Arla Foods Annual Report 2020

Management Review Our Strategy Our Brands and Commercial Segments Our Responsibility Our Governance Our Performance Review Our Consolidated Financial Statements Our Consolidated Environmental, Social and Governance Data Funding 4.5 FINANCIAL INSTRUMENTS Funding 4.6 SALE AND REPURCHASE AGREEMENTS Risk mitigation Methods and assumptions applied when measuring fair values of financial instruments: Bonds and shares The fair value is determined using the quoted prices in an active market. Non-option derivatives The fair value is calculated using discounted cash flow models and observable market data. The fair value is determined as a termination price and consequently, the value is not adjusted for credit risks. Option instruments The fair value is calculated using option models and observable market data, such as option volatilities. The fair value is determined as a termination price and consequently, the value is not adjusted for credit risks. Fair value hierarchy Level 1: Fair values measured using unadjusted quoted prices in an active market Level 2: Fair values measured using valuation techniques and observable market data Level 3: Fair values measured using valuation techniques and observable as well as significant non-observable market data. Attractive funding arrangement The group has invested in listed Danish mortgage bonds underlying its mortgage debt. By entering into a sale and repurchase agreement on the mortgage bonds, the group is able to archieve a lower interest rate, compared to current market interest rates on mortgage debt. The mortgage bonds are measured at fair value through other comprehensive income. Table 4.6 Transfer of financial assets (EURM) The receipt of proceeds from these bonds create a repurchase obligation which has been recognised within short-term loans. In addition to mortgage bonds, the group holds other securities with a carrying value of EUR 5 million. 107 ARLA FOODS ANNUAL REPORT 2020 2020 Mortgage bonds Repurchase liabilities Net position 2019 Carrying value Notional amount Fair value 409 405 409 -398 -397 -398 11 8 11 Mortgage bonds 430 425 430 Repurchase liabilities -429 -424 -429 Net position 1 1 1

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