1.2.1 New and amended standards and interpretations

The following new and amended standards and interpretations effective as of January 1st 2021 had an effect on these consolidated financial statements:

The amendments to the standards contain temporary derogations addressing the effects of replacement of interbank interest rate (’IBOR’) with an alternative benchmark close to risk-free rate (’RFR’) and their impact on financial reporting. As of January 1st 2022, some of the benchmarks will cease to be provided and will be replaced by other benchmarks.

Practical expedient applicable to changes in the basis for determining contractual cash flows as a result of the IBOR reform.

The amendments provide for a practical expedient requiring that amendments to contractual terms or changes to cash flows made as a direct consequence of the reform be treated as changes in a variable interest rate, which is equivalent to a change in the market interest rate. The expedient may be applied if the transition from an IBOR benchmark to a RFR takes place on an economically equivalent basis without transfer of value.

Examples of changes that result in a new basis for determining contractual cash flows that is economically equivalent to the existing basis (i.e., the basis in effect immediately prior to the change) are:

a) replacing the existing benchmark interest rate used to determine contractual cash flows for a financial asset or financial liability with an alternative benchmark,

b) changes in the update period, the update dates or the number of days between the coupon payment dates in order to implement the IBOR reform, and

c) adding a contingency clause to the contractual terms of a financial asset or financial liability to allow implementation of any change described above.

Any other changes made at the same time, such as a change in credit margin or maturity, are subject to a separate assessment. If they are material, the existing instrument is derecognised and a new instrument is recognised. If they are not material, the effective interest rate is updated and the carrying amount of the financial instrument recalculated. The result of the modification is recognised in profit or loss.

The practical expedient is also required to be applied for IFRS 16 Leases with respect to lease modifications required by the IBOR reform.

Exemption from termination of hedging relationships.

The amendments allow for adjustments to hedge accounting documentation for designating and documenting hedging relationships without terminating them if those changes were directly required by the IBOR reform. Permitted changes include redefining the hedged risk to reference the RFR and redefining the description of hedging instruments and/or hedged items to reflect the RFR. Entities are permitted to apply the above changes until the end of the reporting period during which the modification required by the IBOR reform is implemented.

Any gains or losses that may arise in the interim period are accounted for in accordance with the normal requirements of IFRS 9 and IAS 39 for measuring and recognising hedge ineffectiveness.

The amounts accumulated in the cash flow hedge reserve are considered to be based on RFR. This capital is released to profit or loss in the same period or periods in which the RFR-based hedged cash flows affect profit or loss.

To assess the retrospective effectiveness of hedges under IAS 39, upon transition to RFR, entities may elect (on a relationship-by-relationship basis) to level the cumulative change in fair value to zero. This exemption applies when the exception for retrospective assessment ends (when paragraph 102G of IAS 39 no longer applies).

The amendments provide an exemption for items within a designated group of items (such as items that are part of a portfolio macro cash flow hedging strategy) that are modified due to modifications directly required by the IBOR reform. Exemptions allow to maintain the hedging strategy and continue to use it.

As items within the hedged group pass from IBOR to RFR at different times, they will be transferred to sub-groups of instruments that designate the RFR as hedged risk.

When instruments pass on to RFR, the hedging relationship may need to be modified more than once. Phase 2 exemptions apply whenever a hedging relationship is modified as a direct result of the IBOR reform. Phase 2 exemptions cease to apply once all changes to financial instruments and hedging relationships have been implemented as required by the IBOR reform.

Separately identifiable risk components.

The amendments provide for temporary exemption of entities from having to meet the separately identifiable requirement when an RFR instrument is designated as a hedge of a risk component. The exemption allows entities to assume, post designation, that the separate identification criterion is met, provided that the entity expects the risk component of the RFR to be separately identified within the next 24 months.

In the first stage of implementation, the benchmark reform focused on hedge accounting for interest rate hedging instruments. As the Group did not have hedging relationships for these types of instruments as at December 31st 2020 or December 31st 2021, the IBOR reform had no impact on the Company’s financial statements in this respect.

In the next stage of the reform, as WIBOR, EURIBOR, LIBOR, NIBOR are replaced with risk-free rates, the Group may see a marginal impact of the reform on the measurement of hedging instruments and loans. The Group also entered into CCIRS transactions involving exchange of interest payments based on 3M WIBOR (received) and 3M NIBOR (paid) rates not designated for hedge accounting. The Group expects the impact, if any, of measurement of the CCIRS instruments to be immaterial. Table A presents the totals of net holdings of financial instruments indexed to a floating rate, by current benchmarks.

PGNiG S.A. does not have any instruments indexed directly to the IBOR rates which ceased to be provided at the end of 2021 and therefore considers the probability of the risks discussed below to be negligible. Given the current high uncertainty as to the target format of certain benchmarks over a period of more than one financial year (e.g. EURIBOR, WIBOR, NIBOR), the potential risks to which the Group is exposed in connection with the IBOR reform may include:

• the market risk (interest rate risk) resulting from the inability to apply a relevant hedging instrument,
• the liquidity risk arising from uncertainties regarding future cash flows indexed to the WIBOR, LIBOR and NIBOR benchmarks,
• the accounting risk arising from uncertainties regarding the correctness of fair value and amortised cost models for instruments indexed to WIBOR, LIBOR and NIBOR benchmarks,
• the tax risk arising from the need to update transfer pricing documentation,
• the legal risks arising from the inability to agree with counterparties (banks) on the implementation of the benchmark reform with respect to the existing contracts within the required timeframe.

The Group has taken the following measures to mitigate these risks:

• continuous monitoring of communications on the IBOR reform published by the key global regulatory authorities,
• continuous monitoring of available market data based on alternative benchmarks (including discount curves, alternative
  compound interest rate indices) available on the information services (e.g., Refinitv Eikon, Bloomberg), to apply them in
  managing the market risk, the liquidity risk, the risk of fair value measurement calculations and in testing effectiveness of
  hedging relationships,
• based on available market data on alternative benchmarks – performing periodic stress-tests for the market risk, the liquidity
  and the risk of fair value measurement calculations,
• the planned commencement of negotiations with the financing institutions and the Group entities to which the loans were
  granted, as soon as possible after the relevant regulatory authorities have announced the date on which the WIBOR, LIBOR
  and NIBOR benchmarks cease to be provided,
• signing of an EONIA protocol with banks in which the EONIA rate was used for calculating interest on collaterals and signing a new agreement with a bank which provided the Group with an overdraft facility based on the EONIA rate (as at December 31st 2021 the facility was not used by the Group).

Taking into account the measures specified above, the Group has assessed the possible threat from the discussed risks as
marginal.

Other standards, amendments to standards and interpretations that have been issued but are not yet effective and have not been
listed above are not relevant to the Group’s financial statements or do not apply to its business