Impairment of property, plant and equipment, intangible assets and right-of-use assets
At the end of the reporting period, the Group assesses whether there are indicators that an asset or cash-generating unit (CGU) may be impaired or any indicators that the previously recognised impairment should be reversed.
Assets that do not generate the independent cash flows are grouped on the lowest level on which cash flows, independent from cash flows from other assets, are generated (CGU). If such case occurs, the recoverable amount is determined on the CGU level, to which the asset belongs.
Recognition and reversal of impairment allowances of property, plant and equipment, intangible assets and right-of-use assets is recognised in other operating activity.
Impairment of property, plant and equipment, intangible assets and right-of-use assets
The Management Board assesses whether there is any indicator for impairment of an assets or cash generating unit. As part of the analysis of indications, both external factors – including primarily the macroeconomic environment as well as internal environment are analyzed – including strategic decisions, financial projections and operational plans. If there is any indicator for impairment, the estimation of recoverable amount of an asset is made
As at 31 December 2019, an impairment indicators were identified in the ORLEN Group in accordance with IAS 36 “Impairment allowances of assets” related to the approval on 19 December 2019 of The Financial Plan of PKN ORLEN S.A. and the ORLEN Group for the year 2020 by the Management Board and the Supervisory Board of PKN ORLEN and the update of discount rates for the valuation of non-current assets as at 31 December 2019.
The Financial Plan of PKN ORLEN S.A. and the ORLEN Group for 2020 has been prepared taking into account current macroeconomic assumptions, operational plans and investment plans.
The macroeconomic assumptions of The Financial Plan of PKN ORLEN S.A. and the ORLEN Group for 2020 were based on the analyses and recommendations of renowned global advisors, including IHS Markit, Nexant, JBC Energy, PVM, EIA, Platts, Continuum Economics, Wood Mackenzie Chemicals, observations of main competitors and expert knowledge of the ORLEN Group.
Production assets of the Upstream segment located both in Poland and Canada have been assessed by independent companies using current knowledge and geological techniques, engineering and computer software.
Decisions on impairment of expenditures incurred for individual exploration and recognition projects are made in case of a negative assessment of the perspectives of the area.
Due to the lack of a reliable estimate of the price, at which place a potential transaction to sale the assets of the Group would have taken place, as the recoverable value of its individual assets its value in use was taken, according to IAS 36.20. The Upstream segment assets test was performed by reference to the fair value reduced by the costs of recultivation.
The fair value is based on the expected discounted cash flows generated by a single CGU (Cash Generating Unit) until the end of extraction. The valuation is based largerly on non-market input data (valuation level 3, as defined in IFRS13 – Fair value measurement) – mainly these are forecasts of future oil and gas prices, and evaluation of the production potential of the reserves.
The impairment tests were performed on the basis of assets of the ORLEN Group as at 31 December 2019 and net cash flows projected in the approved Financial Plan for year 2020 and within Strategy the Mid-term Plan for years 2021-2022 or in the mentioned above Reserve Reports, discounted to their present value using the discount rates which reflect the current market value of money and the specific risks to the valued assets.
The discount rate structure used in the impairment tests of assets by cash-generating unit of ORLEN Group as at 31 December 2019
| Poland | Czech Republic | Lithuania | Canada | Germany | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Refining | Petrochemical | Retail | Upstream | Refining | Petrochemical | Retail | Refining | Retail | Upstream | Retail | |
| Cost of equity | 9.71% | 9.52% | 9.10% | 10.56% | 9.16% | 8.98% | 8.55% | 11.13% | 10.44% | 9.45% | 6.19% |
| Cost of debt after tax | 2.38% | 2.38% | 2.38% | 2.38% | 1.98% | 1.98% | 1.98% | 3.16% | 3.16% | 1.93% | 0.43% |
| Capital structure | 0.54 | 0.43 | 1.03 | 1.11 | 0.54 | 0.43 | 1.03 | 0.54 | 1.03 | 0.56 | 1.03 |
| Nominal discount rate | 7.15% | 7.39% | 5.68% | 6.26% | 6.66% | 6.88% | 5.21% | 8.35% | 6.74% | 6.74% | 3.26% |
| Long-term rate of inflation | 2.48% | 2.48% | 2.48% | 2.48% | 2.16% | 2.16% | 2.16% | 2.06% | 2.06% | 2.08% | 1.50% |
The discount rate structure used in the impairment tests of assets by cash-generating unit of ORLEN Group as at 31 December 2018
| Poland | Czech Republic | Lithuania | Canada | Germany | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Refining | Petrochemical | Retail | Upstream | Refining | Petrochemical | Retail | Refining | Retail | Upstream | Retail | |
| Cost of equity | 11.94% | 10.56% | 10.28% | 12.49% | 10.98% | 9.61% | 9.33% | 14.08% | 12.09% | 10.56% | 6.99% |
| Cost of debt after tax | 3.00% | 3.00% | 3.00% | 3.00% | 2.27% | 2.27% | 2.27% | 4.17% | 4.17% | 2.06% | 0.78% |
| Capital structure | 0.55 | 0.38 | 1.14 | 1.11 | 0.55 | 0.38 | 1.14 | 0.55 | 1.14 | 0.55 | 1.14 |
| Nominal discount rate | 8.77% | 8.46% | 6.40% | 7.51% | 7.89% | 7.57% | 5.56% | 10.56% | 7.86% | 7.54% | 3.68% |
| Long-term rate of inflation | 2.50% | 2.50% | 2.50% | 2.50% | 2.0% | 2.10% | 2.10% | 2.10% | 2.10% | 2.00% | 1.80% |
Discount rates were calculated as the weighted average cost of engaged equity and debt. Sources of macroeconomic indicators necessary to determine the discount rate were published by prof. Aswath Damodaran (source: http://pages.stern.nyu.edu) and government bonds quotation available as at 31 December 2019.
The Group identified significant drops in discount rates relative to the verification of the value of the ORLEN Group assets that took place on 31 December 2018 and when also the update of the ORLEN Group’s Strategy for 2019-2022 adopted by the Management Board and Supervisory Board on December 20, 2018 was the indicator.
The Group observed that the reduction of the expected rates of return on investment is a consequence of structural changes taking place in the global economy and the fact that we are entering a group of developed markets. The sustainable business strategies characteristic for this group require extending the horizon of return on investment, which is consistent with the reduction of discount rates. The nominal risk free rate is reduced. This is the result of among others the maturing of economies, the developing process of better use of existing assets, the so-called sharing economy, as well as the growing share of the services in the entire GDP basket.
Net impairment allowances of property, plant and equipment, intangible assets and right-of-use assets
| NOTE | 2019 | 2018 | |
|---|---|---|---|
| ORLEN Upstream | (131) | (18) | |
| Unipetrol Group | (39) | 741 | |
| Other | (9) | (19) | |
| 9 | (179) | 704 |
As at the 31 December 2019, the ORLEN Upstream Group assessed the prospects of concessions located in Poland based of the Reserve Report prepared by a reputable European adviseor. The actual report revealed a decrease in the level of exploration reserves of crude oil and gas compared to the last resource verification by 15%.
The updated assumptions included in the Reserve Report and changes in discount rates constituted the indicator for the ORLEN Upstream Group to test the impairment of production assets in Poland. As a result, in 2019, the ORLEN Upstream Group recognized an impairment in the amount of PLN (147) million (in the Płotki project for upstream assets in the amount of PLN (7) million and exploration assets in the amount of PLN (135) million, in the Edge project for exploration assets in the amount of PLN (5) million) and a reversal of the impairment in the amount of PLN 27 million regarding upstream assets in the Płotki project.
In addition, the Group ORLEN Upstream received a report prepared as at 31 December 2019 allowing the estimation of the fair value of assets for the development and extraction of mineral resources in Canada, which was prepared by an independent company. The actual reports revealed a slight decrease in the level of production potential relative to the last resource verification by 6%.
As a result of tests based on the current Reserve Report and using the actual discount rate, the ORLEN Upstream Group recognized PLN (94) million (including cash-generating units: mainly Southern Alberta, Kaybob, Peace River Oil, Central Alberta Gas), and reversals of impairments of PLN 83 million (including cash generating unit Ferrier). The value of non-current assets of the segment in Canada has been updated in 2019 by a net value of PLN (11) million.
The total impact of recognised impairments and reversal of impairments on non-current assets of the ORLEN Upstream Group in 2019 amounted to PLN (131) million.
Fair value of the Upstream segment’s assets in the Upstream Group
| ORLEN Upstream Canada | 6,525 |
| FX Energy Poland | 360 |
| ORLEN Upstream Poland | 217 |
| 7,102 |
Other allowances of property, plant and equipment, intangible assets and right of use and intangible assets concerned mainly PKN ORLEN in Retail and Downstream segment amounted to PLN (8) million and Downstream segment in the Unipetrol Group amounted to PLN (39) million.
Sensitivity analysis of the upstream segment of the Upstream Group assets value in use within an impairment test performed as at 31 December 2019
| in PLN million | EBITDA | |||
|---|---|---|---|---|
| DISCOUNT RATE |
change | -5% | 0% | 5% |
| – 1 p.p. | increase in allowance | decrease in allowance | decrease in allowance | |
| (14) | 21 | 51 | ||
| 0.0 p.p. | increase in allowance | – | decrease in allowance | |
| (56) | 37 | |||
| + 1 p.p. | increase in allowance | decrease in allowance | decrease in allowance | |
| (164) | (48) | 5 | ||
In 2018, the Unipetrol Group reversed impairments on assets in the net amount of PLN 741 million resulting from the identification of a significant excess of the value in use of the downstream segment over its assets. As a result, the Unipetrol Group recorded the net reversal of impairment on the assets of the Refining segment in the amount of PLN 656 million, Petrochemical in the amount of PLN 85 million (including PLN 50 million which was alocated to other segments, mainly to Corporate Functions). As part of the tests, discount rates of 7.89% were applied for refining assets of the Unipetrol Group and 7.57% for the petrochemical assets of the Unipetrol Group, which in line with the general market trend were lower than the rates recognised as at 31 December 2017 by -0.97p.p. and -0.88p.p.
The value in use of the assets of the downstream segment in the Unipetrol Group as at 31 December 2018
| Refining | 4,179 |
| Petrochemical | 5,535 |
| 9,714 |
In 2018, the ORLEN Upstream Group assessed the prospects of concessions located in Poland and identified the premises for carrying out a test for impairment of the value of production assets in Poland based on the Reserve Report prepared by an independent company. As a result, it recognised an impairment of PLN (207) million (including PLN 100 million relating to upstream assets in the Płotki project, of PLN 82 million due to the prospects for prospecting exploration licenses – mainly the Karbon project and PLN 25 million other exploration assets – materials) and reversals of impariment in the amount of PLN 45 million (mainly assets from exploration under the Płotki project). The value of non-current assets of the segment in Poland was updated with a net value of PLN (162) million.
In addition, the Group received a report prepared as at 31 December 2018 allowing the estimation of the fair value of assets for the development and extraction of mineral resources in Canada, which was prepared by an independent company. The ORLEN Upstream Group recognised impairments and reversals of imairments based on a reserve report, reversal of impairments in connection with the sale of upstream assets in Canada and impairments of assets from exploration. The total value of recognised impairments amounted to PLN (65) million (including cash-generating units: mainly Kaybob of PLN 53 million, Peace River Oil of PLN 3 million, Central Alberta Gas of PLN 2 million, other PLN 7 million exploration assets), and reversals of impairments PLN 209 million (including cash generating units: mainly Ferrier of PLN 145 million, Peace River Gas PLN 56 million and Southern Alberta PLN 8 million). The value of non-current assets of the segment in Canada has been updated with a net value of PLN 144 million.
The total effect of recognised allowances of impairments and reversals of impairment losses on the non-current assets of the ORLEN Upstream Group in 2018 is PLN (18) million.
Fair value of the Upstream segment’s assets in the Upstream Group
| ORLEN Upstream Canada | 5,841 |
| FX Energy Poland | 539 |
| ORLEN Upstream Poland | 314 |
| 6,694 |
The remaining impairments concerned the revaluation of assets mainly in the area of the retail segment by fuel stations.
The Group did not identify any impairment of other assets of the ORLEN Group.
As a result, in 2018, the Group recognised the total net reversal effect on impairment losses on assets in the amount of PLN 704 million.
Sensitivity analysis of the downstream segment of the Unipetrol Group assets value in use within an impairment test performed as at 31 December 2018
| in PLN million | EBITDA | |||
|---|---|---|---|---|
| DISCOUNT RATE | change | -5% | 0% | 5% |
| – 1 p.p. | lack of impact | lack of impact | lack of impact | |
| – | – | – | ||
| 0.0 p.p. | decrease of reversal | – | lack of impact | |
| (398) | – | |||
| + 1 p.p. | decrease of reversal | decrease of reversal | lack of impact | |
| (812) | (405) | – | ||
Sensitivity analysis of the Upstream Group assets value in use within an impairment test performed as at 31 December 2018
| in PLN million | EBITDA | |||
|---|---|---|---|---|
| DISCOUNT RATE | change | -5% | 0% | 5% |
| – 1 p.p. | increase in allowance | decrease of reversal | decrease of reversal | |
| (59) | 81 | 214 | ||
| 0.0 p.p. | increase in allowance | – | decrease of reversal | |
| (135) | 136 | |||
| + 1 p.p. | increase in allowance | increase in allowance | decrease of reversal | |
| (204) | (74) | 56 | ||