Financial assets are recognized in the statement of financial position at the moment when a PZU Group company becomes a party to a binding contract, under which it assumes risk and becomes a beneficiary of the benefits associated with the financial instrument. In the case of transactions concluded on an organized market, the purchase or sale of financial assets are recognized in the books on the date of the transaction.
The instrument is classified at the time of recognition of the instrument for the first time. The classification may only be changed in rare cases when the business model changes. The classification of financial assets depends on:
According to IFRS 9 financial assets are classified for valuation at:
Financial assets are managed in accordance with business models applied to enable the provision of information for management purposes. When analyzing business models, the PZU Group takes the following into account:
|Description of business models||Assets held in order to collect contractual cash flows||Assets held in order to collect contractual cash flows and cash flows from selling assets||Other financial assets|
|Risks under management||Long-term interest rate risk, credit risk||Long-term interest rate risk, credit risk, long-term liquidity||Short-term interest rate risk, currency risk, risk of changing prices of equities, indices, commodities and short-term liquidity management.|
|Terms and conditions of the sale of assets in the model||
||The permitted level of sales is higher than in the model of assets held to collect contractual cash flows, but much lower than for assets held for trading.||No restrictions on sales|
Financial assets held for trading and those that are held in a model managed at fair value have been classified as measured at fair value through profit or loss.
A special test is performed to evaluate whether contractual cash flows consist of solely payments of principal and interest (so called the SPPI test). The principal amount is defined as the fair value of the financial asset at initial recognition. Interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin.
The SPPI test examines whether a financial asset contains contractual terms that could change the timing or amounts of contractual cash flows so that the condition of obtaining solely payments of principal and interest would not be met. In making its evaluation, the PZU Group takes the following into account:
The SPPI test is carried out for financial assets classified into a business model whose objective is achieved by collecting contractual cash flows or a business model whose objective is achieved by both collecting contractual cash flows and selling.
The SPPI test is carried out:
If a financial asset contains terms causing modification of the value of money over time, the so-called verification benchmark test is carried out to determine the difference between undiscounted cash flows following from the contract and the undiscounted cash flows which would occur if the value of money over time was not modified (cash flow benchmark level). If the difference is material then the instrument does not pass the SPPI test and is measured at fair value through profit or loss.
Financial assets measured at amortized cost
A financial asset is classified as financial asset measured at amortized cost if both of the following conditions are met:
Financial assets measured at amortized cost include, among others:
Upon first recognition, financial assets measured at amortized cost are recognized at fair value plus transaction costs which can be allocated directly to the purchase of issue of such assets.
The results of the measurement at amortized cost are recognized in the profit and loss account in the “Interest income calculated using the effective interest rate” item.
Financial assets measured at fair value through other comprehensive income
Financial assets are measured at fair value through other comprehensive income if both of the following conditions are met:
Interest on debt instruments accrued using the effective interest rate are recognized in the profit and loss account in the “Interest income calculated using the effective interest rate” line item.
Fair value measurement principles are described in section 9.1. The effects of changes in the fair value are recognized in other comprehensive income until exclusion of the asset from the statement of financial position, when the cumulative effects of the measurement are moved to the profit and loss account, to the “Result on derecognition of financial instruments and investments” item.
The allowances for expected credit losses is recognized in other comprehensive income and on the other side in the profit and loss account in the “Movement in allowances for expected credit losses and impairment losses on financial instruments” item. The value of the recognized allowance does not reduce the carrying amount of the asset.
This category of financial assets also includes equity instruments, for which an irrevocable designation has been made to be measured at fair value, with subsequent changes in fair value recognized in other comprehensive income. The decision on such classification is made individually for each instrument. The portfolio of equity instruments measured at fair value through other comprehensive income comprises assets which have been classified as material from PZU Group’s perspective. If such assets are sold, the result on sales is transferred to supplementary capital.
Financial assets at fair value through profit or loss
This category includes other financial instruments that do not meet the conditions for being classified as financial assets measured at amortized cost or fair value through other comprehensive income. This pertains in particular to:
Fair value measurement principles are described in section 9.1. The effects of change of the measurement of financial instruments carried at fair value, including the interest income related to them and changes in the value of liabilities on account of investment contracts for the client’s account and risk are recognized in the “Net movement in fair value of assets and liabilities measured at fair value” item in the period to which they pertain.
Financial assets are excluded from the consolidated statement of financial position when the contractual rights to the cash flows from the asset expire or are transferred to another entity. The transfer also takes place when the contractual rights to the cash flows from the asset are retained but the contractual obligation to transfer such cash flow to an entity outside the PZU Group is assumed.
When transferring financial assets, the entity assesses to that extent the risk and benefits associated with the holding of the asset is retained:
If control is retained the financial asset is recognized in the consolidated statement of financial position up to the value following from the permanent exposure and if there is no control the asset is excluded from the consolidated statement of financial position.