UOB Annual Report 2002 - United Overseas Bank

Where quoted and observable market prices are not available, fair values are estimated based on a range of methodologies and
assumptions, the principal ones being as follows:
– The fair values of cash and balances with central banks, and placements and balances with banks, agents and related companies
are considered to approximate their carrying values because most of these are (a) of negligible credit risk and (b) either shortterm
in nature or repriced frequently.
– The Group and the Bank consider the carrying amount of advances to customers as a reasonable approximation of its fair value.
Presently, market and observable prices do not exist as there is currently no ready market wherein exchanges between willing
parties occur. In estimating the fair value, loans are categorised into homogeneous groups by product types, risk characteristics,
maturity and pricing profiles, and non-performing accounts. In evaluating the reasonableness of fair value, the Group and the
Bank performed analysis on each of the homogeneous groups, taking into account various hypothetical credit spread and
market interest rate scenarios, future expected loss experience and estimated forced sale values of collateral. General provisions
are also deducted in arriving at the fair value as a discount for credit risk inherent in the large portfolio of advances to customers.
– The Group and the Bank consider the carrying amounts of all its deposits, such as deposits of non-bank customers and deposits
and balances of banks, agents and related companies, as reasonable approximation of their respective fair values given that
these are mostly either repayable on demand or in the shorter term, and the interest rates will be repriced.
– For derivative financial instruments where quoted and observable market prices are not available, fair values are arrived at using
internal pricing models.
As assumptions were made regarding risk characteristics of the various financial instruments, discount rates, future expected loss
experience and other factors, changes in the uncertainties and assumptions could materially affect these estimates and the
resulting fair value estimates.
In addition, the fair value information for non-financial assets and liabilities is excluded as they do not fall within the scope of
SAS 32 which requires fair value information to be disclosed. These include fixed assets, long-term relationships with customers,
franchise and other intangibles, which are integral to the full assessment of the Group’s and the Bank’s financial positions and the
value of their net assets.
UNITED OVERSEAS BANK 161