Accounting policies, and estimates and judgements
The fair value is the price that would be received for the sale of an asset or paid for transfer of a liability in a transaction carried out under regular conditions on the main (or most advantageous) market at the valuation date in the current market conditions (i.e. exit price), regardless of whether this price is directly observable or estimated using another valuation technique.
Depending on the classification of financial assets and liabilities to a specific level of the hierarchy, different methods of fair value measurement are used.
Level 1: Prices quoted on active markets
Financial assets and liabilities whose fair value is stated directly at prices quoted (not adjusted) on active markets for identical assets and liabilities. In this category the Group classifies financial and equity instruments measured at fair value through profit or loss and available for sale, for which there is an active market and for which the fair value is determined with reference to the market value, which is a bid price:
- debt securities valued using fixing from Bondspot platform or Bloomberg or Reuters information services;
- debt and equity securities which are traded on a regulated market, including in the Brokerage House portfolio;
- derivatives instruments, which are traded on a regulated market.
Level 2: Valuation techniques based on observable market data
Financial assets and liabilities whose fair value is determined using valuation models where all significant entry data are observable on the market directly (as prices) or indirectly (based on prices). In this category, the Group classifies financial instruments for which there is no active market:
| Financial assets and liabilities measured at fair value | Valuation method (technique) | Observable inputs |
|---|---|---|
| Derivatives financial instruments – CIRS, IRS, FRA | The discounted future cash flows model based on yield curves. | Yield curves are built based on market rates, market data of the money market, market transactions of FRA, IRS, basis swap. |
| Derivative financial instruments – currency option, interest rate options, equity exotic options, fx forward, fx swap transactions | Valuation model specific for a particular type of currency option. The model of discounted future cash flows based on yield curves for FX forward and FX swap transactions. The prices of equity exotic options embedded in structured products are obtained from the market (market prices). | Yield curves built based on money market rates, market rate of swap points, volatility levels for specific currency pairs, NBP fixing exchange rates. For the purpose of valuation of equity exotic options embedded in structured products, market prices of these options are obtained. |
| NBP money market bills | Yield curve method | Yield curves are built based on money market data and OIS (overnight index swap) transactions market. |
| Currency municipal bonds | Accepted valuation model | Market rates, market data from the money market, IRS transactions market, CDS transactions market, volatility of interest rate options market. |
| Municipal bonds in PLN | Yield curve and a risk margin model | Yield curves are built based on market rates, money market data, IRS transactions market. |
| Corporate bonds | Yield curve and risk margin model | Yield curves are built based on market rates, money market data, IRS transactions market. |
| Commodity swap transactions | Commodity price yield curve model | Commodity price yield curves are built based on money market data, market rate SWAP points |
Level 3: Other valuation techniques
Financial assets and liabilities whose fair value is determined using valuation models for which input data is not based on observable market data (unobservable input data). In this category, the Group classifies financial instruments, which are valued using internal valuation models:
| Financial assets and liabilities measured at fair value | Valuation method (technique) | unobservable input |
|---|---|---|
| Participation units in mutual fund | Method of the net asset value (NAV) of the Fund i.e. the fair value of investment projects (companies) comprised in the Fund, which are subject to semi-annual review or audit performed by a registered auditor | Net asset value of the fund |
| C-series preference shares of Visa Inc. | Estimating the fair value based on the current market value of the listed ordinary shares of Visa Inc., including a discount which takes into account the limited liquidity of C-series shares and the terms and conditions of the conversion of C-series shares into ordinary shares. | Discount taking into account the limited liquidity of C-series shares and the terms of converting the C-series shares into ordinary shares. |
| Corporate bonds | Yield curve and risk margin model. Yield curve is built based on market rates, money market data and the IRS transactions market. | Credit spread (credit margins determined on the basis of initial margins modified by credit indices quotes ascribed to issuers based on their ratings and business sectors) |
Financial information
| ASSETS AND LIABILITIES MEASURED AT FAIR VALUE AS AT 31.12.2017 | Note | Carrying amount | Level 1 | Level 2 | Level 3 |
|---|---|---|---|---|---|
| Prices quoted on active markets | Valuation techniques based on observable market data | Other valuation techniques | |||
| Financial assets held for trading, excluding derivatives financial instruments | 21 | 431 | 429 | 2 | - |
| Debt securities | 405 | 405 | - | - | |
| Shares in other entities | 19 | 19 | - | - | |
| Investment certificates, rights to shares, pre-emptive rights | 7 | 7 | - | - | |
| Derivatives financial instruments | 22 | 2 598 | 1 | 2 597 | - |
| Hedging instruments | 887 | - | 887 | - | |
| Trading instruments | 1 711 | 1 | 1 710 | - | |
| Financial instruments designated at fair value through profit or loss upon initial recognition | 24 | 8 157 | 3 775 | 4 382 | - |
| Debt securities | 6 688 | 2 306 | 4 382 | - | |
| Participation units | 1 469 | 1 469 | - | - | |
| Available-for-sale investment securities | 26 | 43 651 | 34 236 | 7 249 | 2 166 |
| Debt securities | 43 192 | 34 152 | 7 249 | 1 791 | |
| Equity securities | 203 | 80 | - | 123 | |
| Participation units in investment funds and shares in collective investment undertakings | 256 | 4 | - | 252 | |
| Total financial assets measured at fair value | 54 837 | 38 441 | 14 230 | 2 166 | |
| Derivatives financial instruments | 22 | 2 740 | - | 2 740 | - |
| Hedging instruments | 204 | - | 204 | - | |
| Trading instruments | 2 536 | - | 2 536 | - | |
| Total financial liabilities measured at fair value | 2 740 | - | 2 740 | - |
| FINANCIAL INSTRUMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS UPON INITIAL RECOGNITION AS AT 31.12.2017 | Carrying amount | Level 1 | Level 2 | Level 3 |
|---|---|---|---|---|
| Debt securities | 6 688 | 2 306 | 4 382 | - |
| NBP bills | 4 199 | - | 4 199 | - |
| treasury bonds (in PLN) | 1 413 | 1 413 | - | - |
| treasury bonds (in foreign currencies) | 893 | 893 | - | - |
| municipal bonds (in PLN) | 106 | - | 106 | - |
| corporate bonds (in foreign currencies) | 77 | - | 77 | - |
| Participation units in ICF (insurance capital funds) related to insurance products belonging to the group of investment products where the risk is borne by the policyholder | 1 469 | 1 469 | - | - |
| TOTAL | 8 157 | 3 775 | 4 382 | - |
| AVAILABLE-FOR-SALE INVESTMENT SECURITIESAS AT 31.12.2017 | Carrying amount | Level 1 | Level 2 | Level 3 |
|---|---|---|---|---|
| Securities available for sale | 43 192 | 34 152 | 7 249 | 1 791 |
| treasury bonds (in PLN) | 33 502 | 33 502 | - | - |
| treasury bonds (in foreign currencies) | 238 | - | 238 | - |
| municipal bonds (in PLN) | 4 928 | - | 4 928 | - |
| corporate bonds (in PLN) | 4 045 | 321 | 2 083 | 1 641 |
| corporate bonds (in foreign currencies) | 479 | 329 | - | 150 |
| Equity securities | 203 | 80 | - | 123 |
| Participation units in investment funds and shares in collective investment undertakings | 256 | 4 | - | 252 |
| TOTAL | 43 651 | 34 236 | 7 249 | 2 166 |
| ASSETS AND LIABILITIES MEASURED AT FAIR VALUE AS AT 31.12.2016 | Note | Carrying amount | Level 1 | Level 2 | Level 3 |
|---|---|---|---|---|---|
| Prices quoted on active markets | Valuation techniques based on observable market data | Other valuation techniques | |||
| Financial assets held for trading, excluding derivatives financial instruments | 21 | 326 | 326 | - | - |
| Debt securities | 312 | 312 | - | - | |
| Shares in other entities | 11 | 11 | - | - | |
| Investment certificates, rights to shares, pre-emptive rights | 3 | 3 | - | - | |
| Derivatives financial instruments | 22 | 2 901 | 3 | 2 898 | - |
| Hedging instruments | 382 | - | 382 | - | |
| Trading instruments | 2 519 | 3 | 2 516 | - | |
| Financial instruments designated at fair value through profit or loss upon initial recognition | 24 | 13 937 | 4 620 | 9 317 | - |
| Debt securities | 12 204 | 2 887 | 9 317 | - | |
| Participation units | 1 733 | 1 733 | - | - | |
| Available-for-sale investment securities | 26 | 36 641 | 27 345 | 5 922 | 3 374 |
| Debt securities | 36 142 | 27 236 | 5 922 | 2 984 | |
| Equity securities | 183 | 91 | - | 92 | |
| Participation units in investment funds and shares in collective investment undertakings | 316 | 18 | - | 298 | |
| Total financial assets measured at fair value | 53 805 | 32 294 | 18 137 | 3 374 | |
| Derivatives financial instruments | 22 | 4 198 | 1 | 4 197 | - |
| Hedging instruments | 1 135 | - | 1 135 | - | |
| Trading instruments | 3 063 | 1 | 3 062 | - | |
| Total financial liabilities measured at fair value | 4 198 | 1 | 4 197 | - |
| FINANCIAL INSTRUMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS UPON INITIAL RECOGNITION AS AT 31.12.2016 | Carrying amount | Level 1 | Level 2 | Level 3 |
|---|---|---|---|---|
| Debt securities | 12 204 | 2 887 | 9 317 | - |
| NBP bills | 9 079 | - | 9 079 | - |
| treasury bonds (in PLN) | 1 812 | 1 812 | - | - |
| treasury bonds (in foreign currencies) | 1 075 | 1 075 | - | - |
| municipal bonds (in PLN) | 111 | - | 111 | - |
| corporate bonds (in foreign currencies) | 127 | - | 127 | - |
| Participation units in ICF (insurance capital funds) related to insurance products belonging to the group of investment products where the risk is borne by the policyholder | 1 733 | 1 733 | - | - |
| TOTAL | 13 937 | 4 620 | 9 317 | - |
| AVAILABLE-FOR-SALE INVESTMENT SECURITIESAS AT 31.12.2016 | Carrying amount | Level 1 | Level 2 | Level 3 |
|---|---|---|---|---|
| Securities available for sale | 36 142 | 27 236 | 5 922 | 2 984 |
| treasury bonds (in PLN) | 25 744 | 25 744 | - | - |
| treasury bonds (in foreign currencies) | 678 | 457 | 221 | - |
| municipal bonds (in PLN) | 4 552 | - | 4 552 | - |
| corporate bonds (in PLN) | 4 590 | 692 | 1 149 | 2 749 |
| corporate bonds (in foreign currencies) | 578 | 343 | - | 235 |
| Equity securities | 183 | 91 | - | 92 |
| Participation units in investment funds and shares in collective investment undertakings | 316 | 18 | - | 298 |
| TOTAL | 36 641 | 27 345 | 5 922 | 3 374 |
| IMPACT OF ESTIMATED PARAMETERS ON FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS AT LEVEL 3 | 31.12.2017 | 31.12.2016 | ||
|---|---|---|---|---|
| Fair value in | Fair value in | |||
| positive scenario | negative scenario | positive scenario | negative scenario | |
| Available-for-sale investment securities | ||||
| Participation units in a collective investment undertaking1 | 264 | 239 | 313 | 283 |
| Equity securities (shares in Visa Inc.)2 | 129 | 103 | 100 | 70 |
| Corporate bonds3 | 1 799 | 1 783 | 2 992 | 2 977 |
1 Scenario assuming an increase/decrease in the Fund’s net asset value of +/- 5%, respectively.
2 Scenario assuming a discount ratio of 0%/100%, respectively.
3 Scenario assuming a change in the credit spread of +/-10%.
| RECONCILIATION OF CHANGES IN THE FAIR VALUE OF LEVEL 3 FINANCIAL INSTRUMENTS DURING THE PERIOD | 31.12.2017 | 31.12.2016 |
|---|---|---|
| Opening balance at the beginning of the period | 3 374 | 3 635 |
| Total gains or losses | 40 | 113 |
| in the profit or loss | (37) | 68 |
| in other comprehensive income | 77 | 45 |
| Taking up a new share issue in the Fund | 58 | 67 |
| Taking up of shares in Visa Inc. | - | 81 |
| Sale of shares in Visa Europe Limited | - | (337) |
| Other issues and redemptions (including settlements) | (1 213) | (185) |
| Reduction of capital involvement in the Fund | (93) | - |
| Total | 2 166 | 3 374 |
In 2017 and 2016 the Group did not reclassify financial instruments to level 3 of the fair value hierarchy.