34 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 calculated on the basis of valuation techniques.

All financial and non-financial assets and liabilities, which possess a fair value and qualify, are assigned to one of the following three levels of the fair values hierarchy:

Level 1

The fair value of listed debt instruments and equity instruments in the financial assets 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. Valuation models or methods with non-observable input factors are employed for 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. 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 calculated using a combination of observable transaction prices and market information.

The LLB Group employs standardised and accepted valuation techniques or takes over the fair values evaluated by third parties to determine the fair value of financial and non-financial assets and liabilities which are not actively traded or listed. It essentially uses the following valuation methods or techniques and input factors:

Measurement of assets and liabilities, classified as Level 3

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 following table, are explained in the following. No explanation of the interrelationships between observable and non-observable inputs is provided because they have no material influence on the measurement of fair value.

Financial investments measured at fair value through other comprehensive income

These financial investments consist of non-listed shares in companies having an infrastructure character, which are necessary for the operation of a bank. They are periodically revalued on the basis of current company data, or with the aid of third-party valuation models.

Investment property

These properties are periodically valued by external experts, or 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.

Investment properties do not diverge to highest and best use.

Non-current assets held for sale

Non-current assets held for sale comprise wholly owned properties, as well as a company that manages apartments (see also note 36). The basic valuation process is the same as with that for investment property, i.e. the fair value measurement is carried out solely by third parties. The reported value of these assets and liabilities corresponds to the fair value minus sales costs.

Measurement of fair values through active markets or valuation techniques

The following table shows the classification of financial and non-financial assets and liabilities of the LLB Group within the fair value hierarchy and their fair value.

Positions measured at fair value are recognised on a recurring basis in the balance sheet at fair value. As at 31 December 2020, 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 2020 financial year, there were no significant transfers between Level 1, Level 2 and Level 3 financial instruments.

Reconciliation of assets and liabilities classified as Level 3

All Level 3 positions are measured by third parties and are not material due to their amount. The reconciliation is therefore not shown in tabular form.

The financial investments measured at fair value through other comprehensive income rose by CHF 2.0 million in the 2020 business year. This increase was attributable mainly to the purchase of new securities amounting to CHF 2.3 million due to capital increases made by the issuer. Marginal price corrections led to a decline in the fair value of CHF 0.3 million.

There were no changes in the value of investment property. Accordingly, there were no effects on the income statement.

The change in the value of non-current assets held for sale was caused by the classification of properties as available for sale and their subsequent sale. The sale of several properties generated a profit of CHF 1.9 million and a decrease in the carrying value of the properties of CHF 12.2 million. The profit was recognised in the income statement and a component of other income. The value was also marginally influenced by exchange rate fluctuations of the euro to the Swiss franc.

Financial investments not measured at fair value

The fair value hierarchy also includes details of financial assets and liabilities which are not measured on a fair value basis, but for which a fair value does exist. In addition to their inclusion in the fair value hierarchy, basically a comparison between the fair value and the carrying value of the individual categories of financial assets and liabilities is to be presented.

The following table shows this comparison only for positions which were not measured at fair value, since for positions measured at fair value the carrying value corresponds to the fair value. On account of the maturity being more than one year, for specific positions a present value was calculated taking as a basis LIBOR interest rates appropriate for the duration of the term. In the case of all other positions, the carrying value represents a reasonable approximation of the fair value.