5 _371 2023 UNIVERSAL REGISTRATION DOCUMENT_MICHELIN 5 FINANCIAL PERFORMANCE 2023 consolidated financial statements 3.6 Fair value of financial instruments Fair value measurements are disclosed by level in the following fair value measurement hierarchy: ● Level 1: quoted prices in active markets. The fair value of financial instruments traded in active markets is based on quoted market prices at the date of the consolidated statement of financial position. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. The quoted market price used for financial assets held by the Group is the current bid price. These instruments, essentially cash and cash equivalents, as well as quoted unconsolidated equity investments, are included in level 1. ● 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). The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. These valuation techniques maximize 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 these instruments are observable, these instruments, essentially cash management financial assets and derivative instruments, are included in level 2. ● Level 3: inputs for assets or liabilities that are not based on observable market data (i.e., unobservable inputs). If one or more of the significant inputs is not based on observable market data, the instrument, essentially non-quoted unconsolidated equity investments, is included in level 3. Specific valuation techniques used to value, generally internally, financial instruments include: ● quoted market prices or dealer quotes for similar instruments (level 1); ● the fair value of interest rate swaps calculated internally as the present value of the estimated future cash flows based on observable yield curves (level 2); ● the fair value of forward foreign exchange contracts determined internally using spot exchange rates at the date of the consolidated statement of financial position, applied to discounted future cash flows (level 2). Other techniques, such as discounted cash flow analysis, are used internally to determine fair value for the remaining financial instruments (level 3). When observable yield curves include negative interest rates, those are used without adjustment to determine the fair value of derivatives. The Group assesses the counterparty risk included in the fair value of its over-the-counter derivatives for which there is no exchange of collateral. The Group includes the effect of its exposure to the credit risk of the counterparty or the counterparty's exposure to the credit risk of the Group. The valuation for long-term derivatives with no exchange of collateral is based on discounted cash flows using a rate including the counterparty credit risk. 3.7 Definition of certain indicators presented in the consolidated financial statements 3.7.1 Net debt Net debt is made up of current and non-current financial liabilities (including lease liabilities), as they appear on the consolidated statement of financial position, less: ● cash and cash equivalents as they appear on the consolidated statement of financial position; ● derivative instruments included in "Current financial assets and Non-current financial assets" on the consolidated statement of financial position; ● cash management financial assets included in "Current financial assets" on the consolidated statement of financial position (these assets are highly liquid, little affected by interest rate risk and foreign currency risk); and ● borrowing collateral included in "Current financial assets and Non-current financial assets" on the consolidated statement of financial position. 3.7.2 Segment EBITDA The Group defines Segment EBITDA as segment operating income less depreciation of property, plant and equipment, right-of-use assets and amortization of intangible assets allocated to segments.
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