Consolidated financial statements

1.2. Composition of the Group

As at 31 December 2019, the Group consisted of: JSW S.A. as the Parent Company and its direct and indirect subsidiaries located in the territory of Poland. The subsidiaries are consolidated by the full method.

As at 31 December 2019, JSW held, directly or indirectly, shares in 20 related companies, including:

• 19 subsidiaries (direct or indirect),
• associated company.

In connection with the JSW’s acquisition of 4,430,476 shares in PBSz constituting 95.01% of the share capital on 20 May 2019, the consolidated statement of financial position as at 31 December 2019 includes the financial data of that company. The consolidated statement of profit or loss and other comprehensive income and the consolidated statement of cash flows include the data of PBSz for the 6-month period ended 31 December 2019.

JSW Stabilization Closed-end Investment Fund was also consolidated.

The investment in the associate (Remkoks Sp. z o.o.) is measured by the equity method in the consolidated financial statements.

Table. Information on companies comprising the Group and consolidated by the full method is provided below:

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Changes in equity relations in 2019

Information on subsidiaries with non-controlling interest

Table. The table below presents details on the Group’s subsidiaries with non-controlling interest:

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Table. The table below contains selected financial data of the Group’s key entities holding non-controlling interest:

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2.2. Going concern assumption

These consolidated financial statements have been prepared based on the assumption that the Group would continue as a going concern for at least 12 months of the final date of the reporting period. The Management Board of the parent company, as at the date of approval of these consolidated financial statements, has found no facts and circumstances that would indicate a threat to the Group’s continuation as a going concern in the foreseeable future. Moreover, all the assets and liabilities are posted in the consolidated statement of financial position assuming that the Group will be able to obtain economic benefits from the assets and fulfill the obligations in the ordinary course of business.

2.3. Accounting policy and significant accounting estimates and judgments

Material accounting principles and material figures based on judgments and estimates have been presented as an element of the various explanatory notes to the consolidated financial statements. The accounting policies adopted by the Group are consistent with the policies applied in the previous financial year, except for the adoption of new and amended standards as described in Note 2.5.

In order to prepare the consolidated financial statements according to the IFRS, one must adopt certain assumptions, make estimates and judgments, which affect the accepted accounting principles and the amounts shown in the consolidated financial statements. The assumptions and estimates result from past experiences and other factors, including anticipated future events that seem reasonable in the current situation. By definition, the resulting accounting estimations will rarely match the actual performance. Accounting estimations and judgments are subject to regular evaluation.

Table. Items in the consolidated financial statements involving material risk of having to make a significant adjustment to the carrying amount of assets and liabilities during the subsequent financial year have been presented below.

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2.4. Principles of consolidation and recognition of investments in associates

These consolidated financial statements have been prepared on the basis of the Parent Company’s financial statements and the financial statements of its subsidiaries and associates. The financial statements of the consolidated entities are drawn up for the very same reporting period based on uniform accounting principles.

All intragroup transactions, settlements, revenues, costs and unrealized profits from transactions between Group companies are eliminated in full. Unrealized losses are ignored, unless they constitute a proof of impairment.

Subsidiaries are consolidated by the full method as of the date of acquisition, meaning when control is taken over them until the date of losing that control. Control exists when the Parent Company, because of its exposure to such an entity, is subject to exposure to varying returns, or if it holds rights to them and can also influence those returns by exercising control over the entity.

Associated companies are all the entities on which the Parent Company directly or through subsidiaries exerts significant influence but does not control them; this usually coincides with holding from 20% to 50% of the total number of votes in their decision-making bodies. Investments in associates are recognized using the equity method.

2.5. New standards, interpretations and their amendments

2.6. Impact of first application of the standard on consolidated financial statements

As of 1 January 2019 the Group has made changes to the accounting rules applied in connection with the entry into force of the new accounting standard: IFRS 16 “Leases”.

2.6.1. Impact of first application of IFRS 16 on consolidated financial statements

In these consolidated financial statements, the Group applied for the first time the IFRS 16 “Leases” standard issued by the International Accounting Standards Board on 13 January 2016 and endorsed by the European Union on 31 October 2017. The new standard is applicable to annual periods beginning on or after 1 January 2019.

The Group has decided to implement the IFRS 16 standard as of 1 January 2019 by applying a modified retrospective approach (Appendix C par. C5 IFRS 16). In effect, the comparative data for 2018 were not restated.

Upon adoption of IFRS 16, the Group posted lease liabilities for agreements that had been previously classified under IAS as operating leases (which also included lease, rental agreements and future payments related to perpetual land usufruct rights). The liabilities were measured at the present value of the lease payments remaining to be paid, discounted using the incremental borrowing rate as at 1 January 2019. The discount rates calculated and applied by the Parent Company ranged (depending on the term and nature of the lease contract) from 1.64% to 5.86% for contracts in PLN.

In the case of contracts recognized as at 31 December 2018 as finance leases, the Group recognized the carrying amount of the lease asset and liability directly before the adoption of IFRS 16 for application, as the carrying amount of the right-of-use assets and lease liabilities on the first application date, i.e. 1 January 2019. The principles of measurement resulting from the new standard are applied only after that date.

Table. The impact of recognition of additional lease liabilities and related right-of-use assets is presented in the table below:

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2.7. Impact exerted by new regulations on the consolidated financial statements

By 31 December 2019, the Group applied hedge accounting in accordance with IAS 39. The Group made a decision to implement the hedge accounting requirements under IFRS 9 as of 1 January 2020.
According to IFRS 9 (paragraph 7.2.24), hedging relationships that qualified for hedge accounting in accordance with IAS 39 that meet all the requirements for hedge accounting under IFRS 9, after taking into account any rebalancing of the hedging relationship on transition, may be regarded as continuing hedging relationships.

During transition to hedge accounting provisions consistent with IFRS 9, the hedge ratio value calculated in accordance with IAS 39 is used as the reference value for making decisions on the possible actions to rebalance the hedge ratio (IFRS 9: 7.2.25(b)). Rebalancing involves adjustment of the amount of the hedging instrument or hedged item in response to changes in external factors (in particular economic) affecting the effectiveness of the hedging relationship.

The effective portion of changes to the fair value of derivative instruments designated for and qualifying as cash flow hedges is recognized in equity. The profit or loss related to the ineffective portion is recognized in the current period profit or loss.

The amounts recognized in equity are classified as revenues or costs of the same period, in which the hedged item will affect the profit or loss (e.g. at the moment the planned sales transaction, which is subject to the hedge).

The Group assumes that the hedging relationships designated before the first application of hedge accounting provisions presented in IFRS 9 will be continued. The Group considered the changes resulting from transition of the new standard as insignificant.

4.1. Sales revenues

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The Group has concluded long-term master agreements containing basic quantitative arrangements per annum and options. Each time before the year begins they are made specific and divided into quarters and the terms for exercising the options are defined. Operationally, the arrangements for specific quarters are made through quarterly negotiations. Therefore, the Group assumes that performance obligations arise under contracts with the expected term up to 1 year and on this basis uses the exemption specified in IFRS 15 and does not present the transaction price attached to the performance obligations not fulfilled under these agreements.

4.2. Costs by nature

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4.3. Other revenues

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4.4. Other costs

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4.5. Other net gains/(losses)

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4.6. Financial income and costs

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4.7. Earnings/(loss) per share

Basic earnings/(loss) per share

Basic earnings/(loss) per share are calculated as the quotient of earnings/(loss) attributable to shareholders of the Parent Company and the weighted average number of ordinary shares during the year.

Diluted earnings/(loss) per share

Diluted earnings/(loss) per share are calculated by adjusting the weighted average number of common shares in a manner allowing for a potential complete conversion into common shares causing dilution. The Parent Company has no instruments that would cause dilution of the potential common shares. Accordingly, diluted earnings/(loss) per share are equal to the basic earnings/(loss) per share of the Parent Company.

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5.1. Income tax

Table. Income tax captured in net profit:

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Table. Income tax captured in other comprehensive income

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Tabela. Reconciliation of theoretical tax calculated on profit before tax and the statutory tax rate to the income tax liability shown in net profit is as follows:

5.2. Deferred tax

Table. Deferred tax assets and liabilities are offset at the level of financial statements of individual Group companies and therefore the following amounts are shown in the consolidated financial statements:

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Table. Change in deferred tax is as follows:

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Table. Change in deferred tax asset and liabilities before offsetting:

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Ability to recover deferred tax assets

The Group measures deferred tax assets using the tax rates that will be applied at the anticipated moment when the asset is utilized, based on the tax regulations in force on the end of the reporting period. The Group recognizes an income tax asset based on the assumption that tax profit would be recorded in the future allowing the Group to use the asset.

Table. The table below presents the final periods in which deferred tax assets on tax loss may be settled in accordance with the Corporate Income Tax Act:

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6.1. Loans and borrowings

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The fair value of loans and borrowings is not significantly different from their carrying amount.

Table. Loans and borrowings taken as at 31 December 2019, by maturity:

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Table. Loans and borrowings taken as at 31 December 2018 by maturity:

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Table. The Group has at its disposal the following unused credit facilities:

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Table. Average interest rate on loans and borrowings:

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The fair value of loans and borrowings is not significantly different from their carrying amount.

Finance contract with consortium

On 9 April 2019, a finance contract was entered into by and between JSW and Agencja Rozwoju Przemysłu S.A., Bank Gospodarstwa Krajowego, Bank Polska Kasa Opieki S.A., Powszechna Kasa Oszczędności Bank Polski S.A. (“PKO BP”) and ICBC (Europe) S.A. Branch in Poland (“Consortium”). This financing was granted in the form of:

1. a term loan in the amount of PLN 100.0 million,
2. term loans facilities A and C in the USD equivalent of PLN 300.0 million,
3. renewable loan B in the amount of PLN 360.0 million.

The financing is planned for a maximum term of 7 years, however the financing in the form of the revolving loan has been set for 5 years with the possibility of extending it by up to 2 years.

The beneficiary of the facility plans to earmark the funds among other things for: financing JSW Group’s investments, financing Group’s other general corporate needs and financing the acquisition of a 95.01% stake in PBSz by the Parent Company.

Finance contract with the European Investment Bank

On 9 April 2019, a finance contract was entered into by and between JSW, its subsidiary JSW KOKS and the European Investment Bank (“EIB”) with its registered office in Luxembourg. This financing was granted in the form of a term facility in the amount of EUR 58.5 million. Both JSW and JSW KOKS may take out financing on this account. The agreement did not specify in which parts the financing will be divided between JSW and JSW KOKS.

The borrowers have the option of drawing the loan in EUR or, subject to availability, in USD or PLN. The facility amortization term is 8 years from its origination, while the contract permits its early repayment. The beneficiaries of the facility granted by EIB with the support of the European Fund for Strategic Investments intend to use the funds obtained to conduct a project involving the modernization of a coking plant and investments to generate energy using coke oven gas and methane obtained from a hard coal mine.

The collateral of the finance agreements with the Consortium and the EIB is shared based on the pari passu principle:

1. Registered pledges up to the highest collateral amount of PLN 690.0 million, USD 117.8 million and EUR 87.8 million established in favor of PKO BP as the pledge administrator on the following:
   • personal property assets of Knurów-Szczygłowice OPE, Pniówek OPE, Zofiówka OPE, Bzie-Dębina OPE,
   • shares held by JSW in JSW KOKS and PBSz,
   • JSW’s bank accounts.
2. Joint contractual mortgages established in favor of PKO BP as the mortgage administrator up to PLN 690.0 million and up to USD 117.8 million and in favor of EIB up to EUR 87.8 million on real properties owned or held in perpetual usufruct by JSW, comprising organized parts of JSW’s enterprise in the form of Knurów-Szczygłowice OPE, Pniówek OPE, Zofiówka OPE, Bzie-Dębina OPE.
3. Sureties extended to the Consortium by JSW KOKS up to PLN 690.0 million and USD 117.8 million.

Assignment of receivables under a commercial agreement and receivables under insurance agreements effected under the assignment agreement of 9 April 2019 governed by Polish law, entered into by and between JSW as the assignor and PKO BP as the assignee.

Non-renewable loan agreement with BOŚ S.A.

On 14 May 2019, a non-renewable loan agreement was signed between the subsidiary JSW KOKS and BOŚ S.A. in the amount of PLN 60.1 million to finance the task entitled “Modernization of coke oven battery no. 4 at the Przyjaźń Coking Plant”, which at the same time is co-financed under a separate agreement signed by JSW KOKS on 17 October 2018 with NFOŚiGW in Warsaw in the amount of PLN 200.0 million.

Under the agreement, the non-renewable loan will be secured on:

1. surety extended by JSW up to PLN 90.2 million,
2. registered pledge on coal inventories worth no less than PLN 75.0 million and no less than 100 thousand tons of coal with an assignment of an insurance policy up to the amount of no less than PLN 20.0 million;
3. registered pledge on machinery and equipment to be purchased as part of the task entitled “Modernization of coke oven battery no.
4. at the Przyjaźń Coking Plant” up to the amount of PLN 90.2 million.

Preferential loand agreement with NFOŚIGW

On 9 December 2019, a preferential loan was partly released in the amount of PLN 36.9 million by the subsidiary JSW KOKS from the National Fund for Environmental Protection and Water Management in Warsaw, which was granted in the amount of PLN 134.0 million as part of the Operational Programme Infrastructure and Environment for the implementation of a project titled “Improvement of Energy Efficiency at JSW KOKS” related to the construction of a power unit in the Radlin Coking Plant. The loan was granted at an interest rate of 0%. At the end of 2019, the loan was evaluated at PLN 28.5 million. The difference is the preferential interest rate of PLN 8.4 million.

The borrowing will be repaid quarterly, starting from September 2022.

Other collateral for loans and borrowings

(in addition to the collateral on the financing agreement with EIB and the Consortium and the loan from BOŚ S.A., which are described above):

• mortgage on real properties of PLN 223.8 million,
• registered pledges on movable assets of PLN 56.3 million,
• assignments of receivables under bank agreements/accounts,
• assignment of receivables from the term deposit account in the amount of PLN 10.1 million.

If the loans and borrowings are secured with non-current assets then additional security is provided in the form of an assignment of rights under insurance agreements for these assets. Blank promissory notes with a promissory note declaration are another form of security used to secure liabilities under contracted loans and borrowings.

6.2. Liabilities under debt securities issued

Table. Liabilities under debt securities issued captured in the consolidated statement of financial position:

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Table. Liabilities under debt securities issued by currency (after conversion to PLN):

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An analysis of sensitivity to the risk associated with changes of exchange rates and interest rates is presented in Note 9.5.1.

On 16 January 2019, the JSW Management Board adopted a resolution on the full redemption of bonds for a total nominal amount of PLN 121.0 million (including PLN 71.5 million and USD 13.2 million). The final bond redemption date was 30 December 2019. The redemption of bonds was carried out on 18 January 2019, which resulted in ending the Bond Issue Program. As at 31 December 2019, the Group had no liability under debt securities issued (as at 31 December 2018: PLN 121.0 million). The redemption of the bonds was consistent with the Terms and Conditions of Issue.

Interest and commission of PLN 0.3 million paid in the reporting period in relation to the issue of bonds is presented in the financing activity part of the consolidated statement of cash flows.

6.3. Lease liabilities

Table. The currency structure of the Group’s lease liabilities after translation to PLN is as follows:

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Table. Lease liabilities captured in the consolidated statement of financial position:

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In the measurement of lease liabilities the Group includes variable lease payments linked to reference interest rates.

Leaseback

In the 12-month period ended 31 December 2019, one of the subsidiaries (PGWiR) purchased machinery and equipment and vehicles in the amount of PLN 11.6 million from international and domestic suppliers. Subsequently, these assets were sold to PKO Leasing S.A. and then taken over from PKO Leasing S.A. by way of sale and leaseback transactions. The transaction of purchasing and selling these assets had no effect on the Group’s financial result. Fixed assets were purchased, resold and taken over through a sale and leaseback transaction in the same amount, i.e. PLN 11.6 million.

In the 12-month period ended 31 December 2019, the subsidiary PBSz concluded leaseback agreements. The total amount of sales and leaseback transactions in the period of 12 months of 2019 was PLN 12.8 million (of which PLN 0.8 million before JSW obtained control). The sales value was equal to the purchase value of the device. The total result on sale and leaseback under the concluded leaseback agreements in PBSz was insignificant in the context of the Group.

On 25 September 2019, the JSW Innowacje subsidiary signed a lease agreement with “PEKAO LEASING” Spółka z ograniczoną odpowiedzialnością. The leased asset was a shearer with coalface equipment and other equipment. Under the lease agreement, “PEKAO LEASING” Sp. z o.o. undertook to purchase the leased asset from JSW Innowacje and release it to the company for use. This transaction was recognized as a leaseback. The transaction of purchasing and selling these assets had no effect on the Group’s financial result. Fixed assets were purchased, resold and taken over through a sale and leaseback transaction in the same amount, i.e. PLN 27.5 million.

On 7 November 2019, the PBSz subsidiary and PEKAO LEASING Sp. z o.o. with its registered office in Warsaw signed an agreement to grant a lease limit of PLN 20.0 million.

In 2019, in connection with the effective date of IFRS 16, the presentation of liabilities under lease agreements changed. The tables below present finance lease liabilities recognized in 2018 (comparative data).

Table. Finance lease liabilities recognized in the consolidated statement of financial position as at 31 December 2018:

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Table. Net carrying amount per each group of assets in finance leases:

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6.4. Reconciliation of debt

Table. The table below depicts the movement in debt as at 31 December 2019:

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Table. The table below depicts the movement in debt as at 31 December 2018:

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7.2. Goodwill

Selected accounting policies

Goodwill

Goodwill is the surplus of:

• the consideration transferred,
• the amount of any non-controlling interests in the acquiree,
• the fair value of previously held equity instruments of the acquiree owned by the acquirer,

over the fair value of identifiable acquired net assets. If these amounts are lower than the fair value of identifiable net assets of the acquiree then the difference is captured directly in the financial result as bargain purchase gain.

After initial recognition, goodwill is recognized at initial value less impairment losses, if any.

Gain or loss on disposal includes the carrying amount of the goodwill relating to the disposed entity.

Goodwill is not amortized but is subject to an annual impairment test, irrespective of whether there is any indication of impairment.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to individual cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated:

• represent the lowest level at which the goodwill is monitored for internal management purposes;
• cannot be larger than an operating segment as defined in IFRS 8 before aggregation.

A cash-generating unit to which goodwill has been allocated is tested for impairment annually, and also whenever there is an indication that the unit may be impaired.

If some or all of the goodwill allocated to a cash-generating unit was acquired in a business combination during the current annual period, that unit must be tested before the end of the current annual period.

The tests are carried out by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit. If the recoverable amount of the unit exceeds its carrying amount then the unit and the goodwill allocated to that unit are regarded as not impaired.

Goodwill is monitored on the operating segment level.

Goodwill is recognized in a separate item of the consolidated statement of financial position.

Goodwill

In 2019, the presented goodwill amount was affected by the purchase price allocation for the acquisition of Przedsiębiorstwo Budowy Szybów S.A. (“PBSz”) in Tarnowskie Góry, which is discussed in detail in Note 10.3.

Table. As a result of this transaction, the Group presented in its consolidated statement of financial position prepared as at 31 December 2019 the goodwill of PLN 57.0 million, as specified in the table below:

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Having in mind the accounting policy in effect in the group, the goodwill representing future economic benefits that the Group expects as a result o fthe acquisition of PBSz and also considering the synergies described in Note 10.3, the JSW Management Board believes that the goodwill obtained in the purchase price allocation process for PBSz shares should be allocated in full to the segment to which PBSz was allocated – Other segment.

Table. The summary of the goodwill allocation at the segment level is presented below:

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Impairment of goodwill

According to the standard, testing measures recoverable amount of the cash generating unit to which goodwill is allocated. Recoverable amount is defined as the higher of: fair value less cost to sell, and the value in use (estimated present value of the future cash flows expected to be derived from the cash-generating unit). Value in use has been assumed for the testing calculation purposes.

The recoverable amount was calculated at the level of the cash generating unit, i.e. PBSz.

The assumptions adopted e.g. for projected revenues, costs, capital expenditures are the same as the projections included in the "JSW Strategy including the JSW Group’s subsidiaries for 2020-2030", discount rate at 6.81% (in real terms).

The projections included in the above Strategy are, at the moment of testing, the most likely estimate that the Group could make. There are no other estimates to suggest that other values should be assumed. The projection period is 5 years.

The result of the testing indicates that no impairment loss had to be recognized for a Group asset (goodwill).

7.3. Intangible assets

Selected accounting policies

Intangible assets

Material estimates

Periods of useful life for intangible assets

The Group sets the estimated useful lives and consequently the depreciation rates for particular intangible assets. This estimate is based on the anticipated useful lives of those assets. The correct application of amortization periods and rates and the final value of intangible assets are subject to annual reviews in the fourth quarter of the year in order to make appropriate adjustments to amortization charges starting from the next financial year.

The review of amortization rates for intangible assets resulted in a PLN 0.1 million increase in amortization in 2019 vs. the previous year.

Intangible assets

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Amortization of intangible assets

Table. The items, which include amortization of intangible assets, are listed below:

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Perpetual usufruct right to land

In connection with the application of IFRS 16 as of 1 January 2019, the perpetual usufruct right to land not previously presented in the consolidated financial statements has been recognized as a right-of-use asset.

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Other information concerning intangible assets

As at 31 December 2019, the net value of intangible assets securing the repayment of liabilities is PLN 10.8 million (as at 31 December 2018: PLN 59.6 million) and this is security for the repayment of liabilities under debt financing agreements. The security interest for loans and borrowings is described in Note 6.1.

In 2019 and in 2018, there were no capitalized costs of external financing of intangible assets in the Group.

Certificates of origin

In intangible assets, the Parent Company recognizes certificates of origin of energy purchased to fulfill the obligation to redeem them as required by the Energy Law regulations. Due to their special character, expenditures for the purchase of certificates of origin of energy were included in the consolidated statement of cash flows, as cash flows on operating activity.

Table. The change in the value of certificates of origin is presented below:

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7.4. Right-of-use asset

Selected accounting policies

Right-of-use asset

Since 1 January 2019, date the Group recognizes a right-of-use asset on the lease agreement commencement date.

The assets used by the Group under lease agreements include mainly longwall shearers and roadheaders and mining machines, means of transport, computer and multimedia equipment, as well as real property and the perpetual usufruct right to land.

On initial recognition, a right-of-use asset is measured at cost. The cost of a right-of-use asset consists of:

• the amount of initial measurement of the lease liability,
• any lease payments made at or before the commencement date, less any lease incentives received;
• any initial direct costs incurred by the lessee in connection with the execution of a lease agreement,
• an estimate of costs to be incurred by the lessee in connection with the duty of dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories.

After the lease commencement date, the Group measures the right-of-use asset at cost less any accumulated depreciation and any accumulated impairment losses and adjusted for any revaluation of the lease liability other than unwinding of the discount.

A right-of-use asset is amortized using a straight-line method over the useful life of assets no longer than the term of the lease based on the concluded agreements.

Amortization rates depend on the term of the agreement.

If the Group has reasonable certainty that it will exercise the purchase option, the right-of-use asset is amortized over the useful life of that asset.

The Group benefits from an exemption from the application of IFRS 16 requirements when the following are recognized:

• short-term lease – a lease that, at the commencement date, has a lease term of 12 months or less. This simplification was not applied to short-term lease agreements for productive assets used in underground mines. A lease that contains a purchase option is not a short-term lease.
• lease of low value assets – assets, whose initial unit value of a new leased item does not exceed PLN 20 thousand, except for perpetual usufruct right to land and lease agreements to which a purchase option was introduced.

Payments related to short-term leases and leases of low value assets are recognized on a straight-line basis in costs of the current period.

For leases where the Group is a lessee, for contracts containing lease components as well as non-lease components, if they cannot be separated, the Group applies a simplification and accounts for each lease component and non-lease component as a single lease component.

Material estimates

The application of IFRS 16 requires certain estimates and calculations to be made, which affect the measurement of lease liabilities and right-of-use assets.
These include, among others:

• determination of the term of the agreements (also for agreements with an indefinite term or with a renewal option),
• determination of the interest rate used to discount future cash flows,
• determination of the depreciation rate.

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Amortization of right-of-use-assets

Table. Items including amortization of right-of-use assets:

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Other information of right-of-use assets

As at 31 December 2019, the net value of right-of-use assets for assets securing the repayment of liabilities is PLN 51.0 million and this is mainly security for the repayment of liabilities under debt financing agreements. The security interest for loans and borrowings is described in Note 6.1.

In 2019 there were no capitalized costs of external financing of right-of-use asset in the Group.

The amount of fees for short-term leases accounted as costs in the consolidates statement of profit or loss and other comprehensive income for the period of 12 months ended 31 December 2019 is PLN 1.5 million, while the cost of lease for low-value agreement is PLN 0.3 million.

7.5. Impairment of non-financial non-current assets

Material estimates

Impairment of non-financial assets

The assets that are subject to depreciation and amortization are analyzed for impairment any time any events or changes in circumstances indicate that their carrying amount may not be realized. If the carrying amount of a non-financial non-current asset exceeds its estimated recoverable amount then its carrying amount is subject to an impairment loss down to its recoverable amount. Recoverable amount is the higher of: fair value of the assets minus the selling and distribution expenses, or value in use.

For the purpose of the impairment analysis, assets are grouped at the lowest level where there are identifiable separate cash flows (cash flow centers). Impairment tests for non-financial non-current assets are conducted based on the principle that, for assets not withdrawn from use, the smallest group of assets is a mine or another subsidiary company ("cash-generating unit – CGU").

If an impairment test shows that the recoverable amount of a non-financial asset or a cash-generating unit is lower than its carrying amount then an impairment loss is made at the amount of the difference between the recoverable amount and the carrying amount of the asset or the CGU. After the impairment loss is recognized, the depreciation charge for the asset is adjusted so that the remaining net amount (after the loss is recognized) is depreciated over the remaining useful life. Non-financial assets whose impairment has been found earlier are evaluated at every end date of the reporting period for the occurrence of premises indicating that the impairment loss may be reversed.

Recognition and reversal of impairment losses on non-financial non-current assets is presented in the consolidated statement of profit or loss and other comprehensive income in the "other income/cost" item.

Impairment losses

Because of the volatile macroeconomic environment, the Group regularly reviews the indications that may suggest a decline in the recoverable amount of the assets in the respective Group companies. Impairment of non-current assets is analyzed by estimating the recoverable amounts of cash-generating units (CGUs). Such analysis is based on a number of significant assumptions, some of which are beyond the Group’s control. Significant changes in these assumptions affect the results of impairment tests and, as a consequence, may lead to significant changes in the Group’s financial standing and financial performance.

Table. The table below depicts movements in impairment losses for non-current assets:

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In connection with the impairment testing conducted as at 31 December 2018, considering the provisions of IFRS 16 par. 33, right-of-use assets recognized as at 1 January 2019 were covered by impairment losses in the amount of PLN 45.6 million. The value of this impairment loss, adjusted by the deferred tax asset, was recognized as at 1 January 2019 as an adjustment to retained earnings in the amount of PLN 37.0 million. At the same time, a portion of the impairment loss in the amount of PLN 14.0 million pertaining to property, plant and equipment recognized as at 1 January 2019 as the right-of-use asset was reclassified.

Coal segment

Coke segment

7.6. Investment property

Selected accounting policies

Investment property includes property that is held to earn rent or for value appreciation or both and property that is being constructed or developed for future use as investment property.

Investment property is initially measured at purchase cost or manufacturing cost, including the costs of transaction and borrowing costs.

After initial recognition, the Group measures all investment property according to the cost model, i.e. purchase price or manufacturing cost, less accumulated depreciation and accumulated impairment losses.

Investment properties are depreciated using the straight-line method over their useful life. The estimated useful life of investment property is 42 years.

Investment properties are removed from the ledgers when sold or withdrawn from use permanently, provided that no benefits from its disposal are expected in the future.

Investment property

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Table. Rental income from and cost associated with investment property:

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7.7. Investments in the FIZ asset portfolio

Selected accounting policies

Financial assets held in the FIZ investment portfolio are classified as:

• financial assets measured at fair value through profit or loss,
• financial assets measured at amortized cost.

Financial assets measured at amortized cost include those assets that meet the SPPI test and are held for the purpose of collecting the principal and interest; these include mainly: cash and bank deposits, receivables arising in current activity.

Financial liabilities measured at amortized cost include liabilities arising in current activity.

In the FIZ portfolio, the Group does not hold debt instruments measured at fair value through other comprehensive income (i.e. assets meeting the SPPI test and held for the purpose of collecting the principal and interest and for sale).

All other assets in the FIZ portfolio are classified as “measured at fair value through profit or loss”.

In respect of financial assets measured at amortized cost, impairment losses are calculated using the model of expected credit losses The Group applies a three-stage impairment model:

• Stage 1 – balance positions for which credit risk has not increased significantly since initial recognition. Moreover, Stage 1 also includes financial assets with high credit quality (investment grade). Expected credit losses are calculated based on the probability of default within 12 months (i.e. total expected credit loss is multiplied by the probability that such loss occurs within the next 12 months);
• Stage 2 – balance positions for which has increased significantly since initial recognition, but there is no objective evidence of impairment; expected credit losses are determined based on the probability of default for the entire lifetime of the asset;
• Stage 3 – balance positions with an objective indication of impairment.

For financial assets measured at amortized cost, interest income is calculated using the effective interest rate method and recognized in the “other net gains/losses” line item.

A gain or loss on the fair value measurement of investments is recognized in the financial result and presented in the “other net gains/losses” line item in the period in which it occurred.

One of the important actions that the Parent Company took to prevent potential threats related to the deterioration of liquidity, was the establishment of the Closed-End Investment Fund (“FIZ”). As at the balance sheet date, JSW holds 100% of FIZ certificates and consolidates the FIZ by the full method. The Fund has been established for a specific term until 30 December 2024 with an option of extending its term of operation by no more than three years. In periods of upswing on the coal markets, JSW intends to transfer a portion of its cash surpluses to FIZ to have them invested. The Company will be able to use the funds accumulated in FIZ in periods of market downturn and/or in periods of negative cash flows generated by JSW. In parallel, these funds will offer financial support for long-term and medium-term expense planning associated with the execution of investment projects of strategic importance for JSW and the Group aimed at, among other objectives, the expansion of mining capacity, improved access to deposits, coal preparation and coke production.

The Fund subscribes to a conservative investment policy. Its only business is investment of funds accumulated through private offerings of Investment Certificates in very secure liquid assets specified in the Articles of Association, including primarily State Treasury bonds and other treasury and banking debt instruments for which the applicable exposure limit has been strictly defined in the Fund’s investment policy. The Fund has been entered in the register pursuant to the decision of 26 January 2018. The fund is managed by Towarzystwo Funduszy Inwestycyjnych Energia S.A. On 6 February 2018, the Fund commenced its investment operations by way of the Investment Committee of TFI Energia making the first investment decision on the allocation of the Fund’s assets.

In 2019, no new investment certificates were issued within the Fund.

The carrying amount of investments in the FIZ asset portfolio as at 31 December 2019 was PLN 1,874.0 million (PLN 1,826.1 million as at 31 December 2018).

The Group has been investing in a portfolio of financial assets through the Fund in which the Parent Company holds 100% outstanding investment certificates.

The Fund may invest its assets in:

• debt securities,
• money market instruments,
• currencies,
• derivatives, including non-standardized derivatives, provided that they are negotiable,
• deposits in banks.

The basic criterion for selecting the investments is the possibility of earning as high as possible rate of return, while minimizing the risk associated with the issuer’s insolvency, interest rate volatility and limited liquidity risk.

Rules for diversifying investments:

1. Money market securities or instruments issued by a single entity, accounts receivable from that entity and participations in that entity cannot constitute a total of more than 20% (twenty percent) of the Fund’s asset value. The limitation does not apply to securities issued, guaranteed or secured by the State Treasury, the National Bank of Poland, OECD member states or any international financial institutions of which the Republic of Poland is a member or at least one of the OECD member states.
2. Bonds guaranteed or secured by the State Treasury may represent up to 100% of the Fund’s asset value.
3. Deposits in a single domestic bank, foreign bank or credit institution must not account for more than 20% of the Fund Assets value.
4. Currency exposure – construed as the total value of investments in foreign currencies and other types of investment denominated in foreign currencies, must not exceed 10% of the Fund’s net asset value.
5. Corporate bonds or local government bonds will jointly account for no more than 10% of the Fund’s net asset value, while bonds issued by a single entity must not represent more than 1% of the Fund’s net asset value.
6. Debt securities and money market instruments issued by banks will jointly account for no more than 25% of the Fund’s net asset value, it being understood that, for the purposes of application of this limit, debt securities and money market instruments issued by Bank Gospodarstwa Krajowego will not be classified as debt securities or money market instruments issued by banks. The share of a single issuer must not exceed 5% of the net asset value (while for covered bonds the share of a single issuer must not exceed 10% of the net asset value).
7. Debt securities and money market instruments issued by Bank Gospodarstwa Krajowego, save for securities guaranteed or secured by the State Treasury of the Republic of Poland, will account for no more than 10% of the net asset value.

Table. The following table presents the structure of the Fund’s assets at the end of the reporting period.

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For financial assets measured at fair value through profit or loss (debt securities, covered bonds), there is no active market and in their case the Group also cannot apply the valuation techniques resulting in reliable values. Accordingly, the value received from the Fund’s manager based on information received from the custodian is deemed to be its fair value.

Credit risk

In the case of financial assets measured at amortized cost (i.e. deposits and cash and cash equivalents), the Group classifies them as Stage 1 in terms of impairment because of the high rating of their credit quality and the potential impairment allowance is not significant and it was not recognized.

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Significant concentration of credit risk is 10% of the issuer’s share in total assets.

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7.8. Other non-current financial assets

Selected accounting policies

According to the provisions of the Geological and Mining Law Act and the Minister of Economy's Regulation on the principles of establishing and managing a mine closure fund, the Company is obligated to accumulate funds on a separate bank account of the Mine Closure Fund (Fundusz Likwidacji Zakładów Górniczych – FLZG), which may be expended solely and exclusively to finance a total or partial closure of a mining plant. Cash and cash equivalents of the Mine Closure Fund, due to restrictions on their disposal, are presented in the statement of financial position as non-current financial assets, regardless of their maturity. The Group measures these assets using the effective interest rate method, taking impairment losses into account.

Other non-current financial assets

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All the non-current financial assets are denominated in Polish zloty.

The fair value of non-current financial assets is not significantly different from their carrying amount.

Information on the degrees of assessment of credit risk for cash based on external agency ratings is presented in Note 9.5.1.

7.9. Inventories

Selected accounting policies

Inventories are stated at purchase price or production cost which, however, is not higher than their net sales prices. The net sales price is the estimate sales price in ordinary course of business, less pertinent variable selling and distribution expenses. The cost of finished products and production in progress comprises direct labor, auxiliary materials, other direct costs and pertinent general production costs (based on normal production capacity).

The value of consumption of materials and goods is determined using the "first in first out" (FIFO) method. The consumption of finished products is determined using the weighted average method.
White certificates are certificates confirming the saving of a specific quantum of energy as a result of completing investments to enhance energy efficiency. The Group classifies the proprietary rights arising from energy efficiency certificates as goods.The proprietary rights arising from these certificates are recognized by the Group in its accounting ledgers as of the date they are awarded. These rights on their initial recognition are measured as the product of the number of awarded rights and the unit market price per property right arising from a certificate of origin on the date the certificate or origin was awarded and property rights acquired. The second posting is in other revenues. On the other hand, sales of energy efficiency certificates increase revenues from sales of goods and cost of goods sold. The measurement of the outgoing certificates of origin is determined by the FIFO method.

Material estimates

Impairment loss for inventories

The Group recognized impairment losses on inventories of finished products if they are measured at net sales price, which is lower than their manufacturing cost. The manufacturing cost at the end of a reporting period is the average manufacturing cost, calculated from the beginning of the year to the relevant reporting month. The net selling price is assumed to be equal to realistically achievable market prices.

Impairment losses on inventories of finished products, both recognition and reversal, is captured as cost of the period when the charge took place.
If any events occur that causes material inventories to lose their 'value in use', the Group makes a relevant impairment loss, making sure however that the carrying amount of inventories never exceeds their recoverable amount. Impairment losses on inventories of materials are made no less frequently than at end of each quarter and captured as cost of the period in the "Cost of products, materials and goods sold" item.

Inventories

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The inventories of finished products as at 31 December 2019 included, among others, inventories of 1,789.4 thousand tons of coal produced by the Group worth PLN 587.9 million and inventories of 485.8 thousand tons of coke produced by the Group worth PLN 378.3 million (as at 31 December 2018: 791.6 thousand tons of coal worth PLN 275.9 million and 225.3 thousand tons of coke worth PLN 149.4 million).

Impairment losses for inventories

Table. The table below depicts impairment losses for inventories:

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Recognition and reversal of impairment loss amounts for inventories were recognized as costs in the current reporting period.
Impairment losses for inventories recognized in 2019 refer to finished products and materials and merchandise.

7.10. Other current financial assets

Selected accounting policies

The Group classifies bank term deposits as assets measured at amortized cost. An asset is classified as belonging to this category if both of the following conditions are satisfied:

• the Group’s intention is to maintain these financial assets to receive the contracted cash flow, and
• for which the contractual clauses trigger cash flows at specified dates that are solely payments of the unpaid principal and the interest on that amount.

The financial assets in this category after their initial recognition are measured at amortized cost while using the effective interest rate, after subtracting any possible impairment losses.

Table. Other current financial assets are presented in the following table:

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7.11. Trade and other receivables

Selected accounting policies

Financial receivables are initially recognized at fair value, with the fair value of trade receivables upon initial recognition being the nominal value resulting from issued sale invoices. After initial recognition, trade receivables and other financial receivables are evaluated at amortized cost using the effective interest rate method (all trade receivables meet the SPPI test and are held in order to collect contractual cash flows), taking into account the impairment losses. Trade receivables with a date of maturity shorter than 12 months from the date of their origin (i.e. not containing a financing element) are not subject to discounting and are measured at their nominal value. Other receivables, which are not financial assets, are measured at the end of the reporting period at the due payment amount.

Material estimates

Impairment losses for receivables

Starting from 1 January 2018, the Group as at the date ending the reporting period, estimates the expected credit loss on financial assets measured at amortized cost. The impairment model is based on a calculation of expected losses.

With regard to trade receivables which do not comprise any significant financing component, a simplified approach and valuation of the loss was used on the basis of expected credit losses for the entire life of the instrument. The Group has classified its trade receivables to Stage 2 of the financial asset impairment classification envisaged in IFRS 9, except for receivables for which an impairment has been identified – these receivables have been classified to Stage 3 of that classification. The Group assumes that the moment of impairment is the moment the receivables are forwarded for collection, but no later than on the 90th day past due.

Trade receivables are the most important line item of financial assets in the Group’s consolidated financial statements and it is subject to the new rules for the calculation of expected credit losses.

To determine the impairment losses the Group has distinguished the following groups of trade receivables, determined on the basis of probability of the credit risk characteristics:

• coal and coke trade receivables from the main business partners, i.e. business partners whose percentage of sales revenues is above 2.5% in a given reporting period,
• coal and coke trade receivables from other business partners whose percentage of sales revenues is below 2.5% in a given reporting period,
• other trade receivables.

The analysis of the coal and coke trade receivables from the main business partners has been carried out individually for each business partner on the basis of the probability of insolvency determined on the basis of external ratings and publicly available rating agency information on the probability of default and the expected loss has been calculated on the basis of these probabilities, average maturity for the receivables portfolio and on the basis of the expected recovery rate.

The analysis of coal and coke trade receivables from other business partners has been carried out on the basis of the calculated weighted average of probability of insolvency for the portfolio and the expected loss has been calculated for this portfolio on the basis of these probabilities, average maturity and on the basis of the expected recovery rate.

For other trade receivables (except for those analyzed individually as not serviced), a portfolio has been carried out and a simplified impairment loss matrix has been applied in individual age brackets on the basis of expected credit losses throughout the life of the receivable based on the default ratio determined on the basis of historical data (for the last three years).

The expected credit loss is estimated and revalued on every subsequent day ending a reporting period.

Trade and other receivables

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The fair value of trade and other receivables is not significantly different from their carrying amount.

Table. The currency structure of the Group's trade receivables after conversion to PLN is as follows:

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Impairment losses for receivables

Table. The table below depicts the changes in the impairment loss for trade receivables:

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Table. The table below presents the age structure of trade receivables as at 31 December 2019:

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As at 31 December 2019, PLN 195.7 million of trade receivables was past due. That figure included PLN 115.4 million of receivables that were not found impaired and an impairment loss of PLN 2.1 million was recognized for them in 2019, while PLN 80.3 million were found impaired and an impairment loss of PLN 3.7 million in respect of them was recognized in 2019.

The PLN 613.7 million of trade receivables included trade receivables of PLN 404.0 million from coal and coke counterparties with more than 2.5% share in revenues and PLN 131.3 million from coal and coke counterparties with a share in revenues below 2.5%.

Table. The table below presents the age structure of trade receivables as at 31 December 2018:

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As at 31 December 2018, PLN 113.0 million of trade receivables was past due. That figure included PLN 36.2 million of receivables that were not found impaired and an impairment loss of PLN 1.1 million was recognized for them in 2018, while PLN 76.8 million were found impaired and an impairment loss of PLN 3.4 million in respect of them was reversed in 2018.

The PLN 1,056.5 million of trade receivables included trade receivables of PLN 762.9 million from coal and coke counterparties with more than 2.5% share in revenues and PLN 173.9 million from coal and coke counterparties with a share in revenues below 2.5%.

The changes in gross values did not materially affect the value of impairment losses.

7.12. Cash and cash equivalents

Selected accounting policies

Cash and cash equivalents include cash on hand, bank deposits payable on demand, other short-term investments with high liquidity and with original maturity date of up to three months. Overdraft facilities are presented in the consolidated statement of cash flows as a component of cash flows from financing activities.

The overdraft facility contracted under the financing agreement with the Consortium is presented in the consolidated statement of financial position as an element of long-term loans and borrowings in non-current liabilities.

The Group classifies cash and cash equivalents as financial assets measured at amortized cost, while taking into account, from 1 January 2018, impairment losses calculated in accordance with the expected loss model.

Material estimates

Impairment losses for cash and cash equivalents

As of 1 January 2018, the Group estimates impairment losses for cash and cash equivalents on the basis of the probability of insolvency calculated on the basis of external ratings of the banks in which the cash is kept and publicly available rating agency information pertaining to probability of insolvency and the expected loss is calculated on the basis of these probabilities, the time horizon of the exposure to credit risk and on the basis of the expected recovery rate.

In connection with the low associated credit risk, cash and cash equivalents are assigned a 3-month horizon for credit risk exposures.

Analysis of the levels of credit risk assessment for cash based on external agency ratings is presented in Note 9.5.1.

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As at 31 December 2019, restricted cash amounted to PLN 70.2 million (PLN 165.8 million on 31 December 2018) and included cash received by JZR under an agreement with the State Treasury Minister to provide support which does not constitute public aid, designated for specific investment projects in the amount of PLN 31.5 million and funds accumulated on the VAT account (as part of the split payment mechanism) as well as bid deposits and good performance bonds. In the course of its business, the Group makes payments on the above accounts on an ongoing basis.

Table. The currency structure of the Group's cash and cash equivalents, after conversion to PLN, is as follows:

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Cash and cash equivalents are identical in the consolidated statement of cash flows and in the consolidated statement of financial position.

7.13. Equity

7.13.1. Share capital

Selected accounting policies

Common shares are classified as share capital. The share capital is recognized in the amount specified in the articles of association and registered in the court register of the Parent Company, taking into account an adjustment for hyperinflation of the part of the share capital which comes from before 31 December 1996.

The costs incurred directly in connection with the issue of new shares and options are presented in the equity as decrease, after tax, of proceeds from the issue.

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As at 31 December 2019, the share capital of JSW was PLN 587,057,980.00 and was divided into 117,411,596 common shares with no voting preference, fully paid up, with a par value of PLN 5.00 each. All the shares were issued and registered as at the end date of the reporting period. The total number of votes linked to all the shares issued by JSW is 117,411,596 votes at the Shareholder Meeting of JSW.

Table. The Parent Company's share capital as at 31 December 2019 consists of the following share series:

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Table. As at 31 December 2019 and as at the date of these consolidated financial statements, the structure of JSW's shareholders was as follows*:

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JSW does not have a detailed list of the shareholder structure as at 31 December 2019 or as at the date of these consolidated financial statements. In the reporting period, JSW did not receive any information about exceeding the percentage thresholds of the total number of votes specified in Article 69 Section 1 of the Act on Public Offerings and the Conditions for Floating Financial Instruments in an Organized Trading System and on Public Companies. The only shareholder of JSW which held a number of shares constituting 5% of the share capital and giving it the right to the same amount of votes at the Shareholder Meeting, as at 31 December 2019 and as at the date of preparation and publication of this report was the State Treasury.

7.13.2. Capital on revaluation of financial instruments

Table. Change in capital on revaluation of financial instruments

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The capital on revaluation of financial instruments includes the valuation of hedging instruments, which meet the hedge accounting criteria.

In the current reporting period, as a result of the measurement of transactions to hedge future cash flow, the amount of PLN 31.5 million was recognized in other comprehensive income, of which:

• PLN 15.2 million is the positive valuation driven by the change in fair value of the effective part of hedging instruments,
• PLN (6.1) million is the negative valuation driven by the change in fair value of the effective part of hedging instruments,
• PLN 1.2 million is the positive valuation driven by the change in fair value of the effective part of hedging instruments (loan),
• PLN (3.3) million is the value posted to the period’s profit or loss if the hedged position is realized (FX Forward),
• PLN 31.9 million is the value posted to the period’s profit or loss if the hedged position is realized (bonds, loan),
• PLN (7.4) million is the tax effect of the above items (deferred tax).

In the comparative reporting period, as a result of the measurement of transactions to hedge future cash flow, the amount of PLN 14.6 million was recognized in other comprehensive income, of which:

• PLN 5.8 million is the positive valuation driven by the change in fair value of the effective part of hedging instruments,
• PLN (14.9) million is the negative valuation driven by the change in fair value of the effective part of hedging instruments,
• PLN 5.8 million is the value posted to the period’s profit or loss if the hedged position is realized (FX Forward),
• PLN 21.3 million is the value posted to the period’s profit or loss if the hedged position is realized (bonds),
• PLN (3.4) million is the tax effect of the above items (deferred tax).

7.13.3. Retained earnings

As at 31 December 2019, retained earnings of the Jastrzębska Spółka Węglowa S.A. Group amounted to PLN 6,326.9 million (PLN 5,976.6 million as at 31 December 2018). This item includes, among others, the Parent Company’s supplementary capital. Supplementary capital was created from allowances from profit generated by JSW in previous reporting periods. Also, pursuant to the requirements of the Commercial Company Code, joint stock companies are required to create supplementary capital to cover losses. At least 8% of the profit generated in any financial year, as disclosed in the standalone financial statements of the Parent Company, is transferred to this category of capital until it reaches at least one-third of the entity’s share capital. The use of the supplementary capital is decided by the Shareholder Meeting of JSW, however, the portion of the supplementary capital representing one-third of the share capital may only be used to cover a loss posted in the financial statements and cannot be allocated to other purposes.

7.13.4. Dividends paid and proposed

Selected accounting policies

Dividend payments to shareholders are recognized as liability in the Group's consolidated financial statements in the period when they are approved by the shareholders.

The per share dividend ratio is calculated as the quotient of the dividend payable to the shareholders of the Parent Company and the number of ordinary shares outstanding as at the dividend record date.

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Distribution of the 2018 profit

In accordance with the dividend policy set forth in the JSW prospectus of 2011 (page 59): it is the intention of the JSW Management Board to recommend to the Shareholder Meeting to pay a dividend in the amount of at least 30% of the consolidated net profit for the financial year. The dividend policy depends on current activity results, cash flows, financial standing and capital requirements, general economic conditions as well as legal, tax, regulatory and contractual restrictions pertaining to dividend payments and on other factors which the JSW Management Board considers important, and will be subject to changes aimed at adapting it to the above factors. Considering the above, in 2019 the Parent Company’s Management Board proposed to the JSW Shareholder Meeting to distribute the dividend at less than 30% of the 2018 consolidated net profit.

On 3 July 2019, the Ordinary Shareholder Meeting of JSW made a decision on the distribution of the net profit for the financial year ended 31 December 2018 in the amount of PLN 1,418.6 million. As a result it designated the amount of PLN 200.8 million, or PLN 1.71 per share, as a dividend for shareholders. The Ordinary Shareholder Meeting of JSW set the record date at 27 August 2019 and the dividend payment date at 10 September 2019.

The Shareholder Meeting decided to designate the remainder of the 2018 financial result in the amount of PLN 1,162.9 million (after obligatorily covering the net loss incurred in Other comprehensive income on the measurement of the employee defined benefit plans for after the employment period in the amount of PLN 53.4 million and after covering the net loss incurred on the first application date of IFRS 9 in the amount of PLN 1.5 million) to supplementary capital (shown in the consolidated statement of changes in equity in retained earnings).

2019 profit distribution proposal

The Management Board of JSW shall not recommend the payment of dividends for 2019 due to the obligation included in the Finance Contracts to not recommend the dividend payment in the case any disbursement of FIZ in the period of 12 months preceding such recommendation.

In connection to the above, the JSW Management Board will propose to allocate the net profit earned by JSW in 2019 in the amount PLN 330.4 million – after covering the net loss incurred on the first application date of IFRS 16 Leases in the amount of PLN 37.6 million and covering the net loss incurred in Other comprehensive income in the amount of PLN 33.5 million – to supplementary capital.

7.14. Employee benefit liabilities

Selected accounting policies

In accordance with the provisions of labor law, the Group pays employee benefits on account of the following:

• post-employment benefits: retirement or disability severance pays, equalization disability benefits, write-offs for the Company Social Benefits Fund for old-age and disability pensioners, death benefits,
• other long-term employee benefits: jubilee awards,
• other employee benefits: unused holiday leaves.

Since 2015, the JSW Management Board has not taken an allowance for the Company Social Benefits Fund for old-age and disability pensioners and it terminated the payment of free coal allowance for old-age and disability pensioners.

In its consolidated statement of financial position, the Group recognizes the commitment to pay the above benefits in the amount equal to the present value of the liability as at the end of the reporting period, taking into account actuarial gains and losses.

The amount of the post-employment benefit liability in the form of defined benefit plans and other long-term employee benefits is calculated by an independent actuarial advisory company using the projected unit benefit method, until the expiration of this liability.

Employee benefit liabilities are calculated using an individual method, for each employee separately. The liability for an employee is calculated based on the anticipated amount of the respective benefit that the Group undertakes to pay out on the basis of internal regulations and pertinent provisions of law. The amount calculated is subject to actuarial discounting as at the final day of the reporting period and then decreased by actuarially discounted amounts of annual provision charges, as at the same day, which the Group makes to increase the provision of the respective employee. The actuarial discount means the product of the financial discount and probability of survival of the respective employee as a Group employee until the time of receipt of the benefit.

Defined benefit plans expose the Group to actuarial risk, which includes:

• interest rate risk – a decrease of interest on bonds will increase liabilities of the plan,
• longevity risk – the present value of liabilities of the defined benefit plan is calculated by reference to the best mortality estimates for plan members, both during and after the employment period. An increase in the expected life span of plan members will result in an increase of the value of liabilities,
• payroll risk – the present value of liabilities of the defined benefit plan is calculated by reference to the future remuneration of plan members. Accordingly, an increase in salaries of plan members will also increase the amount of liabilities.

The cost components of the post-employment defined benefits are classified as follows:

• costs of current employment – as operating expenses,
• net interest on the net liability derived from a changing value of provisions due to the passage of time – as financial costs,
• actuarial gains/losses resulting from changes in actuarial assumptions – as other comprehensive income.

On the other hand, with respect to other long-term employee benefits, current employment costs and actuarial gains/losses are recognized as operating expenses, while net interest as financial costs.

The provision for death benefits is calculated on the basis of historical data, amounts of death benefits paid over the 5 years preceding the balance sheet date, using the discount rate recommended by the actuary and the expected inflation rate and statistical number of years remaining to be worked by Group employees, constituting the difference between the average retirement age of the Group’s employees and the average age of the employees as at the final day of the reporting period.

Provisions for unused holiday leaves are calculated at the end of each quarter of the financial year. The provision is calculated as follows: number of days

Material estimates and assumptions

The balance sheet liability on account of future employee benefits is equal to the present value of the defined benefits liability. The present value of employee benefit liabilities depends on a number of factors that are determined using actuarial methods, with several assumptions. Any changes in these assumptions affect the carrying amount of employee benefit liabilities.

One of the primary assumptions for determining the amount of the liability is the interest rate. As at the end date of the reporting period, based on the opinion issued by an independent actuary, the proper discount rate is applied, which reflects the interest rate of T-bonds denominated in the currency of the future disbursement of benefits, with maturities close to the dates of payment of the pertinent liabilities. Assumptions regarding future mortality rates and probability of the employee becoming a disability benefit recipient were estimated based on the statistical data from Polish survival tables for men and women published by the Central Statistical Office, as at the measurement date. The main assumptions adopted for the valuation as at 31 December 2019 and the sensitivity of liabilities on account of future employee benefits to changes in such assumptions are disclosed in the following Note.

Employee benefit liabilities

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The amounts of employee benefit liabilities on account of retirement and disability severance pays, jubilee awards, equalization disability benefits and write-offs for the Company Social Benefits Fund for old-age and disability pensioners are recognized in the consolidated financial statements based on the actuarial valuation calculated by an independent actuarial consulting firm.

Table. Change in employee benefit liabilities

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Post-employment benefits include: retirement or disability severance pays, death benefits, equalization disability benefits, while other benefits include: jubilee awards and unused holiday leaves.

Employee benefit costs captured in the consolidated statement of profit or loss and other comprehensive income

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Table. Total amount of employee benefit costs captured in the consolidated statement of profit or loss and other comprehensive income:

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Key actuarial assumptions

Table. Key actuarial assumptions adopted for days ending the reporting periods*:

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Sensitivity analysis

A sensitivity analysis was carried out as at 31 December 2019 and 31 December 2018 to determine how the results of actuarial valuation are affected by changes in the discount rate assumed for measurement and how the levels of employee benefit liabilities are affected by the planned changes in the benefit measurement base within the range of -/+0.5 p.p.

Table. Sensitivity analysis as at 31 December 2019:

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Table. Sensitivity analysis as at 31 December 2018:

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In these analyses, the present value of the defined benefit liability was calculated using the forecast unit benefits method, which is the same method that was used to calculate the employee benefit liability in the consolidated statement of financial position.

Maturity of employee benefit liabilities

Table. Results of actuarial valuation of employee benefit liabilities as at 31 December 2019, by maturities:

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Table. Results of actuarial valuation of employee benefit liabilities as at 31 December 2018, by maturities:

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7.15. Provisions

Selected accounting policies

The Group recognizes provisions, in particular for:

Material estimates

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. The estimates and assumptions adopted to calculate the provisions are disclosed in the subsequent part of the Note.

Provisions

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Mine closures

Estimating the provision for mine closure costs

The main assumptions made when determining the cost of mine closure include the assumptions with regards to the life of a mine, anticipated inflation and long-term discounting rates and the expected nominal cost of closing the respective mines, which are determined by the Company. Any changes to these assumptions affect the carrying amount of the provision.

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 Parent Company operates. JSW estimates the size of the resources based on the geological data about the size, depth and shape of the deposits. Interpretation of this information requires complex judgments prepared by qualified specialists. 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 samples regarding the deposit's geological parameters. Any changes in coal resource estimations may affect the anticipated life of mines and thus, indirectly, also the carrying amount of property, plant and equipment, provisions for mine closure costs, deferred tax assets and depreciation expenses.

JSW’s mines have a total of approx. 7.038 billion tons of resources of coal, including approx. 1197 billion tons of recoverable coal reserves (based on mine resource appraisal reports as at 31 December 2019).

Table. Recoverable coal reserves in respective mines:

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Remeasurement of the mine closure provision as at 31 December 2019 entailed an increase in the provision by PLN 68.9 million, which was recognized in property, plant and equipment in line with IFRIC 1 (Note 7.1).

Mining damage

Due to the need to remove mining damage resulting from the operations of mines, the Parent Company has established a provision for mining damage. The value of work necessary to remove mining damage as at 31 December 2019 was PLN 333.4 million and was calculated as the estimated cost of repairs of facilities and structures and of compensations resulting from the consequences of mining operations.

The moment of recognition (creation) of a financial provision is when a cause and effect relationship is determined between the mining exploitation carried out by a mining enterprise and damage caused to a building or a property. The provision is presented as the present value of expenditures required to fulfill this obligation and estimated based on the knowledge of the mine’s technical function.

The Group expects that PLN 134.6 million of the provision will be used in 2020. The remaining amount of this provision will be used in the period from 2020 to 2027. The JSW mines classify the tasks based on their knowledge of the dates of repair of the individual damage (individual evaluation of tasks) or the agreed compensation payment dates. The tasks included in the non-current provision are systemically reclassified to the current part based on the technical and economic plan accepted for the year. The movement of individual provisions from non-current to current should occur quarterly or more frequently, i.e. when events or circumstances occur that require such movement of the provision.

Environmental fee and environmental protection

As at 31 December 2019, the Parent Company has a provision for environmental protection associated with biological reclamation of land in the total amount of PLN 83.1 million. Based on the administrative decisions received, current zoning plans and the applicable act on the protection of arable land, JSW is legally obligated to reclaim the storage yards after it discontinues its industrial activity.

The Group’s coke plants recognize a provision for the costs of remediation of contaminated sites in accordance with the law regulating the issues of soil, earth and groundwater pollution. The owner of the land where contamination of the earth's surface occurs is obliged to carry out remediation steps. As a result of the conducted tests, the existence of pollution with risk-causing substances was found in the areas of the Jadwiga, Przyjaźń and Radlin coking plant and in the areas of the former coking plants Dębieńsko and Makoszowy.
Installations holding an integrated permit have the option to postpone remediation until the end of the installation’s operation if the operator demonstrates that it does not pose a significant threat to human health or the condition of the environment. The provision applies to installations currently in operation. Since no installations are in operation in the areas of the closed coking plants, JSW KOKS will have to carry out remediation and will not be able to postpone the process. At present, further work is underway to prepare reports on the contamination status of the soil, earth and groundwater in these areas.
The provisions were estimated by taking into account primarily the costs of works related to the construction of sheet piling and reactive barriers, as well as the use of soil mixing and soil washing processes. The calculation also includes the necessary preparatory, documentation and acceptance works. Based on market data, an average cost estimate was prepared for the above-mentioned works per 1 hectare. The projected remediation costs of the hydrocarbons installations area in the former Makoszowy Coking Plant were estimated at PLN 9.0 million and of the hydrocarbons installations area in the Dębieńsko Coking Plant at PLN 10.9 million (as at 31 December 2018, the provision was PLN 19.9 million).

Property tax

An assessment or risk conducted by the Group's coke plants, associated with the classification of fixed assets for property tax purposes, based on the updated risk calculation and assessment in this respect resulted in reducing the provision amount to PLN 14.3 million as at 31 December 2019 (PLN 18.6 million as at 31 December 2018).

Other provisions

Other provisions include mainly:

• provision for the litigation against JSW filed by Towarzystwo Ubezpieczeń Ergo Hestia S.A. for payment of compensation for the loss in property resulting from endogenous fire that occurred underground in the Zofiówka Section of KWK Borynia-Zofiówka-Jastrzębie. The total provision amount is PLN 9.2 million,
• provision for the litigation against JSW filed by FAMUR S.A. for payment of compensation for the loss in property resulting from endogenous fire that occurred underground in the KWK Krupiński mine. The total provision is PLN 12.8 million.
• provision for compensation liabilities on account of non-contractual use of a real property (land located within a former protection zone) affected by installations owned by one of the companies. According to the Civil Code, the damages period is 10 years. Accordingly, the company recognizes a provision for liabilities on account of damages. In 2019, the legal standing of this land was subject to repeated analysis. Since this is mainly a forested, uninhabited area that is not used for agricultural production, it is estimated that the probability of claims being raised is low. As at 31 December 2019, the provision amounts to PLN 1.8 million (PLN 1.8 million as at 31 December 2018).
• provision created by JSW KOKS for the reclamation fund of the waste storage yard in the amount of PLN 4.6 million,
• provision for the costs of liquidation of the Dębieńsko Coking Plant in the amount of PLN 13.4 million,
• provision for penalties due to non-performance of an agreement.

7.16. Trade and other liabilities

Selected accounting policies

Trade and other liabilities

Initially liabilities are recognized at fair value, but this measurement corresponds to the required payment amount or the amount of the liability and, in later periods, financial liabilities are shown at amortized cost, using the effective interest rate method (for trade liabilities this corresponds to the required payment amount), while other non-financial liabilities at the required payment amount. Current liabilities comprise trade and other liabilities maturing within 12 months of the final day of the reporting period.

Non-current liabilities are initially recognized at fair value minus the transaction costs incurred, and in the next periods are shown at amortized cost, using the effective interest rate method.

The increase in liabilities due to lapse of time is recorded as financial costs.

Subsidies

Subsidies are not recognized until obtaining reasonable certainty that the Group will satisfy the required conditions and receives such subsidies.

Subsidies with the principal condition that the Group acquires or develops non-current assets, are recognized in the consolidated statement of financial position in the deferred income line item and charged to the financial result systematically throughout the anticipated useful life of such assets.

Other subsidies are systematically recognized in revenues, over a period required to compensate the costs which such subsidies were intended to compensate. Subsidies due as compensation of costs or losses already incurred or as a form of direct financial support for the Group without incurring future costs, are recognized in the financial result over the period in which they are due.

Material estimates

Estimation of interest on liabilities

Pursuant to Article 5 of the Polish Act on Payment Terms in Commercial Transactions of 8 March 2013, the Group calculates, not less frequently than as at the end of each quarter, hypothetical interest on liabilities for which the contractually defined payment term is longer than 30 days. The amount of calculated interest is then adjusted to the level of forecast amounts owed by the Parent Company to counterparties on account of the rights due to them. JSW charges 50% of the maximum amount of interest due to hypothetical counterparties to its financial result; this amount corresponds to the current level of the risk of counterparties raising a claim to pay interest for the term of payment extended over and above the one prescribed in the Act on payment terms in commercial transactions.

Hypothetical interest on liabilities accruing for 2019 amounted to PLN 30.0 million (in 2018: PLN 29.0 million). The remaining part of the expected risk of the Group being charged any hypothetical late interest is recognized as contingent liabilities.

Trade and other liabilities