37.1.2. Principles of measurement

A financial asset is classified as financial asset measured at amortized cost if both of the following conditions are met:

• the financial asset is held within a business model whose objective is achieved by holding financial assets in order to collect contractual cash flows;
• it passes the SPPI test – the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding

Financial assets measured at amortized cost include, among others:

• payment transferred for debt securities purchased under a contract under which the seller retained substantially all the risks and rewards of ownership of the securities (buy-sell-back and reverse repo transactions);
• debt securities;
• term deposits with credit institutions;
• loans granted.

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 are measured at fair value through other comprehensive income if both of the following conditions are met:

• the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets;
• it passes the SPPI test – the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

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.

The rules of measurement to fair value are described in section 10.1. 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 carried at fair value through other comprehensive income includes assets considered material from the perspective of the PZU Group. If such assets are sold, the result on sales is transferred to supplementary capital.

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:

• financial assets designated for measurement at fair value through profit or loss;
• participation units that are not equity instruments and to which the SPPI condition does not apply, which solely payment of principal and interest;
• financial assets that have not passed the SPPI test – for which contractual terms result in cash flows not being solely payments of principal and interest;
• financial assets held within a business model other than the one whose objective is to hold financial assets in order to collect contractual cash flows or both to collect contractual cash flows and to sell financial assets;
• equity instruments that were not irrevocably designated as at fair value through other comprehensive income.

The rules of measurement to fair value are described in section 10.1. The effect of the change in measurement of financial instruments at fair value, including related interest income and changes in liabilities under investment contracts for the client’s account and risk are recognized under “Net movement in fair value of assets and liabilities measured at fair value” in the period to which they relate.