13 Fair value measurement

Measurement guidelines

The fair value represents a market-based and not an entity-specific measurement. 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.

Various standard market techniques and models are employed to determine fair value. As far as possible, the LLB Group uses observable input factors from active markets accessible to the company on the measurement date. The fewer the number of observable input factors that can be employed, the more assumptions and estimates have to be utilised to enable an exit price on the measurement date to be determined from the perspective of the market participant. 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.

All financial and non-financial assets and liabilities, which possess a fair value, are assigned to one of three levels of fair value hierarchy. It is possible that the input factors, which are used to measure the fair value of individual financial and non-financial assets and liabilities, fall into different levels of the fair value hierarchy. The classification of the financial or non-financial asset or liability in the fair value hierarchy is made to the lowest level, to which one of the significant input factors is assigned.

Level 1

Financial and non-financial assets and liabilities, whose prices are quoted on active markets for identical assets and liabilities and which were not calculated on the basis of valuation techniques or models for the determination of fair value.

Level 2

If no market price quotes are available, or if they cannot be extrapolated from active markets, the fair value is determined by means of valuation techniques or models which are based on assumptions made on the basis of observable market prices and other market quotes.

Level 3

Input factors are considered in the valuation techniques and models to determine the fair value, which are not observable because they are not based on market prices.

Valuation techniques and models

Valuation techniques and models are employed to determine the fair value of financial and non-financial assets and liabilities if no market prices quoted on an active market are available. The LLB Group employs standardised and generally recognised valuation techniques and models.

The LLB Group employs the market-based approach to determine the fair value of investment funds and shares, which are not traded on an active market or which are not listed.

The income-based approach is used if payment streams or expenses and revenues with financial assets and liabilities form the basis for fair value measurement. The present value technique is used to determine the fair value by discounting the payment streams to the present value on the reporting date. Interest rate curves appropriate for the term and /or foreign currency curves, as well as spot prices form the main basis for this purpose. Forward pricing models are used in the case of futures contracts.

To determine the fair value of financial and non-financial assets and liabilities, which are classified as Level 3 positions, the LLB Group takes over the fair value determined by third parties (estimates made by experts).

The following table shows the most important valuation techniques and models together with the key input factors:

Valuation 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 non-observable input factors, as shown in the previous table, is explained in the following. No explanation of the interrelationships between observable and non-observable inputs is provided because these have no material influence on the measurement of fair value.

Financial investments measured at fair value through other comprehensive income

These financial investments largely relate to non-listed shares in companies of an infrastructure nature, which offer the services necessary or beneficial for the operation of a bank. The largest proportion of the portfolio consists of shares in the SIX Swiss Exchange and in the Pfandbriefbank schweizerischer Hypothekarinstitute (Swiss Mortgage Institutes). The financial investments are periodically revalued on the basis of current company data, or with the aid of external valuation models.

Investment property

These properties are periodically valued by external experts. The assessments take into consideration such circumstances as the location and condition of the property, as well as the costs and income expected in connection with it.

Measurement of fair values through active markets or valuation techniques

The following tables show the fair value and classification of financial and non-financial assets and liabilities of the LLB Group within the fair value hierarchy.

Positions measured at fair value are recognised on a recurring basis in the balance sheet at fair value. As at 30 June 2022, the LLB Group had no assets or liabilities which were measured at fair value on a non-recurring basis in the balance sheet. There were no significant transfers between Level 1, Level 2 and Level 3 financial instruments in the current financial year.

Reconciliation of assets and liabilities classified as Level 3

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

The financial investments measured at fair value through other comprehensive income rose by CHF 0.3 million in the first half of 2022. The increase in the form of unrealised gains was attributable to changes in the fair value.

The change in investment property was due solely to the change in the exchange rate of the Euro to the Swiss franc. The differences from the conversion in the reporting currency are recognised directly in other comprehensive income.

Financial instruments 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 amount of the individual categories of financial assets and liabilities is to be disclosed.

The following table shows this comparison only for positions which are not measured at fair value, since for positions measured at fair value the carrying amount corresponds to the fair value. Due to the maturity of more than one year, the present value of certain positions is calculated on the basis of SARON interest rates with appropriate maturities. In the case of all other positions, the carrying amount represents a reasonable approximation of the fair value.