46. Fair value of financial assets and financial liabilities

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

The Group classifies particular components of financial assets and liabilities designated at fair value to the following categories:

• Level 1: Prices quoted on the active markets
• Level 2: Valuation techniques based on observable market data
• Level 3: Other valuation techniques

The table below presents a classification of financial assets and liabilities presented in the financial statements at fair value divided into 3 levels as at 31 December 2013:

The table below presents a classification of financial assets and liabilities presented in the financial statements at fair value divided into 3 levels as at 31 December 2012:

Depending on the category of classification of financial assets and liabilities to the hierarchy, different methods of fair value valuation are used:

Level 1: Prices quoted on the active markets

Financial assets and liabilities whose fair value is stated directly at prices quoted (not adjusted) from active markets for identical assets and liabilities. The Group classifies to this category financial and equity instruments designated at fair value through profit and loss and available for sale, for which there is an active market and for which the fair value is determined with reference to market value which is a bid price:

• debt securities valued at fixing from Bondspot platform,
• debt and equity securities which are traded on regulated market, including the Brokerage House of PKO Bank Polski portfolio,
• derivative instruments. 

Level 2: Valuation techniques based on observable market data

Financial assets and liabilities whose fair value is determined with use of valuation models where all significant entry data are observable on the market directly (as prices) or indirectly (based on prices). The Group classifies to this category financial instruments for which there is no active market:

Level 3: Other valuation techniques

Financial assets and liabilities whose fair value is determined with use of valuation models, for which available data is not derived from observable markets (unobservable entry data).

The Group classified to that category shares not listed on WSE, which are valued with internal valuation models. The fair value of these securities (the Fund) is determined based on the net asset value of the fund, i.e. the fair value of investment projects (of the companies) in the fund, which are subject to semi-annual examination by the registered auditor. If the Group used the values of the unobservable parameters, that are extreme values from the range of possible values, the fair value of the equity financial instruments could be PLN 6 866 thousand higher or PLN 6 866 thousand lower as at 31 December 2013.

The impact of parameters estimated on measurement of financial instruments at fair value, for which the Group uses fair value measurement on Level 3 as at 31 December 2013 is as follows.

The Group does not disclose in the fair value hierarchy shares in companies, which are measured at acquisition price less impairment allowances, previously presented in Level 3. Comparable data were appropriately restated.

In the fourth quarter of 2013, a single measurement of Finansowa Kompania ‘Prywatne Inwestycje’ Sp. z o.o. at fair value of PLN 48 532 thousand and a reclassification of a share in the above mentioned company to non-current assets held for sale were made.

Instruments transfers between Level 1 and Level 2 are based on the availability of quotations in an active market at the end of the reporting period. Transfer from Level 2 to Level 3 occurs in the situation of the conversion an observable factor for an unobservable in the valuation or applying a new unobservable risk factor to the valuation, which also results in a significant impact on the valuation of the instrument. Transfer from Level 3 to Level 2 occurs in the situation of the conversion an unobservable factor for an observable in the valuation or when an impact of an unobservable factor on the instrument valuation ceases to be relevant. Transfers between levels of valuation occur at the date and at the end of the reporting period.

In the period from 1 January to 31 December 2013, there were no transfers between levels in the fair value hierarchy used in measuring financial instruments at fair value.

The tables below present reconciliation during the periods of measurement from 1 January 2013 to 31 December 2013 and from 1 January 2012 to 31 December 2012 at fair value at level 3 of fair value hierarchy:

46.2 Financial assets and liabilities not presented at fair value in the consolidated statement of financial position

The Group holds financial instruments which are not presented at fair value in the consolidated statement of financial position.

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

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

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

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

With regard to loans and advances to customers, a model based on estimates of present value of future cash flows through discounting future cash flows, and applying current interest rates plus a credit risk margin and relevant scheduled repayment dates were used. The current margin level has been established based on transactions on instruments with similar credit risk concluded in the last quarter of the year.

The fair value of deposits and other amounts due to customers other than banks, with specified maturities, has been calculated using the discounted expected future cash flows and applying current interest rates for given deposit products.

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

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

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

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

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