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(26) Additional Fair Value Disclosures on Financial Instruments

Fair Value of Financial Instruments

We use various types of financial instruments in the ordinary course of business, which are classified as either: loans and receivables (L&R), available-for-sale (AFS), held-for-trading (HFT), or amortized cost (AC). For those financial instruments measured at fair value or for which fair value must be disclosed, we have categorized the financial instruments into a three-level fair value hierarchy depending on the inputs used to determine fair value and their significance for the valuation techniques.

 

Fair Values of Financial Instruments and Classification Within the Fair Value Hierarchy

€ millions   Category   December 31, 2016
Carrying Amount   Measurement Categories   Fair Value
At Amortized Cost   At Fair Value   Level 1   Level 2   Level 3   Total
Assets                                
Cash and cash equivalents1)   L&R   3,702   3,702                    
Trade and other receivables       6,050                        
Trade receivables1)   L&R   5,825   5,825                    
Other receivables2)     225                        
Other financial assets       2,482                        
Available-for-sale financial assets                                
Debt investments   AFS   195       195   195           195
Equity investments   AFS   953       953   153   94   706   953
Investments in associates2)     38                        
Loans and other financial receivables                                
Financial instruments related to employee benefit plans2)     144                        
Other loans and other financial receivables   L&R   956   956           956       956
Derivative assets                                
Designated as hedging instrument                                
FX forward contracts     12       12       12       12
Interest rate swaps     47       47       47       47
Not designated as hedging instrument                                
FX forward contracts   HFT   35       35       35       35
Call options for share-based payments   HFT   84       84       84       84
Call option on equity shares   HFT   17       17           17   17
Liabilities                                
Trade and other payables       −1,408                        
Trade payables1)   AC   −1,016   −1,016                    
Other payables2)     −392                        
Financial liabilities       −8,294                        
Non-derivative financial liabilities                                
Loans   AC   −16   −16           −16       −16
Bonds   AC   −6,147   −6,147       −6,374           −6,374
Private placements   AC   −1,717   −1,717           −1,744       −1,744
Other non-derivative financial liabilities   AC   −219   −219           −219       −219
Derivatives                                
Designated as hedging instrument                                
FX forward contracts     −24       −24       −24       −24
Interest rate swaps     0       0       0       0
Not designated as hedging instrument                                
FX forward contracts   HFT   −170       −170       −170       −170
Total financial instruments, net       2,533   1,369   1,149   −6,026   −944   723   −6,248

 

 

Fair Values of Financial Instruments and Classification Within the Fair Value Hierarchy

€ millions
  Category   December 31, 2015
Carrying Amount   Measurement Categories   Fair Value
At Amortized Cost   At Fair Value   Level 1   Level 2   Level 3   Total
Assets                                
Cash and cash equivalents1)   L&R   3,411   3,411                    
Trade and other receivables       5,362                        
Trade receivables1)   L&R   5,199   5,199                    
Other receivables2)     163                        
Other financial assets       1,687                        
Available-for-sale financial assets                                
Debt investments   AFS   26       26   26           26
Equity investments   AFS   882       882   299   21   562   882
Investments in associates2)     58                        
Loans and other financial receivables                                
Financial instruments related to employee benefit plans2)     121                        
Other loans and other financial receivables   L&R   316   316           316       316
Derivative assets                                
Designated as hedging instrument                                
FX forward contracts     14       14       14       14
Interest rate swaps     100       100       100       100
Not designated as hedging instrument                                
FX forward contracts   HFT   69       69       69       69
Call options for share-based payments   HFT   94       94       94       94
Call option on equity shares   HFT   6       6           6   6
Liabilities                                
Trade and other payables       −1,169                        
Trade payables1)   AC   −893   −893                    
Other payables2)     −276                        
Financial liabilities       −9,522                        
Non-derivative financial liabilities                                
Loans   AC   −1,261   −1,261           −1,261       −1,261
Bonds   AC   −5,733   −5,733       −5,825           −5,825
Private placements   AC   −2,202   −2,202           −2,288       −2,288
Other non-derivative financial liabilities   AC   −199   −199           −199       −199
Derivatives                                
Designated as hedging instrument                                
FX forward contracts     −10       −10       −10       −10
Interest rate swaps     0       0       0       0
Not designated as hedging instrument                                
FX forward contracts   HFT   −117       −117       −117       −117
Total financial instruments, net       −232   −1,361   1,064   −5,500   −3,261   568   −8,192

1) We do not separately disclose the fair value for cash and cash equivalents, trade receivables, and accounts payable as their carrying amounts are a reasonable approximation of their fair values.
2) Since the line items trade receivables, trade payables, and other financial assets contain both financial and non-financial assets or liabilities (such as other taxes or advance payments), the carrying amounts of non-financial assets or liabilities are shown to allow a reconciliation to the corresponding line items in the Consolidated Statements of Financial Position.

 

Fair Values of Financial Instruments Classified According to IAS 39

€ millions Category December 31, 2016
Carrying Amount At Amortized Cost At Fair Value
Financial assets
At fair value through profit or loss HFT 136 136
Available-for-sale AFS 1,148 1,148
Loans and receivables L&R 10,484 10,484
Financial liabilities
At fair value through profit or loss HFT −170 −170
At amortized cost AC −9,115 −9,115

€ millions Category December 31, 2015
Carrying Amount At Amortized Cost At Fair Value
Financial assets
At fair value through profit or loss HFT 169 169
Available-for-sale AFS 908 908
Loans and receivables L&R 8,926 8,926
Financial liabilities
At fair value through profit or loss HFT −117 −117
At amortized cost AC −10,288 −10,288

Determination of Fair Values

It is our policy that transfers between the different levels of the fair value hierarchy are deemed to have occurred at the beginning of the period of the event or change in circumstances that caused the transfer. A description of the valuation techniques and the inputs used in the fair value measurement is given below:

Financial Instruments Measured at Fair Value on a Recurring Basis

 

Type   Fair Value Hierarchy   Determination of Fair Value/Valuation Technique   Significant Unobservable Inputs   Interrelationship Between Significant Unobservable Inputs and Fair Value Measurement
Other financial assets      
Debt investments   Level 1   Quoted prices in an active market   NA   NA
Listed equity investments   Level 1   Quoted prices in an active market   NA   NA
Level 2   Quoted prices in an active market deducting a discount for the disposal restriction derived from the premium for a respective put option.   NA   NA
Unlisted equity investments   Level 3   Market approach. Comparable company valuation using revenue multiples derived from companies comparable to the investee.   Peer companies used (revenue multiples range from 3.9 to 8.3)
Revenues of investees
Discounts for lack of marketability (10% to 30%)
  The estimated fair value would increase (decrease) if:
The revenue multiples were higher (lower)
The investees' revenues were higher (lower)
The liquidity discounts were lower (higher).
        Market approach. Venture capital method evaluating a variety of quantitative and qualitative factors such as actual and forecasted results, cash position, recent or planned transactions, and market comparable companies.   NA   NA
        Last financing round valuations   NA   NA
        Liquidation preferences   NA   NA
        Net asset value/Fair market value as reported by the respective funds   NA   NA
Call options for share-based payment plans   Level 2   Monte-Carlo Model.
Calculated considering risk-free interest rates, the remaining term of the derivatives, the dividend yields, the stock price, and the volatility of our share.
  NA   NA
Call option on equity shares   Level 3   Market approach. Company valuation using EBITDA multiples based on actual results derived from the investee.   EBITDA multiples used
EBITDA of the investee
  The estimated fair value would increase (decrease) if:
The EBITDA multiples were higher (lower)
The investees' EBITDA were higher (lower)
Other financial assets/ Financial liabilities    
FX forward contracts   Level 2   Discounted cash flow using Par-Method.
Expected future cash flows based on forward exchange rates are discounted over the respective remaining term of the contracts using the respective deposit interest rates and spot rates.
  NA   NA
Interest-rate swaps   Level 2   Discounted cash flow.
Expected future cash flows are estimated based on forward interest rates from observable yield curves and contract interest rates, discounted at a rate that reflects the credit risk of the counterparty.
  NA   NA

 

Financial Instruments Not Measured at Fair Value

 

Type   Fair Value Hierarchy   Determination of Fair Value/Valuation Technique
Financial liabilities    
Fixed rate bonds (financial liabilities)   Level 1   Quoted prices in an active market
Fixed rate private placements/ loans (financial liabilities)   Level 2   Discounted cash flows.
Future cash outflows for fixed interest and principal are discounted over the term of the respective contracts using the market interest rates as of the reporting date.

 

For other non-derivative financial assets/liabilities and variable rate financial debt, it is assumed that their carrying value reasonably approximates their fair values.

Transfers Between Levels 1 and 2

Transfers of available-for-sale equity investments from Level 2 to Level 1 which occurred because disposal restrictions lapsed and deducting a discount for such restriction was no longer necessary were not material in all years presented, while transfers from Level 1 to Level 2 did not occur at all.

Level 3 Disclosures

The following table shows the reconciliation from the opening to the closing balances for our unlisted equity investments and call options on equity shares classified as Level 3 fair values:

 

Reconciliation of Level 3 Fair Values

€ millions   2016   2015
Unlisted Equity Investments and Call Options on Equity Shares   Unlisted Equity Investments and Call Options on Equity Shares
January 1   568   400
Transfers        
Into Level 3   18   12
Out of Level 3   −18   −80
Purchases   156   170
Sales   −168   −22
Gains/losses        
Included in financial income, net in profit and loss   96   9
Included in available-for-sale financial assets in other comprehensive income   48   34
Included in exchange differences in other comprehensive income   22   45
December 31   722   568
Change in unrealized gains/losses in profit and loss for investments held at the end of the reporting period   0   0

 

Changing the unobservable inputs to reflect reasonably possible alternative assumptions would not have a material impact on the fair values of our unlisted equity investments held as available-for-sale as of the reporting date.

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