7.5.2 Credit risk

in PLN millions, unless otherwise stated

Credit risk is defined as the risk that the Group’s counterparties will not be able to meet their contractual liabilities and involves three main areas:

• the creditworthiness of the customers with whom physical sales transactions are undertaken;
• the creditworthiness of the financial institutions (banks/brokers) with whom, or through whom, hedging transactions are undertaken, as well as those in which free cash and cash equivalents are deposited; and
• the financial standing of subsidiaries – borrowers.

In particular, the sources of exposure to credit risk are:

• cash and cash equivalents and deposits;
• derivatives;
• trade receivables;
• loans granted (Note 6.2),
• guarantees granted (Note 8.6); and
• other financial assets.

The Group recognises impairment loss on expected credit losses on financial assets measured at amortised cost. Expected credit losses are credit losses weighed by the default probability. The Group applies the following models for designating impairment losses:

• the simplified model – for trade receivables,
• the general (basic) model – for other financial assets.

Under the general model the Group monitors changes in the level of credit risk related to a given financial asset and classifies financial assets to one of three stages of determining impairment losses – based on observations of changes in the level of credit risk compared to an instrument’s initial recognition. In particular, the following are monitored: the credit rating and the financial condition of the customer and the payment delay period. Depending on which stage it is classified to, an impairment loss is estimated for a 12-month period (stage 1) or in the horizon of lifetime (stage 2 and stage 3). The absolute indicator of default is an overdue period of more than 90 days.

Under the simplified model the Group does not monitor changes in the level of credit risk during an instrument’s life and estimates the expected credit loss over the time horizon of maturity of the instrument based on historical data respecting the repayments of receivables.