4.5. The impact of IFRS 9 on equity and capital adequacy measures

The impact of IFRS 9 on equity and capital adequacy measures results from the following factors:

• a change in the classification and measurement of financial assets, which as at 1 January 2018 was recognized in equity under retained earnings/accumulated losses and other comprehensive income (impact of adjustments in respect of fair value measurement of loans measured at fair value through profit or loss);
• a change in the impairment model as at 1 January 2018, whose effect was also recognized in equity under retained earnings/accumulated losses;
• changes in the value of deferred income tax assets (an adjustment to the value of deferred income tax assets in correspondence with unappropriated profit/(loss)). The value of the deferred tax asset is included in the calculation of the risk exposure in accordance with the Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (“CRR Regulation” or “CRR”) (i.e. attribution of a risk weight of 250% or reducing own funds). As a standard, assets are treated as assets based on future returns and resulting from temporary differences.

The impact of the provisions of IFRS 9 concerning changes in the impairment model on equity and capital adequacy measures is regulated by Regulation (EU) 2017/2395 of the European Parliament and of the Council of 12 December 2017 amending the CRR requirements regarding transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds and for the large exposures treatment of certain public sector exposures denominated in the domestic currency of any Member State. In accordance with this regulation, banks may apply transitional provisions with respect to own funds and increase Tier 1 capital associated with the implementation of a new impairment model in the period of 5 consecutive years from 1 January 2018. The scaling factor shall decrease from one period to another.

The Group has decided to apply the transitional provisions in full and to spread the impact of adjustments resulting from IFRS 9 implementation on own funds and capital adequacy measures over time.

At the same time, in accordance with the above-mentioned Regulation of the European Parliament and of the Council of 12 December 2017, in the event of applying the transitional provisions the Group is additionally obliged to disclose the following values as they would be in the event that the transitional provisions were not applied (own funds, Common Equity Tier 1 capital, Tier 1 capital, total capital ratio, Common Equity Tier 1 capital ratio, Tier 1 capital ratio, and the leverage ratio).

As a result of adjusting the calculations of regulatory capital requirements that take into account the transitional solutions aimed at easing the impact of the IFRS 9 implementation as at 1 January 2018, the Group’s equity calculated for capital adequacy purposes increased by approx. PLN 84 million; at the same time, due to impairment adjustments resulting from the implementation of IFRS 9, equity decreased by approx. PLN 35 million, and due to adjustments relating to changes in classification and measurement methods it decreased by approx. PLN 47 million.

At the same time, the Group’s equity increased by approx. PLN 72 million due to the fact that the transitional period provided for in the CRR for removing a specific percentage of unrealized gains on securities measured at fair value from equity ended (as at 31 December 2017, 20% of such gains was removed).

Had the transitional solutions not been applied, the Group’s equity would be PLN 580 million lower. This decrease would comprise a decrease of PLN 699 resulting from impairment adjustments, a decrease of PLN 47 million resulting from changes in classification and measurement methods, and a simultaneous increase of PLN 72 million resulting from the end of the transitional period provided for in the CRR.

As a result of using IFRS 9 for the first time the total capital ratio decreased by 1 base point. If the transitional solutions relating to IFRS 9 were not applied and the total impact of the implementation of IFRS 9 was recognized, the total capital ratio would decrease by 29 base points.