15 Fair value measurement

(unaudited)

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, which possess a fair value and are eligible, are classified in one of the three following fair value hierarchy levels:

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. Valuation models or methods having non-observable input factors are utilised for 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, or uses the fair values of third parties, 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 input factors:

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Valuation model

 

Inputs

 

Significant, non-observable inputs

Level 2

 

 

 

 

 

 

Derivative financial instruments

 

Option models

 

Underlying assets of future contracts

 

 

Own investment funds

 

Market to model

 

Market prices of underlying assets

 

 

Equities

 

Market to model

 

Market prices of underlying assets

 

 

Due from banks

 

Present value calculation

 

Market price of congruent LIBOR interest rates

 

 

Due to banks

 

Present value calculation

 

Market price of congruent LIBOR interest rates

 

 

Loans

 

Present value calculation

 

Market price of congruent LIBOR interest rates

 

 

Due to customers

 

Present value calculation

 

Market price of congruent LIBOR interest rates

 

 

Debt issued

 

Present value calculation

 

Market price of congruent LIBOR interest rates

 

 

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

 

 

 

 

 

 

 

 

 

Level 3

 

 

 

 

 

 

Financial investments, recognised at fair value through other comprehensive income

 

Market to model

 

Audited financial statements

 

Illiquidity, special micro- economic conditions

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

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 30 June 2019, 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 2019, there were no significant transfers between Level 1, Level 2 and Level 3 financial instruments.

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in CHF thousands

 

30.06.2019

 

31.12.2018

 

+/– %

Level 1

 

 

 

 

 

 

Financial investments at fair value through profit and loss

 

574'090

 

635'676

 

–9.7

Financial investments, recognised at fair value through other comprehensive income

 

1'477'127

 

1'207'796

 

22.3

Total financial instruments at fair value

 

2'051'217

 

1'843'472

 

11.3

 

 

 

 

 

 

 

Cash and balances with central banks

 

5'368'029

 

5'708'324

 

–6.0

Total financial instruments not at fair value

 

5'368'029

 

5'708'324

 

–6.0

 

 

 

 

 

 

 

Total Level 1

 

7'419'246

 

7'551'796

 

–1.8

 

 

 

 

 

 

 

Level 2

 

 

 

 

 

 

Derivative financial instruments

 

101'070

 

197'886

 

–48.9

of which for hedging purpose

 

3'387

 

2'071

 

63.5

Financial investments at fair value through profit and loss

 

45'248

 

69'546

 

–34.9

Total financial instruments at fair value

 

146'318

 

267'431

 

–45.3

 

 

 

 

 

 

 

Due from banks

 

1'888'205

 

1'617'123

 

16.8

Loans

 

13'622'832

 

13'391'601

 

1.7

Accrued income and prepaid expenses

 

55'572

 

56'868

 

–2.3

Total financial instruments not at fair value

 

15'566'609

 

15'065'592

 

3.3

 

 

 

 

 

 

 

Total Level 2

 

15'712'927

 

15'333'023

 

2.5

 

 

 

 

 

 

 

Level 3

 

 

 

 

 

 

Financial investments, recognised at fair value through other comprehensive income

 

28'143

 

24'039

 

17.1

Total financial instruments at fair value

 

28'143

 

24'039

 

17.1

 

 

 

 

 

 

 

Total financial instruments not at fair value

 

0

 

0

 

 

 

 

 

 

 

 

 

Investment property

 

15'000

 

15'000

 

0.0

Non-current assets held for sale

 

21'323

 

21'214

 

 

Total other assets at fair value

 

36'323

 

36'214

 

0.3

 

 

 

 

 

 

 

Total Level 3

 

64'466

 

60'253

 

7.0

 

 

 

 

 

 

 

Total assets

 

23'196'639

 

22'945'072

 

1.1

 

 

 

 

 

 

 

Level 1

 

 

 

 

 

 

Total financial instruments at fair value

 

0

 

0

 

 

Bonds issued

 

152'792

 

0

 

 

Total financial instruments not at fair value

 

152'792

 

0

 

 

Total Level 1

 

152'792

 

0

 

 

 

 

 

 

 

 

 

Level 2

 

 

 

 

 

 

Derivative financial instruments

 

180'445

 

255'564

 

–29.4

of which for hedging purpose

 

23'773

 

7'687

 

209.3

Total financial instruments at fair value

 

180'445

 

255'564

 

–29.4

 

 

 

 

 

 

 

Due to banks

 

1'332'563

 

1'509'905

 

–11.7

Due to customers

 

17'836'686

 

17'540'159

 

1.7

Debt issued

 

1'355'354

 

1'280'606

 

5.8

Accrued expenses and deferred income

 

50'949

 

51'625

 

–1.3

Total financial instruments not at fair value

 

20'575'552

 

20'382'294

 

0.9

 

 

 

 

 

 

 

Total Level 2

 

20'755'997

 

20'637'858

 

0.6

 

 

 

 

 

 

 

Level 3

 

 

 

 

 

 

Non-current liabilities held for sale

 

2'311

 

2'386

 

–3.1

Total other liabilities at fair value

 

2'311

 

2'386

 

–3.1

Total Level 3

 

2'311

 

2'386

 

–3.1

 

 

 

 

 

 

 

Total liabilities

 

20'911'100

 

20'640'244

 

1.3

Measurement of assets and liabilities, classified as Level 3

Financial investments recognised at fair value through other comprehensive income increased by CHF 4.1 million in the first half of 2019. This rise is purely the result of an increase in the fair value of the investments.

There were no value changes with investment property. Accordingly, there was no impact on the income statement.

The change in value with non-current assets held for sale was caused by the classification of properties as available for sale and their subsequent sale. The sale of one property generated a profit of CHF 0.6 million; the corresponding disposal of a property valued at CHF 0.9 million was offset by the purchase of another with a carrying value of CHF 0.9 million. The profit was recognised in the income statement under other income. The change in value between the current and comparison periods therefore relates to changes in the portfolio. The value was also affected slightly by exchange rate fluctuations between the euro and the Swiss franc.

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. All level 3 positions were immaterial, accordingly a full disclosure of level 3 positions was regarded as unnecessary.

Financial investments measured at fair value through other comprehensive income

The financial investments consist of non-listed shares in companies of an infrastructure nature which are required to operate a bank. Based on the current company data, these are periodically revalued by the companies themselves or by third parties utilising valuation models.

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.

Investment properties do not diverge to highest and best use.

Non-current assets and liabilities held for sale

Non-current assets held for sale contain utilised bank branches and rental apartments, as well as wholly-owned unused properties and a company that administers rental apartments (see Note 16 “Non-current assets and liabilities held for sale”). The process on which the valuation is based is the same one as for investment properties, i.e. the fair value assessment is made solely by third parties. The reported value of these assets and liabilities corresponds to the fair value minus selling expenses.

The liabilities relate to the management company.

Financial instruments 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 disclosed.

The following table shows this comparison only for positions which are 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.

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30.06.2019

 

31.12.2018

in CHF thousands

 

Book amount

 

Fair value

 

Book amount

 

Fair value

Assets

 

 

 

 

 

 

 

 

Cash and balances with central banks

 

5'368'029

 

5'368'029

 

5'708'324

 

5'708'324

Due from banks

 

1'888'161

 

1'888'205

 

1'611'454

 

1'617'123

Loans

 

13'019'759

 

13'622'832

 

12'852'541

 

13'391'601

Accrued income and prepaid expenses

 

55'572

 

55'572

 

56'868

 

56'868

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Due to banks

 

1'329'376

 

1'332'563

 

1'509'412

 

1'509'905

Due to customers

 

17'731'977

 

17'836'686

 

17'475'706

 

17'540'159

Debt issued

 

1'294'573

 

1'355'354

 

1'236'362

 

1'280'606

Bonds issued

 

150'210

 

152'792

 

0

 

0

Accrued expenses and deferred income

 

50'949

 

50'949

 

51'625

 

51'625