4. Selected significant accounting principles

These financial statements have been prepared on the historical cost basis, except for:

• CO₂ emission allowances purchased to realise gains on market price fluctuations, which are recognised at fair value less costs of sales;
• financial instruments measured at fair value;
• assets whose impairment has been ascertained.

These consolidated financial statements of the PGE Capital Group have been prepared on the basis of the financial statements of the parent company, as well as the financial statements of its subsidiaries, associates and jointly controlled entity. The financial statements of the entities under consolidation have been prepared for the same reporting period, on the basis of the uniform accounting principles.

All balances of settlements, revenue and expenses arising among the PGE Group entities and unrealised intragroup profits are eliminated in full.

Subsidiaries are subject to consolidation as of the date on which the Group obtains control over them and cease to be subject to consolidation as of the date on which such control ceases. The parent company exercises control over a subsidiary when it holds, directly or indirectly through its subsidiaries, more than a half of the voting rights in a given company, unless it is possible to prove that such ownership does not constitute the exercise of control. The parent company exercises control when, by virtue of its involvement in another entity, it has rights to variable financial results and has the ability to exert impact on the amount of such financial results by exercising control over that entity. Exercising control may also occur when the parent company does not own more than a half of votes in a subsidiary.

Accounting for the establishment of the PGE Capital Group and subsequent transformations within the Group in consolidated financial statements

Issues related to acquisitions and business combinations are in principle regulated by IFRS 3 Business Combinations, however this standard excludes from its scope transactions among entities under common control. At the time of their merger, the entities on the basis of which the PGE Group was established were controlled by the State Treasury. Therefore, in the Company’s opinion, the contribution transaction fulfilled the criteria of the definition of a transaction under common control and, consequently, it is excluded from the scope of IFRS 3.

The combinations of businesses under common control were accounted for using the pooling of interests method. Thus, consolidated financial statements reflect the continuity of common control and do not reflect changes in the value of net assets to fair values (or the recognition of new assets) or the valuation of goodwill.

Subsequent combinations within the PGE Group were recognised as transactions between entities under common control and were therefore accounted for within the Capital Group’s equity with no impact on goodwill. Acquisitions of companies from unrelated entities are accounted for using the acquisition method, in accordance with IFRS 3.

Joint arrangements and joint control

In connection with participation in a joint venture (a joint contractual arrangement that confers a right to a share of net assets), such a share is recognised as an investment in financial statements and is accounted for using the equity method.

In connection with participation in a joint venture, each partner recognises its share of such an operation’s assets and liabilities, revenue and costs.

Joint control is a contractually agreed division of control within the scope of a contractual arrangement that occurs only when decisions on significant activities require the unanimous consent of the parties exercising joint control.

Investments in associates

Associates are entities over which the parent company, directly or indirectly through subsidiaries, exercises significant influence, but not control or joint control. Investments in associates are accounted for using the equity method.

Measurement of the fair value of acquired assets and liabilities, determination of the value of goodwill

In accordance with IFRS 3 Business Combinations, the PGE Group identifies and measures acquired assets, liabilities and goodwill or gain from a bargain purchase. Such measurement is based on a number of significant assumptions, including a selection of the appropriate method, the management’s plans for the use of acquired assets, financial forecasts (including price trajectories identifying major revenue and cost items), legislative changes, etc. On the other hand, the settlement of a transaction is affected by the appropriate determination of the purchase price (including the contingent portion). The applied assumptions can have a significant impact on the determination of the fair value of acquired assets and liabilities and the determination of the value of goodwill or gain from a bargain purchase. Goodwill is tested for impairment together with relevant cash generating units.

Translation of items denominated in foreign currencies

Transactions denominated in foreign currencies are translated into the Polish zloty using the exchange rate prevailing at the date of a given transaction. As at the reporting date:

• monetary items are translated using the simplified method and the closing rate quoted by the National Bank of Poland,
• non-monetary items measured at historical cost in a foreign currency are translated using the exchange rate effective as at the date of the initial transaction,
• non-monetary items measured at fair value in a foreign currency are translated using the exchange rate effective as at the date when the fair value was determined.

Exchange differences resulting from translation are recognised in profit or loss or, where accounting policies so specify, in the value of assets.

Exchange differences arising on non-monetary items, such as equity instruments measured at fair value through profit or loss, are recognised as part of changes in fair value. Exchange differences arising on non-monetary items, such as equity instruments, are recognised in other comprehensive income. Exchange differences resulting from translation of assets and liabilities of foreign companies with a functional currency other than the functional currency of the parent company are recognised in other comprehensive income and accumulated under a separate equity item “Foreign exchange differences from translation”.