Fair value
of financial assets
and financial liabilities

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing, unrelated parties in an arm's length transaction.

Categories of valuation at fair value of financial assets and liabilities measured at fair value in the statement of financial position

On the basis of applied methods of valuation at fair value, the Group classifies financial assets and liabilities to the following categories:

  1. Level 1: 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 classified to that category the following items:

    • debt securities valued at fixing from Bondspot platform.
    • debt and equity securities in the Brokerage House (Dom Maklerski) portfolio.
    • debt and equity securities which are traded on regulated market.

  2. Level 2: 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 classified to that category the following items:

    • debt securities valuated to the curve or those whose price comes from Bloomberg platform or brokerage pages in Reuters system but for which market is not active,
    • non-treasury debt securities issued by other financial entities, local government bodies, non-financial entities quoted on the stock exchange or not traded on a regulated market,
    • securities issued by Ministry of Finance of Ukraine in KREDOBANK SA portfolio,
    • derivative instruments.

  3. Level 3: Financial assets and liabilities whose fair value is determined with use of valuation models, for which available data is not derived from observable markets. The Group classified to this category shares not quoted on Warsaw Stock Exchange (WSE), equity securities portfolio and debt securities portfolio of KREDOBANK SA.

Note 2 ‘Summary of significant accounting policies and estimates and judgements’ provides detailed information on the method of fair value calculation.

The table below presents a classification of financial assets and liabilities presented in the financial statements at fair value divided into three levels of the fair value hierarchy as at 31 December 2011:

Assets and liabilities valued at fair value as at 31.12.2011 Carrying amount Level 1 Level 2 Level 3
Prices quoted on the active markets Valuation techniques based on observable market data Other valuation techniques
Trading assets 1 311 089 1 261 687 49 402 -
Debt securities 1 300 164 1 250 762 49 402 -
Shares in other entities 10 925 10 925 - -
Derivative financial instruments 3 064 733 5 066 3 059 667 -
Hedging instruments 516 925 - 516 925 -
Trade instruments 2 547 808 5 066 2 542 742 -
Financial assets designated upon initial recognition at fair value through profit and loss 12 467 201 1 318 278 11 148 923 -
Debt securities 12 467 201 1 318 278 11 148 923 -
Investment securities available for sale 14 393 276 8 465 685 5 891 671 35 920
Debt securities 14 307 525 8 415 854 5 891 671 -
Equity securities 85 751 49 831 - 35 920
Financial assets at fair value - total 31 236 299 11 050 716 20 149 663 35 920
Derivative financial instruments 2 645 281 816 2 644 465 -
Hedging instruments 342 598 - 342 598 -
Trade instruments 2 302 683 816 2 301 867 -
Debt securities in issue 175 615 - 175 615 -
Financial instruments designated at fair value through profit and loss 175 615 - 175 615 -
Financial liabilities at fair value - total 2 820 896 816 2 820 080 -


Financial assets available for sale as at 31.12.2011 (Note 19) Carrying amount Level 1 Level 2 Level 3
Debt securities 1 300 164 1 250 762 49 402 -
Treasury bills 49 402 - 49 402 -
Treasury bonds 1 219 069 1 219 069 - -
Corporate bonds 15 186 15 186 - -
Municipal bonds 14 783 14 783 - -
BGK bonds 1 724 1 724 - -
Shares in other entities 10 925 10 925 - -
TOTAL 1 311 089 1 261 687 49 402 -


Financial assets designated upon initial recognition at fair value through profit and loss as at 31.12.2011 (Note 22) Carrying amount Level 1 Level 2 Level 3
Debt securities 12 467 201 1 318 278 11 148 923 -
NBP money market bills 8 593 791 - 8 593 791 -
Treasury bills 2 180 148 - 2 180 148 -
Treasury bonds PLN 1 318 278 1 318 278 - -
Treasury bonds EUR 122 089 - 122 089 -
Municipal bonds PLN 108 922 - 108 922 -
Municipal bonds EUR 143 973 - 143 973 -
TOTAL 12 467 201 1 318 278 11 148 923 -


Investment securities available for sale as at 31.12.2011 (Note 24) Carrying amount Level 1 Level 2 Level 3
Debt securities available for sale 14 307 525 8 415 854 5 891 671 -
Treasury bonds PLN 8 414 865 8 414 865 - -
Treasury bonds EUR 11 720 - 11 720 -
Treasury bonds UAH 220 793 - 220 793 -
Treasury bonds USD 30 661 - 30 661 -
Municipal bonds 3 458 356 - 3 458 356 -
Corporate bonds 2 170 141 - 2 170 141 -
Treasury bills 989 989 - -
Equity securities 85 751 49 831 - 35 920
TOTAL 14 393 276 8 465 685 5 891 671 35 920

The table below presents a classification of financial assets and liabilities presented in the financial statements at fair value divided into three levels of the fair value hierarchy as at 31 December 2010.

Assets and liabilities valued at fair value as at 31.12.2010 Carrying amount Level 1 Level 2 Level 3
Prices quoted on the active markets Valuation techniques based on observable market data Other valuation techniques
Trading assets 1 503 649 1 448 815 54 834 -
Debt securities 1 491 053 1 436 219 54 834 -
Shares in other entities 12 596 12 596 - -
Derivative financial instruments 1 719 085 718 1 718 367 -
Hedging instruments 153 921 - 153 921 -
Trade instruments 1 565 164 718 1 564 446 -
Financial assets designated upon initial recognition at fair value through profit and loss 10 758 331 3 048 210 7 710 121 -
Debt securities 10 758 331 3 048 210 7 710 121 -
Investment securities available for sale 10 219 400 5 746 686 4 463 428 9 286
Debt securities 10 123 419 5 659 991 4 463 428 -
Equity securities 95 981 86 695 - 9 286
Financial assets at fair value - total: 24 200 465 10 244 429 13 946 750 9 286
Derivative financial instruments -
Hedging instruments 555 983 - 555 983 -
Trade instruments 1 848 812 - 1 848 812 -
Financial liabilities at fair value - total 2 404 795 - 2 404 795 -


Financial assets available for sale as at 31.12.2010 (Note 19) Carrying amount Level 1 Level 2 Level 3
Debt securities 1 491 053 1 436 219 54 834 -
Treasury bills - - - -
Treasury bonds 1 483 144 1 428 310 54 834 -
Corporate bonds 519 519 - -
Municipal bonds 7 390 7 390 - -
BGK bonds - - - -
Shares in other entities 12 596 12 596 - -
TOTAL 1 503 649 1 448 815 54 834 -


Financial assets designated upon initial recognition at fair value through profit and loss as at 31.12.2010 (Note 22) Carrying amount Level 1 Level 2 Level 3
Debt securities 10 758 331 3 048 210 7 710 121 -
NBP money market bills 3 997 780 - 3 997 780 -
Treasury bills 1 893 058 - 1 893 058 -
Treasury bonds PLN 4 738 644 3 048 210 1 690 434 -
Municipal bonds EUR 128 849 - 128 849 -
TOTAL 10 758 331 3 048 210 7 710 121 -


Investment securities available for sale as at 31.12.2010 (Note 24) Carrying amount Level 1 Level 2 Level 3
Debt securities available for sale 10 123 419 5 659 991 4 463 428 -
Treasury bonds PLN 5 636 357 5 636 357 - -
Treasury bonds EUR - - - -
Treasury bonds UAH 153 323 - 153 323 -
Treasury bonds USD - - - -
Municipal bonds 2 824 173 - 2 824 173 -
Corporate bonds 1 485 932 - 1 485 932 -
Treasury bills 23 634 23 634 - -
Equity securities 95 981 86 695 - 9 286
TOTAL 10 219 400 5 746 686 4 463 428 9 286

Between 2011 and 2010, there was a change in the approach to the Polish Treasury bonds denominated in Polish zloty for which there is no BondSpot fixing, including the bonds which in line with the principles of the BondSpot market do not have BondSpot fixing due to the short term to maturity. In 2010, the prices for such bonds were obtained from Bloomberg websites or from broker sites in the Reuters system. As from 2011, the revaluation price for the above-mentioned bonds is the market price in the regulated BondSpot market. Apart from the above change, there were no significant transfers between levels 1 and 2 in 2011 and 2010.

The table below presents the classification of financial assets and liabilities measured in the period at fair value divided into a three-level hierarchy (1 January 2011 - 31 December 2011):

  Financial assets designated at fair value through profit and loss Investment securities available for sale Total
Opening balance as at 1 January 2011 - 9 286 9 286
Total gains or losses 3 628 3 994 7 622
in financial result 3 628 3 994 7 622
Purchase - 25 900 25 900
Sales (3 628) (3 260) (6 888)
Closing balance as at 31 December 2011 - 35 920 35 920
Total gains or losses for the period in the financial result for assets held at the end of the period 3 628 3 994 7 622
  Financial assets designated at fair value through profit and loss Investment securities available for sale Total
Opening balance as at 1 January 2010 4 159 7 846 12 005
Total gains or losses (3 885) 1 182 (2 703)
in financial result (3 885) 262 (3 623)
total in other comprehensive income - 920 920
Purchase - 4 950 4 950
Sales (274) (3 663) (3 937)
Transfer to or from level 3 - (1 029) (1 029)
Closing balance as at 31 December 2010 - 9 286 9 286
Total gains or losses for the period in the financial result for assets held at the end of the period (3 885) 262 (3 623)

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

The Group holds certain financial instruments which are not stated 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 using 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 interest rates. All models 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 presented 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 following groups of financial instruments:

  • loans and advances to customers: a portion of the mortgage loans portfolio (the so-called ‘old portfolio’), loans with no specified repayment schedule, which are due at the moment of valuation
  • amounts due to clients: liabilities with no specified payment schedule, other specific products for which no active market exists, such as housing plan passbooks and bills of savings,
  • deposits and interbank placements with maturity date up to 7 days or with a variable interest rate,
  • loans and advances granted and taken on interbank market at a variable interest rate (change of interest rate maximum on a three month basis),
  • cash and balances with the Central Bank and amounts due to the Central Bank,
  • other financial assets and liabilities,
  • debt securities in issue (at variable interest rate), issued by KREDOBANK and BFL.

With regard to loans and advances to clients, the fair value of these instruments has been calculated using discounted future cash flows, and applying current interest rates plus a risk margin and relevant scheduled repayment dates. The current margin level has been established based on transactions with similar credit risk executed during the last quarter of the year ended as of the balance sheet date.

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 of the subordinated debt of the Bank 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 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 has been estimated based on the expected future cash flows discounted using the current interbank interest rates.

Receivables on financial lease 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.

The table below shows a summary of the carrying amounts and fair values for the individual groups of financial instruments which have not been presented at fair value in the Group’s statement of financial positions as at 31 December 2011 and 31 December 2010:

  31.12.2011 31.12.2010
carrying amount fair value carrying amount fair value
Cash and balances with the central bank 9 142 168 9 142 168 6 182 412 6 182 412
Amounts due from banks 2 396 227 2 395 600 2 307 032 2 310 677
Loans and advances to customers 141 634 494 134 828 126 130 668 119 132 354 672
corporate loans 48 929 163 47 334 318 44 842 815 45 730 364
consumer loans 22 872 908 22 444 892 24 129 437 24 276 727
mortgage loans 69 832 423 65 048 916 61 695 867 62 347 581
Other financial assets 431 144 431 144 374 088 374 088
Amounts due to the central bank 3 454 3 454 3 370 3 370
Amounts due to banks 6 239 164 6 234 511 5 233 875 5 233 592
Amounts due to customers 146 473 897 146 495 779 132 981 215 132 769 766
due to corporate entities 38 468 560 38 468 586 31 826 551 31 617 979
due to state budget entities 3 822 243 3 822 243 6 046 810 6 046 896
due to retail clients 104 183 094 104 204 950 95 107 854 95 104 891
Debt securities in issue 7 771 779 7 773 693 3 298 867 3 298 867
Subordinated liabilities 1 614 377 1 618 446 1 611 779 1 617 238
Other financial liabilities 1 857 592 1 857 592 1 307 838 1 307 838