30 AUGUST 2013 NEW ZEALAND GAZETTE, No. 119 3207

THE COMMUNITY TRUST OF SOUTHLAND

NOTES TO THE FINANCIAL STATEMENTS

For the Year Ended 31 March 2013

23. FINANCIAL INSTRUMENTS (Cont’d)

Fair Value Hierarchy

The following table details the basis for the valuation of financial assets measured at fair value. This includes those financial assets that are fair valued through the profit and loss. Fair value is the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Fair Value may be determined using different methods depending on the type of asset. The three levels of fair value used in the table are defined below:

Level 1 Quoted Market Value
The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange or broker and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Instruments in Level 1 comprise primarily of shares listed on the New Zealand and Australasian Stock Exchanges.

Level 2 Observable Markets
The fair value of financial instruments that are not traded in an active market are determined using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. Typically the types of equities in Level 2 are investments in unit trusts and fixed interest investments (bonds).

Level 3 Significant Non-Observable Inputs
If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3. Currently the only investment in this category is that held by Direct Capital.

In arriving at the fair value for the Direct Capital Portfolio, the Trust has used the fair value assessed by Direct Capital IV Partnership (Direct Capital). Direct Capital have applied, the Australian Venture Capital and Private Equity Valuation Guidelines are applied to quarterly revaluations on each Direct Capital IV portfolio company. In addition Direct Capital note:

• With consideration towards current and future maintainable financial performance, the multiple of earnings approach is used. The earnings multiple is derived with consideration towards the multiple paid on investment, current industry and competitor multiples and listed equivalents. It is uncommon for the earnings multiple to be changed quarter on quarter.

• The resulting enterprise value is then discounted to recognise the private nature of the businesses, which takes into account the less liquid nature of the investment, possible minority interest position, etc. The discount rate used is typically between 10 and 30%.

• Finally the last quarterly closing net debt net of any ongoing working capital requirements to calculate Equity Value.

Each valuation is completed following receipt of portfolio company quarterly financial statements.

Each year the valuations are audited by KPMG in order to achieve audited special purpose financial statements as at 31 December.