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Notes to the consolidated financial statements

36. Fair value of financial instruments

Download note 36 in XLS

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.
As at 31 December 2014 and 31 December 2013, the Group classified financial assets and liabilities measured at fair value in the statement of financial position as well as financial assets and liabilities which are not measured at fair value on an ongoing basis in the following manner:

  • Level I: financial assets/liabilities measured based on quoted (unadjusted) prices on active markets for identical assets or liabilities, available to the Group at the measurement date.
  • Level II: financial assets/liabilities measured based on input data other than quoted prices, as specified for Level I, observable for an asset or liability either indirectly or directly.
  • Level III: financial assets/liabilities measured based on non-observable input data concerning an asset or liability.

A. Financial instruments which are not measured at fair value in the consolidated statement of financial position
The main classes of financial assets and liabilities which are not measured at fair value in the consolidated statement of financial position are items measured at amortized cost or historical cost, such as:

  • originated loans, advances and other receivables not held for trading;
  • financial assets held to maturity;
  • financial liabilities not held for trading.

Cash in hand, deposits with the Central Bank and receivables from other banks
This item includes the Group’s cash in current accounts with other banks and debt securities of banks classified as loans and receivables.
The fair value of current receivables and term deposits of the Group, maturing within one year, and other receivables is consistent with the carrying amount.
Fair value of debt securities issued by banks, classified as loans and receivables, is measured by discounting future payments from these instruments using spread determined at the transaction date. Debt securities with embedded call option are measured with the assumption that the call option will be realized in the nearest possible term. Call option embedded in a security is measured at the end of the reporting period by way of determining the difference between security measurement assuming the realization of the call option in the nearest possible term and discounted cash flows from the security held to maturity.

Loans and advances granted to clients
“Loans and advances granted to clients” include loans and advances as well as debt securities classified as loans and receivables in accordance with IAS 39.
The fair value of loans and advances is determined by calculating the carrying amount - fair value adjustment for each loan. The adjustment was calculated as the difference between the total future cash flows related to such loan, discounted using the market interest rate (in line with the yield curve based on WIBOR, FRA and IRS quoted) increased by the market product markup and the value of the loan not matured as at the end of the reporting period. The said future cash flows included those related to the principal (as specified in the agreement) and those related to interest, calculated on in line with the market yield curve based on WIBOR, FRA and IRS quoted at the end of the reporting period, increased by individual contract markup for each loan. The market product markup has been determined as the average effective principal-weighted markup for a similar group of products extended in the three-month period immediately preceding the end of the reporting period. The carrying amount adjustment to the fair value has been determined for facilities, whose future cash flows are predictable, while for other exposures, such as overdrafts, impaired exposures with impairment loss recognized, the adjustment was assumed at zero.
Fair value of corporate debt securities is measured by discounting future payments from these instruments using spread determined at the transaction date. Securities with embedded call option are measured with the assumption that the call option will be realized in the nearest possible term. Call option embedded in a security is measured at the end of the reporting period by way of determining the difference between bond measurement assuming the realization of the call option in the nearest possible term and discounted cash flows from the bond held to maturity.

Investment financial assets held to maturity
The fair value of treasury bonds is determined directly based on prices quoted on the active market.
Fair value of other debt securities classified as financial assets held to maturity, is measured by discounting future payments from these instruments using spread determined at the transaction date. Debt securities with embedded call option are measured with the assumption that the call option will be realized in the nearest possible term. Call option embedded in a security is measured at the end of the reporting period by way of determining the difference between the debt security measurement assuming the realization of the call option in the nearest possible term and discounted cash flows from the debt security held to maturity.
The tables below present the differences between the carrying amount (carrying amount of interest-bearing financial assets and liabilities has been presented with interest accrued) and the estimated fair value of financial assets and liabilities of the Group as well as fair value hierarchy classification of financial assets and liabilities which are not measured at fair value in the consolidated statement of financial position of the Group.

Other financial assets/liabilities not carried at fair value in the consolidated statement of financial position
In case of financial assets and liabilities recognized at the amount due less impairment loss, the Group assumes that the fair value equals the carrying amount due to the nature of such groups of assets, e.g. short term to maturity, unique nature of the instrument. This concerns, in particular, cash and monetary assets, current receivables, current liabilities and liabilities under finance leases. The fair value of term deposits of banks, maturing within one year, and other financial liabilities is equal to the carrying amount.

Liabilities to clients
The fair value of “Liabilities to clients” was determined by calculating the carrying amount - fair value adjustment for each term deposit. The adjustment was calculated as the difference between the total future cash flows related to the principal and interest accrued from the end of the reporting period to the maturity date, discounted using the market interest rate (in line with the yield curve based on WIBOR, FRA and IRS) increased by the applicable product markup and the carrying amount of the deposit balance. The applicable product markup has been determined as the average markup for a similar group of products extended in the three-month period immediately preceding the end of the reporting period as the average difference between the effective interest rate of the deposit and the base rate as of the end of the reporting period. The carrying amount adjustment to the fair value has been determined for deposits, whose future cash flows are predictable, while for other exposures, such as term deposits maturing within up to 3 months of the balance sheet date, the adjustment was assumed at zero.

Subordinated liabilities and liabilities arising from issue of debt securities
Fair value of the subordinated loan and liabilities arising from issued debt securities is measured by discounting future payments from these instruments using spread determined at the transaction date.

The tables below present the differences between the carrying amount (carrying amount of interest-bearing financial assets and liabilities has been presented with interest accrued) and the estimated fair value of financial assets and liabilities of the Group as well as fair value hierarchy classification of financial assets and liabilities which are not measured at fair value in the consolidated statement of financial position of the Group.

 




B.
Financial instruments which are measured at fair value in the consolidated statement of financial position

 

The table below presents classification of financial assets and liabilities which are measured at fair value based on the fair value hierarchy in the consolidated statement of financial position.



No reclassifications between Level I and Level II took place in the analyzed period. No items were reclassified from or to Level III, either.
As the scale of derivative transactions, which are entered into with banks which have been assigned investment rating, is inconsiderable, the Group’s measurement of derivatives does not take into account the counterparty credit risk or own credit risk, which the Group believes exerts a marginal effect on measurement of its derivatives.
Reconciliation of the change in the balance of Level III financial instruments in 2014, whose fair value is determined using measurement methods based on non-observable input data, has been presented below.



Given a rise in the credit spread by 1 b.p., the potential effect on a change in the fair value of Level III financial instruments would be PLN -2 thousand, whereas given a drop in the credit spread by 1 b.p., the potential effect would be PLN 2 thousand.
Inputs used for fair value measurement of assets and liabilities have been presented in the table below.


“Investment financial assets available for sale” in the consolidated statement of financial position present the Group’s equity instruments with the carrying amount of PLN 8 thousand, which are measured at cost as their fair value may not be measured reliably. Such instruments are not subject to the fair value hierarchy analysis performed for investment financial assets available for sale.

 

 

 

Annual Report 2014 - Bank Pocztowy