10.1 Property, plant and equipment and intangible assets

Property, plant and equipment

Items of property, plant and equipment other than land are measured at cost less accumulated at cost less impairment losses.

Initial value of an item of property, plant and equipment comprises its costs, which includes all costs directly related to its acquisition and bringing it to working condition for its intended use. The cost also includes the cost of replacing component parts of plant and equipment, which is recognised when incurred, provided that relevant recognition criteria are fulfilled. Costs incurred on an asset which is already in service, such as costs o repairs and overhauls or operating fees, are expensed in the reporting period in which they were incurred.

The initial value of property, plant and equipment includes borrowing costs.

Borrowing costs (i.e. interest and other costs incurred in connection with borrowings) are recognised as an expense in the period in which they were incurred, With the exception of costs directly attributable to the acquisition, construction or production of a qualifying asset (including exchange differences where they are regarded as an adjustment to interest costs, and exchange differences on fees and commission), which are capitalised as part of the cost of such asset (a qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale).

To the extent that funds are borrowed specifically for the purpose of acquiring a qualifying a set , the amount of the borrowing cost which may be capitalised as part of such asset is determined as the difference between the actual borrowing costs incurred in connection with a given credit facility or loan in a given period and the proceeds from temporary investments of the borrowed funds.

To the extent that funds are borrowed without a specific purpose and are later allocated for the acquisition of a qualifying asset, the amount of the borrowing costs which may be capitalised is determined by applying an appropiate capitalisation rate to the expenditure on that asset.

Items of property, plant and equipment (including their components), other than land and property, plant and equipment comprising production infrastructure, are depreciated using the straight-line method over their estimated useful lives.

Items of property, plant and equipment comprising production infrastructure used in crude oil and natural gas extraction are depreciated using the units-of-production method, where depreciation per unit of produced crude oil or natural gas charged to expenses. The depreciation rate is estimated by reference to forecasts of crude oil and gas production from a given geological area. If the estimated hydrocarbon reserves (2P – proved and probable reserves) change materially as at the end of the reporting period, depreciation per unit of produced crude oil or natural gas is remeasured and the revised depreciation rate is applied starting from the new financial year.

Items of property, plant and equipment under construction are measured at the amount of aggregate costs directly attributable to their acquisition or production (including finance costs) less impairment losses, if any. Items of property, plant and equipment under construction are not depreciated until they are ready for their intended use.

 

An item of property, plant and equipment may be removed from the statement of financial position if it is sold or if the entity does not expect to realise any economic benefits from its further use. Any gains or losses on derecognition of an asset from the statement of financial position (calculated as the difference between net proceeds from its sale, if any, and the carrying amount of the asset) are disclosed in the statement of comprehensive income in the period of derecognition.

Property, plant and equipment comprising the Group’s production infrastructure include assets corresponding to the amount of the provision for decommissioning of oil and gas extraction facilities. These assets are recognised in accordance with IAS 16 Property, Plant and Equipment, which states: “Cost of an item of property, land and equipment includes […] the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period”. The Group’s obligated to incur costs of decommissioning of oil and gas extraction facilities, perform demolition, disassembly, removal of other fixed assets and restore the place of their assembly to their original shape. In addition, the Group’s obligated to review the value of the assets periodically, at least as at the end of each reporting period in accordance with IAS 16 (Section 63).

Revaluation of the assets may be caused by:

• change in the estimate of the cash outflow that will be necessary to ensure performance of the decommissioning obligation,
• change in the current market discount rate,
• change in inflation rate.

Expenditure on property, plant and equipment used in exploration for and evaluation  of crude oil and natural gas resources is capitalised until the deposit volume and the economic viability of production are determined; such expenditure is presented in a separate item of property, plant and equipment in accordance with IFRS 6 Exploration for and Evaluation of Mineral Resources. Upon confirmation of existence of reserves in the case of  which extraction is technically feasible and economically viable, such expenditure is transfered to relevant items of property, plant and equipment classified as development or production assets, and is subsequently depreciated using the units-of-production method (see above) based on the volume of reserves and actual production.

If expenditure on property, plant and equipment under construction does not result in discovery of any reserves in the case of which extraction is technically feasible and economically viable, impairment losses on property, plant and equipment under construction are recognised and charged to profit or loss of the period in which it is found that commercial production from the deposits is not viable.

Intangible assets

Intangible assets other than goodwill comprise oil exploration and production licencses in Lithuania acquired as part of a business combination, expenditure incurred on oil and gas exploration licences on the Norwegian Continental Shelf, other production and exploration licences in Poland, software licences, patents, trademarks, acquired CO2 emission allowances and intangible assets under development.

Intangible assets are initially recognised at cost if they are acquired in separate transactions. Intangible assets acquired as part of a business combination are recognised at fair value as at the transaction date. Subsequent to initial recognition, intangible assets are carried at amounts reflecting accumulated amortisation and impairment losses.

Purchased CO₂ esmission allowances are measured at cost less impairment losses, if any, and carried as non-depreciable intangible assets. If the purchased rights are used to cover a shortage of allowances at the date of settlement of emissions for  given year, then the used allowances at their carrying amount are settled agains the previously recognised provision for covering the shortage of CO₂ emission allowances.

Theses allowances are accounted for using the First In First Out (FIFO) method. Income from sale of unsed emission allowances is recognised in the statement of comprehensive income at the time of sale. CO₂ emission allowances received free of charge are presented by the Group in its financial statements in accordance with the net liability approach (see Note 10.13). Under this method, allowances received free of charge are not disclosed in the statement of financial position.

Licences obtained in Lithuania during the step acquisition of the AB LOTOS Geonafta Group companies are disclosed under intangible assets classified as development or production assets and amortised using the unit-of-production method, where amortisation per unit of produced crude oil is charged to expenses. The amortisation rate is estimated by reference to forecasts of hydrocarbon prodcution from a given field. If the estimated hydrocarbon reserves (2P – proved and probable reserves) change materially as at the end of the reporting period, amortisation per unit of produced crude oil or natural gas is remeasured and the revised amortisation rate is applied starting from the new financial year.

Expenditure on oil and gas exploration licences on the Norwegian Continental Shelf is presented as a separate item of intangible assets, as required under IFRS 6 Exploration for and Evaluation of Mineral Resources, and is not amortised until the technical feasibility and commercial viability of extraction is demonstrated. For more information on the accounting policies concerning expenditure on exploration for and evaluation of mineral resources, see  Note 10.1.2.1.

Except capitalised development expenditure, expenditure on intangible assets produced by the Group is not capitalised, but is charged to expenses in the period in which it was incurred.

The amortisation period and the amortisation method for an intangible asset are reviewed at the end of each financial year. Changes in the expected useful life or pattern of generation of the future economic benefits embodied in an intangible asset are reflected by changing the amortisation period or amortisation method, as appropriate, and are treated as changes in accounting estimates.

Impairment losses on non-financial non-current assets

As at the end of each reporting period, the Group assesses whether there is an indication of impairment of any of its assets. If the Group finds that there is such indication or if it is required to perform annual impairment tests, the recoverable amount of the asset is estimated.

The recoverable amount of an asset is equal to the higher of:

• the fair value of the asset or cash generating unit in which such asset is used less cost to sell, or
• the value in use of the asset or cash generating unit in which such asset is used.

The recoverable amount is determined for the individual assets unless a given asset does not generate separate cash flows largely independent from those generated by other assets or asset groups. If the carrying amount of an asset is higher than its recoverable amount, the value of the asset is impaired and an impairment loss is recognised, reducing the asset’s carrying amount to the established recoverable amount.

In assessing value in use, the projected cash flows are discounted to their present value (at a pre-tax discount rate) which reflects current market assessments of the time value of money and risks specific to the asset. Any impairment losses on non-financial assets used in operations are recognised under other expenses.

The Group assesses at the end of each reporting period whether there is any indication that previously recognised impairment of an asset no longer exists or should be reduced. If there is such indication, the Group again estimates the recoverable amount of the asset, and the recognised impairment loss is reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. In such a case, the carrying amount of the asset is increased up to its recoverable amount. Such increased amount may not exceed the carrying amount of the asset that would have been determined (net of accumulated amortisation or depreciation) had no impairment loss been recognised for the asset in previous years. Reversal of an impairment loss on a non-financial non-current asset is immediately recognised as other income. Following reversal of an impairment loss, in the subsequent periods the amortisation/depreciation charge for a given asset is adjusted so that its revised carrying amount, less residual value, can be regularly written off over the remaining useful life of that asset.

The Group offsets corresponding items of other income and expenses, including impairment losses and their reversals, in accordance with IAS 1 Presentation of Financial Statements (Section 34) and recognises them in the statement of comprehensive income on a net basis.

Classification of natural gas and crude oil assets in financial statement

The Group classifies its natural gas and crude oil assets as exploration and evaluation assets, development assets or production assets, relying on its professional judgement.

Once the size of a deposit is confirmed and its production plan is approved, the expenditure on natural gas and crude oil assets is transferred from exploration and evaluation assets to appropriate items of property, plant and equipment or intangible assets classified as development or production assets.

The decision to present natural gas and crude oil assets in the financial statements under development assets or production assets is made taking into account all conditions and circumstances related to the upstream project and the subsequent production from the field.

Depreciation and amortisation

Depreciation and amortisation of the assets of onshore and offshore oil and gas extraction facilities is calculated (using the units-of-production method) based on 2P hydrocarbon reserve estimates (proved and probable reserves), evaluated, revised and updated by the Group, as well as forecast production volumes from the individual oil and gas fields based on geological data, test production, subsequent production data and the schedule of work adopted in the long-term strategy.

Depreciation and amortisation rates for refining and other non-current assets are determined based on the expected useful lives of property, plant and equipment and intangible assets. The Group reviews the useful lives of its assets annually, based on current estimates. The relevant estimate update which had an effect on the Group’s financial statements for 2021 concerned primarily the Parent, where depreciation/amortisation expense decreased by PLN 1.1m.

Impairment of cash-generating units, in individual items of property, plant and equipmnet, and intangible assets

If there is any indication of impairment, the Group estimates the recoverable amounts of assets and cash-generating units. To determine the recoverable amount, the Group takes into account such key variables as discount rates, growth rates and price indices, as well as macroeconomic factors, including oil prices, the differential, refining margins and cracks.

As at December 31st 2021, following an analysis of cash flows for individual cash-generating units and the required impairment tests for assets, the Group made necessary adjustments to assets and disclosed detailed information on the test assumptions and results.