VIVAT Group classifies its financial instruments in one of the following categories: (1) loans and receivables, (2) available for sale and (3) at fair value through profit or loss. The classification depends on the purpose for which the financial assets are acquired. Management decides to which category the asset is allocated.
Upon initial recognition, financial instruments are measured at fair value including transaction costs, with the exception of the category ‘at fair value through profit or loss’, in which transaction costs are taken directly to the statement of profit or loss.
The categories for investments are explained in more detail in the following Section.
Investments
Fair value through profit or loss
An investment is classified at fair value through profit or loss if it is held for trading purposes (‘held for trading’) or if it was designated as such upon initial recognition (‘designated’). Investments are only designated at fair value through profit or loss if:
1. this eliminates or considerably limits an inconsistency in valuation or recognition between X and Y that would otherwise arise; or
2. VIVAT Group manages and assesses the investments on the basis of fair value.
The investments are recognised at fair value. Realised and unrealised gains and losses are recognised directly in the statement of profit or loss under ‘investment income’.
Interest income earned on securities is recognised as interest income in ‘investment income’. Dividend received is recognised under investment income.
Loans and receivables (amortised cost)
The category loans and receivables comprises unlisted investments with a fixed term and the saving components of endowment mortgages that the insurance company has issued. The loans and receivables are measured at amortised cost using the effective interest method, less a provision for impairment if deemed necessary.
Available for sale (fair value through other comprehensive income)
Investments that do not meet the criteria defined by management for ‘loans and receivables’ or ‘at fair value through profit or loss’ are classified as available for sale.
After initial recognition, investments available for sale are subsequently measured at fair value. Unrealised gains and losses resulting from fair value adjustments of these investments are recognised in other comprehensive income (shareholders’ equity), net of deferred taxes.
When investments are sold, the related accumulated fair value adjustments are recognised in the statement of profit or loss as ‘investment income’. VIVAT Group uses the average cost method to determine the results.
Impairments on investments
At reporting date, VIVAT Group assesses whether there are objective evidence of an impairment of investments classified as loans and receivables and as available for sale. Impairment losses are recognised directly in the statement
of profit or loss as ‘impairment charges’. To the extent a positive revaluation reserve exists regarding investments available for sale, impairment losses are charged against the revaluation reserve within shareholders’ equity. Investments in debt securities
Investments in debt securities measured at amortised cost or available for sale are tested for impairment if objective evidence exists of financial difficulties at the counterparty, declining markets for the product of the counterparty or other relevant evidence. This test comprises both quantitative and qualitative considerations. Debt securities are assessed on aspects including expected credit losses and credit losses already incurred (for example due to default), market data on credit losses and other evidence of the issuer of the instrument’s inability to meet its payment commitments.
Investments in equity instruments
An investment in equity instruments (an investment in shares) is considered to have been subject to impairment if its carrying amount exceeds the recoverable value for an extended period, which means the fair value:
• decreased 25 percent or more below cost, or
• has been at least 5 percent below cost for 9 months or more.
The fair value of unlisted shares is determined according to the following criteria, depending on the availability of data: • The price of the most recent transaction as an indication.
• Current fair values of other, similar investments (in entities).
• Using valuation methods in accordance with accepted economic methods that use market data to the extent possible.
Reversal of impairments on debt securities and equity investments
If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively to an event occurring after the impairment was recognised, this decrease is reversed by reducing the provision for impairment accordingly. The reversal is recognised in the statement of profit or loss. This does not apply to investments in equity securities, where an increase in value is always recognised through shareholders’ equity.
Investments in mortgages
In respect to the loans with mortgage collateral (mortgages), a provision for impairment is recognised, if objective evidence exists that VIVAT Group is not able to collect all the amounts in accordance with the initial contract. For mortgages that are individually significant, the provision recognised equals the difference between the carrying amount and the recoverable amount. The recoverable amount equals the expected future cash flows, including the amounts realised by virtue of guarantees and collateral, discounted at the initial effective interest rate of the loans.
The criteria relating to impairments are applied to the entire mortgage portfolio. Mortgages with less significant amounts per individual loan (and corresponding credit risk), are tested collectively for impairment.
The provision for impairment losses also covers losses where objective evidence of losses likely to be incurred in the loan portfolio (IBNR: ‘incurred but not reported’) exist. Losses on mortgages are estimated on the basis of historic loss patterns and the creditworthiness of the counterparties. Both estimates take into account the current economic climate in which the counterparties operate.
If the amount of the impairment subsequently decreases due to an event occurring after the impairment, the previously recognised impairment loss is reversed in the statement of profit or loss. When a loan is uncollectable, it is impaired against the relevant provision for impairment. Amounts that are subsequently collected are deducted from the addition to the provision for impairment in the statement of profit or loss.