10.6 Inventories

Inventories are measured at the lower of cost and net realisable value.

Costs incurred in order to bring an inventory item to its present location and condition are accounted for in the following manner:

• materials and merchandise – at cost,
• finished goods and work-in-progress – at the cost of direct materials and labour and an appropriate portion of indirect production costs, established on the basis of normal capacity utilisation.

Net realisable value is the selling price realisable as at the end of the reporting period, net of VAT, excise duty and fuel charge, less any rebates, discounts and other similar items, and less the estimated costs to complete and costs to sell.

Net selling prices for the most significant inventory groups are determined as follows:

• finished goods and merchandise – the average realised selling price of each index during the seven working days of the month following the end of the reporting month,
• crude oil (feedstock) – purchase price in the last reporting month,
• semi-finished products – prices are estimated using the PIMS production planning optimisation system using the purchase price of oil in the last reporting month,
• fast moving inventories – the sale price is equal to the purchase price; for materials in warehouses the sale price is determined on the basis of the analysis of the usability of the inventory; if an item of inventory is classified as redundant and unsaleable, the sale price is equal to zero.

Decrease in inventories is established with the weighted average method.

Write-downs of finished goods or semi-finished products, resulting from revaluation at net selling prices, are charged to production costs. Write-downs of merchandise are charged to cost of merchandise sold in the statement of comprehensive income.

As at the end of each reporting period, the Group estimates (based on an individual assessment of the usefulness of inventories for the purposes of the Group’s business) the amount of write-downs of stored materials. If crude oil and refining product prices go down, the Group recognises an inventory write-down to adjust the carrying amount of inventories, given the difference between their cost and net realisable value, in accordance with IAS 2. Write-downs of stored materials due to their impairment are charged to cost of If the reason for making an inventory write-down no longer exists, the value of the inventory item is increased by an amount equal to the entire or part of the write-down. For the sake of clarity and because of the economic substance of the operation, if a write-down is used, its reversal is reflected in cost of sales.

The Group maintains emergency stocks as required by the following acts:

• Act on Stocks of Crude Oil, Petroleum Products and Natural Gas, and on the Rules to be Followed in the Event of Threat to National Fuel Security or Disruptions on the Petroleum Market of February 16th 2007 (Dz.U. of 2007, No. 52, item 343, dated March 23rd 2007, as amended).
• Regulation of the Minister of Economy, Labour and Social Policy, on fuel stocks at energy sector companies, dated February 12th 2003 (Dz.U. No. 39, item 338, as amended).

These regulations define the rules for creating, maintaining and financing stocks of crude oil, petroleum products and fuels at energy sector companies.

Emergency stocks are disclosed as current assets given their short turnover cycle. The Group’s emergency stocks include crude oil, petroleum products (liquid fuels), LPG and coal. In the Refining & Marketing segment, emergency stocks are maintained mainly by the Parent.

Inventories are measured at the lower of cost or cost less write-downs to net realisable value less cost to sell.

As at December 31st 2021, the amount of inventories securing liabilities under bank borrowings was valued at PLN 4,654.8m (December 31st 2020: PLN 2,704.0m).

Change in inventory write-downs

The effect of revaluation of inventories is taken to cost of sales.