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Annual
Report 2022

5.4. Valuation of financial assets and liabilities

Financial assets

At the moment of the initial recognition the financial assets are classified into the following categories at the :

  • financial assets measured at amortised cost,
  • financial assets measured at fair value through other comprehensive income,
  • financial assets measured at fair value through profit or

The above mentioned classification is based on the entity’s business model for managing the financial assets and the characteristics regarding the contractual cash flows (i.e. whether the contractual payments are solely payments of principal and interest on the principal amount outstanding ( i.e.‘criterion SPPI’).

The financial assets could be classified depending on the Group’s business model to the following categories:

  • a business model whose objective is to hold financial assets in order to collect contractual cash flows,
  • a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets,
  • other business model than business model whose objective is to hold financial assets in order to collect contractual cash flows and business model whose objective is achieved by both collecting contractual cash flows and selling financial.
FINANCIAL ASSETS CLASSIFICATION SIGNIFICANT ITEMS INCLUDED PRESENTATION AND MEASUREMENT
Measured at amortised cost To this category, the Bank classifies financial assets included in the following items of the Statement of financial position:
  • ‘Cash and due from Central Bank’,
  • ‘Loans and advances to banks’,
  • ‘Loans and advances to customers’,
  • ‘Securities’.
Financial assets are measured at amortized cost if at the same time they meet the following two criteria and were not designated for measurement at fair value through profit or loss:
  • the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and
  • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI criteria are met).

Upon initial recognition, these assets are measured at fair value increased by transaction costs that are directly attributable to the acquisition or issue of a financial asset.

After initial recognition, these assets are measured at amortized cost using the effective interest rate.

The calculation of the effective interest rate includes all commissions paid and received by the parties, transaction costs and other bonuses and discounts constituting an intergrated part of the effective interest rate.

Interest accrued using the effective interest rate is recognized in net interest income.

Since the impairment recognition, the interest recognized in the income statement is calculated based on the net carrying amount, whereas the interest recognized in the statement of financial position is accrued on the gross carrying amount.

The impairment allowances are estimated for the part of accrued interest exposure, which the Bank consider as difficult to recover.

Allowances for expected credit losses reduce the gross carrying amount of assets, on the other hand they are recognized in the income statement under ‘Net allowances for expected credit losses’.

Measured at fair value through other comprehensive income To this category, the Bank classifies financial assets included in the following items of the Statement of financial position:
  • Loans and advances to customers’,
  • ‘Securities’,
  • Assets pledged as security for liabilities.
Financial assets (excluding equity instruments) are measured at fair value through other comprehensive income when they simultaneously meet the following two conditions and have not been designated for measurement at fair value through profit or loss:
  • the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and
  • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI criteria are met).

Interest accrued using the effective interest rate is recognized in net interest income.

The effects of changes in fair value are recognized in other comprehensive income until the asset is excluded from the statement of financial position, when accumulated profit or loss is recognized in the income statement under ‘Result on derecognition of financial assets and liabilities not measured at fair value through profit or loss’.

An allowance for expected credit losses from financial assets that are measured at fair value through other comprehensive income is recognized in other comprehensive income and does not reduce the carrying amount of the financial asset in the statement of financial position. On the other hand, an expected credit risk allowance is recognized in the income statement under ‘Net allowances for expected credit losses’.

Measured at fair value through profit or loss To this category, the Bank classifies financial assets included in the following items of the Statement of financial position:
  • ‘Derivative financial instruments (held for trading)’,
  • ‘Loans and advances to customers’,
  • ‘Hedging instruments’,
  • ‘Securities’,
  • Assets pledged as security for liabilities.
Loans and advances to customers recognized in a model other than the model held to obtain contractual cash flows and the model held to obtain contractual cash flows and for sale, or those that do not meet the SPPI criterion.

At initial recognition, the Bank may irrevocably designate selected financial assets that meet the amortized cost measurement criteria or at fair value through other comprehensive income for measurement at fair value through profit or loss if it eliminates or significantly reduces the accounting mismatch that would otherwise arise from measuring assets at different methods.

Changes in the fair value of assets, which occur during the period from transaction date to transaction settlement date, shall be recognized similarly as in the case of the asset held.

Derivative instruments are recognized on transaction dates.

FINANCIAL LIABILITIES CLASSIFICATION SIGNIFICANT ITEMS INCLUDED PRESENTATION AND MEASUREMENT
Measured at amortised cost To this category, the Bank classifies financial assets included in the following items of the Statement of financial position:
  • ‘Amounts due to Central Bank’,
  • ‘Amounts due to other banks’,
  • ‘Amounts due to customers’,
  • ‘Debt securities issued’,
  • ‘Subordinated liabilities’.
The measurement of financial liabilities at amortized cost is performed using the effective interest rate.

When the financial liability at amortised cost is derecognised, the gain or loss is recognised in the profit and loss in the item ‘Profit (loss) on derecognition of financial assets and liabilities not measured at fair value through profit or loss.

Measured at fair value through profit or loss To this category, the Bank classifies financial assets included in the following items of the Statement of financial position:
  • ‘Financial liabilities held for trading’,
  • ‘Derivative financial instruments (held for trading)’,
  • ‘Hedging instruments’.
Measurement and presentation of financial liabilities measured at fair value through profit or loss follow the same principles as for financial assets measured at fair value through profit or loss.

The business model assessment

The assessment of the business model is made at the initial recognition of the asset. The business model criteria refers to the way the Group managing financial assets in order to generate cash flows.

The Group evaluates the purpose of the business model, to which the particular financial assets are classified on the level of particular portfolios of the assets – performing the analysis on those portfolio level is a reliable reflection business activities regarding these models and also reflects to information analysis of those activities provided to the Group’s management.

The assessment of the business model is based on the analysis of the following information regarding the portfolio of the financial assets:

  • applied policies and business aims for the particular portfolio and its practical In particular, the management’s strategy regarding the acquisition of revenues from contractual interest payments, maintaining a specific interest rate profile of the portfolio, managing the liquidity gap and obtaining cash flows as a result of the sale of financial assets is assessed,
  • the manner in which the profitability of the portfolio is assessed and reported to the Bank’s Management Board,
  • types of risk that affect the profitability and effectiveness of a given business model (and financial assets held under this business model) and the manner of managing the identified types of risk,
  • the way in which the managers of business operations are remunerated under a given business model – eg whether the remuneration depends on changes in the fair value of financial assets or the value of contractual cash flows obtained,
  • frequency, value and moment of sale of financial assets made in prior reporting periods, the reasons for these sales and expectations regarding future sales However, information on sales activity is analyzed taking into account the overall assessment of the Group’s implementation of the adopted method of managing financial assets and generating cash flows.

Before making a decision regarding allocating a portfolio of financial assets to a business model which purpose is to obtain contractual cash flows, the Group reviews and evaluates significant and objective quantitative data influencing the allocation of asset portfolios to the relevant business model, in particular:

  • the value of sales of financial assets made within the particular portfolios,
  • the frequency of sales of financial assets as part of particular portfolios,
  • expectation analysis regarding the value of planned sales of financial assets and their frequency of the particular portfolios, this analysis is carried out on the basis of probable scenarios of the Group’s business activities in the future.

The portfolios of financial assets from which sales are made that do not result from an increase in credit risk meet the assumptions of the business model, which purpose is to obtain contractual cash flows, provided that these sales:

  • are at low volume (even with a relatively high frequency of sales) or
  • are made rarely – as a result of one-off events, which the probability to occur again in the future, according to the Group’s professional judgment is rare (even with a relatively high volume) or
  • they occur close to the maturity date of the financial assets being sold, and the revenue obtained from such sales is similar to those which could be obtained from remaining contractual cash flows as if the financial asset was held in the Group’s portfolio to the original maturity date.

The following sales are excluded from the analysis of sales value:

  • the sales resulting from an increase in the credit risk of financial assets, regardless of their frequency and volume,
  • the sales resulting from one-off events, which the probability to occur again in the future, according to the Group’s professional judgment is rare,
  • the sales made close to maturity.

A held to obtain contractual cash flows or sale business model includes a portfolio of financial assets whose purpose is, in particular, managing current liquidity levels, maintaining the assumed profitability profile and/or adjust the duration of the asset and financial liabilities, and a level of sales are higher than for those financial assets classified in a model which purpose is to obtain contractual cash flows.

The business model comprising financial assets held for sale and other includes assets that do not meet the criteria to be classified into the business model, which purpose is to obtain contractual cash flows the business model which purpose is to obtain contractual cash flows or sales and also acquiring cash flows from interest and capital is not the main business target.

Assessment, whether the contractual payments are solely payments of principal and interest on the principal amount outstanding (SPPI criteria)

For the purposes of assessing cash flow characteristics, ‘principal’ is defined as the fair value of a financial asset at the time of initial recognition. ‘Interest’ is defined as the time value of money and the credit risk related to the unpaid part of principal and also other risks and costs associated with a standard loan agreement / a security (e.g. liquidity risk or administrative costs) and margin.

When assessing whether the contractual cash flows constitute solely payments of principal and interest, the Group analyzes contractual cash flows. This analysis includes an assessment whether the contractual terms include any provisions that the contractual payments could be changed or the amount of the contractual payments could be changed in a way that from an economic point of view they will not only represent repayments of principal and interest on the outstanding principal. When making this assessment, the Group takes into account the occurrence of, among others:

  • conditional events that may change the amount or timing of the payment,
  • financial leverage (for example, interest terms include a multiplier greater than 1),
  • terms regarding the extension of the contract or prepayment option,
  • terms that the Group’s cash flow claim is limited to a specified assets (eg non-recourse assets),
  • terms that modify the time value of money – g. mismatch of the frequency of the revaluation of the reference interest rate to its tenor.

The SPPI test is conducted for each financial asset classified into the business model, which purpose is to obtain contractual cash flows or a business model which purpose is to obtain contractual cash flows or sale, as at the initial recognition date or as at the latest significant annex date changing the terms of contractual cash flows.

The Group performs an SPPI test at the level of homogeneous groups of standard products or at the level of a single contract for non-standard products or at the level of ISIN code for debt securities.

In situation when the time value of money is modified for a particular financial asset, the Group is required to make an additional assessment (i.e. Benchmark Test) to determine whether the contractual cash flows are still solely payments of principal and interest on the principal amount outstanding by determining how different the contractual (undiscounted) cash flows could be from the (undiscounted) cash flows that would arise if the time value of money element was not be modified (the benchmark cash flows). Benchmark Testing is not permitted for situation that some terms modify contractual cash flows, such as the built-in leverage element.

Purchased or originated credit-impaired financial assets (POCI)

The Group distinguishes the category of purchased or originated credit-impaired assets. POCI are assets that are credit- impaired on initial recognition. Financial assets that were classified as POCI at initial recognition should be treated as POCI in all subsequent periods until they are derecognition.

POCI assets may arise through:

  • by purchasing a contract that meets the definition of POCI (e.g. as a result of a merger with another entity or purchase of a portfolio of assets),
  • by concluding a contract that is POCI at the time of original granting (e.g. granting a loan to a customer in a bad financial condition),
  • by modifying the contract (e.g. under restructuring) qualifying this contract to be derecognised, resulting in a recognition of a new contract meeting the definition of POCI. Conditions for qualifying a contract to be derecognised are described below.

At initial recognition, POCI assets are recognized in the balance sheet at their fair value, in particular they do not have recognized impairment allowance.

POCI assets do not constitute a separate accounting category of financial assets. They are classified into accounting categories in accordance with the general principles for classification of financial assets. The categories in which POCI assets may exist are a category of financial assets measured at amortized cost and financial assets measured at fair value through other comprehensive income.

Investments in equity instruments

For investments in equity instruments not held for trading, the Group may irrevocably choose to present changes in their fair value in other comprehensive income. The Group makes a decision in this respect based on an individual analysis of each investment. In sucha a case the amounts presented in other comprehensive income are never subsequently transferred to profit or loss. In case of sale of an equity investment elected to be measured at fair value through other comprehensive income, a result on sale is transferred to the item ‘Other reserve capital’.

Equity investments not designated for measurement at fair value through other comprehensive income at the initial recognition are measured at fair value through profit or loss. Changes in the fair value of such investments, as well as the result on sales, are recognized in the income statement under ‘Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result’.

Dividends from equity instruments, both measured at fair value through profit or loss and designated for valuation through other comprehensive income, are recognized in the income statement when the Group’s right to receive payment is established.

Reclassification of financial asset

Financial assets are not reclassified in the reporting periods following the initial recognition, except for the reporting period following the change of the business model for managing financial assets by the Group.

The reclassification of financial assets is applied prospectively from the reclassification date – without restatement of previously recognized gains or losses (including impairment gains or losses) or interest.

The following are not changes in business model:

  • a change in intention related to particular financial assets (even in circumstances of significant changes in market conditions),
  • the temporary disappearance of a particular market for financial assets,
  • a transfer of financial assets between parts of the entity with different business models.

Modifications of financial assets

If the terms of the financial asset agreement change, the Group assesses whether the cash flows generated by the modified asset differ significantly from those generated by the asset before modifying the terms of its agreement. If a significant difference is identified, (defined by the quantitative criteria presented below), the original financial asset is derecognised, and the modified financial asset is recognized in the books at its fair value. Income or expense arising as at the date of determining the effects of the significant modification is recognized in the profit and loss in the item ‘Profit (loss) on derecognition of financial assets and liabilities not measured at fair value through profit or loss’.

If the cash flows generated by the modified asset measured at amortized cost are not materially different from the original cash flows, the modification does not result in derecognition of the financial asset. In this case, the Group recalculates the gross carrying amount of the financial asset, and the result on the immaterial modification is recognized in interest income. Quantitative information about financial assets that were subject to modification that didn’t result in derecognition was presented in Note 46.2.

The assessment whether a given modification of financial assets is significant or insignificant modification depends on the fulfillment of qualitative and quantitative criteria.

The Group has adopted the following quality criteria to determine significant modifications:

  • currency conversion, unless it results from existing contractual provisions or requirements of applicable legal regulations,
  • change (replacement) of the debtor, excluding the addition/departure of the joint debtor or taking over the loan in inheritance,
  • consolidation of several exposures into one under an annex or settlement/restructuring agreement, The occurrence of at least one of these criteria results in a significant modification.

The Group has adopted the following quantitative criteria to determine significant modifications:

  • extension of the loan term by at least one year and at least a doubling of the residual maturity to the original maturity (meeting both conditions jointly), or
  • increasing the current loan amount/limit by at least 10%.

If the terms of a financial asset agreement are modified, and the modification does not result in derecognition of the asset from the balance sheet, the determination, whether the credit risk of a given asset significantly increases, is made by comparing:

  • lifetime PD on the reporting date, based on modified conditions, with
  • lifetime PD estimated on the basis of data valid at the date of initial recognition and initial contractual terms.

In the case of modification of financial assets, the Group analyzes whether the modification has improved or restored the Group’s ability to collect interest and principal. As part of this process, the Group assesses the borrower’s ability to pay in relation to modified terms of agreement.

De-recognition of financial instruments from the statement of financial position

Financial assets are derecognized when the contractual rights to the cash flows from the financial assets expire or when the Group transfers the contractual rights to receive the cash flows in a transaction in which substantially all risk and rewards of ownership of the financial asset are transferred.

The Group derecognizes a credit or a loan receivable, or its part, when it is sold. Additionally, the Group writes-off a receivable against the corresponding impairment provision (completely or partially) when the debt redemption process is completed and when no further cash flows from the given receivable are expected (i.e. the created write-down covers almost the entire gross value of the loan/advance).

The value of contractual cash flows required under contracts of financial assets, which were written-off in 2022 and are still subject to enforcement proceedings as at 31 December 2022, is PLN 674 296 thousand (as at 31 December 2021 – PLN 425 329 thousand).

Accumulated profits and losses that have been recognized in other comprehensive income from equity instruments designated to be measured at fair value through other comprehensive income are not recognized in the profit and loss account when these financial instruments are removed from the balance sheet.

The Group derecognizes a financial liability, or its part, when the liability expires. The liability expires when the obligation stated in the agreement is settled, redeemed or the period for its collection expires.

Repo and reverse-repo agreements

Repo and reverse-repo transactions, as well as sell-buy back and buy-sell back transactions are classified as sales or purchase transactions of securities with the obligation of resale and repurchase at an agreed date and price.

Sales transactions of securities with the repurchase obligation granted (repo and sell-buy back) are recognized as at transaction date in amounts due to other banks or amounts due to customers from deposits depending upon the counterparty to the transaction. Securities purchased in reverse-repo and buy-sell back transactions are recognized as loans and receivables from banks or as loans and receivables from customers, depending upon the counterparty to the transaction.

The difference between the sale and repurchase price is recognized as interest income or expense, and amortized over the contractual life of the contract using the effective interest rate method.

Other significant accounting policies

Other significant accounting policies are presented in the Notes below.

NOTE TITLE NOTE NUMBER
Interest income and expense 7
Fee and commission income and expense 8
Dividend income 9
Result on financial assets and liabilities measured at fair value through profit or loss and foreign exchange result 10
Result on derecognition of financial assets and liabilities not measured at fair value through profit or loss 11
Net allowances for expected credit losses 12
Other operating income and expenses 13
Administrative expenses and amortization 14
Income tax 16
Derivative financial instruments (held for trading) 21
Hedge accounting 22
Assets held for sale 26
Investments in associates 27
Intangible assets 28
Property, plant and equipment 29
Other assets 30
Provisions 36
Other liabilities 37
Share-base payment 39
Leasing 40
Contingent commitments 41
Share capital 42

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