANAGEMENT OF MARKET RISK CONTINUED