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298 NEDBANK GROUP Limited INTEGRATED REPORT 20106 FAIR-VALUE MEASUREMENT ... continued6.6 Effect of changes in significant unobservable assumptions to reasonable possible alternativesAs discussed above the fair-value measurement of financial instruments are, in certain circumstances, measured using valuation techniquesthat include assumptions that are not market observable. Where these scenarios apply, the group performs stress testing on the fair valueof the relevant instruments. In performing the stress testing, appropriate levels for the unobservable input parameters are chosen so thatthey are consistent with prevailing market evidence and in line with the group’s approach to valuation control.In accordance with IFRS 7 Financial Instruments: Disclosure, the following information is intended to illustrate the potential impact of therelative uncertainty in the fair value of financial instruments for which valuation is dependent on unobservable input parameters. However,it is unlikely in practice that all unobservable parameters would simultaneously be at the extremes of their ranges of reasonably possiblealternatives. Furthermore, the disclosure is neither predictive nor indicative of future movements in fair value.The following table shows the effect on fair value of changes in unobservable input parameters to reasonable possible alternative assumptions:PrincipleassumptionstressedStressparameters%Statement offinancialposition valueRmFavourablechange in fairvalue due tostress testRmUnfavourablechange in fairvalue due tostress testRm2010AssetsGovernment and other securities Credit spreads Between (25)and 25 47 1 (1)Loans and advances Credit spreads Between (25)and 25 36 * *Investment securitiesValuation multiples,correlations, volatilitiesand credit spreadsBetween (20)and 201 599 243 (268)Investments in associate companies Valuation multiples Between (10)and joint venturesand 10 912 88 (88)Total financial assets classified at level 3 2 594 332 (357)LiabilitiesDerivative financial instruments* Represents amounts less than R1 million.2009AssetsDerivative financial instrumentsCorrelations, volatilitiesand credit spreadsBetween (33)and 33 10 3 (3)Correlations, volatilitiesand credit spreadsGovernment and other securities Credit spreads Between (20)and 20 55 1 (1)Loans and advances Credit spreads Between (20)and 20 82 * *Between (25)and 25 16 13 (13)Investment securitiesCorrelations, volatilities Between (20)and credit spreads and 20 2 489 235 (300)Investments in associate companies Valuation multiples Between (6)and joint venturesand 6 908 57 (57)Total financial assets classified at level 3 3 550 306 (371)LiabilitiesDerivative financial instruments* Represents amounts less than R1 million.Correlations, volatilitiesand credit spreadsBetween (25)and 25 53 9 (9)
299Reports andcertificationsConsolidatedannual financialstatementsShareholdermeeting mattersDefinitions andabbreviationsInstrumentcodesContactdetailsnotes to the financial statements for the year ended 31 December 20106.7 Fair-value approximates carrying valueCertain financial instruments of the group are not carried at fair value. The calculation of the fair value of these financial instruments incorporatesthe group’s best estimate of the amount at which these financial assets could be exchanged, or financial liabilities settled, between knowledgeable,willing parties in an arm’s length transaction.Fair values at the balance sheet date of these respective financial instruments detailed below are estimated for the purpose of disclosureas follows:Loans and advancesLoans and advances that are not recognised at fair value principally comprise variable-rate financial assets. The interest rates on these financialassets are adjusted when the applicable benchmark interest rate changes.Loans and advances are not actively traded in the SA market and it is therefore not possible to determine the fair value of these loans andadvances using observable market prices. Due to the unique characteristics of the loans and advances book and the fact that there have beenno recent transactions involving the disposals of loans and advances, there is no basis to determine a price that could be negotiated between awilling buyer and seller. The group is not currently in the position of a forced sale for the underlying loans and advances and it would thereforebe inappropriate to value the loans and advances on a forced-sale basis.For impaired loans and advances, the carrying value as determined after consideration of the group’s IAS 39 credit impairments is consideredthe best estimate of fair value.The group has developed a methodology and model to determine the fair value of the gross exposures for performing loans and advancesmeasured at amortised cost. This model incorporates the use of average interest rates and projected monthly cashflows per product type. Futurecashflows are discounted using interest rates at which similar loans would be granted to borrowers with similar credit ratings and maturities.Methodologies and models are updated on a continuous basis for changes in assumptions and modelling techniques.Future forecasts for the group’s probability of default (PD) and LGD for 2011 to 2013 (2009: for 2010 to 2012) are based on the latest availableinternal data and is applied to the first three years’ projected cashflows. Thereafter, PDs and LGDs are reverted to their long-run averages and areapplied to the remaining projected cashflows.The results of these fair-value calculations are summarised below:2010%2009%Positive scenario 0,36 0,38Base scenario 0,16 0,25Mild-risk scenario (0,81) (0,20)The above scenarios are based on the group’s assessment of future economic developments.Where the percentage is positive, this indicates that the fair value of the performing loans and advances is greater than the carrying value.Similarly, if the percentage is negative, this indicates that the fair value of the performing loans and advances is less than its carrying value.The group is of the opinion that the carrying value of loans and advances approximates fair value.Government and other securitiesThe fair value of government and other securities are determined based on available market prices and directors’ valuations where appropriate.See note 25.3 for further detail.Other financial assets (excluding government and other securities and loans and advances) and financial liabilities(excluding amounts owed to depositors and long-term debt instruments)The carrying values of cash and cash equivalents, other assets, mandatory deposits with central banks and provisions and other liabilities areconsidered a reasonable approximation of their respective fair values, as they are either short term in nature or are repriced to current marketrates at frequent intervals.Amounts owed to depositorsThe group is of the opinion that the carrying value of variable-rate amounts owed to depositors approximates fair value.Long-term debt instrumentsThe group is of the opinion that the carrying value of variable-rate long-term debt instruments approximates fair value.
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