5. Changes in accounting policies and data presentation

New standards and interpretations which became effective on January 1, 2018

The accounting principles (policies) applied in preparing these financial statements are consistent with those applied in preparing the separate consolidated financial statements for 2018, except for as stated below. The following amendments to IFRSs are applied in these financial statements in line with their effective dates. Amendments relating to IFRS 16 Leases are described below. The other amendments did not have material impact on the presented and disclosed financial information or they were not applicable to the Group’s transactions:

• Amendments to IFRS 9 – Amendments related to the early repayment option with negative compensation;
• Amendments to IFRIC 23 – This interpretation applies to establishing taxable revenue, tax base, unsettled tax losses, unused tax rebates and tax rates;
• Annual improvements to IFRS (cycle 2015-2017) – amendments to IFRS 3, IFRS 11; IFRS 12; IAS 23;
• Amendments to IAS 28 – This amendment concerns measurement of non-current investments in associates;
• Amendments to IAS 19 – Amendments concern defined benefit plans.

The Group has not elected to early adopt any of the standards, interpretations or amendments that have been published but are not yet effective in accordance with the European Union regulations.

IFRS 16 Leases

IFRS 16 replaced IAS 17 Leases and interpretations in this respect.

PGE Group has implemented the new IFRS 16 starting from financial statements prepared for the periods starting after January 1, 2019. The Group has selected the implementation option set out in paragraph C5.b) of IFRS 16, i.e. retrospectively, with the cumulative effect of the initial application of the standard recognised as at January 1, 2019 as an adjustment to the opening balance of retained earnings.

The new IFRS 16 changes principles for the recognition of contracts which meet the criteria of lease. The main change is to move away from the classification of leases as either operating leases or finance leases in the lessee’s accounts. All contracts which meet the criteria of a lease will be recognised as a finance lease.

The Group has analysed the following types of contracts in order to determine whether a given contract contains a lease in accordance with the definition set out in IFRS 16.

• right to perpetual usufruct of land – both purchased and received as contribution-in-kind or received free of charge based on an administrative decision;,
• land easements and transmission service easements;
• tenancy agreements, lease agreements, etc. related to the installation of power line and technical infrastructure (heat transfer systems, transformers);
• tenancy agreements, lease agreements, etc. related to office space;
• tenancy agreements, lease agreements, etc. related to buildings, structures and technical equipment.

The analysis showed that the rights of perpetual usufruct of land and land tenancy/lease contracts which were recognised as operating leases before the effective date of IFRS 16 had the most significant effect on the consolidated financial statements.

After analysis, the Group concluded that the following types of contracts are outside the scope of IFRS 16:

• agreements on use of road strip for which a significant right of substitution was identified;
• lease agreements for lines/fibre-optic cables/cable ducts

In the case of easements relating to the foundation of overhead infrastructure, the dominant element of the contract is the non-leasing component (overhead line). The share of the lease component (pole) is immaterial. Therefore, such contracts are outside the scope of IFRS 16.

Decisions on use of road strip, in principle, meet the definition of a lease. However, in the PGE Group companies where there are cases of exercise by a road administrator of the right to request, in accordance with the provisions of law, the relocation of infrastructure situated in the road strip, the company has no full right to direct the use of the identified asset. In such a situation, the contracts do not meet the definition of a lease.

As regards lease agreements for lines/fibre-optic cables/cable ducts, the Group does not utilise the majority of the asset’s capacity. Therefore, the asset does not meet the criteria for an identified asset under IFRS 16 and the above agreements (e.g. an agreement for the lease of capacity in fibre optic cables) do not meet the definition of a lease.

In turn, in the case of easements relating to the foundation of overhead infrastructure, the dominant element of the contract is the non-leasing component (overhead line). The share of the lease component (pole) is immaterial. As a rule, easements meet the definition of a lease set out in IFRS 16, but due to their immaterial impact on the financial statements they were not recognised as leases in accordance with IFRS 16.

In accordance with the selected implementation option, the Group did not restate comparative data. On the date of implementation of IFRS 16, the Group recognised right-of-use assets in the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position immediately before the date of initial application, in accordance with paragraph C8.b.ii).

Furthermore, PGE Group decided to use the following practical expedients as at January 1, 2019 provided for in paragraph C10 of IFRS 16 with respect to leases previously classified as operating leases in accordance with IAS 17:

• PGE Group applied a single discount rate to a portfolio of leases with similar characteristics (such as real property).
• PGE Group elected not to apply the requirements in paragraph C8 to leases for which the lease term ends within 12 months of the date of initial application, i.e. January 1, 2019. The Group accounted for those leases in the same way as short-term leases.
• PGE Group decided to exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application.
• PGE Group used hindsight, in determining the lease term for contract containing options to extend or terminate the lease.

As a result of the application of IFRS 16:

• Right-of-use assets for new lease agreements recognised and finacial liabilities increased by PLN 895 million as at January 1, 2019.
• Following reclassification of contracts meeting the definition of a lease and recognised before January 1, 2019 under intangible assets and property, plant and equipment, right-of-use assets increased and intangible assets and property, plant and equipment decreased by PLN 390 million.
• As at January 1, 2019, retained earnings remained unchanged.
• Profit before tax for 2019 is lower by approximately PLN 45 million.
• As estimated, EBITDA for 2019 is higher by PLN 50 million.

The lease liabilities were measured at the present value of lease payments. Lease payments were discounted using the lessee’s incremental borrowing rate of 2.290%–5.855%.

For information on lease liabilities, see note 25.1.3 and 26.2, and for information on right-of-use assets – note 12 to these financial statements. Information on costs of amortisation and depreciation is provided in note 7.2.1, whereas interest costs on finance liabilities are disclosed in note 7.4.

In 2019, the total cash outflow on account of leases amounted to PLN 69 million.

In the current period, costs related to short-term leases amounted to about PLN 2 million, while costs related to leases of low-value assets did not reach one million PLN.

There were no material sale and leaseback transactions in the current period.

Changes in applied accounting policies and data presentation

In the current period, the Group decided to change the manner of presentation of the following valuations: valuations of currency forwards related to the purchase and sale of CO₂ emission allowances for captive use were transferred from financing activities to other operating activities, and valuations of derivatives related to coal trading transactions were transferred from operating activities to other operating activities. The changed presentation more accurately reflects the nature of the Group’s operations – in particular, all transactions related to trading in CO₂ allowances and coal are included in the same section of the statement.

To better reflect its business operations, the Group also decided to change the method of division of liabilities on account of loans, borrowings and bonds into long-term and short-term portions. The previous present value of cash flows generated was replaced by the payment term method.

In connection with these changes, the Group has restated the comparative data. The restatement is presented in the tables below.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF FINANCIAL POSITION