6 Financial Instruments

6.1 Accounting classification

The following table shows the carrying amounts of financial assets and financial liabilities.

Fair value is 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 in the principal or, in its absence, the most advantageous market to which FMO has access at that date.

At June 30, 2018	FVPL - mandatory	FVPL-designated	Fair value hedging instruments	FVOCI-equity instruments	Amortized cost	Financial liabilities used as hedged items	Total
Financial assets measured at fair value
Short-term deposits	171,284	1,279,401	-	-	-	-	1,450,685
Derivative financial instruments	164,421	-	63,922	-	-	-	228,343
Loans to the private sector	587,652	-	-	-	-	-	587,652
Equity investments	-	1,458,869	-	85,964	-	-	1,544,833
Total	923,357	2,738,270	63,922	85,964	-	-	3,811,513
Financial assets not measured at fair value
Banks	-	-	-	-	48,525	-	48,525
Interest-bearing securities	-	-	-	-	362,488	-	362,488
Loans to the private sector	-	-	-	-	3,680,202	-	3,680,202
Current accounts with state funds and other programs	-	-	-	-	230	-	230
Current income tax receivables	-	-	-	-	24,047	-	24,047
Other receivables	-	-	-	-	21,687	-	21,687
Accrued income	-	-	-	-	107,127	-	107,127
Total	-	-	-	-	4,244,306	-	4,244,306
Financial liabilities measured at fair value
Derivative financial instruments	213,446	-	1,355	-	-	-	214,801
Total	213,446	-	1,355	-	-	-	214,801
Financial liabilities not measured at fair value
Short-term credits	-	-	-	-	90,166	-	90,166
Debentures and notes	-	-	-	-	1,878,253	3,022,616	4,900,869
Current accounts with state funds and other programs	-	-	-	-	1,729	-	1,729
Other liabilities	-	-	-	-	12,809	-	12,809
Accrued liabilities	-	-	-	-	65,757	-	65,757
Total	-	-	-	-	2,048,714	3,022,616	5,071,330

IAS 39 December 31, 2017	Held for trading	Designated as at FVPL	Loans and receivables and financial liabilities at amortized cost	Available for sale	Financial liabilities used as hedged items	Fair value hedging instruments	Total
Financial assets measured at fair value							-
Short-term deposits	-	1,544,118	-	-	-	-	1,544,118
Interest-bearing securities	-	-	-	362,916	-	-	362,916
Derivative financial instruments	207,372	-	-	-	-	52,030	259,402
Equity investments	-	-	-	1,502,833	-	-	1,502,833
Total	207,372	1,544,118	-	1,865,749	-	52,030	3,669,269
Financial assets not measured at fair value
Banks	-	-	71,763	-	-	-	71,763
Interest-bearing securities	-	-	-	-	-	-	-
Loans to the private sector	-	-	4,139,381	-	-	-	4,139,381
Current accounts with state funds and other programs	-	-	274	-	-	-	274
Current income tax receivables	-	-	7,458	-	-	-	7,458
Other receivables	-	-	120,713	-	-	-	120,713
Accrued income	-	-	83,136	-	-	-	83,136
Total	-	-	4,422,725	-	-	-	4,422,725
Financial liabilities measured at fair value
Derivative financial instruments	142,512	-	-	-	-	4,912	147,424
Total	142,512	-	-	-	-	4,912	147,424
Financial liabilities not measured at fair value
Short-term credits	-	-	125,935	-	-	-	125,935
Debentures and notes	-	-	2,588,358	-	2,512,930	-	5,101,288
Current accounts with state funds and other programs	-	-	182	-	-	-	182
Other liabilities	-	-	5,039	-	-	-	5,039
Accrued liabilities	-	-	56,721	-	-	-	56,721
Total	-	-	2,776,235	-	2,512,930	-	5,289,165

6.2 Fair values

Fair value hierarchy

All financial instruments for which fair value is recognized or disclosed are categorized within the fair value hierarchy, based on lowest level input that is significant to the fair value measurement as a whole, as follows:

Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.

Level 3 – Valuation technique for which the lowest level input that is significant to the fair value measurement is unobservable.

Valuation processes

For recurring and non-recurring fair value measurements categorized within Level 3 of the fair value hierarchy, FMO uses the valuation processes to decide its valuation policies and procedures and analyze changes in fair value measurement from period to period.

FMO’s fair value methodology and governance over it’s methods includes a number of controls and other procedures to ensure appropriate safeguards are in place to ensure its quality and adequacy. The responsibility of ongoing measurement resides with the relevant departments. Once submitted, fair value estimates are also reviewed and challenged by the Investment Risk Committee (IRC). The IRC approves the fair values measured including the valuation techniques and other significant input parameters used.

Valuation techniques

When available, the fair value of an instrument is measured by using the quoted price in an active market for that instrument (level 1). A market is regarded as active if transactions of the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

If there is no quoted price in an active market, valuation techniques are used that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. Valuation techniques include:

Recent broker/ price quotations
Discounted cash flow models
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 (level 3). A substantial part of fair value (level 3) is based on net asset values.

Investments are measured at fair value when a quoted market price in an active market is available or when fair value can be estimated reliably by using a valuation technique. The main part of the fair value measurement related to investments (level 3) is based on net asset values of investment funds as reported by the fund manager and are based on advanced valuation methods and practices. When available, these fund managers value the underlying investments based on quoted prices, if not available multiples are applied as input for the valuation.

FMO uses internal valuation models to value its OTC derivative 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 June 30, 2018, the unamortized accrual amounts to €15,740 (December 31, 2017: €18,479). An amount of €2,446 was recorded as an expense in the profit and loss (December 31, 2017: €6,193).

The table below presents the carrying value and estimated fair value of FMO’s non fair value financial assets and liabilities.

The carrying values in the financial asset and liability categories are valued at amortized cost except for the funding in connection with hedge accounting. The underlying changes to fair value of these assets and liabilities are therefore not recognized in the balance sheet.

	IFRS 9 June 30, 2018		IAS 39 December 31, 2017
Non fair value financial assets-liabilities	Carrying value	Fair value	Carrying value	Fair value

Banks	48,525	48,525	71,763	71,763
Interest-bearing securities	362,488	359,476	-	-
Loans to the private sector at AC	3,680,202	3,700,048	4,139,381	4,215,472
Total non fair value financial assets	4,091,215	4,108,049	4,211,144	4,287,235

Short-term credits	90,166	90,166	125,935	125,935
Debentures and notes	4,900,869	4,833,390	5,101,288	5,112,707
Total non fair value financial liabilities	4,991,035	4,923,556	5,227,223	5,238,642

The valuation technique we use for the fair value determination of loans to the private sector and non-hedged funding is based on the discounted cash-flow method. The discount rate we apply is a spread curve based on the average spread of the portfolio.

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.

IFRS 9 June 30, 2018	Level 1	Level 2	Level 3	Total

Financial assets at fair value through profit or loss
-Short-term deposits	-	1,450,685	-	1,450,685
-Derivative financial instruments	-	225,774	2,569	228,343
-Loans to the private sector at FVPL	17,044	-	570,608	587,652
-Equity investments	24,938	-	1,433,931	1,458,869
Financial assets at fair value through other comprehensive income
-Equity investments	-	-	85,964	85,964
Total financial assets at fair value	41,982	1,676,459	2,093,072	3,811,513

Financial liabilities at fair value through profit or loss
-Derivative financial instruments	-	214,801	-	214,801
Total financial liabilities at fair value	-	214,801	-	214,801

IAS 39 December 31, 2017	Level 1	Level 2	Level 3	Total

Financial assets at fair value through profit or loss
-Short-term deposits	-	1,544,118	-	1,544,118
-Derivative financial instruments	-	255,492	3,910	259,402
Available for sale financial assets
-Equity investments	36,488	-	1,466,345	1,502,833
-Interest-bearing securities	362,916	-	-	362,916
Total financial assets at fair value	399,404	1,799,610	1,470,255	3,669,269

Financial liabilities at fair value through profit or loss
-Derivative financial instruments	-	147,424	-	147,424
Total financial liabilities at fair value	-	147,424	-	147,424

Movements in financial instruments measured at fair value based on level 3	Derivative financial instruments	Loans to the private sector	Equity investments	Total

Balance at January 1, 2017	5,653	-	1,650,681	1,656,334
Total gains or losses
-In profit and loss (changes in fair value and value adjustments)	-1,743	-	-46,919	-48,662
-In other comprehensive income (changes in fair value available for sale reserve)	-	-	-145,400	-145,400
Purchases	-	-	188,369	188,369
Sales	-	-	-180,386	-180,386
Transfers into level 3	-	-	-	-
Transfers out of level 3	-	-	-	-
Balance at December 31, 2017 as previously reported	3,910	-	1,466,345	1,470,255
Adjustments from adoption of IFRS 9 (net of tax)	-3,176	599,373	430	596,627
Restated balance at January 1, 2018	734	599,373	1,466,775	2,066,882
Total gains or losses
-In profit and loss (changes in fair value and value adjustments)	1,835	-7,951	-462	-6,578
-In other comprehensive income (changes in fair value reserve)	-	-	8,166	8,166
Purchases/disbursements	-	12,741	114,759	127,500
Sales/repayments	-	-47,114	-68,067	-115,181
Write-offs	-	-	-1,276	-1,276
Exchange rate differences	-	13,559	-	13,559
Transfers into level 3	-	-	-	-
Transfers out of level 3	-	-	-	-
Balance af June 30, 2018	2,569	570,608	1,519,895	2,093,072

Valuation techniques and unobservable inputs used measuring fair value of debt instruments

Type of equity investment	Fair value at June 30, 2018	Valuation technique	Range (weighted average) of significant unobservable inputs	Fair value measurement sensitivity to unobservable inputs

Loans	98,116	DCF	Based on discounted cash flows	A decrease/increase of the used unobservable data with 10% will result in a lower/higher fair value of €10 million.
			Based on client spread	A decrease/increase of the used spreads with 1% will result is a higher/lower fair value of €5 million
	258,159	Compared to ECL level	Based on ECL measurement	An improvement / deterioration of the Client Rating with 1 notch will result 1% increase/decrease
	22,277	Compared to credit impaired level	Based on specific credit impairments	An increase/decrease of the specific impairment with 10% will result a lower/higer value of €6 million
Embedded derivatives	1,113	Black and Scholes	EBITDA multiples within a range of 6-8 for the relevant industry classes per country/region, adjusted for illiquidity	An increase/decrease by 10% of these EBITDA multiples would have minimum to zero impact as a result of the decline in value
Debt Funds	190,943	Net Asset Value	n/a	n/a
Total	570,608

Valuation techniques and unobservable inputs used measuring fair value of equity investments

Type of equity investment	Fair value at June 30, 2018	Valuation technique	Range (weighted average) of significant unobservable inputs	Fair value measurement sensitivity to unobservable inputs

Private equity fund investments	875,688	Net Asset Value	n/a	n/a
Private equity direct investments	55,986	Recent transactions	Based on at arm’s length recent transactions	n/a
	285,528	Book multiples	0.8 – 2.5	A decrease/increase of the book multiple with 10% will result in a lower/higher fair value of €29 million.
	187,365	Earning Multiples	Depends on several unobservable data such as EBITDA multiples (range 5 - 16)	A decrease/increase of the used unobservable data with 10% will result in a lower/higher fair value of €19 million.
	39,539	Discounted Cash Flow (DCF)	Based on discounted cash flows	A decrease/increase of the used unobservable data with 10% will result in a lower/higher fair value of €4 million.
	50,752	Put option based on guaranteed floor	The guaranteed floor depends on several unobservable data such as IRR, EBITDA multiples, book multiples and Libor rates	A decrease/increase of the used unobservable data with 10% will result in a lower/higher fair value of €5 million.
	25,037	Firm offers	1.0 - 1.4	n/a
Total	1,519,895

Share this page: