Consolidated financial statement of JSW S.A. Capital Group for 2012

2.1. Basis for drawing up the financial statements

These consolidated financial statements of the Jastrzębska Spółka Węglowa S.A. Capital Group were prepared in accordance with the IFRS approved by the European Union.

These consolidated financial statements have been drawn up in accordance with the historical cost principle, except for financial derivatives measured at fair value.

Preparation of the consolidated financial statements in accordance with IFRS requires that certain significant accounting estimations are used. It also requires the Management Board to exercise its judgment when applying the accounting principles adopted by the Group. The matters that require more judgment, that are more complex or that assumptions and estimations regarding them are more significant from the standpoint of the consolidated financial statements are disclosed in Note 4.

These financial statements have been prepared using the same accounting principles for the current period and for the comparative period, while the comparative period has been adjusted to the comparative conditions to reflect the change to the accounting and presentation principles adopted in the statements in the current period in connection with the early application of changes to IAS 19 “Employee Benefits”. Detailed information about the effect of applying changes to IAS 19 on the consolidated financial statements is presented in Note 2.1.1.

New standards, interpretations and their changes

a. New and amended standards and interpretations used

In these consolidated financial statements, the following new and amended standards and interpretations have been applied for the first time:

• Changes to IAS 19 “Employee benefits”

The changes to IAS 19 “Employee benefits” were published by the International Accounting Standards Board in June 2011 and are applicable to annual periods commencing 1 January 2013 or after that date, with an early application option. These changes implement new requirements on capturing and measuring the costs of defined benefit plans related to employee benefits after the employment period and additional guidelines for job severance benefits; they also change the required disclosures concerning all employee benefits. The changes to IAS 19 were approved by the European Union on 5 June 2012.

The Group decided to apply the changes to IAS 19 starting on 1 January 2012 and to capture actuarial profits/losses arising from the measurement of defined benefit plans after the employment period in other comprehensive income. Since the changes were applied retrospectively, the consolidated statement of comprehensive income contains restated data for the financial year ended 31 December 2011. The consolidated statement of changes in equity as at 31 December 2011 was changed accordingly. These changes have not affected the consolidated statement of financial position as at 1 January 2011.

The impact of the early application of the changes to IAS 19 on the consolidated statement of comprehensive income for the financial year ended 31 December 2011 is presented in the table below:

	31 Dec 2011 approved data	Adjustment due to early application of changes to IAS 19	31 Dec 2011 restated data
Cost of products, materials and merchandise sold	(5,961.6)	(5.5)	(5,967.1)
Gross sales profit	3,415.2	(5.5)	3,409.7
Administrative costs	(490.3)	(18.6)	(508.9)
Operating profit	2,732.6	(24.1)	2,708.5
Pre-tax profit	2,699.1	(24.1)	2,675.0
Income tax	(593.6)	4.6	(589.0)
Net profit	2,105.5	(19.5)	2,086.0
Actuarial profit/(loss)	-	24.1	24.1
Income tax	-	(4.6)	(4.6)
Total other comprehensive income	-	19.5	19.5
Total comprehensive income	2,105.5	-	2,105.5
Net profit attributable to:
- shareholders of the Parent Company	2,086.6	(19.5)	2,067.1
- non-controlling interest	18.9	-	18.9
Total comprehensive income attributable to:
- shareholders of the Parent Company	2,086.6	-	2,086.6
- non-controlling interest	18.9	-	18.9
Earnings per share attributable to shareholders of the Parent Company (in PLN per share)	18.43	(0.18)	18.25

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• Changes to IFRS 7 – Transfers of financial assets

The changes to IFRS 7 “Financial Instruments: Disclosures” about the transfer of financial assets were published by the International Accounting Standards Board in October 2010 and are applicable to annual periods commencing 1 July 2011 or after that date. These changes require the disclosure of information relating to the risk stemming from the transfer of financial assets. They include the requirement of disclosure, by asset class, nature, book value and description of the risk and benefits concerning the financial assets transferred to some other entity, but which continue to remain in the entity’s statement of financial standing. If the financial assets are removed from the accounts, but the entity is exposed to some risk and may obtain some benefits associated with the transferred asset component, it is additionally necessary to make a disclosure of information making it possible to understand the effects of that risk.

The Group has applied the changes to IFRS 7 as of 1 January 2012.

The amendments have no effect on the Group’s consolidated financial statements.

Other changes of standards applicable from 1 January 2012 do not apply to these consolidated financial statements.

b. The published standards and interpretations which are not yet effective and which have not been applied by the Group before:

With respect to these consolidated financial statements, the Group has not chosen early application of the following published standards, interpretations or amendments to the existing standards before their effective date.

• IFRS 9 “Financial Instruments Phase 1: Classification and Measurement”

IFRS 9 published by the International Accounting Standards Board on 12 November 2009 supersedes those parts of IAS 39 that refer to the classification and measurement of financial assets. In October 2010 IFRS 9 was modified to include the problem of classifying and measuring financial liabilities. In accordance with the changes introduced in December 2011, the new standard applies to annual periods beginning on or after 1 January 2015. This standard implements a single model contemplating only two categories for the classification of financial assets: fair value measurement and amortized cost measurement. The assets are classified upon the initial recognition and depend on the financial instruments management model adopted by the entity and the characteristics of contractual cash flows from these instruments. Most of the IAS 39 requirements relating to classification and measurement of financial liabilities were transferred to IFRS 9 without any modification. The crucial change is the requirement imposed on entities of presenting the effects of changes in their own credit risk in other comprehensive income on account of financial liabilities subject to fair value measurement through the financial result.

The Group plans to apply IFRS 9 as of 1 January 2015.

The Group is in the course of analyzing the impact this new standard will exert on the consolidated financial statements.

At the time of preparing these consolidated financial statements IFRS 9 has not yet been approved by the European Union.

• IFRS 10 “Consolidated financial statements”

IFRS 10 was published by the International Accounting Standards Board in May 2011 and is applicable to annual periods commencing 1 January 2013 or after that date (mandatory application in the European Union from 1 January 2014). The new standard supersedes the guidelines on control and consolidation in IAS 27 “Consolidated and Separate Financial Statements” and SIC-12 interpretation “Consolidation– Special-Purpose Entities”. IFRS 10 alters the definition of control in such a manner that the same criteria for determining control will apply to all entities. The adjusted definition is accompanied by extensive guidelines concerning application.

The Group will apply IFRS 10 as of 1 January 2014.

It is expected that the application of this new standard will have no effect on the future consolidated financial statements, since the evaluation of the holding control, performed in accordance with the new standard, will not change any conclusions regarding control over entities comprising the Capital Group.

• IFRS 11 “Joint ventures”

IFRS 11 was published by the International Accounting Standards Board in May 2011 and is applicable to annual periods commencing 1 January 2013 or after that date (mandatory application in the European Union from 1 January 2014). The new standard supersedes IAS 31 “Interests in Joint Ventures” and SIC-13 interpretation “Jointly Controlled Entities - Non-Monetary Contributions by Venturers”. The changes in the definitions curtailed the number of types of joint ventures to two: joint operations and joint ventures. At the same time, the current possibility of selecting pro rata consolidation in reference to entities under joint control was eliminated. All participants in joint ventures currently have the duty of consolidating them by the equity method.

The Group will apply IFRS 11 as of 1 January 2014.

Application of the new standard will have no material effect on the future consolidated financial statements of the Group.

• IFRS 12 “Disclosure of Interests in Other Entities”

IFRS 12 was published by the International Accounting Standards Board in May 2011 and is applicable to annual periods commencing 1 January 2013 or after that date (mandatory application in the European Union from 1 January 2014). This new standard applies to entities holding interests in a subsidiary, joint venture, associated entity or in an unconsolidated entity managed under a management contract. The standard replaces the disclosure requirements that were previously included in IAS 27 “Consolidated and Separate Financial Statements”, IAS 28 “Investment in Associates” and IAS “Interest in Joint Ventures”. IFRS 12 requires entities to disclose information to assist the users of financial statements in assessing the nature, risk and financial effects of the entity’s investments in subsidiaries, associates, joint ventures and entities managed under a management contract. To this end the new standard imposes the requirement of information disclosure regarding many areas, including significant judgments and assumptions made when determining whether the entity controls, co-controls or exercises significant influence over other entities, extensive information on the importance of non-controlling interests in a group’s operations and cash flows; summary financial information on subsidiaries with substantial non-controlling interests as well as specific information on stakes in unconsolidated entities managed under a management contract.

The Group will apply IFRS 12 as of 1 January 2014.

The application of the new standard will increase the number of required disclosures about investments in other entities.

• IFRS 13 “Fair Value Measurement”

IFRS 13 was published by the International Accounting Standards Board in May 2011 and is applicable to annual periods commencing 1 January 2013 or after that date. The new standard aims to enhance consistency and attenuate complexity by articulating a precise definition of fair value and concentrating in a single standard the requirements concerning fair value measurement and the disclosure of relevant information.

The Group will apply IFRS 13 as of 1 January 2013.

It is expected that the application of this new standard will have no effect on the Group's future consolidated financial statements, as the methods and assumptions used for measuring asset components at fair value are consistent with IFRS 13

• Amended IAS 28 “Investments in Associates and Joint Ventures"

The amended IAS 28 “Investments in Associates and Joint Ventures" was published by the International Accounting Standards Board in May 2011 and is applicable to annual periods beginning on or after 1 January 2013 (mandatory application in the European Union from 1 January 2014). The amendments to IAS 28 resulted from the project carried out by the International Accounting Standards Board regarding joint ventures. The Board decided to include the principles for recording joint ventures using the equity method of accounting in IAS 28, since the method is applicable to both joint ventures and associates. Other than this exception, no other guidelines were changed.

The Group will apply the amended IAS 28 starting from 1 January 2014.

The foregoing changes will not exert an influence on the Group’s consolidated financial statements.

• Changes to IAS 12 – Asset value realization

The changes to IAS 12 “Income Tax” concerning the recovery of underlying assets were published by the International Accounting Standards Board in December 2010 and are applicable to annual periods beginning on or after 1 January 2012 (mandatory application in the European Union from 1 January 2013). These changes concern the measurement of deferred tax assets and liabilities on investment properties measured at fair value in accordance with z IAS 40 “Investment Property” and implement the supposition, that may be refuted, that the value of an investment property may be totally recovered by sale. This supposition may be refuted if the investment property is maintained in a business model whose objective is basically to use all the economic benefits represented by an investment property over time, and not at the time of sale. The SIC-21 interpretation “Income Taxes – Recovery of Revalued Non-Depreciable Assets” referring to similar questions pertaining to non-depreciable assets, which are measured according to the revaluation model presented in IAS 16 “Property Plant and Equipment” was included in IAS 12 after removal of the guidelines pertaining to investment properties carried at fair value.

The Group will apply the changes to IAS 12 as of 1 January 2013.

The foregoing changes will not exert an influence on the Group’s consolidated financial statements.

• Changes to IFRS 1 – Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters of IFRS

The changes to IFRS 1 “First-time Adoption of International Financial Reporting Standards” were published by the International Accounting Standards Board in December 2010 and are applicable to annual periods commencing 1 July 2011 or after that date (mandatory application in the European Union from 1 January 2013). The change concerning severe hyperinflation creates an additional exclusion in the event that an entity which underwent severe hyperinflation, re-commences or intends for the first time to prepare its financial statements in compliance with IFRS. This exclusion enables the entity to choose asset and liability measurement using fair value and to use this fair value as the assumed cost of these assets and liabilities in the opening balance in the first statement of financial standing according to IFRS. IASB also changed IFRS 1 to exclude any references to fixed dates for one exception and one exclusion for financial assets and liabilities. The first change requires first-time adopters of IFRS to prospectively apply the requirements pertaining to the derecognition according to IFRS from the IFRS adoption date instead of 1 January 2004. The other change pertains to financial assets or liabilities carried at fair value upon first recognition, where the fair value is determined using valuation techniques since there is no active market and permits for the application of the guidelines prospectively from the IFRS adoption date instead of 25 October 2002 or 1 January 2004. This means that the first-time adopters of IFRS do not have to determine the fair value of financial assets and liabilities before the IFRS adoption date. IFRS 9 has also been adapted to these changes.

The amendments have no effect on the Group’s consolidated financial statements.

• Amendments to IAS 1 – Presentation of items of Other Comprehensive Income

The changes to IAS 1 “Presentation of Financial Statements” pertaining to the presentation of items of other comprehensive income were published by the International Accounting Standards Board in June 2011 and are applicable to annual periods commencing 1 July 2012 or after that date. These changes require that entities split the line items presented in other comprehensive income into two groups on the basis of whether they may be captured in the financial result in the future. In addition, the title of the statement was changed from statement of comprehensive income to “statement of financial result and other comprehensive income”.

The Group will apply the changes to IAS 1 as of 1 January 2013.

The Group has only one item of other comprehensive income – actuarial profit/loss on the valuation of defined benefit plans after the employment period. This item is not revalued through profit or loss.

• Amendments to IAS 32 – Offsetting Financial Assets and Financial Liabilities,

The amendments to IAS 32 “Financial Instruments: Presentation” pertaining to the offsetting of financial assets and financial liabilities were published by the International Accounting Standards Board in December 2011 and are applicable to annual periods beginning on or after 1 January 2014. The amendments introduce additional explanations pertaining to IAS 32 in order to clarify certain inconsistencies found in the application of certain offsetting criteria. They include, among others, an explanation what the phrase “has a legally enforceable right to set off the amounts” means and that some mechanisms for settlement on a gross basis may be treated as settlement on a net basis when certain conditions are met.

The Group will apply the amendments to IAS 32 as of 1 January 2014.

Application of the aforementioned amendments will have no material effect on the future consolidated financial statements of the Group.

• Amendments to IFRS 7 – Disclosures – Offsetting Financial Assets and Financial Liabilities,

The amendments to IFRS 7 relating to disclosures – offsetting financial assets and financial liabilities, were published by the International Accounting Standards Board in December 2011 and are applicable to annual periods beginning on or after 1 January 2013. The amendments introduce an obligation to make new disclosures, which will allow users of financial statements to evaluate effects or potential effects of arrangements that allow for settlements on a net basis, including the rights to perform offsetting.

The Group will apply the amendments to IFRS 7 as of 1 January 2013.

Application of the aforementioned amendments will have no material effect on the future consolidated financial statements of the Group.

• Amendment to IFRS 1 – Government Loans

The amendments to IFRS 1 “First adoption of International Financial Reporting Standards” pertaining to government loans were published by the International Accounting Standards Board in March 2012 and are applicable to annual periods beginning on or after 1 January 2013. The changes pertaining to government loans and borrowings received by the entity on preferential terms (below-market rate of interest) allow the first-time adopters of IFRS drawing up financial statements to be exempt from the requirement of full retrospective recognition of those transactions in accounting records. Therefore, these changes introduce the same exemption for first-time adopters of IFRS as the one that exists for all other entities.

The Group plans to apply the amendments to IFRS 1 as of 1 January 2013.

The foregoing changes will not exert an influence on the Group’s consolidated financial statements.

At the time of preparing these interim condensed consolidated financial statements the changes to IFRS 1 have not yet been approved by the European Union.

• IFRIC 20 – Stripping Costs in the Production Phase of a Surface Mine

IFRIC Interpretation 20 was published by the International Accounting Standards Board in October 2011 and is applicable to annual periods beginning on or after 1 January 2013. The interpretation pertains to the settlement of the stripping costs in the production phase of a surface mine. The interpretation that the stripping process costs are recorded as costs of ongoing production activity in accordance with the principles of IAS 2 “Inventories” if benefits from stripping take the form of producing inventories. On the other hand, if stripping leads to benefits in the form of a better access to ore, the entity should recognize those costs as “stripping assets” in non-current assets, provided that the conditions specified in the interpretation are met.

Since the Group owns underground mines only, this interpretation will not affect the consolidated financial statements.

• Amendments to IFRS 2009-2011

In May 2012, the International Accounting Standards Board published the “Improvements to IFRSs 2009-2001” amending 5 standards. The improvements include changes to presentation, recognition, measurement and contain changes in terms and editorial changes. The changes will apply for the annual periods starting on 1 January 2013.

The Group plans to apply the improvements to IFRSs 2009-2011 as of 1 January 2013.

The changes will have no material effect on the consolidated financial statements, as the improvements are mainly explanations or elimination of accidental inconsistencies between the published standards.

At the time of preparing these consolidated financial statements, the Improvements to IFRSs 2009-2011 have not yet been approved by the European Union.

• Changes to transition guidance for IFRS 10, IFRS 11 and IFRS 12

In June 2012, the International Accounting Standards Board published changes to transition guidance for IFRS 10, IFRS 11 and IFRS 12. The changes will apply to the annual periods starting on 1 January 2013 or earlier, if the underlying standards (IFRS 10, 11 or 12) are applied from an earlier date. The changes define in detail the transition guidance for IFRS 10 “Consolidated financial statements”. The entities adopting IFRS 10 should assess whether or not they have control on the first day of the annual period, for which IFRS 10 was applied for the first time and if conclusions from that assessment are different from the conclusions in IAS 27 and SIC 12 then comparative data should be restated, unless impracticable. The changes also introduce additional transition guidance providing relief from the full application of IFRS 10, IFRS 11 and IFRS 12 by limiting the obligation to present adjusted comparative information to a single reporting period directly preceding the current one. Moreover, the changes abolish the requirement to present comparatives for disclosures relating to unconsolidated entities managed under a management contract for periods preceding the first time adoption of IFRS 12

The Group plans to apply these changes as of 1 January 2014.

The Group is in the course of analyzing the impact these changes will have on the consolidated financial statements.

At the time of preparing these consolidated financial statements, the amendments to transition guidance for IFRS 10, IFRS 11 and IFRS 12 have not yet been approved by the European Union.

• Changes to IFRS 10, IFRS 12, IAS 27 – Investment Entities

The changes to IFRS 10, IFRS 12, IAS 27 “Investment Entities” were published by the International Accounting Standards Board in October 2012 and are applicable to annual periods beginning on or after 1 January 2014.

The changes introduce a definition of an investment entity into IFRS 10. Such entities will be required to measure investments in subsidiaries at fair value through profit or loss and consolidate only those of the subsidiaries that provide services that are related to the entity's investment activity. Also, IFRS 12 was changed by introducing new disclosures about investment entities.

The Group plans to apply these changes as of 1 January 2014.

These changes will have no effect on the consolidated financial statements, as the Group currently does not conduct any such operations.

At the time of preparing these consolidated financial statements, the amendments to IFRS 10, IFRS 11 and IFRS 12 have not yet been approved by the European Union.