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287Reports andcertificationsConsolidatedannual financialstatementsShareholdermeeting mattersDefinitions andabbreviationsInstrumentcodesContactdetailsnotes to the financial statements for the year ended 31 December 2010• The time value of money: The business may use well-accepted and readily observable general interest rates, such as the JohannesburgInterbank Agreed Rate (South Africa), London Interbank Offered Rate (United Kingdom) or an appropriate swap rate, as the benchmarkrate to derive the present value of a future cashflow.• Credit risk: Credit risk is the risk of loss associated with a counterparty’s failure or inability to fulfil its contractual obligations. Thevaluation of the relevant financial instrument takes into account the effect of credit risk on fair value by including an appropriateadjustment for the risk taken.• Foreign currency exchange prices: Active currency exchange markets exist for most major currencies, and prices are quoted daily onvarious trading platforms and in financial publications.• Commodity prices: Observable market prices are available for those commodities that are actively traded on exchanges in South Africa,London, New York and Chicago, as well as on other commercial exchanges.• Equity prices: Prices (and indices of prices) of traded equity instruments are readily observable on JSE Limited or any other recognisedinternational exchange. Present value techniques may be used to estimate the current market price of equity instruments for whichthere are no observable prices.• Volatility: Measures of the volatility of actively traded items can be reasonably estimated by the implied volatility in current marketprices. The shape and skew of the volatility curve is derived from a combination of observed trades and doubles in the market. In theabsence of an active market, a methodology to derive these volatilities from observable market data will be developed and utilised.• Recovery rates/Loss given default (LGD): These are used as an input to valuation models as an indicator of the severity of losses ondefault. Recovery rates are primarily sourced from market data providers or inferred from observable credit spreads.• Prepayment risk and surrender risk: Expected repayment patterns for financial assets and expected surrender patterns for financialliabilities can be estimated on the basis of historical data.• Servicing costs: If the cost of servicing a financial asset or financial liability is significant and other market participants would facecomparable costs, the issuer would consider them in determining the fair value of that financial asset or financial liability.• Dividends: Consistent consensus dividend forecasts adjusted for internal investment analysts’ projections can be applied to each share.Forecasts are usually available for the current year plus one additional year. Thereafter, a constant growth rate would be applied to thespecific dates into the future for each individual share.• Inception profit (day-one gain or loss): The best evidence of the fair value of a financial instrument at initial recognition is thetransaction price (ie the fair value of the consideration given or received), unless the fair value of that instrument is evidenced bycomparison with other observable current market transactions in the same instrument (ie without modification or repackaging) orbased on a valuation technique, the variables of which include data from observable markets only.Valuation adjustmentsTo determine a reliable fair value, where appropriate, the group applies certain valuation adjustments to the pricing information derivedfrom the above sources. In making appropriate adjustments, the group considers certain adjustments to the modelled price that marketparticipants would make when pricing that instrument. Factors that would be considered include the following:• Own credit on financial liabilities: The carrying amount of financial liabilities held at fair value is adjusted to reflect the effect ofchanges in the group’s own credit spreads. As a result, the carrying value of issued bonds and subordinated-debt instruments thathave been designated as at fair value through profit or loss is adjusted by reference to the movement in the appropriate spreads. Theresulting gain or loss is recognised in profit and loss in the statement of other comprehensive income.• Counterparty credit spreads: Adjustments are made to market prices when the creditworthiness of the counterparty differs from thatof the assumed counterparty in the market price (or parameter).Valuation techniques by instrument• Other short-term securities and government and other securitiesThe fair value of these instruments is based on quoted market prices from an exchange dealer, broker, industry group or pricing service,when available. When they are unavailable, the fair value is determined by reference to quoted market prices for similar instruments,adjusted as appropriate for the specific circumstances of the instruments.