3.5. The principles for classification of financial instruments
The Group classifies financial assets into the following categories:
- measured at amortized cost
- measured at fair value through other comprehensive income;
- measured at fair value through profit or loss
2019
The Group classifies financial liabilities into the following categories:
- measured at amortized cost;
- measured at fair value through profit or loss.
Classification of financial assets as at the date of acquisition or origin depends on the business model adopted by the Group for the purposes of managing a particular group of assets and on the characteristics of the contractual cash flows resulting from a single asset or a group of assets. The Group identifies the following business models:
Model, in which financial assets originated or acquired are held in order to collect gains from contractual cash flows – this model is typical for lending activities;
Model, in which financial assets originated or acquired are hold to collect gains from contractual cash flows, but they may also be sold – frequently and in transactions of a high volume – this model is typical for liquidity management activities;
Other than the “held to collect” or the “hold to collect and sell” cash flows model.
Financial instruments have been classified at the moment of the first-time application of IFRS 9, i.e. as at 1 January 2018, and after that date, they are classified at the moment of recognition or significant modification of the instrument. A change in the classification of financial assets may be caused by a change in the business model.
| Financial assets | Classification and measurement |
|---|---|
| Cash and balances with the Central Bank | measured at amortized cost |
| Amounts due from banks | measured at amortized cost |
| Hedging derivatives | not held for trading, measured at fair value through profit or loss or through other comprehensive income |
| Other derivative instruments | held for trading – measured at fair value through profit or loss |
| Securities | held for trading – measured at fair value through profit or loss |
| not held for trading, measured at fair value through profit or loss | |
| measured at fair value through other comprehensive income | |
| measured at amortized cost | |
| Loans and advances to customers | not held for trading, measured at fair value through profit or loss |
| measured at fair value through other comprehensive income | |
| measured at amortized cost | |
| Other financial assets | measured at amortized cost |
| Financial liabilities | Classification and measurement |
|---|---|
| Amounts due to the Central Bank | measured at amortized cost |
| Amounts due to banks | measured at fair value through profit or loss |
| measured at amortized cost | |
| Hedging derivatives | measured at fair value through profit or loss or other comprehensive income |
| Other derivative instruments | measured at fair value through profit or loss |
| Amounts due to customers | measured at fair value through profit or loss |
| measured at amortized cost | |
| Securities in issue | measured at amortized cost |
| Subordinated liabilities | measured at amortized cost |
| Total financial liabilities | measured at amortized cost |
Business model
The business model is determined/selected upon initial recognition of financial assets. The determination/selection is performed at the level of individual groups of assets, in the context of the business area in connection with which the financial assets originated or were acquired, and is based, among other things, on the following factors:
- the method for assessing and reporting the financial assets portfolio;
- the method for managing the risk associated with such assets and the principles of remunerating the persons managing such portfolios.
In the “hold to collect” business model, assets are sold occasionally, in the event of an increase in credit risk or a change in the laws or regulations. The purpose of selling the assets is to maintain the assumed level of regulatory capital, in accordance with the principles described in the portfolio management strategy or close to maturity, in the event of a decrease in the credit rating below the level assumed for a given portfolio, significant internal restructuring or acquisition of another business, the performance of a contingency or recovery plan or another unforeseeable factor independent of the Group.
Assessment of contractual cash flow characteristics
The assessment of the contractual cash flow characteristics establishes, based on a test of contractual cash flows, whether contractual cash flows are solely payments of principal and interest (hereinafter “SPPI test”). Interest is defined as consideration for the time value of money, credit risk relating to the principal remaining to be repaid within a specified period and other essential risks and costs associated with granting financing, as well as the profit margin
Contractual cash flow characteristics do not affect the classification of the financial asset if:
- their effect on the contractual cash flows from that asset could not be significant (de minimis characteristic);
- they are not genuine, i.e. they affect the contractual cash flows from the instrument only in the case of occurrence of a very rare, unusual or very unlikely event (non-genuine characteristic).
In order to make such a determination, the potential impact of the contractual cash flow characteristics in each reporting period and throughout the whole life of the financial instrument is considered.
The SPPI test is performed for each financial asset in the “hold to collect” or “hold to collect and sell” models upon initial recognition (and for modifications which are significant after subsequent recognition of a financial asset).
If the qualitative assessment performed as part of the SPPI test is insufficient to determine whether the contractual cash flows are solely payments of principal and interest, a benchmark test (quantitative assessment) is performed to determine the difference between the (non-discounted) contractual cash flows and the (non-discounted) cash flows that would occur should the time value of money remain unchanged (the reference level of cash flows).