26. Investment securities available for sale

Accounting policies

Investment securities available for sale are debt and equity securities which have been designated as available for sale.

At initial recognition these assets are measured at fair value plus direct transaction costs and then remeasured to fair value and the effects of fair value changes (with the exception of impairment losses) are recognised in other comprehensive income until a given asset is derecognised from the statement of financial position when the accumulated gain/loss is recognised in profit or loss as the result on investment securities. Interest accrued using the effective interest rate on available-for-sale assets is recognised in net interest income.

Impairment allowances on assets classified as available for sale are recognised in the income statement under net impairment allowance and write-downs, which results in derecognition from other comprehensive income accumulated losses on valuation which were previously recorded there and to recognise them in the income statement.

In subsequent periods, if the fair value of debt securities increases, and the increase may be objectively related to an event subsequent to the impairment loss being recognised in the income statement, the impairment loss is reversed and the amount of the reversal is recognised in the income statement.

Impairment losses recognised on equity instruments are not reversed through profit and loss.

Estimates and judgements:

Impairment allowances

At each balance sheet date, the Group makes an assessment, whether there is objective evidence that a given financial asset classified to financial assets available for sale is impaired. If such evidence exists, the Group determines the amounts of impairment allowances.

Objective evidence that a financial asset or group of assets available for sale is impaired includes the following events:

1) significant financial difficulties of the issuer,

2) breach of a contract by the issuer, such as lack of contracted payments of interest or principal or late payments,

3) granting a concession by the lender to the issuer, for economic or legal reasons relating to the borrower's financial difficulty, that the lender would not otherwise consider (‘forbearance practices’),

4) deterioration of the issuer’s financial condition in the period of maintaining the exposure,

5) high probability of bankruptcy or other financial reorganization of the issuer,

6) an increase in risk of a certain industry in the period of maintaining a significant exposure, in which the issuer operates, reflected by the industry being qualified by the Group as elevated risk industry.

The Group firstly assesses if impairment on an individual basis for individually significant receivables exists.

If there are objective indicators of impairment on financial assets classified as debt securities available for sale not issued by the State Treasury, an impairment allowance is calculated as the difference between the asset’s carrying amount and the present fair value estimated as value of future cash flows discounted using the original effective interest rate.

CVA and DVA adjustments

The fair value non-quoted debt securities available for sale is determined using valuation models based on discounted cash flows expected to be received from the given financial instrument. In the valuation of non-quoted debt securities available for sale, assumptions are also made about the counterparty's credit risk, which may have an impact on the valuation of the instruments. The credit risk of the securities, for which there is no reliable market price available, is included in the margin, for which the valuation methodology is consistent with the calculation of credit spreads to determine CVA and DVA adjustments.

Financial information

Investment securities available for sale31.12.201631.12.2015
   
Debt securities, gross36 419.627 661.8
Treasury Bonds PLN25 743.917 920.0
foreign currency Treasury bonds678.5437.9
municipal bonds PLN4 551.84 613.7
corporate bonds PLN4 800.04 097.5
foreign currency corporate bonds645.4592.7
Impairment allowances(277.2)(56.9)
corporate bonds PLN(209.4)(23.0)
foreign currency corporate bonds(67.8)(33.9)
   
Total net debt securities 36 142.4 27 604.9
   
Equity securities, gross284.6567.4
not admitted to public trading128.9346.9
admitted to public trading155.7220.5
Impairment allowances(67.0)(75.6)
   
Total net equity securities 217.6 491.8
   
Participation units in investment funds and shares in joint investment institutions315.6212.8
   
Total net investment securities available for sale 36 675.6 28 309.5

Investment debt securities available for sale - the Group's exposure to credit riskExposure
 31.12.201631.12.2015
   
impaired, assessed on an individual basis1 296.8397.4
not impaired, not past due35 122.827 264.4
with external rating30 034.721 726.0
with internal rating5 088.15 538.4
   
Gross total 36 419.6 27 661.8
Impairment allowances(277.2)(56.9)
   
Net total 36 142.4 27 604.9

Investment debt securities available for sale - the Group's exposure to credit riskExposure
 31.12.201631.12.2015
   
impaired, assessed on an individual basis1 296.8397.4
not impaired, not past due35 122.827 264.4
with external rating30 034.721 726.0
with internal rating5 088.15 538.4
   
Gross total 36 419.6 27 661.8
Impairment allowances(277.2)(56.9)
   
Net total 36 142.4 27 604.9
 
Debt securities available for sale by maturity (by carrying amount) 31.12.2016 31.12.2015
     
up to 1 month 27.9 80.4
1 - 3 months 36.5 88.2
3 months - 1 year 1 869.4 591.7
1 - 5 years 20 176.8 12 283.2
over 5 years 14 031.8 14 561.4
     
Total 36 142.4 27 604.9
Impairment allowances – reconciliation of movements in 2016 Value at the beginning of the period Recognised during the period Reversed during the period Derecognition of assets and settlement Other Value at the end of the period Net- impact on the income statement
               
Debt securities 56.9 52.0 - - 168.3 277.2 (52.0)
Equity instruments 75.6 - - (9.7) 1.1 67.0 -
               
Total 132.5 52.0 - (9.7) 169.4 344.2 (52.0)
   
Impairment allowances – reconciliation of movements in 2015 Value at the beginning of the period Recognised during the period Reversed during the period Derecognition of assets and settlement Other Value at the end of the period Net- impact on the income statement
               
Debt securities - 56.7 - - 0.2 56.9 (56.7)
Equity instruments 129.4 4.7 (3.6) (54.9)   75.6 (1.1)
               
Total 129.4 61.4 (3.6) (54.9) 0.2 132.5 (57.8)
   

Significant transaction

On 29 January 2016, the Management Board of PKO Bank Polski SA accepted the conditions of the Group’s participation in acquisition of Visa Europe Ltd. by Visa Inc. presented to the Group by Visa Europe Ltd. On 16 June 2016, the final amounts due to the Group were confirmed. On 21 June 2016, the Group obtained from Visa Europe Ltd. information on completing the acquisition of Visa Europe Ltd. by Visa Inc.

The final Group’s participation in above-mentioned transaction includes:

•the amount of EUR 70.5 million in cash, paid on the Group’s account on 21 June 2016 (equivalent to PLN 309.9 million according to NBP average exchange rate of 21 June 2016),

•the number of 25 612 preference C-series shares of Visa Inc., the value of which as at the transaction date was estimated at the amount of USD 20.9 million (equivalent to PLN 81 million according to NBP average exchange rate of 21 June 2016),

•the receivable due to deferred payment in cash equivalent to 0.5435987989% from the amount of EUR 1.12 billion, i.e. the amount attributable to all transaction participants, paid on the 3rd anniversary of the transaction, unless potential adjustments, in case of occurrence of situation described in the transaction terms; the value of above-mentioned receivable as at 21 June 2016 amounted to EUR 6.1 million (equivalent to PLN 26.7 million according to NBP average exchange rate of 21 June 2016).

The Group recognised in the income statement due to settlement of the transaction the total amount of PLN 417.6 million (the profit before taxation). Within this amount, the amount settled in the other comprehensive income due to valuation of Visa Europe Ltd. shares amounted to PLN 336.7 million.

Received preference C-series shares will be converted to ordinary Visa Inc. shares, and terms of transaction provide progressive shares conversion. The conversion of all preference shares shall occur not later than in 2028. Current conversion ratio equals to 13.952 and may be reduced in the period until 2028, which is depended on potential liabilities due to legal claims in that period relating to acquired company, i.e. Visa Europe Ltd.

Preference shares of Visa Inc. have been classified to the portfolio of securities available for sale and they are measured at its fair value based on the market price of quoted ordinary shares, taking into consideration discount due to the limited liquidity of the preference shares and the conditions of shares conversions (adjustments resulting from court proceedings).

The fair value of the mentioned above shares as at 31 December 2016 was estimated at USD 22.1 million (equivalent to PLN 92.4 million according to NBP average exchange rate of 30 December 2016 applicable as of the end of 2016).