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Armour Energy and controlled entities armourenergy.com.au Financial report continued Notes to the consolidated financial statements continued NOTE 25. FAIR VALUE MEASUREMENT CONTINUED FAIR VALUE HIERARCHY CONTINUED The fair values of all financial assets and liabilities approximate their carrying amounts principally due to their short-term nature or the fact that they are measured and recognised at fair value. Level 3 inputs used in determining the fair value of the Lakes Oil investment was based on an external valuation report that determined the implied equity value of the convertible notes issued by LKO. The external valuation report assumed the following: 100% volatility of stock • 0% dividend yield 0.74% risk free rate ACCOUNTING POLICY FOR FAIR VALUE MEASUREMENT When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs, and minimising the use of unobservable inputs. S Assets and liabilities measured at fair value are classified into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. ☐ NOTE 26. FINANCIAL RISK MANAGEMENT GENERAL OBJECTIVES, POLICIES AND PROCESSES In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group's objectives, policies, and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. There have been no substantive changes in the Group's exposure to financial instrument risks, its objectives, policies, and processes for managing those risks or the methods used to measure them from previous years unless otherwise stated in this note. The Group's financial instruments consists of deposits with banks, receivables, other financial assets, payables, borrowings, and corporate bonds. The Board has overall responsibility for the determination of the Group's risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Group's finance function. The overall objective of the Board is to set polices that seek to reduce risk as far as possible without unduly affecting the Group's competitiveness and flexibility. Risk management is carried out by senior finance executives ('finance') under policies approved by the board. These policies include identification and analysis of the risk exposure of the Group and appropriate procedures, controls, and risk limits. Finance identifies, evaluates and manages financial risks within the Group's operating units. Finance reports to the Board on a monthly basis. Further details regarding these policies are set out below. MARKET RISK Market risk arises from the use of interest bearing, tradable and foreign currency financial instruments and investments in listed securities. It is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in interest rates (interest rate risk), foreign exchange rates (currency risk) or other market factors (other price risk). The Group is exposed to market risk on investments in equity securities, and these investments are measured at fair value based on quoted market rates. Management considers market risk on this class of assets to be minor given the low value of the assets, and stability of long-term market rates. The Group does not have any material exposure to market risk other than interest rate risk and price risk on available for sale financial assets. PRICE RISK The Group has short-term and longer-term commercial contracts for the sale of its oil and gas products, some of which contain pricing which is adjustable annually for the Consumer Price Index (CPI) and some of which are set with reference to the variable Australian domestic gas price. To manage these exposures, forward Australian domestic price forecasts are monitored regularly and reported to the board. 92 93 33

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