26.3.1 Trade receivables. Other loans and financial receivables

ACCOUNTING POLICIES

Financial receivables

Financial receivables, including trade receivables, are measured at fair value at the date on which they arise, and subsequently at amortised cost using the effective interest rate method, taking into account an allowance for expected credit losses.

The Group uses simplified methods to measure receivables at amortised cost, unless this would distort information contained in its statement of financial position, in particular where the period until the due date is not long.

PGE Group does not monitor changes in the level of credit risk during the life of the instrument. The expected credit loss is estimated in the horizon up to maturity of the instrument.

The companies apply the following rules for estimating and recognising impairment losses on financial receivables:

• for trade receivables from significant clients that are subject to a credit risk assessment procedure, the companies estimate expected credit losses based on a model used to evaluate this risk on the basis of ratings assigned to counterparties; ratings have a likelihood of default assigned, which is adjusted to reflect the impact of macroeconomic factors;
• for receivables from mass or clients not covered by the credit risk assessment procedure, the companies estimate expected credit losses based on an analysis of the likelihood of credit losses in each age bracket;
• in justified cases, the companies might estimate the amount of an impairment loss on a case by case basis.

Impairment losses on receivables are charged to other operating expenses or finance costs, as appropriate. Non-current receivables are measured at present (discounted) value.

Ratios adopted to estimate the value of expected losses calculated according to the provision matrix:

The allowance concerns receivables covered by an allowance calculated in accordance with the matrix and allowance determined on a case by case basis.

Ratios adopted to estimate the value of expected losses calculated according to the model for key customers:

Trade receivables are, as a rule, paid in 2-3 weeks. In 2019, PGE Group waited on average 34 days for the payment of receivables on average (receivables turnover ratio in the main companies of PGE Group ranged from 11 to 73 days). Trade receivables relate mainly to receivables from energy sold and distribution services. According to the management of PGE Group, there is no additional credit risk that would exceed the level reflected by impairment losses.

PGE Group reduces and controls the credit risk related to trade transactions in accordance with uniform credit risk management rules implemented at all key PGE Group companies. In the case of trade transactions which due to high value may generate substantial loss in case of failure of business partner to comply with the agreement, the assessment of contractor is carried out before the transaction is conducted, taking into account contractor’s financial analysis, its credit history and other factors. Based on the assessment, an internal rating is recognised or PGE Group uses a rating determined by an independent reputable rating agency. A limit for the contractor is set based on the rating. Entering into contracts that would increase exposure above the limit, requires in principle the collateral in line with PGE Group’s rules pertaining to credit risk management. The level of used limit is regularly monitored and reported to the Risk Committee, and if it is substantially exceeded, units responsible for contractor’s risk are obliged to undertake measures to eliminate them. PGE Group regularly monitors the payment of receivables and uses a system for early recovery taking into consideration deadlines arising from the energy law and high level of repayment of receivables that have been past due for a short period. It also cooperates with credit bureaus and debt collection agencies.

Credit risk relating to trade receivables by geographical region is presented in the table below:

Ageing of receivables and impairment losses

As at December 31, 2019, impairment losses were recognised for a part of financial assets. Changes in allowances for these classes of financial instruments are presented in the following table:

Most of impairment losses on trade receivables relate to the supply and distribution segments. As at December 31, 2019, the total amount of impairment losses on trade receivables of those companies was PLN 189 million (vs. PLN 143 million in 2018).

There are no significant receivables in the Group that would be substantially past due and not covered by an impairment loss, except for disputed receivables from ENEA S.A. described in detail in note 28.4 to these financial statements.

Aging analysis of trade receivables, other loans and receivables, taking into account impairment losses, is presented below:

As at December 31, 2019, more than 36% of the balance of past due trade receivables and other loans and receivables, for which no impairment losses were recognised, relate to sales of energy to end users.