4. Selected accounting policies

The financial statements were prepared in accordance with the historical cost convention, except for CO₂ emission allowances acquired in order to realise gains from changes in market prices, which are recognised at fair value less costs to sell.

These consolidated financial statements of PGE Group were prepared on the basis of the financial statements of the parent company and financial statements of its subsidiaries, associates and a jointly-controlled entity. The financial statements of consolidated entities were prepared for the same reporting period, using consistent accounting policies.

All balances, income and expenses arising between the Group entities and unrealised gains from intercompany transactions, are fully eliminated.

Subsidiaries are consolidated from the date when the Group obtains control of them and cease to be consolidated when the control is lost. The parent also exercises control when it owns directly or indirectly through its subsidiaries more than half of the votes in a given entity, unless it is possible to prove that such ownership does not constitute control. The Parent controls a subsidiary when it has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the subsidiary. Exercising control may also occur when the parent company does not own half of votes in a subsidiary.

Accounting for the formation of PGE Group and later Group transformations in the consolidated financial statements

Matters concerning acquisitions and business combinations are generally regulated by IFRS 3 Business Combinations. However, the scope of this standard does not include transactions among business entities under common control. The entities that later formed PGE Group had been controlled by the State Treasury. This transaction thus, according to the Company, meets the definition of transaction under common control and is therefore excluded from IFRS 3.

Business combinations under common control were accounted for using the pooling of interests method and thus the consolidated financial statements reflect the fact of the common control continuity and does not present the changes in the net asset value to fair value (or recognition of new assets), or measurement of the goodwill.

Further business combinations within PGE Group were recognised as transactions between entities under common control, therefore should be accounted within the equity of PGE Group, without affecting goodwill.

Acquisitions of companies from third parties are accounted for using the acquisition method in line with IFRS 3.

Joint ventures and joint control

In relation to participation in a joint venture (a joint arrangement giving the right to the net assets) this participation is recognised in the financial statements as an investment and accounted for using the equity method.

Joint control is a contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

Investments in associates

Associates are those entities over which the parent has significant influence, either directly or indirectly through its subsidiaries, but are neither controlled, nor jointly controlled by the parent.

Investments in associates are equity-accounted.

Measurement of fair value of assets and liabilities acquired, determination of goodwill

PGE Group identifies acquired assets and liabilities, measures their fair value and recognizes goodwill or gain on bargain purchase in accordance with IFRS 3 Business combinations. Measurement is based on a number of assumptions, which include inter alia: application of appropriate valuation method, management’s plans relating to the use of acquired assets, financial projections (including price forecasts influencing main items of income and expenses), changes in laws and regulations and other. On the other hand, the accounting for the transaction is also affected by the appropriate determination of the consideration transferred (including contingent portion). Assumptions applied may significantly impact fair values of acquired assets and liabilities, and calculation of goodwill or gain on bargain purchase. Goodwill is tested for impairment together with the respective cash generating units.

Translation of items denominated in foreign currencies

Transactions denominated in foreign currencies are translated into the Polish złoty using the exchange rate from the transaction date.
As at the reporting date:

• monetary items are translated in a simplified manner, using the closing rate quoted by the National Bank of Poland;
• non-monetary items that are measured at historical cost in a foreign currency are translated at the exchange rate effective at the date of the transaction;
• non-monetary items measured at fair value in a foreign currency are translated at the exchange rate effective for the date of determining the fair value.

Foreign exchange gains and losses arising on translation are recognised in profit or loss or, where the accounting policies so provide, capitalised in the value of assets.

Exchange differences resulting from translation of non-monetary items, such as equity instruments measured at fair value through profit or loss, are recognised as a change in fair value. Exchange differences resulting from translation of non-monetary items, such as equity instruments, are recognised in other comprehensive income. Exchange differences resulting from translation of assets and liabilities of foreign companies with functional currency other than functional currency of the parent company are recognised other comprehensive income and accumulated in equity, under “Foreign exchange differences from translation”.