FINANCIAL STATEMENTS AND MARKETING OF NESTLE

QUESTIONPrincipal exchange rates
CHF per 2011 2010 2011 2010
Year ending rates  Weighted average annual rates
1 US Dollar USD 0.940 0.938 0.887 1.045
1 Euro EUR 1.217 1.253 1.233 1.380
1 Pound Sterling GBP 1.450 1.454 1.421 1.606
100 Brazilian Reais BRL 50.124 56.291 52.935 59.141
100 Japanese Yen JPY 1.212 1.153 1.121 1.188
100 Mexican Pesos MXN 6.712 7.568 7.122 8.241
1 Canadian Dollar CAD 0.921 0.938 0.890 1.012
1 Australian Dollar AUD 0.954 0.955 0.913 0.957
100 Philippine Pesos PHP 2.144 2.146 2.048 2.313
100 Chinese Yuan Renminbi CNY 14.926 14.227 13.796 15.362
Consolidated Financial Statements of the Nestlé Group 2011 45
Consolidated income statement
for the year ended 31 December 2011
In millions of CHF Notes 2011 2010
Total
(a)
Continuing
operations
46 Consolidated Financial Statements of the Nestlé Group 2011
2010
(a)
(b)
Discontinued
operations
2010
(a)
Total
Sales 3 83 642  87 906  5 109  93 015
Other revenue  128  109  —    109
Cost of goods sold (44 127)  (44 775)  (1 074)  (45 849)
Distribution expenses (7 602)  (7 953)  (125)  (8 078)
Marketing and administration expenses (17 395)  (19 846)  (1 276)  (21 122)
Research and development costs (1 423)  (1 403)  (478)  (1 881)
Other trading income 4  51  168  —    168
Other trading expenses 4 (736)  (1 530)  —    (1 530)
Trading operating profit 3 12 538  12 676  2 156  14 832
Other operating income 4  112  38  24 535  24 573
Other operating expenses 4 (179)  (571)  (14)  (585)
Operating profit 12 471  12 143  26 677  38 820
Financial income 13  115  72  22  94
Financial expense 13 (536)  (834)  (13)  (847)
Profit before taxes and associates 12 050  11 381  26 686  38 067
Taxes 14 (3 112)  (3 343)  (350)  (3 693)
Share of results of associates 15  866  1 010  —    1 010
Profit for the year 9 804  9 048  26 336  35 384
of which attributable to non-controlling interests  317  271  880  1 151
of which attributable to shareholders of the parent (Net profit) 9 487  8 777  25 456  34 233
As percentages of sales
Trading operating profit 15.0% 14.4% 42.2% 15.9%
Profit for the year attributable to shareholders of the parent
(Net profit) 11.3% 36.8%
Earnings per share (in CHF)
Basic earnings per share 16  2.97  2.60  7.56  10.16
Diluted earnings per share 16  2.96  2.60  7.52  10.12
(a)  2010 restated following the changes in the Income Statement described in Note 1 – Accounting Policies.
(b)  Detailed information related to Alcon discontinued operations is disclosed in Note 2.
Consolidated statement of comprehensive income
for the year ended 31 December 2011
In millions of CHF 2011 2010
Profit for the year recognised in the income statement 9 804 35 384
Currency retranslations (1 166) (4 801)
Fair value adjustments on available-for-sale financial instruments
– Unrealised results (199) 227
– Recognition of realised results in the income statement 7 (10)
Fair value adjustments on cash flow hedges
– Recognised in hedging reserve (423) 704
– Removed from hedging reserve (42) (752)
Actuarial gains/(losses) on defined benefit schemes (2 503) (153)
Share of other comprehensive income of associates 456 (89)
Taxes 859 268
Other comprehensive income for the year (3 011) (4 606)
Total comprehensive income for the year 6 793 30 778
of which attributable to non-controlling interests 284 941
of which attributable to shareholders of the parent 6 509 29 837
Consolidated Financial Statements of the Nestlé Group 2011 47
Consolidated balance sheet as at 31 December 2011
before appropriations
In millions of CHF Notes 2011 2010
Assets
Current assets
Cash and cash equivalents 13/17 4 938 8 057
Short-term investments 13 3 050 8 189
Inventories 5 9 255 7 925
Trade and other receivables 6/13 13 340 12 083
Prepayments and accrued income  900  748
Derivative assets 13  731 1 011
Current income tax assets 1 094  956
Assets held for sale  16  28
Total current assets 33 324 38 997
Non-current assets
Property, plant and equipment 7 23 971 21 438
Goodwill 8 29 008 27 031
Intangible assets 9 9 356 7 728
Investments in associates 15 8 629 7 914
Financial assets 13 7 161 6 366
Employee benefits assets 10  127  166
Current income tax assets  39  90
Deferred tax assets 14 2 476 1 911
Total non-current assets 80 767 72 644
Total assets 114 091 111 641
48 Consolidated Financial Statements of the Nestlé Group 2011
Consolidated balance sheet as at 31 December 2011 (continued)
In millions of CHF Notes 2011 2010
Liabilities and equity
Current liabilities
Financial debt 13 16 100 12 617
Trade and other payables 13 13 584 12 592
Accruals and deferred income 2 909 2 798
Provisions 12  576  601
Derivative liabilities 13  646  456
Current income tax liabilities 1 417 1 079
Liabilities directly associated with assets held for sale  —    3
Total current liabilities 35 232 30 146
Non-current liabilities
Financial debt 13 6 207 7 483
Employee benefits liabilities 10 7 105 5 280
Provisions 12 3 094 3 510
Deferred tax liabilities 14 2 060 1 371
Other payables 13 2 119 1 253
Total non-current liabilities 20 585 18 897
Total liabilities 55 817 49 043
Equity 18
Share capital  330  347
Treasury shares (6 722) (11 108)
Translation reserve (16 927) (15 794)
Retained earnings and other reserves 80 116 88 422
Total equity attributable to shareholders of the parent 56 797 61 867
Non-controlling interests 1 477  731
Total equity 58 274 62 598
Total liabilities and equity 114 091 111 641
Consolidated Financial Statements of the Nestlé Group 2011 49
Consolidated cash flow statement
for the year ended 31 December 2011
In millions of CHF Notes 2011 2010
Operating activities
Profit for the year 9 804 35 384
Non-cash items of income and expense 17 3 039 (20 948)
Decrease/(increase) in working capital 17 (1 837) (632)
Variation of other operating assets and liabilities 17 (1 243) (196)
Operating cash flow
(a)
Investing activities
Capital expenditure 7 (4 779) (4 576)
Expenditure on intangible assets 9 (247) (408)
Sale of property, plant and equipment 111 113
Acquisition of businesses 2 (3 742) (5 582)
Disposal of businesses 2 7 27 715
Cash flows with associates 357 254
Inflows/(outflows) from non-current financial investments (1 802) (2 528)
Other investing cash flows (448) (439)
Cash flow from investing activities
(a)
Financing activities
Dividend paid to shareholders of the parent 18 (5 939) (5 443)
Purchase of treasury shares 17 (5 480) (12 135)
Sale of treasury shares 527 278
Cash flows with non-controlling interests (266) (791)
Bonds issued 595 1 219
Bonds repaid (1 751) (832)
Inflows from other non-current financial liabilities 93 130
Outflows from other non-current financial liabilities (93) (225)
Inflows/(outflows) from current financial liabilities 3 504 (2 174)
Inflows/(outflows) from short-term investments 6 452 (5 835)
Cash flow from financing activities
(a)
Currency retranslations 19 (117)
Increase/(decrease) in cash and cash equivalents (3 119) 2 232
Cash and cash equivalents at beginning of year 8 057 5 825
Cash and cash equivalents at end of year 17 4 938 8 057
(a)  Detailed information related to Alcon discontinued operations is disclosed in Note 2. In 2010, even if Alcon’s assets and liabilities were classified as held for sale,
individual lines of the cash flow statement comprise Alcon’s movements until disposal.
50 Consolidated Financial Statements of the Nestlé Group 2011
9 763 13 608
(10 543) 14 549
(2 358) (25 808)
Consolidated statement of changes in equity
for the year ended 31 December 2011
In millions of CHF
Total equity
attributable to
shareholders
Retained
earnings and
other reserves
Translation
reserve
Treasury
shares
Share
capital
Consolidated Financial Statements of the Nestlé Group 2011 51
Total
equity
Non-controlling
interests
of the parent
Equity as at 31 December 2009 365 (8 011) (11 175) 67 736 48 915 4 716 53 631
Profit for the year 34 233 34 233 1 151 35 384
Other comprehensive income for the year (4 619) 223 (4 396) (210) (4 606)
Total comprehensive income for the year (4 619) 34 456 29 837 941 30 778
Dividend paid to shareholders of the parent (5 443) (5 443) (5 443)
Dividends paid to non-controlling interests (729) (729)
Movement of treasury shares (net)
(11 859) 77 (11 782) (11 782)
Equity compensation plans 179 2 181 19 200
Changes in non-controlling interests (146) (146) (4 216) (4 362)
Adjustment for hyperinflation
(b)
(a)
305 305 305
Reduction in share capital (18) 8 583 (8 565) — —
Total transactions with owners (18) (3 097) (13 770) (16 885) (4 926) (21 811)
Equity as at 31 December 2010 347 (11 108) (15 794) 88 422 61 867 731 62 598
Profit for the year 9 487 9 487 317 9 804
Other comprehensive income for the year (1 133) (1 845) (2 978) (33) (3 011)
Total comprehensive income for the year (1 133) 7 642 6 509 284 6 793
Dividend paid to shareholders of the parent (5 939) (5 939) (5 939)
Dividends paid to non-controlling interests (226) (226)
Movement of treasury shares (net)
(4 615) (355) (4 970) (4 970)
Equity compensation plans 175 5 180 180
Changes in non-controlling interests
(a)
(996) (996) 688 (308)
Adjustment for hyperinflation
(b)
(c)
146 146 146
Reduction in share capital (17) 8 826 (8 809) — —
Total transactions with owners (17) 4 386 (15 948) (11 579) 462 (11 117)
Equity as at 31 December 2011 330 (6 722) (16 927) 80 116 56 797 1 477 58 274
(a)  Movements reported under retained earnings and other reserves mainly relate to written put options on own shares.
(b)  Relates to Venezuela, considered as a hyperinflationary economy.
(c)  Movements reported under retained earnings and other reserves include a put option for the acquisition of non-controlling interests.
Notes
1. Accounting policies
Accounting convention and accounting standards
The Consolidated Financial Statements comply with
International Financial Reporting Standards (IFRS) issued
by the International Accounting Standards Board (IASB)
and with the Interpretations issued by the International
Financial Reporting Interpretations Committee (IFRIC).
The Consolidated Financial Statements have been
prepared on an accrual basis and under the historical
cost convention, unless stated otherwise. All significant
consolidated companies and associates have a 31 December
accounting year-end.
The preparation of the Consolidated Financial
Statements requires Group Management to exercise
judgement and to make estimates and assumptions that
affect the application of policies, reported amounts of
revenues, expenses, assets and liabilities and disclosures.
These estimates and associated assumptions are based
on historical experience and various other factors that are
believed to be reasonable under the circumstances. Actual
results may differ from these estimates.
The estimates and underlying assumptions are reviewed
on an ongoing basis. Revisions to accounting estimates
are recognised in the period in which the estimate is
revised if the revision affects only that period, or in the
period of the revision and future periods if the revision
affects both current and future periods. Those areas affect
mainly provisions, goodwill impairment tests, employee
benefits, allowance for doubtful receivables, share-based
payments and taxes, and key assumptions are detailed in
the related notes.
Scope of consolidation
The Consolidated Financial Statements comprise those
of Nestlé S.A. and of its affiliated companies, including
joint ventures and associates (the Group). The list of the
principal companies is provided in the section “Companies
of the Nestlé Group.”
Consolidated companies
Companies, in which the Group has the power to exercise
control, are fully consolidated. This applies irrespective of
the percentage of interest in the share capital. Control
refers to the power to govern the financial and operating
policies of a company so as to obtain the benefits from
its activities. Non-controlling interests are shown as
a component of equity in the balance sheet and the share
of the profit attribu table to non-controlling interests is
shown as a component of profit for the year in the income
statement.
Proportionate consolidation is applied for companies
over which the Group exercises joint control with partners.
The individual assets, liabilities, income and expenses are
consolidated in proportion to the Nestlé participation in
their equity (usually 50%).
Newly acquired companies are consolidated from the
effective date of control, using the acquisition method.
Associates
Companies where the Group has the power to exercise
a significant influence but does not exercise control are
accounted for using the equity method. The net assets
and results are adjusted to comply with the Group’s
accounting policies. The carrying amount of goodwill
arising from the acquisition of associates is included in
the carrying amount of investments in associates.
Venture funds
Investments in venture funds are recognised in accordance
with the consolidation methods described above, depending
on the level of control or significant influence exercised.
Foreign currencies
The functional currency of the Group’s entities is the
currency of their primary economic environment.
In individual companies, transactions in foreign
currencies are recorded at the rate of exchange at the
date of the transaction. Monetary assets and liabilities in
foreign currencies are translated at year-end rates. Any
resulting exchange differences are taken to the income
statement.
On consolidation, assets and liabilities of Group entities
reported in their functional currencies are translated into
Swiss Francs, the Group’s presentation currency, at yearend
exchange
rates.
Income
and
expense
items
are

translated
into
Swiss
Francs
at
the
annual
weighted

average
rates
of
exchange
or
at
the
rate
on
the
date
of
the

transaction
for
significant
items.
Differences arising from the retranslation of opening net
assets of Group entities, together with differences arising
from the restatement of the net results for the year of Group
entities, are recognised in other comprehensive income.
52 Consolidated Financial Statements of the Nestlé Group 2011
1. Accounting policies (continued)
The balance sheet and net results of Group entities
operating in hyperinflationary economies are restated for
the changes in the general purchasing power of the local
currency, using official indices at the balance sheet date,
before translation into Swiss Francs at year-end rates.
When there is a change of control in a foreign entity,
exchange differences that were recorded in equity are
recognised in the income statement as part of the gain
or loss on disposal.
Segment reporting
Operating segments reflect the Group’s management
structure and the way financial information is regularly
reviewed by the Group’s chief operating decision maker
(CODM), which is defined as the Executive Board.
The CODM considers the business from both
a geographic and product perspective, through three
geographic Zones and several Globally Managed
Businesses (GMB). Zones and GMB that meet the
quantitative threshold of 10% of sales, trading operating
profit or assets, are presented on a standalone basis as
reportable segments. Other GMB that do not meet the
threshold, like Nestlé Professional, Nespresso, Nestlé
Health Science and the Joint Ventures in the Food and
Beverages and Pharmaceutical activities are aggregated
and presented in Other. Therefore, the Group’s reportable
operating segments are:
– Zone Europe;
– Zone Americas;
– Zone Asia, Oceania and Africa;
– Nestlé Waters;
– Nestlé Nutrition;
– Other.
As some operating segments represent geographic zones,
information by product is also disclosed. The seven product
groups that are disclosed represent the highest categories
of products that are followed internally.
Finally, the Group provides information attributed to the
country of domicile of the Group’s parent company (Nestlé S.A.
– Switzerland) and to the ten most important countries in
terms of sales.
Segment results represent the contribution of the different
segments to central overheads, research and development
costs and the trading operating profit of the Group.
Specific corporate expenses as well as specific research
and development costs are allocated to the corresponding
segments.
Segment assets and liabilities are aligned with internal
repor ted information to the CODM. Segment assets comprise
property, plant and equipment, intangible assets, goodwill,
trade and other receivables, assets held for sale, inventories,
prepayments and accrued income as well as specific
financial assets associated to the reportable segments.
Segment liabilities comprise trade and other pay ables,
liabilities directly associated with assets held for sale,
some other payables as well as accruals and deferred
income. Eliminations represent inter-company balances
between the different segments.
Segment assets by operating segment represent the
situa tion at the end of the year. Assets and liabilities by
product represent the annual average, as this provides
a better indication of the level of invested capital for
management purposes.
Capital additions represent the total cost incurred to
acquire property, plant and equipment, intangible assets
and goodwill, including those arising from business
combinations. Capital expenditure represents the
investment in property, plant and equipment only.
Depreciation of segment assets includes depreciation
of property, plant and equipment and amortisation of
intangible assets. Impairment of assets includes impairment
related to property, plant and equipment, intangible assets
and goodwill.
Unallocated items represent non-specific items whose
allocation to a segment would be arbitrary. They mainly
comprise:
– corporate expenses and related assets/liabilities;
– research and development costs and related assets/
liabilities; and
– some goodwill and intangible assets.
Non-current assets by geography include property,
plant and equipment, intangible assets and goodwill that
are attributable to the ten most important countries and
the country of domicile of Nestlé S.A.
Valuation methods, presentation and definitions
Revenue
Revenue represents amounts received and receivable from
third parties for goods supplied to the customers and for
services rendered. Revenue from the sales of goods is
recognised in the income statement at the moment when
the significant risks and rewards of ownership of the goods
have been transferred to the buyer, which is mainly upon
shipment. It is measured at the list price applicable to
Consolidated Financial Statements of the Nestlé Group 2011 53
1. Accounting policies (continued)
a given distribution channel after deduction of returns,
sales taxes, pricing allowances, other trade discounts and
couponing and price promotions to consumers. Payments
made to the customers for commercial services received
are expensed.
Expenses
Cost of goods sold is determined on the basis of the cost
of production or of purchase, adjusted for the variation of
inventories. All other expenses, including those in respect
of advertising and promotions, are recognised when the
Group receives the risks and rewards of ownership of the
goods or when it receives the services.
Othertradingincome/(expenses)
These comprise mainly restructuring costs, impairment of
all assets except goodwill, litigations and onerous contracts,
result on disposal of property, plant and equipment, and
specific other income and expenses that fall within the
control of operating segments.
Restructuring costs are restricted to dismissal
indemnities and employee benefits paid to terminated
employees upon the reorganisation of a business.
Dismissal indemnities paid for normal attrition such as
poor performance, professional misconduct, etc. are part
of the expenses by functions.
Otheroperatingincome/(expenses)
These comprise impairment of goodwill, results on
disposals of businesses, acquisition-related costs and
other income and expenses that fall beyond the control of
operating segments and relate to events such as natural
disasters and expropriation of assets.
Netfinancingcost
Net financing cost includes the financial expense on
borrowings from third parties as well as the financial
income earned on funds invested outside the Group.
Net financing cost also includes other financial income
and expense, such as exchange differences on loans and
borrowings, results on foreign currency and interest rate
hedging instruments that are recognised in the income
statement. Certain borrowing costs are capitalised as
explained under the section on Property, plant and
equipment. Others are expensed.
Unwind of discount on provisions is presented in net
financing cost.
Taxes
The Group is subject to taxes in different countries all over
the world. Taxes and fiscal risks recognised in the
Consolidated Financial Statements reflect Group
Management’s best estimate of the outcome based on the
facts known at the balance sheet date in each individual
country. These facts may include but are not limited to
change in tax laws and interpretation thereof in the
various jurisdictions where the Group operates. They may
have an impact on the income tax as well as the resulting
assets and liabilities. Any differences between tax
estimates and final tax assessments are charged to the
income statement in the period in which they are in curred,
unless anticipated.
Taxes include current taxes on profit and other taxes
such as taxes on capital. Also included are actual or
potential withholding taxes on current and expected
transfers of income from Group companies and tax
adjustments relating to prior years. Income tax is
recognised in the income statement, except to the extent
that it relates to items directly taken to equity or other
comprehensive income, in which case it is recognised
against equity or other comprehensive income.
Deferred taxation is the tax attributable to the
temporary differences that arise when taxation authorities
recognise and measure assets and liabilities with rules that
differ from the principles of the Consolidated Financial
Statements. It also arises on temporary differences
stemming from tax losses carried forward.
Deferred taxes are calculated under the liability method
at the rates of tax expected to prevail when the temporary
differences reverse subject to such rates being substantially
enacted at the balance sheet date. Any changes of the tax
rates are recognised in the income statement unless related
to items directly recognised against equity or other
comprehensive income. Deferred tax liabilities are
recognised on all taxable temporary differences excluding
non-deductible goodwill. Deferred tax assets are
recognised on all deductible temporary differences
provided that it is probable that future taxable income will
be available.
For share-based payments, a deferred tax asset is
recognised in the income statement over the vesting
period, pro vided that a future reduction of the tax expense
is both probable and can be reliably estimated. The
deferred tax asset for the future tax deductible amount
exceeding the total share-based payment cost is
recognised in equity.
54 Consolidated Financial Statements of the Nestlé Group 2011
1. Accounting policies (continued)
Financialinstruments
Classes of financial instruments
The Group aggregates its financial instruments into classes
based on their nature and characteristics. The details of
financial instruments by class are disclosed in the notes.
Financial assets
Financial assets are initially recognised at fair value plus
directly attributable transaction costs. However when
a financial asset at fair value through profit or loss is
recognised, the transaction costs are expensed
immediately. Subsequent remeasurement of financial
assets is determined by their classification that is revisited
at each reporting date.
Derivatives embedded in other contracts are separated
and treated as stand-alone derivatives when their risks
and characteristics are not closely related to those of their
host contracts and the respective host contracts are not
carried at fair value.
In case of regular way purchase or sale (purchase or
sale under a contract whose terms require delivery within
the time frame established by regulation or convention in
the market place), the settlement date is used for both
initial recognition and subsequent derecognition.
At each balance sheet date, the Group assesses
whether its financial assets are to be impaired. Impairment
losses are recognised in the income statement where
there is objective evidence of impairment, such as where
the issuer is in bankruptcy, default or other significant
financial difficulty. In addition, for an investment in an
equity security, a significant or prolonged decline in its fair
value below its cost is objective evidence of impairment.
Impairment losses are reversed when the reversal can be
objectively related to an event occurring after the
recognition of the impairment loss. For debt instruments
measured at amortised cost or fair value, the reversal is
recognised in the income statement. For equity
instruments classified as available for sale, the reversal is
recognised in other comprehensive income. Impairment
losses on financial assets carried at cost because their fair
value cannot be reliably measured are never reversed.
Financial assets are derecognised (in full or partly)
when substantially all the Group’s rights to cash flows
from the respective assets have expired or have been
transferred and the Group has neither exposure to
substantially all the risks inherent in those assets nor
entitlement to rewards from them.
The Group classifies its financial assets into the following
categories: loans and receivables, held-for-trading assets
(finan cial assets at fair value through profit and loss), heldto-maturity
investments
and
available-for-sale
assets.
Loans and receivables
Loans and receivables are non-derivative financial assets
with fixed or determinable payments that are not quoted
in an active market. This category includes the following
classes of financial assets: loans; trade and other
receivables and cash at bank and in hand.
Subsequent to initial measurement, loans and
receivables are carried at amortised cost using the
effective interest rate method less appropriate allowances

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