5.2 Financing liabilities

Non-bank borrowings and debt securities

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

Lease liabilities

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

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

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

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

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

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

Lease term

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

Discount rates applied in the valuation of lease liabilities

For the purpose of measuring lease liabilities and right-of-use assets, the Group estimated the incremental interest rates applied in discounting future cash flows. The incremental interest rates are defined as the sum of:

• the risk-free rate, determined based on IRS (Interest Rate Swap) at the time of maturity of the discount rate and the relevant base rate for a given currency, and
• the credit risk premium of the Group based on the credit margin.

The Group applied marginal interest rates ranging from 0.9% to 5.5%.

The process of determining a current incremental interest rate consists of the following steps:

• analysis of the lessee’s current financing structure (e.g. the debt instruments held by the lessee and their terms);
• determination of the appropriate reference rate – for a given currency, economic conditions and the lease term;

analysis of the other material lease terms, including the nature of the underlying assets.