5.4 Acquisition method

The acquisition of subsidiaries by PZU Group is accounted for using the acquisition method in accordance with IFRS 3 "Business Combinations".

In the case of acquisition of an entity, an acquirer is determined as well as the acquisition date being the day on which it obtains control of the acquiree. On the acquisition date, identifiable assets acquired, liabilities assumed and non-controlling interest in the acquiree are recognized separately from goodwill.

All identifiable assets acquired and liabilities assumed are measured at acquisition-date fair value.

In the case of every acquisition, all non-controlling interest in an acquiree are measured at a proportional share in fair value of identifiable net assets of the acquiree.


Goodwill is measured and recognized as at the acquisition date as the difference between:

  • the consideration transferred measured at their acquisition-date fair value;
  • non-controlling interest in the acquiree, measured as described above;
  • acquisition-date fair value of the equity interest previously held by PZU Group;
    over the net of the acquisition-date fair value of the identifiable assets acquired and the liabilities assumed.

In the measurement period, PZU Group may retrospectively adjust provisional amounts recognized as at the acquisition date, so as to reflect new information obtained concerning the facts and circumstances at the acquisition date, which, if known, could have an effect on measurement of the amounts recognized as at the aforementioned date. Pursuant to IFRS 3 point 45, the measurement period shall not exceed one year after the acquisition date.

Intangible assets

Intangible assets acquired on business combination transactions are recognized at fair value as at the acquisition date. Fair value of intangible assets reflects expectations as to the probability that the entity achieves economic benefits from a given asset. Fair value of intangible assets is determined in the following manner:

  • trademark – using the relief-from-royalty method, based on potential savings on the license fees the entity will not be charged with being the owner of the trademark (i.e. the present value of future license fees). Determining the market rate of license fees involves an analysis of license rates for using trademarks applied between unrelated parties in a comparable market segment. Then, hypothetical license payments are established, defined as the product of the adopted license fee and the value of estimated revenue from sales. In order to calculate the net income from license, license payments should be reduced by the hypothetical amount of income tax. To the calculated net cash flows the potential tax savings on tax depreciation of a trademark should be added, the so-called TAB (tax amortization benefit). Finally, the indicated cash flows are discounted using the discount rate reflecting, among others, the typical risk of a given trademark;
  • Broker and customer relations – using the multi-period excess earnings method (MEEM) based on the present value of future profits generated by the respective relations. Fair value is determined based on discounted future cash flows arising from the additional revenue generated by the company owning a given intangible asset as compared to the revenue generated by the company if it did not hold such an asset. The relations are identified along with the projected period of their duration (using an appropriate churn rate and applying the so-called Weibull’s curve); revenue and costs related to individual relations are projected. The identified and calculated CAC (contributory asset charge), including retaining capital ratios at levels required by supervisory authorities, fixed assets, organized workforce, trademark and other intangible assets, is applied to cash flows after tax. Should there be any tax structures in place allowing an average market participant for tax depreciation of the relations, the TAB should be included in its measurement;
  • present value of future profits (VIF – value in force) – as a potential excess of book value of technical provisions over their fair value, including deferred acquisition costs. Fair value of technical provisions is determined as the expected value of nominal cash flows projected using actuarial methods appropriate for particular provision types, including the specific nature of a given portfolio and market trends. The expected value of future cash flows is determined by discounting projected nominal cash flows using discount rates established on the basis of the risk-free rates’ curve. When forecasting nominal cash flows, the following factors are considered: the likelihood of occurrence and the value of future claims, claim handling costs (both direct and indirect) and – in the case of unearned premiums reserve – also administrative expenses related to insurance portfolio management. The estimates take into account reinsurer's share resulting from binding reinsurance treaties. The relevant probability of an event’s occurrence is estimated using statistical and actuarial methods, whereas the cash flow value results from relevant provisions of insurance contracts and actuarial analysis.
  • customer relations concerning deposit clients (core deposit intangible, CDI) – as a current value of the difference between the borrowing costs of deposits and alternative borrowing costs (including interest and administrative expenses) which would be incurred by the bank if it did not have a portfolio of such deposits. The value of a CDI is measured with the favorable source of funds method, being a derivative of the expense and income methods. In this method, forecasts are made for the retention level of deposit accounts (with the application of so-called Weibull curve), average opening balance and the number of accounts which have to be included in the measurement are estimated and net balance of deposits is calculated (adjusted by the retention ratio and unstable part of the deposit base). On the basis of the requirements for the minimum reserves, interest and administration expenses less commission income from accounts, the cost of acquired deposits is calculated. Next, on the basis of interest rate benchmarks, the alternative borrowing cost is estimated. In the next step, the difference between the alternative borrowing costs and the cost of acquired accounts, which is discounted using the acceptable return rate, is calculated. In the measurement of CDI no tax amortization benefit (TAB) was included.

The discount rate applied to measure the intangible assets reflects the time value of money and risks related to expected cash flows in the future. It is calculated based on the expected return from the best alternative investment as compared with the measured investment. The rate indicates the lowest acceptable return from an asset by the investor in such a manner that the return rate achieved by the investor is at least equal to the best available investment alternative. The return from alternative investment must be comparable in terms of value, time and certainty.

Cost of equity (CE) is estimated as at the acquisition date in accordance with the CAPM (Capital Asset Pricing Model) model: CE = RF + ERP x β + SP + SR, where RF stands for risk-free rate, ERP – market risk premium, β – measure of systematical risk borne by the equity holders, including the operational and financial risks related to a given type of activity, SP – low capitalization premium, SR – specific premiums.

Tangible assets

Property are measured using the income method, on the assumption that the acquirer pays the price the rate of which is dependent on the discounted value of achievable cash flows.

Other plant, property and equipment is measured using comparative or replacement value method.

Technical provisions

The value of technical provisions is measured in accordance with the acquiree carrying amount. In accordance with IFRS 4, the difference between fair value and the carrying amount is disclosed as intangible assets (present value of future profits).