Fair Value of Financial Assets and Liabilities
Fair value is the amount for which an asset can be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. When available an instrument's fair value is measured using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm's length basis (level 1).
If a market for a financial instrument is not active, the fair value is established using a valuation technique. Valuation techniques include:
- recent dealer price quotations
- discounted cash flow models
- option-pricing models
The techniques incorporate current market and contractual prices, time to expiry, yield curves and volatility of the underlying instrument. Inputs used in pricing models are market observable (level 2) or are not market observable but can be derived from market observable data (level 3). A substantial part of fair value of equity investments (level 3) is based on net asset values.
The carrying values in the financial asset and liability categories approximate their fair values, except private sector loans with a fixed interest rate, and non-hedged funding. Loans to the private sector are valued at amortized cost. The underlying changes to the fair value of these assets are therefore not recognized in the balance sheet. At December 31, 2011, the fair value of these loans was €145,696 (2010: €65,876) above their carrying value. The funding non-hedged is valued at amortized cost. The carrying value does not materially differ from the fair value and the difference amounts to €10,987 (2010: €12,187).
FMO uses internal valuation models to value its financial instruments. Due to model imperfections, there are differences between the transaction price and the calculated fair value. These differences are not recorded in the profit and loss at once but are amortized over the remaining maturity of the transactions. Per December 31, 2011, the unamortized accrual amounts to €3,265 (2010: €10,075). An amount of €3,050 was recorded as a loss in the profit and loss (2010: €4,174).
The following table gives an overview of the financial instruments valued at fair value using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Please note that the fair value hedges have not been included in the following table.
|
At December 31, 2011
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Financial assets at fair value through profit and loss
|
|
|
|
|
|
|
-
|
498,787
|
-
|
498,787
|
- Derivative financial instruments
|
-
|
334,062
|
-
|
334,062
|
|
Available for sale financial assets
|
|
|
|
|
|
|
36,439
|
-
|
545,414
|
581,853
|
- Interest-bearing securities
|
671,578
|
-
|
-
|
671,578
|
Total financial assets at fair value
|
708,017
|
832,849
|
545,414
|
2,086,280
|
|
|
|
|
|
|
|
Financial liabilities at fair value through profit and loss
|
|
|
|
|
- Derivative financial instruments
|
-
|
66,038
|
-
|
66,038
|
|
|
-
|
-
|
-
|
-
|
Total financial liabilities at fair value
|
-
|
66,038
|
-
|
66,038
|
|
At December 31, 2010
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Financial assets at fair value through profit and loss
|
|
|
|
|
|
|
-
|
333,175
|
-
|
333,175
|
- Derivative financial instruments
|
-
|
316,979
|
-
|
316,979
|
|
Available for sale financial assets
|
|
|
|
|
|
|
51,915
|
-
|
424,522
|
476,437
|
- Interest-bearing securities
|
563,710
|
-
|
-
|
563,710
|
Total financial assets at fair value
|
615,625
|
650,154
|
424,522
|
1,690,301
|
|
|
|
|
|
|
|
Financial liabilities at fair value through profit and loss
|
|
|
|
|
- Derivative financial instruments
|
-
|
44,431
|
-
|
44,431
|
|
|
-
|
36,011
|
-
|
36,011
|
Total financial liabilities at fair value
|
-
|
80,442
|
-
|
80,442
|
The following table shows the movements of financial assets measured at fair value based on level 3.
|
Available for sale financial assets:
equity investments
|
2011
|
2010
|
|
|
|
|
Balance at January 1
|
424,522
|
310,721
|
|
Total gains or losses
|
|
|
|
|
-12,053
|
-6,691
|
- In other comprehensive income
|
61,344
|
52,054
|
|
Purchases
|
113,339
|
91,701
|
|
Sales
|
-63,935
|
-29,299
|
|
Transfers into level 3
|
22,197
|
19,994
|
|
Transfers out of level 3
|
-
|
-13,958
|
Balance at December 31
|
545,414
|
424,522
|
There are no financial liabilities measured at fair value based on level 3.