Financial assets and liabilities are recognized in the statement of the financial position when a PZU Group entity becomes a party to a binding contract under which it incurs risk and receives benefits related to the financial instrument. For transactions concluded in an organized market (exchange) on terms adopted on that market, acquisition or sales of financial assets and liabilities are recognized as at the transaction date.
Financial instruments are classified at the time of acquisition to one of the categories determined in IAS 39 and recognized at fair value adjusted by the transaction costs which may be directly attributed to acquisition or sale of the given financial instrument (except for instruments classified as measured at fair value through profit or loss, whose transaction costs are recognized separately under “Net investment revenue”). At initial recognition, the fair value of the instrument is usually calculated as its transaction price, unless the nature of the instrument indicates otherwise.
In the case of financial instruments generating interest income, the interest is calculated starting from the first day after the date of transaction settlement.
Fair values of financial instruments are determined based on quotations available to the public on an active market; when no such quotations are available, using the valuation models applied to public quotations of financial instruments, interest rates and stock market indices.
Shares whose fair value cannot be reliably estimated are measured at acquisition price including impairment loss.
3.11.1 Financial instruments held to maturity
Financial instruments held to maturity are measured at the amortized cost and the effects of the measurement are recognized under “Net revenue from investments”.
3..11.2 Receivables and loans
Receivables and loans include in particular:
- debt securities acquired as part of a contract under which the seller has not lost control over the securities;
- debt securities not quoted on the active market;
- deposits in credit institutions;
- granted loans;
- receivables due to concluded insurance contracts (including reinsurance);
- other receivables.
Loans and receivables, excluding receivables due to concluded insurance contracts and other short-term receivables, are measured as at the end of the reporting period at the amortized cost.
Receivables due to concluded insurance contract and other short-term receivables, due to their nature, are measured at the nominal value including impairment loss on doubtful receivables (the manner of estimating the loss is described in section 4.2.5).
The effects of measurement of receivables and loans up to the value of measurement at the amortized cost are recognized under “Net revenue from investments”.
3.11.3 Financial instruments available for sale
Financial instruments available for sale include financial instruments which have not been classified to any other category.
Instruments classified to this category are measured at fair value. The difference between the fair value as at the end of the reporting period and acquisition price is charged directly to the revaluation reserve. In the case of debt securities, interest accrued using the effective interest rate is recognized under “Net revenue from investments”. The difference between the fair value and the value at the amortized cost is recognized in the revaluation reserve.
3.11.4 Financial instruments measured at fair value through profit or loss
Financial instruments measured at fair value through profit or loss include:
- financial instruments held for trading - financial instruments held for trading - assets acquired to be resold in a short term or liabilities incurred to be repurchased in a short term and derivatives;
- financial instruments classified at the time of acquisition as those measured at fair value through profit or loss, provided that the fair value may be reliably estimated. Such financial instruments include:
- some instruments that pursuant to the Act of 22 May 2003 on insurance activity (Journal of Laws 2013, item 950 with subsequent amendments, henceforth “Act on insurance activity”) are aimed at covering technical provisions and investment contracts in life insurance products. Adopted classification of those instruments eliminates or significantly limits mismatch between measurement and recognition of assets and liabilities covered by those assets,
- financial instruments managed and evaluated based on fair value in accordance to documented risk management principles. The group includes unit-linked investment contracts.
The effects of a change in the measurement of financial instruments measured at fair value and interest revenue recognized are recognized in profit or loss under “Net change in the fair value of assets and liabilities measured to fair value” in the period when they occurred.
Derivatives are recognized in the accounting records at fair value as at the transaction date. Subsequently, they are measured at fair value.
The fair value of derivatives quoted on an active market is the closing price as at the end of the reporting period.
The fair value of derivatives which are not quoted on an active market, including forward contracts and interest rate swaps (IRS) is determined using the discounted future cash flows method. Cash flows are discounted using interest rates from the yield curves assigned to a specific type of financial instruments and foreign currencies, constructed based on available market data.
The fair value of options related to the structured deposits is determined based on measurements of the option writers, considering verification of the measurements carried out by the companies in the PZU Group based on internal measurement models.
Changes in the fair value of derivatives which are not hedging instruments are recognized in profit or loss of the reporting period of revaluation in the “Net change in the fair value of assets and liabilities measured at fair value”.
PZU Group companies do not apply hedge accounting.
3.11.5 Financial liabilities other than ones measured at fair value
Trade liabilities - which are short-term - are recognized at the amount due.
Other financial liabilities are measured at amortized cost.
Financial liabilities measured at amortized cost include investment contract with guaranteed and determined terms. Results of their measurement are recognized under “Benefits and change in measurement of investment contracts”.
The accounting principles for financial guarantees that meet the definition of an insurance contract and a financial instrument at the same time have been presented in Section 4.5.1.
3.11.6 Impairment of financial assets
As at the end of each reporting period, potential existence of objective evidence for impairment of a financial asset or a group of financial assets is tested.
In the case of any objective evidence for impairment resulting from events following the initial recognition of financial assets and resulting in a decrease in expected future cash flows, appropriate write-downs are created and charged to the current period expenses. Expected impairment losses as a result of future events, irrespective of their probability, are not recognized.
Objective evidence for impairment includes information concerning the following events:
- material financial difficulties of the issuer or debtor;
- breach of the terms and conditions of the contract (such as outstanding interest or principal repayment);
- special facilities given to the debtor resulting from financial difficulties of the debtor which otherwise would not have been given;
- high probability of bankruptcy or other financial reorganization of the debtor;
- disappearance of an active market for a given financial instrument due to financial difficulties of the issuer;
- availability of data indicating measurable decrease in estimated future cash flows related to the group of financial assets since their initial recognition, despite lack of evidence indicating impairment of a single financial asset, including:
- negative changes concerning the status of the debtors’ payments in the group (e.g. an increase in the amount of outstanding payments) or
- unfavorable changes of the economic situation in the industry, region, etc., which lead to deterioration in the debtor’s solvency;
- significant and prolonged decrease in the fair value of an investment in an equity instrument below the acquisition cost (additional information presented in section 4.2.4);
- unfavorable changes in the technological, market, economic, legal or other situation affecting the issuer of the equity instruments which indicate that the costs of investment in the equity instrument may not be recovered.
In the case of premises indicating impairment of financial instruments available for sale, losses on measurement, initially recognized under revaluation reserve are charged to profit or loss.
Impairment losses on financial instruments available for sale charged to profit or loss:
- in the case of equity instruments - not reversed;
- in the case of debt instruments they may be reversed, provided that in the subsequent periods the fair value of a given debt instrument increases, and the increase may be objectively associated with the event following recognition of the impairment loss in profit or loss.
In the case of a sale of financial instruments available for sale, the value of revaluation reserve related to the sold financial instruments is derecognized and recognized in profit or loss under “Net profit or loss on realization and impairment loss on financial assets”.
The estimates and judgments used for determination of impairment losses have been presented in Section 4.2.