16. Impairment testing of assets

As at the end of 2017 an impairment test of non-financial non-current assets of KOGENERACJA S.A. was performed.

Methodology of tests is in compliance with International Accounting Standard. 36 Impairment of Assets. The test relied on comparison of the assets’ carrying value with their recoverable amounts.

In the test for impairment performed by the Company recoverable amount is represented by value in use. The value in use is determined based on the present value of the future cash flows expected to be derived from the cash-generating unit - DCF method. For the purpose of impairment testing it was assumed that the assets of KOGENERACJA S.A, excluding investments in subsidiaries, are a cash-generating unit. The valuation model applied assumed valuation of KOGENERACJA S.A. based on the discounted cash flows method (DCF) in the years 2018-2042. According to KOGENERACJA S.A., adoption of the financial projections longer than five years is reasonable due to the significant and long-term impact of estimated changes in the regulatory environment of the Company.

The key assumptions influencing the recoverable amount of tested CGUs were as follows:

electricity prices forecasts for the years 2018-2042, assuming an increase in the wholesale market price by 49% till 2035, (comparing to market price in KOGENERACJA S.A. might be different because of the production profile and the way of contracting),
CO₂ emission rights prices forecasts for the years 2018-2042, assuming an increase in market prices by 269% (comparing to market price in KOGENERACJA S.A. might be different because of the way of contracting),
hard coal prices forecasts for the years 2018-2042, assuming an increase in price by 2%, (comparing to market price in KOGENERACJA S.A. might be different because of the way of contracting),
the assumptions on the number of CO₂ emission rights for the production of electricity received free of charge for the years 2016-2020 for particular CGUs in accordance with the Application of Poland for temporary allocation of free of charge emission rights for modernization of electricity production on the basis of article 10c paragraph 5 of Directive 2003/87/EC of the European Parliament and of the Council (so-called derogations application), which meets the requirements of Commission Decision of July 13, 2012. In terms of heat production, free of charge rights has been taken into account in line with the list of allocations of CO₂ emission rights for heat in the reference period 2013-2020, published by Ministry of the Environment,
taking into account free allocations of CO₂ emission rights in the period 2021-2042 for KOGENERACJA S.A. forecasted based on allocation method applied until now,
taking into account the system of support for high-performance cogeneration in the years 2018-2022,
maintenance of production capacities at the current level, as a result of replacement investments,
adopting weighted average cost of capital after tax (WACC) at the level of 7,56%.

KOGENERACJA S.A. - test na utratę wartości	Wartość bieżąca netto (NPV)
	%	mln zł
Sensitivity analysis (-0,5%)	7,06%	1 473
Weighted average cost of capital - WACC	7,56%	1 398
Sensitivity analysis (+0,5%)	8,06%	1 328

The results of the impairment testing indicate that the fair value is higher than the carrying value of the cash-generating unit. No impairment was required in regard to the non-current assets.

The value of the excess between the recoverable amount taken from the test and the amount tested is PLN 165 million.

In 2014 the Company recognized group of assets related to EC Muchobór, which, due to low production capacity utilization and lack of perspectives for improvements was impaired. The book value of those assets were lower than its fair value by PLN 20 124 thousand and was close to its value in use.

In 2016 assets held for sale were re-valued and an impairment loss in the amount of PLN 2 992 thousand was recognized. As at 31 December 2016, the net value of fixed assets presented as assets held for sale is PLN 2 550 thousand (gross book value: PLN 16 345 thousand, depreciation: PLN 2 357 thousand, impairment loss: PLN 11 438 thousand).

In 2017, after the value of the assets had been re-estimated by an expert, an impairment loss in the amount of PLN 740 thousand was recognized. The value of the fixed assets presented as assets held for sale as at 31 December 2017 amounts to PLN 1 810 thousand. (gross value: PLN 16 345 thousand, depreciation: PLN 2 357 thousand, impairment loss: PLN 12 178 thousand).

The results of the impairment testing indicate that the fair value is higher than the carrying value of the cash-generating unit. No impairment was required in regard to the non-current assets.

The value of the excess between the recoverable amount taken from the test and the amount tested is PLN 165 million.

On 21 July 2015 KOGENERACJA S.A. signed an agreement with Wrocław Technology Park terminating cooperation effective from 30 September 2015. As part of the disinvestment process, assets relating to EC Muchobór were partially disposed and impairment loss recognized in 2014 and 2015 was partially reversed. The reaming part of assets were appraised after disassembly and qualified as assets held for sale. In 2016 assets held for sale were re-valued and an impairment loss in the amount of PLN 2 992 thousand was recognized. As at 31 December 2016, the net value of fixed assets presented as assets held for sale is PLN 2 550 thousand (gross book value: PLN 16 345 thousand, depreciation: PLN 2 357 thousand, impairment loss: PLN 11 438 thousand).