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 2014.

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 reporting period, the Group adopted all 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 2014.

• IFRS 10 Consolidated Financial Statements, endorsed by the European Commission on December 11th 2012,
• IFRS 11 Joint Arrangements, endorsed by the European Commission on December 11th 2012,
• IFRS 12 Disclosure of Interests in Other Entities, endorsed by the European Commission on December 11th 2012,
• IAS 27 (revised 2011) Separate Financial Statements, endorsed by the European Commission on December 11th 2012,
• IAS 28 (revised 2011) Investments in Associates and Joint Ventures, endorsed by the European Commission on December 11th 2012,
• Amendments to IAS 32 Financial Instruments: Presentation– Offsetting Financial Assets and Financial Liabilities, endorsed by the European Commission on December 13th 2012,
• Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities, and IAS 27 Separate Financial Statements – Investment Entities, endorsed by the European Commission on November 20th 2013,
• Amendments to IAS 36 Impairment of Assets – Recoverable Amount Disclosures for Non-Financial Assets, endorsed by the European Commission on December 19th 2013,
• Amendments to IAS 39 Financial Instruments: Recognition and Measurement – Novation of Derivatives and Continuation of Hedge Accounting, endorsed by the European Commission on December 19th 2013,
• IFRIC 21 Levies – endorsed by the European Commission on June 13th 2014.

Application of the above amendments to standards has not caused any material changes in the accounting policies of the Group or in the presentation of data in its 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:

• Amendments to IFRS (2010−2012) – changes in the procedure of introducing annual amendments to IFRS – effective for reporting periods beginning on or after July 1st 2014,
• Amendments to IFRS (2011−2013) – changes in the procedure of introducing annual amendments to IFRS – effective for reporting periods beginning on or after July 1st 2014,
• Amendments to IAS 19 Defined Benefit Plans: Employee Contributions – effective for reporting periods beginning on or after July 1st 2014.

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 International Accounting Standards Board which as at December 31st 2014 were not endorsed for use by the European Commission and therefore have not yet been applied in these financial statements

Standards which as at December 31st 2014 were not endorsed for use by the European Commission:

• IFRS 9 Financial Instruments – effective for reporting periods beginning on or after January 1st 2018,
• Amendments to IFRS (2012−2014) – changes in the procedure of introducing annual amendments to IFRS – planned to be effective for reporting periods beginning on or after July 1st 2016,
• Amendments to IFRS 10 and IAS 28 Sales or Contributions of Assets between an Investor and Its Associate/Joint Venture – effective for reporting periods beginning on or after January 1st 2016,
• IFRS 14 Regulatory Deferral Accounts – effective for reporting periods beginning on or after January 1st 2016,
• IFRS 15 Revenue from Contracts with Customers – effective for reporting periods beginning on or after January 1st 2017,
• Amendments to IAS 16 Property, Plant and Equipment – effective for reporting periods beginning on or after January 1st 2016,
• Amendments to IAS 16 Property, Plant and Equipment, and IAS 38 Intangible Assets: Clarification of Acceptable Methods of Depreciation and Amortisation – effective for reporting periods beginning on or after January 1st 2016,
• Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests in Joint Operations – effective for reporting periods beginning on or after January 1st 2016.
• Amendments to IAS 1 Disclosure Initiative – effective for reporting periods beginning on or after January 1st 2016,
• Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception – effective for reporting periods beginning on or after January 1st 2016,
• Amendments to IAS 27 Equity Method in Separate Financial Statements – effective for reporting periods beginning on or after January 1st 2016,

The Group estimates that the above standards 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, the associated entity and the joint venture.

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:

• similar items of assets, liabilities, equity, revenue, costs and cash flows of the parent and its subsidiaries are presented jointly;
• the carrying amount of parent’s investment in each subsidiary and the parent’s share in subsidiaries’ equity is offset (under IFRS 3);
• the Group’s assets, liabilities, equity, revenue, costs and cash flows from transactions between Group entities are eliminated in full (gains and losses on intra-group transactions, recognised as assets such as inventories and tangible assets are eliminated in full).

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 statement of profit or loss, 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 reporting 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 statement of profit or loss for the period in which the acquisition took place.

Unrealised gains and losses on transactions between the Group and an associated entity are eliminated on 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 arrangements

Joint arrangements are either:

• joint operations, or
• joint ventures.

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint operators.

A joint operator recognises in relation to its interest in a joint operation:

• its assets, including its share of any assets held jointly,
• its liabilities, including its share of any liabilities incurred jointly,
• its revenue from the sale of its share of the output arising from the joint operation;
• its share of the revenue from the sale of the output by the joint operation; and
• its expenses, including its share of any expenses incurred jointly.

As assets, liabilities, revenues and costs relating to the joint operation 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.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement Those parties are called joint venturers.

In the consolidated financial statements, a joint venturer recognises its interest in a joint venture as an investment and accounts for that investment using the equity method in accordance with IAS 28, unless the entity is exempted from applying the equity method as specified in that standard. A party that participates in, but does not have joint control or significant influence over, a joint venture accounts for its interest in the arrangement in accordance with IAS 39.

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:

• POGC Libya B.V. – US dollar (USD),
• PGNiG Upstream International AS – Norwegian krone (NOK),
• PGNiG Sales & Trading GmbH − euro (EUR),
• PGNiG Finance AB – Swedish krona (SEK),
• the foreign branches of the Group companies.

2.3.2.1. Measurement at initial recognition

Transactions denominated in foreign currencies are initially disclosed at the exchange rate of the functional currency effective as at the transaction date.

2.3.2.2. Measurement at the end of the reporting period

At the end of each reporting period:

• Cash items denominated in foreign currencies are translated at the exchange rate of the functional currency effective as at the reporting date.
• 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 valued at fair value in a foreign currency are translated at the exchange rate effective as at the date of determining the fair value.

2.3.2.3. Recognition of exchange differences

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements is recognised in profit or loss in the period in which they arise. When a gain or loss on a non-monetary item is recognised directly in equity, any exchange component of that gain or loss is recognised directly in equity. Conversely, when a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss is recognised by the Group companies in profit or loss.

Foreign currency differences arising on translation of the assets and liabilities of foreign branches are recognised in Accumulated other comprehensive income and presented in a separate item of equity. 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 year, 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:

• expenditure incurred at initial recognition,
• expenditure incurred on improvements (modernisation) which increase future economic benefits.

Property, plant and equipment is initially disclosed at 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 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 is recognised by the Group at historical cost. Property, plant and equipment, initially recognised as assets, is 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:

• Buildings and structures 2-40 years
• Plant and equipment, vehicles and other tangible assets 2-35 years

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.

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.

Expenses under seismic surveys are capitalised under exploration and evaluation assets and disclosed as a separate exploration and evaluation asset.

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 useful economic lives.

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:

• assets measured at fair value, and
• inventories produced or generated in significant volumes in the course of a repetitive process.

Borrowing costs may comprise:

• interest expense calculated using the effective interest rate method,
• financial liabilities under finance lease agreements,
• exchange differences arising on borrowings denominated in a foreign currency, to the extent that they are regarded as an adjustment to interest expenses.

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:

• development expenses;
• goodwill;
• perpetual usufruct right to land – acquired for consideration;
• licences, mining rights and geological information;
• software;
• greenhouse gas emission allowances.

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:

• the technical feasibility of completing the intangible asset so that it is fit for use or sale,
• its intention to complete and to use or sell the intangible asset,
• its ability to either use or sell the intangible asset,
• the manner in which the intangible asset will generate future economic benefits,
• the availability of appropriate technical, financial and other means which are necessary to complete the development work and to use or sell the intangible asset,
• the feasibility of a reliable determination of the expenditure incurred in the course of development work.

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:

• acquired for consideration,
• acquired free of charge.

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:

• purchased for redemption,
• purchased for resale,
• received free of charge.

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:

• Acquired licences, patent rights and similar items 2-15 years
• Acquired software   2-10 years
• Perpetual usufruct right to land 40-99 years
• Licences - granted for periods specified in relevant decisions of the President of the Energy Regulatory Office.

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).

2.3.8.  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 a 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 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 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:

• financial assets measured at fair value through profit or loss (positive valuation of derivatives which are not measured pursuant to the principles of hedge accounting),
• financial instruments hedging specific risks under hedge accounting,
• financial assets available for sale,
• loans and receivables.

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:

• acquired principally for the purpose of selling it in the near term;
• part of a portfolio of identified financial instruments that are managed together in accordance with a recent actual pattern of short-term profit-taking;
• a derivative (except for a derivative that is a designated and effective hedging instrument).

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.  Financial instruments hedging specific risks under hedge accounting

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 2.3.12.

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 reporting date to reflect changes in currency exchange rates).

The Group classifies the following financial assets as loans and receivables:

• investments in unlisted equity instruments (other than shares in subsidiaries, associates and joint ventures),
• investments in listed equity instruments not held for trading (other than shares in subsidiaries, associates and joint ventures),
• investments in debt instruments that the Group does not have a firm intention to hold to maturity.

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:

• all receivables (excluding taxes, grants, customs duties, social security and health insurance contributions and other benefits),
• loans advanced and bonds not quoted in an active market,
• cash and cash equivalents.

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.

2.3.10.4.1.  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.

2.3.10.4.2.   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 hedging relationship is formally designated and documented, including the entity’s risk management objective and strategy for the hedge, at the time when the hedge is undertaken,
• the hedge is expected to be highly effective in offsetting changes in the fair value or cash flows attributable to the hedged risk, based on the originally documented risk management strategy pertaining to a given hedging relationship,
• in the case of a cash flow hedge, the contemplated transaction to which the hedge relates is highly probable and exposed to variability in cash flows, which may ultimately affect the profit or loss,
• the effectiveness of the hedge can be reliably assessed by way of reliable measurement of the fair value of the hedged item or of the related cash flows and fair value of the hedging instrument,
• the hedge is assessed on an ongoing basis and determined to have been highly effective throughout the reporting periods for which the hedge was designated.

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:

• the Group charges gain or loss on remeasurement of fair value of hedging instrument to profit or loss; and
• gains or losses connected with the hedged item and resulting from the risk hedged adjust the carrying amount of the hedged item and are charged to profit or loss. This principle applies to the hedged item which under different circumstances is measured at cost.

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 goods, 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:

• For inventory of purchased materials which are idle for a period of 1–5 years, the Group generally recognises an impairment loss of 20% of their value; Where the case-by-case usefulness assessment and the possibility of using a category of materials and their cycle structure are taken into account, the Group may recognise impairment losses of 5% and 10% of the value of the materials;
• For inventory of purchased materials which are idle for a period of 5–10 years, the Group recognises an impairment loss of 20%–100% of their value;
• For materials remaining in warehouses for more than 10 years, which are completely useless and intended for liquidation, the Group recognises an impairment loss of 100% of their value.

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:

• provision for well decommissioning costs,
• provision for costs of environmental liabilities,
• provision for claims under extra-contractual use of land,
• provision for the buy-out price payable under the Energy Efficiency Act,
• other 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:

• abandonment of and securing production, storage, discharge, observation and monitoring wells;
• liquidation of redundant facilities and disassembly of machinery and equipment;
• reclamation of land and development of areas after completion of extraction activities;
• maintenance of facilities intended for decommissioning in an order ensuring safety of extraction facility operations.

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 costs of 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 the provisions of Art. 305¹–305⁴ of the Polish Civil Code of April 23rd 1964 (Dz.U. No. 16, item 93 as amended), introduced in 2008.

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:

• an estimate survey made by an expert appraiser, or
• its own valuation, taking into account the size of the controlled area in square metres, the amount of annual rent per square metre for similar land in a given municipality, and the period of extra-contractual use of land (not more than ten years), or
• if it is not possible to obtain reliable data required to apply the method described above, the Group analyses submitted claims on a case-by-case basis.

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.  Prepayments and accrued income

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 revenue, the Group recognises deferred revenue from additional charges for uncollected gas and government grants relating to assets. Deferred revenue 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 revenue is reclassified to income from compensations, penalties, fines, etc.

Government grants relating to assets are recognised as deferred revenue 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 revenue 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:

• it is classified as held for trading, or
• it was designated by the Group as measured at fair value through profit or loss upon initial recognition.

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

• incurred principally for the purpose of selling or repurchasing it in the short term;
• a derivative (except for a derivative that is a designated and effective hedging instrument).

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 reporting 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:

• salaries, wages and social security contributions,
• short-term compensated absences where the absences are expected to occur within 12 months after the end of the period in which the employees render the related employee service;
• profit-sharing and bonuses payable within 12 months after the end of the period in which the employees render the related service,
• non-monetary benefits for current employees.

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 entity has a legal or constructive obligation to make such payments as a result of past events, and
• a reliable estimate of the expected cost can be made.

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.

In 2014, the Group operated the “Programme for Workforce Streamlining and Redundancy Payments to PGNiG Group Employees for 2009–2011 (Stage 3)”, (the “Programme”) under which the Parent set up a provision in the form of the Central Restructuring Fund to guarantee funding of redundancy-related benefits for the eligible employees. The detailed rules of operation of the Fund as well as the list of mark-ups and expenses from the Fund were specified in the Parent’s internal regulations. The Programme expired on December 31st 2014. For more information, see Note 38.

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:

• suppliers (trade and other payables related to acquisition or construction of property, plant and equipment and intangible assets) and sellers of securities,
• insurance companies,
• employees (other than salaries and wages)
• shareholders (dividends),
• suppliers (bid bonds),
• lessors (operating leases),
• trading partners (performance bonds),
• other liabilities.

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.  Sales 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 reporting 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:

• grants related to assets, receivable on condition that the Group purchases, produces, or otherwise obtains plant, property and equipment.
• grants related to revenue.

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 revenue 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

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 reporting 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:

• has a legally enforceable right to set off current tax assets against current tax liabilities; and
• the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities.

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:

• that engages in business activity from which it may earn revenues and incur expenses;
• whose operating results are reviewed regularly by the Group’s chief operating decision maker, and are used when making decisions on asset allocation to the segment and when reviewing its performance;
• for which discrete financial information is available.

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. a) 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. b) 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. Sales of natural gas are handled by PGNiG S.A. and PGNiG Obrót Detaliczny Sp. z o.o., while Operator Systemu Magazynowania Sp. z o.o. is engaged in the provision of gas storage services. The segment operates six underground gas storage facilities (Mogilno, Wierzchowice, Husów, Brzeünica, 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, and selling prices are established on the basis of tariffs approved by the President of URE. Wholesale transactions are executed on the Polish Power Exchange.

1. c) 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.
2. d) 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.
3. e) 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 uncertainty and estimates, which had a 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 areas listed below.

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 distribution 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. The assumptions made in connection with potential continued use, liquidation and sale of assets are revised in individual reporting periods. For information on the value of impairment losses recognised in 2014, 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 impairment losses on the Exploration and Production segment 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 natural gas sales

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 liabilities

The provision for well decommissioning costs and provisions for environmental liabilities presented in Note 26 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 its investment 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 (which depend on implementation by the company of the Inter-Governmental Protocol with respect to net profit to be earned in subsequent years) 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.

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:

• a possible obligation 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 Group; or
• a present obligation that arises from past events but is not recognised, because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or the amount of the obligation (liability) cannot be measured with sufficient reliability.

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 discloses 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:

• an estimate of its financial effect, measured using the principles set out for provisions,
• an indication of the uncertainties relating to the amount or timing of any outflow; and
• the possibility of any reimbursement.

2.6.  Presentation changes in the financial statements

Change in presentation of purchase of gas fuel transmission services at entry points

The Group changed the presentation of cost of gas fuel transmission services purchased at the system entry points (pursuant to the Regulation of the Minister of Economy on detailed rules for determining and calculating tariffs for gas fuels and on settlement of transactions in gas fuels trading). As of 2014, the costs are disclosed in the statement of profit or loss under “Raw materials and consumables used” (increase in gas fuel purchase costs), and not under “Services” as was the case previously.

Change in presentation of joint-operation transactions in which the Parent acts as the operator

Beginning from the 2014 half-year report, the Group offsets the costs representing the partner's interest in joint operations against the corresponding revenue under the operator's charge invoice. Such events were previously presented separately under revenue and expenses.

Change in the presentation of deferred tax assets and liabilities

The Group reviewed its presentation of deferred tax assets and liabilities. Beginning from the periodic report for the first half of 2014, the Group stopped presenting some of the deferred tax assets and liabilities in net amounts.

Change of presentation of capitalised interest repayment

The Group has reclassified interest amounts capitalised in interest-bearing liabilities at the beginning of a given reporting period and paid in the current reporting period. So far, these amounts were disclosed in the statement of cash flows under "Repayment of borrowings", "Repayment of debt securities" and "Payment of finance lease liabilities", depending on which item the capitalised interest related to. Starting from 2014, these amounts are disclosed under "Interest paid".

Amalgamation of items in the statement of financial position

Starting from the consolidated financial statements for 2014, the Group changed the presentation of its “Financial assets available for sale”; the non-current portion of this item is now presented in “Other financial assets”, whereas the current portion is carried in “Other assets”.

The purpose of these changes was to increase the transparency and usefulness of the data presented in the financial statements.

As a result, the comparative data for 2013 were adjusted, 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

2.6.2.  Consolidated statement of profit or loss − restatement of comparative data

2.6.3.  Consolidated statement of comprehensive income − restatement of comparative data

2.6.4.  Consolidated statement of financial position − restatement of comparative data

2.6.5.  Consolidated statement of cash flows − restatement of comparative data