32. Intangible assets and property, plant and equipment

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.

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 – 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 is charged on all non-current assets, whose value decreases due to the use 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:

• the amount of depreciation or amortization charges becomes equal to the initial cost of the asset, or
• the asset is designated for liquidation, or
• the asset is sold, or
• the asset is found to be missing, or
• 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.

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.

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.

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 2003–2018 amounted to PLN 1 495 million. The net carrying amount of the Integrated Information System (IIS) amounted to PLN 581 million as at 31 December 2018 (PLN 632 million as at 31 December 2017). The expected useful life of the IIS system is 17 years. As at 31 December 2018, the remaining useful life is 5 years.

As at 31 December 2018, the Group performed mandatory impairment tests in respect of goodwill on the acquisition of Nordea Bank Polska SA in accordance with the model compiled based on the guidelines included in IAS 36. 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 5 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 2.5%. 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 8.3% was used, taking into account the risk-free rate and risk premium.

The impairment test performed as at 31 December 2018 showed a surplus of the recoverable amount over the carrying amount of each CGU and therefore no CGU impairment was recognized.

The impairment test of goodwill which arose on the acquisition of PKO Towarzystwo Funduszy Inwestycyjnych SA was conducted using the discounted dividend method on the basis of the 2-year financial forecast prepared by the company, taking into account the residual value.

The impairment test of goodwill of PKO Życie Towarzystwo Ubezpieczeń SA was conducted on the basis of the present value of the expected future cash flows for PKO Bank Polski SA taking into account the residual value. The cash flows were assessed on the basis of the 10-year financial forecast prepared by the company.

The goodwill that arose on the acquisition of Raiffeisen-Leasing Polska SA and its subsidiaries by PKO Leasing SA was allocated to the portion of the assets of the PKO Leasing SA Group that was separately recorded in the accounts as assets of the Raiffeisen-Leasing Polska SA Group that was acquired. The impairment test was conducted using the discounted dividend method on the basis of the 8-year financial forecast prepared by the company, taking into account the residual value.

The impairment test of goodwill of PKO BP BANKOWY PTE SA was conducted using the embedded value method, according to which the value in use of the company’s shares was established. The test takes into account the changes introduced by the Act on the amendment to the Act on pensions from the Social Insurance Fund and certain other Acts which was enacted by the Polish Sejm on 16 November 2016 and which reduced the minimum retirement age, setting the right to retire at the age of 60 for women and 65 for men. The Act became effective on 1 October 2017.

The goodwill arising on the acquisition of PKO Leasing Pro SA by PKO Bank Polski SA was allocated to the whole of PKO Leasing SA as the immediate parent company, which acquired the assets of PKO Leasing Pro SA in the merger. The impairment test was prepared on the basis of the present value of the expected future cash flows generated by the company, estimated on the basis of the financial forecast prepared by the company for 5 years with the simultaneous fading out of activities thereafter.

The goodwill which arose on the acquisition of ZenCard sp. z o.o. was allocated to the whole of the investment project (i.e. the whole of the goodwill). The impairment test was conducted on the basis of the present value of the expected future cash flows generated by the company, which were estimated on the basis of a 3-year financial forecast, taking into account the residual value.

A discount rate of 7.84% which accounts for the risk-free rate on 10-year Treasury bond yields as at the date of the valuation and for market risk premium and risk ratio specified for PKO Bank Polski SA’s projects were used for discounting future cash flows in the impairment tests described above, regarding PKO Bank Polski SA’s subsidiaries.

The measurement methods and forecast periods were adapted to the specificity of the assets or companies measured.

Goodwill of ZenCard sp. z o.o. was fully written off as a result of the above impairment tests.