SBN HOLDINGS LIMITED Annual Report 2022
ANNEXURE D - DETAILED ACCOUNTING POLICIES continued
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SBN HOLDINGS LIMITED
Annual report 2022
4.
Fair value continued
Hierarchy transfer policy
Transfers of financial assets and financial liabilities between levels of the fair value hierarchy are deemed to have occurred at
the end of the reporting period.
Inputs and valuation techniques
Fair value is measured based on quoted market prices or dealer price quotations for identical assets and liabilities that are
traded in active markets, which can be accessed at the measurement date, and where those quoted prices represent fair
value. If the market for an asset or liability is not active or the instrument is not quoted in an active market, the fair value is
determined using other applicable valuation techniques that maximise the use of relevant observable inputs and minimise the
use of unobservable inputs. These include the use of recent arm's length transactions, discounted cash flow analyses, pricing
models and other valuation techniques commonly used by market participants.
Fair value measurements are categorised into level 1, 2 or 3 within the fair value hierarchy based on the degree to which the
inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement.
Where discounted cash flow analyses are used, estimated future cash flows are based on management's best estimates and a
market-related discount rate at the reporting date for an asset or liability with similar terms and conditions.
If an asset or a liability measured at fair value has both a bid and an ask price, the price within the bid-ask spread that is most
representative of fair value is used to measure fair value.
The group's valuation control framework governs internal control standards, methodologies, and procedures over its valuation
processes, which include the following valuation techniques and main inputs and assumptions per type of instrument:
Item and description
Derivative financial instruments
Derivative financial instruments comprise
foreign exchange, interest rate, commodity,
credit and equity derivatives that are either
held-for-trading or designated as hedging
instruments in hedge relationships.
Trading assets and trading liabilities
Trading assets and liabilities comprise
instruments which are part of the group's
underlying trading activities. These
instruments primarily include sovereign
and corporate debt, commodities,
collateral, collateralised lending
agreements and equity securities.
Pledged assets
Pledged assets comprise instruments
that may be sold or repledged by the
group's counterparty in the absence of
default by the group. Pledged assets
include sovereign and corporate debt,
equities, commodities pledged in terms of
repurchase agreements and commodities
that have been leased to third parties.
Financial investments
Financial investments are non-trading
financial assets and primarily comprise of
sovereign and corporate debt, listed and
unlisted equity instruments, investments
in debentures issued by BoN, investments
in mutual fund investments and unit-linked
investments.
Valuation technique
Standard derivative contracts are valued
using market accepted models and
quoted parameter inputs. More complex
derivative contracts are modelled using
more sophisticated modelling techniques
applicable to the instrument. Techniques
include:
■Discounted cash flow model.
■Black-Scholes model
■ combination technique models.
Where there are no recent market
transactions in the specific instrument,
fair value is derived from the last available
market price adjusted for changes in risks
and information since that date. Where
a proxy instrument is quoted in an active
market, the fair value is determined by
adjusting the proxy fair value for differences
between the proxy instrument and the
financial investment being fair valued.
Where proxies are not available, the fair
value is estimated using more complex
modelling techniques. These techniques
include discounted cash flow and Black-
Scholes models using current market rates
for credit, interest, liquidity, volatility and
other risks. Combination techniques are
used to value unlisted equity securities
and include inputs such as earnings and
dividend yields of the underlying entity.
Main inputs and
assumptions
For level 2 and 3 fair value
hierarchy items:
discount rate*
■spot prices of the
underlying
■correlation factors
■ volatilities
■dividend yields
■ earnings yield
■valuation multiples.
4.
Fair value continued
Inputs and valuation techniques continued
*
Item and description
Loans and advances to banks and
customers
Loans and advances comprise:
Loans and advances to banks: call loans,
loans granted under resale agreements
and balances held with other banks
Loans and advances to customers:
mortgage loans (home loans and
commercial mortgages), other asset-
based loans, including collateralised debt
obligations (instalment sale and finance
leases), and other secured and unsecured
loans (card debtors, overdrafts, other
demand lending, term lending and loans
granted under resale agreements).
Deposits and debt funding
Deposits from banks and customers
comprise amounts owed to banks and
customers, deposits under repurchase
agreements, negotiable certificates of
deposit, credit-linked deposits and other
deposits.
Third-party financial liabilities arising
on the consolidation of mutual funds
(included in other liabilities)
These are liabilities that arise on the
consolidation of mutual funds.
Valuation technique
For certain loans fair value may be
determined from the market price of a
recently occurring transaction adjusted for
changes in risks and information between
the transaction and valuation dates. Loans
and advances are reviewed for observed
and verified changes in credit risk and the
credit spread is adjusted at subsequent
dates if there has been an observable
change in credit risk relating to a particular
loan or advance. In the absence of an
observable market for these instruments,
discounted cash flow models are used to
determine fair value. Discounted cash flow
models incorporate parameter inputs for
interest rate risk, foreign exchange risk,
liquidity and credit risk, as appropriate. For
credit risk, probability of default and loss
given default parameters are determined
using credit default swaps (CDS) markets,
where available and appropriate, as well
as the relevant terms of the loan and
loan counterparty such as the industry
classification and subordination of the loan.
For certain deposits, fair value may be
determined from the market price on a
recently occurring transaction adjusted for
all changes in risks and information between
the transaction and valuation dates. In the
absence of an observable market for these
instruments, discounted cash flow models
are used to determine fair value based on
the contractual cash flows related to the
instrument. The fair value measurement
incorporates all market risk factors,
including a measure of the group's credit risk
relevant for that financial liability. The market
risk parameters are valued consistently to
similar instruments held as assets stated
in the section above. The credit risk of the
reference asset in the embedded CDS in
credit-linked deposits is incorporated into
the fair value of all credit-linked deposits
that are designated to be measured at fair
value through profit or loss. For collateralised
deposits that are designated to be measured
at fair value through profit or loss, such as
securities repurchase agreements, the credit
enhancement is incorporated into the fair
valuation of the liability.
The fair values of third-party financial
liabilities arising on the consolidation of
mutual funds are determined using the
quoted put (exit) price provided by the fund
manager and discounted for the applicable
notice period. The fair value of a financial
liability with a demand feature is not less
than the amount payable on demand,
discounted from the first date on which the
amount could be required to be paid.
Main inputs and
assumptions
For level 2 and 3 fair value
hierarchy items:
■discount rate*
For level 2 and 3 fair value
hierarchy items:
■discount rate*
For level 2 and 3 fair value
hierarchy items:
■discount rate*
Discount rates, where applicable, include the risk-free rate, risk premiums, liquidity spreads, credit risk (own and counterparty as appropriate), timing of
settlement, storage/service costs, prepayment and surrender risk assumptions and recovery rates/LGD.
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