34.2.1 Financial instruments excluding banking activities
The fair value of the bond debt and of the related swaps is measured using a calculation method based on observable data, which corresponds to Level 2 of the fair value ranking established in IFRS 7. Details of this calculation method are provided below.
Every financial product is assessed as a series of future cash flows regardless of whether they are determined at the calculation date. The fair value calculation is based on discounting these future cash flows. The discounting factors are deduced from a zero coupon curve, which is itself determined based on a benchmark of interest-rate products spread over more than 40 due dates. To calculate the fair value of the bond debt, La Poste’s credit spread is added to the zero coupon curve.
La Poste’s implied credit spread is determined based on price brackets supplied by various market participants (brokers), which are adjusted for data observed in the market (price and bracket dispersion).
In the case of cash flows dependent on a floating-rate not yet determined at the calculation date, future rates are estimated based on the future structure of interest rates.
In the case of financial products with cash flows in different currencies, the cash flows are discounted for each currency based on discounting factors specific to each currency. The currency market values obtained
are then translated into euros at the ECB exchange rate on the day of the calculation.
Option products are determined by factoring in implied market volatility, in view of the option exercise dates.
The fair value of current financial assets and liabilities is deemed equivalent to their book value, in view of their short-term maturity.
The fair value of bonds and UCITS units is determined according to listed prices.
34.2.2 Financial instruments used in banking activities
Fair value is the amount for which an asset could be exchanged, or a liability extinguished between knowledgeable and willing parties operating under normal competition conditions. When an instrument is first recognised, its fair value is usually the transaction price.
IAS 39 recommends initially using a listed price on an active market to determine the fair value of a financial asset or liability. A market is considered to be active if prices are easily and regularly available from a stock exchange, a broker, a trader or a regulatory agency, and if these prices represent actual transactions carried out at arm’s length. In the absence of an active market, fair value must be determined using valuation techniques.
34.2
31 DECEMBER 2014
These techniques include the use of recent arm’s length transactions. They are based on market data, the fair values of substantially identical instruments, discounted cash flow models or option pricing models, and use recognised valuation methods. The aim of a valuation technique is to establish what the instrument’s price would have been in a normal market.
For example, the fair value of bonds, variable-income securities and futures is determined according to listed prices. Valuation techniques are used for over-the-counter derivatives, discount securities (e.g.
commercial paper, and certificates of deposit, etc.) and repo deposits.
The market value of unlisted equity investments classified as available-for-sale financial assets is determined with reference to certain criteria such as net assets, the earnings outlook and discounted future cash flows.
Unconsolidated investments where the fair value cannot be measured reliably are valued at cost, and are deemed Level 3.
The listed price for an asset held or a debt to be issued is usually the bid price, and the ask price for a debt held or an asset to be acquired.
Fair value of loans
The scope applied is that of all loans drawn down and included on La Banque Postale’s balance sheet. Loans that have been granted but not yet released are not taken into account, as it is assumed that, since their rate has just been fixed, their value will not be different from the amount advanced.
For the types of loans sold by the Bank, the main assumptions underlying the calculation are as follows:
The fair value of overdrafts on sight accounts is assumed to correspond to the accounting value.
This seems a conservative assumption given the interest rate charged to customers (12%) and the very short length of the loans (less than one month).
The fair value of loans is determined on the basis of internal models, which consist in discounting future recoverable capital and interest flows over the residual maturity, which are discounted based on opportunity interest rates.
Fair value of deposits
The main underlying assumptions for the calculation are as follows:
For deposits where the remuneration rate is regulated, Livret B (savings passbook) accounts, Youth passbook savings accounts, National Savings Accounts and term deposits accounts, fair value is assumed to correspond to the net book value of the amount outstanding.
The fair value of sight deposits is assumed to correspond to the net book value of the amount outstanding, net of the fair cost value of the swaps used to hedge overnight deposits (via the carve-out option).
Fair value of held or issued debt instruments
The fair value of listed financial instruments corresponds to the closing market price. The fair value of unlisted financial instruments is determined by discounting future cash flows at the market rate in effect at the closing date.
All of these instruments are deemed level 2, and the most significant parameters with regard to the market value of these instruments are considered indirectly observable.
31 DECEMBER 2014
34.2.3 Ranking of fair value assessments recognised on the balance sheet The fair value ranking levels defined in IFRS 7 are as follows:
Level 1: valuation determined by prices listed on an active market Level 2: valuation determined by techniques using observable data;
Level 3: valuation determined by techniques using unobservable data.
As at 31 December 2014
(€ million)
BANKING ACTIVITIES ASSETS Level 1 Level 2 Level 3
Government sec urities and similar 783
Bonds and other fixed- income sec urities 2,803 5,746
Equities and other variable-inc ome sec urities 45
Financial assets at fair value through profit or loss 3,631 5,746
Interest-rate derivatives 279
Foreign exc hange derivatives 11
Equity and index derivatives 6
Trading derivatives 297
Interest-rate derivatives 1,359
Fair value hedging derivatives 1,359
Interest-rate derivatives 96 77
Cash flow hedging derivatives 96 77
Government sec urities and similar 2,177 36
Bonds and other fixed- income sec urities 8,766 661
Equities and other variable-inc ome sec urities 963 265 116
Unc onsolidated investments 118
Available-for-sale financial assets 11,905 962 234
NON-BANKING ACTIVITIES ASSETS
Other non-c urrent financ ial assets 190 491 33
Trade and other rec eivables 3,303
Other c urrent financ ial assets 273 110
Cash and cash equivalents 3 1,386
BANKING ACTIVITIES LIABILITIES
Debt evidenc ed by a c ertific ate 5
Financial liabilities designated at fair value through profit or loss 5
Interest-rate derivatives 282
Foreign exc hange derivatives 1
Other derivative instruments 27
Equity and index derivatives 18
Trading derivatives 327
Interest-rate derivatives 432
Fair value hedging derivatives 432
NON-BANKING ACTIVITIES LIABILITIES
Bonds and other financ ial debt 7,005
Trade and other payables 4,321
Reclassifications from Level 1 to Level 2 : Assets: €491.7 million, Liabilities: none Reclassifications from Level 1 to Level 3 : Assets: €104.4 million, Liabilities: none Reclassifications from Level 2 to Level 1 : Assets: €6.9 million, Liabilities: none
31 DECEMBER 2014
As at 31 December 2013
(€ million)
BANKING ACTIVITIES ASSETS Level 1 Level 2 Level 3
Government sec urities and similar 105
Bonds and other fixed- income sec urities 1,719 3,378
Equities and other variable-inc ome sec urities 51
Financial assets at fair value through profit or loss 1,875 3,378
Interest-rate derivatives 118
Foreign exc hange derivatives 3
Equity and index derivatives 7
Trading derivatives 128
Interest-rate derivatives 129
Fair value hedging derivatives 129
Interest-rate derivatives 92
Cash flow hedging derivatives 92
Government sec urities and similar 2,049 36
Bonds and other fixed- income sec urities 9,283 121
Equities and other variable-inc ome sec urities 1,176
Unc onsolidated investments 127
Available-for-sale financial assets 12,509 157 127
NON-BANKING ACTIVITIES ASSETS
Other non-c urrent financ ial assets 304 638
Trade and other rec eivables 2,936
Other c urrent financ ial assets 252 179
Cash and cash equivalents 1,061 1,102
BANKING ACTIVITIES LIABILITIES
Debt evidenc ed by a c ertific ate 6
Financial liabilities designated at fair value through profit or loss 6
Interest-rate derivatives 73
Foreign exc hange derivatives 6
Other derivative instruments 20
Equity and index derivatives 12
Trading derivatives 112
Interest-rate derivatives 372
Fair value hedging derivatives 372
NON-BANKING ACTIVITIES LIABILITIES
Bonds and other financ ial debt 7,103
Trade and other payables 4,424
Level 3 fair values: reconciliation of opening and closing balances (banking activities)
(€ million)
Assets at fair value through profit or loss
Assets designated at fair value through profit and loss
Trading derivatives
Hedging derivatives
Available-for-sale assets TOTAL
Opening balance 127 127
Gains and losses rec orded in inc ome (2) (2)
Gains and losses rec orded in equity 1 1
Purc hases 30 30
Sales (11) (11)
Other movements (5) (5)
Rec lassific ations to or from Level 3 95 95
Closing balance 234 234
Level 3 fair values: profits and losses for the period recognised in income None
31 DECEMBER 2014