27.3 Testing for impairment
Impairment tests for goodwill were performed as at 31 December 2020 for all the CGUs, to which goodwill was allocated. As a result of the tests, no need has been found to recognize impairment losses.
In connection with the economic downturn caused by the COVID-19 pandemic, which led to a series of interest rate cuts by NBP and the increase of credit risk in banking activity, in 2020 tests for impairment of the Pekao and Alior Bank CGUs were carried out. The test carried out for Pekao as at 30 June 2020 showed that an impairment had occurred and, consequently, an impairment loss on goodwill was recognized in the amount of PLN 555 million. The impairment loss was recognized through profit or loss under other operating expenses and was charged to the net financial result attributable to the owners of the parent company in the amount of PLN 555 million. The tests carried out as at 31 March and 30 June 2020 for Alior Bank showed certain shortages which resulted in the need to recognize an impairment loss on goodwill in the amount of PLN 746 million and intangible assets involving the trademark and relations with clients in the amount of PLN 161 million. As a result of the recognized impairment losses, the carrying amount of the company’s goodwill, trademark and relations with clients as at 31 December 2020 was zero. The impairment losses are recognized through profit or loss under other operating expenses. The total impact on the net financial result attributable to the owners of the parent company of the impairment losses on all the said assets related to Alior Bank recognized in 2020 stood at PLN 788 million. These impairments ensued from the significant deterioration in the business conditions for the banking sector due to the cuts of the interest rates by the Monetary Policy Council, elevated credit risk and additional impairments for expected credit losses associated with economic slowdown.
The goodwill impairment test involves a comparison of carrying amounts (including the allocated goodwill) and recoverable amounts of the CGUs to which goodwill has been allocated. An impairment loss for a CGU should be recognized in the profit and loss account if CGU’s recoverable amount is less than its carrying amount.
Cash-generating units (CGUs)
Goodwill is allocated to the individual companies (constituting CGUs for the purposes of the impairment test) and is monitored at this level. During the final purchase price allocation, the goodwill arising from the acquisition of Link4 was fully allocated to the mass insurance segment in non-life insurance, which – due to the scale of integration of Link4’s business with PZU under the ‘two brands’ strategy that assumed synergies resulting from the management of the mass client portfolio and sale of additional insurance products – is the smallest CGU to which goodwill can be allocated. Goodwill on the acquisition of PIM was fully allocated to Pekao, since that was the lowest level at which goodwill is monitored at the Group level.
Carrying amount
The carrying amount comprises CGU net assets, including intangible assets such as trademarks and client relations, which were identified in connection with the acquisition of CGU and goodwill. For the entities, in which non-controlling interests exist, the carrying amount for the purposes of the test is increased by the portion of goodwill allocated to non-controlling interests (it is not presented in the consolidated statement of financial position).
For the purposes of the test, the net carrying amount of the mass insurance segment was determined on the basis of allocation of the PZU Group’s net assets. The assets were allocated in the proportion corresponding to the ratio of the hypothetical solvency capital requirement, which may be allocated to the mass insurance segment, to the total solvency capital requirement. The Euler method was used to allocate the solvency capital requirement. This method allocates to a segment the risk measures, which are based on Solvency II regulations and take into account diversification effects.
Recoverable amount
The recoverable amount of individual CGUs was determined based on value in use of the entities, using the discounted cash flow method based on the most current financial projections, for a period not exceeding 5 years, which are presented in the table below. CGU financial projections take into account the product offering and market growth prospects, balance sheet structure and available capital surpluses, to-date results and expected macroeconomic parameters, such as the interest rate levels and economic growth. The discount rates used for testing of the insurance companies were set at the cost of equity level. In the case of medical companies, the weighted average cost of capital (WACC) was used. The cost of equity was set in accordance with the CAPM model. Also, size premiums were applied in justified cases. Risk-free rates were determined based on the yield of 10-year government bonds offered by the country where the CGU is domiciled and the betas were based on measures of similar listed entities. Market premiums were 6.0% (5.5% in 2019). For regulated entities (banks and insurance companies, financial institutions), the projected cash flows incorporate the requirement to maintain an adequate level of own funds (economic capital). Cash flows of the mass insurance segment were calculated based on the amount of hypothetical dividends that the segment could have paid if it had operated as a separate insurance company. The amount of dividends depends on the projected technical results of that segment, net of income tax and levy on financial institutions and capital surpluses allocated to that segment as at the balance sheet date and in subsequent periods. The growth ratios after the projection period were determined while taking into account the long term growth prospects for the market on which the entity conducts its business. Growth rates do not exceed the long-term GDP growth forecasts of the country in nominal terms.
| Cash generating unit | 31 December 2020 | 31 December 2019 | ||||
| Discount rate | Growth rate after the projection period | Timeframe of financial projections | Discount rate | Growth rate after the projection period | Timeframe of financial projections | |
| Pekao | 8.7% | 3.5% | 6 years | 8.7% | 3.5% | 3 years |
| Alior Bank | n/a | n/a | n/a | 8.8% | 3.5% | 5 years |
| Lietuvos Draudimas AB | 6.1% | 3.00% | 5 years | 5.7% | 3.00% | 3 years |
| Mass insurance segment | 7.50% | 2.50% | 3 years | 7.40% | 2.50% | 3 years |
| AAS Balta | 6.10% | 3.00% | 5 years | 6.10% | 3.00% | 3 years |
| Medical companies | 5.7%-6.3% | 2.0%-3.0% | 3 years | 5.8%-6.4% | 2.0%-3.0% | 3 years |
Sensitivity analysis
Estimation of the recoverable amount is a complex process that requires the parent company’s Management Board to make professional judgments and apply complicated and subjective assumptions. Relatively small changes in key assumptions may have a significant impact on the results of the recoverable amount measurement. The key assumptions in the process of estimation of the recoverable amount are: growth rates during the residual period, discount rates, expected profitability level, future capital requirements and minimum level of solvency as a condition for the disbursement of dividends by regulated entities.
The table on the next page presents the surplus of recoverable amounts over carrying amounts and the maximum discount rates and minimum marginal growth rates after the projection period, at which the carrying amounts and recoverable amounts of the individual CGUs. The surplus amount was stated as PZU’s share.
| Cash generating unit | 31 December 2020 | 31 December 2019 | ||||
| Surplus (in PLN m) |
Marginal value of the discount rate | Marginal value of the growth rate after the projection period | Surplus (in PLN m) |
Marginal value of the discount rate | Marginal value of the growth rate after the projection period | |
| Pekao | 170 | 8.80% | 2.70% | 1,084 | 9.60% | 2.50% |
| Alior Bank | n/a | n/a | n/a | 136 | 9.00% | 2.40% |
| Lietuvos Draudimas AB | 320 | 6.90% | 2.10% | 333 | 6.50% | 0.40% |
| AAS Balta | 253 | 8.40% | 0.30% | 502 | 11.20% | (3.2)% |
| Mass insurance segment | 8,864 | 23.40% | n/a1 | 10,103 | 34.90% | n/a1 |
| Medical companies | 7202 | 6.2%-28.1% | (41.0%)-2.3% | 442 | 7.2%-16.0% | (10.5%)-1.4% |
1 The amount of discounted cash flows in the projection period is higher than the carrying amount attributed to the mass insurance segment and therefore no marginal growth rate was presented after the projection period.
2 The amount of the surplus results from recognizing Tomma whose surplus as at 31 December 2020 was PLN 284 million. Tomma, acquired in December 2019, was not tested as at 31 December 2019.
Impairment test for Pekao’s goodwill
The recoverable amount was determined on the basis of value in use using the discounted cash flow method. For the needs of the test, financial projections for 2021-2026 were used. Extension of the projections to a period exceeding 5 years made it possible to reflect in full the impact of the assumed macroeconomic changes on the situation of the banks. Considering the uncertainty pertaining to the duration of the pandemic and the severity of its impact on the economy, the value in use was estimated for a number of scenarios, which reflected different future levels of interest rates, costs of risk and operating expenses. The most significant assumption affecting future cash flows is the level of future interest rates. For the purposes of the test, it was assumed that the NBP reference rate would remain at the current level at least until the end of 2022, following which, depending on the scenario, it would change by 0.0-1.4 p.p. The value in use was estimated as the average value weighted by the probability of the scenarios. Due to the high degree of uncertainty, the estimates may be subject to significant changes in the future, as we gather knowledge regarding further development of the situation.