Intangible assets and property, plant and equipment

Accounting policies

Intangible assets

Software – Acquired computer software licenses are recognized in the amount of costs incurred on the purchase and preparation of the software for use, taking into consideration accumulated amortization and impairment allowances. Further expenditure related to the maintenance of the computer software is recognized as expense when incurred.

Goodwill – Goodwill is recognized as the excess of consideration paid over the amount of identifiable assets acquired, liabilities assumed measured at fair value as at the acquisition date. Following the initial recognition, goodwill is measured at the initial value less any cumulative impairment allowances. Goodwill arising on acquisition of subsidiaries is recognized under “Intangible assets” and goodwill arising on acquisition of associates and joint ventures is recognized under “Investments in associates and joint ventures”. The test for goodwill impairment is carried out at least at the end of each year. Impairment is calculated by estimating the recoverable amount of the cash-generating unit to which the given goodwill relates. If the recoverable amount of the cash-generating unit is lower than its carrying amount, an impairment allowance is recognized.

Customer relations and value in force – As a result of a settlement of the transaction, two components of intangible assets that are recognized separately from goodwill, i.e. customer relations and value in force, representing the present value of future profits from concluded insurance contracts, were identified. These components of intangible assets are amortized using the declining balance method based on the rate of consumption of the economic benefits arising from their use.

Other intangible assets – Other intangible assets acquired by the Group are recognized at acquisition cost or production cost, less accumulated amortization and impairment allowances.

Development costs – Research and development costs are included in intangible assets in connection with future economic benefits and meeting specific terms and conditions, i.e. if there is a possibility and intention to complete and use the internally generated intangible asset, there are appropriate technical and financial resources to finish the development and to use the asset and it is possible to measure reliably the expenditure attributable to the intangible asset during its development which can be directly associated to the creation of the intangible asset.

Property, plant and equipment

Property, plant and equipment – are valued according to the purchase price or cost of production, less accumulated depreciation and impairment allowances.

Investment properties – are valued according to accounting principles applied to property, plant and equipment.

Capital expenditure accrued – Carrying amount of property, plant and equipment and intangible assets is increased by additional expenditure incurred during their maintenance.

Depreciation / amortization

Depreciation/amortization is charged on all non-current assets, whose value decreases due to the usage or passage of time, using the straight-line method over the estimated useful life of the given asset. The adopted depreciation/amortization method and useful lives are reviewed at least on an annual basis.

Depreciation of property, plant and equipment, investment properties and amortization of intangible assets begins upon commissioning the asset for use, and ends no later than at the time when:

1) the amount of depreciation or amortization charges becomes equal to the initial cost of the asset, or

2) the asset is designated for liquidation, or

3) the asset is sold, or

4) the asset is found to be missing, or

5) it is found – as a result of verification – that the expected residual value of the asset exceeds its (net) carrying amount, taking into account the expected residual value of the asset upon scrapping, i.e. the net amount that the Group expects to obtain at the end of the useful life of the asset, net of its expected costs to sell.

For non-financial non-current assets it is assumed that the residual value is nil, unless there is an obligation of a third party to buy back the asset, or if there is an active market which will continue to exist at the end of the asset’s period of use and when it is possible to determine the value of the asset on this market.

Costs relating to the acquisition or construction of buildings are allocated to significant parts of the building (components), when such components have different useful lives or when each of the components generates benefits for the Group in a different manner. Each component of the building is depreciated separately. Intangible assets with indefinite useful lives, which are subject to an annual impairment test are not amortized.

Impairment allowances on non-financial non-current assets

An impairment allowance is recognized if the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognized in the income statement.

Impairment allowances in respect of cash generating units first and foremost reduce the goodwill relating to those cash generating units (groups of units), and then they reduce proportionally the book value of other assets in the unit (group of units).

An impairment allowance in respect of goodwill cannot be reversed. In respect of other assets, the impairment allowance may be reversed if there was a change in the estimates used to determine the recoverable amount. An impairment allowance may be reversed only to the level at which the book value of an asset does not exceed the book value – less depreciation/amortization – which would be determined should the impairment allowance not have been recorded.

If there are impairment triggers for a group of assets, which do not generate cash flows irrespective of other assets or asset groups, and the recoverable amount of a single asset included in common assets cannot be determined, the Group determines the recoverable amount at the level of the cash-generating unit to which the asset belongs.

Operating lease – lessor

Initial direct costs incurred in the course of negotiating the operating lease agreements are added to the carrying amount of a leased asset and recognized over the period of the lease on the same basis as the rental income. Contingent lease payments are recognized as income in the period in which they become due. Lease payments receivable in respect of operating leases are recognized as revenue in the income statement on a straight-line basis over the period of the lease. The average agreement period is usually 36 months. The lessee bears service and insurance costs.

Estimates and judgements

Useful economic lives of property, plant and equipment, intangible assets and investment properties

In estimating the useful economic lives of particular types of property, plant and equipment, intangible assets and investment properties, the following factors are considered:

1) expected physical wear and tear, estimated based on the average period of use recorded to date, reflecting the normal physical wear and tear rate, intensity of use, etc.;

2) technical or market obsolescence;

3) legal and other limitations on the use of the asset;

4) expected use of the asset assessed based on the expected production capacity or volume;

5) other factors affecting useful lives of such assets.

When the period of use of a given asset results from a contract term, the useful economic life of such an asset corresponds to the period defined in the contract. If the estimated useful life is shorter than the period defined in the contract, the estimated useful economic life is applied. The adopted depreciation / amortization method and useful life for property, plant and equipment, investment properties and intangible assets are reviewed on an annual basis.

Depreciation /amortization periods applied by PKO Bank Polski SA Group:

Impairment allowances

At each balance sheet date, the Group makes an assessment of whether there is objective evidence of impairment of any non-financial non-current assets (or cash-generating units). If any such evidence exists, and annually in the case of intangible assets which are not amortized and goodwill, the Group estimates the recoverable amount being the higher of the fair value less costs to sell or the value in use of a non-current asset (or a cash-generating unit); if the carrying amount of an asset exceeds its recoverable amount, the Group recognizes an impairment loss in the income statement. The estimation for the above-mentioned values requires making assumptions, among other things, about future expected cash flows that the Group may receive from the continued use or disposal of the non-current asset (or a cash-generating unit). The adoption of different assumptions with reference to the valuation of future cash flows could affect the carrying amount of certain non-current assets.

Financial information

Intangible assets

With regard to the Group, a significant item of intangible assets relates to expenditure on the Integrated Information System (IIS). The total capital expenditure incurred for the IIS system in the years 2007–2017 amounted to PLN 921 million. The net carrying amount of the Integrated Information System (IIS) amounted to PLN 632 million as at 31 December 2017 (PLN 679 million as at 31 December 2016). The expected useful life of the IIS system is 17 years. As at 31 December 2017, the remaining useful life is 6 years.  

Goodwill

As at 31 December 2017, the Group performed mandatory impairment tests in respect of goodwill on the acquisition of Nordea Bank Polska SA. The impairment test is conducted by comparing the carrying amounts of Cash Generating Units (‘CGUs’) with their recoverable amount. Two CGUs were identified to which goodwill on acquisition of Nordea Bank Polska SA was allocated – the retail and corporate CGU.

The recoverable amount is estimated based on the value in use of the CGUs. The value in use is the present estimated value of future cash flows in 10 years, taking into consideration the residual value of the CGUs. The residual value of a CGU has been calculated by extrapolating the cash flow projections beyond the period of the forecast, using the growth rate adopted at a level of 2.7%. Cash flow projections are based on the assumptions included in the financial plan of the Bank for 2018. For the discounting of the future cash flows a discount rate of 8.16% was used, taking into account the risk-free rate and risk premium.

The impairment test performed as at 31 December 2017 showed a surplus of the recoverable amount over the carrying amount of each CGU and therefore no goodwill impairment was recognized.

The impairment test of PKO Życie Towarzystwo Ubezpieczeń SA has been developed on the basis of the present value of expected future cash flows for PKO Bank Polska SA including the residual value. Future cash flows were estimated on the basis prepared by the Company’s 10 year financial forecast.

Goodwill arising on the acquisition of PKO Leasing Pro SA by PKO Bank Polski SA was allocated to the entire entity PKO Leasing SA as a direct parent which took over the assets of PKO Leasing Pro SA as a result of the merger. The impairment test was carried out on the basis of the present value of expected future cash flows generated by PKO Leasing SA for 5 years, developed on the basis of the financial projections of the Company, assuming termination of its operations after this period.

Goodwill arising on the acquisition of Raiffeisen-Leasing Polska SA with its subsidiaries was allocated to a group of assets separated in the records of the PKO Leasing SA Group, constituting the assets of the acquired Raiffeisen-Leasing Polska SA Group. The impairment test was carried out using the discounted dividend method, taking into account the residual value, based on an 8-year financial forecast.

The impairment test of goodwill arising from the acquisition of PKO Towarzystwo Funduszy Inwestycyjnych SA was carried out on the basis of the present value of expected future cash flows for PKO Bank Polski SA, prepared by the Company’s management on the basis of a three-year financial forecast. The test takes into account the two variants of financial flows: only dividend as well as dividend and distribution fee for the sale of fund units of PKO TFI SA in the network of PKO Bank Polski SA, and in both cases includes the residual value.  

The impairment test of the goodwill of PKO BP BANKOWY PTE SA was carried out using the embedded value method according to which the value in use of the Company’s shares was established. The impairment test of the goodwill of PKO BP BANKOWY PTE SA was carried out using the embedded value method according to which the value in use of the Company’s shares was established. The test takes into account changes connected with the Act on the amendments to the act on pensions from the Social Insurance Fund and certain other acts, passed by the Sejm (the Polish Parliament) on 16 November 2016, which introduced a reduction in the compulsory minimum retirement age, establishing the right to retire at the age of 60 years for women and 65 years for men. The Act came into force as of 1 October 2017.

The goodwill arising from the acquisition of ZenCard Sp. z o.o. was allocated to the entire investment project (i.e. the company’s total value). The impairment test was carried out based on the current value of expected future cash flows generated by the company, taking into account the residual value, based on a 3-year financial forecast developed by the company’s management.

In the above-mentioned impairment tests concerning the subsidiaries of PKO Bank Polski SA, the future cash flows were discounted using a discount rate of 8.79%, taking into account a risk-free rate equal to the yield on 10-year treasury bonds as of the valuation date as well as the market risk premium and risk ratio determined for projects in PKO Bank Polski SA.

The valuation methods and forecast periods were adapted to the specific features of activities related to the assets or companies being valued.

The above-mentioned tests indicated no need for the recognition of impairment.

At the same time in 2017, consistently as in previous years, an impairment loss was recognized on goodwill resulting from the acquisition of shares in Qualia 2 Spółka z ograniczoną odpowiedzialnością – Nowy Wilanów Sp. k. in the amount of PLN 0.5 million, i.e. in proportion to the sold part of the cash-generating units to which goodwill has been allocated.

Property, plant and equipment

Operating lease – lessor

The average agreement period for operating lease agreements where the Group is a lessor is usually 36 months. The lessee bears service and insurance costs.

As at the balance sheet date the assets in lease under operating lease are as follows:

Calculation of estimates

The impact of change in the economic useful life of assets being subject to depreciation and classified as land and buildings, resulting in a change in the financial result, is presented in the table below (in PLN million):