1.2 Basis of preparation and presentation

The consolidated financial statements include the financial statements of the Parent Entity and its subsidiaries. Subsidiaries are understood as being entities which are either directly controlled by the Parent Entity or indirectly through its subsidiaries.

Obtaining control of a subsidiary, which is a business, is accounted for using the acquisition method.

Subsidiaries are fully consolidated from the date on which control is obtained to the date on which control is lost.

Balances, incomes, expenses and unrealised gains recognised in assets from intra-group transactions, are eliminated.

Determining whether the Parent Entity has control over a company requires an assessment as to whether it has rights to direct relevant activities of the company.

Determining what constitutes relevant activities of the company and by which investor it is controlled requires a judgment.

Among others, the following factors are taken into consideration when assessing the situation and determining the nature of relationships: voting rights, relative voting power, dilution of voting rights of other investors and their ability to appoint members of key management personnel or members of the supervisory board.

Level 1
Value is based on inputs from active markets, as they are seen as the most reliable source of data.

Level 2
Value is based on inputs other than from active markets, which are nevertheless observable (unbiased, measurable).

Level 3
Value is based on unobservable inputs, used when appropriate observable input data is not available. Unobservable input data reflect assumptions that would be adopted by market participants in order to calculate the price of an asset or a liability, including risk assumptions.

Transfer between levels of the fair value hierarchy takes place if there is a change of sources of input data used for fair value measurement, such as:

• active market,
• lack of an active market, but there is observable data on the market,
• subjective input data.

It is acknowledged that transfers between levels of the fair value hierarchy take place at the end of the reporting period.

Fair value presents current estimates which may be subject to change in subsequent reporting periods due to market conditions or due to other factors. There are many methods of measuring fair value, which may result in differences in fair values.

Moreover, assumptions constituting the basis of fair value measurement may require estimating the changes in costs/prices over time, the discount rate, inflation rate or other significant variables.

Certain assumptions and estimates are necessary to determine to which level of fair value hierarchy a given instrument should be classified.

For purposes of preparing the consolidated financial statements in the presentation currency of the KGHM Polska Miedź S.A. Group, i.e. in PLN, individual items of financial statements of foreign operations whose functional currencies are other than PLN are translated in the following manner:

(i) assets and liabilities – at the closing rate, i.e. at the average exchange rate for that currency announced by the NBP at the end of the reporting period,

(ii) items of the statement of profit or loss, the statement of comprehensive income and the statement of cash flows – at the arithmetical average of average exchange rates announced for a given currency by the NBP at the end of each month of a given reporting period. If there is a significant volatility of exchange rates in a given period, revenues and costs in the statement of profit or loss and the statement of comprehensive income are translated using the exchange rates as at the transaction date.

Exchange differences from the translation of statements of operations with a functional currency other than PLN are recognised in other comprehensive income of a given period.

The consolidated financial statements are presented in PLN, which is also the functional currency of the Parent Entity and the Group’s subsidiaries, with the exception of: the subsidiary Future 1 Sp. z o.o. and subsidiaries of the subgroup KGHM INTERNATIONAL LTD. in which mainly the US dollar (USD) is the functional currency.

The balance of exchange differences from the translation of financial statements of the aforementioned entities:

2021 – PLN 2 619 million,

2020 – PLN 2 690 million.

(Note 8.2.2 Changes of other equity items).).

At the moment of initial recognition, foreign currency transactions are translated into the functional currency:

• at the actual exchange rate applied, i.e. at the buy or sell exchange rate applied by the bank in which the transaction occurs, in the case of the sale or purchase of currencies and the payment of receivables or liabilities;
• at the average exchange rate set for a given currency, prevailing on the date of the transactionfor other transactions.

At the end of each reporting period, foreign currency monetary items are translated at the closing rate prevailing on that date.

Foreign exchange gains or losses on the settlement of foreign currency transactions, and on the measurement of foreign currency monetary assets and liabilities (other than derivatives), are recognised in profit or loss.

Foreign exchange gains or losses on the measurement of foreign currency derivatives are recognised in profit or loss as a fair value measurement, provided they do not represent a change in the fair value of the effective cash flow hedge. In such a case, they are recognised in other comprehensive income in accordance with hedge accounting policies.

Foreign exchange gains or losses on non-monetary items, such as equity instruments classified as financial assets measured at fair value through other comprehensive income, are recognised in other comprehensive income.

Foreign exchange gains or losses on monetary items measured at fair value through profit or loss (e.g. loans granted measured at fair value) are recognised as a part of the fair value measurement.

On 1 January 2022, a change was introduced in the KGHM Polska Miedź S.A. Group concerning foreign exchange rates applied to measure currency sales and purchase transactions as well as the transactions of receivables and liabilities payment (including to measurement of transactions of borrowing receiving, granting or repayment) on the Group’s currency bank accounts. To translate these transactions to the functional currency, an average exchange rate prevailing on the date of the transaction is used, and the prevailing rate on the date of the transaction is the average NBP exchange rate from the last working day preceding the transaction date. Change in the applied exchange rates is, pursuant to IAS 8, a change in estimates and its impact will be recognised prospectively for periods beginning on or after 1 January 2022.