Notes to the consolidated financial statements

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

The 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

These consolidated financial statements have been prepared in line with International Financial Reporting Standards, International Accounting Standards with their interpretations (“IFRS”) endorsed by the European Union (“EU”). With regard to issues not regulated by the aforementioned standards and interpretations, they are compliant the provisions of the Accounting Act of 29 September 1994 (uniform text: 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 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 2014

The following standards, revised standards and interpretations issued by the International Accounting Standards Board (IASB) and endorsed by the EU have entered into force as of 1 January 2014:

• IFRS 10 “Consolidated Financial Statements”, published by IASB on 12 May 2011.
  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 has control over an investee if:
  1) it has power over the investee;
  2) it is exposured or entitled to variable returns from its involvement with the investee;
  3) it has 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 has not materially affected the consolidated financial statements.
   
• IFRS 11 “Joint Arrangements”, published by IASB on 12 May 2011. IFRS 11 introduces new accounting regulations regarding joint arrangements and replaces IAS 31 “Interests in Joint Ventures”. Proportional consolidation is no longer allowed for jointly controlled entities. 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 have joint control of the rights to the net assets.
  The Group analyzed the requirements of the new standard. Application of the standard has not materially affected the consolidated financial statements.
   
• IFRS 12 “Disclosure of Interests in Other Entities”, published by IASB on 12 May 2011.
  IFRS 12 requires enhanced disclosures regarding both consolidated and not consolidated entities the reporting entity holds interests in. The purpose of IFRS 12 is to provide users of financial statements with information allowing their assessment of the control basis, restrictions placed on consolidated assets and liabilities, risk exposure arising from involvement in structured vehicles not included in consolidation and involvement of NCI in operations of consolidated entities.
  The Group analyzed the requirements of the new standard. Application of the standard has not materially affected the consolidated financial statements.
   
• IFRS 27 “Separate Financial Statements” (2011), published by IASB on 12 May 2011.
  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 has analyzed amendments to this standard. The amendments did not materially affect the consolidated financial statements
   
• IFRS 28 “Investments in Associates and Joint Ventures” (2011), published by IASB on 12 May 2011.
  The amendments result from publication of IFRS 10, IFRS 11 and IFRS 12.
  The Group has analyzed amendments to this standard. The amendments did not materially affect the consolidated financial statements
   
• Revised IFRS 10 “Consolidated Financial Statements”, IFRS 11 “Joint Arrangements” and IFRS 12 “Disclosure of Interests in Other Entities” – guidance on transitional provisions published by IASB on 28 June 2012.
  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 has analyzed amendments to these standards. The amendments did not materially affect 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 – published by IASB on 31 October 2012.
  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 has analyzed amendments to these standards. The amendments did not materially affect the consolidated financial statements
   
• Revised IFRS 32 “Financial Instruments: Presentation”- Offsetting Financial Assets and Financial Liabilities – published by IASB on 16 December 2011.
  The changes clarify the offsetting principles and focus on four key areas:
  1) explaining what is ”a legally enforceable right to set off the recognized amounts”;
  2) performing offset and settlement at the same time;
  3) offsetting hedges;
  4) unit of account used for offsetting purposes.
  The Group has analyzed amendments to this standard. The amendments did not materially affect the consolidated financial statements
   
• Revised IFRS 36 “Impairment of Assets”- Recoverable Amount Disclosures for Non-Financial Assets – published by IASB on 29 May 2013.
  Amendments 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.
  The Group has analyzed amendments to this standard. The amendments did not materially affect the consolidated financial statements
   
• Revised IAS 39 "Financial Instruments: Recognition and Measurement” – Novation of Derivatives and Continuation of Hedge Accounting, published by IASB on 29 May 2013.
  The amendments 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 provided certain conditions are met.
  The Group has analyzed amendments to this standard. The amendments did not materially affect the consolidated financial statements

Standards and interpretations published and endorsed 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:

• Changes to various standards “Amendments to IFRS (2010-2012)” published on 12 December 2013.
  The amendments to various standards and interpretations result from the annual quality improvement project (IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24, and IAS 38) focusing mainly on solving inconsistencies and clarifying the wording. 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:
  1) definition of “vesting condition”;
  2) settlement of contingent consideration in business combinations;
  3) aggregation of operating segments and reconciliation of the total assets of reporting segments to the entity's assets;
  4) measurement of short-term receivables and liabilities;
  5) proportional restatement of accumulated depreciation in the remeasurement model;
  6) defining key management members.
  The Group has analyzed amendments to these standards. The amendments will not materially affect the consolidated financial statements
   
• Changes to various standards “Amendments to IFRS (2011-2013)” published on 12 December 2013.
  The amendments to various standards and interpretations result from the annual quality improvement project (IFRS 1, IFRS 3, IFRS 13 and IAS 40) focusing mainly on solving inconsistencies and clarifying the wording. 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:
  1) importance of the applicable IFRS for IFRS 1;
  2) the scope of exemptions regarding joint ventures;
  3) the scope of IFRS 13.52 (portfolio exemption);
  4) 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 has analyzed amendments to these standards. The amendments will not materially affect the consolidated financial statements
   
• Amendments to IAS 19 “Employee Benefits” – Defined Benefit Plans: Employee Contributions- published by IASB on 21 November 2013.
  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 settlement of premiums independent from the years in service (e.g. calculated as a fixed percentage of remuneration).
  The Group has analyzed amendments to this standard. The amendments will not materially affect the consolidated financial statements
   
• IFRIC 21 “Levies”, published by IASB on 20 May 2013.
  This is the interpretation of IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”. IAS 37 defines criteria of recognizing liabilities, including the requirement to have a present obligation of the entity arising from past events (an obligating event). The interpretation explains that an event obligating to pay a levy is operation subject to levies determined in relevant legal regulations.
  The Group analyzed the requirements of the new interpretation. Application of the interpretation will not considerably affect 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 2014 had not yet been adopted for use:

• IFRS 9 “Financial Instruments” – published on 24 July 2014 replaces IAS 39 “Financial Instruments: Recognition and Measurement”.
  IFRS 9 determines requirements regarding recognition, measurement, impairment, derecognition and hedge accounting.
  Classification and measurement: IFRS 9 introduces a new approach to classification of financial instruments, depending on cash flow characteristics and business model related to a given asset.
  Impairment: IFRS 9 introduces a new model of calculating impairment based on expected losses, which requires ongoing recognition of expected credit losses. In particular, the new standard requires reporting entities to recognize expected credit losses upon first-time recognition of financial instruments and to recognize all expected losses for the entire instrument's lifetime faster than before.
  Hedge accounting: IFRS 9 introduces a new hedge accounting model with extended requirements regarding risk management disclosures. The new model constitutes a significant change in hedge accounting, which is to adjust the relevant accounting principles to risk management practice.
  Own credit risk: IFRS 9 eliminates variability of the financial profit/loss arising from changes in own credit risk related to liabilities designated for fair value measurement.
  For IFRS 9, application of the standard with regard to classification and measurement of financial instruments and recognition of impairment losses on financial instruments shall materially impact the consolidated financial statements of the Group. The Group is analyzing and estimating the impact of IFRS 9 on its financial performance.
   
• Revised IFRS 9 “Financial Instruments” and IFRS 7 “Financial Instruments: Disclosures” – mandatory effective date and transitional provisions, published by IASB on 16 December 2011. The amendments defer the mandatory effective date from 1 January 2013 to 1 January 2015. Further, they introduce an exemption from the obligatory restatement of comparative data in financial statements related to application of IFRS 9. The exemption was first available only to entities that had decided to apply IFRS 9 before 2012. Instead, additional disclosures are required regarding the effects of transitioning to new standards, prepared in a manner helping investors in understanding of the effects of initial application of IFRS 9 on classification and measurement of financial instruments.
  For IFRS 9, application of the standard with regard to classification and measurement of financial instruments and recognition of impairment losses on financial instruments shall materially impact the consolidated financial statements of the Group. The Group is analyzing and estimating the impact of IFRS 9 on its financial performance.
   
• IFRS 14 “Regulatory Deferral Accounts”, published by IASB on 30 January 2014.
  The Standard is to allow first-time adopters that at present recognize regulatory deferral accounts in accordance with previously applied GAAP continuing their application after transition to IFRS.
  The Group analyzed the requirements of the new standard. Application of the standard will not materially affect the consolidated financial statements.
   
• IFRS 15 “Revenue from Contracts with Customers”, published by IASB on 28 May 2014.
  The Standard specifies when and how to recognize the revenue and requires more detailed disclosures. It replaces IAS 18 “Revenue”, IAS 11 "Construction Contracts” and a number of interpretations related to revenue disclosure. It applies to nearly all customer contracts (exceptions include leases, financial instruments and insurance contracts). The new standard introduces a new key principle to recognize revenue in a manner reflecting transfer of goods or services to customers in the amount reflecting the consideration (i.e. payment) to which the entity expects to be entitled in exchange for these goods or services. The Standard provides also guidance regarding recognition of transactions that have not been regulated in detail by the existing standards (e.g. revenue from services or amendments to contracts) and provides more extensive explanation regarding recognition of multiple-element arrangements.
  The Group analyzed the requirements of the new standard. Application of the standard will not materially affect the consolidated financial statements.
   
• Revised IFRS 10 “Consolidated Financial Statements” and IAS 28 “Investments in Associates and Joint Ventures” – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture , published on 11 September 2014.
  The changes are aimed at eliminating inconsistencies between the requirements of IAS 28 and IFRS 10 and explain that the method of profit or loss recognition in transactions involving an associate or a joint venture depends on whether the sold or contributed assets constitute a business or not.
  The Group has analyzed amendments to these standards. The amendments will not materially affect the consolidated financial statements
   
• Revised IFRS 10 “Consolidated Financial Statements”, IFRS 12 “Disclosure of Interests in Other Entities” and IAS 28 “Investments in Associates and Joint Ventures” – Investment Entities: Applying the Consolidation Exception; published on 18 December 2014.
  Amendments to IFRS 10, IFRS 12 and IAS 28 introduce explanations regarding settlement of investment entities. In special cases, certain exemptions are available.
  The Group has analyzed amendments to these standards. The amendments will not materially affect the consolidated financial statements
   
• Revised IFRS 11 “Joint Arrangements”, Accounting for Acquisitions of Interests in Joint Operations, published by IASB on 6 May 2014.
  The amendments provide new guidance regarding accounting for acquisition of shares in joint operations in the form of a business.
  The Group has analyzed amendments to this standard. The amendments will not materially affect the consolidated financial statements
   
• Amendments to IFRS 1 “Presentation of Financial Statements” - Disclosure Initiative - published on 18 December 2014.
  The amendments to IAS 1 are to encourage entities to apply professional judgment in order to determine which information should be disclosed in financial statements. For example, they clearly indicate that the materiality principle applies to financial statements as a whole and that disclosure of certain immaterial data may reduce usefulness of disclosures in the financial statements.
  The Group has analyzed amendments to this standard. The amendments will not materially affect the consolidated financial statements
   
• Revised IAS 16 “Property, Plant and Equipment” and IAS 38 “Intangible Assets” – Clarification of Acceptable Methods of Depreciation and Amortization, published by IASB on 12 May 2014.
  The changes clarify that the use of revenue-based methods to calculate the depreciation of a fixed asset is not appropriate, since revenue on activities that include the use of the asset usually reflects other factors than consumption of economic benefits derived from that asset. Further, the amendments clarify that assuming revenue as the basis to measure the consumption of economic benefits derived from a given intangible asset is in principle deemed incorrect. Certain exceptions are allowed in precisely determined cases.
  The Group has analyzed amendments to these standards. The amendments will not materially affect the consolidated financial statements
   
• Revised IAS 16 “Property, Plant and Equipment” and IAS 41 “Agriculture” – Agriculture: Bearer Plants, published by IASB on 30 June 2014.
  The amendments include bearer plants in the scope of IAS 16 and therefore require accounting for them in the same manner as for property, plant and equipment.
  The Group has analyzed amendments to these standards. The amendments will not materially affect the consolidated financial statements
   
• Revised IFRS 27 “Separate Financial Statements” - Equity Method in Separate Financial Statements - published by IASB on 12 August 2014.
  The amendments are aimed at reintroducing the equity method as and additional option of accounting for investments in subsidiaries, associates and joint ventures in separate financial statements.
  The Group has analyzed amendments to this standard. The amendments will not materially affect the consolidated financial statements
   
• Changes to various standards “Amendments to IFRS (2012-2014)” published on 25 September 2014.
  The amendments to various standards and interpretations result from the annual quality improvement project (IFRS 5, IFRS 7, IAS 19, and IAS 34) focusing mainly on solving inconsistencies and clarifying the wording. The introduced changes have refined the required accounting treatment in cases where previously free choice was allowed. The amendments include new or amended requirements regarding:
  1) changes in the methods of disposal;
  2) servicing contracts;
  3) application of Amendments to IFRS 7 to condensed interim financial statements;
  4) discount rate application to bonds issued in other countries;
  5) disclosing information "elsewhere in the interim financial report".
  The Group has analyzed amendments to these standards. The amendments will not materially 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 2014 to 31 December 2014 and include comparable data:

• for items of the consolidated statement of financial position as at 31 December 2013,
• 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 2013 to 31 December 2013.

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 2014.
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 period from 1 January 2014 to 31 December 2014 and in the comparable period 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 12-month period ended 31 December 2014.
The financial statements of the subsidiaries, including the adjustments made to ensure their compliance with IFRS, have been prepared for the same reporting period as the financial statements of the parent, in line with consistent accounting policies 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 has no longer been exercised. The parent’s control exists when the parent has the power over the subsidiary, related exposure to variable returns or right to variable returns and the ability to use the power to affect its returns from the investee.