13 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 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

Level 2

 

 

 

 

 

 

Trading portfolio assets

 

Market to model

 

Market prices of underlying assets

 

 

Own investment funds

 

Market to model

 

Market prices of underlying assets

 

 

Derivative financial instruments

 

Option model

 

Underlying assets of future contracts

 

 

Due from banks

 

Present value calculation

 

Marktet price of congruent LIBOR interest rates

 

 

Due to banks

 

Present value calculation

 

Marktet price of congruent LIBOR interest rates

 

 

Loans

 

Present value calculation

 

Marktet price of congruent LIBOR interest rates

 

 

Due to customers

 

Present value calculation

 

Marktet price of congruent LIBOR interest rates

 

 

Debt issued

 

Present value calculation

 

Marktet 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 at fair value through profit and loss

 

Market to model

 

Audited financial statements

 

Illiquidity, special micro-economic conditions

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 the LLB Group’s financial and non-financial assets and liabilities 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 2018, the LLB Group had no assets or liabilities that were measured at fair value on a non-recurring basis in the balance sheet. In the first half of 2018 there were no significant transfers between Level 1, Level 2 and Level 3 financial instruments.

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in CHF thousands

 

30.06.2018

 

31.12.2017

 

+/− %

Level 1

 

 

 

 

 

 

Trading portfolio assets

 

1

 

52

 

–98.5

Financial investments at fair value through profit and loss

 

774'455

 

915'108

 

–15.4

Financial investments available for sale

 

 

 

282'317

 

 

Financial investments, recognised at fair value through other comprehensive income

 

675'894

 

 

 

 

Total financial instruments at fair value

 

1'450'351

 

1'197'477

 

21.1

 

 

 

 

 

 

 

Cash and balances with central banks

 

4'229'939

 

4'129'723

 

2.4

Total financial instruments not at fair value

 

4'229'939

 

4'129'723

 

2.4

 

 

 

 

 

 

 

Total Level 1

 

5'680'289

 

5'327'201

 

6.6

 

 

 

 

 

 

 

Level 2

 

 

 

 

 

 

Trading portfolio assets

 

32

 

10

 

216.5

Derivative financial instruments

 

72'170

 

58'740

 

22.9

of which for hedging purpose

 

2'091

 

1'438

 

45.4

Financial investments at fair value through profit and loss

 

232'741

 

239'199

 

–2.7

Total financial instruments at fair value

 

304'944

 

297'949

 

2.3

 

 

 

 

 

 

 

Due from banks

 

2'232'385

 

1'940'433

 

15.0

Loans

 

12'395'508

 

12'083'966

 

2.6

Accrued income and prepaid expenses

 

48'743

 

39'395

 

23.7

Total financial instruments not at fair value

 

14'676'635

 

14'063'794

 

4.4

 

 

 

 

 

 

 

Total Level 2

 

14'981'579

 

14'361'742

 

4.3

 

 

 

 

 

 

 

Level 3

 

 

 

 

 

 

Financial investments at fair value through profit and loss

 

 

 

23'449

 

 

Financial investments, recognised at fair value through other comprehensive income

 

23'954

 

 

 

 

Total financial instruments at fair value

 

23'954

 

23'449

 

2.2

 

 

 

 

 

 

 

Total financial instruments not at fair value

 

0

 

0

 

 

 

 

 

 

 

 

 

Investment property

 

15'000

 

15'000

 

0.0

Non-current assets held for sale

 

3'504

 

6'734

 

 

Total other assets at fair value

 

18'504

 

21'734

 

–14.9

 

 

 

 

 

 

 

Total Level 3

 

42'458

 

45'183

 

–6.0

 

 

 

 

 

 

 

Total assets

 

20'704'326

 

19'734'126

 

4.9

 

 

 

 

 

 

 

Level 1

 

 

 

 

 

 

Total Level 1

 

0

 

0

 

 

 

 

 

 

 

 

 

Level 2

 

 

 

 

 

 

Derivative financial instruments

 

121'238

 

117'448

 

3.2

of which for hedging purpose

 

2'211

 

1'795

 

23.2

Total financial instruments at fair value

 

121'238

 

117'448

 

3.2

 

 

 

 

 

 

 

Due to banks

 

1'436'968

 

943'316

 

52.3

Due to customers

 

16'175'315

 

15'652'158

 

3.3

Debt issued

 

1'199'542

 

1'169'027

 

2.6

Accrued expenses and deferred income

 

36'836

 

30'250

 

21.8

Total financial instruments not at fair value

 

18'848'661

 

17'794'750

 

5.9

 

 

 

 

 

 

 

Total Level 2

 

18'969'899

 

17'912'198

 

5.9

 

 

 

 

 

 

 

Level 3

 

 

 

 

 

 

Total Level 3

 

0

 

0

 

 

 

 

 

 

 

 

 

Total liabilities

 

18'969'899

 

17'912'198

 

5.9

Measurement of assets and liabilities classified as Level 3

For the recurring measurement of the fair value of investment property for which significant, non-observable inputs have been used and which are classified as Level 3, there were no effects on the income statement in the first half of 2018. A portion of the properties classified in non-current assets held for sale as at 31 December 2017 was sold as planned. No new assets were added to the portfolio. Accordingly, the change in value between the current and the comparison periods therefore relates solely to the change due to disposals.

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 on fair value.

Financial investments at fair value through other comprehensive income

Following the changeover to IFRS 9, financial investments at fair value through profit and loss were designated FVOCI. This new designation means that only the recognition of the alteration in fair value changes, the measurement of the fair value remains the same.

Financial investments are periodically valued through profit and loss 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 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 or 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 held for sale

Non-current assets held for sale encompass only wholly owned properties, which currently comprise bank branches and unused properties (see note 14 “Non-current assets held for sale”). These are valued in the same way as investment property.

Financial instruments not measured at fair value

The fair value hierarchy also includes details of financial assets and liabilities that are measured on a basis other than fair value, but for which, however, a fair value exists. 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 shown.

The following table shows this comparison only for positions, which are not measured at fair value because for positions measured at fair value, the carrying value is the same as the fair value. On account of the maturity being longer than one year, for certain positions the present value was calculated on the basis of LIBOR interest rates appropriate for the duration. For all other positions, the carrying value represents a reasonable approximation of the fair value.

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30.06.2018

 

31.12.2017

in CHF thousands

 

Carrying amount

 

Fair value

 

Carrying amount

 

Fair value

Assets

 

 

 

 

 

 

 

 

Cash and balances with central banks

 

4'229'939

 

4'229'939

 

4'129'723

 

4'129'723

Due from banks

 

2'232'385

 

2'232'409

 

1'940'433

 

1'944'825

Loans

 

12'395'508

 

12'902'788

 

12'083'966

 

12'595'887

Accrued income and prepaid expenses

 

48'743

 

48'743

 

39'395

 

39'395

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Due to banks

 

1'436'968

 

1'439'010

 

943'316

 

945'030

Due to customers

 

16'175'315

 

16'232'561

 

15'652'158

 

15'708'690

Debt issued

 

1'199'542

 

1'236'593

 

1'169'027

 

1'215'905

Accrued expenses and deferred income

 

36'836

 

36'836

 

30'250

 

30'250