Notes to the consolidated financial statements

5.5. Key accounting principles

Download note 5.5 in XLS

5.5.1. Initial recognition of financial assets and liabilities

The Group recognizes a financial asset or liability in the consolidated statement of financial position only when it becomes a party to the contractual provisions of the instrument.
The Group classifies a financial asset at initial recognition.
Financial assets and liabilities included in IAS 39 are classified as follows:

• financial assets measured at fair value through profit or loss (the class includes financial assets and liabilities held for trading, including derivatives, as well as financial assets and liabilities designated as measured at fair value through profit or loss at initial recognition);
• financial assets available for sale;
• loans and receivables;
• financial assets held to maturity;
• other financial liabilities.

Upon initial recognition, a financial asset or liability is measured at fair value, and in the case of a financial asset or liability which does not qualify for measurement at fair value through profit or loss, the fair value is increased by the transaction costs which may be directly attributed to the acquisition or issue of the financial asset or liability.
A regular way purchase or sale of the financial asset is recognized off the statement of financial position at the trade date, i.e. on the day when the Group commits to acquire a financial asset, while it is recognized in the statement of financial position at the settlement date. A regular way purchase or sale is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the timeframe established generally by regulation or convention in the marketplace concerned.

5.5.2. Subsequent measurement of financial assets and liabilities

Financial assets and liabilities held for trading

Financial derivatives
Derivative financial instruments are measured at fair value. Derivatives with a positive fair value as at the measurement date are disclosed in the consolidated statement of financial position as assets, while those with a negative value from measurement - as liabilities. Fair value changes of derivatives held for trading are recognized in the consolidated income statement in “Gain/loss on financial instruments measured at fair value through profit or loss and gain/loss on foreign exchange transactions”.

Other financial assets and liabilities held for trading
Financial assets and liabilities held for trading include financial instruments acquired or incurred for resale or repurchase in near term or those being a part of a portfolio of identified financial instruments that are manager jointly and for which there is evidence of a recent actual pattern of short-term profit-taking. Financial assets and liabilities other than derivative instruments classified as held for trading are carried at fair value in the consolidated statement of financial position. Fair value changes are recognized in the consolidated income statement in “Gain/loss on financial instruments measured at fair value through profit or loss and gain/loss on foreign exchange transactions”. Interest income and expense are recognized in “Interest income” or "Interest expense", respectively.

Financial assets held to maturity
Financial assets held to maturity are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity, other than:

• financial assets and liabilities designated at measured at fair value through profit or loss at initial recognition;
• financial assets designated as financial assets available for sale; and
• financial assets qualifying as loans and receivables.

Following initial recognition, financial assets held to maturity are measured at amortized cost using the effective interest method.
The settlement of amortized cost using the effective interest method is recognized under “Interest income” in the income statement. Impairment losses are recognized in the income statement in “Net impairment losses”.

The effective interest method is a method of accruing the amortized cost of financial assets or liabilities (or a group of financial assets or financial liabilities) and assigning interest income and expenses to relevant periods. The effective interest rate is the rate that discounts estimated future cash payments or receipts over the expected life of the financial instrument, or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating an effective interest rate, the Bank estimates cash flows including all contractual terms but without potential future losses related to irrecoverability of loans. The calculation includes all commissions paid and received by the contractual parties and points that constitute an integral part of the effective interest rate, costs of transaction and any other premiums or discounts.
The Bank applies simplified methods, the results of which do not differ considerably from those based on calculations made using the effective interest method to account for fees and commissions and selected external cost of a financial instrument and for instruments with determined cash flow schedules for which the effective interest method cannot be applied for technical or compliance reasons.

Loans and receivables
Loans, advances and receivables are non-derivative financial assets with fixed or determinable payment schedules that are not quoted in an active market, other than:

• financial assets that the Group intends to sell immediately or in the near term, which are classified as held for trading, and those that the Group designated upon initial recognition as measured at fair value through profit or loss;
• financial asses that the Group designated upon initial recognition as available for sale; or
• financial assets for which the Group may not recover substantially all of its initial investment, for reasons other than loan service deterioration, which are classified as available for sale.

Following the initial recognition, loans and receivables are measured at depreciated cost using the effective interest method. The settlement of amortized cost using the effective interest method is recognized under “Interest income” in the consolidated income statement. Impairment losses for items other than “Other assets” are recognized in the consolidated income statement in “Net impairment losses”.

Financial assets available for sale
Financial assets available for sale are those not classified as derivatives, designed as available for sale, or not classified as any of the classes mentioned above.
Following initial recognition financial assets available for sale are measured at fair value, whereas any gains and losses resulting from changes in the fair value estimates are recognized in other comprehensive income (other comprehensive income is accumulated in equity in "Revaluation reserve”). Revaluation reserve is accounted for in the consolidated income statement in time of sale of the asset or its impairment, while the accumulated gains and losses are recognized under “Gain/loss on other financial instruments”.
For debt instruments, interest income and discount or bonus are accounted for using the effective interest method and recognized under “Interest revenue” in the consolidated income statement. Dividends on equity instruments are recognized in the consolidated income statement in “dividend income” when the entity’s right to receive dividend arises.
If the fair value of equity instruments cannot be determined, the assets are measured at cost less any impairment losses. Impairment losses are recognized in the consolidated income statement in “Net impairment losses” and cannot be reversed.

Financial liabilities measured at amortized cost
Financial liabilities other than those measured at fair value through profit or loss are measured at amortized using the effective interest method. If a cash flow schedule cannot be determined for a given financial liability and therefore the effective interest rate cannot be reliably estimated, such a liability is measured at amount due.

Financial guarantee contracts
In line with IAS 39 financial guarantee contract is a contract that requires the Group, i.e. the issuer, to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. At initial recognition, financial guarantee contracts are measured at fair value adjusted by costs of transaction directly attributable to extending the guarantee. Subsequently, liabilities are measured at the higher of: best estimates of costs necessary to repay current liabilities at the end of the reporting period and the initial value less any depreciation charges in line with IAS 18.

5.5.3. Reclassification of financial assets

The Group may reclassify a non-derivative financial asset from held-for-trading assets to loans and receivables if it is no longer held with the intention to be sold or repurchased in near term. A financial asset can be reclassified if it fulfils the conditions specified in the definition of loans and receivables and if the Group has a positive intention and ability to hold the financial asset item in foreseeable future or until maturity.
Reclassified financial assets are measured at fair value at the date of reclassification. If an item is reclassified from held-for-trading financial assets, any gain or loss recognized in the income statement is not reversed. The fair value of a financial asset shall become a new amortized cost at the date of reclassification.
For financial assets reclassified from available-for-sale financial assets to held-to-maturity financial assets or loans and receivables (if meeting all classification criteria), any gain or loss related to the asset which was previously charged to revaluation reserve is accounted for in the following manner:

• for a financial asset with fixed maturity, accumulated gains or losses charged to revaluation reserve by the reclassification date are amortized and recognized in the consolidated income statement in the term to maturity, using the effective interest method;
• for a financial asset with undetermined maturity, accumulated gains or losses are charged to revaluation reserve until sale or disposal, when it is disclosed in the consolidated income statement.

5.5.4. Derecognition of financial assets and liabilities

Financial assets
A financial asset (or a part of a financial asset or a group of similar financial assets) is derecognized from the consolidated statement of financial position if:

• the contractual rights to the cash flows from the financial asset expire;
• the Group has transferred the rights to receive cash flows from the financial asset or committed to transfer cash flows received to a third party without undue delay as a transaction intermediary and:
  (a) it has transferred substantially all risks and rewards of ownership of the financial asset; or
  (b) it has neither transferred not retained substantially all the risks and rewards of ownership of the financial asset, but it has transferred control over the financial asset.

If the Group has transferred its title to cash flows from the asset to another entity or committed to intermediate in a transaction but it has neither transferred nor retained substantially all risks and rewards of ownership and the transfer in question has not resulted in the transfer of control, the asset is recognized to an extent the Group holds its exposure in the given asset.
Exposure in a financial asset in the form of a financial guarantee contract is measured at the lower of: initial carrying amount of the asset and the maximum amount the Group may be obliged to pay for the asset.
Financial liabilities
The Group derecognizes a financial liability from its consolidated statement of financial position when the obligation specified in the contract is discharged, cancelled or expired.
Replacement of an existing debt instrument with an instrument with substantially different terms performed by the same entities is recognized as expiration of the initial financial liability and recognition of a new one. Similarly, significant modification of contractual terms and conditions regarding the existing financial liability is recognized as an expiration of the initial liability and recognition of a new one. The difference of corresponding carrying amounts resulting from the replacement is recognized in the consolidated income statement.

5.5.5. Repurchase/resale and security loan agreements

Securities sold under repurchase and sell-buy-back agreements are included in the balance sheet provided that the Group retains substantially all risks and benefits arising from a given asset. Liabilities to a counterparty are accounted for as “Liabilities arising from securities sold under repo, sell-buy-back agreements”.
For securities puchased under reverse repo, buy-sell-back agreements, where counterparties retain substantially all risks and benefits regarding these securities, receivables arising from the concluded transactions are recognized as receivables from securities purchased under reverse repo, buy-sell-back agreements.
Transactions of selling securities under repo, sell-buy-back agreements and purchasing securities under reverse repo, buy-sell-back agreements are measured at amortized cost using the effective interest method, while the securities sold under repurchase/sell-buy-back agreements are measured according to principles determined for each security portfolio.
The difference between the sale and repurchase agreement is treated as interest expense/income and settled over the duration of the agreement using the effective interest method.
For sales of securities purchased under reverse repo/buy-sell-back agreements, the liability reflecting the obligation to return the assets is recognized under “Financial liabilities measured at fair value through profit or loss”.

5.5.6. Fair value of financial instruments

Fair value is a price the Group would receive for sale of an asset or pay for transfer of a liability in a transaction carried out on arms-length terms as at the measurement date.
The fair value of financial instruments quoted in an active organized financial market is determined in relation to the current purchase price (for assets) or the current sales price (for liabilities).
Fair value of financial instruments with no active market available is determined using various valuation methods, with the Group maximizing the use of observable inputs, such as estimating the price of a financial instrument based on a publicly announced price quoted in an active regulated market, a price of a similar financial instrument or prices of components of a complex financial instrument or by estimating the price of a financial instrument using generally accepted estimation methods.
The fair value of individual financial assets and financial liabilities and methods of its estimation are described in details in Note 36.

5.5.7. Impairment of financial assets

As at each balance sheet date, the Group evaluates whether there is any indication of impairment of a financial asset or a group of financial assets. Impairment loss is identified when there is objective evidence of impairment associated with one or more events that took place after the initial recognition of an asset (”loss generating event”) and the loss generating event affects the expected future cash flows from a financial asset or group of financial assets the value of which can be reliably estimated. Objective evidence of impairment is e.g. considerable financial difficulty of the debtor, default under timely payment of the principal amount or interest, high probability of bankruptcy, other financial reorganization of the debtor or factors indicating a measurable decrease in estimated future cash flows.
Indications of impairment for individually material exposures have been divided into two groups:
  1) Quantitative (obligatory):
      a) payment of the principal amount or interest delayed by over 90 days;
      b) for government and self-government sector, payment of the principal amount or interest delayed by over 30 days;
      c) exposure classified as “at risk” (i.e. risk categories “below standard”, “doubtful”, “loss”) according to the Ordinance of the Minister of Finance on
          recognizing provisions for risks related to banking operations.
  2) Qualitative criteria:
      a) Hard (mandatory) criteria:
          - application (including that filed by the bank) for instigation of collection, liquidation, bankruptcy or remedial proceedings with regard to the
            debtor;
          - debtor’s questioning the balance sheet credit exposure in court proceedings;
          - termination of a facility agreement;
          - partial forgiveness of debt, arrangement, composition,
      b) Soft criteria (factors analyzed by a professional analyst):
          - obtaining information that a bankruptcy or other reorganization procedures have been instigated with a counterparty;
          - high probability of bankruptcy or other financial reorganization of the counterparty;
          - unknown residence or undisclosed assets of a counterparty;
          - an active market of a given balance sheet credit exposure disappearing due to financial problems;
          - default under payment or under timely payment of the principal or interest within last 3 months;
          - significant court dispute lost, which may lead to considerable costs;
          - obtaining information about counterparty’s financial problems (e.g. reduced income, increased debt, payment default with other institutions);
          - major financial difficulties of the counterparty (based on a negative assessment of the financial position of the debtor indicated in the
            monitoring process);
          - debt restructuring;
          - significant deterioration of the client’s rating or scoring (e.g. to a category in which a client would not be granted a loan at all or would not be
            granted exposure on terms applicable in time of concluding the agreement or would receive a lower amount);
          - a recognized rating institution (credit rating agency) lowering the credit rating of a counterparty, of the country or the rating of any debt
            securities issued by the counterparty;
          - debtor’s accounts being seized;
          - loss of sales markets or key clients;
          - deterioration of macroeconomic factors affecting the obligor’s industry;
          - default under other material contract terms resulting in a drop in estimated future cash flows;
          - adverse changes in the internal organizational structure or the management structure of the borrower;
          - change in regulations adversely affecting the borrower’s operations;
          - significant drop in market prices of collateral;
          - borrower’s failure to provide documents concerning its business and financial position;
          - other factors which may affect expected future cash flows.
For individually immaterial loans analyzed on a collective basis, the Group identifies the following impairment indications:
  1) Quantitative (obligatory):
       a) payment of the principal amount or interest delayed by over 90 days;
       b) termination of a facility agreement;
       c) the exposure bears characteristics of a fraud;
       d) the exposure is restructured;
       e) exposure subject to collection proceedings;
       f) the Group having obtained information about an event that may impact projected cash flows;
       g) exposure classified as “at risk” (i.e. risk categories “below standard”, “doubtful”, “loss”) according to the Ordinance of the Minister of Finance on
          recognizing provisions for risks related to banking operations.
  2) Soft criteria (factors analyzed by an expert):
      a) disappearance of an active market for a selected group of credit exposures due to financial difficulties of counterparties (e.g. significant
         deterioration of issuers’ financial standing resulting in a reduction in trading of selected assets, which in turn disallows their reliable measurement);
      b) observable inputs indicate a measurable decrease in estimated future cash flows related to a group of balance sheet credit exposures after their
          initial recognition, although drops regarding individual assets in the group cannot be measured, to include:
        - adverse changes in counterparties’ payment status in the group (e.g. an increased number of delayed payments or an increased number of credit
          card holders who have reached their credit limit and keep repaying the minimum monthly installments); or
       - the standing of the domestic or local market related to the default in credit exposure payment in the group (e.g. increased unemployment in the
         counterparty’s location; for mortgage loans, a decrease in real property prices in a given region; adverse changes in the standing of a given industry
         that impact a group of counterparties).

Receivables from other banks; loans and advances to customers
For receivables from other banks and loans and advances granted to clients measured at amortized cost using the effective interest method, the Group checks if any indication of impairment of individually significant financial assets and aggregate individually insignificant assets have occurred. If the analysis shows that there is no objective indication that an individually evaluated financial asset may be impaired, irrespective of whether it is material or not, the Group includes the asset in the group of financial assets with a similar credit risk and jointly determines their impairment. Assets which are individually tested for impairment and for which an impairment loss has been recognized or it has been determined that the previous one will not change, are not included in the general test of asset impairment.
If there is any evidence of impairment, an impairment loss equals the difference between the carrying amount of the asset and the present value of estimated future cash flows (excluding future credit losses). The carrying mount of the asset is reduced using a reserve account and the loss amount is recognized in the consolidated income statement under “Net impairment losses”.
For financial assets for which an impairment loss has been recognized, interest income is calculated with the use of the interest rate applied to discount future cash flows for the purpose of estimating the impairment loss amount. Credit facilities with related impairment losses are written off when their recovery is highly improbable and all collateral has been realized and transferred to the Group. If in the subsequent period impairment loss is decreased or increased as a result of an event following impairment recognition, the previously recognized loss is increased or decreased by way of making an adjustment of the reserve account.
The present value of estimated future cash flows is calculated using the original effective interest rate for a given financial instrument. For floating interest loans or receivables, the discount rate used for measuring impairment is the present effective interest rate. Computation of the present value of estimated cash flows related to an asset collateralized with a pledge reflects cash flows which may arise as a result of enforcement of collateral, reduced by costs of establishing or selling the collateral (in portfolio analysis, the costs are not included since there is no possibility to clearly assign each cost to a relevant credit exposure, and the inclusion of the costs is considered immaterial based on analyses carried out), irrespective of enforcement probability.
For purposes of aggregate impairment testing, financial assets are aggregated based on the credit risk factors determining the borrower’s ability to repay the entire contractual obligations, e.g. based on credit risk assessment or assessment in line with a given scale considering asset type, industry, location, collateral type, default under timely payments and other significant issues.
Future cash flows in the group of financial assets collectively tested for impairment are estimated based on history of losses for assets of similar credit risk characteristics.
Impairment losses determined for a group of financial assets collectively tested for impairment, including IBNR losses, are estimated in accordance with the incurred but not reported loss concept based on risk parameters commonly applied in the sector: PD and LGD. When estimating provisions for off-balance sheet credit exposures, the Group additionally includes the credit conversion factor (CCF). The values of PD, LGD and CCF parameters are estimated with the use of statistical methods based on observation of historical losses for assets with similar credit risk characteristics using the point in time (PIT) principle, through weighting of historical observations and including factors that arise from current market conditions. If necessary, historical data regarding the losses are adjusted based on available current data in order to reflect the impact of present conditions that did not influence the historical period from which the historical loss data are derived and to eliminate factors that affected historical data but do not occur now.
Additionally, in order to ensure adequacy of impairment losses, the Group’s calculation model is subject to the model management process (including regular validation) and backtested once a year.

Financial assets held to maturity
As at each reporting date, the Group individually evaluates whether there is any indication of impairment of financial assets held to maturity. If there is any evidence of impairment, an impairment loss equals the difference between the carrying amount of a given asset and the present value of estimated future cash flows. The carrying amount of an asset is reduced and an impairment loss is recognized in the consolidated income statement in “Net impairment losses”.
If in the subsequent period impairment loss is decreased and the decrease may be objectively linked to the event following impairment recognition, the previously recognized loss is reversed. The reversed impairment loss is recognized in the consolidated income statement in “Net impairment losses”.

Financial assets available for sale
As at each reporting date, the Group evaluates whether there is any indication of impairment of a financial asset or a group of financial assets available for sale.
As regards capital investments available for sale, a decrease in the fair value of the financial assets below the cost for a significant or extended period is objective evidence of impairment.
In case of impairment of financial assets, accumulated losses constituting the difference between the cost and the present fair value, less any impairment losses on the assets recognized in the consolidated income statement are derecognized from revaluation reserve and recognized in the consolidated income statement in “Net impairment losses”.
Impairment losses on investments in equity instruments are not reversed through the income statement. The increase in their fair value after impairment loss recognition is charged directly in other comprehensive income.
Debt instruments classified as available for sale are tested for any indication of impairment of a financial asset in line with the same principles as those applied to financial assets measured at amortized cost.
For financial assets for which an impairment loss has been recognized, interest income is calculated with the use of the interest rate applied to discount future cash flows for the purpose of estimating the impairment loss amount.
If in the subsequent period fair value of an available-for-sale debt instrument increases, and the increase may be objectively related to an event occurring after the recognition of the impairment loss in the consolidated income statement, the reversed impairment loss amount is recognized in the consolidated income statement in “Net impairment losses”.

Financial assets measured at cost
If there is objective evidence that an impairment loss on an unquoted equity instrument which is not measured at fair value (as the fair value may not be determined reliably) has been incurred, the amount of the loss is measured as the difference between the financial asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for similar financial assets. Impairment losses determined in this manner are not reversed.

5.5.8. Cash and cash equivalents

Cash and cash equivalents include cash in hand and on the nostro (current) account in the National Bank of Poland as well as receivables from other banks on the current account, and other cash with maturity of up to 3 months, disclosed at the nominal value and financial assets with high liquidity, i.e. current financial assets (with the maturity period of up to three months from the acquisition date).

5.5.9. Property, plant and equipment

Property, plant and equipment are recognized at cost, less depreciation charges and impairment losses. The initial amount of fixed assets includes their cost increased by all costs directly related to their purchase and adaptation for use. The cost includes also cost of replacement of parts of plant and machinery when incurred, if the recognition criteria are met. Costs incurred after the date of commissioning, such as costs of maintenance and repair, are charged to profit or loss when incurred. Land is not depreciated. Depreciation of other property, plant and equipment is calculated according to the straight-line method over the estimated useful life of an asset:
 

Depreciation charge on property, plant and equipment whose useful life is limited is recognized in the consolidated income statement in “General and administrative expense”.
Any gain or loss (calculated as a difference between possible net inflows from sales and the carrying amount of the item) resulting from derecognition of the asset from the balance sheet is charged to profit or loss for the period of the derecognition under other operating revenue or other operating expense, respectively.
Investments in progress are related to fixed assets under construction or assembly and are recognized at cost less impairment losses, if any. Fixed assets under construction are not depreciated until their construction is completed and until they are commissioned.

5.5.10. Intangible assets

Intangible assets acquired in a separate transaction are initially measured at acquisition price or manufacturing cost. After the initial recognition, intangible assets are recognized at cost, less accumulated amortization and impairment loss. Expenditures on internally generated intangible assets, except for capitalized development expenditures, are recognized in expenses of the period in which they were incurred.
Amortization of intangible assets is calculated using the straight-line method in order to spread out the initial asset value over the useful life, i.e. 2 years, and in justified cases for expected useful lives from 3 to 20 years.
Amortization charges on intangible assets whose useful life is limited is recognized in the consolidated income statement in “General and administrative expense”.
Gains or losses on derecognition of intangible assets are recognized in the consolidated income statement under other operating revenue or other operating expenses, respectively.
Other research expenses are recognized in profit or loss when they are incurred.
Intangible assets arising from R&D works are recognized in the statement of financial position only if the following conditions have been met:

• completion of an intangible asset so that it is fit for sale or use is technically possible;
• the intent to complete the asset, its use and sale can be proven;
• the asset will be fit for use or sale;
• the manner in which the asset will generate future economic benefits is known;
• technical resources and funds necessary to complete R&D work, the use and sale of the asset will be provided;
• outlays incurred in the course of R&D work can be reliably measured.

The initial value of an internally manufactured intangible asset is the total of expenditures incurred from the date when the asset has first met the recognition criteria (see above). If costs of R&D works related to internally produced intangible assets cannot be recognized in the balance sheet, they are recognized in the income statement of the period when incurred.
Following initial recognition, intangible assets produced internally in the course of R&D works are recognized at an amount reduced by accumulated amortization and total impairment losses, similarly to acquired intangible assets.

5.5.11. Lease

Group as a lessee
The Group is a party to finance lease agreements based on which it uses third-party fixed assets for a period of time agreed therein in return for a fee.
Finance leases transfer to the Capital Group basically the entire risks and rewards of holding the lease object recognized in the statement of financial position as at the lease commencement date at the lower of the following two amounts: fair value of a leased asset or current value of minimum lease payments. Lease payments are split between financial expenses and a decrease in the balance of lease liabilities in order to obtain a fixed interest rate on the outstanding liability. Financial expenses are charged directly to the income statement. Fixed assets used based on finance leases are depreciated with the straight line method over the shorter of the following two periods: estimated useful life or lease term.
Moreover, the Group is a party to operating lease agreements whereby the lessor retains substantially all the risks and rewards of ownership of an asset. Payments arising from operating leases are recognized as expenses in the income statement in accordance with the straight-line method over the lease term.

The Group as a lessor
The Group is a party to operating lease agreements based on which it lets out fixed assets to be used or generate rewards for a period of time agreed in the agreement in return for a payment.
Payments arising from operating leases are recognized as “other operating revenue” in the income statement in accordance with the straight-line method over the lease term.

5.5.12. Impairment of non-financial non-current assets

Once a year the Group evaluates whether any circumstances indicating impairment of non-financial non-current assets have occurred. If there is any indication of impairment or if an annual impairment test is required under the IFRS, the Group estimates the recoverable amount of a given asset.
The recoverable amount of an asset corresponds to the fair value of the asset or a cash-generating unit (CGU) less costs to sell or its value in use, whichever is higher. The recoverable amount is determined for individual assets, unless a given asset does not generate cash inflows which are largely independent of those generated by other assets or groups of assets. If the carrying amount of an asset or a CGU is higher that its recoverable amount, the asset has been impaired and is written down to a relevant recoverable amount. At the time of estimation of the value in use, projected cash flows are discounted to their present value using the discount rate before the effects of tax, reflecting the current market valuation of the time value of money and the risk characteristic of a given asset.
A model appropriate for measuring a given asset item is applied to determine the fair value less costs to sell. The computations are confirmed using measurements made based on other sources and other available methods of determining the fair value.
Impairment losses for assets are recognized in the consolidated income statement, excluding assets already remesured, in case of which the remeasurement has been charged to equity. In such a case, impairment losses are also recognized in equity up to earlier remeasurement amounts.
At the end of each financial year the Group evaluates whether the indications of impairment still occur and whether the impairment losses should be reduced. If there is such indication, the Group estimates the recoverable amount of the asset or a cash-generating unit. Impairment loss is reversed only when the estimations used to determine the recoverable amount of the asset have changed since the last impairment loss recognition. If so, the carrying amount of the asset is increased to its recoverable amount.
The increased amount should not exceed the carrying amount of the asset which would have been determined (including amortization), had the Company not recognized an impairment loss for the asset. A reversal of an impairment loss is recognized immediately in the consolidated income statement, unless the relevant asset is carried at a remeasured amount, in which case the reversal of the impairment loss is treated as a revaluation reserve increase.
The criteria specified above also apply to assessing impairment of intangible assets. The test is performed for individual asset items or cash-generating units and if any indications of impairment occur.

5.5.13. Provisions

Provisions are recognized, if the Group has a present obligation (legal or constructive) as a result of a past events and when it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
If the Group expects reimbursement of the expenditure required to settle the provision (for example, through insurance contracts), the reimbursement is recognized as a separate asset, but only when it is virtually certain that reimbursement will be received. The expenses relating to the provision less the amount recognized for reimbursement are disclosed in the consolidated income statement.
If the impact of the time value of money is material, the provision is discounted using the current interest rate (tax not included), reflecting possible risk related to a given liability. If the provision has been discounted, the increase in the provision due to the passage of time is recognized as interest expense.

Provisions for disputes
Provisions for disputes are recognized for court cases, administrative proceedings and other legal disputes. The Group keeps a detailed record of disputes. Provisions are recognized if the Group is subject to a legal or customary obligation resulting from past events, and if there is a probability that fulfillment of the obligation will result in an outflow of funds. Any future claims are charged to the provisions. The Group has recognized provisions for all estimated losses. As a rule, estimated term of provisions for disputes exceeds one year.
Provisions for retirement and disability benefits
In accordance with IAS 19, retirement and disability benefits are post-employment defined benefit plans. The provision for retirement and disability benefits has been determined based on the Compensation Policies applicable in the Group. The present value of provisions for retirement and disability benefits and the related current and past service costs are measured by an independent actuary using the projected unit credit method. Revaluation of provisions for retirement and disability benefits is composed of the following elements:

• employment costs (including costs of current and past employment);
• net interest income or expense and
• actuarial gains or losses.

Employment costs and net interest income or expense are recognized in the income statement, while actuarial gains and losses are recognized in the statement of financial position and charged to revaluation reserve in the period of incurring.

Provisions for off-balance sheet liabilities
Guarantees granted and unconditional financial commitments are treated as an exposure bearing credit risk. While calculating provisions for off-balance sheet liabilities, the Bank uses the credit conversion factor (CCF). Detailed principles of recognizing impairment losses for exposures bearing credit risk, including loans and advances, have been presented in Note 5.5.7

5.5.14. Other assets

“Other assets” include in particular: prepaid expenses and accrued revenue, advance payments, payment cards settlements, inventory related to auxiliary activities of the Group and receivables from counterparties.
Accrued revenue is the revenue pertaining to the profit/loss of a given reporting period, receivable by the Group in a subsequent period, related to bank fees and commissions for keeping accounts and carrying out other banking activities.
Prepaid expenses are costs incurred in a given reporting period pertaining to the following reporting periods, in particular insurance costs, subscriptions and premiums for Guaranteed Employee Benefit Fund.
Receivables from contractors are recognized at fair value plus transaction costs (if any) in line with IAS 39.
Acquired or occurred inventories of tangible current assets are recognized in the accounting records at cost as at the date of acquisition or occurance.
Receivables are revalued based on the probability of their payment with recognition of an impairment loss, which is recognized in the income statement in other operating expense or commission expense.
Inventory is revalued based on its cost compared to the net realizable value. The write-down of inventory to its net realizable value is recognized in the income statement under “other operating expenses".

5.5.15. Other liabilities

Other liabilities include: provisions for administrative costs resulting from performances rendered for the Group by its counterparties, which will be settled in the following reporting periods, liabilities due to unused paid vacations, bonuses, advance payments received and other liabilities from counterparties, inter-bank settlements, settlements under public law and settlements with Poczta Polska due to substitution services. These items are recognized at amounts due.

5.5.16. Revenue recognition

Net interest income
For all financial assets and liabilities measured at amortized cost and interest-bearing financial assets classified as available for sale, intrest expense is recognized with the effective interest rate method under “Interest income” or “Interest expense”. When calculating an effective interest rate, the Group estimates cash flows including all contractual terms but without potential future losses related to irrecoverability of loans. If the Group changes estimated payments disbursed or received, it also adjusts the carrying amount of a given financial asset or liability. The adjustment is calculated using the original effective interest rate of the financial instrument and recognized as interest income or expense in the consolidated income statement.
Interest income from debt securities classified as held for trading or designated as measured at fair value through profit or loss at initial recognition is recognized in interest income.
For financial assets or a group of similar assets for which an impairment loss was recognized, interest income is calculated from the current amount receivable (i.e. their amount reduced by the impairment loss) with the use of the interest rate applied to discount future cash flows for the purpose of estimating the impairment loss amount.

Net fee and commission income
Fees and commissions, which do not constitute an integral part of the effective interest rate, i.e. those not accounted for using the effective interest method but in accordance with the straight-line method or recognized on a one-off basis in the income statement, are recognized in “Fee and commission income” or “Fee and commission expense”. Commissions on overdrafts are included in deferred revenue and accounted for using the straight-line method.
Commission income recognized on one-off basis includes:

• fees paid to post offices for concluded term deposit contracts are recognized in the income statement when incurred, provided that the contracts are independent from the (term) deposits;
• fees paid to post offices for conclusion of plenipotentiary agreements, provided they do not regard specific deposits but a variety of deposits, are recognized in the income statement when incurred;
• fees paid to post offices for cancellation of plenipotentiary agreements are recognized in the income statement when incurred;
• fees paid to post offices for disposition of accounts in the case of death are recognized in the income statement when incurred.

Revenue and expenses related to sales of insurance products
The Group generates bancassurance revenue on sales of insurance products in the banking channels. At the same time, when the insurance coverage is valid, the Group may provide additional services to insurance companies, in the form of post-sale service of insurance policies.
The Group recognizes the fee for offering insuarance products based on a professional judgment regarding the scope of sale: whether it is limited to the sales agency service, or whether the sales of insurance are linked to sales of credit products. The assessment is based on the economic contents of credit and insurance products offered. The purpose of the judgment is to economically separate revenue that constitutes:

• an integral part of a fee related to a credit product offered;
• a fee for agency services;
• a fee for additional services provided after sale of an insurance product.

Evaluation of a direct relation is based mostly on the following criteria:

• ability to purchase a credit product without an insurance product (a facility agreement unrelated to an insurance agreement);
• the average actual annual interest on each facility in the Group's portfolio classified as including insurance coverage or without an insurance component;
• the voluntary nature of insurance;
• client’s ability to provide an insurance policy issued by any insurer without the Group’s participation;
• profitability assessment of a credit product based on management reports including the performance as an agent selling insurance products;
• assessment of the sales of bancassurance products, i.e. the percentage share of credit products with insurance coverage in the number of credit facility agreements in the Group’s portfolio;
• number of resignations and amount of commissions refunded – broken down by loan type offered by the Group, insurance products and insurance groups; the level of insurance contracts continued after the initial term.

Analysis of the direct link between an insurance product and a credit facility results in division of bancassurance products, i.e. separation of the fair value of a loan offered and the fair value of an insurance products sold with the loan. If the Group acts as an agent, the receivable fee is divided into a portion classified as a component of amortized cost of credit recognized Interest income and a portion constituting the agent’s fee recognized under the fee and commission income. The fee is divided based on the identifiable portion of the fair value of the loan and the fair value of the agency service referred to the total of both amounts.
If it is probable that the Group will be obliged to provide further services during the life of the insurance contract, the commission or its part is deferred and recognized over time in line with the matching principle.
The fair value is determined as follows:

• agency service - based on market data involving the reference to prices and other market information generated by identical or comparable market transactions on insurance products sold separately from credit products;
• fair value of a credit facility - determining future principal and interest payments including future impairment losses of the fair value and its projected recovery, discounted with the market interest rate curve increased by current margins offered by the Group for a given loan type;
• with relation to the fee for other activities performed by the Group for the insurer in the insurance term, estimation of the fair value for allocation purposes based on analysis of costs incurred with relation to the service provision.

Additionally, the Group carries out reliable estimates of provisions for refunds, i.e. the amount that should reduce the Group’s fee for distribution of insurance products. The estimates of provisions for refunds are based on historical data regarding actual refunds of the fee in the past, and on the Group's projections of future trends. The provision for refunds is settled porportionally to the division of the fee between agency services and the integral part of the effective interest rate on a loan.
Insurance selling expenses are recognized proportionally to the income division into that recognized under the calculation of amortized cost (recognized as "Interest income”) and income recognized on a one-off basis as a fee due to agency services and disclosed as "Fee and commission expense”.
The Group recognizes the revenue and expense due to sale of bancassurance products related to credit facilities in the following manner:

• cash loans with insurance policy – from 6% to 17% of the revenue due to sale of bancassurance products related to cash loans is recognized on a one-off basis as commission income, while the remaining portion of the income is accounted for as interest income using the effective interest method or a simplified method during the credit financing period;
• mortgage loans with insurance policy – from 0% to 15% of the revenue due to sale of bancassurance products related to mortgage loans is recognized on a one-off basis as commission income, while the remaining portion of the income is accounted for as interest income using the effective interest method or a simplified method during the credit financing period.

Gain/loss on financial instruments measured at fair value through profit or loss and gain/loss on foreign exchange transactions
“Gain/loss on financial instruments measured at fair value through profit or loss and gain/loss on foreign exchange transactions” includes all gains and losses on the sale and gains or losses on fair value measurement of financial assets and liabilities designated as measured at fair value through profit or loss.
The item also includes a gain/loss on foreign exchange transactions, i.e. exchange gains and losses, both realized and unrealized, resulting from everyday measurement of foreign currency assets and liabilities at the average exchange rate of the National Bank of Poland applicable at the end of a reporting period.

Profit/loss on other financial instruments
“Gain/loss on other financial instruments”

• Gain/loss on sale of financial assets designated as available-for-sale (AVS) financial assets and the effects of settling gains or losses on financial assets recognized in the revaluation reserve and initially designated as AVS financial assets and then reclassified to HTM (held to maturity) investments settled using the effective interest rate method;
• Gain/loss on sale of securities designated as loans and receivables.

Employee benefit costs
Payments due to remunerations, premiums and paid vacations are recognized as “Employee benefit costs” in the period of employees’ employment.
Payments to defined pension plans, i.e. Social Insurance Institution, pension funds and Employee Pension Scheme constitute defined contribution plans and are recognized as expenses in “Employee benefit costs” once employees have performed services qualifying them as plan participants.

Other operating revenue and expense
Operating revenue and expense include items that are not directly related to the core operating activities of the entity.
Other operating revenue includes in particular gains on sale of fixed assets, damages and fines received, revenue due to collection of overdue and cancelled receivables and bad debts, reimbursement of collection costs, reversal of provision for future liabilities and sundry income of the Group.
Other operating expense includes mainly the costs of selling/liquidating fixed assets and intangible assets, costs of damages and fines, costs of receivables written off, impairment allowances for receivables from various debtors and other operating expense.

5.5.17. Taxes

Current tax
Current income tax liabilities and receivables for the current and prior periods are measured at projected amounts payable to tax authorities (for tax receivables - reimbursable) using tax rates and regulations valid as at the end of the reporting period, or regulations whose endorsement had been considered completed.
Income tax on items not recognized in profit or loss is recognized in other comprehensive income for items recognized there or directly in equity for items recognized directly in equity.

Deferred tax
For the purposes of financial reporting, deferred income tax is calculated using the balance sheet liability method based on temporary differences that occur as at the end of the reporting period between the tax value of assets and liabilities and their carrying amount recognized in the consolidated financial statements.
The deferred tax liability is recognized in relation to all taxable temporary differences, except where the deferred tax liability arises from initial recognition of goodwill or another asset or liability item in a transaction that is not a business combination and at the time of the transaction affects neither gross accounting profit/loss nor taxable profit (tax loss).
A deferred income tax asset is recognized for all deductible temporary differences, carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the above differences, assets and losses can be utilized except where except where the deferred tax asset relating to deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction affects neither accounting profit nor taxable profit (tax loss).
The carrying amount of the deferred tax asset is verified as at each balance sheet date and is reduced as appropriate, taking into account the reduction of the probability of achieving taxable income sufficient for the realization of the deferred tax asset in part or in whole. An undisclosed deferred tax asset is remeasured as at the end of each financial year and recognized up to the amount reflecting probable taxable income which will facilitate realization of the asset.
Deferred tax asset and liability are measured with the application of tax rates expected to be applicable in the period when the asset is realized or provision released, based on tax rates (tax regulations) applicable as at the end of the reporting period or rates whose endorsement had been considered completed.
Income tax on items not recognized in profit or loss is recognized in other comprehensive income for items recognized there or directly in equity for items recognized directly in equity.
The Group offsets its deferred tax assets and deferred tax liabilities only if it has an enforceable legal title to offset its current tax assets with liabilities and the deferred income tax is related to the same taxpayer and the same tax authority.

5.5.18. Equity

Share capital is recognized in the amount compliant with the Bank’s charter and the entry in the court register at the nominal value.
Other items of equity are recognized in the consolidated statement of financial positon by type and in accordance with the principles defined in legal regulations and the provisions of the Bank’s charter. Such items include:

• supplementary capital created from the share premium and mandatory 8% appropriation of the net profit and reclassification from the revaluation reserve;
• In line with the Banking Law of 29 August 1997 (uniform text: Journal of Laws of 2012, item 1376 as amended) (the “Banking Law”) and the Bank’s charter, the reserve capital is created from net profit distribution;
• the net profit for the reporting period and undistributed profit or uncovered loss from prior periods (presented jointly in “Retained earnings/Uncovered losses”);
• revaluation reserve.

 

5.5.19. Net earnings per share

Net earnings per share for a given period are calculated by dividing the net profit for the period by the weighted average number of shares in the period.
The Group does not present diluted earnings per share, because there are no potential ordinary shares which would dilute weighted average number of ordinary shares.

5.5.20. Contingent liabilities

The Bank concludes transactions that are not recognized as assets or liabilities in the statement of financial position when concluded but give rise to contingent liabilities. Contingent liability is:

• a possible obligation arising from past events whose occurrence shall be confirmed only upon occurrence of one or more uncertain future events not fully controlled by the Bank;
• an existing obligation arising from past events, which has not been recognized in the statement of financial position since the need to spend cash or other assets to fulfil the obligation is improbable or its amount cannot be reliably measured.

Provisions are established for off-balance sheet liabilities granted which bear the risk that the mandator will not fulfill contractual terms. Off-balance sheet liabilities include in particular credit lines and guarantees granted. Upon initial recognition, financial guarantee agreements are measured at fair value. Following the initial recognition, they are measured at the higher of:

• amount determined in line with IAS 37 and
• initial value decreased if appropriate by accumulated amortization charges recognized in line with IAS 18.

5.5.21. Company Social Benefits Fund

The Group has established a Social Benefits Fund in accordance with the Act on Social Benefits Funds of 4 March 1994 (uniform text: Journal of Laws of 2012 item 592 as amended). The purpose of the fund is to finance social benefits for employees. The fund’s liabilities comprise accumulated appropriations made by the Bank and Group entities to the Social Benefits Fund less non-refundable expenses from that fund.
The Group does not recognize Social Benefit Fund assets, as the entire Social Benefits Fund liabilities are expressed in cash accumulated on a separate bank account.
For the purposes of presentation in these consolidated financial statements the Group has set off Social Benefits Fund liabilities against assets, because they do not constitute the Group’s assets.

5.5.22. Measurement of items denominated in foreign currencies

The consolidated financial statements have been prepared in the Polish zloty (PLN), which is the functional currency of the Group. It is also the currency of the key business environment of the Group.
Foreign currency transactions are translated into the Polish zloty by reference to the exchange rate effective as at the date of the transaction.
As at the end of the reporting period, monetary assets and liabilities denominated in currencies other than the Polish zloty are translated into PLN at the average exchange rate effective as at the end of the reporting period and determined for the currency by the National Bank of Poland. Forex differences from translation are recognized in the consolidated income statement in “Gain/loss on financial instruments measured at fair value through profit or loss and gain/loss on foreign exchange transactions”. Non-monetary assets and liabilities recognized at historical cost in a foreign currency are recognized at the historical exchange rate effective as at the date of the transaction. Non-monetary assets and liabilities recognized at fair value in a foreign currency are translated by reference to the exchange rate effective as at the fair value measurement date.

5.5.23 Hedge accounting

The Group does not apply hedge accounting.