Mega Bank Annual Report 2017

75 Annual Report 2017 -75- EV/EBIT method or EBITDA×EV method, taking into account the operation condition of the comparable listed companies, most recent one month trading information and its liquidity. And if the objective has no comparable instruments or its fair value cannot be estimated using market method, other valuation technique, such as net assets method or income approach, is used to estimate its fair value. G. Funds Ǻ net assets value is adopted. H. Derivative financial instruments: (A) Foreign exchange forward contract, currency swaps, forward rate agreement, interest rate swaps and cross currency swaps: the discounting future cash flow is adopted. (B) Options: Black-Scholes model is mainly adopted for valuation. (C) Some structured derivative financial instruments are valued by using Bloomberg. (D) Some foreign-currency derivatives are valued by using the quoted prices from Bloomberg. (4) Credit risk value adjustment A. Credit risk value adjustments can be primarily classified as either credit value adjustments or debit value adjustments. The definitions are as follows: (A) Credit value adjustments refer to adjustments through fair value, which reflect the possibility that a counterparty may default on repayments and that an entity may not be able to recover, in full, the market value, for transactions in non-centralized markets (i.e. valuation adjustments on derivative contracts traded over-the-counter). (B) Debit value adjustments refer to adjustments through fair value, which reflect the possibility that the Bank may default on repayments and that the Bank may not be able to pay, in full, the market value, for transactions in non-centralized markets (i.e. valuation adjustments on derivative contracts traded over-the-counter). B. The Bank and subsidiaries has incorporated credit risk value adjustments in the considerations for calculating the fair value of financial instruments in order to respectively reflect the counterparty’s credit risk and the Bank’s and its subsidiaries’ credit quali ty. (5) Financial instruments not measured at fair value through profit or loss A. In relation to cash and cash equivalents, bills and bonds purchased under resale agreements, due from the Central Bank and call loans to banks, receivables, refundable deposits, due to the Central Bank and commercial banks, funds borrowed from the Central Bank and other banks, bills and bonds sold under repurchase agreements, payables and deposits received, the book value of the financial instruments which have a short maturity period will be considered as their fair value. While the maturities are quite closed or the future payment or receipt is closed to the carrying amount, the carrying amount at the consolidated balance sheet date is used to estimate the fair value. B. Interest rates of the Bank and sub sidiaries’ bills discounted and loans (including non -performing loans) are generally based on the benchmark interest rate plus or minus certain adjustment to reflect the market interest rate. Thus, their fair values are based on the book value after adjustments of estimated recoverability. Fair values for long-term loans with fixed interest rates shall be estimated using their discounted values of expected future cash flows. However, as such loans account for only a small portion of all loans, book value was used to estimate the fair value. C. When held-to-maturity financial assets have a quoted market price available in an active market, the fair value is determined using the market price. 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. D. The fair value of deposits and remittances are represented by the book value. E. The coupon rate of convertible bonds and bank debentures issued by the Bank and subsidiaries is equivalent to market interest rate; therefore, fair value estimated based on the present value of future cash flows is equivalent to book value. F. For other financial assets, such as investments in debt instruments without active market and financial assets measured at cost, as they have no quoted price in active market and their valuation results by using different valuation methods are significantly different, their fair value cannot be measured reliably and is not disclosed here. (6) Level information of financial instrument at fair value A. Three definitions of the Bank and subsidiaries’ financial instruments at fair value (A) Level 1 Level 1 is quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market refers to a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The Bank and subsidiaries’ investment in listed stock, beneficiary certificates, popular Taiwan government bonds and the derivatives with a quoted price in an active market are deemed as Level 1. (B) Level 2 Level 2 inputs are observable prices other than quoted prices included in Level 1, including observable direct (e.g. prices) or indirect (e.g. those inferred prom prices) inputs in an active market. The Bank and subsidiaries’investments in non -popular government bonds, corporate bonds, bank debentures, convertible bonds, derivative instruments and corporate bonds issued by the Bank and subsidiaries belong to this category.