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Financial Instruments Fair Value Risk

12 Months Ended

Dec. 31, 2020

18. Financial instruments fair value risk

The Group is exposed to the risks of changes in fair value of its financial assets and liabilities. The following table summarises the fair values and carrying amounts of financial instruments.


							€ million			€ million
	€ million			€ million			Carrying			Carrying
	Fair value			Fair value			amount			amount
Fair values of financial assets and financial liabilities	2020			2019			2020			2019
Financial assets
Cash and cash equivalents		5,548			4,185			5,548			4,185
Financial assets at amortised cost		606			798			606			798
Financial assets at fair value through other comprehensive income		370			266			370			266
Financial assets at fair value through profit or loss:
Derivatives		80			134			80			134
Other		628			583			628			583

		7,232			5,966			7,232			5,966
Financial liabilities
Bank loans and overdrafts		(411	)		(853	)		(411	)		(853	)
Bonds and other loans		(26,936	)		(26,525	)		(24,585	)		(25,032	)
Lease liabilities		(1,771	)		(1,919	)		(1,771	)		(1,919	)
Derivatives		(315	)		(270	)		(315	)		(270	)
Other financial liabilities		(223	)		(183	)		(223	)		(183	)
		(29,656	)		(29,750	)		(27,305	)		(28,257	)

The fair value of trade receivables and payables is considered to be equal to the carrying amount of these items due to their short-term nature.

The instruments that have a fair value that is different from the carrying amount are classified as Level 2 for both 2019 and 2020.

Fair value hierarchy

The fair values shown in notes 15C and 17A have been classified into three categories depending on the inputs used in the valuation technique. The categories used are as follows:

•

Level 1: quoted prices for identical instruments;

•

Level 2: directly or indirectly observable market inputs, other than Level 1 inputs; and

•

Level 3: inputs which are not based on observable market data.

For assets and liabilities which are carried at fair value, the classification of fair value calculations by category is summarised below:


			€ million		€ million		€ million			€ million			€ million			€ million			€ million			€ million
																			Total fair			Total fair
			Level 1		Level 1		Level 2			Level 2			Level 3			Level 3			value			value
	Notes		2020		2019		2020			2019			2020			2019			2020			2019
Assets at fair value
Financial assets at fair value through other comprehensive income		17A		5		7		3			4			362			255			370			266
Financial assets at fair value through profit or loss:
Derivatives (a)		16C		—		—		158			208			—			—			158			208
Other		17A		300		311		—			—			328			272			628			583
Liabilities at fair value
Derivatives (b)		16C		—		—		(418	)		(326	)		—			—			(418	)		(326	)
Contingent consideration		14		—		—		—			—			(140	)		(154	)		(140	)		(154	)

(a)	Includes €78 million (2019: €74 million) derivatives, reported within trade receivables, that hedge trading activities.

(b)	Includes €(103) million (2019: €(56) million) derivatives, reported within trade payables, that hedge trading activities.

There were no significant changes in classification of fair value of financial assets and financial liabilities since 31 December 2019. There were also no significant movements between the fair value levels since 31 December 2019.

The impact in 2020 income statement due to Level 3 instruments is a loss of €22 million (2019: loss of €9 million).

Reconciliation of Level 3 fair value measurements of financial assets and financial liabilities is given below:


	€ million			€ million
Reconciliation of movements in Level 3 valuations	2020			2019
1 January		373			241
Gains and losses recognised in income statement		(22	)		(9	)
Gains and losses recognised in other comprehensive income		75			43
Purchases and new issues		41			83
Sales and settlements		83			15

31 December		550			373

Significant unobservable inputs used in Level 3 fair values

Assets valued using Level 3 techniques include €494 million (2019: €403 million) relating to a number of unlisted investments within Unilever Ventures companies, none of which are individually material; €51 million (2019: €nil) for an option over a non-controlling interest; and €106 million (2019: €114 million) of long-term cash receivables under life insurance policies. Valuation techniques used are specific to each asset and for all assets a change in one or more of the inputs to reasonably possible alternative assumptions would not change the value significantly.

Calculation of fair values

The fair values of the financial assets and liabilities are defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Methods and assumptions used to estimate the fair values are consistent with those used in the year ended 31 December 2019.

Assets and liabilities carried at fair value

•

The fair values of quoted investments falling into Level 1 are based on current bid prices.

•

The fair values of unquoted financial assets at fair value through other comprehensive income and at fair value through profit or loss are based on recent trades in liquid markets, observable market rates, discounted cash flow analysis and statistical modelling techniques such as the Monte Carlo simulation. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3.

•

Derivatives are valued using valuation techniques with market observable inputs. The models incorporate various inputs including the credit quality of counter-parties, foreign exchange spot and forward rates, interest rate curves and forward rate curves of the underlying commodities.

•

For listed securities where the market is not liquid, and for unlisted securities, valuation techniques are used. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same and discounted cash flow calculations.

Other financial assets and liabilities (fair values for disclosure purposes only)

•

Cash and cash equivalents, trade and other current receivables, bank loans and overdrafts, trade payables and other current liabilities have fair values that approximate to their carrying amounts due to their short-term nature.

•

The fair values of listed bonds are based on their market value.

•

Non-listed

bonds, other loans, bank loans and

non-current

receivables and payables are based on the net present value of the anticipated future cash flows associated with these instruments using rates currently available for debt on similar terms, credit risk and remaining maturities.

Policies and processes used in relation to the calculation of level 3 fair values

Assets valued using Level 3 valuation techniques are primarily made up of long-term cash receivables and unlisted investments. Valuation techniques used are specific to the circumstances involved. Unlisted investments include €494 million (2019: €403 million) of investments within Unilever Ventures companies.