52. Fair value hierarchy
Report Online
2020
Accounting policies, and estimates, and judgments
Depending on the classification of financial assets and liabilities to a specific level of the hierarchy, different methods of fair value measurement are used.
Financial assets and liabilities whose fair value is stated directly at prices quoted (not adjusted) on active markets for identical assets and liabilities. In this category the Group classifies financial instruments for which there is an active market and for which the fair value is determined with reference to the market value, which is a bid price:
- debt securities valued using fixing from the Bondspot platform, or Bloomberg or Reuters information services;
- debt and equity securities which are traded on regulated markets, including in the Biuro Maklerskie PKO BP portfolio;
- derivative instruments, which are traded on a regulated market.
Financial assets and liabilities whose fair value is determined using valuation models where all significant entry data is observable on the market directly (as prices) or indirectly (based on prices). In this category, the Group classifies financial instruments for which there is no active market:
| Financial assets and liabilities measured at fair value | Valuation method (technique) | Observable inputs |
|---|---|---|
| Derivative financial instruments – CIRS, IRS, FRA | The discounted future cash flows model based on the yield curves. | Yield curves are built based on market rates, market data of the money market, market transactions of FRA, IRS, basis swap. |
| Derivative financial instruments – currency option, interest rate options, equity exotic options, fx forward, fx swap transactions | Valuation models specific for particular types of currency options.
The model of discounted future cash flows based on yield curves for FX forward and FX swap transactions. The prices of exotic equity options embedded in structured products are obtained from the market (market prices). |
Yield curves built based on money market rates, market rate of swap points, volatility levels for specific currency pairs, NBP fixing exchange rates.
For the valuation of exotic equity options embedded in structured products, market prices of these options are obtained. |
| NBP money market bills | Yield curve method | Yield curves are built based on money market data and OIS (overnight index swap) transactions market. |
| Municipal bonds in EUR | Accepted valuation model. | Market rates, market data from the money market, IRS transactions market, CDS transactions market, volatility of interest rate options market. |
| Municipal bonds in PLN | Yield curve and risk margin model. | Yield curves are built based on market rates, money market data, IRS transactions market. |
| Corporate bonds | Yield curve and risk margin model. | Yield curves are built based on market rates, money market data, IRS transactions market. |
| Commodity swap transactions | Commodity price curve model. | Commodity price and yield curves are built based on money market rates, market rates of SWAP points. |
| Liabilities in respect of insurance products measured at fair value | A provision for life insurance in which the deposit risk is borne by the policyholder, in insurance with the insurance capital fund, is set up for each active policy individually, at the end of the reporting period. The provision is equal to the individual balance of the fund as at the date at which the provisions are created, and is equal to the number of units accumulated under the individual fund balance multiplied by the price as at the date of valuation. | Number of fund units, unit price |
Financial assets and liabilities whose fair value is determined using valuation models for which input data is not based on observable market data (unobservable input data). In this category, the Group classified financial instruments, which are measured using internal valuation models.
The fair value of equity and debt securities classified as financial assets is determined by the organizational units of the Head Office responsible for them, including the Treasury Products Department and the Brokerage House. In their internal regulations, these units specify the detailed measurement methods, including determining the data sources used for measurement purposes and the method of performing the calculation.
The Credit Risk Department develops the assumptions of the fair value model for financial assets arising from loans and advances granted or other financing agreements being the substitute of loans. The Assets and Liabilities Management Committee approves the fair value model for loan exposures.
| Financial assets and liabilities measured at fair value | Valuation method (technique) | unobservable input |
|---|---|---|
| Financial instruments not held for trading, mandatorily measured at fair value through profit or loss | ||
| Loans and advances to customers | Discounted cash flow method. | Effective margin on loans. |
| C-series preference shares of Visa Inc. | Estimation of the fair value based on the current market value of the listed ordinary shares of Visa Inc., including a discount which takes into account the limited liquidity of C-series shares and the terms and conditions of conversion of C-series shares into ordinary shares. | Discount taking into account the limited liquidity of C-series shares and the terms of converting the C-series shares into ordinary shares. |
| Corporate bonds | Yield curve and risk margin model. Yield curves are built based on market rates, money market data and IRS transactions market data. | Credit spread (credit margins determined on the basis of initial margins modified by credit indices quotes ascribed to issuers based on their ratings and business sectors). |
| Shares in Biuro Informacji Kredytowej S.A. | Estimation of the fair value based on the present value of the forecast results of the company | Forecast results of the company.
Discount rate. |
| Shares in Polski Standard Płatności sp. z o.o. | Estimation of the fair value based on the present value of the forecast results of the company. | Forecast results of the company.
Discount rate. |
| Shares in Society For Worldwide Interbank Financial Telecommunication | Market value of the shares estimated by the company. | Market value estimated by the company.
Discount rate. |
| Shares in Krajowa Izba Rozliczeniowa S.A | Estimation of the fair value based on the present value of the forecast results of the company. | Forecast results of the company.
Discount rate. |
| Shares in Wałbrzyska Specjalna Strefa Ekonomiczna “Invest-Park” sp z o.o. | Fair value determined by an appraiser using the net adjusted assets method. | Value of the company’s net assets. |
| Shares in Wielkopolska Gildia Rolno-Ogrodnicza S.A. | Fair value determined by an appraiser using the net adjusted assets method. | Value of the company’s net assets. |
| Financial Instruments measured at fair value through other comprehensive income | ||
| Corporate bonds | Yield curve and risk margin model. Yield curves are built based on market rates, money market data and IRS transactions market data. | Credit spread (credit margins determined on the basis of initial margins modified by credit indices quotes ascribed to issuers based on their ratings and business sectors). |
Financial information
| ASSETS MEASURED AT FAIR VALUE 31.12.2020 | Level 1 | Level 2 | Level 3 | |
|---|---|---|---|---|
| Carrying amount | Prices quoted on active markets | Valuation techniques based on observable market data | Other valuation techniques | |
| Hedging derivatives | 958 | – | 958 | – |
| Other derivative instruments | 5 501 | – | 5 501 | – |
| Securities | 77 155 | 68 647 | 7 174 | 1 334 |
| held for trading | 1 178 | 824 | 354 | – |
| debt securities | 1 151 | 797 | 354 | – |
| shares in other entities – listed | 25 | 25 | – | – |
| shares in other entities – not listed | 2 | 2 | – | – |
| not held for trading, measured at fair value through profit or loss | 2 466 | 1 832 | 26 | 608 |
| debt securities | 978 | 799 | 21 | 158 |
| shares in other entities – listed | 135 | 135 | – | – |
| shares in other entities – not listed | 451 | – | 1 | 450 |
| participation units in investment funds, investment certificates, rights to shares, pre emptive rights | 902 | 898 | 4 | – |
| measured at fair value through other comprehensive income – corporate bonds | 73 511 | 65 991 | 6 794 | 726 |
| Loans and advances to customers | 6 009 | – | – | 6 009 |
| not held for trading, measured at fair value through profit or loss | 6 009 | – | – | 6 009 |
| housing loans | 7 | – | – | 7 |
| corporate loans | 114 | – | – | 114 |
| consumer loans | 5 888 | – | – | 5 888 |
| Total financial assets measured at fair value | 89 623 | 68 647 | 13 633 | 7 343 |
| LIABILITIES MEASURED AT FAIR VALUE | Level 1 | Level 2 | Level 3 | |
|---|---|---|---|---|
| 31.12.2020 | Carrying amount | Prices quoted on active markets | Valuation techniques based on observable market data | Other valuation techniques |
| Hedging derivatives | 378 | – | 378 | – |
| Other derivative instruments | 6 104 | – | 6 104 | – |
| Liabilities in respect of insurance products | 1 216 | – | 1 216 | – |
| Total financial liabilities measured at fair value | 7 698 | – | 7 698 | – |
| ASSETS MEASURED AT FAIR VALUE 31.12.2019 | Level 1 | Level 2 | Level 3 | |
|---|---|---|---|---|
| Carrying amount | Prices quoted on active markets | Valuation techniques based on observable market data | Other valuation techniques | |
| Hedging derivatives | 645 | – | 645 | – |
| Other derivative instruments | 2 795 | 1 | 2 794 | – |
| Securities | 67 118 | 57 089 | 7 206 | 2 823 |
| held for trading | 1 112 | 1 112 | – | – |
| debt securities | 1 095 | 1 095 | – | – |
| shares in other entities – listed | 15 | 15 | – | – |
| participation units in investment funds, investment certificates, rights to shares, pre emptive rights | 2 | 2 | – | – |
| not held for trading, measured at fair value through profit or loss | 2 199 | 1 439 | 144 | 616 |
| debt securities | 493 | 301 | 12 | 180 |
| shares in other entities – listed | 150 | 150 | – | – |
| shares in other entities – not listed | 436 | – | – | 436 |
| participation units in investment funds, investment certificates, rights to shares, pre emptive rights | 1 120 | 988 | 132 | – |
| measured at fair value through other comprehensive income – corporate bonds | 63 807 | 54 538 | 7 062 | 2 207 |
| Loans and advances to customers | 8 286 | – | – | 8 286 |
| not held for trading, measured at fair value through profit or loss | 8 286 | – | – | 8 286 |
| housing loans | 15 | – | – | 15 |
| corporate loans | 148 | – | – | 148 |
| consumer loans | 8 123 | – | – | 8 123 |
| Total financial assets measured at fair value | 78 844 | 57 090 | 10 645 | 11 109 |
| LIABILITIES MEASURED AT FAIR VALUE | Level 1 | Level 2 | Level 3 | |
|---|---|---|---|---|
| 31.12.2019 | Carrying amount | Prices quoted on active markets | Valuation techniques based on observable market data | Other valuation techniques |
| Hedging derivatives | 589 | – | 589 | – |
| Other derivative instruments | 2 924 | – | 2 924 | – |
| Liabilities in respect of a short position in securities | 363 | 363 | – | – |
| Liabilities in respect of insurance products | 1 353 | – | 1 353 | – |
| Total financial liabilities measured at fair value | 5 229 | 363 | 4 866 | – |
In 2020, corporate bonds amounting to PLN 154 million were transferred from level 1 to level 3, and those amounting to PLN 1 063 million from level 3 to level 2, as a result of a change in the manner of calculating the risk margin. In 2019 corporate bonds amounting to PLN 1 469 million were transferred from level 2 to level 3 as a result of a change in the manner of calculating the risk margin.
| IMPACT OF ESTIMATES ON FAIR VALUE MEASUREMENT OF LEVEL 3 FINANCIAL INSTRUMENTS | 31.12.2020 | 31.12.2019 | ||
|---|---|---|---|---|
| Fair value under | Fair value under | |||
| positive scenario | negative scenario | positive scenario | negative scenario | |
| Shares in Visa Inc.1 | 255 | 244 | 225 | 199 |
| Other equity investments2 | 203 | 183 | 226 | 204 |
| Corporate bonds3 | 879 | 876 | 2 392 | 2 382 |
| Loans and advances to customers4 | 6 009 | 6 009 | 8 526 | 8 054 |
2 Scenario assuming a change in the company’s value of +/-5%
3 Scenario assuming a change in the credit spread of +/-10%
4 Scenario assuming a change in the discount rate of +/- 0.5 p.p.
The reconciliation of changes to fair value of the financial instruments at Level 3 is presented in the table below.
| RECONCILIATION OF CHANGES DURING THE REPORTING PERIOD TO FAIR VALUE AT LEVEL 3 | 2020 | 2019 |
|---|---|---|
| Opening balance at the beginning of the period | 11 109 | 3 025 |
| Increase in exposure to equity instruments | 4 | – |
| Increase in exposure to corporate and municipal bonds | 38 | – |
| Decrease in exposure to corporate bond | (596) | (710) |
| Increase in exposure to loans and advances to customers | 802 | 779 |
| Decrease in exposure to loans and advances to customers | (2 770) | (1 748) |
| Transfers from level 2 and 2 to level 3 | 154 | 1 469 |
| Transfers from level 3 to level 2 | (1 063) | – |
| Reclassification from measured at amortized cost to measured at fair value through profit or loss | 73 | 8 204 |
| Net gain/(loss) on financial instruments measured at fair value through profit or loss | (171) | 108 |
| Change in the valuation recognized in OCI | 2 | (20) |
| Foreign exchange differences | 2 | 2 |
| Other | (240) | – |
| As at the end of the period | 7 344 | 11 109 |