Note 39  Fair values of financial assets and liabilities  Fair value reflects the amount for which an asset could be  exchanged or a liability settled, between knowledgeable, willing  parties in an arm’s length transaction. Quoted prices or rates are  used to determine fair value where an active market exists. If the  market for a financial instrument is not active, fair values are  estimated using present value or other valuation techniques, using  inputs based on market conditions prevailing on the measurement  date.  The values derived from applying these techniques are affected by  the choice of valuation model used and the underlying assumptions  made regarding inputs such as timing and amounts of future cash  flows, discount rates, credit risk, volatility and correlation.  Financial instruments measured at fair value are categorised in their  entirety, in accordance with the levels of the fair value hierarchy as  outlined below:  Level 1: quoted prices (unadjusted) in active markets for identical  assets or liabilities;  Level 2: inputs other than quoted prices included within Level 1  that are observable for the asset or liability, either directly  (i.e. as prices) or indirectly (i.e. derived from prices); and  Level 3: inputs for the asset or liability that are not based on  observable market data (unobservable inputs).  The appropriate level for an instrument is determined on the basis of  the lowest level input that is significant to the fair value  measurement.  The Consolidated Entity uses the portfolio exemption in AASB 13  Fair Value Measurement  to measure the fair value of certain groups  of financial assets and financial liabilities. These are measured using  the price that would be received to sell a net long position, or  transfer a net short position, for a particular risk exposure.  The following methods and significant assumptions have been  applied in determining the fair values of financial instruments:  – trading portfolio assets and liabilities, financial assets and  liabilities at fair value through profit or loss, derivative financial  instruments and other transactions undertaken for trading  purposes are measured at fair value by reference to quoted  market prices when available (e.g. listed securities). If quoted  market prices are not available, then fair values are estimated on  the basis of pricing models or other recognised valuation  techniques;  – investment securities classified as available for sale are  measured at fair value by reference to quoted market  prices when available (e.g. listed securities). If quoted  market prices are not available, then fair values are  estimated on the basis of pricing models or other  recognised valuation techniques. Unrealised gains and  losses, excluding impairment write-downs, are  recorded in the available for sale reserve in equity until  the asset is sold, collected or otherwise disposed of;  – fair values of fixed rate loans and issued debt  classified as at fair value through profit or loss is  estimated by reference to current market rates  offered on similar loans and issued debt;  – for financial assets carried at fair value, in order to  measure counterparty credit risk, a Credit Valuation  Adjustment (CVA) is incorporated into the valuation.  The CVA is calculated at a counterparty level taking  into account all exposures to that counterparty;  – for financial liabilities carried at fair value, in order to  measure the Consolidated Entity’s own credit risk, a  Debit Valuation Adjustment (DVA) is incorporated into  the valuations;  – for uncollateralised derivative positions, the  Consolidated Entity has incorporated the market  implied funding costs for these uncollateralised  derivative positions as a Funding Valuation Adjustment  (FVA). Where valuation techniques are used to determine fair  values, they are validated and periodically reviewed by  qualified personnel independent of the area that created  them. All models are certified before they are used, and  models are calibrated periodically to test that outputs  reflect prices from observable current market transactions  in the same instrument or other available observable  market data. To the extent possible, models use only  observable market data (e.g. for over-the-counter  derivatives), however management is required to make  assumptions for certain inputs that are not supported by  prices from observable current market transactions in the  same instrument, such as, volatility and correlation.  195 