50. Fair value hierarchy

Accounting policies and estimates and judgements

The fair value is the price that would be received for the sale of an asset or paid for transfer a liability in a transaction carried out under regular conditions on the main (or most advantageous) market at the valuation date in the current market conditions (i.e. output price), regardless of whether this price is directly observable or estimated using another valuation technique.

Depending on category of classification of financial assets and liabilities to hierarchy, different methods of fair value valuation are used.

Level 1: Prices quoted on the active markets

Financial assets and liabilities whose fair value is stated directly at prices quoted (not adjusted) from active markets for identical assets and liabilities. The Group classifies to this category financial and equity instruments measured at fair value through profit and loss and available for sale, for which there is an active market and for which the fair value is determined with reference to market value, which is a bid price:

  • debt securities valued using fixing from Bondspot platform or Bloomberg and Reuters information service,
  • debt and equity securities which are traded on regulated market, including in the Brokerage House of PKO Bank Polski SA portfolio,
  • derivative instruments, which are traded on a regulated market.

Level 2: Valuation techniques based on observable market data

Financial assets and liabilities whose fair value is determined with use of valuation models where all significant entry data are observable on the market directly (as prices) or indirectly (based on prices). The Group classifies to that category financial instruments for which there is no active market:

Financial assets and liabilities measured at fair valueValuation method (technique)Observable inputs
Derivative financial instruments – CIRS, IRS, FRAThe 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  Specified valuation models for a given type of a currency option.   The model of discounted future cash flows based on yield curves for FX forward and FX swap transactions.   The prices of equity exotic 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 purpose of valuation of equity exotic options embedded in structured products, market prices of these options are obtained.
NBP money market billsYield curve methodYield curves are built based on money market data and OIS (overnight index swap) transactions market.
Currency municipal bondsAccepted valuation modelMarket rates, market data from the money market, IRS transactions market, CDS transactions market, volatility of interest rate options market.
Municipal bonds PLNYield curve and a risk marginYield curves are built based on market rates, money market data, IRS transactions market.
Corporate bondsYield curve and a risk marginYield curves are built based on market rates, money market data, IRS transactions market.
Commodity swap transactionsCommodity price yield curveCommodity price yield curves are built based on money market data, market rate SWAP points.
 

Level 3: Other valuation techniques

Financial assets and liabilities, whose fair value is determined with use of valuation models, for which available input data are not derived from observable markets (unobservable input data).

The Group classified financial instruments, which are valued with internal valuation models:

Financial assets and liabilities measured at fair valueValuation method (technique)unobservable inputs
participation units in mutual fundMethod of the net asset value of the Fund (NAV - Net Asset Value) i.e. the fair value of investment projects (of the companies) in the Fund, which are subject to semi-annual review or audit performed the registered auditor.Value of the Fund’s net assets.
C-series preference shares of Visa Inc.  Estimating 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 the 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 bondsYield curve and a risk margin. Yield curves are built based on market rates, money market data, IRS transactions market.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 sector).
     

Financial information

Assets and liabilities measured at fair value as at 31.12.2016NoteCarrying amountLevel 1Level 2Level 3
   Prices quoted on the active marketsValuation techniques based on observable market dataOther valuation techniques
Trading assets21326.4326.4--
Debt securities 311.6311.6--
Shares in other entities 11.311.3--
Investment certificates, shares rights and pre-emptive rights 3.53.5--
Derivative financial instruments222 900.63.02 897.6-
Hedging instruments 382.1-382.1-
Trading instruments 2 518.53.02 515.5-
Financial instruments designated upon initial recognition at fair value through profit and loss2413 937.24 619.89 317.4-
Debt securities 12 204.12 886.79 317.4-
Participation units 1 733.11 733.1--
Investment securities available for sale2636 675.627 345.15 921.83 408.7
Debt securities 36 142.427 236.15 921.82 984.5
Equity securities 217.691.1-126.5
Participation units in investment funds and shares in joint investment institutions 315.617.9-297.7
Financial assets measured at fair value - total  53 839.8 32 294.3 18 136.8 3 408.7
Derivative financial instruments224 197.91.04 196.9-
Hedging instruments 1 135.2-1 135.2-
Trading instruments 3 062.71.03 061.7-
Financial liabilities measured at fair value - total  4 197.9 1.0 4 196.9 -

Financial instruments designated upon initial recognition at fair value through profit and loss as at 31.12.2016Carrying amountLevel 1Level 2Level 3
Debt securities12 204.12 886.79 317.4-
NBP money market bills9 078.8-9 078.8-
Treasury bonds PLN1 811.91 811.9--
foreign currency Treasury bonds1 074.81 074.8--
municipal bonds PLN110.9-110.9-
foreign currency municipal bonds127.7-127.7-
Units in ICF (insurance capital funds) related to insurance products belonging to
the group of investment poducts where the risk is borne by the policyholder
1 733.11 733.1--
TOTAL 13 937.2 4 619.8 9 317.4 -
 

Investment securities available for sale as at 31.12.2016Carrying amountLevel 1Level 2Level 3
Debt securities available for sale36 142.427 236.15 921.82 984.5
Treasury bonds PLN25 743.925 743.9--
foreign currency Treasury bonds678.5457.1221.4-
municipal bonds PLN4 551.8-4 551.8-
corporate bonds PLN4 590.6692.51 148.62 749.5
foreign currency corporate bonds577.6342.6-235.0
Equity securities217.691.1-126.5
Participation units in investment funds and shares in joint investment institutions315.617.9-297.7
TOTAL 36 675.6 27 345.1 5 921.8 3 408.7

Assets and liabilities measured at fair value as at 31.12.2015NoteCarrying amountLevel 1Level 2Level 3
   Prices quoted on active marketsValuation techniques based on observable market dataOther valuation techniques
Trading assets21783.2783.2--
Debt securities 766.7766.7--
Shares in other entities 9.99.9--
Investment certificates, shares rights, pre-emptive rights 6.66.6--
Derivative financial instruments224 347.32.24 345.1-
Hedging instruments 508.7-508.7-
Trading instruments 3 838.62.23 836.4-
Financial instruments designated upon initial recognition at fair value through profit and loss2415 154.14 837.410 316.7-
Debt securities 13 337.43 020.710 316.7-
Participation units 1 816.71 816.7--
Investment securities available for sale2628 291.319 255.45 401.33 634.6
Debt securities 27 604.919 093.25 401.33 110.4
Equity securities 473.6146.0-327.6
Participation units in investment funds and shares in joint investment institutions 212.816.2-196.6
Financial assets measured at fair value – total  48 575.9 24 878.2 20 063.1 3 634.6
Derivative financial instruments224 624.81.54 623.3-
Hedging instruments 998.5-998.5-
Trading instruments 3 626.31.53 624.8-
Debt securities in issue3571.7-71.7-
Financial instruments designates upon initial recognition at fair value through profit and loss 71.7-71.7-
Financial liabilities measured at fair value - total  4 696.5 1.5 4 695.0 -

Financial instruments designated upon initial recognition at fair value through profit and loss as at 31.12.2015Carrying amountLevel 1Level 2Level 3
Debt securities13 337.43 020.710 316.7-
NBP money market bills10 036.9-10 036.9-
Treasury bonds PLN1 934.81 934.8--
foreign currency Treasury bonds1 118.01 085.432.6-
municipal bonds PLN115.9-115.9-
foreign currency municipal bonds131.3-131.3-
corporate bonds PLN0.50.5--
Units in ICF (insurance capital funds) related to insurance products belonging to the group of investment poducts where the risk is borne by the policyholder1 816.71 816.7--
TOTAL 15 154.1 4 837.4 10 316.7 -
 

Investment securities available for sale as at 31.12.2015Carrying amountLevel 1Level 2Level 3
Debt securities available for sale27 604.919 093.25 401.33 110.4
Treasury bonds PLN17 920.017 920.0--
foreign currency Treasury bonds437.9310.6127.3-
municipal bonds PLN4 613.7-4 613.7-
corporate bonds PLN4 074.5541.8660.32 872.4
foreign currency corporate bonds558.8320.8-238.0
Equity securities473.6146.0-327.6
Participation units in investment funds and shares in joint investment institutions212.816.2-196.6
TOTAL 28 291.3 19 255.4 5 401.3 3 634.6

Impact of estimated parameters on fair value measurement of financial instruments at Level 331.12.201631.12.2015
 Fair value inFair value in
 positive scenarionegative scenariopositive scenarionegative scenario
Investment securities available for sale    
Participation units in investment fund1312.7282.9206.5186.8
Shares of Visa Europe Limited299.770.4378.7282.0
Corporate bonds32 991.92 977.03 122.23 098.7
 

Reconciliation of changes in the period in fair value at level 3 of fair value hierarchy 31.12.201631.12.2015
Opening balance at the beginning of the period3 634.6203.3
Total gains or losses 146.6 334.4
recognised in financial result101.9(3.6)
recognised in other comprehensive income44.7338.0
Foreign exchange differences-(1.0)
Settlement of Visa Europe Limited shares sale transaction(337.0)-
Acquisition of Visa Inc shares81.0-
Acquisition of new shares in the Fund67.6-
Sale of shares of a listed company-(12.0)
Settlements(183.9)(0.5)
Transfers from Level 2 to Level 3-3 110.4
Closing balance as the end of the period 3 408.9 3 634.6
 

In 2016 the Group did not reclassify financial instruments to level 3 of the fair value hierarchy. In 2015 the Group partially transferred corporate bonds recognised in investment securities available for sale from level 2 to levels 1 and 3 of the fair value hierarchy.