Significant Values Based on Professional Judgment and Estimates
Economic useful lives of fixed assets
The Group estimates the economic useful lives of individual items of property, plant and equipment and on this basis determines the depreciation rates for these items. The estimates are based on the expected economic useful lives of the assets. Depreciation rates may change in the event of circumstances causing a change in the expected useful life, which in turn affects the value of the depreciation charges and the net carrying amount of specific items of property, plant and equipment in future periods. The verification of the useful lives of property, plant and equipment conducted as at 31 December 2018 did not reveal the need to correct the previously applied depreciation rates.
Residual value of the rolling stock
As at 31 December 2018, the Group verified the residual value of its rolling stock. As a result of this verification, the Group decided to update the residual value of its rolling stock without valid technical railworthiness certificates, yet this change did not have a material impact on the value of the impairment loss on rolling stock. In respect of the other rolling stock items, the Group did not update their residual value, because the change did not have a material impact on the Group’s financial statements in the current period or in the subsequent periods.
Impairment of non-current assets
In the second quarter of 2018, certain redundant rolling stock assets were identified as part of the optimization processes executed in the AWT Group. After the analysis and taking into account the effects of the optimization processes an impairment loss on the redundant rolling stock assets was recognized in the amount of PLN 18 million.
As at 31 December 2018, the Group performed impairment tests with respect to two cash-generating units defined at the level of assets of the Parent Company and the AWT Group. The main indications of potential impairment of the Group’s selected assets were:
- the market value of the Group’s net assets continued to be lower than their carrying amount;
- significant uncertainty as to the implementation of the approved restructuring plan for the main business partner of the AWT Group and the observed changes on the Czech rail market.
Impairment tests have been performed on cash-generating units by determining their recoverable amount at the level of their value in use.
PKP CARGO S.A.
The recoverable value of analysed assets was determined on the basis of their estimated useful value using the net discounted cash flows method, in line with detailed financial projections developed for 2019–2028. In the opinion of the Parent Company’s Management Board, adopting financial projections for more than five years is reasonable because the property, plant and equipment used by the Parent Company have a considerably longer economic useful lives. Presented below are the key assumptions affecting the estimate of the value in use of the tested cash-generating units:
a) in the whole period covered by the detailed projection, the compound annual growth rate (CAGR) of operating revenue will be at 2.8% in real terms;
b) in the whole period covered by the detailed projection, capital expenditures will achieve annual operating revenue of 13.2% in real terms;
c) the after-tax weighted average capital cost (WACC) level will be at 6.03% in real terms;
d) after the detailed projection period, the growth of future cash flows was assumed at 0.0% in real terms.
Since the recoverable amount determined as a result of the test exceeded the carrying amount of the assets tested as at 31 December 2018, the Parent Company recognized no impairment loss for the assets.
The Parent Company’s Management Board did not identify any key assumptions which, when changed by reasonably expected values, would lead to impairment.
The recoverable value of analysed assets was determined on the basis of their estimated useful value using the net discounted cash flows method, in line with detailed financial projections developed for 2019–2028. In the opinion of the Group, adopting financial projections for more than five years is reasonable, because the property, plant and equipment used by the AWT Group have considerably longer useful lives and such projections enable a better depiction of the impact of expected changes in the Czech coal and rail market on the Group’s performance.
The key assumptions affecting the estimation of the value in use of the tested cash-generating unit were as follows:
a) the cash-generating unit was considered to be all owned by the AWT Group, used mainly to service customers on the Czech rail market;
b) the first three years of the forecast are based on the approved financial plans, for the years 2022–2028 a compound annual growth rate (CAGR) of 3.8% has been assumed in nominal terms (with a 2% projected inflation rate);
c) the after-tax weighted average cost of capital (WACC) in the detailed projection period will be at a level of 7.30% in nominal terms (5.20% in real terms). The WACC calculation takes into account a premium for specific risk, including that related to the main customer undergoing a restructuring process;
d) the increase in remunerations in the residual period was on the level of 0.15% in real terms; no increase was assumed for other parameters.
As at 31 December 2018, following an impairment test, the Group recognized an impairment loss in the amount of PLN 51.2 million.
Presented below is the estimated amount of impairment loss as at 31 December 2018 when changing only the following key parameters and keeping the other assumptions on a fixed level: