Note 7.1. Financial Instruments

Gains/(losses) on financial instruments

The fair value hierarchy of financial instruments

* N/A – not applicable – an item which was not measured in accordance with principles arising from the application, from 1 January 2018, of IFRS 9.

Note 7.2 Derivatives

Hedging derivatives – open items as at the end of the reporting period

Trade derivatives – open items as at the end of the reporting period

As at 31 December 2018, counterparty credit risk (CVA – credit value adjustment, for assets) and own credit risk (DVA – debit value adjustment, for liabilities) were not recognised in the measurement of derivatives (hedging and trade) due to their immateriality.

The fair value measurement of derivatives was classified under level 2 of the fair value hierarchy (i.e. measurement which applies observable inputs other than quoted prices):

• In the case of forward currency purchase or sell transactions, the forward prices from the maturity dates of individual transactions were used to determine their fair value. The forward price for currency exchange rates is calculated on the basis of fixing and appropriate interest rates. Interest rates for currencies and the volatility ratios for exchange rates are taken from Reuters. The standard Garman-Kohlhagen model is used to measure European options on currency markets.
• In the case of forward commodity purchase or sell transactions, the Parent Entity uses forward prices from the maturity dates of individual transactions to determine their fair value. At the end of the reporting period, in the case of copper, official closing prices from the London Metal Exchange are used, and with respect to silver and gold, the fixing price set by the London Bullion Market Association. Volatility ratios and forward price curves given by the Reuters system are used to calculate derivatives at the end of the reporting period. Levy approximation to the Black-Scholes model is used for Asian options pricing on commodity markets.

The impact of derivatives and hedging transactions on the items of the statement of profit or loss and on the statement of comprehensive income is presented below.

* The Parent Entity decided to implement IFRS 9 (including new hedge accounting principles) as at 1 January 2018 without adjusting comparative data, which means that the data concerning 2017 presented in the financial statements for 2018 are not comparable.

Note 7.3 Other financial instruments measured at fair value

 The measurement of listed shares is classified to level 1 of the fair value hierarchy (i.e. measurement is based on the prices of these shares listed on an active market at the measurement date), while the measurement of unquoted shares is classified to level 2 (i.e. measurement based on non-observable data).

Due to investments in listed companies, the Group is exposed to price risk. In accordance with applied principles arising from the requirements of IFRS 9, from 1 January 2018, the Group classified all equity instruments it has as at 1 January 2018 as assets measured at fair value through other comprehensive income and, pursuant to IFRS 9, changes in fair value (including impairment) are recognised in other comprehensive income. As a result of the above, the Group is not exposed to the risk of a change in profit or loss caused by changes in the share prices of these companies. Detailed information is presented in Note 1.4.1.4 (a) (iii).

The following table presents the sensitivity analysis of listed companies shares to price changes.

Sensitivity analysis for significant types of market risk to which the Group is exposed presents the estimated impact of potential changes in individual risk factors (at the end of the reporting period) on profit or loss and other comprehensive income.

Potential movements in share prices at the end of the reporting period were determined at the level of maximum deviations in a given year.

Note 7.4 Other financial instruments measured at amortised cost

As at 31 December 2018, non-current financial assets for decommissioning mines and the restoration of tailings storage facilities were presented by cash and debt securities in the amount of PLN 430 million (2017: PLN 403 million) collected by the Parent Entity and the KGHM INTERNATIONAL LTD. Group based on obligations resulting from law, among others the Law on Geology and Mining and the Waste Act as well as from laws applicable in the United States of America and Canada.

Other non-current financial assets designated for decommissioning mines and restoring tailings storage facilities are exposed to the credit risk described in Note 7.5.2.4

Details regarding measurement of the provision for the decommissioning costs of mines and other technological facilities are described in Note 9.4.

Note 7.5 Financial risk management

In the course of its business activities the Group is exposed to the following main financial risks:

• market risks:
• commodity risk,
• risk of changes in foreign exchange rates,
• risk of changes in interest rates,
• price risk related to investments in debt securities,
• price risk related to investments in shares of listed companies (Note 7.3),
• credit risk, and
• liquidity risk (the process of financial liquidity management is described in Note 8).

The Group identifies and measures financial risk on an ongoing basis, and also takes actions aimed at minimising their impact on the financial position.

The Parent Entity manages identified financial risk factors in a conscious and responsible manner, using the adopted Market Risk Management Policy, the Financial Liquidity Management Policy and the Credit Risk Management Policy. The process of financial risk management in the Parent Entity is supported by the work of the Market Risk Committee, the Financial Liquidity Committee and the Credit Risk Committee.

Note 7.5.1 Market risk

The market risk to which the Group is exposed to is understood as the possible occurrence of negative impact on the Group's results arising from changes in the market prices of commodities, exchange rates, interest rates, and debt securities, as well as the share prices of  listed companies.

Note 7.5.1.1 Principles and techniques of market risk management

In market risk management (especially commodity and currency risk) the scale and profile of activities of the Parent Entity and of mining companies of the KGHM INTERNATIONAL LTD. is of the greatest significance and impact on the results of the KGHM Polska Miedź S.A. Group.

The Parent Entity actively manages market risk by taking actions and making decisions in this regard within the context of the KGHM Polska Miedź S.A. Group’s global exposure as a whole.

In accordance with the adopted policy, the goals of the market risk management process in the Group are as follows

• limit volatility in the financial result;
• increase the probability of meeting budget targets;
• decrease the probability of losing financial liquidity;
• maintain financial health; and
• support the process of strategic decision making related to investing activities, including financing sources.

The objectives of market risk management should be considered as a whole, and their realisation is determined mainly by the Group’s internal situation and market conditions.

The goals of market risk management at the Group level are achieved through their realisation in individual mining companies of the Group, with the coordination of these activities at the Parent Entity’s level, in which key tasks related to the process of market risk management in the Group were centralised (such as coordination of the identification of sources of exposure to market risk, proposing hedging strategies, contacting financial institutions in order to sign, confirm and settle derivative transactions, and calculating measurements to fair value).

The primary technique used by the Parent Entity in market risk management is the utilisation of hedging strategies involving derivatives. Natural hedging is also used. Some other domestic companies of the Group make use of derivatives. However, only the Parent Entity applies hedging strategies, as understood by hedge accounting.

Taking into account the potential scope of their impact on the Group’s results, market risk factors were divided into the following groups:

In market risk management various approaches are applied for particular, identified exposure groups.

The Parent Entity considers the following factors when selecting hedging strategies or restructuring hedging positions: current and forecasted market conditions, the internal situation of the Entity, the effective level and cost of hedging, and the impact of the minerals extraction tax.

The Parent Entity applies an integrated approach to managing the market risk to which it is exposed. This means a comprehensive approach to market risk, and not to each element individually. An example is the hedging transactions on the currency market, which are closely related to contracts entered into on the metals market. The hedging of metals sales prices determines the probability of achieving specified revenues from sales in USD, which represent a hedged position for the strategy on the currency market.

The Parent Entity only executes those derivatives which it has the ability to evaluate internally, using standard pricing models appropriate for a particular type of derivative, and which can be traded without significant loss of value with a counterparty other than the one with whom the transaction was initially entered into. In evaluating the market value of a given instrument, the Parent Entity uses information obtained from leading information services, banks, and brokers.

The Market Risk Management Policy in the Group permits the use of the following types of instruments:

• swaps;
• forwards and futures;
• options; and
• structures combining the above instruments.

The instruments applied may be, therefore, either of standardised parameters (publicly traded instruments) or non-standardised parameters (over-the-counter instruments). The primary instruments applied are cash flow hedging instruments meeting the requirements for effectiveness as understood by hedge accounting. The effectiveness of the financial hedging instruments applied by the Parent Entity in the reporting period is continually monitored and assessed (details in Note 7.2 Derivatives - accounting policies).

The economic relationship between a hedging instrument and a hedged position is based on the sensitivity of the value of the position to the same market factors (metals prices, exchange rates or interest rates) and on matching appropriate key parameters of the hedging instrument and the hedged position (volume/notional amount, maturity date).

The hedge ratio of the established hedging relationship is set at the amount ensuring the effectiveness of the relationship and is consistent with the actual volume of the hedged position and the hedging instrument. Sources of potential ineffectiveness of the relationship arise from a mismatch of the parameters of the hedged instrument and the hedged position (e.g. the notional amount, maturity, base instrument, impact of credit risk). When structuring a hedging transaction, the Parent Entity aims to ensure a maximal match between these parameters to minimise the sources of ineffectiveness.

The Parent Entity quantifies its market risk exposure using a consistent and comprehensive measure. Market risk management in the Group is supported by simulations (such as scenario analysis, stress-tests, backtests) and calculated risk measures. The risk measures being used are mainly based on mathematical and statistical modelling, which uses historical and current market data concerning risk factors and takes into consideration the current exposure to market risk.

One of the measures used as an auxiliary tool in making decisions in the market risk management process in the Parent Entity is EaR - Earnings at Risk. This measure indicates the lowest possible level of profit for the period for a selected level of confidence (for example, with 95% confidence the profit for a given year will be not lower than…). The EaR methodology enables the calculation of profit for the period incorporating the impact of changes in market prices of copper, silver and foreign exchange rates in the context of budgeted results. EBITDA-at-Risk ratio is calculated for both the KGHM INTERNATIONAL LTD. Group and the JV Sierra Gorda S.C.M.

Due to the risk of production cutbacks (for example because of force majeure) or failure to achieve planned foreign currency revenues, as well as purchases of metals contained in purchased materials, limits with respect to commitment in derivatives have been set.

For the Parent Entity limits on metals and currency markets were set at:

• up to 85% of planned, monthly sales volume of copper, silver and gold from own concentrates, while: for copper and silver - up to 50% with respect to instruments which are obligations of the Parent Entity (for financing the hedging strategy), and up to 85% with respect to instruments representing the rights of the Parent Entity,
• up to 85% of planned, monthly revenues from the sale of products from own concentrates in USD or of the monthly, contracted net currency cash flows in the case of other currencies. For purposes of setting the limit, expenses for servicing the debt denominated in USD decrease the nominal amount of exposure to be hedged.

With respect to the risk of changes in interest rates, the Parent Entity has set a limit of commitment in derivatives of up to 100% of the debt’s nominal value in every interest period, as stipulated in the signed agreements.

For selected mining companies in the Group, limits were set for using derivatives on the copper and currency markets at the same levels as those functioning in the Parent Entity, while with respect to transactions on the nickel, silver and gold markets the limits were set as up to 60% of planned, monthly sales volume from own concentrates.

These limits are in respect both of hedging transactions as well as of the instruments financing these transactions.

The maximum time horizon within which the Group decides to limit market risk is set in accordance with the technical and economic planning process and amounts to 5 years, whereas in terms of interest rate risk, the time horizon reaches up to the maturity date of the long-term financial liabilities of the Group.

Note 7.5.1.2 Commodity risk

The Parent Entity is exposed to the risk of changes in the prices of the metals it sells: copper, silver, gold and lead. Furthermore, the KGHM INTERNATIONAL LTD. Group is exposed to the risk of changes in the prices of copper, gold, nickel, molybdenum, platinum and palladium.

In the Parent Entity and the KGHM INTERNATIONAL LTD. Group, the price formulas used in physical delivery contracts are mainly based on average monthly quotations from the London Metal Exchange for copper and other common metals and from the London Bullion Market for precious metals. Within the commercial policy, the Parent Entity and KGHM INTERNATIONAL LTD. set the price base for physical delivery contracts as the average price of the appropriate future month.

The permanent and direct link between sales proceeds and metals prices, without similar relationships on the expenditures side, results in a strategic exposure. In turn, operating exposure is a result of possible mismatches in the pricing of physical contracts with respect to the Group’s benchmark profile, in particular in terms of the reference prices and the quotation periods.

On the metals market, the Group has a so-called long position, which means it has higher sales than purchases. The analysis of the Group’s strategic exposure to market risk should be performed by deducting from the volume of metals sold the amount of metal in purchased materials.

The Group’s strategic exposure to the risk of changes in the price of copper and silver in years 2017-2018 is presented in the table below.

The notional amount of copper price hedging strategies settled in 2018 represented approx. 19% (in 2017: 23%) of the total sales of this metal realised by the Parent Entity (it represented approx. 25% of net sales in 2018 and 32% in 2017).
In 2018 revenues from silver sales were not hedged by derivatives.

With respect to strategic management of market risk in 2018, the Parent Entity implemented copper price hedging transactions with a total notional amount of 126 thousand tonnes and a maturity period from July 2018 to December 2020 (of which: 114 thousand tonnes were in respect of hedging revenues from sales of copper in years 2019-2020). Collar and seagull options structures were implemented (Asian options). In 2018 the Company did not implement derivatives transactions on the silver market.

In addition, in 2018 the Parent Entity began the management of a net trading position in order to react to changes in contractual agreements with customers, non-standard pricing terms in metals sales and purchases of copper-bearing materials. In the fourth quarter of 2018 QP adjustment swap transactions were entered into on the copper and gold markets with maturity to June 2019.

As a result, as at 31 December 2018 the Parent Entity held open derivatives transactions on the copper market for 168 thousand tonnes (of which: 156 thousand tonnes came from strategic management of market risk, while 12 thousand tonnes came from the management of a net trading position).

The condensed table of open derivatives transactions held by the Parent Entity on the copper market as at 31 December 2018, entered into as part of the strategic management of market risk, is presented below (the hedged notional in the presented periods is allocated evenly on a monthly basis).

In 2018, neither KGHM INTERNATIONAL LTD. nor any of the mining companies implemented any forward transactions on the commodity market. As at 31 December 2018, the risk of changes in metals prices was also related to derivatives embedded in the long-term contracts for supply of sulphuric acid and water.

The sensitivity analysis of the Company for risk of changes in copper prices as at 31 December 2018 is presented in the table below:

The sensitivity analysis of the Company for risk of changes in copper prices as at 31 December 2017 is presented in the table below:

In order to determine the potential movements in metals prices for purposes of sensitivity analysis of commodity risk factors (copper), the mean reverting Schwarz model (the geometrical Ornstein-Uhlenbeck process) was used.

Note 7.5.1.3 Risk of changes in foreign exchange rates

Regarding the risk of changes in foreign exchange rates within the KGHM Polska Miedź S.A. Group, the following types of exposures were identified:

• transaction exposure related to the volatility of cash flows in the base currency;
• exposure related to the volatility of selected items of the statement of financial position in the base (functional) currency;
• the exposure to net investments in foreign operations concerning volatility of consolidated equity in the Group’s base currency (presentation currency).

The transaction exposure to currency risk derives from cash flow-generating contracts, whose values expressed in the base (functional) currency depend on future levels of exchange rates of the foreign currencies with respect to the base currency. Cash flows exposed to currency risk may possess the following characteristics:

• denomination in the foreign currency – cash flows are settled in foreign currencies other than the functional currency; and
• indexation in the foreign currency – cash flows may be settled in the base currency, but the price (i.e. of a metal) is set in a different foreign currency.

The key source of exposure to currency risk in the Parent Entity’s business operations are the proceeds from sales of products (with respect to metals prices, processing and producer margins).

The exposure to currency risk derives also from items in the consolidated statement of financial position denominated in foreign currencies, which under the existing accounting regulations must be, upon settlement or periodic valuation, including the translation of foreign operations statements, translated by applying the current exchange rate of the foreign currencies versus the base (functional) currency. Changes in the carrying amounts of such items between valuation dates result in the volatility of profit or loss for the period or of other comprehensive income.

Items in the consolidated statement of financial position which are exposed to currency risk include in particular:

• trade receivables and trade payables related to purchases and sales denominated in foreign currencies;
• financial receivables due to loans granted in foreign currencies;
• financial liabilities due to borrowings in foreign currencies;
• cash and cash equivalents in foreign currencies; and
• derivatives on metals market.

As for the currency market, the notional amount of settled transactions hedging revenues from metals sales amounted to approx. 32% (in 2017: 26%) of the total revenues from sales of copper and silver realised by the Parent Entity in 2018.

In 2018 the Parent Entity implemented transactions hedging against a change in the USD/PLN exchange rate with a notional amount of USD 1 710 million and maturity falling from April 2018 to December 2020 (of which: transactions hedging revenues in the amount of USD 1 080 million were in respect of the period from January 2019 to December 2020). On the currency market put options (European options) were purchased and collar options structures (European options) were entered into.

As at 31 December 2018, the Parent Entity held an open hedging position in derivatives for USD 1 260 million of planned revenues from sales of metals.

As for managing currency risk which may arise from bank loans, the Parent Entity applies natural hedging by borrowing in currencies in which it has revenues. As at 31 December 2018, following their translation to PLN, the bank loans and the investment loans which were drawn in USD amounted to PLN 7 655 million (as at 31 December 2017: PLN 6 935 million).

Some of the Group’s Polish companies managed the currency risk related to their core business (among others trade) by opening transactions in derivatives, among others on the USD/PLN and EUR/PLN markets. The table of open transactions as at 31 December 2018 is not presented, due to its immateriality for the Group.

The condensed table of open transactions in derivatives held by the Parent Entity on the currency market as at 31 December 2018 is presented below (the hedged notional in the presented periods is allocated evenly on a monthly basis).

The currency structure of financial instruments exposed to currency risk (change in the USD/PLN, EUR/PLN, CAD/PLN and GBP/PLN exchange rates) of the KGHM Polska Miedź S.A. Group is presented in the tables below.

*Transactions on the commodities and interest rate markets which are denominated in USD and translated to PLN at the exchange rate as at the end of the reporting period are presented in the item “derivatives”, in the column “USD million”, while the column “total PLN million” also includes the fair value of derivatives on the currency market which are denominated solely in PLN.

 *Transactions on the commodities and interest rate markets which are denominated in USD and translated to PLN at the exchange rate as at the end of the reporting period are presented in the item “derivatives”, in the column “USD million”, while the column “total PLN million” also includes the fair value of derivatives on the currency market which are denominated solely in PLN.

The sensitivity analysis of the Group to currency risk as at 31 December of each year is presented in the tables below:

In order to determine the potential movements in the USD/PLN, EUR/PLN, CAD/PLN and GBP/PLN exchange rates for sensitivity analysis purposes, the Black-Scholes model (the geometrical Brownian motion) was used.

Note 7.5.1.4 Interest rate risk

In 2018 the Group was exposed to the risk of changes in interest rates due to loans granted to joint ventures, investing cash and using borrowings.

Positions with variable interest rates expose the Group to the risk of changes in cash flow from a given position as a result of changes in interest rates (i.e. it has an impact on the interest costs or income recognised in profit or loss). Positions with fixed interest rates expose the Group to the risk of fair value changes of a given position, excluding positions measured at amortised cost, for which the change in fair value does not affect their measurement and profit or loss.

The main items which are exposed to interest rate risk are presented below.

*Presented amounts include cash accumulated in special purpose funds: Mine Closure Fund and Tailings Storage Facility Restoration Fund
**Presented amounts include  the preparation fee paid which decreases financial liabilities due to bank loans.

In 2018, the Parent Entity did not implement any new derivative transactions hedging against an increase of the interest rate (LIBOR USD). However, in the first half of 2018 the Parent Entity drew a bank loan in the amount of USD 150 million, based on a fixed interest rate and the first instalment, in the amount of USD 65 million, of the loan granted in December 2017 by the European Investment Bank, also based on a fixed interest rate, and therefore hedging itself against the interest rate risk (natural hedging).

A condensed table of open transactions in derivatives on the interest rate market as at 31 December 2018 is presented below (maturity dates of options fall at the end of subsequent quarters).

The table below presents the sensitivity analysis of the Group to interest rate risk with respect to positions with variable interest rates.

Note 7.5.1.5 Impact of hedge accounting on the financial statements

The following table contains information on changes in the fair value of derivatives and of loans designated as hedging instruments under hedge accounting, as well as corresponding changes  in the fair value of hedged positions during the reporting period, being the basis for recognising the effective and ineffective portions of changes in the fair value of hedging instruments as at 31 December 2018.

The table below presents information on the impact of hedge accounting on profit or loss and other comprehensive income.

The following table contains information on changes in other comprehensive income in the period in connection with the application of hedge accounting.

Note 7.5.2 Credit risk

Credit risk is defined as the risk that the Group’s counterparties will not be able to meet their contractual liabilities and involves three main areas:

• the creditworthiness of the customers with whom physical sale transactions are undertaken;
• the creditworthiness of the financial institutions (banks/brokers) with whom, or through whom, hedging transactions are undertaken, as well as those in which free cash and cash equivalents are deposited; and
• the financial standing of subsidiaries - borrowers.

In particular, the sources of exposure to credit risk are:

• cash and cash equivalents and bank deposits;
• derivatives;
• trade receivables;
• loans granted (Note 6.2);
• guarantees granted (Note 8.6); and
• other financial assets.

Note 7.5.2.1 Credit risk related to cash, cash equivalents and bank deposits

The Group allocates periodically free cash in accordance with the requirements to maintain financial liquidity and limit risk and in order to protect capital and maximise interest income.

As at 31 December 2018, the total amount of free and restricted cash and cash equivalents of PLN 955 million was held in bank accounts and in short-term deposits. All entities with which deposit transactions are entered into by the Group, operate in the financial sector. Analysis of exposure to this type of risk indicated that these are solely banks with the highest, medium-high and medium ratings, and which have an appropriate level of equity and a strong, stable market position. In the Parent Entity and KGHM INTERNATIONAL LTD., the credit risk in this regard is monitored through the on-going review of the financial standing and by maintaining an appropriately low concentration levels in individual financial institutions.

The following table presents the level of concentration of cash and deposits, with the assessed creditworthiness of the financial institutions*.

* Weighed by amount of deposits.

As at 31 December 2018, the maximum share of one bank in relation to the level of cash allocated by the Group amounted to 24% (as at 31 December 2017: 36%).

Note 7.5.2.2 Credit risk related to derivative transactions

All entities with which derivative transactions (excluding embedded derivatives) are entered into by the Group operate in the financial sector.

The following table presents the structure of ratings of the financial institutions with whom the Group had derivatives transactions, representing exposure to credit risk*.

* Weighed by positive fair value of open and unsettled derivatives.

Taking into consideration the fair value of open derivative transactions entered into by the Group and the fair value of unsettled derivatives, as at 31 December 2018 the maximum single entity share of the amount exposed to credit risk arising from these transactions amounted to 22%, i.e. PLN 121 million (as at 31 December 2017: 47%, i.e. PLN 124 million).

In order to reduce cash flows and at the same time to limit credit risk, the Parent Entity carries out net settlements (based on framework agreements entered into with its customers) to the level of the positive balance of fair value measurement of transactions in derivatives with a given counterparty. Moreover, the resulting credit risk is continuously monitored by the review of the credit ratings and is limited by striving to diversify the portfolio while implementing hedging strategies.

Despite the concentration of credit risk associated with derivatives’ transactions, the Parent Entity has determined that, due to its cooperation only with renowned financial institutions, as well as continuous monitoring of their ratings, it is not materially exposed to credit risk as a result of transactions concluded with them.

The fair value of open derivatives of the Group (excluding the embedded derivatives) and receivables due to unsettled derivatives are presented by the main counterparties in the table below.

Note 7.5.2.3 Credit risk related to trade receivables

The following Group companies have significant trade receivables: the KGHM INTERNATIONAL LTD. Group
PLN 447 million, KGHM Polska Miedź S.A. PLN 270 million, CENTROZŁOM WROCŁAW S.A. PLN 84 million, NITROERG S.A. PLN 34 million, WPEC w Legnicy S.A. PLN 28 million, „MCZ” S.A. PLN 20 million and KGHM Metraco S.A. PLN 13 million.

The Parent Entity limits its exposure to credit risk related to trade receivables by evaluating and monitoring the financial condition of its customers, setting credit limits and requiring collateral. An inseparable element of the credit risk management process performed by the Parent Entity is the continuous monitoring of receivables and the internal reporting system.

Buyer’s credit is only provided to proven, long-term customers, while sales of products to new customers are mostly based on prepayments or trade financing instruments which wholly transfer the credit risk to financial institutions.

The Parent Entity makes use of the following forms of collateral:

• registered pledges, bank guarantees, promissory notes, notarial enforcement declarations, corporate guarantees, cessation of receivables, mortgages and documentary collection;
• ownership rights to merchandise to be transferred to the buyer only after payment is received;
• a receivables insurance contract, which covers receivables from entities with buyer’s credit which have not provided strong collateral or have provided collateral which does not cover the total amount of the receivables.
  
  

Taking into account the above forms of collateral and the credit limits received from the insurance company, as at 31 December 2018 the Parent Entity had secured 75% of its trade receivables (as at 31 December 2017, 95%).

Moreover, the Parent Entity enters into net settlement framework agreements, when it recognises both receivables and liabilities with the same client.

Assessment of concentration of credit risk in the Group:

The following table presents a change in trade receivables measured at amortised cost.

The following table presents a change in the estimation of expected credit losses on trade receivables measured at amortised cost.

Note 7.5.2.4 Credit risk related to loans granted to the joint venture Sierra Gorda S.C.M.

Credit risk related to loans granted depends on risk related to the realisation of the joint mining venture in Chile (Sierra Gorda S.C.M.) These loans, due to the recognised impairment at the moment of initial recognition, were classified as POCI for the purposes of calculation of expected credit losses. Due to the identified indications, in 2018 the Group performed impairment testing of mining assets and recognised a reversal of impairment loss on loans granted in the amount of PLN 733 million as at 31 December 2018. Details on the results of the test are presented in part 3 of this report.

The following table presents the change in the period in the gross value of loans granted measured at amortised cost.

The basis for accruing interest on loans measured at amortised cost is the gross amount less any allowance for impairment.

Note 7.5.2.5 Credit risk related to other financial assets

The most significant item in other financial assets is cash accumulated on bank deposits in the special purpose funds: Mine Closure Fund and Tailings Storage Facility Restoration Fund in the amount of PLN 366 million.

All special purpose deposits of the Group, which are dedicated to collection of cash for future decommissioning costs of mines and other technological facilities and restoration of tailing storage facilities, are carried out by banks with the highest or medium-high ratings confirming the security of the deposited cash.

The table below presents the level of cash concentration within special purpose funds dedicated to the collection of cash by the Group for future decommissioning costs of mines and other technological facilities and restoration of tailing storage facilities, according to the credit ratings of financial institutions holding special purpose deposits.