6.1.1 Consolidation principles
220.127.116.11 Judgments in determining PZU has control
In accordance with point 7 of IFRS 10, PZU Group assumes that it has control only when it simultaneously has power over the investee, exposure, or rights, to variable returns from its involvement with the investee and the ability to use its power over the investee to affect the amount of the investor's returns.
In order to determine whether PZU Group has the exisiting rights which are sufficient to exercise power, i.e. the current ability to direct the relevant activities, PZU Group analyses i.e.:
- how many votes it holds and whether it holds more votes than other investors (including potential voting rights and rights resulting from other contractual arrangements);
- how many entities would have to act together in order to outvote PZU Group;
- distribution of votes at previous general meetings;
- obligations, if any, to ensure undisturbed operations of the entity in which the investment was made;
- are the key personnel of the entity or members of the management body of the entity where the investment was made related to PZU Group;
- capacity to appoint members of management and supervisory bodies of the entity;
- possibility to oblige or prevent the entity to perform significant transactions;
- other prerequisites.
Following the purchase of the II tranche of Alior Bank shares, under the transaction specified in 18.104.22.168, PZU Group performed control analysis and determined that:
- it holds a total of 23.9574% of Alior Bank shares (and after inclusion of potential voting rights resulting from irrevocably mandatory purchase of the III tranche – 29,2232%) that entitles it to the same number of votes at the General Shareholders’ Meeting of Alior Bank;
- only three shareholders own interests of over 5%, and the rest of shareholding is fragmented and a large number of entities would have to act together to outvote PZU;
- it would hold a majority of votes at the majority of general meetings (as a result of an analysis of attendance and schedule of votes at Alior Bank general meetings in the years 2013-2015);
- upon PZU Group’s request, a member of the Alior Bank management board was appointed who previously served as a member of the PZU Management Board, as well as two members to the Alior Bank supervisory board who are key managers at PZU;
- PZU Group does not have knowledge of potential agreements concluded between other shareholders of Alior bank;
- it undertook investment obligations towards Alior Bank, due to which its exposure to variability of Alior Bank’s financial results is disproportionately greater that its voting rights.
In the light of the above prerequisites, it was stated that, starting from 18 December 2015, PZU Group exercises control over Alior Bank along with its subsidiaries, and included it in consolidation.
22.214.171.124 Principles of consolidation of investment funds
PZU Group has assumed that it controls the investment fund if both conditions mentioned below are met:
- PZU Group entities together have the ability to use their power over the fund in order to influence the value of the return on investment and the rationales for this ability are, among others, the control over the investment fund management company, a significant share in the total number of votes at the general meeting of investors or the board of investors;
- the total exposure of PZU Group entities to variable returns from involvement in the investment fund is significant, which means that the total share of PZU Group entities in the net assets of the fund is equal to or exceeds 20%, whereas the determination of the so understood total share does not take into consideration the fund assets that are attributable to unit-linked products. If the involvement does not exceed 20% in the net assets of the fund, the exposure to volatility of the fund’s financial results considered together with decision-making powers imply that such a fund is not under control.
PZU Group accepts that the consolidation of the fund will be maintained (or dropped, accordingly) during the period of two subsequent quarters following a quarter which closed with a decrease (or increase, accordingly) of the share in the net assets of the fund below (or above, accordingly) 20% when this decrease (or increase) resulted from amounts paid in (or out) of participants not belonging to PZU Group.
Investment funds controlled by PZU Group are consolidated. Their assets are fully presented in the statement of financial position as financial assets by type and portfolio classification, while the liability related to the net assets of the fund held by third-party investors – as "Liabilities".
6.1.2 Classification of insurance contracts in accordance with IFRS 4
PZU Group entities that carry out insurance activity apply guidance included in IFRS 4 regarding classification of their products as insurance contracts subject to IFRS 4 or investment contracts. A contract can be classified as an insurance contract only when an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance (i.e. have no discernible effect on the economics of the transaction), i.e. when the contract involves significant insurance risk transfer.
Assessment whether a contract does transfer significant insurance risk requires an analysis of cash flows related to a product under various scenarios and estimation of probability of their occurrence. The assessment is based on a subjective judgment which significantly impacts accounting principles applied. Based on the assumptions adopted by PZU Group, significant insurance risk occurs when an insured event results in payment of claims at least 10% higher than claims paid if the event had not occurred. Based on the aforementioned criterion, concluded contracts are recognized either in accordance with IFRS 4 or IAS 39.
6.1.3 Contract classification in non-life insurance
The analysis carried out proves that all non-life insurance contracts transfer significant insurance risk and therefore are governed by regulations of IFRS 4.
Additionally, in the light of work on the second stage of IFRS 4 carried out by IASB, the Group continues to apply insurance contract accounting to financial guarantees that meet the definition of a financial instrument.
6.1.4 Classification of life insurance contracts
Based on the carried out analysis, it was concluded that products from PZU Group’s offer that do not transfer significant insurance risk (they include certain products with guaranteed return rate and some unit-linked ones) and thus do not meet the definition of an insurance contract pursuant to IFRS 4. Therefore, these products have been classified in the consolidated financial statements as investment contracts measured in accordance with IAS 39 (depending on the product construction), which means at amortized cost or fair value.
Investment contracts include, among others: individual life and endowment Pewny Zysk insurance (recognized at amortized cost), unit-linked PZU IKZE insurance and Program Inwestycyjny Prestige [Prestige Investment Program] (recognized at fair value).
Both insurance and investment contracts can include discretionary participation features (DPF). They entitle the insured to receive additional claims or bonuses as an extra to the guaranteed claim. Such a claim constitutes a significant part of the total contractual claim; its amount and period of validity are of contractual nature and they depend on the insurer’s discretion and their occurrence depends on:
- a specific set or type of contracts;
- profit or no profit from specific assets;
- profit or loss of the insurer, fund or other entity related to the contract.
All contracts with discretionary participation features, unilaterally specified by the insurance company, are measured in accordance with IFRS 4.
Additionally, no life insurance contracts were identified which would provide for the transfer of both insurance and financial risk and require unbundling of insurance and investment components. In the case of contracts for which unbundling of embedded options (e.g. the right to surrender a contract, change it into a premium-free contract, guaranteed annuity for a set premium, indexation of the sum insured and premiums) is permitted, but not required according to IFRS4, the investment component is not unbundled.
6.1.5 Unrecognized deferred tax assets
PZU Group applies the prudence principle and recognizes deferred tax assets resulting from tax losses of PZU Group entities to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilized.
The amount of unrecognized deferred tax assets due to tax losses incurred by PZU Group entities is presented in Note 34.