8.6.1 Acquisition of INEOS E&P Norge AS (IFRS 3)

On March 25th 2021, PGNiG Upstream Norway AS (PUN), a subsidiary of PGNiG, entered into a conditional agreement (Agreement) to acquire INEOS E&P Norge AS (INEOS) from the INEOS Group. The acquirer, within the meaning of IFRS 3, is PUN. The scope of the Agreement included interests in 22 licences on the Norwegian Continental Shelf, the Nyhamna gas processing plant and transfer to PUN of INEOS staff. The purchase price provided for in the Agreement was USD 615m, with January 1st 2021 being the effective transaction date. In accordance with the contractual mechanism, the consideration payable to INEOS was to be adjusted for income generated by INEOS between the effective transaction date and the acquisition date, as well as for the balances of the over-/undercall positions and amounts receivable/payable at the effective transaction date and for the time value of money. Conditions precedent to the Agreement included the grant of corporate approvals within the PGNiG Group and the grant of administrative approvals by the Norwegian authorities.

The estimated volume of hydrocarbon resources attributable to INEOS’ licence interests is approximately 117m barrels of oil equivalent (as at January 1st 2021), of which over 94% are natural gas resources. Following the transaction, PGNiG’s estimated average gas output in Norway may increase by some 1.5 bcm per annum over the next five years. As part of the transaction, PUN is also to acquire a portfolio of exploration licences with INEOS acting as the operator under six of them.
The acquisition of INEOS is set to contribute to the delivery of the PGNiG Group Strategy for 2017–2022 (with an outlook until 2026) by increasing its proven hydrocarbon reserves and production levels. As a result of the acquisition of INEOS, PUN’s gas production volumes in Norway may reach a peak level of 4 bcm per year in 2027.

On September 24th 2021, all the conditions precedent to the Agreement and conditions for the acquisition by PUN of control over INEOS were satisfied. The consideration transferred, of PLN 1,309m (translated at exchange rates as at December 31st 2021), was paid on September 30th 2021, which is the acquisition date for that transaction within the meaning of IFRS 3. Pursuant to the Agreement, the transaction will be finally settled within 60 days of the acquisition date. The final accounting for the business combination in accordance with IFRS 3 will take place within 12 months of the acquisition date.

The transaction-related costs incurred by the Group amounted to PLN 11.3m and were recognised in the line item Other income and expenses in the Group’s consolidated statement of profit or loss for 2021.

Presented below are the fair values of identified assets and liabilities and the calculation of goodwill identified for the acquisition.

Revenue and net profit earned by INEOS from the acquisition date to the end of the current reporting period, recognised in the consolidated statement of profit or loss, were PLN 2,198m and PLN 374m, respectively.

Estimated revenue and net profit earned by INEOS in the reporting period, calculated as if the acquisition date were the beginning of the reporting period, are PLN 4,248m and PLN 624m, respectively.

Classification of an acquisition of assets as either a business combination (under IFRS 3) or an asset acquisition (under IAS 16)

A reporting entity must determine whether a particular transaction or other event is a business combination by applying the relevant definition provided in IFRS 3. If the acquisition of assets does not satisfy the definition of a business combination, the reporting entity must account for the transaction or other event as an asset acquisition based on the relevant provisions of IAS 16.

In accordance with IFRS 3, a business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.

In order to determine whether a particular transaction should be classified as a business combination in accordance with IFRS 3 (and thus accounted for using the acquisition method) or an asset acquisition in accordance with IAS 16, the reporting entity is often required to apply professional judgement.

In the Exploration and Production segment, projects in the production phase are typically classified as businesses, whereas projects in the exploration phase are regarded as asset acquisitions. The acquisition of INEOS involves both production assets (mainly licences) and workforce operating those assets, which is an indication that the transaction should be classified as a business combination and accounted for as prescribed by IFRS 3.

Technical and residual goodwill

If, when accounting for a transaction using the acquisition method, it turns out that the amount of the consideration transferred exceeds the net value at the acquisition date of identifiable assets acquired and liabilities assumed, the resulting difference is recognised as goodwill. For the purpose of subsequent impairment testing, goodwill arising from the business combination should, upon the acquisition, be allocated to each of the acquirer’s cash-generating units or groups of cash-generating units that is expected to benefit from the synergies of the combination. Under the Norwegian tax regime, the acquirer of a business is deemed for tax purposes to acquire the acquiree’s assets and liabilities at a value equal to their tax bases at the acquisition date. As all assets and liabilities acquired are measured at fair value at the acquisition date if the acquisition method of accounting is applied, the acquirer books a net deferred tax liability reflecting the difference between the fair value of the assets acquired and their tax bases. The amount of the resulting deferred tax liability in the acquirer’s books can be recognised directly as goodwill arising from the transaction and allocated directly to the relevant cash-generating units being the subject of the transaction. The resulting goodwill is referred to as technical goodwill.

In the case of the transaction concerned, technical goodwill of PLN 2,814m was recognised.

The difference between goodwill (which amounts to PLN 1,283m for the transaction concerned) and technical goodwill for the transaction represents residual goodwill. Given that the hydrocarbon prices, as a factor affecting final settlement of the acquisition of INEOS, were significantly higher than the prices prevailing at the time when the terms of the transaction were agreed between its parties, residual goodwill arising from the transaction was negative at PLN -1,531m. This amount was allocated to individual cash-generating units in proportion to their value.

Such allocation of goodwill between technical and residual goodwill will have its implications for impairment testing of the carrying amount of goodwill in subsequent periods. Following initial recognition of the acquisition of INEOS in PUN’s books, the difference between depreciation and amortisation of assets acquired at fair value for accounting purposes and their depreciation and amortisation for tax purposes will result in the reversal of the deferred tax liability. In order to avoid impairment losses being recognised on that part of goodwill which is reflected in the current balance of the deferred tax liability in PUN’s books, goodwill subject to periodic impairment testing will always be reduced by the net balance at the time of testing of the deferred tax liability allocated to the relevant cash-generating unit.

Goodwill arising on the acquisition of INEOS is not deductible for tax purposes.