10.2 Fair value hierarchy

On the basis of the input data used for fair value measurement, individual assets and liabilities for which the fair value is presented, are classified to the following levels:

  • Level I – financial assets and liabilities measured based on listed prices (unadjusted) from active markets for identical assets and liabilities. The level includes:
    • listed liquid debt instruments;
    • listed shares;
    • listed derivatives.
  • Level II – assets and liabilities measured based on input data other than listed prices, classified to Level I, which can be directly (as prices) or indirectly (on the basis of prices) observed on the market. The level includes:
    • listed debt instruments measured based on the valuations published by an authorized information service;
    • derivatives, i.a. FX Swap, FX Forward, IRS, CIRS, FRA;
    • investment fund units;
    • investment property or property held for sale, measured with the use of the comparable method, including available development land and some smaller and less valuable buildings (such as residential premises, garages etc.);
    • liabilities to participants of consolidated investment funds;
    • unit-linked investment contracts.
  • Level III – assets measured based on input data unobserved on the existing markets (unobservable input data). The level includes:
    • unlisted debt securities and non-liquid debt securities (including other than treasury debt securities issued by other financial entities, local government and entities from outside the financial sector), measured with the models based on the discounted cash flows;
    • investment property or property held for sale, measured using the income method or the residual method;
    • loan receivables from clients and liabilities to clients from deposits;
    • options embedded in deposit certificates issued by the PZU Group companies and options concluded on the interbank market to hedge embedded options positions.

In a situation where input data classified into different levels of fair value hierarchy is used for measurement of asset or liability elements, the measured component is attributed to the lowest level, from which the input data originate, which have a significant impact on the overall measurement.

The valuation of the asset or liability elements within Level III is substantially influenced by unobservable input data.

Assets measured Unobservable data Characteristics Impact on valuation
Non-liquid bonds and loans Credit spreads Spreads are observed on all bonds (their series) or loans of the same issuer or issuer having similar characteristics. These spreads are observed on the date of the issue of the new bond series, dates of the conclusion of the new loan agreements and dates of the market transactions whose subjects are the receivables arising from mentioned bonds and loans. Negative correlation.
Investment property Capitalization rate Capitalization rate is determined on the basis of the analysis of return rates achieved in transactions for similar property. Negative correlation.
  Construction costs The value of construction costs is determined based on market cost of construction less costs incurred as at the measurement date. Positive correlation.
  Monthly rental rate for 1m2 of appropriate type of space or for one parking lot Rental rates are observed for similar property, with similar quality, localization and size of the rented surface. Positive correlation.
fair_value_hierarchy_pzu2016.xlsx

Assets and liabilities measured at fair value 31 December 2016 31 December 2015(restated)
  Level I Level II Level III Total Level I Level II Level III Total
Assets                
Financial assets available for sale 8,113 2,887 614 11,635 6,689 386 670 7,745
Equity instruments 132 264 - 417 196 386 17 599
Debt instruments 7,981 2,623 614 11,218 6,493 - 653 7,146
Financial instruments measured at fair value through profit or loss – classified as such upon initial recognition 12,555 1,882 42 14,479 13,107 84 54 13,245
Equity instruments 2,837 97 17 2,951 2,274 84 26 2,384
Debt instruments 9,718 1,785 25 11,528 10,833 - 28 10,861
Financial instruments measured at fair value through profit or loss – held for trading 1,881 5,333 188 7,403 3,341 3,933 129 7,403
Equity instruments 744 3,321 - 4,066 1,053 3,025 - 4,078
Debt instruments 1,119 1,202 135 2,456 2,278 - 74 2,352
Derivative instruments 18 810 53 881 10 908 55 973
Hedging derivatives - 72 - 72 - 140 - 140
Investment property - 149 1,589 1,738 - 117 1,055 1,172
Assets held for sale - 49 1,081 1,130 - 90 1,413 1,503
Liabilities                
Derivative instruments 31 730 26 787 36 869 35 940
Liabilities to participants of consolidated investment funds 31 1544 26 1544 - 656 - 656
Unit-linked investment contracts - 329 - 329 - 393 - 393
Liabilities arising from securities lending 654 - - 654 207 - - 207
fair_value_hierarchy_2_pzu2016.xlsx

Level III investment property 31 December 2016 31 December 2015
Office property 902 551
Warehouse property 681 487
Other 6 17
Level III investment property, total 1,589 1,055
fair_value_hierarchy_3_pzu2016.xlsx

Fair value of assets and liabilities for which it is only disclosed 31 December 2016 31 December 2015( restated)
  Level I Level II Level III Total Level I Level II Level III Total
Assets                
Entities measured using the equity method – EMC - 37 - 37 - 55 - 55
Financial assets held to maturity 15,531 15 3,520 19,066 17,069 - 2,751 19,820
Loans                
Debt instruments 1 1 2,467 2,469 - 7 2,761 2,768
Loan receivables from clients - - 44,897 44,897 - - 30,254 30,254
Loans - - 1,705 1,705 - - 1,927 1,927
Liabilities                
Liabilities to banks - 399 124 523 - 476 125 601
Liabilities to clients - - 51,364 51,364 - - 33,665 33,665
Liabilities arising from the issue of bank securities - - 2,784 2,784 - - 2,301 2,301
Liabilities arising from the issue of own debt instruments - - 3,761 3,761 - - 3,573 3,573
Subordinated liabilities - - 1,027 1,027 - - 759 759
Investment contracts with guaranteed and fixed terms and conditions - 67 - 67 - 153 - 153
fair_value_hierarchy_4_pzu2016.xlsx
   

Property classified to Level III of the fair value

No. Name of the property Fair value as at 31 December 2016 Fair value as at 31 December 2015 Type of space Ranges of unobservable data As at 31 December 2016 Ranges of unobservable data As at 31 December 2015
The property valuated with income approach using the investment method and the income stream discounting technique
1. Office complex, Wrocław 282 274 Office EUR 11.25 – 14.50 EUR 14.25 – 15.50
2. Warehouse park, Bielany Wrocławskie 233 215 Office Warehouse Construction costs EUR 7.00 – 9.00 EUR 3.00 – 3.60 1) EUR 7.50 – 9.00 EUR 2.50 – 4.20 1)
3. Office building, Warsaw 165 155 Office Parking lot EUR 12.00 – 25.00 EUR 50.00 – 200.00 EUR 11.70 – 14.10 EUR 70.00 – 150.00
4. Office complex, Gdańsk 165 2) Office EUR 13.00 – 15.00 EUR 12.00 – 16.00
5. Office building, Warsaw 130 2) Office Parking lot EUR 6.33 – 15.00 EUR 65.00 – 90.00 EUR 12.00 – 34.00EUR 65.00 – 150.00
6. Warehouse park under construction, Komorniki 116 119 Office Warehouse Construction costs EUR 7.00 – 9.00 EUR 3.00 – 3.50 1) EUR 7.50 – 9.00 EUR 2.50 – 4.00 1)
7. Office building, Warsaw 111 114 Office Parking lot EUR 8.00 – 16.50 EUR 50.00 – 80.00 EUR 10.09 – 12.91 EUR 35.20 – 84.48
8. Office building under construction, Wrocław 34 7 Office Construction costs EUR 11.00 – 14.501) EUR 11.00 – 15.501)
The property valuated with mixed approach with the use of the residual method
9. Warehouse park under construction, Sosnowiec Pieńki 217 116 Office Warehouse Construction costs EUR 7.00 – 9.00 EUR 2.89 – 3.60 1) EUR 7.50 – 9.00 EUR 2.50 – 4.00 1)
10. Warehouse park under construction, Sosnowiec 116 37 Office Warehouse Construction costs EUR 7.00 – 9.00EUR 2.89 – 3.601) EUR 7.50 – 9.00EUR 2.90 – 4.301)
11. Other 20 18 n/a n/a n/a
  Total 1,589 1,055      

1) The value of outstanding construction costs to be incurred was determined based on market construction costs.
2) As at 31 December 2015, property was classified as assets held for sale. At that date their value amounted to PLN 165 million (Gdansk) and PLN 134 million (Warsaw).

fair_value_hierarchy_5_pzu2016.xlsx

 

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