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Allianz Annual Report 2012

SUBSEQUENT MEASUREMENT OF FINANCIAL INSTRUMENTS The subsequent measurement of financial instruments depends on their classification as follows: Financial assets and liabilities carried at fair value through income Financial assets and liabilities carried at fair value through income include financial assets and liabilities held for trad- ing and financial assets and liabilities designated at fair value through income. Financial assets held for trading consist of debt and equity securities that have been princi- pally acquired for the purpose of generating a profit from short-term fluctuations in price or for the purpose of sell- ing in the near future and derivative financial instruments with positive fair values that do not meet the criteria for hedge accounting. Financial liabilities held for trading primarily consist of derivative financial instruments with negative fair values that do not meet the criteria for hedge accounting. Derivative financial instruments include separated embed- ded derivatives of hybrid financial instruments. Financial assets and liabilities carried at fair value through income are measured at fair value. Changes in fair value are recognized directly in the consolidated income state- ment. The recognized net gains and losses include divi- dends and interest of the underlying financial instruments. A financial instrument may only be designated at inception as held at fair value through income and cannot be subse- quently changed. Available-for-sale investments Available-for-sale investments comprise debt and equity securities that are designated as available-for-sale or are not classified as held-to-maturity, loans and advances to banks and customers, or financial assets carried at fair value through income. Available-for-sale investments are measured at fair value. Unrealized gains and losses, which are the difference between fair value and cost or amortized cost, are recognized as a separate component of other com- prehensive income, net of deferred taxes and the latent reserve for premium refunds to the extent that policyhold- ers will participate in such gains and losses on the basis of statutory or contractual regulations when they are realized. When an available-for-sale investment is derecognized or determined to be impaired, the cumulative gain or loss pre- viously recorded in other comprehensive income is trans- similar instruments from inactive markets. Market observ- able inputs also include interest rate yield curves, option volatilities and foreign currency exchange rates. No active markets – Valuation techniques – Fair value Level 3: Where observable market inputs are not available, fair value is based on appropriate valuation techniques using non-market observable inputs. Valuation techniques in- clude net present value techniques, the discounted cash flow method, comparison to similar instruments for which observable market prices exist and other valuation models. In the process, appropriate adjustments are made for cred- it risks. In particular when observable market inputs are not available, the use of estimates and assumptions may have a high impact on the valuation outcome. Please refer to note 3, where the processes and controls for ensuring an appropriate use of estimates and assumptions are explained. No active markets – Equity instruments – Fair value Levels 2 and 3: Equity securities are measured at fair value when the ownership interest is less than 20 % and no significant influ- ence exists, and the fair value is reliably measurable. If the fair value cannot be measured reliably, unquoted equity instruments and derivatives linked to such instruments are stated at cost until a fair value can be measured reliably. These financial instruments are subject to the normal im- pairment procedures. Please refer to note 44 Financial instruments for further details. Amortized cost of financial instruments The amortized cost of a financial instrument is the amount at which the financial instrument is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest rate method of any difference between that initial amount and the redemption amount, minus any subsequent re- duction for impairment or uncollectability. Recognition of a day one profit or loss A day one profit or loss is recognized when the fair value of a financial instrument differs from its initial transaction price. In this case the fair value is evidenced by comparison with other observable current market transactions in the sameinstrumentclassorisbasedonavaluationtechnique incorporating only observable market data. Annual Report 2012    Allianz Group230

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