As at the last day of each reporting period, the Group estimates expected credit losses on debt instruments measured at amortised cost and at fair value through other comprehensive income, whether or not there has been any evidence of impairment. The Group applies the following impairment recognition approaches:
- general (basic) approach,
- simplified approach.
With respect to short-term trade receivables without a significant financing component, the Group applies the simplified approach and measures impairment losses in the amount of credit losses expected over the entire life of the receivable since its initial recognition. The Group applies the provision matrix for calculating impairment losses on trade receivables classified in different age groups or delinquency periods.
For the purpose of determining expected credit losses, receivables are grouped based on the similarity of credit risk characteristics. To determine the overall default rate, an analysis of collectability of receivables for the last three years is carried out. Default rates are calculated for the following periods:
- up to 30 days;
- from 30 to 90 days;
- from 90 to 180 days;
- more than 180
To determine the default rate for a given period, the amount of written off trade receivables is compared with the amount of outstanding receivables. The calculation takes into account the effect of future factors on the amount of credit losses.
Impairment losses are calculated taking into account default rates adjusted for the effect of future factors and the amount of receivables outstanding at the reporting date for each period.
Material individual items of receivables (representing more than 5% of total receivables) are analysed on a case-by-case basis.
Intra-group receivables carry a different credit risk than receivables from third parties due to existing links and control. In the event of financial difficulties, the Group usually supports its subsidiaries. Therefore, poor financial performance and position of a subsidiary do not necessarily translate into higher credit risk. In such a case, the Group estimates impairment based on individual analysis. In other cases, where the number of items is significant, they may form a separate portfolio of intra-group receivables based on a portfolio analysis.
The Group applies a three-stage impairment model with respect to financial assets other than trade receivables:
- Stage 1 – financial instruments that have not had a significant increase in credit risk since initial recognition. Expected credit losses are determined based on the probability of default within 12 months (i.e. the total expected credit loss is multiplied by the probability that the loss will occur over the next 12 months – 12 month ECL);
- Stage 2 – financial instruments that have had a significant increase in credit risk since initial recognition, but have no objective evidence of impairment; expected credit losses are calculated based on the probability of default over the life of an asset;
- Stage 3 – instruments for which there is objective evidence of impairment.
To the extent necessary – according to the general approach – to assess whether there has been a significant increase in credit risk, the following factors are taken into account by the Group:
- delinquency period of at least 30 days;
- any legislative, technological or macroeconomic changes with a material adverse effect on the debtor;
- a significant adverse event has been reported concerning the loan or another loan taken by the same debtor from another lender, such as termination of a loan agreement, breach of its terms and conditions, or its renegotiation due to financial difficulties, etc.;
- the debtor has lost a significant customer or supplier or has experienced other adverse developments on its market.
The Group considers that there is a default risk for a financial asset if internal and external information indicates that it is unlikely that the Group will receive all remaining contractual cash flows in full. This is the case when the asset is past due 90 days or more. Financial assets are written off, in whole or in part, when the Group has used practically all measures to collect them and determines that they cannot be reasonably expected to be recovered.
Trade receivables are included in Stage 2 or Stage 3:
- Stage 2 – trade receivables for which a simplified approach to lifetime expected credit losses was applied, except for trade receivables included in Stage 3;
- Stage 3 – trade receivables that are more than 90 days past due or are identified as not serviced, with identified impairment.