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:
- the entity’s business model for managing the financial assets and
- the contractual cash flow characteristics of the financial asset.
According to IFRS 9 financial assets are classified for valuation at:
- amortized cost;
- fair value through profit or loss;
- fair value through other comprehensive income
Assets securing liabilities in respect of which the recipient has the right to sell these assets or exchange them for another security are presented in a separate line item in the statement of financial position.
Business models
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:
- how the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity’s key management personnel;
- the risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way in which those risks are managed.
| 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.
SPPI test
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:
- conditional events that could change the amounts and timing of cash flows;
- factors modifying the interest rate;
- terms of prepayment and extension;
- terms limiting the right to obtain cash flows;
- factors that modify the time value of money, including periodic resets of the interest rate.
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:
- collectively – for homogeneous groups of standard products;
- on the single contract level – for non-standard products;
- on the ISIN code level – for debt securities.
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.