funds - - - -
Held for trading Available for sale - - - -
Total 11,272,366 10,757,348 277,974 288,444 (6,316) 248,553 Instruments type (1) Accounting Portfolio before reclassification (2) Accounting Portfolio after reclassification (3) Income/expenses absent reclassification (before taxes) Carrying amount as at 06.30.2011 (4) Fair Value as at 06.30.2011 (5) Income/expense recognized during the
period (before taxes)
Debt securities reclassified in the loan with customers portfolio include structured credit products (other than derivative contracts and financial instruments with incorporated derivatives) for an amount of €5,304,294 thousand at June 30, 2011.
No further reclassifications were made during 2010 and first half 2011, therefore table A.3.1.2 “Reclassified financial assets: effects on comprehensive Income before reclassification” and information concerning item A.3.1.4 “Effective interest rate and cash flows expected from reclassified assets” are not provided.
A.3.1.3. Transfer of financial assets held for trading
In application of the provisions of Article 2 of referenced EC Regulation 1004/2008, pursuant to which "the current financial crisis is considered to be such a rare circumstance which would justify the use of this possibility [reclassification] by companies" during the second half of 2008 and first half of 2009, the Group reclassified HfT financial assets consisting of structured credit products (other than derivatives) and other debt securities issued by governments, public entities, companies and financial institutions and covered bonds and Pfandbriefe other than derivative contracts and financial instruments containing embedded derivatives.
A.3.2 Fair Value Hierarchy
IFRS 7 calls for classifying instruments being measured at fair value as a function of the ability to observe the inputs used for pricing.
To be specific, three levels are specified:
Level 1: the fair value of instruments classified in this level is determined based on quotation prices observed in active markets;
Level 2: the fair value of instruments classified in this level is determined based on valuation models that use inputs that can be observed in the market;
Level 3: the fair value of instruments classified in this level is determined based on valuation models that primarily use inputs that cannot be observed in the market;
The following table shows a breakdown of financial assets and liabilities designated at fair value according to the above-mentioned levels.
A.3.2.1 Accounting portfolios - breakdown by fair value levels (€ '000)
Financial Assets/Liabilities
measured at fair value Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
1. Financial assets held for Trading 29,273,890 74,155,818 3,773,241 32,622,072 86,116,427 3,812,903 2. Financial assets at fair value
through P&L 5,899,466 22,051,319 911,609 16,281,851 9,484,236 1,311,769 3. Available for sale financial assets 39,303,834 10,763,424 5,522,679 34,542,540 15,252,294 5,308,356
4. Hedging derivative assets 435 8,843,274 967 416 11,367,544 239
Total 74,477,625 115,813,835 10,208,496 83,446,879 122,220,501 10,433,267
1. Financial liabilities held for Trading 11,777,480 82,584,805 3,672,588 12,980,446 97,446,943 3,671,747 2. Financial liabilities at fair value
through P&L - 1,065,190 - - 1,216,810 51,079
3. Hedging derivative liabilities 4,410 8,330,983 - 1,091 9,679,759 -
Total 11,781,890 91,980,978 3,672,588 12,981,537 108,343,512 3,722,826
Amounts as at 06.30.2011 Amounts as at 12.31.2010
As at June 30, 2011, the item 3. “Available for sale financial assets” - Level 3 includes€216,743 thousand Greek Government securities with a face value of€282,000 thousand.
Given the illiquidity of these securities in the second quarter of 2011, further worsened in the last month as a consequence of the financial crisis in Greece, it was considered appropriate to determine their fair value as at June 30, 2011 using a "fundamental value", also in accordance with the international accounting standards IAS/IFRS.
In this regard, it should be noted that on July 21, 2011, Council of the European Union approved a new program of government economic aid to Greece, which will be accompanied by a rescue plan aimed at private sector and with voluntary participation (Private Sector Involvement or PSI).
Up till now the proposal that received the greatest support from political authorities and financial institutions is the one published by The Institute of International Finance (IIF) on the same date. UniCredit has positively considered to agree to the IIF proposal and has therefore deemed that the application of a fundamental value based on the conditions provided for by the above-mentioned proposal would have been the most appropriate one for valuing the Greek Government securities as of 30 June 2011, both in the available-for-sale and held-to-maturity portfolios, in light of the current lack of liquidity of Greece’s instruments.
In particular, this proposal provides for the swap of held securities with new securities bearing different characteristics, which estimated initial value will cause a loss of 21% calculated by discounting estimated cash flows at a rate of 9%, defined as “normalized” in the IIF document, on the grounds of the expectation that the international community will accept the program.
The fundamental value was therefore determined, with reference to the instruments included in UniCredit’s available-for-sale and held-to-maturity portfolios, by discounting the estimated cash flows at the interest rate of those assets, and is therefore classified in fair-value Level 3 as indicated above, in accordance with IAS/IFRS.
In the first place, this made necessary the posting of a negative revaluation reserve for available-for-sale financial assets amounting to€79,468 thousand.
According to IAS/IFRS, however, the granting from the lender of more favourable conditions for economic or legal reasons related to the financial difficulty of the beneficiary is objective evidence that a financial asset has been reduced in value; therefore, at June 30, 2011, the aforementioned negative reserve has been classified under the item 130.b) of Income Statement "Impairment losses on available-for-sale financial assets”.
Finally, it should be noted that the valuation of these securities on the basis of a fair-value level 1 (market price) at June 30, 2011, i.e. the method used until March 31, 2011, would have resulted in a negative reserve of€154,608 thousand.
A.3.3 Day One Profit/Loss
The value at which financial instruments are recognized is equal to their fair value on the same date. The fair value of financial instruments, other than those designated at fair value through profit or loss, at their recognition date is usually assumed to be equal to the amount collected or paid.
For financial instruments held for trading and instruments designated at fair value, any difference from the amount collected or paid is posted under the appropriate items of the income statement.
The use of conservative valuation models, the processes for revising the models used and related parameters and value adjustments to reflect model risk ensure that the amount recognized in the income statement is not derived from the use of valuation parameters that cannot be observed.
More specifically, the calculation of value adjustments to reflect model risk ensures that the fair value portion of these instruments relating to the use of subjective parameters is not recognized in the profit and loss account, but changes the balance sheet value of these instruments.
Recognition of this portion in the profit and loss account is then made only when objective parameters are applied and therefore the adjustments are derecognized.
The balance of value adjustments to reflect model risk changed from€148,146 thousand at December 31, 2010 to€123.689 thousand at June 30, 2011.