7.1 Measurement techniques

7.1.1 Debt securities

The fair value of debt securities for which an active market does not exist, is measured using the discounted cash flow method. Discount rates are determined on the basis of the yield curve for government bonds shifted by the credit spread calculated as the difference between the yield on listed debt securities of issuers with a similar rating operating in similar industries and the yield on government bonds (German government bonds for bonds denominated in EUR).

7.1.2 Assets and liabilities related to investment funds

Interest in investment funds (units and investment certificates), liabilities arising from unit-linked investment contracts and liabilities to participants in consolidated investment funds are measured at the fair value of the assets of the investment fund (based on the share in the net assets of the investment fund).

7.1.3 Real property measured at fair value

Real property measured at fair value includes items classified to the following portfolios:

  • investment property;
  • assets held for sale. In accordance with IFRS 5, non-current assets classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Additionally, prior to being actively exposed on the market and, consequently, classified as held for sale, the major part of the PZU Group entities’ real property (including, in particular, items sold with a view to restructuring the real property portfolio) was classified as investment property. Consequently, its carrying amount corresponded to the fair value and the designation for sale did not have any effect on the measurement method.

Depending on the measurement method used, as appropriate for the characteristics of the real property, real property is classified to:

  • Level II of the fair value hierarchy – real property measured with the use of the comparable method, including available development land and some smaller and less valuable buildings (such as residential premises, garages etc.). The comparable method is based on the assumption that the fair value is determined by reference to the observable market prices, including adjustment ratios. The adjustment ratios take such factors into account as the passage of time and market price change trends, location, exposure, intended use defined in the local development plan, availability of means of communication and transport, area, neighborhood (including location against attractive facilities), investment opportunities, physical conditions, ownership etc.;
  • Level III of the fair value hierarchy – real property measured using the income method, which consists in estimating the fair value of real property based on discounted cash flows estimated taking into account such variables as the capitalization rate, rental fee level, maintenance cost level, vacancy provision, losses on exemptions from rental payment and delinquencies etc. The level of the aforementioned variables differs depending on the characteristics and intended use of the real property measured (office space, commercial space, logistic and warehouse space), its modernity and location (transport, distance from the city center, availability, exposure etc.) as well as local market parameters (such as the capitalization rate, rental fee, maintenance costs).

Measurement of Level III real property is sensitive to changes in parameters used for measurement purposes and the aforesaid parameters depend on the macroeconomic environment (e.g. economic growth, inflation rate, interest rates), supply and demand on individual local property markets (taking into account both the lease market and the demand for complete items of real property, expressed by financial investors). The parameters used for measurement purposes may be interrelated, whereas the dependence is not fixed and may change depending on the market conditions.

Fair value measurement of real property is performed by licensed appraisers, whereas approval of each such measurement is additionally preceded by an inspection carried out by the employees of the PZU Group entities aimed at eliminating potential errors and inconsistencies. Any doubts are clarified with property appraisers as they arise.

Real property classified to Level III of the fair value hierarchy includes:

  • real property held by investment funds being PZU’s subsidiaries – measured on a semi-annual basis – as at the last day of each year half and the financial year;
  • investment property held by the PZU Group companies – the most valuable items are measured if indications of a possible significant change in value occur (most frequently, on an annual basis). Each investment property, whatever its value, is measured at least every 5 years;
  • real property held for sale – measured before being actively exposed on the market.