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

4. Significant accounting estimations and judgments

These result from the past experience and other factors, including anticipated future events that seem reasonable in the current situation. Accounting estimations and judgments are subject to regular evaluation.

Estimations

The Group makes estimations and adopts assumptions concerning the future. By definition, the resulting accounting estimations will rarely match the actual performance. The estimations and assumptions which carry a significant risk of making significant adjustment of the book value of assets and liabilities during the next financial year are discussed below.

Estimating the provision for mining plant decommissioning costs

The Group establishes a provision for mining plant decommissioning costs, which it is obligated to do by the applicable provisions of law. The main assumptions made when determining the cost of mine decommissioning include the assumptions with regards to the life of a mine, anticipated inflation and long-term discounting rates and the expected nominal cost of decomissioning the respective mining plants, which are determined inside the Company. Any changes to these assumptions affect the book value of the provision.

a. Assumptions of the life of a mine:

Based on the concessions held for the mining of black coal and methane as a concomitant mineral, the size of the documented resource base of the mines according to an official evaluation of the resources and forecasts of the mining capacity of the mines, the following periods for conducting production activities by particular mining facilities within the organizational structure of the Parent Company are anticipated:

	According to the status
	as at 31 Dec 2012	as at 31 Dec 2011
Zakład Górniczy KWK “Borynia-Zofiówka” Mining Plant
– “Borynia” Section	till 31.12.2030	till 31.12.2030
– “Zofiówka” Section	till 31.12.2051	till 31.12.2051
Zakład Górniczy KWK “Budryk” Mining Plant	till 31.12.2077	till 31.12.2077
Zakład Górniczy KWK “Jas-Mos” Mining Plant	till 31.12.2022	till 31.12.2022
Zakład Górniczy KWK “Krupiński” Mining Plant	till 31.12.2030	till 31.12.2030
Zakład Górniczy KWK “Pniówek” Mining Plant	till 31.12.2051	till 31.12.2051

The Management Board of the Parent Company believes that development of new deposits or parts of new deposits or development of mined deposits on greater depths may extend the lives of mines mentioned above.

b) Other significant assumptions relating to the calculation of the mining plant decomissioning costs:

	2012	2011
Inflation rate	2.7%	2.5%
Nominal discount rate	4.5%	5.75%

 

If the discount rates used were 0.5% points lower than the Management Board's estimates then the book value of the provision for mining plant decomissioning costs would be PLN 48.1 million more and if the discount rates used were 0.5% points higher then the book value of the reserve would be PLN 40.1 million less.

Estimations of coal resources

Coal resources are the estimated volumes of coal which may be extracted legally and in an economically-justified manner from the mining areas where the Group operates. The Group estimates the size of the resources based on information prepared by properly qualified persons pertaining to the geological data about the size, depth and shape of the resources. Interpretation of this information requires complex judgments to be applied. Estimation of coal resources that are suitable for extraction is based on factors such as coal prices, future investment requirements, cost of production and assumptions and judgments regarding the deposit's geological parameters. Any changes in coal resource estimations may affect the anticipated life of mines and thus, indirectly, also the book value of property, plant and equipment, provisions for mining plant decomissioning costs, deferred tax assets and depreciation costs.

Employee benefits

The present value of employee benefit liabilities depends on a number of factors that are determined using actuarial methods, with several assumptions. The assumptions used to determine the provision for and costs of employee benefits include the discount rate assumption. The main assumptions for provisions for employee benefits are disclosed in Note 19. Any changes to these assumptions affect the book value of the provision for employee benefits. If the discount rates used were 0.5% points lower than the Management Board's estimates then the book value of the provision for employee benefits would be PLN 122.9 million more and if the discount rates used were 0.5% points higher then the book value of the reserve would be PLN 112.5 million less.

Property tax on mine workings

After a positive ruling of the Constitutional Tribunal and the judgments of the Voivodship Court of Administration, the Parent Company estimates the risk of further administrative proceedings in courts, as a result of which some of the property, plant and equipment components located in mine workings may be taxed and revalues the provisions for potential disputes with municipalities as described in Notes 20 and 27.

Any changes in assumptions adopted on the basis of the pending administrative proceedings affect the carrying value of the provision for the disputed property tax and receivables on account of the disputed property tax on underground mine workings. A change in the taxable base by 1% of the total gross value of “capital pits” results in a PLN 3.2 million change in the current provision and a PLN 2.1 revaluation charge to receivables on account of the disputed property tax on underground mine workings.

Mining damages

The provision for removing mining damages is established for reported damages based on a reliable estimation of cost of repairing the facilities, structures and compensation being the effect of the mining operations. The provision is presented as the present value of expenditures necessary to fulfill this obligation. Details are described in Note 20.

Settlement of expensable mining pits

As described in Note 2.5.1, expensable mining pits are settled pro rata to the production of coal in respective wall areas. The length of the settlement period depends on the estimated quantity of coal in the stratum made available as part of the expensable mining pit.

Useful life period of property plant and equipment

The Management determines the estimated useful lives and consequently the depreciation rates for particular property, plant and equipment. This estimate is based on the anticipated period of economic usefulness of those assets. If any circumstances arise that change the anticipated period of use (e.g. technological changes, retirement, etc.), the depreciation rates may change. As a result the value of depreciation charges and net book value of property, plant and equipment will change.

Accounting judgments

Combination of business entities under common control

When defining the accounting principles, the Management Board was guided by its judgment relating to the accounting principles applicable to business combinations. The accounting principles adopted by the Management Board are described in Note 2.2 (d).