Standards and interpretations applied in 2016 and not binding as of the balance sheet day

Amendments to IAS 19 “Employee benefits” were published by IAS Board in November 2013. The amendments allows entities to recognise employee contributions as a reduction in the service cost in the period in which the related employee service is rendered, instead of attributing the contributions to the periods of service, if the amount of the employee contributions is independent of the number of years of service.

Application of the standard did not have a material impact on the consolidated financial statements.

IAS Board issued in December 2013 “Improvements to IFRSs 2010-2012” which consist of changes to seven standards.

The amendments include changes in presentation, recognition and valuation as well terminology and editorial changes.

These changes do not apply to the activity of the Group.

This amendment to IFRS 11 requires the investor when he acquires an interest in a joint operation that constitutes a business as defined in IFRS 3 to apply accounting rules on businesses connections in accordance with IFRS 3 and the rules under other standards, unless they are contrary to the guidelines set out in IFRS 11.

Application of the standard did not have an impact on the consolidated financial statements.

Amendments clarify that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset.

Application of the standard did not have an impact on the consolidated financial statements.

IAS Board issued on 25 September 2014 “Improvements to IFRSs 2012-2014” which impact 4 standards: IFRS 5, IFRS 7, IAS 19 and IAS 34.

Application of the standard did not have a material impact on the consolidated financial statements.

In December 2014, in the framework of so-called initiative on disclosure, the IAS Board issued an amendment to IAS 1. The Standard was amended to clarify the concept of materiality and explains that an entity need not provide a specific disclosure required by an IFRS if the information resulting from that disclosure is not material, even if the IFRS contains a list of specific requirements or describes them as minimum requirements. Amended Standard also provides new guidance on subtotals in financial statements depending on materiality.

Application of the standard did not have a material impact on the consolidated financial statements.

The amendments of IAS 27 will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements.

The standard is not applied to consolidated financial statements.

Amendment to IFRS 10, IFRS 12 and IAS 28 published as Investment Entities: the consolidation exception specifies requirements for investment entities and introduces some facilities.

The Standard clarifies that an investment entity should measure at fair value through profit or loss all of its subsidiaries that are themselves investment entities. In addition, the exemption from preparing consolidated financial statements if the entity’s ultimate or any intermediate parent produces consolidated financial statements available for public use was amended to clarify that the exemption applies regardless whether the subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with IFRS 10 in such ultimate or any intermediate parent’s financial statements.

Application of the standard did not have an impact on the consolidated financial statements.

On 24th July 2014 the International Accounting Standards Board (IASB) issued a new International Financial Reporting Standard – IFRS 9: „Financial instruments” effective for annual periods beginning on or after 1st January 2018, which replaces the existing International Accounting Standard 39 „Financial instruments: recognition and measurement”. The European Commission adopted the Standard as published by the IASB on 24th July 2014 in the Resolution No. 2016/2067 issued on 22nd November 2016.

IFRS 9 introduces a new standard in the impairment process. New model is based on the concept of „expected credit losses”, estimated with the use of predictions and introduces modifications regarding the rules of classification and measurement of financial instruments (particularly of financial assets) as well as a new approach towards hedge accounting.

In March 2016 the Group launched an IFRS 9 implementation project which actively engages various the Group’s organizational units responsible for accounting, financial reporting and risk management as well as business and IT departments and external consultants.

Work on the project has been planned in two stages:

• gap analysis – Phase I
• Implementation of the concept of IFRS 9 Group – Phase II.

The Group is currently designing and testing necessary solutions regarding the implementation of IFRS 9, based on the gap analysis and defined key methodological assumptions. The Group intends to complete design works in the II quarter 2017.

Summary of key IFRS 9 requirements

Classification and measurement

Financial assets

In accordance with IFRS 9, on initial recognition a financial asset may be classified as subsequently measured at:

• amortised cost,
• fair value through other comprehensive income,
• fair value through profit or loss.

A financial asset shall be classified as subsequently measured at amortised cost, fair value through other comprehensive income or fair value through profit or loss on the basis of both:

• the Group’s business model for managing the financial assets which is determined at a level that reflects how groups of financial assets are managed together to achieve a particular business objective; and
• the contractual cash flow characteristics of the financial asset by verifying if 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 (so called SPPI criterion).

A financial asset shall be measured at amortised cost if both of the following conditions are met:

• 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.

A financial asset shall be measured at fair value through other comprehensive income if both of the following conditions are met:

• 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.

A financial asset shall be measured at fair value through profit or loss if:

• the financial asset does not meet the conditions of being classified as subsequently measured at amortised cost or at fair value through other comprehensive income (the business model the asset is held in is managed on a fair value basis or the contractual terms of the financial asset give rise on specified dates to cash flows that are not solely payments of principal and interest on the principal amount outstanding);
• at initial recognition, the  Group has irrevocably designated the financial asset as measured at fair value through profit or loss because doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases.

On the initial recognition the Group is required to determine if a financial instrument contains an embedded derivative. Derivatives embedded in contracts where the host is a financial asset in the scope of IFRS 9 are never bifurcated. Instead, the hybrid financial instrument as a whole is assessed for classification. However, derivatives embedded in contracts where the host is not a financial asset in the scope of IFRS 9 shall be analysed in order to determine whether it should be bifurcated.

A financial asset shall be reclassified if, and only if, the Group changes its business model for managing financial assets. In such a case, all financial assets affected by the business model change are subject to reclassification.

Financial liabilities

IFRS 9 does not introduce significant changes with regard to classification and measurement of financial liabilities requirements existing in IAS 39 – on initial recognition a financial liability shall be classified as:

• a financial liability measured at fair value through profit loss, or
• other financial liability (measured at amortised cost).

Additionally in accordance with IFRS 9, financial liabilities shall not be reclassified subsequent to their initial recognition.

Hedge accounting

In accordance with standard, when initially applying IFRS 9 the Group may choose as its accounting policy element to continue to apply the IAS 39 hedge accounting requirements instead of the IFRS 9 requirements.

IFRS 9 requires the Group to ensure that its hedging relationships are compliant with the risk management strategy applied by the Group and its objectives. IFRS 9 introduces new requirements with regard to the assessment of hedge effectiveness, rebalancing of the hedge relationship as well as it prohibits voluntary discontinuation of hedge accounting.

Potential impact of IFRS 9 on the Group’s financial situation and own funds

Quantitative estimation of the impact of IFRS 9 on the Group’s financial situation and own funds

As of 31st December 2016, it is not possible to reliable estimate the complete impact of IFRS 9 implementation on the Group’s financial situation and own funds. Therefore, the Group has chosen to disclose solely qualitative information on the Group’s approach to the IFRS 9 implementation, which in the Group’s opinion will enable the users of the financial statement to understand the impact of IFRS 9 on the financial situation and capital management of the Group.

Qualitative data enabling the users of the financial statement to understand the impact of IFRS 9 on the Group’s financial situation

Classification and measurement

Financial assets

In order to be able to classify the financial assets in accordance with IFRS 9 on 1st January 2018, the Group, in the course of the ongoing IFRS 9 implementation project, is reviewing the financial assets in the Group’s portfolio, which are going to a part of the portfolio after 31st December 2017. The objectives of the review are:

• determining and allocating groups of financial assets to the appropriate business model on the basis of the assessment of the applied way of managing the financial asset portfolios by:
  • reviewing and assessing relevant and objective qualitative data which may have an impact on allocating financial asset portfolios to the appropriate business model (such as, e.g.: how the performance of the business model and the financial assets held within that business model are evaluated; the risks that affect the performance of the business model in particular, the way in which those risks are managed; the justification of the sales of the financial assets from certain portfolios that occurred in the past);
  • reviewing and assessing relevant and objective quantitative data which may have an impact on allocating financial asset portfolios to the appropriate business model (e.g. the value of sales of the financial assets from certain portfolios that occurred in previous reporting periods and the frequency of those sales);
  • analysis of expectations regarding the value and frequency of future sales from certain portfolios.
• identifying and analysing the contractual terms of financial assets that may cause the financial assets to fail the SPPI criterion.

As a result of the IFRS 9 implementation, the Bank expects changes in classification of certain loans granted to clients, measured at amortised cost under IAS 39, which will have to be measured at fair value through profit or loss because the contractual terms of the loan give rise on specified dates to cash flows that are not solely payments of principal and interest on the principal amount outstanding. Based on the current stage of analysis, the Bank expects that these changes will apply to a small percentage of the loan portfolio estimated at approx. 2% of value of total loan portfolio as at 31.12.2016.

Regarding the portfolio of debt securities the Group does not expect significant changes in the applied method of the classification and measurement of financial assets that could have a significant impact on the balance sheet and / or the Group’s financial result.

Quantitative data regarding classification and measurement of financial assets (comprising the estimated impact  on the financial position and/or the profit or loss of the Group) will be available after completing the review of the financial assets held by the Group.

As of 31st December 2016 the Group holds equity instruments (stocks and shares) which, in accordance with IAS 39, are categorized as financial assets “available for sale”. In accordance with IFRS 9, the Group will be able to classify them as financial assets measured at fair value through profit or loss (provided that they do not constitute a strategic investment in the view of the entities which manage them) or irrevocably choose to measure them at fair value through other comprehensive income. If the Group chooses to measure the equity instruments at fair value through other comprehensive income, the fair value gains and losses would be reported in other comprehensive income, no impairment losses would be recognised in profit or loss and no gains or losses would be reclassified to profit or loss on disposal. At the moment of preparation of these financial statement the Group has not yet made a decision in this regard.

Financial liabilities

As a result of implementing IFRS 9, the Group does not expects changes in classification of financial liabilities in comparison to existing requirements in IAS 39, which could have a significant impact on the financial position / profit or loss of the Group.

Impairment

The Group assumes that the implementation of the new impairment model based on the concept of ECL will have a significant impact on the level of the Group’s loss allowance, particularly with regard to exposures allocated to Stage 2. Contrary to IAS 39, IFRS 9 does not require the entities to identify the impairment events in order to estimate lifetime credit losses in Stage 2. Instead, the  Group is obliged to constantly estimate the level of credit losses since the initial recognition of a given asset until its derecognition. In the event of significant increase in credit risk since the initial recognition of the asset, the Group will be obliged to calculate lifetime expected credit losses – Stage 2. Such an approach will result in the earlier recognition of credit losses which will cause an increase in loss allowance and therefore it will also affect profit or loss. It needs to be emphasized that as of the date of implementation of IFRS 9, this specific change in the level of loss allowance stemming from the adoption of new impairment model will be recognized in retained earnings, not in profit or loss.

Within the scope of the IFRS 9 implementation project, the Group is working on implementing a new methodology of loss allowance calculation as well as on implementing appropriate modifications in IT systems and processes used by the Group. In particular work are focused on the foundations of the impairment model, acquiring appropriate data as well as designing the processes and tools and performing a detailed estimation of the impact of IFRS 9 on the level of loss allowance. Methodological tasks are focused on both redevelopment of currently applied solutions as well as implementation of the brand new solutions. In terms of the redevelopment of existing solutions, the Bank is currently adjusting PD, LGD, EAD and CCF models so that they may be used to estimate expected credit losses. In terms of brand new solutions, the scope of the IFRS 9 project is focused mainly on defining the Stage allocation criteria and including expectations regarding future macroeconomic outlook in the estimation of loss allowance levels.

It should be underlined that, the implementation of the new Standard requires the application of more complex credit risk models of greater predictive abilities which require a significantly broader set of source data than the currently applied models.

The impact assessment of IFRS 9 on the financial position of the Group and its capital management is currently difficult. The difficulties stem from the ongoing methodological works regarding adjustments of credit risk models to IFRS 9 requirements which are still in progress as well as from the lack of unambiguous interpretations of the new Standard and uniform market practice. From the legislative standpoint, the supervisory and regulatory authorities are working on updating prudential requirements which will be binding for the Bank. However, it needs to be noted that these works are not advanced enough to enable Bank to unambiguously determine the impact of the IFRS 9 on the financial position and capital adequacy indicators. It should also be noted that, in terms of capital impact, the potential increase of impairment loss allowances in the implementation moment of IFRS9  may be partially offset by improvement of own funds through reduction of deductions connected with the difference between expected credit loss and incurred loss (this situation applies to IRB banks such as Bank Millennium).

Hedge accounting

Based on the paragraph 7.2.21 of IFRS 9, on the 1st January 2018 the Group is going to choose to continue to apply the hedge accounting requirements of IAS 39 instead of the requirements of IFRS 9, the decision will constitute an element of the Group’s accounting policy. The decision will be applied to every hedging relationship that the Group applies and is going to apply in the future. Changing the decision is possible solely by introducing appropriate changes to the accounting policy which will be associated with all the consequences resulting from IAS 8.

Due to the aforementioned decision, the adoption of IFRS 9 will not have an impact on the financial position of the Group.

The standard permits first-time adopters implementing IFRS commencing from 1 January 2016 or later, to continue to recognise amounts related to rate regulation in accordance with their previously binding accounting standards. However, to enhance comparability with entities that already apply IFRS and do not recognise such amounts, IFRS 14 requires that the effect of rate regulation must be presented separately from other items both in statement of financial position as well as in the income statement and statement of other comprehensive income.

Accordingly to European Union decision, IFRS 14 will not be endorsed.

IFRS 15 “Revenue from Contracts with Customers” is effective for the periods beginning on or after 1 January 2018.

The principles set out in IFRS 15 will apply to all contracts resulting in revenue. The new standard introduces the core principle that revenue must be recognised when the goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the value of revenues varies for any reason, minimum amounts must be recognised if they are not at significant risk of reversal. Additionally accordingly IFRS 15 costs incurred to secure contracts with customers have to be capitalised and amortised over the period when the benefits of the contract are consumed.

Real impact of the implementation of the new standards by the Group has not been estimated yet.

Clarifications to IFRS 15, Revenue from Contracts with Customers (issued on 12 April 2016 and effective for annual periods beginning on or after 1 January 2018).

The amendments clarify main assumptions provided by the IFRS 15, among others: how to identify a separate obligation; how to determine whether a company is a principal (the provider of a good or service) or an agent; and how the revenue from granting a licence should be recognised.  In addition to the clarifications, the amendments include additional reliefs for a company when it first applies the new Standard.

Real impact of the implementation of the new standards by the Group has not been estimated yet.

At the date of these consolidated financial statements, Clarifications to IFRS 15 have not yet been endorsed by the European Union.

These amendments address an inconsistency between the requirements in IFRS 10 and those in IAS 28. The accounting recognition depends on whether non-monetary assets sold or contributed to an associate or joint venture involves a business. If the non-monetary assets meet the definition of a business the investor will show the full gain or loss on the transaction. In case a transaction involves assets that do not constitute a business a partial gain or loss is recognised (excluding the part representing the interests of other investors).

The amendments were published on 11 September 2014, but effective data has not been set by IAS Board.

The Group believes that the application of the standard will not have a material impact on the consolidated financial statements.

At the date of these consolidated financial statements, endorsement of aforementioned amendments have been postponed by the European Union.

IFRS 16 „Leases” was issued in on 13 January 2016 by the International Accounting Standards Board and is effective for annual periods beginning on or after 1 January 2019.

The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset and liability due to payment obligation. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Lessees will be required to recognise: (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on lease liabilities in the income statement. IFRS 16 substantially carries forward the lessor accounting requirements set out in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.

The impact of the application of the new rules by the Group has not yet been estimated.

As at the day of preparation of these consolidated financial statements, IFRS 16 was not endorsed by the European Union.

The amendment has clarified the requirements on recognition of deferred tax assets for unrealised losses on debt instruments. The entity will have to recognise deferred tax asset for unrealised losses that arise as a result of discounting cash flows of debt instruments at market interest rates, even if it expects to hold the instrument to maturity and no tax will be payable upon collecting the principal amount. The economic benefit embodied in the deferred tax asset arises from the ability of the holder of the debt instrument to achieve future gains (unwinding of the effects of discounting) without paying taxes on those gains.

The Amendment is effective for annual periods beginning on or after 1 January 2017

The Group believes that the application of the standard will not have a material impact on the consolidated financial statements.

As at the day of preparation of these consolidated financial statements, the Amendment was not endorsed by the European Union.

Amendments to IAS 7 are effective for annual periods beginning on or after 1 January 2017. The amended IAS 7 will require disclosure of a reconciliation of movements in liabilities arising from financing activities.

As at the day of preparation of these consolidated financial statements, the Amendment was not endorsed by the European Union.

The amendments are effective for annual periods beginning on or after 1 January 2018. The amendments introduce, among others, rules for recognition of liability due to cash-settled share-based payment transactions, clarify accounting for cash-settled share based payments that are modified to become equity-settled, as far as rules for recognition employee tax liability due to share based payments.

The Group believes that the application of the standard will not have a material impact on the consolidated financial statements.

As at the day of preparation of these consolidated financial statements, the Amendment was not endorsed by the European Union.

These changes do not apply to the activity of the Group.

International Accounting Standards Board issued in December 2016 Annual Improvements to IFRSs 2014-2016 effective for covering improvements impact three standards: IFRS 12, IFRS 1 and IAS 28.

The amendments include clarifications and changes to the scope of standards, recognition and valuation and include terminology and editorial changes.

The Group believes that the application of the standard will not have a material impact on the consolidated financial statements.

As at the day of preparation of these consolidated financial statements, the Amendment was not endorsed by the European Union.

These changes do not apply to the activity of the Group.

IFRIC 22 provides accounting for transactions in which the entity receives or transmits advance payment in foreign currency. The guidelines are effective for annual periods beginning on or after 1 January 2018.

The Group believes that the application of the standard will not have a material impact on the consolidated financial statements.

As at the day of preparation of these consolidated financial statements, the Amendment was not endorsed by the European Union.