Financial assets
and liabilities

 Classification

Financial assets are classified by the Group into the following categories: financial assets designated at fair value through profit and loss, financial assets available for sale, loans and other receivables, financial assets held to maturity. Financial liabilities are classified as follows: financial liabilities designated at fair value through profit and loss and other financial liabilities. The classification of financial assets and liabilities is determined by the Group on initial recognition.

Financial assets and liabilities designated at fair value through profit and loss

A financial asset or financial liability at fair value through profit and loss is a financial asset or financial liability that meets either of the following conditions:

  1. it is classified as held for trading. Financial assets or financial liabilities are classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term, is a part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. A derivative is also classified as held for trading except for a derivative that is a designated and effective hedging instrument.
  2. upon initial recognition it is classified as designated at fair value through profit and loss. The Group may use this designation only when:
    1. the designated financial asset or liability is a hybrid instrument which includes one or more embedded derivatives qualifying for separate recognition, and the embedded derivative financial instrument cannot significantly change the cash flows resulting from the host contract or its separation from the hybrid instrument is forbidden,
    2. it eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as 'an accounting mismatch' that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different basis),
    3. a group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with the written risk management principles or investment strategy of the Group.

The Group has a policy of financial assets and liabilities management according to which financial assets and liabilities classified as held for trading and financial assets and liabilities portfolio designated upon initial recognition at fair value through profit and loss are managed separately.

Financial assets available for sale

Financial assets available for sale are non-derivative financial assets that are designated as available for sale or are not classified as financial assets:

  1. at fair value through profit and loss (designated by the Group upon initial recognition),
  2. held-to-maturity,
  3. those that meet the definition of loans and advances.

Loans, advances and other receivables

Loans and advances and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:

  1. those that the Group intends to sell immediately or in the near term, which are classified as held for trading, and those that the Group upon initial recognition designates as at fair value through profit and loss,
  2. those that the Group upon initial recognition designates as available for sale,
  3. those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, which are classified as available for sale.

Financial assets held to maturity

Financial assets held-to-maturity are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity other than:

  1. those that the Group designates upon initial recognition at fair value through profit and loss,
  2. those that the Group designates as available for sale,
  3. those that meet the definition of loans and advances.

As at 31 December 2011 and as at 31 December 2010, the Group did not hold any assets classified to this category.

Other financial liabilities

Other financial liabilities are the financial liabilities other than measured at fair value through profit and loss which have the nature of a deposit, or a loan or an advance received.

Accounting for transactions

Financial assets and financial liabilities, including forward transactions giving rise to an obligation or a right to acquire or sell in the future a given number of specified financial instruments at a given price, are recognised in the books of account under trade date, irrespective of the settlement date provided in the contract.

Derecognition of financial instruments from a statement of financial position

Financial assets are derecognised when contractual rights to the cash flows from the financial asset expire, or when the financial asset is transferred by the Group to another entity. The financial asset is transferred when the Group:

  1. the contractual rights to receive the cash flows from the financial asset is transferred, or
  2. the Group retains the contractual rights to receive cash flows from the financial asset, but assumes a contractual obligation to pay cash flows to an entity outside the Group.

When the Group transfers a financial asset, it evaluates the extent to which it retains the risks and rewards of ownership of the financial asset. In such cases:

  1. if all the risks and rewards of ownership of the financial asset are substantially transferred, then the Group derecognises the financial asset from the statement of financial position,
  2. if all the risks and rewards of ownership of the financial asset are substantially retained, then the financial asset continues to be recognised in the statement of financial position,
  3. if substantially all the risks and rewards of ownership of the financial asset are neither transferred nor retained, then a determination is made as to whether control of the financial asset has been retained. If the Group has retained control, it continues to recognise the financial asset in the statement of financial position to the extent of its continuing involvement in the financial asset, if control has not been retained, then the financial asset is derecognised from the statement of financial position.

The Group does not reclassify financial instruments to or from the category of designated at fair value through profit and loss since they are held or issued.

The Group removes a financial liability (or a part of a financial liability) from its statement of financial position when the obligation specified in the contract is discharged or cancelled or expires.

The Group derecognises loans when they have been extinguished, when they are expired, or when they are not recoverable. Loans, advances and other amounts due are written off against impairment allowances that were recognised for these accounts. In the case where no allowances were recognised against the account or the amount of the allowance is less than the amount of the loan or other receivable, the loan or receivable is written off after, the amount of the impairment allowance is increased by the difference between the value of the receivable and the amount of the allowances that have been recognised to date.

Valuation

When a financial asset or liability is initially recognised, it is measured at its fair value plus, in the case of a financial asset or liability not designated at fair value through profit and loss, transaction costs that are directly attributable to the acquisition or the issue of the financial asset or liability.

Subsequent to the initial recognition financial instruments are valued as follows:

Assets and liabilities designated at fair value through profit and loss

Assets and liabilities designated at fair value through profit and loss are measured at fair value with the result transferred to the income statement to the item ‘net income from financial instruments at fair value through profit and loss’.

Financial assets available for sale

Financial assets available for sale (except for impairment allowances and currency translation differences) are measured at fair value, and gains and losses arising from changes in fair value are recognised in the other comprehensive income until the amount included in the other comprehensive income is reclassified to the income statement when a financial asset is derecognised from a statement of financial position. Interest determined using effective interest rate from financial assets available for sale is presented in the net interest income.

Loans, advances and investments held to maturity

They are measured at amortised cost with the use of effective interest rate and an allowance for impairment losses. In the case of loans and advances for which it is not possible to reliably estimate the future cash flows and the effective interest rate, loans advances and investments held to maturity are measured at costs to pay.

Other financial liabilities including liabilities resulting from the issue of securities

They are measured at amortised cost. If the time schedule of cash flows from a financial instrument cannot be determined, and thus the effective interest rate cannot be determined fairly, the liability is measured at the amount of consideration due.

Debt instruments issued by the Group are recognised as other financial liabilities and measured at amortised cost.

Method of establishing fair value and amortised cost

Fair value of debt and equity financial instruments (at fair value through profit and loss and available for sale), for which there is an active market, is determined with reference to market value (bid price) (LEVEL 1, Note 49).

Fair value of debt and equity financial instruments (designated at fair value through profit and loss and available for sale), for which there is no active market is determined as follows:

  1. equity instruments designated at fair value through profit and loss and available for sale:
    • price of the last transaction concluded on the market, unless in the period between the date of the transaction and the balance date there were significant changes in market conditions which might affect the price (LEVEL 2, Note 49),
    • at valuation performed by a specialised external entity providing services of this kind (LEVEL 2 or LEVEL 3, Note 49),
  2. debt instruments designated at fair value through profit and loss (LEVEL 2, Note 49):
    • the method based on market prices of securities (the market value method),
    • the method based on market interest rate quotation (the yield curve method),
    • the method based on market prices of securities with similar financial characteristics (the reference asset value method),
  3. debt instruments available for sale:
    • the method based on market prices of securities (the market value method) (LEVEL 2, Note 49),
    • the method based on market interest rate quotation (the yield curve method), adjusted for a risk margin equal to the margin specified in the issue terms. Material changes in the market interest rates are reflected in the changes in the fair value of such instruments (LEVEL 2, Note 49),
    • the method based on market prices of securities with similar financial characteristics (the reference asset value method) (LEVEL 2, Note 49),
    • in the case of securities whose fair value cannot be established with the use of the methods mentioned above, the fair value is determined based on the internal valuation model (LEVEL 2 or LEVEL 3, Note 49).

If it is not possible to determine fair value, equity instruments are stated at acquisition cost less impairment losses (LEVEL 3, Note 49).

Amortised cost is the amount at which the financial instrument was measured at the date of initial recognition, decreased by principal repayments, and increased or decreased by the cumulative amortisation of any differences between that initial amount and the amount at maturity, and decreased by any impairment allowances. Amortised cost is determined using the effective interest rate - the rate that discounts the expected future cash flows to the net present value over the period to maturity or the date of next re-pricing, and which is the internal rate of return of the asset/liability for the given period. The calculation of this rate includes payments received/made by the Group which affect financial characteristics of the instrument, with exception of potential future losses related to non-performing loans. Commissions, fees and transaction costs which constitute an integral part of the effective return on a financial instrument, adjust their carrying amounts and are included in the calculation of the effective interest rate.

Derivative instruments

Recognition and measurement

Derivative financial instruments are recognised at fair value from the trade date. A derivative instrument becomes an asset if its fair value is positive and it becomes a liability if its fair value is negative. The fair value of instruments that are actively traded on the market is their market price (LEVEL 1, Note 49).

In other cases, fair value is derived with the use of valuation models which use data from an active market. Valuation techniques are based on discounted cash flow models, option models and yield curves (LEVEL 2, Note 49).

When the estimated fair value is lower or higher than the fair value as of the preceding balance date (for transactions concluded in the reporting period – initial fair value), the Group includes the difference, respectively, in the net income from financial instruments designated at fair value through profit and loss or in the net foreign exchange gains in correspondence with ‘Derivative financial instruments’. The above recognition method applies to derivative instruments which do not qualify to the application of hedge accounting. The method of recording hedging derivatives is presented in Note 2.6.6.4.

The result of the ultimate settlement of derivative instrument transactions is reflected in the result from financial instruments designated at fair value through profit and loss or in the foreign exchange gains.

The notional amount of the underlying instruments is presented in off-balance sheet items from the date of the transaction until maturity.

Embedded derivative instruments

An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract (both of a financial or non-financial nature), with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract.

An assessment of whether a given contract contains an embedded derivative instrument is made at the date of entering into a contract. A reassessment can only be made when there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract.

Embedded derivative instruments separated from host contracts and recognised separately and accounting records are valued at fair value. Valuation is presented in the statement of financial position under ‘Derivative Financial Instruments’. Changes in the valuation at fair value of derivative instruments are recorded in the income statement under the ‘Net income from financial instruments designated at fair value through profit and loss’ or ‘Net foreign exchange gains’.

Derivative instruments are recognised separately from the host contract, if all of the following conditions are met:

  1. the hybrid (combined) instrument is not measured at fair value, changes of fair value are not recognised in the income statement,
  2. the economic characteristics and risks of the embedded derivative instrument are not closely related to the economic characteristics and risks of the host contract,
  3. a separate instrument with the same characteristics as the embedded derivative would meet the definition of a derivative.

In case of contracts which are not financial instruments and which include an instrument that fulfils the above conditions, profits and losses from embedded derivatives are recorded in the income statement under the ‘Net income from financial instruments designated at fair value through profit and loss’ or ‘Net foreign exchange gains’.

Hedge accounting

Hedge accounting criteria

The Group applies hedge accounting when all the terms and conditions below, specified in IAS 39, have been met:

  1. upon setting up the hedge, a hedge relationship, the purpose of risk management by the entity, and the hedging strategy was officially established. The documentation includes the identification of the hedging instrument, the hedged item or transaction, the nature of the hedged risk and the manner in which the entity will assess the effectiveness of the hedging instrument in compensating the threat of changes in fair value of the hedged item or the cash flows related to the hedged risk,
  2. a hedge was expected to be highly effective in compensating changes to the fair value or cash flows resulting from the hedged risk in accordance with the initially documented risk management strategy relating to the specific hedge relationship,
  3. in respect of cash flow hedges, the planned hedged transaction must be highly probable and must be exposed to changes in cash flows which may, as a result, have an impact on the income statement,
  4. the effectiveness of a hedge may be reliably assessed, i.e. the fair value or cash flows related to the hedged item and resulting from the hedged risk, and the fair value of the hedging instrument, may be reliably measured,
  5. the hedge is assessed on a current basis and its high effectiveness in all reporting periods for which the hedge had been established is determined.

Discontinuing hedge accounting

The Group discontinues hedge accounting when:

  1. a hedge instrument expires, is sold, released or exercised (replacing one hedge instrument with another or extending the validity of a given hedge instrument is not considered to be expiration or release if the replacement or extension of period to maturity is part of the documented hedging strategy adopted by the entity). In such an instance accumulated gains or losses related to the hedging instrument which were recognised directly in other comprehensive income over the period in which the hedge was effective are recognised in a separate item in other comprehensive income until the planned transaction is effected,
  2. the hedge ceases to meet the hedge accounting criteria. In such an instance accumulated gains or losses related to the hedging instrument which were recognised directly in other comprehensive income over the period in which the hedge was effective are recognised in a separate item in other comprehensive income until the planned transaction is effected,
  3. the planned transaction is no longer considered probable, therefore, all the accumulated gains or losses related to the hedging instrument which were recognised directly in other comprehensive income over the period in which the hedge was effective, are recognised in the income statement.
  4. the Group invalidates a hedge relationship.

Fair value hedge

As at 31 December 2011 and 2010, the Group did not apply fair value hedge accounting.

Cash flows hedges

A cash flow hedge is a hedge against the threat of cash flow volatility which can be attributed to a specific type of risk related to a recorded asset or a liability (such as the whole or a portion of future interest payments on variable interest rate debt) or a highly probable planned transaction, and which could affect the income statement.

Changes in the fair value of a derivative financial instrument designated as a cash flow hedge are recognised directly in other comprehensive income in respect of the portion constituting the effective portion of the hedge. The ineffective portion of a hedge is recognised in the income statement in ‘Net income from financial instruments designated at fair value through profit and loss’.

Amounts transferred directly to other comprehensive income are recognised in the income statement in the same period or periods in which the hedged planned transaction affects the income statement.

The effectiveness tests comprise the valuation of hedging transactions, net of interest accrued and currency translation differences on the nominal value of the hedging transactions. These are shown in the income statement, in ‘Net interest income’ and ‘Net foreign exchange gains’ respectively.

Offsetting of financial instruments

A financial asset or liability may only be offset when the Group has a valid legal title to offset it and the settlement needs to be performed on a net basis, or the asset and liability are realised at the same time.