49. Fair value of financial assets and liabilities

49.1. Categories of fair value valuation of financial assets and liabilities measured at fair value in the consolidated statement of financial position

The Group classifies particular components of financial assets and liabilities designated at fair value to the following categories:

  • Level 1: Prices quoted on the active markets
  • Level 2: Valuation techniques based on observable market data
  • Level 3: Other valuation techniques

The table below presents a classification of financial assets and liabilities presented in the financial statements at fair value divided into 3 levels as at 31 December 2014:

Assets and liabilities measured at fair value as at 31.12.2014NoteCarrying amountLevel 1Level 2Level 3
Prices quoted on the active marketsValuation techniques based on observable market dataOther valuation techniques
Trading assets 18 1,924,426 1,924,426 - -
Debt securities 1,915,120 1,915,120 - -
Shares in other entities 5,137 5,137 - -
Investment certificates 3,891 3,891 - -
Rights issues 278 278 - -
Derivative financial instruments 19 5,494,822 1,397 5,493,425 -
Hedging instruments 599,841 - 599,841 -
Trade instruments 4,894,981 1,397 4,893,584 -
Financial instruments designated upon initial recognition at fair value through profit and loss 21 15,723,148 4,371,012 11,352,136 -
Debt securities 13,804,860 2,452,724 11,352,136 -
Participation units 1,918,288 1,918,288 - -
Investment securities available for sale 23 22,267,433 12,709,259 9,354,898 203,276
Debt securities 21,961,102 12,601,236 9,354,898 4,968
Equity securities 306,331 108,023 - 198,308
Financial assets measured at fair value - total 45,409,829 19,006,094 26,200,459 203,276
Derivative financial instruments 19 5,545,141 523 5,544,618 -
Hedging instruments 494,961 - 494,961 -
Trade instruments 5,050,180 523 5,049,657 -
Debt securities in issue 35 118,262 - 118,262 -
Financial instruments designated at fair value through profit and loss 118,262 - 118,262 -
Financial liabilities measured at fair value - total 5,663,403 523 5,662,880 -

Trading assets as at 31.12.2014 (Note 18)Carrying amountLevel 1Level 2Level 3
Debt securities 1,915,120 1,915,120 - -
Treasury bonds PLN 1,825,454 1,825,454 - -
municipal bonds PLN 50,563 50,563 - -
corporate bonds PLN 22,215 22,215 - -
corporate bonds EUR 9 9 - -
bonds issued by WSE 2,248 2,248 - -
bonds issued by banks, including BGK bonds 14,631 14,631 - -
Shares in other entities 5,137 5,137 - -
Investment certificates 3,891 3,891 - -
Rights issues 278 278 - -
TOTAL 1,924,426 1,924,426 - -

Financial instruments designated upon initial recognition at fair value through profit and loss as at 31.12.2014 (Note 21)Carrying amountLevel 1Level 2Level 3
Debt securities 13,804,860 2,452,724 11,352,136 -
NBP money market bills 10,998,812 - 10,998,812 -
Treasury bonds PLN 2,452,213 2,452,213 - -
Treasury bonds UAH 26,495 - 26,495 -
municipal bonds EUR 139,882 - 139,882 -
municipal bonds PLN 113,935 - 113,935 -
structured bonds PLN 73,012 - 73,012 -
corporate bonds PLN 511 511 - -
participation units 1,918,288 1,918,288 - -
TOTAL 15,723,148 4,371,012 11,352,136 -

 

Investment securities available for sale as at 31.12.2014 (Note 23)Carrying amountLevel 1Level 2Level 3
Debt securities available for sale 21,961,102 12,601,236 9,354,898 4,968
Treasury bonds PLN 12,601,236 12,601,236 - -
Treasury bonds USD 149,582 - 149,582 -
Treasury bonds UAH 30,233 - 30,233 -
municipal bonds PLN 4,480,325 - 4,480,325 -
corporate bonds PLN 4,072,922 - 4,072,922 -
corporate bonds EUR 406,832 - 406,832 -
corporate bonds USD 199,412 - 199,412 -
corporate bonds UAH 20,560 - 15,592 4,968
Equity securities 306,331 108,023 - 198,308
TOTAL 22,267,433 12,709,259 9,354,898 203,276

The table below presents a classification of financial assets and liabilities presented in the financial statements at fair value divided into 3 levels as at 31 December 2013:

Assets and liabilities measured at fair value as at 31.12.2013NoteCarrying amountLevel 1Level 2Level 3
Prices quoted on the active marketsValuation techniques based on observable market dataOther valuation techniques
Trading assets 18 479,881 475,339 4,542 -
Debt securities   467,931 463,389 4,542 -
Shares in other entities   10,799 10,799 - -
Investment certificates   1,151 1,151 - -
Derivative financial instruments 19 3,000,860 1,015 2,999,845 -
Hedging instruments   361,639 - 361,639 -
Trade instruments   2,639,221 1,015 2,638,206 -
Financial instruments designated upon initial recognition at fair value through profit and loss 21 15,204,756 931,325 14,273,431 -
Debt securities   15,204,756 931,325 14,273,431 -
Investment securities available for sale 23 14,067,356 8,679,109 5,250,921 137,326
Debt securities   13,867,437 8,616,516 5,250,921 -
Equity securities   199,919 62,593 - 137,326
Financial assets measured at fair value - total   32,752,853 10,086,788 22,528,739 137,326
Derivative financial instruments 19 3,328,211 912 3,327,299 -
Hedging instruments   414,804 - 414,804 -
Trade instruments   2,913,407 912 2,912,495 -
Debt securities in issue 35 290,509 - 290,509 -
Financial instruments designated at fair value through profit and loss   290,509 - 290,509 -
Financial liabilities measured at fair value - total   3,618,720 912 3,617,808 -

Trading assets as at 31.12.2013 (Note 18)Carrying amountLevel 1Level 2Level 3
Debt securities 467,931 463,389 4,542 -
Treasury bonds PLN 390,660 390,660 - -
Treasury bonds EUR 4,542 - 4,542 -
municipal bonds 41,907 41,907 - -
corporate bonds 24,026 24,026 - -
bonds issued by WSE 6,628 6,628 - -
bonds issued by banks 168 168 - -
Shares in other entities 10,799 10,799 - -
Investment certificates 1,151 1,151 - -
TOTAL 479,881 475,339 4,542 -

Financial instruments designated upon initial recognition at fair
value through profit and loss as at 31.12.2013 (Note 21)
Carrying amountLevel 1Level 2Level 3
Debt securities 15,204,756 931,325 14,273,431 -
NBP money market bills 13,997,228 - 13,997,228 -
Treasury bonds PLN 931,325 931,325 - -
municipal bonds EUR 136,700 - 136,700 -
municipal bonds PLN 113,935 - 113,935 -
Treasury bonds UAH 25,568 - 25,568 -
TOTAL 15,204,756 931,325 14,273,431 -

 

Investment securities available for sale as at 31.12.2013 (Note 23)Carrying amountLevel 1Level 2Level 3
Debt securities available for sale 13,867,437 8,616,517 5,250,920 -
Treasury bonds PLN 8,616,517 8,616,517 - -
Treasury bonds USD 181,823 - 181,823 -
Treasury bonds UAH 20,160 - 20,160 -
municipal bonds 3,440,753 - 3,440,753 -
corporate bonds PLN 1,556,067 - 1,556,067 -
corporate bonds UAH 52,117 - 52,117 -
Equity securities 199,919 62,593 - 137,326
TOTAL 14,067,356 8,679,110 5,250,920 137,326

Depending on the category of classification of financial assets and liabilities to the hierarchy, different methods of fair value valuation are used:

Level 1: Prices quoted on the active markets

Financial assets and liabilities whose fair value is stated directly at prices quoted (not adjusted) from active markets for identical assets and liabilities. The Group classifies to this category financial and equity instruments designated at fair value through profit and loss and available for sale, for which there is an active market and for which the fair value is determined with reference to market value which is a bid price:

  • debt securities valued at fixing from Bondspot platform,
  • debt and equity securities which are traded on regulated market, including the Brokerage House of PKO Bank Polski SA portfolio,
  • derivative 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 with use of valuation models where all significant entry data are observable on the market directly (as prices) or indirectly (based on prices). The Group classifies to this category financial instruments for which there is no active market:

Financial assets and liabilities measured at fair valueValuation method (technique)Observable inputs
Trading assets - Treasury bonds EUR Market price of Polish Treasury securities in foreign currency is obtained from information services, in which quotations of such securities are included (Bloomberg or brokerage websites in the Reuters system). This is not a regulated market. The market price of securities obtained from information services.
Derivative financial instruments - hedging instruments Valuation of derivatives CIRS, IRS is made in accordance with the discounted future cash flows model. Discounting is based on the 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 - trade instruments Valuation of derivatives CIRS, IRS and FRA is made in accordance with the discounted future cash flows model. Discounting is based on the yield curves. Valuation of currency options is made in accordance with specified valuation models for a given type of a currency option. The prices of exotic options embedded in structured products are obtained from the market (they are market prices). Yield curves are built based on market rates, market data of the money market, market transactions of FRA, IRS, basis swap. Inputs to currency options valuation models are 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 exotic options embedded in structured products, market prices of these options are obtained.
Financial assets designated upon initial recognition at fair value through profit and loss
- NBP money market bills Yield curve valuation method Yield curves for money market bills are built based on market prices, money market data and OIS (overnight index swap) transactions market.
- municipal bonds EUR Valuation in accordance with an accepted valuation model Inputs to a valuation model are market rates, market data: money market, IRS transactions market, CDS (credit–default swap) transactions market, volatility of interest rate options market.
- municipal bonds PLN Valuation in accordance with a yield curve and a risk margin Yield curves are built based on market rates, money market data, IRS transactions market.
- Treasury bonds UAH Market approach Prices quoted on a less active market.
- structured bonds PLN Valuation acquired from an outside party under the agreement concluded Yield curves are built based on market rates and the market price volatility of the underlying instruments, based on which the option is constructed.
Investment securities available for sale  
- municipal bonds Valuation in accordance with a yield curve and a risk margin Yield curves are built based on market rates, money market data, IRS transactions market.
- corporate bonds Valuation in accordance with a yield curve and a risk margin Yield curves are built based on market rates, money market data, IRS transactions market.
- Ukrainian Treasury bonds UAH, USD Market approach Prices quoted on a less active market.
- corporate bonds UAH Market approach Prices quoted on a less active market.
Debt securities in issue - financial instruments designated at fair value through profit and loss Valuation in accordance with a yield curve and the prices of exotic options embedded in these securities Yield curves are built based on market rates, money market data, IRS transactions market. For the purpose of valuation of exotic options embedded in structured products market prices of these options are obtained.

Level 3: Other valuation techniques

Financial assets and liabilities whose fair value is determined with use of valuation models, for which available input data is not derived from observable markets (unobservable input data).

The Group classified to that category shares not listed on WSE, which are valued with internal valuation models:

  1. Fund - the fair value of these securities is determined based on the net asset value of the fund, i.e. the fair value of investment projects (of the companies) in the fund, which are subject to semi-annual review or examination by the registered auditor. If the Group used the values of the unobservable parameters, that are extreme values from the range of possible values, the fair value of the equity financial instruments could be PLN 9 306 thousand higher or PLN 9 306 thousand lower as at 31 December 2014.
  2. Shares of a listed company - the fair value of these securities is determined based on the price set out in a contingent sale agreement. If the Group used the values of the unobservable parameters, that are extreme values from the range of possible values, the fair value of the equity financial instruments could be PLN 2 000 thousand higher or PLN 2 000 thousand lower as at 31 December 2014.
  3. Corporate bonds UAH - a fair value of these securities is determined based on the present value of discounted future cash flows. If the Group has applied the unobservable parameter values that are extremes of the range of possible values, the fair value of equity financial instruments could be higher by PLN 693 thousand or lower by PLN 2 229 thousand as at 31 December 2014.

The impact of parameters estimated on measurement of financial instruments at fair value, for which the Group uses fair value measurement on Level 3 as at 31 December 2014 is as follows:

Financial instrumentValuation techniqueUnobservable factorFair value by
positive scenarionegative scenario
Investment securities available for sale
Equity securities - Fund Net Asset Value (NAV) method price for a participation unit 195,432 176,820
Equity securities - Listed company price set out in a contingent sale agreement price set out in a contingent sale agreement 14,000 10,000
Debt securities - corporate bonds UAH current value technique probability of default 5,661 2,739

In the fourth quarter of 2014, individual fair value measurement based on binding offers receive from potential buyers in respect of shares of Qualia Development Sp. z o.o. in the amount of PLN 165 000 thousand as well as a reclassification of a share in the above-mentioned company to non-current assets held for sale were made.

Instruments transfers between Level 1 and Level 2 are based on the availability of quotations in an active market at the end of the reporting period. Transfer from Level 2 to Level 3 occurs in the situation of the conversion an observable factor for an unobservable in the valuation or applying a new unobservable risk factor to the valuation, which also results in a significant impact on the valuation of the instrument. Transfer from Level 3 to Level 2 occurs in the situation of the conversion an unobservable factor for an observable in the valuation or when an impact of an unobservable factor on the instrument valuation ceases to be relevant. Transfers between levels of valuation occur at the date and at the end of the reporting period.

In the period from 1 January to 31 December 2014, the corporate bonds in UAH were transferred from Level 2 to Level 3. The reason for the reclassification was that these securities as at 31 December 2014 were not quoted on the stock exchange in the last 3 months.

The table below presents reconciliation during the periods of measurement from 1 January 2014 to 31 December 2014 and from 1 January 2013 to 31 December 2013 at fair value at level 3 of fair value hierarchy:

Investment securities available for sale20142013
Opening balance at the beginning of the period 137,326 88,243
Total gains or losses 29,965 4,455
recognised in other comprehensive income 29,965 4,455
Take up of new shares in the Fund and translation differences of currency entities 19,017 44,628
The conclusion of a conditional sale agreement of the Company listed on the stock exchange 12,000 -
Transfers from or to level 3 4,968 -
Closing balance at the end of the period 203,276 137,326

49.2. Financial assets and liabilities not presented at fair value in the consolidated statement of financial position

The Group holds financial instruments which are not presented at fair value in the statement of financial position.

Where there is no market values of financial assets and liabilities available, their fair values have been estimated with the use of various valuation techniques. The fair value of financial instruments was measured using a model based on estimating the present value of future cash flows by discounting them using relevant interest rates.

All model calculations include certain simplifying assumptions and therefore are sensitive to those assumptions. Set out below is a summary of the main methods and assumptions used for estimation of fair values of financial instruments which are not presented at fair value.

For certain categories of financial instruments it has been assumed that their carrying amount equals approximately their fair values, which is due to lack of expected material differences between their carrying amount and their fair value resulting from the features of these groups (such as short term character, high correlation with market parameters, unique character of the instrument). This applies to following groups of financial instruments:

  • loans and advances granted by the Group to its customers: a portion of the housing loans portfolio (‘old’ housing loans portfolio), loans with no specified repayment schedule, loans due at the moment of valuation,
  • amounts of the Group due to customers: liabilities with no specified payment schedule, other specific products for which no active market exists,
  • deposits and interbank placements with maturity date up to 7 days or with a variable interest rate,
  • loans or advances granted and taken on interbank market at a floating interest rate (change of interest rate maximum on a 3 month basis),
  • cash and balances with the central bank and amounts due to the central bank,
  • other financial assets and liabilities.

With regard to loans and advances to customers, a model based on estimates of present value of future cash flows through discounting future cash flows, and applying current interest rates plus a credit risk margin and relevant scheduled repayment dates were used. The current margin level has been established based on transactions on instruments with similar credit risk concluded in the last quarter of the reporting period.

The fair value of deposits and other amounts due to customers other than banks, with specified maturities, has been calculated using the discounted expected future cash flows and applying current interest rates for given deposit products.

The fair value of the subordinated debt of the Bank has been estimated based on the expected future cash flows discounted using the yield curve.

The fair value of debt securities issued by PKO Bank Polski SA has been estimated based on expected future cash flows discounted using the current interbank interest rates.

The fair value of debt securities issued by PKO Finance AB has been estimated using Bloomberg data.

Interbank placements and deposits have been estimated based on the expected future cash flows discounted using the current interbank interest rates.

Receivables on financial lease have been estimated based on expected cash flows discounted using internal rate of return for lease transactions of the same kind, concluded by the Group in the period directly preceding the balance sheet date.

The table below shows a summary of the carrying amounts and fair values for the particular groups of financial instruments which have not been presented at fair value in the Group’s statement of financial position as at 31 December 2014:

 level of
fair value
hierarchy
valuation method31.12.2014
carrying amountfair value
Cash and balances with the central bank n/a value at cost to pay 11,738,371 11,738,371
Amounts due from banks 2 discounted cash flows 2,486,686 2,486,692
Loans and advances to customers     179,497,384 170,510,276
housing loans 3 discounted cash flows 95,797,964 86,756,438
corporate loans 3 discounted cash flows 58,231,138 58,274,526
consumer loans 3 discounted cash flows 20,321,718 20,440,558
receivables due from repurchase agreements 3 discounted cash flows 310,852 310,852
debt securities 3 discounted cash flows 4,835,712 4,727,902
Investment securities held to maturity 3 discounted cash flows 233,358 241,902
Other financial assets 3 value at cost to pay including impairment allowance 710,349 710,349
Amounts due to the central bank 2 value at cost to pay 4,427 4,427
Amounts due to other banks 2 discounted cash flows 19,394,482 19,394,544
Amounts due to customers     174,386,766 174,352,166
due to corporate entities 3 discounted cash flows 40,932,868 40,932,943
due to public entities 3 discounted cash flows 4,778,337 4,778,337
due to retail clients 3 discounted cash flows 128,675,561 128,640,886
Debt securities in issue 1, 2 market quotations / discounted cash flows 13,182,348 13,620,129
Subordinated debt 2 discounted cash flows 2,413,985 2,398,946
Other financial liabilities 3 value at cost to pay 2,321,761 2,321,761

The table below shows a summary of the carrying amounts and fair values for the particular groups of financial instruments which have not been presented at fair value in the Group’s statement of financial position as at 31 December 2013:

 level of
fair value
hierarchy
valuation method31.12.2014
carrying amountfair value
Cash and balances with the central bank n/a value at cost to pay 7,246,120 7,246,120
Amounts due from banks 2 discounted cash flows 1,893,441 1,889,160
Loans and advances to customers     149,623,262 152,274,472
housing loans 3 discounted cash flows 74,900,220 75,060,086
corporate loans 3 discounted cash flows 51,576,141 53,836,616
consumer loans 3 discounted cash flows 19,213,873 19,444,847
receivables due from repurchase agreements 3 discounted cash flows 2,144,088 2,144,088
debt securities 3 discounted cash flows 1,788,940 1,788,835
Investment securities held to maturity 3 discounted cash flows 38,005 37,699
Other financial assets 3 value at cost to pay including impairment allowance 611,313 611,313
Amounts due to the central bank 2 value at cost to pay 4,065 4,065
Amounts due to other banks 2 discounted cash flows 3,747,337 3,747,311
Amounts due to customers     151,904,181 151,901,068
due to corporate entities 3 discounted cash flows 31,966,616 31,966,755
due to public entities 3 discounted cash flows 3,473,476 3,473,476
due to retail clients 3 discounted cash flows 116,464,089 116,460,837
Debt securities in issue 1, 2 market quotations / discounted cash flows 10,255,937 10,485,677
Subordinated debt 2 discounted cash flows 1,620,857 1,605,265
Other financial liabilities 3 value at cost to pay 2,004,459 2,004,459