## 51. Financial assets and liabilities not presented at fair value in the statement of financial position

The Group holds financial assets and liabilities which are not presented at fair value in the statement of financial position.

Where there is no market value of financial instruments available, their fair values have been estimated with the use of various valuation techniques. The fair value of financial instruments was measured using a model based on estimating the present value of future cash flows by discounting them using relevant discount rates.

All model calculations include certain simplifying assumptions and therefore are sensitive to those assumptions. Set out below is a summary of the main methods and assumptions used for estimation of fair values of financial instruments which are not measured at fair value.

For certain categories of financial instruments it has been assumed that their carrying amount equals approximately their fair values, which is due to lack of expected material differences between their carrying amount and their fair value resulting from the features of these groups (such as short term character, high correlation with market parameters, unique character of the instrument). This applies to the following groups of financial instruments:

- loans and advances to customers: a portion of the housing loans portfolio (‘old’ housing loans portfolio), loans with no specified repayment schedule, loans payable at the moment of valuation,
- amounts of the Group due to customers: liabilities with no specified payment schedule, other specific products for which no active market exists,
- deposits and interbank placements with maturity date up to 7 days or with a variable interest rate,
- loans or advances granted and taken on interbank market at a variable interest rate (change of interest rate maximum on a 3 month basis),
- cash and balances with the Central Bank and amounts due to the Central Bank,
- other financial assets and liabilities.

For non-impaired loans and advances to customers, present value of discounted cash flow model was used that includes current interest rate with credit margin risk and real maturities that steam from loan agreements. The current level of margins was calculated based on financial instrument transactions with similar risk level that took place in the last quarter that ended on the balance sheet date. For currency loans, the current loan margin for PLN loans was used and it was adjusted with the cost of currency acquisition in basis-swap transaction. The valuation does not take into consideration proposed system solutions which might result in losses being incurred be the Group on the mortgage loan portfolio denominated in CHF. For impaired loans, it is assumed that fair value equals their carrying value.

The fair value of deposits and other amounts due to customers other than banks, with specified maturities has been calculated using the discounted expected future cash flows and applying current interest rates for given deposit products. The fair value is calculated for each deposit and liability, then the fair values of the entire deposit portfolio are grouped by type of product and customer segment. For demand deposits, it is assumed that for them, the fair value equals their carrying amount.

The fair value of the subordinated debt of the Group has been estimated based on the expected future cash flows discounted using the yield curve.

The fair value of debt securities issued by PKO Bank Polski SA has been estimated based on the expected future cash flows discounted using the current interbank interest rates.

The fair value of debt securities issued by PKO Finance AB has been estimated using Bloomberg data.

The fair value of interbank placements and deposits have been estimated based on the expected future cash flows discounted using the current interbank interest rates.

Finance lease receivables have been estimated based on expected cash flows discounted using internal rate of return for lease transactions of the same kind, concluded by the Group in the period directly preceding the balance sheet date.

| level of fair value hierarchy | valuation method | 31.12.2016 | |

carrying amount | fair value | |||

Cash and balances with the Central Bank | n/a | value at cost to pay | 13 325.1 | 13 325.1 |

Amounts due from banks | 2 | discounted cash flows | 5 345.4 | 5 344.4 |

Loans and advances to customers | | | 200 606.5 | 199 125.5 |

housing loans | 3 | discounted cash flows | 106 121.3 | 102 351.1 |

corporate loans | 3 | discounted cash flows | 52 914.9 | 53 731.5 |

consumer loans | 3 | discounted cash flows | 23 221.9 | 24 700.7 |

debt securities (corporate) | 3 | discounted cash flows | 2 282.8 | 2 209.2 |

debt securities (municipal) | 3 | discounted cash flows | 2 587.9 | 2 587.9 |

receivables due from repurchase agreements | 3 | discounted cash flows | 1 339.0 | 1 339.0 |

finance lease receivables | 3 | discounted cash flows | 12 138.7 | 12 206.1 |

Investment securities held to maturity | 3 | discounted cash flows | 465.6 | 466.1 |

Other financial assets | 3 | value at cost to pay less impairment allowance | 2 247.1 | 2 247.1 |

Amounts due to the Central Bank | 2 | value at cost to pay | 4.1 | 4.1 |

Amounts due to banks | 2 | discounted cash flows | 19 208.4 | 19 211.1 |

Amounts due to customers | | | 205 066.4 | 205 005.3 |

due to corporate entities | 3 | discounted cash flows | 48 657.1 | 48 650.3 |

due to public entities | 3 | discounted cash flows | 8 408.9 | 8 408.9 |

due to retail clients | 3 | discounted cash flows | 148 000.4 | 147 946.1 |

Debt securities in issue | 1, 2 | market quotations / discounted cash flows | 14 493.2 | 14 752.5 |

Subordinated debt | 2 | discounted cash flows | 2 539.0 | 2 525.8 |

Other financial liabilities | 3 | value at cost to pay | 3 059.1 | 3 059.1 |

| level of fair value hierarchy | valuation method | 31.12.2015 | |

carrying amount | fair value | |||

Cash and balances with the Central Bank | n/a | value at cost to pay | 13 743.9 | 13 743.9 |

Amounts due from banks | 2 | discounted cash flows | 4 553.0 | 4 553.0 |

Loans and advances to customers | | | 190 413.7 | 183 613.8 |

housing | 3 | discounted cash flows | 100 668.6 | 93 429.7 |

corporate | 3 | discounted cash flows | 58 068.5 | 58 759.7 |

consumer | 3 | discounted cash flows | 21 959.8 | 21 815.6 |

debt securities (corporate) | 3 | discounted cash flows | 2 591.9 | 2 483.9 |

debt securities (municipal) | 3 | discounted cash flows | 2 692.7 | 2 692.7 |

receivables due from repurchase agreements | 3 | discounted cash flows | 4 432.2 | 4 432.2 |

Investment securities held to maturity | 3 | discounted cash flows | 210.3 | 213.6 |

Other financial assets | 3 | value at cost to pay less impairment allowance | 875.2 | 875.2 |

Amounts due to the Central Bank | 2 | value at cost to pay | 4.2 | 4.2 |

Amounts due to banks | 2 | discounted cash flows | 18 288.8 | 18 288.8 |

Amounts due to customers | | | 195 758.5 | 195 719.0 |

due to corporate entities | 3 | discounted cash flows | 51 213.7 | 51 214.2 |

due to public entities | 3 | discounted cash flows | 9 134.4 | 9 134.4 |

due to retail clients | 3 | discounted cash flows | 135 410.4 | 135 370.4 |

Debt securities in issue | 1, 2 | market quotations / discounted cash flows | 9 361.2 | 9 637.4 |

Subordinated debt | 2 | discounted cash flows | 2 499.2 | 2 486.2 |

Other financial liabilities | 3 | value at cost to pay | 2 282.8 | 2 282.8 |