2013 Annual report

NOTE 20

THE USE OF FAIR VALUE AND FINANCIAL INSTRUMENTS

Ferd applies the following principles in the measurement of fair value in the financial statements:

Ferd applies the valuation method that is considered to be the most representative estimate of an assumed sales value. Such a sale is assumed to be carried out in an orderly transaction at the balance sheet date. As a consequence, all assets for which there is observable market information, or where a transaction recently has been carried out, these prices are applied (the market method). When a price for an identical asset is not observable, the fair value is calculated by another valuation method. In the valuatons, Ferd applies relevant and observable data at the largest possible extent.

For all investments where the value is determined by another method than the market method, analyses of changes in value from period to period are carried out. Thorough analyses on several levels are made, both by business area management, by Ferd's group management and finally by Ferd's Board. Sensitivity analyses for the most central and critical input data in the valuation model are prepared, and in some instances recalculations of the valuation are made by using alternative valuation methods in order to confirm the calculated value.

Ferd is consistent in the application of valuation method and normally does not change the valuation principles. A change of principles will deteriorate the reliability of the reporting and weaken the comparability between periods. The principle for the valuation and use of method is determined for the investment before it is carried out, and is changed only exceptionally and if the change results in a measurement that under the circumstances is more representative for the fair value.

Investments in listed shares are valued through the application of the market method. The quoted price of the last transaction carried out at the stock exchange, is used.

 

Investments in unlisted shares managed in-house are normally valued on the basis of an earnings multiple. In calculating the value (Enterprise Value - EV),  EV/EBITDA, EV/EBITA and EV/EBIT can be applied, adjusted by a liquidity discount reduction and the addition of a control premium. In companies where Ferd has significant influence on the decisions made, the liquidity discount and control premium normally counterbalance. The corrections are made directly on the multiple. The company's income figure applied in the valuation is normalised for non-recurring effects. Finally, the equity value is calculated by deducting net interest-bearing debt. In the event that an independent transaction has taken place in the security, this is often used as a basis for our valuation.

Several of the venture investments constitute companies with no positive cash flows. This implies a greater degree of uncertainty in the valuations of the companies. The assessments are based on international valuation principles (EVCA guidelines). The investment is measured at cost, but the pricing is adjusted for progress in accordance with a business plan or if a transaction has taken place.

The valuation of investments in externally managed private equity and hedge funds is based on value reports received from the funds (NAV). Ferd makes a critical assessment of whether the reported NAV can be used as fair value, based on the characteristics of the fund. In many instances, the reported NAV must be adjusted, at a liquidity discount, as an example. Special Investments purchase hedge funds in the secondary market, often with a considerable discount compared to the reported value from the funds (NAV). In measuring these hedge funds, estimates from external brokers are obtained in order to assess the discount used at the trading of these hedge funds, compared to the most recently reported NAV.

Rental properties are valued by discounting future expected cash flows. The value of properties that are part of building projects is valued at an assumed sales value on a continuous basis. There is often a shift in value at achieved milestones. In the calculation, it is assumed that the property is utilised in the best possible way. Other properties are valued on the basis of independent appraisals.

The table below is an overview of carrying and fair value of the Company's financial instruments and how they are valued in the financial statements. It is the starting point for additional information on the Company's financial risk and refers to notes to follow.

NOK 1 000

Investments at fair value over profit and loss

Investments at fair value over extended result

Loans

and receivables

Financial

liability

Other valuation methods

TOTAL

Non-current assets

Intangible assets

Deferred tax assets

Tangible assets

Investments at the equity method

Investment property

Pension funds

Other financial non-current assets

Total 2013

Total 2012

Current asssets

Inventories

Short-term receivables

Listed shares and bonds

Unlisted shares and bonds

Hedge funds

Interest investments

Bank deposits

Total 2013

Total 2012

Non-current liabilities

Pension obligation

Deferred tax

Long-term interest-bearing debt

Other long-term debt

Total 2013

Total 2012

Current liablities

Short-term interest-bearing debt

Tax payable

Other short-term debt

Total 2013

Total 2012

Fair value herarchy - financial assets and liabilities

Ferd classifies assets and liabilities measured at fair value by a hierarchy based on the underlying basis for the valuation. The hierarchy has the following levels:

Level 1: Valuation based on quoted prices in active markets for identical assets without adjustments. An active market is characterised by the fact that the security is traded with adequate frequency and volume in the market. The price information shall be continuously updated and represent expected sales proceeds. Only listed shares owned by Ferd Invest and allocated to the Small Caps mandate are considered to be level 1 investments.

Level 3: All Ferd's other securities are valued on level 3. The valuation is based on valuation models where parts of the utilised information cannot be observed in the market. Securities valued on the basis of quoted prices or reported value (NAV), but where significant adjustments are required, are assessed on level 3. Shares with little or no trading, where an internal valuation is required to determine the fair value, are assessed on level 3. For Ferd this concerns all venture investments, private equity investments and funds investments where reported NAV has to be adjusted. A reconciliation of the movements of assets on level 3 is shown in a separate table.

Ferd allocates each investment to its respective hiearchy at the acquisition. Transfers from one level to another are made only exceptionally and only if there have been changes of significance for the level classification concerning the financial asset. This can be the case when an unlisted share has been listed or correspondingly. A transfer between levels will then take place when Ferd has become aware of the change.

The table shows at what level in the valuation hierarchy the different measurement methods for the Group's financial instruments at fair value is considered to be:

NOK 1 000

Total 2013

Assets

Investment property

Short-term receivables

Listed shares and bonds

Unlisted shares and bonds

Hedge funds

Liabilities

Other long-term debt

Other short-term debt

Total 2013

NOK 1 000

Total 2013

Assets

Investment property

Short-term receivables

Listed shares and bonds

Unlisted shares and bonds

Hedge funds

Interest investments

Liabilities

Other long-term debt

Other short-term debt

Total 2012

Reconciliation of movements in assets on level 3

NOK 1 000

Op.bal.1 Jan. 2013

Purchases/

share issues

Sales and proceeds from investments

Unrealised gain

and loss,

recognised in comprehensive income

Unrealised gain

and loss,

recognised in the result

Gain and loss recognised in the result

Closing bal. on 31 Dec. 2013

Investment property

Short-term receivables

Unlisted shares and bonds

Hedge funds

Liabilities

Total

NOK 1 000

Op.bal.1 Jan. 2012

Purchases/

share issues

Sales and proceeds from investments

Unrealised gain

and loss,

recognised in comprehensive income

Unrealised gain

and loss,

recognised in the result

Gain and loss recognised in the result

Closing bal. on 31 Dec. 2012

Investment property

Short-term receivables

Unlisted shares and bonds

Hedge funds

Liabilities

Total

The table below gives an overview over the most central assumptions used when measuring the fair value of Ferd's investments, allocated to level 3 in the hierarchy. We also show how sensitive the value of the investments is for changes in the assumptions.

NOK 1 000

Balance sheet value at 31 Dec 2013

Applied and

implicit EBITDA multiples

Value, if

the multiple is reduced by 10 %

Applied

discount rate

Value, if the

interest is increased by 1 percentage point

Estimated

discounts according to broker (interval)

Value if the

discount is increased by 10 percentage points

Investment property 1)

7,5% - 9,0%

Unlisted shares and bonds 2)

7,6 - 9,5

Hedge funds 3)

12 % - 76 %

1) Appr. 35% of Ferd Eiendom AS' portfolio constitutes rental property sensitive for changes in the discount interest rate.

2) Appr. 63 % of the investments are sensitive for a change in multiple. The other investments are valued by other methods.

3) Appr. 92 % of the hedge funds are sensitive for a change in discount. The other investments are valued by other methods.