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 31.12.2014 | Note | Carrying amount | Level 1 | Level 2 | Level 3 |
---|---|---|---|---|---|
Prices quoted on the active markets | Valuation techniques based on observable market data | Other 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 amount | Level 1 | Level 2 | Level 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 amount | Level 1 | Level 2 | Level 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 amount | Level 1 | Level 2 | Level 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 31.12.2013 | Note | Carrying amount | Level 1 | Level 2 | Level 3 |
---|---|---|---|---|---|
Prices quoted on the active markets | Valuation techniques based on observable market data | Other 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 amount | Level 1 | Level 2 | Level 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 amount | Level 1 | Level 2 | Level 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 amount | Level 1 | Level 2 | Level 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 value | Valuation 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:
- 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.
- 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.
- 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 instrument | Valuation technique | Unobservable factor | Fair value by | |
---|---|---|---|---|
positive scenario | negative 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 sale | 2014 | 2013 |
---|---|---|
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 method | 31.12.2014 | ||
---|---|---|---|---|
carrying amount | fair 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 method | 31.12.2014 | ||
---|---|---|---|---|
carrying amount | fair 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 |