Notes to the Consolidated Financial Statements – Contents

2. Applied Accounting Policies

2.1. Basis of preparation

These consolidated financial statements have been prepared in accordance with the historical cost convention, 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 used in these consolidated financial statements 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 2013.
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).

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

2.2.1. First-time adoption of standards and interpretations

In the period covered by these consolidated financial statements, 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 2013.

2.2.1.1. Application of revised IAS 1

Revised IAS 1 Presentation of Financial Statements − Presentation of Items of Other Comprehensive Income − requires that the items of other comprehensive income be grouped in two categories: those items which, upon the fulfilment of specified conditions, may in the future be reclassified to profit or loss and those which, in accordance with the requirements of individual IFRSs may not and will not be reclassified to profit or loss.
Application of this amendment in these financial statements has had no effect on the values of items previously disclosed in the statement of comprehensive income.

2.2.1.2. Application of revised IAS 19

The revised IAS 19 Employee Benefits − Amendments to Post-Employment Benefit Accounting − introduces material changes in accounting for defined employee benefits plans. In particular, the corridor method, which allowed deferred recognition of actuarial gains/losses, has been eliminated. This means that actuarial gains/losses should be recognised immediately upon origination.
The amendments to the standard also refer to the manner of presentation of changes in assets and liabilities of defined benefits plans. The amendments, in particular, require permanent recognition of impacts of remeasurement of assets and obligations of a benefits plan in the statement of comprehensive income, with respect to post-employment benefits. The impacts of remeasurement of assets and obligations of a benefits plan with respect to benefits paid during the employment period, as well as employment costs and interest are to be recognised in profit or loss for a given period, as under the previous regime.
Having adopted revised IAS 19, the Group changed the presentation of actuarial gains/(losses) and recognises them in other comprehensive income and not in net profit/loss for current the period. Actuarial gains/(losses) on remeasurement of long-term employee benefits paid during the employment period (jubilee awards) are, as earlier, charged against net profit/loss for current reporting period. The Group made a one-off recognition of past service cost in profit/(loss). Formerly, the cost was recognised on a straight-line basis. The impact of the amendments on these consolidated financial statements is presented in Note 2.6 Presentation changes in the financial statements.

2.2.2. Standards and interpretations published and endorsed for application 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 elect the option to early adopt the above amendments.
The Group estimates that the above standards, interpretations and amendments to standards would not have had a material effect on the financial statements if they had been applied by the Group as at the end of the reporting period.

2.2.3. Standards and interpretations adopted by the IASB but not yet endorsed for application in 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 2013 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 effect 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. Consolidation methods

The consolidated financial statements have been prepared based on the financial statements of the Parent, its subsidiaries, a jointly-controlled entity and an associate.
Financial statements of the consolidated entities are prepared for the same reporting period, based on uniform accounting policies. If necessary, adjustments are made to the financial statements of subsidiaries or associates to ensure consistency between the accounting policies applied by a given entity and those applied by the Group.
In line with the materiality principle prescribed in the IAS conceptual framework, those controlled subsidiaries whose financial statements reveal values immaterial to the performance of obligation of fair and clear presentation of the Group's financial standing and assets have not been consolidated.

2.3.1.1. Investments in subsidiaries

Subsidiaries are consolidated with the full method from their acquisition date (the date of assuming control of the company) until the date the control is lost. Control is exercised when the parent, due to its involvement with the subsidiary, is exposed to gains and losses from variable financial performance and has the power to influence such financial performance by exercising governance over the subsidiary.
Information in the consolidated financial statements is presented as if it concerned a single entity. Consequently, in the consolidated financial statements:

Identifiable acquired assets and assumed liabilities of the acquiree are recognised as at the acquisition date and are measured at fair value. The excess of the acquisition cost (consideration transferred measured in accordance with IFRS 3, any non-controlling interest in the acquiree measured in accordance with IFRS 3, and - in a business combination achieved in stages - the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree) over the net fair value of identifiable acquired assets and assumed liabilities, as determined as at the acquisition date, measured in accordance with the IFRS, is recognised as goodwill. If the acquisition cost is lower than the net fair value of identifiable acquired assets and assumed liabilities, as determined as at the acquisition date, the difference is recognised as gain in profit or loss as at the acquisition date.
A non-controlling interest is an interest in profit or loss and net assets of consolidated subsidiaries not attributable, directly or indirectly, to the parent. Non-controlling interests are presented in separate items of the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of financial position and consolidated statement of changes in equity.
If the parent loses control of a subsidiary in a given reporting period, 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.

2.3.1.2. Investments in associated entities

Associates are entities over which the parent has significant influence, but not control or joint control, and participates in making financial and operating policy decisions.
Financial interests in associates are equity-accounted, except when an investment is classified as held for sale. Investments in associates are measured at cost, taking into account changes in the Group’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 net fair value of identifiable assets and liabilities of the associate as at the acquisition date is included the carrying amount of the investment. If acquisition cost is lower than net fair value of identifiable assets and liabilities of the associate as at the acquisition date, the difference is disclosed as gain in the income statement 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. Losses incurred by an associate may indicate an impairment of its assets and relevant impairment losses would then need to be recognised.

2.3.1.3. 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 separate financial statements of the party, these items are not subject to adjustment or other consolidation procedures when preparing consolidated financial statements of that party.

2.3.2. Translation of items denominated in foreign currencies

The Polish złoty (PLN) is the functional currency (measurement currency) and the reporting currency of PGNiG S.A. and its subsidiaries, with the exception of:

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 the consolidated income statement, except for the exchange differences 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.
As at the end of the reporting period, assets and liabilities of the foreign operations are translated into the reporting currency of PGNiG S.A. 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 operation, accumulated foreign exchange gains or losses disclosed under equity are recognised in profit or loss.
To hedge against foreign currency risk, the Group enters into derivatives transactions (for description of the accounting policies applied by the Group to derivative financial instruments see Note 2.3.12).

2.3.3. Property, plant and equipment

Property, plant and equipment comprises assets which the Group intends to use in the production or supply of merchandise 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 includes 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 the capitalisation policies applied to borrowing costs see Section 2.3.5.). 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 pipeline refilling or replacing lost fuel are charged to 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 the 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 an item 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.

2.3.4. Exploration and evaluation assets

Natural gas and crude oil exploration and evaluation expenditure covers geological work performed to discover and document deposits and is accounted for with the successful efforts method.
Natural gas and/or crude oil (mineral) deposits can be evaluated once the Group obtains:

The cost of a licence for evaluation 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 on individual wells is first capitalised in "Tangible assets under construction" as a separate item of exploration and evaluation assets.
If exploration activities are successful and lead to a discovery of commercial reserves, the Group assesses the areas and prospects in terms of economic viability of production.
If following the evaluation a decision is made to extract minerals, the Group reclassifies relevant exploration and evaluation assets at the start of production into property, plant and equipment.
If exploration is unsuccessful or a Group entity does not file for a licence for evaluation of natural gas and/or crude oil following the analysis of economic viability of production from the areas or prospects, the entire capitalised expenses incurred in relation to the wells drilled during exploration are recognised in profit or loss, in the period in which the decision to discontinue exploration was made.
The Group recognises provisions for extraction 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.
Expenses under seismic surveys are capitalised under exploration and evaluation assets and presented as a separate exploration and evaluation asset.

2.3.5. 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.
These 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.

2.3.6. Investment property

Investment property is the property (land, buildings or parts thereof) 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 recognition includes transaction costs. Following initial recognition of its investment property, the Group uses the cost model and 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.
Investment property is derecognised from the statement of financial position upon its sale or decommissioning if no benefits from its sale are expected in the future.
All gains or losses arising from the sale or discontinuation of use of investment property are determined as the difference between net proceeds from sale and the carrying amount of the asset, and are recognised in profit or loss in the period in which the liquidation or sale is performed.
The Group depreciates investment property with the straight-line method over useful economic life periods of 2–40 years.

2.3.7. 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 over 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 excess 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.
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 capitalised and presented under intangible assets.
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 are recognised as intangible assets at actual acquisition price.
Emission allowances purchased for resale are recognised 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 applied 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 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).

2.3.7. 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.

2.3.8.1. 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.

2.3.8.2. 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 other debt instruments", with breakdown into 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, and represent 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.

2.3.9. 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 for impairment. If any indication 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 a given 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 belongs is determined.
Intangible assets with an indefinite useful life are 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 an indication 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 the 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.

2.3.10. Financial assets

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

2.3.10.1. 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:

Derivatives with positive valuation which are not measured pursuant to the principles of hedge accounting (e.g. SWAP, CIRS, options) are classified by the Group as held for trading.
The Group did not apply hedge accounting to CIRS transactions as the valuation of both the hedged item, i.e. exchange differences on a loan, and the hedge is reflected in profit or loss for 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.

2.3.10.2. Derivative financial instruments

This category includes measurement of derivative transactions executed to hedge the Group against the risk of fluctuations in gas and electricity prices, exchange rates and interest rates. The Group applies hedge accounting policies with respect to derivative transactions used in managing currency risk and the risk of gas price fluctuations. For description of the applied hedge accounting policies, see Section 2.3.13.

2.3.10.3. 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 cost (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.

2.3.10.4. 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 which mature 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 when recognised as irrecoverable accounts. If receivables are written off or cancelled due to their expiry or irrecoverability, impairment losses recognised on such receivables, if any, are reduced.
Receivables cancelled or written off due to their expiry or irrecoverability for which no impairment losses were recognised or the impairment losses that were recognised were lower than the full amounts of the receivables, are charged to other expenses or finance costs.

2.3.10.5. 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 which mature 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.
Uncollectible receivables are charged to profit or loss when recognised as irrecoverable accounts. If receivables are written off or cancelled due to their expiry or irrecoverability, impairment losses recognised on such receivables, if any, are reduced.
Receivables cancelled or written off due to their expiry or irrecoverability with respect to which no impairment losses were recognised or the impairment losses that were recognised were lower than the full amounts of the receivables, are charged to other expenses or finance costs, as appropriate.

2.3.10.6. 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.

2.3.11. Impairment of financial assets

As at the end of each reporting period, the Group assesses whether there is an objective evidence of impairment of a financial asset or a group of financial assets. A financial asset or a group of financial assets is deemed impaired if there is objective evidence 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 the estimated future cash flows related to the asset or group of assets, which can be reliably estimated.
The value of loans and receivables measured at amortised cost takes into account the probability of collection. The amount of impairment losses 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.
The Group recognises impairment losses on receivables using the individual method if the receivable is past due by more than 90 days or if the receivable is at risk (e.g. the debtor has filed for bankruptcy). Impairment loss covers 100% of the amount of such a receivable.
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 are charged to other expenses or finance costs, as appropriate, depending on the type of receivables for 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 may not result in increasing 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.
Impairment losses on investments in equity instruments classified as available for sale are not reversed through profit or loss. Any increase in fair value after the recognition of impairment losses is disclosed directly in equity.

2.3.12. Hedge accounting

Hedge accounting specifies the rules for accounting of hedging instruments and hedged items in the event these transactions are formally designated to hedge certain risks.
The Group defines hedging as designating one or more hedging instruments, in accordance with hedge accounting rules, so that the change in their fair value offsets, in full or in part, the change in fair value of the hedged item or future cash flows related to the hedged item.
Hedging instruments designated for hedge accounting are recognised in accordance with fair value or cash flow hedge accounting rules, if all of the following conditions are met:

The Group does not apply hedge accounting retroactively, that is it does not recognises hedges with past dates.
A fair value hedge is a hedge of the exposure of the financial result to changes in fair value of a recognised asset, liability or highly probable future liability (or an identified portion of such asset, liability or highly probable future liability) that is attributable to a particular risk (e.g. currency or interest rate risk).
If fair value hedge accounting is applied:

Cash flow hedging consists in mitigating the effect on profit or loss of changes in cash flows attributable to certain risks (exchange rate risk, interest rate risks, price risk etc.) related to assets and liabilities recognised in the accounting records, probable future liabilities or highly probable planned transactions.
The portion of gains or losses on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income. The non-effective value is charged to profit or loss.
The Group ceases to apply hedge accounting if the derivative expires or is sold, terminated or exercised, if the Group revokes its designation as a hedge, the hedge no longer meets the criteria of hedge accounting, or if the hedged transaction is no longer expected to be executed.

2.3.13. Inventories

Inventories comprise 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 raw materials or consumables used in the production process or in the course of rendering of services. The Group’s inventories comprise materials and consumables, merchandise, finished products, work in progress and certificates of origin for electricity.
The value of inventories is established at the lower of cost and net realisable 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.
Gas fuel at storage facilities is measured jointly for all storage units, at the average weighted cost. Changes in the inventories of gas fuel stored in the Underground Gas Storage Facilities for sale 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 companies are obliged to obtain and surrender 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 purchased certificates of origin are measured using the weighted average method.
Upon sale of electricity, a provision is recognised for the certificates of origin to be 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 bringing the value of such inventories to the net realisable amount. Impairment losses on inventories bringing their value to the net realisable amount and all losses on inventories are recognised as cost in the period when the loss occurred.
Impairment losses on inventories are determined by way of a case-by-case assessment of the usefulness of inventories, based on the following assumptions:

2.3.14. 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 disposal group), 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 with 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.

2.3.15. 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 comprises the positive difference between the issue price of shares over the par value of the shares which remains after covering issue costs.
Share issue costs incurred upon establishment of a joint-stock company or share capital increase reduce the share premium account to the amount of the difference between the issue proceeds and the par value of the shares, and their balance is charged to other capital reserves, disclosed under Retained earnings/deficit.
The effects of adjustments related to the first-time adoption of the IAS were charged to Retained earnings/deficit. In accordance with the IAS, net profit for the previous financial year can be allocated by an entity only to equity or dividends to shareholders. The option provided by 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 the IAS. Therefore, the Group recognises the aforementioned reductions in profit as the cost of the period. Profit distributions to employees are recognised as payroll cost, while funds transferred to the Company Social Benefits Fund are disclosed under employee benefits expense.

2.3.16. 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 resources embodying economic benefits, and a reliable estimate can be made of the amount of the obligation (with the obligation amount and maturity date being uncertain).
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 the provisions as a result of lapse of time is disclosed as costs of external funding.
The Group recognises the following provisions:

2.3.16.1. 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 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 of 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 (determined in accordance with income tax laws) 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.

2.3.16.2. 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, which are estimated and reviewed periodically based on current prices.

2.3.16.3. 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 owned by third parties, which are often natural persons.
Where possible, at the time of installing the elements of the infrastructure the Group companies entered into agreements establishing standard land easements 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:

2.3.16.4. Provision for the buy-out price payable under the Energy Efficiency Act

The Energy Efficiency Act of April 15th 2011 introduces the system of white certificates, imposing an obligation to obtain the certificates and surrender them for cancellation to the President of the Energy Regulatory Office, or pay a buy-out price. The obligation applies to companies selling electricity, heat and gas fuels to end users.
White certificates, i.e. energy savings certificates, may be obtained for efficiency-improving measures implemented or planned to be implemented by a company. An energy savings certificate may be obtained for a measure that results in annual energy savings of at least 10 tonnes of oil equivalent (toe) or a group of such measures that results in total annual savings in excess of 10 toe.
The Group estimates the amount of the provision for the buy-out price in accordance with the formula set forth in the Energy Efficiency Act.

2.3.16.5. 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 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.

2.3.17. 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 merchandise 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. They are subsequently charged to profit or loss pro rata to depreciation charges on the corresponding assets.
The gas companies (distribution system operators) 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 under equity and liabilities in the consolidated statement of financial position.

2.3.18. 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).
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.

2.3.18.1. 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 derivative financial instruments that are not measured pursuant to the principles of hedge accounting and whose measured value is negative.

2.3.18.2. 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 costs 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 costs over the term of the borrowing.

2.3.18.3. 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.

2.3.18.4. Trade and other payables

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

2.3.18.5. 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 employee provides the services to the entity, and in the case of profit-sharing and bonus payments – when the following conditions are met:

The Group recognises expected short-term employee benefit expenses related to compensated absences in the case of accumulated compensated absences (that is absences to which the entitlement is transferred to the future periods and can be used in the future if the absences were not fully used in the current period), and in the case of non-accumulating absences (which cause obligations on the part of the Group upon their occurrence).
Post-employment benefits in the form of defined benefit plans (retirement severance) and other long-term employee benefits (e.g. “jubilee” benefits, long-term disability pensions) are determined using the projected unit credit method, with the actuarial valuation made as at the end of the reporting period.
Actuarial gains and losses related to post-employment benefits are presented in other comprehensive income, whereas gains and losses related to other post-employment benefits are charged to profit or loss of the current reporting period.
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. For more information, see Note 40.

2.3.18.6. 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:

2.3.19. 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.
The Group's business consists in sales of goods, rendering of services and leasing out the Group's assets to third parties. Goods include the Group's products intended for sale and goods purchased for resale, e.g. merchandise, lands, and property.
Revenue comprises amounts receivable (excluding VAT and other amounts received on behalf of third parties) for goods and services delivered in the ordinary course of business. Revenue is measured at fair value of the consideration received or receivable, less any discounts, sales taxes (VAT, excise duty) and other charges.

2.3.19.1. Sale of goods

Sales of goods are recognised when the goods and products are delivered to the customer and significant risks and benefits related to their ownership are transferred.
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.

2.3.19.2. 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, well services as well as transport, accommodation, 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.

2.3.19.3. 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.

2.3.20. Lease/rental income

Use of the Company's assets by third parties results in income in the form of interest, royalties, and dividends. Such income is recognised when it is probable that the economic benefits associated with the transaction will flow to the Company and the amount of income can be measured reliably.

2.3.20.1. 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.

2.3.20.2. Royalties

Revenue from royalties is recognised on accrual basis, taking into account the substance of a relevant agreement.

2.3.20.3. Dividends

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

2.3.21. Grants

The Group distinguishes the following types of 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 as immediate financial support for the entity, with no future related costs, should be recognised in profit or loss in the period in which it becomes receivable.

2.3.22. Income tax expense

Mandatory increases in loss/decreases in profit include current 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 is not a 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).

2.3.23. 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:

  1. Exploration and Production Segment The segment's key business is hydrocarbon extraction and preparation of products for sale. The segment covers the 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 S.A., POGC Libya BV, PGNiG Upstream International AS and other Group companies rendering services within this segment.
  2. Trade and Storage Segment The segment’s activities consist in sale of natural gas, either from imports or from domestic sources, operation of underground gas storage facilities for trading purposes, and electricity trading. Following the integration of the trading business and separation of storage and trading functions, sale of natural gas is conducted by PGNiG S.A., while gas storage services are provided 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, which conducts activities in the area of gas and electricity trading and distribution, is 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.
  3. Distribution Segment The segment’s activities consist in transmitting natural gas through the distribution network. Natural gas distribution services are rendered by Polska Spółka Gazownictwa Sp. z o.o., which supplies gas to individual, industrial and wholesale customers. The company is also responsible for operation, maintenance and expansion of the distribution network.
  4. Generation Segment The segment’s activities consist in generation and sale of electricity and heat. Assets, revenues and expenses of PGNiG TERMIKA S.A. are presented in this segment.
  5. Other segments. This segment comprises all Group companies whose activities cannot be classified into any of the other segments: engineering design and construction of structures, machinery and equipment for the extraction and energy sectors, as well as catering and hospitality services.

A 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.
A segment’s liabilities comprise all operating liabilities (primarily trade payables), salaries and wages, and tax liabilities (both due and accrued), as well as 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 extraction 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 extraction 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 extraction assets.
Another significant uncertainty is connected with the risk related to the decisions of the Energy Regulatory Office concerning prices of the gas fuel distribution services. Because prices materially affect the Group’s cash flows, 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 2.3.3. 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 periods, 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. Accordingly, profit or loss for a given period may 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 applied 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 2.3.16.3).
As the amounts used in the above calculations were arrived at based on a number of variables, the actual 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. The result of impairment test is sensitive to the 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 material effect on the company’s future value. For more information on the valuation, see Note 6.
Further, implementation of the provisions of the Inter-Governmental Protocol with respect to the net profit earned in subsequent years will be of material importance to the assessment of the value of SGT EUROPOL GAZ S.A.

2.5. Contingent assets and liabilities

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company.
Contingent assets are not recognised in the consolidated statement of financial position as this might result in recognition of income that may never be realised. However, when the realisation of income is probable, then the Group discloses a brief description of the nature of such contingent assets at the end of the reporting period in the notes and, where practicable, estimate their financial effects using the principles set out for provisions.
Contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial statements. If it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognised in the financial statements of the period in which the change occurs. If an inflow of economic benefits has become probable, the Group discloses the contingent asset.
A contingent liability is:

The Group does not recognise contingent liabilities in the consolidated statement of financial position, except contingent liabilities assumed as a result of business combinations, which are recognised in the statement of financial position as provisions for liabilities.
Unless the possibility of any outflow in settlement is remote, the Group shall disclose for each class of contingent liability at the end of the reporting period a brief description of the nature of the contingent liability and, where practicable:

2.6. Presentation changes in the financial statements

Application of IAS 19 Employee Benefits
The Group made changes in the comparative data following the first-time adoption of the revised IAS 1 Presentation of Financial Statements and IAS 19 Employee Benefits. The effect of the application of the revised standards is discussed in Note 2.2.1. First-time adoption of standards and interpretations.

Change in the presentation of electricity trading
The Group has also introduced presentation changes with respect to electricity trading. Until 2013, the cost of purchase of electricity for trading was presented in the income statement in “Other income and expenses”. Since 2013, it has been presented in the income statement under “Raw material and consumables used”.

Transfer of an entity between the reporting segments
On July 1st 2013, INVESTGAS S.A. (target company) was merged with Operator Systemu Magazynowania Sp. z o.o. (acquiring company). Accordingly, in the presentation of the comparative period in the Reporting Segments note, INVESTGAS S.A. was transferred from Other Segments to Trade and Storage.
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, adjustments were made to comparative data for 2012, as presented below.

2.6.1. Earnings/(loss) and diluted earnings/(loss) per share attributable to owners of the parent (PLN) – restatement of comparative data

Jan 1–Dec 31 2012 before the change Jan 1–Dec 31 2012 after the change
Earnings/(loss) and diluted earnings/(loss) per share attributable to owners of the parent (PLN) 0.38 0.38
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2.6.2. Consolidated income statement − restatement of comparative data

in PLN m

  Jan 1–Dec 31 2012 before the change Adjustments ensuring comparability − change of IAS 19 Change in the presentation of electricity trading Jan 1–Dec 31 2012 after the change
Revenue (28,730) - - (28,730)
Raw material and consumables used (17,447) - (156) (17,603)
Employee benefits expense (3,054) (7) - (3,047)
Depreciation and amortisation expense (2,069) - - (2,069)
Services (3,060) - - (3,060)
Work performed by the entity and capitalised (1,006) - - (1,006)
Other income and expenses (1,573) - (156) (1,417)
Total operating expenses (26,197) (7) - (26,190)
Operating profit/(loss) (2,533) (7) - (2,540)
Finance income (216) - - (216)
Finance costs (380) - - (380)
Share in net profit/loss of equity-accounted entities  (173) - - (173)
Profit/(loss) before tax (2,542) (7) - (2,549)
Income tax (308) (1) - (309)
Net profit/(loss) (2,234) (6) - (2,240)
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2.6.3. Consolidated statement of comprehensive income − restatement of comparative data

in PLN m

  Jan 1–Dec 31 2012 before the change Adjustments ensuring comparability − change of IAS 19 Jan 1–Dec 31 2012 after the change
Net profit/(loss) 2,234 6 2,240
Other comprehensive income, net (204) 11 (193)
including:
Exchange differences on translating foreign operations 0 11 11
Total comprehensive income 2,030 17 2,047
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2.6.4. Consolidated statement of financial position − restatement of comparative data

in PLN m

Dec 31 2012 before the change Adjustments ensuring comparability − change of IAS 19 Dec 31 2012 after the change
ASSETS
Total non-current assets 37,084 12 37,096
 including:
 Deferred tax assets 1,124 12 1,136
Total current assets 10,833 - 10,833
Total assets 47,917 12 47,929
LIABILITIES AND EQUITY
Total equity 27,247 (50) 27,197
including:
Accumulated other comprehensive income (90) (62) (152)
Retained earnings/(deficit) 19,693 12 19,705
Total non-current liabilities 11,057 62 11,119
including:
Employee benefit obligations 319 62 381
Total current liabilities 9,613 - 9,613
including:
Employee benefit obligations 356 - 356
Total liabilities 20,670 62 20,732
Total liabilities and equity 47,917 12 47,929
Jan 1 2012 before the change Adjustments ensuring comparability − change of IAS 19 Jan 1 2012 after the change
ASSETS
Total non-current assets 31,301 16 31,317
 including:
 Deferred tax assets 920 16 936
Total current assets 7,523 - 7,523
Total assets 38,824 16 38,840
LIABILITIES AND EQUITY
Total equity 25,218 (67) 25,151
including:
Accumulated other comprehensive income 114 (73) 41
Retained earnings/(deficit) 17,457 6 17,463
Total non-current liabilities 5,760 83 5,843
including:
Employee benefit obligations 268 83 351
Total current liabilities 7,846 - 7,846
including:
Employee benefit obligations 238 - 238
Total liabilities 13,606 83 13,689
Total liabilities and equity 38,824 16 38,840
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2.6.5. Consolidated statement of cash flows − restatement of comparative data

in PLN m

Jan 1–Dec 31 2012 before the change Adjustments ensuring comparability − change of IAS 19 Jan 1–Dec 31 2012 after the change
Net cash flows from operating activities 2,552 - 2,552
 including:
 Net profit/(loss) 2,234 6 2,240
 Current tax expense 308 1 309
 Other items, net 456 14 470
 Change in working capital (1,981) (21) (2,002)
Net cash flows from investing activities (6,149) - (6,149)
Net cash flows from financing activities 4,040 - 4,040
Net change in cash 443 - 443
Cash and cash equivalents at beginning of the period 1,504 - 1,504
Cash and cash equivalents at end of the period 1,947 - 1,947
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2.6.6. Reportable segments − restatement of comparative data

in PLN m

Period ended December 31st 2012 Exploration and Production Trade and Storage Distribution Generation Other segments Eliminations Total
Segment's operating profit/(loss) before the changes 1,353 325 878 15 (20) (18) 2,533
Changes, including: 1 7 2 - (8) 5 7
Adjustments ensuring comparability − change of IAS 19 1 2 2 - 2 - 7
Transfer of INVESTGAS S.A. from Other Segments to Trade and Storage* - 5 - - (10) 5 -
Segment's operating profit/(loss) after the changes 1,354 332 880 15 (28) (13) 2,540
Segment's assets before the changes 16,580 18,650 13,089 4,345 483 (7,278) 45,869
Changes, including: - 61 - - (70) 9 -
Transfer of INVESTGAS S.A. from Other Segments to Trade and Storage* - 61 - - (70) 9 -
Segment's assets after the changes 16,580 18,711 13,089 4,345 413 (7,269) 45,869
Segment's liabilities before the changes 5,823 3,937 2,234 2,870 171 (6,943) 8,092
Changes, including: 17 33 45 - (42) 9 62
Adjustments ensuring comparability − change of IAS 19 17 3 45 - (3) - 62
Transfer of INVESTGAS S.A. from Other Segments to Trade and Storage* - 30 - - (39) 9 -
Segment's liabilities after the changes 5,840 3,970 2,279 2,870 129 (6,934) 8,154

* The change results from the merger of INVESTGAS S.A. and OSM Sp. z o.o. in Q3 2013

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