Mega Bank Annual Report 2017

74 Mega Bank -74- 7. FAIR VALUE INFORMATION OF FINANCIAL INSTRUMENTS (1) Overview Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial instruments are recorded at fair value upon their initial recognition, where often fair value refers to the transaction price; for subsequent measurements, other than a portion of financial instruments being measured at amortized cost, fair value is elected for measurements. The best evidence for fair value is a public quote in an active market. If the market of a financial instrument is not active, the Bank elects valuation techniques or references Bloomberg or the quotes of counterparties to measure the fair value of the financial instrument. In addition, through the valuation process, information on the counterparty’s and the Bank’s credit risk is also considered. (2) Fair value information of financial instruments Except for those listed in the table below, the carrying amounts of certain financial instruments held by the Bank and subsidiaries (such as cash and cash equivalents, due from the Central Bank and call loans to banks, bills and bonds purchased under resale agreement, receivables, bills discounted and loans, held-to-maturity financial assets- Central Bank’s certificates of deposits, due to the Central Bank and other banks, funds borrowed from the Central Bank and other banks, bills and bonds sold under repurchase agreements, accounts payable, deposits and remittances, financial bonds payable, and other financial liabilities) are approximate to their fair values (please refer to Note 7(5)). The fair value information of financial instruments measured at fair value is provided in Note 7(6). NT$ Book Value Fair Value December 31, 2017 Held-to-maturity financial assets - investments in bonds $ 19,343,891 $ 19,381,844 US$ Book Value Fair Value December 31, 2017 Held-to-maturity financial assets - investments in bonds $ 652,452 $ 653,732 NT$ Book Value Fair Value December 31, 2016 Held-to-maturity financial assets - investments in bonds $ 20,229,023 $ 20,215,485 The fair values of the above-mentioned held-to-maturity financial assets are classified as Level 1 and Level 2. (3) Financial instruments measured at fair value If the market quotation from the Taiwan Stock Exchange Corporation, brokers, underwriters, Industrial Trade Unions, pricing service agencies or competent authorities can be frequently obtained on time, and the price represents the actual and frequent transactions at arm’s length, then a financial instrument is deemed to have an active market. If the above condition cannot be met, the market is deemed inactive. In general, significant price variance between the purchase price and selling price, significantly increasing price variance or extremely low trading volume are all indicators of an inactive market. If the quoted market price of a financial instrument is available in an active market, the quoted price is the fair value, usually the fair value is measured using the market price, interest rate, foreign exchange central parity rate shown in Reuters quotation system, partially using the quoted prices from Bloomberg, OTC, and the basis for valuation is maintained consistently. If there is no quoted market price for reference, a valuation technique or quoted price offer by the counterparties will be adopted to measure the fair value. Fair value measured by a valuation technique is usually estimated by reference to the fair values of other financial instruments with similar terms and characteristics, or by using cash flows discounting method, or using model calculation based on the market information (such as yield rate curves from OTC, average interest rate of TAIBOR from Reuters) available on the balance sheet date. When assessing non-standardized financial instruments with lower complexity, derivative financial instruments such as interest rate swap contracts, foreign exchange swap contracts, options, the Bank and subsidiaries use valuation techniques and models which are extensively used by the market to estimate their fair value. The parameters used in the valuation model for these kinds of financial instruments usually use the observable information as the input. For more complicated financial instruments, such as debt instruments with embedded derivative instruments or securitization products, the Bank and subsidiaries develop its own valuation models to estimate fair value by reference to the valuation techniques and methods which are extensively used by the same trade. Parts of parameters used in these valuation models are not observable from the market; they must be estimated by using some assumptions. A. NTD Central Government Bond: the yield rates across different contract length and one-hundred price bulletined by Over-The-Counter (hereinafter OTC) are used. B. NTD corporate bonds, financial debentures, government bonds, bond-type beneficiary securities and designated financial debentures issued by the Bank and subsidiaries: the present value of future estimated cash flows is calculated by using the yield rate curve. C. NTD short-term bills and NTD bill-type beneficiary securities: the present value of future estimated cash flows of NTD and USD short-term bills is calculated by using average interest rate of TAIBOR and TAIFX3 central parity rate from Reuters, respectively. D. Foreign securities: quoted prices from Bloomberg are adopted. E. Listed stock Ǻ the closing price being listed in TSE is adopted. F. Emerging stock: If the objective recently has representative trading, its trading price might be the best estimate of its fair value. If the objective has comparable listed trades, its fair value can be estimated by using appropriate market method, such as P/E method, P/B method,