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 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 its 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 Financial Risk Committee (FRC). The FRC 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:
Recent broker/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 not market observable (level 3). A substantial part of fair value (level 3) is based on net asset values.
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.
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 financial statements. The determination of the timing of transfers is embedded in the quarterly valuation process, and therefore recorded at the end of each reporting period.
Other financial liabilities carried at FVPL represent amounts attributable to the Dutch State in return for their co-investment in the FMO Ventures Program (refer to the 'Group accounting and consolidation section' of the 'Accounting policy' chapter). The management of FMO's Ventures Program has the mandate to engage in transactions and also to realize any positions at a given time and call out the Program at reporting date. The amount attributable to co-investors is based on a predefined value sharing waterfall which utilizes the values of the underlying investments in the program. The underlying investments in the program are valued using the existing equity investment fair valuation techniques described in the paragraphs above. The waterfall calculation defines the timing and amount of distributions to respective co-investors and is therefore applied to estimate the fair values of the related financial liabilities.
IFRS 9 requires the adjustments in the valuation of FVPL financial liabilities related to FMO's own credit risk to be recorded in the statement of other comprehensive income. The impact of this treatment is however negligible due to the Support Agreement between the Dutch State and FMO.
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.
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.
Financial assets and liabilities not measured at fair value |
||||
At December 31 |
2023 |
2022 |
||
Carrying amount |
Fair value |
Carrying amount |
Fair value |
|
Financial assets not measured at fair value |
||||
Short term deposits at AC |
1,220,359 |
1,220,359 |
1,144,801 |
1,144,801 |
Banks |
49,273 |
49,273 |
26,807 |
26,807 |
Interest-bearing securities |
539,708 |
522,820 |
537,825 |
504,720 |
Loans to the private sector at AC |
4,295,723 |
3,790,288 |
4,623,568 |
4,662,490 |
Current accounts with state funds and other programs |
488 |
488 |
956 |
956 |
Other receivables |
33,677 |
33,677 |
17,251 |
17,251 |
Total financial assets not measured at fair value |
6,139,228 |
5,616,905 |
6,351,208 |
6,357,025 |
Financial liabilities not measured at fair value |
||||
Short-term credits |
97,114 |
97,114 |
52,156 |
52,156 |
Debentures and notes |
6,060,683 |
5,986,337 |
5,572,253 |
5,530,569 |
Current accounts with state funds and other programs |
43 |
43 |
1,058 |
1,058 |
Accrued liabilities |
29,498 |
29,498 |
24,466 |
24,466 |
Other liabilities |
35,821 |
35,821 |
52,263 |
52,263 |
Total financial liabilities not measured at fair value |
6,223,159 |
6,148,813 |
5,702,196 |
5,660,512 |
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, 2023 |
Level 1 |
Level 2 |
Level 3 |
Total |
Financial assets mandatorily at FVPL |
||||
Short-term deposits |
170,901 |
442,130 |
- |
613,031 |
Derivative financial instruments |
- |
197,150 |
- |
197,150 |
Loans to the private sector |
87,482 |
- |
500,458 |
587,940 |
Equity investments |
32,965 |
- |
2,160,806 |
2,193,771 |
Financial assets at FVOCI |
||||
Equity investments |
- |
- |
167,074 |
167,074 |
Total financial assets at fair value |
291,348 |
639,280 |
2,828,338 |
3,758,966 |
Financial liabilities mandatorily at FVPL |
||||
Derivative financial instruments |
- |
407,968 |
10,871 |
418,839 |
Financial liabilities designated at FVPL |
||||
Other financial liabilities |
- |
- |
74,003 |
74,003 |
Total financial liabilities at fair value |
- |
407,968 |
84,874 |
492,842 |
December 31, 2022 |
Level 1 |
Level 2 |
Level 3 |
Total |
Financial assets mandatorily at FVPL |
||||
Short-term deposits |
223,575 |
- |
- |
223,575 |
Derivative financial instruments |
- |
195,239 |
- |
195,239 |
Loans to the private sector |
53,917 |
- |
432,150 |
486,067 |
Equity investments |
33,851 |
- |
2,097,052 |
2,130,903 |
Financial assets at FVOCI |
||||
Equity investments |
- |
- |
150,733 |
150,733 |
Total financial assets at fair value |
311,343 |
195,239 |
2,679,935 |
3,186,517 |
Financial liabilities mandatorily at FVPL |
||||
Derivative financial instruments |
- |
597,088 |
13,888 |
610,976 |
Financial liabilities designated at FVPL |
||||
Other financial liabilities |
- |
- |
82,328 |
82,328 |
Total financial liabilities at fair value |
- |
597,088 |
96,216 |
693,304 |
The following table shows the movements of financial assets measured at fair value based on level 3. All other financial liabilities are level 3 positions (refer to other financial liabilities note 15).
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 December 31, 2021 |
- |
562,147 |
1,947,116 |
2,509,263 |
Total gains or losses |
||||
-In profit and loss (changes In fair value) |
- |
-21,252 |
6,045 |
-15,207 |
-In other comprehensive income (changes in fair value) |
- |
- |
10,308 |
10,308 |
Purchases /disbursements |
- |
10,964 |
279,815 |
290,779 |
Sales/repayments |
- |
-139,741 |
-105,019 |
-244,760 |
Interest capitalization |
- |
6,746 |
- |
6,746 |
Write-offs |
- |
-1,450 |
- |
-1,450 |
Accrued income |
- |
3,822 |
- |
3,822 |
Exchange rate differences |
- |
25,583 |
80,047 |
105,630 |
Derecognition and/or restructuring FVPL versus AC |
- |
2,570 |
- |
2,570 |
Conversion from loans to equity |
- |
-17,239 |
938 |
-16,301 |
Conversion associate/FVPL |
- |
- |
-18,924 |
-18,924 |
Transfers into level 3 |
- |
- |
- |
- |
Transfers out of level 3 |
- |
- |
- |
- |
Other changes |
- |
- |
47,459 |
47,459 |
Balance at December 31, 2022 |
- |
432,150 |
2,247,785 |
2,679,935 |
Total gains or losses |
||||
-In profit and loss (changes In fair value) |
- |
48,772 |
13,533 |
62,305 |
-In other comprehensive income (changes in fair value) |
- |
- |
16,341 |
16,341 |
Purchases /disbursements |
- |
117,126 |
333,825 |
450,951 |
Sales/repayments |
- |
-50,729 |
-224,513 |
-275,242 |
Interest capitalization |
- |
4,964 |
- |
4,964 |
Write-offs |
- |
-42,200 |
- |
-42,200 |
Accrued income |
- |
6,010 |
- |
6,010 |
Exchange rate differences |
- |
-13,058 |
-60,970 |
-74,028 |
Derecognition and/or restructuring FVPL versus AC |
- |
-698 |
- |
-698 |
Conversion from loans to equity |
- |
-1,879 |
1,879 |
- |
Conversion associate/FVPL |
- |
- |
- |
- |
Transfers into level 3 |
- |
- |
- |
- |
Transfers out of level 3 |
- |
- |
- |
- |
Other changes |
- |
- |
- |
- |
Balance at December 31, 2023 |
- |
500,458 |
2,327,880 |
2,828,338 |
Other changes relate to consolidation of FMO's Ventures Program (refer to section 'Group accounting and consolidation' in the 'Accounting policies' chapter).
Type of debt investment |
Fair value at December 31, 2023 |
Valuation technique |
Range (weighted average) of significant unobservable inputs |
Fair value measurement sensitivity to unobservable inputs |
Loans |
73,170 |
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 €2.6 million |
113,596 |
ECL measurement |
Based on client rating |
An improvement / deterioration of the Client Rating with 1 notch wil result 0.4% increase/decrease |
|
42,173 |
Credit impairment |
n/a |
n/a |
|
Debt Funds |
271,519 |
Net Asset Value |
n/a |
n/a |
Total |
500,458 |
Type of equity investment |
Fair value at December 31, 2023 |
Valuation technique |
Range (weighted average) of significant unobservable inputs |
Fair value measurement sensitivity based on the significant unobservable inputs |
Private equity fund investments |
1,319,228 |
Net Asset Value |
n/a |
n/a |
Private equity direct investments |
22,182 |
Recent transactions |
Based on at arm’s length recent transactions |
n/a |
651,617 |
Book multiples |
1.0 – 1.9 |
A decrease/increase of the book multiple with 10% will result in a lower/higher fair value of €65 million. |
|
182,160 |
Earning Multiples |
Depends on several unobservable data such as EBITDA multiples (range 1.0 - 12.7) |
A decrease/increase of the used unobservable data with 10% will result in a lower/higher fair value of €18million. |
|
51,115 |
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 €5 million. |
|
32,449 |
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 €3 million. |
|
69,129 |
Firm offers |
Based on offers received from external parties |
n/a |
|
Total |
2,327,880 |
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.