40. Changes to companies comprising the Group
In 2019, the following selected events had an impact on the PKO Bank Polski SA Group’s structure:
2019
Acquisition of Prime Car Management SA by PKO Leasing SA
Description of the transaction
PKO Leasing SA (the Bank’s subsidiary) acquired a total of 100% of shares of the public company Prime Car Management SA (PCM), including:
| Consideration given for the shares of the Prime Car Management S.A. Group companies | date of settlement/exchange |
number of shares | in PLN million |
| – purchased as a result of the first call | 2019-05-27 | 11 244 402 | 267 |
| – purchased as a result of the squeeze-out | 2019-06-24 | 664 438 | 16 |
| Total | 11 908 840 | 283 |
Until 17 June 2019, the shares of PCM were traded on the Warsaw Stock Exchange (WSE). On 31 October 2019, they were withdrawn from stock exchange trading. The purchase of shares was financed with an overdraft facility granted to PKO Leasing SA by Bank
The acquired company engages in lease operations (finance and operating leases) and in vehicle fleet management.
The Company’s share capital as at 31 December 2019 amounts to PLN 23 817 680 and consists of 11 908 840shares, each of PLN 2 nominal value.
In connection with the acquisition of PCM, its subsidiaries became part of the PKO Leasing SA Group in accordancewith IFRS. The subsidiaries included:
| Company | Share capital | Number of shares | Nominal value of the shares |
| Masterlease sp. z o.o. | 7 905 000 PLN | 158 100 | 50 PLN |
| MasterRent24 sp. z o.o. | 2 850 000 PLN | 28 500 | 100 PLN |
| Futura Leasing SA | 1 689 320 PLN | 1 689 320 | 1 PLN |
The subsidiaries of PCM engage primarily in passenger car rental, finance leases, sales of vehicles and servicing and repairs of vehicles.
Simultaneously, in June 2019, the Bank granted PCM two loans totalling PLN 1 890 million for the purpose of changing the financing structure of PCM and its Group (refinancing of hitherto existing liabilities of PCM resulting from loan agreements concluded and bonds issued, as well as current financing and refinancing activities).
Accounting for the acquisition
The transaction was accounted for using the acquisition method in accordance with IFRS 3 which requires: identifying the acquirer, determining the date of acquisition, recognizing and measuring identifiable assets acquired, liabilities assumed measured at fair value as at the date of acquisition, and all non-controlling shares in the acquiree, as well as recognizing and measuring goodwill or gains from bargain purchase.
Taking into account the fact that control over PCM and its subsidiaries was taken over as of 27 May 2019, the transaction was accounted for on the basis of PCM’s consolidated financial statements as at 31 May 2019 and adjusted for material operations which took place between 27 May 2019 and 31 May 2019, i.e. from the date of assuming control.
Recognition and measurement of identifiable assets acquired and liabilities assumed in accordance with IFRS
As at the date of preparing these financial statements, an initial provisional measurement of the acquisition transaction was performed, in particular as regards the portfolio of lease receivables, the portfolio of assets leased under operating leases; contingent liabilities were also identified and measured. The final transaction settlement may differ from the preliminary settlement presented in these financial statements.
In accordance with IFRS 3.45, the Group has 12 months – i.e. to 26 May 2020 for determining final amounts.
The data concerning fair value measurement of identified assets acquired and liabilities assumed presented below has been based on the identification performed from the perspective of the entire PCM Group.
| ASSETS | Data of the Prime Car Management S.A. Group as at the acquisition date 27.05.2019 (at amounts derived from the financial statements) |
Adjustment relating to fair value measurement | Fair value of the assets acquired |
|---|---|---|---|
| Amounts due from banks | 8 | – | 8 |
| Loans and advances to customers | 1 116 | (38) | 1 078 |
| Intangible assets, of which: | – | 10 | 10 |
| Trademark | – | 3 | 3 |
| Customer relationships | – | 7 | 7 |
| Property, plant and equipment | 835 | (49) | 786 |
| Deferred income tax assets | 70 | 3 | 73 |
| Other assets | 87 | (10) | 77 |
| Total | 2 116 | (84) | 2 032 |
| LIABILITIES | Data of the Prime Car Management S.A. Group as at the acquisition date 27.05.2019 (as per financial statements) |
Adjustment relating to fair value measurement | Fair value of the assets acquired |
|---|---|---|---|
| Amounts due to banks | 1 301 | – | 1 301 |
| Amounts due to customers | 2 | – | 2 |
| Debt securities in issue | 250 | – | 250 |
| Other liabilities | 110 | (20) | 90 |
| Current income tax liabilities | 2 | – | 2 |
| Provisions | 2 | – | 2 |
| Total | 1 667 | (20) | 1 647 |
| Net assets | 449 | (64) | 385 |
Information on assumptions and valuation methods relating to individual identifiable assets acquired and liabilities assumed as at 27 may 2019
The tables below show acquired loans and advances to customers at fair value as at 27 May 2019. They comprise exclusively lease receivables.
| LOANS AND ADVANCES TO CUSTOMERS BY CUSTOMER SEGMENTS | Data of the Prime Car Management S.A. Group as at the acquisition date 27.05.2019 (as per the financial statements) |
Adjustment relating to fair value measurement | Fair value of the assets acquired |
|---|---|---|---|
| Loans and advances to customers, gross, of which: | 1 166 | (65) | 1 101 |
| measured at amortized cost | 1 166 | (65) | 1 101 |
| corporate | 102 | (5) | 97 |
| retail and private banking | 74 | (4) | 70 |
| SME | 990 | (56) | 934 |
| Allowances for expected credit losses | (50) | 27 | (23) |
| measured at amortized cost | (50) | 27 | (23) |
| corporate | (4) | 2 | (2) |
| retail and private banking | (3) | 2 | (1) |
| SME | (43) | 23 | (20) |
| Loans and advances to customers, net, of which | 1 116 | (38) | 1 078 |
| measured at amortized cost | 1 116 | (38) | 1 078 |
| corporate | 98 | (3) | 95 |
| retail and private banking | 71 | (2) | 69 |
| SME | 947 | (33) | 914 |
The portfolio of finance lease receivables has been measured at fair value using the discounted cash flow method (the income approach) based on discounted cash flows arising from contracts concluded. The expected cash flows have been defined as a sum of contractual principal instalments, including the residual amounts of the leased assets and interest instalments determined based on forward interest rates and effective contractual rates.
The expected cash flows have been discounted using the effective market rates being the sum of the relevant forward rate and effective market margin. Effective market margins have been established as the average margins for homogeneous groups of products for transactions concluded during the last three months by Prime Car Management S.A. In the Group’s opinion, the margins realized during the last three months by the acquired PCM constitute an appropriate approximation of market margins as at the valuation date.
The total adjustments arising from fair value measurement of the portfolio of finance lease receivables amounted to PLN (-)38 million.
Upon accounting for the acquisition transaction customer relationships were identified arising from concluding finance and operating lease agreements in an amount of: PLN 2 million and PLN 5 million respectively. Customer relationships in the area of the lease portfolio have been analysed separately for the portfolio of finance and operating lease agreements. Customer relationships were measured using the multi-period excess earnings method.
Under this method value is determined based on discounted future cash flows arising from additional earnings generated by a company possessing a given intangible asset above the earnings generated by a company which does not possess such an asset. The method also takes into account the costs and investments related to an intangible asset, marketing expenses etc. In order to estimate the fair value of customer relationships the entity identifies the relationships with the key customers for the individual CGUs, determines the forecast period of their duration and forecast revenue from the individual relationships, and direct costs related to those relationships. Administrative expenses (including amortization and depreciation) are deducted each year from such cash flows. The required return on other assets contributing to generating revenue from customer relationships is also deducted (property, plant and equipment, trademarks, organized labour). Charges arising from using other assets correspond to the required return on individual tangible and intangible assets used for generating revenue from customer relationships. The required return is calculated accordingly for non-current assets, trademarks, organized labour and the capital requirement, and then set off against revenue from customer relationships.
Cash flows received in the individual years are subsequently discounted using the discount rate plus a suitable premium for intangible assets. The discounted cash flows thus calculated are an estimate of the intangible asset.
As part of the settlement of the acquisition transaction the Masterlease trademark was measured at PLN 3 million. Measurement of the trademark based on the market level of licence fees was performed by determining the present value of future licence payments as a result of holding the right to the trademark. This method is based on the assumption that the benefits arising from holding the trademark are equal to the costs that the entity would have to incur if it did not have the right to the trademark but only used it based on a licence agreement at market rates. The market level of the licence fee can be determined by analysing licence rates for using trademarks applied between non-related parties within a comparable market segment. The valuation was performed based on the so-called umbrella approach. The value of the Materlease trademark was based on the activities of PCM as a whole.
As part of the transaction’s settlement the residual value of cars used under operating lease was adjusted by PLN (-) 49 million. The adjustment has been estimated based on residual values adopted by PCM adjusted for the valuation prepared by an independent surveyor, which was slightly lower than the prices actually applied by the company during 2019.
As part of the transaction’s settlement the residual value of pre-contract and post-contract cars was adjusted by PLN (-) 5 million.
Fair value of post-lease cars which have been recovered by PCM as a result of terminating agreements or through a debt recovery process has been established in an amount of the valuation performed by an independent surveyor and it is slightly lower than the margins actually obtained by the company in 2019.
Fair value of pre-lease cars which were not transferred to PCM customers as part of finance or operating lease agreements is based on cost adjusted for a write-down for each month of their being kept in the books of account.
As part of the transaction settlement, other assets adjustments amounted to minus PLN 5 million were made. The aforementioned adjustments relate to:
- write-off interest accrued on operating lease contracts that do not meet the definition of assets as at the date of taking control (due to the measurement of fixed assets subject to operating lease at fair value), in the total amount of minus PLN 6 million;
- changes in settlements due to maintenance services within the scope of car fleet management services (in order to proportional recognition of the financial results in contractual maturity period in accordance with IFRS 15 Revenue from contracts with clients) in the total amount of PLN 1 million;
As part of the transaction settlement, other liabilities adjustments amounted to minus PLN 20 million were made. The aforementioned adjustments relate to:
- write-off accrued revenues due to initial fees in operating leasing that do not meet the definition of an obligation as at the date of taking control, in the total amount of minus PLN 17 million;
- changes in settlements due to maintenance services within the scope of car fleet management services (in order to proportional recognition of the financial results in contractual maturity period in accordance with IFRS 15 Revenue from contracts with clients) in the total amount of PLN 1 million.
Gain from a bargain purchase arising from the transaction
As a result of the settlement of the purchase of PCM shares, gain from a bargain purchase was recognized in an amount of the difference between the consideration transferred and a net amount of identifiable assets acquired and liabilities assumed measured in accordance with IFRS.
| Total, Prime Car Management S.A. Group companies |
|
|---|---|
| Consideration paid | 283 |
| Net identifiable assets acquired and liabilities assumed | 385 |
| Gain from bargain purchase, of which: | (102) |
| corporate segment | (23) |
| retail segment | (79) |
The Group purchased the shares in PCM to obtain economic benefits by increasing the customer base in the lease portfolio, in particular the operating lease. The synergy effect of acquiring Prime Car Management S.A. with its subsidiaries will comprise strengthening the leading position in the sector of lease services, including operating lease, and developing fleet management and car lease services.
Additional information
Due to the fact that the business combination took place during the reporting period, presented below is the aggregate income statement of the acquired entities from the date of acquisition to 31 December 2019 and the income statement of the Group for the period from 1 January to 31 December 2019 presented as though the acquisition date fell on 1 January 2019.
The table below shows the amounts of revenue and costs, and profits or losses of the PCM Group from the date of acquisition, i.e. from 27 May 2019.
| INCOME STATEMENT | Data of the Prime Car Management S.A. Group for the period from acquisition date |
|---|---|
| Interest income | 37 |
| Interest expense | (31) |
| Net interest income | 6 |
| Fee and commission income | 5 |
| Fee and commission expense | (1) |
| Net fee and commission income/(expense) | 4 |
| Net expected credit losses, impairment allowances and provisions | (10) |
| Other operating income | 198 |
| Other operating expenses | (72) |
| Net, other operating income and expense | 126 |
| Administrative expenses | (121) |
| Operating profit | 5 |
| Profit before tax | 5 |
| Income tax expense | (2) |
| Net profit (including non-controlling shareholders) | 3 |
| Net profit attributable to equity holders of the parent | 3 |
The table below shows the income statement of the PKO Leasing SA Group, including the PCM Group, for the current reporting period, calculated as though the beginning of the reporting period, i.e. 1 January 2019, was the date of assuming control.
| INCOME STATEMENT | The PKO Bank Polski SA Group for the period from 1 January to 31 December 2019 (including the Prime Car Management S.A. Group from the acquisition date) | The Prime Car Management S.A. Group for the period from 1 January 2019 to the acquisition date |
The PKO Bank Polski SA Group, including the Prime Car Management S.A. Group for the period from 1 January 2019 to 31 December 2019 |
|---|---|---|---|
| Interest and similar income | 12 760 | 26 | 12 786 |
| Interest expense | (2 481) | (24) | (2 505) |
| Net interest income | 10 279 | 2 | 10 281 |
| Fee and commission income | 4 130 | 2 | 4 132 |
| Fee and commission expense | (1 083) | (1) | (1 084) |
| Net fee and commission income/(expense) | 3 047 | 1 | 3 048 |
| Dividend income | 14 | – | 14 |
| Net gain/(loss) on financial instruments measured at fair value through profit or loss | 175 | – | 175 |
| Net foreign exchange gains/(losses) | 473 | – | 473 |
| Gains/(losses) on derecognition of financial assets and financial liabilities not measured at fair value through profit or loss | 145 | – | 145 |
| Net expected credit losses | (1 147) | 1 | (1 146) |
| Impairment of non financial assets | (114) | 323 | (114) |
| Cost of the legal risk of mortgage loans in convertible currencies | (451) | (232) | (451) |
| Other operating income | 905 | 91 | 1 228 |
| Other operating expenses | (368) | (89) | (600) |
| Net other operating income and expense | 537 | – | 628 |
| Administrative expenses | (5 611) | – | (5 700) |
| Net regulatory charges | (537) | 6 | (537) |
| Tax on certain financial institutions | (1 022) | – | (1 022) |
| Operating profit | 5 788 | 6 | 5 794 |
| Shares in profits / (losses) of associates and joint ventures | 31 | (2) | 31 |
| Profit before tax | 5 819 | 4 | 5 825 |
| Income tax expense | (1 787) | – | (1 789) |
| Net profit (including non-controlling shareholders) | 4 032 | 4 | 4 036 |
| Profit / (loss) attributable to non-controlling shareholders | 1 | – | 1 |
| Net profit attributable to equity holders of the parent company | 4 031 | 4 | 4 035 |
Other changes in the PKO Leasing SA Group
On 28 June 2019 the merger between Qualia Development sp. z o.o (the Bank’s subsidiary) as the acquiree and PKO Leasing SA as the acquirer was registered in the National Court Register with jurisdiction over the registered office of the acquirer. The merger took place in accordance with Article 492 § 1 item 1 of the Commercial Companies Code (merger by acquisition) by transferring all the assets of the acquiree to the acquirer, with a simultaneous increase in the share capital of the acquirer and conversion of the shares in the acquiree into the shares of the acquirer.
After the merger PKO Bank Polski SA held 34 785 566 shares of PKO Leasing SA with a total nominal value of PLN 347 855 660 constituting 100% of the share capital and carrying 100% of the votes at the General Meeting of Shareholders.
On 26 September 2019, PKO Leasing SA sold a portfolio of securitized lease receivables to the special-purpose vehicle Polish Lease Prime 1 Designated Activity Company (Polish Lease Prime 1 DAC) with its registered office in Dublin (Ireland). Under IFRS 10, Polish Lease Prime 1 DAC meets the definition of a subsidiary of PKO Leasing SA and has been consolidated.
Reclassification of Operator Chmury Krajowej sp. z o.o.
On 5 September 2019, the increase in the share capital of Operator Chmury Krajowej sp. z o.o. of PLN 60 million, acquired by Polski Fundusz Rozwoju SA, and the amended Articles of Association of the company, were entered in the National Court Register.
Following the above-mentioned capital increase, the share capital of Operator Chmury Krajowej sp. z o.o. amounts to
PLN 120 million and is divided into 1 200 000 shares of PLN 100 nominal value each. PKO Bank Polski SA holds 600 000 shares of the company with a total nominal value of PLN 60 million constituting 50% of the share capital and carrying 50% of the votes at the General Shareholders’ Meeting.
PKO Bank Polski SA changed the company’s classification from a subsidiary to a joint venture.