The key assumptions concerning the future as well as other key sources of uncertainty occurring at the reporting date, that pose a significant risk of material adjustment to the carrying amounts
of assets and liabilities within the next reporting period, are described below. The parent company has based its assumptions and estimates concerning the future on the data available when the financial statements were prepared.
However, the existing circumstances and assumptions about future developments may change due to market changes or circumstances beyond the control of the company. Such changes are reflected in estimates and assumptions when they occur.
At each reporting date, the Group determines whether there is objective evidence that the interest in its associates is impaired, in accordance with IAS 36. To do this, the Group analyses the indications of impairment. Significant objective indicators principally include gross financial problems of an entity, occurrence of significant, external, negative for an entity, changes in technology, markets, economy or laws in the company’s place of business.
Following the prudence principle, and accounting for the indicators which contribute to the impairment loss of investment according to IAS 36, at the end of the reporting period the Group presents its revalued interests in associates and subsidiaries. .
As at each reporting date the Group assesses whether there are any indications of impairment of assets and, if required, conducts an impairment test.
As at each reporting date the Group assesses the indicators of impairment of assets, coming from external and internal sources of information. When it is ascertained that there is at least one indication of impairment, further stages of the assets revaluation procedure are performed. Particular attention must be paid to the assets which value has already been adjusted in earlier periods by impairment provisions, and those which value is the most sensitive to occurrence of indicators of impairment.
The impairment test procedure requires estimating recoverable amount and comparing it with the asset’s carrying amount. The recoverable amount i is set by comparing and choosing the higher of an asset’s fair value less costs of disposal and its value in use. The Group assesses the impairment on the level of an individual asset and also on the level of a group of related assets or assets that jointly contribute to cashflow generating. A test for a group of assets is performed on the level of a cash generating unit.
Assessing the probability of obtaining future economic benefits, basing on reasonable and proven assumptions the parent company of the Group assessed whether there were any indications that the recognised in earlier periods impairment losses, relating to some property, plant and equipment items, were justified. In the opinion of Management of the parent company, the value of those items estimated in earlier periods has not changed and there are no grounds for reversing the impairment.
Fair value of the financial instruments for which there is no active market is established using appropriate valuation techniques. In the selection of appropriate methods and assumptions an entity of the Group is guided by professional judgement.
Fair value of assets or liabilities is measured using observable market data to the possible extent. When it is not possible to use quoted market prices to measure fair values of assets or liabilities, external chartered valuers are involved to perform the valuation.
The Group verifies annually the residual value, depreciation methods and expected useful lives of fixed tangible assets which are subject to depreciation.
In the opinion of the Management, fixed tangible assets are used evenly. Depreciation charges are calculated by estimating the assets useful economic lives and even distribution of the amount of depreciation.
Fixed tangible assets are checked in order to ascertain the correctness of the assumed useful lives, and the following is assessed:
Furthermore, consultations are carried out with persons responsible for the use of fixed assets, with the users and industrial experts. After the review made as at 31 December 2017, it was estimated that the useful lives of assets adopted by the Group for the purpose of depreciation reflect the expected period of obtaining future economic benefits by those assets.
The Group recognises a deferred income tax asset basing on the assumption that the taxable profit will be available against which it can be utilized. Future deterioration of taxable income could make the assumption unjustified.
Deferred tax assets are measured at the tax rates to be applied at the time when the asset is realized, based on tax laws applicable at the date of preparation of the financial statements.
The provision for employee benefits was measured using the actuarial methods.
The technical assumptions, calculation methodology and analysis of changes in the amount of employee benefits liabilities (retirement and other pension severance pay) adopted for the end of 2015 have not essentially changed.
Change in the provision for employee benefits during the period results from recognition of projected value of benefits calculated by an independent actuary as at the last day of the financial year.
As at the end of the reporting period the entities of the Group assessed whether there was any indication that the inventories might have been impaired. Basing on the outcome of inspection of stocks and the analysis of data from rotation records it is ascertained whether the value in use or trading value of inventories has impaired (partially or fully). This justifies impairment of the asset to reduce its carrying value to its net realizable price. The Company determines a reliable net selling price for each type or each item of inventories.
Regulations related to tax on goods and services, corporate income tax and charges relating to social insurance are subject to frequent changes. These frequent changes are the cause of the lack of suitable reference, incoherent interpretations and few set precedents to be applied. The applicable laws also include ambiguities which are the cause of differences of opinions as to legal interpretation of tax regulations, both among government agencies themselves and between government agencies and enterprises.
Tax settlements and other areas of activity (such as duty or foreign currency issues) can be the subject of inspection by the bodies authorized to impose severe penalties and fines, and any additional tax liabilities resulting from these inspections have to be paid together with high interest. Because of these circumstances tax risk in Poland is greater than in the countries with more mature tax systems.
Consequently, amounts presented and disclosed in financial statements may change in the future in result of a final decision of a tax inspection body.
As of 15 July 2016 some changes were introduced to the Tax Ordinance Act with the purpose of accounting for the provisions of the General Anti-Avoidance Clause (GAAR). GAAR is intended to prevent the creation and use of artificial legal arrangements to avoid payment of tax Poland. The GAAR defines tax avoidance as an act carried out primarily in order to achieve a tax benefit, contrary in the circumstances to the object and goal of a provision of a tax act. According to GAAR such an act shall not result in a tax benefit, if the mode of action was not genuine Any occurrence of: (i) an unjustified split of operations, (ii) involvement of intermediary entities without any economic or business justification, (iii) elements that compensate or exclude each other and (iv) other acts that lead to a result similar to the above may be assessed as premises of artificial actions subject to GAAR. The new regulations will require more profound judgement when the tax effects of a transaction are assessed.
The GAAR clause shall be applied for transactions concluded after it has entered into force and to transactions concluded before the GAAR clause entered into force but for which the benefits have been or still are obtained after its entry into force. Implementation of the above regulations will allow Polish tax inspection bodies to challenge taxpayers’ legal arrangements and agreements such as restructuring or reorganization of the group.
As at 31 December 2017 the parent company assessed whether there were any indications from external and internal information sources that the assets may be impaired. According to IAS 36 para. 12(d) there are indications that an asset may be impaired when the carrying amount of the net assets of the entity is more than its market capitalization (book value of ELEKTROBUDOWA shares as at 31 December 2017 was 90.77 PLN, while market value 77.50 PLN).
The Management of the parent company has a test for impairment performed and for this purpose estimated the recoverable amount of the assets of the parent company ELEKTROBUDOWA SA and the subsidiary ENERGOTEST sp. z o.o. The results of the test for the assets have shown that the recoverable amount was more than the carrying amount of the tested assets, therefore there were no grounds for impairment loss to be recognized for the assets.
According to the description in Note 4.23, the preferred by the Group method of measuring the value of goods and services which are transferred to customers over time is the input method (method of share of costs incurred until the date of revenue recognition in the total cost of service provision). In the case of this method, revenue from performance of long-term contracts, in the period from contract conclusion until the balance sheet date – after deducting the revenue which had impact on the financial result in prior reporting periods – is established according to the stage of completion measured by the share of costs incurred from the date of concluding the contract until the revenue is recognized in total costs of the service.
Contract budgets are the basic element which enables calculation of sales revenue. Contract budgets are subject to formal process of updating (revision) based on current information, and are prepared by competent teams, substantially responsible for performance of the applicable area basing on knowledge and experience. If, between formal revisions of a budget, any events occur which have significant impact on the outcome of the contract, the amount of total revenue or costs of the contract may be updated earlier.
If the estimate of total costs remaining to be incurred, relating to the contracts in progress, increased compared with the estimated costs of the Group, the amount of revenue would be decreased.
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