FLE122 Annual Report 2018

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Notes to the Financial Statements 2018

16. Financial instruments continued

Fair value measurement All of the Group's derivatives are in designated hedge relationships and are measured and recognised at fair value. All derivatives are level 2 valuations based on accepted valuation methodologies. Forward exchange fair value is calculated using quoted forward exchange rates and discounted using yield curves derived from quoted interest rates matching maturity of the contract. The fair value of electricity price swaps is measured using a derived forward curve and discounted using yield curves derived from quoted interest rates matching the maturity of the contract. Interest rate derivatives are calculated by discounting the future principal and interest cash flows at current market interest rates that are available for similar financial instruments. Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 Inputs that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) other than quoted prices included within level 1. Level 3 Inputs for the asset or liability that are not based on observable market data (unobservable inputs). Fair value disclosures The fair values of borrowings used for disclosure are measured under level 2, by discounting future principal and interest cash flows at the current market interest rate plus an estimated credit margin that is available for similar financial instruments with a similar credit profile to the Group. The interest rates across all currencies used to discount future principal and interest cash flows are between 1.70% and 7.00% (June 2017: 1.69% and 9.98%) including margins, for both accounting and disclosure purposes. (i) Capital risk management The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns to shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of a through-the-cycle net debt to net debt plus equity ratio (gearing) and net debt to EBITDA ratio (leverage). The target gearing ratio range is 30 – 40%. The target leverage ratio range is 1.5 to 2.5 times. It is intended that the Group will not be materially outside the target gearing and leverage ratio ranges on a long-term basis.

84 Fletcher Building Limited Annual Report 2018

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