12. Right-of-use assets

ACCOUNTING POLICIES

Right-of-use assets – accounting policy applied from January 1, 2019

Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

IFRS 16 does not apply to lease agreements to explore for or use lignite resources, including in particular agreements for the establishment of mining rights and RPUL, rental agreements and similar land lease agreements for mining sites, forefields and dumping sites. In accordance with the Group’s interpretation, agreements concerning the production from lignite deposits are excluded from the scope of IFRS 16.

The Group defines the lease period as the non-cancellable period for which a lessee has the right to use an underlying asset, together with both:

• periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option and
• periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.

In determining the lease term and assessing the length of the non-cancellable period of a lease, the Group applies the definition of a contract and determine the period for which the contract is enforceable. A lease is no longer enforceable when the lessee and the lessor each has the right to terminate the lease without permission from the other party with no more than an insignificant penalty. The concept of a penalty includes any economic 'disadvantage’ of any kind that creates barriers to exit from the contract.

If only a lessee has the right to terminate a lease, that right is considered to be an option to terminate the lease available to the lessee that an entity considers when determining the lease term. If only a lessor has the right to terminate a lease, the non-cancellable period of the lease includes the period covered by the option to terminate the lease.

The lease term begins at the commencement date (date of making the underlying asset available for use by the lessee) and includes any rent-free periods provided to the lessee by the lessor.

At the lease commencement date, the Group takes into account all relevant facts and circumstances that create an economic incentive for the lessee to exercise, or not to exercise, the option to extend the lease or to purchase the underlying asset, or not to exercise an option to terminate the lease.

The interest rate implicit in the lease is the rate that causes the present value of the lease payments and the unguaranteed residual value to equal the sum of the fair value of the underlying asset and any initial direct costs of the lessor.

The lessee’s incremental borrowing rate of interest is the rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

The lessee recognises a right-of-use asset at the commencement date.

The Group as a lessee applies the exemption in respect of recognition, measurement and presentation in relation to:

• short-term leases, i.e. leases with a term of up to 12 months and without a purchase option;
• leases for which the underlying asset is of low value and is not sub-leased. The Group considers that the underlying asset is of low value (value of the asset when it is new, regardless of the age of the asset being leased) if that value is not higher than PLN 18 thousand.

The election for short-term leases is made by class of underlying asset to which the right of use relates. The Group uses the exemption for all contracts concluded. The election for leases for which the underlying asset is of low value is made on a lease-by-lease basis.

At the commencement date, the lessee measures the right-of-use asset at cost. The cost of the right-of-use asset should comprise:

• the amount of the initial measurement of the lease liability;
• any lease payments made at or before the commencement date, less any lease incentives received,
• any initial direct costs incurred by the lessee; and
• an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories. The lessee incurs the obligation for those costs either at the commencement date or as a consequence of having used the underlying asset during a particular period.

After the commencement date, a lessee measures the right-of-use asset applying a cost model. The lessee measures the right-of-use asset at cost:

• less any accumulated depreciation and any accumulated impairment losses. Depreciation charges are recognised throughout the lease term, from the moment the asset is placed in service. No depreciation charges are recognised for right-of-use assets classified as non-current assets held for sale.
• adjusted for any remeasurement of the lease liability (e.g. to reflect revised lease payments).

Leases – accounting policy applied until December 31, 2018

Classification of the lease is made at the lease inception, based on the economic substance of the lease agreement.

A lease, tenancy contract or other contract of a similar nature under which transfer to the Group substantially all the risks and rewards of ownership is classified as a finance lease. The subject of a finance lease is recognized in assets as at the lease commencement date at the lower of the fair value of the leased asset or the present value of the minimum lease payments. Any initial direct costs of the lessee are added to the amount recognised as an asset. Lease payments shall be apportioned between reduction of the outstanding liability balance and the financial expenses in such a way as to maintain a constant discount rate in relation to the unsettled part of the liability.Financial expenses are recognised as financial expenses in the statement of comprehensive income during the lease period.

An operating lease is a lease under which the lessor retains significant part of the risks and rewards incidental to ownership of the asset. Lease payments under an operating lease are recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit.

The following useful lives are adopted for particular groups of right-of-use assets:

Changes in right-of-use assets by group