The table below presents items under which depreciation of property, plant and equipment was recognised:

As at December 31st 2012, financing costs capitalised in property, plant and equipment under construction amounted to PLN 43,211 thousand (December 31st 2011: PLN 35,078 thousand).

In 2012, financing costs capitalised in property, plant and equipment under construction amounted to PLN 11,299 thousand (2011: PLN 36,191 thousand).

As at December 31st 2012, the Group’s liabilities under executed agreements relating to expenditure on property, plant and equipment amounted to PLN 82,633 thousand.

As at December 31st 2012, the value of property, plant and equipment serving as collateral for the Group’s liabilities amounted to PLN 7,150,215 thousand (December 31st 2011: PLN 7,850,904 thousand).

The Group incurs exploration and appraisal expenditure. In 2012, costs of direct purchases of materials and investment services related to exploration and appraisal assets amounted to PLN 66,231 thousand (2011: PLN 12,765 thousand), including direct cash flows from investing activities related to exploration and appraisal assets of PLN 65,263 thousand (2011: PLN 10,843 thousand). As at December 31st 2012, investment commitments amounted to PLN 968 thousand (December 31st 2011: PLN 1,922 thousand).

The Group recognises exploration and appraisal property, plant and equipment until the technical feasibility and commercial viability of extracting a mineral resource is demonstrable. As at December 31st 2012, property, plant and equipment in respect of which the technical feasibility and commercial viability of extracting a mineral resource have been demonstrated amounted to PLN 109,030 thousand (December 31st 2011: PLN 108,303 thousand); the cost of their depreciation was PLN 7,300 thousand (December 31st 2011: PLN 5,436 thousand). As at the last day of the reporting period, those assets were no longer recognised under exploration and appraisal property, plant and equipment, but under property, plant and equipment used in petroleum production, depreciated using the units-of-production method.

Under property, plant and equipment, the Group recognises the oil and gas facilities decommissioning asset (for more information, see Note 31.1). As at December 31st 2012, the net value of the oil and gas facilities decommissioning asset amounted to PLN 188,523 thousand (December 31st 2011: PLN 133,094 thousand).

In 2012, the Group recognised impairment losses of PLN 969,823 thousand on property, plant and equipment (2011: PLN 279,881 thousand). Those included primarily impairment losses of PLN 935,247 thousand (2011: PLN 239,775 thousand) on assets of LOTOS Exploration and Production Norge AS ( upstream segment) related to the YME project, described below in a section devoted to interests in Norwegian production and exploration licences, as well as impairment losses of PLN 22,840 thousand (2011: PLN 15,050 thousand) on assets of LOTOS Asfalt Sp. z o.o related to the Waterproofing Materials Production Plant situated in the Tarnobrzeg Special Economic Zone, EURO-PARK WISŁOSAN.

As the time required to achieve the initially assumed sales volumes of finished products proved longer than expected, LOTOS Asfalt Sp. z o.o. tested the assets related to the Waterproofing Materials Production Plant for impairment, which involved  an analysis of the discounted cash flows to be generated by the Plant in  2013–2017 based on the following assumptions of gradual growth in sales volumes:  35% in 2013 (relative to 2012), and 10% in 2014–2017 (year on year), taking into account an adjustment for expected inflation at the level of 2.44%–2.74% (in 2014–2017) and weighted average cost of capital of 11.17%. Based on the test results, an impairment loss for the full amount of the assets was recognised.

Information on interests in Norwegian production and exploration licences

The item “Property, plant and equipment under construction” includes expenditure of PLN 1,768m (NOK 3.184m, translated at the mid-exchange rate as at December 31st 2012) incurred by LOTOS Exploration and Production Norge AS  on the purchase of interests in Norwegian production licences  and on development of the YME field, including prepayments of PLN 137m (NOK 247m, translated at the mid-exchange rate quoted by the National Bank of Poland as at December 31st 2012).

The Group tested the YME project for impairment as at June 30th 2012 and December 31st 2012. Following the tests, impairment losses were recognised as at June 30th 2012, and no need for recognition of further impairment losses as at December 31st 2012 was identified.

During its execution, the YME project suffered significant delays and cost overruns, and the project is the subject matter of arbitration proceedings involving the contractor responsible for the delivery of the platform. For this reason, the operator of the YME field, Talisman Energy Norge AS, carried out (and concluded in April 2012) further internal and external analyses of the YME project, which resulted in a revision of the project cost estimates and the scheduled completion date. This in turn led to recognition of an impairment loss on the project by the YME field operator. The operator citied the delays in project execution and the need to perform significant work prior to the production launch as the main reasons for recognising the impairment loss. Talisman Energy Norge AS further stated that it continued close cooperation with the project partners and the supplier of the Mobile Offshore Production Unit (the production component of the platform), Single Buoy Moorings Inc. (hereinafter referred to as SBM), with a view to achieving full understanding of the scope of work remaining to be done. However, the operator is also considering other options for completing the development of the YME field.

In light of the information presented above and having identified possible impairment, as at June 30th 2012, the Group tested the assets for impairment based on estimated values in use, using a discounted cash flow analysis of LOTOS Exploration and Production Norge AS’s interests in the hydrocarbon reserves held under the acquired production licences covering the YME field development project. Following the impairment test, the Group recognised impairment losses on the YME assets, which brought the amount of the YME project property, plant and equipment under construction to PLN 445m as at June 30th 2012 (NOK 787m, translated at the mid-exchange rate quoted by the National Bank of Poland for that day).

The YME field impairment test as at June 30th 2012 was carried out assuming a change in crude oil prices by +/-15%/bbl relative to Brent crude spot and forward prices as at June 29th 2012, a +/-15% change on the USD/NOK forward rate as at June 29th 2012, and a +/-15% change in the YME field reserves, and a weighted average cost of capital of 7.5% subject to a 78% marginal tax rate (applicable in Norway).

For the purposes of the test as at June 30th 2012, a scenario was adopted providing for the launch of production in Q3 2015.

Based on such assumptions, it was concluded that as at June 30th 2012 the carrying amount of the assets related to the YME field exceeded the upper limit of the recoverable amount ranges determined, and hence an impairment loss was recognised on the tested asset, of PLN 928m, as at the end of June 2012 (NOK 1,672m, translated at the mid-exchange rate quoted by the National Bank of Poland for that day), compared with the impairment loss of PLN 256m (NOK 451m, translated at the mid-exchange rate quoted by the National Bank of Poland for that day). In the consolidated statement of comprehensive income for 2012, the impairment loss on YME field assets was included in Other expenses at PLN 395m (NOK 1,672m, translated at the average mid-exchange rate quoted by the National Bank of Poland for the reporting period ended December 31st 2012), compared with PLN 240m (NOK 451m, translated at the average mid-exchange rate quoted by the National Bank of Poland for the reporting period ended December 31st 2011) for 2011. The effect of the impairment loss on net profit for 2012, taking into account the deferred tax effect, was PLN 286m (NOK 510.4m, translated at the mid-exchange rate quoted by the National Bank of Poland for the period), compared with the effect of PLN 84.6m (NOK 159m, translated at the mid-exchange rate quoted by the National Bank of Poland for the period) on the 2011 net profit.

As discussed in Note 38 (Material events subsequent to the last day of the reporting period), on March 12th 2013, Talisman Energy Norge AS (the YME field operator) and Single Buoy Moorings Inc. (SBM, production platform owner) announced that they reached an agreement concerning removal of the defective platform from the YME field (evacuated since mid-July 2012) and termination of all existing contracts and agreements executed by them in connection with the YME project.

When carrying out an impairment test with respect to assets related to the YME field as at December 31st 2012, in connection with the contemplated possibility for LOTOS Exploration and Production Norge AS to exit the YME field development project, the Group adopted a different approach to testing the recoverable amount of expenditure incurred than the one used in the impairment test performed as at June 30th 2012. The Group calculated the recoverable amount of the assets on the basis of their estimated fair value less cost to sell. For the purpose of determining the price that can be obtained for the interest in the YME field (the realisable value), the value of the assets was calculated on the basis of the proved  reserves  of crude oil (2P) and the price per unit of reserves in similar market transactions concerning fields with comparable development status, taking into account the tax position. The realisable value thus determined has confirmed the realisability of the YME field assets as shown in the consolidated financial statements as at December 31st 2012, which means that there is no need to recognise any additional impairment.

Moreover, assuming the Group's further involvement in the YME project, the Group carried out a multi-scenario analysis of the YME field development based on various levels of investment expenditure and operating costs, and various production start dates. Analyses of the value in use confirmed the results of the test based on estimates of fair value of the YME project less cost to sell.

The total value of impairment losses as at December 31st 2012 adjusts the value of expenditure related to the YME project by PLN 1,179m (NOK 2,123m, translated at the mid-exchange rate quoted by the National Bank of Poland for that day). As at the reporting date, the amount of expenditure on property, plant and equipment under construction related to the YME field, net of impairment, was PLN 589m (NOK1,061m, translated at the mid-exchange rate quoted by the National Bank of Poland for that day).

Taking into consideration the impairment losses recognised on the capital expenditure on the YME field, as well as earlier tax losses  deductible in future periods, in the consolidated statement of financial position as at December 31st 2012, the Group recognised a deferred tax asset totalling PLN 1,077m (NOK 1,939m, translated at the mid-exchange rate quoted by the National Bank of Poland for that day). Based on the completed analyses and obtained legal opinions, and taking into consideration the Norwegian tax legislation, which does not impose any time limit for settling deductible tax losses, the Group believes that the deferred tax asset recognised as at December 31st 2012 is fully recoverable in the nominal amount disclosed in these consolidated financial statements.

Due to high market volatility, in particular with respect to crude oil prices, the adopted assumptions might be subject to reasonable changes, as a result of which it may be necessary to further reduce the carrying amount of the YME project assets due to the fact that it will exceed their recoverable amount. Therefore, the Management Board points out to a number of uncertainties as to the recoverable amount of the assets recognised in connection with the YME field, including.

• Volatility in market prices of crude oil;
• Estimated size and market value of the recoverable hydrocarbon reserves in the YME field depending on the  Plan for Development and Operation of the field;
• Estimated fair value of tax assets taken into account in the impairment test of the YME field made as at the end of the year;
• Amount of reclamation liabilities taken over together with the SBM’s sub-sea infrastructure under the settlement reached on March 11th 2013 between the YME project operator and SBM, referred to in Note 38.
• Date of commencement of production from the YME field, if any;
• NOK/USD exchange rate fluctuations;
• Discount rates.

Prospects for development of the B-4 and B-6 gas fields

Since 2010, impairment losses have been recognised for the full amount of expenditure incurred by LOTOS Petrobaltic S.A. on gas exploration at the B-4 and B-6 fields, including PLN 593 thousand (December 31st 2011: PLN 593 thousand) recognised under property, plant and equipment under construction, and PLN 48,672 thousand (December 31st 2011: PLN 48,308 thousand) recognised under exploration and appraisal assets. According to the findings of analyses performed with respect to the B-4 and B-6 fields, significant capital expenditure was required to obtain commercial production of hydrocarbons and ensure that the development of the B-4 and B-6 fields is profitable. Therefore, LOTOS Petrobaltic S.A. took measures to find an industry partner to continue the project. In October 2012, LOTOS Petrobaltic S.A. and CalEnergy Resources Poland Sp. z o.o. executed a cooperation agreement on the development of the B-4 and B-6 fields. The agreement is subject to a number of conditions precedent. The project provides for joint operations carried out through a special purpose vehicle. Under the preparatory work schedule, seismics acquisition and selection of a preliminary field development concept are scheduled for 2013–2014. On completion of that stage, the partners will be able to make a final investment decision concerning the development of the B-4 and B-6 fields.