32 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 2018:

  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 31 December 2018    

79,478

 

79,478

                 
At fair value through profit or loss                
Quoted equities 31 December 2018 161,384       161,384
Quoted debt instruments 31 December 2018      
   
161,384
     
161,384
At fair value through other comprehensive income                
Quoted equities 31 December 2018 454,925       454,925
Unquoted equities 31 December 2018   12,036   87,281   99,317
Investment in managed funds 31 December 2018   6,336     6,336
   
454,925
 
18,372
 
87,281
 
560,578
Assets for which fair value is disclosed                
Investment carried at amortised cost    

1,837

   

1,837

 

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 2017:

  Date of Level 1   Level 2   Level 3   Total
  Valuation AED’000   AED’000   AED’000   AED’000
Assets measured at
fair value
               
Non-current assets classified as held for sale 31December 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 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.