Orange Polska S.A.

Annual Report (ESEF) • Feb 16, 2022

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Corporate information 8 2. Statement of compliance and basis of preparation 9 3. Segment information and performance measures 9 4. Main acquisitions, disposals and changes in scope of consolidation 11 5. Impact of COVID-19 pandemic 13 Operating income excluding depreciation and amortisation 6. Revenue 14 7. Operating expense and income 15 8. Gains on disposal of assets 16 Non-current assets 9. Impairment test 16 10. Goodwill 18 11. Other intangible assets 18 12. Property, plant and equipment 19 13. Investment in joint venture 20 Leases 14. Leases 22 Current assets and liabilities 15. Assets and liabilities relating to contracts with customers 23 16. Other assets 26 17. Provisions 27 18. Trade payables and other liabilities 28 19. Employee benefits 29 2 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Financial instruments excluding trade receivables and payables 20. Finance income and expense 34 21. Net financial debt 35 22. Loans from related party 35 23. Liabilities arising from financing activities 35 24. Cash and cash equivalents 36 25. Derivatives 37 26. Fair value of financial instruments 40 27. Objectives and policies of financial risk management 41 Income tax 28. Income tax 47 Equity and management of capital 29. Equity 48 30. Management of capital 50 Other explanatory notes 31. Investment commitments 51 32. Litigation, claims and contingent liabilities 51 33. Related party transactions 53 34. Subsequent events 55 35. Significant accounting policies 55 3 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish CONSOLIDATED INCOME STATEMENT (in PLN millions, except for earnings per share) 12 months ended 12 months ended Note 31 December 2021 31 December 2020 Revenue 6 11,928 11,508 External purchases 7.1 (6,786) (6,535) Labour expense 7.2 (1,421) (1,359) Other operating expense 7.3 (571) (448) Other operating income 7.3 358 260 Impairment of receivables and contract assets 20 (67) (151) Gain on the loss of control of Światłowód Inwestycje 4 1,543 - Gains on disposal of assets 8 52 61 Employment termination expense 17 (119) 13 Depreciation and impairment of right-of-use assets 14.1 (509) (434) Depreciation, amortisation and impairment of property, plant and equipment and intangible assets 11,12 (2,221) (2,511) Share of profit of joint venture 13 24 - Operating income 2,211 404 Interest income 20 34 33 Interest expense on lease liabilities 20 (53) (62) Other interest expense and financial charges 20 (200) (216) Discounting expense 20 (66) (43) Foreign exchange gains/(losses) 20 4 (54) Finance costs, net (281) (342) Income tax 28.1 (258) (16) Net income 1,672 46 Net income attributable to owners of Orange Polska S.A. 1,672 46 Net income attributable to non-controlling interests – – Earnings per share (in PLN) (basic and diluted) 35.4 1.27 0.04 Weighted average number of shares (in millions) 29.1 1,312 1,312 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in PLN millions) 12 months ended 12 months ended Note 31 December 2021 31 December 2020 Net income 1,672 46 Items that will not be reclassified to profit or loss Actuarial gains/(losses) on post-employment benefits 19 8 (3) Income tax relating to items not to be reclassified (2) 1 Items that may be reclassified subsequently to profit or loss Gains/(losses) on cash flow hedges 25 376 (13) Losses on receivables at fair value through other comprehensive income (6) - Income tax relating to items that may be reclassified (69) 2 Share of other comprehensive income of joint venture, net of tax 22 - Other comprehensive income/(loss), net of tax 329 (13) Total comprehensive income 2,001 33 Total comprehensive income attributable to owners of Orange Polska S.A. 2,001 33 Total comprehensive income attributable to non-controlling interests – – 4 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish CONSOLIDATED STATEMENT OF FINANCIAL POSITION (in PLN millions) At 31 December At 31 December Note 2021 2020 ASSETS Goodwill 10 2,285 2,285 Other intangible assets 11 3,984 4,184 Property, plant and equipment 12 9,728 10,301 Right-of-use assets 14.1 2,834 2,768 Investment in joint venture 13 1,333 - Trade receivables 15.1 354 382 Contract assets 15.2 89 70 Contract costs 15.3 127 106 Derivatives 25 273 - Other assets 16 432 41 Deferred tax assets 28.2 581 800 Total non-current assets 22,020 20,937 Inventories 281 230 Trade receivables 15.1 1,853 1,850 Contract assets 15.2 95 87 Contract costs 15.3 397 368 Derivatives 25 3 147 Income tax receivables 31 - Other assets 16 450 240 Prepaid expenses 94 83 Cash and cash equivalents 24 933 358 Total current assets 4,137 3,363 TOTAL ASSETS 26,157 24,300 EQUITY AND LIABILITIES Share capital 29.1 3,937 3,937 Share premium 832 832 Other reserves 191 (123) Retained earnings 7,649 5,951 Equity attributable to owners of Orange Polska S.A. 12,609 10,597 Non-controlling interests 2 2 Total equity 12,611 10,599 Trade payables 18.1 99 242 Lease liabilities 23, 27.6 2,302 2,216 Loans from related party 22 4,938 2,406 Other financial liabilities at amortised cost 28 2 Derivatives 25 3 100 Provisions 17 739 657 Contract liabilities 15.4 993 338 Employee benefits 19 73 53 Other liabilities 18.2 18 50 Total non-current liabilities 9,193 6,064 Trade payables 18.1 2,400 2,236 Lease liabilities 23, 27.6 528 488 Loans from related party 22 12 3,584 Other financial liabilities at amortised cost 33 19 Derivatives 25 2 32 Provisions 17 258 254 Contract liabilities 15.4 607 476 Employee benefits 19 171 204 Income tax liabilities 2 18 Other liabilities 18.2 340 326 Total current liabilities 4,353 7,637 TOTAL EQUITY AND LIABILITIES 26,157 24,300 5 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (in PLN millions) Share Share Other reserves Retained Equity Non- Total equity capital premium earnings attributable Controlling to owners interests of OPL S.A. Cash flow Actuarial gains/ Losses on Deferred tax Share of hedge reserve (losses) on post- receivables at fair other reserves employment value through other of joint venture benefits comprehensive income Balance at 1 January 2021 3,937 832 (89) (62) - 28 - 5,951 10,597 2 10,599 Net income - - - - - - - 1,672 1,672 - 1,672 Other comprehensive income - - 376 8 (6) (71) 22 - 329 - 329 Total comprehensive income for the 12 months ended 31 December 2021 - - 376 8 (6) (71) 22 1,672 2,001 - 2,001 Share-based payments (transactions with the owner, see Note 29.3) - - - - - - - 26 26 - 26 Transfer to inventories - - (18) - - 3 - - (15) - (15) Balance at 31 December 2021 3,937 832 269 (54) (6) (40) 22 7,649 12,609 2 12,611 Balance at 1 January 2020 3,937 832 (50) (59) - 20 - 5,875 10,555 2 10,557 Net income - - - - - - - 46 46 - 46 Other comprehensive loss - - (13) (3) - 3 - - (13) - (13) Total comprehensive income for the 12 months ended 31 December 2020 - - (13) (3) - 3 - 46 33 - 33 Share-based payments (transactions with the owner, see Note 29.3) - - - - - - - 3 3 - 3 Transfer to inventories - - (26) - - 5 - - (21) - (21) Other movements (see Note 29.4) - - - - - - - 27 27 - 27 Balance at 31 December 2020 3,937 832 (89) (62) - 28 - 5,951 10,597 2 10,599 6 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish CONSOLIDATED STATEMENT OF CASH FLOWS (in PLN millions) 12 months ended 12 months ended Note 31 December 2021 31 December 2020 OPERATING ACTIVITIES Net income 1,672 46 Adjustments to reconcile net income to cash from operating activities Gains on loss of control and disposal of assets 4,8 (1,595) (61) Depreciation, amortisation and impairment of property, plant and equipment, intangible assets and right-of-use assets 11,12,14.1 2,730 2,945 Share of profit of joint venture 13 (24) - Finance costs, net 20 281 342 Income tax 28.1 258 16 Change in provisions and allowances (7) (150) Operating foreign exchange and derivatives (gains)/losses, net 3 (10) Change in working capital Increase in inventories, gross (51) (5) Decrease in trade receivables, gross 15.1 75 383 (Increase)/decrease in contract assets, gross 15.2 (28) 26 Increase in contract costs 15.3 (50) (46) Increase/(decrease) in trade payables 100 (64) Increase/(decrease) in contract liabilities 15.4 86 (1) Increase in prepaid expenses and other assets (104) (22) Increase/(decrease) in other payables 99 (33) Interest received 30 33 Interest paid and interest rate effect paid on derivatives, net (342) (370) Exchange rate effect received on derivatives, net 4 2 Income tax paid (36) (26) Net cash provided by operating activities 3,101 3,005 INVESTING ACTIVITIES Payments for purchases of property, plant and equipment and intangible assets 11,12 (1,995) (2,015) Investment grants received 18.2 109 177 Investment grants paid to property, plant and equipment and intangible assets suppliers 18.2 (204) (221) Exchange rate effect received on derivatives economically hedging capital expenditures, net 7 10 Proceeds from sale of property, plant and equipment and intangible assets 196 60 Proceeds from loss of control of Światłowód Inwestycje, net of cash and transaction costs 4 872 - Income tax paid in relation to loss of control of Światłowód Inwestycje 4 (122) - VAT paid in relation to loss of control of Światłowód Inwestycje 4 (157) - Cash paid for acquisition of subsidiaries, net of cash acquired 4 (22) (75) Receipts from loan to joint venture and other financial instruments, net 4 160 - Net cash used in investing activities (1,156) (2,064) FINANCING ACTIVITIES Proceeds from long-term debt 23 26 - Repayment of long-term loans from related party 23 (101) - Repayment of lease liabilities 23 (481) (421) Repayment of revolving credit line and other debt, net 23 (906) (568) Exchange rate effect received on derivatives hedging debt, net 23 91 - Net cash used in financing activities (1,371) (989) Net change in cash and cash equivalents 574 (48) Effects of exchange rate changes on cash and cash equivalents 1 2 Cash and cash equivalents at the beginning of the period 24 358 404 Cash and cash equivalents at the end of the period 24 933 358 7 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish 1. Corporate information 1.1. The Orange Polska Group Orange Polska S.A. (“Orange Polska” or “the Company” or “OPL S.A.”), a joint stock company, was incorporated and commenced its operations on 4 December 1991. The Orange Polska Group (“the Group”) comprises Orange Polska and its subsidiaries. The Group is a part of Orange Group based in France. Orange Polska shares are listed on the Warsaw Stock Exchange. The Group is one of the biggest providers of telecommunications services in Poland. The Group provides mobile and fixed telecommunications services, including calls, messaging, content, access to the Internet and TV. In addition, the Group provides IT and integration services, leased lines and other telecommunications value added services, sells telecommunications equipment, provides data transmission, constructs telecommunications infrastructure and sells electrical energy. Orange Polska’s registered office is located in Warsaw, Poland, at 160 Aleje Jerozolimskie St. The Group’s telecommunications operations are subject to the supervision of Office of Electronic Communication (“UKE”). Under the Telecommunication Act, UKE can impose certain obligations on telecommunications companies that have a significant market power on a relevant market. Orange Polska S.A. is deemed to have a significant market power on certain relevant markets. 1.2. Entities of the Group The Group comprises Orange Polska and the following subsidiaries: Share capital Entity Location Scope of activities owned by the Group 31 December 31 December 2021 2020 Integrated Solutions Sp. z o.o. Warsaw, Poland Provision of integrated IT and network services. 100 % 100 % TP TelTech Sp. z o.o. Łódź, Poland Design, development and servicing of telecommunications network, monitoring of alarm signals. 100 % 100 % BlueSoft Sp. z o.o. Warsaw, Poland Provision of IT services and solutions. 100 % 100 % Orange Energia Sp. z o.o. Warsaw, Poland Sale of electrical energy. 100 % 100 % Essembli Sp. z o.o. Warsaw, Poland Provision of IT services and solutions. 100 % 100 % Craftware Sp. z o.o. Warsaw, Poland Provision of IT services and solutions. 100 % 100 % Orange Szkolenia Sp. z o.o. Warsaw, Poland Training and hotel services, insurance agent. 100 % 100 % Telefony Podlaskie S.A. Sokołów Podlaski, Poland Local provider of fixed-line, internet and cable TV services. 89.3 % 89.3 % Orange Retail S.A. Modlnica, Poland Points of sale rental. 100 % 100 % Pracownicze Towarzystwo Emerytalne Orange Polska S.A. Warsaw, Poland Management of employee pension fund. 100 % 100 % Fundacja Orange Warsaw, Poland Charity foundation. 100 % 100 % Telekomunikacja Polska Sp. z o.o. Warsaw, Poland No operational activity. 100 % 100 % Światłowód Inwestycje Sp. z o.o. (1) Warsaw, Poland Building fibre infrastructure and offering wholesale access services to other operators. 50 % 100 % (1) 50% stake was sold on 31 August 2021 and, as a result, Światłowód Inwestycje became a jointly controlled entity accounted for using the equity method (see Note 4). 8 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Additionally, the Group and T-Mobile Polska S.A. hold a 50% interest each in NetWorkS! Sp. z o.o., located in Warsaw. This company was classified as a joint operation as its scope of activities comprises management, development and maintenance of networks owned by the Group and T-Mobile Polska S.A. NetWorkS! Sp. z o.o. was incorporated following the agreement on reciprocal use of mobile access networks between both operators. This agreement was signed in 2011 for 15 years with an option to extend it and is also classified as a joint operation for accounting purpose. During the 12 months ended 31 December 2021 and 2020, the voting power held by the Group was equal to the Group’s interest in the share capital of its subsidiaries. Main acquisitions, disposals and changes in scope of consolidation are described in Note 4. 2. Statement of compliance and basis of preparation These Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union. IFRSs comprise standards and interpretations approved by the International Accounting Standards Board (“IASB”) and the IFRS Interpretations Committee. These Consolidated Financial Statements have been prepared in millions of Polish złoty (“PLN”). Comparative amounts for the year ended 31 December 2020 have been compiled using the same basis of preparation. The Consolidated Financial Statements have been prepared under the historical cost convention, except for the fair value applied to derivative financial instruments, selected trade receivables arising from sales of mobile handsets in instalments and contingent consideration receivable from the sale of 50% stake in Światłowód Inwestycje. The Consolidated Financial Statements have been prepared on the going concern basis. The financial data of all entities constituting the Group included in these Consolidated Financial Statements were prepared using uniform group accounting policies. These Consolidated Financial Statements were authorised for issuance by the Management Board on 16 February 2022 and are subject to approval at the General Meeting of Orange Polska S.A. The principles applied to prepare financial data relating to the year ended 31 December 2021 are described in Note 35 and are based on all standards and interpretations endorsed by the European Union and applicable to the reporting period beginning 1 January 2021. Adoption of standards and interpretations in 2021 There were no new standards or interpretations issued from the date when the IFRS Consolidated Financial Statements for the year ended 31 December 2020 were published. Changes to standards and interpretations in 2021 did not result in any changes to accounting policies applied by the Group. 3. Segment information and performance measures The Group reports a single operating segment as decisions about resources to be allocated and assessment of performance are made on a consolidated basis. Group performance is currently evaluated by the Management Board based on revenue, EBITDAaL, net income, eCapex (economic capital expenditures), organic cash flows, net financial debt and net financial debt to EBITDAaL ratio based on cumulative EBITDAaL for the last four quarters. Since the calculation of EBITDAaL, eCapex, organic cash flows, and net financial debt is not defined by IFRS, these performance measures may not be comparable to similar indicators used by other entities. The methodology adopted by the Group is presented below. 9 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Starting from 2021, the Group has a joint venture accounted for using the equity method and definitions of performance measures have been supplemented taking into account the impact of the joint venture on the Group performance: share of profits/losses of joint venture and elimination of margin (unrealised profit) earned on asset related transactions with joint venture are excluded from EBITDAaL calculation. Additionally, the Group has clarified a treatment of the rights of perpetual usufruct of land in calculation of performance measures. The rights of perpetual usufruct of land which on initial recognition were classified as property, plant and equipment and were subsequently, on adoption of IFRS 16, reclassified to right-of-use assets, are treated similarly to property, plant and equipment in business decisions made by the Management Board. Consequently, impairment and result on disposal of these rights is excluded from EBITDAaL calculation, while proceeds accrued on their disposal offset capital expenditures. The clarifications of definitions described above do not require any restatements in calculation of performance measures for the comparative period. EBITDAaL is the key measure of operating profitability used by the Management Board and corresponds to operating income before gains on disposal of assets, depreciation, amortisation and impairment of property, plant and equipment and intangible assets, impairment of the rights of perpetual usufruct of land historically recognised as property, plant and equipment and subsequently reclassified to right-of-use assets and share of profits/losses of associates and joint ventures, decreased by interest expense on lease liabilities and adjusted for the impact of deconsolidation of subsidiaries, costs related to acquisition, disposal and integration of businesses, employment termination programs, restructuring costs, elimination of margin earned on asset related transactions with joint ventures and associates accounted for using the equity method, significant claims, litigation and other risks as well as other significant non-recurring items. eCapex (economic capital expenditures) is the key measure of resources allocation used by the Management Board and represents acquisitions of property, plant and equipment and intangible assets excluding telecommunications licences, decreased by the proceeds accrued on disposal of these assets as well as on disposal of the rights of perpetual usufruct of land historically recognised as property, plant and equipment (‘proceeds accrued on disposal of assets’). eCapex does not include acquisitions of right-of-use assets. Organic cash flows are the key measure of cash flow generation used by the Management Board and correspond to net cash provided by operating activities decreased by payments for purchases of property, plant and equipment and intangible assets and repayment of lease liabilities, increased/decreased by impact of net exchange rate effect received/paid on derivatives economically hedging capital expenditures and lease liabilities and proceeds from sale of property, plant and equipment and intangible assets and adjusted for the payments for acquisition of telecommunications licences, payments for costs related to acquisition, disposal and integration of businesses not included in purchase price and payments relating to significant claims, litigation and other risks. Cash flows arising from obtaining or losing control of subsidiaries or other businesses, including significant tax cash flows specifically identified with these transactions, are classified as investing activities and by definition are not included in organic cash flows. Net financial debt and net financial debt to EBITDAaL ratio are the key measures of indebtedness and liquidity used by the Management Board. The calculation of net financial debt is presented in Note 21. Basic financial data of the operating segment is presented below: (in PLN millions) 12 months ended 12 months ended 31 December 2021 31 December 2020 Revenue 11,928 11,508 EBITDAaL 2,963 2,797 Net income 1,672 46 eCapex 1,737 1,801 Organic cash flows 867 642 10 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish At 31 December At 31 December 2021 2020 Net financial debt (in PLN millions, see Note 21) 4,076 5,549 Net financial debt/EBITDAaL ratio 1.4 2.0 Calculation of performance measures of the operating segment is presented below: (in PLN millions) 12 months ended 12 months ended 31 December 2021 31 December 2020 Operating income 2,211 404 Less gain on the loss of control of Światłowód Inwestycje (1,543) - Less gains on disposal of assets (52) (61) Add-back of depreciation, amortisation and impairment of property, plant and equipment and intangible assets (1) 2,255 2,511 Less share of profit of joint venture adjusted for elimination of margin earned on asset related transactions with joint venture (9) - Less interest expense on lease liabilities (53) (62) Adjustment for the impact of employment termination programs 129 (22) Adjustment for the costs related to acquisition, disposal and integration of subsidiaries (see Note 4) 25 27 EBITDAaL 2,963 2,797 (1) Includes impairment of rights of perpetual usufruct of land historically recognised as property, plant and equipment, subsequently reclassified to right-of-use assets (PLN 34 million in 2021). (in PLN millions) 12 months ended 12 months ended 31 December 2021 31 December 2020 Acquisitions of property, plant and equipment and intangible assets 2,011 1,893 Proceeds accrued on disposal of assets (274) (92) eCapex 1,737 1,801 (in PLN millions) 12 months ended 12 months ended 31 December 2021 31 December 2020 Net cash provided by operating activities 3,101 3,005 Payments for purchases of property, plant and equipment and intangible assets (1,995) (2,015) Exchange rate effect received on derivatives economically hedging capital expenditures, net 7 10 Proceeds from sale of property, plant and equipment and intangible assets 196 60 Repayment of lease liabilities (481) (421) Adjustment for payment for costs related to acquisition, disposal and integration of subsidiaries (see Note 4) 39 3 Organic cash flows 867 642 4. Main acquisitions, disposals and changes in scope of consolidation Joint venture with APG Group On 31 August 2021, the Orange Polska Group and the APG Group (APG’s subsidiary Acari Investments Holding B.V., “APG”) finalised a share sale agreement under which the Group disposed of its 50% stake in Światłowód Inwestycje Sp. z o.o., a fully-owned subsidiary of OPL S.A. whose scope of activities comprises building fibre infrastructure and offering wholesale access services to other operators. Total fair value of the consideration amounted to PLN 1,323 million and consisted of: a. PLN 897 million received in cash and 11 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish b. PLN 426 million to be received in years 2022-2026 conditional on the Group delivering on the agreed network rollout schedule (maximum contractual amount of PLN 487 million before discounting). The amount receivable from APG Group is recognised as other assets in the consolidated statement of financial position. The Group applied the expected present value technique to measure the fair value of the contingent consideration receivable. More details on the assumptions and valuation methodology are described in the Note 16. As a result of the transaction, the Group sold the following assets and liabilities of Światłowód Inwestycje: (in PLN millions) Assets: Property, plant and equipment 388 Cash and cash equivalents 21 Other assets (1) 920 Total assets 1,329 Liabilities: Financial liabilities at amortised cost (2) 162 Derivatives 17 Other liabilities 65 Total liabilities 244 Net assets of Światłowód Inwestycje 1,085 of which: Net assets derecognised from the consolidated financial statements 601 Net assets related to settlements between Światłowód Inwestycje and Orange Polska (1,2) 484 (1) Includes PLN 691 million of prepayment made by Światłowód Inwestycje to OPL S.A. for lease and services to be rendered in the future by OPL S.A. On the deconsolidation date, the Group recognised the prepayment received in contract liabilities in the consolidated statement of financial position. (2) Includes PLN 158 million of loan made by OPL S.A. to Światłowód Inwestycje, recognised on the deconsolidation date as a loan receivable in the consolidated statement of financial position. The loan was repaid by Światłowód Inwestycje in 2021. Gain on the loss of control of Światłowód Inwestycje recognised in the consolidated income statement amounted to PLN 1,543 million and consisted of: (in PLN millions) Sales price for the 50% stake sold 1,323 Fair value of the remaining 50% stake retained 1,323 Net assets of Światłowód Inwestycje (1) (1,085) Transaction costs incurred (18) Gain on the loss of control of Światłowód Inwestycje 1,543 (1) Includes PLN 484 million of net assets related to settlements between Światłowód Inwestycje and Orange Polska. As a result of the above transaction, Światłowód Inwestycje became a jointly controlled entity accounted for using the equity method. Additionally, the transaction assumes equity contributions for each party of around PLN 300 million to be made in years 2023-2026. Orange Polska has an option to buy c.1% of additional stake in Światłowód Inwestycje and obtain control in years 2027-2029. In the 12 months ended 31 December 2021, the Group paid PLN 122 million of CIT (after utilisation of tax losses from previous years) and PLN 157 million of VAT with respect to the transaction. These payments are classified as cash flows from investing activities as they can be specifically identified with the loss of control of Światłowód Inwestycje. The payment occurred before the Group obtained tax ruling at the end of September 2021. Consequently, the Group recalculated the taxable gain on the sale of 50% stake in Światłowód Inwestycje and as at 31 December 2021, recognised income tax receivable of PLN 92 million related to the consideration to be received and taxed in the next years, and decreased deferred tax asset by PLN 79 million. 12 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Acquisition of Craftware in 2020 On 7 December 2020, the Group purchased 100% of shares in Craftware Sp. z o.o. (‘Craftware’). Total transaction value, consisting of the enterprise value and settlements related to cash and working capital, amounted to PLN 126 million and included acquisition price of PLN 94 million and remuneration for post-transaction services estimated at PLN 32 million. Out of the acquisition price, PLN 87 million was paid upon signing of the agreement and PLN 2 million in 2021. The remaining part, estimated at PLN 5 million, is a contingent consideration that will be settled before the end of 2024 and will be based on achieving certain financial targets of Craftware in years 2021–2023 as well as on meeting certain other legal conditions. Remuneration for post-transaction services is accounted for as a cost related to integration of the new subsidiary and is recognised in the consolidated income statement in years 2020-2022 as labour expense. In the 12 months ended 31 December 2021 and 2020, the Group recognised, respectively, PLN 16 million and PLN 7 million of costs related to acquisition and integration of the new subsidiary. In the 12 months ended 31 December 2021 and 2020, the Group paid, respectively, PLN 6 million and PLN 1 million of costs related to acquisition and integration of the new subsidiary. Due to a short period of time between the acquisition and the date when the Consolidated Financial Statements for the year ended 31 December 2020 were authorised for issuance, provisional accounting for a business combination was made. In 2021, the Group finalised the accounting for the acquisition of Craftware. There were no adjustments in 2021 to the assets and liabilities recognised as at 31 December 2020. Acquisition of BlueSoft and Essembli in 2019 In 2019, the Group purchased 100% of shares in BlueSoft Sp. z o.o. (“BlueSoft”) and Essembli Sp. z o.o. – a subsidiary of BlueSoft. Total transaction value, consisting of the enterprise value and settlements related to cash and working capital, amounted to PLN 204 million and included acquisition price of PLN 182 million and remuneration for post-transaction services estimated at PLN 22 million. Out of the acquisition price, PLN 147 million was paid upon signing of the agreement, PLN 5 million in 2020 and PLN 20 million in 2021. The remaining part, estimated at PLN 10 million, is a contingent consideration that will be settled before the end of 2022 and will be based on meeting certain legal conditions. Remuneration for post-transaction services is accounted for as a cost related to integration of new subsidiaries and was recognised in the consolidated income statement in years 2019-2021 as labour expense. In the 12 months ended 31 December 2021 and 2020, the Group recognised, respectively, PLN 9 million and PLN 15 million of costs related to integration of these subsidiaries. In the 12 months ended 31 December 2021 and 2020, the Group paid, respectively, PLN 29 million and PLN 2 million of costs related integration of these subsidiaries. 5. Impact of COVID-19 pandemic The situation related to the COVID-19 pandemic remained volatile, with Poland and other countries experiencing new waves of COVID-19 in 2021. The pandemic has significantly impacted the Polish economy. Poland’s GDP decreased by 2.5% in 2020, by 0.8% in the first quarter of 2021 and started to grow from the second quarter of 2021 (year-on-year). Preliminary estimations of the Polish Statistical Office indicate that GDP in Poland increased by 5.7% in 2021. Since the beginning of the COVID-19 pandemic in the first quarter of 2020, the Management has adopted a number of counteractive measures to mitigate the negative impact of the pandemic on Group’s business performance. The results achieved by the Group indicate that the core of the Group’s operations remain relatively immune to the impact of the pandemic. Data and voice connectivity has become more essential than ever to the needs of consumers and businesses. The majority of revenue and profits are derived from subscription-based services, which allows the Group to rely on relatively stable and predictable revenue streams. The Group performed an impairment test of the single telecom operator Cash Generating Unit as at 31 December 2021, 30 June 2021 and 31 December 2020 (see Note 9). No impairment loss was recognised as a result of these tests. 13 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish The Group performed an analysis of available information about past events, current conditions and forecasts of future economic conditions to evaluate the impact of COVID-19 on the bad debt allowance. Based on an analysis of current conditions, a scenario analysis and the bad debt experience in 2011-2012 when a significant reduction in GDP growth last occurred, the Group recognised additional PLN 4 million of impairment of trade receivables in 2021 and PLN 26 million in 2020. The impact of the COVID-19 pandemic on the Group (both direct and indirect), its financial position and performance in next periods depends on many factors which are beyond the control of the Group. These factors include, among others: the length and severity of the pandemic, measures taken by the government to limit the pandemic and to protect society from the effects of the crisis and in result its ultimate impact on the Polish economy including inflationary pressure, energy prices and supply disturbances. The Group will monitor the situation, its impact on the Polish economy and indicators more specific to the Group. 6. Revenue Revenue is disaggregated as follows: Mobile only services Revenue from mobile offers (excluding consumer market convergent offers) and Machine to Machine connectivity. Mobile only services revenue does not include equipment sales, incoming and visitor roaming revenue. Fixed only services Revenue from fixed offers (excluding consumer market convergent offers) including mainly (i) fixed broadband (including wireless for fixed), (ii) fixed narrowband, and (iii) data infrastructure and networks for business customers. Revenue from fixed offers includes also content element (linear TV and OTT - over-the-top). Convergent services (consumer market) Revenue from consumer market convergent offers. A convergent offer is defined as an offer combining at least a broadband access and a mobile voice contract with a financial benefit (excluding MVNOs - mobile virtual network operators). Convergent services revenue does not include equipment sales, incoming and visitor roaming revenue. Revenue from convergent offers includes also content element (linear TV and OTT). Equipment sales Revenue from all retail mobile and fixed equipment sales, excluding equipment sales associated with the supply of IT and integration services. IT and integration services Revenue from ICT (Information and Communications Technology) services and Internet of Things services, including licences and equipment sales associated with the supply of these services. Wholesale Revenue from telecom operators for (i) mobile: incoming, visitor roaming, domestic mobile interconnection (i.e. domestic roaming agreement and network sharing) and MVNO, (ii) fixed carriers services, and (iii) other (mainly data infrastructure and networks). Other revenue Includes (i) revenue from sale of electrical energy, (ii) revenue from infrastructure projects, (iii) other miscellaneous revenue e.g. from property rentals, research and development activity and equipment sales to brokers. 14 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish (in PLN millions) 12 months ended 12 months ended 31 December 2021 31 December 2020 Mobile only services 2,636 2,557 Fixed only services 1,968 2,081 Narrowband 682 798 Broadband 859 856 Network solutions (business market) 427 427 Convergent services (consumer market) 2,002 1,741 Equipment sales 1,460 1,344 IT and integration services 1,186 999 Wholesale 2,190 2,422 Mobile wholesale 1,371 1,438 Fixed wholesale 460 654 Other 359 330 Other revenue 486 364 Total revenue 11,928 11,508 IT and integration services, wholesale and other revenue for the 12 months ended 31 December 2021 and 2020 include, respectively, PLN 82 million and PLN 83 million of lease revenue that is outside the scope of IFRS 15 “Revenue from Contracts with Customers”. Revenue is generated mainly in the territory of Poland. Approximately 4.1% and 4.5% of the total revenue for the 12 months ended 31 December 2021 and 2020, respectively, was earned from entities which are not domiciled in Poland, mostly from interconnect services. 7. Operating expense and income 7.1. External purchases (in PLN millions) 12 months ended 12 months ended 31 December 2021 31 December 2020 Commercial expenses (2,566) (2,380) - cost of handsets and other equipment sold (1,822) (1,737) - commissions, advertising, sponsoring costs and other (744) (643) Interconnect expenses (1,782) (1,991) Network and IT expenses (673) (650) Other external purchases (1,765) (1,514) Total external purchases (6,786) (6,535) Other external purchases include mainly costs of content, real estate operating and maintenance costs, customer support and management services, costs of temporary staff, subcontracting fees, rental costs, postage and storage costs. 15 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish 7.2. Labour expense (in PLN millions) 12 months ended 12 months ended 31 December 2021 31 December 2020 Average number of active employees (full time equivalent) 10,924 11,720 Wages and salaries (1,296) (1,336) Social security and other charges (301) (313) Long-term employee benefits (see Note 19.1) 5 61 Capitalised personnel costs (1) 245 252 Other employee benefits (74) (23) Total labour expense (1,421) (1,359) (1) Costs capitalised as property, plant and equipment and other intangible assets. 7.3. Other operating expense and income (in PLN millions) 12 months ended 12 months ended 31 December 2021 31 December 2020 Taxes other than income tax (274) (280) Orange brand fee (see Note 33.2) (136) (117) Expense related to sale of fibre network goods and services to joint venture (93) - Other expense and changes in provisions, net (68) (51) Total other operating expense (571) (448) Total other operating income 358 260 Other operating income includes mainly income from sale of fibre network goods and services to joint venture, income from the Orange Group resulting from shared resources and income from scrapped assets. 7.4. Research and development During the 12 months ended 31 December 2021 and 2020, research and development costs expensed in the consolidated income statement mainly in labour expense and depreciation, amortisation and impairment of property, plant and equipment and intangible assets, amounted to PLN 57 million and PLN 59 million, respectively. 8. Gains on disposal of assets During the 12 months ended 31 December 2021 and 2020, gains on disposal of assets amounted to PLN 52 million and PLN 61 million, respectively, and included mainly gains on disposal of real estate and fibre network assets. 9. Impairment test 9.1 Telecom operator Cash Generating Unit Vast majority of the Group’s individual assets do not generate cash inflows independently from other assets due to the nature of the Group’s activities, therefore the Group identifies all telecom operations as a single telecom operator Cash Generating Unit (“CGU”). As at 31 December 2021, 30 June 2021 and 31 December 2020 the Group performed impairment tests of the CGU (including goodwill). No impairment loss was recognised in the years 2021 and 2020. 16 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish The following key assumptions were used to determine the value in use of the telecom operator CGU: - value of the market, penetration rate, market share and the level of the competition, level of prices and decisions of the regulator in terms of pricing, customer base, the level of commercial expenses required to replace products and keep up with existing competitors or new market entrants, the impact of changes in revenue on direct costs; - the level of capital expenditures which may be affected by the roll-out of necessary new technologies or regulatory decisions concerning telecommunications licences allocation; - macroeconomic environment and its impact on the CGU performance; - the length and severity of the COVID-19 pandemic and its impact on the CGU performance; - discount rate which is based on weighted average cost of capital and reflects current market assessment of the time value of money and the risks specific to activities of the CGU; and - perpetuity growth rate which reflects Management’s assessment of cash flows evolution after the last year covered by the cash flow projections. The amounts assigned to each of these parameters reflect past experience adjusted for expected changes over the timeframe of the business plan, but may also be affected by unforeseeable changes in the political, economic or legal framework. Telecom operator CGU At 31 December 2021 At 30 June 2021 At 31 December 2020 Basis of recoverable amount Value in use Value in use Value in use Sources used Business plan Business plan Business plan 5 years cash flow 5 years cash flow 5 years cash flow projections projections projections Perpetuity growth rate 1.5 % 1.5 % 1.5 % Post-tax discount rate 7.25 % 7.00 % 7.25 % Pre-tax discount rate (1) 8.49 % 8.15 % 8.47 % (1) Pre-tax discount rate is calculated as a post-tax discount rate adjusted to reflect the specific amount and timing of the future tax cash flows. Sensitivity of recoverable amount The value in use of the telecom operator CGU as at 31 December 2021 exceeds its carrying value by PLN 4.8 billion. Any of the following changes in key assumptions: - a 28% fall in projected cash flows after fifth year or - a 1.4 p.p. decrease in growth rate to perpetuity or - a 1.7 p.p. increase in post-tax discount rate would bring the value in use of the telecom operator CGU to the level of its carrying value. 9.2 Investment in joint venture The Group’s investment in joint venture (see Note 13) is not included in the telecom operator CGU as it generates cash inflows that are largely independent of those from other Group’s assets. Consequently, the investment in joint venture is analysed for impairment individually. As at 31 December 2021, the Group has not identified any objective evidence of impairment of the investment in joint venture resulting from events that occurred after 31 August 2021, i.e. the date of initial recognition of the investment in joint venture. Impairment test of the investment in joint venture was not performed as at 31 December 2021 and no impairment loss was recognised in 2021. 17 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish 10. Goodwill (in PLN millions) At 31 December 2021 At 31 December 2020 Accumulated Accumulated CGU Cost impairment Net Cost impairment Net Telecom operator 4,078 (1,793) 2,285 4,078 (1,793) 2,285 Total goodwill 4,078 (1,793) 2,285 4,078 (1,793) 2,285 The goodwill of PLN 3,909 million arose in 2005 on acquisition of the remaining 34% of non-controlling interest in the mobile business controlled by OPL S.A. The remaining balance of goodwill of PLN 169 million arose on acquisition of certain subsidiaries, mainly BlueSoft and Essembli (see Note 4). 11. Other intangible assets (in PLN millions) At 31 December 2021 Accumulated Accumulated Cost amortisation impairment Net Telecommunications licences 5,728 (3,424) - 2,304 Software 6,282 (4,726) - 1,556 Other intangibles 276 (141) (11) 124 Total other intangible assets 12,286 (8,291) (11) 3,984 (in PLN millions) At 31 December 2020 Accumulated Accumulated Cost amortisation impairment Net Telecommunications licences 5,760 (3,109) - 2,651 Software 5,859 (4,487) - 1,372 Other intangibles 298 (126) (11) 161 Total other intangible assets 11,917 (7,722) (11) 4,184 Details of telecommunications licences are as follows: (in PLN millions) Acquisition Years to Net book value date expiration (2) At 31 December 2021 At 31 December 2020 800 MHz 2016 9.1 1,858 2,062 900 MHz 2014 7.5 180 204 1800 MHz 1997 5.6 - - 1800 MHz (1) 2013 6.0 95 111 2100 MHz 2000 1.0 100 195 2600 MHz 2016 9.1 71 79 Total telecommunications licences 2,304 2,651 (1) Licence held under agreement with T-Mobile Polska S.A. (2) Remaining useful life in years as at 31 December 2021. 18 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Movements in the net book value of other intangible assets for the 12 months ended 31 December 2021 were as follows: (in PLN millions) Telecommunications Total other intangible licences Software Other intangibles assets Opening balance net of accumulated amortisation and impairment 2,651 1,372 161 4,184 Acquisitions of intangible assets - 489 19 508 Amortisation (347) (327) (27) (701) Impairment - - (2) (2) Reclassifications and other, net - 22 (27) (5) Closing balance 2,304 1,556 124 3,984 From 2021, as a result of an annual review of the estimated useful lives of fixed assets, the Group extended the estimated useful lives for certain items of software. Consequently, the amortisation expense was lower by PLN 116 million in the 12 months ended 31 December 2021 in comparison to 2020. Movements in the net book value of other intangible assets for the 12 months ended 31 December 2020 were as follows: (in PLN millions) Telecommunications Total other intangible licences Software Other intangibles assets Opening balance net of accumulated amortisation and impairment 3,010 1,413 122 4,545 Acquisitions of intangible assets - 378 19 397 Recognition of customer contracts and related customer relationships of Craftware - - 54 54 Amortisation (359) (438) (24) (821) Impairment, net - - (7) (7) Reclassifications and other, net - 19 (3) 16 Closing balance 2,651 1,372 161 4,184 12. Property, plant and equipment (in PLN millions) At 31 December 2021 Accumulated Accumulated Cost depreciation impairment Net Land and buildings 2,244 (1,762) (11) 471 Network 40,233 (31,508) (84) 8,641 Terminals 1,956 (1,664) - 292 Other IT equipment 1,267 (1,027) - 240 Other 296 (210) (2) 84 Total property, plant and equipment 45,996 (36,171) (97) 9,728 (in PLN millions) At 31 December 2020 Accumulated Accumulated Cost depreciation impairment Net Land and buildings 2,311 (1,772) (14) 525 Network 40,204 (31,012) (80) 9,112 Terminals 1,986 (1,640) - 346 Other IT equipment 1,272 (1,039) - 233 Other 294 (207) (2) 85 Total property, plant and equipment 46,067 (35,670) (96) 10,301 19 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish As at 31 December 2021 and 2020, the amount of expenditures recognised in the carrying amount of items of property, plant and equipment in the course of their construction amounted to PLN 1,349 million and PLN 1,393 million, respectively. Movements in the net book value of property, plant and equipment for the 12 months ended 31 December 2021 were as follows: (in PLN millions) Total property, Land and Other IT plant and buildings Network Terminals equipment Other equipment Opening balance net of accumulated depreciation and impairment 525 9,112 346 233 85 10,301 Acquisitions of property, plant and equipment 45 1,269 97 65 27 1,503 Derecognition of assets in Światłowód Inwestycje (see Note 4) - (387) (1) - - (388) Disposals and liquidations (18) (151) - - - (169) Depreciation (77) (1,192) (151) (66) (18) (1,504) Impairment, net (5) (9) - - - (14) Dismantling costs, reclassifications and other, net 1 (1) 1 8 (10) (1) Closing balance 471 8,641 292 240 84 9,728 Movements in the net book value of property, plant and equipment for the 12 months ended 31 December 2020 were as follows: (in PLN millions) Total property, Land and Other IT plant and buildings Network Terminals equipment Other equipment Opening balance net of accumulated depreciation and impairment 587 9,111 394 228 82 10,402 Acquisitions of property, plant and equipment 35 1,256 112 64 29 1,496 Disposals and liquidations (12) (1) - - (1) (14) Depreciation (75) (1,340) (160) (62) (21) (1,658) Impairment, net 2 (27) - - - (25) Dismantling costs, reclassifications and other, net (12) 113 - 3 (4) 100 Closing balance 525 9,112 346 233 85 10,301 13. Investment in joint venture The Group has a 50% interest in Światłowód Inwestycje Sp. z o.o. whose scope of activities comprises building fibre infrastructure and offering wholesale access services to other operators in Poland. Światłowód Inwestycje is a jointly controlled entity accounted for using the equity method. Światłowód Inwestycje Sp. z o.o. is structured through a separate entity and there are no contractual terms or other relevant facts and circumstances which indicate that the parties retain rights to the assets and obligations for the liabilities of the joint arrangement. As a result, the Group considers that the parties which jointly control the arrangement have rights to the net assets and the Group classifies the joint arrangement as a joint venture. The Group and the other investor in the joint venture are committed under certain conditions to make additional equity contributions of around PLN 300 million (each party) in years 2023-2026. Orange Polska has an option to buy c.1% of additional stake in Światłowód Inwestycje and obtain control in years 2027-2029. 20 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Summarised financial information of the joint venture and a reconciliation with the carrying amount of the investment in joint venture in the consolidated financial statements are presented below: (in PLN millions) At 31 December 2021 Assets Property, plant and equipment 569 Other non-current assets (1) 822 Total non-current assets 1,391 Cash and cash equivalents 26 Other current assets (1) 140 Total current assets 166 Total assets 1,557 Liabilities Non-current financial liabilities excluding trade and other payables 177 Other non-current liabilities 32 Total non-current liabilities 209 Trade and other payables 166 Total current liabilities 166 Total liabilities 375 Net assets 1,182 Group’s share of net assets (50%) 591 Fair value adjustment at initial recognition(2) 777 Elimination of unrealised profit on asset related transactions (35) Carrying amount of investment in joint venture 1,333 (1) Includes PLN 692 million of prepayment made by Światłowód Inwestycje to OPL S.A. for lease and services to be rendered in the future by OPL S.A. (2) Fair value of the 50% stake retained less 50% of net assets of Światłowód Inwestycje at initial recognition of investment in joint venture. (in PLN millions) 1 September - 31 December 2021 (1) Revenue 34 Operating loss (2) (12) Finance income, net (3) 73 Income tax (14) Net income 47 Other comprehensive income 45 Total comprehensive income 92 Share of profit of joint venture (50% of net income) 24 Share of other comprehensive income of joint venture (50%) 22 (1) The amounts for the period in which the company was fully consolidated (January – August 2021) are not included. (2) Includes PLN (8) million of depreciation and amortisation of property, plant and equipment, intangible assets and right-of-use assets. (3) Includes mainly change in fair value of derivatives. 21 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish 14. Leases 14.1. Group as a lessee The Group leases mainly land and buildings. Some of the agreements are denominated in foreign currencies and some of them are indexed with price indices applicable for a given currency. Some of the agreements include extension and termination options. (in PLN millions) At 31 December 2021 Accumulated Accumulated Cost depreciation impairment Net Land and buildings 3,501 (1,028) (35) 2,438 Terminals 477 (193) - 284 Other 182 (70) - 112 Total right-of-use assets 4,160 (1,291) (35) 2,834 (in PLN millions) At 31 December 2020 Accumulated Accumulated Cost depreciation impairment Net Land and buildings 3,139 (684) (2) 2,453 Terminals 370 (133) - 237 Other 135 (57) - 78 Total right-of-use assets 3,644 (874) (2) 2,768 Movements in the net book value of right-of-use assets for the 12 months ended 31 December 2021 were as follows: (in PLN millions) Total right- Land and buildings Terminals Other of-use assets Opening balance net of accumulated depreciation and impairment 2,453 237 78 2,768 Additions 146 127 72 345 Modifications, terminations and disposals 232 - 1 233 Depreciation (362) (79) (35) (476) Impairment, net (33) - - (33) Dismantling costs, reclassifications and other, net 2 (1) (4) (3) Closing balance 2,438 284 112 2,834 Movements in the net book value of right-of-use assets for the 12 months ended 31 December 2020 were as follows: (in PLN millions) Total right- Land and buildings Terminals Other of-use assets Opening balance net of accumulated depreciation and impairment 2,417 194 70 2,681 Additions 196 105 52 353 Modifications, terminations and disposals 143 - (13) 130 Depreciation (342) (62) (30) (434) Dismantling costs, reclassifications and other, net 39 - (1) 38 Closing balance 2,453 237 78 2,768 Information on lease liabilities is disclosed in Notes 20, 23, 27.3 and 27.6. 22 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish 14.2. Group as a lessor When considering the Group as a lessor, future minimum lease payments under non-cancellable operating leases as at 31 December 2021 and 2020 amounted to PLN 56 million and PLN 61 million, respectively, and related mainly to the lease of land and buildings. 15. Assets and liabilities relating to contracts with customers 15.1. Trade receivables (in PLN millions) At 31 December At 31 December 2021 2020 Trade receivables measured at amortised cost 1,974 2,021 Trade receivables measured at fair value through other comprehensive income 233 211 Total trade receivables 2,207 2,232 Current 1,853 1,850 Non-current 354 382 Vast majority of trade receivables results from contracts with customers. Invoices are typically issued on a monthly basis, with subscription fee usually invoiced in advance and usage-based fees invoiced in arrears. The payment is due 14 days after the invoice date for most retail customers and up to 30 days for most wholesale customers. Non-current trade receivables relate mainly to sales of mobile handsets in monthly instalments. The Group considers there is no concentration of credit risk with respect to trade receivables due to its large and diverse customer base consisting of individual and business customers. The Group’s maximum exposure to credit risk at the reporting date is represented by the carrying amounts of receivables recognised in the consolidated statement of financial position. The Group sells selected receivables arising from sales of mobile handsets in instalments on the basis of an agreement concluded with BNP Paribas S.A. Those selected trade receivables are measured at fair value through other comprehensive income as the business model is to collect contractual cash flows and sell them. Sold receivables are derecognised from the consolidated statement of financial position because the sale is without recourse. Loss on derecognition recognised in other operating expense for the 12 months ended 31 December 2021 and 2020 amounted to PLN 8 million and PLN 6 million, respectively. Part of the price paid by BNP Paribas S.A. amounting to PLN 41 million is deferred and presented as other assets as at 31 December 2021 and 2020. The Group applies the present value valuation technique to measure selected trade receivables arising from sales of mobile handsets in instalments at fair value through other comprehensive income. The expected risk-adjusted cash flows related to the receivables are discounted using market risk-free interest rate. The nominal cash flows are decreased by the expected credit risk based on historical data. Such risk-adjusted discounted cash flows are adjusted by the margin expected to be received by the market participant buyer. The margin is determined based on the last instalment receivables sale transaction with BNP Paribas S.A. Movements in the impairment of trade receivables during the 12 months ended 31 December 2021 and 2020 were as follows: (in PLN millions) 12 months ended 12 months ended 31 December 2021 31 December 2020 Beginning of period 277 280 Impairment losses, net 60 134 Utilisation of impairment for receivables sold or written-off (108) (137) End of period 229 277 23 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish In the 12 months ended 31 December 2021 and 2020, the Group recognised, respectively, additional PLN 4 million and PLN 26 million of impairment of trade receivables as a result of COVID-19 pandemic (see Note 5). Information about the credit risk exposure on the Group’s trade receivables as at 31 December 2021 was as follows: (in PLN millions) Days past due < 180 180-360 > 360 Not past due days days days Total Expected credit loss rate 4.7 % 16.1 % 50.0 % 80.9 % Total trade receivables, gross 2,133 174 14 115 2,436 Accumulated impairment loss (101) (28) (7) (93) (229) Total trade receivables, net 2,032 146 7 22 2,207 Information about the credit risk exposure on the Group’s trade receivables as at 31 December 2020 was as follows: (in PLN millions) Days past due < 180 180-360 > 360 Not past due days days days Total Expected credit loss rate 4.7 % 16.3 % 74.3 % 91.5 % Total trade receivables, gross 2,149 196 35 129 2,509 Accumulated impairment loss (101) (32) (26) (118) (277) Total trade receivables, net 2,048 164 9 11 2,232 15.2. Contract assets (in PLN millions) At 31 December At 31 December 2021 2020 Non-current contract assets 89 70 Current contract assets 95 87 Total contract assets 184 157 The Group considers there is no concentration of credit risk with respect to contract assets due to its large and diverse customer base consisting of individual and business customers. The Group’s maximum exposure to credit risk at the reporting date is represented by the carrying amounts of contract assets recognised in the consolidated statement of financial position. Movements in the contract assets balance for the 12 months ended 31 December 2021 and 2020 were as follows: (in PLN millions) 12 months ended 12 months ended 31 December 2021 31 December 2020 Beginning of period 157 182 Additions 166 127 Invoiced amounts transferred to trade receivables (138) (153) Impairment, net (1) 1 End of period 184 157 Expected credit loss rate for contract assets as at 31 December 2021 and 2020 amounted to 2.9% and 2.7%, respectively. 24 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish 15.3. Contract costs (in PLN millions) At 31 December At 31 December 2021 2020 Non-current contract costs 127 106 Current contract costs 397 368 Total contract costs 524 474 Contract costs comprise mainly incremental customer acquisition and retention costs (e.g. commissions paid to retailers for acquisition or retention of contracts). Movements in the contract costs balance for the 12 months ended 31 December 2021 and 2020 were as follows: (in PLN millions) 12 months ended 12 months ended 31 December 2021 31 December 2020 Beginning of period 474 428 Contract costs recognised as assets 588 551 Contract costs amortised (539) (503) Impairment, net 1 (2) End of period 524 474 15.4. Contract liabilities (in PLN millions) At 31 December At 31 December 2021 2020 Prepayment from joint venture for the lease and services (see below) 692 - Upfront fee for wholesale access to fibre network (see below) 220 238 Subscription (including unused post-paid balances) 185 183 Unused pre-paid balances 163 151 Connection fees 101 100 Prepayment for national roaming 80 - Other 159 142 Total contract liabilities 1,600 814 Current 607 476 Non-current 993 338 Approximately PLN 476 million of the contract liabilities balance as at 1 January 2021 was recognised as revenue in the 12 months ended 31 December 2021. Approximately PLN 471 million of the contract liabilities balance as at 1 January 2020 was recognised as revenue in the 12 months ended 31 December 2020. On 1 July 2021, Orange Polska and Światłowód Inwestycje, a fully-owned subsidiary at that time, concluded agreements for the lease and services to be rendered by the Group in the future, for which Światłowód Inwestycje paid PLN 729 million upfront, which was set off against cash contribution made by Orange Polska to Światłowód Inwestycje. On the date of deconsolidation of Światłowód Inwestycje, the Group recognised the prepayment received in contract liabilities in the consolidated statement of financial position (see Note 4). In 2018, the Company and T-Mobile Polska signed a long term contract on telecommunications access to Orange Polska’s fibre network in the form of Bitstream Access. OPL S.A. started providing services in December 2018. The fees under the contract comprise mainly a fixed upfront fee of PLN 275 million, a fixed fee for infrastructure set-up, IT systems integration and monthly fees for each customer. The revenue from the contract is recognised during 15 years which currently is the estimated term of the contract. The Group applies input method to measure revenue for the period with the application of constraint in respect to recognition of revenue to the level that is highly probable not to be reversed in the future. As a result, the fixed fee elements are evenly accounted as revenue over 15 years, 25 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish while the variable fees dependent on the number of end-customers are recognised as revenue based on the actual number of customers in the period. 15.5. Performance obligations As at 31 December 2021 and 2020, the transaction price allocated to unsatisfied performance obligations resulting from contracts with customers amounted to PLN 6,265 million and PLN 5,010 million, respectively. The following table presents the time bands in which the Group expects to satisfy those performance obligations and recognise revenue. Starting from 2021 the Group includes contract liabilities in the calculation of unsatisfied performance obligations. The comparative amounts as at 31 December 2020 were changed accordingly. More information on the nature of typical contracts with customers and related performance obligations can be found in Note 35.8. (in PLN millions) At 31 December At 31 December 2021 2020 Within one year 3,287 2,896 Between one and two years 1,062 872 Between two and three years 379 319 Between three and four years 322 194 Between four and five years 189 149 More than five years 1,026 580 Total unsatisfied performance obligations 6,265 5,010 16. Other assets (in PLN millions) At 31 December At 31 December 2021 2020 Contingent consideration receivable from sale of 50% stake in Światłowód Inwestycje (see Note 4) 416 - Receivables from sale of fixed assets 127 64 Deferred purchase price receivables from BNP Paribas (see Note 15.1) 41 41 Other 298 176 Total other assets 882 281 Current 450 240 Non-current 432 41 The Group applies the expected present value technique to measure the fair value of the contingent consideration receivable from the sale of 50% stake in Światłowód Inwestycje. The expected cash flows have been calculated as the probability-weighted average of possible future cash inflows from the contingent consideration. The discount rates used in the calculation of the present value of the expected cash flows range from 2.9% in 2022 to 4.0% in 2026 and are based on the market risk-free interest rates increased by the credit risk margin estimated for the APG Group. Significant inputs to the valuation technique used by the Group to measure the fair value of the contingent consideration receivable are unobservable and include the credit risk margin estimated for the APG Group and probabilities assigned to possible future cash inflows used to calculate the expected value. The Group has performed sensitivity analysis for the impact of changes in unobservable inputs and concluded that reasonably possible change in any unobservable input would not materially change the fair value of the contingent consideration receivable. 26 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish 17. Provisions Movements of provisions for the 12 months ended 31 December 2021 were as follows: (in PLN millions) Provisions for claims Provisions and litigation, risks for employment Dismantling and other charges termination expense provisions Total provisions At 1 January 2021 183 84 644 911 Increases 86 130 42 258 Reversals (utilisations) (63) (73) (7) (143) Reversals (releases) (5) (11) (50) (66) Discounting effect 3 - 34 37 At 31 December 2021 204 130 663 997 Current 181 68 9 258 Non-current 23 62 654 739 Movements of provisions for the 12 months ended 31 December 2020 were as follows: (in PLN millions) Provisions for claims Provisions and litigation, risks for employment Dismantling and other charges termination expense provisions Total provisions At 1 January 2020 149 184 558 891 Increases 44 - 86 130 Reversals (utilisations) (10) (89) (7) (106) Reversals (releases) (2) (13) - (15) Discounting effect 2 2 7 11 At 31 December 2020 183 84 644 911 Current 164 84 6 254 Non-current 19 - 638 657 Provisions for claims and litigation, risks and other charges These provisions relate mainly to claims and litigation described in Note 32. As a rule, provisions are not disclosed on a case-by-case basis, as, in the opinion of the Management Board, such disclosure could prejudice the outcome of the pending cases. Provisions for employment termination expense On 7 December 2021, OPL S.A. concluded with Trade Unions the Social Agreement under which up to 1,400 employees are entitled to take advantage of the voluntary departure package in years 2022-2023. The value of voluntary departure package varies depending on individual salary, employment duration, age and year of resignation. The basis for calculation of the provision for employment termination expense is the estimated number, remuneration and service period of employees who will accept the voluntary termination until the end of 2023. Increases of provisions for employment termination expense during 12 months ended 31 December 2021 included PLN 130 million of the estimated amount of termination benefits for employees scheduled to terminate employment in OPL S.A. under the 2022-2023 Social Agreement. Other movements of these provisions during the 12 months ended 31 December 2021 relate to termination benefits for employees scheduled to terminate employment under the 2020-2021 Social Agreement. The discount rate used to calculate the present value of provisions for employment termination expense amounted to 1.07% as at 31 December 2021 and 0.11% as at 31 December 2020. 27 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Dismantling provisions The dismantling provisions relate to dismantling or removal of items of property, plant and equipment (mainly telecommunications poles and items of mobile access network) and restoring the site on which they are located. Based on environmental regulations in Poland, items of property, plant and equipment which may contain hazardous materials should be dismantled and utilised by the end of their useful lives by entities licensed by the State for this purpose. The amount of dismantling provisions is based on the estimated number of items that should be utilised/sites to be restored, time to their liquidation/restoration, current utilisation/restoration cost and inflation. The discount rate used to calculate the present value of provisions for dismantling amounted to 3.17% as at 31 December 2021 and 1.40% as at 31 December 2020. 18. Trade payables and other liabilities 18.1. Trade payables (in PLN millions) At 31 December At 31 December 2021 2020 Trade payables 1,546 1,417 Fixed assets payables 696 671 Telecommunications licence payables 257 390 Total trade payables 2,499 2,478 Current 2,400 2,236 Non-current (1) 99 242 (1) Includes telecommunications licence payables. As at 31 December 2021 and 2020, trade payables subject to reverse factoring amounted to PLN 162 million and PLN 117 million, respectively. These payables are presented together with the remaining balance of trade payables, as analysis conducted by the Group indicates they have retained their trade nature. 18.2. Other liabilities (in PLN millions) At 31 December At 31 December 2021 2020 Investment grants received 114 146 VAT payables 81 46 Other taxes payables 26 20 Contingent consideration related to acquisition of subsidiaries (see Note 4) 15 37 Other 122 127 Total other liabilities 358 376 Current 340 326 Non-current 18 50 Operational Programme “Digital Poland” The Group concluded agreements with the “Digital Poland” Project Centre for co-financing of investment projects under the Operational Programme “Digital Poland” (“the Programme”). The Programme aims to strengthen digital foundations for the national development including common access to high-speed Internet, effective and user- friendly public e-services and a continuously rising level of digital competences of the society. Under the second contest of the Programme, the Group’s own contribution to the Programme amounts to PLN 0.3 billion and the Group was granted PLN 0.7 billion from the Programme funds for the development of the broadband 28 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish telecommunications network. The funds shall be used in accordance with the rules applicable to the European Union funded projects and specific conditions resulting from the state aid regulations, such as costs eligibility. In the 12 months ended 31 December 2021 and 2020, Orange Polska received PLN 109 million and PLN 177 million of investment grants under the Programme, respectively. In the 12 months ended 31 December 2021 and 2020, PLN 150 million and PLN 194 million was deducted from the cost of related assets as a result of the Programme and PLN 204 million and PLN 221 million, respectively, was paid to fixed assets suppliers. Investment grants are presented separately within investing activities in the consolidated statement of cash flows. Received advances for investment grants are presented as cash and cash equivalents and other liabilities in the consolidated statement of financial position. Grants might not be paid by the financing institution or once obtained might become repayable under certain circumstances resulting from not complying with conditions of the financing. The Group assesses that it is reasonably assured that grants corresponding to the scope of investments completed will be received and they will not become repayable. 19. Employee benefits (in PLN millions) At 31 December At 31 December 2021 2020 Jubilee awards - 19 Retirement bonuses 41 55 Salaries and other employee-related payables 203 183 Total employee benefits 244 257 Current 171 204 Non-current 73 53 On 7 December 2021, OPL S.A. concluded with Trade Unions the Social Agreement for years 2022 - 2023 (see Note 17) in which the Company, as a part of the negotiated employment optimisation programme, committed to make additional contributions in the fixed amount totalling PLN 19 million to the employee social programmes carried out by the Company. As a result, this amount was recognised as other employee-related payables as at 31 December 2021 and labour expense in the 12 months ended 31 December 2021. 29 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish 19.1. Jubilee awards and retirement bonuses Certain employees of the Group are entitled to long-term employee benefits in accordance with the Group’s remuneration policy (see Note 35.21). These benefits are not funded. Changes in the present and carrying value of obligations related to long-term employee benefits for the 12 months ended 31 December 2021 and 2020 are detailed below: (in PLN millions) 12 months ended 31 December 2021 Retirement Jubilee awards bonuses Total Present/carrying value of obligation at the beginning of the period 19 55 74 Current service cost (1) - 3 3 Past service cost (1) (4) - (7) (7) Interest cost (2) - 1 1 Benefits paid (18) (3) (21) Actuarial gains for the period (1) (1) (8) (3) (9) Present/carrying value of obligation at the end of the period - 41 41 Weighted average duration (in years) - 12 12 (1) Recognised under labour expense in the consolidated income statement. (2) Recognised under discounting expense in the consolidated income statement. (3) Recognised under actuarial gains/(losses) on post-employment benefits in the consolidated statement of comprehensive income. (4) Includes mainly impact of curtailment resulting from the Social Agreement concluded on 7 December 2021 (see Note 17). (in PLN millions) 12 months ended 31 December 2020 Retirement Jubilee awards bonuses Total Present/carrying value of obligation at the beginning of the period 95 50 145 Current service cost (1) 6 2 8 Past service cost (1) (4) (64) - (64) Interest cost (2) 1 1 2 Benefits paid (14) (1) (15) Actuarial (gains)/losses for the period (5) (1) 3 (3) (2) Present/carrying value of obligation at the end of the period 19 55 74 Weighted average duration (in years) 1 13 10 (1) Recognised under labour expense in the consolidated income statement. (2) Recognised under discounting expense in the consolidated income statement. (3) Recognised under actuarial gains/(losses) on post-employment benefits in the consolidated statement of comprehensive income. (4) Impact of the amendment to the Collective Labour Agreement signed in 2020 and described below. In June 2020, Orange Polska signed with Trade Unions amendments to the Collective Labour Agreement. Under the applicable provisions of the Collective Labour Agreement, employees were entitled to jubilee awards upon completion of a certain number of years of service. According to the agreed changes, these current rules regarding jubilee awards were cancelled from April 2021. At the same time, in the period between April and December 2021, employees with 15-30 years of service received a one-off jubilee award at the specified amount depending on a number of years of service. As a result, negative past service cost of PLN 64 million was recognised as a decrease in labour expense in the 12 months ended 31 December 2020 with a corresponding decrease in liabilities relating to employee benefits. The valuation of obligations as at 31 December 2021 and 2020 was performed using the following assumptions: At 31 December At 31 December 2021 2020 Discount rate 3.8 % 1.6 % Long-term wage increase rate 3.5 % 2.5 % 30 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish A change of the discount rate by 0.5 p.p. would increase or decrease the present/carrying value of obligations related to long-term employee benefits by PLN 2 million as at 31 December 2021. 19.2. Cash-settled share-based payment plans On 23 July 2021 and 4 September 2017, the Supervisory Board of OPL S.A. adopted respectively LTI (Long Term Incentive) and Orange.One incentive programmes (“the programmes”) for the key managers of the Orange Polska Group (“the participants”), which are based on derivative instruments (“phantom shares”), whose underlying assets are the Orange Polska S.A. shares listed on the Warsaw Stock Exchange. The purpose of the programmes is to provide additional incentives to motivate senior managers to achieve mid-term commercial and financial objectives, resulting from Orange Polska’s strategy and to lead to the increase of the value of the Company’s shares. 19.2.a. LTI Programme The terms of the programme are as follows: a. Participation in the programme is voluntary. b. The programme is based on 3 three-year cycles, each starting in consecutive calendar years. The phantom shares shall be purchased by the programme participants at the beginning of each cycle of the programme. c. The participants of the first cycle of the programme for years 2021 – 2023 could purchase a total of up to 2,023,200 phantom shares for a price of PLN 0.50 per phantom share. d. Phantom shares shall be bought back from the participants by the Group, at Orange Polska’s average share price in the first quarter after the end of each cycle of the programme (first quarter of 2024 for the first cycle), only when it is not lower than the average Orange Polska’s share price in the first six months of the cycle (first half of 2021 for the first cycle of the programme). Otherwise, phantom shares shall not be bought back, resulting in the loss of invested funds by the participants. The number of phantom shares bought back depends on the independent achievement of the business objectives regarding EBITDAaL, organic cash flows, reduction in CO2 emission and average price of Orange Polska shares. The following table illustrates the number and average fair value of phantom shares granted by the Group: (number) Phantom shares CO2 EBITDAaL OCF share price condition condition condition condition Outstanding at 1 January 2021 - - - - Granted during the year 190,620 571,860 476,550 667,170 Outstanding at 31 December 2021 190,620 571,860 476,550 667,170 Average fair value per unit (in PLN) at 31 December 2021 6.64 6.64 6.64 6.33 31 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish The following table illustrates the key assumptions used in the calculation of the fair value of phantom shares as at 31 December 2021: At 31 December 2021 Phantom shares CO2, EBITDAaL and share price OCF conditions condition Exercise price (in PLN) 0.50 0.50 Barrier (in PLN) 6.61 6.61 - 7.61 Expected volatility 26.95 % 26.95 % Risk-free interest rate 4.03 % 4.03 % Dividend yield (1) 2.70 % 2.70 % Expiry date 1st quarter 2024 1st quarter 2024 Model used Black-Scholes Black-Scholes Date of vesting period end 31 December 2023 31 December 2023 (1) Dividend yield is one of the key assumptions required in the calculation of the fair value of phantom shares. Dividend yield used in the calculation model assumes dividend payment of PLN 0.25 per share from 2022, which reflects mean expectation of market consensus for 2022 and does not constitute any guidance or commitment from the Company regarding future dividend payments. As a result of the programme, PLN 4 million was recognised as an increase in labour expense in the 12 months ended 31 December 2021. The carrying amount of liabilities recognised as employee benefits as at 31 December 2021 amounted to PLN 4 million. 19.2.b. Orange.One Motivation Programme The terms of the programme were as follows: a. Participation in the programme was voluntary. b. The participants could purchase at the beginning of the programme a total of up to 2,315,000 phantom shares from the basic pool for a price of PLN 1 per phantom share. c. In case of meeting certain criteria regarding the average price of Orange Polska shares (not fulfilled) and NPS (Net Promoter Score) (fulfilled), the participants could purchase in the fourth quarter of 2020 additional packages of up to 1,438,500 and 616,500 phantom shares, respectively, for a price of PLN 1 per phantom share. d. In 2021 phantom shares were bought back from the participants by the Group, at Orange Polska’s average share price in the first quarter of 2021, as the criterion of the average share price in the first quarter of 2021 was met (not lower than the average of Orange Polska’s closing share prices in the third quarter of 2017). The following tables illustrate the number and average fair value of phantom shares and options for phantom shares granted by the Group: (number) Phantom shares Basic pool Additional pool Outstanding at 1 January 2021 1,880,000 454,500 Exercised during the year (1,865,000) (454,500) Forfeited during the year (15,000) - Outstanding at 31 December 2021 - - Average OPL’s share price at the moment of exercise (in PLN) 6.41 6.41 32 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish (number) Phantom shares Options for additional phantom shares NPS Share price Basic pool Additional pool condition condition Outstanding at 1 January 2020 1,950,000 - 481,500 1,123,500 Granted during the year - 454,500 (1) 4,500 - Exercised during the year - - (454,500) (1) - Forfeited during the year (70,000) - (31,500) (1,123,500) (2) Outstanding at 31 December 2020 1,880,000 454,500 - - Average fair value per unit (in PLN) at 31 December 2020 5.29 5.29 (1) As a result of meeting the criterion related to NPS additional phantom shares were granted. (2) The criterion related to OPL’s share price was not met. The following table illustrates the key assumptions used in the calculation of the fair value of phantom shares as at 31 December 2020: At 31 December 2020 Phantom shares Basic pool Additional pool Exercise price (in PLN) 1.00 1.00 Barrier (in PLN) 5.46 5.46 Expected volatility 25 % 25 % Risk-free interest rate 0.11 % 0.11 % Dividend yield (1) 0.00 % 0.00 % Expiry date 1st quarter 2021 1st quarter 2021 Model used Black-Scholes Black-Scholes 30 September 1 October Date of vesting period end 2019 2020 (1) Dividend yield assumed no dividend payment in the 1st quarter of 2021 which reflected mean expectation of market consensus and did not constitute any guidance or commitment from the Company regarding future dividend payments. As a result of the programme, PLN 1 million was recognised as a decrease in labour expense in the 12 months ended 31 December 2020. The carrying amount of liabilities recognised as employee benefits as at 31 December 2020 amounted to PLN 12 million. 33 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish 20. Finance income and expense (in PLN millions) 12 months ended 31 December 2021 Financial assets Derivatives Financial liabilities at Non- At amortised Lease amortised Held for financial cost At fair value liabilities cost Hedging trading (1) items (2) Total Interest income 29 5 (3) - - - - - 34 Interest expense on lease liabilities - - (53) - - - - (53) Other interest expense and financial charges, including: - (10) (4) - (104) (71) (15) - (200) − interest expense - - - (104) (5) (85) (15) - (204) − ineffectiveness on derivatives hedging interest rate risk - - - - 14 - - 14 Discounting expense - - - (28) - - (38) (66) Foreign exchange gains/(losses) - - (1) 16 (16) 5 - 4 Total finance costs, net 29 (5) (54) (116) (87) (10) (38) (281) Interest income 9 (6) - - - - - - 9 Impairment losses (57) (10) (7) - - - - - (67) Foreign exchange gains/(losses) - - - (4) 3 1 - - Items recognised under operating income (48) (10) - (4) 3 1 - (58) (1) Derivatives economically hedging commercial or financial transactions. (2) Includes mainly provisions. (3) Interest income on financial assets at fair value through other comprehensive income (selected trade receivables arising from sales of mobile handsets in instalments, see Note 15.1). (4) Change in valuation of financial assets at fair value through profit or loss (contingent consideration receivable from sale of 50% stake in Światłowód Inwestycje, see Note 16). (5) Includes mainly interest expense on loans from related party. (6) Late payment interest on trade receivables. (7) Impairment losses on financial assets at fair value through other comprehensive income. (in PLN millions) 12 months ended 31 December 2020 Financial assets Derivatives At fair value Financial through other liabilities at Non- At amortised comprehensive Lease amortised Held for financial cost income (1) liabilities cost Hedging trading (2) items (3) Total Interest income 29 4 - - - - - 33 Interest expense on lease liabilities - - (62) - - - - (62) Other interest expense and financial charges, including: - - - (114) (94) (8) - (216) − interest expense - - - (114) (4) (92) (8) - (214) − ineffectiveness on derivatives hedging interest rate risk - - - - (2) - - (2) Discounting expense - - - (29) - - (14) (43) Foreign exchange gains/(losses) 2 - (54) (85) 66 17 - (54) Total finance costs, net 31 4 (116) (228) (28) 9 (14) (342) Interest income 11 (5) - - - - - - 11 Impairment losses (142) (9) - - - - - (151) Foreign exchange gains/(losses) 7 - - (18) (1) 24 - 12 Labour expense - - - - (2) (2) - (4) Items recognised under operating income (124) (9) - (18) (3) 22 - (132) (1) Selected trade receivables arising from sales of mobile handsets in instalments (see Note 15.1). (2) Derivatives economically hedging commercial or financial transactions. (3) Includes mainly provisions and employee benefits. (4) Includes mainly interest expense on loans from related party. (5) Late payment interest on trade receivables. 34 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish 21. Net financial debt Net financial debt is a measure of indebtedness used by the Management Board. Since the calculation of this aggregate is not defined by IFRS, the methodology adopted by the Group is presented below. (in PLN millions) At 31 December At 31 December Note 2021 2020 Loans from related party 22 4,950 5,990 Other financial liabilities at amortised cost 61 21 Derivatives – net (liabilities less assets) 25 (271) (15) Gross financial debt after derivatives 4,740 5,996 Cash and cash equivalents 24 (933) (358) Cash flow hedge reserve 269 (89) Net financial debt 4,076 5,549 22. Loans from related party (in millions of currency) Amount outstanding at (1) 31 December 2021 31 December 2020 Creditor Repayment date Currency PLN Currency PLN Floating rate Atlas Services Belgium S.A. (EUR) 20 May 2021 - - 190 876 Atlas Services Belgium S.A. (PLN) 20 June 2021 - - 2,700 2,700 Atlas Services Belgium S.A. (PLN) (2) 29 July 2022 - - 159 159 Atlas Services Belgium S.A. (PLN) 20 May 2024 1,500 1,500 1,499 1,499 Atlas Services Belgium S.A. (PLN) 20 June 2026 2,693 2,693 - - Fixed rate Atlas Services Belgium S.A. (PLN) 27 March 2023 757 757 756 756 Total loans from related party 4,950 5,990 Current 12 3,584 Non-current 4,938 2,406 (1) Includes accrued interest and arrangement fees. (2) Revolving credit line. On 29 January 2021, the Group and Atlas Services Belgium S.A., a subsidiary of Orange S.A., concluded a Loan Agreement for PLN 2,700 million with repayment date in June 2026. The new Loan Agreement, together with the Revolving Credit Facility, provided non-cash-refinancing of loans granted by Atlas Services Belgium S.A.: EUR 190 million which expired in May 2021 and PLN 2,700 million which expired in June 2021. Additionally, on 17 June 2021, the Group and Atlas Services Belgium S.A. concluded an Annex to existing Revolving Credit Facility Agreement, extending its maturity to 29 July 2022. The weighted average effective interest rate on loans from related party, before and after swaps (see Note 25), amounted respectively to 3.60% and 2.93% as at 31 December 2021 (1.30% and 3.08% as at 31 December 2020). Loans from related party are not secured. 23. Liabilities arising from financing activities Liabilities arising from financing activities are liabilities for which cash flows were, or future cash flows will be, classified in the consolidated statement of cash flows as cash flows from financing activities. 35 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish The tables below present the reconciliation of the Group’s liabilities arising from financing activities and derivatives (liabilities less assets) hedging these liabilities: (in PLN millions) Other financial Derivatives Total liabilities hedging liabilities liabilities from Lease Loans from at amortised from financing financing liabilities related party cost activities (1) activities Note 22 Note 25 Amount outstanding as at 1 January 2021 2,704 5,990 21 22 8,737 Net cash flows provided by: (539) (1,121) 38 12 (1,610) − financing activities (481) (1,021) 40 91 (1,371) − operating activities (2) (58) (100) (2) (79) (239) Non-cash changes: 665 81 2 (309) 439 − foreign exchange (gains)/losses 1 (16) - 16 1 − fair value change, excluding foreign exchange losses - - - (325) (325) − other changes 664 (3) 97 (4) 2 (4) - 763 Amount outstanding as at 31 December 2021 2,830 4,950 61 (275) 7,566 (1) Includes derivatives economically hedging liabilities from financing activities. (2) Includes interest paid. (3) Includes mainly recognition of new contracts and modification of existing contracts. (4) Includes accrued interest and arrangement fees. (in PLN millions) Other financial Derivatives Total liabilities hedging liabilities liabilities from Lease Loans from at amortised from financing financing liabilities related party cost activities (1) activities Note 22 Note 25 Amount outstanding as at 1 January 2020 2,572 6,442 69 18 9,101 Net cash flows provided by: (489) (632) (49) (79) (1,249) − financing activities (421) (520) (48) - (989) − operating activities (2) (68) (112) (1) (79) (260) Non-cash changes: 621 180 1 83 885 − foreign exchange (gains)/losses 54 68 - (77) 45 − fair value change, excluding foreign exchange gains - - - 160 160 − other changes 567 (3) 112 (4) 1 (4) - 680 Amount outstanding as at 31 December 2020 2,704 5,990 21 22 8,737 (1) Includes derivatives economically hedging liabilities from financing activities. (2) Includes interest paid. (3) Includes mainly recognition of new contracts and modification of existing contracts. (4) Includes accrued interest and arrangement fees. 24. Cash and cash equivalents (in PLN millions) At 31 December At 31 December 2021 2020 Current bank accounts, overnight deposits and cash on hand 106 115 Bank accounts dedicated for investment grants (see Note 18.2) 89 184 Deposits with Orange S.A. 738 55 Bank deposits up to 3 months - 4 Total cash and cash equivalents 933 358 36 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish The Group’s cash surplus is invested into short-term highly-liquid financial instruments - mainly bank deposits and deposits with Orange S.A. under the Cash Management Treasury Agreement. Short-term deposits are made for varying periods of between one day and three months. The instruments earn interest which depends on the current money market rates and the term of investment. The Group’s maximum exposure to credit risk at the reporting date is represented by carrying amounts of cash and cash equivalents. The Group deposits its cash and cash equivalents with Orange S.A. and leading financial institutions with investment grade. Limits are applied to monitor the level of exposure to credit risk on the counterparties. In case the counterparty’s financial soundness is deteriorating, the Group applies the appropriate measures mitigating the default risk. 25. Derivatives As at 31 December 2021 and 2020, the Group’s derivatives portfolio constituted financial instruments for which there was no active market (over-the-counter derivatives), mainly interest rate swaps, currency swaps, non-deliverable forwards, commodity swaps and stock options. To price these instruments the Group applies standard valuation techniques. The fair value of swap/forward transaction represents discounted future cash flows, where the applicable market interest rate curves constitute the base for calculation of discounting factors and amounts in foreign currencies are converted into PLN at the National Bank of Poland period-end average exchange rate. Future cash flows of commodity swaps are based on commodity prices on commodity exchange. The fair value of stock options is calculated on the basis of Black-Scholes model. Valuation of derivatives is also adjusted by counterparty (credit valuation adjustment - “CVA”) or own (debit valuation adjustment - “DVA”) credit risk. CVA and DVA estimates were not material compared to the total fair value of the related derivatives. 37 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish The derivative financial instruments used by the Group are presented below: (in PLN millions) Fair value Type of Weighted average Financial Financial instrument (1) Hedged item Nominal amount Maturity price or rate per unit asset liability At 31 December 2021 Derivative instruments - cash flow hedge Interest rate risk IRS Loans from related party 3,800 m PLN 2024-2026 WIBOR 3M -> 1.48 % 273 - Currency risk NDF Purchase of inventories 43 m EUR 2022 4.61 - (1) NDF Purchase of inventories 3 m USD 2022 4.14 - - FX option Purchase of inventories 10 m EUR 2022 4.71 - - Commodity risk Commodity swap Sale of copper 1,257 T 2022 9,401 USD - (1) Commodity swap Purchase of energy 1,452,000 MWh 2035 299 PLN - (3) Total cash flow hedges 273 (5) Derivative instruments - held for trading (2) Interest rate risk IRS Loan from related party 500 m PLN 2022 WIBOR 1M -> 2.19 % 1 - Currency risk NDF Commercial transactions 27 m EUR 2022 4.58 1 - NDF Lease liabilities 7 m EUR 2022 4.53 1 - NDF Commercial transactions 5 m USD 2022 4.14 - - Total derivatives held for trading 3 - Total derivative instruments 276 (5) Current 3 (2) Non–current 273 (3) (1) IRS – interest rate swap, NDF – non-deliverable forward. (2) Derivatives economically hedging commercial or financial transactions. 38 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish (in PLN millions) Fair value Type of Weighted average Financial Financial instrument (1) Hedged item Nominal amount Maturity price or rate asset liability At 31 December 2020 Derivative instruments - cash flow hedge Currency and interest rate risk CCIRS Loan from related party 187 m EUR 2021 4.05 104 - EURIB 6M + 0.28 %-> WIBOR 6M + 0.54 % Interest rate risk IRS Loans from related party 5,450 m PLN 2021-2024 WIBOR 1/3/6M -> 2.13 % - (132) Currency risk NDF Purchase of inventories 141 m EUR 2021 4.44 26 - NDF Purchase of inventories 12 m USD 2021 3.74 - - Share price risk Stock option Share-based payment plan 2 m shares 2021 5.22 3 - (see Note 19.2.b) Total cash flow hedges 133 (132) Derivative instruments - held for trading (2) Currency and interest rate risk CCIRS Loan from related party 3 m EUR 2021 4.05 2 - EURIB 6M + 0.28 %-> WIBOR 6M + 0.53 % Currency risk NDF 2100 MHz licence payable 14 m EUR 2021 4.52 1 - NDF Commercial transactions 27 m EUR 2021 4.44 5 - NDF Lease liabilities 22 m EUR 2021 4.42 4 - FX Swap Cash 3 m EUR 2021 4.61 - - NDF Commercial transactions 11 m USD 2021 3.71 1 - Share price risk Stock option Share-based payment plan 1 m shares 2021 5.02 1 - (see Note 19.2.b) Total derivatives held for trading 14 - Total derivative instruments 147 (132) Current 147 (32) Non–current - (100) (1) CCIRS – cross currency interest rate swap, IRS – interest rate swap, NDF – non-deliverable forward. (2) Derivatives economically hedging commercial or financial transactions. The Group’s maximum exposure to credit risk is represented by the carrying amounts of derivatives. The Group enters into derivatives contracts with Orange S.A. and leading financial institutions. Limits are applied to monitor the level of exposure to credit risk on the counterparties. Limits are based on each institution’s rating. In case the counterparty’s financial soundness is deteriorating, the Group applies the appropriate measures mitigating the default risk. 39 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish The change in cash flow hedge reserve is presented below: (in PLN millions) 12 months ended 31 December 2021 12 months ended 31 December 2020 Before tax Tax After tax Before tax Tax After tax Total cash flow hedge reserve – beginning of period (89) 16 (73) (50) 9 (41) - interest rate risk (117) 22 (95) (43) 8 (35) - currency risk 28 (6) 22 (7) 1 (6) - share price risk - - - - - - Effective part of gains/(losses) on hedging instrument: (1) 282 (53) 229 (33) 6 (27) - interest rate risk 308 (59) 249 (157) 30 (127) - currency risk (23) 5 (18) 126 (24) 102 - share price risk - - - (2) - (2) - other market risk (3) 1 (2) - - - Reclassification to the income statement, adjusting: (1) 94 (17) 77 20 (4) 16 - interest expense presented in finance costs, net 81 (15) 66 83 (16) 67 - foreign exchange (gains)/losses presented in finance costs, net 16 (3) 13 (65) 12 (53) - foreign exchange gains presented in operating income (3) 1 (2) - - - - labour expenses - - - 2 - 2 Foreign exchange gains transferred to inventories (18) 3 (15) (26) 5 (21) Total cash flow hedge reserve – end of period 269 (51) 218 (89) 16 (73) - interest rate risk 272 (52) 220 (117) 22 (95) - currency risk - - - 28 (6) 22 - share price risk - - - - - - - other market risk (3) 1 (2) - - - (1) Recognised under gains/losses on cash flow hedges in the consolidated statement of comprehensive income. Gains/losses on cash flow hedges cumulated in cash flow hedge reserve as at 31 December 2021 are expected to mature and affect the consolidated income statement in years 2022-2035. 26. Fair value of financial instruments 26.1. Fair value measurements For the financial instruments measured subsequent to their initial recognition at fair value, the Group classifies fair value measurements using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements: - Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities, - Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), - Level 3: inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). The Group’s financial assets and liabilities that are measured subsequent to their initial recognition at fair value comprise derivative instruments presented in Note 25, selected trade receivables arising from sales of mobile handsets in instalments described in Note 15.1 and the contingent consideration receivable arising from the sale of 50% stake in Światłowód Inwestycje described in Note 16. The Group classifies derivative instruments and selected trade receivables arising from sales of mobile handsets in instalments to Level 2 fair value measurements and the contingent consideration receivable to Level 3 fair value measurements. 40 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish 26.2. Comparison of fair values and carrying amounts of financial instruments As at 31 December 2021 and 2020, the carrying amount of the Group financial instruments excluding lease liabilities, except for telecommunications licence payables and a loan from related party based on fixed interest rate, approximated their fair value due to relatively short term maturity of those instruments, cash nature, variable interest rates or immaterial difference between the original effective interest rates and current market rates. A comparison of carrying amounts and fair value of telecommunications licence payables and a loan from related party based on fixed interest rate, for which the estimated fair value differs from the book value due to significant change between the original effective interest rates and current market rates, is presented below: (in PLN millions) At 31 December 2021 At 31 December 2020 Estimated Estimated Carrying fair value Carrying fair value Note amount Level 2 amount Level 2 Telecommunications licence payables 18.1 257 272 390 437 Loan from related party 22 757 750 756 801 The fair value of financial instruments is calculated by discounting contractual future cash flows at the prevailing market interest rates for a given currency. Fair value amounts are translated to PLN at the National Bank of Poland period-end average exchange rate and adjusted by own credit risk. DVA estimates were not material compared to the total fair value of the related financial instruments. 27. Objectives and policies of financial risk management 27.1. Principles of financial risk management The Group is exposed to financial risks arising mainly from financial instruments that are issued or held as part of its operating and financing activities. That exposure can be principally classified as market risk (encompassing mainly currency risk and interest rate risk), liquidity risk and credit risk. The Group manages the financial risks with the objective to limit its exposure to adverse changes mainly in foreign exchange rates and interest rates, to stabilise cash flows and to ensure an adequate level of financial liquidity and flexibility. The principles of the Group Financial Risk Management Policy have been approved by the Management Board. Financial risk management is conducted according to strategies developed by the Treasury Committee under the direct control of the Board Member in charge of Finance. Financial Risk Management Policy defines principles and responsibilities within the context of an overall financial risk management and covers the following areas: - risk measures used to identify and evaluate the exposure to financial risks, - selection of appropriate instruments to hedge against identified risks, - valuation methodology used to determine the fair value of financial instruments, - transaction limits for and credit ratings of counterparties with which the Group concludes hedging transactions. 27.2. Hedge accounting The Group has entered into numerous derivative transactions to hedge exposure to currency risk, interest rate risk and other market risk. The derivatives used by the Group include: interest rate swaps, cross currency interest rate swaps, cross currency swaps, non-deliverable forwards, currency options, currency forwards, commodity swaps and stock options. 41 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Certain derivative instruments are classified as cash flow hedges and the Group applies hedge accounting principles as stated in IFRS 9 (see Note 35.17). The cash flow hedges are used to hedge the variability of future cash flows that is attributable to a particular risk and could affect the consolidated income statement. The terms of the hedging instruments match the terms of the hedged items. The Group has established hedge ratios at the level of 1:1 as the underlying risks of the hedging instruments are identical to the hedged risks. Hedge effectiveness is determined at the inception of the hedge relationship and through periodic prospective assessment to ensure that hedge effectiveness requirements are met. Derivatives are used for hedging activities and it is the Group’s policy that derivative financial instruments are not used for trading (speculative) purposes. However, certain derivatives held by the Group are not designated as hedging instruments as set out in IFRS 9 and hedge accounting principles are not applied to those instruments. The Group considers those derivatives as economic hedges because they, in substance, protect the Group against currency risk, interest rate risk and other market risk. Detailed information on derivative financial instruments, including hedging relationship, that are used by the Group is presented in Note 25. 27.3. Currency risk The Group is exposed to foreign exchange risk arising from financial assets and liabilities denominated in foreign currencies, mainly lease liabilities, 2100 MHz licence payable, loan from related party (see Note 22) and bank borrowings. The Group’s hedging strategy, minimising the impact of fluctuations in exchange rates, is reviewed on a regular basis. The acceptable exposure to a selected currency is a result of the risk analysis in relation to an open position in that currency, given the financial markets’ expectations of foreign exchange rates movements during a specific time horizon. Within the scope of the hedging policy, the Group hedges its currency exposure entering mainly into cross currency interest rate swaps, cross currency swaps and forward currency contracts, under which the Group agrees to exchange a notional amount denominated in a foreign currency into PLN or to settle in cash the difference between the contracted price and the prevailing spot price. As a result, the gains/losses generated by derivative instruments compensate the foreign exchange losses/gains on the hedged items. Therefore, the variability of the foreign exchange rates has a limited impact on the consolidated income statement. Hedge ineffectiveness may arise from currency basis spread included in the hedging instrument that does not occur in the hedged instrument, a difference between the counterparty credit risk and the own credit risk and changes to the forecasted amount of cash flows of hedged items. The table below presents the hedge rate of the Group’s major currency exposures. The rate compares the hedged value of a currency exposure to the total value of the exposure. Hedge rate Currency exposure At 31 December 2021 At 31 December 2020 Loan from related party and bank borrowings Not applicable 99.6 % 2100 MHz licence payable 0.0 % 25.6 % Lease liabilities 4.5 % 13.8 % The Group is also actively hedging the exposure to foreign exchange risk generated by future operating and capital expenditures. The Group uses the sensitivity analysis described below to measure currency risk. 42 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish The Group’s major exposures to foreign exchange risk (net of hedging activities) and potential foreign exchange gains/losses on these exposures resulting from a hypothetical 1% appreciation/depreciation of the PLN against other currencies are presented in the following table: (in millions of currency) Sensitivity to a change of the PLN against other Effective exposure after hedging currencies impacting consolidated income statement At 31 December 2021 At 31 December 2020 At 31 December 2021 At 31 December 2020 +1% -1% +1% -1% Currency exposure Currency PLN Currency PLN PLN PLN PLN PLN 2100 MHz licence payable (EUR) 30 136 41 188 1 (1) 2 (2) Lease liabilities (EUR) 133 611 127 587 6 (6) 6 (6) Lease liabilities (USD) 7 26 7 25 - - - - Total 773 800 7 (7) 8 (8) The sensitivity analysis presented above is based on the following principles: - unhedged portion of the discounted amount of liabilities is exposed to foreign exchange risk (effective exposure), - derivatives designated as hedging instruments and those classified as economic hedges are treated as risk-mitigation transactions, - cash and cash equivalents are excluded from the analysis. The changes in fair value of derivatives classified as cash flow hedges of forecast transactions affect other reserves. The sensitivity analysis prepared by the Group indicated that the potential gains/(losses) impacting cash flow hedge reserve resulting from a hypothetical 1% depreciation/appreciation of the PLN against other currencies would amount to PLN 2/(2) million and PLN 7/(7) million as at 31 December 2021 and 2020, respectively. 27.4. Interest rate risk The interest rate risk is a risk that future cash flows of the financial instrument will change due to interest rates changes. The Group has interest bearing financial liabilities consisting mainly of loans from related party and bank borrowings (see Notes 22 and 33.2). The Group’s interest rate hedging strategy, limiting exposure to unfavourable movements of interest rates, is reviewed on a regular basis. The preferable split between fixed and floating rate debt is the result of the analysis indicating the impact of the potential interest rates evolution on the financial costs. According to the hedging strategy, the Group uses interest rate swaps and cross currency interest rate swaps to hedge its interest rate risk. As a result of the hedge, the structure of the liabilities changes to the desired one, as liabilities based on the floating/fixed interest rates are effectively converted into fixed/floating obligations. As at 31 December 2021 and 2020, the Group’s proportion between fixed/floating rate debt (after hedging activities) was 91/9% and 99/1%, respectively. Hedge ineffectiveness may arise from designation of non-zero fair value derivatives in hedge relationships and a difference between the counterparty credit risk and the own credit risk. The Group uses the sensitivity analysis described below to measure interest rate risk. 43 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish The table below provides the Group’s sensitivity analysis for interest rate risk (net of hedging activities) assuming a hypothetical increase/decrease in the interest rates by 1 p.p.: (in PLN millions) Sensitivity to 1 p.p. change of interest rates At 31 December 2021 At 31 December 2020 WIBOR EURIBOR WIBOR EURIBOR +1 p.p. -1 p.p. +1 p.p. -1 p.p. +1 p.p. -1 p.p. +1 p.p. -1 p.p. Finance costs, net (3) 3 - - 2 (2) (3) 3 Other reserves 113 (118) - - 63 (65) (3) 3 The sensitivity analysis presented above is based on the following principles: - finance costs, net include the following items exposed to interest rate risk: a) interest cost on financial debt based on floating rate (after hedging), b) the change in the fair value of derivatives not designated as hedging instruments and classified as held for trading (see Note 25), - other reserves include the change in the fair value of derivatives that is determined as effective cash flow hedge (see Note 25), - as at 31 December 2021, the gross financial debt based on floating rate (after hedging) amounted to PLN 438 million (as at 31 December 2020, PLN 31 million). 27.5. Other market risks The Group is exposed to other market risks including commodity risk (energy price risk and copper price risk arising from sale of copper) and share price risk arising from cash-settled share-based payment plans (see Note 19.2). The Group hedges its exposure entering into commodity swaps and stock options, under which the Group sets the price of energy and copper and has the right to receive cash if OPL S.A. share price exceeds certain level. As a result, the gains/losses generated by derivative instruments compensate the losses/gains on the hedged item. There are no sources of hedge ineffectiveness that are expected to affect significantly hedging relationships. The sensitivity analysis prepared by the Group indicated that a hypothetical increase/decrease of 10% in the base energy prices used in the valuation of commodity swaps would change the fair value of these instruments and affect other reserves respectively by PLN 34/(34) million as at 31 December 2021. The potential gains/losses resulting from a reasonably possible change of copper price and OPL S.A. share price would have an insignificant impact on the consolidated income statement and other reserves as at 31 December 2021 and 2020. 27.6. Liquidity risk The liquidity risk is a risk of encountering difficulties in meeting obligations associated with financial liabilities. The Group’s liquidity risk management involves forecasting future cash flows, analysing the level of liquid assets in relation to cash flows, monitoring liquidity ratios and maintaining a diverse range of funding sources including back-up credit facilities. In order to increase efficiency, the liquidity management process is optimised through a centralised treasury function of the Group, as liquid asset surpluses generated by the Group entities are invested and managed by the central treasury. The Cash Management Treasury Agreement with Orange S.A. enables the Group to deposit its cash surpluses with Orange S.A. The Group’s cash surplus is also invested into short-term highly-liquid financial instruments – bank deposits. The Group also manages liquidity risk by maintaining committed, unused credit facilities, which create a liquidity reserve to secure solvency and financial flexibility. The above-mentioned Cash Management Treasury Agreement with Orange S.A. gives the Group access to back-up liquidity funding with headroom of up to PLN 500 million. In 2021, the Group and Orange S.A. updated the Cash Management Treasury Agreement, extending access to back-up liquidity funding to 28 February 2023. No drawdown was made on this facility as at 31 December 2021. The Group also has a revolving credit line from the Orange Group for up to PLN 1,500 million and other credit lines 44 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish for up to PLN 213 million, of which PLN 58 million was used as at 31 December 2021. Therefore, as at 31 December 2021, the Group had unused credit facilities amounting to PLN 2,155 million (as at 31 December 2020, PLN 1,978 million). Liquidity risk is measured by applying following ratios calculated and monitored by the Group regularly: - liquidity ratios, - maturity analysis of undiscounted contractual cash flows resulting from the Group’s financial liabilities, - average debt duration. The liquidity ratio (representing the relation between available financing sources, i.e. cash and cash equivalents and credit facilities, and debt repayments during next 12 and 18 months) and current liquidity ratio (representing the relation between unused credit facilities, current assets and current liabilities) are presented in the following table: (in PLN millions) Liquidity ratios At 31 December At 31 December 2021 2020 Liquidity ratio (incl. derivatives) - next 12 months (1) 811 % 62 % Unused credit facilities (excluding short term) 519 1,840 Cash and cash equivalents 933 358 Debt repayments (2) 258 3,648 Derivatives repayments (3) (79) (79) Liquidity ratio (incl. derivatives) - next 18 months (1) 145 % 58 % Unused credit facilities (excluding short term) 519 1,840 Cash and cash equivalents 933 358 Debt repayments (2) 1,131 3,829 Derivatives repayments (3) (130) (60) Current liquidity ratio (incl. unused credit facilities) 107 % 68 % Unused credit facilities (excluding short term) 519 1,840 Total current assets 4,137 3,363 Total current liabilities 4,353 7,637 Current liquidity ratio (incl. unused credit facilities and new loan agreement) (4) Not applicable 105 % Unused credit facilities (excluding short term) Not applicable 1,840 Total current assets Not applicable 3,363 Total current liabilities (4) Not applicable 4,937 (1) The ratio does not include future cash flows from operating or investing activities, nor debt refinancing. (2) Undiscounted contractual cash flows on loans from related party and bank borrowings. (3) Undiscounted contractual cash flows on derivatives. (4) As a result of the new loan agreement concluded on 29 January 2021, the amount of current liabilities would decrease to PLN 4,937 million and current liquidity ratio would increase to 105%. 45 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish The maturity analysis for the contractual undiscounted cash flows resulting from the Group’s financial liabilities as at 31 December 2021 and 2020 is presented below. As at 31 December 2021 and 2020, amounts in foreign currency were translated at the National Bank of Poland period-end average exchange rates. The variable interest payments arising from the financial instruments were calculated using the interest rates applicable as at 31 December 2021 and 2020, respectively. (in PLN millions) At 31 December 2021 Undiscounted contractual cash flows (1) Non-current More Carrying Within 1-22-3 3-44-5 than 5 Total non- Note amount 1 year years years years years years current Total Loans from related party 22 4,950 227 977 1,661 108 2,758 - 5,504 5,731 Other financial liabilities at amortised cost 61 33 6 4 4 4 14 32 65 Derivative assets 25 (276) (84) (93) (69) (58) (29) - (249) (333) Derivative liabilities 25 5 5 - (20) (26) (5) 10 (41) (36) Gross financial debt after derivatives 4,740 181 890 1,576 28 2,728 24 5,246 5,427 Trade payables 18.1 2,499 2,407 24 24 24 24 26 122 2,529 Lease liabilities 23 2,830 538 423 370 307 251 1,685 3,036 3,574 Total financial liabilities (including derivative assets) 10,069 3,126 1,337 1,970 359 3,003 1,735 8,404 11,530 (1) Includes both nominal and interest payments. (in PLN millions) At 31 December 2020 Undiscounted contractual cash flows (1) Non-current More Carrying Within 1-22-3 3-44-5 than 5 Total non- Note amount 1 year years years years years years current Total Loans from related party 22 5,990 3,633 203 784 1,510 - - 2,497 6,130 Other financial liabilities at amortised cost 21 19 2 - - - - 2 21 Derivative assets 25 (147) (143) - - - - - - (143) Derivative liabilities 25 132 64 31 25 8 - - 64 128 Gross financial debt after derivatives 5,996 3,573 236 809 1,518 - - 2,563 6,136 Trade payables 18.1 2,478 2,242 166 24 24 24 49 287 2,529 Lease liabilities 23 2,704 495 435 342 296 237 1,719 3,029 3,524 Total financial liabilities (including derivative assets) 11,178 6,310 837 1,175 1,838 261 1,768 5,879 12,189 (1) Includes both nominal and interest payments. The average duration for the existing debt portfolio as at 31 December 2021 was 3.4 years (1.4 years as at 31 December 2020). 27.7. Credit risk The Group’s credit risk management objective is defined as supporting business growth while minimising financial risks by ensuring that customers and partners are always in a position to pay amounts due to the Group. The main function of the Credit Committee under the control of the Board Member in charge of Finance is to coordinate and consolidate credit risk management activities across the Group, which involve: - clients’ risk assessment, - monitoring clients’ business and financial standing, - managing accounts receivable and bad debts. 46 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish The policies and rules regarding consolidated credit risk management for the Group were approved by the Credit Committee. There is no significant concentration of credit risk within the Group. Further information on credit risk is discussed in Notes 15.1, 15.2, 24, 25. 28. Income tax 28.1. Income tax (in PLN millions) 12 months ended 12 months ended 31 December 2021 31 December 2020 Current income tax (112) (14) Deferred tax (146) (2) Total income tax (258) (16) The reconciliation between the income tax expense and the theoretical tax calculated based on the Polish statutory tax rate was as follows: (in PLN millions) 12 months ended 12 months ended 31 December 2021 31 December 2020 Income before tax 1,930 62 Less: Untaxed gain on the loss of control of Światłowód Inwestycje (793) - Income before tax, adjusted 1,137 62 Statutory tax rate 19 % 19 % Theoretical tax (216) (12) Tax relief on research and development 7 6 Unrecognised deferred tax assets (27) (1) Expenses of share-based payment plans (5) - Other expenses not deductible for tax purposes (17) (9) Total income tax (258) (16) Expenses not deductible for tax purposes consist of cost items, which, under Polish tax law, are specifically determined as non-deductible. 47 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish 28.2. Deferred tax (in PLN millions) Consolidated statement of financial position Consolidated income statement At 31 December At 31 December 12 months ended 12 months ended 2021 2020 31 December 2021 31 December 2020 Property, plant and equipment, intangible assets and right-of-use assets, net 367 388 (21) 9 Unused tax losses 6 44 (36) (4) Receivables and payables 39 158 (118) 21 Contract assets and contract costs (133) (120) (13) (4) Contract liabilities 138 121 17 (1) Employee benefits 35 35 1 (19) Provisions 177 157 20 - Net financial debt (51) 20 - (4) Other 3 (3) 4 - Deferred tax assets, net (1) 581 800 Total deferred tax (146) (2) (1) During the 12 months ended 31 December 2021, deferred tax assets, net were decreased by PLN 5 million as the effect of the loss of control of Światłowód Inwestycje Sp. z o.o. (see Note 4). During the 12 months ended 31 December 2021 and 2020, PLN (71) million and PLN 3 million of change in deferred tax assets was recognised in the consolidated statement of comprehensive income, respectively. During the 12 months ended 31 December 2021 and 2020, PLN 3 million and PLN (1) million of change in deferred tax assets was recognised directly in equity, respectively. Deferred tax assets are recognised in the amounts which are expected to be utilised using future taxable profits estimated on the basis of the business plan approved by the Management Board of Orange Polska and used to determine the value in use of the telecom operator CGU (key assumptions are described in Note 9), which are considered as a positive evidence supporting the recognition of deferred tax assets. Significant amount of the Group’s deferred tax assets relates to property, plant and equipment and intangible assets and has been recognised on temporary differences arising mainly from different tax and accounting depreciation rates used by the Group. As a result, the estimated period required to utilise this deferred tax asset is dependent on useful lives of items of property, plant and equipment and intangible assets estimated for accounting and tax purposes. The majority of deferred tax asset relating to property, plant and equipment and intangible assets is expected to be utilised after year 2025. Unrecognised deferred tax assets relate to temporary differences, which based on the Group’s Management assessment could not be utilised for tax purposes and to those incurred tax losses, which are expected to expire rather than to be realised. As at 31 December 2021 and 2020, deductible temporary differences, for which no deferred tax asset was recognised, amounted to PLN 104 million and PLN 2 million gross, respectively. As at 31 December 2021 and 2020, incurred tax losses, for which no deferred tax asset was recognised, amounted to PLN 105 million and PLN 86 million gross, respectively. The majority of incurred tax losses, for which no deferred tax asset was recognised as at 31 December 2021, will expire in 2024 and 2025. As at 31 December 2021 temporary differences associated with the investment in joint venture for which a deferred tax liability was not recognised amounted to PLN 814 million. The Group controls the timing of reversal of this temporary difference and based on the Group’s Management assessment the temporary difference will not reverse in the foreseeable future. 29. Equity 29.1. Share capital As at 31 December 2021 and 2020 the share capital of the Company amounted to PLN 3,937 million and was divided into 1,312 million fully paid ordinary bearer shares of nominal value of PLN 3 each. 48 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish The ownership structure of the share capital as at 31 December 2021 and 2020 was as follows: (in PLN millions) At 31 December 2021 At 31 December 2020 Nominal Nominal % of votes % of shares value % of votes % of shares value Orange S.A. 50.67 50.67 1,995 50.67 50.67 1,995 Nationale-Nederlanden Open Pension Fund 5.01 (1) 5.01 (1) 197 n/a n/a n/a Other shareholders 44.32 44.32 1,745 49.33 49.33 1,942 Total 100.00 100.00 3,937 100.00 100.00 3,937 (1) To the best of the Company’s knowledge as at 31 December 2021, i.e. according to the notice from Nationale-Nederlanden Open Pension Fund of 3 August 2021. On 3 August 2021 the Company received from Nationale-Nederlanden Open Pension Fund a notice on increasing its ownership of Orange Polska shares from 4.96% to 5.01%. Before that day, Nationale-Nederlanden Open Pension Fund owned less than 5% of Orange Polska shares and according to the Polish law was not obliged to notify the Company of the number of shares held. Consequently, any shares held by Nationale-Nederlanden Open Pension Fund as at 31 December 2020 are included in “other shareholders”. Between 3 August 2021 and 31 December 2021 Nationale-Nederlanden Open Pension Fund did not notify the Company of any changes in its ownership of Orange Polska shares. 29.2. Dividend In accordance with the recommendation of the Management Board of the Company there was no dividend paid in 2021. OPL S.A.’s retained earnings available for dividend payments to the Group’s shareholders amounted to PLN 5.0 billion as at 31 December 2021. The remaining balance of the Company’s retained earnings is unavailable for dividend payments due to restrictions of the Polish commercial law. Additionally, PLN 0.2 billion of OPL S.A.’s subsidiaries retained earnings as at 31 December 2021 was available for dividend payments by subsidiaries to OPL S.A. 29.3. Equity-settled share-based payment plans 29.3.a. Together 2021 plan On 21 April 2021, Orange S.A. approved the implementation of a share ownership plan for the Orange Group’s employees: Together 2021. The plan was launched on 15 September 2021 in 37 countries, including Poland. The purpose of Together 2021 is to increase employee shareholding and the involvement of all employees in the growth of the Orange Group. The terms of Together 2021 are as follows: a.Participation in the plan was voluntary. b. All employees of the Orange Group with at least 3 months of employment as at 8 November 2021 (the grant date) could subscribe to the plan. c. Under the plan employees were entitled to acquire Orange S.A.’s shares under preferential terms, i.e. with a 30% discount on the reference price of the shares. The reference price was calculated as the average of daily Orange S.A. share prices on the Euronext Paris market over the 20 trading sessions from 5 October to 1 November 2021 and amounted to EUR 9.48. d. In addition to shares subscribed, employees received also a contribution from Orange S.A. in the form of bonus shares in the amount of up to EUR 2,600 depending on the amount of personal investment of each employee. e.The subscription price was set at EUR 6.64 per share (EUR 9.48 after 30% discount). f. The maximum amount of a participant’s investment could not exceed 25% of their 2021 gross annual remuneration. 49 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish g.The shares were delivered on 1 December 2021 and are locked-up until 1 June 2026. h.Participants of the plan are entitled to dividends paid by Orange S.A. The Orange Polska Group’s employees purchased 374,030 shares and received free of charge additional 485,814 bonus shares, making a total of 859,844 shares. The value of the benefits granted to employees under Together 2021 plan in exchange for their work for the Orange Polska Group, amounted to PLN 24 million and was recognised in labour expense and equity in 2021. The following table illustrates the key assumptions used in calculation of the value of the benefits granted by Orange S.A. to the Orange Polska Group’s employees: Key assumptions Together 2021 plan Reference price at the grant date (in EUR) 9.48 Subscription price for shares purchased (in EUR) 6.64 Subscription price for bonus shares (in EUR) 0.00 Risk-free interest rate (0.425) % Lending borrowing rate (1) 4.7 % Lock-up period 4.5 years Date of lock-up period end 1 June 2026 (1) Corresponds to Orange S.A. lending-borrowing rate used to calculate the non-transferability costs. 29.3.b. Long term incentive plan of Orange S.A. Orange S.A. operates a long term incentive plan (“LTIP”), under which key managers of the Orange Polska Group are awarded a defined number of free shares of Orange S.A., subject to performance conditions and continuous service in the Orange Group. The value of services rendered by managers for granting equity instruments of Orange S.A. recognised in labour expense in 2021 and 2020 amounted to PLN 2 million and PLN 3 million, respectively. 29.4. Other movements in retained earnings Corrections resulting from immaterial errors in prior periods were recognised by the Group directly in retained earnings and presented as other movements in the consolidated statement of changes in equity for the 12 months ended 31 December 2020. The corrections of PLN 27 million, net (after PLN (6) million of tax impact) relate to capitalisation of some indirect employee benefits as property, plant and equipment and other intangible assets (PLN 48 million) and write-off of other non-current assets (PLN (21) million). 30. Management of capital The Group manages its capital through a balanced financial policy, which aims at providing both relevant funding capabilities for business development and securing a relevant financial structure and liquidity. The Group’s capital management policy takes into consideration the following key elements: - business performance together with applicable investments and development plans, - debt repayment schedule, - financial market environment, - distribution policy to the Group’s shareholders. In order to combine these factors the Group periodically establishes a framework for the financial structure. The Group regards capital as the total of equity and net financial debt. The Group monitors capital on the basis of net financial debt and net financial debt to EBITDAaL ratio (see Note 3). Announcing .Grow strategy in June 2021 50 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish the Management Board set a target for net financial debt to EBITDAaL ratio to be in the range of 1.7-2.2 in the long term. 31. Investment commitments Investment commitments contracted for at the end of the reporting period but not recognised in the consolidated financial statements were as follows: (in PLN millions) At 31 December At 31 December 2021 2020 Property, plant and equipment 404 642 Intangibles 99 88 Total investment commitments 503 730 Amounts contracted to be payable within 12 months after the end of the reporting period 445 645 Investment commitments relate mainly to development of telecommunications network, purchases of telecommunications network equipment, IT systems and other software. As at 31 December 2021 and 2020, the Group’s commitments for the purchase of property, plant and equipment and intangible assets under the Operational Programme “Digital Poland” (see Note 18.2), contracted for at the end of the reporting period but not recognised in the consolidated financial statements amounted to PLN 168 million and PLN 310 million, respectively. 32. Litigation, claims and contingent liabilities As at 31 December 2021, the Group recognised provisions for known and quantifiable risks related to various current or potential claims and proceedings, which represent the Group’s best estimate of the amounts, which are more likely than not to be paid. As a rule, provisions are not disclosed on a case-by-case basis, as, in the opinion of the Management Board, such disclosure could prejudice the outcome of the pending cases. a. Proceedings by UOKiK and UKE and claims connected with them According to the Act on Competition and Consumer Protection, in case of non-compliance with its regulations, the President of the Office of Competition and Consumer Protection (“UOKiK”) is empowered to impose on an entity penalties of up to a maximum amount of EUR 50 million for refusal to provide requested information or up to a maximum amount of 10% of an entity’s revenue for the year prior to the year of fine imposition for a breach of the law. According to the Telecommunications Act, the President of UKE may impose on a telecommunications operator a penalty of up to a maximum amount of 3% of the operator’s prior year’s tax revenue, if the operator does not fulfil certain requirements of the Telecommunications Act. Proceedings by UOKiK related to retail prices of calls to Play In 2013, UOKiK commenced competition proceedings against Orange Polska, Polkomtel Sp. z o.o. and T-Mobile Polska S.A. UOKiK alleged that they abused collective dominant position and the abuse consisted in the fact that the retail prices of calls made by individual users from the network of each of the three operators to the network of P4 Sp. z o.o. (“P4”), operator Play, were relatively higher than the prices for such calls to the networks of the three operators. On 2 January 2018, UOKiK discontinued the competition proceedings. UOKiK stated that there was no basis to determine that Orange Polska, Polkomtel Sp. z o.o. and T-Mobile Polska S.A. acted in breach of the competition law. In September 2015, Orange Polska received a lawsuit filed by P4 with the Court under which P4 claims for damages, in the amount of PLN 316 million (PLN 231 million and PLN 85 million of interest) relating to the retail mobile prices for a period between July 2009 and March 2012. P4 originally claimed jointly and severally towards Orange Polska, 51 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Polkomtel Sp. z o.o. and T-Mobile Polska S.A. but subsequently the proceedings against T-Mobile was discontinued due to a settlement concluded by the latter with P4. On 2 July 2018, P4 extended its claim by the amount of PLN 314 million (PLN 258 million and PLN 56 million of capitalised interest). The factual basis for both claims is the same (retail price difference) but as regards the claim extension the period for which damages are calculated is different i.e. from April 2012 to December 2014. On 29 November 2018 the court excluded P4’s claim for PLN 314 million to separate court proceedings. On 27 December 2018 the court of first instance dismissed P4’s claim for PLN 316 million in its entirety as time barred. P4 appealed that verdict to the Appeal Court and, on 28 December 2020, the Appeal Court repealed the verdict and remanded the case back to the court of first instance on the basis that the court did not sufficiently explain the reasons for the claim being time barred. No other arguments were assessed by the Court of Appeal. Proceedings by UOKiK related to activation of certain additional services On 14 May and 23 July 2021, UOKiK instituted proceedings regarding practices violating collective interests of consumers in the provision of certain additional services by Orange Polska alleging, among others, insufficient information for consumers in activating the service, lack of information on a durable medium and insufficient replies to customer complaints. On 14 December 2021, UOKiK issued a commitment decision (without imposing a fine) concluding the proceedings instituted on 14 May 2021. Other proceedings by UOKiK and UKE As at 31 December 2021, the Group recognised provisions for known and quantifiable risks related to proceedings against the Group initiated by UOKiK and UKE, which represent the Group’s best estimate of the amounts, which are more likely than not to be paid. The actual amounts of penalties, if any, are dependent on future events the outcome of which is uncertain, and, as a consequence, the amount of the provision may change at a future date. b.Tax settlements Tax settlements are subject to review and investigation by a number of authorities, which are entitled to impose fines, penalties and interest charges. Value added tax, corporate income tax, personal income tax, real estate tax, other taxes and the general anti-avoidance rules or social security regulations are subject to frequent changes. These changes contribute to the lack of system stability and tax disputes. Frequent contradictions and inconsistencies in legal interpretations both within government bodies and between companies and government bodies create uncertainties and conflicts. These uncertainties result in higher risk in the area of tax settlements, which may require recognition of liabilities for uncertain tax positions and provisions resulting from differences of interpretation of the tax law. Tax authorities may examine accounting records up to five years following the end of the year in which the tax becomes due. Consequently, the Group may be subject to additional tax liabilities, which may arise as a result of additional tax audits. In 2018, the Tax Office finalised a tax audit relating to OPL S.A.’s corporate income tax settlements for the fiscal year ended 31 December 2016. Based on the findings of the audit, tax proceedings were launched against the Company in 2019. The Company does not agree with the findings and believes that the issues raised in the tax audit protocol are without merit and the possibility of ultimate outflow of resources in the ongoing proceedings is low. The Group is also involved in other proceedings and litigations in respect to various taxes, including PIT, CIT, VAT, real estate tax and other taxes. Some of these proceedings and litigations may result in future cash outflows. The possible outcomes of these proceedings and litigations are assessed by the Group on a regular basis and quantifiable risks related to them that are probable to result in future cash outflows are adequately reflected as income tax liabilities or provisions in the statement of financial position. 52 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish c.Issues related to the incorporation of Orange Polska Orange Polska was established as a result of the transformation of the state-owned organisation Poczta Polska Telegraf i Telefon (“PPTiT”) into two entities – the Polish Post Office and Orange Polska S.A. The share premium in the equity of Orange Polska includes an amount of PLN 713 million which, in accordance with the Notary Deed dated 4 December 1991, relates to the contribution of the telecommunication business of PPTiT to the Company. During the transformation process and transfer of ownership rights to the new entities, certain properties and other assets that are currently under Orange Polska’s control were omitted from the documentation recording the transfer and the documentation relating to the transformation process is incomplete in this respect. This means that Orange Polska’s rights to certain properties and other non-current assets may be questioned and, as a result, the share premium balance may be subject to changes. d.Other contingent liabilities and provisions Operational activities of the Group are subject to legal, social and administrative regulations a breach of which, even unintentional, may result in sanctions imposed on the Group. In addition to fines which may be imposed by UOKiK and UKE described in Note 32.a also the President of Energy Regulatory Office may impose a penalty of up to a maximum amount of 15% of the revenues gained in the previous tax year among others for an infringement of certain provisions of Energy Law, a failure in fulfilment of obligations determined by the concession, a refusal to provide information. The Group is a party to a number of legal proceedings and commercial contracts related to its operational activities. Some regulatory decisions can be detrimental to the Group and court verdicts within appeal proceedings against such decisions can have negative consequences for the Group. Also, there are claims including claims for damages, contractual penalties or remuneration raised by counterparties to commercial contracts, or claims for other payments resulting from breach of law which may result in cash outflows. Furthermore, the Group uses fixed assets of other parties in order to provide telecommunications services. Terms of use of these assets are not always formalised and as such, the Group is subject to claims and might be subject to future claims in this respect, which will probably result in a cash outflows in the future. The amount of the potential obligations or future commitments cannot yet be measured with sufficient reliability due to legal complexities involved. Some of the above determined matters may be complex in nature and there are many scenarios for final settlement and potential financial impact for the Group. The Group monitors the risks on a regular basis and the Management Board believes that adequate provisions have been recorded for known and quantifiable risks. Information regarding the range of potential outcomes has not been separately disclosed as, in the opinion of the Group’s Management, such disclosure could prejudice the outcome of the pending cases. 33. Related party transactions 33.1. Management Board and Supervisory Board compensation Compensation (remuneration, bonuses, post-employment and other long-term benefits, termination indemnities and share-based payment plans – cash and non-monetary benefits) of OPL S.A.’s Management Board and Supervisory Board Members is presented below. Additionally, the President of OPL S.A.’s Management Board is employed by Orange Global International Mobility S.A., a subsidiary of Orange S.A., and posted to Orange Polska since September 2020. The amount incurred by the Orange Polska Group for the reimbursement of key management personnel costs from the Orange Group is presented separately in the table below. 53 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish (in PLN thousands) 12 months ended 12 months ended 31 December 2021 31 December 2020 Short-term benefits excluding employer social security payments 15,040 17,005 Post-employment benefits 1,060 5,378 Share-based payment plans 1,243 57 Total compensation 17,343 22,440 Reimbursement of the key management personnel costs 5,382 1,339 Total 22,725 23,779 Additionally, Section 9.3 of the Management Board’s Report on the Activity of the Orange Polska Group and Orange Polska S.A. for the year ended 31 December 2021 includes the information on the Remuneration Policy of Orange Polska, where more details on Management Board and Supervisory Board compensation can be found. 33.2. Related party transactions As at 31 December 2021, Orange S.A. owned 50.67% of shares of the Company. Orange S.A. has majority of the total number of votes at the General Meeting of OPL S.A. which appoints OPL S.A.’s Supervisory Board Members. The Supervisory Board decides about the composition of the Management Board. According to the Company’s Articles of Association, at least 4 Members of the Supervisory Board must be independent. The majority of Members of the Audit Committee of the Supervisory Board are independent. The Group’s income earned from the Orange Group comprises mainly wholesale telecommunications services and research and development income. The purchases from the Orange Group comprise mainly brand fees and wholesale telecommunications services. Orange Polska S.A. operates under the Orange brand pursuant to a licence agreement concluded with Orange S.A. and Orange Brand Services Limited (hereinafter referred to as “OBSL”). The brand licence agreement provides that OBSL receives a fee of up to 1.6% of the Company’s operating revenue earned under the Orange brand. In 2021, Orange S.A. granted benefits to Orange Polska Group’s employees under Together 2021 share ownership plan in exchange for their work for the Group in the amount of PLN 24 million (see Note 29.3). Until 31 December 2021, the Group and Atlas Services Belgium S.A., a subsidiary of Orange S.A., concluded loan agreements for PLN 4,950 million and Revolving Credit Facility Agreement for up to PLN 1,500 million (see Note 22). Additionally, the Group concluded an agreement with Orange S.A. concerning derivative transactions to hedge exposure to interest rate risk and foreign currency risk related to the financing from Atlas Services Belgium S.A. The nominal amount of derivative transactions outstanding under the agreement as at 31 December 2021 was PLN 4,300 million with a total fair value of PLN 274 million (as at 31 December 2020, nominal amount of PLN 5,450 million and EUR 190 million, respectively, with a total negative fair value of PLN 26 million). Financial receivables, payables, financial costs, net and other comprehensive income/loss concerning transactions with the Orange Group relate mainly to the above-mentioned agreements. Cash and cash equivalents deposited with Orange S.A. relate to the Cash Management Treasury Agreement (see Note 27.6). The Group’s transactions with joint venture relate to transactions with Światłowód Inwestycje Sp. z o.o. (see Notes 4 and 13). The Group’s income and receivables from joint venture relate mainly to sale of fibre network assets. Liabilities to joint venture relate mainly to agreements for the lease and services to be rendered by the Group in the future, for which joint venture paid upfront. 54 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish (in PLN millions) 12 months ended 12 months ended 31 December 2021 31 December 2020 Sales of goods and services and other income: 594 217 Orange S.A. (parent) 166 138 Orange Group (excluding parent) 86 79 Joint venture 342 - Purchases of goods (including inventories, tangible and intangible assets) and services: (292) (219) Orange S.A. (parent) (78) (58) Orange Group (excluding parent) (183) (161) - including Orange Brand Services Limited (brand licence agreement) (136) (117) Joint venture (31) - Financial costs, net: (156) (198) Orange S.A. (parent) (76) (17) Orange Group (excluding parent) (80) (181) Other comprehensive income/(loss): 389 (74) Orange S.A. (parent) 389 (74) (in PLN millions) At 31 December At 31 December 2021 2020 Receivables and contract costs: 362 85 Orange S.A. (parent) 67 51 Orange Group (excluding parent) 35 34 Joint venture 260 - Liabilities: 802 84 Orange S.A. (parent) 44 31 Orange Group (excluding parent) 63 53 Joint venture 695 - Financial receivables: 274 106 Orange S.A. (parent) 274 106 Cash and cash equivalents deposited with: 738 55 Orange S.A. (parent) 738 55 Financial liabilities: 4,950 6,122 Orange S.A. (parent) - 132 Orange Group (excluding parent) (see Note 22) 4,950 5,990 34. Subsequent events On the basis of an annual review of estimated useful lives of fixed assets, the Group decided to extend useful lives for certain network assets and items of software from 2022. As a result, depreciation and amortisation expense in 2022 relating to these assets is expected to be lower by approximately PLN 38 million. 35. Significant accounting policies In addition to the statement of compliance included in Note 2, this note describes the accounting principles applied to prepare the Consolidated Financial Statements for the year ended 31 December 2021. 55 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish 35.1. Use of estimates and judgement In preparing the Group’s accounts, the Company’s Management Board is required to make estimates. Management Board reviews these estimates if the circumstances on which they were based evolve or in the light of new information or experience. Consequently, estimates made as at 31 December 2021 may be subsequently changed. The main estimates and judgements made are described in the following notes: Note Estimates and judgements 6, 35.8 Revenue Allocation of transaction price to each performance obligation based on stand-alone selling price. Estimating stand-alone selling prices of performance obligations. Straight-line recognition of revenue relating to service connection fees. Reporting revenue on a net versus gross basis (analysis of Group’s involvement acting as principal versus agent). Estimation of early termination fees charged to customers. 35.6 Co-control Judgment with respect to the existence or not of the co-control. 9, 35.16 Impairment of cash generating unit and individual tangible and intangible assets Key assumptions used to determine CGU and recoverable amounts: impairment indicators, models, discount rates, growth rates. 14, 35.14 Leases Key assumptions used to measure the lease liability and the right of use assets: lease term, discount rate and usage of options. Application of portfolio approach to certain leases. 11, 12, 35.12, 35.13 Useful lives of tangible and intangible assets (excluding goodwill) The useful lives and the method of depreciation and amortisation. 12, 18.2, 35.13 Property, plant and equipment – investment grants The assumptions underlying the measurement and recognition of investment grants obtained, i.e. when meeting grant criteria is considered reasonably assured. 15.1, 15.2, 35.17 Impairment of financial assets Key assumptions used to determine impairment of financial assets: expected credit loss rate (including incorporation of forward looking information), grouping of financial assets. 17, 32, 35.20 Provisions The assumptions underlying the measurement of provisions for claims and litigation. Provisions for employment termination expense: discount rates, number of employees, employment duration, individual salary and other assumptions. 17 Dismantling costs The assumptions underlying the measurement of provision for the estimated costs for dismantling and removing the asset and restoring the site on which it is located. 18 Reverse factoring Reverse factoring: distinguishing operating debt and financial debt 19, 35.21, 35.22 Employee benefits Discount rates, salary increases, retirement age, staff turnover rates and other. Model and assumptions underlying the measurement of fair values of share-based payment plan. 25, 26, 35.17 Fair value of derivatives and other financial instruments Model and assumptions underlying the measurement of fair values. 28, 35.19 Income tax Assumptions used for recognition of deferred tax assets. Assumptions used to determine taxable results and tax bases for uncertain tax treatments. 35.18 Allowance for slow moving and obsolete inventories Methodology used to determine net realisable value of inventories. The Group considers that the most significant adjustments to the carrying amounts of assets and liabilities could result from changes in estimates and judgements relating to impairment (see Note 9), provisions for claims, litigation and risks (see Notes 17 and 32), leases (see Note 14), useful lives of tangible and intangible assets (see Notes 11, 12, 35.12 and 35.13) and co-control over Światłowód Inwestycje (see Notes 4 and 13). 56 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Where a specific transaction is not dealt with in any standard or interpretation, Management Board uses its judgment in developing and applying an accounting policy that results in information that is relevant and reliable, in that the financial statements: - represent faithfully the Group’s financial position, financial performance and cash flows, - reflect the economic substance of transactions, - are neutral and - are complete in all material respects. Consideration of climate change The Group has analysed the impact of climate change on the Consolidated Financial Statements and concluded that there is no impact on the carrying amounts of assets and liabilities as at 31 December 2021. The Group has specifically considered the impact of climate change on the estimates and judgments made, including impairment assessment of the telecom operator cash generating unit as well as useful lives of tangible and intangible assets. 35.2. Standards and interpretations issued but not yet adopted IFRS 17 “Insurance Contracts”. This standard was issued on 18 May 2017 and will be effective for annual periods beginning on or after 1 January 2023. This standard has not yet been endorsed by the European Union. IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts. The Group does not act as a principal in case of insurance contracts and this standard will have no impact on financial statements. 35.3. Options available under IFRSs and used by the Group Certain IFRSs offer alternative methods of measuring and recognising assets and liabilities. In this respect, the Group has chosen: Standards Option used IAS 2 Inventories The cost of inventories is determined by the weighted average unit cost method. IAS 16 Property, plant and equipment Property, plant and equipment are measured at cost less any accumulated depreciation and any accumulated impairment losses. IAS 20 Government grants and disclosure of government assistance Non-repayable government grants related to assets decrease the carrying amount of the assets. Government grants related to income are deducted from the related expenses. IFRS 9 Financial instruments Recognition of the loss allowance at an amount equal to lifetime expected credit losses for trade receivables and contract assets that contain a significant financing component. IFRS 16 Leases Right of use assets are measured at cost less any accumulated depreciation and any accumulated impairment losses and adjusted for any remeasurement of the lease liability. Right of use assets are presented separately from other assets in the statement of financial position. The Group elected to apply the short term exemption and the exemption for low value leases, as described in IFRS 16. The Group does not apply IFRS 16 to leases of intangible assets. 35.4. Presentation of the financial statements Presentation of the statement of financial position In accordance with IAS 1 “Presentation of financial statements”, assets and liabilities are presented in the statement of financial position as current and non-current. 57 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Presentation of the income statement As allowed by IAS 1 “Presentation of financial statements”, expenses are presented by nature in the income statement. Earnings/loss per share The net income/loss per share for each period is calculated by dividing the net income/loss for the period attributable to the equity holders of the Company by the weighted average number of shares outstanding during that period. The weighted average number of shares outstanding is after taking account of treasury shares, if any. 35.5. The principles of consolidation Subsidiaries that are controlled by Orange Polska, directly or indirectly, are fully consolidated. Control is deemed to exist when Orange Polska or its subsidiary is exposed, or has rights, to variable returns from the involvement with the investee and has the ability to affect those returns through its power over the investee. In order to have control over an investee, all the following criteria must be met: - the Group has the power over the investee; - the Group has exposure, or rights, to variable returns from its involvement with the investee; - the Group has the ability to use its power over the investee to affect the amount of the investor’s returns. Subsidiaries are consolidated from the date on which control is obtained by the Group and cease to be consolidated from the date on which the Group loses control over the subsidiary. Intercompany transactions and balances are eliminated on consolidation. 35.6. Investments in joint arrangements A joint arrangement is either a joint venture or a joint operation. The Group is involved in both a joint operation (NetWorkS! Sp. z o.o., see Note 1.2) and a joint venture (Światłowód Inwestycje Sp. z o.o., see Note 13). In case of a joint operation, the Group recognises its assets, liabilities, revenue and expenses, including its respective shares in the above. In case of a joint venture, the Group recognises its investment using the equity method. The carrying amount accounted for under the equity method corresponds to the initial acquisition cost increased by the share of profit or loss in the period. An impairment test is performed when there is objective evidence of impairment, for instance a significant financial difficulty of the entity, observable data indicating that there is a measurable decrease in the estimated future cash flows, or information about significant changes having an adverse effect on the entity. An impairment loss is recorded when the recoverable amount is lower than the carrying amount, the recoverable amount being the higher of the value in use and the fair value less costs to sell. The unit of account is the whole investment. Impairment losses shall be reversed once the recoverable amount exceeds the carrying amount. 35.7. Effect of changes in foreign exchange rates The functional currency of Orange Polska and its subsidiaries is the Polish złoty. 58 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Transactions in foreign currencies Transactions in foreign currencies are translated into Polish złoty at the spot exchange rate prevailing as at the transaction date. Monetary assets and liabilities which are denominated in foreign currencies are translated at the end of the reporting period using the period-end exchange rate quoted by National Bank of Poland and the resulting translation differences are recorded in the income statement: - in other operating income and expense for commercial transactions, - in financial income or finance costs for financial transactions and lease contracts. 35.8. Revenue Separable components of bundled offers For the sale of multiple products or services (e.g. offers including a handset and a telecommunications service contract), the Group evaluates all promises in the arrangement to determine whether they represent distinct performance obligations i.e. obligations not dependent on each other. Sale of mobile handsets and sale of services in bundled offers are distinct goods or services. The consideration for the bundled package (i.e. transaction price) is allocated to the distinct performance obligations (e.g. sale of a handset and sale of a service) and recognised as revenue when the performance obligation is satisfied (i.e. when the control over good or service is transferred to a customer). In general, the transaction price is the amount of consideration (usually the cash) to which the Group expects to be entitled during the contract term, including up-front fees. The contract term is the period that is made enforceable through contractual terms or business practices i.e. the enforceable period length is impacted by practices e.g. when the Group creates or accepts a valid expectation to free the customer from certain commitments before the end of the contract by allowing commencement of a new contract. The transaction price does not include the effect of time value of money (except payments by instalments models which, by nature, meet the definition of a financial receivable) unless the effect of financing component, in comparison to the transaction price, is significant at a contract level. The allocation of the transaction price between various performance obligations is made to estimate the amount to which the Group is expected to be entitled in exchange for transferring a promised good or service to the customer. The Group is a service company and achieves the vast majority of its margin by selling telecommunication services. The sale of subsidised handsets (i.e. when an invoice amount for a handset is lower than the cost of a handset) is a tool to promote the Group’s services and to attract customers. Therefore, in case of services sold with subsidised handsets, the Group allocates the subsidy to the service revenues. The Group estimates the amount of revenue that it expects to earn while pricing the service offer. Based on rationale described above, the stand- alone selling price (i.e. the price at which the Group would sell a promised good or service separately to the customer) of subsidised handsets is estimated by their cost plus margin to cover additional costs connected with the sale of handsets, such as e.g. transport costs or logistic costs. The estimated margin is insignificant. Therefore, it is disregarded from the cost plus margin formula for the sake of the practicality. If the Group is able to sell a handset with a profit (i.e. when an invoice amount for a handset is higher than the cost of a handset in bundled offer), it allocates the handset profit to the handset revenue. While defining the stand-alone selling price of any performance obligation, firstly, the Group’s observable price should be identified i.e. the price of good or service when the Group sells that good or service separately in similar circumstances and to similar customers. In case of the lack of an entity observable price, other methods of valuation of an obligation should be used. The stand-alone selling prices of a service are defined per different categories of customers, they are dependent on the service content, commitment period and consumption profile. Therefore, the SIMO price (the price of a service sold stand-alone i.e. not in a bundle with a handset) is not treated as a good 59 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish proxy of the stand-alone selling price of a specific service sold in a bundled offer. Consequently, the stand-alone selling price of the telecommunication service sold in a bundled offer is determined by using an adjusted-market assessment approach and corresponds to the service price in the bundle adjusted by the handset subsidy recovered over the enforceable period. The Group accounts for contract balances if the right to a payment differs from timing when performance obligation is satisfied. A contract asset corresponds to Group’s right to a payment in exchange for goods or services that have been transferred to Group’s customers. A contract asset, if any, is recognised at inception of the contract. It is typically measured as the sum of the monthly subsidy recovery over the remaining enforceable period of the contract. Contract liabilities represent amounts billed to customers by Group before receiving the goods and/or services promised in the contract. This is typically the case for advances received from customers or amounts invoiced for goods or services not yet transferred, such as contracts payable in advance or prepaid packages. Equipment sales Revenue from an equipment sales is recognised when the control over the equipment is transferred to the buyer (see also paragraph “Separable components of bundled offers”). Equipment/dark fibres’ leases Equipment/dark fibres’ lease revenue is recognised on a straight-line basis over the life of the lease agreement in case of an operating lease. In case of a finance lease, revenue/income from sale of equipment/dark fibres is considered as a sale on credit. Revenues from the sale or supply of content and third party licences Depending on the substance of a transaction and the Group’s role in the transaction, the Group can act as a principal and recognise revenue at the gross amount, separately from costs, or as an agent and recognise revenue in the amount net of costs. The assessment of the role of the Group is based on the notion of the control and the indicators of the control. The Group is treated as a principal if it controls a good or a service before the good or service is transferred to a customer. The Group is considered as an agent if the Group’s performance obligation is to arrange for the provision of a good or a service to the client by another party, i.e. when it does not control the specified good or service provided by another party before that good or service is transferred to the customer. Service revenue Telephone service and Internet access subscription fees are recognised in revenue on a straight-line basis over the service period because of the continuous transfer of control over the service to the customer. Charges for incoming and outgoing telephone calls are recognised in revenue when the service is rendered. Revenue from the sale of phone cards in mobile telephony systems is recognised when they are used or expire. Installation fees are recognised when the service is rendered. Promotional offers For certain commercial offers where customers do not pay for services over a certain period in exchange for signing up for a fixed period (time-based incentives), the total revenue generated under the contract is spread over the enforceable period. 60 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Material rights Material right is an option to purchase additional goods or services with a discount that is incremental to discounts typically given for those goods or services. The Group has not identified any material rights in the contracts with customers which would need to be treated as separate performance obligations. 35.9. Subscriber acquisition costs, costs to fulfil a contract, advertising and related costs Incremental acquisition and retention costs (e.g. commissions paid to retailers for acquisition or retention of contracts), as well as costs that are directly incurred for the purpose to fulfil a certain contract are expensed as costs over the enforceable period of contracts on a straight-line basis as these costs are directly associated with the contracts with customers and are expected to be recoverable. Advertising, promotion, sponsoring, communication and brand marketing costs are expensed as incurred. 35.10. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. Qualifying assets are assets that necessarily take a substantial period of time to get ready for their intended use or sale. In the Group’s assessment, the network roll-out does not generally require a substantial period of time. 35.11. Goodwill Goodwill recognised as an asset in the statement of financial position for business combination before 1 January 2010 comprises: - goodwill as the excess of the cost of the business combination over the acquirer’s interest in the acquire’s identifiable net assets measured at fair value at the acquisition-date; and - goodwill relating to any additional purchase of non-controlling interests with no purchase price allocation. For business combination after 1 January 2010 goodwill recognised as an asset in the statement of financial position is the excess of (a) over (b) below: (a) the aggregate of: (i) the consideration transferred, measured at acquisition-date fair value; (ii) the amount of any non-controlling interest in the acquire, measured either at its fair value or at its proportionate interest in the net identifiable assets; (iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquire. (b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured at fair value, apart from limited exceptions provided in IFRS 3. Goodwill represents a payment made in anticipation of future economic benefits from assets that are not capable of being individually identified and separately recognised. 35.12. Intangible assets (excluding goodwill) Intangible assets, consisting mainly of telecommunications licences, software and development costs, are initially stated at acquisition or production cost comprising its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates, any directly attributable costs of preparing the assets for their intended use, and, if applicable, attributable borrowing costs. Identifiable intangible assets acquired in a business combination are recognised separately from goodwill at their acquisition date fair values. An intangible asset is identifiable if it is either separable, i.e. capable of being separated 61 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish or divided from the acquired entity, or arises from contractual or other legal rights. Fair value of an intangible asset is measured using valuation techniques appropriate in the circumstances. Internally developed trademarks and subscriber bases are not recognised as intangible assets. Telecommunications licences Expenditures regarding telecommunications licences are amortised on a straight-line basis over the reservation period from the date when the network is technically ready and the service can be marketed. Research and development costs Development costs are recognised as an intangible asset if and only if the following can be demonstrated: - the technical feasibility of completing the intangible asset so that it will be available for use, - the intention to complete the intangible asset and use or sell it and the availability of adequate technical, financial and other resources for this purpose, - the ability to use or sell the intangible asset, - how the intangible asset will generate probable future economic benefits for the Group, - the Group’s ability to measure reliably the expenditure attributable to the intangible asset during its development. Development costs not fulfilling the above criteria and research costs are expensed as incurred. The Group’s research and development projects mainly concern: - upgrading the network architecture or functionality; - developing service platforms aimed at offering new services to the Group’s customers. Development costs recognised as an intangible asset are amortised on a straight-line basis over their estimated useful life, generally not exceeding three years. Software Software is amortised on a straight-line basis over the expected useful life (approx. 9 years). Useful lives of intangible assets are reviewed annually and are adjusted if current estimated useful lives are different from previous estimates. These changes in accounting estimates are recognised prospectively. 35.13. Property, plant and equipment The cost of tangible assets corresponds to their purchase or production cost or price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates, as well as including costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, including labour costs, and, if applicable, attributable borrowing costs. The cost includes the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, representing the obligation incurred by the Group. The cost of network includes design and construction costs, as well as capacity improvement costs. The total cost of an asset is allocated among its different components and each component is accounted for separately when the components have different useful lives or when the pattern in which their future economic benefits are expected to be consumed by the entity varies. Depreciation is established for each component accordingly. Maintenance and repair costs (day to day costs of servicing) are expensed as incurred. 62 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Investment grants The Group may receive grants from the government or the European Union for funding of capital projects. These grants are deducted from the cost of the related assets and recognised in the income statement, as a reduction of depreciation, based on the pattern in which the related asset’s expected future economic benefits are consumed. Grants are not recognised until there is a reasonable assurance that the Group will comply with the conditions attached to them and that the grant will be received. Grants received before the conditions are met are presented as other liabilities. Derecognition An item of property, plant and equipment is derecognised on its disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising from the derecognition of an item of property, plant and equipment is recognised in operating income/loss and equals the difference between the net disposal proceeds, if any, and the carrying amount of the item. Depreciation Items of property, plant and equipment are depreciated to write-off their cost, less any estimated residual value on a basis that reflects the pattern in which their future economic benefits are expected to be consumed. Therefore, the straight-line basis is usually applied over the following estimated useful lives: Buildings 10 to 30 years Network 3 to 40 years Terminals 2 to 10 years Other IT equipment 3 to 5 years Other 2 to 10 years Land is not depreciated. These useful lives are reviewed annually and are adjusted if current estimated useful lives are different from previous estimates. These changes in accounting estimates are recognised prospectively. 35.14. Leases IFRS 16 “Leases” establishes the principles for recognition, measurement, presentation and disclosure of lease contracts. A single lease accounting model was adopted if the Group acts as a lessee. If the Group acts as a lessor then it continues to classify its leases as operating leases or finance leases, and accounts for those two types of leases differently. The Group qualifies a contract as a lease as long as it gives the lessee the right to control the use of a particular asset. In order to qualify a contract as a lease, three main conditions shall be met: - the contract shall convey the right to use an identified asset; - the lessee shall obtain the economic benefits from use of this asset; - the lessee obtains the right to direct the use of this asset throughout the period of the contract. The Group has defined four major categories of lease contracts: - real estate: points of sale, offices, perpetual usufruct of land; - mobile network: land, technical premises, space on towers, chimneys, rooftops; - fixed network: technical premises, limited property rights, access to the local loop, collocation, dark fibre contracts, subsurface rights, ground easements; - other rentals: vehicles, technical equipment, data centre. The accounting presentation of lease contracts in the statement of financial position depends mainly on: - the scope of contracts qualified as leases, - the duration adopted for certain types of contracts, 63 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish which require significant judgment from the Company’s Management Board. The Management Board reviews these estimates if the circumstances on which they were based evolve or in the light of new information or established market practice. Group as a lessee On the lessee’s side the Group uses a single accounting model, in which the lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. The Group has chosen to apply two exemptions proposed by the standard and expense as external purchases the following contracts: - all contracts, except for contracts for vehicles, whose lease term is less than 12 months; - contracts where the value of the underlying asset is less than USD 5,000. The lease duration corresponds to the non-cancellable period of the lease, periods covered by extension options that the Group is reasonably certain to exercise and termination options that the Group is reasonably certain not to exercise. In case of indefinite period leases the Group estimates the reasonably certain lease term to determine the lease term. The Group assessed the reasonably certain lease terms of cancellable lease contracts to be equal to 5 years for all lease contracts, except for 18 years for road occupancy leases where fixed network infrastructure is placed. For easements in buildings, where the Group located its telecommunication infrastructure, a lease duration is assessed as an average useful life of buildings in the Group. Subsurface contracts and land easements are measured basing on the portfolio approach due to significant number of homogenous contracts. At the lease commencement date, the Group recognises a right-of-use asset and a lease liability. The right-of-use asset is measured at cost which comprises: - the amount of the initial measurement of the lease liability; - any lease payments made at or before the commencement date, less any lease incentives received; - any initial direct costs incurred by the lessee; and - an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease. After the commencement date, the Group measures the right-of-use asset applying a cost model, less any accumulated depreciation and any accumulated impairment losses, as well as any adjustments resulting from remeasurement of the lease liability. The lease liability is measured at the present value of the lease payments that are not paid at the commencement date. The lease payments are discounted using the incremental borrowing rates as the rates implicit in the lease are not easily determinable. Discount rates adopted are based on Polish state bond yield, adjusted by credit spread observable for entities with similar credit rating. Discount rates are differentiated by duration and by currency, and not by class of assets. The lease liability comprises the following payments: - fixed payments (including in-substance fixed payments), less any lease incentives receivable; - variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; - amounts expected to be payable by the lessee under residual value guarantees; - the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; - payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease. 64 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish After the commencement date, the lease liability is increased to reflect interest on the lease liability and reduced to reflect the lease payments made, as well remeasured to reflect any reassessment or lease modification. Only the lease component is taken into account in the measurement of the right-of-use asset and of the lease liability. Other non-lease components, like payments for utilities, are accounted for separately in accordance with other applicable accounting standards. Group as a lessor The Group continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset. Examples of situations that individually or in combination would lead to a lease being classified as a finance lease are as follows: - the lease transfers ownership of the underlying asset to the lessee by the end of the lease term; - the lessee has the option to purchase the underlying asset at a price significantly lower than the fair value; - the lease term is for the major part of the economic life of the underlying asset; - at the inception date, the present value of the lease payments amounts to at least substantially all of the fair value of the underlying asset; and - the underlying asset is of such a specialised nature that only the lessee can use it without major modifications. 35.15. Non-current assets held for sale Non-current assets held for sale are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than continuing use. Those assets are available for immediate sale in their present condition subject only to terms that are usual and customary for sales of such assets and the sale is highly probable. Non-current assets held for sale are measured at the lower of carrying amount and estimated fair value less costs to sell and are presented in a separate line in the statement of financial position if IFRS 5 requirements are met. Those assets are no longer depreciated. If fair value less costs to sell is less than its carrying amount, an impairment loss is recognised in the amount of the difference. In subsequent periods, if fair value less costs to sell increases the impairment loss is reversed up to the amount of losses previously recognised. 35.16. Impairment tests of non-financial assets and Cash Generating Units Given the nature of Group’s assets and operations, most of its individual assets do not generate cash inflows independently from other assets. The Group identifies a single major CGU (see Note 9). For the purpose of impairment testing the Group allocates the whole goodwill to this CGU. In accordance with IFRS 3 “Business Combinations”, goodwill is not amortised but is tested for impairment at least once a year or more frequently when there is an indication that it may be impaired. IAS 36 “Impairment of Assets” requires these tests to be performed at the level of the cash generating unit (CGU). Recoverable amount To determine whether an impairment loss should be recognised, the carrying value of the assets and liabilities of the CGU, including allocated goodwill, is compared to its recoverable amount. The recoverable amount of a CGU is the higher of its fair value less costs to sell and its value in use. 65 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Fair value less costs to sell is the best estimate of the amount realisable from the sale of a CGU in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal. This estimate is determined on the basis of available market information taking into account specific circumstances. Value in use is the present value of the future cash flows expected to be derived from the CGU, including goodwill. Cash flow projections are based on economic and regulatory assumptions, telecommunications licences renewal assumptions and forecast trading conditions drawn up by the Group management, as follows: - cash flow projections are based on the business plan and its extrapolation to perpetuity by applying a growth rate reflecting the expected long-term trend in the market, - the cash flows obtained are discounted using appropriate rates for the type of business concerned. If the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised in the amount of the difference. The impairment loss is firstly allocated to reduce the carrying amount of goodwill and then to the other assets of CGUs. Goodwill impairment losses are recorded in the income statement as a deduction from operating income/loss and are not reversed. 35.17. Financial assets and liabilities Financial assets are classified in the following measurement categories – depending on the business model in which assets are managed and their cash flow characteristics: - assets subsequently measured at amortised cost – if the financial assets are held within a business model whose objective is to collect contractual cash flows, and the contractual terms of these financial assets give rise to cash flows that are solely payments of principal and interest; - assets subsequently measured at fair value through other comprehensive income – if the financial assets are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and the contractual terms of these financial assets give rise to cash flows that are solely payments of principal and interest; - hedging derivative instruments; - assets at fair value through profit or loss – all other financial assets. Financial liabilities are classified as financial liabilities at amortised cost, liabilities at fair value through profit or loss and hedging derivative instruments. Recognition and measurement of financial assets When financial assets are recognised initially, they are measured at fair value plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. Trade receivables that do not have a significant financial component are initially measured at their transaction price. A regular way purchase or sale of financial assets is recognised using settlement date accounting. - Assets subsequently measured at amortised cost Assets subsequently measured at amortised cost include “Trade receivables” (excluding trade receivables measured at fair value through other comprehensive income) “Cash and cash equivalents”. Interest income from these financial assets is calculated using the effective interest rate method and is presented within finance costs, net. Cash and cash equivalents consist of cash in bank and on hand, cash deposits with Orange S.A. under the Cash Management Treasury Agreement and other highly-liquid instruments that are readily convertible into known amounts of cash and are subject to insignificant changes in value. 66 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish - Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include derivative assets not designated as hedging instruments as set out in IFRS 9 and contingent consideration receivable related to sale of 50% stake in Światłowód Inwestycje. - Financial assets at fair value through other comprehensive income Financial assets at fair value through other comprehensive income include selected receivables arising from sales of mobile handsets in instalments which are subject to the factoring agreement. - Impairment The Group measures the loss allowance at an amount equal to lifetime expected credit losses for trade receivables, lease receivables, cash and cash equivalents and contract assets. Trade receivables that are homogenous and share similar credit risk characteristics (e.g. separately for B2C and B2B) are tested for impairment collectively. When estimating the lifetime expected credit loss the Group uses historical data as a measure for expected credit losses. In calculating the recoverable amount of receivables that are individually material and not homogenous, the Group assess expected credit losses on individual basis taking into account significant financial difficulties of the debtor or probability that the debtor will enter bankruptcy or financial reorganisation. This method is mainly used for carrier customers (national and international), administrations and public authorities. As soon as information about deteriorating standing of the customer is available (e.g. clients in bankruptcy or subject to equivalent judicial proceedings), these receivables are excluded from the statistical impairment database and individually impaired. IFRS 9 requires recognition of expected losses on receivables immediately upon recognition of the financial instruments. The Group applies a simplified approach of anticipated impairment at the time the asset is recognised. The approach establishes the rate of expected losses by comparing bad debt to revenue. The Group considers a financial asset to be credit-impaired when events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred, for example significant financial difficulty of the debtor or a breach of contract, such as a default or past due event. The Group considers a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows. Recognition and measurement of financial liabilities - Financial liabilities at amortised cost Financial liabilities measured at amortised cost include borrowings, trade payables and fixed assets payables, including the telecommunications licence payables and are presented in the statement of financial position as “Trade payables”, “Loans from related party” and “Other financial liabilities at amortised cost”. Trade payables include those that are subject to reverse factoring. The Group considers that these financial liabilities carry the characteristics of trade payables, in particular as the payment schedules are within the range of ordinary payment terms for a telecommunications operator and as no additional collateral was required. Borrowings and other financial liabilities are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method. - Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include derivative liabilities not designated as hedging instruments as set out in IFRS 9. 67 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Recognition and measurement of derivative instruments Derivative instruments are measured at fair value and presented in the statement of financial position as current or non-current according to their maturity. Derivatives are classified as financial assets and liabilities at fair value through profit or loss or as hedging derivatives. - Derivatives classified as financial assets and liabilities at fair value through profit or loss Except for gains and losses on hedging instruments (as explained below), gains and losses arising from changes in fair value of derivatives are immediately recognised in the income statement. The change in fair value (excluding interest rate component and credit risk adjustment) of derivatives held for trading is presented in operating income/loss or finance costs, net, depending on the nature of the economically hedged transaction. The interest rate component and credit risk adjustment of derivatives held for trading are presented under other interest expense and financial charges within finance costs, net. - Hedging derivatives Derivative instruments may be designated as cash flow hedges. A cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (such as a future purchase or sale) and could affect profit or loss. The effects of applying hedge accounting are as follows: the portion of the gain or loss on the hedging instrument that is determined to be an effective cash flow hedge is recognised directly in other comprehensive income and the ineffective portion of the gain or loss on the hedging instrument is recognised in profit or loss. Amounts recognised in cash flow hedge reserve are subsequently recognised in profit or loss in the same period or periods during which the hedged item affects profit or loss. If a hedge of a forecast transaction results in the recognition of a non-financial asset or a non-financial liability, the gains and losses accumulated in equity are removed from the cash flow hedge reserve and included in the initial measurement of the cost of the asset or liability. This is not a reclassification adjustment and is not recognised in other comprehensive income. 35.18. Inventories Inventories, mainly handsets, are stated at the lower of cost and net realisable value. The Group provides allowance for slow-moving or obsolete inventories based on inventory turnover ratios and current marketing plans. Change in allowance is presented in the consolidated income statement in “External purchases”. Cost corresponds to purchase or production cost determined by the weighted average cost method. Net realisable value is the estimated selling price in the ordinary course of business, less selling expenses. 35.19. Income tax The tax expense comprises current and deferred tax. Current tax The current income tax charge is determined in accordance with the relevant tax law regulations in respect of the taxable profit. Income tax liabilities/assets represent the amounts expected to be paid to/received from the tax authorities at the end of the reporting period. Deferred taxes Deferred taxes are recognised for temporary differences, as well as for unused tax losses. Deferred tax assets are recognised only when their recovery is considered probable. At the end of the reporting period unrecognised deferred tax assets are re-assessed. A previously unrecognised deferred tax asset is recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. 68 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish Deferred tax is not accounted for if it arises from the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction, affects neither accounting nor taxable profit nor loss. Deferred tax assets and liabilities are not discounted. Deferred income tax is calculated using the enacted or substantially enacted tax rates at the end of the reporting period. 35.20. Provisions A provision is recognised when the Group has a present obligation towards a third party, which amount can be reliably estimated and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. The obligation may be legal, regulatory or contractual or it may represent a constructive obligation deriving from the Group’s actions. The estimate of the amount of the provision corresponds to the expenditure likely to be incurred by the Group to settle its obligation. If a reliable estimate cannot be made of the amount of the obligation, no provision is recorded and the obligation is deemed to be a “contingent liability”. Contingent liabilities – corresponding to (i) possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the Group’s control or (ii) to present obligations arising from past events that for which it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or because the amount of the obligation cannot be measured with sufficient reliability – are not recognised but disclosed where appropriate in the notes to the Consolidated Financial Statements. Provisions for dismantling and restoring sites The Group is required to dismantle equipment and restore sites. In accordance with paragraphs 36 and 37 of IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”, the provision is based on the best estimate of the amount required to settle the obligation. It is discounted by applying a discount rate that reflects the passage of time and the risk specific to the liability. The amount of the provision is revised periodically and adjusted where appropriate, with a corresponding entry to the asset to which it relates. 35.21. Pensions and other employee benefits Certain employees of the Group are entitled to jubilee awards and retirement bonuses. Jubilee awards are paid to employees upon completion of a certain number of years of service whereas retirement bonuses represent one-off payments paid upon retirement in accordance with the Group’s remuneration policies. Both items vary according to the employee’s average remuneration and length of service. Jubilee awards and retirement bonuses are not funded. The cost of providing benefits mentioned above is determined separately for each plan using the projected unit credit actuarial valuation method. This method sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation which is then discounted. The calculation is based on demographic assumptions concerning retirement age, staff turnover rates and financial assumptions concerning rates of future salary increases, future interest rates (to determine the discount rate). Actuarial gains and losses on jubilee awards plans are recognised as income or expense when they occur. Actuarial gains and losses on post-employment benefits are recognised immediately in their total amount in the other comprehensive income. The present value of the defined benefit obligations is verified at least annually by an independent actuary. The demographic and attrition profiles are based on historical data. Benefits falling due more than 12 months after the end of the reporting period are discounted using a discount rate determined by reference to market yields on Polish government bonds. 69 Table of contents Orange Polska Group IFRS Consolidated Financial Statements – 31 December 2021 Translation of the financial statements originally issued in Polish The Group recognises termination benefits, which are provided in exchange for the termination of an employee’s employment as a result of either: - the Group’s decision to terminate an employee’s employment before the normal retirement date; or - an employee’s decision to accept an offer of benefits in exchange for the voluntary termination of employment. Termination benefits are provided for when the Group terminates the employment or when the Group has offered to its employees benefits in exchange for voluntary termination of employment. Based on the past practice such offers are considered as constructive obligations and accounted for if it is probable that benefits will be paid out and they might be reliably measured. The basis for calculation of the provision for voluntary employment termination is expected payment dates and the estimated number, remuneration and service period of employees who will accept the voluntary termination. Provision for employment termination benefits is presented in the consolidated statement of financial position in “Provisions”. In addition to post-employment and other long-term employee benefits, the Group also provides to its current and retired employees certain non-monetary benefits, including subsidised telecommunication services. In absence of specific guidance under IFRS, the Group’s policy is to value such employee benefits at their incremental cost net of related revenue generated from the service. 35.22. Share-based payments In 2017 and 2021 OPL S.A. launched a cash-settled share-based payment plans under which employees render services to the Group in exchange for its obligation to transfer cash for amount that is based on the price of equity instruments of the Company. The value of the services rendered by employees (determined with reference to fair value of Orange Polska shares) for granting share appreciation rights is recognised as an expense with a corresponding entry to employee benefits liabilities over the vesting period. At the end of the reporting period the liability is re-measured until the date of settlement with any changes in value recognised in profit or loss for the period. In years 2017-2021 Orange S.A. launched equity-settled share-based payment plans under which employees render services to the Group in exchange for equity instruments of Orange S.A. The value of the services rendered by employees (determined with reference to fair value of Orange S.A. shares) for granting equity instruments of Orange S.A. is recognised as an expense with a corresponding increase in equity over the vesting period. 70