The preparation of consolidated financial statements in conformity with IFRS EU requires the Management Board to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenues and costs. Estimates and underlying assumptions are based on historical data and other factors considered as reliable under the circumstances, and their results provide grounds for an assessment of the carrying amounts of assets and liabilities which cannot be based directly on any other sources. Actual results may differ from those estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
The most significant estimates and assumptions made primarily related to the following:
- Classification of lease agreements
The Group classifies leasing agreements as operating or financial based on the assessment as to what extent the risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee. The assessment is based on the economical substance of each transaction. The Group concludes agreements for the rental of reception equipment to its customers in the course of its business operations including delivery of digital pay television services. These lease agreements are classified as operating leases as the Group holds substantially all the risks and rewards incidental to ownership of the reception equipment.
As a part of its business activities the Group has concluded agreements with Eutelsat for the rental of transponder capacity as well as an agreement with Nagravision for the lease of conditional access system (including SMART cards). These agreements were classified as operating leases as Eutelsat and Nagravision hold substantially all the risks and rewards incidental to the ownership of the transponders and the conditional access system. For more information see note 33.
- Depreciation rates of property, plant and equipment and intangible assets with definite useful lives
Depreciation rates are based on the expected economic useful lives of property, plant and equipment (including reception equipment provided to customers under lease agreements) and intangible assets. The expected economic useful lives are reviewed on an annual basis based on the experience of the entity.
The economic useful lives of the reception equipment rented to customers under operating lease agreements are estimated for 5 years. For information on the useful lives of property, plant and equipment, programming assets and other intangible assets with definite useful lives see notes 6j and 6k. For information on the depreciation charge for the period by the category of property, plant and equipment and intangible assets with definite useful lives see notes 17 and 21.
- Economic useful lives and amortization method of programming assets
Economic useful life of programming assets is based on the shorter of the expected consumption of future economic benefits embodied in an asset and the license period. Amortisation method of programming assets reflects how these economical benefits are consumed. The estimation of the useful life and the amortization method requires assessment of the timing during which the Group is expecting to obtain the income from the acquired programming assets and the percentage apportionment of this income in the given period. For more information about the amortization method and amortization charge for the period by programming assets category see notes 6l and 22.
- Indefinite useful life of Polsat brand
As at the reporting date, the Group has reviewed whether relevant factors continue to indicate indefinite useful life of Polsat brand recognised in 2011 on the acquisition of Telewizja Polsat S.A.
The Group has reviewed the following factors which are essential for estimating the economic useful life of the Polsat brand:
- The expected usage of the asset by the entity and whether the asset could be managed more efficiently
- Technical, technological, commercial or other types of obsolescence
- The stability of the industry in which the asset operates and changes in the market demand for media services
- Expected actions by competitors or potential competitors
- The level of maintenance expenditure required to obtain the expected future economic benefits from the asset
- Whether the useful life of the asset is dependent on the useful life of other asset of the entity.
Having analyzed the above factors, the Group has concluded that there is no foreseeable limit to the period over which the Polsat brand is expected to generate net cash inflows for the Group and thus the indefinite useful life was assumed. Furthermore, the Polsat brand is widely recognized by media and is highly appreciated in numerous rankings, for example ’Rzeczpospolita’ journal’s rankings or BAV Consulting’s rankings. Numerous awards for employees, individuals associated with the brand as well as high Power Ratio index also indicate a strong position of the brand.
- Fair value of assets and liabilities of INFO-TV-FM
The Group identified assets and liabilities and estimated their fair value under the purchase price allocation process relating to the acquisition of INFO-TV-FM. For more information see note 38.
- Fair value of assets and liabilities of entities comprising the IPLA platform
The Group identified assets and liabilities and estimated their fair value under the purchase price allocation process relating to the acquisition of entities comprising the Ipla platform. For more information see note 38.
- Fair value of IPLA brand
The Group identified Ipla brand in the balance sheet under the purchase price allocation process relating to the acquisition of entities comprising Ipla platform. The fair value of the brand was estimated on the basis of relief from royalty method. The method is based on the assumption that the benefits of owning a brand are equivalent to the hypothetical costs the owner of the brand would have to incur, should the brand be licensed from another entity based on market rates. Fair value estimation of the Ipla brand was based on the following key assumptions:
- market level royalty fee rates
- forecasted level of revenues from sale of products and/or services under the Ipla brand
- growth rate for estimating the cash flows beyond the financial planning period
- discount rate reflecting the risks associated with the brand
For more information on fair value of Ipla brand and the assumptions and estimates used see note 19.
- Indefinite useful life of IPLA brand
Having reviewed all the relevant events and circumstances the Group has concluded that there is no foreseeable limit to the period over which the Ipla brand is expected to generate economic benefits for the Group and thus the indefinite useful life was assumed. The following factors were analyzed:
- The expected usage of the brand and the assessment whether the brand could be managed more efficiently
- Technical, technological, commercial and other types of obsolescence
- The stability of the industry in which the asset operates and changes in the market demand for the products or services output from the asset
- Expected actions by competitors or potential competitors
- The level of maintenance expenditure required to obtain the expected future economic benefits from the asset
- Whether the useful life of the asset is dependent on the useful life of other asset of the entity
Having analyzed given factors, the Group has concluded that there is no predictable time limit during which the IPLA brand will contribute to the Group’s net income therefore the indefinite useful life was assumed.
- The impairment of goodwill
The Group performed impairment test. The impairment test was based on the value-in-use calculations of the cash-generating unit to which the goodwill has been allocated on the initial recognition. The value-in-use calculations included estimation of discounted cash flows for the given cash-generating unit and the relevant discount rate. The value of goodwill tested at each cash-generating unit, the key assumptions used in the value-in-used calculations for each cash-generating unit, impairment test results and sensitivity analysis of reasonably possible changes in the key assumptions are presented in note 20.
- The impairment of intangible assets with indefinite useful lives
The Group performed the impairment test for the intangible assets with indefinite useful lives (Polsat band and Ipla brand). The impairment test was based on the value-in-use calculations of the cash-generating units to which the brands have been allocated. The value-in-use calculations included estimation of discounted cash flows for the given cash-generating unit and the relevant discount rate. The key assumptions used in the impairment test of Polsat brand and Ipla brand, impairment test results and sensitivity analysis are presented in note 20.
- The impairment of non-financial non-current assets
As at the reporting date the Group has assessed whether there are any indications that intangible and tangible assets with definite useful lives may be impaired. No such indicators were found and thus no impairment tests were performed.
- Revenues from contractual penalties
The Group recognizes the revenues from contractual penalties in the amount probable to recover. The estimated recoverability of contractual penalties from the customers is 20%.
- Impairment of receivables
Judgment is required in evaluating the likelihood of collection of customer debt after revenue has been recognized. This evaluation requires estimates to be made including the level of bad debt allowance made for amounts with uncertain recovery profiles. Allowances are based on the probability of receivables collection, and on more detailed reviews of individually significant balances. Depending on the type of the customer and the source of the receivable, the assessment of the probability of receivable collection is done either based on the analysis of individual balances or based on the statistical probability of recoverability for each receivable’s ageing profile. Recoverability rates are defined based on the analysis of the historical recoverability and the customers’ behavior as well as other factors that, according to the Management Board, might influence the recoverability of the receivables. For more information see notes 6h, 26 and 39.
- Provisions for pending litigation
The provisions are estimated based on the court documentation and the expertise of the Group’s lawyers who participate in the current litigations. Group’s probable obligations are estimated based on the progress of litigation proceedings. For more information see note 6r and 44.
- Measurement of the provisions for employee benefits
The provisions for employee benefits were estimated based on the actuarial methods.
- Deferred tax
The key assumption in relation to deferred tax accounting is the assessment of the expected timing and manner of realization or settlement of the carrying amounts of assets and liabilities held at the reporting date. In particular, assessment is required of whether it is probable that there will be suitable future taxable profits against which any deductible temporary differences can be utilized. For further details refer to note 6y and 14.
- Fair value of financial instruments
Fair value of financial instruments for which there is no active market is estimated using appropriate techniques of measurements. The techniques are chosen based on the professional judgment. For more information about the method of establishing the fair value of financial instruments and key assumption made see note 6h.
