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Note 25 to the financial statements describes the We checked that the valuation techniques used to deter-
elements that make up the available for sale investment mine the fair values of unquoted equity instruments were
securities balance. The most judgemental aspect of avail- consistent with the market approach prescribed by the
able for sale investment securities relate to the valuation applicable standard.
of level 3 financial instruments (N 59.7 billion - refer to
note 4.1.1), which we consider to be a key audit matter. We evaluated the principal assumptions and checked the
inputs by comparing them to independent sources for
The following risks could lead to inaccurate fair values of reasonableness.
available for sale investment securities:
We assessed the valuation methodology and modelsfor
• The Group uses a number of model types to value its consistency by comparing to prior periods.
level 3 financial instruments. Model deficiencies or
inaccurate model parameters could lead to material We reviewed the disclosures for compliance with the
misstatements of the financial statements; and relevant standards.
• Whilst some of the model inputs used for determin-
ing fair values are observable, there are unobservable
inputs (such as illiquidity discount rate and hair cut)
which could lead to valuation variances.
Inputs into the fair value approach include the ratio of
Enterprise Value (EV) to Earnings Before Interest Tax, De-
preciation and Amortisation (EBITDA), Price Earnings (P/E)
ratios and Price to Book (P/B) ratios.
This is considered a key audit matter in both the consoli-
dated and separate financial statements.

Valuation of derivative financial instruments Derivative
financial assets - N 92.4 billion Derivative financial liabil-
ities - N 5.3 billion (refer to notes 3.9, 4.1 and 21)
Due to the significance of derivative financial instruments We obtained an understanding of the valuation techniques
and the related estimation uncertainty, this is considered a and inputs used by management.
key audit matter.
We tested the validity of the underlying data used in man-
The fair value of derivative financial instruments is deter- agement’s valuation report. Furthermore, we employed
mined through the application of valuation techniques the services of our valuation specialists in assessing the
which often involve the exercise of judgement by manage- reasonableness of assumptions and models used.
ment and the use of assumptions and estimates especial-
ly in the determination of forward rates and discount rates. For the forwards and swap contracts, we have assessed
the reasonableness of management’s fair value estima-
The Bank’s derivative financial instruments are broadly tion by:
categorized into the following:
• discounting the payoff in each currency to the valua-
• Forward contracts tion date using that currency’s swap curve;

• Swap contracts • converting the foreign currency payoffs to local cur-
rency using spot exchange rates as at valuation date
• Non deliverable forwardcontracts between local and the foreign currencies; and
For forward and swap contracts which have terms to ma- • determining the value to the bank as the present val-
turity of less than one year from the statement of financial ue of the difference between the value to be received
position date, management obtains the input for the and the value to be paid (both in local currency).
valuation (i.e. market rate) from a quoted market.
With respect to non-deliverable forward contracts, we
Non deliverable forward contracts are short tenured and tested management’s assessment of fair values by check-
are valued with respect to a reference market rate with no ing the market rate differential between the contracted
adjustment for discounting. exchange rate and the spot exchange rates.

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Annual Report & Accounts 2017