in PLN millions, unless otherwise stated

Impairment of financial assets

IFRS 9 introduces a new approach to estimating losses on financial assets measured at amortised cost and measured at fair value through other comprehensive income (other than equity instruments). This approach is based on indicating expected losses, regardless of whether or not there have occurred any indications of impairment.

The Company applies the following models to determine impairment losses:

- the general model, and
- the simplified model.

Under the general model the Company monitors changes in the level of credit risk related to a given financial asset and classifies the financial asset to one of three stages of determining impairment losses:

Stage 1 – amount in respect of which there has not been a substantial increase in credit risk compared to an instrument’s initial recognition and  for which the amount of impairment is estimated for 12 month expected credit losses,

Stage 2 – amount in respect of which there has been a substantial increase in credit risk compared to an instrument’s initial recognition and for which the amount of impairment  is estimated for lifetime expected credit losses,

Stage 3 – amount reflecting impairment, for which the amount of impairment is set for lifetime expected credit losses.

Under the simplified model the Company estimates the expected credit loss up to the instrument’s maturity.

In order to estimate expected credit loss the Company makes use of the following:

- under the general model – default probability levels, forecasted based on market quotations of credit derivative instruments, for entities with a given credit rating from the given sector,

- under the simplified model – the historic levels of repayment of receivables and a two-stage approach (quality and quantity) to accounting for the impact of macroeconomic conditions on the recovery rates.

The Company considers default payment where the receivable balance is 90 days past due.
The Company accounts for forward-looking information in the applied parameters of the expected credit losses estimation model by adjusting the base probability of default ratios (for receivables) or by calculating probability of default parameters based on current market quotations (for other financial assets).

The Company applies the simplified model to calculate the allowances for impairment of trade receivables.
The general model is applied to the remaining types of financial assets, including debt financial assets measured at fair value through other comprehensive income.

Impairment losses on debt financial instruments measured at amortised cost (at the moment of initial recognition and calculated for each successive day ending a reporting period) are recognised in other operating costs. Gains (reversals of impairment loss) due to a decrease in the expected amount of the impairment are recognised in other operating income.

For purchased or originated credit impaired assets at the moment of initial recognition (POCI), favourable changes in expected credit losses are recognised as gains due to the reversal of impairment losses in other operating income.

Impairment losses on debt financial instruments measured at fair value through other comprehensive income are recognised in other operating costs in correspondence with other comprehensive income, while not reducing the carrying amount of a financial asset in the statement of financial position. Gains (reversals of impairment loss) due to a decrease in the amount of the expected credit loss are recognised in other operating income in correspondence with other comprehensive income.


Hedge accounting

The Company decided to apply hedge accounting arising from IFRS 9 from 1 January 2018.
Hedges include fair value hedges, cash flow hedges and hedges of net investment in foreign operations.
The Company does not use either fair value hedges or hedges of net investments in foreign operations. Hedging instruments are designated as cash flow hedges.
In a cash flow hedge, a derivative used as a hedging instrument is an instrument which:

  • hedges the exposure to volatility of cash flows and is attributable to a particular type of risk associated with an asset or liability recognised in the statement of financial position, or a highly probable forecast transaction, and
  • will affect profit or loss in the statement of profit or loss.

Gains and losses arising from changes in the fair value of cash flow hedging instruments are recognised in other comprehensive income, to the extent by which the given instrument represents an effective hedge of the associated hedged item. Moreover, the Company recognises, in other reserves from the measurement of hedging instruments, the portion of the gain or loss on the hedging instrument arising from changes in the time value of options, forward elements  and currency margin (cross currency basis spread), with the provision that with respect to the latter two elements, the Company may each time select the method of recognition (through equity or directly to profit or loss).
The ineffective portion of a hedge is recognised in profit or loss as other operating income or other operating costs (in the case of hedges of cash flows from operating activities), and as finance income or finance costs (in the case of hedges of cash flows from financing activities).
Gains and losses originating from cash flow hedges are recognised in profit or loss at the time when the underlying hedged item affects profit or loss.
In particular, with respect to the gain or loss arising from changes in the time value of options, the forward element or currency margin, the reclassification from equity (from other comprehensive income) to profit or loss (as other operating income or other operating costs for hedges of cash flows from operating activities, and as finance income or finance costs for hedges of cash flows from financing activities) is carried out on a one-off basis, if realisation of the hedged item is related to a transaction, or is amortised over the lifetime of a hedging relationship, if realisation of a hedged item is effected over time.

The Company applies the following requirements of effectiveness to a hedging relationship:
- there is an economic relationship between the hedged item and the hedging instrument,
- the effect of credit risk does not dominate the fair value changes of a hedged item or a hedging instrument,
- the hedge ratio is the same as that resulting from the quantity (nominal) of the hedged item that the Company actually hedges and the quantity (nominal) of the hedging instrument that the Company actually uses to hedge that quantity of hedged item.

The following table summarises the impact of IFRS 9 on the change in the classification and measurement of the Company’s financial instruments as at 1 January 2018.

(MSSF 7. 42I, 42J, 42O):


Classification per IAS 39
Classification
 per IFRS 9
Carrying amount per IAS 39 – as at 31 December 2017
Carrying amount per IFRS 9 – as at
 1 January 2018
Reference to explanations below the table
Financial assets





Available-for-sale financial assets (equity instruments)
Available for sale
Fair value through other comprehensive income
613
648
(a)
Loans granted
Loans and receivables
Fair value through profit or loss
1 210
1 255
(b)
Loans granted
Loans and receivables
Amortised cost
3 771
3 520
(c)
Trade receivables - trade receivables subject to factoring arrangements

Loans and receivables
Fair value through profit or loss
196
196
(d)
Trade receivables – trade receivables priced upon M+ formula
Loans and receivables
Fair value through profit or loss
446
462
(e)
Other receivables - receivables
due to the present value of future payments respecting financial guarantees
Loans and receivables
Amortised cost
67
100
(f)
Financial liabilities





Other liabilities - liabilities due to financial guarantees
Financial liabilities measured at amortised cost
Initially recognised fair value, increased by transaction costs and decreased by the amount of income recognised in profit or loss
-
37
(f)

The comments below concern the table summarising the impact of IFRS 9 on the change in classification and measurement of the Company’s financial instruments as at 1 January 2018.

a) This item is comprised of equity instruments not held for trading, in accordance with IAS 39 classified as available-for-sale, which were measured at fair value (listed) and at cost (unquoted) by the Company. Because these instruments were not purchased in order to be traded, and due to the above, by the Company’s decision, these assets will be measured at fair value through other comprehensive income at the moment of transition, without the possibility of later transfer of gains or losses on these instruments to profit or loss. These equity instruments are presented in the financial statements in the item “Other financial instruments measured at fair v

b) This item is comprised of loans granted to subsidiaries which did not pass the SPPI test, because in the structure of financing the target recipient of funds, at the last stage, debt is changed into capital (the amount of capital is material) pursuant to the methodology of classification of financial instruments. Due to the above, these assets are measured at fair value through profit or loss. These financial instruments are presented in the financial statements in the item “Loans granted measured at fair value through profit or loss”.

c) This item is comprised of loans granted to subsidiaries and others, which met two conditions:  they are in a business model whose objective is to collect contractual cash flows due to holding financial assets and which passed the SPPI test. They are presented in the financial statements in the item “Loans granted measured at amortised cost”.

d) This item is comprised of trade receivables subject to non-recourse factoring agreements, which were classified to the held for sale (Model 3) business model and therefore are measured at fair value through profit or loss. These trade receivables are presented in the financial statements in the item  “Trade receivables measured at fair value”.

e) This item is comprised of trade receivables priced upon M+ formula (selling price will be set on the basis of the selling month or months subsequent to the selling date), which did not pass the SPPI test. Failure to pass the test arises from the embedded derivative – the M+ formula. These receivables are measured at fair value through profit or loss. These trade receivables are presented in the financial statements in the item “Trade receivables measured at fair value through profit or loss”.

f) This item is comprised of guarantees granted to Sierra Gorda to secure its obligations arising from lease contracts and short-term bank loans. Receivables due to guarantees (passed SPPI test, assets held to acquire contractual cash flows) are measured at amortised cost and are recognised at the present value of future payments and then corrected by the unwinding of the discount effect and the amount of impairment due to expected credit losses in correspondence with the liability. The results of the measurement of financial guarantees are presented in the financial statements in the item “Other financial instruments measured at amortised cost”, while the liabilities are presented in the item “Other liabilities”.

With the exception of the aforementioned items of other financial assets and liabilities, there were no changes arising from changes in classification or changes in measurement of financial instruments.

The following table presents a reconciliation of impairment allowances estimated in accordance with IAS 39 as at 31 December 2017 with the amount of impairment allowances estimated in accordance with IFRS 9 as at 1 January 2018. Changes in impairment allowances estimated in accordance with IFRS 9 arise from a change in the classification of financial assets between the categories of financial assets measured at amortised cost and at fair value, as well as from the remeasurement of impairment allowances reflecting the requirements of the model of expected credit losses (IFRS 7. 42P).

Category of assets
Amount of allowance per IAS 39 as at 31 December 2017
Change due to change in classification
Change due to change in measurement
Amount of allowance per
 IFRS 9 as at
 1 January 2018
Loans and receivables (IAS 39) / Financial assets at amortised cost (IFRS 9)




Loans granted
2 630
(1 843)
410
1 197
Total
2 630
(1 843)
410
1 197





Available-for-sale assets (IAS 39) / Financial assets at fair value through other comprehensive income (IFRS 9)




Shares
568
568
-
-
Total
568
(568)
-
-

The impact of implementation of IFRS 9 on statement of financial position items as at 1 January 2018, for which there was a change in classification or measurement, is presented below.

Impact of the implementation of IFRS 9 Financial Instruments

Applied standard
 IFRS/IAS
As at 31 December 2017
Carrying amount
Change due to change in classification
Change due to change in measurement
As at 1 January 2018
Carrying amount
Impact on retained earnings
Impact on other comprehensive income
Impact on equity
Available-for-sale financial assets
IAS 39
613
(613)
-
-
-
-
-
Financial assets measured at fair value through other comprehensive income
IFRS 9-
613
35
648
-
35
35
Retained earnings - accumulated impairment losses on available-for-sale financial assets
IAS 39
(568)
568
-
-
568
-
568
Other reserves from measurement of financial instruments
IFRS 9
-
(568)
-
(568)
-
(568)
(568)
Loans granted
IAS 39/IFRS 9
4 981
(1 291)
(251)
3 439
(251)
-
(251)
Credit-impaired loans granted, at the moment of initial recognition (POCI)
IFRS 9-
81
-
81
-
-
-
Loans at fair value through profit or loss
IFRS 9
-
1 210
45
1 255
45
-
45
Trade receivables
IAS 39/IFRS 91 034
(642)
-
392
-
-
-
Trade receivables at fair value through profit or loss
IFRS 9-
642
16
658
16
-
16
Retained earnings – change in the time value of hedging instruments
IAS 39
(223)
223
-
-
223
-
223
Other reserves from measurement of hedging instruments
IFRS 9
-
(223)
-
(223)
-
(223)
(223)
Other receivables –  receivables due to present value of future payments due to financial guarantees
IFRS 9
67
-
33
100
33
-
33
Other liabilities – liability due to financial guarantees
IFRS 9
-
-
37
37
(37)
-
(37)
Deferred tax on the aforementioned adjustments

-
-
13
13
(139)
152
13
Total impact





458
(604)
(146)

IFRS 15  Revenue from contracts with customers

Selected elements of the accounting policy with respect to IFRS 15 are presented in part 2 – Operating segments. KGHM Polska Miedź S.A. has applied IFRS 15 retrospectively, pursuant to paragraph C3 (b).
Pursuant to IFRS 15.63, the Company applies a practical expedient and did not adjust the promised amount of consideration for the effects of a significant financing element.
The implementation of IFRS 15 did not have an impact on the amounts presented in the Company’s financial statements. In order to improve the usefulness of the information provided to users of the financial statements, the Company widened the scope of disclosures and presented the revenues from sales transactions, for which the amount of revenue was not finally determined (among others, priced upon the M+ formula) at the end of the reporting period, in the statement of profit or loss.

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