33 Fair value measurement

Fair value measurement

While the Group prepares its financial statements under the historical cost convention modified for measurement to fair value of investments carried at fair value and investment properties, in the opinion of management, the estimated carrying values and fair values of financial assets and liabilities, that are not carried at fair value in the financial statements are not materially different, since assets and liabilities are either short term in nature or in the case of deposits and performing loans and advances, frequently repriced. For impaired loans and advances, expected cash flows, including anticipated realisation of collateral, were discounted using the original interest rates, considering the time of collection and a provision for the uncertainty of the cash flows.

 

Fair value hierarchy:

The Group measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:

  • Level 1: Quoted market price (unadjusted) in an active market for an identical instrument. Such instruments are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price represents actual and regularly occurring market transactions.
  • Level 2: Valuation techniques based on observable inputs, either directly (i.e., as prices) or indirectly (i.e., derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.
  • Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes input not based on observable data and the unobservable input have a significant impact on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

 

Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market priced or dealer priced quotations. For all other financial instruments the Group determines fair values using valuation techniques.

Valuation techniques include net present value and discounted cash flow models.  Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other inputs used in estimating discount rates.  The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date that would have been determined by market participants acting at arm’s length.

Observable prices and model inputs are usually available in the market for listed equity securities. Availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces the uncertainty associated with determination of fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets.

The following table shows the analysis of assets recorded at fair value by level of the fair value hierarchy for the year ended 31 December 2017:


Date of Level 1   Level 2   Level 3   Total
Valuation AED’000 AED’000 AED’000 AED’000
Assets measured at
fair value
             
Investment properties 07 December 2017

 –

 

 –

 

82,070

 

82,070

At fair value through profit or loss              
Quoted equities 31 December 2017 174,858       174,858
Quoted debt instruments 31 December 2017 1,500       1,500
 
176,358
 
 
 
176,358
At fair value through other comprehensive income              
Quoted equities 31 December 2017 616,102       616,102
Unquoted equities 31 December 2017   9,822   83,095   92,917
Investment in managed funds 31 December 2017   7,322     7,322
616,102
 
17,144
 
83,095
 
716,341
Assets for which fair value is disclosed              
Investment carried at amortised cost

 

82,657

 

 

82,657

The fair values of the Group’s financial assets and liabilities that are carried at amortised cost approximate to their carrying amount as disclosed in these financial statements. For the long-term financial assets and liabilities, management does not expect to have a material difference between the carrying amount and the fair value.



The following table shows the analysis of assets recorded at fair value by level of the fair value hierarchy as at 31 December 2016:

Date of Level 1   Level 2   Level 3   Total
Valuation AED’000 AED’000 AED’000 AED’000
Assets measured at
fair value
             
Investment property
Non-current assets classified as held for sale 21 December 2016

125,215

125,215

At fair value through profit or loss
Quoted equities 31 December 2016 202,243 202,243
Quoted debt instruments 31 December 2016 2,523 2,523
 
204,766
204,766
At fair value through other comprehensive income
Quoted equities 31 December 2016 603,196 603,196
Unquoted equities 12,846 87,305 100,151
Investment in managed funds 31 December 2016 9,078 9,078
31 December 2016
603,193
21,924
87,305
712,425
Assets for which fair value is disclosed
Investment carried at amortised cost 31 December 2016

128,631

128,631

The following is a description of the determination of fair value for assets which are recorded at fair value using valuation techniques. These incorporate the Group’s estimate of assumptions that a market participant would make when valuing the assets.

 

Investments carried at fair value through profit or loss

Investments carried at fair value through profit and loss are listed equities and debt instruments in local as well as international exchanges. Valuations are based on market prices as quoted in the exchange.

 

Investments carried at fair value through other comprehensive income

Investments carried at fair value through other comprehensive income, the revaluation gains/losses of which are recognized through equity, comprise long term strategic investments in listed and unlisted equities, Tier 1 Capital instruments and private equity funds. Listed equity and Tier 1 Capital instruments valuations are based on market prices as quoted in the exchange while funds are valued on the basis of net asset value statements received from fund managers. For unquoted equities, the financial statements provide the valuations of these investments which are arrived at primarily by using Price Earning Multiple basis valuation. The valuation requires management to make certain assumptions about the model inputs, including forecast cash flows, the discount rate, credit risk and volatility and price earnings multiples. The probabilities of the various estimates within the range can be reasonably assessed and are used in management’s estimate of fair value for these unquoted equity investments.

Following is the description of the significant unobservable inputs used in the valuation of unquoted equities categorized under level 3 fair value measurement.

  Significant Range Sensitivity
Valuation unobservable (Weighted of the input
technique inputs to valuation average) to fair value
Unquoted equities Price Earning Multiple Valuation Basis PE Multiple 9-11 Increase (decrease) in the  PE Multiples by 1 would result in increase (decrease)  in fair value by AED 5 million

Transfers between categories

During the period, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into or out of Level 3 fair value measurements.