36 Fair value measurement

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 and financial liabilities from insurance contracts as well as investment property. 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

 

 

 

Own investment funds

Market to Model

Market prices of the underlying assets

 

Derivative financial instruments

Option model

Underlying assets of future contracts

 

OTC Structured Product

Discounted par value of capital protection based on discount rate

Market interest rates, prices of comparable assets

 

 

 

 

 

Level 3

 

 

 

Financial investments from insurance contracts

Basically cost approach and market to model

Audited financial statements, insurance sums. Assets can be transferred if insurance event occurs.

Illiquidity, special micro-economic conditions, insolvency risks

Financial liabilities from insurance contracts

Basically cost approach and market to model

Audited financial statements, insurance sums. Assets can be transferred if insurance event occurs.

Illiquidity, special micro-economic conditions, insolvency risks

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.

Purchase price liabilities from acquisitions

Discounted expected values based on assumptions and company factors.

Specific company assets

Development of business activity, such as development of profit and client assets under management.

Measurement of fair values by active markets or valuation techniques

The following table shows the classification of fair value hierarchies of financial and non-financial assets and liabilities of the LLB Group. All assets and liabilities are measured at fair value on a recurring basis in the statement of financial position. As per 31 December 2015, the LLB Group had no assets or liabilities which were measured at fair value on a non-recurring basis in the balance sheet. In the 2015 business year there were no significant transfers between Level 1 and Level 2 financial instruments.

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in CHF thousands

31.12.2015

31.12.2014

+/– %

*

The financial investments, financial liabilities are no longer recognised in the balance sheet due to the deconsolidation of the swisspartners Group in 2015.

Level 1

 

 

 

Trading portfolio assets

2'198

561

292.0

Derivative financial instruments

0

0

 

Financial investments at fair value

776'408

1'413'225

–45.1

of which financial investments from insurance contracts *

0

520'036

–100.0

Financial investments available for sale

0

0

 

Total Level 1

778'606

1'413'785

–44.9

 

 

 

 

Level 2

 

 

 

Trading portfolio assets

252

0

 

Derivative financial instruments

62'013

87'781

–29.4

of which for hedging purpose

392

0

 

Financial investments at fair value

366'028

507'121

–27.8

of which financial investments from insurance contracts *

0

139'818

–100.0

Financial investments available for sale

296'172

58'541

405.9

Total Level 2

724'465

653'444

10.9

 

 

 

 

Level 3

 

 

 

Trading portfolio assets

0

0

 

Derivative financial instruments

0

0

 

Financial investments at fair value

0

536'620

–100.0

of which financial investments from insurance contracts *

0

536'620

–100.0

Investment property

16'240

16'385

–0.9

Total Level 3

16'240

553'005

–97.1

 

 

 

 

Total assets

1'519'311

2'620'234

–42.0

 

 

 

 

Level 1

 

 

 

Financial liabilities at fair value

0

520'036

–100.0

of which financial investments from insurance contracts *

0

520'036

–100.0

Derivative financial instruments

0

0

 

Total Level 1

0

520'036

–100.0

 

 

 

 

Level 2

 

 

 

Financial liabilities at fair value

0

139'818

–100.0

of which financial investments from insurance contracts *

0

139'818

–100.0

Derivative financial instruments

151'593

165'809

–8.6

of which for hedging purpose

531

0

 

Total Level 2

151'593

305'627

–50.4

 

 

 

 

Level 3

 

 

 

Financial liabilities at fair value

0

536'620

–100.0

of which financial investments from insurance contracts *

0

536'620

–100.0

Derivative financial instruments

0

0

 

Purchase price obligations from acquisitions

0

25'160

–100.0

Total Level 3

0

561'780

–100.0

 

 

 

 

Total liabilities

151'593

1'387'442

–89.1

Measurement of assets and liabilities, classified as Level 3

For the recurring measurement of the fair value of financial and non-financial assets and liabilities for which significant non-observable inputs have been used and which are classified as Level 3, the effects on the income statement in the business year 2015 are immaterial and therefore they are not shown. The measurement or valuation had no influence on other comprehensive income in 2015.

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 from insurance business and financial liabilities from insurance business

Individual subsidiaries of the swisspartners Group, which were sold and removed from the scope of consolidation of the LLB Group as per 1 January 2015, are operative in the insurance sector. Within the scope of this business, only fund-linked insurance policies are written. The configuration of the fund-linked insurance policies envisages that, in the occurrence of the insured events, the value of the insurance coverage fund plus a risk benefit are to be paid out. The investment risk of the fund-linked insurance policies is always borne by the policy holder. Accordingly, the company is not exposed to an investment risk at any time. The valuation of these insurance policies is carried out periodically and in compliance with IFRS. Changes in insurance coverage funds and the corresponding provisions are booked to profit and loss. Basically, the valuation is made on the basis of the cost approach and market-to-model methods. In the cost approach method, the valuation is based on the replacement value. In the market-to-model method, models are employed which calculate a market-consistent value for the assets. Changes in the inputs, on which the measurement of the fair value is based, can lead to a significant change in the models. It cannot be quantified to what extent changes influence the fair value and the sensitivity of fair value, because the valuation of an insurance policy is based on an individual measurement, which is influenced by various assumptions such as the type of assets, the contract duration and payment flows. Consequently, a significant change in the fair value can occur, which is not quantifiable.

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.

Purchase price obligations from acquisitions

As per 31 December 2014, a shareholders’ agreement existed between swisspartners Investment Network AG, Zurich, and the LLB, which granted the shareholders the right to sell the remaining shares of the share capital and the voting rights to the LLB. At the same time, the shareholders of the LLB had the right to buy the remaining shares of the share capital and the voting rights. This purchase price obligation was determined periodically according to a calculation specified in the shareholders’ agreement, which was based on a company value comprising the client value, an earnings value and an actual value. The calculation of the purchase price obligation and the determination of the input factors based on the company value consisted of partly available public information such as assets under management, annual profit and equity. Assumptions were made for the discounting of the purchase price obligation and for the consideration of its future development in order to calculate the obligation. The assumptions related to the future development of annual profit and client assets. As far as possible, the assumptions were based on factors observable on the market such as overall economic trends or macro-economic developments. Changes in the input factors for the calculation of the fair value could have had a significant influence on the purchase price obligation. It was not possible to quantify how the changes would affect the fair value or its degree of sensitivity because the valuation was influenced by business and economic developments and factors. The shareholders’ agreement between swisspartners Investment Network AG, Zurich, and the LLB was rescinded in March 2015 as a result of the sale of swisspartners Investment Network AG, Zurich.

Structured products (OTC market)

Among its financial investments, the LLB Group has structured products with capital protection until final maturity, whose market value is estimated by the LLB Group with the aid of valuation models.

Structured products with capital protection until final maturity are periodically valued on the basis of an internal cash value model. On the basis of their characteristics up to maturity, the products correspond to zero coupon bonds. To calculate the discount interest rate in the cash value model, assumptions are made regarding the interest rate components, which are estimated periodically on the basis – among other criteria – of the market data of other bond issuers. Since no public market exists, assumptions are made regarding the redemption fees of issuers. These assumptions are periodically reviewed on the basis of data from various market participants and information from issuers regarding internal liquidity management.

Changes on the bond markets, for example due to monetary policy measures or the creditworthiness and internal liquidity of issuers, could lead, in the event of redemption during the life of the instrument, to changes in the valuation, especially in the bid / ask spread.

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Movements of level 3 financial instruments

 

Assets

Liabilities

in CHF thousands

Financial investments at fair value through profit and loss

Financial liabilities at fair value through profit and loss

*

The financial investments, financial liabilities are no longer recognised in the balance sheet due to the deconsolidation of the swisspartners Group in 2015.

As at 1 January 2015

536'620

536'620

Change from disposals to the scope of consolidation *

–536'620

–536'620

As at 31 December 2015

0

0

There are no risks from Level 3 positions.