• CLEAN AND ENVIRONMENTALLY FRIENDLY Natural gas is the cleanest and most environmentally friendly of all fossil fuels...Read more

  • WELL DRILLING PADThe size of a typical drilling pad is about 1 hectare. To compare, the floorage of an average shopping centre is 4.5 hectares... Read more

  • SECURING OF WELL DRILLING PADA drilling pad as well as the adjacent pool are reinforced and tightened with concrete slabs. Protective foil is additionally laid where necessary.

  • WORK NOISEWell drilling does not produce onerous noise. The intensity of sounds generated in connection with drilling work is lower than that generated by street traffic.Read more

  • SAFETY OF FRACTURING PROCESSIn Poland, exploration wells in shale rock are drilled to depths of over 2.5 km.Read more

  • COMPOSITION OF FRACTURING FLUIDFracturing fluid is 95% water. Read more

  • NO MAJOR LANDSCAPE INTERFERENCEIf gas production is launched, the land surrounding the isolated, secured zone, is subject to a reclamation treatment. Read more

Notes to the Consolidated Financial Statements – Contents

2. Applied Accounting Policies

2.1. Basis of preparation

These financial statements have been prepared on the historical cost basis, except with respect to financial assets available for sale, financial derivatives measured at fair value, and loans and receivables measured at adjusted cost.
The reporting currency is the Polish złoty (PLN). Unless stated otherwise, all amounts are given in PLN million. Differences, if any, between the totals and the sum of particular items are due to rounding off.

2.1.1. Statement of compliance

These consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) as endorsed by the European Union (“EU”) as at December 31st 2012.
According to IAS 1 Presentation of Financial Statements, the IFRSs comprise the International Financial Reporting Standards (IFRS), the International Accounting Standards (IAS) and the Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC).
The scope of information disclosed in these consolidated financial statements is consistent with the provisions of the IFRS and the Regulation of the Minister of Finance on current and periodic information to be published by issuers of securities and conditions for recognition as equivalent of information whose disclosure is required under the laws of a non-member state, dated February 19th 2009 (Dz. U. No. 33, item 259, as amended).

2.1.2. Basis of consolidation

These consolidated financial statements comprise the financial statements of PGNiG SA (the Parent) and the financial statements of companies controlled by the Parent (or by the Parent’s subsidiaries) other than subsidiaries whose effect on the consolidated financial statements would be immaterial, prepared as at December 31st 2012.
Subsidiaries are consolidated using the full consolidation method from their acquisition date (the date of assuming control over the company) until the date control is lost. Control is exercised when the parent has the power to determine the financial and operating policies of an entity so as to benefit from its activity. As at the acquisition date, assets, equity and liabilities of the acquired entity are recognised at fair value. Any excess of the acquisition cost over the fair value of the net identifiable assets acquired is recognised as goodwill. If the acquisition cost is lower than the fair value of the net identifiable assets of the acquiree, the difference is recognised as a gain in profit or loss for the period in which the acquisition took place.
Non-controlling interests represent the portion of net profit or loss and net assets that are not held by the Group. Non-controlling interests are presented in separate items of the income statement, the statement of comprehensive income, the statement of financial position and the statement of changes in equity.
Financial statements of subsidiaries are prepared for the same reporting period as the financial statements of the parent, using consistent accounting policies. If necessary, adjustments are made to the financial statements of subsidiaries or associated entities in order to ensure consistency between the accounting policies applied by a given entity and those applied by the parent.
All transactions, balances, revenues and costs resulting from dealings between consolidated related entities are eliminated on consolidation.
Financial results of entities acquired or sold during the year are accounted for in the consolidated financial statements from their acquisition date to their disposal date. If the parent loses control over a subsidiary, the consolidated financial statements account for the subsidiary's results for such part of the reporting year in which control was held by the parent.

2.2. Changes in applied accounting policies and changes to the scope of disclosure

2.2.1. First-time adoption of standards and interpretations

In the current year, the Group adopted all the new and revised standards and interpretations issued by the International Accounting Standards Board and the International Financial Reporting Interpretations Committee, and endorsed by the EU, which apply to the Group’s business and are effective for annual reporting periods beginning on or after January 1st 2012. The newly adopted standards are presented below:

Application of the above amendment has not caused any material changes in the accounting policies of the Group or in the presentation of data in its consolidated financial statements.

2.2.2. Standards and interpretations published and endorsed for use in the EU but not yet effective

As at the date of these consolidated financial statements, the Group did not apply the following standards, amendments and interpretations which have been published and endorsed for application in the EU but have not yet become effective:

The Group decided not to use the option of early adoption of the above amendments.

2.2.3. Standards and interpretations adopted by the IASB but not yet approved for use by the EU

The IFRSs endorsed by the EU do not significantly differ from the regulations adopted by the International Accounting Standards Board (IASB), except to the extent of the following standards, amendments and interpretations, which as at December 31st 2012 had not yet been endorsed for use:

The Group estimates that the above standards, interpretations and amendments to standards would not have had a material bearing on the financial statements if they had been applied by the Group as at the end of the reporting period.

2.3. Accounting policies

Below are presented the principal accounting policies applied by the PGNiG Group.

2.3.1. Investments in associates

An associated entity is an entity over which the Group exercises significant influence, but which is not controlled by the Group and is not a joint venture. Financial and operating policies of such entity are determined with the participation of the Group.
Financial interests in associates are accounted for with the equity method, except when an investment is classified as held for sale. Investments in associated entities are measured at cost, taking into account changes in the Company’s share in the net assets which occurred until the balance sheet date, less impairment of particular investments. Losses incurred by an associated entity in excess of the value of the Group’s share in such associated entity are not recognised.
Excess of acquisition cost over the fair value of identifiable acquired net assets of the associated entity as at the acquisition date is recognised as the carrying amount of the investment. If acquisition cost is lower than fair value of identifiable acquired net assets of the associated entity as at the acquisition date, the difference is disclosed as profit for the period in which the acquisition took place.
Gains and losses on transactions between the Group and an associated entity are eliminated in consolidation proportionately to the Group’s interest in such associated entities’ equity. Financial statements of associated entities are drawn up to the same date as the Group’s financial statements, using consistent accounting policies. If necessary, adjustments are made in the financial statements of associated entities to conform to the accounting policies of the Parent. Losses incurred by an associated entity may indicate impairment of its assets and relevant impairment losses would then need to be recognised.

2.3.2. Interests in joint ventures

A joint venture is a contractual relationship between two or more parties, under which such parties undertake an economic activity and jointly control such activity. Strategic financial and operating decisions concerning the joint venture need to be made unanimously by all parties.
A party to a joint venture discloses assets controlled and liabilities incurred in relation to its interests in such joint venture as well as costs incurred and such party’s interests in revenues from products sold and services rendered, generated by the joint venture. As assets, liabilities, revenues and costs relating to the joint venture are also disclosed in the non-consolidated financial statements of the party, these items are not adjusted and other methods of consolidation are not used when preparing consolidated financial statements of that party.

2.3.3. Translation of items denominated in foreign currencies

The Polish złoty (PLN) is the functional currency (measurement currency) and the reporting currency of PGNiG SA and its subsidiaries, with the exception of POGC Libya BV, PGNiG Norway AS, PGNiG Sales & Trading GmbH and PGNiG Finance AB.
Transactions denominated in foreign currencies are initially disclosed at the exchange rate of the functional currency effective as at the transaction date. Cash items denominated in foreign currencies are translated at the exchange rate of the functional currency effective as at the balance sheet date. All foreign exchange gains and losses are recognised in profit or loss, except for the foreign exchange gains and losses on cash items comprising part of an entity's net investment in a foreign operation, which are recognised in other comprehensive income and accumulated in a separate item of equity until the disposal of the foreign operation. Non-cash items measured at historical cost in a foreign currency are translated at the exchange rate effective as at the date of transaction. Non-cash items measured at fair value in a foreign currency are translated at the exchange rate effective as at the date of determining the fair value.
To hedge against foreign currency risk, the Parent enters into derivatives transactions (for description of the accounting policies applied by the Group to derivative financial instruments see Note 2.3.13).
The functional currencies of the Parent's foreign branches are as follows: the Pakistan rupee (PKR) for the Pakistan Operating Branch; the Polish złoty (PLN) for the Egypt Branch and Denmark Branch; the US dollar (USD) for POGC Libya BV, the euro (EUR) for PGNiG Sales & Trading GmbH, the Norwegian krone (NOK) for PGNiG Norway AS and the Swedish crown (SEK) for PGNiG Finance AB. As at the end of the reporting period, assets and liabilities of the foreign entities are translated into the reporting currency of PGNiG SA at the exchange rate effective as at the end of the reporting period, and the items of their income statements are translated at the average exchange rate for a given reporting period. Foreign exchange gains and losses on such translation are recognised in equity as revaluation capital reserve. In the consolidated financial statements they are disclosed under Accumulated other comprehensive income. Upon disposal of a foreign entity, accumulated foreign exchange gains or losses disclosed under equity are recognised in profit or loss.

2.3.4. Property, plant and equipment

Property, plant and equipment comprises assets which the Group intends to use in the production or supply of goods or services, for rental to others (under a relevant agreement), or for administrative purposes for more than one period, where it is probable that future economic benefits associated with the assets will flow to the Group. The category of property, plant and equipment also comprises tangible assets under construction. The cost of property, plant and equipment includes:

Property, plant and equipment is initially disclosed at cost (i.e. measured at historical cost). Borrowing costs are also disclosed at cost (for a description of borrowing costs capitalisation policies see Section 2.3.6.). Spare parts and maintenance equipment are recorded as inventories and recognised in profit or loss as at the date of their use. Significant spare parts and maintenance equipment may be disclosed as property, plant and equipment if the Group expects to use such spare parts or equipment for a period longer than one year and they may be assigned to specific items of property, plant and equipment.
The Group does not increase the carrying amount of property, plant and equipment items to account for day-to-day maintenance costs of the assets. Such costs are recognised in profit or loss when incurred. The costs of day-to-day maintenance of property, plant and equipment, i.e. cost of repairs and maintenance works, include the cost of labour and materials used, and may also include the cost of less significant spare parts.
Property, plant and equipment, initially recognised as assets, are disclosed at cost less depreciation and impairment losses.
The initially recognised value of gas pipelines and gas storage facilities includes the value of gas used to fill the pipelines or facilities for the first time. The amount of gas required to fill a pipeline or a storage chamber for the first time equals the amount required to obtain the minimum operating pressure in the pipeline or chamber.
In the event of a leak, the costs of partial or complete refilling of a pipeline are carried through profit or loss in the period when incurred.
Depreciable amount of property, plant and equipment, except for land and tangible assets under construction, is allocated on a systematic basis using the straight-line method over estimated economic useful life of an asset:

Property, plant and equipment used under lease or similar contract and recognised by the Group as its assets are depreciated over their economic useful lives, but not longer than for the term of the contract.
On disposal or when no future economic benefits are expected from the use or disposal of property, plant and equipment, its carrying amount is derecognised from the statement of financial position, and any gains or losses arising from the derecognition are charged to profit or loss.
Tangible assets under construction are measured at cost or aggregate cost incurred in the course of their production or acquisition, less impairment losses. Tangible assets under construction are not depreciated until completed and placed in service.

2.3.5. Exploration and appraisal assets

Natural gas and crude oil exploration and appraisal expenditure covers geological work performed to discover and document deposits and is recognised with the successful efforts method.
Appraisal of natural gas and/or crude oil (mineral) deposits can be performed once the Group obtains:
•   a licence for appraisal of mineral deposits,
•   a licence for exploration for and appraisal of mineral deposits,
•   a signed agreement establishing mining rights.
The cost of a licence for appraisal of natural gas and/or crude oil deposits and the cost of its extension is the charge for operations executed under the licence, recognised in the Group’s statement of financial position under intangible assets.
Expenditure incurred in relation to individual wells is first capitalised in tangible assets under construction as a separate item under exploration and appraisal assets.
If exploration is successful and leads to a discovery of commercial reserves, the Group assesses the areas and prospects in terms of economic viability of production.
If a decision to produce minerals is made following the appraisal, the Group reclassifies relevant exploration and appraisal assets at the start of production into property, plant and equipment or intangible assets, depending on the type of the asset.
If exploration is unsuccessful or a Group entity does not file for a licence for appraisal of natural gas and/or crude oil following the analysis of economic viability of production from the areas or prospects, the capitalised expenses incurred in relation to the wells drilled during exploration are recognised in profit or loss in full, in the period in which the decision to discontinue exploration was made.
The Group recognises provisions for production and storage well decommissioning costs. The value of the discounted provision is added to the initial value of the wells and depreciated over their expected useful economic lives.
In the current reporting period, the Group changed the rules governing recognition of expenses related to seismic surveys. In previous reporting periods, these expenses were recognised directly in profit or loss when incurred, whereas currently expenses under seismic surveys are capitalised in the value of exploration and appraisal assets and presented in the accounting books as a separate exploration and appraisal asset. For more information on expenses incurred as at the reporting date, see Note 2.5.

2.3.6. Borrowing costs

The Group capitalises borrowing costs.
Borrowing costs directly attributable to acquisition, construction or production of assets, which are assets that necessarily take a substantial period of time to become ready for their intended use or sale, are capitalised at part of cost of the asset.
Gains earned on short-term investment of particular borrowings pending their expenditure on acquisition, construction or production of assets is deducted from the borrowing costs eligible for capitalisation.
All other borrowing costs are recognised in profit or loss when incurred.

The above cost capitalisation policies do not apply to:

Borrowing costs may comprise:

In the case of funds borrowed without a specific purpose, borrowing costs are calculated by applying the capitalisation rate to the capital expenditure on that asset. The capitalisation rate is the weighted average of rates applied to all borrowing costs which are recognised as the Group’s liabilities in the period, other than funds borrowed specifically for the purpose of acquiring qualifying assets.

2.3.7. Investment property

Investment property is the property (land, buildings, parts of buildings, and structures) treated by the Group, as the owner or lessee under finance lease, as a source of rental income or held for expected capital appreciation, or both.
Investment property is initially recognised at cost and the initial valuation includes transaction costs. The Group has selected the cost model to measure its investment property and, after initial recognition, measures all its investment property in line with the requirements of IAS 16 defined for that model, i.e. at cost less accumulated depreciation and impairment losses.

The Group depreciates investment property based on the straight-line method over the following useful economic life periods:

2.3.8. Intangible assets                                                                                    

Intangible assets are identifiable non-monetary assets without physical substance, controlled by the Group as a result of past events. In line with the Group’s expectations, such assets will cause an inflow of economic benefits to the Group in the future and their cost can be reliably established.

The Group identifies the following intangible assets:

Intangible assets generated in the course of development work are recognised in the statement of financial position only if the Group is able to demonstrate:

Research expense is recognised in profit or loss when incurred.
Intangible assets also include expenditure on acquisition of a perpetual usufruct right to land.

The Group holds perpetual usufruct rights:

Perpetual usufruct rights to land acquired for consideration (from other entities) are presented as intangible assets and amortised during their useful life. The useful life of a perpetual usufruct right to land acquired for consideration from an entity other than the State Treasury or local government unit is equal to the period from the acquisition date of the perpetual usufruct right to the last day of the perpetual usufruct period set out in the perpetual usufruct agreement. The useful life of the surplus of the first payment over the annual perpetual usufruct charge is equal to the perpetual usufruct period specified in the perpetual usufruct agreement.
Perpetual usufruct rights to land acquired free of charge pursuant to an administrative decision issued under the Amendment to the Act on Land Management and Expropriation of Real Estate of September 20th 1990 are presented only in off-balance-sheet records.
In the current reporting period, the Group changed the rules of recognition of expenses related to licences, rights to geological information and mining rights. In previous reporting periods, the Group disclosed these expenses in the statement of financial position under other assets. At present, the costs of licences for production of natural gas and/or crude oil and charges for establishment of mining rights payable to the State Treasury are disclosed as expenditure subject to capitalisation and presented under intangible assets.
For more information on changes in effect as at the reporting date, see Note 2.5.
Pursuant to the Act on Trading in Greenhouse Gas Emission Allowances, the Group holds CO2 emission allowances, allocated for individual installations.

The Group distinguishes the following emission allowances:

Emission allowances purchased for redemption at an installation are disclosed in the accounting books as intangible assets at actual acquisition price.
Emission allowances purchased for resale are disclosed in the accounting books as inventory and measured initially at cost. At the end of the reporting period, they are measured at the lower of cost or net realisable value.
Emission allowances received free of charge under the National Allocation Plan are recognised as off-balance-sheet items at nominal value (equal to zero).
The Group initially recognises intangible assets at cost and afterwards they are carried at cost less accumulated amortisation and impairment losses. The adopted amortisation method reflects the pattern of consumption of economic benefits associated with an intangible asset by the Group. If the pattern of consumption of such benefits cannot be reliably determined, the straight-line method is applied. The adopted amortisation method is applied consistently over subsequent periods, unless there is a change in the expected pattern of consumption of economic benefits.
Intangible assets are amortised with the amortisation rates reflecting their expected useful economic life. The estimated amortisation period and expected amortisation method are reviewed at the end of each financial year. If the forecast useful life of an asset is significantly different from previous estimates, the amortisation period is changed. If the expected pattern of consumption over time of economic benefits associated with an intangible asset has altered significantly, a different amortisation method is applied. Such transactions are recognised by the Group as revision of estimates and are recognised in profit or loss in the period in which such estimates are revised.

Intangible assets are amortised over the following useful economic live periods:

Intangible assets with an indefinite useful life are not amortised. Intangible assets with an indefinite useful life and intangible assets not yet available for use are tested for impairment periodically (at least once a year or whenever there is indication of impairment).

2.3.9. Leases

A lease is classified as a finance lease if the lease agreement provides for the transfer of substantially all risks and benefits resulting from the ownership of the leased asset onto the lessee. All other types of leases are treated as operating leases.

2.3.9.1. The Group as a lessor

Finance leases are disclosed in the statement of financial position as receivables, at amounts equal to net investment in the lease. Lease payments relating to the given financial period, excluding costs of services, reduce the value of gross investment in the lease, reducing both the principal amount and the amount of unrealised finance income.
Finance income on a finance lease is disclosed in subsequent periods at a constant rate of return on the net investment in the lease.
Income from operating leases is recognised in profit or loss on a straight-line basis over the lease term, unless the application of a different systemic method better reflects the pattern of reduction over time of the benefits derived from a leased asset.
The excess of the fair value over the carrying amount of leased assets is posted to the deferred income.

2.3.9.2. The Group as a lessee

Non-current assets used under finance lease are recognised as assets of the Group. As at the commencement of the lease term, the Group discloses finance leases in the statement of financial position under assets and liabilities at the lower of the fair value of the leased assets as at the first day of the lease term or present value of the minimum lease payments as at the first day of the lease term. The resultant liability to the lessor is disclosed in the statement of financial position under Borrowings and debt securities, including a current and non-current portion.
Minimum lease payments are apportioned between finance costs, representing the interest portion of lease payments, and the reduction of the outstanding lease liability. Finance costs are spread over individual reporting periods, representing a fixed percentage of the outstanding lease liability in each of the reporting periods. Finance costs are determined using the internal rate of return (IRR) method.

Lease payments under operating leases are recognised as costs on a straight-line basis over the lease term, unless the application of a different symmetric method better reflects the pattern of spreading over time of benefits derived by the user.

2.3.10. Impairment of property, plant and equipment and intangible assets

As at the end of each reporting period, the Group tests its property, plant and equipment and intangible assets to determine whether there is any evidence of impairment of any of the assets. If any evidence of impairment is found to exist, the recoverable amount of a particular asset is estimated in order to determine whether the asset is impaired. If an asset does not generate cash flows which are to a large extent independent of the cash flows generated by other assets, the recoverable amount of the cash-generating unit to which the asset in question belongs is determined.
In case of an intangible asset with an indefinite useful life, such an asset is tested for impairment on an annual basis, by way of comparing the recoverable amount of the asset with its carrying amount, and each time there is evidence of impairment of the asset.
The recoverable amount is determined as the higher of the fair value less cost to sell or value in use of the asset or cash-generating unit. Value in use corresponds to the present value of estimated future cash flows expected to be obtained from the continued use of an asset or cash-generating unit, discounted at a discount rate reflecting the current market time value of money and the risk specific to a particular asset.
If the recoverable amount is lower than the carrying amount of an asset (or cash-generating unit), the carrying amount is decreased to the recoverable amount of the asset (or cash-generating unit). An impairment loss is recognised as cost of the period in which the impairment loss arose.

If an impairment loss is reversed, the carrying amount of an asset (or cash-generating unit) is increased to the newly estimated recoverable amount, which should not be higher than the carrying amount that would have been determined (net of accumulated depreciation/amortisation) had no impairment of that asset (or cash-generating unit) been recognised in previous years. Reversal of an impairment loss is recognised in profit or loss.

2.3.11. Financial assets

Due to their nature and purpose, the Group’s financial assets are classified to the following categories:

2.3.11.1. Financial assets measured at fair value through profit or loss

This category comprises financial assets held for trading and financial assets designated at initial recognition at fair value through profit or loss.
A financial asset is classified as held for trading if it is:

The Group classifies the following financial assets as held for trading:

The Group did not apply hedge accounting to CIRS transactions due to the fact that the valuation of both the hedged item, i.e. exchange differences on a loan, and the hedge is recognised in profit or loss in the same reporting period.
The item “Financial assets held for trading” includes also a positive value of commodity options with respect to which the Group cancelled the hedging relationship.

2.3.11.2. Hedge derivatives

The category comprises valuation of derivative instruments to which the Group applies hedge accounting. For description of the applied hedge accounting policies, see Section 2.3.13.

2.3.11.3. Financial assets available for sale

Non-derivative financial assets that are designated as available for sale or which are not financial assets included in any other category are classified as financial assets available for sale and are measured at fair value. Profit gained or loss incurred as a result of changes in fair value is recognised in equity under accumulated other comprehensive income. Investments in equity instruments that do not have a quoted market price on an active market and whose fair value cannot be reliably measured are carried at acquisition price (without remeasurement as at each balance sheet date to reflect changes in currency exchange rates).
The Group classifies the following financial assets as loans and receivables:

If impairment is identified, the Group recognises an appropriate impairment charge. In the statement of financial position, the value of the interests is presented net of impairment charges.

2.3.11.4. Loans and receivables

Loans and receivables comprise non-derivative financial assets with fixed or determinable payments which are not quoted on an active market.
Loans and receivables are measured at amortised cost, using the effective interest rate method. Measurement differences are recognised in profit or loss. The Group does not discount receivables maturing in less than 12 months from the end of the reporting period and where the discounting effect would be immaterial.
The Group classifies the following financial assets as loans and receivables:

Uncollectible receivables are charged to costs if deemed unrecoverable. Writing off or cancellation of receivables due to their expiry or irrecoverability reduces previously recognised impairment losses on such receivables.
Receivables cancelled or written off due to their expiry or irrecoverability for which no impairment losses have been recognised or the impairment losses that have been recognised were lower than the full amounts of receivables, are charged to other expenses or finance costs, respectively.

2.3.11.5. Trade and other receivables

Trade receivables are initially recognised at nominal value (provided that the discounting effect is immaterial). Following initial recognition, receivables are measured at amortised cost using the effective interest rate method. Measurement differences are recognised in profit or loss. The Group does not discount receivables maturing in less than 12 months from the end of the reporting period and where the discounting effect would be immaterial.

Receivables are revalued through the recognition of impairment losses based on the probability of their recovery, if there is objective evidence that the receivables will not be fully recovered. Impairment losses on receivables are charged to other expenses or finance costs, as appropriate, depending on the type of receivable with respect to which an impairment loss is recognised.

Uncollectible receivables are charged to profit or loss when recognised as unrecoverable accounts. Writing off or cancellation of receivables due to their expiry or irrecoverability reduces previously recognised impairment losses on such receivables.

Receivables cancelled or written off due to their expiry or irrecoverability with respect to which no impairment losses have been recognised or the impairment losses that have been recognised were lower than the full amounts of receivables, are charged to other expenses or finance costs, as appropriate.

2.3.11.6. Cash and cash equivalents

Cash and cash equivalents disclosed in the statement of financial position include cash at bank and in hand as well as short-term financial assets with high liquidity and the original maturity not exceeding three months, which are readily convertible into specific cash amounts and subject to an insignificant risk of fluctuation in value.

The balance of cash and cash equivalents disclosed in the statement of cash flows consists of the cash and cash equivalents specified above, less outstanding overdraft facilities.

2.3.12. Impairment of financial assets

As at the end of each reporting period, the Group assesses whether there is an indication of impairment of a financial asset or a group of financial assets. A financial asset or a group of financial assets is impaired if there is an objective indication of impairment following from one or more events which took place after initial recognition of such asset or group of financial assets and the event leading to impairment has an adverse effect on estimated future cash flows related to the asset or group of assets which can be reliably estimated.
The value of loans and receivables or investments held to maturity measured at amortised cost takes into account the probability of collection. The amount of impairment loss equals the difference between the carrying amount of an asset and the present value of estimated future cash flows discounted at the asset’s original effective interest rate.
Depending on the type of receivables, impairment losses are determined using the statistical or individual method. Impairment losses on receivables for gas deliveries to customers from tariff groups 1-4 are determined using the statistical method. The impairment losses are determined based on the analysis of historical data regarding the payment of past due receivables in particular maturity groups. The results of the analysis are then used to calculate recovery ratios on the basis of which the amounts of impairment losses on receivables in each maturity group are determined.
Impairment losses on receivables from other customers are determined using the individual method, based on a case-by-case analysis of the financial standing of each debtor.
A full impairment loss is recognised for receivables past due by more than 90 days and for accrued penalty charges, litigation expenses, enforcement costs and interest on past due payments.
Impairment losses on receivables are charged to other expenses or finance costs, as appropriate, depending on the type of receivable with respect to which an impairment loss is recognised.

If the amount of impairment loss on financial assets, except for financial instruments available for sale, is reduced, the previously recognised loss is reversed through profit or loss. The reversal does not drive the carrying amount of the financial asset above the amount that would have been the amortised cost of the asset as at the date of reversal had no impairment losses been recognised.
The amount of the impairment loss on investments in equity instruments classified as available for sale is not subject to reversal through profit or loss. Any increase in fair value is made after the recognition of impairment loss and disclosed directly in equity.

2.3.13. Hedge accounting

The Group applies cash-flow hedge accounting with respect to foreign exchange and commodity transactions.
The objective of the Group’s activities to hedge against the EUR/PLN and USD/PLN currency risk is to guarantee a specified Polish złoty value of its expenses incurred in the euro and the US dollar on gas purchases under long-term contracts.
The type of hedging applied is the hedging of future, highly probable cash flows related to the Group’s expenses incurred in the euro and the US dollar.
The selected hedging instruments include purchased forward contracts for the USD/PLN and EUR/PLN exchange rates, purchased European call options and zero-cost option structures (collars) involving a combination of purchased European call options and issued European put options for the EUR/PLN and USD/PLN exchange rates with the identical face values and settlement dates falling on the days of an expected outflow of the hedged foreign-currency amount related to the incurred gas expenses.
The objective of the Group’s activities to hedge against the risk of changes in gas prices is to guarantee a specified level of cost of gas expressed in the US dollars.
The applied hedging are hedges of future, highly probable cash flows related to gas purchases.

Instruments designated for hedge accounting include purchased commodity swaps (fix/float), Asian commodity call options zero-cost option structures involving a combination of long Asian call options and short Asian put options. The underlying indices for all instruments are Gasoil 0.1% Barges FOB Rotterdam (Platt’s) and Fuel Oil 1% Barges FOB Rotterdam (Platt’s).

Changes in the fair value of financial derivatives selected to hedge cash flows, to the extent representing an effective hedge, are posted directly to accumulated other comprehensive income. Changes in the fair value of financial derivatives selected to hedge cash flow, to the extent not representing an effective hedge, are charged to other income or expenses in the reporting period.
If a hedging instrument expires, is sold, terminated or exercised, or the hedge no longer meets certain criteria for hedge accounting, the valuation is left in a separate item under equity until the planned transaction is executed. If the Group no longer expects the planned transaction to be executed, part of the valuation is transferred from equity to the income statement as an adjustment resulting from reclassification. If the Group cancels the hedging relationship, the valuation amounts remain in a separate item under equity until the planned transaction is executed or until it is no longer expected to be executed.

2.3.14. Inventories

Inventories include assets intended to be sold in the ordinary course of business, assets in the process of production intended to be sold and assets in the form of materials or raw materials used in the production process or assets used in the course of rendering of services. Inventories comprise materials and consumables, goods, finished products, work in progress and certificates of origin for electricity.
The value of inventory is established at the lower of cost and net realizable value. Cost comprises all costs of purchase and processing, as well as other costs incurred to bring the inventories to their present location and condition.
The gas fuel in the storage facilities is measured jointly for all storage units, at the average weighted cost. Decreases in the inventories of gas fuel stored in the Underground Gas Storage Facilities attributable to its sales and own consumption, as well as balance-sheet differences, are measured at the average actual cost, which comprises costs of purchase of gas fuel from all foreign sources, actual costs of its production from domestic sources, costs of nitrogen removal and costs of its acquisition from other domestic sources.
The Group obtains and surrenders for cancellation certificates of origin for electricity corresponding to the volume of electricity sold to end customers. Under inventories, the Group recognises certificates of origin for electricity obtained in connection with electricity production and certificates of origin for electricity purchased in order to be surrendered for cancellation.
The certificates of origin obtained in connection with the production of electricity are recognised at market value when their grant becomes probable. Purchased certificates of origin are recognised at cost. Decreases in the acquired certificates of origin is measured using the weighted average method.
Upon sale of electricity, a provision is recognised for the certificates of origin surrendered for cancellation in connection with the sale of electricity to end customers. The provision and the registered certificates of origin disclosed under inventories are accounted for at the time of registering their cancellation in the Register of Certificates of Origin maintained by the Polish Power Exchange (“TGE”).
If the cost of inventories is not recoverable, the Group recognises an impairment loss on such inventories to net realisable amount. The amount of impairment losses on inventories to their net realisable amount and all losses on inventories are charged to expense of the period when occurred.
Impairment losses on inventories are determined by way of an ad hoc assessment of the usefulness of inventories, based on the following assumptions:

2.3.15. Non-current assets held for sale

The Group classifies a non-current asset (or a disposal group) as available for sale if its carrying amount is to be recovered principally through a sale transaction rather than through continuing use. This is the case if an asset (or a disposal group) is available for immediate sale in its present condition, subject only to usual and customary terms applicable to the sale of such assets (or a group of assets for disposal), and its sale is highly probable.
An asset (or a disposal group) is classified as held for sale after an appropriate decision is made by a duly authorised body under the company's Articles of Association – the company's Management Board, Supervisory Board or General Meeting. In addition, an asset (or a disposal group) must be actively offered for sale at a reasonable price corresponding to its present fair value. It should also be expected that the sale will be disclosed in the accounting books within one year from the date of such classification.
Non-current assets available for sale are measured at the lower of their net carrying amount and fair value less cost to sell. If the fair value is lower than the net carrying amount, the resulting difference is recognised in profit or loss as an impairment loss. Any reversal of the difference is also recognised in profit or loss, but only up to the amount of the previously recognised loss.
Non-current assets available for sale (or a disposal group) are not subject to depreciation or amortisation.
In the consolidated statement of financial position, assets available for sale (or a disposal group) are presented as a separate item of current assets.

2.3.16. Equity

Equity is disclosed in the statement of financial position by type and in accordance with the rules stipulated by applicable laws and the entity’s Articles of Association.
Share capital is disclosed at par value and in the amount specified in the Parent’s Articles of Association and the entry in the court register.
Declared but not made contributions to equity are disclosed under “Called-up share capital not paid”. Treasury shares and called-up share capital not paid reduce the entity’s equity.
Share premium includes the surplus of the issue price of shares over the par value of shares (share premium) remaining after covering issue costs.
Share issue costs incurred upon establishment of a joint-stock company or share capital increase reduce the reserve funds set up from the surplus of the issue proceeds over the par value of shares, up to the share premium, and the remaining part is charged to other capital reserves disclosed under Retained earnings/(deficit).
The effects of adjustments related to the first-time adoption of IAS were charged to Retained earnings/(deficit). In accordance with IAS, net profit for the previous financial year can be allocated only to company’s equity or dividends for shareholders. The option available under the Polish law whereby profit can be allocated to the Company Social Benefits Fund, the Restructuring Fund, employee profit-sharing schemes or for other purposes is not reflected in IAS. Therefore, the Group recognises the aforementioned reductions in profit as the cost of the period. Distribution of profit among employees is recognised in payroll cost, while funds transferred to the Company Social Benefits Fund are disclosed under employee benefit expense.

2.3.17. Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) resulting from past events, and when it is probable that the discharge of this obligation will cause an outflow of funds including economic benefits, and the amount of the obligation, whose amount and maturity date is not certain, may be reliably estimated.
The Group reviews provisions at the end of each reporting period in order to reflect the current best estimate. If the effect of changes in the time value of money is material, provisions are discounted. If the provisions are discounted, an increase in provisions as a result of lapse of time is disclosed as cost of external funding.
The Group recognises the following provisions:

2.3.17.1. Provision for well decommissioning costs

The Group recognises a provision for future well decommissioning costs and contributions to the Extraction Facilities Decommissioning Fund.
The provision for future well decommissioning costs is calculated based on the average cost of well decommissioning at the individual production branches of the Parent over the last three full years preceding the reporting period, adjusted for the projected consumer price index (CPI) and changes in the time value of money. The adoption of a three-year time horizon was due to the varied number of decommissioned wells and their decommissioning costs in the individual years.
If a provision relates to the cost of liquidation of property, plant and equipment, the initial value of the provision is added to the value of the property, plant and equipment. Any subsequent adjustments to the provision resulting from changes in estimates are also treated as an adjustment to the value of the property, plant and equipment. Changes in provisions resulting from a change of discount are charged/credited against finance income or costs.
The Extraction Facilities Decommissioning Fund is created on the basis of Art. 26c of the Mining and Geological Law of February 4th 1994 (Dz.U. 05.228.1947, as amended).
The funds accumulated in the Extraction Facilities Decommissioning Fund may be used only to cover the costs of decommissioning an extraction facility or its specific part, in particular the costs of:

The Group makes contributions to the Extraction Facilities Decommissioning Fund in the amount of 3% to 10% of the value of the annual tax depreciation of extraction property, plant and equipment with a corresponding increase in other expenses.
The amount of the provision for future well decommissioning costs is adjusted for any unused contributions to the Extraction Facilities Decommissioning Fund.

2.3.17.2. Provision for environmental liabilities

Future liabilities for the reclamation of contaminated soil and water resources, if there is a relevant legal or constructive obligation, are recognised under provisions. The provision recognised for such liabilities reflects potential costs projected to be incurred, estimated and reviewed periodically based on current prices.

2.3.17.3. Provision for claims under extra-contractual use of land

In the ordinary course of business, the Group companies install technical equipment used for transmission and distribution of gas on land properties owned by third parties, which are often natural persons.
Where possible, at the time of installing the elements of the infrastructure Group companies entered into agreements establishing standard land and transmission easements.
Transmission easement is a new construct of civil law governed by Art. 3051–3054 of the Polish Civil Code of April 23rd 1964 (Dz. U. No. 16, item 93, as amended).
In line with the materiality principle, the Group estimates the amount of the provision for claims under extra-contractual use of land if the exchange of correspondence with a claimant has continued for the last three years and such claims have been confirmed to be valid.
The Group estimates the amount of the provision based on:

2.3.17.4. Other provisions

The Group companies may also recognise other provisions for future expenses related to their activities and operations, if such costs are so material that a failure to recognise them in profit or loss for a given period would distort the true view of the Group's assets and financial position.

2.3.18. Accruals and deferrals

The Group recognises as prepayments those costs incurred upfront that relate to future reporting periods.
In the consolidated statement of financial position prepayments are disclosed as non-current (under Other non-current assets) and current (under Other assets).
Accruals are outstanding liabilities due for goods or services which have been delivered/provided, but have not yet been paid, invoiced or formally agreed upon with the supplier/provider. Accruals are disclosed together with trade and other payables as an item of equity and liabilities in the statement of financial position.
In deferred income, the Group recognises deferred income from additional charges for uncollected gas and government grants relating to assets. Deferred income from additional charges for uncollected gas is generated under take-or-pay contracts. Under this item the Group recognises the amount of income based on the volume of ordered and uncollected gas, which is then adjusted pro rata to the actual volume of delivered gas. If a trading partner fails to collect the declared volume of gas by the deadline specified in the contract, deferred income is reclassified to income from compensations, penalties, fines, etc.
Government grants relating to assets are recognised as deferred income when it is certain that they have been awarded. Then, they are charged to profit or loss pro rata to depreciation charges on the corresponding assets.
The gas companies (operators of distribution systems) disclose as Accruals and deferrals the value of gas infrastructure accepted free of charge and connection fees (received by June 30th 2009). This income is amortised over time, proportionately to depreciation charges on those connections.
Deferred income is broken down into a non-current and current portion and disclosed in equity and liabilities of the consolidated statement of financial position.

2.3.19. Financial liabilities

Financial liabilities are classified into two categories: financial liabilities measured at fair value through profit or loss and other financial liabilities (including trade and other payables and other liabilities).
Upon initial recognition, financial liabilities are measured at fair value increased, in the case of financial liabilities not classified as measured at fair value through profit or loss, by transaction costs, which may be directly attributed to the acquisition or issue of a given financial liability.

2.3.19.1. Financial liabilities measured at fair value through profit or loss

A financial liability at fair value through profit of loss is a financial liability that meets either of the following conditions:

A financial liability is classified as held for trading if it is:

Changes in the fair value of derivatives included in the above category of financial liabilities are recognised as income or expense in a reporting period in which a given derivative is remeasured.

The Group classifies as liabilities at fair value through profit or loss those derivatives that are not measured pursuant to the principles of hedge accounting and whose measured value is negative.

2.3.19.2. Financial liabilities at amortised cost

The other financial liabilities at amortised cost category includes all liabilities with the exception of salaries and wages, taxes, grants, customs duties, social security and health insurance contributions and other benefits.
Upon initial recognition, liabilities included in this category are measured at fair value plus transaction cost, which may be directly attributed to the acquisition or issue of a given financial liability.
As at the balance-sheet date, they are measured at amortised cost with the use of the effective interest rate method. The adjusted acquisition cost includes cost of obtaining the borrowing as well as discounts or premiums obtained at settlement of the liability. The difference between net funding and redemption value is disclosed under finance income or expenses over the term of the borrowing.

2.3.19.3. Other financial liabilities

Other financial liabilities comprise liabilities other than those recognised at fair value through profit or loss.

Following initial recognition, they are measured at amortised cost with the use of the effective interest rate method. The adjusted acquisition cost includes cost of obtaining the borrowing as well as discounts or premiums obtained at settlement of the liability.

2.3.19.4. Trade and other payables

Trade payables are liabilities due for goods or services which have been delivered/provided and have been paid, invoiced or formally agreed upon with the supplier/provider.

2.3.19.5. Employee benefit obligations

Employee benefits are all forms of consideration given by the Group in exchange for services rendered by employees or upon termination of employment.
Short-term employee benefits are employee benefits (other than termination benefits) which fall due wholly within 12 months after the end of the annual reporting period in which the employees render the related service.
Post-employment benefits are employee benefits (other than termination benefits and short-term employee benefits) which are payable after the completion of employment.
Short-term employee benefits paid by the Group include:

Short-term employee benefits, including payments towards defined contribution plans, are recognised in the periods in which the entity receives the payment from the employee, and in the case of profit-sharing and bonus payments – when the following conditions are met:

The Group operates a length-of-service award and retirement severance payment scheme. Payments under the schemes are recognised in profit or loss, so that the costs of length-of-service awards and retirement severance payments can be amortised over the entire period of employees’ service at the respective companies. The costs of such benefits are determined using the actuarial valuation method, i.e. the projected unit credit method.
Obligations for length-of-service awards are disclosed in the statement of financial position at the value of current obligations under such benefits resulting from actuarial calculations.
Obligations for retirement severance payments are disclosed in the statement of financial position at the net amount of obligation, i.e. after adjustment for unrecognised actuarial gains or losses and past employment costs.
All changes to these obligations are recognised in profit or loss as Employee benefit expense.
In the calculation of obligations for length-of-service awards and retirement severance payments, the Group made the following assumptions:

The Parent recognised a provision in the form of the Central Restructuring Fund in order to provide redundancy-related benefits for the eligible employees under the Restructuring Programme. The detailed rules of operation of the Fund as well as the list of mark-ups and expenses from the Fund are specified in the Parent’s internal regulations.
The Group also recognises as liabilities expected employee benefit expenses related to compensated absences in the case of accumulated compensated absences (when employees rendered services that increased their entitlement to future compensated absences), and in the case of non-accumulating absences (upon their occurrence).
In 2012, Group companies launched Voluntary Termination Programmes as part of employee benefits. Under the Voluntary Termination Programme, employees who decided to terminate their employment with a Group company by December 31st 2012 will receive compensation much in excess of a severance payment provided for in the Labour Code.

2.3.19.6. Other liabilities

Other liabilities include all liabilities not classified by the Group as trade and other payables, taxes, customs duties, social security contributions, other benefits, salaries and wages.

The category of other non-current liabilities includes liabilities under bank settlements, arrangement and recovery proceedings, liabilities under licences, property, plant and equipment assigned and still used by the Group, which are to be repaid in instalments over a period longer than one year.

Other current liabilities include in particular liabilities towards:

2.3.20. Revenue

The Group's business consists in production, distribution, storage and trade in high-methane and nitrogen-rich natural gas, sale and generation of electricity and heat, as well as production and sale of crude oil.
Revenue comprises amounts receivable (except for VAT and other amounts received on behalf of third parties) for products, goods and services delivered as part of ordinary business. Revenue is measured at the fair value of the consideration received or receivable, less any discounts, sales taxes (VAT, excise duty) and other charges.

2.3.20.1. Sale of goods and products

Sale of goods and products are recognised upon delivery of goods and products to the customer along with transfer of significant risks and benefits related to their ownership rights.
In order to correctly recognise revenue from gas sales in appropriate reporting period, estimates are made as at the balance-sheet date of the quantity and value of gas delivered, but not invoiced, to retail customers.
Estimated sales, not invoiced in a given reporting period, are determined using industry standards based on gas off-take characteristics by retail customers in comparable reporting periods. The value of estimated gas sales is defined as the product of quantities assigned to the individual tariff groups and the rates defined in a current tariff.

2.3.20.2. Rendering of services

The Group's business also includes rendering of services, i.e. distribution of gas fuels, storage of gas fuels, real estate rental, gas services, servicing as well as transport, hotel, geological, exploration, finance lease and other services.

When the outcome of the transaction involving the rendering of services can be reliably estimated, revenue is recognised by reference to the stage of completion of the service at the end of the reporting period.

2.3.20.3. Revenue from construction contracts

When the outcome of a transaction involving the rendering of construction services can be reliably estimated, revenue and costs are recognised by reference to the stage of completion of the contract activity at the end of the reporting period.
When the stage of completion of the contract activity cannot be estimated reliably, revenue is recognised only to the extent that contract costs incurred are expected to be recoverable.

2.3.21. Other categories of income

2.3.21.1. Interest income

Interest income is recognised on a time apportionment basis by reference to the principal due, using the effective interest rate, i.e. the real interest rate calculated on the basis of cash flows related to a transaction.

2.3.21.2. Dividends

Dividend income is recognised when the shareholders’ right to receive dividend is recorded.

2.3.22. Grants

The Group distinguishes the following grants:

A grant is recognised only when there is reasonable assurance that the Group company will comply with any conditions attached to the grant and the grant will be received.
Grants related to assets are recognised in the statement of financial position as deferred income and subsequently recognised – through equal annual write-offs – in profit or loss throughout the expected useful life of the assets. Non-monetary grants are accounted for at fair value.
Grants, which are generally disclosed under Revenue, may also reduce relevant costs.
A grant receivable as compensation for costs or losses already incurred or for immediate financial support for the entity, with no future related costs, should be recognised as income in the period in which it becomes receivable.

2.3.23. Income tax expense

Mandatory increases of loss/decreases of profit include current corporate income tax (CIT) and deferred tax.
Current tax is calculated based on the taxable profit/(loss) (tax base) for a given financial year. Profit/loss established for tax purposes differs from net profit/loss established for accounting purposes due to different time of recognising income as earned and expenses as incurred and because of permanent differences between tax and accounting treatment of income and expenses.
Deferred tax is determined using the balance-sheet method based on temporary differences between the carrying amounts of assets and liabilities for accounting purposes and the amounts used for taxation purposes.
Current tax is calculated based on the tax rates effective in a given financial year.
Deferred tax liabilities are recognised for temporary differences which are taxable when realised for tax purposes, while a deferred tax asset is recognised to the extent that it is probable that taxable profit will be available against which deductible temporary differences, including tax losses, can be utilised.
Deferred tax liabilities are not recognised with respect to recognised goodwill. Deferred tax liabilities (assets) are also not recognised in connection with initial recognition of an asset or liability in a transaction, which does not constitute business combination, and when it does not affect either the accounting or the taxable profit at the moment of transaction.
Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries or associates, and interests in joint ventures, unless the Group company, acting as the parent, investor or venturer is able to control the timing of the reversal of the temporary differences and it is probable that the temporary difference will not reverse in the foreseeable future.
The amount of deferred tax assets is reviewed at each balance-sheet date. If future foreseen taxable profit is insufficient for deductible temporary differences to be settled, impairment losses on deferred tax assets are recognised.
Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realised or the liability is settled.
Deferred tax assets and liabilities are offset if, and only if, the Group:

Deferred and current tax is recognised as income or expense, except to the extent that the tax arises from a transaction or event that is credited or charged directly to other comprehensive income or to equity (deferred tax is then credited or charged directly to equity).

2.3.24. Operating segments

An operating segment is a component of the Group:

The PGNiG Group has adopted division into business segments as the basic division of its operations. Consolidated entities operate within the following five segments:
a) Exploration and Production Segment The segment encompasses extracting hydrocarbons from reserves and preparing products for sale. The segment covers the entire process of exploring for and extracting natural gas and crude oil from reserves, including geological surveys, geophysical research, drilling and development of and production from the reserves. The exploration and production activities are conducted by PGNiG SA, POGC Libya BV, PGNiG Norway AS and other Group companies rendering services within this segment.
b) Trade and Storage Segment. The segment's activities consist in sale of natural gas, either from imports or domestic sources, and operation of underground gas storage facilities for trading purposes. Following completion of the trading business integration and the separation of storage and trading functions, sale of natural gas is conducted by PGNiG SA, while gas storage services are rendered by Operator Systemu Magazynowania Sp. z o.o. The segment operates six underground gas storage facilities (Mogilno, Wierzchowice, Husów, Brzeźnica, Strachocina and Swarzów). PGNiG Sales & Trading GmbH of Munich, whose buisness consists in gas and electricity trading and distribution, and PGNiG Energia S.A., involved in electricity trading, are also classified as the Trade and Storage segment.
Gas trading and storage business is regulated by the Energy Law, with prices established on the basis of tariffs approved by the President of URE.
c) Distribution Segment. The segment's activities consist in transmitting natural gas through the distribution network. Natural gas distribution services are rendered by six Gas Distribution Companies, which supply gas to individual, industrial and wholesale customers. These entities are also responsible for operation, maintenance and expansion of the distribution network.
d) Generation Segment The segment's activities consist in generation electricity and heat. Assets, revenues and expenses of PGNiG Termika S.A. are presented in this segment.
e) Other Activities SegmentThis segmentcomprises all the Group companies whose activities cannot be classified into any of the other segments: engineering design and construction of structures, machinery and equipment for the mining and energy sectors, as well as catering and hospitality services.
Segment’s assets include all operating assets used by the segment: chiefly cash, receivables, inventories and property, plant and equipment, in each case net of depreciation and impairment losses. Most assets can be directly allocated to particular segments, however, if assets are used by two or more segments their value is allocated to individual segments based on the extent to which a given segment actually uses such assets.
Segment’s liabilities comprise all operating liabilities (primarily trade payables), salaries and wages, and tax liabilities (both due and accrued), as well as any provisions for liabilities which can be assigned to a particular segment.
A segment’s assets or liabilities do not include deferred tax.
Intercompany transactions within a segment are eliminated.

2.4. Key reasons for uncertainty of estimates

In connection with the application by the Group of the accounting policies described above, the Group made certain assumptions as to the uncertainty and the estimates which had the most material effect on the amounts disclosed in the financial statements. Accordingly, there is a risk that there might be significant changes in the next reporting periods, mainly concerning the following areas:

2.4.1. Impairment of non-current assets

The Group’s key operating assets include mining assets (for production of natural gas and crude oil), gas transmission infrastructure and gas fuel storage facilities. These assets were tested for impairment. The Group computed and recognised material impairment losses on the assets, based on an assessment of their current and future usefulness or planned decommissioning or sale. For certain assets, the assumptions made in connection with potential future use, liquidation and sale may change. For information on the value of recognised impairment losses see Note 11.2.
In the case of the mining assets, there is uncertainty connected with the estimates of natural gas and crude oil resources, on the basis of which the related cash flows are calculated. Any changes in the estimates of the resources directly affect the amount of the impairment losses on the mining assets.
Another significant uncertainty is connected with the risk related to the decisions of the Polish Energy Regulatory Office concerning prices of the gas fuel distribution services. Because prices materially affect the cash flows at the Group, any change could lead to the necessity to remeasure the impairment losses on the distribution assets.

2.4.2. Useful lives of property, plant and equipment

The useful lives of the main groups of property, plant and equipment are set forth in Section 2.3.4. of these financial statements. The useful lives of the property, plant and equipment were determined on the basis of assessments made by the engineering personnel responsible for their operation. Any such assessment is connected with uncertainty as to the future business environment, technology changes and market competition, which could lead to a different assessment of the economic usefulness of the assets and their remaining useful lives and ultimately have a material effect on the value of the property, plant and equipment and the future depreciation charges.

2.4.3. Estimating sales of natural gas

In order to correctly recognise revenue from gas sales in appropriate reporting period, estimates are made – as at the end of the reporting period – of the quantity and value of gas delivered, but not invoiced, to retail customers.
The value of natural gas which has been supplied to retail customers, but has not been invoiced, is estimated on the basis of the customers’ consumption patterns seen to date in comparable reporting periods. There exists a risk that the actual final volume of the gas fuel sold might differ from the estimate. Therefore profit or loss for the given period might account for a portion of the estimated sales volume which will never be realised.

2.4.4. Provisions for well decommissioning costs and environmental protection

The provision for well decommissioning costs and provisions for environmental liabilities presented in Note 28 represent significant items among the provisions disclosed in the consolidated financial statements. These provisions are based on the estimates of future asset decommissioning and land reclamation costs, which largely depend on the adopted discount rate and the estimated future cash-flow period.

2.4.5. Provision for claims under extra-contractual use of land

In accordance with the materiality rule, the Group estimated the amount of the provision for claims under extra-contractual use of land (see Section 2.3.17.3).
As the amounts used in the above calculations were arrived at based on a number of variables, the final amounts of compensation for extra-contractual use of land that the Group will be required to pay may differ from amounts of the related provisions.

2.4.6. Impairment of SGT EUROPOL GAZ S.A. shares

The Parent tested the shares held in SGT EUROPOL GAZ S.A. for impairment using the discounted cash flow method. The valuation was based on the Inter-Governmental Protocol of October 29th 2010, which specified the company's expected net profit, as discussed in Note 6. The result of the impairment test is sensitive to adopted assumptions regarding future cash flows and discount rate. Changes in these 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 considerable effect on the company's future value.
Additionally, implementation of the provisions of the Inter-Governmental Protocol with respect to the net profit earned in subsequent years will be of material importance for the assessment of the value of SGT EUROPOL GAZ S.A.

2.5. Presentation changes in the financial statements

In the financial statements for the year ended December 31st 2012, the Group made changes to comparative financial data relating to the presentation of expenses on:

Previously, costs of seismic surveys and licences were charged directly to profit or loss under costs for the period in which they had been incurred, in line with the Accounting Policies. As for rights to geological information and mining rights, the Group presented them under other assets.
Given the intensified exploration for unconventional gas, leading to potential development of unconventional gas fields, as well as the need to improve comparability of Group's financial performance with results published by peer companies, as of 2012 the Group presents these expenses in the following manner:

The changes are presented retrospectively, in correspondence with retained earnings.
The Group also made presentation changes with respect to employee benefit expense. Until 2012, employee benefit expense provisions had been recognised in profit or loss as other expenses/income. In 2012, the Group presented those expenses/income in the income statement under employee benefit expense, while the obligations were carried under Employee benefit obligations in the statement of financial position.
The purpose of the above changes was to increase the transparency and usefulness of data shown in the financial statements.
As a result of the changes, several adjustments were made to comparative data for the year ended December 31st 2011 and are presented in the following financial statements.

Earnings and diluted earnings per share attributable to owners of the Parent (in PLN)

Jan 1–Dec 31 2011 before the change Jan 1–Dec 31 2011 after the change
Earnings and diluted earnings per share attributable to owners of the Parent (in PLN) 0.28 0.3
Download Excel file

Income statement

in PLN m

  Jan 1 – Dec 31 2011 before the change Adjustments ensuring comparability – presentation change – employee benefit obligations Adjustments ensuring comparability – seismic surveys, licences Jan 1 – Dec 31 2011 after the change
Revenue 23,004  -   -  23,004
Raw material and consumables used (14,059)  -   -  (14,059)
Employee benefit expense (2,809) (41)  -  (2,850)
Depreciation and amortisation expenses (1,574)  -   -  (1,574)
Contracted services (3,241)  -  59 (3,182)
Work performed by the entity and capitalised 1,002  -  127 1,129
Other income and expenses (637) 41  -  (596)
Total operating expenses (21,318)  -  186 (21,132)
Operating profit/(loss) 1,686  -  186 1,872
Finance income 135  -   -  135
Finance costs (152)  -   -  (152)
Share in net profit/(loss) of equity-accounted entities  43  -   -  43
Profit/(loss) before tax 1,712  -  186 1,898
Income tax expense (85)  -  (58) (143)
Net profit/(loss) 1,627  -  128 1,755
Download Excel file

Statement of comprehensive income

in PLN m

  Jan 1 – Dec 31 2011 before the change Adjustments ensuring comparability – presentation change – employee benefit obligations Adjustments ensuring comparability - seismic surveys, licences Jan 1 – Dec 31 2011 after the change
Net profit/(loss) 1,627  -  128 1,755
Other comprehensive income, net 64  -  1 65
of which:
Exchange differences on translating foreign operations (2)  -  1 (1)
Total comprehensive income 1,691  -  129 1,820
Download Excel file

Statement of financial position

in PLN m

  Dec 31 2011 before the change Adjustments ensuring comparability – rights to geological information and mining rights Adjustments ensuring comparability – seismic surveys and licences Dec 31 2011 after the change
ASSETS
Total non-current assets 30,435 6 860 31,301
of which:
Property, plant and equipment 28,427  -  892 29,319
Intangible assets 275 56 12 343
Deferred tax assets 964  -  (44) 920
Other non-current assets 98 (50)  -  48
Total current assets 7,529 (6)  -  7,523
of which:
Other non-current assets 84 (6)  -  78
Total assets 37,964  -  860 38,824
LIABILITIES AND EQUITY
Total equity 24,496  -  722 25,218
of which:
Accumulated other comprehensive income 120  -  (6) 114
Retained earnings 16,729  -  728 17,457
Total non-current liabilities 5,622  -  138 5,760
of which:
Employee benefit obligations  -  268  -  268
Provisions 1,626 (268)  -  1,358
Deferred tax liabilities 1,434  -  138 1,572
Total current liabilities 7,846  -   -  7,846
of which:
Trade and other payables 3,354 (118)  -  3,236
Employee benefit obligations  -  238  -  238
Provisions 305 (120)  -  185
Total liabilities 13,468  -  138 13,606
Total liabilities and equity 37,964  -  860 38,824
Download Excel file
  Jan 1 2011 before the change Adjustments ensuring comparability – rights to geological information and mining rights Adjustments ensuring comparability – seismic surveys and licences Jan 1 2011 after the change
ASSETS
Total non-current assets 27,433 4 700 28,137
of which:
Property, plant and equipment 25,662  -  698 26,360
Intangible assets 247 34 17 298
Deferred tax assets 677  -  (15) 662
Other non-current assets 71 (30)  -  41
Total current assets 6,209 (4)  -  6,205
of which:
Other non-current assets 79 (4)  -  75
Total assets 33,642  -  700 34,342
LIABILITIES AND EQUITY
Total equity 23,519  -  592 24,111
of which:
Accumulated other comprehensive income 19  -  (7) 12
Retained earnings 15,846  -  599 16,445
Total non-current liabilities 4,974  -  108 5,082
of which:
Employee benefit obligations  -  280  -  280
Provisions 1,501 (280)  -  1,221
Deferred tax liabilities 1,393  -  108 1,501
Total current liabilities 5,149  -   -  5,149
of which:
Trade and other payables 3,206 (103)  -  3,103
Employee benefit obligations  -  177  -  177
Provisions 290 (74)  -  216
Total liabilities 10,123  -  108 10,231
Total liabilities and equity 33,642  -  700 34,342
Download Excel file

Statement of cash flows

in PLN m

Jan 1 – Dec 31 2011 before the change Adjustments ensuring comparability – presentation change – employee benefit obligations Adjustments ensuring comparability – seismic surveys, licences Jan 1 – Dec 31 2011 after the change
Net cash flows from operating activities 2,468 22 186 2,676
of which:
Net profit/loss 1,627  -  128 1,755
Current tax expense 85  -  58 143
Change in working capital (774) 22  -  (752)
Net cash flows from investing activities (4,019) (22) (186) (4,227)
of which:
Purchase of property, plant and equipment and intangible assets (4,298) (22) (186) (4,506)
Net cash flows from financing activities 1,682  -   -  1,682
Net change in cash 131  -   -  131
Cash and cash equivalents at beginning of the period 1,373  -   -  1,373
Cash and cash equivalents at end of the period 1,504  -   -  1,504
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The Group also made certain presentation changes in the reporting segments.

These changes involved:

  1. transfers of entities between segments - transfer of Investgas S.A. from the Trade and Storage segment to the Other Activities segment, with a concurrent transfer of PGNiG Energia S.A. from the Other Activities segment to the Trade and Storage segment;
  2. transfer of amounts relating to gas storage facilities, used previously for the purposes of the Exploration and Production segment, to the Trade and Storage segment;
  3. transfer of intersegment eliminations in assets from the particular segments to Eliminations;
  4. seismic surveys and licences (impact on segments of the adjustments described above, made to ensure data comparability).

The table below presents the impact of the changes introduced in the reported period on the segments' operating results, as well as their assets, equity and liabilities, for the comparative period, i.e. 2011.

in PLN m

Period ended December 31st 2011 Exploration and Production Trade and Storage Distribution Other Activities Eliminations Total
Segment's operating profit/loss before the changes 1,126 (183) 783 (4) (36) 1,686
Changes, including 189 (16)  -  13  -  186
1) Transfer of companies (PGNiG Energia and Investgas) between Trade and Storage and Other Activities  -  (13)  -  13  -  - 
2) Transfer of amounts relating to gas storage facilities from the Exploration and Production segment to the Trade and Storage segment 15 (15)  -   -   -  - 
4) Seismic surveys and licences 174 12  -   -   -  186
Segment's operating profit/loss after the changes 1,315 (199) 783 9 (36) 1,872
Segment's assets before the changes 14,923 12,117 12,420 490 (3,889) 36,061
Changes, including 952 97 183 59 (387) 904
1) Transfer of companies (PGNiG Energia and Investgas) between Trade and Storage and Other Activities  -  (40)  -  55 (15) - 
2) Transfer of amounts relating to gas storage facilities from the Exploration and Production segment to the Trade and Storage segment (27) 27  -   -   -  - 
3) Exclusion of intersegment eliminations into Eliminations 87 98 183 4 (372) - 
4) Seismic surveys and licences 892 12  -   -   -  904
Segment's assets after the changes 15,875 12,214 12,603 549 (4,276) 36,965
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The above table presents only those changes which affected operating profits/losses of the segments and material changes in the segments' assets. In the section presenting information by operating segments (Note 3), all figures for the comparative period have been restated to ensure comparability with the reported period.

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