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

2.18. Provisions

Provisions are recognized if the Group has a legal or customary obligation following from past events and is probable that fulfillment of the obligation will cause the necessity to pay out funds comprising economic benefits and payment amount has been reliably estimated.

The Group establishes provisions, in particular for:

a. Decommissioning of a mining plant

The provision for future costs associated with decommissioning of a mining plant is established on the basis of the obligations following from the Geological and Mining Law Act imposing on mining enterprises an obligation to decommission mining plants upon completion of operation, in the amount of anticipated costs associated with:

• securing or decommissioning of mining workings and facilities and mining plant equipment;
• securing the unused part of the mineral deposit;
• securing the neighboring mineral deposits;
• securing the workings of neighboring mining plants;
• undertaking necessary measures to protect the environment and reclaim the land and develop the sites left after mining operations.

The provision amounts are presented in the present value of the expenditures which are expected to be required to fulfill the obligation. The interest rate before tax is then used, which reflects the current assessment of the market regarding the value of money over time and the risk associated specifically with the given liability. The initial estimation of the provision for decommissioning of mining plants increases the value of property, plant and equipment (Note 2.5). Increase of the provisions associated with elapse of time is recognized as interest expenses. Changes in the amount of the provisions associated with updating the estimates pertaining to them (discount rate, inflation rate, expected nominal value of liquidation expenditures) are recognized as an adjustment correction of the value of fixed assets subject to the liquidation obligation.

b. mining damages

The provision for removing mining damages is calculated on the basis of a reliable estimation of cost of repairing the facilities, structures and compensation being the effect of the mining operations. The starting point for recognition of the provision are the impacts of mining operations, resulting from execution of mine operation plans, identified on the surface. The provision is presented as the present value of expenditures required to fulfill this obligation.

c. other reserves

The provision for environment reclamation, property tax, legal claims, warranty repairs et al. is recognized when the Group has the legal or customary obligation resulting from past events and it is probable that fulfillment of the obligation will cause the necessity to pay out funds, and its size has been reliably estimated. Provisions are not created for future operating losses.

The balance of provisions is verified as at each final day of the reporting period and is adjusted to reflect the current, most appropriate estimate.