While preparing financial statements, the Group makes certain estimates and assumptions, which have a direct influence on both the financial statements presented and the notes to the financial statements.
The estimates and assumptions that are used by the Group in determining the value of its assets and liabilities as well as revenues and costs, are made based on historical data and other factors which are available and are considered to be proper in the given circumstances. Assumptions regarding the future and the data available are used for assessing carrying amounts of assets and liabilities which cannot be determined interchangeably using other sources. In making assessments the Group takes into consideration the reasons and sources of the uncertainties that are anticipated at the balance sheet date. Actual results may differ from estimates.
Estimates and assumptions made by the Group are subject to periodic reviews. Adjustments to estimates are recognised in the periods in which the estimates were adjusted, provided that these adjustments affect only the given period. If the adjustments affect both the period in which the adjustment was made as well as future periods, they are recognised in the period in which the adjustments were made and in the future periods.
The most significant areas in which the Group performs critical estimates are presented below:
Impairment of loans and advances
An impairment loss is incurred when there is objective evidence of impairment due to events that occurred after the initial recognition of the asset (‘a loss event’), when the loss has a reliably measurable impact on the expected future cash flows from the financial asset or group of financial assets. Future cash flows are assessed by the Group on the basis of estimates based on historical parameters.
The adopted methodology used for estimating impairment allowances will be developed in line with the further possibilities of accumulations of historic impairment data from the existing information systems and applications. As a consequence, acquiring new data by the Group could affect the level of impairment allowances in the future. The methodology and assumptions used in the estimates are reviewed on a regular basis to minimise the differences between the estimated and actual loss amounts. In the case of a +/- 10% change in the present value of estimated cash flows for the Bank’s loan portfolio individually determined to be impaired, the estimated impairment allowances would decrease by PLN 212 million or increase by PLN 384 million respectively (as at 31 December 2010 respectively would decrease by PLN 181 million or increase by PLN 378 million). This estimate was made for the loan portfolio assessed for impairment on an individual basis, i.e. on the basis of individual analysis of future cash flows arising both from own payments and realisation of the collateral, i.e. the positions for which an individual method is applied.
Valuation of derivatives and non-quoted debt securities available for sale
The fair value of non-option derivatives and debt securities available for sale not listed on an active market is determined using valuation models based on discounted cash flows expected to be received from the given financial instrument. Options are valued using option pricing models. The variables and assumptions used in a valuation include any available data derived from observable markets.
In the valuation of non-quoted debentures available for sale, assumptions are also made about the contractor's credit risk, which may have an impact on the pricing of the instruments. Any change in these assumptions could affect the valuation of the above-mentioned instruments.
The valuation techniques used by the Bank for non-option derivative instruments are based on yield curve based on available market data (deposit margins on interbank market, IRS quotations). The Bank conducted a simulation to assess the potential influence of change of the yield curve on the transaction valuation. Upwards movement of yield curve by 50 b.p. would result in decrease of non-option derivative instruments valuation by PLN 77 million (as at 31 December 2010: PLN 35 million). A similar downwards movement in opposite direction would result in valuation increase by PLN 82 million (as at 31 December 2010: PLN 37 million), including the instruments covered by hedge accounting: a drop of PLN 83 million (in 2010: PLN 42 million) for upward movement of yield curve and increase of PLN 88 million (in 2010: PLN 50 million) for downward movement of the curve.
Calculation of provision for retirement and pension benefits and anniversary bonuses
The calculation of the provision includes all jubilee bonuses and retirement benefits expected to be paid in the future. The Bank performed a reassessment of its estimates as at 31 December 2011, on the basis of calculation conducted by an independent external actuary. The provisions calculated equate to discounted future payments, taking into account staff turnover, and relate to the period ending on the balance date. An important factor affecting the amount of the provision is the adopted financial discount rate. An increase/decrease in the financial discount rate of 0.25 pp. will contribute to an increase/decrease in the amount of the provision for retirement and pension benefits and jubilee bonuses of approx. PLN 9 million (as at 31 December 2010, an increase/decrease in financial discount rate by 0.5 pp. affected a decrease/increase in the value of the provision for retirement and pension benefits and anniversary bonuses by about PLN 19 million).
Useful economic lives of tangible fixed assets, intangible assets and investment properties
In estimating useful lives of particular types of tangible fixed assets, intangible assets and investment properties, the Group considers following factors:
- expected physical wear and tear, estimated based on the average period of use recorded to date, reflecting the normal physical wear and tear rate, intensity of use etc.,
- technical or market obsolescence,
- legal and other limitations on the use of the asset,
- expected use of the asset assessed based on the expected production capacity or volume,
- other factors affecting useful lives of such assets.
When the period of use of a given asset results from a contract term, the useful life of such an asset corresponds to the period defined in the contract. However, if the estimated useful life is shorter than the period defined in the contract, the estimated useful life is applied.
If the useful life of assets being subject to depreciation and classified as land and buildings was changed by +/- 10 years, it would influence the financial result of the Group as follows: a decrease in depreciation costs by PLN 27 million or an increase in depreciation costs by PLN 137 million respectively (as at 31 December 2010: a decrease in deprecation cost by PLN 27 million or increase in depreciation cost by PLN 152 million respectively).