2.4 Professional judgement of management and estimates

In the process of applying accounting rules with regards to the below issues, management has made judgements and estimates that affect the amounts presented in the consolidated financial statements, including in other explanatory information. The estimates are based on the best knowledge of the Management Board relating to current and future operations and events in particular areas. Detailed information on the assumptions made is presented below or in respective explanatory notes.

• During the reporting period, the Group conducted asset impairment tests as of June 30, 2022. The test results are described in note 3 to these financial statements.
• Estimates of the recoverable amount of property, plant and equipment are based on a number of significant assumptions, the appearance of which is uncertain and mostly beyond PGE Group’s control. The Group believes that it has assumed the most accurate volumes and values. Nevertheless, realisation of the particular assumptions may diverge from the ones established by the Group.
• Provisions are liabilities of uncertain amount or timing. During the reporting period, the Group changed estimates regarding the validity or amounts of some provisions.
• In particular, during the reporting period a provision for land rehabilitation and a provision for employee benefits were updated due to an increase in the discount rate and inflation. Details are presented in note 21 to these financial statements.
• Uncertainties concerning tax settlements are described in note 30 to these consolidated financial statements.
• The Group makes significant estimates in respect of the recognised contingent liabilities, details are set out in note 28 of these financial statements.
• The valuation of financial instruments is based on a number of assumptions and estimates on the basis of the data available at the time of preparing the financial statements. Changes in these assumptions and estimates may affect the future financial statements of PGE Group. Note 25.1.2 provides information on the impact of the valuation of financial instruments on profit or loss and other comprehensive income.
• In view of the crisis situation in the electricity market in 2022, a number of legal regulations came into force, which made it necessary for PGE Group side to make revenue and cost estimates for coal compensation, compensation and price adjustments resulting from the Act for households, the contribution for the Price Difference Payment Fund resulting from the Emergency Measures Act in 2023. These estimates are described in greater detail in notes 33.4 and 33.5 to these financial statements.
• Some of the sales revenue described in detail in note 7.1 of these consolidated financial statements is invoiced based on cyclical readings of metering and billing systems. This results in the need for an overestimation of sales revenue in relation to supplies for which PGE Group does not have readings from metering equipment at the reporting date.
• No significant extensions in the payment of receivables or problems with liquidity resulting from the COVID-19 pandemic were observed as of the reporting date. Following the pandemic’s outbreak, in 2020 the Group updated its models for estimating expected credit losses. For the purposes of estimating the expected credit losses, counterparties were split into two groups: strategic counterparties, which have been internally assigned ratings based on a scoring model, and other counterparties, for which expected credit losses are estimated based on a provisions matrix. For the first group of counterparties, the basis for calculating expected credit losses was changed. Losses are currently calculated on the basis of Credit Default Swap (CDS) prices, while for the other group of counterparties percentage coefficients in each time interval of the provisions matrix were updated to a level corresponding to the current recovery rate for receivables.