33 Fair value measurement
Measurement guidelines
The fair value represents a market-based measurement and not an entity-specific valuation. It is defined as 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 on the principal market or the most advantageous market.
As far as possible, the fair value is determined on the basis of the quoted market prices in active markets accessible to the company on the measurement date. An active, accessible market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The fair value is determined using significant and observable inputs. These are basically available in the case of quoted assets or liabilities. If a market for financial or non-financial assets or liabilities is inactive, or if no observable inputs, or insufficient observable inputs, are available, the LLB Group must employ techniques or processes (valuation methods or models) to determine the fair value. The valuation techniques contain assumptions, including estimates, to enable an exit price on the measurement date from the perspective of the market participant to be determined. However, such assumptions and estimates contain uncertainties, which at a later date can lead to substantial changes in the fair value of financial and non-financial assets and liabilities. In the case of financial and non-financial assets and liabilities for which a valuation technique involving non-observable market data is used to determine the fair value, these are measured at the transaction price. This fair value can differ from the fair value determined on the basis of valuation techniques.
All financial and non-financial assets and liabilities measured at fair value are categorised into one of the following three fair value hierarchies:
Level 1
The fair value of listed securities and derivatives contained in the trading portfolio and financial investments is determined on the basis of market price quotes on an active market.
Level 2
If no market price quotes are available, the fair value is determined by means of valuation methods or models which are based on assumptions made on the basis of observable market prices and other market quotes.
Level 3
For the remaining financial instruments, neither market price quotes nor valuation methods or models based on market prices are available. Our own valuation methods or models are employed to measure the fair value of these instruments.
Valuation methods
Valuation methods and techniques are employed to determine the fair value of financial and non-financial assets and liabilities for which no observable market prices on an active market are available. These include, in particular, illiquid financial investments. If available, the LLB Group uses market-based assumptions and inputs as the basis for valuation techniques. If such information is not available, assumptions and inputs from comparable assets and liabilities are employed. In the case of complex and very illiquid financial and non-financial assets and liabilities, the fair value is determined using a combination of observable transaction prices and market information.
The LLB Group employs standardised and accepted valuation techniques to determine the fair value of financial and non-financial assets and liabilities which are not actively traded or listed. In general, the LLB Group uses the following valuation methods and techniques as well as the following inputs.
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Valuation model |
Inputs |
Significant, non-observable inputs |
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Level 2 |
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Derivative financial instruments |
Option models |
Underlying assets of future contracts |
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Own investment funds |
Market to model |
Market prices of underlying assets |
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Equities |
Market to model |
Market prices of underlying assets |
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Due from banks |
Present value calculation |
Market price of congruent LIBOR interest rates |
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Due to banks |
Present value calculation |
Market price of congruent LIBOR interest rates |
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Loans |
Present value calculation |
Market price of congruent LIBOR interest rates |
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Due to customers |
Present value calculation |
Market price of congruent LIBOR interest rates |
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Debt issued |
Present value calculation |
Market price of congruent LIBOR interest rates |
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Accrued income and prepaid expenses / Accrued expenses and deferred income |
Fair value corresponds to carrying value on account of the short-term maturity |
Price conditions; deferred income corresponds to deferrals on commissions and fees |
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Level 3 |
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Financial investments at fair value through profit and loss |
Market to model |
Audited financial statements |
Illiquidity, special micro-economic conditions |
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Financial investments, recognised at fair value through other comprehensive income |
Market to model |
Audited financial statements |
Illiquidity, special micro-economic conditions |
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Investment property |
External expert opinions, relative values in market comparison |
Prices of comparable properties |
Assessment of special property factors, expected expenses and earnings for the property |
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Non-current assets held for sale |
External expert opinions, relative values in market comparison |
Prices of comparable properties |
Assessment of special property factors, expected expenses and earnings for the property |
Measurement of fair values by active markets or valuation techniques
The following table shows the classification of financial and non-financial assets and liabilities of the LLB Group within the fair value hierarchy. All assets and liabilities are measured at fair value on a recurring basis in the statement of financial position. As at 31 December 2018, the LLB Group had no assets or liabilities which were measured at fair value on a non-recurring basis in the balance sheet. In the 2018 financial year, there were no significant transfers between Level 1, Level 2 and Level 3 financial instruments.
Download |
in CHF thousands |
31.12.2018 |
31.12.2017 |
+/− % |
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Level 1 |
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|
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Financial investments at fair value through profit and loss |
635'676 |
915'160 |
–30.5 |
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Financial investments available for sale |
|
282'317 |
–100.0 |
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Financial investments, recognised at fair value through other comprehensive income |
1'207'796 |
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|
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Total financial instruments at fair value |
1'843'472 |
1'197'477 |
53.9 |
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Cash and balances with central banks |
5'708'324 |
4'129'723 |
38.2 |
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Total financial instruments not at fair value |
5'708'324 |
4'129'723 |
38.2 |
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Total Level 1 |
7'551'796 |
5'327'201 |
41.8 |
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Level 2 |
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Derivative financial instruments |
197'886 |
58'740 |
236.9 |
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of which for hedging purpose |
2'071 |
1'438 |
44.0 |
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Financial investments at fair value through profit and loss |
69'546 |
239'209 |
–70.9 |
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Total financial instruments at fair value |
267'431 |
297'949 |
–10.2 |
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Due from banks |
1'617'123 |
1'944'825 |
–16.8 |
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Loans |
13'391'601 |
12'595'887 |
6.3 |
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Accrued income and prepaid expenses |
56'868 |
39'395 |
44.4 |
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Total financial instruments not at fair value |
15'065'592 |
14'580'107 |
3.3 |
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Total Level 2 |
15'333'023 |
14'878'055 |
3.1 |
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Level 3 |
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Financial investments at fair value through profit and loss |
0 |
23'449 |
–100.0 |
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Financial investments, recognised at fair value through other comprehensive income |
24'039 |
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Total financial instruments at fair value |
24'039 |
23'449 |
2.5 |
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Total financial instruments not at fair value |
0 |
0 |
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Investment property |
15'000 |
15'000 |
0.0 |
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Non-current assets held for sale |
21'214 |
6'734 |
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Total other assets at fair value |
36'214 |
21'734 |
66.6 |
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Total Level 3 |
60'253 |
45'183 |
33.4 |
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Total assets |
22'945'072 |
20'250'439 |
13.3 |
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Level 1 |
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Total Level 1 |
0 |
0 |
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Level 2 |
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Derivative financial instruments |
255'564 |
117'448 |
117.6 |
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of which for hedging purpose |
7'687 |
1'795 |
328.2 |
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Total financial instruments at fair value |
255'564 |
117'448 |
117.6 |
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Due to banks |
1'509'905 |
945'030 |
59.8 |
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Due to customers |
17'540'159 |
15'708'690 |
11.7 |
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Debt issued |
1'280'606 |
1'215'905 |
5.3 |
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Accrued expenses and deferred income |
51'625 |
30'250 |
70.7 |
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Total financial instruments not at fair value |
20'382'294 |
17'899'875 |
13.9 |
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Total Level 2 |
20'637'858 |
18'017'323 |
14.5 |
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Level 3 |
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Non-current liabilities held for sale |
2'386 |
0 |
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Total other liabilities at fair value |
2'386 |
0 |
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Total Level 3 |
2'386 |
0 |
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Total liabilities |
20'640'244 |
18'017'323 |
14.6 |
Measurement of assets and liabilities, classified as Level 3
The financial investments measured at fair value through other comprehensive income increased by CHF 0.6 million in the 2018 business year. Two factors were responsible for this increase: 1) an increase in the fair value of the instruments already held in the 2017 business year led to a rise in other comprehensive income of CHF 0.5 million; and 2) instruments amounting in value to CHF 85 thousand were acquired within the scope of the takeover of Semper Constantia Privatbank AG and its subsidiaries.
There were no value changes in investment property. Accordingly, there were no effects on the income statement.
The change in value of non-current assets held for sale was caused by the classification of properties as available for sale and their subsequent sale. The sale realised a profit of CHF 0.8 million, compared with a decrease in carrying value of CHF 4.0 million. The profit was recognised in the income statement as other income. The change in value between the current period and the comparison period therefore relates to new properties, which were classified in 2018 as IFRS 5 Non-current Assets Held for Sale.
The measurement process to determine the fair value of recurring and non-recurring Level 3 assets and liabilities, especially the significant non-observable inputs, as shown in the previous table, are explained in the following. The interrelationships between observable and non-observable inputs are not explained in the following, because such interrelationships have no significant influence on the measurement of fair value.
Financial investments measured at fair value through other comprehensive income
With the transition to IFRS 9, financial investments were designated FVOCI, measured at fair value through other comprehensive income. Only the fair value recognition changes as a result of the designation, the procedure for measuring the fair value remains the same.
Financial investments are periodically valued without affecting the income statement on the basis of market values provided by external experts. The financial investments consist of the non-listed shares of companies, which are periodically revalued on the basis of current company data or by third parties with the aid of valuation models. The valuation is made available to shareholders. An own valuation by shareholders with the aid of a valuation model based on observable or significant non-observable inputs is therefore unnecessary. How changes would affect the fair value, or how sensitively this would react, cannot be quantified or would have to be based on various assumptions to be made by LLB on how the company will develop. Since these are investments having an infrastructure character, whereby basically the fair value has changed in the last few years only by the amount of profit attained, a sensitivity analysis would bring no additional benefit for the reader of the financial statement. The financial investments do not diverge to highest and best use.
Investment property
Investment property is periodically valued by external experts or is valued on the basis of relative values in a market comparison. If no corresponding values for comparable properties are available, on which to base a reliable calculation of the fair value, assumptions are made. These assumptions contain assessments and considerations of such circumstances as the location and condition of the property, as well as the expected costs and revenues with it. Properties are always revalued whenever on the basis of events or changed circumstances the fair value no longer reflects the market price, so that changes in the calculation of the fair value can be promptly determined and recognised in the accounts. Changes in the inputs, on which the measurement of the fair value is based, can lead to significant changes in it. It cannot be quantified to what extent changes influence the fair value and the sensitivity of fair value, because the valuation of a property is based on an individual measurement, which is influenced by various assumptions. Consequently, a significant change in the fair value can occur, which is not quantifiable. Investment properties do not diverge to highest and best use.
Non-current assets and liabilities held for sale
Non-current assets held for sale encompass wholly owned properties, which currently comprise bank branches, rental apartments, unused real estate and also a company which manages apartments (see also Note 35 “Non-current assets and liabilities held for sale”). These are recognised as investment property.
The liabilities relate to the management company.
Financial investments not measured at fair value
The fair value hierarchy also includes details of financial assets and liabilities which are not measured on a fair value basis, but for which a fair value does exist. In addition to their inclusion in the fair value hierarchy, basically a comparison between the fair value and the carrying value of the individual categories of financial assets and liabilities is to be presented.
The following table shows this comparison only for positions which were not measured at fair value, since for positions measured at fair value the carrying value corresponds to the fair value. On account of the maturity being more than one year, for specific positions a present value was calculated taking as a basis LIBOR interest rates appropriate for the duration of the term. In the case of all other positions, the carrying value represents a reasonable approximation of the fair value.
Download |
|
31.12.2018 |
31.12.2017 |
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---|---|---|---|---|---|---|---|---|
in CHF thousands |
Book amount |
Fair value |
Book amount |
Fair value |
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Assets |
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|
|
|
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Cash and balances with central banks |
5'708'324 |
5'708'324 |
4'129'723 |
4'129'723 |
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Due from banks |
1'611'454 |
1'617'123 |
1'940'433 |
1'944'825 |
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Loans |
12'852'541 |
13'391'601 |
12'083'966 |
12'595'887 |
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Accrued income and prepaid expenses |
56'868 |
56'868 |
39'395 |
39'395 |
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Liabilities |
|
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Due to banks |
1'509'412 |
1'509'905 |
943'316 |
945'030 |
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Due to customers |
17'475'706 |
17'540'159 |
15'652'158 |
15'708'690 |
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Debt issued |
1'236'362 |
1'280'606 |
1'169'027 |
1'215'905 |
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Accrued expenses and deferred income |
51'625 |
51'625 |
30'250 |
30'250 |