5 Financial Instruments
5.1 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, 2019 | 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 | 1,315,177 | - | - | - | - | - | 1,315,177 |
Derivative financial instruments | - | 152,101 | 166,764 | - | - | - | 318,865 |
Loans to the private sector | 739,832 | - | - | - | - | - | 739,832 |
Equity investments | 1,613,636 | - | - | 84,554 | - | - | 1,698,191 |
Total | 3,668,646 | 152,101 | 166,764 | 84,554 | - | - | 4,072,065 |
Financial assets not measured at fair value | |||||||
Banks | - | - | - | - | 32,765 | - | 32,765 |
Short-term deposits | - | - | - | - | 490,159 | - | 490,159 |
Interest-bearing securities | - | - | - | - | 384,998 | - | 384,998 |
Loans to the private sector | - | - | - | - | 4,028,168 | - | 4,028,168 |
Current accounts with state funds and other programs | - | - | - | - | 230 | - | 230 |
Other receivables | - | - | - | - | 17,304 | - | 17,304 |
Total | - | - | - | - | 4,953,624 | - | 4,953,624 |
Financial liabilities measured at fair value | |||||||
Derivative financial instruments | - | 241,852 | 7,379 | - | - | - | 249,231 |
Total | - | 241,852 | 7,379 | - | - | - | 249,231 |
Financial liabilities not measured at fair value | |||||||
Short-term credits | - | - | - | - | 115,660 | - | 115,660 |
Debentures and notes | - | - | - | - | 2,374,601 | 3,428,280 | 5,802,881 |
Current accounts with state funds and other programs | - | - | - | - | 2,639 | - | 2,639 |
Other liabilities | - | - | - | - | 42,280 | - | 42,280 |
Accrued liabilities | - | - | - | - | 20,468 | - | 20,468 |
Total | - | - | - | - | 2,555,648 | 3,428,280 | 5,983,928 |
At December 31, 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 | 756,216 | - | - | - | - | - | 756,216 |
Derivative financial instruments | - | 172,602 | 75,221 | - | - | - | 247,823 |
Loans to the private sector | 685,799 | - | - | - | - | - | 685,799 |
Equity investments | 1,504,427 | - | - | 77,553 | - | - | 1,581,980 |
Total | 2,946,442 | 172,602 | 75,221 | 77,553 | - | - | 3,271,818 |
Financial assets not measured at fair value | |||||||
Banks | - | - | - | - | 54,642 | - | 54,642 |
Short-term deposits | - | - | - | - | 391,635 | - | 391,635 |
Interest-bearing securities | - | - | - | - | 402,380 | - | 402,380 |
Loans to the private sector | - | - | - | - | 4,085,022 | - | 4,085,022 |
Current accounts with state funds and other programs | - | - | - | - | 494 | - | 494 |
Other receivables | - | - | - | - | 20,597 | - | 20,597 |
Total | - | - | - | - | 4,954,770 | - | 4,954,770 |
Financial liabilities measured at fair value | |||||||
Derivative financial instruments | - | 210,209 | 6,965 | - | - | - | 217,174 |
Total | - | 210,209 | 6,965 | - | - | - | 217,174 |
Financial liabilities not measured at fair value | |||||||
Short-term credits | - | - | - | - | 76,051 | - | 76,051 |
Debentures and notes | - | - | - | - | 2,442,786 | 2,697,095 | 5,139,881 |
Current accounts with state funds and other programs | - | - | - | - | 4,173 | - | 4,173 |
Other liabilities | - | - | - | - | 1,331 | - | 1,331 |
Accrued liabilities | - | - | - | - | 10,086 | - | 10,086 |
Total | - | - | - | - | 2,534,427 | 2,697,095 | 5,231,522 |
5.2 Short-term deposits
June 30, 2019 | December 31, 2018 | |
Collateral delivered (related to derivative financial instruments) | 67,305 | 66,531 |
Commercial paper | 1,121,771 | 590,350 |
Money market funds | 193,406 | 165,866 |
Dutch central bank | 421,982 | 324,615 |
Mandatory reserve deposit with Dutch central bank | 872 | 489 |
Total short term deposits | 1,805,336 | 1,147,851 |
Mandatory reserve deposits are not available for use in FMO’s day-to-day operations.
5.3 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 applied methods includes a number of controls and other procedures to ensure appropriate safeguards are in place to ensure 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. The appropriateness of the valuation techniques applicable to the underlying instruments is assessed as part of the valuation process and any potential changes between levels in the fair value hierarchy are considered.
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.
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.
June 30, 2019 | December 31, 2018 | |||
Non fair value financial assets-liabilities | Carrying value | Fair value | Carrying value | Fair value |
Short term deposits at AC | 490,159 | 490,159 | 391,635 | 391,635 |
Banks | 32,765 | 32,765 | 54,642 | 54,642 |
Interest-bearing securities | 384,998 | 394,374 | 402,380 | 406,561 |
Loans to the private sector at AC | 4,028,168 | 4,123,036 | 4,085,022 | 4,167,007 |
Total non fair value financial assets | 4,936,090 | 5,040,333 | 4,933,679 | 5,019,845 |
Short-term credits | 115,660 | 115,660 | 76,051 | 76,051 |
Debentures and notes | 5,802,881 | 5,832,235 | 5,139,881 | 5,128,431 |
Total non fair value financial liabilities | 5,918,541 | 5,947,895 | 5,215,932 | 5,204,482 |
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.
At June 30, 2019 | Level 1 | Level 2 | Level 3 | Total |
Financial assets at FVPL | ||||
-Short-term deposits mandatorily at FVPL | 1,315,177 | - | 1,315,177 | |
-Derivative financial instruments | - | 313,254 | 5,612 | 318,865 |
-Loans to the private sector mandatorily at FVPL | 63,317 | - | 676,515 | 739,832 |
-Equity investments | 30,523 | - | 1,583,114 | 1,613,636 |
Financial assets at FVOCI | ||||
-Equity investments | - | - | 84,554 | 84,554 |
Total financial assets at fair value | 1,409,017 | 313,254 | 2,349,794 | 4,072,065 |
Financial liabilities at FVPL | ||||
-Derivative financial instruments | - | 249,231 | - | 249,231 |
Total financial liabilities at fair value | - | 249,231 | - | 249,231 |
At December 31, 2018 | Level 1 | Level 2 | Level 3 | Total |
Financial assets at FVPL | ||||
-Short-term deposits mandatorily at FVPL | 756,216 | - | - | 756,216 |
-Derivative financial instruments | - | 243,199 | 4,624 | 247,823 |
-Loans to the private sector mandatorily at FVPL | 15,194 | - | 670,605 | 685,799 |
-Equity investments | 25,028 | - | 1,479,399 | 1,504,427 |
Financial assets at FVOCI | ||||
-Equity investments | - | - | 77,553 | 77,553 |
Total financial assets at fair value | 796,438 | 243,199 | 2,232,181 | 3,271,818 |
Financial liabilities at FVPL | ||||
-Derivative financial instruments | - | 217,174 | - | 217,174 |
Total financial liabilities at fair value | - | 217,174 | - | 217,174 |
Movements in financial instruments measured at fair value based on level 3 | Derivative financial instruments | Loans to the private sector | Equity investments | Total |
Restated Balance at January 1, 2018 | 734 | 590,405 | 1,466,775 | 2,057,914 |
Total gains or losses | ||||
-In profit and loss (changes In fair value) | 3,890 | -6,206 | -36,280 | -38,596 |
-In other comprehensive income (changes in fair value) | - | - | -245 | -245 |
Purchases /disbursements | - | 88,113 | 283,387 | 371,500 |
Sales/repayments | - | -81,344 | -152,417 | -233,761 |
Write-offs | - | - | - | |
Accrued income | - | 4,906 | - | 4,906 |
Exchange rate differences | - | 23,025 | -4,268 | 18,757 |
Derecognition and/or restructuring FVPL versus AC | - | 56,520 | - | 56,520 |
Reclassification Loans versus Equity | - | -4,814 | - | -4,814 |
Transfers into level 3 | - | - | - | - |
Transfers out of level 3 | - | - | - | - |
Balance at December 31, 2018 as previously reported | 4,624 | 670,605 | 1,556,952 | 2,232,181 |
Total gains or losses | ||||
-In profit and loss (changes In fair value) | 968 | 3,113 | -10,031 | -5,950 |
-In other comprehensive income (changes in fair value) | - | - | 6,530 | 6,530 |
Purchases /disbursements | - | 38,721 | 147,031 | 185,752 |
Sales/repayments | - | -32,150 | -34,501 | -66,651 |
Write-offs | - | -1,035 | - | -1,035 |
Accrued income | - | -1,638 | - | -1,638 |
Exchange rate differences | 20 | 3,659 | 2,154 | 5,832 |
Derecognition and/or restructuring FVPL versus AC | - | 2,038 | - | 2,038 |
Reclassification Loans versus Equity | - | -6,798 | 6,798 | - |
Transfers into level 3 | - | - | - | - |
Transfers out of level 3 | - | - | -7,264 | -7,264 |
Balance at June 30, 2019 | 5,612 | 676,515 | 1,667,668 | 2,349,795 |
Valuation techniques and unobservable inputs used measuring fair value of loans to the private sector
Type of debt investment | Fair value at June 30, 2019 | Valuation technique | Range (weighted average) of significant unobservable inputs | Fair value measurement sensitivity to unobservable inputs |
Loans | 120,953 | Discounted cash flow model | Based on client spread | A decrease/increase of the used spreads with 1% will result is a higher/lower fair value of €6m. |
285,006 | ECL measurement | Based on client rating | An improvement / deterioration of the Client Rating with 1 notch wil result 1% increase/decrease | |
55,455 | Credit impairment | n/a | n/a | |
Debt Funds | 215,101 | Net Asset Value | n/a | n/a |
Total | 676,515 |
Valuation techniques and unobservable inputs used measuring fair value of equity investments
Type of equity investment | Fair value at June 30, 2019 | Valuation technique | Range (weighted average) of significant unobservable inputs | Fair value measurement sensitivity to unobservable inputs |
Private equity fund investments | 884,536 | Net Asset Value | n/a | n/a |
Private equity direct investments | 45,558 | Recent transactions | Based on at arm’s length recent transactions | n/a |
473,234 | Book multiples | 1.0 – 2.5 | A decrease/increase of the book multiple with 10% will result in a lower/higher fair value of €47m. | |
177,521 | Earning Multiples | Depends on several unobservable data such as EBITDA multiples (range 6 - 14) | A decrease/increase of the used unobservable data with 10% will result in a lower/higher fair value of €18m. To be recorded in other comprehensive income | |
17,030 | 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 €2m. | |
37,540 | 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 €4m. | |
32,248 | Firm offers | 1.0 - 1.4 | n/a | |
Total | 1,667,668 |