6. Major professional judgements and estimates

Determining whether the parent company controls an entity requires an assessment whether it has rights to direct relevant activities of the company. Determining what constitutes relevant activities of a company and which investor controls the company requires a judgement. The following factors are taken into consideration when assessing the situation and determining the nature of relationships: voting rights, relative voting power, dilution of voting rights of other investors and the scope of their participation in the process of appointing key management personnel or members of the Supervisory Board.

Assessment of the risk of assets impairment requires estimations with regard to the potential indicators of impairment, and in case of identification, carrying out impairment tests. Impairment tests are developed on the basis of macro- and microeconomic assumptions as well as financial projections for the subsequent years, whose realisation is not certain and is often beyond the Group’s control. The test assumptions, susceptibility analysis and recognised write-downs are presented in note 13.8.

Impairment tests carried out by the Group in the current and in the previous year under IAS 36 did not show any need to recognise write-downs of goodwill and intangible assets with an indefinite useful life.

In 2021 the Group did not carry out impairment tests for non-current assets with definite useful life, as there were no indicators of impairment.

As regards other non-current assets, i.e. property, plant and equipment, intangible assets subject to depreciation, and right-of-use assets, in 2020 the Group carried out impairment tests owing to the pandemic, but the tests did not reflect any impairment of the assets

The provisions for employee benefits comprise only jubilee bonuses, retirement and disability benefits, and death in service benefits. They were measured by a licensed actuary with the use of actuarial methodology. The assumptions adopted for that purpose are specified in note 24.2.

The analysis of the provisions for employee benefits sensitivity to a change in key assumptions is presented in note 24.1.

The valuation of other provisions and accruals, including provisions for annual bonuses, unused employee holiday and warranty repairs is based on the estimates of the Management Board. If the effect of the change of money in time is material, the provision amount corresponds to the present value of expenditure which, as expected, will be necessary to satisfy the obligation.

The Group recognises the deferred income tax asset on the basis of the assumption that, in the future, tax profit is to be obtained enabling its utilisation. A deterioration of the generated tax results could cause these assumptions to become unjustified in the future. An improvement of the generated tax results because of carrying out business in special economic zones may cause an increase in the related recognised asset in the future. Details concerning deferred income tax assets related to the tax abatement associated with the operations in special economic zones are presented in note 14.1.

Fair value of financial instruments for which there is no active market is measured with the application of appropriate valuation techniques. In order to select the applicable methods and assumptions, the Group is guided by a professional opinion. The method of fair value determination for individual financial instruments is specified in notes 10.4, 10.21, and 38.

The fair value of investment property is determined on the basis of the valuation carried out by a professional appraiser. The method of determining the fair value of investment property is described in note 19.

The Group assesses the value and the probability of obtaining future economic benefits in relation to the possessed inventories of tangible current assets held by it. In the case of circumstances substantiating that the amount obtained will be lower than the value of the said tangible assets, the Group recognises write-downs of inventories up to the realisable value. The information about the method of determining the value of inventories is presented in note 10.13.

The Group uses provision matrices to measure the expected write-downs of credit losses in reference to trade receivables. In order to determine the expected credit losses, trade receivables are grouped based on the probability of credit risk characteristics. The Group uses its historical data regarding credit losses, adjusted in the respective cases on the basis of information regarding the future. The information about the method of determining the value of receivables is presented in note 10.16. Moreover, should the Group identify any risk of non-realisability of any financial assets, it assesses the risk and recognises additional write-downs of receivables.

The Group runs a share option plan for the management staff. The fair value of the plan is determined as of the date of launching the plan by a licensed actuary with the use of actuarial methodology. In addition, as at each balance-sheet date, the Group assesses the probability of accomplishment of the particular non-market conditions for the take-up of shares, by making an appropriate adjustment of the number of the share options assumed in valuation.

The assumptions adopted for that purpose are specified in note 24.1.

Professional judgement is described in note 7.

The Group applies the percentage-of-completion method for the settlement of long-term contracts fulfilling the conditions of recognition of revenue over time, in accordance with IFRS 15. The method requires the Group to estimate the proportion of the costs of the works already completed to the total budgeted costs. If the percentage of completion were higher by 1% than the percentage estimated by the Company, the revenue would increase by PLN 213,000 (previous year: PLN 213,000). If the actual costs of construction contracts in progress as at the balance-sheet date at the time of their completion were higher than the budgeted costs by 1%, the gross result would decrease by PLN 35,000 (previous year: PLN 195,000).

Depreciation/amortisation rates are determined on the basis of the projected useful lives of property, plant and equipment and intangible assets. The assumptions adopted for that purpose are specified in notes 10.6 and 10.11. For a majority of the acquired trademarks, the Group determined the useful life as indefinite. When determining the useful life for trademarks, the Group took into account the following factors:

• the anticipated period of generating economic benefits from the utilisation of the trademarks;
• the anticipated period of having control over the trademarks;
• the level of future benefits from the utilisation of the trademarks;
• the anticipated activities of competitors and potential competitors.

Each year, the Group verifies the assumed useful lives based on current estimates.

Regulations concerning VAT tax, corporate income tax and social security contributions are subject to frequent changes. The binding regulations are also unclear, which results in different opinions as to the legal interpretation of tax regulations. Tax settlements and other areas of activities (e.g. customs or foreign exchange issues) may be subject to inspections of authorities that are entitled to impose penalties, and any additional liabilities resulting from such inspections may be immediately payable.

Consequently, the amounts recognised and disclosed in financial statements may change in the future as a result of final decisions of tax inspection authorities.

The Polish General Tax Code comprises provisions applicable to the General Anti-Abuse Rule (‘GAAR’). GAAR is to prevent the establishment and use of artificial legal arrangements created in order to avoid payment of tax in Poland. GAAR defines tax avoidance as an act committed primarily to achieve a tax advantage contrary, in the given circumstances, with the subject and purpose of the provisions of the Tax Act. In accordance with GAAR, such act does not result in a tax advantage if the mode of operation is artificial. The above regulations will call for a much more insightful judgement when assessing tax implications of individual transactions.

The Group recognises and measures current and deferred income tax assets or liabilities in accordance with IAS 12 Income Taxes on the basis of taxable profit (loss), the tax base, unused tax losses, unused tax credits and tax rates, taking into account the evaluation of the uncertainty related to tax settlements.