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ORLEN Group 2016 Integrated Report

II nagroda specjalna w kategorii Raport Zintegrowany | Najlepszy raport on-line

Explanatory notes to the consolidated financial statements

7.1. EXPLANATORY NOTES TO THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

7.1.1. Sales revenues by assortments

SELECTED ACCOUNTING PRINCIPLES


Sales revenues
Sales revenues of goods and services are recognized, when the significant risks and rewards of ownership are transferred to the buyer and when the Group is no longer permanently involved in managing sold goods to the extent, that such function is usually carried out in relation to goods, to which there is right of ownership, and it does not exercise effective control over them. Revenues include received and due payments for delivered finished goods, merchandise, raw materials and services, decreased by the amount of any trade discounts and value added tax (VAT), excise tax and fuel charges. Revenues are measured at the fair value of the payment received or due.
Revenues from the sale of finished goods, merchandise, raw materials and services are adjusted for profits or losses from settlement of cash flows hedging instruments related to the above mentioned revenues.
Revenues and costs from services, which beginning and end fall within different reporting periods, are recognized by reference to  the stage of completion of the service, when the outcome of a contract can be valuated reliably, in other cases, revenues are recognized only to the extent of costs incurred to the date, but not higher than the costs that the Group expects to recover.


  2016 2015 Share 2016 Share 2015
Downstream Segment        
Medium distillates 22 714 25 062 28.6% 28.4%
Light distillates 10 513 11 528 13.2% 13.1%
Heavy fractions 3 786 4 610 4.8% 5.2%
Monomers 2 025 2 978 2.5% 3.4%
Polymers 1 135 2 341 1.4% 2.7%
PTA 1 571 1 532 2.0% 1.7%
Plastics 1 218 1 492 1.5% 1.7%
Fertilizers 821 1 057 1.0% 1.2%
Aromas 625 930 0.8% 1.1%
Other 4 794 5 457 6.0% 6.0%
  49 202 56 987 61.8% 64.5%
Retail Segment        
Medium distillates 14 305 15 567 18.0% 17.6%
Light distillates 11 838 12 084 14.9% 13.7%
Other 3 698 3 401 4.6% 3.9%
  29 841 31 052 37.5% 35.2%
Upstream Segment        
Liquid hydrocarbons 270 147 0.4% 0.1%
Natural Gas 172 68 0.2% 0.1%
  442 215 0.6% 0.2%
Corporate Functions 68 82 0.1% 0.1%
  79 553 88 336 100.0% 100.0%

In 2016 and 2015 no leading customers were identified in the Group, for which turnover individually would exceeded 10% of total revenues from sale of the ORLEN Group.

7.1.2. Sales revenues geographical division - disclosed by customer’s premises countries

  2016 2015 Share 2016 Share 2015
Poland 33 731 36 223 42.4% 41.0%
Germany 15 781 17 073 19.8% 19.3%
Czech Republic 9 861 10 671 12.4% 12.1%
Lithuania, Latvia, Estonia 6 216 6 886 7.8% 7.8%
Other countries 13 964 17 483 17.6% 19.8%
  79 553 88 336 100.0% 100.0%

The line “Other countries” comprises mainly sales to customers from Switzerland, Ukraine, Hungary, Slovakia, Great Britain, the Netherlands, Canada and Austria.

7.1.3. Cost by nature

SELECTED ACCOUNTING PRINCIPLES


Costs

Cost of sales include costs of finished goods, merchandise, services and raw materials sold and adjustments related to inventories written down to net realizable value.
Costs are adjusted for profits or losses from settlement of cash flow hedging instruments related to the above mentioned costs.
Distribution expenses include selling brokerage expenses, trading expenses, advertising and promotion expenses as well as distribution expenses.
Administrative expenses include expenses relating to management and administration of the Group as a whole.


  2016 2015 share 2016 share 2016
Materials and energy (43 512) (54 542) 59,0% 65,8%
Cost of merchandise and raw materials sold (20 247) (18 303) 27,4% 22,1%
External services (4 073) (4 352) 5,5% 5,3%
Employee benefits, incl.: (2 206) (2 110) 3,0% 2,5%
   payroll expenses (1 740) (1 700) 2,3% 2,0%
   social security expenses (377) (354) 0,5% 0,3%
Depreciation and amortisation (2 110) (1 895) 2,9% 2,3%
Taxes and charges (1 129) (1 152) 1,5% 1,4%
Other (529) (481) 0,7% 0,6%
  (73 806) (82 835) 100,0% 100,0%
Change in inventories (232) (693)
Cost of products and services for own use 264 213
Operating expenses (73 774) (83 315)
Distribution expenses 4 125 3 971
Administrative expenses 1 426 1 552
Cost of sales (68 223) (77 792)

7.1.4. Other operating income

  NOTE 2016 2015
Profit on sale of subsidiaries   63 -
Profit on sale of non-current non-financial assets   60 59
Reversal of provisions   25 32
Reversal of receivables impairment allowances   13 17
Reversal of impairment allowances of property, plant and equipment and intangible assets 7.2.4 366 36
Penalties and compensation   1 449 74
Other   187 202
    2 163 420

The line penalties and compensation in 2016 includes mainly the amount of partial compensation received from insurers related to the steam cracker unit accident in Unipetrol Group in August 2015 in the amount of PLN 1,280 million. Detailed information is presented in note 7.4.4.

7.1.5. Other Operating expenses

  NOTE 2016 2015
Loss on sale of non-current non-financial assets   (39) (38)
Recognition of provisions   (178) (101)
Recognition of receivables impairment allowances   (25) (47)
Recognition of impairment allowances of property, plant and equipment and intangible assets 7.2.4 (221) (1 029)
Penalties, damages and compensation   (133) (53)
Other   (111) (86)
    (707) (1 354)


7.1.6. Finance income and costs

7.1.6.1. Finance income

  2016 2015
Interest 59 82
Dividends 5 2
Settlement and valuation of derivative financial instruments 156 270
Reversal of receivables impairment allowances 2 7
Other 26 29
  248 390

7.1.6.2. Finance costs

  2016 2015
Interest (216) (205)
Foreign exchange loss, net (542) (317)
Settlement and valuation of derivative financial instruments (98) (447)
Recognition of receivables impairment allowances (2) (4)
Other (35) (59)
  (893) (1 032)

7.1.6.3. Interest, net

  2016 2015
Finance income and costs of net interest presented in statement of profit or loss and other comprehensive income (157) (123)
Adjustments to net profit of net interest presented in statement of cash flows 219 199
   interest paid concerning financing activities 223 258
   accrued interest concerning investing and financing activities (4) (59)
Net interest concerning operating activities not correcting profit before tax (62) (76)

7.1.6.4. Foreign exchange loss

  2016 2015
Foreign exchange (loss) surplus presented in statement of profit or loss and other comprehensive income (542) (317)
Adjustments to net profit of foreign exchange differences presented in statement of cash flows 287 24
   realized foreign exchange differences concerning investing and financing activities 355 72
   unrealized foreign exchange differences concerning investing and financing activities (59) (29)
   foreign exchange differences on cash (9) (19)
Foreign exchange differences concerning operating activities not correcting profit before tax (255) (293)

7.1.7. Tax expense

SELECTED ACCOUNTING PRINCIPLES


Income tax expenses (tax expense)

Income tax expenses (tax expense) include of current tax and deferred tax. Current tax expense is determined in accordance with the relevant tax law based on the taxable profit for a given period and is recognized as a liability, in the amount which has not been paid or receivable, if the amount of the current and prior periods income tax paid exceeds the amount due the excess is recognized.
Deferred tax assets and liabilities are accounted as non-current and are not discounted and are offset on the level of particular financial statements of the Group companies when there is a legally enforceable right to set off the recognized amounts.


7.1.7.1. The differences between tax expense recognized in profit or loss and the amount calculated based on the rate from profit before tax

  2016 2015
Profit before tax 6 887 3 698
Tax expense for 2016 and 2015 by the valid tax rate in Poland (19%) (1 309) (703)
Differences between tax rates 22 57
   Lithuania (15%) 39 34
   Germany (29%) (19) (14)
   Canada (26%) 2 37
Tax losses 213 135
Impairment allowances of property, plant and equipment and intangible assets (90) -
Investments accounted for under equity method 56 48
Other (39) (2)
Tax expense (1 147) (465)
Effective tax rate 17% 13%

As at 31 December 2016 and as at 31 December 2015, the Group had unsettled tax losses mainly relating to the ORLEN Lietuva Group, the Unipetrol Group and the Anwil Group of PLN 410 million and PLN 1,155 million respectively, for which no deferred tax asset was recognized due to the lack of certainty regarding the possibility of their realization in the future.

7.1.7.2 Deferred tax

  31/12/2015 Deferred tax recognized in profit or loss Deferred tax recognized in other comprehensive income Exchange differences on translating foreign operations 31/12/2016
Deferred tax assets          
Impairment allowances 779 (286) - 2 495
Provisions and accruals 306 (85) - 1 222
Tax losses 189 304 - - 493
Valuation of financial instruments 10 (7) 75 - 78
Other 138 (168) - - (30)
  1 422 (242) 75 3 1 258
Deferred tax liabilities          
Temporary differences related to non-current assets 1 542 223 - 7 1 772
Other 189 (69) - 8 128
  1 731 154 - 15 1 900
  (309) (396) 75 (12) (642)

As at 31 December 2016 deferred tax assets and liabilities amounted to PLN 167 million and PLN 809 million, respectively.

7.1.7.3. Tax expense (paid)

  NOTE 2016 2015
Tax expense on profit before tax 7.1.7.1 (1 147) (465)
Change in deferred tax asset and liabilities   333 619
Change in current tax receivables and liabilities   420 111
Deferred tax recognized in other comprehensive income 7.1.7.2 75 (292)
Acquisition of subsidiary   - (166)
Foreign exchange differences   (17) (11)
    (336) (204)

 
7.2. EXPLANATORY NOTES TO THE STATEMENT OF FINANCIAL POSITION

7.2.1. 7.2.1. Property, plant and equipment

SELECTED ACCOUNTING PRINCIPLES


7.2.1. Property, plant and equipment
Property, plant and equipment are initially measured at cost, including grants related to assets. Property, plant and equipment are stated in the statement of financial position prepared at the end of the reporting period at the net book value which is the amount at which an asset is initially recognized (cost) less accumulated depreciation and any accumulated impairment losses, as well as received grants for assets.
The costs of significant repairs and regular maintenance programs are recognized as property, plant and equipment.
Fixed assets are depreciated with straight-line method and in justified cases units of production method of depreciation (catalysts, assets arising from development and extraction of mineral resources).
Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately over the period reflecting its useful lives.
The following standard useful lives are used for property, plant and equipment:

The method of depreciation, residual value and useful life of an asset are reviewed at least at the end of each year. When it is necessary adjustments of depreciation are carried out in subsequent periods (prospectively).

Grants
Grants are recognized if there is reasonable assurance that the grants will be received and the entity will comply with the conditions attaching to them.
Grants related to assets are recognized as a decrease of a carrying amount of an asset and as a result a decrease of depreciation and amortisation charges over the useful life of the asset.

Exploration and extraction of mineral resources
Within the framework of exploration and extraction of mineral resources, the following classification of stage was made:

Stage of exploration and assessment of mineral resources include:

The Group shall review annually expenditures incurred in the stage of exploration and recognition of mineral resources in order to confirm the intention of further work. If the work is unsuccessful, the cost previously recognized as an asset are recognized as cost of a current period.
Expenditure incurred in the exploration and recognition of resources are recognized as assets related to development and extraction of mineral resources within property, plant and equipment at the moment of the conclusion of their technical feasibility and economic viability of mining.

Stage of site planning and of extraction of mineral resources
Expenditures incurred for mineral resource sites planning and extraction of resources are capitalized and amortised by unit of production method calculated proportionally to the amount of extraction of hydrocarbons based on unit of installation. The Group calculates the depreciation of all assets related to sites planning and extraction of mineral resources (including their significant components) based on proved plus probable reserves.
In case of significant change in estimated mineral resources, at the reporting date potential impairment allowances are recognized or reversed.
In case of performance of exploratory drillings on already extracted resource, the Group analyses, if costs incurred enable rising new boreholes. If not, the expenditures are recognized in costs of the current period.


PROFESSIONAL JUDGEMENTS


Expenditures for exploration and evaluation of mineral resources
Application of the Group’s accounting policy for expenditures for exploration and evaluation of mineral resources requires an assessment, whether future economic benefits resulting from extraction or sale are possible or if indications allowing to estimate the resources does not yet exist. When estimating the resources, the Group assesses future events and circumstances, including the assessment whether the extraction will be economically feasible.


ESTIMATES


Estimated useful lives of property, plant and equipment
The Group verifies useful lives of property, plant and equipment once at year end with effect from the beginning of next year. Should the economic useful lives of properties, plant and equipment from 2015 be applied in 2016, the depreciation expense would be higher by PLN 40 million.

Exploration and evaluation of mineral resources
The Group estimates resources based on interpretation of available geological data and verifies then on a the current basis, based on effects of further drills, trial exploitation, actual extraction and economic factors such as: hydrocarbons’ prices, contractual terms or investment plans.
At the end of each reporting period the Group analyses cost of removal of wells and supporting infrastructure.

Remediation of land – water environment
The Group estimates the level of capitalized provisions related to non-current assets, which to a significant probability are needed for land – water environment remediation of the territory of petrol stations, fuel depots and areas of production plants.


  Land Buildings and constructions Machinery and equipment Vehicles and other Construction in progress Exploration and evaluation of mineral resource assets Assets related to development and extraction of mineral resources Total
Net carrying amount at 01/01/2016    
Gross carrying amount 1 128 20 546 36 947 2 018 2 819 762 4 293 68 513
Accumulated depreciation (12) (8 500) (19 593) (1 186) - (3) (420) (29 714)
Impairment allowances (33) (2 564) (10 045) (165) (154) (423) (705) (14 089)
Grants - (51) (116) (6) (1) - - (174)
  1 083 9 431 7 193 661 2 664 336 3 168 24 536
increases/(decreases), net
Investment expenditures - 74 130 59 3 736 175 340 4 514
Depreciation (1) (595) (967) (172) - (24) (288) (2 047)
Borrowing costs - - 1 1 56 9 - 67
Impairment allowances* - 101 249 25 14 (72) - 317
Reclassifications 13 431 1 348 120 (1 935) - 29 6
Grants - (1) (1) 1 - - - (1)
Foreign exchange differences, incl.: 23 77 142 17 39 5 245 548
foreign exchange differences of impairment allowances (4) (68) (542) (5) (6) - (73) (698)
Other (3) (69) (182) (35) (14) 35 (1) (269)
  1 115 9 449 7 913 677 4 560 464 3 493 27 671
Net carrying amount at 31/12/2016
Gross carrying amount 1 164 20 837 37 950 2 110 4 707 986 5 307 73 061
Accumulated depreciation (12) (8 805) (19 582) (1 283) - (27) (1 036) (30 745)
Impairment allowances (37) (2 531) (10 338) (145) (146) (495) (778) (14 470)
Grants - (52) (117) (5) (1) - - (175)
  1 115 9 449 7 913 677 4 560 464 3 493 27 671
Net carrying amount at 01/01/2015
Gross carrying amount 1 113 19 030 32 937 2 147 2 374 883 2 363 60 847
Accumulated depreciation (10) (7 766) (17 331) (1 259) (1) - (255) (26 622)
Impairment allowances (42) (2 087) (8 611) (157) (155) (93) (315) (11 460)
Grants - (23) (71) (2) (25) - - (121)
  1 061 9 154 6 924 729 2 193 790 1 793 22 644
increases/(decreases), net
Investment expenditures - 87 89 84 2 501 126 152 3 039
Depreciation (1) (588) (894) (162) - (2) (184) (1 831)
Borrowing costs - 14 17 1 21 10 - 63
Acquisition of subsidiary - 3 2 2 - 79 1 696 1 782
Impairment allowances* 9 (28) (74) 21 31 (333) (423) (797)
Reclassifications 7 826 1 142 85 (2 105) (229) 236 (38)
Grants - (28) (45) (4) 24 - - (53)
Sale of subsidiary - - - - - (86) - (86)
Foreign exchange differences, incl.: 8 29 72 11 12 (8) (102) 22
foreign exchange differences of impairment allowances - (449) (1 360) (29) (30) 3 33 (1 832)
Other (1) (38) (40) (106) (13) (11) - (209)
Net carrying amount at 31/12/2015 1 083 9 431 7 193 661 2 664 336 3 168 24 536

* Increases/(Decreases) net of impairment allowances include recognition, reversal, usage, reclassifications.
In 2016 and 2015,  net increases/(decreases) of impairment allowances covers respectively: recognition and reversal, net in the amount of PLN 148 million and PLN (993) million, usage due to sale/liquidation in the amount of PLN 157 million and PLN 57 million and reclassifications to assets classified as held for sale and due to changes the Group structure in the amount of PLN 12 million and PLN 139 million.

In 2016 and 2015 the capitalization rate used to calculate borrowing costs amounted to 1.14% and 1.44%, respectively.
The gross carrying amount of all fully depreciated property, plant and equipment still in use as at 31 December 2016 and as at 31 December 2015 amounted to PLN 5,086 million and PLN 4,711 million, respectively.
Information regarding property, plant and equipment that were pledged for loans of the Group is presented in note 7.2.6.1.1.

7.2.2. Intangible assets

SELECTED ACCOUNTING PRINCIPLES


Intangible assets

An intangible asset shall be measured initially at acquisition or production cost and shall be presented in the financial statements in its net carrying amount, including grants.
Intangible assets with the finite useful life are amortised using straight-line method. Amortization shall begin when the asset is available for use.
Standard useful lives of intangible assets are from 2 to 10 for software and from 2 to 15 years for concessions, licenses, patents and similar.
The amortization method and useful life of intangible asset item are verified at least at the end of each year.

Goodwill

Goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirer's cash-generating units (CGU), that is expected to benefit from the synergies of the combination.
After combination the acquirer shall measure goodwill in the amount recognized at the acquisition date less any accumulated impairment allowances.
A cash-generating unit to which goodwill has been allocated shall be tested for impairment annually, and whenever there is an indication that the unit may be impaired. An impairment loss recognized for goodwill shall not be reversed in a subsequent period.

Rights

The main item of rights is CO2 emission rights, not amortised, tested for impairment.
Granted emission allowances are presented as intangible assets in correspondence with deferred income at fair value as at the date of registration. Purchased allowances are presented at purchase price.
For the estimated CO2 emission during the reporting period, a provision is created (taxes and charges).
Grants are recognized on a systematic basis to ensure proportionality with the related costs which the grants are intended to compensate.
Outgoing of allowances is recognized using FIFO method (First In, First Out) within the individual types of rights (EUA, CER).
Rights also include energy certificates.


ESTIMATES


Estimated useful lives of intangible assets

The Group verifies useful lives of intangible assets once at year end with effect from the beginning of next year. Should the economic useful lives of intangible assets from 2015 be applied in 2016, the depreciation expense would not change significantly.

As at 31 December 2016 and as at 31 December 2015 internally generated intangible assets amounted to PLN 108 million and PLN 67 million, respectively.

The changes in other intangible assets

  Patents, trade marks and licenses Goodwill Rights Other Total
Net carrying amount at 01/01/2016
Gross carrying amount 1 395 374 840 132 2 741
Accumulated depreciation (944) (18) (1) (65) (1 028)
Impairment allowances (98) (315) (59) (7) (479)
Grants (3) - - - (3)
  350 41 780 60 1 231
increases/(decreases), net
Investment expenditures 45 8 - - 53
Amortisation (69) - - 2 (67)
Impairment allowances* (6) - - - (6)
Foreign exchange differences, incl.: 5 1 - 1 7
foreign exchange differences of impairment allowances (3) - - 1 (2)
Other** 31 - 47 (27) 51
  356 50 827 36 1 269
Net carrying amount at 31/12/2016
Gross carrying amount 1 521 384 886 101 2 892
Accumulated depreciation (1 055) (19) - (59) (1 133)
Impairment allowances (107) (315) (59) (6) (487)
Grants (3) - - - (3)
  356 50 827 36 1 269

 

  Patents, trade marks and licenses Goodwill Rights Other Total
Net carrying amount at 01/01/2015  
Gross carrying amount 1 219 374 256 111 1 960
Accumulated amortisation (830) (18) (1) (11) (860)
Impairment allowances (84) (318) (66) - (468)
Grants (3) - - - (3)
  302 38 189 100 629
increases/(decreases), net
Investment expenditures 48 6 - 1 55
Amortisation (60) - - (7) (67)
Acquisition of subsidiary 1 - 9 - 10
Impairment allowances* (2) 3 7 (6) 2
Sale of subsidiary - (3) - 12 9
Foreign exchange differences, incl.: - (3) (2) - (5)
foreign exchange differences of impairment allowances (12) - - (1) (13)
Other** 61 - 577 (40) 598
Net carrying amount at 31/12/2015 350 41 780 60 1 231

* Increases/(Decreases) net of impairment allowances include recognition, reversal, usage, reclassifications.
In 2016 and 2015, increases/(decreases), net of impairment allowances covers: recognition and reversal in the amount of PLN (3) million and usage and reclassifications.
** Other increases/(decreases) of property rights in the net book value consist mainly of forward transactions settlement, granted free of charge and settlement of rights for 2015 and 2014.

The gross carrying amount of all fully amortised intangible assets still in use as at 31 December 2016 and as at 31 December 2015 amounted to PLN 586 million and PLN 506 million, respectively.

7.2.2.1. Rights

Change in owned CO2 emission rights in 2016.

  Quantity
(in thous. tonnes)
Value
01/01/2016 28 861 770
Granted free of charge 8 488 188
Emission settlement for 2015 (13 636) (375)
Forward transactions settlement 4 450 103
Purchase/(Sale), net 6 358 130
  34 521 816
CO₂ emission in 2016 12 906 353

As at 31 December 2016 the market value of one EUA amounted to PLN 28.93 (representing EUR 6.54 at exchange rate as at 31 December 2016) (source: www.theice.com).
As at 31 December 2016 and as at 31 December 2015 the Group recognized the rights to colourful energy in the amount PLN 11 million and PLN 10 million, respectively. In 2016 the Group granted free of charge rights to colourful energy in the amount of PLN 95 million.

Additionally, as at 31 December 2016 and as at 31 December 2015 the Group recognized COemission rights in the amount PLN 11 million and PLN 18 million, respectively and rights to colourful energy in the amount PLN 3 million and PLN 32 million, respectively (note 7.2.5.2) in trade and other receivables.

7.2.3. Assets by operating segments and non-current assets by geographical allocation

  31/12/2016 31/12/2015
Downstream Segment 38 770 34 282
Retail Segment 6 139 5 683
Upstream Segment 3 840 3 380
Segment assets 48 749 43 345
Corporate Functions 6 943 4 995
Adjustments (133) (203)
  55 559 48 137

Operating segments include all assets except for financial assets, tax assets and cash. Assets used jointly by the operating segments are allocated based on revenues generated by individual operating segments.

  31/12/2016 31/12/2015 share 2016 share 2015
Poland 19 631 18 755 67,1% 72,0%
Germany 966 915 3,3% 3,5%
Czech Republic 5 216 3 343 17,8% 12,8%
Lithuania, Latvia, Estonia 708 638 2,4% 2,5%
Canada 2 731 2 385 9,3% 9,2%
  29 252 26 036 100,0% 100,0%

Non-current assets by geographical allocation include property, plant and equipment (note 7.2.1), intangible assets (note 7.2.2), investment property and perpetual usufruct of land (note 7.2.8).

7.2.4. Impairment of property, plant and equipment and intangible assets

SELECTED ACCOUNTING PRINCIPLES


Impairment of property, plant and equipment and intangible 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 recognized 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 and intangible assets is recognized in other operating activity.


ESTIMATES


Impairment of property, plant and equipment and intangible assets
The Management Board assesses whether there is any indicator for impairment of an asset or cash generating unit. If there is any indicator for impairment, the estimation of recoverable amount of an asset is made.


Net impairment allowances of property, plant and equipment and intangible assets

  NOTE 2016 2015
ORLEN Upstream Canada   - (423)
ORLEN Upstream   (73) (429)
Unipetrol Group   300 (111)
ORLEN Oil Group   (55) -
    172 (963)
Other impairment allowances   (27) (30)
  7.1.4
7.1.5
145 (993)

As at 31 December 2016, an impairment indicators were identified in the ORLEN Group in accordance with IAS 36 “Impairment allowances of assets” related to the approval on 15 December 2016 Strategy of the ORLEN Group for the years 2017-2021 ("Strategy") by the Management Board and the Supervisory Board of PKN ORLEN.
Assumptions of the ORLEN Group Strategy include among others, economic growth in key markets activity of the ORLEN Group, the increase of crude oil prices resulting from the need to replace natural decreases in extractions by productions from more expensive sources and restrictions on investment in recent years, the stabilization of downstream margin at a lower level than that observed in the last 2 years and a further increase in regulatory pressure, especially in the field of low carbon economy and environmental protection. Macroeconomic assumptions were developed on the basis of commercially available sources of knowledge of industry analitical agencies, forecasts of bank analysts, expert knowledge of the ORLEN Group.

Due to the lack of a basis for a reliable estimate of the price, at which would have taken place potential transaction to sale the assets of the Group as the recoverable value of its individual assets is its value in use, according to IAS 36.20.
The tests were performed on the basis of assets of the ORLEN Group as at 31 December 2016 and net cash flows projected in the approved within the Strategy the Mid-term Plan, 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.
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: pages.stern.nyu.edu), government bonds quotation and government agencies available as at 31 December 2016.

The discount rate structure used in the impairment tests of assets by cash-generating unit of ORLEN Group as at 31 December 2016

  Poland   Czech Republic Lithuania Canada Germany
  Refining Petrochemical Retail Upstream Refining Petrochemical Retail Refining Retail Upstream Retail
Cost of equity 15,40% 14,70% 17,65% 15,13% 11,88% 11,21% 14,07% 15,26% 17,83% 8,91% 11,10%
Cost of debt after tax 2,37% 2,37% 2,37% 2,37% 1,56% 1,56% 1,56% 4,27% 4,27% 1,70% 0,88%
Capital structure 0,60 0,29 1,12 1,24 0,60 0,29 1,12 0,60 1,12 0,47 1,12
Nominal discount rate 10,50% 11,93% 9,57% 8,06% 8,00% 9,04% 7,45% 11,13% 10,65% 6,60% 5,69%
Long-term rate of inflation 1,38% 1,38% 1,38% 1,38% 1,98% 1,98% 1,98% 1,84% 1,84% 1,78% 1,50%

At the same time, ORLEN Upstream Sp. z o.o. evaluated the validity of continuing exploration work on the concession areas located in the Mazowieckie, Lubelskie, Łódzkie and Małopolskie province and decided to continue further exploration work on these concessions only in selected, the most promising areas of conventional research.

As a result in the 4th quarter of 2016 recognized effects of reversal of impairment allowance of refinery assets of Unipetrol Group in the amount of PLN 315 million and recognition of impairment allowance of exploration assets of ORLEN Upstream Group in Poland in the amount of PLN (72) million and assets of ORLEN Oil in the amount of PLN (55) million.
As a part of above tests discount rates of 8% were applied for the Unipetrol Group refining assets and 9.57% for the ORLEN Oil assets.

Sensitivity analysis of the Unipetrol Group refining assets value in use within an impairment test performed as at 31 December 2016

  PLN million EBITDA
DISCOUNT RATE change -5% 0% 5%
- 0,5 p.p. decrease of reversal increase of reversal increase of reversal
  (81) 112 305
0,0 p.p. decrease of reversal - increase of reversal
  (185) - 185
+ 0,5 p.p. decrease of reversal decrease of reversal increase of reversal
  (279) (102) 75

 Sensitivity analysis of the ORLEN Oil assets value in use within an impairment test performed as at 31 December 2016

  PLN million EBITDA
DISCOUNT RATE change -5% 0% 5%
- 0,5 p.p. increase in allowance decrease in allowance decrease in allowance
  (1) 8 15
0,0 p.p. increase in allowance - decrease in allowance
  (8) - 8
+ 0,5 p.p. increase in allowance increase in allowance decrease in allowance
  (14) (7) 1

Impairment allowances of property, plant and equipment and intangible assets in 2015

In the 4th quarter of 2015 an impairment allowance of evaluation and extraction of mineral resources assets in ORLEN Upstream Canada within ORLEN Upstream Group of PLN (423) million was recognized.
As at 31 December 2015 the fair value of evaluation and extraction of mineral resources assets in Canada was based on the estimated crude oil prices and reserves evaluation prepared by an independent company engaged in the evaluation of the reserves in accordance with professional standards for the Canadian market. Estimated net cash flow used to forecast the fair value of assets were discounted to their present value using a base discount rate which reflects the current market value of money and the specific risks to the assets on the Canadian market, which amounted to 9%.

Sensitivity analysis of the ORLEN Upstream Canada assets value in use within an impairment test performed as at 31 December 2015

  PLN million HYDROCARBONS PRICES
DISCOUNT RATE change -5% 0% 5%
- 0,5 p.p. increase in allowance decrease in allowance decrease in allowance
  (14) 34 81
0,0 p.p. increase in allowance - decrease in allowance
  (46) - 46
+ 0,5 p.p. increase in allowance increase in allowance decrease in allowance
  (76) (32) 12

In the 2nd quarter of 2015 ORLEN Upstream Group has determined, based on the gathered data of previous work, the most promising areas for further exploration of hydrocarbon in Poland. Narrowing the search area influenced the partial impairment of assets related to exploration and recognition of mineral resources in the amount of PLN (429) million.
The fair value of assets due to exploration and evaluation of mineral resources has been established basing on the analysis of future cash flows, which take into account the current and forecasted hydrocarbon prices, expected changes in the regulatory environment, probability of success/failure and long-term production forecasts. Net cash flow projections used for the purposes of estimating the fair value of the assets were discounted to their present value using a discount rate at 8.99%, which reflects current market assessment of the time value of money and the risks specific to the respective assets on the Polish market.

Sensitivity analysis of the ORLEN Upstream assets value in use within an impairment test performed as at 30 June 2015

  PLN million HYDROCARBONS PRICES
DISCOUNT RATE change -5% 0% 5%
- 0,5 p.p. increase in allowance decrease in allowance decrease in allowance
  (25) 12 51
0,0 p.p. increase in allowance - decrease in allowance
  (25) - 37
+ 0,5 p.p. increase in allowance increase in allowance decrease in allowance
  (25) (11) 24

While lowering prices by 5% the entire value of the tested assets is impaired, with each of the analysed discount rates.

As a consequence of the steam cracker unit accident in Litvinov (Unipetrol Group) in August 2015, impairment of property, plant and equipment of PLN (93) million translated using the exchange rate as at 30 September 2015 (representing approximately CZK (597) million) was recognized in the 3rd quarter of 2015.

7.2.5. Working capital

    NOTE Inventories Trade and other receivables Trade and other liabilities Working capital*
31/12/2015     10 715 6 597 10 658 6 654
31/12/2016     11 182 8 553 13 591 6 144
Change in working capital in the statement of financial position     (467) (1 956) 2 933 510
Adjustments     180 227 (151) 306
Reclassification     25 - - 25
Change in rights and advances for non-financial non-current assets   7.2.5.2 - (77) - (77)
Change in investment liabilities   7.2.5.3 - - 110 110
Change in compensations’ receivables   7.2.5.2 - 222 - 222
Foreign exchange differences     153 133 (235) 51
Other     2 (1) (26) (25)
Change in working capital in the statement of cash flows     (287) (1 679) 2 782 816

*Working capital = Inventories +Trade and other receivables – Trade and other liabilities

7.2.5.1. Inventories

SELECTED ACCOUNTING PRINCIPLES


Inventories
Inventories, including mandatory reserves comprise products, semi-finished products and work in progress, merchandise and materials.
Finished goods, semi-finished products and work in progress are measured initially at production cost. Production costs include costs of materials and costs of conversion for the production period. Costs of production also include a systematic allocation of fixed and variable production overheads estimated for normal production level.
Finished goods, semi-finished products and work in progress shall be measured at the end of the reporting period at the lower of cost or net realizable value.
Outgoings of finished goods, semi-finished products and work in progress are determined based on the weighted average cost of production.
Merchandise and materials are measured initially at acquisition cost, while as at the end of the reporting period merchandise and raw materials are measured at the lower of cost or net realizable value. Outgoings of merchandise and raw materials are determined based on the weighted average acquisition cost.
The initial value of inventories is adjusted for profits or losses from settlement of cash flow hedging instruments related to the above mentioned.
Impairment tests for specific items of inventories are carried out on a current basis during a reporting period. Write-down to net realizable value concerns inventories that are damaged or obsolete and the selling price have fallen. Raw materials held for use in the production are not written down below acquisition or production cost if the products in which they will be incorporated are expected to be sold at or above cost.
However, when a decline in the price of materials indicates that the cost of the products exceeds net realizable value, the materials are written down to net realizable value.
Recognition and reversal of impairment allowances of inventories is recognized in cost of sales.


ESTIMATES


Net realizable values from sale of inventories
The inventory allowances required estimation of the net realizable value based on the most recent sales prices at the moment of estimations.


  31/12/2016 31/12/2015
Raw materials 6 367 5 869
Work in progress 1 154 883
Finished goods 3 139 3 547
Merchandise 522 416
Inventories, net 11 182 10 715
Impairment allowances of inventories to net realisable value 158 288
Inventories gross 11 340 11 003

As at 31 December 2016 and as at 31 December 2015 the value of mandatory reserves presented in consolidated financial statement amounted to PLN 4,109 million and PLN 4,534 million, respectively.

 

Change in impairment allowances of inventories to net realizable value

  2016 2015
At the beginning of the period 288 949
Recognition 153 238
Reversal (98) (67)
Usage (191) (858)
Foreign exchange differences 6 26
  158 288

In 2016 and in 2015 the recognition and reversal of impairment allowances of inventories to net realizable value related mainly to the downstream segment and amounted to PLN (42) million and PLN (170) million, respectively.

7.2.5.2. Trade and other receivables

SELECTED ACCOUNTING PRINCIPLES


Receivables
Receivables, including trade receivables, are recognized initially at a fair value and subsequently, at amortised cost using the effective interest method less impairment allowances.
Impairment allowances of receivables are based on the individual analysis of the value of held collaterals, and based on the possible compensation of debts.
Recognition and reversal of impairment allowances of receivables are recognized in other operating activity in relation to principal amount and in financial activities in relation to interest for delayed payments.


ESTIMATES


Impairment of trade and other receivables
The Management Board assesses whether there is any indicator for impairment of trade and other receivables taking into account the adopted internal procedures as individual assessment of each customer with regard to credit risk.


  NOTE 31/12/2016 31/12/2015
Trade receivables   7 161 5 397
Other   281 24
Financial assets   7 442 5 421
Excise tax and fuel charge   123 151
Other taxation, duties, social security and other benefits   181 187
Advances for non-current non-financial assets   503 544
Rights   14 50
Advances for deliveries   31 26
Prepayments   259 218
Non-financial assets   1 111 1 176
Receivables, net   8 553 6 597
Receivables impairment allowance 7.2.5.2.2 479 477
Receivables gross   9 032 7 074

*Position other includes compensation from insurers due to Unipetrol Group as at 31 December 2016 in the amount PLN 222 million.

Division of financial assets denominated in foreign currencies is presented in note 7.3.5.2. Division of receivables from related parties is presented in note 7.4.6.

7.2.5.2.1. The ageing analysis of receivables

Based on the analysis of balances of receivables the customers were divided into two groups:

The division of not past due receivables

  31/12/2016 31/12/2015
Group I 6 205 3 952
Group II 895 1 103
  7 100 5 055

The division of past due receivables, but not impaired as at the end of the reporting period

  31/12/2016 31/12/2015
up to 1 month 304 275
above 1 to 3 months 26 51
above 3 to 6 months 4 12
above 6 to 12 months 6 16
above 1 year 34 24
  374 378

7.2.5.2.2. Change in impairment allowances of trade and other receivables

  NOTE 2016 2015
At the beginning of the period   477 509
Recognition 7.3.2 27 51
Reversal 7.3.2 (15) (24)
Usage   (20) (67)
Foreign exchange differences   10 8
    479 477

7.2.5.3. Trade and other liabilities  

SELECTED ACCOUNTING PRINCIPLES


Liabilities
Liabilities, including trade liabilities, are initially measured at fair value and subsequently, at amortised cost using the effective interest rate method.


  31/12/2016 31/12/2015
Trade liabilities 7 549 5 430
Investment liabilities 1 398 1 508
Finance lease 29 26
Other 113 175
Financial liabilities 9 089 7 139
Payroll liabilities 260 250
Excise tax and fuel charge 2 585 1 947
Value added tax 1 333 915
Other taxation, duties, social security and other benefits 161 262
Holiday pay accruals 71 63
Other 92 82
Non-financial liabilities 4 502 3 519
  13 591 10 658

Division of financial liabilities denominated in foreign currencies is presented in note 7.3.5.2. Division of liabilities from related parties is presented in note 7.4.6.

As at 31 December 2016 and as at 31 December 2015 in the Group were no material overdue liabilities.

7.2.6. Net debt and equity management

SELECTED ACCOUNTING PRINCIPLES


Net debt
The Group defined net debt as: non-current and current loans, borrowings and bonds lower by cash and cash equivalents.
Cash comprises cash on hand and in a bank accounts. Cash equivalents are short-term, highly liquid investments (of initial maturity up to three months), that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Valuation and outflows of cash and cash equivalents in foreign currencies are based on FIFO (First In First Out) method.
The Group to assess the level of debt used ratios: net financial gearing (net debt / equity (calculated as at the end of the period) x 100%) and net debt / EBITDA before net impairment allowances.


Changes in net debt

  31/12/2016 31/12/2015
At the beginning of the period 6 810 6 720
loans, borrowings and bonds 9 158 10 657
cash and cash equivalents (2 348) (3 937)
Cash changes in net debt (3 456) (225)
net increase/(decrease) in cash and cash equivalents (2 685) 1 608
drawings/(repayments) of net loans, borrowings and bonds (1 099) (1 875)
realized foreign exchange differences in statement of profit or loss 328 42
Non-cash changes in net debt 9 315
unrealized exchange differences recognized in profit or loss (102) 13
exchange differences on translating foreign operations recognized in equity 11 (64)
valuation of debt and settlement of loans hedging instruments 100 (9)
acquisition of subsidiary - 375
  3 363 6 810
Net financial gearing 11,5% 28,1%
Net debt / EBITDA before net impairment allowances  0,35 0,94

7.2.6.1. Loans, borrowings and bonds

  Non-current Current Total
  31/12/2016 31/12/2015 31/12/2016 31/12/2015 31/12/2016 31/12/2015
Loans 653 3 975 286 1 025 939 5 000
Borrowings - 1 1 2 1 3
Bonds 6 793 4 155 702 - 7 495 4 155
  7 446 8 131 989 1 027 8 435 9 158

The ORLEN Group bases its financing on fixed and floating interest rates. Depending on the currency of financing these are relevant interbank rates increased by margin. The margin reflects risk connected with financing of the Group and in case of some long-term contracts depends on net debt/EBITDA ratio.

On 10 March 2017 PKN ORLEN early repaid the long-term credit in the amount of PLN 763 million with interest due, under the agreement the maturity falling in 2025. The credit agreement allowed the early repayment at the request of the borrower .

7.2.6.1.1. Loans
- by currency (translated into PLN)/ by interest rate

  31/12/2016 31/12/2015
PLN - WIBOR 758 975
EUR - EURIBOR 71 2 859
USD - LIBOR USD - 605
CAD - LIBOR CAD 110 561
  939 5 000

As at 31 December 2016 unused credit lines (note 7.3.5.4) increased by trade and other receivables (note ‎7.2.5.2) and cash and cash equivalents exceeded trade and other liabilities (note ‎7.2.5.3) by PLN 11,144 million.
The Group hedges partially cash flows related to interest payments regarding external financing in EUR and USD, by using interest rate swaps (IRS).
In the period covered by the foregoing consolidated financial statements as well as after the reporting date there were no cases of violations of loans or interests repayment.

As at 31 December 2016 there were no property, plant and equipment pledged as collateral for loans of the Group. As at 31 December 2015 pledge on property, plant and equipment as security for loans amounted to PLN 997 million and loans secured by these assets amounted to PLN 361 million.

7.2.6.1.2. Bonds
- by currency (translated into PLN)

  31/12/2016 31/12/2015
PLN 2 017 2 017
EUR 5 478 2 138
  7 495 4 155

- by interest rate

  Fixed rate bonds Floating rate bonds Total
  31/12/2016 31/12/2015 31/12/2016 31/12/2015 31/12/2016 31/12/2015
Nominal value 5 549 2 231 1 900 1 900 7 449 4 131
Carrying amount 5 579 2 239 1 916 1 916 7 495 4 155

 

  Nominal value Subscription date Maturity date Base rate Margin Rating
  PLN EUR          
A Series 200 - 28.05.2013 28.05.2017 6M WIBOR 1,50% A - (pol)
B Series 200 - 03.06.2013 03.06.2017 6M WIBOR 1,50% A - (pol)
C Series 200 - 06.11.2013 06.11.2017 6M WIBOR 1,40% A - (pol)
D Series 100 - 14.11.2013 14.11.2017 6M WIBOR 1,30% A - (pol)
E Series 200 - 02.04.2014 02.04.2018 6M WIBOR 1,30% A - (pol)
F Series 100 - 09.04.2014 09.04.2020 Fixed interest rate 5% A - (pol)
Retail bonds 1 000 -          
Corporate bonds 1 000 - 27.02.2012 27.02.2019 6M WIBOR 1,60% -
EuroBonds 2 131* 500 30.06.2014 30.06.2021 Fixed interest rate 2,5% BBB-, Baa3
EuroBonds 3 318** 750 07.06.2016 07.06.2023 Fixed interest rate 2,5% BBB-, Baa3
EuroBonds 5 449 1 250          
  7 449 1 250          

* translated into PLN using the exchange rate as at 31 December 2014
** translated into PLN using the exchange rate as at 31 December 2016

The difference between the nominal value and carrying amount of bonds results from measurement of bonds according to amortized cost using the effective interest method.

7.2.6.2. Equity management policy

Equity management is performed on the Group level in order to protect the Group’s ability to continue its operations as a going concern while maximizing returns for shareholders.

The Management Board monitors the following ratios:

7.2.7. Equity

SELECTED ACCOUNTING PRINCIPLES


Share capital
Equity paid by shareholders and stated at nominal value in accordance with the Parent Company’s of association and the entry in the Commercial Register.
Share capital as at 31 December 1996, in accordance with IAS 29, § 24 and 25, was revalued based on monthly price indices of consumer goods and services.

Share premium
Created by the surplus of the issuance value in excess of the nominal value of shares decreased by issuance costs. Capital from issue of shares above their nominal value as at 31 December 1996, in accordance with IAS 29, § 24 and 25, was revalued based on monthly price indices of consumer goods and services.

Hedging reserve
Relates to valuation and settlement of hedging instruments that meet the criteria of cash flow hedge accounting.

Exchange differences on translating foreign operations
Result mainly from translation of the financial statements of the foreign companies into PLN under consolidation procedures.

Retained earnings
include:


7.2.7.1. Share capital

  31/12/2016 31/12/2015
Share capital 535 535
Share capital revaluation adjustment 523 523
  1 058 1 058

In accordance with the Polish Commercial Register, the share capital of Polski Koncern Naftowy ORLEN S.A. as at 31 December 2016 and as at 31 December 2015 amounted to PLN 535 million and is divided into 427,709,061 ordinary shares with nominal value of PLN 1.25 each.

Number of shares issued
A Series B Series C Series D Series Total
336 000 000 6 971 496 77 205 641 7 531 924 427 709 061

In Poland, each new issue of shares is labelled as a new series of shares. All of the above series have the exact same rights.

Shareholders’ structure

  Number of shares / voting rights Nominal value of shares (in PLN) Share in share capital
State Treasury 117 710 196 147 137 745 27,52%
Nationale-Nederlanden OFE* 35 590 112 44 487 640 8,32%
Aviva OFE* 30 000 000 37 500 000 7,01%
Other 244 408 753 305 510 941 57,15%
  427 709 061 534 636 326 100,00%

*Shareholders holding directly or indirectly via related parties, at least 5% of total votes at the Extraordinary Shareholders Meeting of PKN ORLEN S.A. held on 24 January 2017

7.2.7.2. Share premium

  31/12/2016 31/12/2015
Nominal share premium 1 058 1 058
Share premium revaluation adjustment 169 169
  1 227 1 227

7.2.7.3. Hedging reserve

  2016 2015
At the beginning of the period (80) (1 319)
   value gross (99) (1 629)
   deferred tax 19 310
Items of other comprehensive income (396) 1 530
settlement of hedging instruments,gross, incl. 129 1 623
   sales revenues (67) (226)
   cost of sales 105 (120)
   inventories 31 1 999
valuation of hedging instruments, gross (586) (93)
settlement of instruments - no hedged item 61 -
Deferred tax from hedging instruments valuation and settlement 75 (291)
Items of other comprehensive income attributable to non-controlling interest 46 -
  (355) (80)
   value gross 440 (99)
   deferred tax 85 19

On 30 June 2016 repayment of the loan tranche took place, for which interest flows hedge accounting was applied. Therefore, further evaluation of instruments is recognized in profit or loss, and a part of the effective valuation at date of repayment was recognized in equity in the amount PLN (106) million. At the time of the expected cash flows, this amount will be settled for as an adjustment to interest expenses.

7.2.7.4. Retained earnings

  31/12/2016 31/12/2015
Reserve capital 17 756 15 720
Other capital 884 884
Actuarial gains and losses (19) (10)
Net profit for the period attributable to equity owners of the parent 5 261 2 837
  23 882 19 431

7.2.7.5. Equity attributable to non-controlling interest

  31/12/2016 31/12/2015
Unipetrol Group 2 511 2 055
Other 11 16
  2 522 2 071

 

  31/12/2016 31/12/2015
At the beginning of the period 2 071 1 615
Share in profit net, incl. 479 396
   Unipetrol Group 481 397
Share in items of other comprehensive income 33 60
   hedging reserve, net (46) -
   exchange differences on translating foreign operations 79 60
Change in the structure of non-controlling interest (1) -
Paid and declared dividends (60) -
  2 522 2 071

 Condensed financial information of UNIPETROL GROUP

  31/12/2016 31/12/2015
Non-current assets 5 259 3 542
Current assets 5 965 5 034
   cash 480 929
   other Current assets 5 485 4 105
Total assets 11 224 8 576
Total equity 6 799 5 571
Non-current liabilities 328 271
Current liabilities, incl. 4 097 2 734
   trade and other liabilities 3 762 2 476
   loans and borrowings 3 -
Total liabilities 4 425 3 005
Total equity and liabilities 11 224 8 576
Net debt (477) (929)

 

  2016 2015
Sales revenues 14 179 16 669
Cost of sales, incl.: (13 438) (14 726)
   depreciation and amortisation (316) (284)
Gross profit on sales 741 1 943
Distribution expenses (401) (316)
Administrative expenses (237) (200)
Net other operating income and expenses, incl. 1 512 (96)
   reversal / recognition of impairment allowances of property, plant and equipment and intangible assets 300 (111)
   penalties and compensations earned 1 194 (15)
Profit from operations 1 615 1 331
Net finance income and costs 21 (7)
Profit before tax 1 636 1 324
Tax expense (337) (252)
Net profit 1 299 1 072
Items of other comprehensive income 92 162
Total net comprehensive income 1 391 1 234

In 2016 and in 2015, there were no significant restrictions in entities with significant non-controlling interest resulting from credit agreements, regulatory requirements and other contractual arrangements that restrict access to assets and settlement of liabilities of the Group.

7.2.7.6. Proposal to distribution of the Parent Company’s profit for 2016

Dividend policy of the Group assumes a gradual increase in the level of dividend per share by taking into account the implementation of strategic financial objectives and forecasts of the macroeconomic situation. This method does not relate the rate of dividend to net profit, which in the ORLEN Group’s area of operations is subject to high fluctuations and can include non-cash items, such as revaluation of assets, inventories or loans, distorting the view of the current financial situation of the Group.

The Management Board of PKN ORLEN, after considering the liquidity situation and achievement of strategic financial objectives, proposes to distribute the net profit of PKN ORLEN for the year 2016 in the amount of PLN 5,364,455,552.64 as follows: PLN 1,283,127,183 will be allocated as a dividend payment (PLN 3 per 1 share) and the remaining amount of PLN 4,081,328,369.64 as reserve capital. The Management Board of PKN ORLEN recommends 14 July 2017 as the dividend date and 4 August 2017 as the dividend payment date. This recommendation of the Management Board will be presented to the General Shareholders’ Meeting of PKN ORLEN, which will make a conclusive decision in this matter.

7.2.7.7. Distribution of the Parent Company’s profit for 2015

Pursuant to article 395 § 2 point 2 of the Commercial Code and § 7 sec. 7 point 3 of the Parent Company’s Articles of Association, the Ordinary General Shareholders’ Meeting of PKN ORLEN S.A. on 3 June 2016, having analysed the motion of the Management Board, decided to distribute the net profit of PKN ORLEN for the year 2015 of PLN 1,047,519,491.84 as follows: the amount of PLN 855,418,122 for dividend payment (PLN 2 per 1 share) and the remaining amount of net profit of PLN 192,101,369.84 as reserve capital.

 

7.2.8. Embedded derivatives and hedging instruments and other assets and liabilities

Embedded derivatives and hedging instruments and other assets

  Non-current Current Total
  31/12/2016 31/12/2015 31/12/2016 31/12/2015 31/12/2016 31/12/2015
Cash flows hedging instruments 66 135 92 797 158 932
   currency forwards 12 45 32 78 44 123
   commodity swaps 54 90 60 719 114 809
Derivatives not designated as hedge accounting - - 5 8 5 8
   currency forwards - - 5 2 5 2
   commodity swaps - - - 6 - 6
Embedded derivatives - - - 1 - 1
   currency swaps - - - 1 - 1
Embedded derivatives and hedging instruments 66 135 97 806 163 941
Other financial assets 33 12 152 168 185 180
   receivables on cash flows settled hedging instruments - - 149 159 149 159
   other 33 12 3 9 36 21
Other non-financial assets 244 242 - - 244 242
   investment property 97 103 - - 97 103
   perpetual usufruct of land 107 99 - - 107 99
   financial assets available for sale 40 40 - - 40 40
Other assets 277 254 152 168 429 422
 

Embedded derivatives and hedging instruments and other liabilities

  Non-current Current Total
  31/12/2016 31/12/2015 31/12/2016 31/12/2015 31/12/2016 31/12/2015
Cash flows hedging instruments 190 239 376 764 566 1 003
   currency forwards 42 - 117 11 159 11
   interest rate swaps - 92 - - - 92
   commodity swaps 28 48 228 753 256 801
   currency interest rate swaps 120 99 31 - 151 99
Derivatives not designated as hedge accounting 90 - 25 1 115 1
   currency forwards - - 4 1 4 1
   commodity swaps - - 21 - 21 -
   interest rate swaps 90 - - - 90 -
Embedded derivatives - - 2 2 2 2
   currency swaps - - 2 2 2 2
Embedded derivatives and hedging instruments 280 239 403 767 683 1 006
Other financial liabilities 280 465 169 103 449 568
   liabilities on cash flows settled hedging instruments - - 169 103 169 103
   investment liabilities 111 300 - - 111 300
   finance lease 141 140 - - 141 140
   other 28 25 - - 28 25
Other non-financial liabilities 9 8 145 200 154 208
   deferred income 9 8 145 128 154 136
   liabilities directly associated with assets classified as held for sale - - - 72 - 72
Other liabilities 289 473 314 303 603 776

7.2.9. Provisions 

SELECTED ACCOUNTING PRINCIPLES


Provisions
The amount recognized as a provision is the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.

Environmental provision
The Group creates provisions for future liabilities due to reclamation of contaminated land or water or elimination of harmful substances if there is such a legal or constructive obligation. Environmental provision for reclamation is periodically reviewed on the basis of contaminated assessment. Changes in the value of provision increase or decrease in the current period the value of assets to reclamation. In case of  increase of provision is higher than carrying amount of the asset, the amount of that excess is recognized in profit or loss.

Jubilee bonuses and post-employment benefits
Under the remuneration plans employees of the Group are entitled to jubilee bonuses, paid to employees after an elapse of a defined number of years in service as well as retirement and pension benefits, paid once at retirement or pension. The amount of above benefits and jubilee bonuses depends on the number of years in service and an employee’s average remuneration.
The jubilee bonuses are other long-term employee benefits, whereas retirement and pension benefits are classified as post-employment defined benefit plans.
Provisions are determined by an independent actuary and revalued if there are any indications impacting their value, taking into account the staff turnover and planned growth of wages.
Actuarial gains and losses from post-employment benefits are recognized in components of other comprehensive income and from other employment benefits are recognized in profit or loss.

CO2 emissions, energy certificates
The Group recognizes the estimated CO2 emissions costs during the reporting period in operating activity costs (taxes and charges). Provision is recognized based on the value of allowances taking into account the principle of FIFO. In case of a shortage of allowances, the provision is created based on the purchase price of allowance concluded in forward contracts or market quotations at the reporting date.
During the reporting period the Group recognizes provision for the estimated volume of energy  rights and energy efficiency certificates for depreciation, which is recognized as a reduction of revenues from sales of energy.

Other provisions
Other provisions include mainly provisions for legal proceedings and are recognized after consideration of all available information, including the opinions of independent experts.
The Group recognizes provisions if at the end of the reporting period the Group is an obligation arising from past events that can be reliably estimated and it is probable that fulfilment of this obligation will cause an outflow of resources embodying economic benefits.


ESTIMATES


Recognition of provisions requires estimates of the probable outflow of resources embodying economic benefits and defining the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Provisions are recognized when the probability of outflow of resources embodying economic benefits is higher than 50%.


  Non-current Current Total
  31/12/2016 31/12/2015 31/12/2016 31/12/2015 31/12/2016 31/12/2015
Environmental 570 450 38 39 608 489
Jubilee bonuses and post-employment benefits 212 217 33 36 245 253
CO₂ emissions, energy certificates - - 365 466 365 466
Other 46 43 230 208 276 251
  828 710 666 749 1 494 1 459
 

Changes in provisions

  Environmental provision Jubilee bonuses and post-employment benefits provision CO₂ emissions, energy certificates Other provisions Total
01/01/2016 489 253 466 251 1 459
Recognition 154 10 354 118 636
Reversal (4) - (63) (140) (207)
Usage (44) (20) (397) (61) (522)
Sale of subsidiary (8) - - - (8)
Foreign exchange differences 21 2 5 108 136
  608 245 365 276 1 494
01/01/2015 451 284 343 279 1 357
Recognition 62 6 461 64 593
Reversal (9) - 2 (24) (31)
Usage (38) (37) (367) (56) (498)
Acquisition of subsidiary 27 - - - 27
Foreign exchange differences (4) - 27 (12) 11
  489 253 466 251 1 459

 

  2016 2015
Change in provisions presented in the statement of financial position 35 102
Usage of prior year provision for CO₂ emissions, energy certificates 392 367
Capitalization of environmental provision (56) -
Foreign exchange differences (28) 21
Other (13) (27)
Change in provisions in the statement of cash flows 330 463

7.2.9.1. Environmental provision 

The Group has legal obligation to clean contaminated land – water environment in the area of production plants, fuel stations, fuel terminals and warehouses.
The Management Board estimated the provision for environmental risks based on analyses provided by independent experts or based on current and expected costs of removal of contaminants.

In the Czech Republic, the Government is responsible for liabilities arising from contamination of land-water environment before date of entity’s privatization. In case of new contamination that arose after this date the Group is responsible for those liabilities.
In 2016, due to the planned in 2017 cease of production of chlorine using mercury electrolysis in Spolana a.s, Unipetrol Group recognized provision for the estimated costs of plant for the production of chlorine using the mercury electrolysis liquidation in the amount of approximately PLN 21 million.
As at 31 December 2016 the balance of provision for liquidation and contaminations clean up costs in the plant amounted to PLN 27 million translated using the exchange rate as at 31 December 2016 (representing CZK 163 million).

Moreover, at the stage of development and extraction of mineral resources the Group recognizes provisions for the cost of removal of drillings and supporting infrastructure.
Increase in the provision results from the updating of present value estimates of investment expenditures required to settle the present obligation at the reporting date.

7.2.9.2. Provision for jubilee bonuses and post-employment benefits

Change in employee benefits obligations

    Jubilee bonuses provision Post-employment benefits Total
  NOTE 31/12/2016 31/12/2015 31/12/2016 31/12/2015 31/12/2016 31/12/2015
At the beginning of the period   150 163 103 121 253 284
Current service costs   6 7 3 3 9 10
Interest expenses   5 4 3 3 8 7
Actuarial gains and losses arising from changes in assumptions:   (16) 4 10 (4) (6) -
   demographic   (19) 2 3 2 (16) 4
   financial   (4) (7) (2) (7) (6) (14)
   other   7 9 9 1 16 10
Past employment costs   (4) (7) 5 (8) 1 (15)
Payments under program   (15) (16) (4) (10) (19) (26)
Other   11 (5) (12) (2) (1) (7)
  7.2.9 137 150 108 103 245 253

The carrying amount of employee benefits liabilities is identical to their present value as at 31 December 2016 and 31 December 2015.

 

Employee benefits liabilities divided into active and retired employees

  Active employees Retired employees Total
  31/12/2016 31/12/2015 31/12/2016 31/12/2015 31/12/2016 31/12/2015
Poland 189 196 32 34 221 230
Czech Republic 17 14 - - 17 14
Lithuania, Latvia, Estonia 7 9 - - 7 9
  213 219 32 34 245 253

 

  Jubilee bonuses provision Post-employment benefits Total
  31/12/2016 31/12/2015 31/12/2016 31/12/2015 31/12/2016 31/12/2015
Employee benefits liabilities divided into geographical structure            
Poland 132 147 89 83 221 230
Czech Republic 5 3 12 12 17 15
Lithuania, Latvia, Estonia - - 7 8 7 8
  137 150 108 103 245 253
Maturity of employee benefits analysis            
up to 1 year 16 24 17 12 33 36
above 1 to 5 years 51 45 13 15 64 60
above 5 years 70 81 78 76 148 157
  137 150 108 103 245 253
Employee benefits payments analysis            
up to 1 year 15 24 16 12 31 36
above 1 to 5 years 59 60 22 17 81 77
above 1 to 5 years 264 322 515 527 779 849
  338 406 553 556 891 962

The weighted average duration of liabilities for post-employment benefits in 2016 and in 2015 amounted to: Poland 9 and 11 years, Czech Republic 10 in both years and Lithuania, Latvia, Estonia 10 and 14 years, respectively.

In 2016 the amount of provision for employee benefits changed as the result of update of assumptions, mainly in relation to discount rate, projected inflation and expected remuneration increase ratio. Should the 2015 assumptions be used, the provision for the employee benefits would be lower by PLN (22) million.

Sensitivity analysis to changes in actuarial assumptions
As at 31 December 2016, the Group used the following actuarial assumptions that had an impact on the level of actuarial provisions for the Polish entities: discount rate 3.5%, expected inflation 1.3% in 2017, 1.5% in 2018 and 2.5% in subsequent years the remuneration increase rate: 0% in years 2017-2018 and 2.5% in subsequent years. In the Group's foreign entities the main impact had: value of discount rate: from 0.56% to 0.85%.
The Group analysed the impact of the financial and demographic assumptions and calculated that the changes of ratios: remuneration ratio by +/- 1 p.p., the discount rate by +/- 0.5 p.p. and the rate of turnover by +/- 0.5 p.p. in Poland, Czech, Lithuania, Latvia and Estonia are no higher than PLN 8 million. Therefore, the Group does not present any detailed information.
The Group carries out the employee benefit payments from current resources. As at 31 December 2015 there were no funded plans and the Group paid no contributions to fund liabilities.

7.2.9.3. Provision for CO2 emissions, energy certificates

Provision for CO2 emissions, energy certificates comprises mainly recognition of the provisions for estimated in the reporting period, the cost of CO2 emissions. As at 31 December 2016 and as at 31 December 2015 the value of the provision amounted to PLN 353 million and PLN 440 million, respectively.

7.2.9.4. Other provisions

As at 31 December 2016 and as at 31 December 2015 other provisions comprise mainly provisions for the risk of unfavourable decisions of pending administrative or court proceedings of PLN 192 million and PLN 170 million, respectively.

7.3. EXPLANATORY NOTES TO THE FINANCIAL INSTRUMENTS AND FINANCIAL RISK

SELECTED ACCOUNTING PRINCIPLES


Financial instruments

Measurement of financial assets and liabilities
At initial recognition, the Group measures financial assets and liabilities at their fair value plus, in the case of a financial asset or a financial liability not at fair value through profit or loss (i.e. held for trading), transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. The Group does not classify instruments as measured at fair value through profit or loss upon initial recognition, i.e. does not apply the fair value options.
At the end of the reporting period, the Group measures item of financial assets and liabilities at amortised cost using effective interest rate method, except for derivatives, which are measured at fair value.
Gains and losses resulting from changes in fair value of derivatives, for which hedge accounting is not applicable, are recognized in the current year profit or loss.

Hedge accounting
Derivatives designated as hedging instruments whose cash flows are expected to offset changes in the cash flows of a hedged item are accounted for in accordance with the cash flow hedge accounting.
The Group assess effectiveness of cash flow hedge at the inception of the hedge and later, at minimum, at reporting date. In case of cash flow hedge accounting, the Group recognizes in other comprehensive income part of profits and losses connected with the effective part of the hedge, whereas profits or losses connected with the ineffective part - under profit or loss.
The Group uses statistical methods, in particular regression analysis, to assess effectiveness of the hedge.
If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, the associated gains or losses that were recognized in other comprehensive income are reclassified to profit or loss of the reporting period in the same period or periods during which the asset acquired, or liability assumed, affects profit or loss.
However, if the Group expects that all or a portion of a loss recognized in other comprehensive income will not be recovered in one or more future periods, it reclassifies the amount that is not expected to be recovered to profit or loss.
If a hedge of a forecast transaction subsequently results in the recognition of a non-financial asset or a non-financial liability, or a forecast transaction for a non-financial asset or non-financial liability becomes a firm commitment for which fair value hedge accounting is applied, the Group removes the associated gains and losses that were recognized in the other comprehensive income and includes them in the initial cost or other carrying amount of the asset or liability.
If a hedge of a forecast transaction results in the recognition of revenue from sales of products, merchandise, materials or services, the Group removes the associated gains or losses that were recognized in the other comprehensive income and adjusts these revenues.

Fair value measurement
The Group maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs to meet the objective of fair value measurement, which is to estimate the price at which an orderly transaction to transfer the liability or equity instrument would take place between market participants as at the measurement date under current market conditions.
The Group measures derivatives at fair value using valuation models for financial instruments based on generally available exchange rates, interest rates, forward and volatility curves, for currencies and commodities quoted on active markets.The fair value of derivatives is based on discounted future flows related to contracted transactions as the difference between term price and transaction price.
Forward exchange rates are not modelled as a separate risk factor, but derives from the spot rate and the respective forward interest rate for foreign currency in relation to PLN.
Derivative instruments are presented as assets, when their valuation is positive and as liabilities, when their valuation is negative.


PROFESSIONAL JUDGEMENTS


Financial instruments
The Management Board assesses the classification of financial instruments, nature and extent of risk related to financial instruments and application of the cash flow hedge accounting. The financial instruments are classified into different categories depending on the purpose of the purchase and nature of acquired assets.


7.3.1. Financial instruments by category and class

inancial instruments by category and class NOTE 31/12/2016 31/12/2015 Financial instruments by category
ASSETS        
Unquoted shares 7.2.8 40 40 Available for sale
Embedded derivatives and derivatives not designated as hedge accounting 7.2.8 5 9 At fair value through profit or loss
Hedging instruments 7.2.8 158 932 Hedging financial instruments
    12 699 7 949 Loans and receivables
Trade receivables 7.2.5.2 7 161 5 397 Loans and receivables
Cash and cash equivalents   5 072 2 348 Loans and receivables
Receivables on cash flows settled hedging instruments 7.2.8 149 159 Loans and receivables
Other 7.2.5.2
7.2.8
317 45 Loans and receivables
    12 902 8 930  
LIABILITIES        
Embedded derivatives and derivatives not designated as hedge accounting 7.2.8 117 3 At fair value through profit or loss
Hedging instruments 7.2.8 566 1 003 Hedging financial instruments
Finance lease 7.2.5.3
7.2.8
170 166 Excluded from the scope of IAS 39
    17 803 16 699 Measured at amortised cost
Loans 7.2.6.1.1 939 5 000 Measured at amortised cost
Borrowings 7.2.6.1 1 3 Measured at amortised cost
Bonds 7.2.6.1.2 7 495 4 155 Measured at amortised cost
Trade liabilities 7.2.5.3 7 549 5 430 Measured at amortised cost
Investment liabilities 7.2.5.3
7.2.8
1 509 1 808 Measured at amortised cost
Liabilities on cash flows settled hedge instruments 7.2.8 169 103 Measured at amortised cost
Other 7.2.5.3
7.2.8
141 200 Measured at amortised cost
    18 656 17 871  

7.3.2. Income, expense, profit and loss in the consolidated statement of profit or loss and other comprehensive income

  NOTE 2016 2015 Financial instruments by category
Interest income 7.1.6.1 59 82 Loans and receivables
Interest costs 7.1.6.2 (216) (205)  
    (211) (194) Measured at amortised cost
    4 (4) Hedging financial instruments (ineffective part)
    (9) (7) Excluded from the scope of IAS 39
Recognition/reversal of receivables impairment allowances   (12) (27) Loans and receivables
   other operating income/expenses 7.1.4
7.1.5
(12) (30) Loans and receivables
   finance income/costs 7.1.6.1
7.1.6.2
- 3 Loans and receivables
Financial instruments gains/(losses)   (484) (518)  
    209 186 Loans and receivables
    (756) (529) Measured at amortised cost
    48 (175) At fair value through profit or loss
    10 (2) Hedging financial instruments (ineffective part)
    5 2 Available for sale
    (653) (668)  
other, excluded from the scope of IFRS 7   (4) (4)  

7.3.3. Fair value measurement

31/12/2016

        Fair value hierarchy
  NOTE Carrying amount Fair value Level 1 Level 2
Financial assets          
Embedded derivatives and hedging instruments 7.2.8 163 163 - 163
    163 163 - 163
Financial liabilities          
Loans 7.2.6.1.1 939 941 - 941
Borrowings 7.2.6.1 1 1 - 1
Bonds 7.2.6.1.2 7 495 7 811 7 811 -
Finance lease 7.2.5.3
7.2.8
170 182 - 182
Embedded derivatives and hedging instruments 7.2.8 683 683 - 683
    9 288 9 618 7 811 1 807
 

31/12/2015 

        Fair value hierarchy
  NOTE Carrying amount Fair value Level 1 Level 2
Financial assets          
Embedded derivatives and hedging instruments 7.2.8 941 941 - 941
    941 941 - 941
Financial liabilities          
Loans 7.2.6.1.1 5 000 5 003 - 5 003
Borrowings 7.2.6.1 3 3 - 3
Bonds 7.2.6.1.2 4 155 4 193 4 193 -
Finance lease 7.2.5.3
7.2.8
166 180 - 180
Embedded derivatives and hedging instruments 7.2.8 1 006 1 006 - 1 006
    10 330 10 385 4 193 6 192

For other classes of financial assets and liabilities fair value represents their carrying amount.

7.3.3.1. Methods applied in determining fair value (fair value hierarchy)

Financial liabilities due to loans, bonds, finance lease and liabilities and receivables for borrowings are measured at fair value using discounted cash flows method. Discount rates are calculated based on market interest rates according to quotations of 1- month, 3-months and 6-months interest rates increased by proper margins for particular financial instruments.
As at 31 December 2016 and as at 31 December 2015 the Group held unquoted shares in entities, for which fair value cannot be reliably measured, due to the fact that there are no active markets for these entities and no comparable transactions in the same type of instruments were noted. The value of shares of these entities was recognized in the consolidated statement of financial position as at 31 December 2016 and as at 31 December 2015 of PLN 40 million at acquisition cost less impairment allowances. As at 31 December 2016 and as at 31 December 2015 the Group did not intend to sell financial instruments classified as available for sale, for which it is not possible to determine fair value.
During the reporting period and comparative period there were no reclassifications of financial instruments in Group between Level 1 and 2 of fair value hierarchy.

7.3.4. Hedge accounting

Net carrying amount of cash flows hedging instruments

  NOTE 31/12/2016 31/12/2015  
Type of instruments / type of risk       Hedging strategies
currency forwards / risk of exchange rates changes   (115) 112 operating and investing activity; sales of products and purchase of crude oil;
commodity swaps / commodity risk   (142) 8 operational inventories, refining margin, time mismatch occurring on purchases of crude oil, risk of crude oil prices on arbitrage transactions cash & carry, offers for which price formulas are based on fixed price;
currency interest rate swaps / risk of interest rates changes   (151) (99) interest payments;
interest rate swaps / risk of interest rates changes   - (92) interest payments
  7.2.8 (408) (71)  

Planned realization date of hedged cash flows which will be recognized in the profit or loss

  31/12/2016 31/12/2015
Currency operating exposure 2017-2018 2016-2018
Finance currency exposure 2017 2016-2017
Interest rate exposure 2017-2019 2016-2020
Commodity risk exposure 2017-2018 2016-2017

7.3.5. Risk identification

Risk management is mainly focused on the unpredictability of markets and aims to minimize any potential negative impacts on the Group's financial results.

Type of risk Exposure Measurement of exposure Management/Hedging
Commodity - risk of changes in refining and petrochemical margins on sale of products and Ural/Brent differential fluctuations;
- risk of changes in crude oil and products prices related to the time mismatch;
- risk of changes in CO₂ emission rights prices;
- risk of changes in crude oil and refinery product prices related to the obligation to maintain mandatory reserves of crude oil and fuels;
- risk of changes in commodity prices on arbitrage transactions cash & carry involving acquisition of
crude oil or products for stock in order to sell them or process them at a later date
Based on planned cash flows. Market risk management policy and hedging strategies, which define principles of measurement of individual exposure, parameters and the time horizon of risk hedging and hedging instruments.
Exchange rates changes - economic currency exposure resulting from inflows decrease by expenses indexed to or denominated in other than the functional currency;
- currency exposure resulting from investment or probable liabilities and receivables in foreign currencies;
- balance sheet exposure resulting from assets and liabilities denominated in foreign currency
Based on planned cash flows.
Based on analysis of balance sheet positions.
Market risk management policy and hedging strategies, which define principles of measurement of individual exposure, parameters and the time horizon of risk hedging and hedging instruments.
Interest rates changes Exposure resulting from owned assets and liabilities for which interest gains or losses are dependent on floating interest rates. Based on total gross debt to positions for which interest costs are dependent on floating interest rate. Market risk management policy and hedging strategies, which define principles of measurement of individual exposure, parameters and the time horizon of risk hedging and hedging instruments.
Liquidity Risk of unforeseen shortage of cash or lack of access to financing sources, both in the horizon of short and long-term borrowing, leading to temporary or permanent loss of ability to pay financial liabilities or imposing the need to obtain funds on unfavourable terms. Based on planned cash flows in short and long-term horizon. Short-term liquidity risk management policy, which defines rules of reporting and consolidation of liquidity of PKN ORLEN and ORLEN Group entities. Group carries out a policy of its financing sources diversification and uses range of tools for effective liquidity management.
Losing cash and deposits Risk of bankruptcy of domestic or foreign banks, in which accounts are kept or in which cash is invested for a short time. Short-term credit rating of bank. Management based on principles of surplus cash management, which determine possibility of granting quotas for individual banks made on the basis of, among others, ratings of investment and reporting data.
Credit Risk of unsettled receivables for delivered products and services by customers. Credit risk is also related to the creditability of customers with whom sales transactions are concluded. Analysis of creditability and solvency of customers. Management based on procedures and policies adopted for management of trade credit and debt recovery.

The ORLEN Group applies a consistent financial risk hedging policy based on market risk management policy supported and supervised by the Financial Risk Committee, the Management Board and the Supervisory Board.

7.3.5.1. Commodity risk

The impact of commodity hedging instruments on the Group's financial statements

Type of hedged raw material/product Unit of measure 31/12/2016 31/12/2015
Crude oil bbl 16 574 715 9 160 200
Gas gj 7 300 000 15 000
Other t 400 710 1 351 801

The net carrying amount of hedging instruments for commodity risk as at 31 December 2016 and as at 31 December 2015 amounted to PLN (142) million and PLN 8 million, respectively.

Sensitivity analysis for changes in prices of products and raw materials

Analysis of the influence of changes in the carrying amount of financial instruments on hedging reserve to a hypothetical change in prices of products and raw materials:

  2016 2016 2015 2015
  Increase of prices Total influence Increase of prices Total influence
Crude oil USD/bbl;CAD/bbl 45% (817) 19% (92)
Diesel USD/t 42% (28) 17% (38)
Gasoline USD/t 41% (8) 21% (62)
Naphta USD/t - - 21% (9)
Heating oil USD/t 53% 33 20% 11
JET fuel USD/t - - 16% 4
Gas CAD/Gj 42% (31) - -
    (851)   (186)

At decrease in prices in 2016 and 2015, respectively by the same percentage, sensitivity analysis assumes  values with the opposite sign in comparison to the table above.
Applied for the sensitivity analysis of commodity risk hedging instruments variations of crude oil and products prices were calculated based on volatility and available analysts’ forecasts.
The influence of changes of prices was presented on annual basis.
In case of derivatives, the influence of crude oil, and products prices variations on fair value were examined at constant level of currency rates.

 

7.3.5.2. The risk of exchange rates changes

Currency structure of financial instruments as at 31 December 2016

Financial instruments by category and class EUR USD CZK CAD Other currencies after translation to PLN Total after translation to PLN
Financial assets            
Trade receivables 466 150 6 337 15 18 3 790
Embedded derivatives and hedging instruments 4 31 - 5 - 163
Cash and cash equivalents 679 76 2 657 - 19 3 775
Receivables on cash flows settled hedging instruments - 36 - - - 149
Other 4 1 182 8 - 75
  1 153 294 9 176 28 37 7 952
Financial liabilities            
Loans 16 - - 36 - 181
Bonds 1 238 - - - - 5 478
Trade liabilities 333 1 069 2 650 4 4 6 390
Investment liabilities 146 9 839 26 - 901
Embedded derivatives and hedging instruments 76 77 - 8 - 683
Liabilities on cash flows settled hedging instruments - 40 - - - 169
Other 1 1 232 - - 47
  1 810 1 196 3 721 74 4 13 849
 

Struktura walutowa instrumentów financial na dzień 31 grudnia 2015 roku

Financial instruments by category and class EUR USD CZK CAD Other currencies after translation to PLN Total after translation to PLN
Financial assets            
Trade receivables 396 91 5 487 17 17 2 973
Embedded derivatives and hedging instruments 19 218 30 2 - 941
Cash and cash equivalents 53 68 5 689 - - 1 388
Receivables on cash flows settled hedging instruments - 41 - - - 159
Other 3 2 38 3 - 35
  471 420 11 244 22 17 5 496
Financial liabilities            
Loans 671 155 - 200 - 4 025
Bonds 502 - - - - 2 138
Trade liabilities 248 570 3 151 17 - 3 826
Investment liabilities 193 19 933 30 - 1 129
Embedded derivatives and hedging instruments 44 210 - - - 1 006
Liabilities on cash flows settled hedging instruments - 26 - - - 103
Other 6 8 371 - - 115
  1 664 988 4 455 247 - 12 342
 

Sensitivity analysis for changes in the exchange rates

  EUR/PLN USD/PLN CZK/PLN CAD/PLN Total
  2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
variation of exchange rates +15%
Influence on result before tax (A) (423) (758) (339) (196) (68) (142) (18) (12) (847) (1 108)
Influence on hedging reserve (B) (1 863) (574) (146) 2 - - (97) - (2 106) (572)
Influence on foreign exchange differences on subsidiaries from consolidation ( C ) 14 6 (63) 10 136 168 - (83) 87 101
Total influence (A+B+C) (2 272) (1 326) (548) (184) 68 26 (114) (95) (2 866) (1 579)
Sensitivity of net investment in foreign operations including hedging reserve (D) 93 72 274 207 1 019 836 274 246 1 660 1 361
Total influence on profit or loss and other comprehensive income (A+B+D) (2 193) (1 260) (211) 13 951 694 160 234 (1 293) (319)

At variation of currency rates by (-)15%, sensitivity analysis assumes the same value as in the table above only with the opposite sign. Variations of currency rates described above were calculated based on average volatility of particular currency rates and analysts’ forecasts.
The influence of currency rate variations on fair value of derivative instruments was examined at constant level of interest rates.

7.3.5.3. The risk of interest rates changes

Structure of financial instruments subject to risk of interest rates changes as at 31 December 2016

Financial instruments by category and class   WIBOR EURIBOR LIBOR USD LIBOR CAD Total
  NOTE          
Financial assets            
Hedging instruments 7.2.8 - 18 130 15 163
    - 18 130 15 163
Financial liabilities            
Loans 7.2.6.1.1 758 71 - 110 939
Borrowings 7.2.6.1 1 - - - 1
Bonds 7.2.6.1.2 1 916 - - - 1 916
Hedging instruments 7.2.8 151* 334* 321 26 681**
    2 826 405 321 136 3 537**

*In financial liabilities - hedging instruments, cross interest rate swaps (CIRS) valuated at the amount of PLN 151 million was recognized, which are sensitive to both WIBOR and EURIBOR interest rates changes.
**Total includes CIRS valuation of PLN 151 million.

Structure of financial instruments subject to risk of interest rates changes as at 31 December 2015

Financial instruments by category and class   WIBOR EURIBOR LIBOR USD PRIBOR LIBOR CAD Total
  NOTE            
Financial assets              
Hedging instruments 7.2.8 - 80 849 5 6 940
    - 80 849 5 6 940
Financial liabilities              
Loans 7.2.6.1.1 975 2 859 605 - 561 5 000
Borrowings 7.2.6.1 3 - - - - 3
Bonds 7.2.6.1.2 1 916 - - - - 1 916
Hedging instruments 7.2.8 99* 186* 818 - - 1 004**
    2 993 3 045 1 423 - 561 7 923**

*In financial liabilities - hedging instruments, cross interest rate swaps (CIRS) valuated at the amount of PLN 99 million was recognized, which are sensitive to both WIBOR and EURIBOR interest rates changes.
**Total includes CIRS valuation of PLN 99 million.

Sensitivity analysis for the interest rates changes

Interest rate Assumed variations Influence on result before tax Influence on hedging reserve Total
  31/12/2016 31/12/2015 2016 2015 2016 2015 2016 2015
WIBOR +0,5p.p. +0,5p.p. (13) (14) 13 (44) - (58)
LIBOR USD +0,5p.p. +0,5p.p. 11 (3) - 13 11 10
EURIBOR +0,5p.p. +0,5p.p. 24 (14) 3 95 27 81
      22 (31) 16 64 38 33
WIBOR -0,5p.p. -0,5p.p. 13 14 (13) 45 - 59
LIBOR USD -0,5p.p. - (11) - - - (11) -
EURIBOR -0,5p.p. - (24) - - - (24) -
      (22) 14 (13) 45 (35) 59

The above interest rates variations were calculated based on observations of average interest rates fluctuations.
The Group at the end of 2016 and 2015 does not consider in the sensitivity analysis change of PRIBOR and LIBOR CAD due to their insignificant impact. Low interest rates of EURIBOR and LIBOR USD at the end of 2015 and market forecasts for further periods caused that the Group did not take the further decrease in the sensitivity analysis into consideration. The influence of interest rates changes was presented on annual basis.
For derivatives in sensitivity analysis for the risk of interest rates changes interest rate curve displacement due to potential reference rate change was used, provided that other risk factors remain constant.

7.3.5.4. Liquidity and credit risk

Liquidity risk

Maturity analysis for financial liabilities as at 31 December 2016

    up to 1 year above 1 to 3 years above 3 to 5 years above 5 years Total Carrying amount
  NOTE            
Loans - undiscounted value 7.2.6.1.1 288 204 194 358 1 044 939
Bonds 7.2.6.1.2 761 1 264 103 5 479 7 607 7 495
floating-rate bonds - undiscounted value   756 1 254 - - 2 010 1 916
fixed rate bonds - undiscounted value   5 10 103 5 479 5 597 5 579
Trade liabilities 7.2.5.3 7 549 - - - 7 549 7 549
Investment liabilities 7.2.5.3
7.2.8
1 398 14 14 83 1 509 1 509
Embedded derivatives and hedging instruments- undiscounted value 7.2.8 421 189 13 - 623 683
   gross exchange amounts, incl.:   114 66 - - 180 244
    currency forwards 7.2.8 87 - - - 87 91
    currency interest rate swaps 7.2.8 25 66 - - 91 151
  net exchange amounts   307 123 13 - 443 439
    currency forwards 7.2.8 30 44 - - 74 72
    interest rate swaps 7.2.8 27 50 13 - 90 90
    commodity swaps 7.2.8 250 29 - - 279 277
Other 7.2.5.3
7.2.8
340 36 24 81 481 481
    10 757 1 707 348 6 001 18 813 18 656

Analiza wymagalności zobowiązań financial na dzień 31 grudnia 2015 roku

    up to 1 year above 1 to 3 years above 3 to 5 years above 5 years Total Carrying amount
  NOTE            
Loans - undiscounted value 7.2.6.1.1 1 053 1 019 2 720 435 5 227 5 000
Bonds 7.2.6.1.2 68 1 003 1 125 2 138 4 334 4 155
floating-rate bonds - undiscounted value   63 993 1 017 - 2 073 1 916
fixed rate bonds - undiscounted value   5 10 108 2 138 2 261 2 239
Trade liabilities 7.2.5.3 5 430 - - - 5 430 5 430
Investment liabilities 7.2.5.3
7.2.8
1 508 196 14 90 1 808 1 808
Embedded derivatives and hedging instruments- undiscounted value 7.2.8 693 205 34 - 932 1 006
   gross exchange amounts, incl.:   5 8 14 - 27 107
    currency interest rate swaps 7.2.8 (2) 8 14 - 20 99
   net exchange amounts, incl.:   688 197 20 - 905 899
    commodity swaps 7.2.8 655 151 - - 806 801
Other 7.2.5.3
7.2.8
306 63 21 82 472 472
    9 058 2 486 3 914 2 745 18 203 17 871

As at 31 December 2016 and as at 31 December 2015 the maximum possible indebtedness due to loans amounted to PLN 12,728 million and PLN 13,916 million, respectively. As at 31 December 2016 and as at 31 December 2015 PLN 11,110 million and PLN 8,441 million, respectively, remained unused.

The value of guarantees regarding liabilities to third parties granted during ongoing operations as at 31 December 2016 and as at 31 December 2015 amounted to PLN 488 million and PLN 458 million, respectively. These concern mainly: civil-law guarantees of contract performance and public-law guarantees resulting from generally applicable regulations secured regularity of business licensed in the liquid fuels sector and resulting from this activity tax and customs receivables, etc.
In addition, guarantees and sureties granted in the Group on behalf of related parties as at 31 December 2016 and as at 31 December 2015 amounted to PLN 12,437 million and PLN 6,836 million, respectively. They were mainly related to secure of ORLEN Capital future liabilities due to these transactions of Eurobonds issuance and timely payment of liabilities by related parties.
Based on analysis and forecasts as at the end of the reporting period, the Group recognized the probability of payment of these amounts as low.

Credit risk

As at 31 December 2016 and as at 31 December 2015 the Group received bank and insurance guarantees of PLN 2,520 million and PLN 2,648 million, respectively. Additionally the Group receives from its customers securities such as blockade of cash on bank accounts, deposits, mortgage and bills of exchange.
Additional information is presented in note 7.2.5.2.

7.4. OTHER EXPLANATORY NOTES

7.4.1. Concessions held

The Group’s operations require concessions, due to their importance to the public interest.

31/12/2016 Remaining concessions periods (in years)
Electrical energy: manufacturing, distribution, trade 3-14
Heating energy: manufacturing, transmission, distribution, trade 9-14
Gaseous fuels: transmission, distribution, trade 4-14
Liquid fuels: manufacturing, transmission, trade, storage 1-14
Non-reservoir storage of crude oil and liquid fuels 13
Rock salt: exploration, recognition and exploitation 1,5-16
Exploration and recognition of crude oil and natural gas deposits 1-4
Marine Wind Farms: preparation, implementation, operation                                 25
Personal and property security services indefinitely

As at 31 December 2016 and as at 31 December 2015 the Group had no liabilities related to concession services in scope of IFRIC 12 – Service concession arrangements.

7.4.2. Leases

SELECTED ACCOUNTING PRINCIPLES


Lease
A lease is an agreement whereby a lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. Assets used under the finance lease, that is under agreement which transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee, are recognized as assets of the lessee. Assets used under the operating lease, that is under the agreement that does not transfer substantially all the risks and rewards incidental to ownership of an asset to the lessee, are recognized as assets of the lessor. Determining whether the transfer of risks and rewards exists depends on the assessment of essence of the economic substance of the transaction.


7.4.2.1. Group as a lessee

Operating lease

As at 31 December 2016 and as at 31 December 2015 the Group was a lessee under non-cancellable operating lease agreements (tenancy, rent), which regard mainly the lease of petrol stations, means of transportation and computer equipment. Agreements include clauses concerning contingent rent payables. In most cases they can be prolonged.
The total lease payments, resulting from non-cancellable operating lease agreements recognized as expenses in 2016 and in 2015 amounted to PLN (79) million and PLN (85) million, respectively.
Future minimum lease payments under non-cancellable operating lease agreements

  31/12/2016 31/12/2015
up to 1 year 83 73
above 1 to 5 years 210 207
above 5 years 544 474
  837 754

Finance lease

As at 31 December 2016 and as at 31 December 2015 the Group was a lessee under finance lease agreements, which relate mainly to the buildings and constructions, machinery and equipment and vehicles.
In concluded lease agreements, the general conditions of finance lease are effective, they do not contain any clauses concerning contingent rent payables, give the possibility to purchase the leased equipment and eventually can be prolonged.

    Present value of future minimum lease payments Value of future minimum lease payments
  NOTE 31/12/2016 31/12/2015 31/12/2016 31/12/2015
up to 1 year   29 26 35 33
above 1 to 5 years   60 58 79 77
above 5 years   81 82 109 112
  7.2.5.3
7.2.9
170 166 223 222

7.4.3. Investment expenditures incurred and future commitments resulting from signed investment contracts

The total amount of investment expenditures together with borrowing costs incurred in 2016 and in 2015 amounted to PLN 4,673 million and PLN 3,183 million, respectively, including PLN 89 million and PLN 306 million of investments relating to environmental protection.

As at 31 December 2016 and as at 31 December 2015 the value of future commitments resulting from contracts signed until this date amounted to PLN 1,941 million and PLN 3,054 million, respectively.

7.4.4. Contingent assets and liabilities

SELECTED ACCOUNTING PRINCIPLES


Contingent assets and liabilities
The Group discloses at the end of reporting period information on contingent assets if the inflow of resources embodying economic benefits is practically probable. If it is practicable the Group estimates the financial impact of contingent assets valuing them according to the principles of valuation provisions.
The Group discloses at the end of reporting period information on contingent liabilities if the outflow of resources embodying economic benefits is probable, unless the possibility of outflow of resources embodying economic benefits is remote.


ESTIMATES


Contingent assets
On the basis of the insurance policies held the Group estimates the value of the compensation related to accident on installation, which took place in the Group entities.


Contingent assets
On 13 August 2015 the steam cracker unit accident in Unipetrol Group took place. Based on the insurance policies Unipetrol Group expects insurers to cover reconstruction costs of installations, which estimated at approximately PLN 0.6 billion translated using the exchange rate as at 31 December 2016 (representing CZK 3.9 billion), as well as lost business profits (business interruption), which estimated at approximately PLN 1.7 billion translated using the exchange rate as at 31 December 2016 (representing CZK 10.1 billion).
In 2016 Unipetrol Group recognized in other operating income (note 7.1.4) amounts of partial compensation received from insurers in the amount PLN 1,280 million. After consideration the above amount the value of contingent asset as at 31 December 2016 due to described above damage Unipetrol Group estimated in the amount of PLN 1 billion translated using the exchange rate of the 31 December 2016 (representing CZK 6.1 billion).
The final amount of compensation will depend on the final agreement with insurers.

Received cash by 31 December 2016 due to the described above compensations amounted to PLN 1,080 million translated using the exchange rate as at 31 December 2016 (representing CZK 6.6 billion).
The remaining part of partial compensation amount recognized in other operating income, Unipetrol Group received in January 2017.

On 17 May 2016, the accident on installation FCC (Fluid Catalytic Cracking) in the Kralupy refinery in Unipetrol Group took place. Based on the insurance policies, Unipetrol Group expects insurers to cover reconstruction costs which estimated at approximately PLN 49 million translated using the exchange rate as at 31 December 2016 (representing CZK 0.3 billion) as well as lost business profits (business interruption), which from the accident to the 31 December of 2016 estimated in the amount of approximately PLN 147 million translated using the exchange rate as at 31 December 2016 (representing CZK 0.9 billion). In  February 2017 Unipetrol Group signed with insurer the agreement related to partial compensation due to the accident on FCC based on which the Group will recognize in other operating income in the 1st quarter of 2017 the amount of PLN 158 million (representing USD 40 million translated using the exchange rate of the 31 December 2016).
The final amount of compensation will depend on the final agreement with insurers.

Production in the Kralupy refinery and the steam cracker unit in Unipetrol Group was restored in the 4th quarter of 2016.

Information on significant court proceedings including contingent liabilities is presented in note 8.

7.4.5. Excise tax guarantees

Excise tax guarantees and excise tax on goods and merchandise under the excise tax suspension procedure as at 31 December 2016 and as at 31 December 2015 amounted to PLN 2,066 million and PLN 1,815 million, respectively.

7.4.6. Related party transactions

In 2016 and 2015 and as at 31 December 2016 and as at 31 December 2015 were no transactions of related parties with members of the Management Board and the Supervisory Board of the Parent Company, other key executive personnel of the Parent Company and their relatives.

In 2016 were transactions of related parties with key executive personnel of the ORLEN Group companies with related parties in the amount of PLN 0.6 million, the main amount regarded purchase of marketing services from a person related with key personnel of the Anwil Group and ORLEN Południe Group in the amount of PLN 0.3 million and PLN 0.2 million, respectively. As at 31 December 2016 the balance of liabilities amounted to PLN 0.2 million.

In 2015 were transactions of related parties with key executive personnel of the ORLEN Group companies with related parties in the amount of PLN 0.4 million, the main amount regarded purchase of marketing services from a person related with key personnel of ORLEN Serwis in the amount of PLN 0.3 million.

ORLEN Group companies’ transactions and balances of settlements with related parties

  Sales Purchases
  2016 2015 2016 2015
Jointly- controlled entities 2 148 2 954 (58) (213)
   joint ventures 2 115 2 806 (35) (37)
   joint operations 33 148 (23) (176)
Associates 38 48 (5) (32)
  2 186 3 002 (63) (245)

 

  Trade and other receivables Trade and other liabilities
  31/12/2016 31/12/2015 31/12/2016 31/12/2015
Jointly- controlled entities 430 509 15 5
   joint ventures 415 508 3 4
   joint operations 15 1 12 1
Associates 15 17 - 8
  445 526 15 13

The above transactions with related parties include mainly sales and purchases of refinery and petrochemicals products and of services.
In 2016 and in 2015 there were no related party transactions in the Group concluded on other than an arm’s length basis.

7.4.7. Remuneration together with profit-sharing paid and due or potentially due to the members of the Management Board, the Supervisory Board of the Parent Company and other members of key executive personnel of the Parent Company and the ORLEN Group companies

  2016 2015
Remuneration of the Management Board Members of the Parent Company performing duties in the current year 13,5 13,5
   remuneration and other benefits 8,4 7,2
   bonus paid for the previous year 5,1 6,3
Bonuses potentially due to the Management Board Members of the Parent Company performing duties in the current year , to be paid in the next year 7,9 6,7
Remuneration and other benefits paid to the former Management Board Members of the Parent Company* 4,3 1,8
Remuneration and other benefits of the key executive personnel 209,9 177,5
   remuneration and other benefits of the key executive personnel of the Parent Company 44,4 37,1
   key executive personnel of the subsidiaries belonging of the ORLEN Group 165,5 140,4
Remuneration of the Supervisory Board Members of the Parent Company 1,4 1,5

* In 2016, bonus paid for the year 2015 and remuneration paid for severance payment and for non-competition; in 2015 remuneration paid for severance payment and for non-competition.

Remuneration of PKN ORLEN Management Board, PKN ORLEN Supervisory Board and other key executive personnel of PKN ORLEN and the Group entities includes short-term employee benefits, post-employment benefits, other long-term employee benefits and termination benefits paid, due and potentially due during the period.
On 24 January 2017 the Extraordinary General Meeting of Shareholders at which were adopted resolutions regarding rules of determining the PKN ORLEN Management Board and the Supervisory Board remuneration, took place. The full text of adopted resolutions is available on website: www.orlen.pl/EN/InvestorRelations/RegulatoryAnnouncements/Pages/Regulatory-announcement-no-14-2017.aspx

Bonus systems for key executive personnel of the ORLEN Group
The regulations applicable to the Management Board of PKN ORLEN , directors directly reporting to the Management Board of PKN ORLEN and other key positions of the ORLEN Group have certain common features. The persons subject to the above mentioned systems are remunerated for the accomplishment of specific goals set at the beginning of the bonus period, by the Supervisory Board for the Management Board Members and by the Management Board for the key executive personnel. The Bonus Systems are consistent with the Concern’s Values, so as to promote the cooperation between individual employees in view to achieve the best possible results for the ORLEN Group.
Bonus systems for the Management Board Members of the ORLEN Group companies in 2017 will be adapted to the conditions specified in the Act on the principles of determining the amount of remuneration for people managing certain companies of 9 June 2016 (Official Journal 2016, item 1202).

Remuneration regarding non-competition clause and dissolution of the contract as a result of dismissal from the position held
According to agreements the Management Board Members of PKN ORLEN are obliged to obey a non-competition clause for 6 or 12 months, starting from the date of termination or expiration of the contract. In the period, they are entitled to receive remuneration in the amount of six or twelve basic monthly remuneration, payable in equal monthly instalments. In addition, agreements include remuneration payments in case of dissolution of the contract because of dismissal from the position held. Remuneration in such a case is six or twelve basic monthly remuneration.
Directors directly subordinate to the Management Board of PKN ORLEN and the Management Board Members of the ORLEN Group companies are typically obliged to obey a non-competition clause for 6 months, starting from the date of termination or expiration of the contract. In the period, they receive remuneration in the amount of 50% of six-month basic remuneration, payable in 6 equal monthly instalments. Severance pay for termination of the contract by the Employer amounts to three or six times basic monthly remuneration.

The Management Board Members of the ORLEN Group companies’ contracts in 2017 will be adapted to the to the conditions specified in the Act on the principles of determining the amount of remuneration for people managing certain companies of 9 June 2016 (Official Journal 2016, item 1202).

7.4.8. Remuneration arising from the agreement with the entity authorized to conduct audit of the financial statements

  2016 2015
Remuneration of KPMG Audyt Sp. z o.o. in respect of the Parent Company 1,7 1,3
   audit and reviews of the financial statements 1,0 1,1
   additional services 0,7 0,2
Remuneration of KPMG Audyt Sp. z o.o. and KPMG member firms in respect of subsidiaries of the Capital Group 5,0 4,4
  audit of the annual financial statements and verification procedures 3,8 3,9
   additional services 1,2 0,5
  6,7 5,7

In the period covered by this consolidated financial statements the entity authorized to conduct audit of the ORLEN Group’s financial statements was KPMG Audyt Sp. z o.o. According to the agreement concluded on 30 May 2005 with subsequent amendments KPMG Audyt Sp. z o.o. executed the interim reviews and audits of separate and consolidated financial statements in years 2005-2016.

On 15 December 2016 the PKN ORLEN Supervisory Board has appointed „Deloitte Polska spółka z ograniczoną odpowiedzialnością spółka komandytowa” as the entity authorized to conduct the interim reviews and audits of separate financial statements of PKN ORLEN and consolidated financial statements of ORLEN Group for years 2017 and 2018 (with the possibility to extend the cooperation for further periods, subject to prior approval by the PKN ORLEN Supervisory Board).