Annual report 2011 - VTB

VTB BankNotes to the Consolidated Financial Statements – 31 December 2011 and 2010(in billions of Russian Roubles)39. Fair Values of Financial Instruments (continued)Movement in Level 3 financial instruments measured at fair value (continued)A reconciliation of movements in Level 3 of the fair value hierarchy by class of instruments for the year ended31 December 2010 is as follows:Financial assets at fair valuethrough profit or lossFinancialassetsdesignated asFinancial at fair valueassets held for through profittrading or lossFinancialassetsavailable-forsaleFinancialderivativeassets andliabilities (net)Fair value at 1 January 2010 – 1.6 18.1 1.0Losses net of gains recognized in profit or lossfor the year – (0.5) – –Gains less losses recognized in othercomprehensive income – – 0.2 –Initial recognition (purchase or issue) 0.3 – 2.0 –Derecognition (sale or settlement) (0.3) (0.7) (0.5) –Acquisition of subsidiary 2.7 – 5.4 –Eliminated at consolidation – – (2.6) –Transfers into level 3 0.1 – 0.2 –Fair value at 31 December 2010 2.8 0.4 22.8 1.0Unrealized gains less losses recognized inprofit or loss or other comprehensiveincome for the current period for assetsand liabilities held at 31 December 2010 – (0.5) 0.2 –Methods and assumptions for Level 2 and Level 3 financial assetsThe fair value of financial assets at fair value through profit or loss, available for sale and derivative financialinstruments valued according to Level 2 models was estimated based on DCF (projected cash flows) method usingthe assumption of future coupon payment and recent transactions prices. The fair value of structured financial assetswas estimated based on stochastic modeling (Level 2 model). Probability models were calibrated using marketindicators (currency forward, ITRAX Index). Value at Risk was calculated based on full historical recalculation andMonte-Carlo simulation.The fair value of financial assets at fair value through profit or loss, available for sale and derivative financialinstruments valued according to Level 3 models was estimated based on DCF (discounted cash flows) method andpeer based method. Peer based method is based on comparing certain financial ratios or multiples, such as the priceto book value, price to earnings, EV/EBITDA, etc., of the equity in question to those of its peers. This type ofapproach, which is popular as a strategic tool in the financial industry, is mainly statistical and based on historicaldata. Main assumptions used in Level 3 models were short-term revenue projections (one year), cost of equity,liquidity discount, cost of debt and net margin fall forecast. The sensitivity to valuation assumptions disclosed belowrepresents by how much the fair value could increase or decrease had management used reasonably possiblealternative valuation assumptions that are not based on observable market data.Sensitivity analysis to changes of key assumptions for financial instruments valued using Level 3 modelsAs at 31 December 2011, financial assets available-for-sale for the amount of RUR 49.4 billion were valued based onvaluation models by using the peer based valuations, discounted cash flow or combinations of these two methodsand others. The assumptions related to projections of discounted cash flows in the model up to 2015 were in thefollowing range: WACC is 10.1-17.6%; Terminal Growth rate is 2-5%; Liquidity discount applied to the valuation is 0-33%.90