26.3.1 Trade receivables. Other loans and financial receivables

Financial receivables, including trade receivables, are measured as at the date they arise at fair value, and then at amortised cost using the effective interest rate, including write-downs for expected credit loss.

The Group applies simplified methods of valuation of receivables measured at amortised cost if it does not distort the information contained in the statement of financial position, in particular when the period until the payment of receivables is not long.

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

The companies apply the following principles for estimating and recognising impairment write-downs on other financial receivables:

• for receivables from significant customers covered by the credit risk assessment procedure, the companies estimate expected credit losses on the basis of the model used to assess this risk based on ratings allocated to particular business partners; ratings are assigned the likelihood of bankruptcy adjusted by the impact of macroeconomic factors;
• for receivables from mass customers or customers not covered by the credit risk assessment procedure, the companies estimate expected credit losses on the basis of an analysis of the probability of incurring credit losses in the particular ageing ranges;
• in justified cases, the companies may assess the amount of a write-down on an individual basis.

Write-downs on receivables are recognised as other operating costs or financial costs, respectively. Long-term receivables are measured at current (discounted) value.

The ratios adopted for estimating expected losses calculated according to the provision matrix:

The write-down relates to receivables written down according to the matrix and on an individual basis (100%).

The ratios adopted for estimating expected losses calculated according to the key customers model:

Trade receivables typically have payment terms of 14-21 weeks. In 2020, the PGE Group waited on average 30 days for the payment of receivables (receivables turnover ratio in the main companies of the PGE Group ranged from 6 to 75 days). Trade receivables mainly relate to receivables for energy sold and distribution services. In the opinion of the management of the PGE Capital Group, there is no additional risk of non-payment of receivables above the level determined by the impairment write-down.

The PGE Capital Group mitigates and controls the credit risk related to trade transactions in accordance with uniform credit risk management principles implemented in all key companies of the PGE Capital Group. In the case of commercial transactions, which due to their high value may generate significant losses as a result of the counterparty’s default, a counterparty assessment is carried out prior to the transaction, taking into account a financial analysis, the counterparty’s credit history and other factors. Based on the assessment, the PGE Capital Group assigns an internal rating or uses a rating assigned by an independent reputable rating agency. Based on the rating, a limit is set for the counterparty. Entering into contracts that would increase exposures above set limits generally requires the establishment of security in accordance with the credit risk management principles in force in the PGE Capital Group.  The level of used limits is monitored and reported on a regular basis, and in the event of material overruns, the units responsible for counterparty risk management are required to take action to eliminate them. The PGE Capital Group monitors on an ongoing basis the payment of receivables and applies early collection, taking into account deadlines resulting from the energy law and a high level of repayment of receivables with short overdue periods. It also cooperates with business intelligence agencies and debt collection companies.

The outbreak of the COVID-19 pandemic contributed to a significant increase in the likelihood of credit risk materialisation, thus prompting PGE and the other companies that had adopted the common credit risk management principles to tighten the criteria for granting internal ratings and credit limits to counterparties. The Group developed internal guidelines aimed at reducing the credit risk by identifying industries that are particularly sensitive or relatively insensitive to the pandemic crisis and adjusting the criteria for credit decisions concerning counterparties in these industries accordingly. These guidelines are monitored and updated on an ongoing basis to ensure their adequacy for the changing economic situation.

As at the reporting date, there was no significant extension of the receivables payment period or liquidity problems resulting from the COVID-19 pandemic. Nevertheless, the Group updated the models used to estimate expected credit losses. For the purpose of estimating expected credit losses, counterparties were divided into two groups: strategic counterparties that are internally assigned ratings based on a scoring model, and other counterparties for which expected credit losses are estimated based on a provision matrix. For the former group of counterparties, the basis for calculating expected credit losses was changed – as at December 31, 2020, losses were calculated based on Credit Default Swap (CDS) quotations, while for the latter group of counterparties, the percentage ratios in the different time intervals of the provision matrix were updated to a level corresponding to the current collectability of receivables. As a result of these two changes, the level of provisions for expected credit losses at December 31, 2020 was PLN 16 million higher than if the provisions had been made under the previous rules. A more detailed description of the impact of the pandemic on the operations of the PGE Capital Group is included in note 33.3 to these financial statements.

The credit risk on trade receivables on a geographical basis is presented in the table below:

As at December 31, 2020, some financial assets were subject to impairment write-downs. The table below presents changes in impairment write-downs for these classes of financial instruments:

Most of impairment write-downs on trade receivables relate to the Distribution segment. As at December 31, 2020, the total amount of impairment write-downs on trade receivables of the segment was PLN 156 million (PLN 143 million in 2019).

The Group has no significant items of receivables that were significantly overdue at the reporting date, but were not written down, except for the disputed receivables from Enea S. A. described in detail in note 28.4 to these financial statements.

The ageing analysis of trade receivables, other loans and receivables, taking into account impairment write-downs, is presented below:

As at December 31, 2020, more than 47% of the balance of overdue trade receivables and other loans and receivables for which no impairment write-downs were made were related to the sales of energy to end users.