Fair value of financial assets and liabilities

Fair value hierarchy

All financial instruments for which fair value is recognized or disclosed are categorized within the fair value hierarchy, based on lowest level input that is significant to the fair value measurement as a whole, as follows:

Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities;

Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable;

Level 3 – Valuation technique for which the lowest level input that is significant to the fair value measurement is unobservable.

Valuation processes

For recurring and non-recurring fair value measurements categorized within Level 3 of the fair value hierarchy, FMO uses the valuation processes to decide its valuation policies and procedures and analyze changes in fair value measurement from period to period.

FMO’s fair value methodology and governance over it’s methods includes a number of controls and other procedures to ensure appropriate safeguards are in place to ensure its quality and adequacy. The responsibility of ongoing measurement resides with the relevant departments. Once submitted, fair value estimates are also reviewed and challenged by the Investment Review Committee (IRC). The IRC approves the fair values measured including the valuation techniques and other significant input parameters used.

Valuation techniques

When available, the fair value of an instrument is measured by using the quoted price in an active market for that instrument (level 1). A market is regarded as active if transactions of the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

If there is no quoted price in an active market, valuation techniques are used that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. Valuation techniques include:

  1. Recent broker / price quotations;

  2. Discounted cash flow models;

  3. 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 (level 3). A substantial part of fair value (level 3) is based on net asset values.

Equity investments are measured at fair value when a quoted market price in an active market is available or when fair value can be estimated reliably by using a valuation technique. The main part of the fair value measurement related to equity investments (level 3) is based on net asset values of investment funds as reported by the fund manager and are based on advanced valuation methods and practices. When available, these fund managers value the underlying investments based on quoted prices, if not, multiples are applied as input for the valuation. For the valuation process of the equity investments we further refer to the accounting policies and related notes within these Annual Accounts. The determination of the timing of transfers is embedded in the quarterly valuation process, and therefore recorded at the end of each reporting period.

FMO uses internal valuation models to value all (derivative) financial instruments. Due to model imperfections, there are initial 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. 

The table below presents the carrying value and estimated fair value of FMO’s financial assets and liabilities, not measured at fair value.

The carrying values of the financial asset and liability categories in the table below are measured at AC except for the funding in connection with hedge accounting. The underlying changes to the fair value of these assets and liabilities are therefore not recognized in the balance sheet.

Financial assets-liabilities not measured at fair value

2019

2018

At December 31

Carrying amount

Fair value

Carrying amount

Fair value

     

Short term deposits at AC

446,708

446,708

391,635

391,635

Banks

64,626

64,626

54,642

54,642

Interest-bearing securities

350,237

355,823

402,380

406,561

Loans to the private sector at AC

4,334,109

4,533,256

4,085,022

4,167,007

Financial assets not measured at fair value

5,195,681

5,400,413

4,933,679

5,019,845

     

Short-term credits

94,339

94,339

76,051

76,051

Debentures and notes

5,808,182

5,791,673

5,139,881

5,128,431

Financial liabilities not measured at fair value

5,902,521

5,886,012

5,215,932

5,204,482

The valuation technique we use for the fair value determination of these financial instruments is the discounted cash-flow method. The discount rate we apply is a spread curve based on the average spread of the portfolio. The fair value calculation is mainly based on level 3 inputs.

The following table gives an overview of the financial instruments measured at fair value using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.

December 31, 2019

Level 1

Level 2

Level 3

Total

     

Financial assets mandatory at FVPL

    

Short-term deposits

926,769

-

-

926,769

Derivative financial instruments

-

295,449

5,788

301,237

Loans to the private sector

66,647

-

629,866

696,513

Equity investments

7,726

-

1,748,918

1,756,644

     

Financial assets at FVOCI

    

Equity investments

-

-

122,921

122,921

Total financial assets at fair value

1,001,142

295,449

2,507,493

3,804,084

     

Financial liabilities mandatory at FVPL

    

Derivative financial instruments

-

255,473

1,698

257,171

Total financial liabilities at fair value

-

255,473

1,698

257,171

December 31, 2018

Level 1

Level 2

Level 3

Total

     

Financial assets mandatory at FVPL

    

Short-term deposits

756,216

-

-

756,216

Derivative financial instruments

-

243,199

4,624

247,823

Loans to the private sector

15,194

-

670,605

685,799

Equity investments

25,028

-

1,479,399

1,504,427

     

Financial assets at FVOCI

    

Equity investments

-

-

77,553

77,553

Total financial assets at fair value

796,438

243,199

2,232,181

3,271,818

     

Financial liabilities mandatory at FVPL

    

Derivative financial instruments

-

217,174

-

217,174

Total financial liabilities at fair value

-

217,174

-

217,174

The following table shows the movements of financial assets measured at fair value based on level 3.

Movements in financial instruments measured at fair value based on level 3

Derivative financial instruments

Loans to the private sector

Equity investments and associates

Total

     

Restated Balance at January 1, 2018

734

590,405

1,466,775

2,057,914

Total gains or losses

    

-In profit and loss (changes In fair value)

3,890

-6,206

-36,280

-38,596

-In other comprehensive income (changes in fair value)

-

-

-245

-245

Purchases /disbursements

-

88,113

283,387

371,500

Sales/repayments

-

-81,344

-152,417

-233,761

Write-offs

-

 

-

-

Accrued income

-

4,906

-

4,906

Exchange rate differences

-

23,025

-4,268

18,757

Derecognition and/or restructuring FVPL versus AC

-

56,520

-

56,520

Conversion from loans to equity

-

-4,814

-

-4,814

Transfers into level 3

-

-

-

-

Transfers out of level 3

-

-

-

-

Balance at December 31, 2018

4,624

670,605

1,556,952

2,232,181

     

Total gains or losses

    

-In profit and loss (changes In fair value)

1,075

-20,359

45,509

26,225

-In other comprehensive income (changes in fair value)

-

-

17,496

17,496

Purchases /disbursements

-

101,268

296,294

397,562

Sales/repayments

-

-113,463

-85,734

-199,197

Write-offs

-

-10,498

-

-10,498

Accrued income

-

1,965

-

1,965

Exchange rate differences

89

10,845

18,461

29,395

Derecognition and/or restructuring FVPL versus AC

-

613

-

613

Conversion from loans to equity

-

-11,110

11,312

202

Transfers into level 3

-

-

19,275

19,275

Transfers out of level 3

-

-

-7,726

-7,726

Balance at December 31, 2019

5,788

629,866

1,871,839

2,507,493

Type of debt investment

Fair value at December 31, 2019

Valuation technique

Range (weighted average) of significant unobservable inputs

Fair value measurement sensitivity to unobservable inputs

     

Loans

106,163

Discounted cash flow model

Based on client spread

A decrease/increase of the used spreads with 1% will result is a higher/lower fair value of approx €1m.

 

210,877

ECL measurement

Based on client rating

An improvement / deterioration of the Client Rating with 1 notch wil result 1% increase/decrease

 

64,976

Credit impairment

n/a

n/a

Debt Funds

247,849

Net Asset Value

n/a

n/a

Total

629,865

   

Type of equity investment/associate

Fair value at December 31, 2019

Valuation technique

Range (weighted average) of significant unobservable inputs

Fair value measurement sensitivity based on the significant unobservable inputs

     

Private equity fund investments

940,265

Net Asset Value

n/a

n/a

Private equity direct investments

100,995

Recent transactions

Based on at arm’s length recent transactions

n/a

 

423,825

Book multiples

Depends on the book value of the underlying investment (range 1.0 – 2.5)

A decrease/increase of the book multiple with 10% will result in a lower/higher fair value of €42 million.

 

311,426

Earning Multiples

Depends on several earnings related data such as EBITDA (range 1.4 - 12.4)

A decrease/increase of the used unobservable data with 10% will result in a lower/higher fair value of €31 million.

 

22,737

Discounted Cash Flow (DCF)

Based on discounted cash flows

A decrease/increase of the used unobservable data with 10% will result in a lower/higher fair value of €2 million.

 

55,157

Put option

The guaranteed floor depends on several unobservable data such as IRR, EBITDA multiples, book multiples and Libor rates

A decrease/increase of the used unobservable data with 10% will result in a lower/higher fair value of €6 million.

 

17,434

Firm offers

Based on offers received from external parties

n/a

Total

1,871,839

   

Transfers between levels 1 and 2

There were no material transfers between levels 1 and 2.

Transfers from levels 1 and 2 to level 3

There were no material transfers between level 1 and 2 to level 3.