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Notes to the consolidated financial statements

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5.6 Summary of key accounting principles

5.6.1. 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 increased or decreased 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 a 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. On the transaction date, a relevant asset is entered in the balance sheet record. 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 time frame established generally by regulation or convention in the marketplace concerned.

5.6.2. 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 positive valuation as at the measurement date are disclosed in the consolidated financial statements as assets, while those with negative value from measurement - as liabilities. Fair value changes of derivatives held for trading are recognized in the 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 managed 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. Changes in the fair value are recognized in consolidated income statement under “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 under “Interest income” or "Interest expense", respectively.

Information regarding the balance of financial assets and liabilities held for trading is presented in Note 22.

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 rate method.

The settlement of amortized cost using the effective interest rate method is recognized under “Interest income” in consolidated income statement. Impairment losses are recognized in the income statement under “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 precisely 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. It is assumed that cash flows and the expected life of a group of similar financial instruments can be reliably estimated.  In rare cases, when cash flows or the expected life of a financial instrument / group of financial instruments cannot be reliably estimated, calculations are based on cash flows arising from a contract covering the full contractual life of a financial instrument / group of financial instruments.

The Bank applies simplified methods (in particular, the sum-of-the-year’s digits method), 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.

Data regarding the balance of items classified as financial assets held to maturity are presented in Note 25.

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 as measured at fair value through profit or loss upon initial recognition;
• financial asses that the Group designated as available for sale upon initial recognition; 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. Settlement of the depreciated cost including the effective interest method is recognized under “Interest income” in consolidated income statement.  Impairment losses on items other than “Other assets” are recognized under “Net impairment losses” in consolidated income statement.

Information on the balance of items classified as loans and receivables is presented in Notes 20-21, 24 and 28.

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; gains and losses on fair value changes are recognized in consolidated statement of other comprehensive income (which is accumulated under “Revaluation reserve”).  Revaluation reserve is accounted for in 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 income” in consolidated income statement. Dividends on equity instruments are recognized in consolidated income statement under “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 consolidated income statement under “Net impairment losses” and cannot be reversed.

Information regarding the balance of financial assets available for sale is presented in Note 25.

Financial assets carried at cost

Financial liabilities other than those measured at fair value through profit or loss, with measurement effects charged to consolidated income statement are measured at amortized cost 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.

Information regarding the balance of items classified as financial liabilities measured at amortized cost is presented in Notes 29-33 and 35.

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.

Information regarding the value of off-balance sheet liabilities are presented in Note 40.

5.6.3. Reclassification of financial assets

The Group may reclassify a financial asset from the available-for-sale class to held-to-maturity if it intends and can held it until its maturity date.  Such an asset shall be reclassified at fair value as at the reclassification date, and the fair value shall become its new amortized cost.  Any gains and losses related to such asset, previously charged to revaluation reserve, are amortized and recognized in consolidated income statement over the remaining maturity period using the effective interest method. 

Information regarding the value of financial assets reclassified in previous years and still held by the Group is presented in Note 25.

5.6.4. 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:

• its rights to cash flows generated by such asset have expired;
• 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:

1. it has transferred substantially all risks and rewards of ownership of the financial asset; or
2. 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 the extent the Group holds its exposure in a 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 in relevant on-balance sheet amounts arising from the change is recognized in consolidated income statement.

5.6.5. Repurchase 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 rewards arising from a given asset. Liabilities to a counterparty are accounted for as “Liabilities from securities sold under repo and sell-buy-back agreements”.

For securities with the commitment to resell them (reverse repo, buy-sell-back transactions) where counterparties retain substantially all risks and rewards arising from these securities, receivables arising from the concluded transactions are recognized as “Receivables from securities purchased under reverse repo and 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 price is treated as interest expense/income and settled over the life of the agreement using the effective interest method.

Information regarding the balance of receivables/liabilities arising from securities purchased/sold under sell-buy-back and repo/buy-sell-back and reverse repo transactions is presented in Note 21.

5.6.6. Fair value of financial instruments

The fair value is a price the Group would receive for the sale of an asset or pay for the transfer of a liability in a transaction carried out on an arm’s 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).

The 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 for its estimation are described in detail in Notes 25 and 37.

5.6.7. 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 may include 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.

Impairment indication regarding individually material exposures are divided into two groups:

• Quantitative (obligatory):
  • delay in payment of the principal amount or interest is over 90 days;
  • for government and self-government sector, the delay in payment of the principal amount or interest is over 30 days;
• Qualitative:
  • termination of a credit facility/loan agreement;
  • application (including that filed by the bank) for instigation of collection, liquidation, bankruptcy or remedial proceedings with regard to the debtor;
  • debt restructuring;
  • partial cancellation of debt, arrangement, composition,
  • debtor’s questioning the balance sheet credit exposure in court proceedings;
  • unknown residence or undisclosed assets of a counterparty;
  • obtaining information that a bankruptcy or other reorganization procedures have been instigated with a counterparty;
  • significant deterioration in the customer’s rating or scoring indicating material financial difficulties of a counterparty based on evaluation of its financial standing carried out in process of credit exposure monitoring, resulting in a change in classification of a given exposure;
  • disappearance of an active market for a given loan exposure due to financial difficulties, if, facing a significant deterioration of issuer’s financial standing (a possible bankruptcy), the liquidity of the related assets is so low that it disallows their pricing; 
  • exposure classified as “at risk” (i.e. risk categories “substandard”, “doubtful”, “loss”) according to the “Principles of monitoring and classification of credit exposures to consumers and institutional clients" – for all exposures except for consumer mortgage loans. For consumer mortgage loans classification to “loss” is the only indication of impairment. Other classifications in the “at risk” group do not trigger recognition of impairment. Additionally, indications resulting from borrower’s classification in line with the “Principles of monitoring and classification of credit exposures to consumers and institutional clients" do not apply to restructured exposures, due to a different grace period;
  • obtaining information about an event that may affect the projected cash flows.

Early Warning Signals observed over two consecutive monitoring periods (excluding seasonality and non-recurring events) along with other available information may provide objective evidence (indication) of impairment.  Typical Early Warning Signals:

• Concerning relations with the Bank / other banks:
  • a significant drop in the number of transactions on the debtor’s current account;
  • a significant increase in the use of overdraft facilities;
  • current account overdraft;
  • recurring delays in payments from key counterparties or arising from issued invoices;
  • delay or failure to pay capital installments or interest on a loan or advance occurring over last 3 months or motioning for extension of payment deadlines;
  • motioning for a release or change of collateral;
  • breaching covenants of loan agreements;
  • default under other material contract terms resulting in a drop in estimated future cash flows;
  • failure or delay in delivery of documents regarding financial and economic standing of a customer;
  • a customer providing false statements and manufactured documents;
  • difficulties in communication with a debtor, arrogance and non-cooperation;
  • debtor’s consent to accept worse loan terms in other banks, insisting on taking a loan;
  • other banks reducing or refusing funding of a customer;     
  • obtaining information regarding loans granted by other banks;
  • customer’s account being seized.
• Signals related to customer’s current operations:
  • a case filed against a debtor (e.g. in relation to fraud or negligence) or explanatory proceedings carried out by authorized bodies;
  • extending payment deadlines for non-bank liabilities (e.g. taxes);     
  • negative market signals regarding a debtor (e.g. from rating agencies);
  • debtor’s key products facing the final stage of business life or suffering from bad reputation;
  • a debtor changing its core business;
  • changes on key management positions; material changes in shareholding structure;
  • significant organizational changes;            
  • poor relations with employees; a threat of strike;
  • a high risk of events generating high costs (environmental damage, repairs, product withdrawal, complaints);    
  • a material increase in off-balance sheet liabilities;
  • reduced liquidity;           
  • reduced sales;
  • modified sales terms;
  • increase in sales revenue accompanied with decrease in profit;        
  • increase in financial expenses;
  • reduced depreciation rates;         
  • extended turnover cycles;
  • parent’s decisions with an adverse effect on the debtor (e.g. regarding pricing policy);
  • occurrence of negative signals regarding an entity related to a customer;
  • significant changes in the asset structure;
  • a material increase in current debt in banks;
  • a large share of borrowings in the funding of customer’s operations;              
  • qualified or emphasis-of-matter opinions issued by a certified auditor with regard to customer’s financial statements;
  • changing an auditor for the purpose of auditing the latest financial statements;           
  • high probability of bankruptcy or other financial reorganization of the counterparty;
  • major financial difficulties of the counterparty (based on a negative assessment of the financial position of the debtor indicated in the monitoring process);
  • significant deterioration in rating analyses or scoring;
  •  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;
  • adverse changes in the internal organizational structure or the management structure;
  • loss of sales markets or key customers;
  • significant drop in market prices of collateral;
  • significant court dispute lost, which may lead to considerable costs;
  • an active market of a given balance sheet credit exposure disappearing due to financial problems;
  • other factors which may affect expected future cash flows.
• Signals related to general economic standing:
  • information regarding adverse changes in the industry, socio-economic policy or legal regulations;
  • deterioration in macroeconomic factors affecting the obligor’s industry;
  • change in regulations adversely affecting the borrower’s operations.

For individually immaterial loans analyzed on a collective basis, the Group identifies the following impairment indications:

• Quantitative (measurable):
  • delay in payment of the principal amount or interest is over 90 days;
  • termination of a credit facility/loan agreement;
  • the exposure with indications of a fraud;
  • the restructured exposure;
  • the exposure is subject to collection procedures;
  • information about material financial difficulties faced by a customer, e.g.
• instigation of bankruptcy proceedings or announcing bankruptcy; 
• financial problems of a retail customer (a lost job, an income decrease, a debt increase, payment defaults in other banks);
• instigation of enforcement proceedings against a counterparty;
• significant deterioration in the customer’s rating or scoring indicating material financial difficulties of a counterparty based on evaluation of its financial standing carried out in process of credit exposure monitoring, resulting in a change in classification of a given exposure;
  • exposure classified as “at risk” (i.e. risk categories “substandard”, “doubtful”, “loss”) according to the “Principles of monitoring and classification of credit exposures to consumers and institutional customers" – for all exposures except for consumer mortgage loans. For consumer mortgage loans classification to “loss” is the only indication of impairment. Other classifications in the “at risk” group do not trigger recognition of impairment. Additionally, indications resulting from borrower’s classification in line with the “Principles of monitoring and classification of credit exposures to consumers and institutional customers" do not apply to restructured exposures, due to a different grace period;
  • obtaining information about an event that may affect the projected cash flows.
• Qualitative (evaluated by experts):
  • 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);
  • 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 or adverse changes in the standing of a given industry that impact a group of counterparties).

Early Warning Signals observed over two consecutive monitoring periods (excluding seasonality and non-recurring events) along with other available information may provide objective evidence (indication) of impairment. 

Receivables from other banks; loans and advances granted to customers

For receivables from other banks and loans and advances granted to customers 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 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 decreases or increases as a result of an event following impairment recognition, the previously recognized loss is increased or decreased through an adjustment to 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 all 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 banking 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. Backtesting based on historical data is also applied to LIP, which currently amounts to 9 months for consumer mortgage loans and to 6 months for other homogenous portfolios of the Bank. If necessary, historical data regarding the losses applied in calculating risk ratios, 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.

Detailed information regarding impairment of these financial assets is presented in Notes 20, 24 and 47.1.

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 consolidated income statement under “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 consolidated income statement under “Net impairment losses”.

The Group has not identified impairment of assets classified as held to maturity.

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.

If an impairment of a financial asset occurs, accumulated losses, constituting the difference between the acquisition cost and the current fair value, reduced by any impairment losses on the asset previously recognized in consolidated income statement, are reclassified from revaluation reserve to “Net impairment losses” in consolidated income statement.

Impairment losses on investments in equity instruments are not reversed through consolidated income statement. An increase in their fair value following impairment loss recognition is recognized directly in consolidated statement of 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 consolidated income statement, the reversed impairment loss amount is recognized in consolidated income statement under “Net impairment losses”.

The Group has not identified impairment of assets classified as held to maturity.

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.

The Group has not identified impairment of financial assets measured at cost.

5.6.8. Hedge accounting

The Group applies hedge accounting principles if the following criteria defined in IAS 39 have been met:

• at the inception of the hedge there is formal designation and documentation of the hedging relationship and the risk management objective and strategy for undertaking the hedge. The documentation covers identification of the hedged item or transaction, the hedging instrument and the nature of the risk hedged. It also covers an assessment of the hedging instrument’s effectiveness in offsetting the exposure to changes in the fair value of the hedged item or cash flows attributable to the risk hedged in time of inception of the hedge and during the entire period of the hedge;
• the Group expects that the hedge will be highly effective in offsetting changes in cash flows and in the fair value, consistently with the originally documented risk management strategy for that particular hedging relationship;
• for cash flow hedges, a forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cash flows that could ultimately affect consolidated income statement;
• the effectiveness of the hedge can be reliably measured, i.e. the fair value or cash flows of the hedged item or of the hedging instrument can be reliably measured;
• the hedge is assessed on an ongoing basis and determined actually to have been highly effective throughout the financial reporting periods for which the hedge was designated.

In the year ended 31 December 2016 the Group applied cash flow hedge accounting. In the years ended 31 December 2016 and 31 December 2015 the Group did not apply fair value hedge accounting.

Macro cash flow hedges

Cash flow hedges hedge against the risk of cash flows fluctuation, which:

• is attributable to a particular risk associated with a recognized asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction;
• may affect consolidated income statement.

Cash flow hedges are recognized as follows: the portion of gains/losses related to the hedging instrument constituting an effective hedge is recognized in consolidated statement of other comprehensive income, while the ineffective portion of gains/losses related to the hedging instrument is recognized under “Gain/loss on financial instruments measured at fair value through profit or loss and gain/loss on foreign exchange transactions”.

Gains and losses recognized in consolidated statement of other comprehensive income (effective hedge) upon recognition of financial assets and liabilities resulting from the hedged transaction are reclassified to consolidated income statement in the period or in periods in which the hedged cash flows affect consolidated profit or loss.  However, if the loss or its portion recognized in other comprehensive income is not likely to be recovered in the future period(s), the irrecoverable amount is reclassified to consolidated profit or loss.

Interest on hedging instruments is recognized in the consolidated income statement in “Interest income” or "Interest expense", respectively.

Detailed information regarding individual hedging transactions is presented in Note 23.

5.6.9. 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).

Detailed information regarding cash and cash equivalent items is presented in Note 39.

5.6.10. 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 also includes the 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 under “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 derecognition period under other operating revenue or other operating expenses, respectively.

Fixed assets under construction or assembly are carried at cost reduced by impairment, if any.  Fixed assets under construction are not depreciated until their construction is completed and until they are commissioned.

Information regarding the balance of property, plant and equipment is presented in Note 26.

5.6.11. Intangible assets

Intangible assets acquired in a separate transaction are initially measured at acquisition price or manufacturing cost. After 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 under “General and administrative expense”.

Gain or loss on derecognition of intangible assets from the statement of financial position is recognized in the 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 consolidated 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 above criteria allowing its recognition in the consolidated statement of financial position. If costs of R&D works related to internally produced intangible assets cannot be recognized in the balance sheet, they are recognized in consolidated 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.

Information regarding the balance of intangible assets is presented in Note 27.

5.6.12. Leases

Group as a lessee

The Group is a party to operating lease agreements whereby the lessor retains substantially all the risks and rewards incidental to ownership of the underlying asset.

During the lease period, operating lease fees and subsequent lease installments are recognized under “General and administrative expenses” in consolidated income statement using the straight line method.

The Group as a lessor

The Group is a party to operating lease agreements under which it gives other parties the right to use fixed assets or derive benefits from them over an agreed term in return for a payment.

Payments arising from operating leases are recognized under “Other operating revenue” in consolidated income statement in accordance with the straight-line method over the lease term.

Information regarding the value of leases is presented in Note 38.

5.6.13. 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 than 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 on assets are recognized in the consolidated income statement, excluding assets already remeasured in which case the remeasurement is charged to equity. In such a case, impairment losses are also recognized under equity up to the previous 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 such an indication exists, the Group estimates the recoverable amount of the asset or a cash-generating unit. Impairment loss is reversed only when the estimations used for determining the recoverable amount of the asset have changed since the last impairment loss recognition. If such a case, the carrying amount of the asset is increased to its recoverable amount.

The increased amount cannot exceed the carrying amount of an asset that would be determined (including depreciation) had no impairment been recognized on that asset in prior years. 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.

5.6.14. 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 constructive 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 provisions. The Group has recognized provisions for all estimated losses. As a rule, estimated term of provisions for disputes exceeds one year.

Information regarding provisions for disputes is presented in Note 34.

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 consolidated income statement, while actuarial gains and losses are charged to revaluation reserve in the period in which they were incurred or earned.

Information regarding provisions for retirement and disability benefits is presented in note 34.

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 Group 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 5.6.7

5.6.15. Other assets

“Other assets” include mostly costs brought forward, accrued income, advance payments, settlements on payment cards, inventories related to auxiliary operations of the Group and receivables from counterparties.

Accrued income is the income 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 and subscriptions.

Receivables from contractors are recognized at fair value plus transaction costs (if any) in line with IAS 39.

Inventory of property, plant and equipment acquired or gathered is recognized in the accounting records at cost as at the date of acquisition or obtaining.

Receivables are revalued based on the probability of their payment with an impairment loss recognized in the consolidated income statement in “Other operating expenses” or “Net fee and commission income”.

Revaluation of inventory is based on the cost of inventory and its net realizable value. The write-down of inventory to its net realizable value is recognized in the income statement under “Other operating expenses".

Information regarding the value of other assets is presented in Note 28.

5.6.16. 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.

Information regarding the value of other liabilities are presented in Note 35.

5.6.17. Recognition of income and expenses

Net interest income

For all financial assets and liabilities measured at amortized cost and interest-bearing financial assets classified as available for sale, interest expense is recognized with the effective interest 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 “Interest 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.

As regards financial assets or a group of similar assets for which an impairment loss was recognized, interest income calculation is based on the current amount receivable (i.e. their amount reduced by the impairment loss) using the interest rate applied to discount future cash flows for the purpose of estimating the impairment loss amount.

Information regarding the value of net interest income is presented in Note 7.

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 consolidated profit or loss upon the provision of a given service, are recognized in “Fee and commission income” or “Fee and commission expenses”. Commissions on overdrafts are included in deferred income and accounted for using the straight-line method.

Commission income and expenses recognized on the one-off basis in consolidated income statement upon the provision of a given service include:

• commissions for maintaining current accounts, performing money transfers, standing orders, payment orders and cash payments;
• fees and commissions for cash card service;
• fees paid to post offices for concluded term deposit contracts, 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;
• fees paid to post offices for cancellation of plenipotentiary agreements;
• fees paid to post offices for disposition of accounts in the case of death. 

Information regarding the value of net interest income is presented in Note 8.

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.

For insurance products, where the Group receives a fee calculated as a percentage rate of an insurance premium charged upfront for the entire insurance period with the right to cancel the insurance coverage and to receive the overpaid premium at any time retained by the customer, the Group recognizes the fee for offering insurance products based on a professional judgment regarding the scope of sale: whether it is limited to the agency sale, or whether the sale of insurance is linked to the sale of credit products. The evaluation is based on the economic substance 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:

• checking whether a given credit product is always offered along with an insurance product, i.e. whether both transactions are concluded at the same moment or sequentially (i.e. when each subsequent transactions results from the preceding one); 
• the average actual annual interest on each credit product in the Group's portfolio classified as including insurance coverage or without an insurance component;
• the voluntary nature of insurance;
• the customer’s ability to provide an insurance policy issued by any insurer without the Group’s participation;
• the profitability assessment of a credit facility based on management reports including the performance as an agent selling insurance products;
• the 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 credit product offered by the Group, insurance products and insurance groups; the level of insurance contracts continued after the original term.

Analysis of the direct link between an insurance product and a credit product results in dividing bancassurance products, i.e. separating the fair value of a credit product offered from the fair value of an insurance product sold along with it. If the Group acts as an agent, the fee is divided into a portion classified as a component of amortized cost of credit recognized as “Interest income” using the sum-of-the-year’s digits method (which produces results significantly different from those of interest effective method-based calculation) 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 credit product 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 facilities;
• fair value of a credit product - determining future principal and interest payments including future impairment losses and its projected recovery, discounted with the market interest rate curve increased by current margins offered by the Group for a given loan type;
• as regards 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 proportionally to the division of the fee between agency services and the adjustment of the effective interest rate on a credit product.

Insurance selling expenses are recognized proportionally to the income division into that recognized under the calculation of amortized cost using the sum-of-the-year’s digits method (which produces results significantly different from those of interest effective method-based calculation) under “Interest income” and income recognized on a one-off basis as a fee due to agency services and disclosed as "Fee and commission expense”.

In the case of mortgage loans offered along with insurance products, the Group recognized from 0% to 12.92% of income and expenses on the sale of insurance products related to the mortgage loans (prior to calculating the provision for fee reimbursement by the Group) on a one-off basis as commission income, while the remaining portion was recognized over the economic useful life of a loan under “Interest income” using the the sum-of-the-year’s digits method and under “Fee and commission income” on the straight-line basis.

Bancassurance products related to credit facilities or other bank products, where the insurance premium paid by the customer and the Group's fee are settled on a monthly basis and the customer may cancel insurance coverage at any time, are treated like insurance products renewable on a monthly basis. The revenue from sale of such bancassurance products are recognized on a monthly basis and presented as “Fee and commission income”. Expenditure (agency costs) incurred by the Group due to the sale of bancassurance products are recognized in line with the straight line method over the life of the facility agreement and presented in “Fee and commission expenses”.

Information regarding the amounts of income and expenses related to sale of insurance products is presented in Note 8.

Gain or loss on financial instruments measured at fair value through profit or loss and gain or loss on foreign exchange transactions

“Gain or loss on financial instruments measured at fair value through profit or loss and gain or loss on foreign exchange transactions” includes:

• any gain or loss on the sale and fair value change of derivative instruments, financial assets and liabilities classified as held for trading and financial instruments designated as measured at fair value through profit or loss at initial recognition;
• ineffective portion of the gain or loss on measurement of hedging instruments in cash flow hedge accounting;
• gain or loss on foreign exchange transactions, i.e. exchange gains and losses, both realized and unrealized, resulting from 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.

Information regarding gain or loss on financial instruments measured at fair value through profit or loss and gain or loss on foreign exchange transactions is presented in Note 9.

Gain or loss on other financial instruments

“Gain or loss on other financial instruments” includes:

• gain or loss on the sale of financial assets classified as financial assets available for sale;
• gain or loss on sale of securities designated as loans and receivables.

Information regarding gain or loss on other financial instruments is presented in Note 10.

Employee benefit costs

Payments related to remuneration, bonuses and annual leave are recognized in consolidated income statement under “Employee benefit costs” in the period of employees’ service.

Payments to defined benefit pension plans, i.e. Social Insurance Institution, pension funds and Employee Pension Scheme constitute defined benefit plans and are recognized in consolidated income statement as expenses in “Employee benefit costs” once employees have performed services qualifying them as plan participants.

Information regarding the employee benefit costs is presented in Note 12.

Other operating revenue and expenses

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 impairment losses on sundry debt, as well as sundry income of the Group.

Other operating expenses include mainly the costs of selling/liquidating fixed assets and intangible assets, costs of damages and fines, costs of provisions for liabilities, costs of receivables written off, impairment allowances for receivables from various debtors and other operating expenses.

Information regarding other operating revenue and expenses is presented in Notes 14 and 15.

5.6.18. 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 income 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.

Deferred 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.

Information regarding current and deferred income tax is presented in Note 16.

5.6.19. 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 position 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 accordance with the Banking Law of 29 August 1997 (uniform text: Journal of Laws of 2016, item 1988 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.

Information regarding Group’s equity is presented in Note 36.

5.6.20. Net earnings per share

Net earnings per share for a given period are calculated by dividing the net profit/loss 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 the weighted average number of ordinary shares.

Information regarding net earnings per share is presented in Note 18.

5.6.21. Contingent liabilities

The Group concludes transactions that are not recognized as assets or liabilities in the consolidated statement of financial position when concluded but give rise to contingent liabilities. A 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 Group;
• an existing obligation arising from past events, which has not been recognized in the consolidated statement of financial position because the need to spend cash or other assets to fulfill 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.

Information regarding the amount of contingent liabilities is presented in Note 41.

5.6.22. Company Social Benefits Fund

The Group companies have established a Social Benefits Fund in accordance with the Act on Social Benefits Funds of 4 March 1994 (Journal of Laws of 2016 item 800 as amended). The purpose of the Fund is to finance social benefits for employees. Fund liabilities include accumulated appropriations thereto recognized by the Bank and Group companies, reduced by non-refundable expenses of the Fund.

The Group has no social assets. All Fund liabilities have the form of cash and are deposited on special bank accounts. 

For the purposes of presentation in these consolidated financial statements the Group has set off the Social Benefits Fund liabilities against assets, because they are not the Group’s assets.

5.6.23. 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.

The following exchange rates have been adopted for the purpose of balance sheet measurement: