39.1 Accounting policies and significant estimates and judgments

An assessment is performed at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired.

If there is objective evidence of impairment arising from loss events that occurred after the initial recognition of financial assets and causing a decrease in expected future cash flows then appropriate impairment losses are recognized against costs of the current period.

Objective evidence of impairment includes information about the following loss events:

•  significant financial difficulty of the issuer or obligor;
• a breach of contract, such as a default or delinquency in interest or principal payments;
•  the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider (forbearance);
•  it becoming probable that the borrower will enter liquidation, bankruptcy or other financial reorganization;
•  the disappearance of an active market for that financial asset because of the issuer’s financial difficulties;
•  observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including:
  •  adverse changes in the payment status of borrowers in the group (e.g. an increased number of delayed payments or
  •  adverse changes in the economic condition in a specific industry, region, etc. contributing to the deterioration of the debtors’ capacity for repayment;

•  adverse changes in the technology, market, economic, legal or other environment in which the issuer of an equity instrument operates indicating that costs of investment in that equity instrument may not be recovered.

In the case of assets which are not measured at fair value through profit or loss, the PZU Group recognizes the expected credit loss – ECL. This applies to:

•  loan receivables from clients;
• loans;
•  debt securities;
•  buy-sell-back transactions;
•  lease receivables;
•  term deposits with credit institutions;
•  lending commitments and issued financial guarantees

For debt assets measured at amortized cost and at fair value through other comprehensive income, impairment is measured as:

•  Lifetime ECL – expected credit losses that result from all possible default events over the expected life of a financial
  instrument;
•  12-month ECL – the portion of lifetime expected credit losses that represent the expected credit losses that result from
  default events on a financial instrument that are possible within the 12 months after the reporting date.

The PZU Group measures allowances for expected credit losses at an amount equal to lifetime ECL, except for the following instruments, for which 12-month ECL is recognized instead:

•  financial instruments for which credit risk has not increased significantly since initial recognition;
•  debt securities that have low credit risk at the reporting date. Low credit risk debt securities are those securities that have been assigned an external investment-grade rating and
•  exposures to banks and the NBP.

The charge is calculated in three categories:

• basket 1 – portfolio with low credit risk – 12-month ECL is recognized;
•  basket 2 – portfolio in which a significant increase of credit risk occurs – lifetime ECL is recognized;
• basket 3 – impaired portfolio – lifetime ECL is recognized.

The method of calculation of the allowance for expected credit losses also impacts the method of recognizing interest income – for baskets 1 and 2 interest income is determined on the basis of gross exposures, and in basket 3 on the net exposure basis.

The PZU Group recognizes the cumulative changes in lifetime ECL since initial recognition as a loss allowance for ECL from purchased or granted credit-impaired financial assets (POCI).

Changes in the value of allowances for expected credit losses is recognized in the consolidated profit and loss account in the “Movement in allowances for expected credit losses and impairment losses on financial instruments” item.

The ECL classification and estimation effected by the PZU Group in terms of loan receivables from clients is in compliance with the requirements of:

• IFRS 9 Financial Instruments and IAS 37 Provisions, contingent liabilities and contingent assets;
•  Recommendation R of the Polish Financial Supervision Authority on the principles of credit exposure classification, estimation and recognition of expected credit losses and credit risk management, issued in April 2021;
•  Article 178 of the CRR, guidelines EBA/GL/2016/07 on the application of the definition of default and the Regulation of the Minister of Finance, Investments and Development of 3 October 2019 on the materiality level of overdue credit obligations and EU Regulation No. 2021/451, Annex V – in accordance with which the definition of default is used at the level of:
  • distinct credit instruments – in the case of retail exposures (including the infection in the case of arrears material for the whole relationship);
  • debtor – for commercial exposures.

n connection with the CJEU ruling of 3 October 2019, the PZU Group identifies legal risk pertaining to FX mortgage loans in Swiss francs.

For exposures outstanding as at 31 December 2022, the PZU Group considers that the legal risk impacts the expected cash flows from the credit exposure and that the level of the expected credit loss, as defined in IFRS 9.

Accordingly, the credit risk of the Swiss franc mortgage portfolio is evaluated in compliance with the legal risk associated with this portfolio. Because of the currently unfavorable case-law resulting in a higher expected number of lawsuits and a significant probability of losing the case as of 31 December 2022, the PZU Group assumed that loans for which the client has filed a lawsuit and loans for which the probability of litigation with the client was estimated at more than 60% were classified into Basket 3. The remaining loans that do not meet these criteria are classified into Basket 2.

Consequently, the PZU Group recognizes the amount of the provision pertaining to credit exposures outstanding as at 31 December 2022 (comprising existing and possible future statements of claim) in the impairment losses for loan receivables from clients and, accordingly, in the “movement in allowances for expected credit losses and impairment losses”.

Additional information on estimation of the provisions associated with the legal risk pertaining to foreign currency mortgage loans in Swill francs is presented in section 48.3.

The process of estimating expected credit losses requires the use of significant estimates and judgments, including assumptions about macroeconomic forecasts and possible scenarios for how these forecasts will evolve in the future, expert adjustments for industries for which the PZU Group identifies increased risk, and rules for identifying significant increases in credit risk.

In 2022, the PZU Group, for clients in certain portfolios and industries for which increased risks were identified, increased PD levels by 100%, resulting in an increase in expected credit losses of PLN 197 million. The impact was included for loan receivables from clients with a gross carrying amount of PLN 15,832 million.

In addition, changes were made to the rules for calculating allowances for certain portfolios of loan receivables from clients. The changes included a different approach to customer segmentation, how to determine PD for certain portfolios and modifications to the transfer logic model.

Determination of impairment losses in compliance with IFRS 9 requires the formulation of forecasts of the evolution of the key credit risk parameters. For the calculation of allowances, the PZU Group takes into account various scenarios for the assessment of the portfolio quality, reflecting the current and expected changes in the economic situation and the uncertainty factors.

The PZU Group calculates its expected credit losses in accordance with various scenarios for the future macroeconomic situation.

Key statutory client support tools available due to the macroeconomic situation, among others, include the Borrower Support Fund, moratoria available to clients who have lost their source of income, and memorandum periods. Exposures covered by the Borrower Support Fund or moratoria for clients who have lost their source of income are classified into forbearance and, consequently, into Basket 2 (unless they meet the grounds for impairment that would result in classification into Basket 3).

Mortgage exposures subject to payment moratoria are subject to general classification rules, where the fact of using moratoria does not meet the conditions of a concession offered due to deteriorated financial situation, as it is not a criterion for using the concession. During periods of suspended maturity, arrears/overdue accruals are suspended, returning to continued accruals onthe date the suspension period ends.