11.10. Modifications – changes in contractual cash flows

Modification – understood as a change in the contractual cash flows in respect of a financial asset based on an annex to the contract, may be substantial or non-substantial. A change in the contractual cash flows resulting from execution of the terms of the contract is not a modification.

When the contractual cash flows of a financial asset are renegotiated or otherwise modified based on an annex to the agreement or by general legislation, and the renegotiation or modification does not result in the derecognition of that financial asset (“Non-substantial modification”), the gross carrying amount of the financial asset is recalculated and gain or loss arising from such modification is recognized in profit or loss (as interest income or expense).

An adjustment of the carrying amount of a financial asset resulting from the modification is recognized in interest income/ expenses over time using the effective interest rate method. The Group accounts for, among other things, the adjustment to the carrying amount due to recognised credit holidays using the effective interest rate method.

In certain circumstances, renegotiation or modification of contractual cash flows associated with a financial asset may lead to derecognition of the financial asset. If an existing financial asset is derecognized due to its modification, and a modified asset is subsequently recognized, the modified asset is treated as a “new” financial asset (“a substantial modification”). The new asset is recognized at the fair value and a new effective interest rate applicable to the new asset is calculated. If the characteristics of a modified new financial asset (after signing an annex) comply with the arm’s length conditions, the carrying amount of that financial asset is equal to its fair value.

The assessment whether a given modification of financial assets is a substantial or a non-substantial modification depends on satisfaction of certain quantitative and qualitative criteria.

The following qualitative criteria have been adopted:

1. currency conversion;
2. change of debtor, other than caused by the debtor’s death;
3. introducing or removing a contractual characteristic that adversely affects the test of cash flow characteristics (SPPI test) or removal of these features;

The occurrence of at least one of these criteria results in a substantial modification.
The quantitative criterion consists of a 10% test analysing the change in the contractual terms of a financial asset resulting in a difference between the amount of future cash flows arising from the changed financial asset discounted using the original effective interest rate and the amount of the future cash flows that would arise from the original financial asset discounted using the same interest rate. The other quantitative criterion is an increase in a debtor’s exposure, which includes an increase in the capital and off-balance sheet liabilities granted of more than 10% in relation to the amount of capital and off-balance sheet liabilities prior to the increase for each individual exposure. The third criterion is the extension of the original term of cash loans, business loans serviced in branch by more than 1 year and by more than double the residual term; cash loans, business loans handled by collection units by more than 1 year; home loans serviced in branch and handled by collection units by more than 4 years.

In the event of the occurrence of a quantitative criterion (a difference) of more than 10%, the modification is considered substantial, whereas a quantitative criterion of 10% or less means that the modification is considered non-substantial.

Derecognition of financial instruments measured at fair value through other comprehensive income or at amortized cost typically relates to a sale or a substantial modification of such assets.