14.1. Property, plant and equipment

SELECTED ACCOUNTING PRINCIPLES

Property, plant and equipment
Property, plant and equipment shall be measured initially at acquisition or production cost and shall be presented in the statement of financial position in its net carrying amount. Property, plant and equipment are presented in the statement of financial position at the net book value which is the amount at which an asset is initially recognised (cost) less accumulated depreciation and any accumulated impairment losses.

The initially recognised cost of gas pipelines and gas storage facilities (classified in buildings and structures) includes the value of gas used to fill the pipelines or facilities for the first time. The amount of gas required to fill a pipeline or a storage chamber for the first time equals the amount required to obtain the minimum operating pressure in the pipeline or chamber. Costs of day-to-day maintenance and repairs of property, plant and equipment are expensed as incurred. In the event of a leak, the costs of pipeline refilling or replacing lost fuel are charged to profit or loss in the period when they were incurred.

The cost of property, plant and equipment includes also borrowing costs.

The costs of significant repairs and regular maintenance programs are recognised as property, plant and equipment.

Material spare parts and maintenance equipment are disclosed as property, plant and equipment if the Group expects to use such spare parts or equipment for a period longer than one year and they may be assigned to specific items of property, plant and equipment.

The cost of property, plant and equipment includes also 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 commissions), 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 asset, the amount of the borrowing costs 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 appropriate capitalisation rate to the expenditure on that asset.

Fixed assets are depreciated with straight-line method and in justified cases units of production method of depreciation (catalysts, assets arising from development and extraction of mineral resources).

Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately over the period reflecting its useful lives.

The following standard useful lives are used for property, plant and equipment:

Buildings and constructions                                            10-40 years
Machinery and equipment                                               4-35 years
Vehicles and other                                                          2-20 years

The method of depreciation, residual value and useful life of an asset are reviewed at least at the end of each year. When it is necessary adjustments of depreciation are carried out in subsequent periods (prospectively).

Exploration and extraction of mineral resources
Within the framework of exploration and extraction of mineral resources, the following classification of stage was made:

Stage of exploration and assessment of mineral resources include:

  • Preliminary analyses
  • Acquisition of rights for exploration and recognition of resources,
  • Expenditure on exploration and recognition of wells,

Initial analyses
During the preliminary analyses stage, seismic, geological and geophysical data are analysed for large areas potentially rich in mineral resources. This stage is usually carried out before the purchase of exploration/production rights (concessions or licences). The costs incurred are recognised in the financial result.

Acquisition of rights for exploration and recognition of resources
Natural gas and/or crude oil (mineral) deposits can be evaluated once the Group obtains:

  • a  licence for recognition of mineral deposits,
  • a  licence for exploration for and recognition of mineral deposits
  • a signed agreement establishing mining rights.

The cost of a license for exploration of natural gas and/or crude oil and the cost of extending such a license is the fee for the activities specified in the license.
Costs of concessions for the exploration of natural gas and/or crude oil deposits are recognised by the Group in the value of exploration and evaluation assets.

Expenditure on exploration and recognition of wells
Natural gas and crude oil exploration and evaluation expenditure covers geological work performed to discover and document deposits and is accounted for with the successful efforts method.

In the exploration stage, geological work is performed to discover and preliminarily document deposits of mineral resources. The activities performed in the exploration stage are very similar to preliminary geological and geophysical analyses, but they are carried out in smaller geographical areas and usually include taking 2D and 3D seismic images, their processing and interpretation of geological and geophysical data, as well as exploration drilling. Exploration work ends with a failure (negative result meaning that production is not technically feasible and economically viable) or the discovery of a deposit.

In the exploration stage, geological appraisal work is carried out in the area of a pre-documented deposit of mineral resources. The purpose of exploratory work is to determine the size and scope of mineral deposits and to assess the technical feasibility and economic viability of their extraction. In some cases, there may be a temporary situation in which the search and reconnaissance stages are carried out in parallel.

Expenditures incurred in the exploration and appraisal stage include:

  • expenditure on exploratory and appraisal wells and other expenditures (including acquisition of seismic data, their processing and interpretation as well as analysis of geological and geophysical data);
  • other costs that can be directly attributed to the stages of exploration and appraisal of deposits that are subject to capitalisation. If direct allocation to the exploration and appraisal stages is not possible, other costs are recognized in costs of the current period;
  • costs of external financing related to the financing of capitalized expenditure on exploration and appraisal work.

The Group annually reviews the expenditures incurred in the exploration and appraisal stage of deposits in order to confirm its further intention to carry out the work. Analyses are carried out at the project level, covering works with a defined exploration and/or appraisal purpose, which are carried out in a designated area. If the work is unsuccessful, resulting in no intention to continue the work, the expenditure initially recognized as an asset is recognized in the costs of the current period.

When the technical feasibility and economic viability of extraction are determined, the expenditures incurred in the exploration and appraisal stage are recognized as assets for the development and extraction of mineral resources under property, plant and equipment, which are tested for impairment.

Stage of site planning and of extraction of mineral resources
Expenditure incurred for mineral resource sites planning and extraction are capitalized and amortised using the straight-line method or the natural method calculated proportionally to the amount of extraction of hydrocarbons based on unit-of-production.

If a trial mining of a deposit is carried out, revenues from the sale of minerals extracted during the trial mining are recognised directly in the profit and loss account, in the part relating to the core business.

The amortization method and rates applied to specific assets reflect the Group's expectation that it will consume the economic benefits of these assets. The Group applies the straight-line method to development and extraction assets used in fields or mines for which annual production is expected to be relatively constant.When using the natural method the Group calculates the depreciation of all assets related to sites planning and extraction of mineral resources based on so called 2P proved plus probable reserves.

In case of significant change in estimated mineral resources, at the reporting date potential impairment allowances are recognised or reversed. In case of performance of exploratory drillings on already extracted resource, the Group analyses, if costs incurred enable rising new boreholes. If not, the expenditures are recognised in costs of the current period.

PROFESSIONAL JUDGEMENT

Expenditures for exploration and evaluation of mineral resources
Application of the Group’s accounting policy for expenditures for exploration and evaluation of mineral resources requires an assessment, whether future economic benefits resulting from future extraction or sale are probable or if indications allowing to estimate the resources does not yet exist. When estimating the resources, the Group assesses future events and circumstances, including the assessment whether the extraction will be economically feasible.

ESTIMATES

Useful lives of property, plant and equipment
The Group verifies useful lives of property, plant and equipment once at year end. Revaluation of useful lives of property, plant and equipment is based mainly on the assessment of technical services responsible for their operation. Such estimates are accompanied by uncertainty as to future business conditions, technological changes and competition on the market, which may result in a different assessment of the economic usefulness of the components and their remaining useful lives, which may significantly affect the value of property, plant and equipment and depreciation costs in the future. As part of this process, the Group is currently taking into account the impact of factors related to climate change, in particular in relation to assets whose useful lives may be shortened as part of the implementation of emission reduction plans in particular in those operating segments, where some production is still based on high-carbon assets including coal. The impact of verification of useful lives in 2022 resulted in a decrease of depreciation costs by PLN 36 million compared to depreciation costs that were recognised based on useful lives applied in 2021. In 2022, there were no cases of significant shortening of the useful lives of property, plant and equipment in the Group due to climate change and the ongoing energy transformation.

Exploration and evaluation of mineral resources
The Group estimates resources based on interpretation of available geological data and verifies then on the current basis, based on effects of further drills, trial exploitation, actual extraction and economic factors such as: hydrocarbons’ prices, contractual terms or investment plans. At the end of each reporting period the Group analyses cost of removal of wells and supporting infrastructure.

Remediation of land – water environment
The Group estimates the level of provisions related to non-current assets, which to a significant probability are needed for land – water environment remediation of the territory of petrol stations, fuel depots areas of production plants, generating installations, power stations and ash landfills.

By calculating the provisions for remediation of of land – water environment, there is a significant uncertainty of estimates, which is influenced by such factors as changes in legal regulations, additional significant works identified during site remediation, the emergence of new remediation techniques, climate changes, changes in the expected useful life of assets, as well as changes in discount rates and inflation rates.  Detailed information in note 14.11.1.

In 2022 and 2021 investments expenditures were reduced by PLN 25 million and PLN 12 million received/due to penalties for delayed execution of the investment contracts.

In 2022 and in 2021 the capitalization rate used to calculate capitalized borrowing costs amounted to 1.42% and 0.83% respectively.

The gross carrying amount of all fully depreciated property, plant and equipment still in use as at 31 December 2022 and as at 31 December 2021 amounted to PLN 5,397 million and PLN 5,314 million, respectively.

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