2012 Annual Report - ZTE

ZTE CORPORATIONNotes to Financial Statements(Prepared under Hong Kong Financial Reporting Standards)31 December 201254. FAIR VALUE AND FAIR VALUE HIERARCHYThe carrying amounts of the Group’s and the Company’s financial instruments approximate to their fair values.The fair values of the financial assets and liabilities are included in the amount at which the instrument couldbe exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Thefollowing methods and assumptions were used to estimate the fair values:The fair values of the cash and cash equivalents, the current portion of pledged deposits, trade receivables,trade and bills payables, financial assets included in prepayments, deposits and other receivables, financialliabilities included in other payables and accruals, amounts due from/to subsidiaries, approximate to theircarrying amounts largely due to the short-term maturities of these instruments.The fair values of the non-current portion of pledged deposits, trade receivables, deposits and otherreceivables and interest-bearing bank borrowings have been calculated by discounting the expected futurecash flows using rates currently available for instruments on similar terms, credit risk and remaining maturities.The fair value of the liability portion of the convertible bonds is estimated using an equivalent market interestrate for a similar convertible bond.The fair value of a listed equity investment is based on quoted market prices.The Group enters into derivative financial instruments with various counterparties, principally financialinstitutions with A- or above credit ratings. Derivative financial instruments, including forward currencycontracts and interest rate swaps are measured using valuation techniques similar to forward pricing and swapmodels, using present value calculations. The models incorporate various market observable inputs includingthe credit quality of counterparties, foreign exchange spot and forward rates and interest rate curves. Thecarrying amounts of forward currency contracts and interest rate swaps are the same as their fair values.Fair value hierarchyThe Group uses the following hierarchy for determining and disclosing the fair values of financial instruments:Level 1: fair values measured based on quoted prices (unadjusted) in active markets for identical assetsor liabilitiesLevel 2: fair values measured based on valuation techniques for which all inputs which have a significanteffect on the recorded fair value are observable, either directly or indirectlyLevel 3: fair values measured based on valuation techniques for which any inputs which have a significanteffect on the recorded fair value are not based on observable market data (unobservable inputs)424