a. Fair value of financial instruments not carried at fair value
1) Financial instruments significant difference between carrying amount and fair value
Except as detailed in the following table, the management consider that the carrying amounts of financial assets and financial liabilities recognized in the condensed consolidated financial statements approximate their fair values or their fair values cannot be reliably measured.
December 31
2016 2015
Carrying
Amount Fair Value
Carrying
Amount Fair Value
Financial assets
Held-to-maturity financial
assets $ 5,544,703 $ 5,550,503 $ 9,849,587 $ 9,894,834
Financial liabilities
Bank debentures 17,450,000 17,544,491 14,950,000 15,033,738 2) The fair value hierarchy
(In Thousands of New Taiwan Dollars) December 31, 2016
Item Total Level 1 Level 2 Level 3
Financial assets
Held-for-maturity financial
assets $ $ 5,550,503 $ - $ 5,550,503 $ -
Financial liabilities
Bank debentures 17,544,491 17,544,491 - - December 31, 2015
Item Total Level 1 Level 2 Level 3
Financial assets
Held-for-maturity financial
assets $ $ 9,894,834 $ - $ 9,894,834 $ -
Financial liabilities
Bank debentures 15,033,738 15,033,738 - - Held-to-maturity financial assets and bank debentures. Refer to quoted market prices for fair value. If quoted market prices are not available, the fair value is determined by using a valuation technique.
b. Fair value of financial instruments carried at fair value
1) The fair value hierarchy of the financial instruments as of December 31, 2016 and 2015 were as follows:
(In Thousands of New Taiwan Dollars) December 31, 2016
Item Total Level 1 Level 2 Level 3
Non-derivative financial instruments
Assets
Financial assets at fair value
through profit or loss
Held-for-trading financial assets
Stocks $ 539,779 $ 360,084 $ 114,669 $ 65,026
Bonds 517,317 10,928 506,389
Bills 96,648,408 - 96,648,408 -
Others 35,342,797 - 35,342,797 -
Financial assets designated as fair value through profit or
loss 12,018,171 - 1,627,391 10,390,780
Available-for-sale financial assets
Stocks 1,201,277 1,201,277 - -
Bonds 125,780,288 101,197 125,679,091 -
Liabilities
Financial liabilities at fair value
through profit or loss
Held-for-trading financial
liabilities 72 - 72 -
Derivative financial instruments
Assets
Financial assets at fair value
through profit or loss 2,655,813 - 2,444,169 211,644
Liabilities
Financial liabilities at fair value
through profit or loss 2,377,800 - 2,377,800 -
December 31, 2015
Item Total Level 1 Level 2 Level 3
Non-derivative financial instruments
Assets
Financial assets at fair value
through profit or loss
Held-for-trading financial assets
Stocks $ 996,647 $ 924,213 $ 72,434 $ -
Bonds 1,425,025 996,832 328,180 100,013
Bills 100,750,259 204,771 100,545,488 -
Others 34,071,511 - 34,071,511 -
Financial assets designated as fair value through profit or
loss 15,946,575 - 2,972,502 12,974,073
Available-for-sale financial assets
Stocks 1,393,411 1,393,411 - -
Bonds 114,448,570 2,862,444 111,586,126 -
Liabilities
Financial liabilities at fair value
through profit or loss
Held-for-trading financial
liabilities 651,528 146,299 505,229 -
(Continued)
December 31, 2015
Item Total Level 1 Level 2 Level 3
Derivative financial instruments
Assets
Financial assets at fair value
through profit or loss $ 6,488,544 $ 6,066 $ 6,209,672 $ 272,806
Liabilities
Financial liabilities at fair value
through profit or loss 5,637,548 - 5,637,548 -
(Concluded) 2) Valuation techniques and assumptions applied for the purpose of measuring the fair values
In a fair deal, the transaction is fully understood and there is willingness to achieve by the two sides, in exchange of assets or settle of liabilities, fair value is the amount settled. Financial instruments at fair value through profit or loss, available-for-sale financial assets and hedging derivative financial assets refer to quoted market prices for fair value. If quoted market prices are not available, then fair value is determined by using a valuation technique.
a) Marking-to-market
This measurement should be used first. Following are the factors that should be considered when using marking-to-market:
i. Ensure the consistency and completeness of market data.
ii. The source of market data should be transparent, easy to access, and should come from independent resources.
iii. Listed securities with high liquidity and representative closing prices should be valued at closing prices.
iv. Unlisted securities which lack tradable closing prices should use quoted middle prices from independent brokers and follow the guidelines required by regulatory authorities.
b) Marking-to-model
The marking-to-model is used if marking-to-market is infeasible. This valuation methodology is based upon the market parameters to derive the value of the positions and incorporate estimates, as well as assumptions consistent with those generally used by other market participants to price financial instruments.
Fair values of forward contracts are estimated based on the forward rates provided by Reuters.
Fair values of interest rate swap and cross-currency swap contracts are based on counterparties’
quotation. Other derivatives are evaluated by the Kondor+ system.
The fair value of interest exchange and swap contracts are using the Kondor+ information system to capture market data from Reuters for calculating the fair value assessment of individual contracts. The structured and credit-linked instruments use discounted cash flows at the applicable yield curve for the duration to calculate and analyze the fair value. Option trading instruments use option pricing model commonly used in the market (ex:
Black-Scholes model) to calculate the fair value.
i. Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities.
Active markets are markets with all of the following conditions: (i) the products traded in the market are homogeneous, (ii) willing parties are available anytime in the market, and (iii) price information is available to the public.
ii. Level 2 - inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (i.e., prices) or indirectly (i.e., derived from prices).
iii. Level 3 - inputs not based on observable market data (unobservable inputs. i.e., option pricing model of historical volatility, due to historical volatility could not represent the overall market participants’ volatility expectations of the future).
3) Reconciliation of Level 3 items of financial instruments For the year ended December 31, 2016
(In Thousands of New Taiwan Dollars)
Name Beginning
Balance
Valuation Gain/Loss Reflected on Profit or Loss
Increase Decrease
Ending Balance Purchase/
Issued
Transfer to Level 3
Disposed/
Sold
Transfer Out of Level 3 Financial assets at fair value
through profit or loss Held-for-trading financial
assets $ 100,013 $ - $ - $ - $ - $ (34,987 ) $ 65,026
Derivative 272,806 (61,162 ) - - - - 211,644
Financial assets designated as fair value through
profit or loss 12,974,073 241,528 10,569,800 - (13,394,621 ) - 10,390,780
For the year ended December 31, 2015
(In Thousands of New Taiwan Dollars)
Name Beginning
Balance
Valuation Gain/Loss Reflected on Profit or Loss
Increase Decrease
Ending Balance Purchase/
Issued
Transfer to Level 3
Disposed/
Sold
Transfer Out of Level 3 Financial assets at fair value
through profit or loss Held-for-trading financial
assets $ 113,804 $ - $ - $ - $ (13,791 ) $ - $ 100,013
Derivative 264,445 8,361 - - - - 272,806
Financial assets designated as fair value through
profit or loss 10,066,332 218,813 11,403,200 - (8,714,272 ) - 12,974,073 Financial liabilities at fair
value through profit or loss Held-for-trading financial
liabilities 1,572 (3,287 ) 7,013 - (5,298 ) - -
4) Transfer between Level 1 and Level 2
The Company has no significant transfers between Level 1 and Level 2 for years ended December 31, 2016 and 2015.
5) Sensitivity to using reasonable alternative in assumption against Level 3 fair value
Although the Company believes that their estimates of fair value are appropriate, their using of different methodologies or assumptions could lead to different measurements of fair value. For fair value measurements in Level 3 of the fair value hierarchy, structural bonds are evaluated by counterparty quotes; no quoted market price of the Bonds and convertible corporate bonds for asset swap are evaluated by the future cash flows discounted model. Its discount rate as the zero coupon yield curve is deduced by using the LIBOR rate yield curve and the dollar yield curve consisting swap rate and considering credit risk premium. A 10% change in either direction of the quotes from respective counterparties would have the following effects:
For the year ended December 31, 2016
(In Thousands of New Taiwan Dollars)
Effect on Profit and Loss Effect on Other Comprehensive Income Favorable Unfavorable Favorable Unfavorable Financial assets at fair value through
profit or loss
Derivative financial instruments $ - $ (1,221) $ - $ - For the year ended December 31, 2015
(In Thousands of New Taiwan Dollars)
Effect on Profit and Loss Effect on Other Comprehensive Income Favorable Unfavorable Favorable Unfavorable Financial assets at fair value through
profit or loss
Derivative financial instruments $ 31 $ (1,388) $ - $ -
49. FINANCIAL RISK MANAGEMENT