5 Financial Instruments

5.1 Accounting classification

The following table shows the carrying amounts of financial assets and financial liabilities.

Fair value is 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 in the principal or, in its absence, the most advantageous market to which FMO has access at that date.

At June 30, 2022

FVPL - mandatorily

Fair value hedging instruments

FVOCI-equity instruments

Amortized cost

Financial liabilities used as hedged items

Total

Financial assets measured at fair value

      

Short-term deposits

619,445

-

-

-

-

619,445

Derivative financial instruments

150,798

25,498

-

-

-

176,296

Loans to the private sector

589,436

-

-

-

-

589,436

Equity investments

2,050,247

-

141,741

-

-

2,191,988

Total

3,409,926

25,498

141,741

-

-

3,577,165

Financial assets not measured at fair value

      

Banks

-

-

-

59,060

-

59,060

Current accounts with state funds and other programs

-

-

-

234

-

234

Short-term deposits

-

-

-

811,014

-

811,014

Interest-bearing securities

-

-

-

537,559

-

537,559

Loans to the private sector

-

-

-

4,267,527

-

4,267,527

Current tax receivables

-

-

-

13,911

-

13,911

Other receivables

-

-

-

24,078

-

24,078

Total

-

-

-

5,713,383

-

5,713,383

Financial liabilities measured at fair value

      

Derivative financial instruments

323,247

201,744

-

-

-

524,991

Total

323,247

201,744

-

-

-

524,991

Financial liabilities not measured at fair value

      

Short-term credits

-

-

-

17,466

-

17,466

Debentures and notes

-

-

-

1,136,921

4,342,023

5,478,944

Current accounts with state funds and other programs

-

-

-

100

-

100

Accrued liabilities

-

-

-

22,139

-

22,139

Other liabilities

-

-

-

25,955

-

25,955

Total

-

-

-

1,202,581

4,342,023

5,544,604

December 31, 2021

FVPL - mandatory

Fair value hedging instruments

FVOCI-equity instruments

Amortized cost

Financial liabilities used as hedged items

Total

Financial assets measured at fair value

      

Short-term deposits

193,302

-

-

-

-

193,302

Derivative financial instruments

129,345

106,328

-

-

-

235,673

Loans to the private sector

621,978

-

-

-

-

621,978

Equity investments

1,876,825

-

140,425

-

-

2,017,250

Total

2,821,450

106,328

140,425

-

-

3,068,203

Financial assets not measured at fair value

      

Banks

-

-

-

95,873

-

95,873

Current accounts with state funds and other programs

-

-

-

648

-

648

Short-term deposits

-

-

-

1,149,877

-

1,149,877

Interest-bearing securities

-

-

-

463,971

-

463,971

Loans to the private sector

-

-

-

4,152,713

-

4,152,713

Other receivables

-

-

-

22,477

-

22,477

Total

-

-

-

5,885,559

-

5,885,559

Financial liabilities measured at fair value

      

Derivative financial instruments

167,719

24,506

-

-

-

192,225

Total

167,719

24,506

-

-

-

192,225

Financial liabilities not measured at fair value

      

Short-term credits

-

-

-

123,359

-

123,359

Debentures and notes

-

-

-

997,778

4,428,818

5,426,596

Current accounts with state funds and other programs

-

-

-

1,017

-

1,017

Accrued liabilities

-

-

-

28,208

-

28,208

Other liabilities

-

-

-

22,400

-

22,400

Total

-

-

-

1,172,762

4,428,818

5,601,580

5.2 Short-term deposits

 

June 30, 2022

December 31, 2021

Collateral delivered (related to derivative financial instruments)

390,824

118,594

Dutch central bank

416,865

1,027,997

Mandatory reserve deposit with Dutch central bank

1,872

1,833

Collateral delivered to European Central Bank

1,453

1,453

Short term deposits measured at AC

811,014

1,149,877

Commercial paper

550,667

149,361

Money market funds

68,778

43,941

Short term deposits measured at FVPL

619,445

193,302

Balance at December 31

1,430,459

1,343,179

Mandatory reserve deposits are not available for use in FMO’s day-to-day operations.

5.3 Derivatives

FMO uses various derivatives to hedge it's assets and liabilities against interest rate risk and market risk. During the first half of 2022, the derivatives position has increased and is related to maturing or termination of interest rate swaps and cross - currency interest swaps (see tables below). 

The amounts relating to derivatives designated as fair value hedging instruments and hedge ineffectiveness were as
follows:

  

Carrying amount

   

June 30, 2022

Notional amount

Assets

Liabilities

Change in fair value used for calculating hedge ineffectiveness

Ineffectiveness recorded in profit or loss

Line item in P&L that includes hedge ineffectiveness

Interest rate swaps

4,561,929

25,498

201,744

-251,557

5,029

Results from financial transactions

       

December 31, 2021

      

Interest rate swaps

4,383,939

106,328

24,506

-124,252

1,152

Results from financial transactions

The amounts relating to items designated as hedged items were as follows:

June 30, 2022

Carrying amount of the hedged item

Accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item

  

Balance sheet line item

Liabilities

Assets

Liabilities

Change in fair value used for calculating hedge ineffectiveness

Accumulated amount remaining in the balance sheet for any hedged items that have ceased to be adjusted for hedging gains and losses

Debentures and notes

4,342,023

-

-

256,586

-

      

December 31, 2021

     

Debentures and notes

4,428,818

-

-

125,404

-

The following table summarizes the notional amounts and the fair values of the ‘derivatives other than hedge accounting
instruments’. These derivatives are held to reduce interest rate risks and currency risks but do not meet the specified
criteria to apply hedge accounting at reporting period. The following table also includes derivatives related to the asset
portfolio.

June 30, 2022

 

Notional amounts

Fair value assets

Fair value liabilities

Derivatives other than hedge accounting instruments:

    

ˑ

Currency swaps

121,594

2,405

291

ˑ

Interest rate swaps

992,233

46,879

1,713

ˑ

Cross-currency interest rate swaps

2,838,102

101,514

306,583

Subtotal

 

3,951,929

150,798

308,587

Derivatives related to asset portfolio

 

-

-

14,660

Total derivative assets (/liabilities) other than hedge accounting instruments

 

3,951,929

150,798

323,247

December 31, 2021

 

Notional amounts

Fair value assets

Fair value liabilities

Derivatives other than hedge accounting instruments:

    

ˑ

Currency swaps

84,217

290

1,486

ˑ

Interest rate swaps

943,510

11,084

23,795

ˑ

Cross-currency interest rate swaps

3,293,367

117,971

133,260

Subtotal

 

4,321,094

129,345

158,541

Derivatives related to asset portfolio

 

-

-

9,178

Total derivative assets (/liabilities) other than hedge accounting instruments

 

4,321,094

129,345

167,719

5.4 Equity Investments

The positive change in fair value as per June 2022 is mainly driven by FX exchange results. Unrealized results from capital movement for FVPL positions is -€9K, please also refer to note 12.

 

Equity measured at FVOCI

Equity measured at FVPL

Total

Net balance at January 1, 2022

140,425

1,876,825

2,017,250

Purchases and contributions

-

99,705

99,705

Conversion of loans to equity

-

-

-

Conversion Associate/FVPL

-

-

-

Return of Capital (including sales)

-

-39,911

-39,911

Changes in fair value

1,316

113,628

114,944

Total balance at June 30, 2022

141,741

2,050,247

2,191,988

5.5 Associates

Net balance at January 1, 2022

298,737

Purchases and contributions

7,363

Conversion from loans to equity

16,770

Conversion Associates/FVPL

-

Return of capital (including sales)

-

Share in net results

-15,357

Exchange rate differences

25,206

Total balance at June 30, 2022

332,719

5.6 Fair values

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 applied methods includes a number of controls and other procedures to ensure appropriate safeguards are in place to ensure 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 Risk Committee (IRC). The IRC approves the fair values measured including the valuation techniques and other significant input parameters used. The appropriateness of the valuation techniques applicable to the underlying instruments is assessed as part of the valuation process and any potential changes between levels in the fair value hierarchy are considered.

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.

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 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 available multiples are applied as input for the valuation.

The table below presents the carrying value and estimated fair value of FMO’s non fair value financial assets and liabilities.

The carrying values in the financial asset and liability categories are valued at amortized cost except for the funding in connection with hedge accounting. 

Financial assets-liabilities not measured at fair value

June 30, 2022

December 31, 2021

 

Carrying value

Fair Value

Carrying value

Fair value

     

Short term deposits at AC

811,014

811,014

1,149,877

1,149,877

Banks

59,060

59,060

95,873

95,873

Interest-bearing securities

537,559

518,939

463,971

466,521

Loans to the private sector at AC

4,267,527

4,343,544

4,152,713

4,247,515

Financial assets not measured at fair value

5,675,160

5,732,557

5,862,434

5,959,786

     

Short-term credits

17,466

17,466

123,359

123,359

Debentures and notes

5,478,944

5,455,061

5,426,596

5,435,668

Financial liabilities not measured at fair value

5,496,410

5,472,527

5,549,955

5,559,027

The valuation technique we use for the fair value determination of loans to the private sector and non-hedged funding is based on the discounted cash-flow method. The discount rate we apply is a spread curve based on the average spread of the portfolio.

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.

At June 30, 2022

Level 1

Level 2

Level 3

Total

     

Financial assets mandatorily at FVPL

    

Short-term deposits

619,445

-

-

619,445

Derivative financial instruments

-

176,296

-

176,296

Loans to the private sector

57,063

-

532,373

589,436

Equity investments

52,640

-

1,997,607

2,050,247

     

Financial assets at FVOCI

    

Equity investments

-

-

141,741

141,741

Total financial assets at fair value

729,148

176,296

2,671,721

3,577,165

     

Financial liabilities mandatorily at FVPL

    

Derivative financial instruments

-

510,331

14,660

524,991

Total financial liabilities at fair value

-

510,331

14,660

524,991

December 31, 2021

Level 1

Level 2

Level 3

Total

     

Financial assets mandatorily at FVPL

    

Short-term deposits

193,302

-

-

193,302

Derivative financial instruments

-

235,673

-

235,673

Loans to the private sector

59,831

-

562,147

621,978

Equity investments

70,134

-

1,806,691

1,876,825

     

Financial assets at FVOCI

    

Equity investments

-

-

140,425

140,425

Total financial assets at fair value

323,267

235,673

2,509,263

3,068,203

     

Financial liabilities mandatorily at FVPL

    

Derivative financial instruments

-

183,047

9,178

192,225

Total financial liabilities at fair value

-

183,047

9,178

192,225

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

Derivative financial instruments

Loans to the private sector

Equity investments

Total

     

Balance at January 1, 2021

4,041

528,879

1,793,694

2,326,614

Total gains or losses

    

-In profit and loss (changes In fair value)

-4,373

-16,126

196,922

176,423

-In other comprehensive income (changes in fair value)

-

-

25,766

25,766

Purchases /disbursements

-

68,779

257,900

326,679

Sales/repayments

59

-52,570

-353,667

-406,178

Interest Capitalization

-

7,602

-

7,602

Write-offs

-

-3,817

-

-3,817

Accrued income

-

-187

-

-187

Exchange rate differences

273

29,587

101,836

131,696

Derecognition and/or restructuring FVPL versus AC

-

-

-

-

Conversion from loans to equity

-

-

-

-

Conversion Associate/FVPL

-

-

-

-

Transfers into level 3

-

-

-

-

Transfers out of level 3

-

-

-75,335

-75,335

Balance at December 31, 2021

-

562,147

1,947,116

2,509,263

     

Total gains or losses

    

-In profit and loss (changes In fair value)

-

-3,999

11,509

7,510

-In other comprehensive income (changes in fair value)

-

-

1,316

1,316

Purchases /disbursements

-

8,502

99,705

108,207

Sales/repayments

-

-54,032

-39,911

-93,943

Interest Capitalization

-

3,226

-

3,226

Write-offs

-

-1,450

-

-1,450

Accrued income

-

912

-

912

Exchange rate differences

-

33,855

119,613

153,468

Derecognition and/or restructuring FVPL versus AC

-

-

-

-

Conversion from loans to equity

-

-16,788

-

-16,788

Conversion Associate/FVPL

-

-

-

-

Transfers into level 3

-

-

-

-

Transfers out of level 3

-

-

-

-

Balance at June 30, 2022

-

532,373

2,139,348

2,671,721

Valuation techniques and unobservable inputs used measuring fair value of loans to the private sector

Type of debt investment

Fair value at June 30, 2022

Valuation technique

Range (weighted average) of significant unobservable inputs

Fair value measurement sensitivity to unobservable inputs

     

Loans

58,003

Discounted cash flow model

Based on client spread

A decrease/increase of the used spreads with 1% will result in a higher/lower fair value of approx €0.5million.

 

201,228

ECL measurement

Based on client rating

An improvement / deterioration of the Client Rating with 1 notch will result in approx 0.5% increase/decrease

 

32,760

Credit impairment

n/a

n/a

Debt Funds

240,382

Net Asset Value

n/a

n/a

Total

532,373

   
Valuation techniques and unobservable inputs used measuring fair value of equity investments

Type of equity investment

Fair value at June 30, 2022

Valuation technique

Range (weighted average) of significant unobservable inputs

Fair value measurement sensitivity to unobservable inputs

     

Private equity fund investments

1,248,456

Net Asset Value

n/a

n/a

Private equity direct investments

34,073

Recent transactions

Based on at arm’s length recent transactions

n/a

 

403,192

Book multiples

1.0

A decrease/increase of the book multiple with 10% will result in a lower/higher fair value of €40 million.

 

220,683

Earning Multiples

Depends on several unobservable data such as EBITDA multiples (range 1.0 - 9,6)

A decrease/increase of the used unobservable data with 10% will result in a lower/higher fair value of €22million.

 

37,415

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 €4 million.

 

81,334

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 €8 million.

 

114,195

Firm offers

Based on offers received from external parties

n/a

Total

2,139,348