9.2 Fair value hierarchy

Reference Areas:
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On the basis of the input data for fair value measurement, the individual assets and liabilities for which fair value has been presented have been classified to the following levels:

  • Level I – assets and liabilities measured based on quoted prices (unadjusted) from active markets for identical assets and liabilities. This level includes:
    • liquid quoted debt securities;
    • shares and investment certificates quoted on exchanges;
    • derivatives quoted on exchanges;
  • Level II – assets and liabilities whose measurement is based on input data other than quoted prices included within level I, which can be observed on the market, either directly (as prices) or indirectly (derived from prices). This level includes:
    • quoted debt securities carried on the basis of the valuations published by an authorized information service;
    • derivatives – among others FX Swap, FX Forward, IRS, CIRS, FRA;
    • participation units in mutual fund;
    • investment properties or properties held for sale measured using the comparative method, including free land free land for development and certain smaller and less valuable buildings (such as residential units, garages, etc.);
    • liabilities to members of consolidated mutual funds;
    • investment contracts for the client’s account and risk.
  • Level III – assets measured based on input data unobserved on the existing markets (unobservable input data). This level includes:
    • unquoted debt securities and non-liquid quoted debt securities (including non-treasury debt securities issued by other financial entities, local government and non-financial entities), measured using models based on discounted cash flows;
    • investment properties or properties held for sale measured using the income method or the residual method;
    • loan receivables from clients and liabilities to clients under deposits;
    • options embedded in certificates of deposit issued by PZU Group companies and options concluded in the interbank market to hedge embedded option positions.

In a situation in which the measurement of an asset or liability is based on input data classified in different levels of the fair value hierarchy, the measured asset is assigned to the lowest level from which the input data are taken, provided that they have a significant impact on the overall measurement.

The value of the measurement of components of assets or liabilities qualified in level III is affected to significant extent by unobservable input data.

Measured assetsUnobservable dataDescriptionImpact on measurement
Loan receivables from clientsLiquidity margin and current margin from the sale of the product groupFair values are estimated using valuation techniques, with an assumption that when the loan is granted, the fair value is equal to the carrying amount. The fair value of loans without recognized impairment is equal to the sum of future expected cash flows discounted at the balance sheet date less expected credit loss. The cash flow discounting rate is the appropriate risk-free market rate plus the liquidity margin and current sales margin for the loan’s product group. The margin is determined by product group and by maturity. For the purpose of estimating the fair value of foreign currency loans, the liquidity margin for PLN loans is used, adjusted by quotations of fx swap and basis- swap transactions. The fair value of loans with recognized impairment is equal to the sum of future expected recoveries discounted using the effective interest rate, since the average expected recoveries fully reflect the credit risk component. For loans that do not have a repayment schedule (current account loans, overdrafts and credit cards), the fair value is assumed to be equal to the carrying amount.Negative correlation.
Liabilities to clients under depositsSales marginFair values are estimated using valuation techniques, with an assumption that when the deposit is accepted, the fair value is equal to the carrying amount. The fair value of term deposits is equal to the sum of future expected cash flows discounted at the balance sheet date. The cash flow discounting rate is the appropriate risk-free market rate plus the current sales margin. The margin is determined on the basis of deposits accepted in the last quarter, by product group and by maturity. For short-term deposits (current deposits, overnight deposits and savings accounts), the carrying amount is taken as fair value.Negative correlation.
Options embedded in certificates of deposit issued by PZU Group companies and options concluded in the interbank market to hedge embedded option positions. Model parametersEmbedded instruments are plain vanilla options and exotic options for individual shares, indices, commodities and other market indicators, including interest rate indices and exchange rates and their baskets. All separated options are offset on an ongoing basis on the interbank market. Currency options are measured based on the Garman- Kohlhagen option pricing model (and in the case of barrier and Asian options based on the so-called extended Garman-Kohlhagen model). Exotic options embedded in deposit agreements and their offsets are measured using the Monte-Carlo technique, assuming a geometric Brownian motion model for risk factors. 
Non-liquid bonds and loansCredit spreadsSpreads are observed on all bonds (their series) or loans of the same issuer or a similar issuer. These spreads are observed on the dates of issue of new bond series, dates of conclusion of new loan agreements and dates of market transactions on the receivables following from such bonds and loans.Negative correlation.
Investment property and property available for saleCapitalization rateCapitalization rate is determined through analysis of rates of return obtained in transactions for similar properties.Negative correlation.
 Construction costsConstruction costs are determined based on market construction costs less costs incurred as at the date of measurement.Positive correlation.
 Monthly rental rate per 1m2 of relevant space or for one parking spaceRental rates are observed for similar properties of similar quality, in similar locations and with a similar size of leased space.Positive correlation.
Measured assetsUnobservable dataDescriptionImpact on measurement
DerivativesModel parametersCurrency options are measured based on the Garman-Kohlhagen option pricing model (and in the case of barrier and Asian options based on the so-called extended Garman-Kohlhagen model). Exotic options embedded in deposit agreements and their offsets are measured using the Monte-Carlo technique, assuming a geometric Brownian motion model for risk factors. 
Own issues and subordinated loansIssue spread above the market curveIf historical issue spread above the market curve is used, these issues are classified at level 3 of the fair value hierarchy.Negative correlation.
Equity instruments not quoted on an active market Quotations of financial services 
  

9.2.1 Assets and liabilities measured at fair value

Assets and liabilities measured at fair value31 December 201731 December 2016 (restated)
 Level ILevel IILevel IIITotalLevel ILevel IILevel IIITotal
Assets        
Financial assets available for sale30,02717,0811,41148,5198,1132,88765211,652
Equity instruments21015629866413226438434
Debt securities29,81716,9251,11347,8557,9812,62361411,218
Financial instruments measured at fair value through profit or loss – classified as such upon first recognition6,143464436,65012,5551,8824214,479
Equity instruments1,802127181,9472,83797172,951
Debt securities4,341337254,7039,7181,7852511,528
Financial instruments measured at fair value through profit or loss – held for trading7,392  8,00819715,5971,8825,3331887,403
Equity instruments5264,091-4,6177453,321-4,066
Debt securities6,8372,042978,9761,1191,2021352,456
Derivatives291,8751002,0041881053881
Hedge derivatives-347-347-72-72
Investment property-1512,2032,354-1491,5891,738
Assets held for sale-44247291-491,0811,130
Liabilities        
Derivatives222,532522,6063172426781
Hedge derivatives-868-868-6-6
Liabilities to members of consolidated mutual funds-420-420-1,544-1,544
Investment contracts for the client’s account and risk (unit-linked)-312-312-329-329
Liabilities on borrowed securities (short sale)73713-750654--654

Change in assets and liabilities classified as Level III of the fair value hierarchy, in the year ended 31 December 2017Financial assets available for saleFinancial assets measured at fair value through profit or loss – classified as such upon first recognitionFinancial assets measured at fair value through profit or loss – held for tradingInvestment propertiesFinancial liabilities – Derivatives
 EquityDebtEquityDebtDebtDerivatives  
Beginning of the period386141725135531,58926
Purchase/opening of the position6-21-290326323
Reclassification from Level II-662 1)--4---
Reclassification from own properties and properties held for sale------830-
Profit or loss recognized in the profit and loss account as:-3122337(101)19
- net investment income-315--(1)--
- net result on realization and impairment losses on investments--------
- net movement in fair value of assets and liabilities measured at fair value--(3)2338(101)19
Net movement in fair value of assets and liabilities measured at fair value, recognized in other comprehensive income(10)(26)------
Reclassification to own properties and properties held for sale------(196)-
Change in the composition of the Group267252--45-22-
Foreign exchange translation differences(3)----- -
Sale and settlements-(437)(22)(2)(380)(22)(4)(16)
Other-17------
End of the period2981,1131825971002,20352

1) Municipal bonds were reclassified to level III; for those bonds, a parameter implied from historical data (credit spread) used in the valuation model exerts a significant influence on measurement.

Change in assets and liabilities classified as Level III of the fair value hierarchy, in the year ended 31 December 2016 (restated data)Financial assets available for saleFinancial assets measured at fair value through profit or loss – classified as such upon first recognitionFinancial assets measured at fair value through profit or loss – held for tradingInvestment propertiesFinancial liabilities – Derivatives
 EquityDebtEquityDebtDebtDerivatives  
Beginning of the period17653262874551,05535
Purchase/opening of the position43727-641913910
Reclassification from own properties and properties held for sale------300-
Profit or loss recognized in the profit and loss account as:-(14)(36)(3)2398-
- net investment income--------
- net result on realization and impairment losses on investments-(8)------
- net movement in fair value of assets and liabilities measured at fair value-(6)(36)(3)2398-
Profit or loss recognized in other comprehensive income-------2
Change in the composition of the Group17-------
Sale and settlements-(62)--(5)(24)(3)(21)
End of the period386141725135531,58926
   

9.2.1.1 Change in the fair value measurement methodology for financial instruments measured at fair value

In 2017, no changes were made in the fair value measurement method for financial instruments measured at fair value that would be of material significance for the consolidated financial statements.

To reflect the fair value more precisely, as of 30 June 2016, for some financial assets (primarily debt financial instruments listed in foreign markets), the fair value is determined on the basis of the valuations published by an authorized information service rather than as previously: on the basis of quotations from the interbank market. The PZU Group concluded that, because of the low activity of the inter-bank market, the change of the source of valuation makes it possible to take into account, when estimating fair value, a broader range of information on transactions and offers from multiple markets on which the financial instrument is quoted. The assets for which the source of valuation was changed were reclassified from Level I to Level II fair value.

9.2.1.2 Investment property classified as Level III fair value

Investment property classified as Level III31 December 201731 December 2016
Office properties710902
Commercial properties102-
Warehousing properties1,365681
Other266
Total investment property classified as Level III2,2031,589

 No.    Property nameFair value as at 31 December 2017Fair value as at 31 December 2016    Type of spaceScope of data unobservable on an active market as at 31 December 2017Scope of data unobservable on an active market as at 31 December 2016
Property measured by the income approach using the investment method and the income stream discounting technique
1.Office complex, Wrocław250282OfficeEUR 14.00 – 16.00EUR 11.25 – 14.50
2.Warehouse/office buildings, Łódź2482631)Office in warehouse facilities WarehouseEUR 6.50 – 9.00   EUR 2.40 – 3.60EUR 7.00 – 9.00   EUR 2.40 – 3.80
3.Warehouse park, Bielany Wrocławskie224233Office Warehouse Construction costsEUR 6.50 – 9.00 EUR 2.90 – 3.30 2)EUR 7.00 – 9.00 EUR 3.00 – 3.60 2)
4.Office complex, Gdańsk151165OfficeEUR 11.00 – 14.50EUR 13.00 – 15.00
5Warehouse and office buildings, Gdańsk1291381)Office in warehouse facilities WarehouseEUR 6.50 – 9.00   EUR 2.80 – 3.20EUR 7.00 – 9.00   EUR 2.80 – 3.20
6.Office complex, Warsaw120130Office Parking lotEUR 12.5 – 19.18 EUR 35.00 – 119.88EUR 6.33 – 15.00 EUR 65.00 – 90.00
7.Warehouse and office building, Nowa Wieś Wrocławska1141241)Office in warehouse facilities WarehouseEUR 6.50 – 9.00   EUR 2.90 – 3.50EUR 7.00 – 9.00   EUR 3.00 – 3.60
8.Warehouse park under construction, Komorniki108116Office Warehouse Construction costsEUR 6.50 – 9.00 EUR 2.75 – 3.60 2)EUR 7.00 – 9.00 EUR 3.00 – 3.50 2)
9.Office building, Warsaw104111Office Parking lotEUR 8.00 – 18.00 EUR 65.00 – 90.00EUR 8.00 – 16.50 EUR 50.00 – 80.00
10.Shopping Center, Pabianice76881)Commercial (depending on size of leased space)  3)  3)
11.Shopping gallery, Iława71701)Commercial (depending on size of leased space)  3)  3)
12.Warehouse/office buildings, Łódź63661)Office in warehouse facilities WarehouseEUR 6.50 – 9.00   EUR 2.40 – 3.60EUR 7.00 – 9.00   EUR 2.40 – 3.80
13.Warehouse and office building, Nowa Wieś Wrocławska61651)Office in warehouse facilities WarehouseEUR 6.50 – 9.00   EUR 2.90 – 3.50EUR 7.00 – 9.00   EUR 3.00 – 3.60
14.Warehouse and office complex, Błonie37391)Office in warehouse facilities WarehouseEUR 6.50 – 9.00   EUR 2.50 – 3.60EUR 7.00 – 9.00   EUR 2.50 – 3.80
15.  Shopping gallery, Lubin31341)Commercial (depending on size of leased space)  3)  3)
Property measured by the mixed approach using the residual method
16.Warehouse park under construction, Sosnowiec Pieńki260217Office Warehouse Construction costsEUR 6.50 – 9.00 EUR 2.40 – 3.60 2)EUR 7.00 – 9.00 EUR 2.89 – 3.60 2)
17.Warehouse park under construction, Sosnowiec122116Office Warehouse Construction costsEUR 6.50 – 9.00 EUR 2.80 – 3.50 2)EUR 7.00 – 9.00 EUR 2.89 – 3.60 2)
11.Other34219 4)n/an/an/a
 Total – investment property2,2031,589   
 TOTAL – held for sale (as classified as at 31 December 2016)  -887   
 TOTAL2,2031,589   

1) As at 31 December 2016, the properties were classified as assets held for sale.
2) Construction costs were determined based on market construction costs less costs incurred as at the date of measurement.
3) Market rent for the real property was determined on the basis of an analysis of the commercial space market in facilities with similar locations and characteristics as the property being measured.
4) Due to the change of use, the investment property, whose value as at 31 December 2016 was PLN 165 million, was reclassified to own property, while the investment property, whose value as at 31 December 2016 was PLN 34 million was reclassified to assets held for sale.

9.2.2 Assets and liabilities not measured at fair value

Fair value of assets and liabilities for which it is only disclosed31 December 201731 December 2016 (restated)
 Level ILevel IILevel IIITotalLevel ILevel IILevel IIITotal
Assets        
Entities measured by the equity method – EMC-20-20-37-37
Financial assets held to maturity17,6313055,58223,51815,531153,52019,066
Loans        
Debt securities18,1535,50013,654112,4672,469
Loan receivables from clients--169,393169,393--44,86644,866
Buy-sell-back transactions-553333886-5832,2962,879
Term deposits with credit institutions-8381,0051,843-5831,6982,281
Loans--3,7443,744--1,7051,705
Liabilities        
Liabilities to banks-1,1614,0925,253-399124523
Liabilities to clients--201,605201,605--51,36451,364
Liabilities on the issue of own debt securities-2,8086,5849,392--6,5456,545
Subordinated liabilities-1,2574,1085,365--1,0271,027
Investment contracts with guaranteed and fixed terms and conditions-1-1-67-67
  

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