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CONSOLIDATED FINANCIAL REPORT | EXPLANATORY NOTES

185

VALUATION TECHNIQUES

Level 1

: The fair value of financial instruments quoted in an active market is based on market price at the

reporting date. The market price used for derivatives is the bid price, while for financial liabilities the ask price

is used.

Level 2

: Derivative financial instruments classified in this category include interest rate swaps, forward

currency contracts and metal derivative contracts that are not quoted in active markets. Fair value is

determined as follows:

for interest rate swaps, it is calculated on the basis of the present value of forecast future cash flows;

for forward currency contracts, it is determined using the forward exchange rate at the reporting date,

appropriately discounted;

for metal derivative contracts, it is determined using the prices of such metals at the reporting date,

appropriately discounted.

Level 3

: The fair value of instruments not quoted in an active market is primarily determined using valuation

techniques based on estimated discounted cash flows.

An increase/decrease in the Group's credit rating at 31 December 2015 would not have had significant

effects on net profit at that date.

D. ESTIMATES AND ASSUMPTIONS

The preparation of financial statements requires management to apply accounting policies and methods

which, at times, rely on judgements and estimates based on past experience and assumptions deemed to be

reasonable and realistic according to the related circumstances. The application of these estimates and

assumptions influences the amounts reported in the financial statements, meaning the statement of financial

position, the income statement, the statement of comprehensive income and the statement of cash flows, as

well as the accompanying disclosures. Ultimate amounts, previously reported on the basis of estimates and

assumptions, may differ from original estimates because of the uncertain nature of the assumptions and

conditions on which the estimates were based.

The following is a brief description of the accounting policies that require the Prysmian Group's management

to exercise greater subjectivity of judgement when preparing estimates and a change in whose underlying

assumptions could have a significant impact on the consolidated financial statements.

(a) Provisions for risks and charges

Provisions are recognised for legal and tax risks and reflect the risk of a negative outcome. The value of the

provisions recorded in the financial statements against such risks represents the best estimate by

management at that date. This estimate requires the use of assumptions depending on factors which may