Financial statements of Bank Gospodarstwa Krajowego for the financial year from 1 January to 31 December 2023         The above financial statements of Bank Gospodarstwa Krajowego is a translation from the original Polish version. In case of any discrepancies between the Polish and English version, the Polish version shall prevail.

Warsaw, 10 April 2024

Selected financial data on financial statements

The selected financial data specified below constitutes additional information to the financial statements of BGK for 2023.

	in PLN million		in EUR million
	2023	2022	2023	2022
Net interest income	4,290	2,957	947	631
Net fee and commission income/expense	451	317	100	68
Operating result	3,862	2,693	853	574
Profit before tax	3,862	2,693	853	574
Net profit	3,150	2,178	696	465
Net comprehensive income	3,831	1,678	846	358
Net cash flows	597	-40,069	132	-8,547

 

	in PLN million		in EUR million
	31 Dec 2023	31 Dec 2022	31 Dec 2023	31 Dec 2022
Total assets	222,354	206,793	51,139	44,093
Total equity	39,420	30,448	9,066	6,492
Total capital ratio including flow funds*	31.57%	31.40%	31.57%	31.40%
Total capital ratio excluding flow funds*	33.32%	31.57%	33.32%	31.57%
Basic funds (Tier 1 capital)*	35,845	30,174	8,244	6,434

* Change of presentation for 2022 – Information on the calculation of the total capital ratio and own funds is presented in Note 51 “Capital adequacy and leverage risk” and in the Report on Risk Management and Capital Adequacy of Bank Gospodarstwa Krajowego as at 31 December 2023 (Pillar  III)”.

 

Selected financial data on the financial statements was translated to EUR in line with the following rates:
	31 Dec 2023	31 Dec 2022
§  items from the statement of profit or loss, statement of comprehensive income, and statement of cash flows at the mid-exchange rate quoted by the National Bank of Poland (NBP) calculated as an arithmetic mean of the exchange rates applicable on the last day of each month in a given period	4.5284	4.6883
§  items from the statement of financial position at the mid-exchange rate quoted by the NBP for the last day of the period	4.3480	4.6899

As at 31 December 2022, carrying amounts denominated in foreign currencies were converted into PLN in accordance with Table No. 252/A/NBP/2022 of 30 December  2022.

As at 31 December 2023, carrying amounts denominated in foreign currencies were converted into PLN in accordance with Table No. 251/A/NBP/2023 of 29 December 2023.

Table of contents

Selected financial data on financial statements22

Statement of profit or loss43

Statement of comprehensive income44

Statement of financial position55

Statement of changes in equity66

Statement of cash flows77

Notes to the financial statements88

1.   General information88

2.   Accounting policies1010

3.   Operating segments3131

4.   Interest income and expense3232

5.   Fee and commission income and expense3232

6.   Net gains (losses) on financial instruments at fair value through profit or loss and foreign exchange gains (losses)3333

7.   Net gains (losses) on investments in financial assets3333

8.   Net gains (losses) on derecognition of financial assets3333

9.   Other operating income and expenses3333

10. General administrative expenses3434

11. Net allowances for expected credit losses3434

12. Net impairment losses on investments in subsidiaries and associates3434

13. Income tax3535

14. Earnings per share3636

15. Contribution to the State Budget3636

16. Cash in Central Bank3636

17. Amounts due from banks3737

18. Derivative financial instruments3838

19. Derivative hedging instruments3838

20. Securities4040

21. Receivables and liabilities under reverse repurchase/repurchase agreements4444

22. Loans and advances to customers4444

23. Investments in subsidiaries4646

24. Investments in associates4646

25. Intangible assets4949

26. Property, plant and equipment5050

27. Right-of-use assets5151

28. Investment property5353

29. Other assets5353

30. Amounts due to banks5353

31. Liabilities to customers5454

32. Debt securities issued5454

33. Lease liabilities5454

34. Other liabilities5555

35. Provisions5555

36. Equity5757

37. Proposed profit distribution5858

38. Contingent liabilities in respect of financial liabilities and guarantees granted and received5959

39. Additional information to the statement of cash flows5959

40. Related party transactions6161

41. Remuneration of the top executives6161

42. Fair value of financial assets and financial liabilities6363

43. Assets pledged as collateral for the payment of liabilities6868

44. Offsetting of financial assets and liabilities6969

Risk management objectives and principles7070

45. Risk management7070

46. Credit risk management7272

47. Liquidity risk management9494

48. Market risk management9898

49. Operational risk management104104

50. Other risks106106

51. Capital adequacy and leverage risk111111

Other notes116116

52. Custody business116116

53. Information on the entity authorised to audit the financial statements116116

54. Major events subsequent to the reporting date116116

Statements of funds established under separate legislation for the financial year from 1 January to 31 December 20231118

Statement of profit or loss

Continuing operations	Note	2023	2022
Interest income	4	13,779	9,998
Interest income calculated with the use of the effective interest rate method		12,874	9,200
Income of similar nature to interest income on instruments at fair value through profit or loss		905	798
Interest expense	4	-9,489	-7,041
Net interest income		4,290	2,957
Fee and commission income	5	471	335
Fee and commission expense	5	-20	-18
Net fee and commission income		451	317
Net gains (losses) on financial instruments at fair value through profit or loss and foreign exchange gains (losses)	6	242	234
Net gains (losses) on investments in financial assets	7	115	62
Net gains (losses) on derecognition of financial assets	8	29	157
Other operating income	9	7	15
Other operating expenses	9	-149	-92
General administrative expenses	10	-852	-675
Net allowances for expected credit losses	11	-402	-299
Net impairment losses on investments in subsidiaries and associates	12	131	17
Operating result		3,862	2,693
Profit before tax		3,862	2,693
Income tax	13	-712	-515
Net profit		3,150	2,178

Statement of comprehensive income

	Note	2023	2022
Net profit		3,150	2,178
Other comprehensive income		681	-500
Items that may be reclassified subsequently to profit or loss		274	-216
Revaluation of financial assets at fair value through other comprehensive income, gross		287	-276
Deferred tax on financial assets at fair value through other comprehensive income	13	-54	52
Cash flow hedge, gross	19	51	10
Deferred tax on cash flow hedge	13	-10	-2
Items that cannot be reclassified subsequently to profit or loss		407	-284
Revaluation and gain or loss on sale of equity instruments designated as at fair value through other comprehensive income, gross		511	-352
Deferred tax on revaluation and gain or loss on sale of equity instruments designated as at fair value through other comprehensive income	13	-97	67
Gains and losses due to measurement of defined benefit plans, gross	35	-9	1
Deferred tax on measurement of defined benefit plans	13	2	0
Total net comprehensive income		3,831	1,678

 

 

 

 

 

 

 

 

 

 

 

 

Notes to the financial statements on the pages to follow form their integral part.

Statement of financial position

	Note	31 Dec 2023	31 Dec 2022
Assets
Cash and balances with the Central Bank	16	4,068	3,300
Amounts due from banks	17	9,635	9,912
Derivative financial instruments	18	1,460	1,587
Derivative hedging instruments	19	85	10
Securities	20	153,431	137,206
Reverse repurchase agreements	21	5,269	12,741
Loans and advances to customers	22	42,514	36,917
Investments in subsidiaries	23	395	413
Investments in associates	24	4,671	3,856
Intangible assets	25	194	116
Property, plant and equipment	26	184	119
Right-of-use assets	27	63	86
Investment property	28	18	16
Deferred tax assets	13	272	430
Other assets	29	95	84
Total assets		222,354	206,793
Liabilities and equity
Liabilities
Amounts due to banks	30	4,459	4,531
Derivative financial instruments	18	797	1,359
Liabilities to customers	31	161,631	153,830
Repurchase agreements	21	6,436	6,574
Debt securities issued	32	1,831	3,934
Lease liabilities	33	63	88
Other liabilities	34	6,402	4,922
Current tax liabilities		573	364
Provisions	35	742	743
Total liabilities		182,934	176,345
Equity
Statutory capital	36	34,023	26,879
Supplementary capital		1,783	1,608
Revaluation reserve		232	-449
Other capital reserves		232	232
Net profit (loss) for the current year		3,150	2,178
Total equity		39,420	30,448
Total liabilities and equity		222,354	206,793

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes to the financial statements on the pages to follow form their integral part.

Statement of changes in equity

 

Changes from 1 January to 31 December 2023	Note	Statutory capital	Supplementary capital	Revaluation reserve			Other capital reserves		Retained earnings	Total equity
				Financial assets at fair value through other comprehensive income	Cash flow hedge	Actuarial gains and losses	Reserve capital	General banking risk reserve
1 January 2023		26,879	1,608	-451	8	-6	77	155	2,178	30,448
Total comprehensive income, including:		0	0	647	41	-7	0	0	3,150	3,831
net profit for the current year		0	0	0	0	0	0	0	3,150	3,150
other comprehensive income for the period		0	0	647	41	-7	0	0	0	681
Retained earnings distribution, including:	36	2,003	175	0	0	0	0	0	-2,178	0
allocation to capital		2,003	175	0	0	0	0	0	-2,178	0
Statutory capital increase	36	5,141	0	0	0	0	0	0	0	5,141
31 December 2023		34,023	1,783	196	49	-13	77	155	3,150	39,420

 

Changes from 1 January to 31 December 2022	Note	Statutory capital	Supplementary capital	Revaluation reserve			Other capital reserves		Retained earnings	Total equity
				Financial assets at fair value through other comprehensive income	Cash flow hedge	Actuarial gains and losses	Reserve capital	General banking risk reserve
1 January 2022		21,982	1,553	58	0	-7	77	155	696	24,514
Total comprehensive income, including:		0	0	-509	8	1	0	0	2,178	1,678
net profit for the current year		0	0	0	0	0	0	0	2,178	2,178
other comprehensive income for the period		0	0	-509	8	1	0	0	0	-500
Retained earnings distribution, including:	36	641	55	0	0	0	0	0	-696	0
allocation to capital		641	55	0	0	0	0	0	-696	0
Statutory capital increase	36	4,256	0	0	0	0	0	0	0	4,256
31 December 2022		26,879	1,608	-451	8	-6	77	155	2,178	30,448

 

 

Statement of cash flows

  

Statement of cash flows	Note	2023	2022
A. Cash flows from operating activities
Net profit/loss		3,150	2,178
Total adjustments:		964	-42,288
Income tax recognised in profit or loss	13	712	515
Depreciation and amortisation	10	74	65
Profit/loss on investing activities		-24	-14
Interest and dividends	39	322	297
Foreign exchange gain/loss		138	-22
Change in amounts due from banks	39	108	146
Change in assets under derivative financial instruments		127	-1,119
Change in assets under derivative hedging instruments		-24	0
Change in securities		-10,292	-39,630
Change in reverse repurchase agreements		7,472	-2,738
Change in loans and advances to customers		-5,597	-3,710
Change in other assets		-11	-23
Change in amounts due to banks		20	1,029
Change in liabilities under derivative financial instruments		-562	464
Change in liabilities to customers		7,801	3,019
Change in repurchase agreements		-138	-3,880
Change in provisions		-10	-15
Change in accumulated loss allowance for non-financial assets		-131	-17
Change in other liabilities		1,480	3,462
Income tax paid		-504	-121
Other adjustments	39	3	4
Net cash from operating activities		4,114	-40,110
B. Cash flows from investing activities
Inflows		101	1,260
Sale of investment property		4	3
Sale of shares in subsidiaries	23	87	0
Sale of shares in associates	24	6	1,200
Sale of investments in financial assets		0	9
Dividends received	39	4	48
Outflows		1,099	832
Purchase of property, plant and equipment	26	82	11
Purchase of intangible assets	25	107	57
Purchase of shares in subsidiaries	23	80	129
Purchase of shares in associates	24	830	635
Net cash from investing activities		-998	428
C. Cash flows from financing activities
Inflows		2,192	466
Increase in equity by the State Treasury		6	0
Long-term loans received		368	466
Debt securities issued		1,818	0
Outflows		4,711	853
Repayment of long-term loans		433	555
Redemption of debt securities issued		3,850	0
Repayment of interest		398	260
Repayment of lease liabilities		30	38
Net cash from financing activities		-2,519	-387
D. Net cash flows		597	-40,069
E. Cash and cash equivalents at the beginning of the period		12,758	52,827
F. Cash and cash equivalents at the end of the period	39	13,355	12,758

 

 

Notes to the financial statements on the pages to follow form their integral part.

Notes to the financial statements

1.           General information

Bank Gospodarstwa Krajowego (Bank, BGK) is a state-owned bank within the meaning of:

§  the Banking Law of 29 August 1997,

§  the Act on Bank Gospodarstwa Krajowego of 14 March 2003,

§  Articles of Association established by the Regulation of the Minister of Development of 16 September 2016 on the Adoption of the Articles of Association of Bank Gospodarstwa Krajowego.

BGK operates in Poland and has its registered office in Warsaw at Al. Jerozolimskie 7, 00-955 Warsaw, with mailing address: Varso 2 Building, ul. Chmielna 73. Its NIP tax identification number is 525-00-12-372 and REGON statistical number is 000017319.

Apart from its Head Office, BGK operates 16 Regions located in province capitals and representative offices based in Brussels, Frankfurt am Main, London and Amsterdam.

The Bank is the parent of the Bank Gospodarstwa Krajowego Group and a significant investor for associates held by the Bank and its subsidiaries.

Under Article 4 of the Act on Bank Gospodarstwa Krajowego, the key objectives of BGK’s activities include supporting the economic policy of the Council of Ministers, social and economic government programmes, including surety and guarantee programmes, as well as local government and regional development programmes, in particular:

§  projects financed with EU funds and international financial institutions, as defined by Article 4.1.3 of the Banking Law,

§  infrastructure projects,

§  projects related to the development of micro, small and medium-sized enterprise sector,

§  - including those financed with public funds.

Tasks fulfilled by the Bank under Articles 5 and 6 of the Act on Bank Gospodarstwa Krajowego include, in particular:

§  performance of activities specified in the Banking Law,

§  administration of funds created by, entrusted with or transferred to BGK under separate legislation,

§  management of export transactions with the use of export support instruments, and supporting exports of Polish goods and services under separate legislation or in performance of government programmes,

§  performance of activities related to credit institutions which were liquidated or regarded as liquidated,

in accordance with Art. 5.4 of the Act,

§  offering, whether directly or indirectly, guarantee and/or surety services under government surety and guarantee programmes or on behalf of and for the account of the State Treasury in accordance with the Act on Sureties and Guarantees Granted by the State Treasury and Certain Legal Persons, in particular to the micro, small and medium-sized enterprise sector,

§  issuing declarations which have the power of official documents within the meaning of Art. 95.1 of the Banking Law and enable the deletion of entries made in Sections III and IV of Land and Mortgage Registers or document sets,

§  supporting the development of residential construction, in particular development of residential property for rent, under separate legislation or government programmes,

§  providing bank account services to the State budget,

§  providing bank account services to the local government budget administration,

§  providing bank account services to the accounts of state or local government legal persons established under separate legislation to carry out public functions,

§  other functions carried out with the use of public funds, as specified in agreements entered into with public administration bodies.

BGK may also fulfil the function of a body implementing a financial instrument or a fund of funds as referred to in Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006.

Since its inception, BGK’s objective has been to support the socio-economic development of Poland. The Bank’s unique role is highlighted in its current strategy for 2021–2025, in which its mission was supplemented with a component relating to sustainable development. The strategy also includes a vision of becoming the Leading institution in sustainable development programmes. BGK achieves its objectives by ensuring a relevant stimulus and supplementing the banking

 sector. What is of particular importance in this context is that BGK undertakes initiatives and activates partners without competing with the market. It fills the economic gap and targets areas where the development offer for other economic operators is insufficient. BGK’s Strategy for 2021–2025 is a response to the changing economic environment, it takes account of the changing needs in society and in the technological and regulatory environment. Consistent efforts are made to strengthen the position of the Bank and the Polish economy on the international market. The current strategy defines three key external pillars (strategic directions, based on which BGK wants to develop and shape the market):

§  Sustainable Development, where the ambition is to support the socio-economic development of the country at least so as not to deteriorate living conditions for the future generations,

§  Social Commitment, thanks to which modern Polish statehood is built through social capital development in the area of education, culture, sport and ecology;

§  International Business and Cooperation, aimed at improving the competitiveness of Polish economy by increasing the internationalisation of Polish enterprises and building awareness of Poland’s attractiveness among foreign investors as a country with high intellectual capital;

as well as two internal pillars (i.e. the manner of organisation and operation aimed at maximising the efficacy of activities in the business pillars):

§  Digital and Process Transformation, which creates optimum conditions for dynamic development determined by the strategy through process excellence and digitisation,

§  Effective Management Model, which ensures an increased scale of tasks completed with a view to meeting the ever more complex needs of the growing number of stakeholders.

In 2023, half way through the strategy timeframe, the Supervisory Board decided to update it by revising, among other things, the levels of selected strategic indicators and adding new milestones for strategy pillars.

A particularly important element of BGK’s Strategy for 2021-2025, are business model programmes, which support the implementation of the strategic pillars. Eight dedicated programmes offer an insight into the way, in which the bank wants to reach the market, react to needs and adapt its solutions:

§  Industrial Development,

§  Infrastructure, Transport and Logistics,

§  Entrepreneurship Development,

§  Strategic Security,

§  Healthcare,

§  Public Finance,

§  Social and Territorial Cohesion,

§  Housing.

Programmes represent a collection of consistent activities and carefully selected products that satisfy the needs of key stakeholders. Their goals result from the state policy, the bank’s strategy and the need to bridge the identified market gaps. Each programme seeks to develop its respective segment of the economy in the direction defined in its objective. 

Composition of the Bank’s Supervisory Board

In 2023, the composition of the Bank’s Supervisory Board changed as follows:

§  On 5 January 2023, Piotr Pawliczak tendered his resignation as member of the Supervisory Board;

§  The Prime Minister appointed the following persons to BGK’s Supervisory Board: Gertruda Uścińska on 14 February 2023, Piotr Kieloch on 2 March 2023, Michał Gajewski on 27 March 2023, Kazimierz Kujda on 11 April 2023, Joanna Strzesak-Rochewicz on 26 May 2023, and Michał Kuczmierowski on 10 August 2023;

§  The Prime Minister removed the following persons from the Supervisory Board of BGK: Zbigniew Krysiak on 25 May 2023, Joanna Strzesak-Rochewicz and Piotr Kieloch on 29 December 2023.

In the period from 6 January to 13 February 2023, the Supervisory Board consisted of eight members.

As at 31 December 2023, the composition of the Bank’s Supervisory Board was as follows:

§  Paweł Borys – Chairman of the Supervisory Board,

§  Beata Gorajek – Deputy Chairwoman of the Supervisory Board,

§  Magdalena Tarczewska-Szymańska – Secretary of the Supervisory Board,

§  Michał Gajewski – Member of the Supervisory Board,

§  Honorata Krysiewicz – Member of the Supervisory Board,

§  Michał Kuczmierowski – Member of the Supervisory Board,

§  Kazimierz Stanisław Kujda – Member of the Supervisory Board,

§  Wojciech Maj – Member of the Supervisory Board,

§  Adam Rudzewicz – Member of the Supervisory Board,

§  Jerzy Szmit – Member of the Supervisory Board,

§  Gertruda Uścińska – Member of the Supervisory Board.

From 31 December 2023 to the date on which these financial statements were signed, the composition of the Bank’s Supervisory Board was changed as follows:

§  The Prime Minister removed the following persons from the Supervisory Board: Jerzy Szmit and Kazimierz Kujda on 11 January 2024, Beata Gorajek, Adam Rudzewicz and Michał Gajewski on 15 February 2024, Honorata Krysiewicz on 15 March 2024; Wojciech Maj on 27 March 2024;

§  The Prime Minister appointed Marcin Buczyński, Jarosław Dąbrowski, Magdalena Miętus, Jacek Pierzyński, Katarzyna Przewalska, Zbigniew Stasiak, and Tomasz Szałwiński as members of the Supervisory Board of BGK as of 16 February 2024.

Composition of the Bank’s Management Board

The following changes occurred in the composition of the Bank’s Management Board in 2023:

§  On 31 January 2023, the Prime Minister removed Włodzimierz Kocon from the position of a Vice-President of the BGK Management Board;

§  Dariusz Szwed, Member of the Management Board, tendered his resignation effective from 13 April 2023;

§  The Prime Minister appointed Marek Tomczuk as Member of the BGK Management Board as of 21 April 2023.

Composition of the Bank’s Management Board as at 31 December 2023 was as follows:

§  Beata Daszyńska-Muzyczka – President of the Management Board,

§  Paweł Nierada – First Vice-President of the Management Board,

§  Radosław Kwiecień – Member of the Management Board,

§  Tomasz Robaczyński – Member of the Management Board,

§  Marek Tomczuk – Member of the Management Board.

From 31 December 2023 to the date on which these financial statements were signed, the composition of the Bank’s Management Board was changed as follows:

§  On 11 January 2024, the Prime Minister removed Beata Daszyńska-Muzyczka from the position of the President of the BGK Management Board. As the position of the President of the Management Board remains vacant, the relevant tasks and functions are performed by the First Vice-President of the Management Board – Paweł Nierada, in accordance with the division of duties at the Bank’s Management Board approved by the Supervisory Board on 25 January 2024.

2.           Accounting policies

2.1.      Basis of preparation of the financial statements and statement of compliance

These financial statements of Bank Gospodarstwa Krajowego contain data for the financial year from 1 January to 31 December 2023 as well as comparative financial data for the financial year from 1 January to 31 December 2022.

These financial statements of Bank Gospodarstwa Krajowego for 2023 (the “financial statements”) have been prepared in accordance with the International Financial Reporting Standards approved by the European Union as at 31 December 2023 and the related interpretations published as Commission Regulations (IFRS), and to the extent not regulated by the aforesaid standards in accordance with the requirements of the Accounting Act of 29 September 1994 (Polish Accounting Standards, PAS) and secondary legislation thereto.

These financial statements of the Bank were prepared based on the following measurement principles:

§  at fair value for financial assets and liabilities measured at fair value through profit or loss, including financial assets held for trading, and for financial assets measured at fair value through other comprehensive income,

§  at amortised cost for other financial assets, including loans and advances and other financial liabilities,

§  at cost less impairment allowances, for associates and subsidiaries,

§  at cost less accumulated depreciation and amortisation and impairment, for property, plant and equipment, intangible assets and right-of-use assets,

§  at fair value for investment property.

Unless otherwise stated, the financial data in the financial statements is presented in Polish zloty, rounded to PLN 1 million. In view of the above, in some cases mathematical inconsistencies may occur in totals or between individual notes, which are due to roundings.

These financial statements were approved for issue by the Management Board of Bank Gospodarstwa Krajowego on 10 April 2024. The financial statements of Bank Gospodarstwa Krajowego are published on the same date as the consolidated financial statements of the Bank Gospodarstwa Krajowego Group for 2023.

2.2.      Going concern

These financial statements have been prepared on the assumption that the Bank will continue as a going concern for at least twelve months after the reporting date. As at the date of approval of these financial statements, the Management Board of the Bank did not identify any facts or circumstances that would pose a risk for the Bank to continue as a going concern as a result of intended or forced discontinuation or material limitation of its operations. The law also excludes the possibility of announcement of the Bank’s bankruptcy. Under Art. 3.2 of the Act on Bank Gospodarstwa Krajowego, BGK is subject to Art. 6.4 of the Bankruptcy and Restructuring Law. According to this provision, bankruptcy cannot be declared for institutions and legal persons established under an act, unless the act stipulates otherwise, and established in performance of an obligation imposed by an act.

2.3.      Amendments to accounting standards

The accounting policies applied in preparing these financial statements for 2023 are consistent with the policies applied in preparing the Bank’s full-year financial statements for the year ended 31 December 2022, save for the effect of application of new or amended standards and interpretations effective for periods beginning on or after 1 January 2023.

Standards and interpretations and amendments to standards and interpretations which were applied in the financial year 2023

The following amendments to existing standards issued by the International Accounting Standards Board (IASB) and approved for use in the European Union (EU) were applied for the first time in the Bank’s financial statements for 2023:

§  IFRS 17 Insurance Contracts, with subsequent amendments to IFRS 17 published by the IASB on 25 June 2020 – approved in the EU on 19 November 2021 (effective for annual periods beginning on or after 1 January 2023),

§  Amendments to IFRS 17 Insurance Contracts – Initial Application of IFRS 17 and IFRS 9 – Comparative Information, approved in the EU on 8 September 2022 (effective for annual periods beginning on or after 1 January 2023),

§  Amendments to IAS 1 Presentation of Financial Statements – disclosures on material accounting policies, approved in the EU on 2 March 2022 (effective for annual periods beginning on or after 1 January 2023),

§  Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors – Definition of Accounting Estimates, approved in the EU on 2 March 2022 (effective for annual periods beginning on or after 1 January 2023),

§  Amendments to IAS 12 Income Taxes – Deferred Tax related to Assets and Liabilities arising from a Single Transaction, approved in the EU on 11 August 2022 (effective for annual periods beginning on or after 1 January 2023),

§  Amendments to IAS 12 Income Taxes: International Tax Reform — Pillar Two Model Rules, approved in the EU on 8 November 2023 (effective for annual periods beginning on or after 1 January 2023).

The above amendments to existing standards have no material effect on the Bank’s financial statements for 2023 or do not apply to the Bank.

Standards and interpretations and amendments to standards and interpretations which were issued by the IASB and approved by the EU, but have not yet become effective and in respect of which the Bank has not opted for early application

Amendments to existing standards which were issued by the IASB and approved by the EU, but which have not yet become effective in respect of which the Bank has not opted for early application:

§  Amendments to IAS 1 Presentation of Financial Statements – Classification of Liabilities as Current or Non-current, approved in the EU on 19 December 2023 (effective for annual periods beginning on or after 1 January 2024),

§  Amendments to IAS 1 Presentation of Financial Statements: Non-current Liabilities with Covenants, approved in the EU on 19 December 2023 (effective for annual periods beginning on or after 1 January 2024),

§  Amendments to IFRS 16 Leases – Lease Liability in a Sale and Leaseback, approved in the EU on 20 November 2023 (effective for annual periods beginning on or after 1 January 2024).

The above amendments to existing standards have no material effect on the Bank’s financial statements for 2023 or do not apply to the Bank.

Standards and interpretations and amendments to standards and interpretations which were published by the IASB, but have not yet been approved for use in the EU

The EU-approved IFRS do not differ significantly from the regulations issued by the International Accounting Standards Board (IASB), with the exception of the following new standards and amendments to standards, which have not yet been approved for use in the EU:

§  Amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates: Lack of Exchangeability (effective for annual periods beginning on or after 1 January 2025),

§  Amendments to IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments: Disclosures: Supplier Finance Arrangements (effective for annual periods beginning on or after 1 January 2024).

The Bank estimates that the above new standards and amendments to existing standards would not have had a material effect on these financial statements if they had been applied by the Bank as at 31 December 2023 or do not apply to the Bank.

2.4.      Estimates and assumptions

The Bank makes certain estimates and assumptions that affect both the financial statements and the accompanying notes. The estimates and assumptions made by the Bank for purposes of recognition of the respective amounts of assets and liabilities as well as revenue and costs are based on historical data and other factors which are available and considered appropriate under given circumstances.

The assumptions concerning the future and the available data are used for purposes of estimating the carrying amounts of assets and liabilities that cannot be measured reliably using other sources. While making such assumptions, the Bank considers causes and sources of uncertainty that it is able to foresee at the end of the reporting period. Actual performance may differ from estimates.

The estimates and assumptions made by the Bank are reviewed on a regular basis. Estimation adjustments are recognised in the period when the estimates are modified, if they pertain to that period only. If the adjustments affect both the period of the modification and future periods, they are recognised in the period of the modification and in the future ones.

The most important estimates made by the Bank include:

§  allowances for expected credit losses,

§  estimates of the impact of the so-called credit holidays which were introduced by the Act on Social Financing for Business Ventures and Assistance to Borrowers, dated 7 July 2022,

§  fair value of financial instruments,

§  estimates of provisions for defined benefit plans,

§  estimates of provisions for litigation and legal risks,

§  estimates of management fee income.

Allowances for expected credit losses

The Bank applies provisions of IFRS 9 regarding impairment of financial assets for the sake of recognition and measurement of allowances for expected credit losses, which in case of credit exposures are measured at amortised cost or at fair value through other comprehensive income. The methods for impairment assessment and calculation of expected credit losses are described in Note 46.2.

With regards to expected credit losses, the Bank proceeded further with the analysis of the situation concerning Russian aggression against Ukraine and took appropriate measures on an ongoing basis to address its potential impact on credit risk.

In 2023, there were no material changes in classification of financing in Ukrainian, Russian and Belarusian markets. The Bank continued to monitor and assess ongoing debt service process. Gross loan exposure (mainly denominated in EUR) in the aforementioned markets as of 31 December 2023 was approximately 33% lower than at the end of 2022 and mainly resulted from repayments of financing in the Belarusian market.

In 2023, cyclical comprehensive stress tests were carried out to analyse various scenarios of the impact of ESG risk factors on the loan portfolio. Among the ESG risks analysed there are: rise of energy commodities prices and disruptions in eastern sources of supply chains resulting from war sanctions imposed.

The above analysis covered the industries that are most vulnerable to the consequences of rising energy commodity prices, including the chemical and district heating industry. The results of this analysis triggered reclassification to stage 2 of exposures to customers operating in the chemical and district heating industries. Such classification was maintained as at the end of 2023.

In 2023, the Bank performed a cyclical review of the “Methodology for the recognition and measurement of expected credit losses”, which resulted in changes regarding:

§  group analysis: verification of the adequacy of allowances, macro adjustment (based on back tests concerning changes in customer risk classes in the lending process as a result of macroeconomic variables), determination of allowance parameters (clarification of the differentiation of EAD determination depending on stage and maturity, how to take into account prepayments in EAD determination);

§  clarification of the guidelines for preparing a scenario analysis using the individual method in the area of macroeconomic factors and the rules for identifying POCI;

§  clarification of the list of impairment triggers: the changes relate to the period of analysis of a drop in net revenue, the date of verification of negative equity of a customer;

§  the quantitative criteria for transfer to Stage 2 were updated.

Changes in the methodology did not affect the amount of expected credit losses. They involved clarification of wording and bringing it in line with the applicable regulations.

The tables below present the estimated effect of changes in the present value of cash flows as well as PD and LGD on the amount of allowances for expected credit losses – for three stages of measurement.

Effect of an increase/decrease in the present value of cash flows on impairment allowances for impaired exposures – tested on an individual basis – Stage 3	31 Dec 2023			31 Dec 2022
Increase/decrease in the present value of cash flows	10%	-10%	10%		-10%
Estimated change in impairment allowances on balance sheet exposures tested on an individual basis	-135	175	-95		180
Estimated change in provisions for off-balance-sheet liabilities tested on an individual basis	-82	93	-22		24

 

Effect of an increase/decrease in LGD on impairment allowances for impaired exposures – tested on a collective basis – Stage 3	31 Dec 2023		31 Dec 2022
Increase/decrease in LGD	10%	-10%	10%	-10%
Estimated change in impairment allowances on balance sheet exposures tested on a collective basis	24	-40	21	-36

 

Effect of an increase/decrease in PD and LGD on impairment allowances for non-impaired exposures – Stage 1 and 2	31 Dec 2023		31 Dec 2022
Increase/decrease in PD	10%	-10%	10%	-10%
Estimated change in impairment allowances on non-impaired balance sheet exposures	52	-52	48	-48
Estimated change in provisions for non-impaired off-balance-sheet liabilities	30	-30	29	-29
Increase/decrease in LGD	10%	-10%	10%	-10%
Estimated change in impairment allowances on non-impaired balance sheet exposures	52	-52	48	-48
Estimated change in provisions for non-impaired off-balance-sheet liabilities	30	-30	29	-29

Estimates of the impact of the so-called credit holidays introduced by the Act on Social Financing for Business Ventures and Assistance to Borrowers

In July 2022, the Bank made a one-off charge due to the effect of recognition of the credit holidays on interest income by PLN 146.4 million. The amount of the deduction was calculated as the difference between the gross value of the loan portfolio at the calculation date and the present value of estimated cash flows under the loan agreements, with the assumption that most of eligible customers will take advantage of credit holidays. The loss was recognised in accordance with IFRS 9 by reducing interest income on assets measured at amortised cost and the gross value of loans. By the end of 2022, the Bank posted part of the loss in the amount of PLN 63.6 million in interest income and the remaining part

of PLN 82.8 million in revenue in the statement of profit or loss in 2023 together with the utilisation or expiry of period for sustaining credit holidays by eligible clients.

In 2024, legislative work related to the introduction of new credit holidays is underway. As the final terms on which credit holidays may be taken are not known as of the date of release of these financial statements, it is not possible to estimate their impact on the Bank’s financial position.

Fair value of financial instruments

Derivatives, unlisted debt securities and receivables recognised in the statement of financial position at fair value, with no active market identified, are measured using generally accepted valuation techniques, using inputs based on observable market data and professional judgement to the maximum extent possible. The valuation techniques and inputs are reviewed on a regular basis.

The estimated effect of changes in the fair value measurement of derivatives with a symmetrical risk profile, unlisted debt securities at fair value through other comprehensive income, and receivables classified in the fair value through profit or loss measurement category, due to a parallel shift in the yield curve is presented in the tables below.

Change in the measurement of derivatives with a linear risk profile due to a parallel shift in the yield curve	31 Dec 2023		31 Dec 2022
Change in the measurement due to a parallel shift in the yield curve by:	+ 50bp	- 50bp	+ 50bp	- 50bp
Change in measurement of derivatives (assets decreased by liabilities)	-44	44	-5	5

 

Change in the fair value measurement of unlisted debt securities at fair value through other comprehensive income due to a parallel shift in the yield curve	31 Dec 2023		31 Dec 2022
Change in the measurement due to a parallel shift in the yield curve by:	+ 50bp	- 50bp		+ 50bp	- 50bp
Change in measurement of unlisted financial instruments	-5	5		-8	8

Estimates of provisions for defined benefit plans

Provisions for defined benefit plans include: retirement, disability and post-mortem benefits. Provisions are estimated on the basis of actuarial valuation – the assumptions made by the actuary are described in Note 35 “Provisions”. The provision for actuarial valuation is recognised and revalued annually.

Provisions are recognised on the basis of the approved and adopted financial plan for a given year.

A sensitivity analysis of provisions for defined benefit plans is presented in Note 35 “Provisions”.

Estimates of provisions for litigation and legal risks

As at 31 December 2023, the Bank remeasured its provision for legal risk related to the portfolio of CHF-indexed mortgage loans.

In terms of calculating the provision for active exposures, the Bank took into account forecasts concerning the potential number of court cases against the Bank (based on historical data and the market trend) and the percentage share of lost suits (taking into account current market data on settlements). As of 31 December 2023, the provision for active exposures amounted to PLN 36.2 million (which comprised the portfolio provision of PLN 22.3 million and the provision for individual cases in the amount of PLN 13.9 million) and covered 84% of the active portfolio (taking into account the total of the amount repaid and the amount outstanding)..

The provision for legal risk related to repaid exposures was updated based on historical and market data on the share of court cases related to repaid exposures. The estimation showed that the Bank’s current exposure to legal risk in the area of repaid exposures would be covered assuming that the portfolio-based provision will represent at least 5% of the value of the portfolio of repaid exposures. As at 31 December 2023, the portfolio provision for repaid exposures stood at PLN 8.9 million (which included the portfolio provision of PLN 5.9 million and the provision for individual cases of PLN 3 million), which accounted for 8% of the repaid exposure portfolio.

In 2023, the Bank continued its efforts to enter into settlements with customers with regard to mortgage loans in CHF.

Based on the current practice, the Bank intends to monitor changes in the market approach and continue the existing practice, including settlements, which are considered as the primary scenario.

For details on the amount of provisions for litigation and legal risks see Note 35 “Provisions”.

Estimates of management fee income

The Bank accounts for income from fees related to programme management as part of commissioned activities as required by IFRS 15. In order to create a fee allocation key, the Bank uses an input method, where the estimation of the appropriate level of satisfaction of a performance obligation under a given management agreement requires the application of estimates throughout the programme period (fees to be received, costs to be incurred, deviation of the actual amounts of income/costs from prior forecast). The Bank updates its estimates at least every six months.

2.5.      Significant accounting policies

2.5.1.       Presentation of the statement of financial position and the statement of profit or loss

Apart from own activities, the Bank carries out commissioned activities, as part of which it operates:

§  funds created, entrusted or transferred to BGK under separate legislation, whose balance sheets and income statements are not audited by a qualified auditor, but are presented as appendices to BGK’s financial statements (Funds):

-     Inland Waterways Fund;

-     National Road Fund;

-     Railway Fund;

-     Thermo-modernisation and Renovation Fund;

-     Student Loan Fund;

-     Subsidy Fund;

-     Borrower Support Fund;

-     National Guarantee Fund;

-     Polish Science Fund;

-     COVID-19 Response Fund;

-     Liquidity Guarantee Fund;

-     Tourist Refund Fund;

-     Government Housing Development Fund;

-     Ecological Surety and Guarantee Fund;

-     Medical Studies Loan Fund;

-     Government Housing Fund;

-     Aid Fund;

-     Armed Forces Support Fund;

-     Crisis Guarantee Fund;

-     Government Road Development Fund.

§  social and economic programmes, as well as programmes of local governments and regional development supported by public funds, including EU funds (Programmes).

For detailed information on the Bank’s commissioned activities see the Report of the Management Board on the Activities of the BGK Group in 2023 – Integrated report.

In the statement of financial position, the Bank presents own activities and that part of commissioned activities which is treated as the Bank’s assets and liabilities under IFRS. In the case of the Funds, these include the Bank’s receivables from or liabilities to such Funds resulting from mutual settlements (the Funds’ cash flows are carried out through the Bank). As for the Programmes, these include in particular cash transferred to the Bank to designated bank accounts.

The Bank’s statement of profit or loss presents revenue and costs related to own activities and does not include revenue and costs of Funds and Programmes, except for costs incurred by the Bank for the purpose of management of commissioned activities and revenue obtained as remuneration for such management.

Pursuant to the relevant laws and agreements concluded with public administration bodies acting as coordinators for individual flow funds, the Bank performs tasks in the area of financial planning, securing debt financing, as well as management of liquidity and operating activities of the funds. Given that flow funds do not have legal personality, the Bank is also the party acting on behalf of the funds in the case of agreements signed with counterparties.

2.5.2.       Foreign currencies

Functional and presentation currency

The functional currency (the currency of the primary economic environment where the Bank operates) and presentation currency is Polish zloty.

Translation of foreign currency items

Foreign exchange gains (losses) arising from the settlement of transactions and the accounting measurement of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss.

Foreign exchange gains (losses) arising from translation of equity instruments classified as financial assets measured at fair value through other comprehensive income are recognised in other comprehensive income.

At the end of each reporting period:

§  foreign currency monetary items are translated at the closing rate,

§  non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction,

§  non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was measured.

Assets and liabilities, and off-balance-sheet liabilities in foreign currencies and indexed to a foreign exchange rate are measured at the mid-exchange rate quoted for a given currency by the NBP as at the reporting date.

Mid-exchange rates of selected foreign currencies relative to Polish zloty:

Currency	31 Dec 2023	31 Dec 2022
EUR	4.3480	4.6899
GBP	4.9997	5.2957
USD	3.9350	4.4018
CHF	4.6828	4.7679

2.5.3.       Cash and cash equivalents

Cash and cash equivalents include cash in nostro account at the National Bank of Poland and in the current accounts in banks and other cash with original maturity of up to three months. These assets are recognised at nominal value.

2.5.4.       Financial assets and financial liabilities

2.5.4.1.       Initial recognition

The Bank recognises a financial asset or a financial liability in its statement of financial position when, and only when, it becomes party to the contractual provisions of the financial instrument. A regular way purchase or sale of financial assets is recognised on the trade date. Initially, the Bank measures financial assets or financial liabilities at fair value. In the case of a financial asset or financial liability not at fair value through profit or loss, the fair value is increased or decreased by transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.

2.5.4.2.       Classification and measurement

Classification of financial assets that are not equity instruments

The Bank classifies financial assets that are not equity instruments to one of the following categories:

1)    financial assets at amortised cost;

2)    financial assets at fair value through other comprehensive income;

3)    financial assets at fair value through profit or loss, including:

§  obligatorily measured at fair value through profit or loss,

§  irrevocably designated as at fair value through profit or loss at initial recognition.

Financial assets at amortised cost

The Bank classifies financial assets that are not equity instruments to the category, if:

1)    the asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and

2)    the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI – solely payments of principal and interest).

Financial assets classified in this category are measured at amortised cost with the use of the effective interest rate method and taking into account allowances for expected credit losses. Amortised cost is determined with regard to a discount or a premium as well as fees, charges and transaction costs, which form an integral part of the effective interest rate. The effect of measurement is recognised under “Interest income” in the statement of profit or loss. Loss allowance for expected credit losses are recognised in the statement profit or loss under “Net allowances for expected credit losses”.

The financial assets at amortised cost category includes primarily: loans and advances to customers, securities (including Treasury bonds and bonds), amounts due from banks, and reverse repurchase agreements.

Financial assets at fair value through other comprehensive income

The Bank classifies financial assets that are not equity instruments to this category, if:

a)    the asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and

b)    the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Changes in fair value are recognised in other comprehensive income until an asset is removed from the statement of financial position, at which time accumulated gain/loss is recognised in profit or loss. The revaluation reserve is recognised in profit or loss when the asset is sold.

For financial assets classified in this category the Bank determines allowances for expected credit losses, which are recognised under other comprehensive income in correspondence with the statement of profit or loss. Allowances for expected losses do not adjust the carrying amount of financial assets measured at fair value through other comprehensive income.

Interest income and a discount or a premium related to debt instruments are deferred – with the use of an effective interest rate and recognised in net interest income as “Interest income”.

The financial assets at fair value through other comprehensive income measurement category includes in particular securities, such as: Treasury bonds, municipal and corporate bonds.

Financial assets at fair value through profit or loss

The Bank classifies the following items as financial assets at fair value through profit or loss:

1)    derivative financial instruments;

2)    financial assets held for trading;

3)    financial assets not held for trading which are included in the “sale” business model;

4)    financial assets which are obligatorily classified to this category (negative SPPI test result);

5)    financial assets, including securities, which were designated to this category at initial recognition, if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases.

Equity instruments

The Bank classifies equity instruments:

1)      to financial assets at fair value through profit or loss, or

2)      to financial assets at fair value through other comprehensive income, provided that:

§  they are not held for trading,

§  they are not contingent consideration recognised by the Bank in a business combination.

Changes in fair value and any other items (e.g. dividend, gains/losses on sales) for equity instruments classified in the financial assets at fair value through profit or loss measurement category are recognised in the statement of profit or loss.

The Bank classifies in the fair value through other comprehensive income measurement category those equity instruments, which are not held for sale and are held as a long-term commitment related to the implementation of the Bank’s strategy, implementation of government economic programmes or access to infrastructure which is material for the Bank. The Bank may make such classification only at initial recognition of an asset in the accounting books and cannot subsequently reclassify the asset to other category.

A change in the fair value of equity instruments classified in the financial assets at fair value through other comprehensive income measurement category is recognised in other comprehensive income. Only dividend is recognised in the statement of profit or loss. Changes in the fair value of such equity instruments will never be reclassified to profit or loss (including upon disposal).

Business models

The Bank identifies the following business models for holding financial assets:

§  the „held to collect” cash flow model,

§  the „held to collect and sell” cash flow model,

§  sale.

Business models are determined at a level that reflects how groups of financial assets are managed together to achieve a particular business objective.

The Bank accepts a sales transaction as consistent with the assumptions of the holding financial assets to collect cash flows model, if:

§  the sales resulted from an increase in the credit risk and were aimed at minimising potential credit losses due to credit deterioration, or

§  the sales were made close to maturity and the proceeds from the sales approximate the collection of the remaining contractual cash flows, or

§  the sales are infrequent, or

§  the sales are insignificant in value, both individually and in aggregate, or

§  the sales occurred in connection with the implementation of a stress test scenario for liquidity risk.

The condition of infrequent sales is deemed fulfilled if not more than 1% (by volume) of all instruments out of a portfolio are sold in a given year.

The condition of sales insignificant in value is deemed fulfilled if not more than 5% (by value) of all instruments out of a portfolio are sold in a given year.

Changes in the business model may result from the Bank’s external or internal changes and must be significant to its operations and demonstrable to external parties.

The following are not changes in business model:

§  a change in intention related to particular financial assets (even in circumstances of significant changes in market conditions);

§  the temporary disappearance of a particular market for financial assets.

Assessment of the nature of cash flows

For the purposes of the assessment of the nature of collected cash flows (SPPI test) the Bank defines:

§  capital as the fair value of a financial instrument at initial recognition,

§  interest as a reflection of the time value of money and the credit risk associated with the nominal value of a financial instrument in a given period, as well as margin, liquidity risk and administrative costs.

The SPPI test consists in verifying whether the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. In particular, the following conditions are assessed:

§  contingent events that affect the amount of the cash flows,

§  financial leverage,

§  terms of prepayment or extension of financing,

§  terms limiting the right to seek legal claims to the collected cash flows,

§  terms modifying the consideration for a change in the time value of money.

The assessment of the terms modifying the change in the time value of money is performed based on a qualitative or quantitative analysis.

Where a qualitative assessment does not make it possible to confirm the conclusion that the SPPI test has been passed, it is necessary to perform an assessment of the impact of the modified time value of money element. The objective of such assessment is to determine how different the contractual undiscounted cash flows could be from the undiscounted cash flows that would arise if a given agreement would not provide for a modified time value of money element. If the analysed cash flows are different and exceed the materiality threshold adopted by the Bank, the assessed asset is obligatorily classified to fair value through profit or loss measurement category, because the SPPI test has not been met, i.e. the contractual terms result in the fact that the contractual cash flows are not solely payments of principal and interest on the principal amount outstanding.

POCI assets

POCI (“purchased or originated credit-impaired”) assets are financial assets that are debt instruments:

1)      purchased or granted with an impairment, which on initial recognition are deemed impaired due to credit risk (PD of 100%);

2)      originated as a result of a significant modification of a credit-impaired financial asset (PD of 100%), leading to the recognition of the assets in the statement of financial position as a new financial asset;

3)      granted in accordance with Article 70 of the Banking Law to uncreditworthy entities (does not apply to newly established entities).

An exposure is identified as POCI when new financing has been provided and there is evidence of impairment, and when the contract has been subject to a significant modification and an impairment has been identified for the modified contract.

Financial assets classified as POCI at initial recognition are treated as POCI until their derecognition, despite being cured, i.e. impairment of the asset is no longer recognised, and regardless of future changes in estimates of the cash flows they generate.

At initial recognition, POCI assets are recognised in the statement of financial position at their fair value, in accordance with the principles applied for other financial assets that are not POCI assets.

Interest income on POCI assets is calculated based on net carrying amount using the effective interest rate adjusted for the credit risk recognised for the entire useful life of the asset.

Financial liabilities

The Bank classifies all financial liabilities as measured at amortised cost, except for:

1)    financial liabilities at fair value through profit or loss, including derivative liabilities,

2)    financial guarantee contracts, which after initial recognition the Bank (as an issuer of such a contract) subsequently measures at the higher of:

§  the amount of the allowance for expected credit losses, and

§  the fair value less, when appropriate, the cumulative amount of income recognised (settled amount of commission).

2.5.4.3.       Reclassification

Reclassification of financial assets occurs only when the business model for managing financial assets is changed. In such an event, the asset is reclassified into a given category in accordance with the new business model. Financial assets are reclassified prospectively from the reclassification date.

Upon reclassification:

§  of a financial asset out of the amortised cost measurement category and into the fair value through profit or loss measurement category, its fair value is measured at the reclassification date. Any gain or loss arising from a difference between the previous amortised cost of the financial asset and fair value is recognised in the statement of profit or loss,

§  of a financial asset out of the fair value through profit or loss measurement category and into the amortised cost measurement category, its fair value at the reclassification date becomes its new gross carrying amount,

§  of a financial asset out of the amortised cost measurement category and into the fair value through other comprehensive income measurement category, its fair value is measured at the reclassification date. Any gain or loss arising from a difference between the previous amortised cost of the financial asset and fair value is recognised in other comprehensive income,

§  of a financial asset out of the fair value through other comprehensive income measurement category and into the amortised cost measurement category, the financial asset is reclassified at its fair value at the reclassification date. The cumulative gain or loss previously recognised in other comprehensive income is removed from equity and adjusted against the fair value of the financial asset at the reclassification date. As a result, the financial asset is measured at the reclassification date as if it had always been measured at amortised cost,

§  of a financial asset out of the fair value through profit or loss measurement category and into the fair value through other comprehensive income measurement category, the financial asset continues to be measured at fair value and the effect of measurement is recognised in other comprehensive income,

§  of a financial asset out of the fair value through other comprehensive income measurement category and into the fair value through profit or loss measurement category, the financial asset continues to be measured at fair value. The cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss.

2.5.4.4.       Modification of financial assets

When contractual terms of a financial asset are renegotiated or modified, it is assessed whether such modification is substantial or non-substantial.

A substantial modification of contractual cash flows related to a financial asset results in derecognition of the asset and recognition of a (new) modified financial asset.

The Bank considers a modification as substantial when one of the following criteria is met:

1)    quantitative criteria:

§  extension of the credit duration by more than one year and more than twofold extension of the period remaining until the original maturity date (when both these conditions are met jointly),

§  increase in the amount of credit by at least 50%;

2)    qualitative criteria:

§  redenomination of the loan,

§  assumption of debt (change of borrower),

§  change in terms resulting in a change of the SPPI test result,

§  change of funded assets where the purpose of the loan is changed,

§  change of legal form/type of financial instrument,

§  forced restructuring of a financial instrument.

A non-substantial modification of contractual cash flows related to a financial asset does not result in derecognition of the asset. In such situation the Bank recalculates the gross carrying amount of the financial asset and recognises a modification gain or loss in profit or loss.

The modification is treated as a change in estimates if the change in cash flows related to a financial asset results from existing contractual terms and it is solely related to the exercise by the Bank’s customer of an available option.

2.5.4.5.       Impairment

The Bank measures and recognises an allowance for expected credit losses on financial assets that are not equity instruments, which are:

1)    measured at amortised cost;

2)    measured at fair value through other comprehensive income;

3)    contract assets or loan commitments and financial guarantee contracts.

A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred.

Evidence of impairment

Evidence that a financial asset is credit-impaired includes observable data about one or more of the following events:

1)    significant financial difficulty of the issuer or the borrower;

2)    a breach of contract, such as a default or non-payment;

3)    the Bank or other lender of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession that the lender would not otherwise consider;

4)    it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation;

5)    the disappearance of an active market for a given financial asset due to financial difficulties;

6)    the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses.

Measurement of allowances for expected credit losses

The Bank measures an allowance for expected credit losses on financial assets in the following manner:

1)    at an amount equal to 12-month expected credit losses (Stage 1) – if the credit risk on a financial instrument has not increased significantly since initial recognition; for such assets the loss allowance is measured as 12-month expected credit losses;

2)    at an amount equal to lifetime expected credit losses (Stage 2) – if the credit risk on that financial instrument has increased significantly since initial recognition (whether assessed on an individual or collective basis) – considering all reasonable and supportable information, including that which is forward-looking. For such assets the loss allowance is measured as lifetime expected credit losses;

3)    at an amount equal to accumulated changes in lifetime expected credit losses from their initial recognition (Stage 3) – for impaired financial assets, for which the allowance for expected credit losses will be measured as lifetime expected credit losses.

The classification of financial assets to three stages and the determined expected credit loss calculation method affect the recognition of interest income. Interest income on financial assets classified to Stages 1 and 2 are determined based on gross exposures (amortised cost of a financial asset, before adjustment for any allowances for expected credit losses) using the effective interest method. For Stage 3 assets – based on the amortised cost of those assets.

Recognition of allowances for expected credit losses

Allowances for expected credit losses on financial assets at amortised cost adjust the carrying amount of the relevant asset and are recognised in profit or loss.

Allowances for expected credit losses on financial assets at fair value through other comprehensive income are recognised in other comprehensive income in correspondence with the profit or loss. Such loss allowances do not adjust the carrying amount of financial assets, because the assets are recognised at fair value.

Allowances for expected credit losses on trade receivables

The Bank applies the simplified method of measurement of allowances for expected credit losses on trade receivables. The loss allowance is calculated based on fixed indicators dependent on actual payment default.

2.5.4.6.       Derecognition of financial assets and financial liabilities from the statement of financial position

The Bank derecognises a financial asset when, and only when:

1)    the contractual rights to the cash flows from the financial asset expire, or

2)    it transfers the financial asset.

While transferring a financial asset, the Bank evaluates the extent to which it retains the risks and rewards of ownership of the financial asset. In this case:

1)    if the Bank transfers substantially all the risks and rewards of ownership of the financial asset, it derecognises the financial asset and separately recognises as assets or obligations all the rights and obligations arising or maintained as a result of transfer;

2)    if the Bank retains substantially all the risks and rewards of ownership of the financial asset, the entity continues to recognise the financial asset;

3)    if the Bank neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, it determines whether it has retained control of the financial asset. In that event:

§  if the Bank has not retained control, it derecognises the financial asset and recognises separately as assets or liabilities any rights and obligations created or retained in the transfer,

§  if the Bank has retained control, it continues to recognise the financial asset to the extent of its continuing involvement in the financial asset.

Upon derecognition of a financial asset in whole, the difference between the carrying amount (measured at the date of derecognition) and the consideration received (including any new asset obtained less any new liability assumed) is recognised in profit or loss.

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

2.5.5.       Fair value measurement

The Bank measures the fair value of a financial asset, financial liability or off-balance-sheet liabilities using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

Determination of fair value is based on the following assumptions:

1)    the financial asset or liability is exchanged in an orderly transaction between market participants to sell the financial asset or transfer the financial liability at the measurement date under current market conditions;

2)    the sale of the financial asset or transfer of the financial liability is made:

§  in the principal market for the financial asset or liability; or

§  in the absence of a principal market, in the most advantageous market for the financial asset or liability.

When a quoted price for the transfer of an identical or a similar financial liability of the Bank is not available and the identical item is held by another party as a financial asset, the Bank measures the fair value of the liability from the perspective of a market participant that holds the identical item as a financial asset at the measurement date.

When a quoted price for the transfer of an identical or a similar financial liability of the Bank is not available and the identical item is not held by another party as a financial asset, the Bank measures the fair value of the liability using a valuation technique from the perspective of a market participant that owes the financial liability.