23.

Financial instruments

The fair values of financial assets and liabilities are based on quoted market prices where available. Where the market value is not available, the Group has estimated relevant fair values on the basis of publicly available information from outside sources or on the basis of discounted cash flow models where appropriate.

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which the fair value is observable:

Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 fair value measurements are those derived from 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);

Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).


	Level 1		Level 2			Level 3
	£m		£m			£m
30 June 2018
Derivatives in designated hedge relationships
Derivative assets		—		—			—
Derivative liabilities		—		(30.4	)		—
Held at fair value through profit or loss
Derivative assets		—		2.1			—
Derivative liabilities		—		(2.2	)		—
Payments due to vendors (earnout agreements) (note 18)		—		—			(542.9	)
Liabilities in respect of put options		—		—			(261.2	)
Equity investments
Other investments		224.4		—			724.9

Reconciliation of level 3 fair value measurements:


	Liabilities in respect of put options			Other investments
	£m			£m
1 January 2018		(258.1	)		820.3
Gains recognised in the income statement		21.3			24.2
Losses recognised in other comprehensive income		—			(93.3	)
Exchange adjustments		5.5			—
Additions		(37.7	)		27.5
Disposals		—			(53.5	)
Reclassifications from other investments to interests in associates		—			(0.3	)
Settlements		7.8			—
30 June 2018		(261.2	)		724.9

Payments due to vendors and liabilities in respect of put options

Future anticipated payments due to vendors in respect of contingent consideration (earnout agreements) are recorded at fair value, which is the present value of the expected cash outflows of the obligations. Liabilities in respect of put option agreements are initially recorded at the present value of the redemption amount in accordance with IAS 32 and subsequently measured at fair value in accordance with IFRS 9. Both types of obligations are dependent on the future financial performance of the entity and it is assumed that future profits are in line with directors’ estimates. The directors derive their estimates from internal business plans together with financial due diligence performed in connection with the acquisition. At 30 June 2018, the weighted average growth rate in estimating future financial performance was 23.8%, which reflects the prevalence of recent acquisitions in the faster growing markets and new media sectors. The risk adjusted discount rate applied to these obligations at 30 June 2018 was 2.4%.

A one percentage point increase or decrease in the growth rate in estimated future financial performance would increase or decrease the combined liabilities due to earnout agreements and put options by approximately £6.6 million and £6.9 million, respectively. A 0.5 percentage point increase or decrease in the risk adjusted discount rate would decrease or increase the combined liabilities by approximately £8.7 million and £8.9 million, respectively. An increase in the liability would result in a loss in the revaluation of financial instruments (note 7), while a decrease would result in a gain.

Other investments

Other investments include equity investments designated as fair value through profit or loss and fair value through other comprehensive income as follows:


	30 June 2018
	£m
Fair value through profit or loss		295.9
Fair value through other comprehensive income		653.4
		949.3

Other investments included in level 1 are based on quoted market prices. Other investments included in level 3 are unlisted securities, where market value is not readily available. The Group has estimated relevant fair values on the basis of publicly available information from outside sources. The sensitivity to changes in unobservable inputs is specific to each individual investment.