17.2. Leases

SELECTED ACCOUNTING PRINCIPLES

Lease

The Group as a lessee

Rights resulting from lease, rental, hire or other agreements which meet the definition of a lease as per IFRS 16 are recognised as right-of-use underlying assets within the framework of non-current assets with a corresponding lease liabilities.

Initial recognition and measurement

The Group recognises the right-of-use asset as well as the lease liability on the date of commencement of the lease.

On the date of commencement the Group measured the right-of-use asset at cost.

The cost of the right-of-use asset is inclusive of the following:

• the amount of the initial measurement of the lease liability,
• all lease payments made on or before the date of commencement, less any lease incentives received,
• all initial costs directly incurred by the Group, and
• estimated costs to be incurred by the Group in connection with the dismantling and removal of underlying assets, the refurbishment of premises within which they were located, or the refurbishment of underlying assets to the condition required by the terms and conditions of the lease, unless these costs are incurred with the aim of creating stocks.

Lease payments included in the evaluation of lease liability include:

• fixed lease payments;
• variable lease payments, which depend on an index or a rate, initially measured using the index or rate as at the commencement date;
• amounts that are expected to be paid by the lessee as part of the guaranteed residual value;
• the call exercise price, should it be assumed with reasonable certainty that the Group shall decide to exercise the call option;
• penalty payments for termination of a lease, unless it can be assumed with reasonable certainty that the Group shall not terminate the lease.

Variable payments, which do not depend on an index or a rate should not be taken into account when calculating lease liability. Such payments are recognised in the profit or loss in the period of the occurrence which renders them payable.

The lease liability on the commencement date shall be calculated on the basis of the current lease payments that are payable by that date and discounted by the incremental borrowing rates of the lessee.

The Group does not discount lease liabilities by the lease interest rate as the calculation of such rates requires information known only to the lessor (the non-guaranteed final value of the leased asset as well as the direct costs incurred by the lessor).

Determining the lessee’s incremental borrowing rate

Lessee’s incremental borrowing rates were specified as the sum of:

a) the risk free rate, based on the Interest Rate Swap (IRS) in accordance with the maturity of the discount rate, and the relevant basic rate for the given currency, as well as

b) the Group’s credit risk premium based on the credit margin calculated inclusive of the credit risk segmentation of all companies which have entered into lease agreements.

Subsequent measurement

After the commencement date, the Group measures the right-of-use asset applying the cost model.

In applying the cost model, the Group shall measure the cost of the right-of-use asset:

a) less any accumulated depreciation and accumulated impairment losses; and

b) adjusted in respect of any updates to the measurement of lease liability not resulting in the necessity for recognition of a separate asset.

After the date of commencement the Group shall measure the lease liability by:

a) increasing the carrying amount to reflect interest on the lease liability,

b) decreasing the carrying amount to reflect any lease payments made, and

c) remeasuring the carrying amount to reflect any reassessment or lease modifications or to revise in-substance fixed lease payments.

The Group shall remeasure the lease liability in cases where there is a change in future lease payments as a result of a change in the index or rate used to determine lease payments (e.g. a change in payment associated with the right of perpetual use), in cases where there is a change in the amount expected by the Group to be payable under the residual amount guarantee, or if the Group reassesses the likelihood of the exercise of the call option, or the extension or termination of the lease.

Updating the lease liability also adjusts the value of the right-of-use asset. In a situation where the carrying amount of the right-of-use asset has been reduced to zero, further reductions in the measurement of the lease liability shall be recognised by the Group as profit or loss.

Depreciation

The right-of-use asset is depreciated linearly over the shorter of the following two periods: the period of lease or the useful life of the underlying asset. However in cases where the Group can be reasonably sure that it will regain ownership of the asset prior to the end of the lease term, right-of-use shall be depreciated from the day of commencement of the lease until the end of the useful life of the asset.

The useful life of right-of-use asset is determined in the same manner as for property, plant and equipment.

The Group has leases agreements regarding mainly:

a) Land, including:

• perpetual usufruct of land for a fixed period of up to 99 years,
• land for petrol stations and motorway service areas concluded for a specified period up to 30 years,

b) Buildings and construction, including petrol stations, storage tank, office spaces for a fixed period up to 30 years.

c) Vehicles and other, including:

• railway tank concluded for a specified period of 3 to 10 years,
• cars for a fixed period up to 3 years,
• locomotives for a fixed period up to 3 years.

Impairment

The Group applies IAS 36 Impairment of Assets to determine whether the right-of-use asset was impaired and to account for any impairment loss identified.

Exemptions, simplifications and practical solutions in the application of IFRS 16

Exemptions

Following agreements within the Group are not included within the scope of IFRS 16:

• lease for the exploration or use of natural resources,
• licences granted and recognised in accordance with IFRS 15 – “Revenue from Contracts with Customers”, and
• lease of intangible assets in accordance with IAS 38 – Intangible Assets

The Group does not apply IFRS 16 to lease agreements or similar for intangible assets.

Simplifications and practical solutions

Short-term lease

The Group applies a practical solution for all asset classes in relation to short-term lease contracts, which are characterised by a maximum possible contract term of up to 12 months, including any options to extend.

Simplifications regarding these contracts involve the settlement of lease payments as costs:

• on a straight-line basis, for the duration of the lease agreement, or
• another systematic method, if it better reflects the way of spreading the benefits gained by the user in time.

Leases of low-value assets

The Group does not apply the rules concerning recognition, measurement and presentation outlined in IFRS 16 to lease agreements of low-value assets.

As low-value assets are considered assets which, when are new, have the value up to USD 5,000 for each concluded lease agreement which corresponds to the amount of PLN 18,799 at the time of first application, translated using the exchange rate as at 1 January 2019 or the equivalent in other currency at the average closing rate of the National Bank of Poland at the time of initial recognition for each concluded lease agreement.

Simplifications in respect of such contracts are due to the settlement of costs on:

• a straight-line basis for the term of the lease contract; or
• another systematic method, if it better reflects the way of spreading the benefits gained by the user in time.

An asset covered by a lease must not be counted as a low-value asset if the asset would typically not be of low value when new. As low-value items, the Group includes for example: gas cylinders, coffee machines, and small items of furniture.

The underlying asset may have a low-value only if:

a) the Group may benefit from use of the underlying asset itself or in conjunction with other resources which are readily available to it, and

b) the underlying asset is not highly dependent on or related to other assets.

If the Group transfers asset into subleasing or expects the asset to be transferred to subleasing, then the main lease does not qualify as lease of a low-value asset.

Determining the lease term: indefinite contracts

The Group has lease agreements concluded for an indefinite period, which relate mainly to land, buildings and constructions

When establishing the term for indefinite leases contracts, the Group determines the lease period, in which termination of the contract will not be justified by making professional judgment and taking into account, among others:

• expenditure incurred in connection with the contract or
• potential costs connected with the termination of the lease contract, including the costs involved in obtaining a new lease contracts, such as negotiation costs; reallocation costs, costs of identifying other underlying asset suitable for the lessee’s needs; costs of integrating a new asset into the Group operations; or termination penalties and similar costs, including costs associated with returning the underlying asset in a contractually specified condition or to a contractually specified location or
• existing business plans and other existing contracts justifying the use of the leased item in the given period.

In cases where the costs connected with the termination of the lease contract are substantial, the lease term adopted is equal to that adopted for the depreciation period of a similar fixed asset with parameters similar to the subject of the lease.

In cases where expenditure incurred in connection with the contract is substantial, the lease term adopted is equal to that of the expected period of economic benefits derived from the incurred expenses.

The value of the incurred expenses represents a separate asset to the right-of-use asset.

Separating non-lease components

From contracts, that include lease and non-lease components, the Group separates and recognises non-lease components separately for all asset classes e.g. service of assets constituting the subject of the contract and allocates consideration based on the terms of the contract, unless all non-lease items are considered immaterial in the context of the whole contract.

The Group as a Lessor

When the Group is the lessor, the lease shall be classified as finance or operating lease at the inception date of the lease.

In order to classify a lease as described above, the Group assesses whether all risks and rewards associated with ownership of the underlying assets are transferred substantially to the lessee.  In case of the substantial transfer of all risks and rewards, the leasing is classified as a finance lease. If the substantial transfer of risks and rewards does not take place it is classified as an operations lease.

Determination of whether the risks and rewards are to be transferred is carried out based on an assessment of the content of the economic transaction.

When assessing the classification of leases the Group certain considers a number of possibilities, such as whether ownership of the asset is to be transferred to the lessee before the end of the lease term as well as the relationship between the lease terms and the useful life of the asset in questions, even in cases where the legal title of the asset is not to be transferred.

If a contract contains both lease and non-lease components, the Group shall allocate the consideration in the contract to each lease component in accordance with IFRS 15.

On the date of commencement of the lease the lessor recognizes any assets leased as part of a financial lease in its statement of financial position and includes them as receivables equal to the value of the net investment in the lease.

On the date of commencement of the lease, lease payments included in the measurement of the net investment in the lease comprise of the following payments for the right-of-use of the underlying assets, which have not yet been received on the date of commencement.

a) fixed lease payments, inclusive of in-substance fixed lease payments, minus any lease incentives;

b) variable lease payments, which depend on an index or a rate, initially measured using the index or rate as at the commencement date;

c) all guaranteed residual values awarded to the lessor by the lessee, an entity connected to the lessee or an independent third party financially capable to fulfill their obligations under this guarantee;

d) the call exercise price, should it be assumed with reasonable certainty that the lessee shall decide to exercise the call option;

e) penalty fee for the termination of the lease, should the conditions of the lease allow for the termination of the lease by the lessee.

If the Group conveyed to another entity the right to use an asset under the finance lease, the present value of the minimum lease payments and unguaranteed residual value is recognised in the statement of financial position as receivables with the division into short and long-term part. The minimum lease payments and unguaranteed residual value are discounted using interest rate implicit in the lease, i.e. rate at which the sum present value of the minimum lease payments:

a) lease payments and

b) any unguaranteed residual value is equal to the sum of:

(i) the fair value of the leased asset and
(ii) any initial direct costs of the lessor.

Assets leased by the Group to other entities for use on the basis of an operational lease are accounted for as Group’s assets. Lease payments from operations leases are recognised by the lessor linearly as revenue from the sale of products and services.

Sublease agreements 

In respect of subleases, the Group operates as both a lessee and lessor in relation to the same underlying assets.  Such contracts are classified as operational or finance leases using the same criteria applied by the lessor, however they are considered in relation to right-of-use as part of the main lease rather than in relation to the underlying assets. If the main lease is a short-term lease, the Group classifies the sublease as an operational lease.

 

PROFESSIONAL JUDGEMENT

Determining the lease term

In determining the lease term, the Group considers all important facts and events resulting in existence of the economic incentives to make use of the option to extend the lease or not to use the option of its termination. The Group also makes a professional judgment to determine the period of contract enforceability (lease term in which termination of the contract will not be justified) in the case of contracts concluded for an indefinite period.

An assessment of a lease term is carried out on the date of commencement of the lease. A reassessment is made upon the occurrence of either a significant event or a significant change in circumstances, that the lessee controls, that impact such an assessment.

 

ESTIMATIONS

The useful life of right-of-use asset

The estimated useful life of a right-of-use asset is determined in the same way as for property, plant and equipment, when the useful life of the right-of-use asset covers the irrevocable lease period and the useful life of the property, plant and equipment resulting from the highly probable use of an option his redemption.

Determining the lessee’s incremental borrowing rate

Due to the fact that the Group does not have information regarding the interest rate for lease contracts, it uses the incremental borrowing rate to measure lease liabilities, that the Group would have to pay, to borrow, over a similar term and with a similar security, the funds in a given currency necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.