ORLEN ORLEN Group 2017
Integrated Report

Explanatory notes to the statement of profit or loss and other comprehensive income

GRI INDICATORS:
Capitals:

9.1. Explanatory notes to the statement of profit or loss and other comprehensive income

9.1.1. Sales revenues by assortments

SELECTED ACCOUNTING PRINCIPLES


Sales revenues
Sales revenues of goods and services are recognized, when the significant risks and rewards of ownership are transferred to the buyer and when the Group is no longer permanently involved in managing sold goods to the extent, that such function is usually carried out in relation to goods, to which there is right of ownership, and it does not exercise effective control over them. Revenues include received and due payments for delivered finished goods, merchandise, raw materials and services, decreased by the amount of any trade discounts and value added tax (VAT), excise tax and fuel charges. Revenues are measured at the fair value of the payment received or due. Revenues from the sale of finished goods, merchandise, raw materials and services are adjusted for profits or losses from settlement of cash flows hedging instruments related to the above mentioned revenues.
Revenues and costs from services, which beginning and end fall within different reporting periods, are recognized by reference to the stage of completion of the service, when the outcome of a contract can be valuated reliably, in other cases, revenues are recognized only to the extent of costs incurred to the date, but not higher than the costs that the Group expects to recover.


  2017 2016 % share
      2017 2016
Downstream Segment        
Medium distillates 28,325 22,714 29.7% 28.6%
Light distillates 12,071 10,513 12.7% 13.2%
Heavy fractions 5,691 3,786 6.0% 4.8%
Monomers 2,994 2,025 3.1% 2.5%
Polymers 2,557 1,135 2.7% 1.4%
PTA 1,399 1,571 1.5% 2.0%
Plastics 1,466 1,218 1.5% 1.5%
Fertilizers 805 821 0.8% 1.0%
Aromas 1,100 625 1.2% 0.8%
Other 5,017 4,794 5.2% 6.0%
  61,425 49,202 64.4% 61.8%
Retail Segment        
Medium distillates 16,471 14,305 17.3% 18.0%
Light distillates 13,086 11,838 13.7% 14.9%
Other** 3,793 3,698 3.9% 4.6%
  33,350 29,841 34.9% 37.5%
Upstream Segment        
NGL* 249 178 0.2% 0.3%
Crude oil 62 84 0.1% 0.1%
Natural Gas 196 172 0.2% 0.2%
Other 8 8 0.0% 0.0%
  515 442 0.5% 0.6%
Corporate Functions 74 68 0.2% 0.1%
  95,364 79,553 100.0% 100.0%

*NGL (Natural Gas Liquids).
**The line other in retail segment includes mainly sale of non-fuel merchandise.

In 2017 and 2016 no leading customers were identified in the Group, for which turnover individually would exceeded 10% of total revenues from sale of the ORLEN Group.

9.1.2. Sales revenues geographical division - disclosed by customer’s premises countries

  2017 2016 % share
      2017 2016
Poland 41,831 33,731 43.9% 42.4%
Germany 16,964 15,781 17.8% 19.8%
Czech Republic 13,085 9,861 13.7% 12.4%
Lithuania, Latvia, Estonia 7,797 6,216 8.2% 7.8%
Other countries 15,687 13,964 16.4% 17.6%
  95,364 79,553 100.0% 100.0%

The line other countries comprises mainly sales to customers from Switzerland, Ukraine, Hungary, Slovakia, Great Britain, the Netherlands, Canada and Austria.
 

9.1.3. Cost by nature

SELECTED ACCOUNTING PRINCIPLES


Costs
Cost of sales include costs of finished goods, merchandise, services and raw materials sold and adjustments related to inventories written down to net realizable value. Costs are adjusted for profits or losses from settlement of cash flow hedging instruments related to the above mentioned costs.
Distribution expenses include selling brokerage expenses, trading expenses, advertising and promotion expenses as well as distribution expenses.
Administrative expenses include expenses relating to management and administration of the Group as a whole.


  2017 2016 % share
      2017 2016
Materials and energy (57,277) (43,512) 64.7% 59.0%
Cost of merchandise and raw materials sold (20,500) (20,247) 23.2% 27.4%
External services (4,218) (4,073) 4.8% 5.5%
Employee benefits, incl.: (2,391) (2,206) 2.7% 3.0%

payroll expenses

(1,857) (1,740) 2.0% 2.3%

social security expenses

(407) (377) 0.5% 0.5%
Depreciation and amortisation (2,421) (2,110) 2.7% 2.9%
Taxes and charges (1,204) (1,129) 1.4% 1.5%
Other (524) (529) 0.5% 0.7%
  (88,535) (73,806) 100.0% 100.0%
Change in inventories 688 (232)    
Cost of products and services for own use 217 264    
Operating expenses (87,630) (73,774)    
Distribution expenses 4,327 4,125    
Administrative expenses 1,537 1,426    
Cost of sales (81,766) (68,223)    

9.1.4. Other operating income

  2017 2016
Profit on sale of subsidiaries - 63
Profit on sale of non-current non-financial assets 40 60
Reversal of provisions 55 25
Reversal of receivables impairment allowances 42 13
Reversal of impairment allowances of property, plant and equipment and intangible assets and other non-current assets 77 366
Penalties and compensations 842 1,449
Other 187 187

received energy certificates

132 49
  1,243 2,163


The line penalties and compensation in 2017 and 2016 includes mainly amounts of partial compensation received from insurers due to the steam cracker unit accident in Unipetrol Group of August 2015 in the amount of PLN 442 million and PLN 1 280 million, respectively and in 2017 amounts of compensation of property damage and loss of profit related to the accident on installation FCC (Fluid Catalytic Cracking) in the Unipetrol Group of May 2016 in the amount of PLN 211 million and penalties received for improper execution of the contract of the power plant CCGT in Włocławek in the amount of PLN 97 million.

In 2016, the reversal of impairment allowances of property, plant and equipment and intangible assets concerned refinery assets of the Unipetrol Group in the amount of PLN 315 million.

9.1.5. Other operating expenses

  2017 2016
Loss on sale of non-current non-financial assets (49) (39)
Recognition of provisions (46) (178)
Recognition of receivables impairment allowances (35) (25)
Recognition of impairment allowances of property, plant and equipment and intangible assets and other non-current assets (246) (221)
Penalties, damages and compensations (26) (133)
Other (166) (111)
  (568) (707)


Recognition of impairment allowances of property, plant and equipment and intangible assets in 2017 concerns mainly ORLEN Upstream Group’s companies in Poland.

As a result of an independent valuation of assets in the 4th quarter of 2017 an impairment allowances on exploration assets was recognized in the amount of PLN (97) million, while in the 3rd quarter of 2017, as a result of the decision to narrow of the search area, impairment allowances on exploration and recognition assets of mineral resources in the amount of PLN (43) million was recognized.
Recognition of impairment allowances of property, plant and equipment and intangible assets in 2016 concerned mainly impairment allowances of ORLEN Upstream Group’s exploration assets in the amount of PLN (72) million and ORLEN Oil assets in the amount of PLN (55) million. The line other in 2017 included costs recognized by ORLEN Południe related to the decision of the Head of the Małopolska Tax and Customs Office in Kraków determining the amount of excise tax liabilities for the previous years in the amount of PLN(75) million.

9.1.6. Finance income and costs

9.1.6.1. Finance income

  2017 2016
Interest 50 59
Net foreign exchange gain 645 -
Dividends 4 5
Settlement and valuation of derivative financial instruments 1,025 156
Reversal of receivables impairment allowances 2 2
Other 34 26
  1,760 248

9.1.6.2. Finance costs
 
  2017 2016
Interest (324) (216)
Net foreign exchange loss - (542)
Settlement and valuation of derivative financial instruments (1,330) (98)
Recognition of receivables impairment allowances (1) (2)
Other (45) (35)
  (1,700) (893)

The line interest in 2017 includes the recognition by ORLEN Południe interest from excise tax liabilities for the previous years in the amount of PLN (112) million.

9.1.6.3. Interest, net

  NOTE 2017 2016
Finance income and costs of net interest presented in statement of profit or loss and other comprehensive income 9.1.6.1
9.1.6.2
(274) (157)
Adjustments to profit before tax of net interest presented in statement of cash flows   204 219

interest paid concerning financing activities

  234 223

accrued interest concerning investing and financing activities

  (30) (4)
Net interest concerning operating activities not correcting profit before tax   70 (62)

9.1.6.4. Foreign exchange gain/(loss)
 
  NOTE 2017 2016
Foreign exchange gain/(loss) surplus presented in statement of profit or loss and other comprehensive income 9.1.6.1
9.1.6.2
645 (542)
Adjustments to profit before tax of foreign exchange differences presented in statement of cash flows   (233) 287

realized foreign exchange differences concerning investing and financing activities

  90 355

unrealized foreign exchange differences concerning investing and financing activities

  (363) (59)

foreign exchange differences on cash

  40 (9)
Foreign exchange differences concerning operating activities not correcting profit before tax   412 (255)

9.1.7. Tax expense

SELECTED ACCOUNTING PRINCIPLES


Income tax expenses (tax expense)

Income tax expenses (tax expense) include of current tax and deferred tax. Current tax expense is determined in accordance with the relevant tax law based on the taxable profit for a given period and is recognized as a liability, in the amount which has not been paid or receivable, if the amount of the current and prior periods income tax paid exceeds the amount due the excess is recognized.
Deferred tax assets and liabilities are accounted as non-current and are not discounted. They are offset on the level of particular financial statements of the Group companies when there is a legally enforceable right to set off the recognized amounts.


  2017 2016
Tax expense in the statement of profit or loss    
Current tax expense (1,329) (751)
Deferred tax (215) (396)
  (1,544) (1,147)
Deferred tax recognized in other comprehensive income    
Hedging instruments (175) 75
Fair value measurement of investment property as at the date of reclassification - (1)
Actuarial gains and losses 2 1
  (173) 75
  (1,717) (1,072)

    
9.1.7.1. Reconciliation of effective tax rate

  2017 2016
Profit before tax 8,717 6,887
Tax expense by the valid tax rate in Poland (19%) (1,656) (1,309)
Differences between tax rates 25 22

Lithuania (15%)

41 39

Germany (29%, 48%)

(18) (19)

Canada (27%)

2 2
Tax losses 31 213
Impairment allowances of property, plant and equipment and intangible assets 7 (90)
Investments accounted for under equity method 47 56
Other 2 (39)
Tax expense (1,544) (1,147)
Effective tax rate 18% 17%

As at 31 December 2017 and as at 31 December 2016, the Group had unsettled tax losses in the total amount of PLN 314 million and PLN 410 million, respectively mainly relating to the Unipetrol Group, and the Upstream Group, for which no deferred tax asset was recognized due to the lack of certainty regarding the possibility of their realization in the future. The possibility of settlement of the above tax losses will expire by 2022.

9.1.7.2. Deferred tax

  31/12/2016 Deferred tax recognized in profit or loss Deferred tax recognized in other comprehensive income Exchange differences on translating foreign operations 31/12/2017
Deferred tax assets          
Impairment allowances 495 (60) - (1) 434
Provisions and accruals 222 96 - (1) 317
Tax losses 493 (153) - (18) 322
Valuation of derivative financial instruments 78 18 (77) - 19
Other (30) 136 2 1 109
  1,258 37 (75) (19) 1,201
Deferred tax liabilities          
Temporary differences related to non-current assets 1,772 197 - (3) 1,966
Unrealized foreign exchange gains - 14 - - 14
Valuation of derivative financial instruments - 4 98 - 102
Other 128 37 - - 165
  1,900 252 98 (3) 2,247
  (642) (215) (173) (16) (1,046)

 

  31/12/2015 Deferred tax recognized in profit or loss Deferred tax recognized in other comprehensive income Exchange differences on translating foreign operations 31/12/2016
Deferred tax assets          
Impairment allowances 779 (286) - 2 495
Provisions and accruals 306 (85) - 1 222
Tax losses 189 304 - - 493
Valuation of derivative financial instruments 10 (7) 75 - 78
Other 138 (168) - - (30)
  1,422 (242) 75 3 1,258
Deferred tax liabilities          
Temporary differences related to non-current assets 1,542 223 - 7 1,772
Other 189 (69) - 8 128
  1,731 154 - 15 1,900
  (309) (396) 75 (12) (642)

As at 31 December 2017 deferred tax assets and liabilities amounted to PLN 49 million and PLN 1,095 million, respectively. 

9.1.7.3. Income tax (paid)

  NOTE 2017 2016
Tax expense on profit before tax 9.1.7.1 (1,544) (1,147)
Change in deferred tax asset and liabilities   404 333
Change in current tax receivables and liabilities   (328) 420
Deferred tax recognized in other comprehensive income 9.1.7.2 (173) 75
Liability for withholding tax   57 -
Foreign exchange differences   (19) (17)
    (1,603) (336)

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