52. Fair value hierarchy
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.
2018
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 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;
- derivative instruments, which are traded on a regulated market.
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 |
|---|---|---|
| Derivative 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 models 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. |
| Municipal bonds in EUR | 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 | 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 | Commodity price yield curves are built based on money market data, market rate SWAP points. |
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 |
|
Financial assets not held for trading, measured at fair value through profit or loss on a mandatory basis |
||
| Loans and advances to customers | Discounted cash flow method | Effective margin on loans |
| 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 curves are 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). |
| Shares in Biuro Informacji Kredytowej SA | Estimation of the fair value based on the present value of the forecast results of the company | Forecast results of the company |
| Shares in Polski Standard Płatności Sp. z o.o. | Estimation of the fair value based on the present value of the forecast results of the company | Forecast results of the company |
| Shares in Society for Worldwide Interbank Financial Telecommunication | Market value of the shares estimated by the company | Market value estimated by the company |
| Shares in Krajowa Izba Rozliczeniowa SA | Establishment of the fair value by a property valuer using the adjusted net asset approach | Forecast results of the company |
| Shares in the Wałbrzych Special Economic Zone „INVEST-PARK” Sp. z o.o. | Establishment of the fair value by a property valuer using the adjusted net asset approach | Net asset value of the Fund |
| Shares in Wielkopolska Gildii Rolno-Ogrodniczej SA | Establishment of the fair value by a property valuer using the adjusted net asset approach | Net asset value of the Fund |
| Participation titles in mutual investment institutions | The Net Asset Value approach (NAV) i.e. the fair value of the investment projects (companies) comprising the Fund, which are subject to review or audit every six months by a statutory auditor. | Net asset value of the Fund |
| Financial instruments measured at fair value through other comprehensive income | ||
| Corporate bonds | Yield curve and risk margin model. Yield curves are 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 measured at fair value 31.12.2018 |
Carrying amount | Level 1 | Level 2 | Level 3 |
| Prices quoted on active markets | Valuation techniques based on observable market data | Other valuation techniques | ||
| Hedging derivatives | 658 | – | 658 | – |
| Other derivative instruments | 1 907 | 3 | 1 904 | – |
| Securities | 55 641 | 43 436 | 10 286 | 1 919 |
| held for trading | 235 | 235 | – | – |
| debt securities | 217 | 217 | – | – |
| shares in other entities – listed | 13 | 13 | – | – |
| shares in other entities – not listed | – | – | – | – |
| investment certificates, rights to shares, pre-emptive rights | 5 | 5 | – | – |
| not held for trading, measured at fair value through profit or loss | 2 848 | 2 278 | 187 | 383 |
| debt securities | 1 201 | 1 034 | 52 | 115 |
| shares in other entities – listed | 180 | 180 | – | – |
| shares in other entities – not listed | 269 | – | 1 | 268 |
| investment certificates, rights to shares, pre-emptive rights | 1 198 | 1 064 | 134 | – |
| measured at fair value through other comprehensive income | 52 558 | 40 923 | 10 099 | 1 536 |
| debt securities | 52 558 | 40 923 | 10 099 | 1 536 |
| Loans and advances to customers | 1 106 | – | – | 1 106 |
| not held for trading, measured at fair value through profit or loss | 1 106 | – | – | 1 106 |
| housing loans | 27 | – | – | 27 |
| business loans | 148 | – | – | 148 |
| consumer loans | 931 | – | – | 931 |
| Total financial assets measured at fair value | 59 312 | 43 439 | 12 848 | 3 025 |
| Liabilities measured at fair value 31.12.2018 |
Carrying amount | Level 1 | Level 2 | Level 3 |
| Prices quoted on active markets | Valuation techniques based on observable market data | Other valuation techniques | ||
| Hedging derivatives | 471 | – | 471 | – |
| Other derivative instruments | 2 655 | – | 2 655 | – |
| Liabilities in respect of the short position in securities | – | – | – | – |
| Total financial liabilities measured at fair value | 3 126 | – | 3 126 | – |
| Assets and liabilities measured at fair value 31.12.2017 |
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 | 431 | 429 | 2 | – |
| Debt securities | 405 | 403 | 2 | – |
| Shares in other entities | 19 | 19 | – | – |
| Investment certificates | 7 | 7 | – | – |
| Derivative financial instruments | 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 | 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 | 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 |
| Derivative financial instruments | 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 | – |
In 2018 and in 2017 there were no transfers between the different levels of fair value hierarchy.
Starting from in the level 3 of the fair value hierarchy 2018, the Group recognizes housing loans measured at fair value through other comprehensive income and loans and advances to customers not held for trading measured at fair value through profit or loss on a mandatory basis. In prior periods these loans were measured at amortized cost.
As a result of the implementation of IFRS 9, the following equity instruments were also recognized at level 3 of the fair value hierarchy:
- Shares in Biuro Informacji Kredytowej SA
- Shares in Polski Standard Płatności Sp. z o.o.
- Shares in Society For Worldwide Interbank Financial Telecommunication
- Shares in Krajowa Izba Rozliczeniowa SA
| Impact of estimates on fair value measurement of level 3 financial instruments | 31.12.2018 | 31.12.2017 | ||
|---|---|---|---|---|
| Fair value acc. to | Fair value acc. to | |||
| positive scenario | negative scenario | positive scenario | negative scenario | |
| Not held for trading, measured at fair value through profit or loss | ||||
| Loans and advances to customers 1 | 1,138 | 1,075 | ||
| Shares in Visa Inc. 2 | 148 | 124 | ||
| Equity investments 3 | 132 | 119 | ||
| Corporate bonds 4 | 115 | 115 | ||
| Measured at fair value through OCI | ||||
| Corporate bonds 4 | 1,539 | 1,533 | ||
| Available-for-sale investment securities | ||||
| Participation units in a collective investment undertaking 5 | 264 | 239 | ||
| Shares in Visa Inc. 2 | 129 | 103 | ||
| Corporate bonds 4 | 1,799 | 1,783 | ||
1 scenario assuming a change in the discount rate of +/- 0.5 p.p.
2scenario assuming a discount rate in respect of the future conditions of converting C-series shares to ordinary shares at a level of 0%/100% respectively
3 a scenario assuming a change in the company’s value of +/- 5%
4 a scenario assuming a change in credit spread of +/- 10%
5 a scenario assuming an increase/decrease in the Fund’s net asset value of +/- 5% respectively
The changes to fair value of the financial instruments at Level 3 are shown in the table below.
| Reconciliation of changes during the period at level 3 of fair value hierarchy | 2018 | 2017 |
|---|---|---|
| Opening balance at the beginning of the period | 2,166 | 3,374 |
| First time adoption of IFRS 9 | 1,186 | |
| Loans and advances to customers not held for trading, measured at fair value through profit or loss | 1 070 | |
| Equity instruments measured at fair value through profit or loss | 116 | |
| Opening balance at the beginning of the period … | 3,352 | |
| Foreign exchange differences | 18 | (37) |
| Participation units in a collective investment undertaking | 7 | (18) |
| Other equity instruments | 11 | (19) |
| Increase in exposure to equity instruments | 2 | – |
| Taking up a new share issue a collective investment institution | – | 58 |
| Issuance and redemption of corporate bonds | (129) | (1,213) |
| Reduction of equity exposure to a collective investment institution | (47) | (93) |
| Sale of participation units in a collective investment institution | (217) | – |
| Reclassification of exposure from measured at amortized cost to measured at fair value through profit or loss | 205 | |
| Loans granted to customers during the period | 7 | – |
| Not held for trading, mandatorily measured at fair value through profit or loss | 7 | – |
| Sale/ repayment of loans during the period | (167) | |
| Not held for trading, measured at fair value through profit or loss | (167) | |
| Net gain/ (loss) on financial instruments measured at fair value financial instruments measured at fair value through profit or loss | 11 | – |
| Loans and advances to customers | (9) | |
| Participation units in a collective investment undertaking | 6 | – |
| Other equity instruments | 14 | – |
| Remeasurement recognized in other comprehensive income | (10) | 77 |
| Corporate bonds | (10) | 20 |
| Participation units in a collective investment undertaking | 7 | |
| Shares in Visa Inc. | 50 | |
| As at the end of the period | 3,025 | 2,166 |