78 LV= Annual Report 2012
Notes to the Financial Statements continued
31 December 2012
Financial assets and liabilities
This section presents information relating to the financial assets and liabilities (excluding insurance contract-related assets and
liabilities which are disclosed in Note 20) held by the Society and Group. These financial asset and liabilities are held at either fair
value or amortised cost as defined by the Group’s accounting policies.
15. Financial assets – Fair value through income
Accounting for financial assets and liabilities at fair value through income.
Financial assets at fair value through income has two sub categories:
– Financial assets held for trading; and
– Those designated at fair value through income at inception.
All investments of the Group classified as fair value are designated as fair value through income at inception. Such assets are measured
at market prices, or prices consistent with market ratings should no price be available. Any unrealised or realised gains or losses are
taken to the Statement of Comprehensive Income, as fair value gains or losses, or realised gains or losses respectively, as they occur.
Financial assets at fair value through income include listed and unlisted investments, units in authorised unit trusts, open ended
investment companies (OEICs), loans secured on residential property and other investments.
Financial liabilities at fair value through income include derivative financial instruments and investment contract liabilities; see Notes 16
and 17 respectively.
The IFRS “fair value hierarchy” levels for financial assets and liabilities required under IFRS7 are disclosed within Note 18.
Loans secured on residential property
The fair value of the loans secured on residential property is determined using discounted cash flows which take into account the
interest rolled up on the loans, maturity profiles and expected future funding costs. The swap rate used as an input to the discount rate
is matched to the expected term of the underlying loans. A ‘No Negative Equity Guarantee’ liability is fair valued using discounted cash
flows and is netted off against the fair value of the assets.
A Group undertaking provides ‘No Negative Equity Guarantee’ contracts to customers on equity release mortgages. The contractual terms
of these guarantees require the company to make payments equivalent to any shortfall between the market value of customers’ property
and the value of the loan plus accrued interest at the date of redemption.
The guarantee is initially recognised at the fair value of the liability on the date the guarantee is given and is subsequently measured at
fair value. The fair value is calculated by applying stochastic scenario models, applying assumptions for interest rates, future house price
inflation and its volatility, mortality rates and early loan repayment rates, to give management’s best estimate of the discounted value of
cash flows required to settle any future financial obligation arising at the Statement of Financial Position date.
The guarantee is included within Financial assets – Fair value through income in the Statement of Financial Position. The movement in
the fair value of the guarantee is taken to the Statement of Comprehensive Income.
Significant accounting estimates and judgements
Fair value of financial assets
Market observable inputs are used wherever possible. In the absence of an active market, estimation of fair value is achieved by using
valuation techniques such as recent arm’s length transactions, discounted cash flow analysis and option pricing models. For discounted
cash flow analysis, estimated future cash flows and discount rates are based on current market information and rates applicable
to financial instruments with similar yields, credit quality and maturity characteristics. This valuation will also take into account the
marketability of the assets being valued.
Details of the key assumptions used in the absence of an active market are contained in the fair value estimation tables, as required by
IFRS7, disclosed in Note 18.