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Notes to the consolidated financial statements

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37.2 Financial instruments which are measured at fair value in the statement of financial position

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

In the period covered by these consolidated financial statements, no reclassification between Level I and Level II occurred.  No items were reclassified from or to Level III, either.

Following the settlement of the sale of shares in Visa Europe, as at 31 December 2016 the Bank held preference C series shares convertible to ordinary A series shares in Visa Inc., which constituted a portion of consideration for the shares in Visa Europe.  Since 15% discount was applied when measuring the preference C series shares convertible to ordinary A series shares in Visa Inc. compared to market prices of ordinary A series shares due to limited transferability of preferred C series shares and the risk of conversion rate adjustment, the Bank has classified these shares to Level III. 

As the scale of derivative transactions which until June 2015 were entered into with banks with investment rating only and which have been concluded mostly through KDPW CCP clearing house since July 2015 (IRS, OIS and FRA transactions denominated in PLN) , 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 exert a marginal effect on measurement of its derivatives.

Reconciliation of the change in the balance of Level III financial instruments in 2016 and 2015, 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 debt securities as at 31 December 2016 would be PLN -1 thousand, whereas given a drop in the credit spread by 1 b.p., the potential effect would be PLN 1 thousand.

As at 31 December 2016, for Level III equity instruments denominated in USD, a 1% rise in the USD/PLN rate would have the potential effect on a change in their fair value of PLN 39 thousand, whereas a 1% drop in the USD/PLN rate would have the potential effect of PLN -39 thousand.

Given a rise in the credit spread by 1 b.p., the potential effect on a change in the fair value of Level III debt securities as at 31 December 2015 would be PLN -1 thousand, whereas given a drop in the credit spread by 1 b.p., the potential effect would be PLN 1 thousand.

As at 31 December 2015, for Level III equity instruments denominated in EUR, a 1% rise in the EUR/PLN rate would have the potential effect on a change in their fair value of PLN 148 thousand, whereas a 1% drop in the EUR/PLN rate would have the potential effect of PLN -148 thousand.

Inputs used for fair value measurement of assets and liabilities have been presented in the table below.

The Group presents equity instruments with the fair value of PLN 14,733 thousand as at 31 December 2015 and of PLN 3,935 thousand as at 31 December 2016 in “Investment financial assets available for sale” in the consolidated statement of financial position. The details of the measurement of these instruments have been presented in note 25.

As at 31 December 2016 and 31 December 2015, the item “Investment financial assets available for sale” in the consolidated statement of financial position presents the Group’s equity instruments with a carrying amount of, respectively, PLN 84 thousand and PLN 81 thousand, which are measured at cost as their fair value cannot be measured reliably. Such instruments are not subject to the fair value hierarchy analysis performed for investment financial assets available for sale.