30. Intangible assets and tangible fixed assets

Accounting policies

Intangible assets

SOFTWARE - Acquired computer software licenses are recognised 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 recognised as expense when incurred.

GOODWILL - Goodwill is recognised as the excess of consideration paid over the amount of acquired identifiable assets and liabilities measured at fair value as at the acquisition date. It is recognised at cost, less accumulated impairment. Following the initial recognition, goodwill is measured at the initial value less any cumulative impairment allowances. Goodwill arising on acquisition of subsidiaries is recognised under ‘Intangible assets’ and goodwill arising on acquisition of associates and joint ventures is recognised 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 recognised.

CUSTOMER RELATIONSHIPS AND VALUE IN FORCE - As a result of a settlement of the transaction in accordance with IFRS 3, two components of intangible assets that are recognised separately from goodwill, i.e. customer relationships and value in force, representing the present value of future profits from concluded insurance contracts, were identified. These components of intangible assets are amortized by declining balance method based on the rate of economic benefits consumption arising from their use.

OTHER INTANGIBLE ASSETS - Other intangible assets acquired by the Group are recognised 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.

Tangible fixed assets

TANGIBLE FIXED ASSETS - are valued according to the purchase price or cost of production, less accumulated depreciation and impairment allowances.

INVESTMENT PROPERTY - are valued according to accounting policies applied to tangible fixed assets

CAPITAL EXPENDITURE ACCRUED - Carrying amount of tangible fixed assets and intangible assets is increased by additional expenditures incurred during their useful life.

Depreciation/amortization

Depreciation/amortization is charged on all non-current assets, whose value decreases due to 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 tangible fixed assets, investment properties and amortization of intangible assets begins on the first day of the month following the month in which the asset has been brought into 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 should the expected present value on scrapping be not lower than 15% of the purchase price or cost of manufacture of the asset, and on condition that the residual value is not higher than PLN 10 000.

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 related to 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 allowance on non-financial non-current assets

An impairment allowance is recognised if the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised 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 amounts. 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 common assets, which do not generate cash inflows 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 that are incremental and directly attributable to negotiating and arranging a lease, are added to the carrying value of the leased asset during the period fixed in the lease agreement, on the same basis as in the case of lease income. Conditional lease payments constitute income when they are due. Lease payments receivable in respect of operating leases are recognised as revenues 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 tangible fixed assets, intangible assets and investment properties

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

1) expected physical wear and tear, estimated based on the average useful life 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 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 life is applied.

The adopted depreciation/amortization method and useful lives of tangible fixed assets, investment properties and intangible assets applied by the Group are reviewed at least on an annual basis.

Periods of amortization for the above groups used in the PKO Bank Polski SA Group.

Tangible fixed assetsPeriods
  
Buildings, premises, cooperative rights to premises (including investment properties)from 10 to 75 years
Leaseholds improvements (buildings, premises)from 1 to 20 years(or the period of the lease, if shorter) 
Machinery and equipmentfrom 2 to 15 years
Computer hardwarefrom 2 to 11 years
Means of transportfrom 3 to 8 years
  
Intangible assetsPeriods
  
Softwarefrom 2 to 20 years
Other intangible assetsfrom 1 to 20 years

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 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 recognises an impairment loss in the income statement. The estimation for the above-mentioned values requires making assumptions, i.a. 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

For the year ended 31 December 2016 SoftwareGoodwill Future profits on concluded insurance contractsCustomer relationshipsOther, includingcapital expenditureTotal
       
Gross carrying amount at the beginning of the period 4 068.2 1 368.4 140.6 86.5 321.0 5 984.7
Purchase13.9---468.9482.8
Transfers from capital expenditure326.6---(326.6)-
Liquidation and sale(8.9)---(1.6)(10.5)
Other, including taking up control over subsidiaries59.957.4-64.0(15.5)165.8
Gross carrying amount at the end of the period 4 459.7 1 425.8 140.6 150.5 446.2 6 622.8
       
Accumulated amortisation at the beginning of the period(2 379.8)-(41.4)(38.3)(62.9)(2 522.4)
Amortisation for the period(429.1)-(18.0)(13.9)(8.5)(469.5)
Liquidation and sale0.5----0.5
Other, including taking up control over subsidiaries(23.2)---9.3(13.9)
Accumulated amortisation at the end of the period (2 831.6) - (59.4) (52.2) (62.1) (3 005.3)
       
Impairment allowances at the beginning of the period (15.5) (169.7) - - (6.1) (191.3)
Recognised during the period-(4.1)   (4.1)
Other, including taking up control over subsidiaries(0.4)---0.50.1
Impairment allowances at the end of the period (15.9) (173.8) - - (5.6) (195.3)
       
Net carrying amount at the beginning of the period 1 672.9 1 198.7 99.2 48.2 252.0 3 271.0
Net carrying amount at the end of the period 1 612.2 1 252.0 81.2 98.3 378.5 3 422.2

For the year ended 31 December 2015 SoftwareGoodwill Future profits on concluded insurance contractsCustomer relationshipsOther, includingcapital expenditureTotal
       
Gross carrying amount at the beginning of the period 3 700.0 1 312.0 140.6 86.5 429.4 5 668.5
Purchase28.9---351.2380.1
Transfers from capital expenditure354.6---(354.6)-
Liquidation and sale----(55.2)(55.2)
Other, including taking up control over subsidiaries(15.3)56.4--(49.8)(8.7)
Gross carrying amount at the end of the period 4 068.2 1 368.4 140.6 86.5 321.0 5 984.7
       
Accumulated amortisation at the beginning of the period(1 972.7)-(18.3)(19.2)(138.9)(2 149.1)
Amortisation for the period(417.9)-(22.4)(19.1)(8.3)(467.7)
Other, including taking up control over subsidiaries10.8-(0.7)-84.394.4
Accumulated amortisation at the end of the period (2 379.8)-(41.4)(38.3)(62.9)(2 522.4)
       
Impairment allowances at the beginning of the period (15.4) (118.2) - - (6.1) (139.7)
Recognised during the period(0.2)----(0.2)
Other, including taking up control over subsidiaries0.1(51.5)---(51.4)
Impairment allowances at the end of the period (15.5) (169.7) - - (6.1) (191.3)
       
Net carrying amount at the beginning of the period 1 711.9 1 193.8 122.3 67.3 284.4 3 379.7
Net carrying amount at the end of the period 1 672.9 1 198.7 99.2 48.2 252.0 3 271.0

To the Group, a significant item of intangible assets relates to expenditures on the Integrated Information System (IIS). The total capital expenditures incurred for the IIS system during the years 2006–2016 amounted to PLN 1 079 million. Net carrying amount amounted to PLN 679.1 million as at 31 December 2016 (PLN 717.4 million as at 31 December 2015). The expected useful life of the IIS system is 17 years. As at 31 December 2016, the remaining useful life is 7 years.

Goodwill

Net goodwill31.12.201631.12.2015
   
Nordea Polska entities985.2985.2
Raiffeisen Leasing Polska SA and its subsidiaries57.4-
PKO Towarzystwo Funduszy Inwestycyjnych SA149.6149.6
PKO BP BANKOWY PTE SA51.251.2
Qualia 2 spółka z o.o. - Nowy Wilanów Sp.k.0.84.9
Assets taken over from Centrum Finansowe Puławska Sp. z o.o.7.87.8
   
Total 1 252.0 1 198.7

As at 31 December 2016 the Group performed mandatory impairment tests in respect of goodwill on the acquisition of Nordea Bank Polska SA, in accordance with the model developed based on the guidance of IAS 36. The impairment test is conducted by comparing the carrying amounts of Cash Generating Units (‘CGUs’) with their recoverable amounts. 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 1.5%. Cash flow projections are based on the assumptions included in the financial plan of the Group for 2017. For the discounting of the future cash flows the discount rate of 8.4% was used, taking into account the risk-free rate and risk premium. The impairment test performed as at 31 December 2016 showed a surplus of the recoverable amount over the carrying amount of each CGU and therefore no CGU impairment was recognised.

The remaining goodwill arising from the acquisition of companies Nordea Polska concerns the acquisition of the company ‘Nordea Polska Towarzystwo Ubezpieczeń SA’ (currently PKO Życie Towarzystwo Ubezpieczeń SA) and Nordea Finance Polska SA. This amount was assigned to the corporate and investment segment – cash generating units are as follow: entire company PKO Życie Towarzystwo Ubezpieczeń SA, and the entire company PKO Leasing SA (as the direct parent entity took over the assets of Nordea Finance Polska SA).

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.

The impairment test of PKO Leasing SA was carried out on the basis of the present value of expected future cash flows for 5 years, developed on the basis of the financial projections of the Company.

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 three-year financial forecast. The test takes into account the 2 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 key parameters which determined the value of goodwill as at 31 December 2016 were the assumptions relating to 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 will come into force as from 1 October 2017.

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 9.13%, 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 test for impairment of goodwill related to the assets acquired company Centrum Finansowe Puławska Sp. z o.o was carried out based on the fair value of the acquired property as a cash-generating unit to which goodwill has been allocated.

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

At the same time in 2016, consistently as in previous years, an impairment loss was recognised on goodwill resulting from the acquisition of shares of the company Qualia 2 Spółka z ograniczoną odpowiedzialnością – Nowy Wilanów Sp. k. in the amount of PLN 4.1 million, i.e. in proportion to the sold part of the cash-generating units to which goodwill has been allocated.

In 2015, as a result of acquisition of the credit union ‘Wesoła’ (SKOK ‘Wesoła’) the Group recognised goodwill and impairment loss of PLN 451 thousand.

Tangible fixed assets

For the year ended 31 December 2016Land and buildingsMachinery and equipmentAssets under constructionOtherTotal
      
Gross value of tangible fixed assets at the beginning of the period 2 712.6 1 849.8 264.7 906.4 5 733.5
Purchase2.222.2213.796.5334.6
Transfers from capital expenditure122.5193.2(369.3)53.6-
Liquidation and sale(93.8)(474.5)-(59.1)(627.4)
Other, including taking up control over subsidiaries208.819.8(2.7)184.1410.0
Gross carrying amount at the end of the period 2 952.3 1 610.5 106.4 1 181.5 5 850.7
      
Accumulated depreciation at the beginning of the period(1 005.8)(1 419.8)-(468.7)(2 894.3)
Depreciation for the period(100.2)(157.6)-(73.4)(331.2)
Other, including taking up control over subsidiaries68.9455.4-2.5526.8
Accumulated depreciation at the end of the period(1 037.1)(1 122.0)-(539.6)(2 698.7)
      
Impairment allowances at the beginning of the period (33.3) (2.6) (4.0) (17.1) (57.0)
Recognised during the period(12.3)--(0.3)(12.6)
Reversed during the period16.02.1 4.422.5
Other, including taking up control over subsidiaries(21.3)-0.21.9(19.2)
Impairment allowances at the end of the period (50.9) (0.5) (3.8) (11.1) (66.3)
      
Net carrying amount at the beginning of the period 1 673.5 427.4 260.7 420.6 2 782.2
Net carrying amount at the end of the period 1 864.3 488.0 102.6 630.8 3 085.7

For the year ended 31 December 2015Land and buildingsMachinery and equipmentAssets under constructionOtherTotal
      
Gross value of tangible fixed assets at the beginning of the period 2 574.3 2 042.4 171.0 824.9 5 612.6
Purchase30.717.7337.3107.4493.1
Transfers from capital expenditure77.9116.4(246.8)52.5-
Liquidation and sale(91.6)(240.4)(0.5)(32.4)(364.9)
Other, including taking up control over subsidiaries121.3(86.3)3.7(46.0)(7.3)
Gross carrying amount at the end of the period 2 712.6 1 849.8 264.7 906.4 5 733.5
      
Accumulated depreciation at the beginning of the period(967.0)(1 542.5)-(439.5)(2 949.0)
Depreciation for the period(99.1)(175.6)-(76.2)(350.9)
Other, including taking up control over subsidiaries60.3298.3-47.0405.6
Accumulated depreciation at the end of the period(1 005.8)(1 419.8)-(468.7)(2 894.3)
      
Impairment allowances at the beginning of the period (4.5) (0.1) (5.5) - (10.1)
Rrecognised during the period(46.0)(3.2)-(4.1)(53.3)
Reversed during the period34.30.8-0.335.4
Other, including taking up control over subsidiaries(17.1)(0.1)1.5(13.3)(29.0)
Impairment allowances at the end of the period (33.3) (2.6) (4.0) (17.1) (57.0)
      
Net carrying amount at the beginning of the period 1 602.8 499.8 165.5 385.4 2 653.5
Net carrying amount at the end of the period 1 673.5 427.4 260.7 420.6 2 782.2

  31.12.2016 31.12.2015
   
Compensation from third parties for impairment or loss of tangible fixed assets27.018.9
Off balance sheet value of plant and machinery used based on operating lease agreements and lease agreements with a purchase option77.174.9
Capital expenditure related to purchases of tangible fixed assets and intangible assets819.1787.3
 

Operating lease – lessor

Total value of future lease payments under irrevocable operating lease for the period:31.12.201631.12.2015
   
up to 1 year243.0233.6
from 1 year to 5 years448.8466.4
over 5 years140.6150.3
   
Total 832.4 850.3

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:

For the year ended 31 December 2016 Vehicles under operating leaseReal estate under operating leasePlant and machinery under operating leaseTotal
     
Gross amount as at the beginning of the period33.72.70.937.3
Taking up control over subsidiaries182.313.07.6202.9
Changes in the period49.161.4(0.9)109.6
Gross amount265.177.17.6349.8
Accumulated depreciation as at the beginning of the period0.8(0.2)(0.4)0.2
Taking up control over subsidiaries(48.7)(0.9)-(49.6)
Depreciation charge for the period(10.7)(1.3)(0.3)(12.3)
Other changes in depreciation, including foreign exchange differences4.7(3.2)(0.7)0.8
Accumulated depreciation(53.9)(5.6)(1.4)(60.9)
Impairment allowances as at the beginning of the period-(0.9)-(0.9)
Taking up control over subsidiaries(3.9)--(3.9)
Impairment allowances recorded during the period-(0.4)-(0.4)
Impairment allowances(3.9)(1.3)-(5.2)
     
Net amount 207.3 70.2 6.2 283.7

for the year ended 31 December 2015 Vehicles under operating leaseReal estate under operating leasePlant and machinery under operating leaseTotal
     
Gross amount as at the beginning of the period39.15.00.945.0
Changes in the period(5.4)(2.3)-(7.7)
Gross amount33.72.70.937.3
Accumulated depreciation as at the beginning of the period(6.0)(0.4)(0.2)(6.6)
Depeciation charge for the period(5.4)-(0.2)(5.6)
Transfers----
Other changes in depreciation, including foreign exchange differences12.20.2-12.4
Accumulated depreciation0.8(0.2)(0.4)0.2
Impairment allowances as at the beginning of the period-(0.6)-(0.6)
Impairment allowances recorded during the period-(0.3)-(0.3)
Impairment allowances-(0.9)-(0.9)
     
Net amount 34.5 1.6 0.5 36.6
 

Calculation of estimates

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

Change in useful economic life of assets being subject to depreciation and classified as land and buildings31.12.2016 31.12.2015 
 +10 years scenario -10 years scenario+10 years scenario -10 years scenario
Depreciation expense(45)313(38)233