4. ACCOUNTING PRINCIPLES

Significant accounting principles and significant values based on judgements and estimates are presented as a part of the specific explanatory notes to the consolidated financial statements. The Group applied the accounting principles consistently to all presented reporting periods, except for:

• changes in the presentation in relation to the operating Segments,
• adoption of the "first in first out" (FIFO) method for measurement of consumption of coal inventories,
• change in presentation of the recognition of the provision for the estimated volume of energy rights and energy efficiency certificates for redemption.

As a consequence of changes in the structure of the ORLEN Group related to taking control over ENERGA S.A. (“ENERGA”), as well as taking into account the development of the ORLEN Group's operations in respective areas and the related operational decision making process and allocation of resources within the Group, as from the 1st half of 2020 the ORLEN Group decided to change the presentation with respect to the Downstream segment and break it down into three operating segments: Refining, Petrochemical and Energy. In connection with the new presentation, the segments’ comparative data for the 2019 were also converted.

In the opinion of the Management Board of PKN ORLEN, such presentation better reflects the internal reporting structure within the Group, on the basis of which key decisions are made regarding the evaluation of the ORLEN Group's operations and allocation of resources, and increases the transparency and usefulness of data presented in the consolidated financial statements. In particular, following the takeover of ENERGA in April 2020, the Energy industry area became more important within the ORLEN Group and now, apart from ensuring power supplies for its own needs, it also generate significant revenues in distribution and sale area as well as electricity and heat generation.

Additionally, the Group decided to adopt the "first in, first out" (FIFO) method for measurement of consumption of coal inventories, which is consistent with the cost formula used so far by ENERGA for this raw material. In the opinion of the Group, this method best reflects business conditions and the actual process of using coal to production of energy, taking into account its physical properties.

Moreover, the Group changed the presentation of the provision for the estimated volume of energy rights and energy efficiency certificates for redemption. So far, the value of the created provision relating to the electricity sold decreased the sales revenues. As a result of the ongoing integration process with the ENERGA Group, which also includes the harmonization of the applied accounting principles within the whole ORLEN Group, a decision was made to change the presentation of this part of the provision in the income statement. In these consolidated financial statements, the provision for the estimated amount of energy rights and energy efficiency certificates related to the energy sold was recognised as operating activity costs (Taxes and charges), and in the account by function as distribution expenses. In the opinion of the Management Board of PKN ORLEN, the current presentation better reflects the nature of the created provision, in particular taking into account the moment when the obligation arises under the current regulations. The presentation of the recognition of the provision for the estimated volume of energy rights and energy efficiency certificates for redemption as part of the operating activity costs is also consistent with the current market practice. With respect to the presented comparative data for 2019, the above change did not have a significant impact.