3.1. Description of transaction
On 12 June 2013, PKO Bank Polski SA and Nordea Bank AB (publ), a company registered in Sweden, concluded an agreement (‘Agreement’) concerning the acquisition by the Bank of shares of Nordea Bank Polska SA (‘the Company’), ‘Nordea Polska Towarzystwo Ubezpieczeń na Życie’ SA and Nordea Finance Polska SA, as well as purchasing a receivables portfolio granted to corporate customers (so-called ‘Swedish portfolio’ assets).
In April and May 2014, after satisfying the conditions precedent defined in the Agreement, PKO Bank Polski SA:
- acquired shares of Nordea Bank Polska SA
On 1 April 2014 Nordea Bank AB (publ) placed a subscription in response to a tender offer announced on 3 December 2013 by the Bank (the ‘Tender Offer’), for the sale of all the shares of Nordea Bank Polska SA, i.e. 55 061 403 shares representing the 99.21% of the Company’s share capital and entitling to 99.21% of votes at the General Shareholders’ Meeting of the Company. Whereas non-controlling shareholders placed a subscription within the Tender Offer regarding the sale of a total of 319 889 shares of Nordea Bank Polska SA. The total purchase price of the above-mentioned shares, paid within the Tender Offer, was PLN 2 635 753 thousand.
On 4 April 2014, as a result of exercising rights under subscription warrants (acquired by PKO Bank Polski SA on 1 April 2014), Nordea Bank Polska SA issued to the Bank 8 335 100 of ordinary registered Series N shares. The purchase price of the Series N shares was PLN 400 001 thousand.
On 12 May 2014, as part of the compulsory buy-out, PKO Bank Polski SA bought 117 408 shares of Nordea Bank Polska SA i.e. all remaining, dematerialised shares, for the amount of PLN 5 635 thousand.
As part of the above-mentioned transactions, the Bank acquired in total 63 833 800 ordinary shares of Nordea Bank Polska SA with a nominal value of PLN 5 each, representing 100% of the Company’s share capital and entitling to 100% of the votes at the General Shareholders’ Meeting of the Company. The total purchase price of the shares of Nordea Bank Polska SA, including the final discount for this Transaction, was PLN 2 998 389 thousand.
The aim of the acquisition of shares of Nordea Bank Polska SA was to achieve the Bank's economic benefits by increasing the customer base and strengthen the Bank's competitive position in the market. On 14 May 2014, the Management Board of PKO Bank Polski SA and the Management Board of Nordea Bank Polska SA signed a merger plan, whereby all property (all assets, equity and liabilities) of the Company was transferred to the Bank, as the acquirer. On 26 September 2014 the Polish Financial Supervision Authority granted its permit to the above-mentioned merger. On 31 October 2014, the merger was register with the National Court Register relevant to PKO Bank Polski SA’s head office. The merger was carried out in the manner provided in Article 515 § 1 of the Commercial Companies Code, i.e. without an increase in the share capital of the Bank.
From the acquisition date (i.e. from 1 April 2014) to the legal merger date (i.e. to 31 October 2014), Nordea Bank Polska SA was a separate company in the Bank’s Group. The Bank and the Company remained separate as regards the provision of their services. Nordea Bank Polska SA ceased to operate as a separate entity as from the legal merger date. As of this day, PKO Bank Polski SA automatically became a party to all agreements concluded with the customers and, consequently, assumed all rights and obligations of the Company. The process of the banks’ integration will be rounded off with an operating merger scheduled for the first year of 2015.
- acquired shares of ‘Nordea Polska Towarzystwo Ubezpieczeń na Życie’ SA
On 1 April 2014, PKO Bank Polski SA concluded an agreement with Nordea Life Holding AB (a company registered in Sweden) for the purchase by the Bank of 1 725 329 shares of ‘Nordea Polska Towarzystwo Ubezpieczeń na Życie’ SA, with a nominal value of PLN 111.59 each, representing 100% of the share capital and entitling to 100% of votes at the General Shareholders’ Meeting, for a total price of PLN 184 636 thousand.
On 14 May 2014, the change in the Company’s name to PKO Życie Towarzystwo Ubezpieczeń SA was registered with the National Court Register. At the same time, in connection with the acquisition of ‘Nordea Polska Towarzystwo Ubezpieczeń na Życie’ SA, its subsidiary, Nordea Usługi Finansowe Sp. z o.o. (currently Ubezpieczeniowe Usługi Finansowe Sp. z o.o. – the change of business name was registered with the National Court Register on 14 May 2014) became part of the PKO Bank Polski SA Group. As at 31 December 2014, the share capital of Ubezpieczeniowe Usługi Finansowe Sp. z o.o. amounted to PLN 1 950 thousand and consisted of 3 900 shares, each of PLN 500 nominal value. PKO Życie Towarzystwo Ubezpieczeń SA is the sole shareholder of the above-mentioned company. The core business of Ubezpieczeniowe Usługi Finansowe Sp. z o.o. is the provision of services supporting insurance operations.
- acquired shares of Nordea Finance Polska SA
On 1 April 2014, PKO Bank Polski SA concluded an agreement with Nordea Rahoitus Suomi OY (a company registered in Finland) for the purchase by the Bank of 4 100 000 shares of Nordea Finance Polska SA, with a nominal value of PLN 1 each, representing 100% of this company’s share capital and entitling to 100% of votes at the General Shareholders’ Meeting, for a total price of PLN 8 000 thousand.
On 26 June 2014, the change in the Company’s name to PKO Leasing Pro SA was registered with the National Court Register.
On 30 September 2014 the merger of PKO Leasing Pro SA with PKO Leasing SA was registered with the National Court Register of the domicile of the acquirer, by which the all property of PKO Leasing Pro SA (all assets and equity and liabilities, excluding statement of financial position items related to factoring activities acquired by PKO BP Faktoring SA), was transferred to PKO Leasing SA.
- acquired the so-called ‘Swedish portfolio’ assets
On 1 April 2014, PKO Bank Polski SA and Nordea Bank AB (publ) concluded an agreement for the purchase by the Bank of the so-called ‘Swedish portfolio’ assets, i.e. receivables from loans and advances granted and bonds issued by Nordea Bank AB (publ) or other members of its Group to corporate customers (the ‘Swedish portfolio’). Pursuant to the agreement: (i) assets which as at 1 April 2014 had a remaining maturity period shorter than 12 months, (ii) assets which had been repaid, prepaid or fully cancelled by the client between the date of the Agreement (i.e. 12 June 2013) and 1 April 2014, and (iii) assets which could not be transferred without client’s or third party’s consent and such consent had not been obtained, were excluded from the Swedish portfolio sold on 1 April 2014. The total acquisition value of the Swedish portfolio was the sum of PLN 761 811 thousand, USD 120 199 thousand, EUR 136 044 thousand and CZK 459 167 thousand i.e. it amounted to PLN 1 763 815 thousand in total (as the average NBP exchange rates of 1 April 2014).
- concluded additional agreements related to the acquisition of the Nordea Bank AB (publ) Group entities
In connection with the fulfilment of the terms of the Transactions related to the Nordea Bank AB (publ) Group retaining the financing of the mortgage loans portfolio granted by Nordea Bank Polska SA (‘Mortgage Portfolio’), based on the agreement concluded on 1 April 2014, Nordea Bank AB (publ) granted a credit facility to PKO Bank Polski SA in an amount of up to: CHF 3 645 818 thousand, EUR 465 414 thousand and USD 3 725 thousand, for a period no longer than 7 years, with a three-year repayment suspension period (the ‘Credit Facility’). The average effective margin over the maximum crediting period under the Credit Facility is 63 basis points above the relevant reference rate. The Credit Facility does not involve any commissions related to the granting of the financing. The Credit Facility was secured with a transfer for security of receivables related to the Mortgage Portfolio to be made by Nordea Bank Polska SA in favour of Nordea Bank AB Spółka Akcyjna Oddział w Polsce according to the agreement on the transfer of ownership for security signed on 2 July 2014. The value of receivables (loans) transferred for security amounts to approx. PLN 14 400 million.
On 1 April 2014, PKO Bank Polski SA concluded a loan agreement with Nordea Bank Polska SA, according to which funds received under the Credit Facility were transferred to Nordea Bank Polska SA in the form of a facility, the so-called push-down facility, in an amount of up to: CHF 3 645 818 thousand, EUR 465 414 thousand and USD 3 725 thousand for a period of no longer than 7 years, with a three-year repayment suspension period (the ‘Push-Down Facility’). The Push-Down Facility was unsecured. The financial terms of the Push-Down Facility (credit margin, commission) are set at arm’s length. On the legal merger between PKO Polski Bank SA and Nordea Bank Polska SA, the contract has expired.
In accordance with the provisions of the Agreement, which require that the Nordea Bank AB (publ) Group participate in the default risk of the Mortgage Portfolio, on 1 April 2014 PKO Bank Polski SA and Nordea Bank AB (publ) concluded the ‘Special Indemnity Agreement’, according to which Nordea Bank AB (publ) will cover, for a period of 4 years following the closing date, 50% of the excess of the Mortgage Portfolio cost of risk over the annual cost of risk set at 40 basis points for each year of the above-mentioned four-year duration of the Special Indemnity Agreement.
3.2. Settlement of the purchase transaction
The settlement of the purchase transaction was conducted in accordance with International Financial Reporting Standard 3 ‘Business Combinations’ (IFRS 3) which requires the acquirer to be identified, the acquisition date to be determined, and identifiable assets acquired, liabilities measured at fair value as at the acquisition date and non-controlling interests in the acquiree to be recognised and measured, and goodwill or gain on bargain acquisition to be recognised and measured.
Given that the assumption of control over the Nordea Polska entities occurred on 1 April 2014, the settlement of the Transaction was made based on data of acquired entities as at that day, taking into account the adjustments required by IFRS 3.
Total consideration paid and the amount of any non-controlling interests in the acquiree
| Total consideration paid | Number of shares | in PLN thousand |
|---|---|---|
| - Shares of Nordea Bank Polska SA | - | 2,598,388 |
| - purchased from Nordea Bank AB on 1 April 2014 | 55,061,403 | 2,620,402 |
| - purchased from non-controlling shareholders on 1 April 2014 | 319,889 | 15,351 |
| - remaining part of shares acquired under the compulsory buy-out of non-controlling shareholders on 12 May 2014* | 117,408 | 5,635 |
| - discount | - | -43,000 |
| - Shares of PKO Życie Towarzystwo Ubezpieczeń SA (formerly Nordea Polska Towarzystwo Ubezpieczeń na Życie SA) | 1,725,329 | 184,636 |
| - Shares of PKO Leasing Pro SA (formerly Nordea Finance Polska SA) | 4,100,000 | 8,000 |
| - Swedish portfolio | - | 1,763,815 |
| Total | 61,324,029 | 4,554,839 |
*The compulsory buy-out was a part of the purchase transaction of Nordea Bank’s shares.
The transaction on increasing the share capital of Nordea Bank Polska SA does not constitute a component of the Purchase price in the acquisition by the Bank of the assets of Nordea Bank Polska SA from Nordea Bank AB.
The Bank holds a 100% interest in the purchased Nordea Polska entities, and therefore there are no non-controlling interests within the acquired entities.
Due to the fact that the conditions of the IFRS 10 ‘Consolidated financial statements’ paragraph B97 have been met, the purchase of shares in individual entities of Nordea Polska and the purchase of the Swedish portfolio should be considered a single Transaction
Shares were paid up in cash.
Recognition and measurement of identifiable acquired assets and liabilities measured in accordance with IFRS
The data presented below concerning fair value measurement of identifiable assets acquired and liabilities assumed is based on an identification conducted from the perspective of the entire PKO Bank Polski SA Group as well as on adopted assumptions concerning the materiality threshold.
| ASSETS | Nordea Polska entities and Swedish portfolio | Adjustments and eliminations | Identifiable acquired assets measured at fair valueassets measured |
|---|---|---|---|
| Cash and balances with the central bank | 775,945 | - | 775,945 |
| Amounts due from banks | 613,637 | (193,231) | 420,406 |
| Derivative financial instruments | 28,384 | - | 28,384 |
| Other financial instruments measured at fair value through profit and loss | 5,599,561 | - | 5,599,561 |
| Loans and advances to customers | 29,324,857 | (1,035,107) | 28,289,750 |
| Securities held to maturity | 37,281 | 3,672 | 40,953 |
| Inventories | 1,070 | - | 1,070 |
| Intangible assets | 26,683 | 208,107 | 234,790 |
| Tangible fixed assets | 98,104 | 10,517 | 108,621 |
| Current income tax receivables | 5,567 | - | 5,567 |
| Deferred income tax asset | 80,379 | 138,061 | 218,440 |
| Other assets | 224,850 | (147,119) | 77,731 |
| TOTAL ASSETS | 36,816,318 | (1,015,100) | 35,801,218 |
| LIABILITIES | Nordea Polska entities and Swedish portfolio | Adjustments and eliminations | Identifiable assumed liabilities measured at fair value |
|---|---|---|---|
| Amounts due to other banks | 15,090,954 | (242,210) | 14,848,744 |
| Derivative financial instruments | 11,086 | - | 11,086 |
| Amounts due to customers | 13,683,577 | (193,231) | 13,490,346 |
| Liabilities due to insurance operations | 2,517,427 | 16,899 | 2,534,326 |
| Subordinated liabilities | 1,000,115 | - | 1,000,115 |
| Other liabilities | 241,394 | 52,511 | 293,905 |
| Current income tax liabilities | - | 3,038 | 3,038 |
| Deferred income tax liability | 2,471 | 3,584 | 6,055 |
| Provisions | 36,485 | 7,500 | 43,985 |
| TOTAL LIABILITIES | 32,583,509 | (351,909) | 32,231,600 |
| Nordea Polska entities and Swedish portfolio | Adjustments and eliminations | Identifiable acquired assets and assumed liabilities measured at fair value | |
|---|---|---|---|
| Fair value of identifiable acquired assets, and assumed liabilities | 4,232,809 | (663,191) | 3,569,618 |
| Identifiable acquired assets and assumed liabilities measured at fair value | |
|---|---|
| Deferred income tax asset | 218,440 |
| Deferred income tax liability | 6,055 |
| Total | 212,385 |
The portfolio of loans and advances granted to customers acquired as part of the Transaction involving the acquisition of Nordea Polska entities and the Swedish portfolio, measured at fair value as at the acquisition date, has been presented in the financial statements showing separately the gross values (which include fair value adjustments) and write-downs. Such presentation is more useful to financial statements users and reflects the market practice followed by the banks.
| Identifiable acquired assets and assumed liabilities measured at fair value | |
|---|---|
| Amounts due from banks gross | 420,407 |
| Impairment allowances on receivables | (1) |
| Amounts due from banks net | 420,406 |
| Identifiable acquired assets and assumed liabilities measured at fair value | |
|---|---|
| Loans and advances to customers, gross | 28,868,667 |
| Allowances - total | (578,917) |
| Loans and advances to customers, net | 28,289,750 |
| Loans and advances to customers by method of calculating impairment allowances | Identifiable acquired assets and assumed liabilities measured at fair value |
|---|---|
| Assessed on an individual basis | 2,240,886 |
| Impaired | 480,071 |
| finance lease receivables | 169,788 |
| Not impaired | 1,760,815 |
| Assessed on a portfolio basis | 286,729 |
| Impaired | 286,729 |
| Assessed on a group basis (IBNR), of which: | 26,341,052 |
| finance lease receivables | 384,971 |
| Loans and advances to customers, gross | 28,868,667 |
| Impairment allowances on exposures assessed on an individual basis | (293,305) |
| Impaired | (155,692) |
| Impairment allowances on exposures assessed on a portfolio basis | (141,416) |
| Impairment allowances on exposures assessed on a group basis (IBNR) | (144,196) |
| impairment allowances on lease receivables | (472) |
| Impairment allowances - total | (578,917) |
| Loans and advances to customers, net | 28,289,750 |
| Loans and advances to customers by sectors | Identifiable acquired assets and assumed liabilities measured at fair value |
|---|---|
| Loans and advances to customers, gross, of which: | 28,868,667 |
| financial sector | 1,014,733 |
| corporate, of which: | 1,014,733 |
| non-financial sector | 24,133,433 |
| housing | 18,150,082 |
| corporate | 4,430,178 |
| consumer | 270,521 |
| debt securities (corporate) | 1,282,652 |
| public sector | 3,720,501 |
| corporate | 1,139,005 |
| debt securities (municipal) | 2,579,817 |
| housing | 1,679 |
| Impairment allowances on loans and advances | (578,917) |
| Loans and advances to customers, net | 28,289,750 |
| Loans and advances to customers by client segment | Identifiable acquired assets and assumed liabilities measured at fair value |
|---|---|
| Loans and advances granted, gross, of which: | 28,868,667 |
| mortgage banking | 15,791,097 |
| corporate | 12,182,012 |
| small and medium enterprises | 616,507 |
| retail and private banking | 274,583 |
| other receivables | 4,468 |
| Impairment allowances on loans and advances | (578,917) |
| Loans and advances granted, net | 28,289,750 |
- Loans and advances to customers
- Fair value measurement of the loan portfolio was conducted by discounting future cash flows taking into account estimated cash flows from an individual loan, the time value of money reflected in risk-free interest rates, the risk premium, credit losses incurred, additional expected future credit losses and liquidity premium. Discounting factors used in the model were determined based on risk-free interest rates curve and market margin, and for mortgage loans, also based on the capital requirement charge.
The fair value measurement of the corporate portfolio without impairment was conducted using the discounted cash flow method ('DCF') as at the acquisition date. Cash flows were determined using the discounting curve derived based on risk-free interest rates curve and market margins. The risk-free interest rate curve was derived using the following curves:
- for PLN: WIBOR (up to one year) and IRS (above one year),
- for foreign currencies: LIBOR (up to 3 months), FRA (from 3 to 12 months) and IRS (above one year).
Market margins were determined based on an analysis of margins at which the Bank provided financing to entities in 2014. These margins depended on the currency of the financing granted and the borrower's credit rating.
The measurement of the corporate portfolio with impairment was conducted using the discounted cash flow method ('DCF') as at the acquisition date. Cash flows from the collateral provided and other cash flows (from sources other than collateral) over the 5 year horizon (2014-2018) were taken into account. The market discount rate was adopted as the discounting rate. It was estimated based on observable asset sale transactions. This rate includes additional risk premium based on observable market transactions involving the sale of similar loan portfolios. WIBOR 3M/LIBOR 3M, as appropriate, was the reference rate adopted.
The measurement of the public sector customers portfolio without impairment (both loans and bonds classified to loans and receivables portfolio) was performed using the same expected future cash flow methods as in the case of corporate loans without impairment.
Fair value measurement of the Nordea Bank mortgage loan portfolio without impairment was conducted by applying the discounted cash flow method ('DCF') as at the acquisition date to specific selected sub-groups of the portfolio. The selection was based on the currency of the contract and the variable part of the interest rate (the reference/base rate). For each of the selected sub-portfolios, a separate valuation was conducted.
Based on contractual schedules for the repayment of principal (in the currency of the contract), an aggregate monthly repayment schedule was developed for each of the sub-portfolios. Future cash flows were determined based on repayment schedules for the principal, early repayments, future impairment losses, contractual interest, income of foreign currency exchange and the costs of liquidity and account servicing. Contractual cash flows from the repayment of the principal were adjusted for early repayments of the principal based on the calculated early repayment ratio.
Future impairment losses were determined based on the PD ratio of Nordea Bank Polska SA and LGD with 5-year recovery period, taken as the average (weighted by the capital engaged), of each of the sub-portfolios identified.
Future cash flows from the repayment of interest was determined based on forward rates calculated based on reference rates (risk-free interest rate curve) and the average contractual credit margins weighted by the capital engaged, for each exposure under this part of the mortgage loan portfolio. Expected future cash flows were discounted using determined discounting rates based on:
- a risk-free interest rate curve:
- for PLN: WIBOR (up to one year) and IRS (above one year)
- for foreign currencies: LIBOR (up to 3 months), FRA (from 3 to 12 months) and IRS (above one year);
- capital requirement charges which depend on the minimum capital adequacy ratio (12%), the cost of capital determined for the Bank (10.8%), risk weights for assets (75% for loans denominated in PLN, 100% for loans denominated in foreign currencies), risk-free interest rate and margin for the liquidity;
- the market margin for the liquidity used by the Bank which, depending on the currency and tenor.
For the part of the portfolio denominated in a currency other than PLN but actually not repaid in the contractual currency, the valuation includes income on foreign exchange calculated based on the total cash flows in a given period, as an additional gain to the Bank on the translation of the payments made in PLN into the loan account maintained in a foreign currency. The foreign exchange income rate was calculated as the difference between the selling exchange rate and the exchange rate of the National Bank of Poland ('NBP'). Foreign exchange income relates to some of the customers.
In addition, the cost of maintenance of account was included in the calculation.
For the purposes of the measurement, the portfolio of mortgage loans with an impairment was divided into:
- Debt collection sub-portfolio – containing exposures with an assigned legal status of ‘debt collection’, ‘fraud’ or ‘bankruptcy’. A debt collection process, depending on the type of collateral provided, is initiated in respect of such customers,
- Other exposures – containing exposures with other status assigned: ‘restructuring’, ‘write-off’, or the ones without an assigned legal status.
As part of the fair value measurement of the debt collection sub-portfolio, the effective interest rate was reduced to the market discounting rate, based on observable rates of return on similar assets in the market, e.g. based on market transactions involving the sale of assets. An analysis of the observable transaction prices for similar purchase and sale transactions enabled determining the fair value of the loans, and consequently, the price which other market participants would be willing to pay for a debt collection sub-portfolio of mortgage loans.
To determine the fair value of the remaining sub-portfolio exposures, it was necessary to adjust the effective interest rate to the market discount rate, based on observed rates of return for comparable assets in the market, eg. based on market transactions, sales of assets or the estimated discount rate compared to the market risk-free rate (in accordance with IFRS 13). The fair value adjustment for this sub-portfolio results from the increase in the discount rate used to discount designated future cash flows. The discount is an additional risk premium determined on the basis of the observed market sales transactions of similar loan portfolios. This allowed to determine the fair value of loans, and thus the price that other market participants would be willing to pay for these mortgage portfolio.
The total amount of adjustments resulting from the fair value remeasurement of the loans and advances granted to customers amounted to minus PLN 656 million. The largest adjustment, in absolute terms, is the adjustment relating to the portfolio of mortgage loans for private individuals of PLN 651.1 million.
2) In addition, the carrying value of loans and advances granted to customers was reduced by the adjustments resulting from the need to adopt the models and estimation methods used by the PKO Bank Polski SA Group.
In particular, the following adjustments were recognised:
- An increase in the IBNR impairment allowance for corporate loans acquired. Due to the differences in customer evaluation systems and the corresponding PD and LGD parameters between the PKO BP Group and the Nordea Group as at the acquisition date, the Bank mapped the Nordea Bank Polska SA ratings between the two systems. The additional IBNR impairment allowance amounts to PLN 37.9 million for both the public and corporate customer portfolios, and represents the differences between the above-mentioned systems.
- An increase in charges in respect of the mortgage loans acquired, which includes both the charges for identified and unidentified (IBNR) impairment losses and results from harmonisation of the risk parameters, including PD parameters (through re-scaling PD parameters to the LIP period used in the Bank), and the LGD curve (through the shortening of the recoveries from the 6 year period to the 5 year period applied by PKO Bank Polski SA). In addition, all impaired mortgage loan exposures with a gross value not exceeding PLN 3 million in respect of which provisions were assessed on individual basis, were subject to a collective assessment. The total amount of additional charges was PLN 50.6 million.
- An increase in the impairment allowances of the impaired corporate portfolio assessed on individual basis due to verification of the expected cash flows from selected credit exposures amounted to PLN 40.4 million.
The total impact of the above-mentioned adjustments on the decrease of carrying value of acquired loan portfolio amounted to
PLN 129.0 million.
Additionally, as at the acquisition date an IBNR impairment allowance of PLN 4.7 million was recognised in respect of so-called Swedish portfolio assets and PLN 3 million for mortgage loans portfolio due to the adjustment of the effective interest rate method.
- Intangible assets
When accounting for the purchase transaction, the following acquired intangible assets were identified:
- customers relations in the area of deposits at the level of PLN 86.5 million. Customers relations in the area of deposits were separately analysed for each cash generating unit (CGU) split into two core products: current accounts and term deposits. The Multiperiod Excess Earnings Method has been used in order to measure customer relations.
In this method the value is determined based on discounted future cash flows resulting from additional income generated by an entity possessing a particular intangible asset in excess over the income generated by an entity which does not hold such intangible asset. This method also takes into consideration the costs and investments connected with an intangible asset, such as patent fees, research and development costs, marketing expenses, etc. For the purposes of customer relations fair value estimation, identification of relations with key customers for each CGU is made, the forecasted period of its further duration and forecasted income on each relation and costs directly associated with these relations are determined. The amount of general administrative expenses (including amortisation) for CGU in each year is deducted subsequently from such determined cash flows. The Contributory Asset Charge (‘CAC’) contributing to generating income on client relations (inflow of fixed assets, working capital, organised labour force, brand) are deducted afterwards. The charges resulting from utilising other assets correspond to the required return on each tangible and intangible assets used to generating income on client relations. The required return is calculated respectively for non-current assets, net working capital and organised labour force and aggregated subsequently and in such amount recognised in income on customers relations. The required return on brands (if it appears in a given CGU) are determined separately. Cash flows obtained for respective years are discounted subsequently with an appropriate discount rate enlarged by an appropriate premium on intangible assets. After discounting the cash flows, the present value of Tax Amortisation Benefit (‘TAB’) is added. Thus received discounted amount of cash flows stands as estimation of intangible asset. - Value in force – future profits on concluded insurance contracts in the amount of PLN 141 million. The present value of future profits on concluded insurance contracts was estimated based on cash flows for three groups of products: regular premium life insurance with a significant investment component, one-off premium life insurance with a significant investment component and protective life insurance. The present value of future profits does not take into consideration changes in deferred acquisition costs, because they were entirely written-off at the moment of acquisition.
In accordance with the Purchase Agreement, the ‘Nordea’ trademark and any other trademarks held by Nordea Polska entities will be transferred respectively into Nordea Bank AB (publ) before the closure of the Transaction and will be excluded from the group of assets acquired by the Bank. The Bank is entitled to use the ‘Nordea’ trademark during the transition period without incurring any costs. Using the ‘Nordea’ trademark during the transition period is merely a technical matter, connected with aspects on integration of Nordea Polska entities within the Acquirer’s structure and does not serve for any business purposes aimed at acquiring new customers. These conditions were considered within the price paid by the Acquirer. In the event of the Bank’s willingness to use the ‘Nordea’ trademark longer, it would be obliged to incur licence fees due to the use of the ‘Nordea’ trademark on terms determined within the Agreement. Having in regard the above conditions there is no possibility to recognise the ‘Nordea’ trademark as an intangible asset.
- Tangible fixed assets
The valuation of properties (buildings) of the acquired entity was carried out using the income method. This approach involves assessing the property’s value assuming that its buyer will pay for it a price which depends on the expected income which can be derived from that property.
The valuation of land was carried out using the comparative approach, by applying the paired comparison method or the average price adjustment method. In the paired comparison method the value of property whose features are known and which is being appraised is compared with similar properties which were traded in the market, where the transaction prices, transaction settlement conditions and property prices are known. In the average price adjustment method the property value is determined as an adjustment to the average price of similar properties by adjusting coefficients which reflect the differences in particular features of these properties.
- Other assets
The adjustment to other assets relates mainly to the write-off of any DAC (deferred acquisition costs) in PKO Życie Towarzystwo Ubezpieczeń SA which have no fair value as at the settlement date. These costs are included in the calculation of the portfolio’s present value (Value in Force) and their write-off is covered with this intangible asset.
- Other adjustments
Other adjustments to fair value and the so-called net assets adjustments resulting from harmonising inconsistent accounting policies related i.a. to a fair value adjustment of assets held to maturity, where for the purposes of the acquisition settlement, instruments measured at amortised costs held by PKO Życie Towarzystwo Ubezpieczeń SA were measured at fair value as at the acquisition date; fair value adjustment of liabilities in respect of the provisions identified in the entities acquired, including Nordea Bank Polska SA and PKO Życie Towarzystwo Ubezpieczeń SA, and other liabilities including IT services or resulting from onerous contracts.
Determining the fair value of the acquired assets and liabilities, and the identification and recognition of intangible assets arising from the acquisition were carried out on the basis of available information, and the best estimates at the date of the financial statements.
The Group completed the process of calculating goodwill recognised as at 1 April 2014 for the acquisition of the Nordea Polska Group entities. Compared to the preliminary calculations presented in the interim financial statements as at 30 June 2014, goodwill increased by PLN 103 962 thousand and amounted to PLN 985 221 thousand as at 1 April 2014. Correction of calculation relates to obtaining of new information on the fair value of assets and liabilities of ‘Nordea Polska Towarzystwo Ubezpieczeń na Życie’ SA and Nordea Finance Polska SA as at 1 April 2014.
Goodwill arising on the Transaction:
| Identifiable acquired assets and assumed liabilities measured at fair value | |
|---|---|
| Total consideration paid | 4,554,839 |
| fair value of identifiable acquired assets, and assumed liabilities | 3,569,619 |
| Goodwill | 985,221 |
| of which assigned to the following segments: | |
| retail segment | 746,708 |
| corporate and investment segment | 238,513 |