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5.2 Amendments to the applied IFRS

Annual Report 2018 > RESULTS 2018 > Supplementary Information and Notes > 5.2 Amendments to the applied IFRS
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5.2.1. Standards, interpretations and amended standards effective from 1 January 2018

The following changes in standards were applied to the consolidated financial statements.

Standard/interpretation Approving regulation Comments
IFRS 9 – Financial Instruments 2067/2016 The effect of the application of IFRS 9 is described in section 5.2.2.
Amendment to IFRS 4 – Application of IFRS 9 ‘Financial Instruments’ together with IFRS 4 ‘Insurance Contracts’         1988/2017 In accordance with the amendment to IFRS 4 issued by IASB on 12 September 2016, insurance undertakings may defer the implementation of IFRS 9 until the entry into force of IFRS 4 Phase II concerning insurance contracts, but by no later than 1 January 2021. The Commission of the European Union has also allowed financial conglomerates to defer application of IFRS 9 by insurance undertakings in the conglomerates, provided that no financial instruments are transferred between insurance and banking entities within the conglomerates. The report includes information on insurance undertakings that continue to apply IAS 39 and the disclosures required under IFRS 7 are provided separately for the insurance entities applying IAS 39 and for other entities applying IFRS 9. The PZU Group could not take advantage of this exemption due to the significant share of banking activity.
IFRS 15 – Revenue from Contracts with Customers                 1905/2016 IFRS 15 specifies how and when to recognize revenues and requires the presentation of more detailed disclosures. The standard replaces IAS 18 “Revenue”, IAS 11 “Construction Contracts” and a number of interpretations related to revenue recognition. The standard applies to almost all agreements with customers (the main exceptions concern lease agreements, financial instruments and insurance agreements). The fundamental principle of the new standard is to recognize revenues in a manner that reflects the transfer of goods or services to customers and in an amount that reflects the value of consideration (i.e. the payment) which the company expects to obtain a right to in exchange for the goods or services. The standard also provides guidelines for recognizing transactions that were not regulated in detail in previous standards (e.g. revenues from services or modification of agreements) and contains more comprehensive explanations on the recognition of agreements with multiple deliverables. The standard does not apply to insurance contracts, financing arrangements and secondary activity (e.g. sale of fixed assets).   The PZU Group applied IFRS 15 in accordance with the approach described in section C3 b) – retrospectively, with joint effect for contracts in force as at 1 January 2018 (date of initial application) recognized once as at that date. The PZU Group has analyzed the impact the new standard will have on agreements signed by PZU Group companies and has not identified any agreements, for which application of IFRS 15 would have a material effect on the consolidated financial statements. This is because revenues covered by IFRS 15 are of secondary importance to the financial reporting of the PZU Group.
Clarifications to IFRS 15 – revenue from contracts with customers       1987/2017 The clarifications provide guidelines concerning the identification of the obligations to fulfill benefits (determining in which instances the promises set forth in a contract constitute “separate” goods or services that should be settled separately), accounting for intellectual property licenses (determining in which situations revenues from intellectual property licenses should be settled “over a certain period” and in which situations “at a given point in time”) and the distinctions between a principal and an agent (stating more precisely that a principal under a given determination controls a good or service prior to turning it over to a client). Changes to the standard also include additional practical solutions facilitating the implementation of the new standard.
Amendment to IFRS 2 – Classification and valuation of share-based payment     289/2018 The amendment provides guidance harmonizing accounting requirements for share-based payments settled in cash which adopt the same approach as that applied in the case of share- based payments settled in equity instruments (an exception to IFRS 2) and clarification of situations where share-based payments settled in cash are changed to share-based payments settled in equity instruments due to changes in contractual provisions.   The change did not affect the consolidated financial statements.
Amendment to IAS 40 – Transfers of Investment Property     400/2018 The amendment clarifies when the entity should transfer properties under construction to or from the investment property category in the event of change of the nature of the use of such property in situations other than listed in IAS 40.   The change did not affect the PZU Group’s consolidated financial statements.
Amendments to IFRS 2014-2016     182/2018 The amendments pertain to: IFRS 1 – waiver of exemptions for first time adopters as regards certain disclosures; IAS 28 – as regards the election by specified entities to measure at fair value through profit or loss interests in associates and joint ventures in accordance with IFRS 9.   The amendments did not affect the PZU Group’s consolidated financial statements.
IFRIC interpretation 22 – Foreign Currency Transactions and Advance Consideration   519/2018 The interpretation clarifies that the exchange rate should be applied in recognizing a transaction denominated in a foreign currency in accordance with IAS 21 if the client makes a non-refundable payment of an advance consideration for delivery of goods or services. The interpretation had no effect on the PZU Group’s consolidated financial statements.
5.2.1.xlsx

5.2.2. IFRS 9 – Financial Instruments

IFRS 9 Financial Instruments, published by the IASB in July 2014 and approved by the European Commission in November 2016, replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 is effective for annual periods beginning on or after 1 January 2018. Earlier application is permitted.

The PZU Group started applying IFRS 9 on 1 January 2018.

IFRS 9 sets out new requirements for the classification and measurement of financial instruments, impairment of financial assets and hedge accounting.

Effect of the application of the new standard

Classification under IAS 39 Classification under IFRS 9 Net carrying amount under IAS 39 as at 31 December 2017 Impact of changes in measurement caused by reclassification Impact of impairment due to expected losses resulting from credit risk Net carrying amount under IFRS 9 as at 1 January 2018
Loan receivables from clients Financial assets at amortized cost 167,554 -108 -1,749 165,697
Financial assets at fair value through other comprehensive income 1,597 -32 -9 1,556
Financial assets at fair value
through profit or loss		 306 51 8 365
Financial derivatives Financial derivatives 2,351 - - 2,351
Held to maturity Financial assets at amortized cost 19,003 -14 -11 18,978
Financial assets at fair value through other comprehensive income 2,186 38 - 2,224
Financial assets at fair value
through profit or loss		 48 1 - 49
Available for sale Financial assets at amortized cost 5,060 1 -2 5,059
Financial assets at fair value through other comprehensive income 43,199 -1 - 43,198
Financial assets at fair value
through profit or loss		 260 - - 260

Measured at fair value through
profit or loss		 Financial assets at amortized cost 25 -2 - 23
Financial assets at fair value through other comprehensive income 491 - - 491
Financial assets at fair value
through profit or loss		 19,727 - - 19,727
Loans – debt securities Financial assets at amortized cost 8,515 41 -19 8,537
Financial assets at fair value through other comprehensive income 5,108 -2 -9 5,097
Loans - other Financial assets at amortized cost 6,424 - -45 6,379
Cash and cash equivalents   8,239 - - 8,239
Other assets   25,775 - 4 25,779
Deferred tax assets   1,590 -2 355 1,943
Total assets   317,458 -29 -1,477 315,952
5.2.2-tab1.xlsx

    Classification under IAS 39     Classification under IFRS 9 Net carrying amount under IAS 39 as at 31 December 2017 Impact of changes in measurement caused by reclassification Impact of impairment due to expected losses resulting from credit risk   Net carrying amount under IFRS 9 as at 1 January 2018
Equity attributable to equity holders of the parent   14,599 (5) (507) 14,087
Share capital   86 - - 86
Revaluation reserve   157 - 7 164
Other capital   11,760 - - 11,760
Retained earnings   2,596 (5) (514) 2,077
Non-controlling interest   22,961 (24) (1,122) 21,815
Total equity   37,560 (29) (1,629) 35,902
Financial liabilities held for trading Financial liabilities at fair value through profit or loss 4,956 - - 4,956
Financial liabilities at amortized cost Financial liabilities at amortized cost 219,594 - - 219,594
Provisions   45,611 - 159 45,770
Deferred tax liability   638 - (7) 631
Other liabilities   9,099 - - 9,099
Total liabilities   279,898 - 152 280,050
Total equity and liabilities   317,458 (29) (1,477) 315,952
5.2.2-tab2.xlsx

Classification under IAS 39 Classification under IFRS 9 The amount of allowances under IAS 39 as at 31 December 2017 Impact of changes in measurement caused by reclassification Impact of impairment due to expected losses resulting from credit risk The amount of allowances under IFRS 9 as at 1 January 2018
Loan receivables from clients   Financial assets at amortized cost 8,826 2,811 378 12,015
Financial assets at fair value through other comprehensive income   9 - 9 18
Financial assets at fair value through profit or loss 4 4 (8) -
  Held to maturity Financial assets at amortized cost 1 - 11 12
Available for sale   Financial assets at amortized cost - - 2 2
Financial assets at fair value through other comprehensive income - 13 2 15
Financial assets at amortized cost 85 (32) 19 72
Loans – debt securities Financial assets at fair value through other comprehensive income 13 - 9 22
Loans - other Financial assets at amortized cost 18 3 47 68
Other assets   661 165 10 836
Provisions   237 - 159 396
Total allowances   9,854 2,964 638 13,456
5.2.2-tab3.xlsx

Net impact (gross impact minus the tax effect) of application of IFRS 9 on equity items Revaluation reserve Retained earnings
As at 31 December 2017 under IAS 39 157 2,596
Reclassifications of debt securities / loans granted to clients: 1 5
- from measured at amortized cost to measured at fair value through profit or loss - 9
- from measured at amortized cost to measured at fair value through other comprehensive income 3 -
- from available for sale to measured at amortized cost (4) (2)
- from available for sale to measured at fair value through profit or loss (1) 1
- from measured at fair value through profit or loss to measured at fair value through other comprehensive income 3 (3)
Reclassification of equity instruments from measured at fair value through profit or loss to measured at fair value through other comprehensive income (3) 3
Reclassification of participation units and mutual fund investment certificates from available for sale to measured at fair value through profit or loss (10) 10
Revaluation of equity securities measured at fair value through other comprehensive income 4 (4)
Recognition of the allowance for expected credit losses (“ECL”) for financial assets measured at amortized cost (including off-balance sheet items) - (510)
Recognition of the allowance for expected credit losses (“ECL”) for debt securities / loans granted to clients measured at fair value through other comprehensive income 7 (4)
Other changes 8 (19)
As at 1 January 2018 under IFRS 9 164 2,077
5.2.2-tab4.xlsx

Classification of financial assets upon first application of IFRS 9

Information on classification of financial assets upon first application of IFRS 9 is presented in section 35.1.2.1.

Classification of financial liabilities

Information on classification of financial liabilities upon first application of IFRS 9 is presented in section 45.1.

Impairment

Information on impairment under IFRS 9 is presented in section 36.1.1. 

Hedge accounting

Upon first application of IFRS 9, the PZU Group has made a decision to continue to apply IAS 39 to hedge accounting instead of chapter 6 of IFRS 9. However, in respect to hedge accounting disclosures, IFRS 7 Financial Instruments: Disclosures amended by IFRS 9 is applied because the option to choose an accounting policy does not exempt from the application of the new disclosure requirements.

Disclosures

The implementation of IFRS 9 resulted in a significant change in the presentation disclosures pertaining to financial instruments. The PZU Group took advantage of the exemption not to restate the comparative data from prior periods in respect to the changes resulting from classification and measurement (including impairment). The differences in the carrying amount of financial assets and liabilities arising from the application of IFRS 9 are recognized in the “Revaluation reserve” and “Retained earnings” line items.

5.2.3. Standards, interpretations and amended standards not yet effective

  • Approved by the regulation of the European Commission

Name of standard/ interpretation Effective date Approving regulation Comments
IFRS 16 – Leases 1 January 2019 1986/2017 IFRS 16 replaces IAS 17 Leases and any interpretations related to this standard and introduces a full model of identification and settlement of leases in the lessors’ and lessees’ financial statements. The most important change pertains to lessees, for which the new standard eliminates the distinction between financial leases and operating leases. The recognition of current operating leases in the statement of financial position will result in the recognition of a new asset (the right to use the leased object) and a new liability (the liability of remitting lease payments). Recognition of leases on the lessor’s side will in most cases remain unchanged due to the maintenance of the breakdown between operating leases and financial leases.   The PZU Group has assessed these contracts in terms of their fulfillment of the definition of lease and estimating the lease period. Applying IFRS 16 the PZU Group made the following assumptions: As at 1 January 2019 the PZU Group will apply the simplified approach in accordance with paragraph C5(b). Comparative data will not be restated and the total effect of the first application of IFRS16 will be recognized as adjustment of the opening balance of retained earnings on the first application date. In the case of leases previously classified as operating leases in accordance with IAS 17 lease assets and liabilities will be carried at present value of the remaining lease payments, discounted by the lessee’s marginal interest rate. The lessee’s marginal rate has been calculated as the sum of the risk-free rate and fixed risk spread. For all contracts ending on the same date and with a fixed amount of monthly payments (this group includes most lease contracts in the PZU Group) a fixed contract discount rate is calculated. In accordance with section 5 the PZU Group will take advantage of the exemptions of short-term leases and for leases for which the underlying asset has a low value. Low value assets are assets with the value equal to or lower than PLN 20 thousand. Pursuant to item C10(c), for operating leases with the lease term ending within 12 months of the day of first application of IFRS 16, PZU Group shall apply rules concerning short-term leases. Pursuant to item 4, PZU Group shall not apply IFRS 16 to intangible assets. PZU Group shall recognize assets and liabilities in respect of lease at a net amount. The VAT amount shall be recognized in expenses of the current period.   The recognition of assets and liabilities in respect of lease is based on a subjective evaluation of the Management Board, taking into account interpretations related to the application of IFRS 16. The subjective evaluation and the estimates concerning the results of the application of the new standard, presented below, are subject to change as a result of new interpretations of IFRS 16 or changes to the general practice of application of new accounting policies.
      In the consolidated profit and loss account for 2019, fees related to lease and rental will be replaced with the amortization of the right to use the lease object and with interest expenses on liabilities in respect of lease. This will generate greater costs at the initial stage of the lease (above all due to the financial element related to the discount settlement), even if the parties have agreed on fixed annual payments.   As a result of the application of IFRS 16, PZU Group shall recognize new assets in respect of the right to use: Property, plant and equipment – PLN 1,200 m; Investment property – PLN 51 m; The value of the recognized liabilities in respect of lease will be PLN 1,251 m.   Assets in respect of the right to use shall be recognized jointly with property, plant and equipment or investment property, respectively, while liabilities in respect of lease shall be disclosed within financial liabilities.
Amendment to IFRS 9 – prepayments with negative compensation 1 January 2019 498/2018 According to the current version of IFRS 9, certain options, which force a lender to accept reduced compensation for granting financing (in the case of negative compensation) do not pass the SPPI test; accordingly any instruments containing such options cannot be classified as measured at amortized cost or at fair value through other comprehensive income. According to the amendment, the positive or negative sign of the prepayment amount will not be important; this means that, depending on the interest rate in effect when the agreement is terminated, payment can be made to a party resulting in prepayment. This compensation must be calculated in the same manner for both a penalty for prepayment and also for a gain earned on prepayment.   The change will not affect to a material extent the PZU Group’s consolidated financial statements.
IFRIC 23 interpretation – Uncertainty over Income Tax Treatments 1 January 2019 1595/2018 The interpretation is applied when there is uncertainty to the determination of taxable profit, tax losses, taxable income, outstanding tax losses, unused tax credits and tax rates under IAS 12.   The interpretation will not affect the PZU Group’s consolidated financial statements.
Amendment to IAS 28 – Long-term interests in associates and joint ventures 1 January 2019 237/2019 According to the amended IAS 28, long-term interests in associates and joint ventures for which the company does not apply the equity method, the applicable standard is IFRS 9, also with regard to impairment.   The amendment will not affect the PZU Group’s consolidated financial statements.
5.2.3-tab1.xlsx

  • Not approved by the European Commission:

Name of standard/ interpretation Date of issue by IASB Effective date (according to IASB)   Comments
IFRS 17 – Insurance contracts 18 May 2017 1 January 2022 The purpose of the standard is to establish the uniform accounting policy for all types of insurance contracts, including the reinsurance contracts held by the insurer. Introduction of this unified standard should ensure comparability of financial reports between different entities, states and capital markets.   The new standard defines insurance contract as a contract under which one entity accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. The scope of the standard does not cover, among others, investment contracts, product warranties, loan guarantees, catastrophe bonds and so-called weather derivatives (contracts requiring payment based on the climatic, geological factor or another physical variable that is not specific to the party to the contract). The standard introduces a definition of contract boundary, defining its beginning as the beginning of coverage, the date when first premium becomes due, the moment when facts and circumstances indicate that the contract belongs to the group of onerous contracts - whichever is earliest. The end of the contract boundary occurs when the insurer has the right or practical ability to reassess the risk for a particular policyholder or a policy group, and the premium measurement does not cover the risk related to future periods.     In accordance with IFRS 17, contracts will be measured by one of the following methods: General Measurement Model, GMM – the basic measurement model, wherein the total value of the insurance liability is calculated as the sum of: discounted value of the best estimate of future cash flows - expected (probability-weighted) cash flows from premiums, claims, benefits, acquisition expenses and costs, risk adjustment, RA – individual estimate of the uncertainty related to the quantity and time of the future cash flows, and contractual service margin (CSM) – representing an estimate of future profits recognized during the policy term. The CSM value is sensitive to changes in estimates of cash flows, resulting e.g. from changed non-economic assumptions. CSM cannot be a negative value – any losses on the contract shall be recognized immediately in the profit and loss account; premium allocation approach, PAA – a simplified model which can be applied to measurement of insurance contracts with the coverage period below 1 year or where its application does not lead to significant changes in relation to GMM. In this model, liability for remaining coverage is analogous to the provision for unearned premiums mechanism, without separate presentation of RA and CSM, while the liability for incurred claims is measured using the GMM (without calculating CSM). variable fee approach, VFA – model used for insurance contracts with direct profit sharing. The liability value is calculated in the same manner as in the GMM, the CSM value is additionally sensitive to changes in economic assumptions.   IFRS 17 provides for separate recognition of reinsurance contracts from reinsured insurance contracts. The cedent shall measure reinsurance contracts by the modified GMM method or, if possible, by the PAA method. Modifications of the GMM method arise above all from the fact that reinsurance contracts are usually assets, not liabilities, and the cedent pays a remuneration to the reinsurer rather than deriving profits from the contract. Modifications are also supposed to reduce discrepancies arising from separate recognition of the reinsurance contract from reinsured insurance contracts.
      In the case of reinsurance contracts, both the profit and the loss calculated as at the contract recognition are recognized in the statement of financial position and settled through the reinsurance coverage period. The assumptions for reinsurance contract measurement shall be consistent with those used for reinsured insurance contract measurement. In addition, measurement shall take into account the risk that the reinsurer fails to fulfill its obligations.   In mid 2018 PZU Group formally launched project work to implement a standard in all PZU Group insurance companies. As part of the project, PZU Group works, among others, on: analyzing the gap in existing IT processes, tools and systems; determining new components necessary to be implemented in processes and areas which will be significantly affected by the implementation of IFRS 17; analyzing the current product offer in terms of segmentation and principles of measurement in accordance with IFRS 17.   Despite publishing the content of IFRS 17, IASB continues the works on its final wording. For this reason, the standard version which will be finally approved by a European Commission Regulation will differ from the present text. The IFRS 17 implementation will have a fundamental impact both on the processes in insurance entities and on the financial reporting of PZU Group. At the present stage of the IFRS 17 implementation project and due to the potential changes in its content, it is not possible to estimate the effect of application of IFRS 17 on PZU Group’s comprehensive income and equity.
Amendments to IAS 19 Employee Benefits – plan amendment, curtailment or settlement 7 February 2018 1 January 2019 The amendment contains clarifications for the guidelines in case of a plan amendment, curtailment or settlement during the reporting period. The amendments require entities, after such an event, to use updated actuarial assumptions to calculate current service cost and net interest for the remaining part of the reporting period. The amendments also clarify how requirements concerning the plan’s amendment, curtailment or settlement affect asset threshold requirements. The IASB has decided that the scope of these amendments does not cover the settlement of “significant market fluctuation” (in euro). The amendments apply to plan amendments, curtailments or settlements that will take place on or after 1 January 2019, with the possibility of earlier application.   The Group is currently analyzing the impact of these amendments on its consolidated financial statements.
Annual improvements to IFRS 2015-2017 12 December 2017 1 January 2019 The amendments pertain to: 1st IFRS 3 - the amendments clarify that when an entity obtains control of a business that is a joint operation, it remeasures previously held interests in that business; 2nd IFRS 11 - the amendments clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business; 3rd IAS 12 - the amendments specify that any income tax consequences of dividends (i.e. profit distribution) should be recognized in the profit and loss account, regardless of how the tax arises; 4th IAS 23 - the amendments clarify that if any specific borrowings remain outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds which an entity generally borrows when calculating the capitalization rate on general borrowings.   The amendments will have no significant influence on the PZU Group’s consolidated financial statements.
Amendment to IFRS 3 – Business combinations 22 October 2018 1 January 2020 The amendments aim to state precisely the difference between the acquisition of a business and an asset acquisition.   The amendments will not affect the PZU Group’s consolidated financial statements.
Amendments to IAS 1 and IAS 8 – definition of materiality 31 October 2018 1 January 2020 According to the new definition, information is material if one may justifiably expect that if it is overlooked, distorted or concealed this may affect the decisions made by the main users of financial statements on the basis of these financial statements.   The change will not affect to a material extent the PZU Group’s consolidated financial statements.
Amendments to the framework 29 March 2018 1 January 2020 The amended conceptual assumptions contain several new concepts pertaining to measurement, they incorporate the updated definitions and criteria for recognizing assets and liabilities and the guidelines for reporting financial results. Additionally, they contain explanations pertaining to important areas such as the role of management, prudence and the uncertainty of measurement in financial statements.   The amendments will have no significant influence on the PZU Group’s consolidated financial statements.
5.2.3-tab2.xlsx

In summary, in the opinion of the PZU Group, the introduction of the above standards and interpretations (except for IFRS 16, for which the estimated impact is presented earlier, and IFRS 17) will have no material effect on the accounting policies applied by the PZU Group.

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