Annual Report 2012 - Raiffeisen Bank Kosovo JSC

3.3.5. Investments at fair value through profit or loss
An instrument is classified as at fair value through profit or loss if it is held for trading or is designated as such upon
initial recognition. Financial instruments are designated at fair value through profit or loss if the Group manages such
transaction costs are recognised in profit or loss when incurred. Financial instruments at fair value through profit or loss
are measured at fair value, and changes therein are recognised in profit or loss.
3.3.6. Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of comprehensive income when
there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or
realize the asset and settle the liability simultaneously.
3.3.7. Fair value measurement
The determination of fair values of financial assets and financial liabilities is based on quoted market prices or dealer
price quotations for financial instruments traded in active markets. For all other financial instruments fair value is
determined by using valuation techniques. Valuation techniques include net present value techniques, the discounted
cash flow method, comparison to similar instruments for which market observable prices exist, and valuation models.
The Bank 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.
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 inputs not based on observable data and the unobservable inputs have a significant effect
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.
The Bank uses widely recognised valuation models for determining the fair value of common and simpler financial
instruments. For these financial instruments, inputs into models are market observable. Valuation techniques include net
present value and discounted cash flow models, comparison to similar instruments for which market observable prices
exist and based on a current yield curve appropriate for the remaining term to maturity. 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,
which would have been determined by market participants acting at arm's length.
The fair value of cash and cash equivalents, loan and advances to banks is approximately equal to the carrying value,
because of their short-term maturity. The fair value of loans and advances to customers is approximately equal to their
carrying value due to fact that the main part of the loan portfolio carries floating interest rates which reflect the changes
in the market conditions.
3.4. Derivative financial instruments
Derivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are
subsequently measured at their fair value. Fair values are obtained from quoted market prices in active markets,
including recent market transactions, and valuation techniques, including discounted cash flow models as appropriate.
All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. Gains and
losses arising from changes in fair value of derivatives are included in ‘Gains and Losses from investment securities’ in
profit or loss for the period.
The Bank uses derivative financial instruments such as over the counter (OTC) interest rate options and forward currency
contracts to hedge its risk arising from fluctuations of market interest rates and foreign currency fluctuations. No hedge
accounting is applied for derivative instruments. Derivative financial instruments are initially recognized at fair value on
the date on which the derivative contract is entered into and are subsequently measured at fair value and the change in
fair values is recognized in profit or loss.
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Addresses Glossary Financial Statements Segment Reports Overview Macroeconomic Environment RBI Vision and Mission Management Board Introduction