2.7.2. Detailed description of adjustments resulting from application of ifrs 16 and supplementary data

On the first application date, the Group recognizes a right-of-use asset for leases previously classified as operating leases under IAS 17, by measuring the right-of-use asset at an amount equal to the lease liability, adjusted by the amount of any prepayments or accrued lease payments relating to the lease, recognized in the consolidated statement of financial position immediately before the first application date.

According to the new standard, after the transition date, i.e. after 1 January 2019, right-of-use assets are measured at cost. The cost of a right-of-use asset consists of:

• the amount of initial measurement of the lease liability,
• any lease payments made on or before the commencement date, less any lease incentives received,
• initial direct costs incurred by the lessee in connection with the execution of a lease agreement,
• estimation of the costs to be incurred by the lessee in respect of an obligation to disassemble and remove the underlying asset or to refurbish the site on which it was located or to refurbish the underlying asset to the condition required by the terms of the lease, unless those costs are incurred to produce inventories.

The right to use an asset is treated in the same way as other non-financial assets and depreciated accordingly.

The Group intends to present its rights to the use of assets in a separate line item of the consolidated statement of financial position. This line item will also present assets used under the currently active finance lease agreements under IAS 17.

Upon adoption of IFRS 16, on the first application date, the Group will recognize a lease liability for leases previously classified as operating leases under IAS 17, measured at the present value of outstanding lease payments. For the purpose of disclosures relating to the impact of the application of IFRS 16, discounting was applied at the marginal interest rate as at 31 December 2018. At the initial recognition date, the lease payments included in the measurement of the lease liability will include the following types of payments for the right to use the underlying asset over the term of the lease:

• fixed lease payments less any lease incentives due,
• variable lease payments based on market indices,
• amounts expected to be paid as part of the guaranteed residual value of the leased item,
• exercise price of the purchase option, if it can be assumed with reasonable certainty that it will be exercised,
• payment of contractual penalties for termination of a lease if the term of the lease reflects the lessee’s exercise of the lease termination option.

In order to calculate discount rates for the purposes of IFRS 16, the Group has assumed that the discount rate should reflect the cost of financing that would be incurred to purchase the leased item. In order to estimate the discount rate, the Group took into account the following parameters of the agreement: type, duration, currency and potential margin that it would have to pay to financial institutions in order to obtain financing. As at 31 December 2018, the discount rates calculated by the Parent Company ranged (depending on the term of the contract) from 1.64% to 5.86% for contracts in PLN.

The application of IFRS 16 requires certain estimates and calculations to be made, which affect the measurement of finance lease liabilities and right-of-use assets. These include, among others:

• identification of agreements covered by IFRS 16,
• determination of the term of the agreements (also for agreements with an indefinite term or with a renewal option),
• determination of the interest rate used to discount future cash flows,
• determination of the purchase value,
• determination of the depreciation rate.

When applying IFRS 16 for the first time, the Group plans to use the following practical solutions / simplifications allowed by the standard:

• a single discount rate will be applied to a portfolio of leases with relatively similar characteristics,
• operating lease agreements with less than 12 months remaining in the term of the lease from the first application date, i.e. 1 January 2019, will be treated as short-term leases,
• right-of-use assets and lease liabilities will not be recognized for agreements concerning assets with a low unit initial value of a new asset (below PLN 20 thousand),
• the lease and non-lease components will not be separated in lease agreements relating to all classes of the underlying asset; they will be captured as a single lease component,
• initial direct costs will be excluded to the extent they refer to the measurement of right-of-use assets on the first application date, and
• a time horizon (post-factum knowledge) will be used to determine the term of a lease if the lease agreement contains an option to extend or terminate the lease.