33.7 Impairment of financial assets and receivables

33.7.1 Accounting policy

An assessment is performed at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired.

If there is objective evidence of impairment arising from loss events that occurred after the initial recognition of financial assets and causing a decrease in expected future cash flows then appropriate impairment losses are recognized against costs of the current period. Losses expected as a result of future events, no matter how likely, are not recognized.

Objective evidence of impairment includes information about the following loss events:

• significant financial difficulty of the issuer or obligor;
• a breach of contract, such as a default or delinquency in interest or principal payments;
• the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider (forbearance);
• it becoming probable that the borrower will enter liquidation, bankruptcy or other financial reorganization;
• the disappearance of an active market for that financial asset because of the issuer’s financial difficulties;
• observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including:
• adverse changes in the payment status of borrowers in the group (e.g. an increased number of delayed payments or
• adverse changes in the economic condition in a specific industry, region, etc. contributing to the deterioration of the debtors’ capacity for repayment;
• significant or prolonged decline in the fair value of investments in an equity instrument below the purchase cost (additional information is presented in section 33.7.2.1);
• adverse changes in the technology, market, economic, legal or other environment in which the issuer of an equity instrument operates indicating that costs of investment in that equity instrument may not be recovered.

The evidence of impairment for credit exposures may be divided into evidence relating to:

• the client, including:
• individual client – consumer bankruptcy, death, lack of information about the customer’s whereabouts, loss of employment, client’s financial problems;
• business client – receivership, bankruptcy/liquidation, significant deterioration of internal scoring/rating, significant deterioration of the economic and financial standing;
• both individual and business clients – significant delay in payment or unauthorized debit, client’s assets not being disclosed.
• account – launch of court proceedings, launch of enforcement proceedings, effective termination of the agreement, restructuring, exposure challenged by the debtor through litigation, identified fraud.

If there no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics, which are collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss has been recognized are not included in a collective assessment of impairment.

The amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition). Interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Exposures for which evidence of impairment has been identified are divided into exposures measured individually and measured collectively in groups.

If evidence of impairment is identified for financial instruments available for sale then the losses previously recognized in the revaluation reserve are charged to profit or loss.

Impairment losses on financial instruments available for sale charged to profit or loss:

• in the case of equity instruments they cannot be reversed;
• in the case of debt instruments they can be reversed if, in a subsequent period, the fair value of the debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss.

33.7.2 Estimates and assumptions

33.7.2.1 Equity instruments quoted on regulated markets and participation units and investment certificates in mutual funds 

Impairment losses for equity instruments quoted on regulated markets, participation units in open-end mutual funds and closed-end mutual fund certificates classified as available for sale are recognized if at least one of the two conditions is met:

• the negative difference between the present value and the purchase value is at least 30% of the purchase value;
• at the end of each of the consecutive 12 months, the value of the asset was lower than the purchase value.

 33.7.2.2 Receivables from policyholders

Receivables from policyholders are reviewed to determine whether any evidence of impairment exists.

Specific impairment loss is estimated first. A specific impairment loss is recognized for an individual receivable after the assessment of the debtor’s economic and property standing and the probability of repayment of the receivables.

In the case of receivables from debtors against whom liquidation or bankruptcy proceedings have been launched, the impairment loss is recognized up to the amount of the receivable that is not covered by a guarantee or other collateral. If a petition for the debtor’s bankruptcy has been dismissed and the debtor’s assets are not sufficient to cover the costs of the bankruptcy procedure, the impairment loss is recognized at the full amount of the receivable.

A specific impairment loss is increased if information is received that the estimated recoverable amount has fallen or the amount of receivables for which the impairment loss was recognized, has increased. A previously recognized specific impairment loss is reversed if it is estimated that the recoverable amount is higher than it was previously estimated or if full or partial payment of the receivable amount has been confirmed. A specific impairment loss is used if the receivable has been forgiven or written down in full.

To the extent that no individual assessment has been made, a collective assessment of impairment of receivables is conducted, as a result of which a group impairment loss is estimated.

Non-life insurance

The group impairment loss is estimated on the basis of the assumed model for assessing impairment of individually insignificant receivables. In the model, the impairment loss is determined by assessing impairment of receivables from policyholders grouped by similar credit risk characteristics.

For matured receivables, an age structure is prepared, depending on the past due period. Matured receivables are reduced by the value of receivables covered by a specific impairment loss. A group impairment loss is calculated in separate ranges of past due periods, based on the uncollectibility ratios determined through historical analysis.

For receivables before maturity, the value of the receivable that is likely to become due is determined based on a historical analysis of the percentage of the ratio of receivables that are not paid before maturity. The receivables amount calculated in this manner is reduced by the value of receivables covered by the specific impairment loss. Then, on the remaining amount of receivables, an impairment loss is recognized in the amount corresponding to the uncollectibility ratio of matured receivables for the shortest past due period.

33.7.3 Quantitative data