20. COMMITMENTS AND CONTINGENT LIABILITIES

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership. All other leases are classified as operating leases.

Assets held under finance leases are initially recognised at the lower of fair value at the date of commencement of the lease and the present value of the minimum lease payments. Subsequent to initial recognition, these assets are accounted for in accordance with the accounting policy relating to that specific asset. The corresponding liability is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance costs in the income statement and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Lease payments under operating leases are charged to the income statement on a straight-line basis over the term of the lease.

Contingent liabilities are either possible obligations that will probably not require a transfer of economic benefits, or present obligations that may, but probably will not, require a transfer of economic benefits. It is not appropriate to make provisions for contingent liabilities, but there is a chance that they will result in an obligation in the future. Assessing the amount of liabilities that are not probable is highly judgemental so contingent liabilities are disclosed on the basis of the known maximum exposure.


	€ million		€ million		€ million		€ million		€ million		€ million
	Future						Future
	minimum						minimum
	lease		Finance		Present		lease		Finance		Present
	payments		Cost		value		payments		cost		value
Long-term finance lease commitments	2018		2018		2018		2017		2017		2017
Buildings^(a)		174		57		117		195		75		120
Plant and machinery		13		2		11		11		—		11

		187		59		128		206		75		131
The commitments fall due as follows:
Within 1 year		20		7		13		20		9		11
Later than 1 year but not later than 5 years		71		20		51		68		23		45
Later than 5 years		96		32		64		118		43		75

		187		59		128		206		75		131

^(a)	All leased land is classified as operating leases.

The table below shows the net book value of property, plant and equipment under a number of finance lease agreements.


	€ million			€ million			€ million
				Plant and
Net book value	Buildings			equipment			Total
Cost		216			106			322
Accumulated depreciation		(94	)		(95	)		(189	)

31 December 2018		122			11			133

Cost		206			125			331
Accumulated depreciation		(84	)		(108	)		(192	)

31 December 2017		122			17			139

The Group has sublet part of the leased properties under finance leases. Future minimum sublease payments of €26 million (2017: €29 million) are expected to be received.


	€ million		€ million
Long-term operating lease commitments	2018		2017
Land and buildings		1,803		1,885
Plant and machinery		661		569

		2,464		2,454

€million

€million

€million

€million

Operating

Operating

Other

Other

leases

leases

commitments

commitments

Operating lease and other commitments fall due as follows:

2018

2017

2018

2017

Within 1 year

481

418

1,099

1,274

Later than 1 year but not later than 5 years

1,259

1,250

780

935

Later than 5 years

724

786

2,464

2,454

1,910

2,240

The Group has sublet part of the leased properties under operating leases. Future minimum sublease payments of €10 million (2017: €12 million) are expected to be received.

Other commitments principally comprise commitments under contracts to purchase materials and services. They do not include commitments to purchase property, plant and equipment, which are reported in note 10 on pages 100 and 101.

CONTINGENT LIABILITIES

Contingent liabilities are possible obligations that are not probable. They arise in respect of litigation against group companies, investigations by competition, regulatory and fiscal authorities and obligations arising under environmental legislation. In many markets, there is a high degree of complexity involved in the local tax regimes. The majority of contingent liabilities are in respect of fiscal matters in Brazil.

Assessing the amount of liabilities that are not probable is highly judgemental. Contingent liabilities are disclosed on the basis of the known maximum exposure. In the case of fiscal matters the known maximum exposure is the amount included on a tax assessment.

A summary of our contingent liabilities is shown in the table below:


	€ million		€ million
	2018		2017
Corporate reorganisation – IPI, PIS and COFINS taxes and penalties^(a)		2,032		2,092
Inputs for PIS and COFINS taxes		52		16
Goodwill amortisation		177		121
Other tax assessments – approximately 600 cases		916		1,095

Total Brazil Tax		3,177		3,324
Brazil other		67		19
Contingent liabilities outside Brazil		414		324

Total contingent liabilities		3,658		3,667

^(a)

During 2004, and in common with many other businesses operating in Brazil, one of our Brazilian subsidiaries received a notice of infringement from the Federal Revenue Service in respect of indirect taxes. The notice alleges that a 2001 reorganisation of our local corporate structure was undertaken without valid business purpose. The 2001 reorganisation was comparable with restructurings done by many companies in Brazil. The original dispute was resolved in the courts in the Group’s favour. However, in 2013 a new assessment was raised in respect of a similar matter. Additionally, during the course of 2014 and again in 2017 and in 2018 other notices of infringement were issued based on the same grounds argued in the previous assessments. The total amount of the tax assessments in respect of this matter is €2,032 million (2017: €2,092 million). The judicial process in Brazil is likely to take a number of years to conclude.

The Group believes that the likelihood that the tax authorities will ultimately prevail is low, however there can be no guarantee of success in court. In each case we believe our position is strong so they have not been provided for and are considered to be contingent liabilities. Due to the fiscal environment in Brazil the possibility of further tax assessments related to the same matters cannot be ruled out.

The contingent liabilities reported for indirect taxes relating to disputes with the Brazilian authorities are separate from the provisions listed in note 19; Unilever does not have provision and contingent liabilities for the same matters.