5.5. Significant estimates and assumptions

[Financial notes are presented in PLN thousand]

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.

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

With regard to all financial assets that are measured at amortized cost or at fair value through other comprehensive income and off-balance sheet liabilities, i.e. financial guarantees or loan commitments, the Group creates the allowance according to IFRS 9 based on the expected credit losses and taking into account forecasts and expected future economic conditions in the context of credit risk.

The process of estimating expected credit losses requires the use of significant estimates, in particular in the area of:

• assumptions regarding macroeconomic forecasts and possible scenarios how these forecasts will develop in the future,
• possible expert adjustments in relations to industries where the Group identifies an increased risk,
• rules (thresholds) for identifying a significant increase in credit risk.

More information on the principles applied by the Group for determining expected credit losses and the significant assumptions applied in this area are presented in the Note 46.2.

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 2022, the Group assessed whether the current market conditions 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 28.

As at 31 December 2022 the Group assessed the probability of the impact of legal risk regarding foreign currency mortgage loans in CHF on the expected cash outflows resulting from this risk

Key elements of the estimate include:

• a forecast of the number of disputes,
• expected decisions/rulings of the courts,
• customers’ willingness to conclude settlements with the Bank.

Details on the main assumptions used to estimate the provisions for legal risk regarding foreign currency mortgage loans in CHF are presented in Note 46.3.

Due to the entry into force of the Act on social financing for business ventures and support to borrowers (the ‘Act’), consumers with PLN mortgage loan agreements acquired the right to suspend the repayment of these loans under the following conditions:

1. from 1 August 2022 to 30 September 2022 – for a period of two months,
2. from 1 October 2022 to 31 December 2022 – for a period of two months,
3. from 1 January 2023 to 31 December 2023 – one month in each calendar quarter.

Applying the guidelines resulting from par. 5.4.3 of the International Financial Reporting Standard 9 ‘Financial Instruments’ (‘IFRS 9’), the Group estimated the cost resulting from the above-mentioned rights by adopting, in particular, expert assumptions regarding the expected level of participation (use) of the above-mentioned rights by borrowers.

Details on the adopted estimates in the above-mentioned area are presented in Note 7.

The fair value of non-option derivatives, debt securities measured at fair value through other comprehensive 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 46.9.

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 38.

As at 31 December 2022 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 2022, 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 36.