Derivative financial instruments

Accounting policies

In the course of its activities, the Group uses derivative financial instruments designated for the purpose of managing the risks associated with its operations. The most frequently used derivative instruments include: IRS, CIRS, FX Swap, options, commodity swap, FRA, Forward and Futures. Derivative financial instruments are recognized at fair value from the transaction date. A derivative instrument is presented under “Derivative financial instruments” as an asset if its fair value is positive, and as a liability if its fair value is negative.

The Group recognizes changes in the fair values of derivative instruments not classified as cash flow hedges and the result on the settlement of those instruments in the result on financial instruments measured at fair value through profit or loss, or in net foreign exchange gains, depending on the type of derivative.

Embedded derivative instruments

With respect to embedded derivatives, the Group assesses whether a given contract contains an embedded derivative instrument as at the moment of concluding the contract. A reassessment can only be made when there is a change in the terms of the contract that significantly modifies the cash flows resulting from the contract.  Derivative instruments separated from host contracts and recognized separately in the books of account are measured at fair value. Valuation is presented in the statement of financial position under “Derivative financial instruments”. Changes in the fair value measurement of derivative instruments are recorded in the income statement under the item ‘‘Net gain/(loss) on financial instruments measured at fair value or “Net foreign exchange gains/(losses)”.

Estimates and judgements

The fair value of non-option derivatives is determined using valuation models based on discounted cash flows expected to be received from the given financial instrument.  Options are valued using option pricing models. The variables and assumptions used in a valuation include, where available, data derived from observable markets.

The fair value of derivatives includes the Group’s own credit risk, DVA (debit value adjustment) as well as counterparty credit risk, CVA (credit value adjustment). The process of calculation of CVA and DVA adjustments includes the selection of method determining the spread of the counterparty’s or the Group’s credit risk (e.g. a market price method based on continuous price quotations of debt instruments issued by the counterparty, a method of spread implied from Credit Default Swap contracts), an estimation of the probability of default by the counterparty or the Group and the recovery rate, and calculation of the amount of CVA and DVA adjustments. 

The valuation techniques used by the Group for non-option derivative instruments are based on yield curves based on available market data (deposit margins on interbank market, IRS quotations).

Financial information

Calculation of estimates

The Group conducted a simulation to assess the potential influence of changes in the yield curves on the transaction value.

As at 31 December 2017, the amount of CVA and DVA adjustments amounted to PLN 2 million (as at 31 December 2016: PLN 7 million).