Fair value of financial assets and 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.

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 analysis 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 review 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.

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 applied that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. Valuation techniques include:

  1. Recent dealer 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 (level 3). A substantial part of fair value of equity investments (level 3) is based on Net Asset Value.

The fair value measurement of derivative financial instruments categorised within level 3, are mainly based on EBITDA multiples within a range of 5-13 for the relevant industry classes per country / region, adjusted for illiquidity. An increase (decrease) by 10% of these EBITDA multiples would have limited impact as a result of the decline in value.

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 and 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 within these Annual Accounts as well as the Equity Risk section of the chapter Financial Risk Management. The determination of the timing of transfers is embedded in the quarterly valuation process, and is therefore recorded at the end of each reporting period.

FMO uses internal valuation models to value its OTC derivative 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, 2017, the unamortized accrual amounts to €18.479 (2016: €21.950). An amount of €6.193 was recorded as a loss in the profit and loss (2016: €6,156).

The table below presents the carrying value and estimate 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. The underlying changes to the fair value of these assets are therefore not recognized in the balance sheet.

 

2017

2016

At December 31

Carrying value

Fair value

Carrying value

Fair value

     

Banks

71,763

71,763

58,178

58,178

Loans to the private sector

4,100,425

4,175,981

4,469,948

4,550,847

Loans guaranteed by the State

38,956

39,491

56,768

57,882

Total non fair value financial assets

4,211,144

4,287,235

4,584,894

4,666,907

     

Short-term credits

125,935

125,935

39,464

39,464

Debentures and notes

5,101,288

5,112,707

5,180,977

5,190,433

Total non fair value financial liabilities

5,227,223

5,238,642

5,220,441

5,229,897

The valuation technique we use for the fair value determination of loans to the private sector and non-hedged funding is the discounted cash-flow method. The discount rate we apply is a spread curve based on the average spread of the portfolio. A parallel downward (upward) shift of 100 basis points in the interest curves will result in an increase (decrease) of the fair value by €51 million (2016: €55 million).

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 December 31, 2017

Level 1

Level 2

Level 3

Total

     

Financial assets at fair value through profit and loss

    

Short-term deposits

-

1,544,118

-

1,544,118

Derivative financial instruments

-

255,492

3,910

259,402

Available for sale financial assets

    

Equity investments

36,488

-

1,466,345

1,502,833

Interest-bearing securities

362,916

-

-

362,916

Total financial assets at fair value

399,404

1,799,610

1,470,255

3,669,269

     

Financial liabilities at fair value through profit and loss

    

Derivative financial instruments

-

147,424

-

147,424

Total financial liabilities at fair value

-

147,424

-

147,424

At December 31, 2016

Level 1

Level 2

Level 3

Total

     

Financial assets at fair value through profit and loss

    

Short-term deposits

-

1,242,604

-

1,242,604

Derivative financial instruments

-

180,857

5,653

186,510

Available for sale financial assets

    

Equity investments

61,431

-

1,650,681

1,712,112

Interest-bearing securities

575,117

-

-

575,117

Total financial assets at fair value

636,548

1,423,461

1,656,334

3,716,343

     

Financial liabilities at fair value through profit and loss

    

Derivative financial instruments

-

423,981

-

423,981

Total financial liabilities at fair value

-

423,981

-

423,981

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

Equity investments

Total

Balance at January 1, 2016

981

1,423,821

1,424,802

Total gains or losses

   

ˑ

In profit and loss (changes in fair value and value adjustments)

4,672

-35,851

-31,179

ˑ

In other comprehensive income (changes in fair value available for sale reserve)

-

105,578

105,578

Purchases

-

281,645

281,645

Sales

-

-118,328

-118,328

Transfers into level 3

-

-

-

Transfers out of level 3

-

-6,184

-6,184

Balance at December 31, 2016

5,653

1,650,681

1,656,334

Total gains or losses

   

ˑ

In profit and loss (changes in fair value and value adjustments)

-1,743

-46,919

-48,662

ˑ

In other comprehensive income (changes in fair value available for sale reserve)

-

-145,400

-145,400

Purchases

-

188,369

188,369

Sales

-

-180,386

-180,386

Transfers into level 3

-

-

-

Transfers out of level 3

-

-

-

Balance at December 31, 2017

3,910

1,466,345

1,470,255

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

Type of equity investment

Fair value at December 31, 2017

Valuation technique

Range (weighted average) of significant unobservable inputs

Fair value measurement sensitivity to unobservable inputs

Private equity fund investments

826,190

Net Asset Value

n/a

n/a

Private equity direct investments

48,992

Recent transactions

Based on at arm’s length recent transactions

n/a

 

265,455

Book multiples

Range of book value 1.0 – 2.6

A decrease/increase of the book multiple with 10% will result in a lower/higher fair value of €27 million. To be recorded in other comprehensive income.

 

189,822

Earning Multiples

Depends on several unobservable data such as EBITDA multiples (range 5-13), EV (enterprise value) /EBITDA (range 5-11)

A decrease/increase of the used unobservable data with 10% will result in a lower/higher fair value of €19 million. To be recorded in other comprehensive income.

 

48,231

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. To be recorded in other comprehensive income.

 

45,250

Put option based on guaranteed floor

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 €5 million. To be recorded in other comprehensive income.

 

42,405

Firm offers

Range of book value 1.0 – 1.4

n/a

Total

1,466,345