Impairment of financial assets
The amount of impairment loss on receivables equals the difference between the carrying amount of an asset and the present value of estimated future cash flows discounted at the asset’s original effective interest rate.
The Group monitors changes in credit risk of a given financial asset and classifies financial assets to one of three classes for the purpose of determining lifetime impairment:
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Class 1 – Not impaired exposures and exposures without a significant increase in credit risk, where the risk of lifetime impairment is not significantly higher than the risk of the exposure as at the grant date. In this class, the expected credit loss is calculated for the next 12 months or for a shorter period, depending on the maturity of the exposure. Financial assets in this class have low credit risk or the increase in risk has not been significant, and have high credit ratings (determined on the basis of reliable financial data, including external ratings).
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Class 2 – Not impaired exposures and exposures with a significant increase in credit risk, where the risk of lifetime impairment is significantly higher than the risk of the exposure as at the date of grant, and not impaired. In this class, the probability of a default event is calculated for the lifetime of an asset.
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Class 3 – Impaired exposures, where the impairment occurred while the asset was held by the Group. For these exposures, impairment losses are calculated over the expected duration of the recovery period, with the expected recovery amount taken into account. Interest on impaired assets is calculated by applying the effective interest rate against the net asset value (net of impairment loss). Consequently, net interest (net of impairment loss) is recognised in the statement of profit or loss.
Depending on the type of financial asset, impairment loss is determined using either the statistical approach or the case-by-case approach.
In the statistical approach, impairment losses are recognised for a large number of current financial assets of relatively small values (the so-called homogeneous portfolio). Impairment losses are determined based on an analysis of historical payment data for past due receivables in particular ageing groups and the migration matrix method. Results of the analysis are then used to calculate recovery ratios on the basis of which the amounts of impairment losses in each ageing group are determined.
In the case-by-case approach, the Group estimates the expected credit losses for those exposures that could not be classified into the homogeneous portfolio, such as:
- lease receivables,
- acquired debt securities,
- material trade receivables (all trade receivables of counterparties covered by the case-by-case approach),
- trade receivables maturing in more than one year,
- receivables from sale of shares,
- receivables under equity contributions.
The Group identifies an instrument as impaired if any of the following occurs:
- a payment is past due by more than 90 days,
- it is becoming probable that the counterparty will enter bankruptcy or other financial reorganisation;
- bankruptcy/arrangement proceedings are pending against the debtor,
- legal dispute with respect to the amount / legitimacy of a claim on which the receivable is based,
- other qualitative information indicating that the debtor is not able to fully satisfy all financial claims.
Expected impairment of such exposures is calculated over the period until the expected end of the recovery period.
Impairment losses are charged to other expenses or finance costs, as appropriate, depending on the type of the item for which an impairment loss is recognised.