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288 NEDBANK GROUP Limited INTEGRATED REPORT 20106 Fair-value measurement ... continued6.1 Valuation of financial instruments ... continuedValuation techniques by instrument ... continuedWhere these instruments include corporate bonds, the bonds are valued using observable active quoted prices or recently executedtransactions, except where observable price quotations are not available. Where price quotations are not available, the fair value isdetermined based on cashflow models, where significant inputs may include yield curves and bond or single-name credit default swapspreads.• Derivative financial instrumentsDerivative contracts can either be traded via an exchange or over the counter (OTC) and are valued using market standard modelsand quoted parameter inputs. Parameter inputs are obtained from pricing services, consensus pricing services and recently occurringtransactions in active markets, whenever possible. Certain inputs may not be observable in the market directly, but can be determinedfrom observable prices via model calibration procedures. Some inputs are not observable, but can generally be estimated fromhistorical data or other sources.• Loans and advancesLoans and advances include mortgage loans (home loans and commercial mortgages), other asset-based loans, including collateriseddebt obligations, and other secured and unsecured loans.In the absence of an observable market for these instruments, the fair value is determined by using internally developed models thatare specific to the instrument and that incorporate all available observable inputs. These models involve discounting the contractualcashflows by using a credit-adjusted zero-coupon curve.• Investment securitiesInvestment securities include private-equity investments, listed investments and unlisted investments.The fair value of listed investments is determined with reference to quoted bid prices at the close of business on the relevant securitiesexchange.Where private-equity investments are involved, the exercise of judgement is required because of uncertainties inherent in estimatingthe fair value. The fair value of private equity is determined using appropriate valuation methodologies that, dependent on the natureof the investment, may include an analysis of the investee’s financial position and results, risk profiles and prospects, discountedcashflowanalysis, enterprise value comparisons with similar companies, price/earnings comparisons and earnings multiples. For eachinvestment the relevant methodology is applied consistently over time and may be adjusted for changes in market conditions relativeto that instrument.The fair value of unlisted investments is determined using appropriate valuation techniques that may include, but are not limited to,discounted-cashflow analysis, net asset value calculations and directors’ valuations.• Other assetsShort positions or long positions in equities arise in trading activities where equity shares, not owned by the group, are sold in themarket to third parties. The fair value of these instruments is determined by reference to the gross short/long position valued at theoffer rate.Investments in instruments that do not have a quoted market price in an active market and the fair value of which cannot be reliablymeasured, as well as derivatives that are linked to and have to be settled by delivery of such unquoted equity instruments, aremeasured at fair value, utilising models considered to be appropriate by management.• Amounts owed to depositorsAmounts owed to depositors include deposits under repurchase agreements, negotiable certificates of deposit and other deposits.These instruments incorporate all market risk factors, including a measure of the group’s credit risk relevant for that financial liabilitywhen designated as at fair value through profit or loss. The fair value of these financial liabilities is determined by discounting thecontractual cashflows using a Nedbank-specific credit-adjusted yield curve that reflects the level at which the group would issuesimilar instruments at the reporting date. The market risk parameters are valued consistently to similar instruments held as assets.The fair value of a financial liability with a demand feature is not less than the amount payable on demand, discounted from the firstdate on which the amount could be required to be paid. When the fair value of a financial liability cannot be reliably determined, theliability is recorded at the amount due.
289Reports andcertificationsConsolidatedannual financialstatementsShareholdermeeting mattersDefinitions andabbreviationsInstrumentcodesContactdetailsnotes to the financial statements for the year ended 31 December 2010Fair value is considered reliably measurable if:– the variability in the range of reasonable fair-value estimates is not significant for that instrument; or– the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value.• Investment contract liabilitiesThe fair value of investment contract liabilities is determined by reference to the fair value of the underlying assets.• Long-term debt instrumentsThe fair value of long-term debt instruments is determined by reference to published market values on the relevant exchange.• Complex instrumentsThese instruments are valued by using internally developed models that are specific to the instrument and that have been calibrated tomarket prices. In less active markets data is obtained from less frequent market transactions, broker quotes and through extrapolationand interpolation techniques. Where observable prices or inputs are not available, other relevant sources of information such ashistorical data, fundamental analysis of the economics of the transaction and proxy information from similar transactions are used.These models are continually reviewed and assessed to ensure that the best available data is being utilised in the determination offair value.• Other liabilitiesShort positions or long positions in equities arise in trading activities where equity shares, not owned by the group, are sold in themarket to third parties. The fair value of these instruments is determined by reference to the gross short/long position valued at theoffer rate.Where the group has assets and liabilities with offsetting market risks, it may use mid-market prices as a basis for establishing fairvalues for the offsetting risk positions and apply the bid or asking price to the net open position, as appropriate.
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