| 11. | THE FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES |
The fair value hierarchy is determined by the levels of judgment involved in estimating fair values of financial assets and liabilities. The specific financial instruments characteristics and respective market condition such as volume of transactions and transparency of transactions between market participants are considered when determining the classification of the inputs used in the valuations. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities. The Group maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value of its financial assets and financial liabilities. Fair value is measured based on the perspective of a market participant. As such, even when market information is not readily available, the Group’s own assumptions reflect those the Group believes a market participants would use for measuring those specific assets or liabilities at the measurement date.
The fair value measurement is described in the one of the following three levels used to classify fair value measurements:
| • | Level 1—fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. The types of financial assets or liabilities generally included in Level 1 are publicly traded equity and debt securities and derivatives. |
| • | Level 2—fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. prices) or indirectly (i.e. derived from prices). The types of financial assets or liabilities generally included in Level 2 are debt securities not traded in active markets and derivatives traded in OTC of which valuation techniques do not require significant judgment. |
| • |
Level 3—fair value measurements are those derived from valuation techniques that include significant inputs for the asset or liability that are not based on observable market data (unobservable inputs). The types of financial assets or liabilities generally included in Level 3 are non-publicly traded securities and derivatives and debt securities of which valuation techniques require significant judgments and subjectivity. |
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Group’s assessment of the significance of a particular input to a fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.
(2) Fair value hierarchy of financial assets and liabilities measured at fair value are as follows (Unit: Korean Won in millions):
| December 31, 2016 | ||||||||||||||||
| Level 1(*1) | Level 2(*1) | Level 3(*2) | Total | |||||||||||||
|
Financial assets: |
||||||||||||||||
|
Financial assets held for trading |
||||||||||||||||
|
Deposits |
26,180 | — | — | 26,180 | ||||||||||||
|
Debt securities |
370,636 | 2,274,280 | — | 2,644,916 | ||||||||||||
|
Equity securities |
35,983 | — | — | 35,983 | ||||||||||||
|
Beneficiary certificates |
— | 23,891 | — | 23,891 | ||||||||||||
|
Loaned securities |
4,459 | — | — | 4,459 | ||||||||||||
|
Derivative instrument assets |
3,233 | 2,871,909 | 23,153 | 2,898,295 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Sub-total |
440,491 | 5,170,080 | 23,153 | 5,633,724 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Financial assets designed at FVTPL |
||||||||||||||||
|
Debt securities |
— | — | 4,348 | 4,348 | ||||||||||||
|
Equity securities |
— | — | 12,652 | 12,652 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Sub-total |
— | — | 17,000 | 17,000 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
AFS financial assets |
||||||||||||||||
|
Debt securities |
2,288,917 | 13,759,392 | — | 16,048,309 | ||||||||||||
|
Equity securities |
428,678 | — | 1,024,935 | 1,453,613 | ||||||||||||
|
Beneficiary certificates |
— | 2,291,571 | 530,511 | 2,822,082 | ||||||||||||
|
Loaned securities |
391,279 | 102,300 | — | 493,579 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Sub-total |
3,108,874 | 16,153,263 | 1,555,446 | 20,817,583 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Derivative assets |
— | 140,478 | 99 | 140,577 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
3,549,365 | 21,463,821 | 1,595,698 | 26,608,884 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Financial liabilities: |
||||||||||||||||
|
Financial liabilities held for trading |
||||||||||||||||
|
Deposits |
26,501 | — | — | 26,501 | ||||||||||||
|
Derivative liabilities |
1,750 | 2,974,703 | 33,524 | 3,009,977 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Sub-total |
28,251 | 2,974,703 | 33,524 | 3,036,478 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Financial liabilities designated at FVTPL |
||||||||||||||||
|
Equity-linked securities |
— | 197 | 673,709 | 673,906 | ||||||||||||
|
Debentures |
— | 92,974 | — | 92,974 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Sub-total |
— | 93,171 | 673,709 | 766,880 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Derivative liabilities |
— | 7,221 | — | 7,221 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
28,251 | 3,075,095 | 707,233 | 3,810,579 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2017 | ||||||||||||||||
| Level 1(*1) | Level 2(*1) | Level 3(*2) | Total | |||||||||||||
|
Financial assets: |
||||||||||||||||
|
Financial assets held for trading |
||||||||||||||||
|
Deposits |
25,972 | — | — | 25,972 | ||||||||||||
|
Debt securities |
405,942 | 2,238,391 | — | 2,644,333 | ||||||||||||
|
Equity securities |
21,666 | — | — | 21,666 | ||||||||||||
|
Beneficiary certificates |
— | 13,041 | — | 13,041 | ||||||||||||
|
Derivative assets |
1,021 | 3,093,272 | 21,482 | 3,115,775 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Sub-total |
454,601 | 5,344,704 | 21,482 | 5,820,787 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Financial assets designated at FVTPL |
||||||||||||||||
|
Debt securities |
— | — | 9,694 | 9,694 | ||||||||||||
|
Equity securities |
— | — | 12,596 | 12,596 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Sub-total |
— | — | 22,290 | 22,290 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
AFS financial assets |
||||||||||||||||
|
Debt securities |
2,710,172 | 10,348,815 | — | 13,058,987 | ||||||||||||
|
Equity securities |
399,214 | — | 1,011,864 | 1,411,078 | ||||||||||||
|
Beneficiary certificates |
— | 68,722 | 643,906 | 712,628 | ||||||||||||
|
Securities loaned |
69,778 | 100,478 | — | 170,256 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Sub-total |
3,179,164 | 10,518,015 | 1,655,770 | 15,352,949 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Derivative assets |
— | 59,272 | — | 59,272 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
3,633,765 | 15,921,991 | 1,699,542 | 21,255,298 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Financial liabilities: |
||||||||||||||||
|
Financial liabilities held for trading |
||||||||||||||||
|
Deposits |
25,964 | — | — | 25,964 | ||||||||||||
|
Derivative liabilities |
2,613 | 3,126,585 | 20,951 | 3,150,149 | ||||||||||||
|
Securities sold |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Sub-total |
28,577 | 3,126,585 | 20,951 | 3,176,113 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Financial liabilities designated at FVTPL |
||||||||||||||||
|
Equity-linked securities |
— | — | 160,057 | 160,057 | ||||||||||||
|
Debentures |
— | 91,739 | — | 91,739 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Sub-total |
— | 91,739 | 160,057 | 251,796 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Derivative liabilities |
— | 67,754 | — | 67,754 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
28,577 | 3,286,078 | 181,008 | 3,495,663 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (*1) | There was no transfers between level 1 and level 2 of financial assets and liabilities measured at fair value. The Group recognizes transfers between levels at the end of reporting period in which events have occurred or conditions have changed. |
| (*2) | Certain AFS financial assets were measured at cost as of December 31, 2016 and 2017, that are amounting to 43,202 million Won and 37,092 million Won, respectively. These unquoted equity instruments mostly represent minority investments in special purpose entity vehicles such as asset securitization structures. They are measured at cost because (a) observable inputs of financial information to measure fair value was not available to obtain, or (b) there is a significant variance in likely estimated cash flows or (c) the probabilities for the various estimated cash flows could not be measured reliably. In addition, there were no indicators of impairments in these investments and the Group has no intention to dispose these investments in the foreseeable future. |
During the year, the Group disposed of certain financial assets which were carried at cost because they did not have quoted market prices in an active market and could not be reliably measured at fair value. The carrying amount and gain from disposal of these financial assets amounted to 1,266 million Won and 657 million Won for the year ended December 31, 2017, respectively.
Financial assets and liabilities designated at FVTPL, held-for-trading financial assets and liabilities, AFS financial assets, and derivative assets and liabilities are recognized at fair value. Fair value is the amount 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 measured at fair value using a quoted market price in active markets. If there is no active market for a financial instrument, the Group determines the fair value using alternative assumptions and developing fair value measurement methods. Alternative assumptions and fair value measurement methods for each type of financial instruments are as follows:
|
Fair value measurement methods |
Input variables | |||
| Debt securities | The fair value is measured by discounting the projected cash flows of debt securities by applying the market discount rate that has been applied to a proxy company that has similar credit rating to the issuers of the securities. | Risk-free market rate, credit spread | ||
| Equity securities and Beneficiary certificates | Among DCF (Discounted Cash Flow) Model, FCFE (Free Cash Flow to Equity) Model, Comparable Company Analysis, Dividend Discount Model, Risk-adjusted Rate of Return Method, and Net Asset Value Method, more than one method is used given the characteristic of the subject of fair value measurement. | Risk-free market rate, market risk premium, Beta, etc. | ||
| Derivatives |
The in-house developed model which is based on the models that are used by market participants in the valuation of general OTC derivative products, such as options, interest rate swaps, currency swap and currency forward that are based on inputs observable in the market.
However, for some complicated financial instruments of which valuation should be based on some assumptions since some significant or all inputs to be used in the model are not observable in the market, the in-house derived model which is developed from the general valuation models, such as Finite Difference Method (“FDM”) or Monte Carlo Simulation. |
Risk-free market rate, forward rate, volatility, foreign exchange rate, stock prices, etc. | ||
| Equity-linked securities | The fair value of security linked to stock prices or derivatives is measured by the models such as DCF model, FDM, or Monte Carlo Simulation given the | Values of underlying assets, risk-free market rate, market rate, dividend and convenience yield, volatility, correlation | ||
| natures of the securities or underlying assets. | coefficient, credit spread, and foreign exchange rate | |||
| Debentures | The fair value is measured by discounting the projected cash flows of a debenture by applying the market discount rate that is reflecting credit rating of the Group. | Risk-free market rate, forward rate | ||
Valuation methods of financial assets and liabilities measured at fair value and classified into Level 3 and significant but unobservable inputs are as follows:
|
Fair value measurement technique |
Input variable |
Range |
Impact of changes in significant unobservable | |||||
| Derivative assets |
Option valuation model and others |
Correlation coefficient |
0.900~0.980 |
Variation of fair value increases as correlation coefficient increases. | ||||
|
Volatility of underlying asset |
12.1%~28.1% |
Variation of fair value increases as volatility increases. | ||||||
| Derivative liabilities |
Option valuation model and others |
Correlation coefficient |
0.900~0.980 |
Variation of fair value increases as correlation coefficient increases. | ||||
|
Volatility of underlying asset |
12.1%~28.1% |
Variation of fair value increases as volatility increases. | ||||||
| Equity linked securities |
Monte Carlo Simulation and others |
Correlation coefficient |
0.363~0.694 |
Equity linked securities’ variation of fair value increases if both volatility and correlation coefficient increase. However when correlation coefficient decreases, despite the increase in volatility, the variation of fair value of equity linked securities may decrease. | ||||
|
Volatility of underlying asset |
6.8%~58.9% | |||||||
| Equity securities and Beneficiary certificates |
External appraisal value and others |
Expected growth rate |
0.0%~1.0% |
Fair value increases as expected growth rate increases. | ||||
|
Volatility of real estate sale price |
0% |
Fair value increases as sale price Increases | ||||||
|
Discount rate of lease cash flow and others |
8.31%~8.54% |
Fair value increases as discount rate of lease cash flow decreases |
Fair value of financial assets and liabilities classified into level 3 is measured by the Group using its own valuation techniques or using external specialists. Unobservable inputs used in the fair value measurements are produced by the internal system of the Group and the appropriateness of inputs is reviewed regularly.
(3) Changes in financial assets and liabilities classified into level 3 are as follows (Unit: Korean Won in millions):
| For the year ended December 31, 2015 | ||||||||||||||||||||||||||||
| January 1, 2015 |
Net Income (loss)(*1) |
Other comprehensive income (loss) |
Purchases/ Issuances |
Disposals/ Settlements |
Transfer to or from level 3(*2) |
December 31, 2015 |
||||||||||||||||||||||
|
Financial assets: |
||||||||||||||||||||||||||||
|
Financial assets held for trading |
||||||||||||||||||||||||||||
|
Derivatives instruments assets(*5) |
49,274 | 71,703 | — | (8,166 | ) | (33,156 | ) | (979 | ) | 78,676 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Sub-total |
49,274 | 71,703 | — | (8,166 | ) | (33,156 | ) | (979 | ) | 78,676 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Financial assets designed at FVTPL |
||||||||||||||||||||||||||||
|
Equity-linked securities |
6,066 | — | — | — | (6,066 | ) | — | — | ||||||||||||||||||||
|
Debt securities |
— | (14 | ) | — | 1,000 | — | — | 986 | ||||||||||||||||||||
|
Equity securities |
10,567 | 1,042 | — | — | — | — | 11,609 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Sub-total |
16,633 | 1,028 | — | 1,000 | (6,066 | ) | — | 12,595 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
AFS financial assets |
||||||||||||||||||||||||||||
|
Equity securities(*3) |
1,031,918 | (57,373 | ) | 105,290 | 105,930 | (100,018 | ) | (92,379 | ) | 993,368 | ||||||||||||||||||
|
Beneficiary certificates |
355,694 | 3,905 | (24,846 | ) | 121,613 | (79,296 | ) | — | 377,070 | |||||||||||||||||||
|
Others |
14,241 | (7,064 | ) | 1,370 | — | (3,239 | ) | — | 5,308 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Sub-total |
1,401,853 | (60,532 | ) | 81,814 | 227,543 | (182,553 | ) | (92,379 | ) | 1,375,746 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Derivative assets |
11,946 | 7,375 | — | — | (13,348 | ) | — | 5,973 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total |
1,479,706 | 19,574 | 81,814 | 220,377 | (235,123 | ) | (93,358 | ) | 1,472,990 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Financial liabilities: |
||||||||||||||||||||||||||||
|
Financial liabilities held for trading |
||||||||||||||||||||||||||||
|
Derivative liabilities(*5) |
41,711 | 58,565 | — | 4,008 | (24,475 | ) | (1,202 | )- | 78,607 | |||||||||||||||||||
|
Financial liabilities designated at FVTPL |
||||||||||||||||||||||||||||
|
Equity-linked securities(*4) |
361,993 | (73,533 | ) | — | 764,005 | (304,917 | ) | (197 | ) | 747,351 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total |
403,704 | (14,968 | ) | — | 768,013 | (329,392 | ) | (1,399 | ) | 825,958 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| For the year ended December 31, 2016 | ||||||||||||||||||||||||||||
| January 1, 2016 |
Net Income (loss)(*1) |
Other comprehensive income (loss) |
Purchases/ Issuances |
Disposals/ Settlements |
Transfer to or from level 3(*2) |
December 31, 2016 |
||||||||||||||||||||||
|
Financial assets: |
||||||||||||||||||||||||||||
|
Financial assets held for trading |
||||||||||||||||||||||||||||
|
Derivative instrument |
78,676 | (29,117 | ) | — | 13,640 | (39,506 | ) | (540 | ) | 23,153 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Financial assets designed at FVTPL |
||||||||||||||||||||||||||||
|
Debt securities |
986 | (161 | ) | — | 4,509 | (986 | ) | — | 4,348 | |||||||||||||||||||
|
Equity securities |
11,609 | 1,043 | — | — | — | — | 12,652 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Sub-total |
12,595 | 882 | — | 4,509 | (986 | ) | — | 17,000 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
AFS financial assets |
||||||||||||||||||||||||||||
|
Equity securities(*3) |
993,368 | (6,986 | ) | 57,323 | 205,749 | (205,348 | ) | (19,171 | ) | 1,024,935 | ||||||||||||||||||
|
Beneficiary certificates |
377,070 | (868 | ) | 5,794 | 174,024 | (25,509 | ) | — | 530,511 | |||||||||||||||||||
|
Others |
5,308 | 594 | (643 | ) | — | (5,259 | ) | — | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Sub-total |
1,375,746 | (7,260 | ) | 62,474 | 379,773 | (236,116 | ) | (19,171 | ) | 1,555,446 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Derivative assets |
5,973 | 3,877 | — | — | (9,751 | ) | — | 99 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total |
1,472,990 | (31,618 | ) | 62,474 | 397,922 | (286,359 | ) | (19,711 | ) | 1,595,698 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Financial liabilities: |
||||||||||||||||||||||||||||
|
Financial liabilities held for trading Derivative liabilities |
78,607 | (8,322 | ) | — | 1,155 | (37,916 | ) | — | 33,524 | |||||||||||||||||||
|
Financial liabilities designated at FVTPL |
||||||||||||||||||||||||||||
|
Equity-linked securities |
747,351 | 71,079 | — | — | (144,721 | ) | — | 673,709 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Total |
825,958 | 62,757 | — | 1,155 | (182,637 | ) | — | 707,233 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| For the year ended December 31, 2017 | ||||||||||||||||||||||||||||
| January 1, 2017 |
Net Income (loss)(*1) |
Other comprehensive income |
Purchases/ Issuances |
Disposals/ Settlements |
Transfer to or out of level 3(*2) |
December 31, 2017 |
||||||||||||||||||||||
|
Financial assets: |
||||||||||||||||||||||||||||
|
Financial assets held for trading |
||||||||||||||||||||||||||||
|
Derivative assets |
23,153 | 22,362 | — | 1,398 | (25,431 | ) | — | 21,482 | ||||||||||||||||||||
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|
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Financial assets designated at FVTPL |
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|
Debt securities |
4,348 | 346 | — | 5,000 | — | — | 9,694 | |||||||||||||||||||||
|
Equity securities |
12,652 | (56 | ) | — | — | — | — | 12,596 | ||||||||||||||||||||
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|
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|
Sub-total |
17,000 | 290 | — | 5,000 | — | — | 22,290 | |||||||||||||||||||||
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|
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AFS financial assets |
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Equity securities |
1,024,935 | 27,986 | 24,442 | 65,961 | (131,460 | ) | — | 1,011,864 | ||||||||||||||||||||
|
Beneficiary certificates |
530,511 | 212 | (4,321 | ) | 226,975 | (109,471 | ) | — | 643,906 | |||||||||||||||||||
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Sub-total |
1,555,446 | 28,198 | 20,121 | 292,936 | (240,931 | ) | — | 1,655,770 | ||||||||||||||||||||
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|
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Derivative assets |
99 | 329 | — | — | (428 | ) | — | — | ||||||||||||||||||||
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|
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|
Total |
1,595,698 | 51,179 | 20,121 | 299,334 | (266,790 | ) | — | 1,699,542 | ||||||||||||||||||||
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Financial liabilities: |
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|
Financial liabilities held for trading |
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|
Derivative liabilities |
33,524 | 24,866 | — | 500 | (37,939 | ) | — | 20,951 | ||||||||||||||||||||
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Financial liabilities designated at FVTPL |
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Equity-linked securities |
673,709 | 112,015 | — | — | (625,667 | ) | — | 160,057 | ||||||||||||||||||||
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Total |
707,233 | 136,881 | — | 500 | (663,606 | ) | — | 181,008 | ||||||||||||||||||||
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| (*1) | From financial assets and liabilities classified as Level 3 that the Group holds as at the end of the year, losses of 2,854 million Won, 94,238 million Won and 34,621 million Won for the year ended December 31 2015, 2016 and 2017, respectively, were recognized in net gain (loss) on financial instruments at FVTPL and net gain (loss) on AFS financial assets in the comprehensive income statements. |
| (*2) | The Group recognizes transfers between levels at the end of reporting period within which events have occurred or conditions have changed. |
| (*3) | AFS financial assets were transferred out of level 1 to level 3 upon the change of the fair value measurement method of the assets by using market the external valuation specialists from previously using quoted prices in the active market, in the opposite case, they were transferred out of level 3 to level 1. |
| (*4) | Since the observable market data for equity-linked securities was available, such securities were transferred out of Level 3 into Level 2. |
| (*5) | As the variables used for the valuation of interest rate and equity related derivatives became observable in the market, such derivatives were transferred out of Level 3 to Level 2. |
| (*6) | As the variables used for the valuation of currency related derivatives became observable in the market, such derivatives were transferred out of Level 3 to Level 2. |
4) Sensitivity analysis on the unobservable inputs used for measuring level 3 financial instruments.
The sensitivity analysis of the financial instruments has been performed by classifying with favorable and unfavorable changes based on how changes in unobservable assumptions would have effects on the fluctuations of financial instruments’ value. When the fair value of a financial instrument is affected by more than one unobservable assumption, the below table reflects the most favorable or the most unfavorable changes which resulted from varying the assumptions individually. The sensitivity analysis was performed for two types of level 3 financial instruments: (1) debt securities, equity securities, interest rate related derivatives, currency related derivatives, equity related derivatives, and equity-linked securities of which fair value changes are recognized as net income; (2) equity securities and beneficiary certificates of which fair value changes are recognized as other comprehensive income. Equity securities classified as level 3 but measured at costs are excluded from sensitivity analysis.
The following table shows the sensitivity analysis to disclose the effect of reasonably possible volatility on the fair value of a level 3 financial instruments for the years ended December 31, 2015, 2016 and 2017. (Unit: Korean Won in millions):
| For the year ended December 31, 2015 | ||||||||||||||||
| Net income (loss) |
Other comprehensive income (loss) |
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| Favorable | Unfavorable | Favorable | Unfavorable | |||||||||||||
|
Financial assets: |
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|
Financial assets held for trading |
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|
Derivatives instruments assets(*1)(*2) |
10,674 | (9,729 | ) | — | — | |||||||||||
|
Financial assets designed at FVTPL |
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Equity securities(*6) |
793 | (739 | ) | — | — | |||||||||||
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AFS Financial Assets |
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|
Equity securities(*3)(*4) |
— | — | 37,648 | (20,869 | ) | |||||||||||
|
Beneficiary certificates(*4) |
— | — | 4,102 | (3,875 | ) | |||||||||||
|
Others(*5) |
— | — | 80 | (80 | ) | |||||||||||
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Total |
11,467 | (10,468 | ) | 41,830 | (24,824 | ) | ||||||||||
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Financial liabilities: |
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|
Financial liabilities held for trading |
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|
Derivative liabilities(*1)(*2) |
13,469 | (12,281 | ) | — | — | |||||||||||
|
Financial liabilities designated at FVTPL |
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Equity-linked securities(*1) |
2,289 | (2,247 | ) | — | — | |||||||||||
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Total |
15,758 | (14,528 | ) | — | — | |||||||||||
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| For the year ended December 31, 2016 | ||||||||||||||||
| Net income (loss) |
Other comprehensive income (loss) |
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| Favorable | Unfavorable | Favorable | Unfavorable | |||||||||||||
|
Financial assets: |
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|
Financial assets held for trading |
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|
Derivatives instruments assets(*1)(*2) |
861 | (2,248 | ) | — | — | |||||||||||
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Financial assets designed at FVTPL |
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|
Debt securities(*6) |
19 | (18 | ) | — | — | |||||||||||
|
Equity securities(*6) |
688 | (639 | ) | — | — | |||||||||||
|
AFS Financial Assets |
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|
Equity securities(*3)(*4) |
— | — | 31,412 | (18,551 | ) | |||||||||||
|
Beneficiary certificates(*4) |
— | — | 2,903 | (2,571 | ) | |||||||||||
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Total |
1,568 | (2,905 | ) | 34,315 | (21,122 | ) | ||||||||||
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Financial liabilities: |
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|
Financial liabilities held for trading |
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|
Derivative liabilities(*1)(*2) |
4,892 | (3,568 | ) | — | — | |||||||||||
|
Financial liabilities designated at FVTPL |
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|
Equity-linked securities(*1) |
905 | (857 | ) | — | — | |||||||||||
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Total |
5,797 | (4,425 | ) | — | — | |||||||||||
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| For the year ended December 31, 2017 | ||||||||||||||||
| Net income (loss) |
Other comprehensive income (loss) |
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| Favorable | Unfavorable | Favorable | Unfavorable | |||||||||||||
|
Financial assets: |
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|
Financial assets held for trading |
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|
Derivatives instruments assets(*1)(*2) |
1,234 | (526 | ) | — | — | |||||||||||
|
Financial assets designed at FVTPL |
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|
Debt securities(*6) |
265 | (309 | ) | — | — | |||||||||||
|
Equity securities(*6) |
670 | (624 | ) | — | — | |||||||||||
|
AFS Financial Assets |
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|
Equity securities(*3)(*4) |
— | — | 28,583 | (15,246 | ) | |||||||||||
|
Beneficiary certificates(*4) |
— | — | 1,861 | (1,857 | ) | |||||||||||
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|
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Total |
2,169 | (1,459 | ) | 30,444 | (17,103 | ) | ||||||||||
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Financial liabilities: |
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|
Financial liabilities held for trading |
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|
Derivative liabilities(*1)(*2) |
5 | (513 | ) | — | — | |||||||||||
|
Financial liabilities designated at FVTPL |
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|
Equity-linked securities(*1) |
8 | (7 | ) | — | — | |||||||||||
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Total |
13 | (520 | ) | — | — | |||||||||||
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|
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| (*1) | Fair value changes of equity related derivatives assets and liabilities and equity-linked securities are calculated by increasing or decreasing historical volatility of the stock price and correlation, which are major unobservable variables, by 10%, respectively. In the case of interest rate related derivative assets and liabilities, fair value changes are calculated by increasing or decreasing the volatility of interest rate, which are major unobservable variables, by 10%, respectively. |
| (*2) | Both derivative assets and liabilities for held for trading and hedging are included. |
| (*3) | Fair value changes of equity securities are calculated by increasing or decreasing growth rate (0~1%) and discount rate or liquidation value (-1~1%) and discount rate. The growth rate, discount rate, and liquidation value are major unobservable variables. |
| (*4) | Among the equity securities, whereas the sensitivity analysis of the capital contributions and beneficiary certificates is not possible in practice, fair value changes of such securities whose major unobservable variables are composed of the real estate are calculated by increasing or decreasing price fluctuation of real estate which is underlying assets and discount rate by 1%. |
| (*5) | Fair value changes of other securities are calculated by increasing or decreasing price fluctuation of trust property or real estate which is underlying assets and discount rate by 1%. The prices of trust property and real estates and discount rate are major unobservable variables. |
| (*6) | Fair value changes are measured by increasing or decreasing the discount rate by 10%, which is major unobservable variable, respectively. |
(5) Fair value and carrying amount of financial assets and liabilities that are recorded at amortized cost are as follows (Unit: Korean Won in millions):
| As of December 31, 2016 | ||||||||||||||||||||
| Fair value | Book value |
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| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
|
Financial assets: |
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|
Held-to-maturity financial assets |
741,880 | 13,243,297 | — | 13,985,177 | 13,910,251 | |||||||||||||||
|
Loans and receivables |
— | — | 259,565,952 | 259,565,952 | 258,392,633 | |||||||||||||||
|
Financial liabilities: |
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|
Deposits due to customers |
— | 221,001,466 | — | 221,001,466 | 221,020,411 | |||||||||||||||
|
Borrowings |
— | 18,785,325 | — | 18,785,325 | 18,769,515 | |||||||||||||||
|
Debentures |
— | 24,004,668 | — | 24,004,668 | 23,565,449 | |||||||||||||||
|
Other financial liabilities |
— | 21,984,171 | — | 21,984,171 | 21,985,086 | |||||||||||||||
| As of December 31, 2017 | ||||||||||||||||||||
| Fair value | Book value |
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| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
|
Financial assets: |
||||||||||||||||||||
|
Held-to-maturity financial assets |
1,206,292 | 15,509,387 | — | 16,715,679 | 16,749,296 | |||||||||||||||
|
Loans and receivables |
— | — | 265,570,649 | 265,570,649 | 267,106,204 | |||||||||||||||
|
Financial liabilities: |
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|
Deposits due to customers |
— | 234,682,775 | — | 234,682,775 | 234,695,084 | |||||||||||||||
|
Borrowings |
— | 14,754,506 | — | 14,754,506 | 14,784,706 | |||||||||||||||
|
Debentures |
— | 27,889,781 | — | 27,889,781 | 27,869,651 | |||||||||||||||
|
Other financial liabilities |
— | 13,890,789 | — | 13,890,789 | 13,892,461 | |||||||||||||||
The fair values of financial instruments are measured using quoted market price in active markets. In case there is no active market for financial instruments, the Group determines the fair value using alternative assumptions through developing fair value measurement methods. Alternative assumptions and fair value measurement methods for financial assets and liabilities that are measured at amortized costs are given as follows:
|
Fair value measurement technique |
Input variables | |||
|
Debt securities |
The fair value is measured by discounting the projected cash flows of debt securities by applying the market discount rate that has been applied to a proxy company that has similar credit rating to the issuers of the securities. | Risk-free market rate and credit spread | ||
|
Loans and receivables |
The fair value is measured by discounting the projected cash flows of loan products by applying the market discount rate that has been applied to a proxy company that has similar credit rating to the debtor. | Risk-free market rate, credit spread and prepayment-rate | ||
|
Deposit due to customers, borrowings, debentures, and other financial liabilities |
The fair value is measured by discounting the projected cash flows of debt products by applying the market discount rate that is reflecting credit rating of the Group. | Risk-free market rate and forward rate | ||