IFRS 13 establishes a hierarchy that categorizes into three levels the inputs to the valuation techniques used to measure fair value by giving the highest priority to quoted prices (unadjusted) in active markets for identical assets and liabilities (level 1 inputs) and the lowest priority to unobservable inputs (level 3 inputs). In some cases, the inputs used to measure the fair value of an asset or a liability might be categorized within different levels of the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy at the lowest level input that is significant to the entire measurement.
Levels used in the hierarchy are as follows:
- Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets and liabilities that the Group can access at the measurement date.
- Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly.
- Level 3 inputs are unobservable inputs for the assets and liabilities.
Assets and liabilities that are measured at fair value on a recurring basis
The following table shows the fair value hierarchy for financial assets and liabilities that are measured at fair value on a recurring basis at 31 December 2013:
|(€ million)||Note||Level 1||Level 2||Level 3||Total|
|Assets at fair value available for sale:|
|Investments at fair value with changes directly in Other comprehensive
|Investments at fair value through profit or loss||(16)||151||-||-||151|
|Other non-current securities||(16)||42||-||12||54|
|Current securities available-for-sale||(19)||92||-||-||92|
|Financial assets at fair value held-for-trading:|
|Current securities held for trading||(19)||155||-||-||155|
|Other financial assets||(20)||20||509||4||533|
|Cash and cash equivalents||(21)||18,498||941||-||19,439|
|Other financial liabilities||(20)||-||135||2||137|
In 2013, there were no transfers between Levels in the fair value hierarchy.
The fair value of Other financial assets and liabilities that are mainly composed by derivatives financial instruments is measured by taking into consideration market parameters at the balance sheet date and using valuation techniques widely accepted in the financial business environment. In particular:
- the fair value of forward contracts and currency swaps is determined by taking the prevailing exchange rate and interest rates at the balance sheet date;
- the fair value of interest rate swaps and forward rate agreements is determined by taking the prevailing interest rates at the balance sheet date and using the discounted expected cash flow method;
- the fair value of combined interest rate and currency swaps is determined using the exchange and interest rates prevailing at the balance sheet date and the discounted expected cash flow method;
- the fair value of swaps and options hedging commodity price risk is determined by using suitable valuation techniques and taking market parameters at the balance sheet date (in particular, underline prices, interest rates and volatility rates);
- the fair value of equity swaps is determined using market prices at the balance sheet date.
The par value of Cash and cash equivalents usually approximates fair value due to the short maturity of these instruments, which consist primarily of bank current accounts and time deposits, certificates of deposit, commercial paper, bankers’ acceptances and money market funds. Money market funds valuation is also based on available market quotations. Where appropriate, the fair value of Cash equivalents is determined with discounted expected cash flow techniques, using observable market yields (represented in level 2 above).
The following table provides a reconciliation from the opening balances to the closing balances for fair value measurements categorized in Level 3 in 2013:
|(€ million)||Other non-current securities||Other financial assets/(liabilities)|
|At 31 December 2012||12||7|
|(Gains)/Losses recognized in Income statement||-||6|
|Gains/(Losses) recognized in Other comprehensive income/losses||-||(3)|
|At 31 December 2013||12||2|
The gains/losses included in the Income statement are recognized in Cost of sales for €6 million. The gains and losses recognized in Other comprehensive income/(losses) have been included in Gains/(losses) on cash flow hedging instruments for €2 million and in Exchange differences on translating foreign operations for €1 million (see Note 23).
Assets and liabilities not measured at fair value on recurring basis
For financial instruments represented by short-term receivables and payables, for which the present value of future cash flows does not differ significantly from carrying value, we assume that carrying value is a reasonable approximation of the fair value. In particular, the carrying amount of Current receivables and Other current assets and of Trade payables and Other current liabilities approximates their fair value.
The following table represents carrying amount and fair value for the most relevant categories of financial assets and liabilities not measured at fair value on a recurring basis:
|At 31 December 2013||At 31 December 2012|
|Other receivables from financing activities||118||118||173||173|
|Receivables from financing activities||(18)||3,671||3,661||3,727||3,724|
|Asset backed financing||596||596||449||449|
The fair values of Receivables from financing activities, which are categorized within the Level 3 of the fair value hierarchy, have been estimated with discounted cash flows models. The most significant inputs used for this measurement are market discount rates, that reflect conditions applied in various reference markets on receivables with similar characteristics, adjusted in order to take into account the credit risk of the counterparties.
Bonds are listed in active markets, their fair value was measured with reference to year-end quoted prices and therefore they were classified within the Level 1 of the fair value hierarchy, with the exception of a residual nominal €7 million issuance maturing in 2021 classified within the Level 2 of the fair value hierarchy, whose fair value was measured by using a discounted cash flow model.
The fair value of Other debt is included in Level 2 of the fair value hierarchy and has been estimated with discounted cash flows models. The main inputs used are year-end market interest rates, adjusted for market expectations on the Group non-performance risk implied in quoted prices of traded securities issued by the Group and existing credit derivatives on Group liabilities.