21.1.1 Fair value accounting of financial assets and liabilities
The following table shows the fair value of the financial assets and liabilities of REAAL. In a number of cases, estimates are used. The balance sheet items not included in this table do not meet the definition of a financial asset or liability. The total of the fair value presented below does not reflect the underlying value of REAAL and should therefore not be interpreted as such.
Value of financial assets and liabilities REAAL
Fair value Book value Fair value Book value
In € millions 2011 2011 2010 2010
Financial assets Investments
- Fair value through profit or loss: designated 1,017 1,017 1,054 1,054
- Available for sale 22,570 22,570 21,611 21,611
- Loans and receivables 6,188 6,173 6,687 6,665
Investments for account of policyholders 12,443 12,443 12,640 12,640
Invested collateral securities lending 117 117 176 176
Derivatives 539 539 225 225
Loans and advances to customers 2,991 3,059 4,656 4,610
Loans and advances to banks 508 499 360 355
Other assets 285 285 257 257
Cash and cash equivalents 1,189 1,189 2,054 2,054
Total financial assets 47,847 47,891 49,720 49,647
Financial liabilities
Participation certificates and subordinated debt 715 1,002 1,092 960
Debt certificates -- -- 1,771 1,771
Securities lending liabilities 120 120 182 182
Derivatives 53 53 84 84
Other amounts due to customers 4,014 4,014 775 775
Amounts due to banks 3,154 3,154 4,507 4,507
Other liabilities 1,315 1,315 1,293 1,293
Total financial liabilities 9,371 9,658 9,704 9,572
The fair values represent the amounts at which the financial instruments could have been traded between
knowledgeable, willing parties in at arm’s length transactions on the balance sheet date. The fair values of financial assets and liabilities are based on quoted market prices, where observable. If market prices are not observable, various techniques are developed in order to arrive at an approximation of these instruments’ fair values. These techniques are subjective and use various assumptions based on the discount rate and the timing and size of expected future cash flows. Changes in these assumptions can significantly influence the estimated fair values. The main assumptions for each balance sheet category are explained in the section below.
For financial assets and liabilities valued at amortised cost, the fair value is shown excluding accrued interest. The accrued interest from these investments is recorded in other assets or other liabilities.
21.1.1.1 Financial assets
The following methods and assumptions are used to determine the fair value of financial instruments.
Investments
The fair values of equities are based on quoted market prices. The fair values of interest-bearing securities, excluding mortgage loans, are also based on quoted market prices or – in the event that quoted market prices do not provide a reliable fair value – on the present value of expected future cash flows. These present values are based on the prevailing market interest rate, taking into consideration the liquidity, creditworthiness and maturity of the relevant investment.
Derivatives
The fair value of non-publicly traded derivatives depends on the type of instrument and is based on a discounted cash flow model or an option valuation model.
Loans and advances to customers and banks
The valuation of loans and advances to customers to fair value has been made to the best estimate of management. In the current volatile market environment, the bandwidth in the valuation is large due to wide variations in interest rates and risk premiums and limited availability of market transactions.
The fair value of loans and advances to customers has been established by determining the present value of the expected future cash flows and extensive market research. Various surcharges on the yield curve were used for the calculation of the present value. In this respect, a distinction was made by type of loan and advance and by type of client group to which the loan/advance relates. In determining the expected cash flows, the effect of any future early
redemptions is taken into account.
The yield curve used to determine the present value of the cash flows of mortgage loans is the swap rate, increased by risk surcharges derived from the development of mortgage rates compared to the swap rate. The effect of very low interest rates at year-end 2011 exceeds the impact of increased risk premiums.
For other loans and advances to customers and loans and advances to banks, the REAAL cost-of-fund curve is applied.
Other assets
Because of the predominantly short-term nature of other assets the book value is considered to be a reasonable approximation of their fair value.
Cash and cash equivalents
The book value of the liquid assets is considered to be a reasonable approximation of their fair value.
21.1.1.2 Financial liabilities
Participation certificates and subordinated debt
The fair value of the participation certificates was estimated on the basis of the present value of the cash flows, making use of the prevailing interest rate plus a risk surcharge for similar instruments. Subordinated debt surcharges are defined as the coupon rate less the swap rate as at the issue date. The cash flows of the subordinated debts are then converted into cash at the current swap rate, plus the risk surcharge applicable specifically to REAAL.
Debt certificates
The fair value of debt certificates was estimated on the basis of the present value of the cash flows, making use of the prevailing interest rate for similar instruments.
Amounts due to customers and banks
The fair values of demand deposits and deposits without specified maturities were determined by the use of a discount factor, which takes into account the observable lapse and the prevailing interest rates for these instruments. The fair values of deposits with specified maturities were estimated on the basis of the expected present value of future cash
flows, using the interest rate currently applicable to deposits with a similar remaining life.
The fair values of amounts due to banks were estimated on the basis of the present value of the future cash flows, using the interest rate currently applicable to amounts due to banks with similar conditions.
Other liabilities
The book value of the other commitments is considered to be a reasonable approximation of their fair value.
Interest rate
The discount rate used in determining fair value is based on market yield curves on the balance sheet date.
21.1.2 Hierarchy in determining the fair value of financial instruments
A major part of the financial instruments is included in the balance sheet at fair value. The table below distributes these instruments among level 1 (the fair value is based on published stock prices in an active market), level 2 (the fair value is based on observable market data) and level 3 (the fair value is not based on observable market data).
Hierarchy financial instruments
Level 1 Level 2 Level 3 Total
In € millions 2011 2010 2011 2010 2011 2010 2011 2010 Financial assets Investments 16,747 14,873 6,769 7,721 70 71 23,586 22,665 Investments for account of policyholders 7,571 6,470 4,872 6,171 -- -- 12,443 12,641 Invested collateral securities lending -- -- 117 176 -- -- 117 176 Derivatives 23 18 516 207 -- -- 539 225 Loans and advances to customers -- -- -- 2,305 -- -- -- 2,305 Financial liabilities Fair value through profit or loss: debt certificates -- -- -- 1,771 -- -- -- 1,771 Derivatives -- -- 53 84 -- -- 53 84