7.1 Financial instruments

The Group holds the following categories of financial instruments:

• measured at amortised cost calculated using the effective interest rate,
• measured at fair value through other comprehensive income,
• measured at fair value through profit or loss,
• hedge derivatives.

In the case of equity instruments to be carried at fair value through profit or loss or through other comprehensive income, the selection is made individually for each instrument.

The Group classifies financial assets based on:

• the entity’s business model of financial asset management. The model concerns the way in which the entity manages its financial assets in order to generate cash flows. A business model may provide for holding assets in order to collect their contractual cash flows (the ‘hold’ model); the objective may be both to collect cash flows and sell financial assets (the ‘hold and sell’ model); or the Group may manage financial assets in order to generate cash flows through the their sale (the ‘sell’ model);
• assessment of the profile of contractual cash flows. At the time of initial recognition of a financial asset, a Group company determines whether the contractual cash flows are solely payments of principal and interest on the principal amount outstanding, and whether are thus consistent with the underlying loan agreement. Interest may include consideration for the time value of money, credit risk, other basic lending risks, as well as costs and profit margin.

Upon initial recognition of a new financial asset, the Group companies assess the business model and perform a cash flow test (SPPI). The assessment of the business model and the outcome of the SPPI test determines the classification of the financial asset into the appropriate category, as follows:

Financial assets measured at amortized cost are those that meet the SPPI test and are held within a business model whose objective is to hold assets in order to collect contractual cash flows. This group of assets includes:

• loans
• trade receivables (Note 6.2.2.),
• debt instruments held to maturity,
• term deposits
• cash and cash equivalents (Note 5.4.).

• investments in equity instruments (other than shares in subsidiaries not consolidated with the full method, jointly-controlled entities and associates not accounted for with the equity method), which the Group measures through other comprehensive income,
• investments in debt instruments that meet the SPPI test and are held within a business model whose objective is achieved by selling financial assets.

Financial assets measured at fair value through profit or loss are assets that do not meet the SPPI test and are held within a business model whose objective is achieved by selling financial assets. These include:

• investments in listed equity instruments,
• loans advanced and other debt instruments not meeting the SPPI test,
• investment fund units,
• investments in equity instruments (other than shares in unconsolidated subsidiaries, as well as jointly-controlled entities and associates which are not equity-accounted), which the Group does not measure at fair value through other comprehensive income,
• other items (including non-refundable contributions to equity, recognised as an investment in a subsidiary at the contributing company).

Financial liabilities at amortised cost:

• trade payables (Note 6.2.3.),
• Financing liabilities (Note 5.2.),
• all other financial liabilities not specified above (except lease liabilities recognised in accordance with IFRS 16).

Financial assets and liabilities at fair value through profit or loss

Derivative financial instruments which are not hedging instruments are classified by the Group as financial assets/liabilities at fair value through profit or loss. For information on accounting policies, see  Note 7.2.

Hedge derivatives

This category comprises derivative instruments to which the Group applies hedge accounting. For description of the applied hedge accounting policies, see Note 7.2.

Modification of contractual cash flows

If any contractual cash flows which are to be renegotiated or otherwise modified are identified in contracts, the Group:

• renegotiates or modifies contractual cash flows, which does not lead to derecognition of the original financial asset – minor modification; or
• renegotiates or modifies contractual cash flows, which leads to derecognition and elimination of the financial asset – significant modification.

The key criteria applied by the Group with respect to a major modification of cash flows from a financial asset include:

•  the quantitative criterion – exceeding the materiality threshold, i.e. a 10% difference between the carrying amount after the change of schedule and the carrying amount before the change.
• Qualitative criteria:
  • change of a variable interest rate into a fixed interest rate and vice versa;
  • deep restructuring of the loan in the case of the borrower’s financial distress, including split of the loan, change of repayment dates or change of disbursement profile, increasing the level of cash flows;
  • material change in conditions resulting in change with regard to passing the SPPI test.

On the date of the change, the previous financial instrument is derecognised, and the new instrument is recognised (at fair value).

The difference between the carrying amount of the original financial asset and the fair value of the modified asset, as determined for the modification date, is charged to profit or loss.

On initial recognition of a new financial asset, the Group assesses the business model and performs an SPPI test taking into account the new terms of the modified financial asset. If, upon initial recognition, the modified financial asset is measured at amortised cost, the Group uses a new effective interest rate to measure such asset.