Basic information

Polski Koncern Naftowy ORLEN Spółka Akcyjna (“Company”, “PKN ORLEN”, “Issuer”, “Parent Company”) was founded by incorporation of Petrochemia Płock S.A. with Centrala Produktów Naftowych S.A., on 7 September 1999.

PKN ORLEN along with the entities comprising the Capital Group of Polski Koncern Naftowy ORLEN S.A. (“ORLEN Group”, “Group”) is one of the biggest and most modern fuel and power companies in Central Europe, operating on the Polish, Lithuanian, Czech, German and Canadian markets. The Group also possesses entities located in Malta, Sweden, the Netherlands, Slovakia, Hungary, Estonia, Latvia and the USA.

Since 26 November 1999 PKN ORLEN shares are listed on the main market of the Warsaw Stock Exchange (WSE) in the continuous quotations system.

The consolidated financial statements have been prepared in accordance with accounting principles contained in the International Financial Reporting Standards (IFRS), comprising International Accounting Standards (IAS) as well as Interpretations of Standing Interpretation Committee (SIC) and the International Financial Reporting Interpretations Committee (IFRIC), which were adopted by the European Union (EU). The accounting principles applied by the Group are based on standards and interpretations adopted by the European Union and applicable to the period beginning on 1 January 2019 or earlier periods.

The consolidated financial statements have been prepared on a historical cost basis, except derivatives measured at fair value and assets measured at fair value through other comprehensive income. This consolidated financial statements have been prepared using the accrual basis of accounting except from the consolidated financial statement of cash flows.

The scope of consolidated financial statements is compliant with the Minister of Finance Regulation of 29 March 2018 on current and periodical information to be published by issuers of securities and conditions of consideration of information required by the law of non-member country’s law as equal (Official Journal 2018, item 757) and covers the annual reporting period from 1 January to 31 December 2019 and the comparative period from 1 January to 31 December 2018.

Presented consolidated financial statements present a true and fair view of the ORLEN Group’s financial position as at 31 December 2019, results of its operations and cash flows for the year ended 31 December 2019.

The consolidated financial statements have been prepared on the assumption that the ORLEN Group will continue to operate as a going concern in the foreseeable future. As at the date of approval of this consolidated financial statements, there is no evidence indicating that ORLEN Group will not be able to continue its operations as a going concern. The Parent Company and the entities comprising ORLEN Group have unlimited period of operations.

The functional currency of the Parent Company and presentation currency of this consolidated financial statements is Polish Złoty (PLN). Possible differences in the amount of PLN 1 million when summing up the items presented in the explanatory notes result from the adopted roundings. Translation into PLN of financial statements of foreign entities, for consolidation purposes:

• particular assets and liabilities – at spot exchange rate as at the end of the reporting period,
• items of the statement of profit or loss and other comprehensive income and the statement of cash flows – at the average exchange rate for the reporting period (arithmetic average of daily average exchange rates published by the National Bank of Poland („NBP”) in a given period).

Foreign exchange differences resulting from the above recalculations are recognised in equity in the line exchange differences on translating foreign operations.

Significant accounting principles and significant values based on judgements and estimates are presented as a part of the specific explanatory notes to the consolidated financial statements. The Group applied the accounting principles consistently to all presented reporting periods, except for:

• the impact of new standards applied for the first time in 2019, described below (note 5),
• changes in accounting policy regarding the issue of CO₂ emission allowances and determining the value of the provision for CO₂ emission costs.

From 1 January 2019 the Group recognises cost flows of CO₂ emission allowances at weighted average method against FIFO method (First In, First Out) applied until 31 December 2018. The effect of changing the cost method  for CO₂ allowances as at 31 December 2018 was immaterial and was recognised in the financial result of the current year and as a change in value of provision for CO₂ emission in the statement of financial position. In the opinion of the Management Board of PKN ORLEN, the change in cost method better reflects commercial substance of legal situation and economic conditions in terms of volatility of market prices for CO₂ emission rights.

The preparation of consolidated financial statements in accordance with IFRSs requires that the Management Board makes professional judgements, estimates and assumptions that affect the presented amounts. The estimates and related assumptions are based on historical expertise and other factors regarded as reliable in given circumstances and their effects provide grounds for professional judgment of the carrying amount of assets and liabilities which is not based directly on any other factors.

In the matters of considerable weight, the Management Board might base its judgments, estimates or assumptions on opinions of independent experts. The judgments, estimates and related assumptions are verified on a regular basis.

IFRS 16 “Lease” issued on 13 January 2016 was adopted by the European Union on 31 October 2017.

Since 1 January 2019, the Group has applied the new Standard in the recognition, measurement, and presentation of lease agreements. The application of the new Standard was made in accordance with the transitional provisions contained in IFRS 16.

Implementation of IFRS 16 within the Group was carried out using the modified retrospective approach, and therefore, comparative data for the year 2018 was not converted and any cumulative effect of the first application of the new Standard was included as an adjustment to the opening balance of retained earnings on the first day of application. Application of IFRS 16 did not affect the recognition of lease contracts by the Group in which the Group is the lessor. Additional information regarding lease contracts is presented in note 14.2.

As at 1 January 2019 the Group has recognised right-of-use asset in the amount of PLN 3,316 million and lease liability in the amount of PLN 3,352 million, what resulted in a difference to be recognised in the position of retained earnings in the amount of PLN 4 million due to recognition of impairment losses as a result of impairment tests and the recognition of receivables from subleasing in the amount of PLN 32 million.

Reconciliation of future minimum lease payments disclosed as at 31 December  2018 with lease liabilities recognised in the statement of financial position as at 1 January 2019

The weighted average incremental borrowing rate of the Group as a lessee applied to the lease liabilities recognised in the statement of financial position as at 1 January 2019 amounted to 2.62%

Identifying a lease

The Group applies new guidelines for identifying a lease only for contracts that it has concluded (or amended) on the day of its first application, i.e. 1 January 2019 or after that date. Thereby, for all contracts concluded before 1 January 2019, the Group applied the practical exemption provided for in IFRS 16, according to which the entity is not required to reassess whether the contract is a lease or contains a lease on the date of first application. As at 1 January 2019 the Group applies IFRS 16 to contracts that were previously identified as leases in accordance with IAS 17 and IFRIC 4.

At the time of conducting a new contract, the Group assesses whether the contract is a lease or whether it contains a lease. An agreement is a lease or contains a lease if it transfers the right to control the use of an identified asset for a given period in exchange for remuneration.  In order to assess if an agreement transfers the right to control the use of an identified asset for a given period, the Group shall determine whether throughout the entire period of use the customer enjoys the following rights:

1. the right to obtain substantially all economic benefits from the use of the identified asset and
2. the right to manage the use of the identified asset.

Should the Group have the right to control the use of an identified asset for part of the duration of an agreement only, the agreement contains a lease in respect of this part of the period.

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:

1. the amount of the initial measurement of the lease liability,
2. all lease payments made on or before the date of commencement, less any lease incentives received,
3. all initial costs directly incurred by the lessee, and
4. estimated costs to be incurred by the lessee 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:

1. 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
2. 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:

1. less any accumulated depreciation and accumulated impairment losses; and
2. 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:

1. increasing the carrying amount to reflect interest on the lease liability,
2. decreasing the carrying amount to reflect any lease payments made, and
3. 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:

1. Land, including:
   1. perpetual usufruct of land for a fixed period of up to 99 years,
   2. land for petrol stations and motorway service areas concluded for a specified period up to 30 years,
2. Buildings and construction, including petrol stations, storage tank, office spaces for a fixed period up to 30 years.
3. Vehicles and other, including:
   1. railway tank concluded for a specified period of 3 to 10 years,
   2. cars for a fixed period up to 3 years,
   3. 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, 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 basis should it be more representative of the time pattern of the user’s benefit.

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:

1. the Group may benefit from use of the underlying asset itself or in conjunction with other resources which are readily available to him, and
2. 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

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.

Standards adopted by International Accounting Standards Board (IASB), approved by the European Union but not yet effective

• Amendments to IAS 1 – Presentation of financial statements and IAS 8 – Accounting policies, changes in accounting estimates and errors: Definition of Material
• Amendments to IFRS 9 – Financial Instruments, IAS 39 – Financial Instruments: Recognition and Measurement and IFRS 7 – Financial Instruments: Disclosures: Interest Rate Benchmark Reform
• Amendments to references to the conceptual framework in IFRS Standards, effective for annual periods beginning on or after 1 January 2020

Standards adopted by International Accounting Standards Board (IASB), waiting for approval by the European Union

• IFRS 17 – Insurance Contracts
• Amendment to IFRS 3 – Business combinations
• Amendments to IFRS 10 – Consolidated Financial Statements and IAS 28 – Investments in Associates and Joint Ventures: sale or contribution of assets between an investor and its associate or joint venture and further amendments
• Amendments to IAS 1 “Presentation of Financial Statements” – Classification of Liabilities as Current or Non-Current, effective for annual periods beginning on or after 1 January 2022

The Group expects that the above standards will have no material impact on consolidated financial statements of ORLEN Group.

The Group intends to adopt new IFRS standards listed above that are published by the International Accounting Standards Board, but not effective as at the date of publication of this consolidated financial statements, in accordance with their effective date.

Changes introduced to financial data as presented in the condensed financial statements for the 4^th quarter of 2019 published on 30 January 2020 with an effect on total assets and net profit.

The above changes affecting the financial result concerned mainly:

• updating of inventories impairment allowances to net realizable value in the amount of PLN (93) million,
• reversal of impairment allowances of non-current assets in Retail and Upstream segment in the amount of PLN 72 million,
• recognition of impairment allowances on fixed assets in the Upstream segment in the amount of PLN (35) million,
• revaluation of the investment property to fair value of in the amoun of PLN 51 million,
• recognition of provisions for potential tax liabilities in the amount of PLN (36) million,
• shortages of materials in external warehouses in the amount of PLN (156) million.

Basis of consolidation

The consolidated financial statements of the Group include assets, liabilities, equity, income, expenses and cash flows of the Parent Company and its subsidiaries that are presented as those of a single economic entity and are prepared as at the same reporting period as separate financial statements of the Parent Company and using uniform accounting principles in relation to similar transactions and other events in similar circumstances.

The subsidiaries are consolidated using full consolidation method, non-controlling interests shall be presented in the consolidated statement of financial position as non-controlling interest, separately from the equity of the owners of the Parent Company.

Joint operations are presented by recognition of respective share in assets, liabilities, revenues and cost.

The joint ventures as well as investments in associates are accounted for under equity method. The Group’s share in net profit or loss of the investee is recognised in the Group’s profit or loss as other operating activity. For investments in associates – the Group has a significant influence if it holds, directly or indirectly (i.e. through subsidiaries), from 20% to 49% of the voting rights of an entity, in which the Group invested, unless it can be clearly stated otherwise.

Investments in subsidiaries and jointly controlled entities

The Group, regardless of the nature of its involvement in the entity (the entity in which it invested) defines its status by assessment, whether it controls the entity in which the investment was made, and whether it has a joint control in a joint venture, after consideration of all the facts and circumstances.

PKN ORLEN as the Parent Company is a multi-segment entity, appropriately allocated to all operating segments and corporate functions.

* Although 80% share in total voting rights, entity is accounted for using equity method. The investor does not control the entity (in accordance with IFRS 10), it cannot individually direct the significant activities, all decisions regarding financing, equity and production require unanimous consent of all shareholders in accordance with the company agreement. 

Activity of core companies belonging to ORLEN Group

Changes in the Group structure are an element of the strategy, assuming a focus on core activities and allocating the released capital for development of the Group in the most prospective areas.

ORLEN Capital AB

The company’s business is raising funds through the issuance of bonds and other financial instruments for institutional and private investors. ORLEN Capital AB specializes in granting borrowings or loans to Group companies and conducts any other activities related to the above financial instruments.

On 30 June 2014 and on 7 June 2016 ORLEN Capital AB issued Eurobonds with 7-year redemption of approximately of PLN 5,323 million translated using exchange rate as at 31 December 2019 (representing EUR 1,250 million).The funds obtained by ORLEN Capital through the issue of bonds were transferred to PKN ORLEN under the borrowing agreement. PKN ORLEN is the guarantor of both issued bonds by an irrevocable and unconditional guarantees issued to the bondholders of PLN 8,943 million translated using exchange rate as at 31 December 2019 (representing of EUR 2.1 billion). The guarantees were granted for the time of the Eurobonds issues, until 30 June 2021 and 7 June 2023, respectively.

ORLEN Insurance Ltd.

ORLEN Insurance is an internal insurance company (i.e. captive), which main purpose is insurance and reinsurance the Group’s business, matching insurance to the individual needs of its property and the potential loss of margin.