On the basis of the input data for fair value measurement, the individual assets and liabilities for which fair value has been presented have been classified to the following levels:
- level I – assets and liabilities measured based on quoted prices (unadjusted) from active markets for identical assets and liabilities. This level includes:
- liquid quoted debt securities;
- shares and investment certificates quoted on exchanges;
- derivatives quoted on exchanges;
- liabilities on borrowed securities quoted on exchanges (short sale).
- level II – assets and liabilities whose measurement is based on input data other than quoted prices included within level I, which can be observed on the market, either directly (as prices) or indirectly (derived from prices). This level includes:
- quoted debt securities carried on the basis of the valuations published by an authorized information service;
- derivatives – among others FX Swap, FX Forward, IRS, CIRS, FRA;
- participation units in mutual fund;
- investment properties or properties held for sale measured using the comparative method, for which there is a sufficient number of transactions of similar properties in the analyzed market, including free land for development and certain smaller and less valuable buildings (such as residential units, garages, etc.);
- liabilities to members of consolidated mutual funds;
- investment contracts for the client’s account and risk.
- level III – assets measured based on input data unobserved on the existing markets (unobservable input data). This level includes:
- unquoted debt securities and non-liquid quoted debt securities (including non-treasury debt securities issued by other financial entities, local government and non-financial entities), measured using models based on discounted cash flows;
- investment properties or properties held for sale measured using the income method or the residual method or the comparative method (if there is no adequate number of transactions of similar properties);
- loan receivables from clients and liabilities to clients under deposits;
- options embedded in certificates of deposit issued by PZU Group companies and options concluded in the interbank market to hedge embedded option positions.
| Measured assets | Unobservable data | Description | Impact on measurement |
|---|---|---|---|
| Loan receivables from clients | Liquidity margin and current margin from the sale of the product group | Fair values are estimated using valuation techniques, with an assumption that when the loan is granted, the fair value is equal to the carrying amount. The fair value of loans without recognized impairment is equal to the sum of future expected cash flows discounted at the balance sheet date less expected credit loss. The cash flow discounting rate is the appropriate risk- free market rate plus the liquidity margin and current sales margin for the loan’s product group. The margin is determined by product group and by maturity. For the purpose of estimating the fair value of foreign currency loans, the liquidity margin for PLN loans is used, adjusted by quotations of FX swap and basis-swap transactions. The fair value of loans with recognized impairment is equal to the sum of future expected salvage discounted using the effective interest rate, since the average expected recoveries fully reflect the credit risk component. For loans that do not have a repayment schedule (current account loans, overdrafts and credit cards), the fair value is assumed to be equal to the carrying amount. |
Negative correlation |
| Loan receivables from clients | Sales margin | Fair values are estimated using valuation techniques, with an assumption that when the deposit is accepted, the fair value is equal to the carrying amount. The fair value of term deposits is equal to the sum of future expected cash flows discounted at the balance sheet date. The cash flow discounting rate is the appropriate risk-free market rate plus the current sales margin. The margin is determined on the basis of deposits accepted in the last quarter, by product group and by maturity. For short-term deposits (current deposits, overnight deposits and savings accounts), the carrying amount is taken as fair value. | Negative correlation |
| Options embedded in certificates of deposit issued by PZU Group companies and options concluded in the interbank market to hedge embedded option positions. | Model parameters | Embedded instruments are plain vanilla options and exotic options for individual shares, indices, commodities and other market indicators, including interest rate indices and exchange rates and their baskets. All separated options are offset on an ongoing basis on the interbank market. Currency options are measured based on the Garman-Kohlhagen option pricing model (and in the case of barrier and Asian options based on the so- called extended Garman-Kohlhagen model). Exotic options embedded in deposit agreements and their offsets are measured using the Monte-Carlo technique, assuming a geometric Brownian motion model for risk factors. | |
| Non-liquid bonds and loans | Credit spreads | Spreads are observed on all bonds (their series) or loans of the same issuer or a similar issuer. These spreads are observed on the dates of issue of new bond series, dates of conclusion of new loan agreements and dates of market transactions on the receivables following from such bonds and loans. | Negative correlation |
| Investment property and property designated for sale | Capitalization rate | Capitalization rate is determined through analysis of rates of return obtained in transactions for similar properties. | Negative correlation |
| Construction costs | Construction costs are determined based on market construction costs less costs incurred as at the date of measurement. | Positive correlation | |
| Monthly rental rate per 1 m2 of relevant space or per parking space | Rental rates are observed for similar properties of similar quality, in similar locations and with a similar size of leased space. | Positive correlation | |
| Derivatives | Model parameters | Currency options are measured based on the Garman-Kohlhagen option pricing model (and in the case of barrier and Asian options based on the so- called extended Garman-Kohlhagen model). Exotic options embedded in deposit agreements and their offsets are measured using the Monte-Carlo technique, assuming a geometric Brownian motion model for risk factors. | |
| Own issues and subordinated loans | Issue spread above the market curve | If the historical spread of issues above the market curve is used, these issues are classified at level III of the fair value hierarchy. | Negative correlation |
| Equity instruments not quoted on an active market | Quotations of financial services, current value of future forecasted profit or loss of the company or measurement models based on available market data. |