FINANCIAL HIGHLIGHTS
PLN ’000 EUR ’000
GRUPA LOTOS S.A.
Year ended Dec 31 2011 Year ended Dec 31 2010 (restated) Year ended Dec 31 2011 Year ended Dec 31 2010 (restated) Sales revenue 27,289,314 18,124,675 6,591,463 4,526,190 Operating profit 603,398 606,305 145,745 151,410 Pre-tax profit 324,345 520,433 78,342 129,965
Net profit from continuing
operations 307,670 464,954 74,315 116,111
Total comprehensive income (111,611) 464,954 (26,959) 116,111
Net cash provided by/(used in)
operating activities 138,906 282,395 33,551 70,521
Net cash provided by/(used in)
investing activities (29,986) (407,232) (7,243) (101,696)
Net cash provided by/(used in)
financing activities (113,629) 401,470 (27,446) 100,257
Total net cash flow 21,079 273,685 5,091 68,346
Basic earnings per share
(PLN/EUR) 2.37 3.58 0.57 0.89
Diluted earnings per share
(PLN/EUR) - - - - PLN ’000 EUR ’000 As at Dec 31 2011 As at Dec 31 2010 (restated) As at Dec 31 2011 As at Dec 31 2010 (restated) Total assets 16,449,524 14,678,065 3,724,308 3,706,301 Equity 5,833,442 5,945,053 1,320,739 1,501,162
Items of the statement of financial position as at December 31th 2011, presented in Financial Highlights, were translated at the EUR mid-exchange rate quoted by the National Bank of Poland for December 31st 2011, i.e. EUR 1 = PLN 4.4168. Items of the statement of comprehensive income and the statement of cash flows for the period ended December 31st 2011, presented in the “Financial Highlights” table, were translated at the exchange rate of EUR 1 = PLN 4.1401 (the arithmetic mean of the mid-exchange rates quoted by the National Bank of Poland for the last day of each full month in the period January 1st – December 31st 2011).
Items of the statement of financial position as at December 31st 2010, presented in the “Financial Highlights” table, were translated using the EUR mid-exchange rate quoted by the National Bank of Poland for that date, i.e. EUR 1 = PLN 3.9603. Items of the statement of comprehensive income and the statement of cash flows for the year ended December 31st 2010, presented in “Financial Highlights”, were translated at the exchange rate of EUR 1 = PLN 4.0044 (the arithmetic mean of the mid-exchange rates quoted by the National Bank of Poland for the last day of each full month in the period January 1st – December 31st 2010).
(This is a translation of a document originally issued in Polish)
GRUPA LOTOS S.A.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31ST 2011
PREPARED IN ACCORDANCE WITH THE INTERNATIONAL FINANCIAL
REPORTING STANDARDS
NOTES TO THE FINANCIAL STATEMENTS 8
1. General information 8
2. Composition of the Management and Supervisory Boards 9
3. Approval of the financial statements 9
4. Information whether the Company is a parent or a major investor and whether it prepares
consolidated financial statements 10
5. Going concern 10
6. Duration of the Company 10
7. Balance-sheet date and the period covered by the financial statements 10
8. Functional currency and reporting currency 10
9. Basis of preparation of the financial statements 10
9.1 New standards and interpretations 11
9.2 Changes in accounting policies and correction of errors 12
10. Key accounting policies 13
10.1 Intangible assets 13
10.2 Property, plant and equipment 13
10.3 Tangible assets under construction 14
10.4 Leases 14
10.5 Shares in subsidiaries and associates 15
10.6 Impairment losses on non-financial non-current assets 15
10.7 Inventories 15
10.8 Trade and other receivables 15
10.9 Foreign currency transactions 16
10.10 Cash and cash equivalents 16
10.11 Accruals and deferrals 16
10.12 Equity 17
10.13 Provisions 17
10.14 Retirement severance payments and length-of-service awards 17 10.15 Assets for social purposes and liabilities of the Company’s Social Benefits Fund 17 10.16 Interest-bearing bank borrowings and other debt instruments 18
10.17 Borrowing costs 18
10.18 Government grants 18
10.19 Carbon dioxide (CO2) emission allowances 18
10.20 Taxes 18
10.20.1 Income tax 18
10.20.2 Value-added tax, excise duty and fuel charge 19
10.21 Financial assets 19
10.22 Impairment of financial assets 20
10.23 Derivative financial instruments 21
10.24 Hedge accounting 21
10.25 Trade and other payables 22
10.26 Recognition of revenue 22
10.27 Sales of products, goods for resale and services 22
10.28 Interest 23
10.29 Dividends 23
10.30 Material values based on the Management Board's professional judgement and estimates 23
10.31 Net earnings/(loss) per share 24
10.32 Contingent liabilities and receivables 24
10.33 Profit distribution for employee benefits and special accounts 24
10.34 Assets held for sale 24
11. Business segments 25
12. Income and expenses 26
12.1 Sales revenue 26
12.2 Other operating income 27
12.3 Finance income 27
12.4 Costs by type 27
16. Dividends 33 17. Property, plant and equipment and tangible assets under construction 34
18. Intangible assets 36
19. Non-current financial assets 38
20. Inventories 42
21. Trade and other receivables 44
22. Prepayments and accrued income 45
23. Current financial assets 45
24. Employee benefits 46
24.1 Retirement benefits and other post-employment benefits 46
24.2 Termination benefits 46
25. Cash and cash equivalents 47
26. Cash structure in the statement of cash flows 47
27. Assets held for sale 50
28. Share capital 50
29. Interest-bearing bank borrowings 52
30. Provisions 57
30.1 Change in provisions 57
31. Trade and other payables, accruals and deferred income, other liabilities, and other financial
liabilities 58
31.1 Trade payables, accruals and deferred income, and other liabilities 58
31.2 Other financial liabilities 59
31.3 Finance lease liabilities 59
32. Contingent liabilities and other guarantees and types of security 60 32.1 Promissory notes, bank guarantees or other forms of security issued by financial institutions at
the Company's request 60
32.2 Contingent investment commitments 62
32.3 Carbon dioxide (CO2) emission allowances 62
32.4 Material court, arbitration or administrative proceedings and other risks 62
33. Related parties 65
33.1 Related-party transactions 65
33.2 Entity with significant influence over the Company 66 33.3 Remuneration of the Management and the Supervisory Board members and information on
loans and other similar benefits granted to members of the management and supervisory staff 66 33.4 Remuneration paid or payable to other members of the key management staff 68 33.5 Other transactions with Members of the Company’s Management or Supervisory Boards, their
spouses, siblings, ascendants, descendants or other close persons 68 34. Information on the agreement with and remuneration payable to the qualified auditor of
financial statements, and information on the appointment of the qualified auditor to audit
the financial statements of Grupa LOTOS S.A. 69
35. Objectives and principles of financial risk management 70
36. Financial instruments 90
36.1 Fair value of financial instruments 94
36.2 Items of income, expenses, gains and losses disclosed in the statement of comprehensive
income by category of financial instrument 96
36.3 Sensitivity analysis with respect to market risk related to fluctuations in FX rates, interest rates and prices of carbon dioxide (CO2) emission allowances. 97
36.3.1 Sensitivity analysis with respect to market risk related to fluctuations in FX rates 97 36.3.2 Sensitivity analysis with respect to market risk related to fluctuations in interest rates 98 36.3.3 Sensitivity analysis with respect to market risk related to fluctuations in prices of carbon
dioxide (CO2) emission allowances 99
37. Employment structure 100
38. Other information 100
38.1 Special rights of the State Treasury and how these rights are exercised in companies 100 38.2 Implementation of the National Indicative Target (NCW) in accordance with the Act on
Biocomponents and Liquid Biofuels 101
39. Capital management 101
40. Material events subsequent to the balance-sheet date 102 41. Signatures of the Management Board members and the person responsible for keeping the
STATEMENT OF COMPREHENSIVE INCOME (PLN '000) Note Year ended Dec 31 2011 Year ended Dec 31 2010 (restated) Sales revenue 12.1 27,289,314 18,124,675 Cost of sales 12.4 (25,893,214) (16,839,383) --- --- Gross profit 1,396,100 1,285,292 Selling costs 12.4 (540,269) (450,087)
General and administrative expenses 12.4 (235,341) (216,586)
Other operating income 12.2 4,766 17,902
Other operating expenses 12.5 (21,858) (30,216)
--- --- Operating profit 603,398 606,305 Finance income 12.3 247,335 255,057 Finance expenses 12.6 (526,388) (340,929) --- --- Pre-tax profit/(loss) 324,345 520,433
Corporate income tax 13.1 (16,675) (55,479)
--- ---
Net profit from continuing operations 307,670 464,954
========= =========
Other comprehensive income
Cash flow hedge accounting (517,631) -
Income tax on other comprehensive income 13.1 98,350 -
--- ---
Other comprehensive income (net) (419,281) -
--- ---
Total comprehensive income (111,611) 464,954
========= =========
Net profit from continuing operations per share (PLN)
Weighted average number of shares
('000) 15 129,873 129,873
- basic 15 2.37 3.58
The Notes to the consolidated financial statements, presented on pages 8 to 103, are an integral part of the statements.
STATEMENT OF FINANCIAL POSITION
(PLN '000) Note Dec 31 2011 Dec 31 2010 (restated) Jan 1 2010 (restated) ASSETS Non-current assets
Property, plant and equipment 17 7,024,570 4,423,681 1,664,687
Tangible assets under construction 17 54,421 2,972,034 5,256,042
Intangible Assets 18 83,354 48,655 43,928
Non-current financial assets 19 1,208,537 1,045,271 1,066,339
Prepayments and accrued income 22 3,900 3,311 3,676
--- ---
---Total non-current assets 8,374,782 8,492,952 8,034,672
--- ---
---Current assets
Inventories, including: 20 5,637,321 4,298,500 2,894,236
- mandatory reserves 20 4,425,263 2,976,818 2,192,785
Trade
and other receivables 21 2,223,332 1,721,759 1,428,666
Current income tax receivable 13.3 73,512 - 71,622
Prepayments and accrued income 22 28,306 22,503 15,355
Current financial assets 23 82,730 127,438 103,883
Cash and cash equivalents 25 3,598 14,913 1,268
--- --- ---
Total current assets 8,048,799 6,185,113 4,515,030
--- --- ---
Assets held for sale 27 25,943 - -
========== ========== ==========
Total assets 16,449,524 14,678,065 12,549,702
========== ========== ==========
EQUITY AND LIABILITIES Equity
Share capital 28 129,873 129,873 129,873
Statutory reserve funds 1,311,348 1,311,348 1,311,348
Cash flow hedging reserve (419,281) - -
Retained earnings 4,811,502 4,503,832 4,038,878 --- --- --- Total equity 5,833,442 5,945,053 5,480,099 --- --- --- Non-current liabilities Interest-bearing borrowings 29 4,786,893 4,141,016 4,662,659 Long-term provisions 30 41,036 31,420 28,820
Deferred tax liabilities 13.4 23,182 104,869 61,929
Other financial liabilities 31.2 127,364 80,107 138,574
--- --- ---
Total non-current liabilities 4,978,475 4,357,412 4,891,982
--- --- ---
Current liabilities
Trade payables, accruals and deferred
income, and other liabilities 31.1 3,817,503 2,623,515 1,612,978
Current income tax payable 13.3 - 12,037 -
Interest-bearing borrowings 29 1,682,149 1,539,545 461,998
Short-term provisions 30 8,521 6,672 7,712
Other financial liabilities 31.2 129,434 193,831 94,933
--- --- ---
Total current liabilities 5,637,607 4,375,600 2,177,621
--- --- ---
Total liabilities 10,616,082 8,733,012 7,069,603
========== ========== ==========
Total equity and liabilities 16,449,524 14,678,065 12,549,702
STATEMENT OF CASH FLOWS (PLN '000) Note Year ended Dec 31 2011 Year ended Dec 31 2010 (restated) Cash flows from operating activities
Net profit from continuing operations 307,670 464,954
Adjustments:
Depreciation and amortisation 26 375,630 215,585
Foreign exchange (gains)/losses 319,275 172,706
Interest and dividends (142,065) (233,765)
(Gain)/loss from investing activities 20,921 6,165
Current income tax 13.1 16,675 55,479
Income tax paid (85,561) -
(Increase) in receivables 26 (501,573) (293,097)
(Increase) in inventories (1,338,821) (1,404,264)
Increase in liabilities and accruals and deferred income 26 1,084,945 1,110,830
Increase in provisions 26 11,465 1,560
(Increase) in prepayments and accrued income 26 (6,757) (7,148)
Settlement and valuation of financial instruments 109,725 193,390
Other adjustments 26 (32,623) -
---
---Net cash provided by/(used in) operating activities 138,906 282,395
---
---Cash flows from investing activities
Sale of non-current financial assets - 485
Sale of property, plant and equipment and intangible assets 715 6,248
Dividends received 12.3 240,479 251,936
Interest received 2,650 558
Repayment of loans advanced 71,877 1,100
Other cash inflows on financial assets - 6,606
Prepayments for tangible assets under construction 17 (3,315) (47,557)
Loans advanced (972) (21,816)
Purchase of non-current financial assets (144,677) (11,559)
Purchase of property, plant and equipment and intangible assets 26 (149,998) (593,233)
Other cash outflows on financial assets 26 (46,745) -
---
---Net cash provided by/(used in) investing activities (29,986) (407,232)
---
---Cash flows from financing activities
Increase in borrowings and other debt instruments 388,689 831,007
Repayment of borrowings and other debt instruments (308,483) (248,085)
Interest paid (87,038) (61,004)
Settlement of financial instruments 12.6 (106,730) (120,201)
Decrease in finance lease liabilities 26 (67) (247)
---
---Net cash provided by/(used in) financing activities (113,629) 401,470
---
---Effect of exchange rate fluctuations on cash held 25,788 (2,948)
========= =========
Change in net cash 26 21,079 273,685
========= =========
Cash at beginning of the period 26 (187,066) (460,751)
========= =========
Cash at end of the period 26 (165,987) (187,066)
========= =========
The Notes to the consolidated financial statements, presented on pages 8 to 103, are an integral part of the statements.
STATEMENT OF CHANGES IN EQUITY
(PLN '000) Note Share capital
Statutory reserve funds Cash flow hedging reserve Retained
earnings Total equity
Jan 1 2010
(restated) 129,873 1,311,348 - 4,038,878 5,480,099
--- --- --- --- ---
Total comprehensive income
Year ended Dec 31 2010 - - - 464,954 464,954
======== ========= ======== ========= =========
Dec 31 2010 129,873 1,311,348 - 4,503,832 5,945,053
======== ========= ======== ========= =========
Jan 1 2011 129,873 1,311,348 - 4,503,832 5,945,053
--- --- --- --- ---
Net profit from continuing operations
for the year ended Dec 31 2011 15 - - - 307,670 307,670
Other comprehensive income, net
for the year ended Dec 31 2011 - - (419,281) - (419,281)
======== ========= ======== ========= =========
Dec 31 2011 129,873 1,311,348 (419,281) 4,811,502 5,833,442
NOTES TO THE FINANCIAL STATEMENTS 1. General information
Grupa LOTOS S.A. (“the Company”) was established by virtue of a Notarial Deed dated September 18th 1991. On April 10th 2002, the Company was entered into the National Court Register maintained by the District Court of Gdańsk, XII Commercial Division of the National Court Register (currently the District Court for Gdańsk - Północ, VII Commercial Division of the National Court Register), under entry No. KRS 0000106150. The Company has been assigned Industry Identification Number (REGON) 190541636.
The Company’s registered address is ul. Elbląska 135, 80-718 Gdańsk, Poland.
In 2003, by virtue of its decision of May 28th 2003, the District Court of Gdańsk, XII Commercial Division of the National Court Register, changed the Company’s name from Rafineria Gdańska Spółka Akcyjna to Grupa LOTOS Spółka Akcyjna.
In accordance with the Company’s Articles of Association, the Company’s core business comprises production and trading activities, as well as provision of services, including in particular:
1) extraction of crude petroleum and natural gas (PKD 06),
2) manufacture and processing of coke and refined petroleum products (PKD 19), 3) manufacture of industrial gases (PKD 20.11),
4) manufacture of other inorganic basic chemicals (PKD 20.13), 5) manufacture of other organic basic chemicals (PKD 20.14), 6) manufacture of plastics in primary forms (PKD 20.16),
7) generation and supply of electricity, gas, steam, hot water and air for air-conditioning installations (PKD 35), 8) water collection, treatment and supply (PKD 36),
9) construction of utility projects for fluids, electricity and telecommunications (PKD 42.2), 10) electrical, plumbing and other construction installation activities (PKD 43.2),
11) wholesale of fuels and related products (PKD 46.71), 12) wholesale of chemical products (PKD 46.75), 13) freight rail transport (PKD 49.2),
14) transport via pipelines (PKD 49.5), 15) cargo handling (PKD 52.24),
16) warehousing and storage (PKD 52.1), 17) technical testing and analysis (PKD 71.2),
18) other research and experimental development on natural sciences and engineering (PKD 72.19).
The code of the Company’s core business according to the Polish Classification of Activities (2007) is PKD 1920Z – manufacture and processing of refined petroleum products. The Company operates in the segment of manufacturing and distribution of petroleum and chemical products.
The Company holds the following licences related to its core business:
- Licence for production of liquid fuels, issued by the President of the Polish Energy Regulatory Office on November 28th 1998 and extended until December 31st 2025 by virtue of the decision of the President of the Energy Regulatory Office of October 5th 2007,
- Licence for trade in liquid fuels, issued by the President of the Polish Energy Regulatory Office on December 23rd 1998 and extended until December 31st 2025 by virtue of the decision of the President of the Energy Regulatory Office of October 5th 2007,
- Licence for storage of liquid fuels valid until October 15th 2016, issued by the President of the Polish Energy Regulatory Office on October 10th 2006,
- Licence for generation of electricity in co-generation units, issued by the President of the Polish Energy Regulatory Office on September 29th 2000 and extended until September 1st 2018 by virtue of the decision of the President of the Polish Energy Regulatory Office of July 16th 2009,
- Licence for trade in electricity, issued by the President of the Polish Energy Regulatory Office on September 5th 2001 and extended until September 1st 2021 by virtue of decision of the President of the Polish Energy
2. Composition of the Management and Supervisory Boards
In the period from January 1st 2011 until the date of approval of these financial statements, the composition of the Management Board of Grupa LOTOS S.A. was as follows:
Paweł Olechnowicz – President of the Management Board, Chief Executive Officer, Mariusz Machajewski – Vice-President of the Management Board, Chief Financial Officer, Marek Sokołowski – Vice-President of the Management Board, Chief Operation Officer, Maciej Szozda – Vice-President of the Management Board, Chief Commercial Officer.
As at January 1st 2011, the composition of Grupa LOTOS S.A.'s Supervisory Board of the seventh term of office was as follows:
Wiesław Skwarko – Chairman of the Supervisory Board, Leszek Starosta – Deputy Chairman of the Supervisory Board, Oskar Pawłowski – Secretary of the Supervisory Board, Małgorzata Hirszel – Member of the Supervisory Board, Michał Rumiński – Member of the Supervisory Board, Rafał Wardziński – Member of the Supervisory Board, Ewa Sibrecht-Ośka – Member of the Supervisory Board, Rafał Lorek – Independent Member of the Supervisory Board.
On June 27th 2011, the General Meeting of Grupa LOTOS S.A. appointed the Company's Supervisory Board for the eighth term of office. The following persons were appointed to the Supervisory Board: Małgorzata Hirszel, Ewa Sibrecht-Ośka, Leszek Starosta, Oskar Pawłowski, Michał Rumiński and Rafał Wardziński. The General Meeting appointed Mr Wiesław Skwarko as the Chairman of the Supervisory Board. In accordance with the Company's Articles of Association, Mr Wiesław Skwarko was appointed to the Supervisory Board by the State Treasury.
On November 8th 2011, Mrs Ewa Sibrecht-Ośka submitted her resignation as Member of the Supervisory Board of Grupa LOTOS S.A.
As at December 31st 2011, the composition of the Supervisory Board of Grupa LOTOS S.A. of the eighth term of office was as follows:
Wiesław Skwarko – Chairman of the Supervisory Board, Rafał Wardziński – Deputy Chairman of the Supervisory Board, Oskar Pawłowski – Secretary of the Supervisory Board, Małgorzata Hirszel – Member of the Supervisory Board, Michał Rumiński – Member of the Supervisory Board, Leszek Starosta – Member of the Supervisory Board.
On January 27th 2012 Mr Rafał Wardziński, Deputy Chairman of the Supervisory Board of Grupa LOTOS S.A., submitted his resignation as member of the Supervisory Board of Grupa LOTOS S.A.
On February 29th 2012, the Extraordinary General Meeting of Grupa LOTOS S.A. resolved to change the composition of the Company's Supervisory Board and appointed Ms Agnieszka Trzaskalska and Mr Marcin Majeranowski as Members of the Supervisory Board, and removed from office Mr Leszek Starosta.
As at the date of approval of these financial statements, the composition of the Supervisory Board of Grupa LOTOS S.A. of the eighth term of office was as follows:
Wiesław Skwarko – Chairman of the Supervisory Board,
Marcin Majeranowski – Deputy Chairman of the Supervisory Board, Oskar Pawłowski – Secretary of the Supervisory Board,
Małgorzata Hirszel – Member of the Supervisory Board, Michał Rumiński – Member of the Supervisory Board, Agnieszka Trzaskalska – Member of the Supervisory Board,
3. Approval of the financial statements
4. Information whether the Company is a parent or a major investor and whether it prepares consolidated financial statements
Grupa LOTOS S.A. is the Parent of the LOTOS Group and a major investor in subordinates and their related parties, controlled by the Company. Accordingly, Grupa LOTOS S.A. prepared consolidated financial statements of its Group, which include these entities’ financial data for the year ended December 31st 2011, and which were approved for publication by the Management Board on April 17th 2012.
5. Going concern
These financial statements were prepared on the assumption that the Company would continue its business activities in the foreseeable future. As at the date of approving these financial statements, the Company’s Management Board has identified no facts or circumstances that might pose a threat to the Company continuing as a going concern in the 12 months following the balance-sheet date as a result of a planned or compulsory discontinuation or substantial limitation of its business activities.
6. Duration of the Company Duration of the Company is indefinite.
7. Balance-sheet date and the period covered by the financial statements
These financial statements of Grupa LOTOS S.A. comprise the balance-sheet data as at December 31st 2011 and comparative data as at December 31st 2010 and January 1st 2010. The statement of comprehensive income, statement of cash flows and statement of changes in the Company’s equity present the data for the period January 1st – December 31st 2011 along with the comparative data for January 1st – December 31st 2010.
The financial information as at December 31st 2011 and December 31st 2010, and for the years then ended, contained in these financial statements, was audited. The financial information as at December 31st 2010 and for the year then ended was audited and an opinion on it was issued by the auditor on April 11th 2011 (this does not refer to selected restated financial information, as mentioned in Note 9.2).
8. Functional currency and reporting currency
The functional and reporting currency of these financial statements is the Polish złoty (PLN). These financial statements are presented in the złoty (PLN), and all the figures are presented in thousands of złoty, unless indicated otherwise.
9. Basis of preparation of the financial statements
These financial statements were prepared in accordance with the International Financial Reporting Standards (“IFRS”) and the IFRS endorsed by the European Union which were in effect as at December 31st 2011.
The IFRS include the standards and interpretations approved by the International Accounting Standards Board (“the Board”, “IASB”) and the International Financial Reporting Interpretation Committee (“IFRIC”).
Amendments to IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction: Prepayments of a Minimum Funding Requirement (effective for periods beginning on or after January 1st 2011),
Revised IAS 24 Related Party Disclosures (effective for annual periods beginning on or after January 1st 2011),
Amendments introduced as part of the improvements to IFRSs published in May 2010 (IFRS 1, IFRS 3, IFRS 7, IAS 1, IAS 27, IAS 34 and IFRIC 13) – some changes are effective for annual periods beginning on July 1st 2010, some for annual periods beginning on January 1st 2011,
Amendments to IFRS 7 Financial Instruments: Disclosures: Transfers of Financial Assets (effective for annual periods beginning on or after July 1st 2011).
The Company has reviewed the new interpretations, standards and amendments to the existing standards. The new interpretations, standards and amendments to the existing standards which are in effect and have been adopted by the European Union, have no material impact on the accounting policies applied by the Company.
9.1 New standards and interpretations
The following new standards, amendments to existing standards and interpretations have been issued by the International Accounting Standards Board or the International Financial Reporting Interpretation Committee, but have not been adopted by the European Union:
IFRS 9 Financial Instruments: Classification and Measurement (effective for periods beginning on or after January 1st 2015),
Amendments to IAS 12 – Deferred Tax: Recovery of Underlying Assets (effective for annual periods beginning on or after January 1st 2012),
Amendments to IFRS 1 – First-Time Adoption of International Financial Reporting Standards: Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (effective for periods beginning on or after July 1st 2011).
IFRS 10 Consolidated Financial Statements (effective for periods beginning on or after January 1st 2013),
IFRS 11 Joint Arrangements (effective for periods beginning on or after January 1st 2013),
IFRS 12 Disclosure of Interests in Other Entities (effective for periods beginning on or after January 1st 2013),
IFRS 13 Fair Value Measurement (effective for periods beginning on or after January 1st 2013),
Amendment to IAS 19 Employee Benefits (effective for periods beginning on or after January 1st 2013),
Amendment to IAS 1 Presentation of Financial Statements – Presentation of Items of Other Comprehensive Income (effective for periods beginning on or after July 1st 2012),
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (effective for periods beginning on or after January 1st 2013).
Amendments to IFRS 7 – Financial Instruments: Disclosures: Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after January 1st 2013),
Amendments to IAS 32 Financial Instruments: Presentation: Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after January 1st 2014),
Amendments to IFRS 1 – First-Time Adoption of International Financial Reporting Standards: Government Loans (effective for annual periods beginning on or after January 1st 2013).
The Company has not decided to choose the option of early application of any of the above standards, interpretations, or amendments which have been published but have not yet become effective.
By the date of approval of these financial statements, the first phase of IFRS 9 Financial Instruments: Classification and Measurement (effective for annual periods beginning on or after January 1st 2015), had not been endorsed by the European Union. During the next phases, the International Accounting Standards Board will focus on hedge accounting and impairment. Implementation of the first phase of IFRS 9 will have an effect on the classification and measurement of the Company’s financial assets. The Company will analyse this effect along with the effect from the other phases of the project after their publication, in order to present a coherent picture.
The Management Board does not expect the introduction of the new standards and interpretations specified above to have any material impact on the accounting policies applied by the Company.
9.2 Changes in accounting policies and correction of errors
The accounting policies and calculation methods adopted by the Company in the preparation of these financial statements are the same as those used in the preparation of the financial statements for the year ended December 31st 2010 along with the comparative data, except to the extent that:
- As of January 1st 2011, the Company changed its accounting policies as regards the exchange rates used to translate business transactions denominated in foreign currencies. As of January 1st 2011, such business transactions will be recognised as at the transaction date (i) using the exchange rate actually applied on that date due to the nature of the transaction – in the case of sale or purchase of foreign currencies, and (ii) using the mid-exchange rate quoted for a given currency by the National Bank of Poland for a day preceding the transaction date – in the case of payment of receivables or liabilities where there is no rationale for using the actual exchange rate, and in the case of other transactions. Application of the new accounting policies will not affect the Company’s total net result, but will affect the values presented in the operating and financial parts of the statement of comprehensive income. Accordingly, in the statement of comprehensive income for the year ended December 31st 2010, cost of sales fell by PLN 298,039 thousand, finance income decreased by PLN 183,369 thousand, and finance expenses grew by 114,670 thousand.
Furthermore, starting as of January 1st 2011, the Company introduced cash flow hedge accounting with respect to foreign-currency denominated borrowings used to finance the 10+ Programme, designated as hedges of future USD-denominated petroleum product sales transactions, as described in more detail in Note 10.24. In the period January 1st – December 31st 2011, foreign exchange loss recognised in the cash flow hedging reserve amounted to PLN 517,631 thousand, before the PLN 98,350 thousand adjustment for a tax effect.
With effect as of January 1st 2011, the Company changed the rules for the presentation of measurement and settlement of financial instruments. The effect of measurement and settlement of financial instruments is presented on a net basis in finance income or expenses. This presentation change had no effect on the comparative data presented in these financial statements.
As at December 31st 2010, in its statement of financial position the Company reclassified certain items which had earlier been presented as restricted cash and cash equivalents into interest-bearing current borrowings. These items included the PLN 8,665 thousand (January 1st 2010: PLN 9,928 thousand) deposits securing the repayment of interest and principal payments under facilities used to finance the 10+ Programme. Furthermore, in the cash flow statement, restricted cash as at December 31st 2010 and cash flows from operating activities for the year ended December 31st 2010, changed by PLN (8,665) thousand and PLN 1,263 thousand, respectively. For the current presentation policy, see Note 29.
The Company has analysed the expected time of realisation of interest rate risk hedges (IRS) and has classified them as current or non-current assets and liabilities, based on the related cash flows. Previously, the Company classified interest rate risk hedges according to their expiry dates. The Company adjusted the comparative data. As at December 31st 2010, the value of current and non-current interest rate risk hedge (IRS) assets and liabilities amounted respectively to PLN 10,259 thousand, PLN 18,828 thousand, PLN 148,253 thousand and PLN 79,644 thousand.
The Company reclassified a portion of general and administrative expenses (fire brigade services, perpetual usufruct charges, property insurance, licence fees) to selling costs and cost of sales. The Company adjusted the comparative data. In the year ended December 31st 2010, general and administrative expenses fell by PLN 34,285 thousand, selling costs rose by PLN 1,092 thousand, and cost of sales increased by PLN 33,193 thousand.
10. Key accounting policies
These financial statements have been prepared in accordance with the historical cost principle, except with respect to financial derivatives, which are measured at fair value. The statement of cash flows is prepared using the indirect method.
The key accounting policies applied by the Company are presented below.
10.1 Intangible assets
Intangible assets are recognised if the Company is likely to obtain future economic benefits attributable directly to the assets. Intangible assets are initially recognised at cost, if they are acquired in separate transactions. Intangible assets acquired as part of a business combination are capitalised at their fair value on acquisition date. Intangible assets acquired as part of a business combination are capitalised at their fair value on acquisition date.
Intangible assets are amortised using the straight-line method over their estimated useful lives, which are as follows;
Patents, trademarks and licences 2 – 40 years
Other 2 – 14 years
The amortisation period and the amortisation method for an intangible asset are reviewed at the end of each financial year. Changes in the expected useful life or pattern of consumption of the future economic benefits embodied in the asset are reflected by changing the amortisation period or amortisation method, as appropriate, and are treated as changes in accounting estimates.
Useful lives are also reviewed each year and, if required, they are adjusted with effect from the beginning of the following financial year.
With the exception of capitalised expenditure on development, expenditure on intangible assets produced by the Company is not capitalised and is charged to expenses in the period in which it was incurred.
10.2 Property, plant and equipment
Items of property, plant and equipment other than land are measured at cost less accumulated depreciation and impairment losses.
Land is measured at cost less impairment losses. In the case of perpetual usufruct rights to land, cost is understood to mean the amount paid for the right to a third party. Perpetual usufruct rights to land obtained free of charge are capitalised in the accounting books.
Initial value of a tangible asset comprises its cost, which includes all costs directly related to its acquisition and bringing it to working condition for its intended use. The cost also includes the cost of replacing component parts of plant and equipment, which is recognised when incurred, if relevant recognition criteria are fulfilled. Costs incurred on an asset which is already in service, such as costs of repairs, overhauls or operating fees, are expensed in the reporting period in which they were incurred.
Upon acquisition, tangible assets are divided into components of material value to which separate useful economic lives can be assigned. Costs of major overhauls are also such components of tangible assets.
Tangible assets (including their components), other than land, are depreciated with the straight-line method over their estimated useful lives, which are as follows:
Buildings and structures 1–80 years
Plant and equipment 1–25 years
Vehicles 1–15 years
Other tangible assets 1–10 years
An item of property, plant and equipment may be removed from the statement of financial position if it is sold or if the company does not expect to realise any economic benefits from its further use. Any gains or losses on removal of an asset from the statement of financial position (calculated as the difference between net proceeds from its sale, if any, and the carrying amount of the asset) are disclosed in the statement of comprehensive income in the period of removal.
The residual value, useful economic life and depreciation method are reviewed on an annual basis and adjusted – if required – with effect from the beginning of the next financial year.
The costs of each overhaul are included in the carrying amount of property, plant and equipment, if relevant recognition criteria are fulfilled.
10.3 Tangible assets under construction
Tangible assets under construction are measured at the amount of aggregate costs directly attributable to the acquisition or production of such assets, including finance expenses, less impairment losses, if any. Tangible assets under construction are not depreciated until completed and placed in service.
Tangible assets under construction comprise tangible assets which are under construction or assembly and are recognised at cost.
Finance expenses capitalised in tangible assets under construction include costs of servicing the debt incurred to finance the assets, in accordance with the policy described in Note 10.17.
10.4 Leases
A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership onto the lessee. All other types of leases are treated as operating leases.
The Company as a lessor
Finance leases are disclosed in the statement of financial position as receivables, at amounts equal to the net investment in the lease less the principal component of lease payments for the given reporting period calculated based on a pattern reflecting a constant periodic rate of return on the lessor's net investment outstanding in respect of the finance lease.
Finance income from interest on a finance lease is disclosed in the relevant reporting periods based on a pattern reflecting a constant periodic rate of return on the lessor's net investment outstanding in respect of the finance lease.
Income from operating leases is recognised in the statement of financial position on a straight-line basis over the lease term.
Operating lease payments are recognised in the statement of comprehensive income on a straight-line basis over the lease term.
10.5 Shares in subsidiaries and associates
Shares in subsidiaries and associates are disclosed at cost less impairment losses. 10.6 Impairment losses on non-financial non-current assets
As at each balance-sheet date, the Company assesses whether there is any evidence of impairment of any of its assets. If the Company finds that there is such evidence, or if the Company is required to perform annual impairment tests, the Company estimates the recoverable value of the given asset.
The recoverable value of an asset is equal to the higher of the fair value of the asset or cash generating unit, less the transaction costs, or its value in use. The recoverable value is determined for the individual assets, unless a given asset does not generate separate cash inflows largely independent from those generated by other assets or asset groups. If the carrying amount of an asset is higher than its recoverable value, the value of the asset is impaired and an impairment loss is recognised up to the established recoverable value. In assessing value in use, the projected cash flows are discounted to their present value using a pre-tax discount rate which reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses related to the assets used in the continued operations are disclosed under the cost categories corresponding to the function of the asset with respect to which impairment has been identified.
As at each balance-sheet date, the Company assesses whether there is evidence that any impairment loss recognised in the previous periods with respect to a given asset is no longer necessary or should be reduced. If there is such evidence, the Company estimates the recoverable value of the given asset. The recognised impairment loss is reversed only when following the recognition of the last impairment loss there has been a change in the estimates used to determine the recoverable value of the asset. In such a case, the carrying amount of the asset is increased up to its recoverable value.
The increased value may not exceed the carrying amount of the asset that would have been determined (net of accumulated amortisation/depreciation) if the impairment loss related to that asset had not been recognised in the previous years. Reversal of an asset impairment loss is immediately recognised as income in the statement of comprehensive income. Following reversal of an impairment loss, in the subsequent periods the amortisation/depreciation charge related to the given asset is adjusted so that over the remaining useful life of that asset its revised carrying amount, less its residual value, can be regularly written off.
10.7 Inventories
Inventories are stated at the lower of cost and net realisable value.
Costs incurred in order to bring each inventory item to its present location and conditions are accounted for in the following manner:
materials and goods for resale – acquisition cost calculated on weighted average basis,
finished goods and work-in-progress – the cost of direct materials and labour and an appropriate portion of indirect production costs, established on the basis of normal capacity, calculated on weighted average basis.
Net realisable value is the selling price estimated as at the balance-sheet date net of VAT, excise duty and fuel charge, less any rebates, discounts and other similar items, and less the estimated costs to complete and costs to sell.
Mandatory stocks are disclosed as non-current assets given their turnover in a short term. 10.8 Trade and other receivables
Trade receivables, which typically become due and payable in 7 to 60 days, are recognised and carried at amounts initially invoiced, less impairment losses on doubtful receivables. Impairment losses on receivables are estimated when the collection of the full amount of receivables is no longer probable. Uncollectible receivables are written off through the statement of comprehensive income when recognised as unrecoverable accounts. If the effect of time value of money is significant, the value of receivables is determined by discounting the projected future cash flows to their present value using a pre-tax discount rate reflecting the current market
estimates of the time value of money. If the discount method is applied, an increase in receivables over time is recognised as finance income.
10.9 Foreign currency transactions
Since January 1st 2011, transactions denominated in foreign currencies have been reported in the functional currency of the Company (Polish złoty) as at the transaction date, using the following exchange rates:
1) the exchange rate actually applied on that date due to the nature of the transaction – in the case of sale or purchase of foreign currencies;
2) the mid-exchange rate quoted for a given currency by the National Bank of Poland for the day immediately preceding the transaction date – in the case of payment of receivables or liabilities where there is no rationale for using the exchange rate referred to in item 1, and in the case of other transactions.
The exchange rate applicable to purchase invoices is the mid-exchange rate quoted by the National Bank of Poland for the last business day immediately preceding the invoice date, and the exchange rate applicable to sales invoices is the mid-exchange rate quoted by the National Bank of Poland for the last business day immediately preceding the sales date.
Any foreign exchange gains or losses are posted to the statement of comprehensive income, except for foreign exchange gains and losses which are treated as a part of borrowing costs and are capitalised in property, plant and equipment (foreign exchange gains and losses on interest and fees and commissions). Non-monetary items measured at their historical cost in a foreign currency are translated at the exchange rate effective as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated at the exchange rate effective as at the date of determining the fair value.
The Company calculates realised and unrealised foreign exchange gains and losses separately and recognises the resulting total balance in the statement of comprehensive income under:
operating income or expenses: in the case of foreign exchange gains and losses related to settlement of trade receivables and liabilities,
finance income or expenses: in the case of borrowings, other debt instruments, investment commitments, and cash.
Exchange differences arising on valuation, as at the balance-sheet date, of short-term investments (e.g. shares, other securities, loans advanced, cash and other monetary assets) and receivables and liabilities denominated in foreign currencies, are charged to finance income or expenses and operating income or expenses.
Exchange rates applied for the purposes of balance-sheet valuation:
Mid-exchange rate quoted by
the NBP for: Dec 31 2011 Dec 31 2010
USD 3.4174 2.9641
EUR 4.4168 3.9603
10.10 Cash and cash equivalents
Cash in hand and at banks, as well as and non-current deposits held to maturity are measured at face value. Cash and cash equivalents as disclosed in the statement of cash flows comprise cash in hand and cash at banks, overdraft facilities as well as those bank deposits maturing within three months which are not treated as investment activity.
The amount of the provision for unused holidays is calculated on the basis of the difference between the balance of holidays actually used and the balance of holidays used established proportionately to the passage of time. 10.12 Equity
Equity is recognised in the accounting books by categories, in accordance with the rules set forth in applicable laws and in the Articles of Association.
The share capital of Grupa LOTOS S.A. is the share capital of the Company and is recognised at its par value, in the amount specified in the Company’s Articles of Association and in the relevant entry in the National Court Register.
10.13 Provisions
Provisions are recognised when the Company has an obligation (legal or following from commercial practice) resulting from past events, and when it is probable that the discharge of this obligation will cause an outflow of funds representing economic benefits, and the amount of the obligation may be reliably estimated. If the Company anticipates that the costs for which provisions have been made will be recovered, e.g. under an insurance agreement, the recovery of such funds is recognised as a separate item of assets, but only when such recovery is practically certain to occur. The cost related to a given provision is disclosed in the statement of comprehensive income net of any recoveries. If the effect of the time value of money is significant, the amount of provisions is determined by discounting projected future cash flows to their present value at gross discount rates reflecting the current market estimates of the time value of money and risks, if any, related to a given obligation. If the discount method is applied, an increase in provisions as a result of lapse of time is recognised as finance expenses. Provisions are charged against operating expenses, other operating expenses, or finance expenses, depending on what circumstances the future obligation relates to.
10.14 Retirement severance payments and length-of-service awards
In accordance with the company remuneration systems applied by Grupa LOTOS S.A., the Company’s employees are entitled to length-of-service awards and severance payments upon retirement due to old age or disability. Length-of-service awards are paid out after a specific period of employment. Old-age and disability retirement severance payments are one-off and paid upon retirement. Amounts of severance payments and length-of-service awards depend on the length of employment and the average remuneration. The Company recognises a provision for future liabilities under retirement severance payments and length-of-service awards in order to assign costs to the periods in which they are incurred. According to IAS 19 Employee Benefits, length-of-service awards are classified as other long-term employee benefits, while retirement severance payments – as defined post-employment benefit plans. The present value of the obligations as at each balance-sheet date is calculated by an independent actuary. The calculated value of the obligations is equal to the amount of discounted future payments, taking into account the employment turnover, and relate to the period ending at the given balance-sheet date. Information concerning demographics and employment turnover is sourced from historical data. Actuarial gains and losses are recognised in profit or loss.
Furthermore, the Company creates a provision for the benefits to which employees and other eligible persons are entitled as part of the Company Social Benefits Fund.
10.15 Assets for social purposes and liabilities of the Company’s Social Benefits Fund
The Act on Company’s Social Benefits Fund of March 4th 1994 (as amended), stipulates that an employer should set up a Social Benefits Fund if it employs over 20 full-time staff. In accordance with the statute and internal rules of procedure, the Company creates such fund and makes regular contributions to the fund, which are charged to costs. The purpose of the Social Benefits Fund is to subsidise social activities of the Company, finance loans to employees and other corporate social spending.
The Company offsets the Social Benefits Fund’s assets against its liabilities towards the Fund, as the Fund’s assets are not fully controlled by the Company. The excess of the Fund's liabilities over the Fund's assets is disclosed under other receivables. The excess of the Fund's assets over the Fund's liabilities is disclosed under other payables.
The Company recognises a provision for contributions to the Company's Social Benefits Fund made for the benefit of old-age and disability retirees covered by the Company's social aid programme (including current employees, who will become eligible for social aid in the future). The amount of the provision represents a sum of products of the expected undiscounted value of annual contribution in each successive year (taking into account
the expected growth of average remuneration in the national economy), the discounting factor for a given year and the likelihood that a given employee will remain with the Company until a given year. The amount of the provision is amortised over time against the length of service of a given employee at the Company.
10.16 Interest-bearing bank borrowings and other debt instruments
All bank borrowings and other debt instruments are initially recognised at cost, equal to the fair value, less cost of obtaining the borrowing.
Following initial recognition, interest-bearing borrowings and other debt instruments are measured at amortised cost, using the effective interest rate method. Amortised cost includes the cost of obtaining the borrowings as well as discounts or premiums obtained at settlement of the liability. Upon removal of the liability from the statement of financial position or recognition of value impairment, gains or losses are charged to the statement of comprehensive income.
10.17 Borrowing costs
Borrowing costs are disclosed as the costs of the period in which they were incurred, except for the costs which relate directly to the acquisition, construction or production of an asset being completed, which are capitalised as a part of the cost of such an asset. To the extent that the funds are borrowed specifically for the purpose of acquiring the asset being completed, the amount of the borrowing costs which may be capitalised as part of such asset is determined as the difference between the actual borrowing costs incurred in connection with a given loan in a given period and the proceeds from temporary investments of the borrowed funds.
To the extent that the funds are borrowed without a specific purpose and are later allocated for the acquisition of an asset being completed, the amount of the borrowing costs which may be capitalised is determined by applying the capitalisation rate to the capital expenditure on that asset.
The accounting policies with respect to capitalisation of currency exchange differences are described in Note 10.9, Foreign currency transactions.
10.18 Government grants
If there is reasonable certainty that the subsidy will be received and that all related conditions will be fulfilled, government grants are recognised at fair value.
If a subsidy concerns a cost item, it is recognised as income in matching with the expenses it is to compensate for. If it concerns an asset, its fair value is recognised as deferred income, and then it is written off annually in equal parts through statement of comprehensive income over the estimated useful life of the asset.
10.19 Carbon dioxide (CO2) emission allowances
The Company recognises carbon dioxide (CO2) emission allowances in its financial statements based on the net
liability method – the Company recognises only those liabilities that result from exceeding the limit of emission allowances granted, and the liability is recognised only after the Company actually exceeds the limit. The Company analyses the limits granted to it on an annual period basis. Income from the sale of unused emission allowances is credited against the statement of comprehensive income at the time of sale.
10.20 Taxes
For the purposes of financial reporting, the Company creates deferred tax liabilities using the balance-sheet liability method in relation to all temporary differences existing as at the balance-sheet date between the tax base of assets and liabilities and their carrying value as disclosed in the financial statements.
Deferred tax liabilities are recognised for all taxable temporary differences:
except to the extent that the deferred tax liabilities arise from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction which is not a business combination, and, at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
in the case of taxable temporary differences associated with investments in subsidiaries or associates, and interests in joint ventures, unless the investor is able to control the timing of the reversal of the temporary differences and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets are disclosed in relation to all deductible temporary differences, unused tax credits, and unused tax losses brought forward in the amount of the probable taxable income which would enable these differences, assets and losses to be used:
except to the extent that the deferred tax assets related to deductible temporary differences arise from the initial recognition of an asset or liability in a transaction which is not a business combination, and, at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
in the case of deductible temporary differences associated with investments in subsidiaries or associates and interests in joint ventures, the related deferred tax assets are recognised in the statement of financial position to the extent it is probable that in the foreseeable future the temporary differences will be reversed and taxable income will be generated which will enable the deductible temporary differences to be offset.
The carrying amount of deferred tax assets is revised as at each balance-sheet date and is subject to appropriate reduction to the extent it is no longer probable that taxable income sufficient for a partial or full realisation of the deferred tax assets would be generated.
Deferred tax assets and deferred tax liabilities are calculated using tax rates expected to be effective at the time of realisation of particular asset or release of particular provision, based on tax rates (and tax legislation) effective as at the sheet date or tax rates (and tax legislation) certain to be effective as at the balance-sheet date in the future. The effect of deferred tax on items posted directly to equity is recognised in equity through other comprehensive income.
The Company offsets deferred tax assets against deferred tax liabilities only if it holds an enforceable legal right to offset current tax receivables against current tax payables, and the deferred income tax is related to the same taxpayer and the same tax authority.
10.20.2 Value-added tax, excise duty and fuel charge
Revenue, expenses, assets and liabilities are recognised net of the VAT, excise duty and fuel charge:
except where the value added tax paid on the purchase of assets or services is not recoverable from the tax authorities; in such a case it is recognised in the cost of the given asset or as part of the cost item, and
except in the case of receivables and payables, which are recognised inclusive of the VAT, excise duty and fuel charge.
The net amount of the VAT, excise duty and fuel charge which is recoverable from or payable to tax authorities is carried in the statement of financial position as part of receivables or liabilities.
10.21 Financial assets
Financial assets are classified into the following categories:
Financial assets held to maturity,
Financial assets at fair value through profit or loss,
Loans and receivables,
Financial assets held to maturity are non-derivative financial assets with fixed or determinable payments and fixed maturities, which are quoted on an active market and which the Company has the positive intention and ability to hold to maturity, other than those:
designated at fair value through profit or loss upon initial recognition,
designated as available for sale,
which qualify as loans and receivables.
Financial assets held to maturity are measured at amortised cost using the effective interest method. Financial assets held to maturity are classified as non-current assets if they mature more than 12 months after the balance-sheet date.
A financial asset at fair value through profit or loss is a financial asset that meets either of the following conditions:
a) it is classified as held for trading. Financial assets are classified as held for trading if they:
have been acquired principally for the purpose of being sold in the near future,
are part of a portfolio of identified financial instruments that are managed together and for which there is probability of profit-taking in the near future,
are derivatives (except for those which are part of hedge accounting or financial guarantee contracts), b) it has been assigned to this category on initial recognition (in accordance with IAS 39).
Financial assets at fair value through profit or loss are measured at fair value, based on their market value on the balance-sheet date, without reflecting sales transaction costs. Any changes in the value of these instruments are recognised in the statement of comprehensive income as finance income or expenses. An entire contract can be designated as financial assets as at fair value through profit or loss if it contains one or more embedded derivatives. The above does not apply when an embedded derivative has no significant impact on the cash flows generated under the contract or when it is clear without an analysis or following a superficial analysis that if a similar hybrid instrument was first considered, separation of the embedded derivative would have been prohibited. Financial assets may be designated as financial assets as at fair value through profit or loss on initial recognition if the following criteria are met: (i) such designation eliminates or significantly reduces a measurement or recognition inconsistency (an accounting mismatch); or (ii) the assets are part of a group of financial assets that are managed and measured based on fair value, according to a well-documented risk management strategy; or (iii) the assets contain embedded derivatives which should be presented separately. Loans and receivables are financial assets with fixed or determinable payments not classified as derivatives and not traded on any active market. They are disclosed under current assets if they mature within 12 months from the balance-sheet date. Loans and receivables with maturities exceeding 12 months from the balance-sheet date are classified as non-current assets.
Financial assets available for sale are financial assets that are not derivative instruments, and have been classified as available for sale or do not belong to any of the previous three categories. Financial assets available for sale are recognised at fair value increased by the transaction costs which may be directly attributed to an acquisition or issue of a financial asset. If quoted market prices from an active market are not available and the fair value cannot be reliably measured using alternative methods, available-for-sale financial assets are measured at cost less impairment. The positive or negative differences between the fair value of available-for-sale financial assets (if they have a market price derived from an active regulated market or their fair value can be established in any other reliable manner) and their cost are recognised net of deferred tax in other comprehensive income. Impairment losses on available-for-sale financial assets are recognised in finance expenses.
Any purchase or sale of financial assets is recognised at the transaction date. On initial recognition, financial assets are recognised at fair value including – in the case of financial assets other than those at fair value through profit or loss – transaction costs directly attributable to the purchase.
Financial assets are derecognised when the Company loses control over contractual rights comprising particular financial instruments; this is usually the case when a financial instrument is sold or when all the cash flows related to a given instrument are transferred to a third party.
10.22 Impairment of financial assets
As at each balance-sheet date the Company determines whether there is objective evidence of impairment of a financial asset or a group of financial assets.