5.2. Financing liabilities

On initial recognition, borrowings and debt securities are measured at fair value less transaction costs. As at the reporting date, the liabilities are measured at amortised cost with the use of the effective interest rate method.

In accordance with the accounting policy applied since January 1st 2019, leases are recognised as right-of-use assets and liabilities to pay for those rights as at the date when the leased assets are available for use by the Group. Right-of-use assets are presented in Note 6.1.

At the lease commencement date, lease liabilities are measured at amounts equal to the present value of the following lease payments for the right to use of the underlying asset during the lease term:

• fixed lease payments (including substantially fixed payments), less any financial incentives payable;
• variable lease payments dependent on an index or a rate;
• amounts expected to be payable by the lessee under residual value guarantees;
• the exercise price of a purchase option if exercise of that option by the lessee is reasonably certain;
• lease termination fees if the lessee is entitled to exercise the option to terminate the lease and it is highly probable that the option will be exercised.

Lease payments are discounted at the lease interest rate, if that rate is readily determinable, or at the lessee’s incremental borrowing rate.

Each lease is allocated between the liability and the finance cost. After initial recognition, lease liabilities are measured using the effective interest rate method. Carrying amounts of the liabilities are updated to reflect changes in the estimate of the lease term, purchase options, changes in lease payments, guaranteed residual value, and modifications to the lease contract.

The lease term is an irrevocable lease term; Periods covered by lease extension or termination options are included in the lease term if there is reasonable certainty that the lease will be extended or the contract will not be terminated earlier.

When determining the lease term, the Management Board takes into account all the facts and circumstances that give the economic incentive to exercise the option to extend the contract or not to exercise the option to terminate the contract. Periods covered by extension or termination options are included when determining the lease term if there is reasonable certainty that the contract will be renewed (extension option) or will not be terminated (termination option). Reassessment of whether there is reasonable assurance that the Group will exercise the extension option or will not exercise the termination option is made if a significant event or a significant change in circumstances occurs that affects such assessment and the Group can control the change or the circumstances.

As at December 31st 2021, the amount of the Group’s payment obligations under short-term leases was PLN 13m.

In the reporting period, the Group did not enter into any sale and leaseback transactions.

The amount of payments not recognised in the measurement of lease liabilities was PLN 12m and related mainly to leases not yet commenced.

The lease contracts outstanding as at December 31st 2021 do not impose any covenants on the Group.

In the reporting period and as at the date of authorisation of these financial statements for issue, there were no instances of default under material terms of any debt securities that could trigger accelerated repayment.

The Group’s debt gives rise to liquidity risk. For detailed description of those risks and sensitivity analysis, see Note 7.3.

The table below presents the Group’s debt.

Interest on floating-rate debt denominated in the Polish złoty is calculated based on 1M WIBOR, 3M WIBOR or 6M WIBOR rates; USD-denominated debt: 1M LIBOR and 3M LIBOR rates; EUR-denominated debt: EONIA, 1M EURIBOR and 3M EURIBOR. Fixed interest rate is applicable only to PLN-denominated debt securities.

For more information on management of the financial resources, see the Directors’ Report on the operations of the PGNiG Group and PGNiG S.A. for 2021

The Group’s debt is subject to interest rate risk, currency risk and liquidity risk. For detailed information on these risks, see Note 7.3.

In the current and comparative periods, the Group repaid its financing liabilities in a timely manner. In the reporting period and as at the date of authorisation of these financial statements for issue, there were no instances of default under material provisions of any credit facility, loan, or debt securities issue agreement that could trigger accelerated repayment.