2.4. Equity-accounted investees
Accounting policies
Joint arrangements
Joint arrangements include:
- Joint operations (see Note 8.7),
- Joint ventures.
As a partner in a joint venture, in the consolidated financial statements the Group recognises its interest in the joint venture as an investment and accounts for that investment with the equity method.
According to the equity method, investments are initially recognised at cost, and subsequently adjusted for the Group’s share in changes of their net assets which occurred in the period from the date joint control was assumed to the reporting date, less impairment. When the Group’s share of losses of a jointly controlled entity exceeds the Group’s interest in that entity, the Group discontinues recognising its share of further losses. Unrealised gains and losses on transactions between the Group and a jointly controlled entity are eliminated on consolidation proportionately to the Group’s interest in the jointly controlled entity.
Material estimates
Impairment of the investment in SGT EUROPOL GAZ S.A., a joint venture
As at the end of each reporting period, the Parent tests its investment in SGT EUROPOL GAZ S.A. (a jointly controlled entity accounted for with the equity method) for impairment and measures its value in use using the DCF method. The valuation was based on the Inter-Governmental Protocol of October 29th 2010, which specified the company’s expected net profit.
The company’s value estimated as at the same date with the discounted cash flow method was PLN 840m.
The calculations were based on the assumption that in each year in 2011−2021 net profit earned by SGT EUROPOL GAZ S.A. (EUROPOL GAZ) will be PLN 21m. The discounted cash flows include all cash flows generated by EUROPOL GAZ, including cash flows related to the servicing of interest-bearing borrowings (interest expense and principal repayments) and other risks known to the issuer. The cash flows were discounted using a discount rate of 7.69% (in real terms).
As at the end of 2016, the value of the Parent’s interest in EUROPOL GAZ determined using the equity method was PLN 902m. Therefore, an impairment loss of PLN 62m was recognised in the current reporting period to align the equity method valuation of the interest with its valuation obtained using the DCF method.
The impairment test result is sensitive to the adopted assumptions regarding future cash flows (which depend on whether the provisions of the Inter-Governmental Protocol with respect to net profit to be earned in each of the years are implemented by the company) and discount rate. Changes in those assumptions following from updates of the company’s financial forecasts and changes in the discount rate due to general or company-specific factors, may have a material effect on the company’s future value.
