2014 Annual report - Statement of changes in equity

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NOTE 5	THE USE OF FAIR VALUE AND FINANCIAL INSTRUMENTS

Ferd's principles in the measurement of fair value, generally
Ferd applies the valuation method that is considered to be the most representative estimate of an assumed sales value. Such a sale shall 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 overall within the business area, 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.
Valuation methods
Investments in listed shares are valued by applying the market method. The quoted price for the most recent carried-out transaction on the market place is the basis.
Investments in unlisted shares managed in-house are normally valued on the basis of an earnings multiple. In calculating the value (Enterprise Value - EV), ratios like EV/EBITDA, EV/EBITA , EV/EBIT and EV / EBITDA-CAPEX are applied.. Ferd obtains relevant mutiples for comparable companies. The multiples for the portfolio companies are adjusted if the assumptions are not the same as for peer groups. Such assumptions can include a control premium, a liquidity discount, growth assumptions, margins or similar. The company's result applied in the valuation is normalised for one-off ffects. 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 normally used as a basis for our valuation.
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 a basis.
Special Investments has acquired hedge funds in the second-hand market, often with at a considerable discount compared to the reported value fraom the funds (NAV). In the measurement of these hedge funds, estimates from selveral external brokers are obtained to evaluate at which discount these hedge funds are traded, compared to the most recently reported NAV. Ferd makes an assessment of the broker estimates, makes a best estimate for discount and uses this estimate in the valuation of the hedge funds.
Rental properties are valued by discounting future expected cash flows. The value of properties being 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. Our calculated values are regularly compared to independent valuations.
The table below is an overview of carrying and fair value of the Group's assets and liabilities 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.
			Investments at fair value over profit and loss	Investments at fair value over extended result	Financial instruments measured at amortised cost
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							4 117 955	4 117 955
Deferred tax assets							195 585	195 585
Tangible assets							2 436 626	2 436 626
Investments accounted for by the equity method							442 250	442 250
Investment property			2 386 449					2 386 449
Pension funds							17 391	17 391
Other financial non-current assets					190 409		81 876	272 285
Total 2014			2 386 449		190 409		7 291 683	9 868 541
Total 2013			1 828 917		58 270		5 103 509	6 990 696

Current asssets
Inventories							2 381 419	2 381 419
Short-term receivables				11 565	2 766 573		174 881	2 953 019
Listed shares and bonds			6 622 553					6 622 553
Unlisted shares and bonds			3 086 854					3 086 854
Hedge funds			4 651 984					4 651 984
Interest investments
Bank deposits					1 320 725			1 320 725
Total 2014			14 361 391	11 565	4 087 298		2 556 300	21 016 554
Total 2013			15 081 626	11 710	3 227 308		2 063 998	20 384 642

Non-current liabilities
Pension obligation							169 417	169 417
Deferred tax							793 731	793 731
Long-term interest-bearing debt						3 704 895	- 7 002	3 697 893
Other long-term debt				52 281		234 566	7 256	294 103
Total 2014				52 281		3 939 461	963 402	4 955 144
Total 2013				42 239		3 768 531	525 731	4 336 501

Current liablities
Short-term interest-bearing debt						1 331 041	- 16 975	1 314 066
Tax payable							277 390	277 390
Other short-term debt			15 503	58 167		2 835 237	99 303	3 008 210
Total 2014			15 503	58 167		4 166 278	359 718	4 584 163
Total 2013				49 842		2 591 977	515 639	3 157 458

Fair value herarchy - financial assets and liabilities

Ferd classifies assets and liabilities measured at fair value in the balance sheet by a hierarchy based on the underlying object 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 are considered to be level 1 investments.
Level 2: Level 2 comprises investments where there are quoted prices , but the markets do not meet the requirements for being characterised as active. Also included are investments where the valuation can be fully derived from the value of other quoted prices, including the value of underlying securities, interest rate level, exchange rate etc. In addition, financial derivatives like interest rate swaps and currency futures are considered to be level 2 investments. Ferd's hedge fund portfolio is considered to meet the requirements of level 2. These funds comprise composite portfolios of shares, interest securities, raw materials and other negotiable derivatives. For such funds the value (NAV) is reported on a continuous basis, and the reported NAV is applied on transactions in the fund.
Level 3: All Ferd's other securities are valued on level 3. This concerns investments where all or parts of the information about value cannot be observed in the market. Ferd is also applying valuation models for investments where the share has little or no trading. Securities valued on the basis of quoted prices or reported value (NAV), but where significant adjustments are required, are assessed on level 3. For Ferd this concerns all private equity investments and funds investments made by Special Investments, where reported NAV has to be adjusted for discounts. A reconciliation of the movements of assets on level 3 is shown in a separate table.
Ferd allocates each investment to its respective level in the 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 the change has been known to Ferd.

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					Level 1	Level 2	Level 3	Total 2014

Assets
Investment property							2 386 449	2 386 449
Short-term receivables						11 565		11 565
Listed shares and bonds					6 622 553			6 622 553
Unlisted shares and bonds							3 086 854	3 086 854
Hedge funds						2 869 671	1 782 313	4 651 984
Liabilities
Other long-term debt						- 52 281		- 52 281
Other short-term debt						- 73 670		- 73 670
Total 2014					6 622 553	2 755 285	7 255 616	16 633 454

NOK 1 000					Level 1	Level 2	Level 3	Total 2013

Assets
Investment property							1 828 917	1 828 917
Short-term receivables						28 414		28 414
Listed shares and bonds					5 241 213			5 241 213
Unlisted shares and bonds							5 446 096	5 446 096
Hedge funds						2 360 531	2 017 082	4 377 613
Liabilities
Other long-term debt						- 42 239		- 42 239
Other short-term debt						- 49 842		- 49 842
Total 2013					5 241 213	2 296 864	9 292 095	16 830 172

Reconciliation of movements in assets on level 3
NOK 1 000		Op.bal.1 Jan. 2014	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. 2014
Investment property		1 828 917	390 609	- 2 435		169 358		2 386 449
Unlisted shares and bonds		5 446 096	553 599	-1 425 596		-1 383 158	- 104 087	3 086 854
Hedge funds		2 017 082	92 895	- 901 293		573 629		1 782 313
Total		9 292 095	1 037 103	-2 329 324		- 640 171	- 104 087	7 255 616

*Included in sales and disposals are MNOK 686 for Interwell AS, that in 2014 was reclassififed from unlisted shares measured at fair value to subsidiary.

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		1 981 853	641 408	- 814 807		- 11 141	31 604	1 828 917
Unlisted shares and bonds		8 744 368	235 239	-3 418 186		- 151 806	36 481	5 446 096
Hedge funds		1 477 773	503 208	- 643 837		388 679	291 259	2 017 082
Total		12 203 994	1 379 855	-4 876 830		225 732	359 344	9 292 095

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. 2014	Applied and implicit EBITDA multiples	Value, if multiple reduced by 10%	Value, if multiple increased by 10%	Applied discount rate	Value, if interest rate increased by 1 percentage point	Value, if interest rate reduced by 1 percentage point
Investment property 1)		2 386 449				7,5% - 9,0%	2 053 449	2 830 349
Unlisted shares and bonds sensitive for multiple 2)		1 476 759	7,2 - 13,0	1 065 402	1 888 116
Other unlisted shares and bonds sensitive for multiple 2)		1 610 095

NOK 1 000		Balance sheet value at 31 Dec 2014				Estimated discounts acc. to broker (interval)	Value if discount increased by 10 %	Value if discount reduced by 10 %
Hedge funds 3)		1 782 313				11 % - 80 %	1 597 900	1 921 501

1) Appr. 52% of Ferd Eiendom AS' portfolio constitutes rental property and development project sensitive for changes in the discount interest rate.
2) Appr. 48 % of the value of unlisted shares and bonds are sensitive for a change in multiple. The other investments are valued on the basis på reported NAV whereby Ferd cannot calculate the sensitivity, even though multiples probably have been applied in determining NAV.
3) Appr. 72 % of the investments are sensitive for a change in discount. These investments were made only by the business area Special Investments.