Note 15 - Measurement of fair value of financial instruments

Financial instruments at fair value are classified at various levels.

Level 1: Valuation based on quoted prices in an active market
Fair value of financial instruments that are traded in the active markets is based on market price on the balance sheet date. A market is considered active if market prices are easily and regularly available from a stock exchange, dealer, broker, industry group, price-setting service or regulatory authority, and these prices represent actual and regularly occurring market transactions at an arm’s length. This category also includes quoted shares and Treasury bills.

Level 2: Valuation based on observable market data
Level 2 consists of instruments that are valued by the use of information that does not consist in quoted prices, but where the prices are directly or indirectly observable for the assets or liabilities concerned, and which also include quoted prices in non-active markets.

Level 3: Valuation based on other than observable data
If valuation data are not available for level 1 and 2, valuation methods are applied that are based on non-observable information.

 

The following table presents the Group's assets and liabilities measured at fair value at 30 September 2018: 
         
Assets (NOKm) Level 1 Level 2 Level 3 Total
Financial assets at fair value through profit/loss        
- Derivatives 4 2,681 - 2,686
- Bonds and money market certificates 2,980 16,741 - 19,721
- Equity instruments 2,037 79 546 2,662
- Fixed interest loans - 43 3,970 4,013
Financial assets through other comprehensive income      
- Loans at fair value through other comprehensive income - - 60,894 60,894
Total assets 5,021 19,544 65,410 89,975
         
Liabilities Level 1 Level 2 Level 3 Total
Financial liabilities through profit/loss        
- Derivatives 16 2,990 - 3,006
- Equity instruments 70 1 - 71
Total liabilities 86 2,992 - 3,078

 

The following table presents the Group's assets and liabilities measured at fair value at 30 September 2017: 
         
Assets (NOKm) Level 1 Level 2 Level 3 Total
Financial assets at fair value through profit/loss        
- Derivatives 7 4,212 - 4,219
- Bonds and money market certificates 2,840 15,083 - 17,922
- Equity instruments 1,137 - 409 1,546
- Fixed interest loans - 43 3,459 3,502
Financial assets avaliable for sale        
- Equity instruments - - 61 61
Total assets 3,983 19,337 3,929 27,250
         
Liabilities Level 1 Level 2 Level 3 Total
Financial liabilities through profit/loss        
- Derivatives 5 3,640 - 3,645
- Equity instruments 217 - - 217
Total liabilities 223 3,640 - 3,862

 

The following table presents the Group's assets and liabilities measured at fair value at 31 December 2017: 
         
Assets (NOKm) Level 1 Level 2 Level 3 Total
Financial assets at fair value through profit/loss        
- Derivatives 16 4,334 - 4,351
- Bonds and money market certificates 2,547 17,189 - 19,736
- Equity instruments 1,339 - 419 1,759
- Fixed interest loans - 43 3,236 3,278
Financial assets avaliable for sale        
- Equity instruments - - 66 66
Total assets 3,902 21,566 3,722 29,190
         
Liabilities Level 1 Level 2 Level 3 Total
Financial liabilities through profit/loss        
- Derivatives 14 3,328 - 3,343
- Equity instruments 239 4 - 244
Total liabilities 254 3,332 - 3,586

 

The following table presents the changes in the instruments classified in level 3 as at 30 September 2018:   
           
(NOKm) Equity instruments through profit/loss Fixed interest loans Loans at fair value through OCI Equity instruments through OCI Total
Closing balance 31 December 419 3,236 - 66 3,722
Implementation effect IFRS 9 66 - 56,743 -66 56,743
Opening balance 1 January 486 3,236 56,743 - 60,464
Investment in the period 54 1,632 20,470 - 22,155
Disposals in the period -13 -893 -16,318 - -17,224
Expected credit loss - - -2 - -2
Gain or loss on financial instruments 19 -5 2 - 17
Closing balance  546 3,970 60,894 - 65,411

 

The following table presents the changes in the instruments classified in level 3 as at 30 September 2017: 
(NOKm) Equity instruments through profit/loss Fixed interest loans Equity instruments available for sale Total
Opening balance 1 January  3,783  524 60  4,367
Investment in the period 269 10  -  279
Disposals in the period -601 -149  -  -751
Gain or loss on financial instruments 9 24 2 34
Closing balance   3,459 409 61  3,929

 

 

The following table presents the changes in the instruments classified in level 3 as at 31 December 2017: 
(NOKm) Equity instruments through profit/loss Fixed interest loans Equity instruments available for sale Total
Opening balance 1 January 524 3,783 60 4,367
Investment in the period 20 304 - 323
Disposals in the period -157 -849 -20 -1,026
Gain or loss on financial instruments 33 -2 27 57
Closing balance  419 3,236 66 3,722

Valuation method
The valuation method applied is adapted to each financial instrument, and is intended to utilise as much of the information that is available in the market as possible.

The method for valuation of financial instruments in level 2 and 3 is described in the following:

Fixed interest loans to customers (level 3)
The loans consist for the most part of fixed interest loans denominated in Norwegian kroner. The value of the fixed interest loans is determined such that agreed interest flows are discounted over the term of the loan by a discount factor that is adjusted for margin requirements. The discount factor is raised by 10 points when calculating sensitivity.

Loans at fair value through other comprehensive income (level 3)
Property Loans at floating interest classified at  fair value over other comprehensive income is valued based on nominal amount reduced by expected credit loss. Loans with no significant credit risk detoriation since first recognition is assessed at nominal amount. For loans with a significant increase in credit risk since first recognition or objective evidence of loss, the calculation of expected credit losses over the life of the asset is in line with loan losses for loans at amortised cost. Estimated fair value is the nominal amount reduced by expected lifetime credit loss. If the likelihood of the worst case scenario in the model is doubled, fair value is reduced by NOK 5 million.

Short-term paper and bonds (level 2 and 3)
Valuation on level 2 is based for the most part on observable market information in the form of interest rate curves, exchange rates and credit margins for the individual credit and the bond’s or certificate’s characteristics. For paper valued under level 3 the valuation is based on indicative prices from a third party or comparable paper.

Equity instruments (level 3)
Shares that are classified to level 3 include essentially investments in unquoted shares. Among other a total of NOK 287 million in Private Equity investments, property funds, hedge funds and unquoted shares through the company SpareBank 1 SMN Invest. The valuations are in all essentials based on reporting from managers of the funds who utilise cash flow based models or multiples when determining fair value. The Group does not have full access to information on all the elements in these valuations and is therefore unable to determine alternative assumptions. Determination of fair value for the shares of Polaris Media is based on valuation undertaken by SpareBank 1 Markets. The latter is based on value-adjusted equity capital.

Financial derivatives (level 2)
Financial derivatives at level 2 include for the most part currency futures and interest rate and exchange rate swaps. Valuation is based on observable interest rate curves. In addition the item includes derivatives related to FRAs. These are valued with a basis in observable prices in the market. Derivatives classified to level 2 also include equity derivatives related to SpareBank 1 Markets’ market-making activities. The bulk of these derivatives refer to the most sold shares on Oslo Børs, and the valuation is based on the price of the actual/underlying share and observable or calculated volatility. 

 

 

Sensitivity analyses, level 3 as at 30 September 2018:
(NOKm)   Book value Effect from change in reasonable possible alternative assumtions
Fixed interest loans   3,970 -10
Equity instruments through profit/loss*   546 -
Loans at fair value through other comprehensive income  60,894 -5
* As described above, the information to perform alternative calculations are not available 
© SpareBank 1 SMN