Notes to the consolidated financial statements

5a. Basis for preparation of the consolidated financial statements and the statement of compliance of the consolidated financial statements with applicable accounting principles

These consolidated financial statements have been prepared in accordance with the historical cost principle, except for available-for-sale financial assets and held-for-trading financial assets, including derivatives, which are measured at fair value.

These consolidated financial statements have been presented in Polish zlotys (PLN) and all figures are in PLN thousand, unless stated otherwise.

Statement of compliance with IFRS

The consolidated financial statements have been prepared in line with the International Financial Reporting Standards, International Accounting Standards and their interpretations (“IFRS”), as endorsed by the European Union (“EU”), whereas with regard to issues not regulated by the aforementioned standards and interpretations, the provisions of the Accounting Act of 29 September 1994 (Journal of Laws of 2013, item 330, as amended) (“Accounting Act”) and secondary legislation were applied. The consolidated financial statements are compliant with all standards and related interpretations endorsed by the EU, except for standards and interpretations specified below, which are awaiting approval of the EU, or have been approved by the EU, but they have entered into force after the balance sheet date or will enter into force in future. In the period covered by the financial statements, the Group decided not to use the opportunity of earlier application of new standards and interpretations, which were endorsed by the EU, but which have entered into force after the balance sheet date or will enter into force in future.

Standards and interpretations published and endorsed by the EU, applied by the Group for the first time as of 1 January 2013

The following standards, amendments to the existing standards and interpretations published by the International Accounting Standards Board (IASB) and endorsed by the EU are effective as of 2013:

• IFRS 13 “Fair Value Measurement”, endorsed by the EU on 11 December 2012 (applicable to annual periods beginning on or after 1 January 2013);
  
  IFRS 13 sets out a unified framework for measuring fair value and disclosures about fair value measurements. The scope of IFRS 13 is considerably wide. IFRS 13 sets out a framework for measuring fair value of financial instruments and non-financial items, for which fair value measurement or disclosure is required or possible under other IFRSs. It does not apply to share-based payments discussed in IFRS 2, lease transactions regulated by IAS 17 and measurements similar to but not tantamount to fair value measurements (e.g. net selling price for measurement of inventory or value in use for impairment purposes).
  
  The Group analyzed the requirements of the new standard. Application of the standard has not affected the consolidated financial statements.
   
• Revised IFRS 1 “First–time Adoption of IFRS” – Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters, endorsed by the EU on 11 December 2012 (applicable to annual periods beginning on or after 1 January 2013).
  
  The first modification regards replacement of fixed dates determined by the Standard (1 January 2004) with the words "the date of transition to IFRS”. As a result, first-time adopters will not have to restate non-disclosure of transactions performed prior to the transition date.
  The other amendment involves introducing of guidance on how to return to IFRS-based financial statements after a period of being unable to comply for severe hyperinflation of the functional currency.
  
  The Group analyzed changes introduced by the standard. The change did not have material impact on the consolidated financial statements.
   
• Revised IFRS 1 “First-time Adoption of International Financial Reporting Standards” – Government Loans endorsed by the EU on 4 March 2013 (applicable to annual periods beginning on or after 1 January 2013).
  
  The amendment determines the manner of accounting for government loans with interest below the market level by first-time adopters as at the transition date. Also, it introduces an exception for first-time adopters regarding the retrospective application in the same manner as for entities currently preparing their financial statements in accordance with IFRS at the moment of introducing the requirement in 2008 to IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance”.
  
  The Group analyzed changes introduced by the standard. The change did not have material impact on the consolidated financial statements.
  
  
• Revised IFRS 7 “Financial Instruments: Disclosures” – Offsetting Financial Assets and Financial Liabilities, endorsed by the EU on 13 December 2012 (applicable to annual periods beginning on or after 1 January 2013).
  
  The changes require disclosures regarding all recognized financial instruments offset in accordance with IAS 42.32. Further, they require disclosures regarding recognized financial instruments that give the holder the right to offset, based on a relevant agreement or similar arrangements, even if they were not offset in compliance with IAS 32.
  
  The Group analyzed changes introduced by the standard. The change did not have material impact on the consolidated financial statements.
   
• Revised IAS 1 “Presentation of Financial Statements” – Presentation of Items of Other Comprehensive Income, endorsed by the EU on 5 June 2012 (applicable to annual periods beginning on or after 1 July 2012).
  
  Revised IAS 1 introduced new terminology to statements of comprehensive income and income statements. The term “statement of comprehensive income” has been changed to “statement of profit or loss and other comprehensive income” and “statement of financial position” to “statement of profit or loss”. The new terminology is not mandatory, though. Revised IAS 1 also allows presentation of profit or loss and other comprehensive income in a single statement or two subsequent statements. In accordance with other standards, items of other comprehensive income are divided into two classes: (a) items which will not be reclassified to profit or loss in subsequent reporting periods and (b) items which may be reclassified to profit or loss in subsequent periods if certain conditions are met.
  
  Income taxes related to other comprehensive income items are allocated in line with the same principles, still the changes do not exclude the possibility to present other comprehensive income items before and after tax. The changes were applied prospectively, therefore the presentation of other comprehensive income items has been modified in order to reflect the changes.
  
  Application of amendments to IAS 1 does not result in changes other than presentation changes mentioned above, it does not affect the income statement, other comprehensive income or the total comprehensive income.

• Revised IAS 12 “Income Taxes” – Deferred Tax: Recovery of Underlying Assets, endorsed by the EU on 11 December 2012 (applicable to annual periods beginning on or after 1 January 2013).
  
  IAS 12 requires preparers to measure deferred tax assets depending on whether an entity plans to recover the asset value through its use or sale. For assets measured in line with IAS 40 “Investment Property”, the evaluation whether the asset will be used or sold may be difficult and subjective. The changes solve the problem, introducing an assumption that the value of an asset is usually recovered upon its sale.
  
  The Group analyzed changes introduced by the standard. The change did not have material impact on the consolidated financial statements.
   
• Revised IAS 19 “Employee Benefits” – improvements to the accounting for post-employment benefits, endorsed by the EU on 5 June 2012 (applicable to annual periods beginning on or after 1 January 2013).
  
  IAS 19 (2011) changes the recognition of defined benefit plans and termination benefits. The key change concerns accounting for changes in defined benefit liabilities and assets. The amendments require that changes in defined benefit liabilities and the fair value of plan assets be recognized when occurred. Consequently, the change eliminates the "corridor approach" deemed admissible by the previous version of IAS 19 and introduces earlier recognition of post-employment benefits. Actuarial gains and losses are recognized immediately in other comprehensive income in order to account for net retirement costs in the consolidated statement of financial position in order to recognize the entire deficit or surplus of the plan. Moreover, interest expense and expected return on plan assets discussed in the previous version of IAS 19, have been replaced with “net interest” on the net defined benefit liability or asset, determined using the discount rate in IAS 19 (2011). The changes affected values recognized the income statement and other comprehensive income of prior periods Moreover, IAS 19 (2011) introduces certain changes in presentation of defined service costs and introduces wider disclosure requirements.
  
  Appropriate transitional provisions apply to first-time adoption of IAS 19 (2011). The Group applies appropriate transitional provisions and it restates the comparable data retrospectively. The impact of changes in the accounting principles (policy) resulting from the amended IAS 19 on the comparable data has been presented in Note 5 b.
  
  
• Amendments to various standards “Amendments to IFRS (cycle 2009-2011)” - resulting from the annual quality improvement of IFRS (IFRS 1, IAS 1, IAS 16, IAS 32 and IAS 34) primarily with a view to removing inconsistencies and clarifying wording, endorsed by the EU on 27 March 2013 (to be applied to annual periods beginning on or after 1 January 2013).
  
  The Group analyzed changes introduced to the standards. The changes did not have material impact on the consolidated financial statements.

Standards and interpretations published and approved by the EU, but not yet effective

Preparing these consolidated financial statements the Capital Group did not apply the following standards, amendments to standards and interpretations that had been published by the IASB and approved for use in the EU, but which had not yet come into force:

• IFRS 10 “Consolidated Financial Statements”, endorsed by the EU on 11 December 2012 (applicable to annual periods beginning on or after 1 January 2014);
  
  IFRS 10 replaces the consolidation guidance included in IAS 27 “Consolidated and Separate Financial Statements” and SIC-12 "Consolidation – Special Purpose Entities" introducing a single control-based consolidation model for all entities, regardless of the investment nature (i.e. whether an entity is controlled through investor's voting rights or through other contractual arrangements commonly used in special purpose entities). According to IFRS 10, an investor controls an investee if and only if the investor has all the following: 1) power over the investee; 2) exposure, or rights, to variable returns from its involvement with the investee (see paragraphs 15 and 16); and 3) the ability to use its power over the investee to affect the amount of the investor’s returns.
  
  The Group analyzed the requirements of the new standard. Application of the standard will not considerably affect the consolidated financial statements.
   
• IFRS 11 “Joint Arrangements”, endorsed by the EU on 11 December 2012 (applicable to annual periods beginning on or after 1 January 2014).
  
  IFRS 11 introduces new accounting regulations regarding joint arrangements, replacing IAS 31 “Interests in Joint Ventures”. The option to use proportional consolidation method for jointly controlled entities has been eliminated. Further, IFRS 11 eliminates jointly controlled assets maintaining the classification into joint operations and joint ventures. Joint operations are joint arrangements under which the parties jointly control the rights to entity’s assets and liabilities. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.
  
  The Group analyzed the requirements of the new standard. Application of the standard will not considerably affect the consolidated financial statements.
   
• IFRS 12 “Disclosure of Interests in Other Entities”, endorsed by the EU on 11 December 2012 (applicable to annual periods beginning on or after 1 January 2014).
  
  It will require enhanced disclosures regarding both consolidated and not consolidated investees. The purpose of IFRS 12 is to provide users of financial statements with information allowing their assessment of the control basis, restrictions on consolidated assets, equity and liabilities, exposure to risk arising from involvement in structured entities not included in consolidation and involvement of NCI in operations of the consolidated entities.
  
  The Group analyzed the requirements of the new standard. Application of the standard will not considerably affect the consolidated financial statements.
  
  
• IAS 27 (2011) “Separate Financial Statements”, endorsed by the EU on 11 December 2012 (applicable to annual periods beginning on or after 1 January 2014).
  
  Requirements regarding separate financial statements have not changed and are included in the amended IAS 27. Other parts of the standard have been replaced by IFRS 10.
  
  The Group analyzed changes introduced by the standard. The change will not have material impact on the consolidated financial statements.
  
  
• IAS 28 (2011) “Investments in Associates and Joint Ventures”, endorsed by the EU on 11 December 2012 (applicable to annual periods beginning on or after 1 January 2014).
  
  The amendments result from publication of IFRS 10, IFRS 11 and IFRS 12.
  
  The Group analyzed changes introduced by the standard. The change will not have material impact on the consolidated financial statements.
  
  
• Revised IFRS 10 “Consolidated Financial Statements”, IFRS 11 “Joint Arrangements” and IFRS 12 “Disclosure of Interests in Other Entities” – Transition Guidance, endorsed by the EU on 4 April 2013 (applicable to annual periods beginning on or after 1 January 2014).
  
  The purpose of the amendments is to provide additional guidance regarding transitional provisions in IFRS 10, IFRS 11 and IFRS 12 in a manner "limiting the restatement of comparative data to the directly preceding reporting period”. Amendments to IFRS 11 and IFRS 12 are also to eliminate the requirement to present comparative data for periods earlier than the directly preceding one.
  
  The Group analyzed changes introduced to the standards. The change will not have material impact on the consolidated financial statements.
   
• Revised IFRS 10 “Consolidated Financial Statements”, IFRS 12 “Disclosure of Interests in Other Entities” and IAS 27 “Separate Financial Statements” – investment vehicles, endorsed by the EU on 20 November 2013 (applicable to annual periods beginning on or after 1 January 2014).
  
  The amendments relieve investment vehicles from the consolidation requirement included in IFRS 10 and require them to recognize their subsidiaries in fair value through profit or loss instead. Further, the amendments clarify disclosure requirements for investment entities.
  
  The Group analyzed changes introduced to the standards. The change will not have material impact on the consolidated financial statements.
  
  
• Revised IAS 32 "Financial Instruments: Presentation” – Offsetting Financial Assets and Financial Liabilities, endorsed by the EU on 13 December 2012 (applicable to annual periods beginning on or after 1 January 2014).
  
  The changes clarify the offsetting principles focusing on four key areas: (a) explaining the meaning of “having a legally enforceable right to set off”; (b) simultaneous offset and settlement; (c) offsetting hedges; (d) unit of account used for offsetting purposes.
  
  The Group analyzed changes introduced by the standard. The change will not have material impact on the consolidated financial statements.
   
• Revised IAS 36 “Impairment of Assets” – disclosure of recoverable value of financial assets endorsed by the EU on 19 December 2013 (applicable to annual periods beginning on or after 1 January 2014).
  
  Small changes to IAS 36 regard disclosures of recoverable value of assets with recognized impairment losses and when the recoverable amount is calculated as fair value less costs of disposal. When preparing IFRS 13 “Fair Value Measurement” IASB decided to amend IAS 36 so as to introduce the requirement to disclose recoverable value of assets for which impairment loss has been recognized. The current amendments clarify the initial intention of IASB to limit the disclosures to the recoverable value of assets for which an impairment loss has been recognized and if the recoverable value is based on fair value less costs of disposal.
  
  The Group analyzed changes introduced by the standard. The change will not have material impact on the consolidated financial statements.
   
• Amendments to IAS 39 “Financial Instruments: Recognition and Measurement” – novation of derivatives and continued hedge accounting, approved by the EU on 19 December 2013 (applicable to annual periods starting on or after 1 January 2014).
  
  Changes allow continuing application of hedge accounting for novation of a derivative (designated as a hedging instrument) when the derivative is novated to a central counterparty and certain conditions are met.
  
  The Group analyzed changes introduced by the standard. The change will not have material impact on the consolidated financial statements.

Standards and interpretations issued by IASB, but not yet approved by the EU

IFRS in the form approved by the EU do not differ significantly from the regulations adopted by the IASB, except for the following standards, amendments to the standards and interpretations, which as at 31 December 2013 had not yet been adopted for use:

• Revised IFRS 9 “Financial Instruments” and later amendments (the effective date has not been determined yet).
  
  On 28 October 2010 IASB issued an amended IFRS 9 introducing new requirements regarding settlement of financial liabilities and transferring requirements related to derecognition of financial assets and liabilities from IAS 39. On 19 November 2013 IASB issued another series of changes concerning hedge accounting. The Standard defines a single approach to determine whether financial statements are measured at amortized cost or at fair value, thus replacing a number of principles included in IAS 39. The IFRS 9 approach is based on assessment of the asset management approach adopted by a reporting entity (i.e. of its business model) and evaluation of the nature of contractual cash flows related to financial assets. Further, the new standard requires application of a single impairment evaluation method, replacing a number of methods formerly included in IAS 39. The new requirements regarding settlement of financial liabilities regard the volatility of the financial profit/loss arising from issuer's decision to measure its debt in fair value. IASB has decided to maintain the current measurement at amortized cost for most liabilities, changing only regulations regarding own credit risk. Under the new requirements, an entity that has decided to measure its liabilities at fair value must present changes in fair value arising from changes in own credit risk in other comprehensive income, not in profit or loss. Amendments from November 2013 shall result in material changes in hedge accounting and allow recognizing own credit risk without the necessity to change other financial instrument accounting principles and eliminate the effective date of IFRS 9 (formerly determined for 1 January 2015).
  
  The Group analyzed the requirements of the new standard. Application of the standard to classification and measurement of financial instruments will affect presentation of these instruments in the consolidated financial statements. The actual impact of the application of IFRS 9 may be estimated after publishing the final, complete version of the standard.
  
  
• Amendments to IAS 19 “Employee Benefits” – defined benefit plans: employee premiums (applicable to annual periods beginning on or after 1 July 2014);
  
  The changes regard the scope of applying the standard to employee or third party premiums contributed to defined benefit plans. The purpose of the changes is to simplify the method of accounting for premiums irrespective of the years in service (e.g. calculated as a fixed percentage of remuneration).
  
  The Group analyzed changes introduced by the standard. The change will not have material impact on the consolidated financial statements.
  
  
• Amendments to various standards “Amendments to IFRS (cycle 2010-2012)” - resulting from the annual quality improvement of IFRS (IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24 and IAS 38) primarily with a view to removing inconsistencies and clarifying wording (to be applied to annual periods starting on or after 1 July 2014).
  
  The introduced changes have refined the required accounting treatment in cases where previously free choice was allowed. The essential ones include new or amended requirements regarding: (i) defining the “vesting condition”, (ii) settlement of the contingent consideration in business combinations; (iii) aggregation of operating segments and reconciliation of the total assets of reporting segments to the entity's assets; (iv) measurement of short-term receivables and liabilities; (v) proportional restatement of accumulated depreciation in the remeasurement model and (vi) defining key management members.
  
  The Group analyzed changes introduced to the standards. The changes will not have material impact on the consolidated financial statements.
  
  
• Amendments to various standards “Amendments to IFRS (cycle 2011-2013)” - resulting from the annual quality improvement of IFRS (IFRS 1, IFRS 3, IFRS 13 and IAS 40) primarily with a view to removing inconsistencies and clarifying wording (to be applied to annual periods starting on or after 1 July 2014).
  
  The introduced changes have refined the required accounting treatment in cases where previously free choice was allowed. The essential ones include new or amended requirements regarding:
  (i) importance of the applicable IFRS for IFRS 1; (ii) the scope of exemptions regarding joint ventures; (iii) the scope of IFRS 13.52 (portfolio exemption) and (vi) clarification of the relationships between IFRS 3 and IAS 40 with regard to classification of property as investment or used for internal purposes.
  
  The Group analyzed changes introduced to the standards. The changes will not have material impact on the consolidated financial statements.
   
• IFRIC 21 “Levies” (applicable to annual periods beginning on or after 1 January 2014).
  
  The interpretation explains that operations subject to levies determined in relevant legal regulations is an event obligating to pay a levy.
  
  The Group analyzed the requirements of the new interpretation. Application of the interpretation will not considerably affect the consolidated financial statements.
   

Scope and period of the consolidated financial statements

The consolidated financial statements of the Group cover the period from 1 January 2013 to 31 December 2013 and include comparable data:

• for items of the consolidated statement of financial position as at 31 December 2012 and as at 1 January 2012,
• for items of the consolidated income statement, consolidated statement of other comprehensive income, consolidated statement of changes in equity, consolidated statement of cash flows for the period from 1 January 2012 to 31 December 2012.

Going concern

The consolidated financial statements of the Group have been prepared on the assumption the Capital Group entities will continue as a going concern for at least 12 months after the end of the reporting period, i.e. 31 December 2013.

According to the Management Board of the Bank, as at the date of approval of these consolidated financial statements for publication no facts and circumstances indicated a risk to the Group entities’ ability to continue as a going concern over a 12-month period after the end of the reporting period due to intended or forced discontinuation or material limitation of their activities.

Discontinued operations

In the year ended 31 December 2013 and in comparable periods no operations were discontinued in the Capital Group.

Consolidation principles

The consolidated financial statements cover the financial statements of the Bank and financial statements of its subsidiaries for the period from 1 January 2013 to 31 December 2013.

The financial statements of subsidiaries, following adjustments to ensure compliance with IFRS, are prepared for the same reporting period as the financial statements of the parent, using the same accounting principles, based on the same accounting principles for similar transactions and business events. Adjustments are applied in order to prevent any discrepancies between the adopted accounting principles.

All material balances and transactions between the Group companies, including revenue and expense, unrealized gains and gains and losses on intra-Group transactions, have been eliminated in whole. Unrealized losses are eliminated, unless they are indications of impairment.

The subsidiaries are consolidated using the full method in the period from the date when the parent assumed control to the date when the control is no longer exercised. A parent controls an entity when it holds, directly or indirectly through its subsidiaries, more than a half of the voting rights in the entity, unless it can be evidenced that such interest is not tantamount to exercising control. Control is also exercised when the parent can control the financial and operational policy of the entity.