34 Fair Value of Financial Instruments
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
- Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
- Level 2: techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and
- Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.
The following tables show an analysis of financial instruments recorded at fair value by level of the fair value hierarchy:
At 31 December 2010 | Level 1 | Level 2 | Level 3 | Total |
---|---|---|---|---|
Financial assets | ||||
Trading securities | 65,704 | 464 | - | 66,168 |
Securities designated at fair value through profit or loss | 81,486 | 21,945 | 3,444 | 106,875 |
Securities pledged under repurchase agreements | 81,493 | - | - | 81,493 |
Investment securities available for sale | 1,193,158 | 5,866 | 11,897 | 1,210,921 |
Derivative financial instruments | - | 4,285 | 4,972 | 9,257 |
Total financial assets at fair value | 1,421,841 | 32,560 | 20,313 | 1,474,714 |
Financial liabilities | ||||
Derivative financial instruments | - | 1,553 | - | 1,553 |
Total financial liabilities at fair value | - | 1,553 | - | 1,553 |
At 31 December 2009 | Level 1 | Level 2 | Level 3 | Total |
---|---|---|---|---|
Financial assets | ||||
Trading securities | 90,507 | 515 | - | 91,022 |
Securities designated at fair value through profit or loss | 103,673 | 4,776 | 15,990 | 124,439 |
Securities pledged under repurchase agreements | 2,699 | - | - | 2,699 |
Investment securities available for sale | 833,084 | 2,982 | 9,909 | 845,975 |
Derivative financial instruments | 3,965 | 3,965 | ||
Total financial assets at fair value | 1,029,963 | 12,238 | 25,899 | 1,068,100 |
Financial liabilities | ||||
Derivative financial instruments | - | 10,589 | - | 10,589 |
Total financial liabilities at fair value | - | 10,589 | - | 10,589 |
Level 2 includes debt securities of first-class borrowers that are not actively traded on the market. Fair value of the securities was calculated using techniques for which all inputs which have a significant effect on the recorded fair value are observable. Financial characteristics of comparable financial instruments actively traded on the market were used as inputs for the fair valuation models.
Corporate bonds recorded in trading portfolio and in portfolio of investment securities available for sale at fair value of RR 858 million were transferred from Level 1 to Level 2 during the year ended 31 December 2010. There were no transfers between level 1 and level 2 during the year ended 31 December 2009.
The following table shows a reconciliation of the opening and closing amount of Level 3 financial assets and liabilities which are recorded at fair value as at 31 December 2010:
At 1 January 2010 | Total gains reported in income statement | Total gains reported in other comprehensive income | Purchases | Transfers from Level 3 | Transfers to Level 3 | At 31 December 2010 | |
---|---|---|---|---|---|---|---|
Financial assets | |||||||
Securities designated at fair value through profit or loss | 15,990 | 678 | 159 | (13,383) | 3,444 | ||
Investment securities available for sale | 9,909 | 212 | 4,472 | 252 | (2,948) | 11,897 | |
Derivative financial instruments | - | 601 | - | 2,131 | - | 2,240 | 4,972 |
Total level 3 financial assets | 25,899 | 1,491 | 4,472 | 2,542 | (16,331) | 2,240 | 20,313 |
Certain financial instruments were transferred from Level 3 to Level 2 during the year ended 31 December 2010 as additional observable market data became available.
For the year ended 31 December 2010 all the gains reported in income statement and reported in other comprehensive income on Level 3 financial assets were unrealized.
Total gains recognized as profit or loss on securities designated at fair value through profit or loss which are presented in the table above are reported in income statement within net gains arising from securities designated at fair value through profit or loss.
Total gains recognized as profit or loss on investment securities available for sale which are presented in the table above are reported in income statement within net gains arising from investment securities available for sale.
Total gains recognized as profit or loss on derivative financial instruments investment which are presented in the table above are reported in income statement within net gains arising from operations with other derivatives.
Investments in shares of a company involved in construction business at fair value through profit and loss of RR 3 340 million using a valuation technique based on non-observable inputs
The Group determined the fair value of the investments based on discounted cash flow model with the following principal assumptions underlying the estimation of the fair value: type of the weighted average cost of capital (hereinafter - "WACC"); volume of construction of housing premises and hotels, terms of construction and subsequent sale, sale price per square meter of housing premises and respective cost of sale, booking rates for hotel rooms.
When determining the sale prices per square meter of housing premises and booking rates for hotel rooms the Group used comparable analogues and estimation of the annual increase in prices.
Should the WACC used by the Group in the valuation model increase / decrease by 1%, the carrying value of the financial instrument would be RR 229 million lower / RR 247 million higher.
Investments in shares of a company involved in machine building at fair value through profit and loss of RR 104 million using a valuation technique based on non-observable inputs
The Group determined fair value of investments based on estimation of fair value of net assets of the company as at the reporting date. The Group applied share of ownership to fair value of assets ratio to determine fair value of shares.
Valuation of available for sale shares in a construction company of RR 731 million using valuation techniques based on non-observable inputs
The Group determined fair value of investments based on discounted cash-flow model. The principal input of the model used is the estimation of fair value of assets and liabilities of the company.
Should the fair value of net assets used by the Group in the valuation model increase / decrease by 5%, the carrying value of the financial instrument would be RR 37 million lower / RR 37 million higher.
Valuation of available for sale shares in a stock exchange of RR 4 683 million using valuation techniques based on non-observable inputs
The Group determined the fair value of the investments based on discounted cash flow model with the following principal assumptions underlying the estimation of the fair value: type of the weighted average cost of capital (hereinafter - "WACC") and estimated future operating cash flows.
Should the WACC used by the Group in the valuation model increase / decrease by 1%, the carrying value of the financial instrument would be RR 336 million lower / RR 395 million higher.
Valuation of available for sale shares of a transportation company of RR 6 442 million using valuation techniques based on non-observable inputs
The principal assumptions underlying the estimation of the fair value include the WACC, commission for transshipment/storage of the goods, annual volume of service and capacity utilization.
The principal assumptions and the impact of reasonable possible changes in these assumptions on the fair value (with all other variables being determined as fixed values) are as follows:
- The volume of the commission for transshipment / storage of the goods will change in the range from -1.5% to +2%;
- The annual production volume will increase by 10%; and
- Capacity utilization ratio will be in the range from 60% to 70%.
As at 31 December 2010 the estimated value of the WACC denominated in US Dollars used by the Group comprised 11.13%.
Should the WACC used by the Group in the valuation model increase / decrease by 1%, the carrying value of the financial instrument would be RR 586 million lower / RR 703 million higher.
Valuation of available for sale shares of a venture company of RR 41 million using valuation techniques based on non-observable inputs
The Group determined fair value of investments based on discounted cash-flow model. The principal input of the model used is the discount rate used, production volumes and cost of production, terms and sale price of goods, and costs of development.
As at 31 December 2010 the estimated value of the discount rate used by the Group and represented by required rate of return for venture investments comprised 41.96%. Should the discount rate used by the Group in the valuation model increase / decrease by 1%, the carrying value of the financial instrument would be RR 3 million lower / RR 3 million higher.
Valuation of a put option on unquoted retail trading company shares of RR 1 189 million using non-observable inputs
The fair value of the option was determined using the Black-Scholes option pricing model. The inputs of the model include current market price of underlying shares and its historical volatility, option strike price and market risk-free rate of return, the principal input being the price of the shares.
Fair value of the underlying shares as at 31 December 2010 was estimated using the discounted cash flow model and comprised RR 10 663 million. Should the estimated value of shares used by the Group in the valuation model increase / decrease by 1%, the carrying value of the financial instrument would be RR 23 million lower / RR 23 million higher.
Valuation of a put option on shares of RR 2 187 million using non-observable inputs
The fair value of the option was determined using the Black-Scholes option pricing model. The principal inputs of the model include current market price of underlying shares, share price volatility and market risk-free rate of return.
Should the share price volatility used by the Group in the valuation model increase / decrease by 1%, the carrying value of the financial instrument would be RR 19 million lower / RR 19 million higher.
Valuation of a put/call option on shares of RR 1 596 million using non-observable inputs
The fair value of the option was determined using the Black-Scholes option pricing model. The principal inputs of the model include share price volatility of publicly traded companies operating in the same industry, share price valuation made using the discounted cash flow model and market risk-free rate of return.
Should the estimated value of shares used by the Group in the valuation model increase / decrease by 1%, the carrying value of the financial instrument would be RR 16 million lower / RR 16 million higher.
The following table shows a reconciliation of the opening and closing amount of Level 3 financial assets and liabilities which are recorded at fair value as at 31 December 2009:
At 1 January 2009 | Total gains/(losses) recorded in income statement | Total gains recorded in other comprehensive income | Purchases | At 31 December 2009 | |
---|---|---|---|---|---|
Financial assets | |||||
Securities designated at fair value through profit or loss | - | 63 | - | 15,927 | 15,990 |
Investment securities available for sale | 4,545 | (864) | 49 | 6,179 | 9,909 |
Total level 3 financial assets | 4,545 | (801) | 49 | 22,106 | 25,899 |
For the year ended 31 December 2009 all the gains reported in income statement and reported in other comprehensive income on Level 3 financial assets were unrealized.
Investment in shares of a company involved in construction business at fair value through profit and loss of RR 2 608 million using a valuation technique based on non-observable inputs
The Group determined the fair value of the investments based on discounted cash flow model with the following principal assumptions underlying the estimation of the fair value: type and volume of construction of housing premises and hotels, terms of construction and subsequent sale, sale price per square meter of housing premises and respective cost of sale, booking rates for hotel rooms.
When determining the sale prices per square meter of housing premises and booking rates for hotel rooms the Group used comparable analogues and estimation of the annual increase of prices.
Should the weighted average cost of the capital (hereinafter - "WACC") used by the Group in the valuation model increase / decrease by 1%, the carrying value of the financial instrument would be RR 237 million lower / RR 258 million higher.
Investment in shares of a company involved in oil and gas production at fair value through profit and loss of RR 13 383 million using valuation technique based on non-observable inputs
The Management of the Group applied the comparative approach using valuation multiples for comparable publicly traded companies.
The principal assumption for determining fair value of the company was that multiples of publicly traded companies operating in the same industry, oil and gas production, provide the best basis for estimating the asset's fair value.
The Management of the Group applied an enterprise value to reserves ratio as the valuation multiple for calculating the company's fair value, and the resulting asset value was then discounted by 20% due to the asset's illiquidity.
Should the weighted multiples and the discount rate used by the Group in the valuation model increase / decrease by 1%, the carrying value of the financial instrument would be RR 21 million lower / RR 16 million higher.
Valuation of available for sale shares in a construction company of RR 731 million using valuation techniques based on non-observable inputs
The Group determined fair value of investments based on discounted cash-flow model. The principal input of the model used is the estimation of fair value of assets and liabilities of the company.
Should the fair value of net assets used by the Group in the valuation model increase / decrease by 5%, the carrying value of the financial instrument would be RR 37 million lower / RR 37 million higher.
Valuation of available for sale shares in an oil and gas producing company of RR 166 million using valuation techniques based on non-observable inputs
The Management of the Group applied the comparative approach using valuation multiples for comparable publicly traded companies.
The principal assumption for determining fair value of the company was that multiples of publicly traded companies operating in the same industry, oil and gas production in the Commonwealth of Independent States, provide the best basis for estimating the asset's fair value.
The Management of the Group applied an enterprise value to reserves ratio as the valuation multiple for calculating the company's fair value, and the resulting asset value was then discounted by 20% due to the asset's illiquidity.
Should the weighted multiples and the discount rate used by the Group in the valuation model increase / decrease by 1%, the carrying value of the financial instrument would be RR 3 million higher / RR 4 million lower.
Valuation of available for sale shares of a transportation company of RR 6 230 million using valuation techniques based on non-observable inputs
The principal assumptions underlying the estimation of the fair value include: commission for transshipment/storage of the goods, production volume and capacity utilization.
The principal assumptions are as follows:
- The volume of the commission for transshipment / storage of the goods will change in the range from -1,5% to +2%;
- The annual production volume will increase by 10%; and
- Capacity utilization ratio will be in the range from 80% to 100%.
Should the WACC used by the Group in the valuation model increase / decrease by 1%, the carrying value of the financial instrument would be RR 609 million lower / RR 736 million higher.
Valuation of available for sale shares in a telecommunication company of RR 2 753 million using valuation techniques based on non-observable inputs
The Management of the Group applied the comparative approach with the use of multiples of comparable publicly traded companies.
The principal assumption for determining fair value of the company was that multiples of publicly traded companies operating in the same industry provide the best basis for estimating the asset's fair value.
The Management of the Group applied two types of multiples for calculating fair value:
- EV/EBITDA as an income generation multiple; and
- EV/Number of the customers for economic sector multiple.
The Management of the Group applied 30% EV/EBITDA and 70% EV/Number of customers weighting coefficients for estimating fair value and then discounted the result by 20% in view of the asset's illiquidity.
Should the weighted multiples and discount coefficients used by the Group in the valuation model increase / decrease by 1%, the carrying value of the financial instrument would be RR 3 million lower / RR 4 million higher.
Fair values of financial assets are as follows:
2010 | 2009 | |||
---|---|---|---|---|
In millions of Russian Roubles | Carrying value | Fair value | Carrying value | Fair value |
Financial assets carried at amortised cost | ||||
Cash and cash equivalents: | ||||
- Cash on hand | 297,956 | 297,956 | 240,641 | 240,641 |
- Cash balances with the Bank of Russia (other than mandatory reserve deposits) |
77,447 | 77,447 | 70,007 | 70,007 |
- Correspondent accounts and overnight placements with other banks with original maturities up to 30 days | 309,704 | 309,704 | 388,295 | 388,295 |
- Reverse-repo agreements with original maturities up to 30 days | 34,494 | 34,494 | 26,578 | 26,578 |
Mandatory cash balances with the Bank of Russia | 50,532 | 50,532 | 40,572 | 40,572 |
Due from other banks | 13,035 | 13,035 | 10,219 | 10,219 |
Loans and advances to customers: | ||||
- Commercial loans to legal entities | 2,395,763 | 2,409,594 | 1,984,834 | 2,028,298 |
- Specialized loans to legal entities | 1,842,704 | 1,875,248 | 1,772,925 | 1,702,977 |
- Consumer and other loans to individuals | 599,604 | 621,434 | 526,126 | 526,126 |
- Mortgage loans to individuals | 574,499 | 599,206 | 484,012 | 484,012 |
- Car loans to individuals | 76,817 | 76,993 | 96,134 | 96,134 |
Investment securities held to maturity | 358,191 | 357,060 | - | - |
Other financial assets carried at amortised cost: | ||||
- Receivables on plastic cards settlements | 91,219 | 91,219 | 52,324 | 52,324 |
- Settlements on currency conversion operations | 6,196 | 6,196 | 4,645 | 4,645 |
- Trade receivables | 5,259 | 5,259 | 1,603 | 1,603 |
- Accrued fees and commissions | 1,164 | 1,164 | 1,153 | 1,153 |
- Funds in settlement | 41 | 41 | 1,117 | 1,117 |
- Other financial assets carried at amortised cost | 3,446 | 3,446 | 714 | 714 |
Financial assets carried at fair value | ||||
Trading securities | 66,168 | 66,168 | 91,022 | 91,022 |
Securities designated at fair value through profit or loss | 106,875 | 106,875 | 124,439 | 124,439 |
Securities pledged under repurchase agreements | 81,493 | 81,493 | 2,699 | 2,699 |
Investment securities available for sale | 1,210,921 | 1,210,921 | 845,975 | 845,975 |
Other financial assets carried at fair value | 9,257 | 9,257 | 3,965 | 3,965 |
Total financial assets | 8,212,785 | 8,304,742 | 6,769,999 | 6,743,515 |
Fair values of financial liabilities are as follows:
2010 | 2009 | |||
---|---|---|---|---|
In millions of Russian Roubles | Carrying value | Fair value | Carrying value | Fair value |
Financial liabilities carried at amortised cost | ||||
Due to other banks: | ||||
- Correspondent accounts and overnight placements of other banks | 38,716 | 38,716 | 35,621 | 35,621 |
- Term placements of other banks | 87,912 | 87,912 | 18,215 | 18,215 |
- Sale and repurchase agreements with other banks | 61,803 | 61,803 | 111 | 111 |
Due to individuals: | ||||
- Current/demand accounts | 785,750 | 785,750 | 540,455 | 540,455 |
- Term deposits | 4,048,709 | 4,075,185 | 3,246,857 | 3,228,747 |
Due to corporate customers: | ||||
- Current/settlement accounts of state and public organisations | 116,827 | 116,827 | 104,004 | 104,004 |
- Term deposits of state and public organisations | 40,475 | 40,691 | 32,900 | 33,152 |
- Current/settlement accounts of other corporate customers | 1,082,754 | 1,082,754 | 861,028 | 861,028 |
- Term deposits of other corporate customers | 576,616 | 610,231 | 653,627 | 657,858 |
Debt securities in issue: | ||||
- Promissory notes | 96,505 | 94,615 | 101,294 | 95,996 |
- Savings certificates | 13,102 | 13,102 | 17,844 | 17,844 |
- Deposit certificates | 1,889 | 1,889 | 5,461 | 5,461 |
- Other debentures | 7,930 | 8,081 | - | - |
Other borrowed funds: | ||||
- Loan participation notes issued under the MTN programme | 153,273 | 153,968 | 46,149 | 48,484 |
- Syndicated loans received | 96,904 | 96,947 | 58,703 | 58,703 |
- Other long-term borrowings | 20,588 | 20,588 | 10,361 | 10,361 |
Other financial liabilities carried at amortised cost: | ||||
- Plastic card payables | 25,425 | 25,425 | 13,170 | 13,170 |
- Trade payables | 9,318 | 9,318 | 2,970 | 2,970 |
- Funds in settlement | 5,071 | 5,071 | 1,579 | 1,579 |
- Deposit insurance system fees payable | 4,476 | 4,476 | 3,449 | 3,449 |
- Deferred commissions received on guarantees issued | 1,222 | 1,222 | 799 | 799 |
- Other financial liabilities carried at amortised cost | 2,109 | 2,109 | 562 | 562 |
Subordinated debt: | ||||
- Subordinated debt received by the Group from the Bank of Russia | 303,299 | 303,299 | 504,346 | 504,346 |
- Subordinated debt received by the Group on international financial markets | 14,504 | 14,562 | ||
- Subordinated debt received by subsidiaries | 214 | 213 | 211 | 200 |
Financial liabilities carried at fair value | ||||
Other financial liabilities carried at fair value | 1,553 | 1,553 | 10,589 | 10,589 |
Total financial liabilities | 7,582,440 | 7,641,745 | 6,284,809 | 6,268,266 |
Financial instruments carried at fair value. Trading securities, other assets at fair value through profit or loss, financial derivatives, available for sale financial assets are carried in the consolidated statement of financial position at fair value.
Cash and cash equivalents are carried at amortised cost which approximately equals their current fair value. Refer to Note 3 for accounting policy on financial instruments carried at fair value.
Loans and receivables carried at amortised cost. The fair value of floating rate instruments is normally their carrying amount. Due to significant changes in market situation interest rates for loans and advances to customers and due from other banks issued at fixed interest rates can be revised. Therefore interest rates for loans issued just before reporting date do not differ significantly from interest rates for new credit instruments with similar credit risk and remaining maturity. If under the Group assessment interest rates for the loans issued before reporting date differ significantly from current interest rates for similar credit instruments the fair value for these loans is estimated. The estimation is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on currency, maturity of the instrument and credit risk of the counterparty.
Contractual interest rates on loans and advances to customers and due from other banks as at 31 December 2010 and 31 December 2009 were as follows:
2010 | 2009 | |
---|---|---|
Due from other banks | 2.5% to 10.0% p.a. | 8.0% to 9.2% p.a. |
Loans and advances to customers: | ||
Corporate loans | 5.4% to 18.0% p.a. | 6.2% to 15.8% p.a. |
Loans to individuals | 9.0% to 20.5% p.a. | 11.2% to 15.0% p.a. |
Estimated fair value of other financial assets including trade debtors equals their carrying amount considering short-term nature of these assets.
Liabilities carried at amortised cost. The fair value is based on quoted market prices, if available. The estimated fair value of fixed interest rate instruments with stated maturity, for which a quoted market price is not available, was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The fair value of liabilities repayable on demand or after a notice period ("demandable liabilities") is estimated as the amount payable on demand, discounted from the first date that the amount could be required to be paid. Discount rates used were consistent with the Group's credit risk and also depend on currency and maturity of the instrument and ranged from 0.03% p.a. to 18.0% p.a. (2009: from 0.04% p.a. to 10.2% p.a.).
Derivative financial instruments. All derivative financial instruments are carried at fair value as assets when the fair value is positive and as liabilities when the fair value is negative. Refer to Note 33.