*Article* **The Quality of Goodwill Disclosures and Impairment in the Financial Statements of Energy, Mining, and Fuel Sector Groups during the Pandemic Period—Evidence from Poland**

**Maciej Gierusz 1,\*, Stanisław Ho ´nko 2,\*, Marzena Strojek-Filus <sup>3</sup> and Katarzyna Swietla ´ <sup>4</sup>**


**Abstract:** The COVID-19 pandemic has strongly affected the economic situation of many countries, which is worth considering not only globally but also in the context of specific industries. An asset that is particularly sensitive to negative economic changes is goodwill. The aim of this study is to assess the impact of the pandemic on the quality of financial disclosures concerning goodwill in consolidated financial statements of groups of chosen strategic sectors in Poland. We investigated the implications of the pandemic on the frequency and scale of goodwill impairment in relation to 23 companies listed on the Warsaw Stock Exchange from the Energy, Mining, and Fuel Index. We identified the research gap in this area. For the purposes of this study, two research hypotheses were formulated: (H1) during the COVID-19 pandemic, there has been a slight improvement in the quality of goodwill disclosures in the consolidated financial statements of groups in the energy, fuel, and mining sectors; (H2) The COVID-19 pandemic caused a decrease in goodwill due to impairment losses in the consolidated financial statements of groups in the energy, fuel, and mining sectors. The hypotheses were verified on the basis of the above research sample. In order to verify the first hypothesis, we tested 81 consolidated financial statements for the years 2018–2021 based on a self-developed index of the quality of disclosed information. To verify the second hypothesis, we analyzed the frequency and scale of the estimated loss of goodwill during the COVID-19 pandemic and its impact on the deterioration of the financial condition of the same research sample. The conducted research shows that the quality of disclosures regarding the goodwill in the examined sample has changed slightly. Contrary to our expectations, the pandemic did not materially reduce the value of goodwill. This means that the first hypothesis was verified positively, while the second hypothesis had to be rejected.

**Keywords:** goodwill; impairment of goodwill; quality of financial statements; energy sector; mining; fuel; disclosures of financial information

#### **1. Introduction**

The COVID-19 pandemic has had serious consequences in two dimensions: health and economics. COVID-19 has had a strong impact on human health and mortality worldwide. It has also caused problems and difficulties in the functioning of business entities in many sectors of the economy. This is the reason for the deterioration of financial results and, in some industries, also the bankruptcies of many companies. The impact of the pandemic on the financial situation of enterprises is also a consequence of the lack of predictability of

**Citation:** Gierusz, M.; Ho ´nko, S.; Strojek-Filus, M.; Swietla, K. The ´ Quality of Goodwill Disclosures and Impairment in the Financial Statements of Energy, Mining, and Fuel Sector Groups during the Pandemic Period—Evidence from Poland. *Energies* **2022**, *15*, 5763. https://doi.org/10.3390/en15165763

Academic Editors: Grzegorz Mentel and Sebastian Majewski

Received: 10 June 2022 Accepted: 4 August 2022 Published: 9 August 2022

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**Copyright:** © 2022 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/).

future results and the instability of operations. One of the sectors with a high vulnerability to many social and economic factors is the energy sector, which has been experiencing strong turbulence for years due to, among other factors, climate policy and geopolitics. The energy sector in Poland is strongly connected with the hard coal and lignite mining industry and also strongly dependent on the policy of the authorities. Studies carried out in different countries also indicate the mutual coupling of this sector with the economic situation of the country and the region [1]. On the other hand, the economic situation is affected by special phenomena, including the pandemic, e.g., [2–7]. In this context, the question arises if the impact of the pandemic on the quality of information on goodwill and its write-offs in companies from the energy, mining, and fuel sectors in Poland can be identified.

The research also took into account two sectors: mining and fuel, which are proprietary to the energy sector in Poland. The mining and fuel sectors are heavily dependent on the geopolitical situation and factors such as the pandemic.

An asset that should serve as a litmus test for the crisis is goodwill. Simply, it can be assumed that it is a fixed estimated value of the market perception of an entity related to, for example, exceptional management qualifications, market share, or a unique business model. Goodwill is a special asset of groups reported as a result of the parent company acquiring control of other entities (subsidiaries) and is presented in the consolidated statements of its financial position [8–10]. Goodwill represents the parent's future expected economic benefits that are not attributable to the other assets reported in the consolidated accounts. It is the result of the occurrence and impact of other "invisible" assets of an intangible nature in a subsidiary [11]. The deterioration of the financial condition of the group is particularly emphasized by an impairment loss of goodwill. Companies in the energy sector belong to the largest business entities, often with extensive holding structures. Research conducted on entities in this sector in China indicates a strong negative effect of the pandemic on the situation of those entities that showed write-downs of goodwill in financial statements [3]. However, there is a deficit of research on this problem in other parts of the world, affected by the effects of the pandemic to varying degrees. The research gap identified in this article is the impact of the COVID-19 pandemic on potential impairment losses of goodwill in groups of the energy, mining, and fuel sectors in Poland.

The aim of the article is to assess the impact of the COVID-19 pandemic on the quality of consolidated financial statements, particularly in terms of goodwill and impairment losses in capital groups of the Warsaw Stock Exchange Index (WIG)-Energy, WIG-Fuel, and WIG-Mining.

The research results partially fill the gap regarding the impact of the pandemic on the goodwill presented in the consolidated financial statements of the energy sector groups and sectors strongly associated with it in the countries of Central and Eastern Europe. The research particularly focused on goodwill impairment as a result of the pandemic. Finally, our research complements the picture of the quality of disclosures of goodwill in the consolidated financial statements of groups in strategic sectors in Poland.

The structure of this article was adapted to the research purpose. The first part presents an overview of the literature on goodwill, with an emphasis on areas specified in the research hypotheses. The empirical part is preceded by a description of the research methods used. This section includes two main parts, aiming to verify research hypotheses. The last part consists of final conclusions and the indication of limitations and recommendations.

#### **2. Literature Review**

The review of the literature concerning the research problem was carried out in two parts corresponding to the stages of the empirical research. Firstly, research on the quality of disclosure of goodwill information was taken into account. Secondly, the remaining studies on goodwill and its write-offs were classified. Each part of the literature review ends with the formulation of a research hypothesis.

A. Kozłowska [12] tried to define the most important factors that determine the quality of financial reporting. She pointed out that it is an issue of the qualitative features of financial information in financial statements that are increasingly raised in the context of the harmonization and standardization of accounting. The author used the qualitative analysis of financial statements. This has been carried out in accordance with the Framework for Financial Reporting Concepts. It was also based on the results of scientific research in this field.

The study presented by G. Iatridis [13–15] indicates that the implementation of International Financial Reporting Standards (IFRS) generally reinforces quality of financial information. The author pointed out that the implementation of IFRS reduces the scope for earnings management. The good quality of accounting information, especially financial statements, is related to more timely loss recognition and provides relevant accounting measures which are also connected with accounting disclosures.

Similar studies were conducted by M. E. Barth, W. R. Landsman, and M. H. Lang, [16] who pointed to the impact of the use of accounting standards on its quality. They referred to the coupling taking place in the application of IFRS in the context of the interpretation of solutions and their practical application due to limited income manipulation, the faster recognition of losses, and the better adequacy of the information presented.

The confirmation of this opinion is also the result of the deliberations of many researchers, e.g., [17,18], analyzing the quality of accounting information in the context of unified solutions in its field.

Conclusions on the impact of the accounting quality on the quality of reports were also presented by Sumiyana et al. [19], who argued that the quality of accounting information is extremely important for the target readers of financial reporting. Consequently, it results in a lower cost of internal and external capital and affects the development of business entities.

In the context of the quality of financial information presented in financial statements, a particular resource to be reported is goodwill. Goodwill is defined in the literature in different ways; however, in most of the presented definitions, its essence is emphasized as "surplus value", referring to the expected profit or assets of the entity [20–23]. It represents the additional gain to be realized in the future and is therefore the present value of the additional benefits that an entity acquiring another entity expects to realize. Meanwhile, Scott [9] indicates that this value is still related to intangible assets. At the same time, Hendriksen [8], while characterizing goodwill both on the basis of economic theory and accounting theory, additionally defines it as a surplus of the value of an entity as a whole over the sum of its tangible and intangible net assets. As an asset, goodwill is recognized in the statement of financial position (consolidated statement of financial position) only when control is obtained over another entityin accordance with IFRS 3 "Business Combinations". It therefore represents the value acquired by the investor and verified by means of the actual transaction of acquiring a controlling interest. It is the result of the existence of other intangible assets that have not been identified, individually measured, and disclosed in the acquired entity's statement of financial position. In the context of the high expectations of users regarding financial reporting, the scope of the presented disclosures becomes of key importance [22–24]. In the research concerning the quality of information on goodwill presented in consolidated financial statements, the basis was the reference to the concept of true and fair view and the requirements of the International Accounting Standards (IAS) and IFRS [25] (Amel-Zadeh, Glaum, and Sellhorn, 2021). M. Gierusz [26] points out the inconsistency between the rules of showing and valuation of goodwill in financial statements and the definition of assets adopted in the IFRS. In the opinion of A. Amel-Zadeh, M. Glaum, and T. Sellhorn [25], the means of identification and valuation, as well as the presentation of a company's value, is crucial for the correct assessment of economic entities' conditions, but it is also strongly influenced by the area of managerial activities. In this area, we can also distinguish research focusing on the problem of the allocation of the purchase price to goodwill and other identifiable intangibles [27,28].

The quality of disclosures concerned with goodwill is a subject of many studies. Khairi et al. [29] conducted a study which answered several important questions regarding the quality of information disclosed on the goodwill impairment process under the requirements of the Financial Reporting Standard (FRS) 36. This study investigated the compliance level and disclosure quality of the financial statements of the top 20 Singaporean firms listed on the stock exchange-SGX in 2007 based on their market capitalization.

The results of an investigation by M. Bouˇcková [30] have shown a generally low level of compliance with disclosure requirements of goodwill impairment within the selected entities. This caused little comparability between financial statements.

A critical review of the literature and research on the disclosure of goodwill were conducted by C. Carvalho, A.M. Rodrigues, and C Ferreira [31], who indicated the main contribution of the literature as well as its limitations. They also suggested new approaches to future research connected with goodwill and the main determinants of its disclosures in the literature and the market. The authors also discussed the need to implement enforcement mechanisms to improve the level of compliance regarding disclosures on goodwill and their impairment tests. They concluded that most of the analyzed literature shows that the information disclosed about goodwill is incomplete and largely heterogeneous. It also confirms a reduced level of compliance with the disclosures indicated by accounting standards.

In the light of the above-mentioned literature, the following hypothesis was formulated:

#### **H1:** *During the COVID-19 pandemic, there has been a slight improvement in the quality of goodwill disclosures in the consolidated financial statements of groups in the energy, fuel, and mining sectors.*

Goodwill, due to its uniqueness compared to other assets, is a subject of research concerning the valuation process. Part of the research concerns factors influencing the identification and valuation of company value (e.g., [10,32,33]).

Another group of studies addresses methods of accounting for goodwill, including assessing the effects of abandoning amortization in favor of impairment testing (e.g., [34–38]). The resignation from amortization in IAS/IFRS in favor of goodwill impairment testing caused discussion among researchers about the implications of this change and its compliance with the true and fair view concept. The results of conducted studies were not unequivocal in their assessment. The results of the study by P. Van Hulzen et al. [39] indicate a higher quality of financial statements when the amortization method is used. However other studies indicate that accounting for goodwill by utilizing impairment write-offs better reflects the economic value of goodwill than the method of systematic write-offs (write-downs) (e.g., [34,39]). Martinez et al. [40] indicate the need for changes in accounting regulation to combine depreciation with impairment testing. A SWOT analysis performed by M. Cieciura and H. Czaja-Cieszy ´nska [41] led to a conclusion about the advantage of impairment testing. The results of the research also point to the threats connected with this method, consisting of an intentional treatment of possible write-offs by managers [11,35,42–44].

There are some studies that verify whether companies disclose the information required by the IFRS on the impairment of goodwill [45,46].

What is important to the purpose of the article is the research on the goodwill impairment losses in terms of their determinants (e.g., [31,47,48]). M. Glaum et al. [49] investigated the main determinants of goodwill impairment decisions undertaken by entities applying the IFRS. The authors chose a comprehensive sample of stock-listed firms from 21 countries and indicated that goodwill impairment is negatively associated with their economic results. The authors concluded that firms in low-enforcement countries are less responsive to declines in the economic value of goodwill.

One of the factors analyzed included the global crisis of 2008–2010 [42]. Zemskova [50] researched the factors influencing goodwill and impairments of goodwill in the oil and gas sectors. Research in recent years has focused on the impact of the COVID-19 pandemic on goodwill write-downs [3,51]. G. Goswami and Kimmel [51] examined whether the deteriorating cash flow due to the pandemic affected goodwill write-downs.

A study of the energy sector in China found a strong negative impact of the pandemic on financial results in the sector [3]. The results indicate that the presentation of write-offs resulted in a moderating variable; companies with goodwill impairment were more strongly affected by the pandemic. The situation of entities that did not show such a write-off was significantly more favorable [3]. This section may be divided into subheadings. It should provide a concise and precise description of the experimental results, their interpretation, as well as the experimental conclusions that can be drawn.

In this context, the second hypothesis was formulated:

#### **H2:** *The COVID-19 pandemic caused a decrease in goodwill due to impairment losses in the consolidated financial statements of groups in the energy, fuel, and mining sectors.*

It is worth emphasizing that there has been very few studies on the impact of the COVID-19 pandemic on the valuation of goodwill, particularly impairment write-offs in selected economic sectors, including the energy, fuel, and mining sectors, which are the research areas of this paper. The small amount of research is due to the very short research period from the outbreak of the pandemic and thus the limited possibilities of observing its direct and indirect effects in selected sectors.

#### **3. Material and Methods**

In line with the adopted objective, the research was carried out in two stages. The first stage focused on the quality of disclosures regarding goodwill presented in consolidated financial statements. In the second stage, the relationship between the pandemic and write-offs (including write-downs) of goodwill was investigated.

The results of the study presented below are aimed at confirming or rejecting the hypotheses H1 and H2. Both hypotheses were verified on the basis of the consolidated financial statements of the same groups. The study covered the consolidated financial statements for the period 2018–2021 of 23 leading stock exchange groups listed in Warsaw, belonging to three sectors of the economy:


The selected sample was targeted and covered the energy sector as well as related industries. On the other hand, the selection of exchange-traded entities was dictated by the fact that such entities, as leading players on the market, conclude the most transactions to acquire other business units. Therefore, it can be expected that the acquired goodwill will constitute a significant percentage of their balance sheet total. In addition, in the case of entities listed on European stock exchanges, all entities report in accordance with IFRS.

The verification of hypothesis H1 required the development of a unique research tool, which is the **self-developed index of disclosure quality**, assuming the perspective of a financial statement user who is interested in understanding the essence of goodwill in a concise way. It is necessary to explain why this method was chosen. There are many methods of assessing the quality of financial statements, including mathematical and statistical methods—for example, relating to earnings management. Different methods are used to evaluate the narrative part of financial statements. Two groups of methods can be distinguished, namely, subjective or semi-objective methods. V. Beattie, B. McInnes, and S. Fearnley [52] consider the disclosure index—for example, in the form of a checklist—to be the semi-objective method. The authors cited distinguish three types of disclosure indexes, namely, binary, weighted, and nested. Taking into account the narrow research area in this article, covering one item of assets (goodwill), a decision was made to use a binary index.

The study used its own disclosure quality index regarding goodwill, which was constructed based on the list of control questions. An affirmative answer results in awarding "1", whereas a negative answer results in "0". For simplicity, no additional weights were assigned to the responses. Goodwill resulting from a merger or attributed to subsidiaries or associates was disclosed in 65 statements (80% of the audited entities). Companies that did not show goodwill (16 financial statements) included only general disclosures regarding goodwill in their accounting policies. The list of control questions is closely related to the scope of disclosures regarding goodwill specified in IAS/IFRS. The selection of questions is aimed at highlighting the information that should be disclosed and is important for the user of the consolidated financial statements to correctly interpret the goodwill. In our opinion, this list of questions can be used to test the quality of goodwill disclosures in the financial statements of entities of different sectors, not only those that we research in this study.

In order to verify research hypothesis H2, an analysis of numerical data was carried out, comparing the goodwill value with other items of the financial statements, such as:


The research part, aimed at verifying the second hypothesis, was divided into the following stages of the analysis

Study 1—change in revenue;

Study 2—change in operating profits;

Study 3—share of goodwill in total assets;

Study 4—share of goodwill in total equity;

Study 5—amount of impairment losses in goodwill;

Study 6—frequency of impairment losses in goodwill;

Study 7—average useful life of fixed assets;

Study 8—the "Rollover Indicator" for goodwill

It should be noted that, despite the selection of a relatively small number of entities from related sectors, it is difficult to talk about full comparability in terms of the scale of business activity. The balance sheet totals and sales revenue indicate that the largest entities' operations amount to hundreds of billions of zlotys (Orlen). In contrast, other entities conduct business activity at the level of tens of millions of zlotys (Photon, Serenius).

We can assume that, due to the radically different business potential, the goodwill presented on the balance sheets of these entities may constitute a different percentage of the balance sheet total, and the transactions of business combinations have different importance and frequency.

Another element that should be noted at the beginning of the study is the number of entities in the research sample; in the analyzed period of 2018–2021, the acquired goodwill did appear on the balance sheet. In the sample, there were 16 entities from 23 companies initially covered by the study. In the further part of the study, results will be presented for each of the three sectors (energy, mining, and fuel) separately and collectively, which should increase the cognitive value of the analysis.

#### **4. Results and Discussion**

#### *4.1. Analysis of the Quality of Disclosures*

The recognition and measurement of goodwill raise many doubts. Some even claim that this balance sheet item is so questionable that it does not meet the definition of assets. The argument for this statement is the inability to sell goodwill separately. The occurrence of doubts as to the existence and measurement of goodwill justifies the expectation of disclosures being of high quality regarding the recognition and impairment of goodwill. It can be assumed that a measure of the quality of financial statements is the quality of disclosures relating to "soft" assets, such as goodwill.

As already mentioned, the analysis covered 81 financial statements. The first hypothesis is verified based on 65 reports in which goodwill appeared. In the remaining statements, there are only general references to goodwill in the accounting policy. They usually repeat the provisions of accounting standards. The binary index consisted of seven questions. One point was assigned for an affirmative answer; hence, the maximum number of points was 65. The questions were deliberately not limited to the requirements imposed by the accounting standards. The collective responses are presented in Table 1.


**Table 1.** The number of points for the quality of disclosures by question.

Question 1 concerns a technical issue. Some of the audited financial statements were made available as scans with the official signatures of management and accountants. This method of communication, appearing only in 2018–2019, was used in five reports. In recent years, it has been observed that the traditional form of presenting financial statements in pdf format has been replaced by a more friendly form: the electronic standard (ESEF).

Question 2 concerned the sources of goodwill. In some financial reports—for example, in Unimot SA—the history of each element of goodwill is presented in detail, specifying not only the means but also the moment of its creation. This allows users to assess whether the elements of goodwill are the result of several transactions or one single transaction. The opposite of this approach, applied in numerous reports, is limited to the recognition of goodwill in the notes concerning intangible assets without providing any explanations. This approach, in our opinion, has low informative value and does not allow users to assess the risks and future economic benefits of goodwill. Most of the investigated entities limited their reporting to the description of transactions generating goodwill in a reporting period. To learn more about the sources of goodwill, it would be necessary to study the financial statements from previous periods.

The answer to question 3 can only be found in 19 financial statements. The lower number of points awarded in response to this question is a consequence of indicating the transactions that are the reason for recognizing goodwill without indicating the date of these transactions. Such a solution leads to difficulties in analyzing changes in the goodwill over time.

Question 4 requires some clarification. By the interpretation of goodwill in this article, we mean the explanation of the meaning of a given component of goodwill. In many analyzed reports, there are general statements that repeat the definition of IFRS goodwill. Goodwill may include the following components [53]:


From the point of view of the user of the financial statements, it is not important how goodwill was calculated. The economic substance of the item is more substantial. An example of the disclosure of economic content may be the disclosure in the reports of the B ˛edzin company: "The recognized goodwill resulted primarily from the possessed experience and specialist knowledge in the financial sector, the reputation of the acquired company, established processes and business projects in the financial area, and access to markets". Another company (Orlen) posted the following content: "Goodwill created from the acquisition of RUCH results from the forecast synergies resulting from the merger of RUCH's operations with the ORLEN Group and presents the value of assets that could not be recognized separately in accordance with the requirements of International Accounting Standard (IAS) 38 (employees and their knowledge)". The presented disclosures, in conjunction with the transaction data (subject, date), assist users in assessing the potential of future cash flows related to a given component of goodwill. In accordance with the requirements of IAS 36 (paragraph 134), an entity is required to disclose goodwill allocated to cash-generating units. This is essential because goodwill does not generate economic benefits on its own but rather in combination with other components of the cash-generating units (CGU).

When analyzing the number of answers to question 5, it should be stated that 25% of the studied financial statements do not meet these requirements. The lack of an attribution of goodwill to the CGU deprives users of key information, reducing the predictive value of financial statements. Informing only about global amounts of goodwill, without their allocation to CGU, excludes assessment of the probability of the impact of economic benefits in a given segment of activity. It also makes it impossible to verify any assumptions accepted for the purpose of measuring the impairment of goodwill.

An entity's obligation under IAS 36 (paragraph 10) is to test goodwill for impairment, regardless of any impairment indicators. Therefore, it is assumed that goodwill is an item that is particularly vulnerable to value adjustments. An entity that recognizes impairment losses is required to disclose the events and circumstances that led to impairment losses (IAS 36 para 130a). Therefore, it is assumed that entities that have not recognized impairment losses of goodwill are not required to disclose the impairment's indicators. The study showed entities that disclosed impairment indicators despite not recognizing any impairment loss. For example, the Polenergia report for 2021 revealed that: "The conducted analysis of the indicators has shown that changes in the expected price levels of electricity, gas and CO2 emission allowances contribute to a decrease in the forecast margin on electricity production." The treatment of the determinants of the impairment of assets provides a background for evaluating the assumptions accepted by an entity for the purpose of measuring impairment.

The last question was about the disclosure of the discount rates applied to measure the recoverable amount of the CGUs. Despite the obligation to disclose key assumptions of the measurement, in almost half of the financial statements, this information was omitted. It is also worth noting that quite different discount rates were applied—from 4% to 12%. It cannot be concluded that higher rates were used in the 2020–2021 reports, which would be justified by expected inflation.

In summary, most entities comply with their obligations regarding disclosure imposed by the IFRS. However, this is not the same as high-quality disclosure, as judged from the perspective of a financial statement for users who expect clear and concise information about goodwill to enable assessment of the risk and the potential forfuture benefits generated by this questionable item of assets.

The following section presents the ranking of disclosure quality scores by year and entity (Table 2). This section may be divided into subheadings. It should provide a concise and precise description of the experimental results, their interpretation, as well as the experimental conclusions that can be drawn.


**Table 2.** The number of points for the quality of disclosures (by the company) (max. 7 points/year).

Source: the authors' own study.

It can be concluded that the quality of disclosures regarding goodwill: (1) is not dependent on the affiliation of the capital group with a sector and (2) is gradually improving. The research carried out with the use of a binary index allows for a positive verification of hypothesis H1: During the COVID-19 pandemic, there has been a slight improvement in the quality of goodwill disclosures in the consolidated financial statements of groups in the energy, fuel, and mining sectors. However, it is difficult to link this improvement with the COVID-19 pandemic. It can only be assumed that, due to the increased risk, the examined entities were willing to present more information, increasing the chances of users assessing the ability to generate economic benefits by the CGU to which goodwill was allocated. This tendency should therefore be assessed positively.

#### *4.2. Recognition and Measurement of Acquired Goodwill in Companies Listed on the Warsaw Stock Exchange*

#### **Study 1—Change in revenue**

The purpose of this analysis is to evaluate how the revenues from the core business of the companies covered by the study behaved in the last four years—thus, the results for 2018/19 and 2020/21 will be compared with each other. This will allow for a determination of what impact the coronavirus pandemic had on the scale of business activity. At this stage, it can be presumed that a possible decrease in revenue, i.e., limited demand for the products and services offered by companies, should be a significant reason for testing goodwill for impairment and should consequently lead to the recognition of impairment losses in this respect. Table 3 presents the changes in revenue by sector and collectively.


**Table 3.** Change in revenue compared to the previous year.

Source: the authors' own study.

From the above analysis, several interesting conclusions can be drawn:


In conclusion, the first study showed that more than half (12 out of 23) of the entities felt the effects of the epidemic in the form of a decrease in their revenues from core activities in the particularly difficult year of 2020. It should be considered that the negative dynamics of sales meet the criterion set for the impairment of assets in accordance with IAS 36, and they therefore should be the basis for conducting formal tests for impairment.

#### **Study 2—Change in operating profits**

The purpose of this study was to see whether the negative trend noticed in sales revenue was also reflected in the dynamics of operating profits. Theoretically, one would expect that the time of economic downturn in the markets could be the perfect time to introduce various types of rationalization activities, which are easier to justify and carry out than in a period of prosperity. In addition, it should be emphasized that the operating profit—i.e., before operations recognized as a result of accounting convention (e.g., revaluation to fair value, impairment losses), one-off events, and financial income and expenses—has the strongest link to cash flows from operating activities, which are key determinants of the generation of added value by an enterprise. Table 4 shows the change in operating profits by sector:


**Table 4.** Change in operating profits 1.

Source: the authors' own study. <sup>1</sup> (The following results must be interpreted with a great deal of caution, as operating profit can be both positive and negative. For example, if a company makes a profit of 10 units in one year and a loss of 40 units in the next year, the decrease is −400%. In addition, if, in the third period, the loss is to be 20 units, we are dealing with an increase in the ratio by 50%. In the case of entities where the increase or decrease in profits exceeded 300%, it was decided to "stabilize" its level and adopt a value of 300%. The aim of this procedure is to ensure that the extremely high or low result of one company does not burden the average too much).

The conclusions to be drawn from the above-presented analysis are as follows:


#### **Study 3—Share of goodwill in total assets**

The aim of this study is to examine what percentage of goodwill constitutes the total assets of the surveyed entities, which will determine the importance of tests for the impairment of goodwill. Guided by the principle of materiality, it can be assumed that the role of the procedures provided for in IAS 36 will be much more important in those entities where goodwill constitutes a significant percentage of the balance sheet total.

The results only for those entities for which goodwill has occurred are presented in Table 5:


**Table 5.** Share of goodwill in total assets—all entities with purchased goodwill.

Source: the authors' own study.

From the above data, the following conclusions can be drawn:


3. The highest share of goodwill can be seen in the fuel industry. The successive increase in this value is connected with the acquisitions of business units realized by the Hungarian MOL.

Behind these ratios, there are specific monetary values, as presented in Table 6.


**Table 6.** The nominal value of goodwill—all entities with purchased goodwill (PLN mln).

Source: the authors' own study.

On the basis of the above data, it can be concluded that:


#### **Study 4—Share of goodwill in total equity**

Equity is often interpreted by readers of financial statements as a "safety cushion", ensuring that an entity's resources are financed in an appropriate proportion—not only by debt but by funds at the disposal of the owners. Too low of a level of equity compared to liabilities leads to an increase in the marginal cost of lending and, as a result, the weighted average capital cost (WACC). The analysis will determine to what extent companies are sensitive to possible impairment losses. It will be possible to determine what impact a oneoff impairment of the entire goodwill would have on the net assets of the analyzed entities. This can be an important indicator in the context of identifying entities or sectors that are particularly interested in protecting goodwill in order to avoid a sharp and significant deterioration in the financial situation. The results are presented in Table 7.


**Table 7.** Share of goodwill in total equity.

Source: the authors' own study.

From the above analysis, the following conclusions can be drawn:


one-off reduction of equity by the impairment of goodwill would already be felt by the company and would have an impact on the deterioration of its financial ratios.

3. In more analytical terms, in the case of five entities, the share of goodwill in equity in at least one of the analyzed years and, in most cases, in the entire period of 2018–2021 exceeded 4%, or the average share exceeded 2.5%. These companies are: POLENERGA, CEZ, INTERAOLT, MOL, UNIMOT, and KOGENERA. In their case, the significance of a possible impairment loss in goodwill would be particularly high.

#### **Study 5—Amount of impairment losses in goodwill**

Goodwill is an intangible asset that, due to its indefinite useful life, is not subject to amortization. Its role is taken over by impairment tests, which must be carried out at least once a year. It is therefore possible to determine the rate of impairment losses, which will be the equivalent of an amortization rate. As explained in the theoretical part of the study, goodwill is a unique resource of an entity representing:


Table 8 presents the share of impairment losses in goodwill in its opening balance for the years 2018–2021:


**Table 8.** Share of impairment losses in goodwill in its opening balance for a period.

Source: the authors' own study.

From the above data, the following conclusions can be drawn:


It is worth noting that, on the basis of the results obtained, the average impairment rates of goodwill for the years 2018–2021 for individual industries can be determined, which are, respectively: energy—7.2% fuel—0.2% mining—0.0%, and total—4.6%. An amortization rate of 4.6% corresponds to an economic useful life of more than 21 years. It can be assumed that, during this period, the analyzed entities amortized their goodwill.

	- 2018/19: 5.5%
	- 2020/21: 3.6%

The above shows that, paradoxically, during the epidemic, despite worse economic results, the surveyed companies were less willing to make write-downs of goodwill. The reasons for this can be manifold. One can only speculate about the reasons for this, but the concerns of unit management about the additional deterioration of financial results in already difficult economic times may play an important role. In addition, the logic of the IAS 36 tests is that they are highly prospectively oriented and thus largely abstract from the weaker performance of the current period, emphasizing the optimistic forecasts of management for subsequent periods. An important element may also be subjective assumptions and estimates when constructing the forecasts of discounted cash flows of the cash-generating unit—this makes models difficult to verify by an external auditor. It should also be noted that making an impairment loss in goodwill can also be read as an admission of the company's management to the error of acquiring a subsidiary—if it is necessary to make a write-off, it means that the investment was a failure. Entities may therefore treat a write-off as a loss to their reputation.

#### **Study 6—Frequency of impairment losses in goodwill**

The purpose of this study is to see how often companies noticed the need to make impairment losses. Table 9 presents the frequency of impairment losses in goodwill for the analyzed years (2018–2021):


**Table 9.** Frequency of impairment losses in goodwill.

Source: the authors' own study.

The above data allow for the drawing the following conclusions:


It is confirmed that goodwill write-offs occurred more often in the period before the pandemic than during it. Even the particularly difficult year of 2020 was not marked by more frequent write-offs made potentially for smaller amounts.

#### **Study 7—Average useful life of non-current assets**

The aim of this study was to determine at what rate all fixed assets rotate in the entities covered by the study. Such a calculation will be very useful in order to compare the obtained results with the estimated useful life of goodwill, determined to be 21 years. According to the authors, the period of holding non-current assets by enterprises should be longer than goodwill due to the fact that non-current assets consist, to a large extent, of tangible resources, which, by their nature, seem to have, in principle, a greater durability than intangible assets, with a particular emphasis on such a volatile resource as goodwill. In order to determine the useful life of all non-current assets, the expenditure on the purchases of new assets as part of investment activities was divided by the sum of non-current assets. This will allow to determine the rate of their rotation. Table 10 presents the turnover of assets in the analyzed 16 entities for the years 2018–2021.


**Table 10.** Turnover of non-current assets.

Source: the authors' own study.

From the above data, the following conclusions can be drawn:


#### **Study 8—The goodwill rollover ratio analysis**

The theoretical part of the study indicates that goodwill is a specific resource of an entity that is not able to generate economic benefits individually but only within cashgenerating units. It should therefore be assumed that it cannot function independently and thus shows an economic useful life exceeding the life of CGU assets, with a particular emphasis on non-current assets. IAS 38 states that the useful life of goodwill cannot be determined, but the economic logic would suggest that it does not seem to be longer than the useful life of the non-current assets to which it is assigned. This claim is evidenced

by the fact that IAS 36, as part of the tests for impairment when calculating the present value of discounted cash flows, expressly prohibits the inclusion of inflows and outflows for the upgrade of existing and purchases of new fixed assets. In other words, the CGU is being tested in its current form. If the period of maintaining goodwill on the balance sheet exceeds the rotation period of all non-current assets, there is a rollover of goodwill. In practice, this means that, when conducting impairment tests, goodwill is assigned to a different set of assets in subsequent reporting periods than those for its initial recognition. The rollover ratio is determined by dividing the fixed asset turnover rate by the goodwill impairment ratio. Table 11 shows the rollover rate for the years analyzed.

**Table 11.** Goodwill rollover ratio.


From the above data, the following conclusions can be drawn:

	- the entity's above-average ability to generate profits;
	- processes occurring in the entity;
	- synergy benefits;
	- resources not individually included in the company's balance sheet;

The research shows that, in general, the pandemic period did not affect the frequency and level of write-downs of goodwill, although significantly deteriorated results for 2020 were recorded. The results of the second stage of research did not confirm hypothesis H2: The COVID-19 pandemic caused a decrease in goodwill through impairment losses in the consolidated financial statements of groups in the energy, fuel, and mining sectors.

The results obtained by us referred to other studies. Research conducted by M. Glaum, W.R. Landsman, and Wyrwa [49] indicated that goodwill impairment losses are negatively associated with the economic performance of entities. However, based on our study, it can

be seen that deteriorated results do not always lead to a reduction in goodwill. Additional observations can be made at specific times, such as a global crisis or a pandemic.

The results of our study do not coincide with the research conducted by M. Glaum and S. Wyrwa [42] on the companies of the 12 largest European stock exchanges in the period 2007–2009, i.e., the period including the global crisis. The researchers noted an increased frequency of both write-offs and their higher level in relation to the period before the crisis. However, there was clear sectoral variation. The energy industry and related sectors showed average data. As can be seen above, the pandemic should be viewed from a different perspective than the man-made financial crisis of the time.

G. Goswami and Kimmel [51] indicate a trend of deteriorating performance and cash flow under the impact of the COVID-19 pandemic, which should result in goodwill writedowns. In light of the study of T. Kiestik et al. [54] on Slovak enterprises, which showed the main sources of goodwill, one would expect that the reduction of these figures should be combined with goodwill write-downs. Thus, in this context, Polish companies from the energy, mining, and fuel sectors should show goodwill write-downs. Their absence or low level may indicate a lack of economic adequacy of goodwill presented in the balance sheet as an asset with the current way of accounting for goodwill. Such conclusions are, to a large extent, in line with those derived by Martinez et al. [40], who point out the need to modify the accounting for "wear and tear" of this group asset in the direction of combining depreciation charges with impairment testing. On the other hand, the results of Fu and Shen [3] show a strong impact of the pandemic on the financial situation of entities in the energy sector. Companies with goodwill impairment were more strongly affected by the pandemic. The situation of entities that did not show such impairment was significantly more favorable. In the context of the cited research results, the dissimilarity of the obtained results can be noted.

C. Carvalho, A.M. Rodrigues, and C. Ferreira [31] point to the problems of incompleteness and wide variation in the form and scope of reported information on goodwill and its write-downs. The results of our research indicate that, during the analyzed period, the quality of reporting improved, but there is no basis to associate this improvement with the impact of the pandemic. The research suggests that the information was not complete. Similar conclusions regarding completeness were drawn by M. Glaum and S. Wyrwa [42], who also took into account an important external factor, namely, the global crisis in 2007–2009. Both studies pointed out the lack of information, among other factors, on the discount rates adopted. The research results indicated above are consistent with those obtained by M. Bouˇcková [30].

#### **5. Conclusions**

In the literature, there are studies in which the impact of the pandemic on the financial situation of entities in the energy sector was investigated [55–58]. Such research concerned various countries, including Poland. However, little research has been focused on the importance of goodwill as a specific asset of energy sector groups in the context of the pandemic. Goodwill can significantly affect the financial situation of groups in this sector. The acquired goodwill can constitute a high percentage of their balance sheet total. The findings of our study partially fill the gap regarding the impact of the pandemic on the goodwill presented in the consolidated financial statements of the energy, fuel, and mining sector groups in Poland. Our research also contributes to the discussion on the quality of goodwill disclosures in consolidated financial statements.

Our study extends the literature on the determinants of the quality of goodwill disclosures, particularly related to goodwill write-offs in energy, mining, and fuel sector groups. Previous studies have not taken into account the unique impact of factors such as pandemics. Economic changes, their scale, and their dynamics, as well as managers' reactions to them, represent a new challenge for researchers. The research hypotheses we have formulated focus on strategic sectors, generally concentrating on the largest groups. In case of Poland, these sectors are strongly interconnected by ownership, which makes

them an interesting object of research. The obtained results provide a new perspective on goodwill as an asset of capital groups presented in consolidated financial statements.

Although there is a slight improvement in the quality of disclosures regarding goodwill based on the disclosure quality index used, this cannot be linked to the impact of COVID-19. In the analyzed financial statements, the reasons for updating the goodwill do not include factors resulting from COVID-19. Thus, it is possible to speak of a general improvement in the quality of disclosures, which contributes to the increase in the prognostic value of financial statements.

The basic conclusion of the study is that even the year 2020, particularly marked by the coronavirus pandemic, did not cause a significant increase in impairment losses in goodwill in the analyzed entities. The year 2021 already marks a clear economic recovery despite the still difficult epidemiological situation. At the same time, the tendency not to make write-offs is a common phenomenon both in the industry and in the time dimension —the volume of write-offs in 2018 and 2019, before the pandemic, also remained at a relatively low level. According to the authors, the practices of the analyzed entities are not consistent with the economic essence of the analyzed balance sheet item, which, in the understanding of readers of financial statements, should be characterized by a relatively short useful life. In addition, the excessive long retention of goodwill in a balance sheet is inconsistent with the provisions of IAS/IFRS, which, despite stating that goodwill has an indefinite useful life (IAS 38), do not allow impairment tests to take into account increases and new purchases of fixed assets (IAS 36). The results of our research indicate the need for changes in the IAS/IFRS.

In summary, the years 2020 and 2021 and the events related to the global pandemic did not result in an increase in impairment losses, even in industries that seemed to be particularly vulnerable to the effects of this phenomenon. It is common to roll over goodwill, i.e., to keep it on the balance sheet for decades (at least twice as long as other non-current assets) and assign it as part of the impairment test to assets that were not in the CGU at the time of the acquisition of the subsidiary.

Our study has limitations due to the short time period that was considered. Due to the limited amount of research conducted on goodwill impairment in the energy, mining, and fuel sectors during this period, we were limited in our ability to compare the results with other research. We intend to continue our studies with a focus on the energy sector in EU countries in order to deepen our sectoral comparative analysis and identify further determinants of goodwill impairment.

**Author Contributions:** Conceptualization, M.G., S.H., M.S.-F. and K.S.; methodology, M.G. and S.H.; ´ validation, M.G., S.H., M.S.-F. and K.S.; investigation, M.G., S.H., M.S.-F. and K. ´ S.; resources, M.G., ´ S.H., M.S.-F. and K.S.; data curation, M.G. and S.H.; writing—original draft preparation, M.G., S.H., ´ M.S.-F. and K.S.; writing—review and editing, M.G., S.H., M.S.-F. and K. ´ S.; visualization, M.G., S.H., ´ M.S.-F. and K.S.; supervision, S.H.; project administration, M.G., S.H., M.S.-F. and K. ´ S.; funding ´ acquisition, M.G., S.H., M.S.-F. and K.S. All authors have read and agreed to the published version of ´ the manuscript.

**Funding:** This research received no external funding.

**Institutional Review Board Statement:** Not applicable.

**Informed Consent Statement:** Not applicable.

**Conflicts of Interest:** The authors declare no conflict of interest.

#### **References**


**Grzegorz Przekota 1,\* and Anna Szczepa ´nska-Przekota 2,\***


**Abstract:** The economic activity of businesses and the living standards of the population are largely dependent on inflation. Here, energy prices are of particular importance. Energy is what offers a competitive edge to economies. Therefore, many energy sectors still remain under state control. However, the fuel market is free although highly concentrated. The primary objective of this study was to determine the impact of fuel price changes on inflation in Poland. The research was based on causality models and regression models including asymmetry correction. The flow path was analyzed of price impulses from the basic raw material (i.e., crude oil) through wholesale diesel prices to inflation. The study demonstrates that with each successive stage of raw material processing, price volatility proves to be weaker. However, the final effect is still significant: inflation is largely shaped by energy carriers and, here, specifically by fuel prices. Such results have serious implications for the state's economic policy. On one hand, they point to the limitations of this policy and, on the other hand, they raise questions about the legitimacy of the reforms that free up energy markets.

**Keywords:** oil prices; inflation; exchange rate; causality

#### **1. Introduction**

Energy is one of the fundamental concepts in physics, and it is also an important factor in overall economic growth, which is why it is given special importance in economics. In physics, energy refers to the ability of a system to do work or produce heat. In economics, energy refers to any raw material and resource containing significant amounts of physical energy, thus enabling work to be performed [1]. The economic analysis of production is not oriented toward energy flows and the performance of work in the physical sense, but toward the process of value creation.

When analyzing the relationships between the economy and energy, the following facts can be noted:


**Citation:** Przekota, G.; Szczepa ´nska-Przekota, A. Pro-Inflationary Impact of the Oil Market—A Study for Poland. *Energies* **2022**, *15*, 3045. https://doi.org/10.3390/en15093045

Academic Editor: David Borge-Diez

Received: 14 March 2022 Accepted: 18 April 2022 Published: 21 April 2022

**Publisher's Note:** MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations.

**Copyright:** © 2022 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/).

− there is a clear short-term relationship between changes in energy consumption and changes in GDP. This relationship is almost proportional, being strictest on the level of the global economy. However, the positive income elasticity of energy demand is gradually declining.

The determinants of energy consumption and changes in energy consumption in the national economy may be represented using a simple identity:

$$\mathbf{E} = \mathbf{L} \cdot \mathbf{GDP} / \mathbf{L} \cdot \mathbf{E} / \mathbf{GDP},\tag{1}$$

This leads to three simple conclusions:


However, the formula presented above does not specify any quantitative relationships between variables and, above all, it does not rely on any theoretical premises that could provide grounds for modeling the relationship between the economy and energy consumption. Attempts may be taken to derive these from economic growth models. In this context, what remains controversial is whether to treat energy as a factor of production, just like human labor and capital. However, regardless of the differences between the different versions, economic growth models do not consider raw materials including energy as a separate variable. Mainstream economic models decouple economic growth from raw materials including energy [5], which in practice could lead to their depletion and welfare falling to zero [6,7].

A useful theoretical approach to account for the interaction between energy, environment, and economic growth is the models proposed by Cass [8] and Koopmans [9]. In these, the future-oriented behaviors of producers and consumers are combined with the past-derived linkages between investments and capital resources. Alternative growth paths do not directly depend on energy and environmental policies, but this is indirectly through their impact on medium-term changes [10].

Increasing importance is being attached to the issue of ecology. In particular, the use of non-renewable energy sources—coal, oil and gas—is being critically viewed from an ecological perspective. Differences between traditional and ecological approaches to energy and economic growth include the following issues, among others [11,12]:


In models proposed by ecological economists, increases in energy inputs are crucial in explaining economic growth [13,14].

The long-term connections between energy consumption and economic growth are two-way connections as a rule, and this was only the methodology adopted and the research sample as well as the degree of economic development of the country that determines which direction will prove to be stronger [15–18]. Apart from long-term studies, the analyses have also covered short-term relationships between the economy and energy, primarily in the context of cyclical fluctuations. The focus has primarily been on the effect of shocks that are taken into account in short-run equilibrium models [19]. The vulnerability of the economy to supply shocks has decreased markedly over the past 200 years as the economy shifted from coal to oil [20,21].

In the past few decades, the greatest number of analyses have been conducted to assess the impact of oil shocks on the economy [22–24]. Detailed analyses have focused on the impact of energy prices, especially oil prices, on the macro economy in the post-World War II period. Many studies have found a significant negative effect of oil price increases on GDP [25–27], although net positive effects were found for energy importers [28,29].

Several studies have found an asymmetric relationship between the domestic product and oil prices. The effect for price increases was stronger than for price decreases [30,31]. In some studies, the results obtained indicated that, after taking into account other macroeconomic variables, the impact of oil prices on changes in the domestic product was insignificant [32]. Much of the recessionary impact of oil price increases may be due not to oil price changes as such, but due to endogenously determined effects on the part of monetary policy [33,34]. The rise in oil prices caused inflation to rise, prompting central banks to tighten monetary policy.

An important area related to energy production and consumption is the problem of energy market regulation and the state energy policy. Energy policy focuses on three main areas [35]:


These goals can be formulated on the level of the national policies of individual countries, but also on the level of economic and political groupings and on the global level. In the conditions of a multiplicity of goals and participants in the decision-making process, a conflict between these is quite natural, and a mechanism for resolving these disputes and decision making needs to constitute a component of the energy policy. In the energy policy of the European Union, these are supplemented by the creation of an internal energy market.

Energy policy makes use of various instruments of influence. Among these, we can distinguish regulatory and market-based instruments. Examples of the former include quality standards, quotas, and prohibitions. The second group includes fiscal and non-fiscal instruments. A well-known proposal in economic theory to internalize external costs (the costs are borne by the issuer) is the Pigou tax. This tax should be equal to the full marginal cost/loss resulting from the emission. As a result, the volume of pollutant emissions is reduced to a level at which the marginal benefits of the emitter are equal to the marginal social costs of the emissions. The advantages of this tax, in addition to those outlined above, are that it offers producers a high degree of flexibility in their operations, relatively low administrative costs, and it stimulates the development of low-carbon technologies [36]. Nevertheless, the rationale and applicability of the Pigou tax are subject to theoretical and practical controversies. Theoretical arguments point to the assumed determinants of the efficiency of the tax. The interaction with other taxes causes the size of the optimal tax to be below the optimum based on the marginal cost criterion of emissions [37]. In turn, the cross elasticity between energy prices and leisure time may lead to the conclusion that the optimal tax should be higher in relation to this criterion [38]. Practical problems arise from the difficulty of estimating the marginal social costs of emissions and their variation depending on, among others, the type of emissions and the location of the issuer. What might be an alternative proposal under these conditions is a criterion based on environmental objectives [39]. Under such an approach, the objective could be to limit

emissions to a certain level. Regulations based on such a principle could reduce the marginal costs of emissions and provide an incentive to develop innovations that reduce emissions. The efficiency of such regulations is enhanced by a system of tradable emission rights [40]. Distortions in the functioning of markets that are due, for example, to price and wage rigidity, undermine the effectiveness of general tax instruments. As a result, energy policy should also include other instruments (e.g., those that take into account differentiation of taxes according to products and raw materials, subsidies, etc.) [41].

Despite the high politicization of the energy market, economic instruments play a fundamental role in its regulation. According to the traditional classification, they can be divided into fiscal and non-fiscal instruments. In economic policy, regulation of the energy sector has largely been subordinated to the achievement of macroeconomic objectives including control of inflation, balance of payments, and technological development [42]. The apogee of these actions was during the oil crises of the 1970s. The ban on oil exports in the USA was a spectacular, but not the only example of such a policy. Energy companies were the main target of the policy, and they incurred costs, but also had some benefits [43]. The source of the latter was primarily regulations protecting domestic companies from international competition.

In many countries, what was an instrument for achieving the primary objectives had a direct influence on energy sector companies, often state-owned ones as well as direct interventions to limit competition in the industry [44]. The experience of the past decades shows that the hierarchy of objectives in the energy policy has changed and, consequently, the instruments preferred by states to influence the sector have also changed. First of all, energy is no longer perceived as a good of social necessity, which was used to justify state support and interference in the past; external costs undermine the idea of always available, cheap energy; they question the idea of the economies of scale underlying the preference for large, centralized electricity systems and energy policy.

At the same time, however, this policy continues to emphasize the importance of technological progress to counteract the scarcity of resources and to enable the supply of energy to meet the expected growth in demand. A review of energy policy goals is also evident in China and in the European Union [45]. There is a stronger emphasis on increasing energy efficiency and reducing the environmental impact of emissions.

In empirical studies carried out for various countries, a statistically significant impact of energy prices on inflation has most frequently been revealed. However, conclusions were often drawn on the basis of primary energy prices including oil prices [46–50], while from the point of view of households and businesses, it is petrol and diesel prices that they observe directly and make decisions on the basis of these prices [51,52] and not the prices of primary energy (e.g., oil). Therefore, the price path from primary energy to the final product needs to be included in the research. The significant influence of the petrol price rather than the oil price has been demonstrated in more recent studies [53–56].

The oil crises of the 1970s became the main cause of increased interest in the subject of the relationship between the energy commodity market and economic development and inflation. Oil prices were pointed out as those responsible for economic recessions [57], although modeling the relationship between oil prices and economic activity provided many problems, especially those related to the constancy of this relationship and linearity [58], which is related to an improvement in the efficiency of energy use.

From a theoretical perspective, oil price volatility affects major macroeconomic processes through supply and inflationary transmission channels [59].

Through the supply channel, changes in oil prices have a direct impact on production, where changes in marginal production costs are the cause. Decreases and corresponding increases in production costs are caused by lower and adequately higher raw material prices [60]. For the economy, uncertainty related to fluctuations in raw material prices is particularly dangerous, as it limits the amount of investment [61]. The inflation channel, on the other hand, indicates the effect of oil price changes on core inflation or inflation related expectations [62]. There is a fairly simple relationship between supply and inflation

channels; changes in the production costs of a whole range of energy-intensive goods result in changes in their prices, which affects the prices of consumer goods, thus having a direct impact on inflation [63].

The economy is particularly stimulated by falling oil prices, as household budgets are relieved by lower energy bills, and overall consumption then rises [64]. On one hand, rising consumption triggers a demand inflation, while on the other, falling oil prices mitigate its effects [65]. Hence, further difficulties arise in modeling the impact of energy prices on economic activity and inflation.

The results of extensive research by Fuinhas et al. [66] prove that energy consumption drives economic growth, but only in the short-run. The ratio of oil production to oil consumption has exerted a positive impact on growth in both the short- and long-run. Oil prices only exert a positive effect on growth in the short-run. Oil rents depress growth, suggesting that oil is more of a curse than a blessing for economies.

The impact of oil prices on inflation occurs through several channels. On one hand, petroleum products constitute a component of consumption baskets, so changes in their prices directly affect inflation rates; on the other hand, these products are used in production and transport, so their price increase generates higher production costs and, consequently, higher prices of consumption goods.

Fluctuations in oil prices in world markets have particularly negative consequences for the functioning of the economies of those countries that import significant quantities of this raw material. However, in general, whether a country is an oil exporter or importer, economic activity depends on oil prices [67,68] and, even more importantly, a significant impact was found on exchange rates, interest rates, inflation, and unemployment [69–71].

In many countries including Poland, the years 2021 and 2022 brought a sharp rise in inflation. The causes of this phenomenon are seen in many social, political, and economic aspects. The most commonly cited are overly expansive fiscal and monetary policies, broken supply chains as a result of the pandemic, and the society's unwinding after the lockdown period; however, a lot of attention is paid to energy markets. In 2021, the prices of all primary energy sources: coal, oil, and gas rose sharply. Policy makers very often use the impact of energy prices on the economy to explain the general rise in inflation. The problem adopted in the study concerns the determination of the impact of energy prices and, more specifically, oil prices, on the overall price increase. Therefore, the aim of the study was to determine the direction, strength, and statistical significance of the relationship between oil prices and inflation in Poland.

Hypotheses have been put forward that:

**Hypothesis 1 (H1).** *Changes in oil prices in the world markets are an important pro-inflationary factor in Poland.*

**Hypothesis 2 (H2).** *The price impulses from oil world market indirectly passes through the prices of diesel and gasoline.*

In a practical assessment of the significance of the impact of oil prices on inflation, it is not only oil prices that may be important, but due to the fact that there are several processing stages between the primary energy source and the final product, there is an additional problem of determining the significance of the product flow chain.

The research is important because the possible confirmation of the hypotheses calls into question the effectiveness of classical methods of monetary policy in terms of price normalization. Rather, it will move toward fiscal policy. The model of the central bank's independence may be undermined. Since the causes of inflation are of a cost nature, it is easier to regulate prices with the tax system than with interest rates.

In this respect, the situation of Poland is a valuable research object because after the period of stable prices, recent years have brought increased inflation. On one hand, the Polish government has supported enterprises with anti-COVID shields, and on the other hand, energy prices have risen worldwide. Today's effect is inflation that has been unheard of for many years.

#### **2. Materials and Methods**

The research used monthly Brent crude oil prices, monthly USD-PLN exchange rate quotations, monthly wholesale prices of diesel oil offered by PKN Orlen, and the CPI inflation index. The data covered the years 2004–2021. The monthly frequency of data is dictated by the frequency of the calculations of the CPI inflation index reported by the Central Statistical Office. The data used makes it possible to trace price impulses directly from the Brent crude oil market on inflation in Poland, but also to trace price impulses in intermediate links and, hence, from Brent quotations through the exchange rate and wholesale diesel oil prices to the inflation index, according to Scheme 1.

p g

**Scheme 1.** Tested price impulses.

What is very important in the context of the whole study is the presentation of world oil prices in the national currency. This is a procedure that is recommended by numerous authors [72–75].

The research was conducted in several stages:


$$\begin{cases} \mathbf{x}\_{l} = a\_{1} + a\_{1.1}\mathbf{x}\_{l-1} + \dots + a\_{1.k}\mathbf{x}\_{l-k} + b\_{1.1}\mathbf{y}\_{l-1} + \dots + b\_{1.k}\mathbf{y}\_{l-k} \\ \mathbf{y}\_{t} = a\_{2} + a\_{2.1}\mathbf{x}\_{l-1} + \dots + a\_{2.k}\mathbf{x}\_{l-k} + b\_{2.1}\mathbf{y}\_{l-1} + \dots + b\_{2.k}\mathbf{y}\_{l-k} \end{cases} \tag{2}$$

The significance of the *ai*.*<sup>k</sup>* and *bi*.*<sup>k</sup>* parameters was tested with the F statistic.

6. Cointegration testing. Cointegration was tested on the basis of the following equations:

$$
\ln(\text{Y}) = a\_1 \cdot \ln(\text{X}) + a\_{0\prime} \tag{3}
$$

where the relationships between the X and Y variables were consistent with the course marked in Scheme 1. The residuals of these equations were subjected to the ADF stationarity test. The aforementioned equations determined the long-run equilibrium path (equation) around which the values of the economic processes analyzed were run. The differences

between the value of the time series and the path determined of the long-run equilibrium were presented in the graphs and interpreted as short-run deviations.

7. Application of the Engel–Granger theorem [78]. According to the Engel–Granger theorem, if X and Y variables are integrated to the degree of (1.1), that is, the processes are non-stationary but their first differences are stationary, and it is possible to determine a long-run equilibrium path whose residuals will be stationary, then it is possible to represent, in a single equation, the short-run relationship between these variables and the process of reaching long-run equilibrium:

$$
\Delta y\_t = \alpha ECT\_{t-1}^+ + \beta ECT\_{t-1}^- + \sum\_{i=1}^{k-1} \theta\_i \Delta y\_{t-i} + \sum\_{i=0}^{k-1} \gamma\_i \Delta x\_{t-i} + \varepsilon\_t \tag{4}
$$

where:

*ECTt*−1—series of positive (+) and negative (−) residuals from the cointegrating equation; *α*, *β*—the rate at which Y variable adjusts to the long-run equilibrium level with X variable after positive (*α*) or negative (*β*) precipitation; in order for the rebalancing mechanism to work properly, the value of this parameter needs to be negative;

*θi*—the impact of lagged values of the increment of Y variable on the current increment of this variable; and

*γi*—the effect of current and lagged values of the increment of X variables on the current increment of Y variable.

8. Graphical representation of the importance of oil price lags in shaping inflation.

The use of the Engel–Granger model allows for the simultaneous testing of short-term and long-term effects. This is an unquestionable advantage of this model, as its results may be an important implication for macroeconomic policy. Short-term and long-term reactions as well as time shifts in the transmission of price impulses are important for its effectiveness.

#### **3. Results**

The research results are summarized under three headings: (1) an evolution of the variables evaluated and the correlations between the variables; (2) a causality analysis; and (3) modeling of dependencies.

#### *3.1. Evolution the Values of Variables Evaluated*

The time series analyzed in their original form are presented in Figure 1. The order of the presentation is consistent with the importance of the volumes for the economy, starting from the most global ones and descending to domestic volumes. Therefore, the first graph presents Brent crude quotations (USD/bbl) and the USD/PLN exchange rate; the second graph converts Brent crude quotations into PLN and shows the wholesale prices of diesel oil (PLN/ton), while the third graph presents the CPI Y/Y inflation indices (month-to-month inflation in the corresponding month of the previous year) and consumer price levels in subsequent months relative to January 2004 prices (CPI 01.2004 = 100).

**Figure 1.** The values of the variables evaluated. (**a**) Stock exchange oil prices and exchange rate; (**b**) Oil and diesel oil prices in Poland; (**c**) Inflation indicators in Poland.

The logarithm values of the variables analyzed underwent a correlation study (Table 1). This study can be interpreted in the context of a long-term relationship.

**Table 1.** Correlation connections of the logarithmic variable levels.


\* Statistically insignificant at *p* = 0.05.

Over the period of 2004–2021, the variables under study followed different trends. The period was long enough to include both significant sharp increases in quotations and spectacular decreases. Oil prices recorded historic highs in 2008, when oil cost around 140 USD/bbl, and a historic low during the uncertainty surrounding the coronavirus pandemic in March 2020, when prices fell below 30 USD/bbl. Local maxima also occurred in 2011 and 2018, and the years 2009 and 2016 saw the minima. At the end of the period under review, the oil price approached 80 USD/bbl, which was slightly above the period's average of 72 USD/bbl.

What happened in the world oil market had a very strong impact on the domestic oil and diesel market. The turning points of development trends fell in the same periods, and correlation links were very strong. The correlation between Brent oil quotations in USD/bbl and Brent oil quotations expressed in PLN (in PLN/bbl) was estimated at 0.9187. This result was possible to achieve despite the negative relationship between the Brent oil quotations and the exchange rate (−0.6360). Additionally, the wholesale diesel prices of PKN Orlen were strongly correlated with oil quotations (0.6395 and 0.8552, expressed in USD and PLN, respectively). The exchange rate was very weakly related to oil and diesel prices in the domestic market but, as indicated above, it proved to be quite strongly and inversely dependent on world oil quotations.

From the perspective of the objective of this study, however, it is important which of the oil market related parameters affects inflation in Poland. It becomes evident that the current price changes expressed by CPI Y/Y are weakly influenced by world oil prices, while the general price level is influenced by diesel prices. Here, the relationship of the CPI (01.2004 = 100) with wholesale oil prices was as high as 0.7661.

In assessing the evolution of oil prices, the issue of volatility looks interesting (Table 2).


**Table 2.** Volatility of crude oil and diesel oil prices.

Due to the logarithmic transformation, it becomes possible to assess the scale of the variability of the time series under study. From the perspective of domestic economy stability, it is quite important to note that the scale of wholesale diesel price variability is twice lower than the variability scale of the basic raw material (i.e., Brent crude oil: 0.18 and 0.36, respectively). This is largely influenced by the exchange rate, as after converting Brent crude prices from USD to PLN, the price volatility decreased from 0.36 to 0.29. Another issue is the stability of other production costs; it is natural that the volatility of the price of the primary raw material is higher than that of the final product, but here the scale of the difference proved to be significant and in favor of the domestic market

#### *3.2. Causality Testing*

The time series studied were classical time series in which the levels are non-stationary, and the first differences are stationary (Table 3).


**Table 3.** Stationarity tests.

The reason for the non-stationarity here is the trend, which is also a classical situation. This situation forces the modeling of the relationship using the first differences. The trend may be responsible for the occurrence of apparent dependencies. Although the nature of the study excludes apparent dependencies, the final model was nevertheless performed for the first differences.

Very important information in the context of the problem covered by the study is contained in Table 4.


**Table 4.** Causality tests.

This study shows the results of the causality test. The direction of the impulse flows and the response latency can be read here. The most important findings include the following:


In general, as expected, all the causal relationships listed in Scheme 1 proved to be statistically significant. In addition, the relationship between the exchange rate and wholesale diesel prices appeared to be two-way but the direction indicated in Scheme 1 was stronger than the reverse direction. The effect of inflation on the exchange rate can also be revealed, but this is a side effect to the flow of impulses in Scheme 1.

#### *3.3. Modeling of Dependencies*

Modeling of the relationship began with the implementation of cointegrating models. The long-term relationship, however, one that is on the verge of statistical significance, concerns the impact of Brent oil quotations expressed in USD and after taking the USD/PLN exchange rate into account as well as the impact of wholesale diesel prices on the CPI\_Y/Y inflation rate (Table 5). The impact of wholesale diesel prices was the strongest here.


**Table 5.** Cointegrations models and tests (A).

On the other hand, it was only the wholesale prices of diesel oil that had a significant impact on the CPI\_01.2004 = 100 inflation index. No significant impact of Brent crude oil quotations was revealed here. This result was due to lagged responses, which were not examined here.

Within the time series of crude oil and diesel, a significant influence of Brent on wholesale crude oil prices was revealed, but without cointegration (Table 6). This is partly a result of economic and political decisions related to the fuel price formation in Poland. On the other hand, Brant crude prices expressed in PLN were strongly cointegrated with original Brent crude prices.


**Table 6.** Cointegrations models and tests (B).

Problems with cointegration are visible in the graphs of residuals (Figures 2 and 3). Generally, stationary graphs are expected, while the trend in question is visible. This may mean that the relationships examined are not long-term in reality, but are short-term only.

**Figure 2.** Residuals from cointegrating models: (**a**) CPI\_Y/Y; (**b**) CPI\_01.2004 = 100.

**Figure 3.** Residuals from cointegrating models: (**a**) LN\_ON (Orlen); (**b**) LN\_BRENT\_PLN.

Thus, inflation could be explained by changes in fuel prices only in the short-term, recognizing that in the long-term, these variables are independent. However, a more reasonable explanation of this phenomenon is to recognize the surging influence of fuel quotations on inflation. Thus, any upward jump in fuel prices will potentially increase inflation on a permanent basis, while temporary decreases in fuel prices will not be of any

special significance. This effect can be attributed to entrepreneurs' reluctance to reduce the prices of their products, even if production costs are falling. It is natural that in such circumstances, they will opt for a higher margin. This phenomenon, if true, should be observed in the error correction model with asymmetry (Table 7). This explains the procedure followed in the study.


**Table 7.** ECT models with asymmetry.

Four error correction models were determined. These models apply to successive price transmissions concerning Scheme 1.

The first model concerns the Brent\_USD→Brent\_PLN transition, hence, this is between the world oil price expressed in USD and the price expressed in PLN; in essence, it is an exchange rate effect. There were no time shifts in this relationship, the current changes in Brent\_PLN depend directly on the current changes in Brant\_USD, and the strength of this translation was estimated to be 0.8432. In this model, the ect parameters were insignificant, which is in line with the expectations, because in fact, the study concerns the same quantity, only expressed in a different currency. Thus, it is not possible to talk about any long-run equilibrium here, since it is the same variable. However, from a practical point of view, what is most important is a combination of the information that past oil price volatility does not affect the present one and that oil price volatility expressed in PLN is smaller than that expressed in USD (Table 2). This results in a greater stability of the oil price in the domestic market.

The next phase of the transition from oil prices to inflation is between world oil quotations and domestic wholesale prices. Here, this is after taking into account the exchange rate (i.e., the Brent\_PLN→ON(Orlen) model). In this model, the outcome variable was increments in wholesale diesel prices, and these were dependent on the current increments in world prices, plus their first and second lags. It is thus a reaction up to three months back, which is a positive reaction. Thus, a rise in world prices significantly increases the domestic prices, but a fall in world prices also lowers domestic prices. There was also an opposite reaction to lagged price changes. This reaction is methodologically justified because it means that the series of increments does not have a trend. The results of the ect parameter are interesting. The ect(plus) parameter was insignificant but the ect(minus) parameter was significant. This means that if the price in the domestic market deviates downward from the equilibrium price with the world price for some reason, a process is quickly triggered to restore this equilibrium, but if the price deviates upward, there is no significance of such a process. The most important finding of this model was the significant positive response of changes in domestic prices to changes in world prices and the impossibility of a permanent reduction in domestic prices relative to the world price.

What is of key importance is what is contained in models 3 and 4. These models concern the impact of wholesale diesel prices on inflation. What is also important is that the conclusions only partly depend on the CPI\_Y/Y or CPI\_01.2004 = 100 inflation indices adopted; mostly, they were common. First, inflation was strongly and statistically significantly influenced by changes in the price of diesel fuel, and this was a reaction with a lag of one month. Furthermore, inflation was significantly fixed as it reacted positively to its lag. In contrast, there was no long-run relationship with oil prices. However, such a rapid short-term reaction to changes in wholesale diesel prices gives ground to consider the fuel market as a key pro-inflationary factor. All the more so since these changes are unidirectional from fuel prices to inflation.

Figure 4 provides a simplified visualization of relationships that occur in the models discussed. Thus, starting from Figure 4a, current changes in world oil prices expressed in PLN are directly dependent on original prices expressed in USD. In Figure 4b, current changes in wholesale diesel prices depend on current changes in world oil prices but, also on their lags. In Figure 4c,d, inflation appears to lag one month in relation to changes in wholesale diesel prices.

**Figure 4.** Dependencies taking into account time shifts. (**a**) Crude oil price response (in PLN) to changes in crude oil prices in the world markets; (**b**) Diesel oil prices response to changes in crude oil prices (in PLN); (**c**) Inflation (CPI\_Y/Y) response to changes in diesel oil prices; (**d**) Inflation (CPI\_01.2004 = 100) response to changes in diesel oil prices.

#### **4. Discussion**

The present study deals with a problem that is important from the economic perspective (i.e., the response of household inflation expectations (the CPI index) to fuel price shocks). This problem is still relevant, and it has especially gained in importance in the periods of increased inflation [79–81]. The issue of the transmission of price shocks from the fuel market to inflation is shown as an important cause of price increases [82–84].

The fact that the fuel market influences inflation is important not only from the perspective of the country's economy, fiscal, or monetary policy, or simply from the perspective of households. The fact that the most important CPI risk factor is the fuel market is also recognized in financial markets, where a popular strategy is to combine positions in the derivatives market for CPI swaps and RBOB futures. This strategy works in the same manner as an elimination of food price volatility risks by constructing an equivalent basket of agricultural futures [85].

One of the most serious problems of the impact of the fuel market on inflation is the controversy surrounding the short-term and long-term approach. Empirical studies are unable to unequivocally question or confirm whether the fuel market is responsible for inflation in the short- or long-term. The study finds evidence that the relationship between inflation and the fuel market is of a short-term nature, and that there is no statistically significant relationship in the long run. This conclusion is consistent with a number of empirical studies [86–88]. Generally, based on the research carried out, it can be concluded that inflation reacts quickly (up to three months) to increases in fuel prices. However, it does not react to decreases in fuel prices. This means that changes in fuel prices permanently increase inflation. Some authors have explained that during periods of falling fuel prices, inflation does not rise, and this is shown as a positive effect. The economy is particularly stimulated by falling oil prices as a result of the burden on the household budget being relieved by a reduction in energy bills; overall consumption then rises [89].

The research conducted has highlighted a unidirectional flow of price impulses: from the fuel market to inflation. Sometimes, the other direction (i.e., from inflation to the raw materials market) is discussed in the literature. It is frequently, however, that such studies treat the raw materials market as a whole and explain the increase in the prices of raw materials by running away from inflation. The oil market appears to be a good investment market against the loss of the value of money [90], which, however, does not seem to be true in light of most studies and the one carried out in this work. This is especially true if one takes into account the considerable volatility of the oil market. Recently, however, this approach has been recommended [91], but it may be the result of an excessive quantity of cash in the market and the need to look for any investment rather than a real and rational approach.

#### **5. Conclusions and Policy Implications**

The global oil market has proved to be a key pro-inflationary factor. This is not a direct influence, but an indirect one through the domestic fuel market. There are time lags in this relationship, generally up to three months. However, inflation does not take over all the volatility of the oil market. This is natural, however, as there are many more inflationary factors. Research in the context of the importance of the fuel market has important implications for economic policy, as all types of fiscal and monetary measures aimed at influencing inflation should take into account the current and projected situation in the fuel market.

The research shows important implications for macroeconomic policy. Several conclusions and suggestions can be drawn:


**Author Contributions:** Conceptualization, A.S.-P.; Methodology, G.P.; Validation, G.P.; Formal analysis, G.P.; Investigation, G.P.; Resources, G.P. and A.S.-P.; Data curation, G.P. and A.S.-P.; Writing original draft preparation, A.S.-P.; Writing—review and editing, G.P. and A.S.-P.; Visualization, G.P.; Supervision, G.P. and A.S.-P.; Project administration, G.P. and A.S.-P. All authors have read and agreed to the published version of the manuscript.

**Funding:** This research received no external funding.

**Institutional Review Board Statement:** Not applicable.

**Informed Consent Statement:** Not applicable.

**Data Availability Statement:** Publicly available data.

**Conflicts of Interest:** The authors declare no conflict of interest.

#### **References**

