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 on an organized market, the purchase or sale of financial assets and liabilities is recognized as at the trade date.
Financial instruments are classified at the moment of acquisition according to the categories determined by IAS 39 and they are recognized at fair value adjusted by transaction costs directly attributable to the purchase or sale of a given financial instrument. Instruments measured at fair value through profit or loss for which transaction costs are recognized separately under “Net investment income” are an exception. The fair value of a financial instrument upon initial recognition is usually its transaction price, unless the nature of the financial instrument provides 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.
Shares whose fair value cannot be reliably estimated are measured at cost less any impairment losses.
Financial assets are derecognised from the consolidated statement of financial position if they expire or if the contractual entitlement to cash flows from the given asset is transferred to another entity. The transfer takes place also when contractual entitlement to cash flows from an asset is blocked, but the contractual obligation to transfer these cash flows to a third party is accepted.
When financial assets are transferred, it is estimated to what extent the risk and benefits related to the ownership of an asset remain:
- if the whole risk and benefits related to the ownership of a financial asset is transferred, the financial asset is derecognised from the consolidated statement of financial position;
- if practically the whole risk and benefits related to the ownership of a financial asset is kept, the financial asset continues to be recognized in the consolidated statement of financial position;
- if practically the whole risk and benefits related to the ownership of a financial asset are neither transferred nor kept, the financial asset continues to be recognized in the consolidated statement of financial position.
If the control is kept, the financial asset is recognized in the consolidated statement of financial position to the amount resulting from the continuous involvement, accordingly, if there is no control, the asset is derecognised from the consolidated statement of financial position.
A financial liability (or its part) is derecognised from the consolidated statement of financial position, if the obligation laid down in the contract was fulfilled, remitted or expired.
Financial assets and liabilities are classified and measured according to the principles described below.
5.11.1. Financial assets held to maturity
Financial assets held to maturity are non-derivative financial assets with fixed or determinable payments and fixed maturity that PZU Group has the positive intention and ability to hold to maturity.
Financial instruments held to maturity are measured at amortised cost and gains or losses on the measurement are recognized under “Net investment income”.
5.11.2. Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:
- those that the entity intends to sell immediately or in the near term, which shall be classified as held for trading, and those that the entity upon initial recognition designates at the fair value through profit or loss;
- those that the entity upon initial recognition designated as available for sale; or
- those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, which shall be classified as available for sale.
Loans and receivables include in particular:
- debt securities acquired as part of a contract under which the seller has kept practically all risks and benefits related thereto (buy sell-back transactions);
- debt securities not quoted in an active market;
- deposits in credit institutions;
- granted loans;
- insurance receivables (including reinsurance);
- other receivables.
Loans and receivables, excluding insurance receivables and other short-term receivables, are measured as at the balance sheet date at amortised cost.
Due to their nature, insurance receivables and other short-term receivables are measured at the nominal value less any impairment losses (the manner of estimating the impairment losses for insurance receivables is described in Note 220.127.116.11).
The effects of measurement of loans and receivables are recognized under “Net investment income”.
5.11.3. 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 in accordance with rules described in Note 10.1. The difference between fair value as at the balance sheet date and cost is charged directly to the revaluation reserve. In the case of debt instruments, interest accrued using the effective interest rate is recognized under “Net investment income”.
The difference between the fair value and the amortised cost is recognized in the revaluation reserve.
In the case of a sale of financial instruments available for sale, the value of accumulated revaluation reserve is derecognized and recognized under “Net profit or loss on realization and impairment loss on financial assets”.
5.11.4. 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 – assets acquired to be resold in a short term or liabilities incurred to be repurchased in a short term and derivatives;
- financial instruments designated upon initial recognition as at fair value through profit or loss, provided that the fair value may be reliably estimated. Such financial instruments include:
- some instruments to cover technical provisions and investment contracts liabilities in life insurance. Adopted classification of those instruments eliminates or significantly reduces a measurement or recognition inconsistency between assets and liabilities covered by those assets;
- financial instruments managed and evaluated based on fair value in accordance to documented risk management principles;
- liabilities arising from unit-linked investment contracts;
- liabilities to participants of consolidated investment funds.
Fair value measurement principles are described in point 10.1. The effects of a change in the measurement of financial instruments measured at fair value, including interest, are recognized under “Net change in the fair value of assets and liabilities measured at fair value” in the period to which they relate. Changes of value of liabilities arising from unit-linked investment contracts are recognized under “Change in measurement of investment contracts”.
Derivatives are recognized in the accounting records at fair value as at the transaction date. Subsequently, they are measured at fair value, according to the rules described in Note 10.1.3.
Changes in the fair value of derivatives which are not hedging instruments are recognized under “Net change in the fair value of assets and liabilities measured at fair value”.
PZU Group entities do not apply hedge accounting.
5.11.5. Financial liabilities other than ones measured at fair value
Financial liabilities measured at amortized cost include:
- Debt instruments issued by PZU Group are recognized under “Liabilities arising from issue of debt instruments. Their remeasurement results are presented under “Borrowing costs”;
- Investment contracts with guaranteed and fixed terms and conditions. Their remeasurement results are presented under “Change in measurement of investment contracts”;
- Security sales transactions with an obligation to buy them back on a predefined day at a predefined price (sell buy-back transactions). Their remeasurement results are presented under “Borrowing costs”.
Trade liabilities are are short-term and, thus, are measured at the amount due.
Other financial liabilities are measured at amortised cost.
5.11.6. Impairment of financial assets
As at the end of each financial year, potential existence of objective evidence for impairment of a financial asset or a group of financial assets is assessed.
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 occurs, appropriate impairment losses are created and charged to the current period expenses. Expected impairment losses resulting from 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
- unfavourable changes of the economic situation in the industry, region, etc., which lead to deterioration in the debtor’s solvency;
- significant or prolonged decrease in the fair value of an investment in an equity instrument below the cost (additional information presented in Note 18.104.22.168);
- unfavourable 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 initially recognized in revaluation reserve are charged to the statement of profit or loss.
Impairment losses on financial instruments available for sale charged to profit or loss:
- in the case of equity instruments – must not be reversed;
- in the case of debt instruments – 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 the statement of profit or loss.
The estimates and judgments used for determination of impairment losses have been presented in Note 6.2.2.