Financial results

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 and hedging instruments, which are measured at fair value.

These consolidated financial statements have been presented in Polish zlotys (PLN) and all figures are in PLN thousand (PLN ‘000), 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 from 1 January 2015

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 2015:

• Amendments to various standards “Annual Improvements to IFRS (Cycle 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 did not materially affect the consolidated financial statements

• IFRIC Interpretation 21 “Levies” – endorsed by the EU on 13 June 2014 (applicable to annual periods beginning on or after 17 June 2014).

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 has analyzed the requirements of the new standard. Application of the interpretation will not considerably affect the annual consolidated financial statements.

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

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

• IFRS 11 “Joint arrangements” - Accounting for Acquisitions of Interests in Joint Operations (applicable to annual periods starting on or after 1 January 2016).
  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.
• Revised IAS 1 “Presentation of Financial Statements” – Disclosure Initiative (applicable to annual periods beginning on or after 1 January 2016).
  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. Moreover, the amendments explain that entities should apply professional judgment to determine the place and sequence 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 (applicable to annual periods beginning on or after 1 January 2016).
  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 (applicable to annual periods beginning on or after 1 January 2016).
  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.
• Amendments to IAS 19 “Employee Benefits” – defined benefit plans: employee premiums (applicable to annual periods beginning on or after 1 February 2015).
  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 of 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.
• Revised IAS 27 "Separate Financial Statements" – Equity Method in Separate Financial Statements (applicable to annual periods beginning on or after 1 January 2016).
  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 affect the consolidated financial statements.
• Amendments to various standards “Annual Improvements to IFRS (Cycle 2010-2012)” - applicable to annual periods beginning on or after 1 February 2015.

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.

• Amendments to various standards “Amendments to IFRS (Cycle 2012-2014)” - resulting from the annual quality improvement of IFRS (IFRS 5, IFRS 7, IAS 19 and IAS 34) primarily with a view to removing inconsistencies and clarifying wording (applicable to annual periods beginning on or after 1 January 2016).
  
  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.

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 2015 had not yet been adopted for use in the EU:

• IFRS 9 “Financial Instruments” – published on 24 July 2014 replaces IAS 39 “Financial Instruments: Recognition and Measurement” (applicable to annual periods beginning on or after 1 January 2018).

      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. This consistent approach supersedes the requirements defined in IAS 39. The new approach also introduces a unified impairment model applicable to all financial instruments.

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 profit or loss arising from changes in own credit risk related to liabilities designated for fair value measurement. The change implies that gains on liabilities resulting from deterioration in own risk position of the entity are not recognized in profit or loss.

For IFRS 9, application of the standard with regard to classification and measurement of financial instruments and recognition of impairment losses on financial instruments and hedge accounting 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” (applicable to annual periods beginning on or after 1 January 2016).

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 has 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” (applicable to annual periods beginning on or after 1 January 2018);

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 has analyzed the requirements of the new standard. Application of the standard will not materially affect the consolidated financial statements.

• IFRS 16 “Leases” (applicable to annual periods beginning on or after 1 January 2019).

Under IFRS 16 the lessee recognizes the right to use an asset and a lease liability. The right to use the asset is treated similarly to other non-financial assets and is depreciated. Lease liabilities are initially measured at the present value of future lease payments due in the lease period, discounted using the lease rate if it can be readily determined. If that rate cannot be readily determined, the lessee shall use their incremental borrowing rate. Leases are classified by lessors in accordance with IAS 17 - as an operating lease or a finance lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of the underlying asset. Otherwise a lease is classified as an operating lease. In finance lease the lessor finance income over the lease term of a finance lease, based on pattern reflecting a constant periodic rate of return on the net investment. A lessor recognizes operating lease payments as income on a straight-line basis, or if more representative of the pattern in which benefit from use of the underlying asset is diminished, another systematic basis.

The new standard will affect the method of recognition, measurement and disclosure of assets used under operating lease and corresponding liabilities in the consolidated financial statements of the Group acting as a lessee.

• 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 (applicable to annual periods beginning on or after 1 January 2016).

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 vehicles: consolidation relief (applicable to annual periods beginning on or after 1 January 2016).

Amendments to IFRS 10, IFRS 12 and IAS 28 introduce explanations regarding settlement of investment entities. Under certain circumstances, some exemptions are possible in this respect.

The Group has analyzed amendments to these standards. The amendments will not materially affect the consolidated financial statements

• Amendments to IAS 7 “Statement of Cash Flows” – Disclosure Initiative (applicable to annual periods beginning on or after 1 January 2017).

Amendments to IAS 7 are intended to improve information provided to users of financial statements about an entity's financing activities.  The amendments require that the entity make disclosures which will enable users of financial statements to assess changes in liabilities resulting from financing activities, including those resulting from cash flows and non-cash flows.

The Group has analyzed amendments to this standard. The amendments will not materially affect the consolidated financial statements

• Amendments to IAS 12 “Income taxes” – Recognition of Deferred Tax Assets for Unrealized Losses (applicable to annual periods beginning on or after 1 January 2017);

Amendments to IAS 12 discuss recognition of deferred tax assets related to debt instruments measured at fair value.

The Group has analyzed amendments to this standard. 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 2015 to 31 December 2015 and include comparable data:

• for items of the consolidated statement of financial position as at 31 December 2014;
• 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 2014 to 31 December 2014.

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 2015.

According to the Management Board of the Bank, as at the date of approval of these consolidated financial statements 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 2015 to 31 December 2015 and in the comparable period no operations were discontinued in the Capital Group.

Consolidation principles

These consolidated financial statements are comprised of the financial statements of the Bank and financial statements of its subsidiaries for the twelve-month period ended 31 December 2015.

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.

The consolidated financial statements offset (eliminate) the carrying amount of the parent's investment in each subsidiary and the parent's portion of equity in each subsidiary corresponding to the interests held by the parent. 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.