25. Loans and advances to customers

Loans and advances to customers are classified in the above categories in accordance with the principles of business model determination and an evaluation of the characteristics of contractual cash flows referred to in note “Description of significant accounting policies”.

Finance lease agreements are recognized as receivables in the amount equal to the current contractual value of the lease payments plus the potential unguaranteed residual value attributed to the lessor, determined as at the date of inception of the lease. Lease payments on finance leases are divided between interest income and a reduction in the balance of receivables in a manner enabling achieving a fixed interest rate on the remaining receivables.

Reverse repo transactions are measured at amortized cost. The difference between the sale price and repurchase price constitutes interest income and is settled over the period of the agreement using the effective interest rate.

The item “Loans and advances to customers” also includes an adjustment relating to fair value hedge accounting for loans and advances to customers representing hedged items (note “Hedge Accounting”).

The item “Gross housing loans at amortized cost” includes an adjustment reducing the carrying amount of loans of PLN 422 million in respect of the legal risk of the mortgage loans in convertible currencies (for details, see note “Risk management of foreign currency risk associated with mortgage loans for households”).

Further information about credit risk exposure for loans and advances to customers measured at amortized cost and at fair value through other comprehensive income is provided in note “Financial assets by stage of impairment and allowances for expected credit losses”.

In the third quarter of 2019, the Group reclassified a part of the portfolio of consumer loan with the net carrying amount of PLN 8 204 million from measured at amortized cost to measured at fair value through profit or loss. Reclassification related to the following products: cash loans, credit cards and revolving loans, which contained a multiple in the interest rate formula. The net impact of reclassification as at the reclassification date was nil.

Reclassification was justified by the fact that these contracts did not meet the IFRS 9 classification criteria for categories other than measured at fair value through profit or loss since the contracts for these products provided for a multiple in the interest rate formula.