Ársskýrsla Landsbankans - Landsbankinn

Notes to the Consolidated Financial Statements
6. Classification and fair value of financial assets and liabilities (continued)
Loans and advances to customers
The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected to be received based on
future recovery of the loans. The recovery rates and loss given default are used as input to valuation models as an indicator of severity of losses on
default. The loans are grouped by type and for each loan the estimated cash flows to be received during each month until end of 2011 are estimated
and payments after 2011 are estimated to be received at the end of June each year. Expected cash flows are discounted at current market rates to
determine fair value. Interest rates are principally benchmark interest rates such as London Inter-Bank Offered Rate (LIBOR), quoted interest rates in
the swap, bond and future markets or the Group's current rates for new loans.
Due to financial institutions and Central Bank
Amounts due to financial institutions and Central Bank are repriced at least monthly and therefore their estimated fair value is the same as their
carrying amount.
Deposits from customers
Deposits from customers are repriced at least monthly in accordance to changes in interest rates set by the Bank's treasury. The estimated fair value
of the deposits is therefore the same as their carrying amount.
Short positions
The short positions are in Icelandic government bonds with readily available quoted market prices.
Secured bonds
The fair value of the secured bonds equals their carrying amount as the bonds have been discounted upon initial recognition at market rate and no
significant changes have occurred in the market rate for these secured bonds since initial recognition.
Contingent bond
The fair value of the contingent bond is based on the expected value of the underlying loan portfolios and on how much it will exceed its expected
return which is defined as 400 basis points over the relevant interbank rate. The estimate of the expected value is based on log-normal distribution
where the minimum payment is ISK 0 and maximum payment is ISK 92 billion. Key input and assumptions used in the valuation model at 31
December 2010 include expected volatility for the loan portfolio of 15.0% (2009: 7%) and a risk free rate of 2.8% (2009: 7.6%). However, the issue
and amount of the bond is subject to considerable outperformance of the underlying loan portfolios.
Fair value hierarchy
The Group has used a valuation hierarchy for disclosure of inputs to valuation used to measure fair value. This hierarchy prioritises the inputs into
three broad levels as follows:
• Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2: Valuation technique using observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
• Level 3: Valuation technique with significant unobservable inputs for the asset or liability that are not based on observable market data
(unobservable inputs). Level 3 includes all instruments that are valued according to quoted prices for similar instruments where significant
unobservable adjustments or assumptions are required to reflect the differences between instruments.
A financial assets or liability's classifications within the hierarchy is determined based on the lowest level input that is significant to the fair value
measurement in its entirety.
NBI hf. Consolidated Financial Statements 2010 28
All amounts are in ISK million
128 Ársreikningur 2010 Allar upphæðir eru í milljónum króna