IDEA BANK S.A. ANNUAL REPORT FOR THE YEAR ENDED

Transcription

1 IDEA BANK S.A. ANNUAL REPORT FOR THE YEAR ENDED Warsaw, 8 March 2018

2 SELECTED FINANCIAL DATA Data on income statement EUR thousand EUR thousand Net interest income Net fee and commission income Profit (loss) before income tax Net profit (loss) Total comprehensive income Net cash flow s Data on statement of financial position EUR thousand EUR thousand Total assets Total equity Share capital Number of shares Capital adequacy ratio (Bank standalone) 13,3% 13,6% 13,3% 13,6% Selected financial data containing basic items of the financial have been converted into euro according to the following rules: individual items of assets, liabilities and equity were converted at the average exchange rates published by the National Bank of Poland in force as at 31 December 2017 EUR 1 = PLN and 31 December 2016 EUR 1 = PLN individual items of the income statement and items of the statement of cash flows were translated at exchange rates representing the arithmetic mean of average exchange rates set by the National Bank of Poland on the last day of each month for the year ended 31 December 2017 and 2016 (respectively EUR 1 = PLN and EUR 1 = PLN ). 2/111

3 CONTENT I. FINANCIAL STATEMENTS INCOME STATEMENT STATEMENT OF FINANCIAL POSITION STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT... 9 II. ADDITIONAL NOTES AND EXPLANATIONS TO THE FINANCIAL STATEMENTS General information Management Board Approval of the financial Major accounting policies Capital management Risk management Interest income and expenses Fee and commission income and expense Dividend income Result on financial assets Foreign exchange gains (losses) Other operating income and expenses General administrative costs Employee benefits Result on investments in purchased debt and impairment losses and provisions for off-balance sheet items Income tax Earnings per share Dividend paid and proposed for payment Cash and balances with Central Bank Receivables from banks and financial institutions Derivative financial instruments Hedge accounting Amounts due from clients Other loans and receivables Financial assets Investment in subsidiaries Investments in associates Intangible assets Property, plant and equipment Other assets Assets pledged as collateral Amounts due to other banks and financial institutions Financial liabilities measured at fair value through profit or loss Amounts due to clients Debt securities in issue Other liabilities Provisions Contingent liabilities Share capital Other capital Additional information to cash flow statement Other comprehensive income Transactions with related parties Remuneration of Management and Supervisory Board members, share based payments Sale of Idea Leasing S.A. and Tax Care S.A. shares as well as Property Solutions FIZAN investment certificates Events after the reporting period /111

4 I. FINANCIAL STATEMENTS 1. INCOME STATEMENT Note Interest income Interest expenses Net interest income Fee and commission income Fee and commission expenses Net fee and commission income Dividend income Result on financial assets at fair value Result on the sale of a subsidiary Foreign exchange result Other operating income Other operating expenses Net other operating income Net impairment losses on loans and advances General administrative costs 13, Result from operating activity Profit (loss) before income tax Income tax Net profit (loss) Attributable to shareholders of parent company Attributable to non-controlling shareholders 0 0 Weighted average number of ordinary shares in the period Earnings per share - Basic earnings per share (PLN per share) 17 4,26 2,26 - Diluted earnings per share (PLN per share) 17 4,26 2,26 In the years ended 31 December 2017 and 2016 there was no discontinued activity. The additional notes and explanations presented on pages from 10 do 110 constitute an integral part of the financial 4/111

5 2. INCOME STATEMENT Idea Bank S.A. annual report Note Profit (loss) for the period Other comprehensive income convertible to income statement Valuation of available-for sale financial assets Effect of cash flow hedge accounting Income tax on other comprehensive income Other comprehensive income non-convertible to income statement 0 0 Total comprehensive income for the period Falls for the company's shareholders Falls for non-controlling shares 0 0 The components of other comprehensive income, i.e. the valuation of financial assets available for sale and the effect of cash flow hedges may, in the future, be transferred to the income statement. The additional notes and explanations presented on pages from 10 do 110 constitute an integral part of the financial 5/111

6 3. STATEMENT OF FINANCIAL POSITION ASSETS Note Cash and balances w ith Central Bank Receivables from banks and financial institutions Amounts due from clients Investments in subsidiaries Investments in associates Other loans and receivables Available-for-sale financial assets Derivative hedging instruments Derivative financial instrument at fair value through profit or loss Intangible assets Property, plant and equipment Investment property Income tax assets current tax assets deferred tax assets Other assets TOTAL ASSETS LIABILITIES AND EQUITY Liabilities Amounts due to other banks and financial institutions Derivative hedging instruments Derivative financial instrument at fair value through profit or loss Debt securities in issue Financial liabilities measured at fair value through profit or loss Amounts due to clients Other liabilities Income tax liability Provisions TOTAL LIABILITIES Equity Share capital Net profit (loss) Other capital Total equity TOTAL LIABILITIES AND EQUITY The additional notes and explanations presented on pages from 10 do 110 constitute an integral part of the financial 6/111

7 4. STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2017 Note Share capital Retained earnings Reserve capital Other capital Revaluation reserve Other reserves Net profit (loss) Total equity 1st January Valuation of available-for-sale financial assets, net of deferred tax Hedge accounting Other comprehensive income for the period Net profit (loss) Total comprehensive income for the period Transfer of net profit (loss) to retained earnings Distribution of net profit (loss) Other changes st December , The additional notes and explanations presented on pages from 10 do 110 constitute an integral part of the financial 7/111

8 for the year ended 31 December 2016 Share capital Retained earnings Other capital Net profit (loss) Total equity Note Reserve capital Revaluation reserve Other reserves 1st January Changes in adopted accounting principles (accounting policy) st January 2016 (restated) Valuation of available-for-sale financial assets, net of deferred tax Hedge accounting Other comprehensive income for the period Net profit (loss) Transfer of net profit (loss) to retained earnings Distribution of net profit (loss) Acquisition of ZCP from Tax Care S.A.* st December , * The Bank acquired an organized portion of the enterprise from Tax Care S.A. The Bank recognized assets and liabilities acquired in the balance sheet while adjusting the value of the investment to a subsidiary on 1 April 2016 as a result. The additional notes and explanations presented on pages from 10 do 110 constitute an integral part of the financial 8/111

9 ) 5. CASH FLOW STATEMENT Note PLN thousand PLN thousand Cash flows from operating activities Net profit (loss) Total adjustments: Depreciation and amortization Foreign exchange (gain) loss Loss / Profit from investing activities Interest and dividend Changes in receivables from banks and financial institutions Changes in receivables from clients Changes in other loans and receivables Changes in available for sale financial assets 25, Changes in deferred tax assets 16, Changes in derivative financial instruments (assets) Changes in other assets Changes in amounts due to banks and financial institutions Changes in financial liabilities at fair value through profit or loss 33, Changes in debt securities in issue Changes in amount due to clients Changes in other liabilities 36, Income tax paid Current income tax recognized in the income statement Other adjustments Net cash flows from operating activities Cash flows from investment activities Inflows from investment activities Sale of intangible assets and property, plant and equipment 28, Sale of investment properties Interest received Sale of subsidiary 26, Sale of financial assets Investment activity outflow s Acquisition of subsidiary and shares in associate 26, Purchase of investment securities Acquisition of intangible assets and property, plant and equipment 28, Net cash flows from/used in investment activities Cash flows from financial activities Interest paid Proceeds from issue of debt securities Net cash flows from/used in financial activities Net increase (decrease) in cash and cash equivalents Opening balance of cash and cash equivalents Closing balance of cash and cash equivalents Restricted cash and cash equivalents 0 0 9/111

10 II. ADDITIONAL NOTES AND EXPLANATIONS TO THE FINANCIAL STATEMENTS 1. General information Idea Bank S.A. ( the Bank) with its registered office in Warsaw, ul. Przyokopowa 33 was registered by the District Court in Warsaw, 12th Business Department of the Polish Court Register under number KRS The Bank was assigned REGON statistical number The duration of the Bank is unlimited. The legal basis for the Bank s operations is its Articles of Association drawn up in the form of a notarial deed dated 23 March The Bank s operations include following banking services: accepting cash deposits payable on demand or on the due date; maintaining respective accounts, maintaining other bank accounts, granting loans and advances, issuing and confirming bank guarantees; L/C opening and confirmation, issuing bank securities, cash settlements, providing borrowings, transactions on cheques and bills of exchange; warranty operations, acquisition and disposal of receivables, custody services, bank safe services, issuing and confirming sureties, representing investors in transactions in securities, issuing and servicing payment cards, forward and futures transactions, purchasing and selling foreign currencies, intermediary services in cash transfers and FX transactions, issuing e-money instruments. The Bank s operations also include: acquiring and purchasing shares, rights, other legal entity s interests and investment funds share units, incurring liabilities related to the issue of securities, debt for asset swap, as agreed upon with the debtor, with the Bank s obligation to sell the assets not later than 5 (five) years following the date of the acquisition for real estate and not later than 3 (three) years following the date of acquisition for other assets. The obligation mentioned above does not apply to assets which the Bank will use to conduct its own banking activities, financial advisory and consulting services, financial services related to insurance and pension and disability funds, finance leases, 10/111

11 purchasing and selling real estate, trading in securities, managing securitized debts in securitization funds, insurance agency, performing, permanently or periodically, on behalf of and for the account of an investment firm, agency services in the scope of activities conducted by this investment company, performing the function of the representative bank and keeping the bond records within the meaning of the act on bonds, suppling of the following other financial services: brokerage services for the conclusion of factoring agreements, forfaiting agreements and for the sale of financial leasing services, brokerabge services in the field of lending, brokerabge services in the field of conclusion of acquiring contracts. performing the non-brokerage activities consisting in: a. acquiring and transfering purchase or sell orders of financial instruments in the form of participation units in collective investment undertakings, b. offering financial instruments in the form of investment certificates and bonds with the reservation that the subject of the activities referred to in point a) - b) above, only the bonds issued by the State Treasury or the National Bank of Poland or financial instruments referred to in point a) may be properly issued. a) - b) above and the bonds referred to in art. 39p par. 1 of the Act of 27 October 1994 on toll motorways and on the National Road Fund. The Group's parent company is Getin Holding S.A., with its registered office in Wrocław (Poland), street Gwiaździsta 66. The ultimate parent is dr Leszek Czarnecki. 2. Management Board Composition of the Bank s Management Board and Supervisory Board as at 31 December 2017 and as at the date of the financial : Supervisory Board Supervisory Board Chairman Supervisory Board Deputy Chairman Supervisory Board Members: dr Leszek Czarnecki Remigiusz Baliński Dariusz Krawczyk Piotr Kamiński Krzysztof Bielecki Artur Gabor Izabela Lubczyńska Management Board acting Management Board President Tobiasz Bury (from 6 October 2017; until 6 October Vice President of the Board) Management Board President Jarosław Augustyniak (until 6 October 2017) 11/111

12 Management Board Members: Małgorzata Szturmowicz Dominik Fajbusiewicz (until 6 October 2017) Marcin Syciński (until 25 June 2017) Dariusz Makosz Aneta Skrodzka-Książek Jaromir Frankowicz (from 1 June 2017) Magdalena Skwarzec (from 6 November 2017) Tomasz Górski (from 1 February 2018) The following significant events for the Bank took place in the reporting period: 1. On 31 March 2017 Idea Bank S.A. sold 100% of shares in Tax Care S.A. to Idea Money S.A. in order to better adjust the Group's structure to the activities conducted by individual companies. 2. On 28 September 2017 the Bank sold to LC Corp B.V. 5,878 ordinary registered shares of Idea Leasing S.A., constituting 25.01% of its share capital and conferring the right to 25.01% of votes at the General Meeting of Shareholders for a price of PLN thousand. The sale agreement is further authorized by LC Corp B.V. to request the Bank to sell to LC Corp B.V. additional 5,875 shares of Idea Leasing S.A., constituting 25% of the share capital. The Call option can be exercised at any time in the future. As a result of the transaction the Bank lost control of Idea Leasing S.A. which was deconsolidated as of 28 September Since 30 September 2017 Idea Leasing is an affiliated company of Idea Bank Group. Details of the transaction are presented in Note and 21 of these financial. 3. In November and December 2017 the Bank was subcject to a control procedure conducted by the regulatory authority. On 1 February 2018 the Bank received an audit report, to which it referred without reservations in a letter sent to the supervisor on 21 February On 29 December 2017, the Bank sold 95,135 investment certificates (i.e. 100% of owning) of Property Solutions Closed Investment Fund to LC Corp Sky Tower sp.z o.o. for PLN thousand. The aim of the transaction was to reorganize the operation of the Idea Bank Capital Group and to simplify its structure and focus the activities relating to the real estate management in one entity. 5. On 21 December 2017 the Bank issued 105 subordinated bonds of PLN 42 million nominal value. On 19 February 2018 the Bank received permission from the Polish Financial Supervision Authority to include those bonds to supplementary funds. 3. Approval of the financial These financial were approved for publication by the Management Board on 8 March Major accounting policies 4.1 Period covered by the These financial cover 12-month period ended 31 December 2017 for the income statement, statement of changes in equity, statement of comprehensive income and statement of cash flow as well as comparative data for the 12-month period ended 31 December 2016, and financial data as at 31 December 2017 for the statement of financial position with comparative date as at 31 December /111

13 4.2 Basis for preparation of the financial These financial have been prepared under historical cost, except for financial assets valued at fair value, financial liabilities measured at fair value and investment property. Assets or asset classes classified as held for sale are stated at the lower of the carrying amount or fair value less cost to sell. When preparing the financial it was assumed that the Bank would continue to operate as a going concern in the foreseeable future, i.e. for a period of at least one year after the balance sheet date. As at the date of approval hereof, there is no substantial threat to the Bank being able to continue as a going concern for one year after the balance sheet date. In the reporting period, there were no discontinued operations requiring disclosure in the financial. The entity authorized to audit the financial is Deloitte Polska Spółka z ograniczoną odpowiedzialnością Sp.k. 4.3 Statement of compliance These financial were prepared in accordance with International Financial Reporting Standards ( IFRS ) as adopted by the European Union and to the extent not regulated by those standards in accordance with the Accounting Act of 29 September 1994, as amended and the secondary regulations thereto, as well as requirements applying to issuers of securities admitted or applying for admission to trading on the market of official SE quotations. The IFRS include standards and interpretations approved by the International Accounting Standards Board (the IASB ) and the International Financial Reporting Interpretations Committee (the IFRIC ). The Bank applied the carve out set forth in IAS 39 approved by the EU, as referred to herein. The Bank applied no standards, interpretations or amendments which have been made public, but have not yet become effective Major accounting estimates and judgments Professional judgment In the process of applying the accounting policies to the issues discussed below, the judgments made by the management are of most significance, besides the accounting estimates made. Insurance commission income The Bank reviews the relation of loans and insurance products. In the case of direct linkage between a loan and insurance product without a classification as a complex product, the Bank recognizes the whole remuneration based on the effective interest rate. For complex products, for which fair value of the offered financial asset has been separated and the insurance product sold jointly with this asset, the Bank allocates based on the proportion of accordingly the fair value of a financial asset and the fair value of the intermediation service to the sum of both those values. Remuneration for intermediation service is settled using the straight-line method based on the level of service advancement, and the remaining portion is settled based on the effective interest rate over the period of the financial instrument. The Bank also estimates part of the remuneration, which will be reimbursed (e.g. due to termination of insurance contracts by clients, prepayments, etc.) in the insurance product post-sales period. The estimated part of the remuneration is deferred in time to the amount of anticipated reimbursement. Impairment of financial assets On each reporting date, the Bank estimates whether there is any objective evidence of the impairment of a financial asset or group of financial assets. In the event of such evidence, the Bank identifies the amount of the loss due to impairment. The value of the loss is equivalent to the difference between the asset s carrying amount and the present value of estimated future cash flows generated 13/111

14 by the financial instrument, discounted at the financial asset s original effective interest rate. An asset s carrying amount is reduced through use of an allowance account. Impairment of non-financial assets At any balance sheet date the Bank assesses whether there are any objective indicators for the impairment of any non-financial asset. If any such indicators exists, the Bank estimates whether the carrying value of the asset is higher than its recoverable amount, i.e. either the value generated by the asset in use or its fair value less costs of disposal,. Should an asset s carrying amount be higher than its recoverable amount, impairment occurs and a relevant impairment loss is recognized in the income statement. Impairment of goodwill After initial recognition, goodwill is reported at acquisition price less any accumulated impairment losses. At each reporting date, it is assessed whether there are any indications of goodwill impairment. The impairment test is carried out once a year by comparing the carrying amount of cash generating units, including goodwill and recoverable amount. The recoverable amount is estimated based on the value in use of cash-generating units, which is the estimated value of future cash flows, taking into account the residual value of cash-generating units. The identified impairment loss is charged to the financial result. Impairment of trademark At the moment of settlement of the acquisition of a subsidiary, the Bank recognizes the fair value of significant trademarks based on the valuation of independent experts. At the reporting date, the Bank assesses whether the useful life of the trademark is specified, or indefinite. Trademarks with an indefinite useful life are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired, by comparing its recoverable amount with the carrying amount. The excess of the carrying amount over the recoverable amount is recognized as an impairment loss. Deferred tax assets The Bank recognizes a deferred tax asset assuming relevant future tax profit. Declining future taxable profits could make the assumption unjustified. As at the date of the financial, the Bank has concluded that sufficient taxable profit will be available to utilize deferred tax assets. The establishment of a tax capital group will postpone the date of utilization of the deferred tax asset for all the items by three years, i.e. the existing period of the tax capital group. Investment in associates As a rule, associates are those entities in which the investor has significant influence. Significant influence is the power allowing participation in decision-making on financial and operating policy of the entity, in which the investment was made, but not referred to the control or joint control.if the Group holds, directly or indirectly (eg. through subsidiaries), 20% or more of the voting rights in the entity in which the investment is made, it is assumed that the Bank has significant influence over this entity, unless it can be proved that it is otherwise. If the Group holds, directly or indirectly (eg. through subsidiaries), less than 20% of the voting rights in the entity in which the investment is made, it can be assumed that the Group does not have significant influence over this entity, unless the significant influence can be easily proved. As at 31 December 2017, the Bank using professional judgement classified Idea Leasing S.A. in which he holds 74.99% of the capital as an associated entity. Idea Leasing S.A. as an associate With reference to Idea Leasing S.A. ("IL", "Company") the Bank carried out a detailed analysis of the criteria resulting from IFRS 10 "Consolidated Financial Statements" to determine if the fact of concluding the sales agreement of 25,01% Idea Leasing S.A. shares and giving LC Corp B.V. the right to request the sale by the Bank (call option) of another 25% of Idea Leasing SA shares at any time after the closure of the above transactions, as well as corporate changes at the same time (in making 14/111

15 decisions and managing significant operations of the Company) in Idea Leasing S.A. affects the Bank's control over Idea Leasing S.A. In the above analysis the Bank considered in particular such areas as: 1. determination of control over Idea Leasing S.A. 2. identification of exposures to variable financial results, 3. determination the Bank's impact on the returns of the company. According to IL's Articles of Association, the Supervisory Board of the company is appointed and may be dismissed by a meeting of shareholders, and the right to appoint the majority of the members of the Supervisory Board belongs to LC Corp B.V. In addition, LC Corp B.V. has additional rights resulting from the company's statute: a) the right to nominate via the representatives of the Supervisory Board, the majority of the members of the Management Board, b) via the representatives of the Supervisory Board of the Company and the Management Board of the Company the right to approve the conditions of employment of key management personnel of the above mentioned company, c) the right to accept contracts and transactions of material importance for the Company. In each case, the objection of LC Corp B.V. means the lack of acceptance of the shareholders or the Supervisory Board irrespective of the number of votes cast. In addition, according to call option of buying 25% of IL shares issued by the Bank to LC Corp B.V. the Bank conducted a detailed analysis if the option is a significant right within the meaning of IFRS 10.In particular the Bank considered the following facts: 1) the execution of the call option does not require any additional consent: the General Meeting, the Supervisory Board or the Management Board of any entity involved in the transaction, 2) the implementation of the planned call option is unconditional, which means that LC Corp B.V. is entitled to make a request to implement this option at any time, 3) particulars of the agreement setting the selling price of shares that fair value of Idea Leasing S.A. as at the date of execution of this call option reduced by 5% discount provided to investor a real financial benefit from it transaction. As a result, voting rights owned by LC Corp B.V. (25.01%) and potential rights (call option - 25%) together represent more than 50% of the vote (50.01%) which means that the control on IL (and therefore the entire IL group) is held by LC Corp BV. With regard to the exposure to variable financial results of IL and the impact on its returns, the Bank concluded that both the Bank and LC Corp B.V. have such exposure due to their share in the capital of the company and the fact of financing the activity of the company. As a result of the analysis - in line with the criteria set out above - the Bank concluded that sale of 25.01% shares of IL to LC Corp B.V. caused lost control in IL. In these financial, the Bank recognized IL as an associate and recognized the result from the loss of control over IL. Details are presented in Note 45 to these financial Significant accounting estimates Portfolio ratios in exposure valuation Estimating a potential impairment of loan and lease receivables depends on many factors, including historical trends. For loans with identified impairment, impairment loss reducing the carrying amount is made if in the Bank s opinion the estimated repayment by debtor, together with the value of the collateral, may be lower than the outstanding receivable. The discount factor is set by use the initial effective interest rate (for the loan portfolio with fixed interest rate) or current effective interest rate at the default date (for the loan portfolio with floating interest rate). 15/111

16 With regard to provisions for losses incurred but not disclosed, the Bank estimates (based on historical data) the PD (probability of default) parameters, and the RR (Rate of Return close to the estimated portfolio values) parameters using an expert approach, needed to determine the IBNR write-offs. Due to insufficient historical data, the RR parameter is estimated using an expert approach based on recovery analysis. 4.5 Transactions in foreign currencies Functional and reporting currency The functional currency of the Bank and the reporting currency of the financial is the Polish zloty (PLN) Functional and reporting currency Transactions denominated in currencies other than PLN are translated into PLN at the exchange rate effective as of the date of the transaction. As at the reporting date assets and liabilities denominated in currencies other than PLN are translated into PLN at exchange rate set for a given currency by the National Bank of Poland at that date. Exchange differences resulting from the translation are recognized under operating income (costs) respectively or, in cases specified in the accounting policies, are capitalized in the cost of the assets. Non-monetary assets and liabilities recognized at historical cost denominated in a foreign currency are disclosed at the historical cost of the transaction. Non-monetary assets and liabilities recognized at fair value denominated in a foreign currency are translated using the exchange rate effective at the date of revaluation to fair value. The following exchange rates were applied for valuation purposes in the financial : valuation day EUR CHF RUB USD GBP CZK DKK NOK SEK ,1709 3,5672 0,0604 3,4813 4,7001 0,1632 0,5602 0,4239 0, ,424 4,1173 0,068 4,1793 5,1445 0,1637 0,5951 0,4868 0, Recognition of investments in subsidiaries and associates Irrespective of the nature of engagement in a given entity, the Bank determines its status of a parent company by evaluating whether it exercises control over the entity in which the investment was made. The Bank exercises control over the entity in which the investment was made if, due to the engagement, it is exposed to variable financial results or if it has the right to variable financial results and may influence those financial results by exercising control over the entity. The Bank exercises control over an entity in which an investment was made only if and when simultaneously: a) it exercises control over the entity in which the investment was made b) in connection with its engagement in an entity in which an investment was made, it is exposed to variable financial results or if it has the right to variable financial results, and c) it may use its control over an entity in which an investment was made to influence its financial results Consolidation of the entity in which an investment was made starts on the day on which the Bank obtains control over the entity and ceases when it loses the control. The Bank attributes the profit or loss and each component of other comprehensive income to the owners of the parent and to the non-controlling interests. The Bank presents non-controlling interests in consolidated financial, in equity separately from the equity of owners of the parent company. Changes to the shareholding structure of the parent company in a subsidiary that do not result in a loss of control by the parent over the subsidiary, provide equity transactions. 16/111

17 If the part of the equity held by non-controlling interest changes, Idea Bank S.A. shall adjust the carrying amounts of the controlling and non-controlling interests to reflect the changes in their relative share in the subsidiary. Any differences between the amount of the adjustment of noncontrolling interests and the fair value of the amount paid or received Bank refers directly to equity and attributes to owners of the parent company. If the Bank loses control over a subsidiary then: a) derecognises the assets (including goodwill) and liabilities of the former subsidiary from the consolidated statement of financial position b) recognizes any investment retained in the former subsidiary at its fair value at the date control is lost and recognizes it and any amount of the mutual commitments of the former subsidiary and the parent company in accordance with the relevant IFRS c) the gain or loss related to loss of control of the assignment of the former parent company. The Bank loses significant influence on the entity in which an investment was made when it loses its power to participate in decision making on the financial and operating policy of the entity in which the investment was made. With respect to the accounting policy for investments in associates the Bank applies the equity method, whereby the investment is initially recognized at cost and then, after the acquisition date, its value is adjusted accordingly to change in the investor's share of net assets in which the investment is made. In case of investments in associates, which arises as a result of the acquisition of significant influence in the entity whose shares were held by the Bank and classified as assets available for sale The Bank recognizes the cost of acquisition of the investment at historical purchase price of the shares. The investor s profit or loss includes its share of the profit or loss of the investee and other comprehensive income of the investor includes its share in other comprehensive income unit in which the investment was made. If the entity's share of losses in an associate equals or exceeds its interest in the associate entity discontinues recognizing its share of further losses. Gains and losses resulting from "upstream" and "downstream" transactions between the Bank and its subsidiaries and an associate are recognized in the financial only to the extent of unrelated investors in the associate. The investor's share of the profits or losses of the associate arising from these transactions is eliminated. The Bank recognized as an investment in an associate the shares in Idea Box S.A. representing 44,9% of the company's capital and shares in Idea Leasing S.A. representing 75% of the company's capital and shares as at 31 December Each time at the end of the reporting period the Group assesses whether premises exist requiring an impairment loss with respect to its net investment in the associate. If such premises exist, the Group estimates the recoverable amount, i.e. the higher of its value in use or fair value less costs to sell. If the carrying amount of an asset is higher than its recoverable amount, the Bank recognizes an impairment loss in the income statement. 4.7 Financial assets and liabilities Classification and recognition The Bank classifies its financial assets into the following categories: financial assets measured at fair value through profit or loss, held-to-maturity, loans and other receivables, available-for-sale financial assets. As at 31 December 2017 and 2016, the Group did not hold any financial assets held to maturity. Financial liabilities are classified in the following categories: financial liabilities measured at fair value through profit or loss and other financial liabilities. 17/111

18 The Bank recognizes in its statement of financial position a financial asset or liability when it becomes a party to the transaction. Purchases and sales of financial assets measured at fair value through profit or loss, held-to-maturity and available-for-sale financial assets, including standardized purchases and sales of financial assets, are recognized in the statement of financial position at the date of the transaction. Loans and receivables are recognized at the time of cash withdrawal of the borrower. All financial instruments at initial recognition are measured at fair value adjusted for transaction costs, except for financial assets and liabilities measured at fair value through profit or loss that may be directly attributable to the acquisition or issue of a financial asset or financial liability Financial instruments measured at fair value through profit or loss The category includes two sub-categories: - financial assets and financial liabilities held-for-trading purchased or incurred to resell in a short-term as well as derivative financial instruments, - financial assets and financial liabilities initially disclosed as financial assets and liabilities measured at fair value through profit or loss. Financial assets and financial liabilities held-for-trading and financial assets and financial liabilities initially classified at fair value through profit or loss are recognized in the statement of financial position at fair value. As at 31 December 2017 and 2016, the Bank had no financial assets or financial liabilities held for trading other than derivative instruments Available-for-sale financial assets Financial assets available for sale are non-derivative financial instruments, which have been classified as available-for-sale or do not fall under any of the categories mentioned above. Available-for-sale financial assets are stated at fair value plus any transaction costs which may be directly attributed to the purchase or issue of a financial asset. Fair value changes of these assets (if there is a market value established on an active market or their fair value can be reliably established otherwise) are recorded in the revaluation reserve until the asset is derecognized or impairment is recognized, at which point accumulated gains or losses recorded in equity are recognized in the income statement. In the case of debt instruments, interest income and discount or premium are recognized in interest income using the effective interest rate method. If fair value cannot be determined, then assets are recognized at cost less impairment. An impairment loss is recognized in the income statement. Fair value changes recorded in the revaluation reserve are presented in the statement of comprehensive income excluding impairment losses, interest calculated using the effective interest rate method and foreign exchange differences, which are recognized in the income statement. If the fair value cannot be reliably determined a financial asset classified as available for sale are recognized at cost less impairment Loans and advances to customers and other loans and receivables The amount of loans and advances issued and receivables, including lease receivables, is assessed periodically to estimate potential impairment and to determine the value of impairment losses. Other loans and receivables is a category of financial assets which are not quoted on the active market, whose cash flow is or may be determined and which are not classified as derivatives. Advances and receivables arise when the Group lends funds to clients for purposes other than obtaining short-term commercial profits. This category includes receivables from clients and investments in debt financial instruments insofar as they are not quoted on the active market. Advances and receivables are measured in the statement of financial position at amortized cost using the effective interest rate method taking into account impairment loss. 18/111

19 Accrued interest together with the commission settled in time at the effective interest rate are recognized in interest income. Commissions which are not an element of interest income are amortized using the straight-line method or recognized on a one-off basis in commission income. Impairment losses are recognized in the income statement as impairment loss on loans and advances to clients. These principles are also applied for purchased debts and debt instruments. As at 31 December 2017 and 31 December 2016 the category other advances and receivables included only corporate bonds Other financial liabilities The category includes amounts due to banks and clients, loans drawn by the Bank and issued debt securities, including transaction costs, except for financial liabilities designated on initial recognition as liabilities measured at fair value through profit or loss. Liabilities, other than those classified at fair value through profit or loss, are presented in the statement of financial position at amortized cost using the effective interest rate method and costs related to these liabilities accrued in subsequent periods are presented as interest expenses Derecognition of financial instruments from financial A financial asset is derecognized from the Bank s statement of financial position when the contractual rights to the cash flows from the asset expire or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party, if the transfer of rights meets the criteria of IAS 39 (International accounting standards). The Bank assesses how the transfer of the rights affects the risk incurred and the benefits associated with the ownership of the asset. Therefore: - if the Bank transfers substantially all the risks and rewards of ownership, the asset is derecognized from the statement of financial position; if the Bank retains substantially all the risks and rewards of ownership, the Bank continues to recognize the financial asset in the statement of financial position - if the Bank neither transfers nor retains all the risks and rewards of ownership, the Bank decides whether it still controls the asset. If control is maintained, the Bank continues to recognize the asset in the statement of financial position. The Bank derecognizes an asset or a part thereof when it loses control over it; i.e. the Bank exercises or waives its contractual rights, or the rights expire. The Bank derecognizes a financial liability (or a part thereof) when the contractual obligation has been discharged, cancelled or expired. It is necessary to exchange debt instruments in essentially different ways from the borrower and the lender as the expiry of the original financial rules and the disposal of new packages. Likewise significant modifications should be considered as the expiration of original and new meaning. As a result conditions are different if discounted value of cash flow as a result of new meaning is not less than 10% of the discounted current value due to loss of weight referred to discounted cash flow from original financial liability. If exchange of debt instruments or modified contract terms is treated as an extinguishment of liabilities, all costs incurred and charges are recognized as part of profits or losses arising from the termination of liabilities Derivative instruments Derivative financial instruments are measured at fair value estimated using a valuation technique. The fair value of forward foreign exchange contracts is determined using current forward exchange rates. The fair value of interest rate swaps is determined using a model based on quotations of similar instruments. 19/111

20 In the fair value of derivative instruments not covered by the bilateral safeguard settlement in the form of a security deposit, is also considered a component of credit risk in the form of valuation adjustments. Valuation adjustment is estimated individually at the level of individual counterparties, taking into account the expected exposure to the pre-settlement counterparty credit risk and the corresponding risk generated by the Group. This approach assumes the possibility of risk to settle future payments on both sides of a transaction. Valuation adjustment of counterparty credit risk takes into account the probability of bankruptcy implied from CDS quotations individual, or in the absence of the CDS premia for comparable entities. Adjustment of the valuation of the credit risk of the Group includes the likelihood of bankruptcy Bank implied from CDS quotations for comparable financial institutions. In cases where the Group does not apply hedge accounting, gains and losses arising from changes in the fair value of the hedged item and the hedging instrument are recognized directly in the income statement for the reporting period. Derivative instruments used by the Group to hedge against risks associated with interest rate and foreign currency exchange rate fluctuations (without applying hedge accounting) include primarily currency forwards and interest rate swaps. Group may classify an instrument comprising one or more embedded derivatives if the following conditions are met: 1. The embedded derivative does not significantly change the cash flows that would be required by the contract, or 2. It is obvious without conducting or after a brief analysis that if a similar hybrid (instrument) was first considered, separation of the built-in instrument would be forbidden Hedge accounting The Bank has adopted the accounting policy related to cash flow hedging to hedge against interest rate risk in compliance with IAS 39 as adopted by the EU. The IAS 39 carve-out approved by the EU enables the Bank to designate a group of derivative instruments as a hedging instrument and lifts some of the limitations provided for in IAS 39 regarding deposit hedging and adoption of the strategy for hedging less than 100% of cash flows. According to IAS 39 as adopted by the EU, hedge accounting can be applied to deposits and ineffective hedges are reported only when the revalued cash flows in a given period of time is lower than the hedged value relating to the relevant period: Hedges are classified as follows under hedge accounting: fair value hedges to mitigate the risk of fair value fluctuations of an asset or liability, or cash flow hedges, hedging against fluctuations of cash flows attributable to particular risk type related to an asset, liability, or forecasted transaction, or net investment hedges in a foreign entity. The Bank manages interest rate risk by extending the interest rate on assets, i.e. swapping floating interest rates to fixed interest rates. Therefore, the Bank applied a cash flow hedge model to the PLN-denominated loan portfolio with floating interest rates which generates interest rate risk and to the related IRS transactions hedging against this risk. The hedging instrument is the IRS transaction portfolio in PLN, in which the Bank is the payer of the floating rate and receives payment based on a fixed rate. The Bank manages foreign exchange risk by seeking to convert a stream of cash flows in foreign currency into cash in PLN. The Bank has applied a cash flow hedging model for foreign currency denominated loans that generates currency risk by entering into CIRS (Currency Interest Rate Swap) transactions hedging against currency risk. The hedging instrument is the CIRS trading portfolio in which the Bank makes payments in foreign currencies and receives cash flows in PLN. 20/111

21 IRS / CIRS transactions meet the requirements allowing them to be designated as hedging instruments (individually or as a transaction group) since those transactions are carried out with entities from outside the Bank s group (meeting the external transaction requirements). The effective portion of the fair value change in the IRS / CIRS hedging instruments is recorded in other comprehensive income of the Bank. At each reporting date the Bank reclassifies from other comprehensive income the amounts of interest expense accrued over the relevant reporting period, compensating for changes in cash flows arising on the hedged items, recognized in a given reporting period in the income statement. The ineffective portion of fair value change of the hedging instrument should be recognized in the Bank s income statement on an ongoing basis Impairment of financial assets On each reporting date, the Bank assess objective evidence of the impairment of a financial asset or a group of financial assets. In the event of such evidence, the Bank identifies the loss amount due to the impairment. Impairment loss occurs when there is objective evidence of impairment due to one or more events occurring after initial recognition, and that loss event (or events) affects estimated future cash flows of the financial asset or group of financial assets, that can be reliably estimated Loans and advances to clients and other receivables The amount of loans and advances issued and receivables, is assessed periodically to estimate potential impairment and to determine the value of impairment losses. If there is objective evidence of losses incurred due to impairment of loans and receivables or held-to-maturity investments measured at amortized cost, then the impairment loss amount is equal to the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future loan losses not yet incurred). The present value is calculated as the sum of discounted cash flows by usung the initial effective interest rate (for the loan portfolio with fixed interest rate) or current effective interest rate at the default date (for the loan portfolio with floating interest rate). The carrying amount of an asset is reduced by an impairment loss amount recognized in the income statement. First, the Bank assesses whether there is objective evidence of impairment of individually significant financial assets (in the case of restructuring) or collectively for financial assets that are not individually significant. If no evidence of impairment of an individually significant financial asset s exists, the asset is included in a group of financial assets with similar credit risk for collective assessment of impairment. Assets that are assessed individually for impairment, and for which impairment loss was recognized, are excluded from collective impairment assessment. Loans, advances and debts that are deemed individually significant are subject to individual assessment for impairment. Impairment of loans, advances or debt occurs and the impairment loss is recognized when there is objective evidence of impairment due to one or more circumstances which affect the estimated future cash flows related to the loans, advances or debts. Such circumstances include: 1. significant financial difficulties of the borrower resulting in his credit risk rating being downgraded 2. high probability of the borrower s bankruptcy, financial restructuring or information on bankruptcy proceedings being initiated with respect to the client, 3. delay in payment over 3 months, 4. termination of a loan agreement or initiation of debt collection procedures, 5. for retail clients - information about the borrower s financial difficulties (job loss, income decrease, debt increase, default reported by other institutions), 6. unknown place of residence, undisclosed property of the borrower. 21/111

22 Impairment loss amount for loans (borrowings) assessed individually is calculated as the difference between the carrying amount of the loan and the present value of estimated future cash flows discounted using the original effective interest rate (for the loan portfolio with fixed interest rate) or current effective interest rate at the default date (for the loan portfolio with floating interest rate). In the case of secured loans, the present value of estimated future cash flows includes the expected cash flows generated from security enforcement, decreased by costs of enforcement and costs of sale if enforcement is likely. The amount of impairment loss decreases the carrying amount of the loan (borrowing) or lease receivable. Homogenous groups of individually insignificant loans as well as individually significant loans for which no objective indicators of impairment were reported in an individual assessment are subject to collective impairment assessment, including losses incurred but not reported (IBNR). In order to estimate group impairment, the Bank identifies similar credit risk loan portfolios and investigates objective evidence of impairment. Default on repayment constitutes a major evidence of loan impairment. The collective assessment of impairment is assessed in two circumstances: to determine the collective impairment amount for individually insignificant exposures to determine the amount of incurred but not reported (IBNR) losses for the exposures with no impairment evidence identified The present value of anticipated potential future cash flows for exposures assessed collectively are calculated based on: the anticipated future cash flows historical data on overdue and regular repayments in particular exposure groups Available-for-sale financial assets At each balance sheet date, the Bank performs an analysis of whether there is objective evidence that there is an impairment of individual assets and / or a portfolio of available-for-sale financial assets. Objective evidence of impairment of available-for-sale financial assets is included: 1. significant financial difficulties of issuer or debtor, 2. failure to comply with the terms of the contract, such as non-payment or default on interest or principal repayment, 3. granting the borrower, by the lender, for economic or legal reasons resulting from the Borrower's financial difficulties, facilities which otherwise the lender would not have granted, 4. high probability of bankruptcy or other financial institution borrower, 5. disappearance of an active market for a given financial asset due to financial difficulties, 6. information about significant negative developments taking place in the technological, market, economic, legal or other environment in which the issuer operates indicates that the investment cost of an equity instrument may not be recovered, 7. significant (over 30%) or prolonged (over 12 months) decline in the fair value of equity investments below cost. If there are objective evidence of impairment of a financial asset available for sale as described above and there are no circumstances or indications that there is no impairment of that financial asset, then the difference between the purchase price of the asset (less any capital repayments and interest) and its current fair value, less any impairment loss of that component previously recognized in the income statement, is derecognized and transferred to profit or loss. Impairment losses on equity instruments classified as available for sale cannot be recognized in the income statement. If, in the next period, the fair value of the available-for-sale debt instrument increases and this increase can be objectively linked to an event subsequent to the impairment loss recognized in the income statement, the reversed amount is recognized in the profit and loss account. 22/111

23 4.7.6 Property, plant and equipment Property, plant and equipment items are stated at cost less accumulated depreciation and any impairment losses. The initial cost of property, plant and equipment includes its purchase price plus all the costs directly related to the purchase of the assets and their adaptation for use. The cost also includes the cost of replacement of spare parts in machines and equipment recorded when incurred if the recognition criteria are met. Costs incurred after an asset has been commissioned, such as maintenance and repairs, are charged to the income statement when incurred. Upon purchase, property, plant and equipment are divided into component items of substantial value with a fixed period of economic life assigned. Major renovation costs also constitute component items. Depreciation is calculated using the straight-line method over the estimated economic life of an asset: Type Leasehold improvements Plant and machinery Computers Vehicles Office equipment, furniture Period Lease term, including extended term (up to 10 years) from 5 to 10 years from 3 to 5 years from 2.5 to 5 years from 5 to 7 years A property, plant and equipment item may be derecognized after it is sold or if no economic benefits arising from further use of such asset are anticipated. Any profit or losses arising from derecognition of the asset (calculated as the difference between net sales proceeds and the item s carrying amount) is recognized in the income statement in the period of derecognition. Assets under construction are assets in the process of construction or assembly and they are stated at their purchase price or cost of manufacture. Assets under construction are not depreciated until the construction is completed and the asset is commissioned but they are reduced by any revaluation write-offs. At the end of each financial year, the residual value, useful life and depreciation method of the assets are reviewed and adjusted, as necessary. In the case of modernization, the cost thereof is each time included in the carrying amount of the property, plant and equipment items if the recognition criteria are met Intangible assets Intangible assets acquired under separate transactions are initially recognized at cost or cost of manufacture. The purchase price of intangible assets acquired in a business combination is equal to their fair value as at the combination date. Subsequently, intangible assets with a finite useful life are stated at cost or cost of manufacture less accumulated amortization and accumulated impairment losses. Expenditure incurred on intangible assets generated internally, except for capitalized expenditure incurred on research and development, is not capitalized but is charged to the income statement for the period in which it was incurred. The Bank determines whether the useful lives of intangible assets are definite or indefinite. Intangible assets with a finite useful life are amortized over that period and tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. The amortization periods and methods for intangible assets with a definite useful life are reassessed at least at the end of each financial year. Changes in the estimated economic useful life, or the expected manner of consuming economic benefits resulting from a given asset, are recognized by changing the amortization period or method respectively and perceived as changes in estimates. The impairment for intangible assets with definite economic useful lives is charged to the income statement against the category corresponding to the function of a given intangible asset. The Bank applies 10% amortization rates for specialized computer systems and 20-33% rates for the remaining software. 23/111

24 Intangible assets with indefinite useful lives, including trademark are tested annually for impairment with respect to individual assets or at a level of a cash-generating unit. Other intangible assets are tested for impairment annually. Useful lives are verified annually and, if needed, adjusted effective from the beginning of the financial year. Acquired client databases are disclosed as intangible assets by the Bank. The Bank determines the useful life of an acquired client database as definite and amortizes it using the straight-line method over a period of 5 years. Upon initial recognition the intangible assets are recognized at cost or cost of manufacture. The useful lives and amortization methods for the acquired client databases are reassessed at least at the end of each financial year and the change is recognized as a change in estimates in accordance with IAS 8. The Bank derecognizes acquired client databases upon their disposal or when no further economic benefits are expected from the asset. The Bank periodically reviews both realized and anticipated future cash flows with respect to the potential impairment loss of acquired client databases. According to the reviews performed by the Bank for this intangible asset as at 31 December 2017 and 31 December 2016, no such premises occur Goodwill Goodwill on acquisition is initially measured at cost being the excess of: the sum of: the payment transferred, the amount of any non-controlling interest in the acquire and in a business combination achieved in stages, the fair value at the acquisition date of the share capital of the acquire previously held by the acquirer the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed After initial recognition, goodwill is measured at cost less any accumulated impairment losses. The impairment test is performed annually or more frequently if there is indication of impairment. Goodwill is not amortized. At the acquisition date, any goodwill acquired is allocated to each of the cash-generating units which may benefit from merger synergies. Each unit or group of units to which goodwill has been allocated: represents the lowest level within the Group at which the goodwill is monitored for internal management purposes and it is not larger than one operating segment determined in accordance with IFRS 8 Operating Segments An impairment loss is determined by estimating the recoverable amount of the cash-generating unit to which the goodwill was allocated. If the recoverable amount of the CGU is less than its carrying value, the Company recognizes an impairment loss. If goodwill forms part of a cash-generating unit and part of the operation within which that unit is sold, when determining the gain or loss on disposal, the goodwill associated with the sold business is included in its carrying amount. In such circumstances, the goodwill sold is determined based on the relative values of the operations sold and the remaining part of the cash-generating unit. In the period covered by this consolidated financial no impairment losses of goodwill were recognized Imapairment of non-financial assets The Bank periodically assesses whether there are any objective indicators of impairment of any non-financial asset. If any such indicators exist, the Bank estimates whether the carrying value of the asset is higher than its recoverable amount, i.e. either the value generated by the asset in use or its fair value less costs of disposal. Should the recoverable amount of an asset be lower than its carrying amount, impairment occurs and the relevant impairment loss is recognized in the income statement. 24/111

25 The recoverable amount of an asset reflects the higher of the sale price of this asset less costs to sell and the value in use is determined as the estimated future cash flows generated by the asset discounted with a discount rate increased by the risk margin related to the given asset class. Impairment write-offs may be reversed only up to the carrying amount of an asset, which would be determined had there been no impairment write-off, taking account of accumulated amortization/depreciation. 4.8 Other components of the statement of financial position Deferred costs, accruals and deferred income Deferred costs (assets) relate to costs that would be charged to the income statement over time in future reporting periods. Deferred costs (assets) are disclosed as Other assets. Accruals (liabilities) comprise provisions for expenses in respect of goods or services rendered to the Group, which will be settled in future periods. The balances are disclosed in Other liabilities. Deferred income includes received advances and up-front fees that will be settled in future periods. They are disclosed as Other liabilities Provisions Provisions are recognized when the Group has an existing obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. If the Bank expects that the expenses covered by a provision are to be returned, for instance pursuant to an insurance agreement, the recovered value is recognized as a separate asset, but only when it is virtually certain that the return will take place. Expenses related to a given provision are charged to the income statement after deducting any returns. Where the effect of the time value of money is significant, the value of the provision is determined by discounting the projected future cash flows to the present value at the gross discount rate reflecting the current market valuations of the time value of money as well as potential risk related to a given liability Employee benefits Pursuant to the provisions of both the Labor Code and Employee Remuneration Rules and Regulations, the Bank's employees are entitled to retirement bonuses. The amount of the above benefit is paid on a one-off basis upon the employee s retirement or disability and depends on the employees years of service and their average remuneration. The Group creates provisions for future liabilities in respect of these benefits in order to match costs to the period to which they relate. In compliance with IAS 19, the retirement benefits constitute defined benefit plans applicable after the employment period. The present value of these liabilities at the end of each reporting period is calculated by an independent actuary. The accrued liabilities are equal to the discounted payments to be made in the future, taking account of staff rotation, and they relate to a given reporting period. Demographic data as well as information about staff rotation are based on historical data. According to the current rules on remunerating the Group s employees, the employees are not entitled to long-service bonuses Social assets and liabilities to the Company Social Fund In accordance with the relevant regulations, the Company Social Fund ( the Fund ) can be established by employers who have at least 20 full-time employees. In the case of smaller entities, the decision to create the fund is optional. The Group companies establish such a fund and make periodic contributions in the minimum required amount. The aim of the Fund is to finance social activities. The Fund balance represents the accumulated income of the fund net of non-reimbursable expenses. In the statement of financial position, the Fund s balance is presented net of the Fund s assets. 25/111

26 4.8.5 Other receivables and liabilities Idea Bank S.A. annual report Other receivables and liabilities are stated at cost, net of impairment losses. Where the effect of the time value of money is significant, the value of the receivables or liability is determined by discounting the estimated future cash flows to the present value at the gross discount rate reflecting the current market rate of return Leases Finance leases, which transfer to the Bank all the risks and benefits of ownership of the leased item, are recognized in the statement of financial position at the date of inception of the lease at the lower of the following two values: fair value of the leased asset or the present value of minimum lease payments. Lease payments are apportioned between the other operating expenses and reduction in the lease liability to achieve a fixed rate of interest on the remaining balance of the liability. Other operating expenses are recognized directly in the income statement. Property, plant and equipment acquired by the Bank under finance leases are depreciated over the term of the contract. Leases where the lessor retains all the risks and benefits of ownership of the asset are classified as operating leases. Lease payments under operating leases are recognized in the income statement on a straight-line basis over the lease term Cash and cash equivalents Cash and cash equivalents include cash in hand, cash on current accounts in the central bank and current accounts and overnight deposits in other banks Equity Equity includes capital and reserves created in accordance with the binding legal regulations and the Articles of Association. Equity consists of share capital, retained earnings (undistributed financial result) and other capital. Share capital Share capital is stated at the par value in accordance with the Articles of Association and entry in the register of businesses. Dividend for the financial year approved by the General Meeting, but not distributed at the end of the reporting period, is presented as Other liabilities in the statement of financial position. Retained earnings (undistributed financial result) Retained earnings are created as a portion of the financial result for the current and previous financial years not transferred to other capital or distributed to the shareholders. Other capital Other capital includes: supplementary capital created from net profit of up to 1/3 of the share capital, other reserves and revaluation reserve. Supplementary capital includes the transferred part of net profit and share premium less issue costs. Other reserves include distributions out of net profit and other sources and may be allocated exclusively to cover future balance sheet losses. This item also includes a general banking risk reserve which is created in accordance with the Banking Law of 29 August 1997 from distributions from net profit and allocated for the Bank s unidentified operating risk. 26/111

27 The revaluation reserve includes the effects of the revaluation of available-for-sale financial assets, the valuation of cash flow hedges and deferred tax in respect of the temporary differences presented in the revaluation reserve Contingent liabilities As part of its operational activity the Bank executes transactions which are not recognized in the statement of financial position as assets or liabilities but which result in contingent liabilities. A contingent liability is a possible obligation that arises as a result of past events, the existence of which will be established only by the occurrence or non-occurrence of one or more uncertain future events that cannot be wholly controlled by the Bank, a present obligation that arises from past events but is not recognized in the statement of financial position because it is not probable that an outflow of cash or other assets will be required to settle the obligation; or the amount of the liability cannot be measured with sufficient reliability. The Bank recorded provisions for off-balance sheet liabilities granted, including unused credit lines. The provision is set as the difference between the expected value of balance sheet exposure that will arise from the off-balance sheet liability and the present value of the estimated future cash flows from the balance sheet exposure arising from the liability given as at the impairment identification date. Financial guarantee contracts which are not classified as insurance contracts are initially recognized at fair value and subsequently measured at the higher of the two: the amount being the closest estimate of outlays necessary to meet the present obligation arising from the financial guarantee given the likelihood of its performance and the amount recognized upon initial recognition, adjusted by the settled commission received for giving the guarantee. 4.9 Financial result Net interest income Interest income and expenses generated by financial assets and liabilities are recognized in the income statement and calculated at amortized cost using the effective interest rate. The effective interest rate is the rate that discounts estimated future cash flows to the present net carrying amount over the maturity period or until the next market valuation of the financial asset or financial liability, and its determination includes all cash payments and flows paid or received by the Group as part of the given instrument, except for future possible credit losses. The settlement of interest coupons (according to the effective interest rate or straight-line method), fee and commissions as well as other costs related to financial instruments depend on the type of financial instrument. Financial instruments with a specified cash flow schedule are valued under the effective interest rate method. The effective interest rate cannot be calculated for financial instruments with an unspecified cash flow schedule and the fee and commissions are settled using the straight-line method. Disclosing particular types of fee/commissions settled over time in the income statement as interest or commission income as well as the need to settle them over time instead of as a one-off payment included in the profit or loss depends on the economic nature of the commission/fee. Fee/commissions settled over time include i.e. fees for accepting a loan application, loan granting commission, loan draw-down commission, additional security fee, etc. These payments are an integral part of the return generated by a particular financial instrument. This category also includes payments and expenses related to amendments in the agreement which result in an adjustment of the initial effective interest rate. 27/111

28 Net interest income includes also interest income from accrued and paid interest related to financial assets classified as available for sale, loans or advances to customers, lease receivables and other receivables Net fee and commission result Fee and commission income Fees and commissions charged to the income statement using the effective interest rate method are recognized as interest income. Fees and commissions which are not calculated using the effective interest rate method but settled over time using the straight-line method or recognized as one-off income are recognized in the income statement as fee and commission income. Commission expenses paid to dealers due to their sale of bank products are settled over the maturity period of the product while commission for sales of insurance is recognized similarly to the underlying revenue. Furthermore the Bank receives proceeds for financial intermediation in selling investment and insurance products. Revenues and the corresponding selling costs are disclosed in the period in which the product was sold in the income statement as commission income and expenses. In case of products for which the Bank carries out post-sales service, the relevant portion of the revenue is deferred and amortized using the straight line method throughout the life of the investment and insurance product. At the same time, the Bank creates provisions for returns of remuneration for premature termination of investment and insurance products Revenues and costs related to sale of insurance products linked to loans If insurance products are offered together with a loan product, the fees obtained by the Bank from the sale of the insurance product constitute an integral part of the remuneration for the offered financial instrument when the insurance product is directly linked to the financial instrument. In order to determine the method of recognizing transactions in the accounting books, the Bank determines the extent of direct linkage of the insurance product with the financial instrument, taking into account the economic substance of the transaction. The Bank applies the following approach to related transactions: - the remuneration received by or due to the Bank for an insurance product directly linked (without extraction of compound financial instrument) to financial assets (loans and advances to clients) measured at amortized cost is accounted for using the effective interest rate method and recognized in interest income. - the remuneration received by or due to the Bank for intermediation services which should be evaluated in terms of its economic substance should be recognized in commission income at the time the insurance product is sold or renewed with the exception of situations when an analysis of the direct linkage of the insurance product with the financial instrument results in the extraction of a compound product, i.e. separation of the fair value of the financial instrument offered and the fair value of the insurance product sold together with that instrument. In the above situation the transaction is split into elements to which income is allocated, and the remuneration due to the Group for the sale of the insurance product is divided between a portion constituting an element of the amortized cost of the financial instrument and a portion constituting remuneration for the intermediation services. The Group analyzes fair value of both the financing transaction and the insurance intermediation service and on this basis it divides the remuneration in proportion: of the fair value of the financial instrument and the fair value of the intermediation service to the sum of both those values 28/111

29 Furthermore part of the remuneration for the sale of insurance products is deferred in time in case the client terminates the agreement before the due date Other operating income and expenses Other operating income and expenses comprise costs and income not related directly to the Group s banking activities, in particular the result on sale or scrapping of property, plant and equipment, revenue from sales of other services, compensation, penalties and fines paid or received Dividend income Dividend income is recognized in the income statement at the time the shareholders rights to receive it are established Result on financial assets measured at fair value through profit or loss The result on financial instruments measured at fair value is determined by: measurement of financial liabilities classified at initial recognition as liabilities measured at fair value through profit or loss and valuation of derivative instruments at fair value Foreign exchanege gains (losses) Net FX result include gains and losses on foreign currency purchases and sales and foreign currency assets and liabilities denominated in foreign currencies, including: unrealized exchange gains arising from initial exchange of derivatives Income tax Current and prior period tax liabilities (or receivables) are measured at the amounts expected to be paid to the tax authorities (recoverable from tax authorities) using the tax rates and regulations in force at the reporting date. For the purpose of financial reporting, deferred tax is calculated using the liability method on all temporary differences at the end of the reporting period between the tax value of assets and liabilities and their carrying amount for financial reporting purposes. Deferred tax liability is recognized for all taxable temporary differences: except where the deferred tax provision arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or tax loss, and in the event of taxable temporary differences arising from investments in subsidiaries, associates and interests in joint ventures, except where the timing of reversal of the temporary differences can be controlled by the investor and it is probable that the temporary differences will not reverse in the foreseeable future Deferred tax assets are recognized for all deductible temporary differences as well as unused tax relief, and carried forward unused tax losses, to the extent that it is probable that taxable profit will be available against which the above differences, assets and losses can be utilized: except where the deferred tax assets related to deductible temporary differences arise from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or tax loss, and 29/111

30 in the case of deductible temporary differences related to investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognized in the statement of financial position to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized The carrying amount of a deferred tax asset is reviewed at the end of each reporting period, and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax asset to be recovered. An unrecognized deferred tax asset is reassessed at the end of each reporting period, and recognized to the extent that it has become probable that future taxable profit will allow the deferred tax to be recovered. Deferred tax assets and liabilities are measured using the tax rates which are expected to be applicable in the period when the asset or liability is realized, based on the tax rates (and tax regulations) enacted or substantively enacted at the end of the reporting period. The Bank offsets deferred tax assets and liabilities only when it has a legally enforceable right to set off current tax assets against liabilities, and when the deferred tax assets and liabilities relate to the same taxable entity and the same tax authority New standards and interpretations Amendments to existing standards applied for the first time in the Bank's financial for 2017: The following changes to existing standards and interpretation issued by the International Accounting Standards Board (IASB) and approved for use in the EU come into force for the first time in the Bank's financial for 2017: Amendments to IAS 7 "Statement of cash flows" - Initiative regarding disclosures - approved in the EU on 6 November 2017 (effective for annual periods beginning on 1 January or after that date). The above changes are primarily connected with the obligation of the entity preparing the financial to establish the opening balances and closing balances of individual liabilities presented in the statement of financial position, which qualify as financial activity in the statement of cash flows. In connection with the above change, the Bank disclosed in note 35 to these financial a disclosure regarding a change in liabilities arising from the issue of debt securities. Amendments to IAS 12 "Income tax" - Recognition of deferred income tax assets on unrealized losses - approved in the EU on 6 November 2017 (effective for annual periods beginning on 1 January 2017 or after that date). The above amendments to IAS 12 provide additional guidelines for the recognition of deferred tax assets from unrealized losses on debt instruments measured at fair value, i.e. in particular the standard confirms that a decrease below the cost in the carrying amount of fixed rate debt instruments valued at fair value, for which the tax base remains at the cost level, results in negative temporary differences, regardless of whether the holder of the instrument intends to maintain or sell it. In the Bank's opinion, the changes have no material impact on the financial. New standards and changes to existing standards already issued by the IASB and approved by the EU, but not yet effective. By approving these financial, the following new standards have been issued by the IASB and approved for use in the EU, but have not yet entered: IFRS 9 "Financial Instruments" approved in the EU on 22 November 2016 (effective for annual periods beginning on 1 January 2018 or after that date) - the description regarding IFRS 9 is presented below. 30/111

31 The IFRS 9 "Financial Instruments" was published by the International Accounting Standards Board on 24 July 2014, and approved for use in EU member states by the European Commission Regulation No. 2016/2067/ EU of 22 November The standard is mandatory for financial drawn up for financial periods beginning on and after 01/01/2018 except for insurance companies that may apply the standard from 1 January IFRS 9 replaces IAS 39 "Financial instruments: recognition and measurement". However, it allows reporting entities to be able to stick to the provisions regarding hedge accounting under IAS 39. IFRS 9 introduces changes affecting the following areas of the accounting principles applied to financial instruments: 1) classification and valuation of financial instruments, 2) impairment of financial instruments, 3) hedge accounting. The Bank's work regarding the implementation of IFRS 9 took place in 2016 and 2017 with the involvement of business departments and those responsible for accounting, reporting and credit risk areas.the first phase of the project was mainly aimed at identifying the differences between IAS 39 and IFRS 9 and defining the activities that must be performed on the Bank's side to meet the requirements imposed by IFRS 9. The main part of the work carried out in 2017 concerned changes in the rules and methodology of calculating impairment losses and concerned mainly the development of models for determining write-downs based on the concept of expected losses, including in particular defining the definition of significant risk increase, rules for classifying financial instruments to the category and impact of macroeconomic scenarios included in individual risk parameters. Classification and valuation With reference to the part of IFRS 9 regarding classification and valuation, the Bank analyzed its operations to determine business models. The Bank determines the business model in such a way that it reflects the manner in which the groups of financial assets are managed jointly to achieve a specific business goal. Making the above analysis the Bank takes into account in particular: 1) the method of assessing the effectiveness of a given asset, i.e. determining whether the Bank is expected to obtain specific cash flows resulting from the agreement, or whether the Bank's objective is to achieve a specific level of return on assets through various types of activities, in particular sales, 2) the types of risk and the manner of managing these risks in relation to a given group of assets, 3) assessment of how the managers of a given activity are remunerated, i.e. in particular determining whether their remuneration is based on the fair value of assets under management or on the value of cash flows resulting from the contract), and 4) the reporting method, i.e. how the results of the business model and financial assets held under this business model are assessed and reported to the key management personnel of the Bank. In addition, in relation to financial assets that are classified to the business model assuming the maintenance of assets in order to obtain cash flows under the contract, without affecting the current model, the Bank additionally applies an analysis of quantitative criteria taking into account in particular the following cases: - sales resulting from an increase in credit risk related to assets, - sales that are not frequent (even if of significant value), - sales of insignificant value (even if it is frequent), - sales of assets for liquidity purposes in extreme conditions, - sales that are forced by third parties, e.g. cases of assets being sold due to the requirements of supervisory authorities, despite the fact that they were originally maintained in order to obtain contractual cash flows, - sales of assets if the concentration limits set in internal procedures are exceeded, as part of the credit risk management policy, - sales close to the maturity of financial assets. Based on the above principles, the Bank assessed business models and based on the conducted analysis determined the following business models: 1) keeping assets in order to obtain cash flows resulting from the contract - to this group the Bank classifies all credit receivables, purchased debts and corporate bonds, 31/111

32 2) maintaining assets for the purpose of both obtaining cash flows from the contract and for the sale of these assets - this group is primarily classified by the Bank with government bonds and bills, 3) maintaining assets for other purposes (i.e. a different business model), which mainly includes derivative instruments. Contractual cash flow test IFRS imposes requirements regarding contractual characteristics of cash flows of a given financial instrument, which determine the method of valuation of a given financial instrument, i.e. only contracts whose contractual cash flows include contract capital (principal amount) and contractual interest, meet the contractual cash flow test requirements and can be measured at amortized cost in the case of financial assets classified to the business model whose purpose is to maintain assets to obtain cash flows resulting from the contract or at fair value through other comprehensive income in the case of financial assets classified to the business model, the purpose of which is to obtain cash flows arising from contracts and the sale of financial assets. Financial assets that do not meet the contractual cash flow test are measured at fair value through profit or loss irrespective of the business model. Identified changes in classification and valuation In order to ensure compliance of the principles of classification and measurement of financial instruments held by the Bank with the requirements of IFRS 9 as at 31 December 2017, the Bank performed analysis of its financial assets, in particular consisting of: 1) defining the business model used in the Bank, and then assigning individual financial assets to individual business models in such a way as to take into account the method of managing these assets, reporting the results and risks associated with a given group of financial assets, 2) analyzing the contractual provisions of individual financial assets in order to determine whether the terms of these financial assets meet the criteria of IFRS 9 in the scope of payment of capital and interest through contractual cash flows resulting from financial assets; 3) assessment - regarding financial assets for which the interest rate of a financial asset is periodically updated, but the frequency of such an update does not correspond to interest rate terms or when the interest rate of the financial asset is updated periodically when the change in the actual interest rate level is more than the set minimum level - whether the cash flows resulting from the contract constitute only repayment of the principal and interest on the principal amount to be repaid by carrying out the so-called benchmark test. The Bank recognized the portfolio of financial assets whose interest rate structure is based on a multiplier greater than one in amortized cost. Considering the ongoing discussions in the area of classification and measurement of financial instruments containing a multiplier larger than one in constructing the contractual interest rate, this approach may change in the future, which could be related to the exercise of the credit card portfolio valuation at fair value through the financial result. As at 31 December 2017, the Bank had a portfolio of credit cards with a carrying value of PLN million, and its estimated fair value as at that date was PLN million. As a result of the work carried out, the Bank decided that financial assets and liabilities will continue to be valued in accordance with the current principles set out in IAS 39 - at amortized cost or fair value through profit or loss. IFRS 9 introduces a definition of the gross carrying amount of a financial asset. The change results in a difference in the calculation of the gross value of financial assets classified in Basket 3 in relation to the previously applicable rules. 32/111

33 From 1 January 2018, interest (including penalty interest accrued on the gross value of the exposure) is recorded in gross (balance sheet) value. For the purpose of the profit and loss account, interest income on financial assets classified in Basket 3 is calculated on the net value of the exposure. Comparative data IFRS 9 introduces a number of significant changes in the presentation method and the scope of disclosures, including the first year of its application, to enable the user of the financial statement to understand the impact of IFRS 9 on the classification and measurement and impairment of financial assets and on the property and financial position and financial performance of the Bank. The Bank decided to follow the provisions of IFRS 9 allowing exemption from the obligation to restate comparative data for prior periods in relation to changes resulting from classification and measurement as well as impairment. Any differences in the carrying amount of financial assets and liabilities resulting from the application of IFRS 9 were recognized as part of the result from previous years in equity as at 1 January Hedge accounting IFRS 9 increases the scope of items that can be designated as hedged items, and enables the designation of financial assets or liabilities measured at fair value through profit or loss to a hedging instrument. In addition, the Standard eliminates the obligation to retrospectively measure the effectiveness of collateral while abolishing the pre-existing range of %, and the condition of applying hedge accounting is to be the economic relationship between the hedging instrument and the hedged item. In addition, the scope of disclosures regarding risk management strategies, cash flows resulting from hedging transactions and the impact of hedge accounting on the financial are increased. The bank using the provisions of par IFRS 9 has decided to apply the requirements of hedge accounting and hedging relationships under IAS 39. Impairment of credit exposures In connection with the introduction of IFRS 9, there has been a change in the estimation of impairment losses on credit exposures. The loss-based concept underlying IAS 39 has been replaced by an approach based on expected losses. The method of estimating the write-down for expected credit losses depends on the change in the level of risk that occurred from the initial recognition. The new standard defines three stages / baskets for credit loss recognition: a) Stage 1 - exposures which at the balance sheet date do not meet the criterion of a significant increase in credit risk and there is no indication of impairment in relation to them. For such exposures, a write-down for expected credit losses is set in a 12-month horizon. b) Stage 2 - exposures which meet the criterion of a significant increase in credit risk at the given balance sheet date and there is no indication of impairment in relation to them. For such exposures, a write-down for expected credit losses is determined in the exposure s lifetime horizon. c) Stage 3 - exposures for which at least one indication of impairment occurred at the balance sheet date. For such exposures, a write-down for expected credit losses is determined in the exposure s lifetime horizon. In addition, for the POCI (purchased or originated credit impaired) exposure, a write-off for expected credit losses is determined in the exposure s lifetime horizon. Identification of a significant increase in credit risk is based on qualitative and quantitative criteria, which include: - a delay in repayment exceeding 30 days, - placing the customer on the Watch List, - identification of negative signals based on reports of the Credit Information Bureau. In order to estimate write-downs due to expected credit losses, Idea Bank uses its own estimates of risk parameters based on developed internal models that have been modified for the need to adapt to IFRS 9, including the field of estimating parameters throughout the exposures lifetime horizon. The expected credit losses were defined as the product of EAD decreased by the value of collateral as well as PD and LGD. The final value of expected losses is the sum of expected losses in particular periods (within 12 months or in the lifetime horizon of credit exposure) discounted with the effective interest rate. 33/111

34 The bank's internal models used for the needs of IFRS 9 were built in accordance with the principles of the standard and are subject to the model management process. The table below presents the impact of the change in the classification of financial instruments at the time of implementation of IFRS 9: Financial assets Classification according to IAS 39 Classification according to IFRS 9 Carrying amount in accordance with IAS 39 change in value resulting from: change in change in classification valuation Carrying amount in accordance with IFRS 9 as at 01/01/2018 Total impact of change in value on assets / liabilities Impact on retained earnings Cash and balances with Central Bank Loans and receivables Valuation at amortized cost Receivables from banks and financial institutions Loans and receivables Valuation at amortized cost Derivative financial instruments Financial assets valued at fair value through profit or loss Valuation at fair value through profit or loss Amounts due from clients Loans and receivables Valuation at amortized cost Available-for-sale financial assets - debt instruments Available-for-sale financial assets - capital instruments Available-for-sale financial assets Available-for-sale financial assets Valuation at fair value through other comprehensive income Valuation at fair value through other comprehensive income Deferred tax assets Other loans and receivables Loans and receivables Valuation at amortized cost Financial liabilities Classification according to IAS 39 Classification according to IFRS 9 Carrying amount in accordance with IAS 39 change in value resulting from: change in change in classification valuation Carrying amount in accordance with IFRS 9 as at 01/01/2018 Total impact of change in value on assets / liabilities Impact on retained earnings Amounts due to other banks and financial institutions Financial liablities valued at amortized cost Valuation at amortized cost Amounts due to clients Financial liablities valued at amortized cost Valuation at amortized cost Debt securities in issue Financial liablities valued at amortized cost Valuation at amortized cost Provisions /111

35 Impact of IFRS 9 on capital adequacy Idea Bank S.A. annual report On 12 December 2017, the European Parliament and the EU Council adopted Regulation No. 2017/2395 amending Regulation (EU) No 575/2013 regarding transitional arrangements to mitigate the impact of the introduction of IFRS 9 on own funds and on the treatment of large exposures of certain exposures to public sector entities denominated in the national currency of any Member State. This Regulation entered into force on the day following its publication in the Official Journal of the European Union and has been applicable since 1 January The European Parliament and the Council (EU) considered that the application of IFRS 9 could lead to a sudden increase in write-offs for expected credit losses, and hence, the fall in Tier 1 capital. According to the Regulation on amortization of the impact of IFRS 9 on Tier 1, where an institution s opening balance sheet on the day that it first applies IFRS 9 reflects a decrease in Common Equity Tier 1 capital as a result of increased expected credit loss provisions, including the loss allowance for lifetime expected credit losses for financial assets that are credit-impaired, compared to the closing balance sheet on the previous day, the institution should be allowed to include in its Common Equity Tier 1 capital a portion of the increased expected credit loss provisions for a transitional period. That transitional period should have a maximum duration of 5 years and should start in The portion of expected credit loss provisions that can be included in Common Equity Tier 1 capital should decrease over time down to zero to ensure the full implementation of IFRS 9 on the day immediately after the end of the transitional period. After analyzing the requirements of Regulation No. 2017/2395, the Bank decided to apply the transitional provisions provided for by the abovementioned Regulation, ie. for the purpose of determining the Bank's capital adequacy, the full impact of the implementation of IFRS 9 will not be taken into account. As a result of including the transitional solutions resulting from the Regulation in the calculation of the Bank's capital adequacy, the Tier 1 capital ratio and the Bank's total capital ratio decreased by 35 basis points. As a result of the application of IFRS 9, as described above, the value of own funds and capital ratios of the Bank decreased. IFRS 15 "Revenues from contracts with customers" and amendments to IFRS 15 "Date of entry into force of IFRS 15" - approved in the EU on 22 September 2016 (effective for annual periods beginning on 1 January 2018 or after that date) IFRS 15 introduces new principles of revenue recognition replacing the existing guidelines resulting from IAS 18. The basic principle of the new standard is the recognition of revenue in such a way as to reflect the transfer of promised goods or services in an amount reflecting the value of remuneration, which the company expects to have the right to in exchange for these goods or services. The scope of the standard excludes financial instruments (IAS 39 / IFRS 9), insurance contracts (IFRS 4) and leasing (IFRS 16), so in the Bank's assessment, the application of the standard will have no significant impact on the financial. IFRS 15 replaced previous revenue recognition models resulting from IAS 18 with a 5-step revenue recognition model, common to all types of transactions, for all enterprises and industries. This model can be applied in two ways, depending on how the obligation to perform is fulfilled: filled in time, completed once. From the point of view of IFRS 15, it is crucial to recognize revenue in the context of the transfer of assets to the client, in a value reflecting the price expected by the Bank in exchange for the transfer of these assets. Thus, the moment of transferring the "risk and benefits" is no longer the basic criterion of revenue recognition as it was in IAS 18. The definition of income in accordance with IFRS 15 is determined by the moment of fulfillment of the obligation to perform the service. On the other hand, it is expected that most often this will coincide with the transfer of risks and rewards in the meaning of IAS /111

36 The 5-stage revenue recognition model resulting from IFRS 15 is as follows: Step 1: Identification of the contract with the client In accordance with IFRS 15, in principle, a contract is a contract between two or more parties that gives rise to enforceable rights and obligations. The Bank recognizes a contract with a client falling within the scope of IFRS 15 only if all of the following criteria are met: the parties to the contract have a contract and are required to perform their duties, the Bank is able to identify the rights of each party regarding assets, the Bank is able to identify the payment terms for assets, the contract has economic content as well, it is probable that the Bank will receive remuneration, which it will be entitled to, in return for the assets that will be transferred to the client. In order to assess whether the receipt of the amount of remuneration is probable, the Bank only considers the ability and intention to pay the amount of remuneration by the client in a timely manner. The bank combines two or more contracts that were concluded simultaneously or almost concurrently with the same client (or entities related to the client), and they are recognized as one contract if at least one of the following criteria is met: contracts are negotiated as a package and concern the same commercial purpose, the amount of remuneration due under one contract depends on the price or performance of another contract or assets promised in the agreements constitute a single obligation to perform the service. Step 2: Identification of individual obligations to perform benefits under the contract. At this stage it is necessary to distinguish the performance obligations arising from the contract, i.e. assets that are independent of each other. A given asset is independent if the customer can use the asset separately or in connection with other resources that are easily available to him and at the same time the asset is not dependent or related to another asset under the same contract, then the Bank has to deal with separate assets obligations to provide. Step 3: Determining the transaction price In accordance with IFRS 15, the transaction price is the remuneration that is expected by the Bank to receive (rights) in exchange for the transfer of promised assets. This reflects the amount of revenue that will be recognized for the performance of the contract. The transaction price should include in addition to the amount of remuneration also the element of highly probable variable remuneration (including bonuses, penalties), the discounting factor, amounts paid to the client or non-cash remuneration. Step 4: Allocation of the transaction price to individual service obligations Due to the fact that individual service obligations can be recognized at different times and in different ways (once or in time) in the case of contracts containing several components of services/ assets provided, it is necessary to allocate the transaction price for the identified performance obligations. The allocation should be based on unit sales prices. Step 5: Recognition of revenue at the time of performance of the contractual obligation. Revenue is recognized when the assets are transferred to the client / the service is performed and it obtains control over the subject of the contract in accordance with IFRS 15. Implementation status In 2017, the Bank analyzed the impact of implementing a 5-step revenue recognition model. 36/111

37 The Bank decided to apply the portfolio approach to the analysis of contracts with clients resulting from IFRS considering that, given the nature of these contracts, their analysis of the portfolio will not result in a significantly different result than if it were carried out separately for each individual contract. As a result, the Bank did not identify any significant categories of income or expenses whose recognition would have to change as a result of the entry into force of IFRS 15. Impact of IFRS 15 on the financial position and own funds Considering the above, the Bank acknowledges that the impact of the implementation of IFRS 15 on the financial position and own funds of the Bank is not material. IFRS 16 "Leasing" - approved in the EU on 31 October 2017 (effective for annual periods beginning on 1 January 2019 or after that date). IFRS 16 introduces new principles of leasing recognition primarily by eliminating the division into operating and financial leasing used so far. According to the new standard, in the case of virtually any contract that meets the definition of leasing, with the exception of contracts of less than 12 months and regarding assets of low value, the lessee will be required to recognize the "right to use the asset" in the balance sheet and pay rentals. In addition, the lessee in his profit and loss account will be required to recognize the cost of depreciation of the leased asset separately from the leasing interest cost. With regard to the lessor, this standard should not have a material impact on the accounting treatment applied so far, i.e. the lessor will continue to recognize two types of lease separately, depending on the nature of the lease. The Bank believes that the application of the abovementioned standard will not have a material impact on the recognition of financial leasing agreements applied by the Bank in the financial of the Bank. In addition, the Bank estimates that the entry into force of the abovementioned standard will have an impact on the recognition, presentation, measurement and disclosures regarding assets and liabilities resulting from operating lease agreements in which the Bank acts as a lessee. The Bank is in the process of estimating the impact of the above changes. Amendments to IFRS 4 "Insurance Contracts" - Application of IFRS 9 "Financial Instruments" together with IFRS 4 "Insurance Instruments" - approved by the EU on 3 November 2017 (effective for annual periods beginning on or after 1 January 2018 or at the time of application of IFRS 9 "Financial Instruments" for the first time), Amendments to IFRS 15 "Revenue from contracts with customers" - Explanations to IFRS 15 "Revenue from contracts with customers" - approved by the EU on 31 October 2017 (effective for annual periods beginning on 1 January 2018 or after that date). New standards and changes to existing standards issued by the IASB, but not yet approved for use in the EU. IFRS in the form approved by the EU does not differ significantly from the regulations issued by the International Accounting Standards Board (IASB), except for the following new standards, amendments to standards and new interpretation, which as at February 28, 2017 have not yet been approved for use in the EU (the following dates of entry into force refer to the full version): IFRS 14 "Deferred Balances from Regulated Activities" (effective for annual periods beginning on or after 1 January 2016) - The European Commission has decided not to start the process of approving this temporary standard for use in the EU until the final version of IFRS 14 IFRS 17 "Insurance Contracts" (effective for annual periods beginning on 1 January 2021 or after that date), 37/111

38 Amendments to IFRS 2 "Payments based on shares" - classification and valuation of payments based on shares (effective for annual periods beginning on 1 January 2018 or after that date), Amendments to IFRS 9 "Financial Instruments" - Characteristics of the prepayment option with negative offset (effective for annual periods beginning on 1 January 2019 or after that date), Amendments to IFRS 10 "Consolidated Financial Statements" and IAS 28 "Investments in Associates and Joint Ventures" - Sale or transfer of assets between an investor and its associate or joint venture and subsequent changes (date of entry into force of amendments has been postponed until completion of research works on the equity method), Amendments to IAS 28 "Investments in associates and joint ventures" - Long-term shares in associates and joint ventures (effective for annual periods beginning on 1 January 2019 or after that date). Amendments to IAS 40 "Investment Property" - Investment property transfers (effective for annual periods beginning on 1 January 2018 or later), Amendments to various standards "Amendments to IFRS (cycle )" - changes made as part of the procedure of introducing annual amendments to IFRS (IFRS 1, IFRS 12 and IAS 28) mainly focused on solving incompatibilities and clarifying vocabulary (amendments to IFRS 12 they are effective for annual periods beginning on or after 1 January 2017, and amendments to IFRS 1 and IAS 28 are effective for annual periods beginning on 1 January 2018 or after that date). The amendments contain explanations and changes regarding the scope of standards, recognition and measurement, as well as terminology and editorial changes. In the Bank's opinion, the changes will not have a material impact on the financial. Amendments to various standards "Amendments to IFRS (cycle )" - changes made as part of the process of introducing annual amendments to IFRS (IFRS 3, IFRS 11, IAS 12 and IAS 23) mainly focused on solving incompatibilities and clarifying vocabulary (applicable for annual periods beginning on 1 January 2019 or after that date), IFRIC 22 "Foreign Currency Transactions and Prepayments" (effective for annual periods beginning on 1 January 2018 or after that date), Interpretation of IFRIC 23 "Uncertainty in income tax settlement" (effective for annual periods beginning on 1 January 2019 or after that date). According to the Bank's estimates, the aforementioned new standards and amendments to existing standards (except for IFRS 9 and IFRS 16) would not have a significant impact on the financial if applied by the Bank as at the balance sheet date Fair value of assets and liabilities Fair value is understood as the price that can be obtained for the sale of an asset on the valuation date or it can be paid for the transfer of a liability in a regular transaction between market participants. The fair value measurement is based on the assumption that the transaction of sale of an asset or liability transfer takes place either on the main market for a given asset or liability, or in the absence of the main market, on the most advantageous market for a given asset or liability. The fair value of an asset or liability is measured assuming that market participants when determining the price of an asset or liability act in their best economic interest. 38/111

39 A fair value measurement of a non-financial asset takes into account a market participant s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Bank uses valuation techniques that are appropriate to the circumstances and for which sufficient data is available to measure fair value, with the maximum use of appropriate observable input data and the minimum use of unobservable input data. All assets and liabilities that are measured at fair value or their fair value is disclosed in the financial are classified in the fair value hierarchy based on the lowest level of input data which is significant for the fair value measurement treated as a whole. At each balance sheet date, the Bank assesses whether there have been transfers between levels of the hierarchy by reassessing the classification to individual levels, guided by the relevance of the input data from the lowest level, which is significant for the fair value measurement treated as a whole. Independent experts are engaged to carry out the valuation of significant assets such as investment properties at each balance sheet date. For the purpose of disclosing the results of fair value measurement, the Bank determined the classes of assets and liabilities based on the type, characteristics and risks associated with individual components of assets and liabilities and the level in the fair value hierarchy, as described above. Amounts due from banks and financial institutions Deposits placed on the interbank market are short-term deposits with maturity up to three months. For this reason, it is estimated that the fair value of amounts due from banks does not significantly differ from their carrying amount. Receivables of over three months are measured at fair value using the discounted cash flow method taking into account information available on the loan margin for a given business partner. Loans, advances and lease receivables The fair value was calculated for loans with a fixed payment schedule. For contracts where such payments have not been defined (e.g. overdrafts) it is estimated that the fair value is equal to the carrying amount (fair value does not significantly differ from the carrying amount). A similar assumption is accepted for due payments and contracts classified as impaired. In order to calculate the fair value, based on the information stored in the transaction systems, for each contract a schedule of principal and interest cash flows is identified. For fixed interest contracts, the contract flow schedule available in the given transaction system is used. For variable interest contracts a contract schedule is generated based on the current interest and forward rates (for contract currency and interest index) for subsequent interest periods. The cash flow so established has been discounted using interest rates to accordingly the contract currency taking into account current margins of residual contract maturity. Comparison of the sum of discounted cash flows attributable to a given contract with its book value allows determining the differences between the fair value and the carrying amount. The identification of the relevant discount rate is based on the currency of the contract, the product type and cash flow date. Amounts due to banks and financial institutions Because most liabilities to banks and financial institutions represent short-term liabilities (up to one month), it is estimated that the fair value of these liabilities does not significantly differ from their carrying amount. For amounts due to banks and financial institutions above one month and non-current liabilities, the Group has made a measurement to fair value based on the discounted cash flow method taking into account the information available on the margin received on deposits run. 39/111

40 Amounts due to clients Fair value is calculated only for fixed rate deposits with a fixed maturity. It is estimated that fair value of current deposits is equal to their carrying amount. In order to calculate the fair value based on data from the transaction systems future, cash flows of principal and interest are determined. Thus calculated, future cash flows are grouped by currency, the original maturity, the product type and date of cash flows. The calculated cash flows are discounted with the interest rate constructed as the sum of the market interest rate for the currency and margins received on deposits run. The discounted value calculated as mentioned above is compared to the carrying amount. As a result, the difference between the carrying amount and the fair value of the relevant portfolio of contracts is calculated. Liabilities from issue of debt securities The fair value of the bonds was calculated according to the rules applied with respect to the fair value measurement of liabilities to clients. As at 31 December 2017 Assets: Financial assets and liabilities as at 31 December 2017 Carrying amount Fair value Fair value less carrying amount Cash and balances w ith Central Bank Receivables from banks and financial institutions Derivative financial instrument at fair value through profit or loss Derivative hedging instruments Amounts due from clients Available-for-sale financial assets Other loans and receivables Liabilities: Amounts due to other banks and financial institutions Derivative financial instrument at fair value through profit or loss Financial liabilities measured at fair value through profit or loss Amounts due to clients Debt securities in issue As at 31 December 2016 Financial assets and liabilities as at 31 December 2016 Carrying amount Fair value Fair value less carrying amount Assets: Cash and balances w ith Central Bank Receivables from banks and financial institutions Derivative financial instrument at fair value through profit or loss Derivative hedging instruments Amounts due from clients Available-for-sale financial assets Other loans and receivables Liabilities: Amounts due to other banks and financial institutions Derivatve hedging instruments Derivative financial instrument at fair value through profit or loss Financial liabilities measured at fair value through profit or loss Amounts due to clients Debt securities in issue /111

41 The Bank classifies individual assets and liabilities measured at fair value using the following hierarchy: Level 1 Assets and liabilities are valued based on market quotations available on active markets. Level 2 Financial assets and financial liabilities whose fair value is measured using valuation techniques based on inputs, which can be directly (as a price) or indirectly (based on prices) observed. In this category the Bank classifies financial instruments for which there is no active market. L.p. Description Valuation method Inputs 1 Central bank bills Discounted cash flow WIBOR on 1D to 1Y method Depo, FRA and IRS quotations Discounted cash flow WIBOR from 1D to 1Y 2 IRS method EURIBOR from 1D to 1Y MOSPRIME from 1D to 6M Depo, FRA and IRS quotations 3 CIRS 4 FX SWAP Discounted cash flow method Discounted cash flow method Average NBP exchange rate WIBOR from 1D to 1Y EURIBOR from 1D to 1Y MOSPRIME from 1D to 6M Depo, FRA and IRS quotations SWAP points, CCS quotations Average NBP exchange rate WIBOR from 1D to 1Y EURIBOR from 1D to 1Y MOSPRIME from 1D to 6M Depo, FRA and IRS quotations SWAP points, CCS quotations Level 3 Financial assets and financial liabilities whose fair value is measured using valuation techniques based on inputs, which cannot be directly observed. Structured Deposits are complex financial instruments containing a debt instrument and an embedded derivative. The debt instrument is the Bank s obligation to return the denomination on the deposit maturity date zero-coupon instrument (term deposit) with a denomination equal to the amount of payment guaranteed by the Bank. The embedded derivative is an option acquired by the Bank s client and issued by the Bank giving the client the right to additional payment set based on a change in the value of the base instrument. The fair value of the debt instrument deposited with Idea Bank is calculated based on a valuation method taking into account the following factors: the risk-free rate determined on the basis of the market-based IRS/ FRA for the period closest to the maturity date of the debt instrument credit spread determined as the weighted average of the difference between the risk-free rate and the cost of acquiring deposits from the Bank s retail clients acquired within the last 6 months (for the funds covered by the BGF guarantee) and the current value of CDS quotes for the class consistent with the hypothetical rating of the Bank (for funds not covered by the BGF guarantee) Liquidity margin reflecting the Bank's cost of acquiring liquidity in the money market The Bank also uses the following volatilities for measurements of fair value. No. Name of Structured Deposit Model Volatility 1 Globalna perspektywa Option model Noble Funds Global Perspecive Index 9,00% 2 Top Giganci Option model Adidas AG 20,14% Hyundai Motor Co 27,17% 41/111

42 MCDONALD'S CORP 13,57% Sony Corporation 24,92% THE COCA-COLA CO 10,41% 3 Absolute Selection Option model NXSRSAF Index 4,50% 4 Lokata Indywidualna 01 Option model S&P 500 9,15% 5 Lokata Indywidualna 02 Option model WIBOR 3M 0,80% FIXNBP EUR/PLN 3,70% 6 Lokata Indywidualna 03 Option model S&P 500 9,15% Samsung Electronics CO LTD 23,25% Intel Corp 17,27% 7 Liderzy Technologii Option model CISCO SUSTEMS INC 15,82% LG ELECTRONICS 35,48% FUJIFILM HOLDINGS 17,81% HITACHI LTD 21,44% 8 Total Perspective Option model Altus Total Perspective 10,00% Facebook, Inc 27,05% Amazon.com, Inc. 15,22% 9 e-rentier2 Option model Netflix, Inc. 30,67% ebay, Inc. 99,26% Yahoo! Inc. 28,67% Facebook, Inc 27,05% Amazon.com, Inc. 15,22% 10 e-rentier 18M Option model Netflix, Inc. 30,67% ebay, Inc. 99,26% Apple Inc. 25,33% Facebook, Inc 27,05% Amazon.com, Inc. 15,22% 11 e-rentier 30M Option model Netflix, Inc. 30,67% ebay, Inc. 99,26% Apple Inc. 25,33% Hasbro Inc 34,56% Mattel Inc 77,31% 12 KIDS1 Option model Danone SA 12,04% Nestle SA 12,34% 21st Century Fox Inc 39,89% The Walt Disney Co 20,03% Hasbro Inc 34,56% Mattel Inc 77,31% 13 KIDS2 Option model Danone SA 12,04% Nestle SA 12,34% 21st Century Fox Inc 39,89% The Walt Disney Co 20,03% 14 KIDS3 Option model Electronic Arts Inc 26,48% 42/111

43 Microsoft Corp 65,40% Danone SA 12,04% Nestle SA 12,34% 21st Century Fox Inc 39,89% The Walt Disney Co 20,03% 15 Momentum V Option model NXS Momentum Fund Stars ER 3,50% 16 Momentum VI Option model NXS Momentum Fund Stars ER 3,50% 17 Optimum Funds Option model NXS Momentum Fund Stars ER 3,50% 18 Optimum Funds 140% Option model NXS Momentum Fund Stars ER 3,50% Alphabet Inc 16,23% 19 AAA Option model Amazon.com, Inc. 21,71% Apple Inc. 18,06% Alphabet Inc 16,23% 20 AAA 12M Option model Amazon.com, Inc. 21,71% Apple Inc. 18,06% 21 Best Funds Option model Best Select Fund Index 2,85% 22 Elite Funds Option model NXS Elite Funds Selection Index 2,13% 23 Elite Funds Go! Option model NXS Elite Funds Selection Index 2,13% The carrying amount of assets and liabilities measured at fair value as at 31 December 2017 per individual measurement levels: Level 1 Level 2 Level 3 Total Assets Derivative financial instrument at fair value through profit or loss Derivative hedging instruments Available-for-sale financial assets Liabilities Derivative financial instrument at fair value through profit or loss Financial liabilities measured at fair value through profit or loss The carrying amount of assets and liabilities measured at fair value as at 31 December 2016 per individual measurement levels: Level 1 Level 2 Level 3 Total Assets Derivative financial instrument at fair value through profit or loss Derivative hedging instruments Available-for-sale financial assets Investment Property Liabilities Derivative hedging instruments Derivative financial instrument at fair value through profit or loss Financial liabilities measured at fair value through profit or loss The Bank did not make any changes in the fair value level classification of assets and liabilities in 2017 and /111

44 5. Capital management Idea Bank S.A. annual report The Bank's capital adequacy management is aimed at maintaining the Bank's funds at a level not lower than the established supervisory requirements, including all superimposed buffers. According to the CRR Regulation and the Macro-prudential Supervision Act, financial institutions are required to maintain additional capital buffers above the minimum levels specified in the CRR Regulation. Buffers must be covered with Tier 1 capital. 1. Security buffer that applies to all banks. According to the CRR Regulation, starting from 2016, the buffer will be increased to a final, constant level of 2.5% (in 2019). The security buffer ratio was 1.25% as at 31 December Countercyclical buffers will be imposed to limit systemic risk resulting from the economic (business) cycle. It can be introduced e.g. during periods of excessive credit growth and resolved when it slows down. The anti-cyclical buffer was 0% as at 31 December Systemic risk buffer, the role of which is to prevent and reduce long-term non-cyclical or macro-prudential risk, which may have a strong negative impact on the financial system and economy of the country. The systemic risk buffer ratio was 0% as at 31 December Systemic institution buffer - an additional requirement for institutions that can create systemic risk. The Bank was not recognized as a systematic global institution, in accordance with Art. 131 of Directive 2013/36 / EU and has not imposed on the Bank the requirement to keep the buffer of other systemically important institutions. The Bank has a security buffer of 1.25% from 1 January The macro-prudential oversight act on the financial system and crisis management in the financial system indicated that the minister competent for financial institutions (Minister of Finance) acts as the designated authority and is authorized to determine by regulation: the height of the countercyclical buffer index and the recognition of the countercyclical buffer rate for another Member State or third country, the height of the systemic risk buffer ratio and the recognition of the systemic risk buffer ratio for another Member State. In the Ordinance of the Minister of Development and Finance of 1 September 2017 regarding the system buffer, the systemic risk buffer rate was set at 3% of the total risk exposure amount calculated in accordance with Art. 92 par. 3 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment companies, amending Regulation (EU) No. 648/2012 (Official Journal of the European Union L 176 of , page 1, with later amendments 2), on an individual and consolidated basis. Systemic risk buffer applies to all exposures located exclusively within the territory of the Republic of Poland. The systemic risk buffer applies from 1 January On the other hand, the Polish Financial Supervision Authority is empowered to issue an administrative decision after obtaining the opinion of the Financial Stability Committee on: determining on a consolidated basis global systemic importance institutions and assign them to a specific category and designate them a global buffer of institutions of systemic importance identifying, on an individual, sub-consolidated or consolidated basis other than global systemic institutions, and impose a buffer on another institution of systemic importance The Polish Financial Supervision Authority on 19 December 2017 changed in part the administrative decision regarding the "Identification of other systemically important institutions" issued on November 14, Idea Bank S.A. according to the published list, is not identified as another institution of systemic significance. Thus, the Bank is not subject to an additional requirement for institutions that may create systemic risk. The main measures of capital adequacy for Idea Bank S.A. in 2017 were as follows: 1. Total capital ratio (TCR) for which, in accordance with the above-mentioned requirements, the minimum level is 13.25%, 2. Tier 1 capital ratio, for which the minimum level is 10.25%, 44/111

45 3. Common Equity Tier 1 (CET1) ratio, with a minimum level of 5.75%, 4. the ratio of own funds to internal capital (internal capital must be entirely covered by own funds), 5. financial leverage ratio Capital Requirements (Pillar I) The Bank applies the methods resulting from the CRR Regulation as part of setting the total capital requirement for regulatory capital, including in particular: Standard method for calculating capital requirement for credit risk Simplified collateral technique where the counterparty risk weight is replaced by the security risk weight (its issuer) Standard method for calculating the capital requirement for operational risk Standard method for the risk of credit adjustment The basic method for calculating the capital requirement for currency risk The maturity method for calculating the capital requirement for general interest rate risk Due to the insignificant scale of trading activity, the capital requirement for the Bank for market risk was PLN This means that in the analyzed period, the Bank had capital requirement solely for credit risk, operational risk and credit risk adjustment (as at 31 December 2017, the correction amounted to PLN 4,972.6 thousand). The total capital ratio, calculated in accordance with CRR / CRD IV, was 14.4% at the end of Tier 1 capital ratio was 12.0%. The level of supervisory capital adequacy measures was above the minimum level recommended by the Polish Financial Supervision Authority, both for individual and consolidated balance sheet in According to the letter from the Polish Financial Supervision Authority (KNF) to the banks of 22 October 2015, due to the introduction of a collateral buffer from 1 January 2017, the KNF recommended rate for the Tier I capital ratio is 10.25% and for a total capital ratio of 13,25%. 45/111

46 The capital ratios of the Bank as of and are presented below: Capital adequacy ratio Core funds Share capital Supplementary capital Audited net profit Other reserves Decreases in core funds Adjustment for intangibles ( ) ( ) Adjustments to core funds for unrealized losses on debt financial instruments classified as available for sale - 80% (30 823) Adjustment for shares in financial institutions (86 986) ( ) Total core funds of the bank (Tier 1) Supplementary funds Subordinated debt w ith the approval of the PFSA Deceases in supplementary funds Adjustment for shares in financial institutions (8 632) (65 725) Total supplementary funds (Tier 2) Total ow n funds Risk-w eighted off-balance sheet liabilities Risk exposure at 0% Risk exposure at 20% Risk exposure at 35% Risk exposure at 50% Risk exposure at 75% Risk exposure at 100% Risk exposure at 150% Risk exposure at 250% Total risk-w eighted assets Risk-w eighted off-balance sheet liabilities Risk exposure at 20% Risk exposure at 35% Risk exposure at 50% Risk exposure at 75% Risk exposure at 100% Total risk-w eighted off-balance sheet liabilities Total risk-w eighted assets and off-balance sheet liabilities Capital requirements for: Credit risk Business partner s credit risk - - Operating risk General interest rate risk - - Other risks Solvency ratio 13,35% 13,61% On February 19, 2018, the Bank received permission from the Polish Financial Supervision Authority to include PLN 42 million of subordinated bonds issued for supplementary capital. 46/111

47 6. Risk management Idea Bank S.A. annual report Risk management is one of the most important internal processes within Idea Bank S.A and aims at ensuring the viability of business operations while ensuring the level of risk control and its maintenance under the risk tolerance and limit system adopted by the Bank in a changing macroeconomic and legal environment. Risk management in the Bank is an integrated process and is based on supervisory requirements and regulations approved by the Supervisory Board and the Bank's Management Board. Internal regulations regarding risk management in the Bank have a 3-level structure: Strategic level - Idea Bank Strategy and Business Plan (updated annually), Level of risk management strategies and policies - Risk management strategies and policies, Level of internal regulations - Approved by the Bank's Management Board Internal instructions governing and delegating to the level of Departments and Offices rules of managing the given risk within the framework of the adopted strategy and policy. In the risk management process participate: Supervisory Board, Management Board, Assets and Liabilities Management Committee, Bank Credit Committee, Organizational units managing individual types of risk, Controlling unit (including internal audit unit and compliance unit), Selected organizational units of subsidiaries. The Supervisory Board supervises the risk management system of Idea Bank S.A. The board accepts the strategy, the key risk management policies, and the amount of acceptable risk. It reviews main areas of risk, hazard identification and the process of setting and monitoring remedial actions. It also assesses whether the actions undertaken by the Management Board are effective. The Bank's Management is responsible for implementing an effective risk management system in line with regulatory requirements and strategic guidelines. This includes activities such as identification, measurement, monitoring and control, reporting, corrective action, and review and verification of the selected risk management process. The Management Board is also responsible for setting up an organizational structure tailored to the size and profile of the risk involved, sharing responsibilities to ensure the independence of the risk measurement and control function from operational activities, introducing and updating the risk management strategy. The Asset and Liability Committee is an advisory and decision-making body established to assist the Management and Supervisory Boards in shaping asset and liability management, monitoring and liquidity risk management, market risk (including currency and interest rate risk), model risk and capital adequacy risk management, assessment of the materiality of the risks incurred and reflected in internal capital formation rules at unit level and the Capital Group. The Bank's Credit Committee is an opinion-making and decision-making body in matters related to credit risk. The role of the Committee is to support the Bank Management Board's activities in the form of performance of advisory functions in the credit decision-making process or independent decision-making in accordance with the Bank's limit of decision-making powers. Due to the wide aspect and penetration of particular types of risk, each type of risk has a lead unit that is responsible for coordinating the management process of the given risk. These units are responsible for identifying, measuring, monitoring and coordinating remedies for specific risks. It is also the task of the units to develop procedures for the implementation of the various stages of the risk management process. The Bank has an internal audit function that is designed to audit and evaluate, in an independent and objective manner, the adequacy and effectiveness of the internal control system, procedures and internal control mechanisms, and to evaluate the Bank's management system, including the effectiveness of risk management related to the Bank's operations. In order to ensure the Bank's compliance with the applicable laws, regulations and standards, the Bank also operates a separate Compliance cell, whose purpose is also to properly manage compliance risk. 47/111

48 As a result of the identification and measurement activities of particular types of risk, it is important to determine which of them are relevant from the Bank's point of view, their classification from the point of view of constant materiality assessment (permanent and material risks) and from the point of view of the purpose of covering the given risk with the capital. Risk management process In the risk management process, the Bank identifies risks and assesses their significance on the basis of accepted materiality assessment factors, guided by the division into permanently material, potentially material and irrelevant risks. Recognizing each risk involves assessing its impact on the results of the Bank's operations, that is, impacts that can have a material and negative impact on the capital or financial result. As significant risks, in 2017 the Bank considered the following types of risk: credit risk interest rate risk in the banking book currency risk liquidity risk counterparty risk the risk of concentration of large exposures operational risk 6.1. Credit risk Credit risk is one of the primary risks associated with the Bank s business activities. Credit risk is defined as the risk of financial loss resulting from the Bank clients default. The default is usually partially or fully caused by the client s deteriorating financial standing or bankruptcy. The Bank is primarily concerned with maintaining the risk appetite as measured by the NPL 90+ by establishing the current credit risk management policy via the risk and recovery rates. Other important factors to be considered are: maintaining an adequate level of capital and adherence to credit limits. The Bank's credit risk management is to ensure the security of its credit business, using a rational approach to risk. The Bank is guided by the following principles in the risk management process: It manages credit risk on the basis of formalized regulations (policies, instructions, and procedures) that identify methods for identifying, measuring, monitoring, limiting and reporting credit risk, It analyzes the credit risk of a single credit exposure in accordance with accepted credit risk assessment methods, It uses models tailored to customer segments and products for risk assessment, It limits the level of credit risk by setting internal and external limits for credit exposure limits, including one client, group of entities related by capital and organization and business sectors resulting respectively from the risk appetite, the Banking Law, the recommendations of the Polish Financial Supervision Authority and the Regulation of the European Parliament and of the Council (EU) No 575/2013 from 26 June 2013 on prudential requirements for credit institutions and investment firms, to ensure objectivity, credit risk separates the sales process (customer acquisition) from the customer credit risk assessment and acceptance process, and manages and controls the risk (application analysis, risk assessment and credit decision making), The credit decision-making procedure is approved by the Bank's Management Board and credit competencies are allocated to the Bank's employees on an individual basis, depending on their skills, experience and functions, the primary criterion for concluding credit transactions is the creditworthiness of the client, for which the Bank uses the credit system, scoring tools, external information (e.g. CBD BR, CBD BR, BIK, BIG), each credit transaction is monitored in terms of credit utilization, repayment timeliness, legal collateral of the loan, capital and organizational relations of the debtor and current economic and financial situation, 48/111

49 the Bank periodically monitors changes occurring on the real estate market and assumptions and legal and economic framework of valuations of properties accepted as collateral for credit exposures as part of its proactive credit risk and loan portfolio quality management, it is pursuing early restructuring measures (loan repayment facilities) for customers experiencing financial difficulties, sets the rules for the establishment and monitoring of legal collateral and debt collection, regularly performs stress tests to assess the potential impact on the Bank's situation of negative events in the environment, Internal regulations concerning the assessment and monitoring of client credit risk and legal value verification, internal credit limits, decision powers and the system of credit risk identification, assessment and reporting to the committees, the Bank's Management Board and the Supervisory Board as well as scoring models and IT tools abused in the credit risk management process are review and update periodical. There is a reporting system in the Bank. The scope and type of risk reporting and measurement include the following elements: vintage analysis in this quality and efficiency of credit processes use of credit limits, results of stress test back-testing analysis for write-offs update of collateral value of credit exposures based on real estate market analyzes In order to determine the level of credit risk and profitability of loan portfolios, the Bank uses various methods to measure and evaluate credit risk. The Bank assesses all balance sheet credit exposures to identify objective evidence of impairment based on the most recent data at the date of revaluation. Identification of impairment is made automatically in the central bank system based on system information (delay in repayment) or data entered by users. Impairment allowances for loan receivables in the Bank are created in accordance with IAS / IFRS. The Bank uses the value of accepted collateral when estimating write-offs taking into account the applied value limits of collateral resulting from the analyzes of recourses. The basis for estimating the value of a collateral of a material nature is its current market value. Quality of the portfolio The Bank examines the quality of the loan portfolio by calculating the share of exposures 90 days past due in the portfolio balance. At the end of December 2017, the share of exposures 90 days past due in the Bank's portfolio was 8.30%. Compared to 2016, this index increased by 1.88 percentage points. The lower ratio in 2016 was related to the sale of selected loan exposures for the total price of PLN 109 million. The total value of sold receivables amounted to PLN 702 million. The share of the 90+ capital balance in the portfolio as at the end of 2016 and 2017 is presented below Share of 90+ balance 8,30% 6,42% *calculated according to the value of the capital remaining to be repaid At the end of 2017, the carrying amount of impairment allowances for the Bank's loan portfolio amounted to PLN million and was higher by 47.7% compared to 2016, which closed with a write-down of PLN million. Coverage ratio of loans 90 days past due at the end of 2017 in the Bank amounted to 41.37% and increased compared to Coverage of 90+ w rite-dow ns 41,37% 38,39% *calculated according to the value of the capital remaining to be repaid 49/111

50 Credit risk management processes The core lending activities of the Bank focus on small and medium enterprises through: targeted financing investments, purchases, operational activities working capital financing financing of purchased leasing and factoring receivables The Bank has developed procedures for particular loan products in various business sectors. Purchase of receivables by Idea Bank pursuant to the provisions of agreements signed by the parties, in the event of a delay in repayment of purchased debt, the seller of the receivables is unconditionally required to repay the outstanding debt. Security is released after the seller (an individual or a company) repays all the Bank s claims related to the purchased debt. Principles of policy of applying collateral and risk reduction The Bank applies a wide range of legally accepted security appropriate to the nature of the products and the scope of activity. Detailed principles of selecting, applying and establishing security are provided in the Bank s internal regulations and product procedures for particular trading areas. The accepted legal security should ensure that the Bank s claims are satisfied if threats occur that obstruct or prevent fulfillment of the borrower s obligations under a loan agreement. The Bank s basic security limiting its risk, in particular credit risk, is a good financial standing of the borrower and the borrower's creditworthiness. When selecting the security, the Bank considers the type and value of the loan facility, its term, legal status and financial standing of the entity, as well as the Bank s risk and other threats. Security in a form which guarantees full and quick recovery of the amounts due by means of debt collection is preferred. The Bank monitors the security on the dates of periodic (quarterly or annual) reviews of credit exposures. Idea Bank S.A. requires one or more collateral for the loan to limit credit risk. Receivables collateral allow: Decrease in impairment allowances and provisions in accordance with IAS 39 Application of more favorable risk weights to the calculation of capital requirements The Bank uses the value of accepted collateral when estimating group exposures. The basis for estimating the value of a collateral of a material nature is its current market value. The following securities are included in the calculation of write-offs: 1. guarantee or guarantee of the National Bank of Poland or the Bank Guarantee Fund 2. guarantee of a central bank or government of a member state of the OECD 3. guarantee of a bank established in a OECD member state where the economic and financial situation of that bank is not a concern 4. guarantee or suretyship of a state-owned legal entity, excluding banks and insurance undertakings, authorized under separate provisions to grant them in the performance of its state tasks entrusted in cases where the state budget specifies the source of funding of possible commitments 5. credit transfer from Standing Letter of Credit opened or confirmed by a bank of a member state of the OECD if the economic and financial situation of the bank is not a concern 6. export insurance contract or insurance guarantee of the Export Credit Insurance Corporation (Korporacji Ubezpieczeń Kredytów Eksportowych S.A.) directly or indirectly covered by the State Treasury, concluded or given on the basis of the provisions of the export credit insurance guaranteed by the State Treaury for a specified loan exposure agreement up to the percentage of the product where the risk of occurrence of the event is covered by insurance or guarantee and the sums of insurance or guarantee respectively, if the need to create specific provisions is a consequence of the events covered by that insurance or guarantee 7. assignment of rights to benefits resulting from export insurance contracts or assignment of rights resulting from insurance guarantees, directly or indirectly covered by the State Treasury, concluded or awarded on the basis of provisions guaranteed by the State Treasury export insurance - up to the percentage of the product in the percantege of the risk of the occurrence of the event is covered by insurance or guarantee and the sum of the insurance or guarantee respectively if the need for specific provisions is a consequence of the events covered by that insurance or the guarantee 50/111

51 8. a guarantee of the BGK from the funds of the National Credit Guarantee Fund granted on the basis of the provisions on sureties and guarantees granted by the State Treasury and some legal persons 9. guarantee of the BGK from the funds of the EU Guarantee Fund 10. European Investment Fund guarantee provided by the InnovFin guarantee line portfolio 11. portfolio security under the Trust Fund Guarantee Credit under the JEREMIE Initiative 12. guarantee of the local government of the Republic of Poland with good economic and financial standing, the amount of collateral taken into account should be the result of the resolution of the competent authority of the local government unit 13. guarantee of a good economic and financial entity, other than entities referred to in items 1-4, 6, 8 and payment of a certain amount in zloty or in another convertible currency to the bank account, meeting the conditions set out in art. 102 of the Act of 29 August Banking Law, the conversion into gold should be made according to the average exchange rate set by the National Bank of Poland on the day of classification 15. registered pledge on receivables from deposit account filed in: a) bank with credit exposure or b) bank domiciled in a member country of the OECD if the economic and financial situation of that bank is not a concern - together with a statement of blockade of the deposit and a power of attorney to collect funds from the deposit account 16. transfer of receivables from the deposit account deposited with a bank other than the bank holding the receivable or an off-balance sheet liability, together with a statement on blockade of the deposit and a power of attorney to collect funds from the deposit account; 17. block of deposit account deposited with a bank with a credit exposure together with a power of attorney to collect funds from the deposit account 18. mortgage set up on: a) real estate b) perpetual usufruct c) ownership of a cooperative right to a dwelling d) cooperative right to the premises, e) right to a single family home in a housing cooperative, f) the right to housing in a house built by a housing cooperative to transfer its ownership to a member 19. transfer to the bank, until the debt is repaid with due interest and commissions, ownership of: a) securities issued by the State Treasury or the National Bank of Poland b) securities issued by central banks or governments of member countries of the OECD c) bank securities issued by other banks - at their fair value 20. registered pledge on the securities rights referred to in point 19 at their fair value 21. transfer to a bank, until the debt is repaid with interest and principal, the ownership of securities not mentioned in paragraph 19, traded on the OECD member countries 22. registered pledge on securities rights referred to in point pledge on a nautical vessel registered in the naval register (maritime mortgage) 24. pledge on aircraft registered in the State Register of aircraft with appropriate application of art. 11 Act of 3 July Aviation Law (Journal of Laws of 2006, No. 100, item 696, as amended1)) 25. transfer to the bank by the debtor, until the debt is repaid with interest and commissions payable, ownership rights to the movable property, under the terms set by the parties in the contract 26. registered pledge on movable item: 27. a patronage statement containing an obligation of the issuer to take action against the debtor to maintain the timely servicing of the bank's credit exposure and to keep the debtor's economic and financial situation free of prejudice if: a) the bank has a legal opinion confirming the possibility and effectiveness of any possible claims against the issuer of the statement b) the obligation on the issuer of the statement is included in his books 51/111

52 28. credit exposure insurance in an insurance company established in a OECD member country where the economic and financial situation of an insurance company is not a concern 29. unconditional assignment of receivables from counterparties established in OECD countries where the claim is uncontested and not determined The Bank applies limits on the value of collateral taken for the purposes of calculating write-downs in the case of: mortgage, transfer of ownership of movable property, transfer of ownership of securities, except those issued by the State Treasury, the National Bank of Poland, central banks or governments of member countries of the Organization for Economic Co-operation and Development and other banks pledge on a sea or air ship registered pledge on securities rights registered pledge on movable item guarantee of the entity and the patronage statement In the case when the subject of transfer of ownership or pledge is a fractional part of a movable item, the fraction of the value of the entire security is taken as the value of the collateral. For the calculation of write-offs, the Bank does not accept the value of mortgage collateral that could not be disposed of within 3 years from the beginning of the process of selling the collateral. Restructured agreements The Bank performs a restructuring process aimed at restructuring loan receivables through debt repayment reliefs, such as: change in repayment schedule for the entire or part of debt; change of installment amounts; change in interest rates; suspension of accruing interest; debt capitalization, excluding collection costs; cancellation of a part of the debt; change in the order of recording repayments; change in legal security; amendments to the provisions regarding fees and commissions; suspension or closing of enforcement proceedings; changing the currency of the risk exposure agreement.. The main risk in the restructuring process is related to the proper assessment of the debtors creditworthiness in the new restructured conditions. Main reasons for restructuring of loan exposures are debtor s financial difficulties caused by delays in payments from counterparties, liquidity problems and downfall of turnover. Restructuring leads to a change of parameters of an existing loan and not in recognition of a new loan. Restructuring is a premise of impairment of the restructured agreement. Restructured exposure may exit the default state if all of the following conditions are met: a) the exposure does not have any other indications of impairment, b) year has passed since restructuring took place, c) at the end of the 12 subsequent balance sheet dates, the delay in repayment of principal, interest, and penalties on assumptions of materiality (PLN 50) decreased to less than 30 days and persisted d) after restructuring, there are no outstanding amounts left over or there are concerns about full repayment of the exposures under the conditions applicable after the restructuring, i.e. if the debtor has paid an amount equal to the amount previously past due (by way of regular payments under the conditions applicable after the restructuring). The existence of overdue amounts) or the amount written off (in the absence of past due amounts) within restructuring operations or if the debtor has otherwise demonstrated its ability to meet the conditions applicable after the restructuring. The tables below show the value of loans and advances in the restructuring process as at 31 December 2017 and 2016: 52/111

53 Renegotiated agreements Loans and advances to customers, including: Number of contracts Gross amount Write off Net amount - investment loans operating loans car loans Total Renegotiated agreements Loans and advances to customers, including: Number of contracts Gross amount Write off Net amount - investment loans operating loans car loans Total The following table presents The Bank s maximum exposure to credit risk: Credit risk exposure Financial assets: Cash and Central Bank Receivables from banks and financial institutions Other loans and receivables Derivative hedging instruments Derivative financial instrument at fair value through profit or loss Loans and advances to clients Available-for-sale financial assets Other assets Total credit risk exposure Guarantees Conditional liabilities Total off-balance sheet liabilities TOTAL CREDIT RISK EXPOSURE /111

54 The following tables present financial assets by delinquency. A high quality level relates to financial assets past due up to 30 days, standard quality level represents financial assets past due from 31 to 60 days, and sub-standard quality level refers to financial assets past due from 61 to 90 days. Overdue, no impairment As at 31 December 2017 Normal High quality Standard quality Sub-standard quality Overdue w ith impairment Write-offs (incl. IBNR) Total Receivables from banks and financial institutions Loans and advances to clients investment loans operating loans car loans purchased debts Other loans and receivables Financial assets Available-for-sale issued by central banks issued by Polish government Total /111

55 Overdue, no impairment As at 31 December 2016 Normal High quality Standard quality Sub-standard quality Overdue w ith impairment Write-offs (incl. IBNR) Total Receivables from banks and financial institutions Loans and advances to clients investment loans operating loans car loans purchased debts Other loans and receivables Financial assets Available-for-sale issued by central banks issued by Polish government Total /111

56 In the case of receivables from customers for which evidence of impairment has been identified, the Bank identifies receivables for which, despite the identified indicators of impairment, the Bank does not recognize, after taking into account the financial impact of collateral hedges and receivables for which impairment has been identified and recognized impairment and write off. Amounts due from clients w ith impairment indicators but w ithout impairment investment loans operating loans car loans purchased receivables Write off /111

57 6.2. Market risk Market risk is defined as uncertainty that interest rates, FX rates or prices of securities or other financial instruments held by the Bank will reach values different from those that were originally expected, thus resulting in unexpected gains or losses arising from the positions maintained. The asset and liability management policy is aimed at optimizing the structure of the statement of financial position and off-balance sheet items in order to maintain the assumed income to risk ratio. The Management Board of the Bank is responsible for risk management at the strategic level. The Asset and Liability Management Committee (ALCO) supports the Management Board in its activities Currency risk The primary objective of currency risk management is to maintain currency positions within the limits of non-compliance with regulatory capital requirements. The Bank's foreign exchange risk management policy is limited to managing the Bank's foreign exchange positions through: determining and observing the limit of open currency positions, compilation of the Bank's foreign currency positions in individual currencies and total position, Monitoring and securing operations generating foreign exchange differences. As part of its operating activity, the Bank aims to minimize currency risk by maintaining the total currency position value at a level lower than the limit adopted in internal regulations, thus limiting possible losses due to adverse exchange rate changes to an acceptable level. The currency risk management in the Bank is based on written internal procedures, including methods for identifying, measuring, monitoring, limiting and reporting currency risk. The basic tool for measuring the currency risk in the Bank is the Value at Risk (VaR) model, which indicates the potential maximum value of the loss that the Bank may incur as part of its open currency position due to exchange rate fluctuations, under normal market conditions and while maintaining the assumed level confidence and period of maintaining the position. The maximum losses on the currency portfolio held by the Bank determined on the basis of VaR in the time horizon of 1 day and 10 days, with the assumed confidence level of 99% and 99.9% as at 31/12/2017 are presented in the table below: FX exposure as at () confidence level 99.9% VaR - 1 day confidence level 99.0% confidence level 99.9% VaR - 10 days confidence level 99.0% USD ,2 74,7 313,7 236,1 EUR ,3 16,0 67,2 50,6 CHF 60 0,6 0,5 1,9 1,4 GBP -10 0,2 0,1 0,5 0,4 RUB 0 0,0 0,0 0,0 0,0 CZK -13 0,1 0,1 0,3 0,2 DKK 160 1,0 0,7 3,0 2,3 NOK 11 0,2 0,1 0,5 0,4 SEK -48 0,6 0,5 1,9 1,4 JPY 46 0,7 0,5 2,1 1,6 VAR ,5 350,9 264,1 57/111

58 FX exposure as at () confidence level 99.9% VaR - 1 day confidence level 99.0% confidence level 99.9% VaR - 10 days confidence level 99.0% USD 70 1,5 1,1 4,7 3,5 EUR ,1 11,4 47,8 36,0 CHF 15 0,2 0,2 0,7 0,5 GBP -58 1,4 1,1 4,6 3,4 RUB 0 0,0 0,0 0,0 0,0 CZK -7 0,1 0,1 0,3 0,2 DKK 58 0,7 0,5 2,1 1,6 NOK 120 2,0 1,5 6,4 4,8 SEK 87 1,2 0,9 3,9 3,0 VAR 18,2 13,7 57,5 43,3 58/111

59 The tables below show the Bank's currency exposure by type of assets, liabilities and off-balance sheet liabilities: Currency () As at PLN EUR CHF RUB USD GBP Other Total ASSETS Cash and Central Bank Receivables from banks and financial institutions Loans and advances to clients Other loans and receivables Financial assets Investments in subsidiaries and associate Other* TOTAL ASSETS LIABILITIES Liabilities due to banks and financial institutions Liabilities due to clients Debt securities in issue Provisions Other liabilities** TOTAL LIABILITIES EQUITY TOTAL LIABILITIES AND EQUITY BALANCE SHEET EXPOSURE OFF-BALANCE SHEET ITEMS Assets Liabilities GAP * Other assets include other assets, income tax assets, assets permanently classified as held for sale, property, plant and equipment, intangible assets and derivative financial instruments ** Other liabilities include financial liabilities measured at fair value through profit or loss and other liabilities 59/111

60 Currency () As at PLN EUR CHF RUB USD GBP RON Total ASSETS Cash and Central Bank Receivables from banks and financial institutions Loans and advances to clients Other loans and receivables Financial assets Investments in subsidiaries and associate Other TOTAL ASSETS LIABILITIES Liabilities due to banks and financial institutions Liabilities due to clients Debt securities in issue Provisions Other liabilities TOTAL LIABILITIES EQUITY TOTAL LIABILITIES AND EQUITY BALANCE SHEET EXPOSURE OFF-BALANCE SHEET ITEMS Assets Liabilities GAP /111

61 Interest rate risk The Bank's primary objective in managing interest rate risk in the banking book is to maintain the volatility of net interest income within the limits that do not jeopardize the implementation of the Bank's financial plan and capital adequacy. Group conducted activities aimed at hedging interest rate risk in asset and liability management, using hedge accounting in The Bank defines interest rate risk as a risk arising from the exposure of the Bank's current and future financial results and its capital to the adverse effect of interest rate changes. The Bank adjusts interest rate risk management to the type and scale of its operations. At the Bank, the interest rate risk is determined only for the banking book. The Bank does not carry out any commercial activity in this regard. Interest rate risk types identified and managed by the Bank: Risk of mismatch of revaluation dates The analysis of sensitivity to changes in market interest rates is based on the method of managing the revaluation gap, which is the basic method of analyzing the interest rate risk, indicating a potential threat to the Bank's interest income, in the event of adverse changes in interest rates or a significant change in the repricing structure (ie the time of adjusting the interest rate to market interest rates) in the balance sheet. Assets and liabilities are divided into sensitive or insensitive due to the possibility of changes in their interest rates in a given future period. Estimating a possible change in the Bank's net interest income is calculated for the unfavorable interest rate change scenario and includes a change in the result for the next 12 months. Base risk The underlying risk results from imperfect linking (correlation) of market interest rates in a given currency (eg WIBOR rates), which are the basis for interest on various income and cost tools with similar overestimation characteristics (date and method of changing the interest rate of a given product resulting from the type of base rate and subscriptions) contractual). The risk of client options The risk of the client's options is related to the risk of options implemented by the client into banking products, which in the case of changes in interest rates unfavorable from the client's point of view (often without any sanctions for the client) in the case of loans - pay off before maturity part or all of the receivables, and in for term deposits - withdraw funds before the deposit due date. The yield curve risk The yield curve risk is the change in the relationship between interest rates relating to different dates and concerning the same index or market. This relation changes when the shape of the yield curve for a given market is flattened, becomes steep or reversed, in the interest rate cycle. The yield curve risk analysis method involves examining the sensitivity of the interest result to changes in the relationship between interest rates for different periods. The analysis is carried out jointly for all currencies based on total revaluation gaps. Interest rate risk management in the Bank is based on internal procedures regarding interest rate risk management and limits limiting the level of interest rate risk. Presented below are the Bank's assets and liabilities classified according to the interest rate risk criterion (in ) - for fixed interest rate, variable interest rate and interest-free interest items: 61/111

62 As at 31 December 2017 Balance sheet items Up to 1 month (included) Above 1 month to 3 months (included) Above 3 months to 1 year (included) Above 1 year to 5 years (included) Above 5 years (included) Non-interest assets/ liabilities Assets: Cash and Central Bank Receivables from banks and financial institutions Loans and advances to clients Other loans and receivables Financial assets Other assets Liabilities: Liabilities due to banks and financial institutions Liabilities due to clients Debt securities in issue Other liabilities Equity Total Total liabilities and equity Gap /111

63 As at 31 December 2016: Balance sheet items Up to 1 month (included) Above 1 month to 3 months (included) Above 3 months to 1 year (included) Above 1 year to 5 years (included) Above 5 years (included) Non-interest assets/ liabilities Assets: Cash and Central Bank Receivables from banks and financial institutions Loans and advances to clients Other loans and receivables Financial assets Other assets Liabilities: Liabilities due to banks and financial institutions Liabilities due to clients Debt securities in issue Other liabilities Equity Total Total liabilities and equity Gap /111

64 Change in net interest income for the 12-month horizon with the assumed interest rate change of +/- 100bps and assumed balance of the balance. The analysis contains consideration about the assumption that in the event of a decline in interest rates, term deposits and current accounts will not fall below 0%. The change in interest income is shown for the main currencies of the Bank's balance sheet (PLN and EUR). Changes in margin PLN EUR PLN EUR Decrease by 1 pp Increase by 1 pp Liquidity risk Liquidity risk means the risk of loss due to forced exchange of cash assets or cash equivalents in the event of a restriction/ loss of ability to finance assets and timely fulfillment of liabilities. The purpose of liquidity risk management is to adjust its size and type of business so as to ensure that all monetary obligations are fulfilled in accordance with their maturity and asset financing without having to incur excessive costs. The Bank's primary objective in terms of liquidity management is to prevent the emergence of a crisis and to identify solutions to its survival. The goal thus adopted is to bring liquidity issues to the Bank's sources of funding stability and the ability to liquidate assets at any time without material loss of value. The Bank's liquidity policy is based on maintaining a sufficient level of liquidity by increasing the portfolio of liquid securities and stable sources of finance, in particular the stable deposit base from individuals. In the liquidity risk management process, the Bank is primarily focused on: 1. maintenance of liquid assets designated in accordance with the methodology adopted by the Bank at the level not lower than liquidity risk appetite, 2. maintaining supervisory liquidity standards at a level that exceeds the external limits in this area, 3. acquiring stable and diversified sources of financing, 4. taking current measures to maintain liquidity risk within the Bank's limits. The Bank measures and manages liquidity risk based on supervisory regulations, risk appetite for liquidity risk, and internal procedures including identification, measurement, monitoring, limiting and reporting liquidity risk. To assess the level of liquidity risk, the Bank uses, among others, the following measures of liquidity risk and analysis: 1. regulatory liquidity measures, 2. liquidity gap analysis, i.e. mismatch between maturities of assets and liabilities, which takes into account all assets and liabilities and off-balance sheet items by maturity dates in contractual and actual terms, 3. liquidity ratios within specified time band according to maturity dates; in contractual and actual terms. Liquidity management is based on the statement of the Bank s assets and liabilities by actual maturity (liquidity gap analysis). It allows analysis and control of the liquidity position of the whole Bank in short, medium and long term, which is intended to warn in advance in case of a mismatch between assets and liabilities. 64/111

65 The following tables present the liquidity gap analysis for the Bank as at 31 December 2017, 31 December 2016 by maturity (in ) As at 31 December 2017 Assets: Balance sheet items Up to 1 month (included) Above 1 month to 3 months (included) Above 3 months to 1 year (included) Above 1 year to 5 years (included) Above 5 years (included) With indeterminated maturity Total Cash and Central Bank Receivables from banks and financial institutions Derivative hedging instruments Derivative financial instrument at fair value through profit or loss Loans and advances to clients Other loans and receivables Financial assets Investments in subsidiaries and associate Intangible assets Fixed assets Assets held for sale Tax assets Other assets Total assets Liabilities: Liabilities due to banks and financial institutions Derivative financial instrument at fair value through profit or loss Financial liabilities at fair value through profit and loss Liabilities due to clients Debt securities in issue Other liabilities Other provisions Equity Total liabilities Off-balance sheet commitments granted Total liabilities Gap /111

66 As at 31 December 2016 Assets: Balance sheet items Up to 1 month (included) Above 1 month to 3 months (included) Above 3 months to 1 year (included) Above 1 year to 5 years (included) Above 5 years (included) With indeterminated maturity Total Cash and Central Bank Receivables from banks and financial institutions Derivative hedging instruments Derivative financial instrument at fair value through profit or loss Loans and advances to clients Other loans and receivables Available-for-sale financial assets Investments in subsidiaries and associate Intangible assets Fixed assets Assets held for sale Tax assets Other assets Total assets Liabilities: Liabilities due to banks and financial institutions Derivative hedging instruments Derivative financial instrument at fair value through profit or loss Financial liabilities at fair value through profit and loss Liabilities due to clients Debt securities in issue Tax assets Other liabilities Other provisions Equity Total liabilities Off-balance sheet commitments granted Total liabilities Gap /111

67 In the tables above, non-current assets, intangible assets and deferred income tax assets and liabilities are presented in the "With indeterminated maturity section. 67/111

68 The Bank makes a statement of the adjusted liquidity gap based on the Bank's formalized methodology. In addition to the balance sheet items, the list includes off-balance sheet items that cause potential inflow or outflow of funds from the Bank. All receivables and liabilities are prior to the actualization reported according to the actual maturities of maturity (contractual liquidity gap). The summary of the adjusted liquidity gap presents individual items that are reported according to the terms of the most likely inflow / outflow of funds. Items that are subject to redemption: 1) on the assets side: cash, amounts due from customers, securities and off-balance sheet items 2) on the liabilities side: liabilities to customers for the non-financial sector. The remaining items are shown in accordance with the actual maturities without any additional adjustments. In order to limit liquidity risk, the Bank applies internal liquidity limits imposed on selected liquidity measures in the scope of mismatching the real flows resulting from assets and liabilities in individual time bands Credit risk adjustment of derivative instruments (CVA) Credit Value Adjustment (CVA) is the difference between the value of a risk-free portfolio and the real value of a portfolio, including the possibility of default of a counterparty. Under the CVA risk management framework, the Bank sets exposure limits for individual counterparties (including limits on symmetric and asymmetric derivative transactions), and applies advanced methods for measuring the fair value of derivative transactions for interest rate and option transactions Concentration risk and geographic and industry concentration risk The Bank performs ongoing assessment of concentration in different areas of activity. The Bank recognizes excessive concentration in each item accompanied by credit risk, for a phenomenon that may have a negative impact on the Bank's operational safety. The Bank has defined the principles and organization of the concentration risk management process in such a way as to properly identify the concentration risk and its reliable assessment as well as ensure proper functioning of control mechanisms and tools for active control of concentration risk exposure. Bank annually reviews and updates the limits for the exposure concentration, in particular relating to: individual customers and groups of related clients customers operating in the same economic sector and customers carrying out the same activity or trading the same goods entities belonging to the Idea Bank S.A. Group individual products, customers from the same geographic region, unrelated customers, but offering the same type of collateral or security offered by the same collateral provider large exposures - limits specified in art. 395 par. 1 CRR exposures granted with comfort factors or derogations 68/111

69 Idea Bank s exposure concentration by industry sectors: Industry sector % % Wholesale and retail trade 38,19% 22,79% Transport, w arehouse management and communication 16,78% 17,33% Construction industry 8,88% 8,65% Production activity 7,48% 7,85% Food 1,00% 1,15% Fabrics and textile products 0,52% 0,58% Leather and leather goods 0,07% 0,07% Wood and w ooden goods 1,45% 1,48% Celluloid pulp, paper and paper product 0,15% 0,16% Coal carbonisation and crude oil refining products 0,01% 0,01% Chemicals and chemical products 0,15% 0,14% Rubber and plastic products 0,38% 0,41% Other non-metal goods 0,86% 0,92% Metal and metal-processed goods 1,30% 1,32% Machines and equipment not classified 0,76% 0,70% Electric and optical appliances 0,69% 0,77% Transport equipment 0,14% 0,14% Not classified production 0,00% 0,00% Agriculture and hunting 2,16% 2,40% Finance agency 2,77% 3,20% Real estate 1,66% 1,73% Individuals 1,01% 1,31% Mining 0,21% 0,22% Public administration 0,09% 0,12% Electricity and gas supply 0,10% 0,17% Other sections 20,67% 34,23% Total 100,00% 100,00% Bank's credit risk is concentrated almost exclusively in Poland due to the local nature of the business. The Bank s loan portfolio structure by natural persons and business entities: Loan portfolio structure % % Individual portfolio 1,01% 1,31% - car loans 0,13% 0,17% - other 0,88% 1,14% Corporate portfolio 98,99% 98,69% - investment loans 22,87% 26,27% - operating loans 30,11% 29,37% - other 46,01% 43,05% Total 100,00% 100,00% 69/111

70 6.3. Operating risk All organizational units of the Bank participate actively in the operating risk management system. Additionally, the Operating Risk Department, which reports to a Member of the Management Board, is the Bank s operating risk management unit. Operating risk is a risk of the occurrence of losses due to failure to adapt or failure of internal processes, staff members and systems or external events, including legal risk. The Bank manages the operating risk in accordance with the operating risk management strategy established by the Management Board and approved by the Supervisory Board, which: takes into account prudence regulations resulting from the banking law and appropriate resolutions and recommendations of supervisory bodies, takes into account the operating risk definition adopted by the Bank, the ultimate operating risk profile and the general operating risk management principles, due to the fact, that many components of the Bank s operating risk management system are at the development and implementation stage, contains a description of principles already applied as well as those being developed and planned for introduction in the future. Operating risk management comprises all processes and systems connected with: identification (registration of events), assessment (verification of information on events, supplementing data, approval), monitoring (analysis of actual and potential losses and incidents, KRI system, operating risk self-assessment), securing and transferring operating risk together with a scope of liability as part of the operating risk management system. Operating risk management comprises all processes and systems connected with performing bank activities, providing the clients with financial services rendered under the activity scope of the banks. All Bank s organizational units and entities as well as the Operating Risk Committees, supporting the activities of the banks, actively participate in the system of operating risk management. The Bank has a system of reporting on and measuring the operating risk supported by an appropriate IT system. The operating risk reporting system comprises reports for internal: management purposes and external: supervisory purposes. The management and supervisory reporting is based on assumptions resulting from: guidelines of the Recommendation M (issued by KNF), supervisory regulations related to the principles and manner of announcing by the banks, the information of qualitative and quantitative character related to capital adequacy, principles of supervisory reporting COREP in the area of operating risk, The reporting system comprises various types of reports, in particular: reports on operating losses/events, reports on operating risk control and management progress, operating risk self-assessment report, report on incidents of a potential loss exceeding PLN 100 thousand, analysis of the use of the operating risk appetite limit in the past year, report on outsourced banking activities. Depending on the level and profile of the operating risk, various corrective and precautionary measures are taken, adequate to the diagnosed risk and providing the choice and implementation of the measures modifying the risk effectively. The following ways of reducing operating risk are applied: preparing and implementing plans of maintaining the operations continuity, (including emergency plans), assuring continuous operations on a specified level, 70/111

71 Idea Bank S.A. annual report insuring against the effects of errors difficult to foresee or significant financial effects of operating incidents, outsourcing activities. The effectiveness of the precautions and methods of limiting the operating risk applied by the Bank is monitored by: continuous following, gathering and analyzing of the operating incidents and observations of the operating risk profile, controlling of the qualitative and quantitative changes of operating risk. Furthermore, part of the Bank s operating risk management is done through other processes, i.e. control functions, internal audit and external controls, risk management related to outsourcing, IT security management, operating continuity programs and emergency programs, and by creating and modifying internal procedures. The Bank has additionally appointed an Audit Committee, which exercises special supervision over financial reporting, monitors the effectiveness of internal control systems, internal audit and risk management; monitors performance of financial audit and of independence of the certified auditor and the entity authorized to audit financial Investments in subsidiaries risk management Supervision over the subsidiaries is the responsibility of the Management Board Members according to the allocation of responsibilities approved by the Bank s Supervisory Board. Supervision is performed by the Office of Supervision over Subsidiaries reporting to the relevant Management Board Members at Idea Bank, who are in charge of supervision over the Subsidiaries. The Bank established detailed internal regulations for both investment risk management and supervision binding for all the Group companies, in particular: principles governing supervision over companies in which the Bank is financially involved, principles of risk management in subsidiaries and in the Idea Bank Group including credit risk, interest rate risk, currency risk, liquidity risk and operating risk, principles for internal audit in subsidiaries, reporting obligations imposed on subsidiaries, principles for creating and monitoring the Idea Bank s budget based on the data included in the subsidiaries budgets and developing rules for internal settlements. Corporate governance in a company is aimed at protecting the interests of the Bank by satisfying the Bank s objectives related to the company, in particular the execution of the agreed financial plan. The purpose of control over investment risk in subsidiaries is to secure the Bank s interests arising from the company s business activities by ensuring that the established business targets and/or financial targets are achieved. The Management Board of the Bank is responsible for managing investment risk at the strategic level; the following committees were appointed for the purpose of operational management: the Loan Committee, Operating Risk Committee and Asset and Liability Management Committee. It is the committees responsibility to manage risks under their control on the operating level, monitor the level of risk exposure and outline current policies in line with the strategy related to internal limits and mandatory regulations approved by the Bank's Management Board. The Bank monitors, records and manages particular consolidated risk areas, i.e. from the Bank s and the Group s perspective Other risks Risk associated with derivative financial instruments The main risks associated with derivative instruments are: market risk and credit risk. On initial recognition, derivative financial instruments generally do not have any or have an insignificant market value (except options). This is due to the fact that derivatives require no initial net investment or require only a small initial net investment compared with other types of contracts which respond similarly to changing market conditions. 71/111

72 Derivatives obtain a positive or negative value with the changes in a specified interest rate, security price, commodity price, foreign currency exchange rate, index of prices, credit standing or credit index, or another market parameter. As a result of these changes, the derivatives become more or less favorable than instruments with the same residual maturity available on the market at a given moment Model risk This risk means the risk of incurring losses as a result of making incorrect business decisions based on the models operating in the Bank. The Bank has regulations regarding model risk management, which specify: principles and organizations regarding models and methods of their evaluation, functioning of proper control mechanisms and tools for active control of the degree of exposure to model risk, effective reporting process. The Bank reviews the models existing at the Bank and updates the register of models taking into account their significance. The following classes of models are identified in the Bank: scoring models, internal capital models, market risk and liquidity risk models, valuation models, impairment models, stress-tests models. In order to determine the scale of threats related to the occurrence of model risk, the Bank assesses the level of model risk at the individual (in the individual model) and aggregated level (risk assessments of all models operating at the Bank). Based on the individual assessments carried out, the Bank determined the Bank's tolerance level for model risk defined as the share of models with a high level of model risk Risk of adverse changes in legal regulations, interpretations or judicial decisions The economic and political situation in the country causes that the activity of Polish enterprises is accompanied by the risk of changes in regulations, in particular in the tax area. The tax risk can be considered high and constantly growing and it may result in an increase in tax burdens, including those in transactions in which it did not occur before. This results, among other things, from a change in the approach of relevant authorities to the legal interpretation of tax regulations. The Bank updates its internal procedures on an on-going basis in order to comply with applicable laws and identifies and minimizes tax risk. In particular, the Bank obtains interpretations of tax regulations issued by the Minister of Finance, where there is a risk of varying interpretations of administrative bodies. To the best knowledge of the Management Board, the Bank complied with all tax regulations in force during the year and correctly recognized the economic events in the financial. In 2017, the regulations of the Minister of Development and Finance were published, implementing the provisions of the Act of 10 June 2016 on the Bank Guarantee Fund, the deposit guarantee system and forced restructuring, including: Regulation of the Minister of Development and Finance of 25 January 2017 on granting the statute to the Bank Guarantee Fund. Regulation of the Minister of Development and Finance of February 22, 2017 on the detailed scope, mode and dates of providing information to the Bank Guarantee Fund other than those provided to the National Bank of Poland and the Polish Financial Supervision Authority, necessary to perform the tasks of the Bank Guarantee Fund. Regulation of the Minister of Development and Finance of 8 March 2017 on the transfer in the form of obligations to pay contributions to the Bank Guarantee Fund by banks, branches of foreign banks, investment companies, cooperative savings and credit unions and the National Cooperative Savings and Credit Union. 72/111

73 Regulation of the Minister of Development and Finance of May 25, 2017 on the information necessary to develop, update and evaluate the feasibility of forced restructuring plans and group plans for forced restructuring. Regulation of the Minister of Development and Finance of 8 June 2017 on the register of financial instruments. Regulation of the Minister of Development and Finance of 9 August on the detailed scope, mode and timing of providing the Bank Guarantee Fund with information necessary to carry out its tasks and the manner of verifying the correctness of the information provided. The necessity to issue regulations resulted from the entry into force of the Act, which extended the scope of BFG's activities, including for planning and conducting forced restructuring of banks, cooperative savings and credit unions and investment firms. By way of ordinances, the minister competent for financial institutions defined the detailed scope, mode and time of submitting information, and the manner of verifying the correctness of the information provided, bearing in mind the necessity of correct implementation of the BGF's tasks. Based on Article. 330 para. 1 of the BFG Act, the Bank Guarantee Fund has the right to obtain information necessary to carry out its tasks, including the preparation of forced restructuring directly from the entity in the event of the entity's obligation to implement the recovery plan, preparation of the rehabilitation program, undertaking of early intervention measures or establishing a receivership in it. 7. Interest income and expenses Interest income Income on deposits and receivables from other banks Income on loans and advances to clients Income from financial assets, including: available-for-sale financial assets measured at fair value Interest on mandatory reserve Interest on purchased lease receivables Other interest Total The total amount of interest income, calculated using the effective interest method, in relation to financial assets that are not measured at fair value through profit or loss is PLN thousand for PLN (in 2016: PLN 761,866 thousand). Interest income on impaired loans in 2017 amounted to PLN 44,099 thousand. PLN (in 2016: PLN 30,741,000). Interest expenses Cost of other banks' deposits Costs of amounts due to clients Cost of debt securities in issue Cost of loans received Other interest Total /111

74 The total amount of interest costs, calculated using the effective interest rate method, with regard to financial liabilities which are not measured at fair value through profit or loss is PLN 402,937,000 for PLN (in 2016: PLN 386,732 thousand). 74/111

75 8. Fee and commission income and expense Fee and commission income Loans and advances granted Guarantees, letter of credit Current accounts Debit and credit cards Intermediation: Insurance products Investments products For accounting and other consulting services Other Total Fee and commission expenses Debit and credit cards Loans and advances Comissions paid to agents Clearing and cash operations Other Total Dividend income Dividend income PLN thousand PLN thousand from Idea Money S.A from BIK S.A from Idea Leasing S.A from Tax Care S.A from Idea Expert S.A Total /111

76 10. Result on financial assets Idea Bank S.A. annual report Net income on financial assets Derivative financial instruments Deposits - structured products Other* Total * the remaining item in 2017 includes the result on the sale of Treasury bonds. Net income on financial assets and liabilities measured at fair value through profit and loss in the period Income Cost Net income Financial assets and liabilities measured at fair value through profit and loss Financial liabilities and liabilities measured at fair value through profit and loss Total Net income on financial assets and liabilities measured at fair value through profit and loss in the period Income Cost Net income Financial assets and liabilities measured at fair value through profit and loss Financial liabilities and liabilities measured at fair value through profit and loss Total Foreign exchange gains (losses) Foreign exchange position net income Exchange differences on financial assets and liabilities measured at fair value through profit and loss Exchange differences on loans and deposits Total /111

77 12. Other operating income and expenses Other operating income Proceeds from re-invoiced services Recovered bad debts Revenues from sales of products and services Revenues from sales of non financial assets Other income Total Other operating expenses Collection and monitoring of loan receivables Cost of sales of products and services Loss on sale of non-financial fixed assets Other expenses Total General administrative costs General administrative costs Note Social benefits Consumables and energy consumption Outsourcing, incl: marketing, entertainment and advertising IT services tenancy and lease security and cash processing service, maintenance and renovation telecommunication and mail services legal services consulting services insurance other Other material costs Tax on assets Taxes and charges Financial Supervisory Authority Depreciation and amortisation Total /111

78 14. Employee benefits Idea Bank S.A. annual report Employee benefits Remuneration including variable components (bonuses) Insurance and other social benefits Total /111

79 15. Result on impairment losses and provisions for off-balance sheet items investment loans Loans and advances to clients operating loans car loans purchased debts Total loans and advances to clients Receivables from banks and financial institutions Off-balance sheet items Write-offs/provisions at the beginning of the period Increase Release Change in net provisions (P&L) Other decreases Other increases Write-offs/provisions at the end of the period Total investment loans Loans and advances to clients operating loans car loans purchased debts Total loans and advances to clients Receivables from banks and financial institutions Off-balance sheet items Write-offs/provisions at the beginning of the period Increase Release Valuation of purchased debts Change in net provisions (P&L) Other decreases Other increases Write-offs/provisions at the end of the period Total The additional notes and explanations presented on pages from 4 do 111 constitute an integral part of the financial 79/111

80 16. Income tax Reconciliation of income tax on pre-tax profit at the statutory tax rate, with income tax calculated at the effective tax rate for the year ended 31 December 2017 and 31 December 2016: Basic components of the tax Profit before tax Current income tax Current tax charge Adjustments related to the tax from previous years Other taxes Deferred income tax Due to the temporary differences Tax charge disclosed in the income statement Profit before tax tax base at applicable tax rate at 19% Tax at applicable tax rate of 19% Non-taxable incomes* Non-tax-allow able costs** Adjustments related to tax from previous years Tax charge disclosed in the consolidated profit and loss statement Effective tax rate 13,19% 19,36% * Mostly div idend income ** Mainly costs of bank asset tax and BGF costs The Bank s effective tax rate for 12 months of 2017 was 13.19% and for the 12 months of %. Tax regulations in force in Poland are subject to frequent changes, causing significant differences in their interpretation and significant doubts in their application. The tax authorities have control instruments enabling them to verify the tax base (in most cases during the previous 5 financial years), and imposing fines and fines. From July 15, 2016, the Tax Code will also take into account the provisions of the General Fraud Prevention Clause (GAAR), which is intended to prevent the creation and use of artificial legal structures created to avoid taxation. The GAAR clause should be applied to both transactions after its entry into force and transactions that were carried out prior to the entry into force of the GAAR clause, but for which benefits have been or are still being achieved after the date of entry into force of the clause. As a result, the determination of tax liabilities may require significant judgment, regarding transactions that have already taken place, and the amounts of tax charges presented and disclosed in the financial may change in the future as a result of tax audits. The additional notes and explanations presented on pages from 4 do 111 constitute an integral part of the financial 80/111

81 Tax assets/ liabilities As at Changes in period Changes in period As at Recognized in income statement Recognized as revaluation reserve Deferred tax assets Accrued interest on deposits, debt in issue and financial assets Income taxed in advance Provisions and accruals Impairment Valuation of available-for-sale financial assets and hedging instruments Other Deferred tax assets Stan na dzień Changes in period Changes in period As at Recognized in income statement Recognized as revaluation reserve Deferred tax liabilities Deferred income on financial assets and derivative instruments Deferred income on loans and advances Commission costs paid in advance Other Deferred tax liabilities The additional notes and explanations presented on pages from 4 do 111 constitute an integral part of the financial 81/111

82 As at Changes in period Changes in period As at Deferred tax assets Accrued interest on deposits, debt in issue and financial assets Income taxed in advance Provisions and accruals Impairment Valuation of available-for-sale financial assets and hedging instruments Other Deferred tax assets As at Changes in period Changes in period As at Recognized in income statement Recognized in income statement Recognized as revaluation reserve Recognized as revaluation reserve Deferred tax liabilities Deferred income on financial assets and derivative instruments Deferred income on loans and advances Other Deferred tax liabilities The additional notes and explanations presented on pages from 4 do 111 constitute an integral part of the financial 82/111

83 17. Earnings per share Basic earnings per share Basic earnings per share are calculated based on the profit or loss attributable to ordinary shareholders of Idea Bank S.A. by dividing this profit or loss by the weighted average number of ordinary shares outstanding during a given period. Earnings per share Net profit attributable to shareholders of Idea Bank S.A Net profit attributable to shareholders of Idea Bank S.A. used for calculation od diluted earnings per share Weighted average number of ordinary shares Effect of dilution: Weighted average number of ordinary shares Earnings per ordinary share (PLN) 4,26 2,26 Diluted earnings per ordinary share (PLN) 4,26 2,26 Diluted earnings per share In the reporting period there were no factors diluting earnings per share. In the reporting periods, Idea Bank S.A. did not issue convertible bonds or stock options. Thus, the diluted earnings per share are equal to basic earnings per share. 18. Dividend paid and proposed for payment Idea Bank S.A. did not pay any dividends to shareholders out of profits earned for the 12 months ended 31 December 2017 and 31 December Cash and balances with Central Bank Cash and balances w ith Central Bank Cash Current account in Central Bank Total The Bank may use during the day cash deposited on the mandatory reserve account for ongoing payments based on an instruction provided to the National Bank of Poland (the NBP ). However, the Bank is required to ensure that the average monthly balance on the mandatory reserve account is appropriate to the mandatory reserve requirements. Mandatory reserve funds bear interest equal to 0.9 of the rediscount rate for bills of exchange; as at and this interest was 1,35%. The additional notes and explanations presented on pages from 4 do 111 constitute an integral part of the financial 83/111

84 20. Receivables from banks and financial institutions Receivables from banks and financial institutions Current accounts Loans and advances Term deposits Other money market deposits Other Total Write-offs for receivables from banks (-) Total net value Receivables from banks and financial institutions by interest rate Receivables from banks w ith floating interest rate Receivables from banks w ith fixed interest rate Interest Total Receivables from banks and financial institutions by maturity Current accounts and O/N Term deposits w ith maturity period: up to 1 month above 1 month to 3 months 0 0 above 3 months to 1 year above 1year to 5 years above 5 years 0 0 Other Total Write-offs for receivables (-) Total net value The additional notes and explanations presented on pages from 4 do 111 constitute an integral part of the financial 84/111

85 21. Derivative financial instruments The table below presents the nominal value of underlying instruments and the fair value of derivative financial instruments by original maturity at 31 December 2017 (): Foreign curency transactions Up to 1 month (included) Above 1 month to 3 months (included) Above 3 months to 1 year (included) Above 1 year to 5 years (included) Above 5 years (included) Total Fair value (negative) Fair value (positive) Currency sw aps Purchase Sale Other transactions Options on indexes and com Purchase Sale Options on interest rate Purchase Sale Other oprions Purchase Sale Foreign curency transactions CIRS Purchase Sale Interest rate transactions Derivative financial instrument at fair value through profit or loss Hedging derivative instruments Interest rate sw ap Purchase Sale Total The additional notes and explanations presented on pages from 4 do 111 constitute an integral part of the financial 85/111

86 The table below presents the nominal value of underlying instruments and the fair value of derivative financial instruments by original maturity at 31 December 2016 (): As part of its activities, the Bank uses derivatives - swaps and currency options. These derivatives are measured at fair value through profit or loss. The main risks associated with derivative financial instruments are: credit risk and market risk. The tables above show the fair value of derivatives. The nominal amounts of financial instruments are recognized as off-balance sheet items. The nominal amounts of certain types of derivatives are the basis for comparison of derivative financial instruments recognized in the statement of financial position, but do not necessarily indicate the amounts of future cash flows, or the current fair value of these instruments, and therefore do not show exposure to credit or price risk. 22. Hedge accounting In , the Bank had: cash flow hedges related to leasing and loan receivables by means of CIRS transactions, aimed at hedging the risk of changes in the exchange rate, cash flow hedges for interest on deposits using IRS transactions, aimed at hedging the risk of changes in interest rates. Cash flow hedges related to leasing receivables consisted in concluding CIRS transactions in which the Bank paid cash flows in EUR and interest according to the EURIBOR rate, and received cash flows in PLN and interest at WIBOR rate. The cash flow hedge for interest on deposits was based on the conclusion of IRS transactions in which the Bank paid cash flows at a fixed interest rate and received cash flows at WIBOR rates. The fair value of CIRS derivatives, being a cash flow hedge against currency risk as at 31/12/2017 amounted to PLN 63,337 thousand for EUR/ PLN transactions (nominal value amounted to PLN 2,241,609 thousand for EUR/ PLN transactions falling within the maturity range from one to five years). The fair value of IRS derivatives, hedging cash flows against interest rate risk as at 31/12/2017 amounted to PLN 257 thousand (nominal value: PLN 250,000 thousand). The additional notes and explanations presented on pages from 4 do 111 constitute an integral part of the financial 86/111