PZU Group companies are parties to lease agreements, both as lessors and as lessees.
An agreement is a lease or comprises a lease if it transfers the right to control the use of an identified asset for a specific period in return for a fee.
On the date when the leased asset is available for use, the PZU Group recognizes the right-of-use asset and the lease liability. Pursuant to item 4 of IFRS 16, the PZU Group does not apply this standard to intangible assets.
The lease period is an irrevocable period of use of an asset, determined taking into consideration:
Assessing the probability of exercise of the aforementioned options, the company takes into account all material facts and circumstances which constitute an economic incentive to exercise the option to extend the lease and or not to exercise the option to terminate the lease.
The PZU Group determines the lease period for agreements for an indefinite term taking into account the economic factors, the existing practice and the available information which may be helpful in determining the period of use of the asset. To determine the lease period, the PZU Group uses professional judgment. In particular, for the perpetual usufruct right to land, the lease period is determined as the time remaining from the date of implementation of IFRS 16 or from the date of purchase of the perpetual usufruct right to land (of acquired after 1 January 2019) until the date of expiry of such right.
On initial recognition:
The PZU Group recognizes assets and liabilities in respect of lease at a net amount. The VAT amount is recognized in expenses of the current period.
Lease payments are discounted using the interest rate implicit in the lease, if it can be easily determined, or the lessee’s marginal interest rate.
The lessee’s marginal rate is calculated as the sum of the risk-free rate and fixed risk spread. For all contracts ending on the same date and with a fixed amount of monthly payments (this group includes most lease contracts in the PZU Group) a fixed contract discount rate has been calculated.
In subsequent periods:
Right-of-use assets are depreciated using the straight-line method from the lease commencement date to the earlier of the end of the useful life or the end of the lease period.
Right-of-use assets are recognized jointly with property, plant and equipment or investment property, respectively, while lease liabilities as financial liabilities.
Changes in lease payments (resulting from, among others, changes in the index, rate, lease period) are taken into account, updating the valuation of lease liabilities and an appropriate adjustment of the right-of-use assets. The lease period is updated in the case of:
The PZU Group does not recognize right-of-use assets for short-term leases and for leases for which the underlying asset has a low value. Low-value assets were deemed to be assets with an original value of the underlying asset equal to or lower than PLN 20 thousand. In such a case the PZU Group recognizes lease payments as a cost in the consolidated profit and loss account during the lease period.
On the lease commencement date, the PZU Group recognizes the receivable in the amount of the net lease investment, i.e. the current value of minimum lease payments and unguaranteed residual value, if any, ascribed to the PZU Group. During the lease period the PZU Group recognizes interest income on the lease receivables.
Operating lease agreements pertain primarily to real property.
Lease payments under operating leases are recognized in the profit and loss account as income using the straight line method throughout the term of the lease.
The classification of leases was based on the extent to which the risks and rewards incidental to ownership of the leased item lie with the lessor or the lessee.
In the case of lease agreements under which substantially all risks and rewards incidental to ownership of a leased asset were transferred, it stopped being recognized in the lessor’s balance sheet. Instead the lessor recognized a receivable in an amount equal to the present value of minimum lease payments, which were then divided between interest income and decrease in the balance of receivables.
Operating lease agreements concerned predominantly real properties.
Lease payments under operating leases were recognized in the profit and loss account as income using the straight line method throughout the term of the lease.