The preparation of financial statements in accordance with the International Financial Reporting Standards requires a number of assumptions, judgments and estimates which affect the value of items disclosed in the financial statements and in the notes.

Although the assumptions and estimates are based on the management’s best knowledge of the current and future events and developments, the actual results might differ from the estimates.

The estimates and underlying assumptions are reviewed on a continuous basis. Any change in an accounting estimate is recognised in the period in which it has been made if it refers exclusively to that period, or in the current period and future periods if it refers to both the current period and future periods. Material assumptions used  in making the estimates are described in the relevant notes.

While making assumptions, estimates and judgments, the Company’s Management Board may rely on its experience and knowledge as well as opinions, analyses and recommendations issued by independent experts.

Apart from the accounting estimates, the professional judgement of the management was of key importance in the application of the accounting policies in the cases described below.

Employee benefit obligations

Employee benefit obligations are estimated using actuarial methods. The assumptions adopted for the measurement of the obligations are described in more detail in Note 30.4.

Depreciation/amortisation charges

Depreciation/amortisation charges are determined based on the expected useful lives of property, plant and equipment and intangible assets. The Group reviews the useful lives of its assets annually, on the basis of current estimates.

The basis for calculation of depreciation (using the units-of-production depreciation method) of the assets of onshore and offshore oil and gas facilities are estimates of  reserves (2P – proved  and probable – reserves), evaluated, revised and updated by the Group, as well as forecast production volumes from the individual fields based on geological data, test production, subsequent production data and the schedule of work adopted for the long-term strategy.

Fair value of financial instruments

The fair value of financial instruments for which no active market exists is determined by means of appropriate valuation methods. In selecting appropriate methods and assumptions for the valuation, the Group relies on professional judgment.

The assumptions adopted for the measurement of fair value of financial instruments are described in Note 7.23.

Deferred tax assets

The Group recognises deferred tax assets if it is assumed that taxable profit will be generated in the future against which the asset can be utilised. If taxable profit deteriorates in the future, this assumption may prove invalid. The Parent's Management Board reviews its estimates regarding the likelihood of recovering deferred tax assets taking into account changes in the factors on which such estimates were based, new information and past experience.

The assumptions adopted for the measurement of deferred tax assets are described in Note 10.3.

Impairment of cash-generating units and individual items of property, plant and equipment and intangible assets

As at the last day of each reporting period, in accordance with IAS 36 Impairment of Assets, it is assessed whether there is any indication of impairment of cash-generating units and individual assets. Indications of impairment may be based on external sources and relate to market variables (including fluctuations in prices, FX rates, stock prices, interest rates and other variables related to current economic trends), as well as plans, actions and developments at the Group, such as decisions concerning change, discontinuation, limitation or development of its business, or technological changes, efficiency and investment initiatives.

If there is any indication of impairment, the Company is required to estimate the recoverable amounts of assets and cash-generating units. While determining the recoverable amount, the Company takes into account such key variables as discount rates, growth rates and price ratios.

For information on impairment of property, plant and equipment and intangible assets, see Notes 13 and 15.

Following the analysis of cash flows generated by individual cash-generating units and impairment tests of selected assets which  required such tests (including: waterproofing materials production plant in Jasło, LOTOS Paliwa Sp. z o.o.'s goodwill, as well as production assets at the YME field and the Girkaliai, Kretinga and Nausodis fields), the Group made necessary adjustments to the value of the assets  and presented their effect in these consolidated financial statements.

Provision for decommissioning of oil and gas facilities and land reclamation

As at the last day of each reporting period, the Group analyses the costs necessary to decommission oil and gas facilities and the expenditure to be incurred on future land reclamation. As a result of those analyses, the Group corrects the value of the land reclamation provision recognised in previous years by adjusting its value to the amount of indispensable future costs. Any changes in the estimated time value of money are also reflected in the increase of the provision amount.