5. Material judgements and estimates
The preparation of financial statements in accordance with the International Financial Reporting Standards requires a number of assumptions, judgements and estimates which affect the value of items disclosed in these financial statements.
Although the assumptions and estimates are based on the management’s best knowledge of the current and future events and developments, the actual results might differ from the estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Any change in an accounting estimate is recognised in the period in which it has been made if it refers exclusively to that period, or in the current period and future periods if it refers to both the current period and future periods. Material assumptions used in making the estimates are described in the relevant notes to these financial statements.
While making assumptions, estimates and judgements, the Parent's Management Board (Management Board) relies on its experience and knowledge and may take into consideration opinions, analyses and recommendations issued by independent experts.
Apart from the accounting estimates, the professional judgement of the management was of key importance in the application of the accounting policies in the cases described below.
Employee benefit obligations
Employee benefit obligations are estimated using actuarial methods. For information on actuarial assumptions and valuation of employee benefit obligations see Note 29.4.
Amortisation and depreciation
Depreciation/amortisation charges 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 2013 chiefly involved a PLN 8,619 thousand decrease in depreciation at the Parent.
Depreciation/amortisation of the assets of onshore and offshore oil and gas facilities is calculated (with the units-of-production depreciation method) based on 2P-category hydrocarbon reserve estimates (proved and probable reserves), evaluated, reviewed and updated by the Group, as well as forecast production volumes for the individual fields based on geological data, test production, subsequent production data and the schedule of work adopted in the long-term strategy.
In 2013, the Group made an adjustment to its estimates of hydrocarbon resources used for calculating (with the units-of-production amortisation method) the amortisation of intangible assets in the upstream segment at the AB LOTOS Geonafta Group companies in Lithuania. The change in estimates resulted in lower value of resources used for calculating (with the units-of-production amortisation method) the amortisation of Lithuanian exploration and production licences in 2013 and increased the amortisation charge for these assets in these financial statements by PLN 5,669 thousand (LTL 4,648 thousand).
Following the purchase of a portfolio of Heimdal assets on the Norwegian Continental Shelf, the estimated oil and gas resources increased, which will affect the depreciation/amortisation (with the unit-of-production method) of the Group's production assets as of January 1st 2014.
Fair value of financial instruments
Fair value of financial instruments for which no active market exists is measured with the use of appropriate valuation methods. In selecting the methods and assumptions appropriate for these objectives, the Group relies on professional judgement.
For more information on the assumptions adopted for the measurement of fair value of financial instruments, see
Deferred tax assets
The Group recognises deferred tax assets if it is assumed that taxable profit will be generated in the future against which the asset can be utilised. If taxable profit deteriorates in the future, this assumption may prove invalid. The Parent's Management Board reviews its estimates regarding the likelihood of recovering deferred tax assets taking into account changes in the factors on which such estimates were based, new information and past experience.
For information on deferred tax assets, see Note 10.3.
Impairment of cash-generating units, individual items of property, plant and equipment, and intangible assets
In accordance with IAS 36 Impairment of Assets, as at the end of each reporting period it is assessed whether there are any indicators of impairment of cash-generating units and individual assets. Impairment indicators may be external and may relate to market variables (including fluctuations in prices, FX rates, stock prices, interest rates and other variables related to current economic trends), and may also follow from plans, actions and developments at the Group, such as decisions concerning change, discontinuation, limitation or development of its business, technology changes, or efficiency and investment initiatives.
If there is any indication of impairment, the Group is required to estimate recoverable amounts of assets and cash-generating units. While determining such recoverable amounts, the Group takes into account such key variables as discount rates, growth rates and price ratios.
Having analysed cash flows for individual cash-generating units and run the required impairment tests for assets, the Group performed necessary adjustments to assets and presented the effect of those adjustments in these consolidated financial statements.
For information on property, plant and equipment, goodwill and other intangible assets see Notes 13, 14 and 15, which also describe the assumptions and results of impairment tests of these assets performed by the Group in 2013 and in the comparative period.
Provision for decommissioning of oil and gas facilities and land reclamation
As at the end of the reporting period, the Group analyses the costs necessary to decommission oil and gas facilities and the expenditure to be incurred on future land reclamation. As a result of those analyses, the Group adjusts the value of the land reclamation provision recognised in previous years to reflect the amount of estimated necessary future costs. Any changes in the estimated time value of money are also reflected in the amount of the provision. For information on the rules for recognition of these provisions and information on provisions disclosed in these financial statements for 2013 see Note 7.27.1, and Note 30.1, respectively.
Carbon dioxide (CO2) emission allowances
Emissions trading is a climate policy instrument designed to reduce pollutant emissions. Poland's obligation to participate in the European Union Emissions Trading Scheme stems from the commitments it accepted under the Kyoto Protocol, a legally binding international agreement, setting out a long-term plan for reducing emissions of six greenhouse gases, including carbon dioxide. The emissions trading mechanism was set up in 2005 under directive 2003/87/EC of the European Parliament and of the Council. The relevant EU legislation was implemented into Polish law with the Act on Trading in Emission Allowances for Greenhouse Gases and Other Substances of December 22nd 2004, subsequently superseded by the Act on Trading in Greenhouse Gas Emission Allowances of April 28th 2011. In 2012 and 2013, extensive work was carried out on a new bill to govern emissions trading, which was put for public consultations at the end of December 2013 and beginning of January 2014. The proposed new regulations introduce a number of changes to the greenhouse gas emissions trading scheme in the 2013-2020 settlement period (phase III of the EU CO2 Emissions Trading Scheme). As at December 31st 2013, these changes are not effective and they do not affect the estimates shown in these financial statements. However, the Group continues to monitor the legislative process, and will account for its result while managing risk related to carbon emission allowances in periods following introduction of the changes.
CO2 emission allowances are presented by the Company in its financial statements in accordance with the net liability approach, which means that the Group recognises only those liabilities that result from exceeding the limit of emission allowances granted, and the liability is recognised only after the Group actually exceeds the limit.
As the European Commission approved the planned allowance limits for the final group of Member States, including Poland, before the release of these financial statements, the Management Board is of the opinion that the Group will be able to use the allocated allowances for 2013 to settle emissions in line with the CO2 emission settlement schedule for 2013, i.e. by the end of April 2014.