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2018 Financial and Social Report

Standards and interpretations applied in 2018 and those not binding at the balance sheet date

Applied new and revised standards and interpretations

This consolidated financial report for the first time reflected provisions of following standards, which came into force on 1 January 2018:

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 replaced the existing International Accounting Standard 39 „Financial instruments: recognition and measurement”.

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

IFRS 9 introduced modifications regarding the rules of classification and measurement of financial instruments (particularly of financial assets) as well as a new approach towards hedge accounting, and introduced a new standard in the impairment process.

Description of business models and accounting standards regarding financial instruments and hedge accounting applicable at the Group in accordance with IFRS 9 is presented below.

Valuation Models

In accordance with the IFRS 9 requirements financial assets are classified at the moment of their initial recognition (and the date of IFRS implementation) into one of three categories:

  • Financial assets valued at amortised cost (hereinfrom „AC” – Amortised Cost),
  • Financial assets valued at fair value through profit & loss (hereinfrom „FVTPL),
  • Financial assets valued at fair value through other comprehensive income (hereinfrom „FVTOCI”).

The classification of financial instruments into one of the above categories is performed based on:

  • The business model of managing financial assets, The assessment of the business model is aimed at determining whether the financial asset is held:
    – to collect contractual cash flows resulting from the contract,
    – both to collect contractual cash flows arising from the contract and the sale of a financial asset or
    – for other business purposes.
  • Test of contractual cash flow characteristics connected with financial assets (hereinfrom „SPPI test”). The purpose of the SPPI test (Solely Payment of Principal and Interest) is to assess the characteristics of contract cash flows in order to verify if:
    – The contractual terms trigger, at specific dates, certain cash flows which constitute solely a payment of principal and interest on such principal,
    – The principal constitutes the fair value of a loan at the moment of its recognition,
    – The interest reflects the value of money over time and credit risk, liquidity risk, the Group’s margin and other administrative costs connected with the value of the principal outstanding at any given moment.

Business Models of the Group

In accordance with IFRS 9 the manner of assets management may be assigned to the following models:

  • Held To Collect (hereinfrom „HTC”),
  • Both Held to Collect and for Sale (hereinfrom “HTC&FS”),
  • Other models, e.g. trading activity, management of assets based on fair value fluctuations, maximising cash flows through sales.

Held To Collect Model (HTC)
Model characteristics:

  • The objective of the model is to hold financial assets in order to collect their contractual cash flows,
  • Sales are infrequent,
  • In principle, lower levels of sales compared to other models (in terms of frequency and volume).

Conditions allowing sale in the HTC model:

  • Low frequency,
  • Low volume,
  • Sale connected with credit risk (sale caused by the deterioration of the credit quality of a given financial asset to a level at which it no longer meets the investment policy requirements).

A sale having at least one of the above features does not preclude qualifying a group of assets in the HTC module.

Impact on classification and valuation:

Instruments assigned to the HTC model are classified as valued at amortised cost (AC) on condition that the criteria of the SPPI Test are met. Consequently, subject to valuation at amortised cost is the Group’s credit portfolio (except loans not meeting the SPPI test) and debt securities issued by local government units (municipal bonds portfolio), previously classified (according to IAS39) as available for sale (AFS), because these instruments in principle are held by the Group in order to collect contract cash flows, while sales transactions occur infrequently.

As a result of the implementation of new rules in the area of classification of financial instruments, the Group has separated credit exposures which include, in the interest rate definition, leverage/multiplier feature (credit card exposures and overdraft limit for which the interest rate is based on the multiplier: 4 times the lombard rate) and presented aforementioned exposures in these financial statements as “Non-trading financial assets mandatorily at fair value through profit or loss – Credits and advances”. It should be noted that there is still a discussion in the banking sector regarding the presentation of such loans; whether the fair value or amortized cost model is appropriate. The provisions of IFRS 9 indicate that the multiplier feature modifies money over time and causes the need to apply fair value measurement, however the economic sense of the transaction, i.e. portfolio management not based on fair value and maintaining the portfolio to obtain cash flows from the contract, constitute characteristics of portfolios valued at amortized cost. On the other hand, due to the current nature of this loan portfolio, the difference between its fair value and the carrying amount determined using the amortized cost method is negligible, therefore the issue has an insignificant impact on the financial result and capital of the Group, it only causes a change in the presentation of these exposure in the balance sheet.

Both Held to Collect and for Sale Model (HTC&FS)

Model characteristics:

  • The integral objectives of the business model are both to collect contractual cash flows and sell assets (in particular the model meets the assumptions of HTC&FS, if its objective is to manage everyday liquidity needs, maintain an adopted interest yield profile and/or match the duration of the financial assets and liabilities),
  • The levels of sales are usually higher than in the HTC model.

Impact on classification and valuation:

In accordance with IFRS 9 instruments assigned to the HTC&FS model are classified as valued at fair value through other comprehensive income (FVTOCI) on condition that the contractual terms of these instruments trigger at particular moments cash flows constituting solely a payment of principal and interest on such principal (the SPPI test is met).

The HTC&FS model is applied to the portfolio of government securities and money bills of the National Bank of Poland (in particular the liquidity and investment portfolio) and other debt securities classified as available for sale (AFS) according to IAS39 (except municipal bonds reclassified in the HTC portfolio). This means that the accounting for these instruments has not changed after the entry into force of IFRS 9.

Equity instruments (with the exception of related entities not covered by the provisions of IFRS9) are classified as valued at fair value through profit & loss (FVTPL), provided that entities which manage them do not intend to hold them as a strategic investment, or at fair value through other comprehensive income (FVTOCI) for instruments which are not held for trading purposes. The decision to use the option to value capital instruments at fair value through other comprehensive income shall be taken by the Group on the day of the initial recognition of the instrument and constitute an irrevocable designation (even at the moment of selling, the profit/loss on the transaction shall not be recognised in the Profit and Loss Account). At the moment of implementation of IFRS9, the Group designated some equity investments from the strategic investment portfolio for which it is not planned to realize profits from sales in the medium-term horizon to the category of fair value measurement with the effect of valuation through other comprehensive income.

Other models

Characteristics:

  • The business model does not meet the assumptions of the HTC and HTC&FS models.
  • The collecting of cash flows on interest and principal is not the main objective of the business model (the SPPI test is not satisfied).

This category should include in particular:

  • Portfolios managed in order to collect cash flows from the sale of assets, in particular „held for trading”,
  • Portfolios whose management results are evaluated at fair value.

A financial asset should be considered as held for trading, if:

  • It was purchased mainly for the purpose of selling in a very short term,
  • At the moment of initial recognition it is part of a portfolio of financial instruments managed jointly for which there is evidence confirming a regularity that they have recently actually generated short-term profits, or
  • Is a derivative instrument, with the exclusion of derivative instruments included in hedge accounting and being effective hedging instruments.The term „trading” means active and frequent purchases and sales of instruments. However, these features do not constitute a necessary condition in order to classify a financial instrument as held for trading.

Impact on classification and valuation:

Financial assets kept under models other than HTC or HTC&FS are valued at fair value through profit & loss (FVTPL).

A business model other than HTC or HTC&FS shall apply to portfolios of the following financial assets:

  • Derivative instruments,
  • Securities held for trading.

The classification of such instruments has not changed after the entry into force of IFRS 9 (Fair Value Through Profit & Loss).

Test of characteristics of contractual cash flows (SPPI test)

The evaluation of the fulfillment of the SPPI Test is carried out in the following cases:

  • granting a loan;
  • purchase of credit;
  • renegotiation of contractual terms;

The subject of the SPPI Test are the contractual terms of loans recognised in the balance sheet, whereas the off-balancesheet products are not analyzed.
The SPPI test is carried out at the design stage of the product/loan agreement, which allows making approvals with taking into account the future method of exposure valuation.
As part of the SPPI Test, the impact of the modified element on the cash flows resulting from the concluded contract is assessed. Contract characteristics introducing volatility or cash flow risk not directly related to interest and capital interest payments may be assessed as having no impact on the classification (fulfillment of SPPI criteria) if they are defined as having negligible classification impact (existence of a “de minimis” characteristic) or such impact is not negligible (no “de minimis” character) but can only occur in extremely rare cases (existence of the “not genuine” attribute).
In cases where there is a modification of the time value of money, eg in case where a period of interest rate mismatch with the base rate tenor, in order to verify the fulfillment of the SPPI Test, the Group performs an assessment based on the
Benchmark Test, ie a comparison of the instrument resulting from the contract with the base instrument.
The clauses contained in the credit agreement that make the interest margin conditional upon the fulfillment of specific covenants (eg maintaining a given ratio at a certain level) constitute an element modifying the value of contractual cash flows and are subject to analysis in terms of impact on meeting SPPI criteria.
Non-recourse assets (products for which the Group’s claim is limited to certain debtor’s assets or cash flows from specific assets), in particular “project finance” and “object finance” products (products in which the borrower, most often a special purpose vehicle is characterized by the minimum level of equity, and the only component of its assets is the credited asset), are assessed by comparing the value of the collateral in relation to the principal amount of the loan. Identification of the appropriate buffer to cover the risk of changes in the value of the collateral satisfies the SPPI Test conditions.
The negative result of the SPPI Test implies the valuation of the loan to fair value, causing a departure from the standard method of credit valuation at amortized cost.

Modifications to the terms of the loan agreement

Modifications to the terms of the loan agreement during the loan period include:

  • changing the dates of repayment of all or part of the receivables,
  • changes in the amount of the repayment installments,
  • changing the interest or stop charging interest,
  • capitalization of arrears or current interest,
  • currency conversion (unless such a possibility results from the original contract),
  • establishing, amending or abolishing the existing security for receivables.

Any mentioned above modification may result in the need to exclude from the balance sheet and re-classify the financial asset taking into account the SPPI test.

If the contractual terms of the loan are modified, the Group performs a qualitative and quantitative assessment to determine whether a given modification should be considered significant and, consequently, derecognize the original financial asset from the balance sheet and recognize it as a new (modified) asset at fair value. A significant modification takes place if the following conditions are met:

  • at least two times extension of the residual maturity (analyzed on the basis of the residual maturity at the time of extension), not shorter than 3 years and at the same time an increase in the amount of financing,
  • conversion of exposures to another currency (if the conversion option was not included in the original contract),
  • change in the SPPI test result.

The result on significant modification is presented in the result on impairment losses.

If the cash flows resulting from the agreement are subject to modification, which does not lead to derecognition of a given asset (so called ‘insignificant modification”), the Group adjusts the gross carrying amount of the financial asset and recognizes the profit or loss due to insignificant modification in the financial result (in a separate item of the Loss Profit Statement – “result on modification “). The adjustment of the gross carrying amount of a financial asset is the difference between the discounted cash flows before and after the contract modification. All costs and fees incurred adjust the carrying amount of the modified financial asset and are depreciated in the period remaining until the maturity date of the modified financial asset.

Impairment

General assumptions of the model

Since 1 January 2018, impairment estimation model has been based on the concept of “expected credit loss”, (hereinafter: ECL). As a direct result of this change, impairment charges now have to be calculated based on expected credit losses and forecasts and expected future economic conditions have to be taken into account when conducting evaluation of credit risk of an exposure.

The implemented impairment model applies to financial assets classified in accordance with IFRS 9 as financial assets measured at amortized cost or at fair value through other comprehensive income, except for equity instruments.

According to IFRS 9, credit exposures are classified in the following categories:

  • Stage 1 – non-impaired exposures, for which expected credit loss is estimated for the 12-month period,
  • Stage 2 – non-impaired exposures, for which a significant increase in risk has been identified and for which expected credit loss is estimated for the remaining life time of the financial asset,
  • Stage 3 – exposures with identified signs of impairment, for which expected credit loss is estimated for the remaining life time of the financial asset.

In the case of exposures classified as POCI (purchased or originated credit impaired) which, upon their initial recognition in the balance sheet, are recognized as impaired, expected losses are estimated for the remaining life of the financial asset.

Identification of a significant increase in credit risk

Assets, for which there has been identified a significant increase in credit risk compared to the initial recognition in the balance sheet, are classified in Stage 2. The significant increase in credit risk is recognized based on qualitative and quantitative criteria.

The qualitative criteria include:

  • repayment delays of more than 30 days,
  • forborne exposures in non-default status,
  • procedural rating, which is reflecting early delays in payments,
  • taking a risk-mitigating decision for corporate clients, triggered by the early warning system,
  • events related to an increase in credit risk, the so called “soft signs” of impairment, identified as part of an individual analysis involving individually significant customers.

The quantitative criterion involves a comparison of the lifetime PD value determined on initial recognition of an exposure in the balance sheet, with the lifetime PD value determined at the current reporting date. If an empirically determined threshold of the relative change in the lifetime PD value is exceeded then an exposure is automatically transferred to Stage 2. The quantitative assessment does not cover exposures analyzed individually.

Incorporation of forward looking information on economic conditions (FLI)

In the process of calculation of expected credit losses, the Group uses forward looking information about macroeconomic events. The Macroeconomic Analysis Office prepares three macroeconomic scenarios (base, optimistic and pessimistic) and determines the probability of their occurrence. The forecasts translate directly or indirectly into the values of estimated parameters and exposures.

Unification of the default definition across the Group

Based on the paragraph 5.5.37 of IFRS 9, on the application date of the new Standard, the impaired definition was adapted to a more conservative default definition used in the capital requirement calculation process (including in the IRB approach). The main difference in both definitions, before the change, was related to the approach to a quarantine for restructured exposures. The approach is more restrictive in respect to the default definition. Therefore, ever since it implemented IFRS 9, the Group has used a uniform definition of default, both in the area of capital calculation and to determine impairment.

Unified Default definition includes following triggers:

  • DPD>90 days considering materiality thresholds for due amount: 500 zł retail and 3000 zł corporates,
  • Restructured loans (annexes and agreements),
  • Loans in vindication process,
  • Qualitative triggers identified in the individual analysis.

Bank is using cross-default approach for all segments.

PD Model

The PD model, created for the calculation of expected credit losses, is based on empirical data concerning 12-month default rates, which are then used to estimate lifetime PD values (including FLI) using appropriate statistical and econometric methods. The segmentation adopted for this purpose at the customer level is consistent with the segmentation used for capital requirement calculation purposes. Additionally, the Bank has been using rating information from internal rating models to calculate PDs. The value of the PD parameter for estimating ECL over a 12-month time horizon corresponds to the value from IRB models (after excluding prudential haircuts).

LGD Models

The LGD models for the retail portfolio used by the Bank in the capital calculation process were adjusted to IFRS 9 requirements in the area of estimating impairment. The main components of these models are the probability of cure and the recovery rate estimated on the basis of discounted cash flows. The necessary adaptations to IFRS 9 include, among other things, exclusion of the conservatism buffer, indirect costs, adjustments for economic slowdown. In addition, adjustments have been made to reflect the current economic situation and to utilize forward looking information on macroeconomic events.

For the corporate portfolio, a completely new LGD model has been developed that fully satisfies the requirements of the new standard. The model is based on a component determining parameterized recovery for the key types of collateral and a component determining the recovery rate for the unsecured part. All the parameters were calculated on the basis of historical data, including discounted cash flows achieved by the corporate debt recovery unit.

EaD Model

The EaD model used in the Group includes calculation of parameters such as: average limit utilization (LU), credit conversion factor (CCF), prepayment ratio, behavioral life expectancy. Segmentation is based on the type of customer (retail, corporate, leasing) and product (products with/without a schedule). Forecasts of foreign exchange rates are used as FLI adjustment.

Impact on the amount of impairment charges

There were multiple factors that contributed to the increase in the amount of impairment charges following the application of IFRS 9. The most important factors included:

  • Identification of exposures with a significant risk increase (Stage 2) and the related need to estimate impairment charges on a lifetime basis.
  • Extension of the Loss Identification Period (LIP) for exposures in Stage 1, to 12 months. So far, the Group has calculated PD parameters on the basis of LIP determined empirically, which was shorter than 12 months for all the observed segments.
  • Unification of the default definition in the Group.

Write-offs

The Group directly reduces the gross carrying amount of a financial asset if there are no reasonable grounds to recover a given financial asset in whole or partially. As a result of write-off, a financial asset component ceases, in whole or partially, to be recognized in the financial statements.

POCI assets

POCI assets (“purchased or originated credit-impaired”) are financial assets that, upon initial recognition, have an identified impairment. Financial assets that were classified as POCI at the time of initial recognition are treated by the Group as POCI in all subsequent periods until they are derecognized from balance sheet, and classified to stage 3, regardless of future changes in estimates of cash flows generated by them (possible improvement of assets quality).

POCI assets can be created in 3 different ways, i.e.:

  • through the acquisition of a contract that meets the definition of POCI (e.g. as a result of the purchase of the “bad credit” portfolio),
  • by entering into a contract that is POCI at the time of original granting (e.g. granting a loan to a client in bad financial condition with the hope of improving it in the future)
  • through a significant modification of the contract included in stage 3 leading to derecognition of the contract from the balance sheet, and then to its further recognition in the balance sheet as a contract meeting the definition of POCI.

Financial liabilities

IFRS 9 has not introduced 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 AC).

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

Hedge accounting

Based on the paragraph 7.2.21 of IFRS 9, the Group decided to continue to apply the hedge accounting requirements of IAS 39 instead of the requirements of IFRS 9. In view of the above, as regards hedge accounting, the adoption of IFRS 9 did not have any impact on the financial position of the Group.

Impact of the implementation of IFRS 9 on the financial position of the Group

Pursuant to the provisions of IFRS 9, the Group decided not to convert comparative data due to the implementation of changes from the classification and valuation area and impairment. As a result, differences in the carrying amount of financial assets and liabilities resulting from the implementation of IFRS 9 were recognized as an adjustment to own equity as at 1 January 2018.

Below an impact of the implementation of IFRS 9 on the financial position of the Group is presented.

ASSETS
Amount ‘000 PLN
IAS 39
31.12.2017
(1)
reclassification
(2)
reclassification
(3)
reclassification
(4)
valuation
(5)
valuation
IFRS 9
01.01.2018
Cash, cash balances at central banks 2 080 151 0 0 0 0 0 2 080 151
Financial assets held for trading 531 125 0 0 0 0 0 531 125
Derivatives 192 664 0 0 0 0 0 192 664
Equity instruments 102 0 0 0 0 0 102
Debt securities 338 359 0 0 0 0 0 338 359
Non-trading financial assets mandatorily at fair value through profit or loss, other than Loans and advances to customers 0 19 232 0 29 632 0 0 48 864
Equity instruments 0 19 232 0 0 0 0 19 232
Debt securities 0 0 0 29 632 0 0 29 632
Financial assets at fair value through other comprehensive income 0 18 970 106 0 0 0 24 904 18 995 010
Equity instruments 0 1 227 0 0 24 904 26 131
Debt securities 0 18 968 879 0 0 0 0 18 968 879
Financial assets available for sale 19 066 946 (19 037 314) 0 (29 632) 0 0 0
Equity instruments 50 091 (20 459) 0 (29 632) 0 0 0
Debt securities 19 016 855 (19 016 855) 0 0 0 0 0
Loans and advances to customers 47 411 078 0 0 0 (291 909) 0 47 119 169
Mandatorily at fair value through profit or loss 0 0 1 099 841 0 0 0 1 099 841
Valued at amortised cost 47 411 078 0 (1 099 841) 0 (291 909) 0 46 019 328
Financial assets at amortised cost other than Loans and advances to customers 254 205 47 976 0 0 0 0 302 181
Debt securities 0 47 976 0 0 0 0 47 976
Deposits, loans and advances to banks and other monetary institutions 254 205 0 0 0 0 0 254 205
Reverse sale and repurchase
agreements
0 0 0 0 0 0 0
Derivatives – Hedge accounting 885 880 0 0 0 0 0 885 880
Investments in subsidiaries, joint ventures and associates 0 0 0 0 0 0 0
Tangible fixed assets 185 880 0 0 0 0 0 185 880
Intangible fixed assets 79 756 0 0 0 0 0 79 756
Income tax assets 288 178 0 0 0 52 887 (4 732) 336 333
Current income tax assets 1 625 0 0 0 0 0 1 625
Deferred income tax assets 286 553 0 0 0 52 887 (4 732) 334 708
Other assets 338 659 0 0 0 0 0 338 659
Non-current assets and disposal groups classified as held for sale 19 557 0 0 0 0 0 19 557
Total assets 71 141 415 0 0 0 (239 022) 20 172 70 922 565

 

LIABILITIES AND EQUITY
Amount ‘000 PLN
IAS 39
31.12.2017
(1) reclassification (2) reclassification (3) reclassification (4) valuation (5) valuation IFRS 9
01.01.2018
LIABILITIES
Financial liabilities held for trading 190 111 0 0 0 0 0 190 111
Derivatives 190 111 0 0 0 0 0 190 111
Short positions 0 0 0 0 0 0 0
Financial liabilities measured at amortised cost 61 484 830 0 0 0 0 0 61 484 830
Liablities to banks and other monetary other monetary institutions 2 353 131 0 0 0 0 0 2 353 131
Liabilities to customers 57 273 255 0 0 0 0 0 57 273 255
Sale and repurchase agreements 0 0 0 0 0 0 0
Debt securities issued 1 156 473 0 0 0 0 0 1 156 473
Subordinated debt 701 971 0 0 0 0 0 701 971
Derivatives – Hedge accounting 176 853 0 0 0 0 0 176 853
Provisions 67 752 0 0 0 23 829 0 91 581
Pending legal issues 46 032 0 0 0 0 0 46 032
Commitments and guarantees given 21 720 0 0 0 23 829 0 45 549
Income tax liabilities 26 988 0 0 0 0 0 26 988
Current income tax liabilities 26 988 0 0 0 0 0 26 988
Deferred income tax liabilities 0 0 0 0 0 0 0
Other liabilities 1 422 282 0 0 0 0 0 1 422 282
Total Liabilities 63 368 816 0 0 0 23 829 0 63 392 645
EQUITY
Capital 1 213 117 0 0 0 0 0 1 213 117
Share premium 1 147 502 0 0 0 0 0 1 147 502
Accumulated other comprehensive income (34 795) 0 0 (5 500) 0 20 172 (20 123)
Retained earnings 5 446 775 0 0 5 500 (262 851) 0 5 189 424
Total equity 7 772 599 0 0 0 (262 851) 20 172 7 529 920
Total equity and total liabilities 71 141 415 0 0 0 (239 022) 20 172 70 922 565

 

(1) Reclassification of securities: the Group has evaluated the business model for investment securities, as a result, debt securities previously classified as available for sale were included in the HTC&FS portfolio and are measured at fair value through other comprehensive income.

The exceptions were municipal bonds included in the HTC portfolio valued at amortized cost, because these instruments are generally maintained by the Group to obtain contractual cash flows, and sales transactions occur infrequently. The impact of valuation of these instruments in 2018 on other comprehensive income (if the reclassification to the category of measurement at amortized cost was not made) would be immaterial.

Equity instruments are classified as measured at fair value through profit and loss unless they are a strategic investment – at the time of implementing IFRS 9, the Group used the option and designated some equity investments treated as strategic to the fair value measurement category with the effect of valuation recognized in other comprehensive income.

(2) The Group identified in credit portfolio exposures which include, in the interest rate definition, leverage/multiplier feature (credit card exposures and overdraft limit for which the interest rate is based on the multiplier: 4 times the lombard rate) and due to not meeting the SPPI test, presented aforementioned exposures in these financial statements as “Nontrading financial assets mandatorily at fair value through profit or loss – Credits and advances”.

(3) Reclassification of exposures to VISA Incorporation securities.

(4) Revaluation of the loan portfolio and provisions for off-balance sheet liabilities.

The change in the balance of all impairment allowances and provisions created by the Group which value has changed as a result of the implementation of IFRS 9 is presented below:

As at
31.12.2017
(IAS 39)
IFRS9 implementation As at
01.01.2018
(IFRS 9)
reclassification of credit portfolio not meeting SPPI test reclassification
of KOIM*
revaluation
Impairment allowances for loan portfolio valued at amortised cost 1 497 228 (83 790) 119 315 291 909 1 824 662
Provisions for off-balance sheet liabilities 21 720 0 0 23 829 45 549

(*) In accordance with IFRS 9, the Group calculates interest on the loan portfolio with recognized impairment based on the net exposure value. For this purpose, the so-called correction of impaired interest (“KOIM”) is calculated and accounted for as a reduction in interest income. The aforementioned adjustment in the balance sheet used to presented in accordance with IAS 39 as a reduction of gross exposure, in accordance with IFRS 9 KOIM in the balance sheet is recognized as impairment allowances. The reclassification of KOIM consisted of a simultaneous increase in the gross exposure value and the balance of impairment allowances.

In relation to other categories of assets and liabilities, the implementation of IFRS 9 did not result in changes in impairment losses and provisions.

The following is the balance of impairment losses and provisions recognized by the Group on January 1, 2018, broken down
into baskets

As at 01.01.2018 accordingly IFRS 9 impairment allowances/provisions Total
Stage 1 Stage 2 Stage 3
Impairment allowances for loan portfolio valued at amortised cost 198 097 215 408 1 411 159 1 824 662
Provisions for off-balance sheet liabilities 24 862 13 189 7 498 45 549

(5) Revaluation of equity instruments.

Impact of IFRS9 implementation on capital adequacy ratios

Group has estimated a negative impact of IFRS 9 implementation on capital ratios and has evaluated it as immaterial.

As at 01/01/2018 full IFRS 9 implementation would cause decrease of TCR by 23 b.p. from 21.99% to 21.76%, and Tier 1 ratio by 28 b.p. from 20.03% to 19.75%. Applying transitional periods rules, TCR would improve by 8 b.p. to 22.07% and Tier 1 ratio by 4 b.p. to 20.07%.

Group took decision on application of transitional periods rules according to Regulation 2017/2395 (EU). Group informed about that decision Competent Authorities.

For annual periods beginning on January 1, 2018, the Group implemented IFRS 15 “Revenue from contracts with customers”. The principles stipulated in IFRS 15 shall apply to all agreements resulting in revenues. Recognition of revenues should be made upon transfer of control over goods or services to the customer, at transaction price. Any and all goods or services sold in packs, which may be identified within the pack, should be recognised separately. Moreover any and all discounts and rebates concerning the transaction price should be as a rule allocated to particular components of the pack. If the amount of revenue is variable, in accordance with the new standard the variable amounts are carried in revenues if there is a high likelihood that in the future there will be no reversal of recognition of revenue in result of revaluation. Moreover costs incurred to acquire and hedge a contract with a customer should be activated and settled over time during the period of consuming the benefits from this contract.

Main types of potential revenues and costs of the Group, which as a rule should be recognised in accordance with IFRS 15 are following:

  • revenues from sale of fixed assets,
  • loyalty programmes,
  • costs eligible for capitalisation.

Due to the fact that a significant majority of revenues of the Bank results from business regulated by other IFRS (including those recognised in the financial report with the effective interest rate method), applying the amended standard does not have a significant impact on the Group’s financial situation and results.

Change to IFRS 2 introduces, inter alia, guidelines for valuation at fair value of liabilities under share-based transactions settled in cash, guidelines regarding change of classification from cash settled share-based transactions to capital instruments settled cash based transactions, and also guidelines on employee tax liability resulting from share-based transactions.

Applying the standard did not have an impact on the Group’s financial situation and results.

Changes to IFR 4 „Insurance Contracts” address the issue of application of the new IFRS 9 „Financial Instruments”. The published changes to IFRS 4 supplement options already existing in the standards with the objective to prevent temporary volatility of results generated by insurance sector entities in connection with implementation of IFRS 9.

Applying the standard did not have an impact on the Group’s financial  situation and results.

“Annual changes to OFRS 2014-2016” amend 3 standards: IFRS 12 „Disclosure of Interests in Other Entities”, IFRS 1 „First Time Adoption of IFRS” and IAS 28 „Investments in Associates”. Amendments contain explanations and changes to standard scopes, posting and valuation and contain terminology and edition changes.

Applying the standard did not have an impact on the Group’s financial situation and results.

Changes to IAS 40 more precisely provide for requirements connected with re-classification to investment property and from investment property.

Applying the standard did not have an impact on the Group’s financial situation and results.

IFRIC 22 explains accounting rules with regard to transactions in which an entity receives or transfers advances in foreign currency.

Applying the standard did not have an impact on the Group’s financial situation and results.

Published standards and interpretations, which are not in force yet and were not applied by the Group earlier

The International Accounting Standards Board has published the new International Financial Reporting Standard No. 16 (IFRS 16) concerning leases. IFRS 16 will apply to reporting periods starting on 1 January 2019 and will affect the Group in the area of assets used under lease agreements. The new requirements eliminate the notion of operating lease and thus off-balance sheet recognition of assets used on this basis. All assets used as well as relevant rent payment liabilities will have to be recognised in the balance sheet.

The Group analysed its agreements to establish which are leases, which aren’t. An agreement is a lease or contains a lease if under it the right is conveyed to control the use of an identified asset for a particular irrevocable period in exchange for remuneration. Recognition of agreements on rental of office space (Head Office, branches) as leases will have the biggest impact on financial statements. Also agreements were identified on small spaces (bin shelters, ATM space etc.) as well as agreements on minor equipment, which were classified as low value leases.

Transition period

In order to implement the new standard the Bank adopted a modified retrospective approach, which assumes not restating comparable data. In consequence the date of applying the standard will be the first day of the annual reporting period, in which the Bank will apply principles of the new standard for the first time (1 January 2019). On the day of first use of the new standard the Bank will recognise lease liabilities equal to the current value of discounted and as yet unpaid lease payments as well as assets equal to liabilities. The life of an asset for use will be equal to the duration of the lease agreement.

Based on budgetary assumptions the Group estimates that in result of application of the new standard in January 2019 the Group will report total assets higher by approx. PLN 376 million, while costs recognised in 2019 result will increase by approx. PLN 5 million over 2018. In subsequent years the impact of the new standard on the result will decrease.

The Bank has adopted the following assumptions, based on which lease agreements will be carried in financial statements:

  • Calculation of liabilities and assets will use net values of future cash flows,
  • In case of agreements denominated in currency the liabilities will be carried in the original currency of the contract while assets in Polish zloty converted at the rate from the day of start of validity (signing) of the agreement, assets in Polish zloty were converted at the rate from the date of initial application of the standard (i.e. 01.01.2019),
  • New agreements shall be discounted using incremental borrowing rate defined as risk free rate (SWAP) from the day of start (signing) of an agreement appropriate for the duration of the agreement, plus credit spread defined and updated with respect to the premium for Bank’s credit risk.

Accounting schedules

The financial report will show in different items both assets from right to use as well as lease liabilities. On the start date lease payments contained in the valuation of the lease liability shall comprise following payments for the right to use the underlying asset during the lease period, which remain due on that date:

  • fixed lease payments less any and all due lease incentives,
  • variable lease payments, which depend on the index or rate, initially valuated with use of this index or this rate in accordance with their value on start date,
  • amounts expected to be paid by the lessee under the guaranteed final value,
  • the buy option strike price if it can be assumed with sufficient certainty that the lessee will exercise this option,
  • monetary penalties for lease termination if the lease terms and conditions stipulated that the lessee may exercise the lease termination option.

A right to use asset will comprise:

  • amount of initial valuation of the lease liability,
  • any and all lease payments paid on the start date or before it, less any and all lease incentives received.

Financial result shall reflect following items:

  • depreciation of right to use,
  • interest on lease liabilities as a sum of two bookings – due monthly rent less value of repayment of liability,
  • VAT on rent invoices reported in cost of rent.

The Group expects that introduction of listed below not effective standards will not have significant impact on the Group’s financial situation and results.

Changes to IFRS 9 apply to annual periods commencing on 1 January 2019 or after that date with early application option. In effect of change to IFRS  9, entities will be able to value financial assets with the so-called pre payment right with negative compensation according to amortised cost or fair value by comprehensive income if a specific condition is met – instead of fair value through profit and loss.

IFRS 17 „Insurance Contracts” was issued by the International Accounting Standards Board on 18 May 2017 and is effective for annual periods commencing on 1 January 2021 or after that date.

The new IFRS 17 Insurance Contracts will replace currently effective IFRS 4, which allows diverse practices in settling of insurance contracts. IFRS 17, in principle, will change accounting of all entities dealing in insurance contracts and investment agreements.

The Group will apply IFRS 17 after its approval by the European Union. As on the date of this consolidated financial statement, the new standard has not been, yet, approved by the European Union.

Change is effective for annual periods commencing on 1 January 2019 or after that date. Changes to IAS 28 “Investments in Associates and Joint Ventures” explain that relative to long term interests in associates or joint ventures to which property right method is not applied, companies will apply IFRS 9. In addition, the Board also published an example illustrating application of IFRS 9 and IAS 28 requirements to long term interests in associate or joint venture.

The Group will apply the above changes from 1 January 2019.

As on the date of this consolidated financial statement, the change has not been, yet, approved by the European Union.

IFRIC 23 explains requirements with regard to recognition and valuation, as contained in IAS 12 in case of uncertainty related to income tax recognition. Guidelines are effective for annual periods commencing on 1 January 2019 or after that date.

The Group will apply the above changes from 1 January 2019.

The International Accounting Standards Board published, in December 2017 “Annual Changes to IFRS 2015-2017”, introducing changes to 4 standards: IFRS 3 „Business Combinations”, IFRS 11 „Joint Arrangements”, IAS 12 „Income Tax” and IAS 23 „Borrowing Costs”.

Amendments provide explanations and more precise standard guidelines in the area of recognition and valuation.

The Group will apply the above changes from 1 January 2019.

As on the date of this consolidated financial statement, the change has not been, yet, approved by the European Union.

Changes to IAS 19 are effective for annual periods commencing on 1 January 2019 or after that date. Amendments to the standard stipulate requirements related to accounting recognition of modification, limitation or settlement of a programme of specific benefits.

The Group will apply the above changes from 1 January 2019.

As on the date of this consolidated financial statement, the change has not been, yet, approved by the European Union.

Changes to the scope of references to Conceptual Assumptions in IFRS will become applicable as on 1 January 2020.

In effect of changes to IFRS 3 definition of “undertaking” was modified. Definition currently introduced has been narrowed down and is likely to produce more transactions to be classified to asset acquisition. Changes to IFRS 3 apply to annual periods commencing on 1 January 2020 or after that date.

As on the date of this consolidated financial statement, the change has not been, yet, approved by the European Union.

The Board published a new definition of the term “materiality”. Changes to IAS 1 and IAS 8 precisely formulate definition of materiality and improve cohesion between standards, but they are not expected to have significant impact upon preparation of financial statements. Guidelines are effective for annual periods commencing on 1 January 2020 or after that date.

As on the date of this consolidated financial statement, the change has not been, yet, approved by the European Union.

The standard allows entities preparing their financial statements in accordance with IFRS for the first time (as from 1 January 2016 or after that date) to recognise amounts resulting from operations with regulated rates in accordance with accounting principles applied to date. To improve comparability with entities that have been already applying IFRS and do not show such amounts, in line with the published IFRS 14 amounts resulting from operations with regulated rates, should be presented in a separate line item both in the report on financial situation and in the profit and loss account and the report on other comprehensive incomes.

By decision of the European Union IFRS 14 will not be approved.

Changes resolve the current inconsistencies between IFRS 10 and IAS 28. Accounting recognition is conditional upon whether non-monetary assets sold or contributed to an associate or a joint venture constitute a „business”.

In case the non-monetary assets constitute “business”, investor will recognise full profit or loss on the transaction. In case assets do not meet the ‘business’ definition, investor will recognise profit or loss excluding the part constituting interests of other investors.

Changes were published on 11 September 2014. The effectiveness date relative to the amended regulations has not been determined by the International Accounting Standards Board yet.

As on the date of this consolidated financial statement, the change has not been, yet, approved by the European Union.