1.2.2. EFFECT OF NEW STANDARDS AND INTERPRETATIONS ON THE GROUP’S FINANCIAL STATEMENTS

The Group applied the requirements of IFRS 16 using a modified retrospective method, with effect as of January 1st 2019 (without restating the comparative data).

The Group decided to implement the new standard retrospectively with the cumulative effect of the initial application of IFRS 16 in equity (Retained earnings) as at January 1st 2019. Consequently, the data presented for 2018 and 2019 is not comparable.

The Group as a lessee

For all leases, except for short-term leases and leases of low-value assets which are not subleased, previously classified as operating leases in accordance with IAS 17, as at the date of initial application of IFRS 16 , i.e. as at January 1st 2019, the Group recognised:

• the lease liability measured at the present value of the remaining lease payments, discounted at the Group’s marginal borrowing rate as at the date of initial application;
• for all leases – the right-of-use asset, in an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments on the lease, recognised in the statement of financial position immediately before the date of initial application.

Assets whose initial value, regardless of the age of the leased asset, does not exceed PLN 20,000 are considered low-value assets (even if their aggregate value is material). In particular, low-value assets comprise small office equipment and ICT equipment.

If the above-described exemptions are applied, the Group recognises lease payments as costs using the straight-line method over the lease term.

In the case of leases previously classified as finance leases under IAS 17, the Group recognises the right-of-use asset at the carrying amount of the leased asset and the lease liability directly before the day of their measurement in accordance with IAS 17.

The weighted average marginal borrowing rate used to measure lease liabilities falls within the range from 0.9% to 5.5%.

Use of practical expedients

The Group decided to use the following practical solutions permitted under IFRS 16:

• the Group applied a single discount rate to the portfolio of leases with similar characteristics (property, vehicles, equipment) and lease terms;
• they will rely on their own assessment of whether leases are onerous contracts under IAS 37 Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application, as an alternative to performing an impairment review. When choosing this practical expedient, the lessee adjusts the right-of-use asset at the date of initial application by the amount of any previously recognised onerous lease provision recognised in the statement of financial position immediately before the date of initial application;
• the Group did not apply lease recognition requirements to contracts where the lease term ends within 12 months from the date of first application, i.e. January 1st 2019, treating such contracts as short-term leases, and the Group will recognise lease payments as costs on a straight-line basis over the remaining lease term;
• the Group excluded initial direct costs in the measurement of the right-of-use asset on the date of initial application;
• the Group used hindsight to determine the lease term for contracts containing options to extend or terminate the lease.

In connection with the application of IFRS 16, the register of land property and the usufruct rights to land was significantly changed. As of January 1st 2019, at the date of initial recognition, the Group recognises rights of use for perpetual usufruct rights acquired free of charge at the present value of lease payments outstanding at the date of initial application of IFRS 16. At the date of initial recognition of perpetual usufruct rights acquired against consideration, such rights were recognised at the present value of lease payments outstanding at the date of initial application of IFRS 16, increased by:

• the excess of the first payment over the annual perpetual usufruct charge in the case of perpetual usufruct agreements made with the State Treasury or a local government unit;
• the acquisition cost of perpetual usufruct rights to land if an agreement was made with an entity other than the State Treasury or a local government unit.

The explanation of the difference between the operating lease liabilities disclosed as at December 31st 2018 in accordance with IAS 17 and the lease liabilities recognised as at January 1st 2019 is presented in the table below.

The Group as a lessor

In accordance with IFRS 16, the Group did not make any changes to the existing and recognised operating and finance leases in which it was a lessor as at January 1st 2019. Therefore, in the case of contracts where the Group is a lessor, the application of IFRS 16 did not require recognition of adjustments as at January 1st 2019.

Summary of the effects of IFRS 16

As at December 31st 2018, the Group had an irrevocable off-balance-sheet liability under operating leases related to perpetual usufruct right to land, as well as lease of land, premises, machinery and equipment, and vehicles. The Group measured the present value of assets used under the contracts and as at January 1st 2019 recognised a right-to-use asset of PLN 1,938m and the corresponding lease liability.

The Group changed the recognition of the provision for site restoration. Prior to the implementation of IFRS 16, the provision was treated as an operating lease in accordance with IAS 17, and the Group would recognise in profit or loss a restoration provision relating to the land held in perpetual usufruct received free of charge. IFRS 16 clearly specifies that the cost of a right-of-use asset should include estimated costs to be incurred by the lessee in connection with the restoration. The change in the recognition of the provision and the corresponding change in deferred tax were recognised under Retained earnings.

The effect of the application of IFRS 16 on the Group’s financial statements is presented in the tables below.

 

Effect of IFRS 16 on financial results

Given the fact that practically all leases were recognised in the statement of financial position, the application of IFRS 16 by the Group affected its balance sheet ratios, including the debt to equity ratio.

It also affected the profit metrics (including operating profit and EBITDAear­nings be­fo­re in­te­rest, ta­xes, de­pre­cia­tion and amor­ti­za­tion) and to cash flows from operating activities. The Group has analysed the implications of these changes for the covenants contained in its credit facility agreements. No risk of default or non-compliance has been identified.

Change in significant judgements resulting in change of accounting policies

As at December 31st 2019, the Parent’s Management Board reviewed a detailed analysis of the regulations related to recognition of lease contracts/administrative decisions concerning the Group’s underground infrastructure. Further, in June 2019, the IFRS Interpretations Committee published an interpretation that addresses an analysis of satisfaction of the definition of a lease under IFRS 16 by underground infrastructure easement agreements. As indicated in the interim report for the three months ended September 30th 2019, there was no single market practice in this respect.

Based on the analysis and taking into account the interpretation, the Group was found to be a party, as at January 1st 2019, to lease contracts/administrative decisions concerning underground infrastructure which meet the definition of a lease under IFRS 16.

Following the change in the judgement, the Group recognised right-of-use assets and lease  liabilities as at January 1st 2019. The adjustment also affected the financial data presented in the interim reports issued in 2019. The table below presents the effect of the adjustment on the consolidated financial statements of the PGNiG Group.