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:

  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 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

  • Short-term deposits

-

498,787

-

498,787

  • Derivative financial instruments

-

334,062

-

334,062

Available for sale financial assets

  • Equity investments

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

  • Debentures and notes

-

-

-

-

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

  • Short-term deposits

-

333,175

-

333,175

  • Derivative financial instruments

-

316,979

-

316,979

Available for sale financial assets

  • Equity investments

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

  • Debentures and notes

-

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

 

  • In profit and loss

-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.