3.2. Basis of consolidation

All entities of the PKO Bank Polski SA Group are consolidated using the acquisition accounting method.

The process of consolidation of financial statements of subsidiaries under the acquisition accounting method involves adding up the individual items of the income statements and statements of financial position of the parent company and the subsidiaries in the full amounts, and making appropriate consolidation adjustments and eliminations. The carrying amount of the Bank’s investments in subsidiaries and the equity of these entities at the date of their acquisition are eliminated on consolidation. The following items are eliminated in full on consolidation:

• intercompany receivables and payables and other settlements between consolidated entities of a similar nature;
• revenues and costs resulting from business transactions between consolidated entities;
• profits or losses resulting from business transactions between consolidated entities contained in the value of the consolidated entities’’ assets, except for losses that indicate inpeirment;
• dividends accrued or paid by subsidiaries to the parent company and other consolidated entities;
• inter-company cash flows in the statement of cash flows.

The consolidated statement of cash flows has been prepared on the basis of the consolidated statement of financial position, consolidated income statement and additional notes and explanations.

Financial statements of subsidiaries are prepared for the same reporting period as the financial statements of the parent company. Consolidation adjustments are made in order to eliminate any differences in the accounting policies applied by the Bank and its subsidiaries.

The acquisition of subsidiaries by the Group is accounted for under the acquisition method.

In respect of mergers of the Group companies, i.e. the so-called transactions under common control, the predecessor accounting method is applied, i.e. the acquired subsidiary is recognized at the carrying amount of its assets and liabilities recognized in the Group’s consolidated financial statements in respect of the given subsidiary, including the goodwill arising from the acquisition of that subsidiary.

Associates are entities on which the Group exerts significant influence but which it does not control, which usually accompanies having from 20% to 50% of the total number of votes in the decision-making bodies of the entities.

Joint ventures are commercial companies or other entities, which are jointly controlled by the Bank on the basis of the Memorandum or Articles of Association or an agreement concluded for a period longer than one year.

Investments in these entities are accounted for in accordance with the equity method and are initially stated at purchase cost. The investment includes goodwill determined as at the acquisition date, net of any accumulated impairment allowances.

The Group’s share in the results of associates and joint ventures from the acquisition date is recorded in the income statement and its share in changes in the balance of other comprehensive income from the acquisition date is recorded in other comprehensive income. The carrying amount of investments is adjusted by the total movements in the individual equity items from the acquisition date. When the Group’s share in the losses of these entities becomes equal or higher than the Group’s interest in such entities, including unsecured receivables (if any), the Group discontinues recognizing further losses, unless it has assumed the obligation or made payments on behalf of the particular entity.

Unrealized gains on transactions between the Group and such entities are eliminated pro rata to the Group’s interest in those entities. Unrealized losses are also eliminated, unless there is evidence of impairment of the transferred asset.

At each balance sheet date, the Group makes an assessment of whether there is any objective evidence of impairment in investments in associates and joint ventures. If any such evidence exists, the Group estimates the recoverable amount, i.e. the value in use of the investment or the fair value of the investment less costs to sell, whichever of these values is higher. If the carrying amount of an asset exceeds its recoverable amount, the Group recognizes an impairment allowance in the income statement.