5.5. Significant estimates and assumptions

The preparation of financial statements in accordance with IFRS requires the Management Board of the Bank to make
judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses.

Estimates and assumptions are reviewed on an ongoing basis by the Group and rely on historic data and other factors
including expectation of the future events which seems justified in given circumstances. In particular, as at 31 December 2021, the Bank included in its estimates the impact of the Covid-19 epidemic on individual items of the Group’s assets and liabilities. However, taking into account the significant uncertainty as to the further development of the economic situation, the estimates made may change in the future. The uncertainty of the estimates made by the Group as at 31 December 2021 concerns mainly:

• forecasts regarding macroeconomic assumptions, in particular those relatin to key economic indicators (i.e. the level of the expected economic slowdown, GDP, employment, housing prices, possible disruptions in capital markets etc.),
• possible business disruptions due to decisions made by public institutions, enterprises and consumers to help contain the spread of the virus,
• the effectiveness of the support programs that have been designed to support businesses and consumers.

Significant accounting estimates that are affected by the aforementioned forecasts and the related uncertainties relate
primarily to expected credit losses and the determination of the recoverable amount of non-financial assets.

Estimates and underlying assumptions are subject to a regular review. Revisions to accounting estimates are recongised
prospectively starting from the period in which the estimates are revised. Information on the areas of significant estimates in these financial statements is presented below.

At each balance sheet date the Group assesses whether there is any objective evidence (‘trigger’) that credit exposures are impaired taking into consideration actual definition of Default. The definition of Default consistently considers all financial instruments. For financial instruments that are not impaired, the Group asses if credit risk has increased significantly since initial recognition.

If at balance sheet date credit risk concerning the financial instrument has not increase significantly since initial recognition, the Group assesses impaired allowances for expected credit losses with regard to the financial instrument as an amount equal 12-month expected credit losses. Otherwise, the Group assesses impaired allowances for expected credit losses with regard to the financial instrument as an amount equal expected credit losses over the expected life (lifetime horizon) of that financial instrument (lifetime expected credit losses).

In order to determine the expected credit losses, Bank distinguishes individually significant exposures, in particular: all financial assets towards the borrower for which the Bank’s total exposure as at the balance sheet date is at least PLN 4 million or PLN 1 million in the case of customers overdue more than 90 days or in the case of which the condition for restructuring has been met on at least one contract.

For all individually significant financial instruments, which are impaired as at balance sheet date, the Group measures the impairment allowance (impairment credit loss) as part of individual assessment. The individual assessment is carrying out by the Group’s employees and consists of individual verification of the default occurrence and projection of future cash flows from foreclosure, less costs incurred for obtaining and selling the collateral or other repayment resources. The Group compares the estimated future cash flows applied for measurement of individual expected credit losses with the actual cash flows on a regular basis.

For all other financial instruments the Group measures the allowance for expected credit losses according to IFRS 9, taking into account forecasts and expected future economic conditions in the context of credit risk.

More information on the assumptions made and the uncertainty related to the estimates made in terms of expected credit losses, as well as the sensitivity analysis of the loan impairment estimates are presented in Note 47.2.

At each balance sheet date the Group reviews its non-current assets for indications of impairment. The Group performs an impairment test of goodwill on a yearly basis or more often if impairment triggers occur.

Where such indications exist, the Group makes an estimation of the recoverable value of a given assets or – in the case of goodwill – all cash-generating units to which the goodwill relates. If the carrying amount of a given asset is in excess of its recoverable value, impairment is defined and a write-down is recorded to adjust the carrying amount to the level of its recoverable value. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value-in-use.

Estimation of the value-in-use of an assets (or cash generating unit) requires assumptions to be made regarding, among other, future cash flows which the Group may obtain from the given asset (or cash generating unit), any changes in amount or timing of occurrence of these cash flows and other factors such as the lack of liquidity. The adoption of different measurement assumptions may affect the carrying amount of some of the Group’s non-current assets.

As at 31 December 2021, the Bank assessed whether the current market conditions and the existing uncertainty regarding the macroeconomic situation caused by COVID-19 have an impact on the impairment of non-current assets. As a result of this analysis, no need was found to make impairment allowances of non-current assets, including goodwill. The main assumptions used in the goodwill impairment test are presented in Note 29.

The fair value of non-option derivatives, debt securities measured at fair value through other commay affect theprehensive income and loans and advances to customers measured at fair value through other comprehensive income and measured at fair value through profit or loss that do not have a quoted market price on an active market is measured using valuation models based on discounted cash flows. Options are valued using option valuation models. Variables used for valuation purposes include, where possible, the data from observable markets. However, the Bank also adopts assumptions concerning counterparty’s credit risks which affect the valuation of instruments. The adoption of other measurement assumptions may affect the valuation of these financial instruments. The assumptions used for fair value measurement are described in detail in Note 47.10.

The main actuarial assumptions applied to estimatio of provisions for defined benefit plans, such as the discount rate and the salary increase rate, were presented in Note 39.

As at 31 December 2021 the Group assessed the probability of the impact of legal risk regarding foreign currency mortgage loans in CHF on future expected cash flows from loan exposures and the probability of cash outflows.

Given the inconsistent judicial decisions regarding foreign currency mortgage loans in CHF and the short period of historical data regarding lawsuits related to the above-mentioned loans, the estimation of the provision required the Group to adopt expert assumptions and is associated with significant uncertainty.

Details on the main assumptions used to estimate the provisions for legal risk regarding foreign currency mortgage loans in CHF are presented in Note 47.3.

As at 31 December 2021 the Group assessed the legal risk arising from the judgment of the Court of Justice of the European Union (hereinafter the ‘CJEU’) on consumer loans and estimated the possible amount of cash outflow as a refund of commission to the customer in relation to early repayment of consumer loans (for loans prepaid before the judgment of the CJEU, i.e. before 11 September 2019).

In addition, with regard to balance sheet exposures as at 31 December 2021, the Group estimated the possible prepayments of these exposures in the future.

The estimates required the Group to adopt expert assumptions primarily regarding the scale of complaints and amounts reimbursed for prepaid loans before the CJEU judgment, as well as the expected scale of prepayments and future returns for balance sheet exposures, and are associated with significant uncertainty.

Details on the estimated provision for early repayment of consumer loans together with the sensitivity analysis are presented in Note 37.