15 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 are 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 models or models based on market prices are available. Our own valuation methods or models with our own inputs 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 and financial liabilities from insurance contracts. 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 methods and techniques as well as the following inputs.

 

Valuation model

Inputs

Significant, non-observable inputs

Level 2

 

 

 

Own investment funds

Market to Model

Market prices of the underlying assets

 

Derivative financial instruments

Option model

Underlying assets of future contracts

 

 

 

 

 

Level 3

 

 

 

Financial investments form insurance contracts

Basically cost approach and market to model

Audited financial statements, insurance sums. Assets can be transferred if insurance event occurs.

Illiquidity, special micro-economic conditions, insolvency risks

Financial liabilities form insurance contracts

Basically cost approach and market to model

Audited financial statements, insurance sums. Assets can be transferred if insurance event occurs.

Illiquidity, special micro-economic conditions, insolvency risks

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.

Purchase price liabilities from acquisitions

Discounted expected values based on assumptions and company factors.

Specific company assets

Development of business activity, such as development of profit and client assets under management.

Measurement of fair values by active markets or valuation techniques

The following table shows the classification of fair value hierarchies of financial and non-financial assets and liabilities of the LLB Group.

All assets and liabilities are measured at fair value on a recurring basis in the financial statement. As per 30 June 2014 and 31 December 2013, 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 first half of 2014 there were no significant transfers between Level 1 and Level 2 financial instruments.

(XLS:)

in CHF thousands

30.06.2014

31.12.2013

+/– %

Level 1

 

 

 

Trading portfolio assets

2'505

5'061

–50.5

Derivative financial instruments

0

0

 

Financial investments at fair value through profit and loss

1'351'936

1'119'330

20.8

of which financial investments from insurance contracts

607'797

485'288

25.2

Total Level 1

1'354'441

1'124'391

20.5

 

 

 

 

Financial liabilities form insurance contracts

 

 

 

Trading portfolio assets

1'319

0

 

Derivative financial instruments

42'169

86'950

–51.5

Financial investments at fair value through profit and loss

544'772

528'281

3.1

of which financial investments from insurance contracts

106'762

115'946

–7.9

Total Level 2

588'261

615'231

–4.4

 

 

 

 

Level 3

 

 

 

Trading portfolio assets

0

0

 

Derivative financial instruments

0

0

 

Financial investments at fair value through profit and loss

362'793

322'075

12.6

of which financial investments from insurance contracts

362'793

322'075

12.6

Other financial assets at fair value through profit and loss

19'768

21'383

–7.6

Total Level 3

382'561

343'458

11.4

 

 

 

 

Total assets

2'325'262

2'083'081

11.6

 

 

 

 

Level 1

 

 

 

Financial liabilities at fair value through profit and loss

607'797

485'288

25.2

of which financial investments from insurance contracts

607'797

485'288

25.2

Derivative financial instruments

0

0

 

Total Level 1

607'797

485'288

25.2

 

 

 

 

Level 2

 

 

 

Financial liabilities at fair value through profit and loss

106'762

115'946

–7.9

of which financial investments from insurance contracts

106'762

115'946

–7.9

Derivative financial instruments

100'276

108'929

–7.9

Total Level 2

207'038

224'875

–7.9

 

 

 

 

Level 3

 

 

 

Financial liabilities at fair value through profit and loss

362'793

322'075

12.6

of which financial investments from insurance contracts

362'793

322'075

12.6

Derivative financial instruments

0

0

 

Other financial liabilities at fair value through profit and loss

24'539

24'358

0.7

Total Level 3

387'332

346'433

11.8

 

 

 

 

Total liabilities

1'202'167

1'056'596

13.8

Measurement of assets and liabilities classified as Level 3

For the recurring measurement of the fair value of financial and non-financial assets and liabilities for which significant non-observable inputs have been used and which are classified as Level 3, the effects on the income statement as per 30 June 2014 are immaterial and therefore they are not shown. The measurement and valuation had no influence on other comprehensive income for the first half of 2014.

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 from insurance business and income from financial liabilities from insurance business

Individual subsidiary companies are active in the insurance sector. Within the scope of this business only fund-linked insurance policies are written. The configuration of the fund-linked insurance policies envisages that, in the case of the occurrence of the insured events, the value of the insurance coverage fund plus a risk benefit are to be paid out. The investment risk of the fund-linked insurance policies is always borne by the policy holder. Accordingly, the company is not exposed to an investment risk at any time. The valuation of these insurance policies is carried out periodically and in compliance with IFRS. Changes in insurance coverage funds and the corresponding provisions are booked to profit and loss. Basically, the valuation is made on the basis of the cost approach and market-to-model methods. In the cost approach method, the valuation is based on the replacement value. In the market-to-model method, models are employed which calculate a market-consistent value for the assets. Changes in the inputs on which the measurement of the fair value is based can lead to a significant change in the models. It cannot be quantified to what extent changes influence the fair value and sensitivity of fair value because the valuation of an insurance policy is based on an individual measurement, which is influenced by various assumptions such as the type of assets, the contract duration and payment flows. Consequently, a significant change in the fair value can occur, which is not quantifiable. Financial investments from insurance business 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 the fair value because the valuation of the 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.

Purchase price obligations from acquisitions

As per 30 June 2014, a shareholders’ agreement existed between swisspartners Investment Network AG, Zurich and LLB, according to which the shareholders are granted the right to sell the share capital and the voting rights to the LLB. At the same time, the shareholders of the LLB are granted the right to buy the remaining shares and voting rights. This purchase price obligation is determined periodically on the basis of a calculation specified in the shareholders’ agreement, which is based on a company value composed of customer equity, and earnings value and an actual value. The input factors, which are applied to calculate the purchase price obligation and to determine the company value, comprise information that is partly available to the public such as assets under management, annual profit and equity. Assumptions are made in the discounting of the purchase price commitment and in considering its future development. These assumptions relate to the future development of annual profit and the value of customer equity. As far as possible the assumptions are based on factors observable on the market such as overall economic trends or macro and micro-economic developments. Changes in the inputs on which the measurement of the fair value is based can lead to significant changes in the purchase price obligation. It cannot be quantified to what extent changes influence the fair value and the sensitivity of the fair value because the measurement is influenced by the company and economic developments and trends. Consequently, a significant change in the fair value can occur, which is not quantifiable. The purchase price obligation does not diverge to highest and best use.

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