Appendix: Reckitt – Unilever Teamwork

Capello Francesco, Ceccarello Lorenzo, Contin Saverio, Mori

Camilla, Pellanda Veronica.

Appendix: Reckitt – Unilever Teamwork

COMPOSITION AND METHOD USED FOR CONSOLIDATION ............................................................... 2
RECKITT - SUBSIDIARY UNDERTAKINGS........................................................................................................................... 2

UNILEVER - SUBSIDIARY UNDERTAKINGS INCLUDED AND NOT IN THE CONSOLIDATION .............. 2

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS............................................................................................. 2
ASSETS AND LIABILITIES HELD FOR SALE ......................................................................................................................... 3

RECKITT-GOODWILL AND IMPAIRMENT TESTING................................................................................ 4

IMPAIRMENT TESTING......................................................................................................................................................... 4

UNILEVER-GOODWILL AND IMPAIRMENT TESTING ............................................................................ 4

IMPAIRMENT TESTING......................................................................................................................................................... 4

RECKITT- TANGIBLE AND INTANGIBLE ASSETS ..................................................................................... 6

UNILEVER - TANGIBLE AND INTANGIBLE ASSETS ................................................................................. 6
RECKITT FINANCIAL INSTRUMENTS ....................................................................................................... 8
DERIVATIVES, HEDGING ACTIVITY AND OTHER CORPORATE INVESTMENT ............................................. 8

UNILEVER FINANCIAL INSTRUMENTS .................................................................................................. 10

1
COMPOSITION AND METHOD USED FOR CONSOLIDATION

RECKITT - SUBSIDIARY UNDERTAKINGS

Reckitt annual report 2022: https://reckitt.com/media/5qbh523b/annual-report-2022.pdf
Pag. 229-237

UNILEVER - SUBSIDIARY UNDERTAKINGS INCLUDED AND NOT IN THE

CONSOLIDATION
Unilever annual report 2022:
https://www.unilever.com/files/92ui5egz/production/0daddecec3fdde4d47d907689fe19e0
40aab9c58.pdf
Pag. 214-224

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Estimates:
- Measurement of defined benefit obligations: the valuations of the Group’s defined
benefit pension plan obligations are dependent on several assumptions. These include
discount rates, inflation, and life expectancy of scheme members.
- Impairment risk in Russia: in 2022 the Russian business contributed 1.4% of the
Group's turnover and 2% of the Group's net profit, and as of 31 December 2022 had
approximately €900 million of assets. While the potential impacts of the war remain
uncertain, there is a risk that the operations in Russia are unable to continue, leading to a
loss of turnover, profit, and a write-down of assets.

Judgements:
- Separate presentation of non-underlying items: certain items of income or expense are
presented separately as non-underlying items. Management use judgement in assessing
which items are non-underlying in line with the Group's policies. These items are excluded
in several of our performance measures, including underlying operating profit and
underlying earnings per share due to their nature and/or frequency of occurrence. In prior
years, all non-underlying items were disclosed on the face of the income statement. This
treatment was reviewed and will now only disclose individually material items.
- Recognition of pension surplus: where there is an accounting surplus on a defined
benefit plan, management uses judgment to determine whether the Group can realize the
surplus through refunds, reductions in future combinations or a combination of both.
- Utilization of tax losses and recognition of other deferred tax assets – the Group
operates in many countries and is subject to taxes in numerous jurisdictions. Management
uses judgement to assess the recoverability of tax assets such as whether there will be
sufficient future taxable profits to utilize losses.
- Likelihood of occurrence of provisions and contingent liabilities – events can occur
where there is uncertainty over future obligations. Judgement is required to determine if an
outflow of economic resources is probable, or possible but not probable. Where it is
probable, a liability is recognized, and further judgement is used to determine the level of
the provision. Where it is possible but not probable, further judgement is used to determine

2
if the likelihood is remote, in which case no disclosures are provided; if the likelihood is not
remote then judgement is used to determine the contingent liability disclosed. Unilever
does not have provisions and contingent liabilities for the same matters. External advice is
obtained for any material cases.

ASSETS AND LIABILITIES HELD FOR SALE

Non-current assets and groups of assets and liabilities which comprise disposal groups are
classified as ‘held for sale’ when all the following criteria are met: a decision has been made
to sell; the assets are available for sale immediately; the assets are being actively marketed;
and a sale has been agreed or is expected to be concluded within 12 months of the balance
sheet date.
Impairment losses on initial classification as held for sale, and subsequent gains and losses
on remeasurement to fair value less costs of disposal, are recognized in the Income
Statement.
Once classified as held for sale, intangible assets and property, plant and equipment are no
longer amortized or depreciated.

3
RECKITT-GOODWILL AND IMPAIRMENT TESTING

IMPAIRMENT TESTING
Goodwill and other indefinite life intangible assets must be tested for impairment on at
least an annual basis. An impairment loss is recognized when the recoverable amount, being
the higher of value-in-use and fair value less costs to dispose, of a GCGU or CGU falls
materially below its net book value at the date of testing. The determination of recoverable
amount is judgmental and requires management to make multiple estimates.
The cash flows to derive the recoverable amount are discounted back to their present value
using a pre-tax discount rate considered appropriate for each GCGU and CGU (inherently
judgmental). Future cash flows are derived from a detailed five-year plan. Cash flows
beyond the five-year period are projected using terminal growth rates.

IMPAIRMENT EXPENSES-TABLE 1

UNILEVER-GOODWILL AND IMPAIRMENT TESTING

IMPAIRMENT TESTING
The impairment test is performed by comparing the carrying value of the CGUs or GCGUs
with their recoverable value. The recoverable amount of each CGU has been calculated
based on its value in use, estimated as the present value of projected future cash flows.
Projected cash flows include specific estimates for a period of five years.
TABLE 2

TABLE 3

4
IMPAIRMENT EXPENSES-TABLE 4

5
RECKITT- TANGIBLE AND INTANGIBLE ASSETS

Regarding intangible assets, Reckitt follows IAS/IFRS using the cost model if the first measure
is at cost, if not the firm uses the revaluation model and, in this case, an intangible asset is
carried at a revalued amount, being its fair value at the date of the revaluation less any
accumulated amortization and any accumulated impairment losses.
Moreover, Goodwill and other indefinite life intangible assets are tested for impairment on
at least an annual basis.
An impairment loss is recognized when the recoverable amount of a GCGU or CGU falls
materially below its net book value at the date of testing.
The determination of recoverable amount, being the higher of value-in-use and fair value less
costs to dispose, requires management to make multiple estimates, for example around
individual market pressures and forces, future price and volume growth, future margins,
terminal growth rates and discount rates.

UNILEVER - TANGIBLE AND INTANGIBLE ASSETS

INTANGIBLE ASSETS
- Separately purchased intangible assets are measured at cost, being the purchase price
as at the date of acquisition.
- On acquisition of new interests in group companies, Unilever recognizes any specifically
identifiable intangible assets at fair value as at the date of acquisition.
- Expenditure to support development of internally produced intangible assets is
recognized in profit or loss as incurred.
Indefinite-life intangibles are not amortized but are subject to a review for impairment
annually, or more frequently if events or circumstances indicate this is necessary.
Finite-life intangible assets mainly comprise software, patented and unpatented technology,
know-how and customer lists. These assets are amortized on a straight-line basis in the
income statement over the period of their expected useful lives, or the period of legal rights
if shorter. None of the amortization periods exceeds ten years.
The impairment test is performed by comparing the carrying value of the CGUs or GCGUs with
their recoverable value. The recoverable value is primarily based on value in use but also
considers fair value less costs of disposal where relevant. Any impairment is charged to the
income statement as it arises.

6
TANGIBLE ASSETS
Property, plant and equipment is measured at cost including less depreciation and
accumulated impairment losses, it is subject to review for impairment if triggering events or
circumstances indicate that this is necessary.
If an indication of impairment exists, the assets or cash generating unit’s recoverable amount
is estimated and any impairment loss is charged to the income statement as it arises.
Owned assets are initially measured at historical cost. Depreciation is provided on a straight-
line basis over the expected average useful lives of the assets. Residual values and useful lives
are reviewed at least annually. The review of residual values and useful lives have taken into
consideration the impacts of climate change and the actions we undertake to mitigate and
adapt against these climate-related risks and there is no material impact on the income
statement for this year. Estimated useful lives by major class of assets are as follows:
- Freehold buildings (no depreciation on freehold land) 40 years
- Leasehold land and buildings 40 years (or life of lease if less)
- Plant and equipment up to 20 years
The cost of a leased asset is measured as the lease liability at inception of the lease contract
and other direct costs less any incentives granted by the lessor. The Group has not capitalized
leases which are less than 12 months or leases of low-value assets. Depreciation is provided
on a straight-line basis from the commencement date of the lease to the end of the lease
term. Our leases mainly comprise of land and buildings and plant and equipment.
The Group leases land and buildings for manufacturing, warehouse facilities and office space
and also sublets some property. Plant and equipment includes leases for vehicles.

TABLE 5

7
RECKITT FINANCIAL INSTRUMENTS
TRADE AND OTHER RECEIVABLES
Trade and other receivables are initially recognized at the fair value of consideration less
transaction costs and subsequently held at amortized cost, less provision for discounts and
doubtful debts. Allowance losses are calculated by reviewing lifetime expected credit losses
using historic and forward- looking data on credit risk.

TRADE AND OTHER PAYABLES

Trade and other payables are initially recognized at fair value including transaction costs and
subsequently carried at amortized cost.

INTEREST-BEARING BORROWINGS
Interest-bearing borrowings are recognized initially at fair value less, where permitted by
IFRS 9, any directly attributable transaction costs. After initial recognition, interest-bearing
borrowings are stated at amortized cost with any difference between cost and redemption
value being recognized in the Income Statement over the period of the borrowings on an
effective interest basis.

TABLE 6

DERIVATIVES, HEDGING ACTIVITY AND OTHER CORPORATE

INVESTMENT

INVESTMENTS IN ASSOCIATES
Accounted for using the equity method.
Interests in associates are stated in the consolidated Balance Sheet at cost, adjusted for the
movement in the Group’s share of their net assets and liabilities. The Group’s share of the
profit or loss after tax of associates is included in the Group’s consolidated profit before
taxation.

NET INVESTMENT HEDGES

Gains and losses on hedges of the net investments in foreign operations are recognized in
other comprehensive income to the extent that the hedging relationship is effective. Gains
and losses accumulated in the foreign currency translation reserve are recycled to the
Income Statement when the foreign operation is disposed of.

8
EQUITY INSTRUMENTS
Neither held for trading nor classified as investments in subsidiaries, associates, or joint
arrangements. After their initial recognition at FV, equity investments are stated at their fair
value. Gains and losses arising from subsequent changes in the fair value are recognized in
the Income Statement or in other comprehensive income on a case-by-case basis. If FVOCI is
opted, Accumulated gains and losses included in other comprehensive income are not
recycled to PL. Dividends from other investments are recognized in the PL.

HEDGING THROUGH FAIR VALUE HEDGERS AND CASH FLOW HEDGERS

● The Group may use derivatives to manage its exposures to fluctuating interest and
foreign exchange rates. These instruments are initially recognized at fair value on the
date the contract is entered into and are subsequently remeasured at their fair
value. The method of recognizing the resulting gain or loss depends on whether the
derivative is designated as a hedging instrument and, if so, the nature of the item
being hedged. At the inception of designated hedge relationships, the Group
documents its risk management objectives and strategy for undertaking various
hedging transactions. The Group also documents its assessment, both at hedge
inception and on an ongoing basis, of whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in cash flows or fair
values of hedged items. The Group designates certain derivatives as:
● Hedges of a particular risk associated with a recognized asset or liability or a highly
probable forecast transaction (cash flow hedges)
● Hedges of the fair value of recognized assets or liabilities or a firm commitment (fair
value hedges)

FAIR VALUE HEDGERS

● Fair value hedges are used to manage the currency and/or interest rate risks to
which the fair value of certain assets and liabilities are exposed.
● Changes in the fair value are recognized in the Income Statement, together with any
changes in the fair value of the hedged asset or liability that are attributable to the
hedged risk.
● If such a hedge relationship no longer meets hedge accounting criteria, fair value
movements on the derivative continue to be taken to the Income Statement while
any fair value adjustments made to the underlying hedged item to that date are
amortized through the Income Statement over its remaining life using the effective
interest rate method.
● Changes in the fair value of any derivative instruments that do not qualify for hedge
accounting are recognized immediately in the Income Statement.

CASH FLOW HEDGERS

● The effective portion of changes in the fair value of derivatives that are designated
and qualify as cash flow hedges is recognized in other comprehensive income and
accumulated in the hedging reserve (It comprises the effective portion of the
cumulative net change in FV of CF hedging instruments related to hedge transactions
that are extant at year end).

9
 ● When the hedged forecast transaction subsequently results in the recognition of a
non-financial item such as inventory, the amount accumulated in the hedging
reserve and the cost of hedging reserve is included directly in the initial cost of the
non-financial item when it is recognized. For all other transactions, the amounts
accumulated in the hedging reserve are recycled to the Income Statement in the
period (or periods) when the hedged item affects the Income Statement. If the
hedge no longer meets the criteria for hedge accounting or the hedging instrument is
sold, expires, is terminated, or is exercised, then hedge accounting is discontinued
prospectively. The amount that has been accumulated in the hedging reserve
remains in equity until it is either included in the cost of a non-financial item or
recycled to the Income Statement.

UNILEVER FINANCIAL INSTRUMENTS

FINANCIAL LIABILITIES
Here the group makes a digression on its sources of funding (through shareholders’ capital
or third-party resources). That’s interesting if we want to assess the ratio among equity and
assets which bear a particular degree of riskiness, like intangibles and goodwill. For what
concerns financial instruments, they show in detail the amount of current and non-current
financial liabilities. They tell us the recognition and the measurement methods, but, since
also this class of liability is heterogeneous, this measurement adopted change significantly
depending on the instrument: given that, it is not enough to know which items are bundled
into this class, but also what is the change from the past years due to (repayment or other
non-cash reasons). That’s why they:

• First do a breakdown of the items present in the class showing the items comprised
and showing the amount (but this information is quite useless). They also tell us the
• Second (and this is the most significant thing, to give a value relevance to the
disclosure above) they provide us with the “reconciliation”. They show us beginning
and ending balance (both for 2021 and 2022) and they split the changes among cash
and non-cash movements, in which we can recognize variations due to:
o Fair value change.
o Business acquisitions and disposals: of course, when there is a disposal or an
acquisition of a subsidiary, the liabilities of it may provide some changes in
the value.
o Foreign exchanges: they use bond and other loans to hedge against foreign
exchange rates, indeed that’s the most significant variation in this class in
both 2021 and 2022.

Moreover, they disclose punctually the different bonds and other loans they have in the
liability side, differentiated by geographic areas, with the related Interest Rate: it is
interesting to notice that, since some of the bonds might have a fixed interest rate, they
hedged against fair value risk entering Interest Rate swap “fixed to floating”, and following
hedge accounting. This translates into a fair value hedging strategy for the bonds, Unilever
tells exactly what the change in FV is (-537 mln € in 2022 vs -47 mln € of 2021). This delta is

10
due to Interest Rates hikes occurred in 2022 due to restrictive monetary policy. This drop in
bonds’ FV is a common feature both in Unilever and Reckitt BS and that is the primary
reason of the mismatch between Carrying amount and FV.

DERIVATIVES
The company enters in several derivatives for hedging against the risks named above. They
disclose with a high level of details a very relevant information: however, this implies that
the disclosure is also more complicated and difficult to reconcile (also because it is quite
fragmented in the report).

However, a very clear table is presented the notes they provide a transversal overview of
their hedging activity through derivatives. Most of these instruments, for which hedge
accounting is put in place, is designated as Cash Flow hedgers (FVtOCI in the “Other
reserves”). The only notable exception is the Fair Value hedge related with the Interest Rate
Swap in Non-current financial liabilities (522): its parallel has already been shown before (in
the “Equity capital and fundings”). They tell us that the bonds they presented embed the
537 changes in value due to the Fair Value hedge accounting that we can see in this table: so
their Fair Value hedging seems to be quite effective.

We can also see that the company has some derivatives for which Hedge accounting is not
applied: these are measured at FVtP&L in compliance with IFRS 9 and their effect is shown
off in the P&L. But why not to choose hedge accounting?

Moreover, they say that there is no mismatch among the hedged item and the hedging
instrument: that is a useful information to assess whether the hedging relation is effective!

Through this table that shows the number of hedging derivatives and the kind of items they
are linked to, remembering that the main purpose of hedging activity is to manage risk and
therefore volatility, this data gives us an idea of the robustness of the performance of the
period, depending on how much items entered in a hedging relation: more hedge
accounting means less volatility.

FINANCIAL ASSETS
The company does a very useful breakdown of financial assets, classified as current and
non-current and among the different measurement methods, which allows us to compare
the different financial assets over the years: this way the investor could have an estimation
of past cash flows provided by these assets to the company and can derive a trend that
might happen also in the future (input for valuation model).

They state a simple sentence that however is of high importance: “there were no significant
changes on account of change in business model in classification of financial assets since 31

11
December 2021”. So far, we know that if a change in the business model occurs, it might
involve a change in the measurement method: the financial asset can be held to collect
(amortized cost) or held to collect and sale and, therefore, it can be measured at Fair Value
through OCI. If such changes occur, we are no more able to compare the amount of financial
assets carried at amortized cost or at FVtOCI with respect of 2021, because the
measurement method of some of them changed. However, they state that there are not
such business model changes: all the differences we see shall be due to fair value (which we
can see in Consolidated Statement of Changes in Equity in the “gains or losses due to Cash
Flow hedges” or we can see in the Consolidated Income Statement) and amortization
(Consolidated Income Statement) or assets sold and traded.

Moreover, they tell us another important thing: they don’t adopt the fair value option. Every
asset can always be measured at FVtP&L without considering if it passes Business Model or
Cash Flow tests. However, they there tell us that they only measure at FVtP&L assets that
are classified as “held for trade”. Therefore, we can assume that these are mostly non-core
business and that’s what they tell: it consists of derivatives (like futures on commodities and
others which they talk about in the derivative section), marketable securities, options for
acquiring NCIs and other investments in other companies. Could represent a problem the
fact that there is no disclosure about those investments: we are not allowed to understand
whether these investments/companies are profitable, and that matters because if the
company the group invested in goes bad, the price will go down and the fair value of the
investment (as well as the trading price) is going down as well, reducing the value of the
asset/investment (even to 0!). That could be a valuation input for inventors and analysts
that must access the future cash flows, but they don’t talk about that. To support that
theory, these other assets are evaluated for the 52% with a level 3 Fair Value, so with
unobservable inputs.

With respect to the other items grouped into the different classifications they provide a very
detailed disclosure, telling us what is comprised in these classes of assets and what is the
amount (and the measurement methods adopted of course), especially for what concerns
cash and equivalents (cash is king). So, it is easily to understand.

RISK MANAGEMENT AND HEDGE ACCOUNTING COMPARISON

Both groups have many risks to manage liquidity risk, market risk (currency, commodities’
price, and interest rate risks) and credit risk.

Unilever provides a wide disclosure about how they face these threats. This information is
complete, and the arguments are strong: the group says what these risks involve, what are
their solutions and what is the sensitivity of the business, also showing numbers and
estimations that helps possible investors or analysts to find an estimation of future cash
flow an appropriate discount rate for any valuation model. In Reckitt, this disclosure is less
quantitative and more qualitative, so the reader has an overview of the risks but does not
understand what these risks involve for the Group.

12
For instance: Unilever also reports the fixed and floating interest rate exposure, helping to
understand the volatility of their finance cost/income to assess future cash flows (the 70%
of their liabilities have a fixed interest rate, due also to the effective cash flow hedge).

Unilever uses widely hedge accounting; hence it deals with a lot of derivative instruments
and account for them in that way. As said before, Unilever disclosure about hedge
accounting is very deep, with a lot of detailed insight. Additionally, aside of every hedging
strategy, a sensitivity analysis is provided which shows possible future outcomes of hedging
strategy according to future changes in value of item hedged and surrounding elements.
Also, Reckitt gives such insights therefore it results more concise, and it results not always as
clear as Unilever’s disclosure.
Reckitt uses far way less hedging strategy due to its lower size, but it shares the same
hedging strategy as Unilever using the same derivatives to hedge.

FAIR VALUE LEVELS FOCUS

At this point the group exposes the financial instruments (both assets and liabilities)
measured at fair value, doing a differentiation among 3 different levels for which different
inputs are used for the valuation model: market prices (level 1), observable or derivable
input (level 2), un-observable data (level 3). Of course, level 1 is the preferred because it can
grant more certainty. Level 3 instead is more uncertain: we don’t know the inputs and
therefore we can’t rely 100% on these values, since they are not predictable (can go to 0 as
well as increase a lot). There are many instruments measured at FV level 3 (Fair Value level 3
on Total instruments at fair value, both assets and liabilities, are the 39%) consisting mainly
in long-term cash receivables under life insurance policies, unlisted investments (financial
assets not supported by enough disclosure), and options for the acquisition of NCIs.

399 + 461 + 164 1024

𝐿𝑒𝑣𝑒𝑙 3 𝑓𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 = = = 39%
407 + 378 + 889 + 784 + 164 2622

As an aside, Unilever proves to be financially stable as these Level 3 FAs are mostly backed
up by a large amount of equity (total equity up to 21701 mln € in 2022 against 860 mln € of
FAs at FV Level 3), meaning that even if these types of assets went down to 0 due to mis
assessment, equity would cover up the losses.

Given that:
• all the assumptions above, so we can compare the assets among the years.
• “No significant changes happened in classification of fair value of financial assets and
financial liabilities since 31 December 2021. There were also no significant
movements between the fair value levels since 31 December 2021” and “Methods
and assumptions used to estimate the fair values are consistent with those used in
the year ended 31 December 2021”.
Unilever group increased by much the level 3 fair value assets and liabilities with respect to
2021. A reader could have problems to assess the meaning and the provenience of this
difference, since the inputs are not observables: so, we cannot be sure that this information

13
is value relevant. That’s why Unilever provides us with a very useful breakdown that shows
the reconciliation of movements in the Fair Value level 3 valuations during the year: they tell
us the amount due to purchase of new assets and new issues, the sales, settlements and the
impact on income statement and equity.
• A reader that has to assess the performance can easily remove these 11 millions of
level 3 valuation to be more conservative.
• As well, to understand if the Equity is enough to cover risky assets (like for instance
goodwill), the same reader can remove the 55 gains recognized in OCI due to FV level
3 revaluations, again to remain more prudent.

FINANCIAL INSTRUMENTS COMPARISON - CREDIT

Overall, Unilever disclosure about financial instruments seems to be the most complete and
clear, even though probably not the most efficient. Indeed, a lot of overwhelming detailed
information is provided along the disclosure and that could lead to a complex interpretation
of numbers throughout the FS. On the other hand, Reckitt is more concise, resulting in a
more fluent analysis which is offset by lack of details which could turn out to be useful for a
whole overview.

Both companies rely on subjective assessments (not stated in both cases what they mean by
that, but Unilever provides some details more) and forward-looking judgement to estimate
impairment for trade receivables. Yet, both companies provided past due tables with the
impairment provision associated for the year. Both seems to apply few conservatism as they
create a few amount of provision against long time overdue. Due to more specific time
information provided, we can conclude that Unilever seems to be slightly less conservative
than Reckitt as of creating provision for impairing trade receivables (recall comments on
Unilever trade receivables). That technique is perfectly legal as IFRS 9 allows to recognize an
impairment loss only when there’s a significant change in the counterparty’s
creditworthiness. Therefore, we think that accounting for a provision which is slightly higher
than the amount of more than one year past due overall is not prudent (no additional
explanation on this delay is provided as well). Computing receivables turnover for both
companies for 2022 shows that, on average, receivables collection is redeemed in about 25
days for Unilever and in 37 days for Reckitt leaving room for doubting the recovery of long
time past due and creating associated provision to recognize timely possible future losses.

This way of proceeding leads to a higher NI for the current year, as well as possible higher
future losses in case these past due could not be redeemed. Furthermore, current earnings
are being overvalued and the risk is shifted to the future.

Due to different company dimensions, Reckitt booked lower FIs than Unilever in absolute
values, while in relative terms, the two company tends to use the same amount. Reckitt
measures most of its FIs at amortized cost, as well as Unilever. However, a higher fraction of
Unilever FIs is carried at FV compared to Reckitt. In addition, most of the FIs accounted at FV
are valued at level 3 by Unilever, while Reckitt has almost nil (only Equity investments are
valued in this way). That delivers uncertainty about the values written because the
valuations made could deliver a wrong representation. Unilever generally stated that
evaluation methods where tailored case-by-case, but it does not provide further specific

14
details. As previously mentioned, we see that this uncertain values are fully covered by
equity, which is at least an indicator of financial soundness.

Same reasoning can be done for Reckitt Equity Investment: it holds them at FV level 3 (not
disclosing which valuation method were used) conveying a lot of uncertainty around it.
Fortunately for Reckitt, it is not a large amount as Unilever FIs held at FV level 3 were, and
so the impact of a mis-assessment is quite limited. However, these uncertain values are
backed by Reckitt’s equity which again is a good sign. Regarding Equity Investments, both
Unilever and Reckitt account for them both through FVOCI or FVP&L according to their
discretion: of course, different ways of accounting could lead to different results in P&L and
OCI. It is necessary to have a complete understanding and disclosure to be able to predict
future results and both have not.

PAYABLES, RECEIVABLES AND OTHERS

Unilever Group has several financial assets and liabilities. They start talking about trades and
current receivables and payables.

Trades and other current receivables: they show the carrying amount within 1 year then
explaining each of the group they classified these assets in. Then they focus on the
impairment (for trades with issues that may affect the recovery and balances past due that
may default based on historical data) and that’s relevant. They do a breakdown of the
trades and current receivables distinguishing from not due and overdue and within which
period: that’s important to understand the recoverability. That data is important because
then they do an overview on the impairment provisions they made (23% of past due current
receivables), also showing the change within the year! This can allow us to understand the
degree of conservatism of the group (how they shield): the impairment provisions on the
amount of past due credits.

Trade payables, other liabilities, and deferred considerations: this class of liabilities is quite
heterogeneous. It comprises payables and accruals but also social securities, sundry taxes,
and deferred considerations due to the sellers of a business emerging from acquisitions. It
may seem that they bundle together elements with different features. However, they are
meticulous in showing in detail the amount of each item and the measurement (except for
“other liabilities”, that are not few, for which we don’t know what amount is carried at
amortized cost or at Fair Value through P&L). Moreover, Unilever makes an interesting
digression on “Deferred considerations” which enables us to understand whether it is fixed
(due for sure) or contingent (depends on certain achievement by the subsidiary that we
don’t know and that might not happen). This way, they tell us that this item can be volatile:
it's the Fair Value is largely based on probability and the parent may have interest in
lowering down the performance to not achieve these results (and therefore lowering the
cost of acquisition). Unilever uses several different measurement methods for each item in
this class of assets: this way, it is harder to compare the changes among years, because we

15
don’t know if they are due to new liabilities, to the changes in fair values of some items or
due to the amortized costs measurement. Reckitt is less value relevant, but it is much more
conservative and uses only the amortized cost approach to measure the whole class. This
can help to have a much predictable outcome and a certain constancy in the performance.

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