7.5.2.3 Credit risk related to trade receivables - Integrated Report of KGHM Polska Miedź S.A. and the KGHM Polska Miedź S.A. Group for 2022

w mln PLN, chyba że wskazano inaczej

The following Group companies had significant trade receivables as at 31 December 2022: KGHM Polska Miedź S.A. PLN 517 million, the KGHM INTERNATIONAL LTD Group PLN 364 million, CENTROZŁOM WROCŁAW S.A. PLN 67 million, WPEC w Legnicy S.A. PLN 49 million, NITROERG S.A. PLN 39 million, Metraco S.A. PLN 28 million, „MCZ” S.A. PLN 24 million, WMN „Łabędy” S.A. PLN 19 million, Energetyka Sp. z o.o. PLN 11 million (as at 31 December 2021: KGHM Polska Miedź S.A. PLN 537 million, the KGHM INTERNATIONAL LTD. Group PLN 219 million, CENTROZŁOM WROCŁAW S.A. PLN 88 million, WPEC w Legnicy S.A. PLN 39 million, NITROERG S.A. PLN 37 million, „MCZ” S.A. PLN 22 million, Metraco S.A. PLN 14 million, and WMN “Łabędy” PLN 12 million).

The total net amount of trade receivables of the Group as at 31 December 2022, excluding the fair value of accepted collateral, up to the amount of which the Group may be exposed to credit risk, amounts to PLN 1 178 million (as at 31 December 2021: PLN 1 026 million).

The Parent Entity limits its exposure to credit risk related to trade receivables by evaluating and monitoring the financial condition of its customers, setting credit limits, requiring collateral, and non-recourse factoring. The terms of factoring agreements entered into meet the criteria of removing receivables from the books at the moment of their purchase
by the factor. As at 31 December 2022, the amount of receivables transferred to factoring, for which payment from factors was not received, amounted to PLN 4 million (as at 31 December 2021: PLN 17 million). Information on the amount of revenues from sales subjected to factoring in the financial period is presented in Note 2.4.

An inseparable element of the credit risk management process performed by the Parent Entity is the continuous monitoring of receivables and the internal reporting system.

Buyer’s credit is only provided to proven customers. In the case of new customers, an effort is made to ensure that sales are based on prepayments or trade financing instruments which transfer the credit risk to financial institutions.

The Parent Entity makes use of the following forms of collateral:

registered pledges, bank guarantees, promissory notes, notarial enforcement declarations, corporate guarantees, cessation of receivables, mortgages and documentary collection;
ownership rights to goods to be transferred to the buyer only after payment is received;
a receivables insurance contract, which covers receivables from entities with buyer’s credit which have not provided strong collateral or have provided collateral which does not cover the total amount of the receivables.

Taking into account the above forms of collateral and the credit limits received from the insurance company, as at 31 December 2022 the Parent Entity had secured 76% of its trade receivables (as at 31 December 2021, 84%).

Although KGHM INTERNATIONAL LTD. does not use collateral, credit risk connected with trade receivables is subject to monitoring, and the majority of sales are to proven, long-term customers conducting international activities.

Assessment of concentration of credit risk in the Group:

While KGHM Polska Miedź S.A. and KGHM INTERNATIONAL LTD. operate in the same sector, these two companies are different both in terms of their portfolios of products as well as in terms of the geographic location and nature of their customers, and consequently this sector concentration of credit risk is considered to be acceptable.

Other companies of the Group operate in various economic sectors, such as transport, construction, commerce, industrial production and energy. As a consequence, in the case of most Group companies, in terms of sectors, there is no concentration of credit risk.

As at 31 December 2022 the balance of receivables from the 7 largest customers represented 58% of trade receivables (2021: 49%). Despite the concentration of this type of risk, it is believed that due to the availability of historical data and the many years of experience cooperating with its customers, as well as to the securing used, the level of credit risk is low.

Companies of the Group have been cooperating for many years with a large number of customers, which affects the geographical diversification of trade receivables. Geographical concentration of credit risk for trade receivables is presented in the table below.

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Trade receivables (net)	As at 31 December 2022	As at 31 December 2021
Poland	40%	59%
Canada	19%	8%
European Union (excluding Poland)	10%	10%
Asia	26%	17%
Other countries	5%	6%

Accounting policies

The Group applies the simplified model of calculating the allowance for impairment of trade receivables (regardless of their maturity). The expected credit loss on trade receivables is calculated at the closest ending date of the reporting period after the moment of recognition of a receivable in the statement of financial position and is updated at every subsequent reporting period ending date. In order to estimate the expected credit loss on trade receivables, the Group’s entities apply provision matrices, made on the basis of historical levels of payment of trade receivables, which are periodically recalibrated in order to update them.

Loss allowance for expected credit losses is measured at the amount equal to expected credit losses during the whole life of the receivables. The Group adopted an assumption that the receivable risk is characterised by the number of days of delay and this parameter determines the estimated PD, i.e. the probability of a delay in payment of trade receivables by at least 90 days. For the purpose of estimating PD, 5 risk groups have been selected based on the criteria of number of days in payment, according to ranges presented below as “Important estimates and assumptions”.

Default is defined as being a failure by a customer to meet its liabilities after a period of 90 days from the due date. In order to estimate the loss allowance for expected credit losses, collateral is also taken into account by allocating expected recovery rates to the particular types of collateral.

Moreover, forward-looking information is taken into account in the applied parameters of the model for estimating expected losses, by adjusting the base coefficients of default probability. This means that if as a result of analysis of macroeconomic data, such as for example: current GDP dynamics, inflation, unemployment rate, or WIG index, the Group recognises any deterioration in them in comparison to the previous period, in the ECL calculation the looking forward factor, which corrects risk connected with any decrease in receivables recovery, is taken into account. Despite the growing inflation, alongside the favourable performance of among others the GDP, unemployment rate, and also forecasts of these indicators, the Parent Entity did not note any deterioration of macroeconomic factors as at the end of the reporting period on 31 December 2022.

Important estimates and assumptions

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Time frame	31 December 2022			31 December 2021
Time frame	Percent of allowance for impairment*	Gross amount of receivables	Allowance for impairment in individual time frames**	Percent of allowance for impairment*	Gross amount of receivables	Allowance for impairment in individual time frames**
Not overdue	0,1-2,7	401	(2)	0,2-5,1	373	(3)
<1,30)	0,2-8,1	23	(1)	0,4-7,8	23	(1)
<30,60)	5,5-41,4	5	(1)	3,1-34,2	2	–
<60,90)	34,1-72,3	1	–	42,9-75,5	–	–
Default	100	36	(35)	100	37	(32)
Total		466	(39)		435	(36)

* Probability of default is represented in thresholds, calculated individually by Group companies on the basis of real historical data as respects the number of days of delay, pursuant to the model for calculating expected credit losses adopted by the Group for trade receivables.
** The amount of allowance for impairment includes the recovery due to collateral.

The following table presents the change in trade receivables measured at amortised cost.

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		2022	2021
	Gross amount as at 1 January	435	444
	Change in the balance of receivables	31	5
	Utilisation of a loss allowance in the period	–	(14)
Note 10.2	Gross amount as at 31 December	466	435

The following table presents the change in the estimation of expected credit losses on trade receivables measured at amortised cost.

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		2022	2021
	Loss allowance for expected credit losses as at 1 January	36	53
	Change in allowance in the period recognised in profit or loss	3	(3)
	Utilisation of a loss allowance in the period	–	(14)
Note 10.2	Loss allowance for expected credit losses as at 31 December	39	36

As at 31 December 2022, disputed receivables amounted to PLN 36 million (as at 31 December 2021, PLN 35 million). The Group is taking actions aimed at recovering these receivables or explaining the validity of pursuing claims.