Consolidated financial statements

1.2. Composition of the group

As at 31 December 2020, JSW held, directly or indirectly, shares in 20 related companies, including:
◦ 19 subsidiaries (direct or indirect),
◦ 1 associated company.

The subsidiaries are consolidated by the full method. 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.

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

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CHANGES IN EQUITY RELATIONS IN 2020

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.

When assessing the Group's ability to continue as a going concern, the JSW Management Board analyses the occurrence of uncertainties relating to events or circumstances that may cast doubt on the Group's ability to continue as a going concern. These events include significant changes in the market environment and the economic and financial system both in Poland and across the world, caused by the situation resulting from the dissemination of the SARS-CoV-2 coronavirus, which affect the Group’s operational and financial standing. These unusual circumstances have prompted the Group to analyze the situation and the degree of the its exposure to the effects of the pandemic on an ongoing basis as well as to take actions to reduce the risks stemming from the disruption of business continuity. Note 9.5 presents the measures taken to secure the risk of liquidity loss and the management plans to handle the situation caused by the SARS-CoV-2 coronavirus pandemic.

As at the date of approval of these consolidated financial statements, no material uncertainties or circumstances (including the events described in Note 2.3) have been identified as indicating a threat to business continuity in the foreseeable future.

All assets and liabilities are posted in the consolidated statement of financial position based on the assumption that the Group will be able to obtain economic benefits from the assets and fulfill its obligations in the ordinary course of business.

2.3.1. Nature of the event and preventive measures taken

The first news from China regarding the SARS-CoV-2 coronavirus causing COVID-19 appeared at the end of 2019. In the first months of 2020, the virus spread across the globe and its negative impact gained momentum. The COVID-19 pandemic, causing disruptions in the economic and administrative system in Poland and resulting in important restrictions of the economic activity, influenced the Group’s operations and results in 2020.

From the outbreak of the pandemic the Group has taken a number of preventive measures and measures strengthening the safety of employees aimed at preventing the spreading of the coronavirus and implemented a contingency plan providing for efforts ensuring operational continuity.

2.3.2. Impact of the pandemic on conducted operating activity

The preventive change in the organization of work and the high absenteeism had an impact on the coal production level. In addition, from 9 to 28 June 2020, the usual coal mining production cycle in the “Knurów-Szczygłowice” and “Budryk” mines was suspended. The above measures were taken in the interest of the employees’ health and safety, in connection with the recommendations of the Silesian Voivode, the Silesian State Voivodeship Sanitary Inspector and the Minister of State Assets.

JSW’s coal production in 2020 was presented compared to PTE forecasts:

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Compared to the forecasts resulting from the PTE developed for 2020, the annual production of coal in JSW was 1,154.1 thousand tons lower, while the most significant deviation from the plan was in the months when the Parent Company was affected by the pandemic the most, i.e. in March, April, May and June 2020. Up until the outbreak of the pandemic, the production was higher than planned.

The progress of investment projects carried out in 2020 resulted primarily from the general limitations driven by the impact of the pandemic on the operation of cooperating companies and their ability to provide services and materials. In 2020, the progress of investment projects was lower than planned for 2020 in the PTE.

JSW has been performing its commercial contracts for the supply of coal to external buyers and to own coking plants on an ongoing basis. Coke sales were also carried out in accordance with the agreed schedules.

A return to restrictions associated with the subsequent waves of COVID-19 may pose a great risk to the Group’s operations. Limitation of rail or marine transport may be a strong risk factor which may disrupt or prevent the Group’s sales activity.

The developments during the COVID-19 pandemic in 2020 affected the level of economic and industrial activity globally and consequently also defined the level of demand for steel and raw materials for its production, including metallurgical (coking) coal and coke, which are the Group’s main products.

JSW’S AND THE GROUP’S COMMERCIAL SITUATION

Limitations of production in steel industry concern idling blast furnaces, whereas the production in coking plants, for technical and technological reasons, cannot be stopped but only reduced to a limited extent. As a result, purchases of metallurgical (coking) coal are continued by business partners, even though in a limited scope. Market coking plants (not tied to steelworks) are to a greater extent exposed to reduction of orders – metallurgical concerns in the first place reduce coke purchases from the outside, protecting the production of their in-house coking plants. The Group’s customers include steelworks that do not have their own coking plants, and JSW KOKS’s coking plants are the core coke suppliers for them. This increases the Group’s security regarding continuity of supplies to such buyers.

The impact of the restrictions associated with the COVID-19 pandemic on the Group is decreasing and in Q4 2020 the situation improved compared to the prior periods in 2020. The efforts made by the sales services and the noticeable improvement of demand from the business partners brought an increase in coal sales to external customers by approximately 8.0% vs. Q3 2020, while coke sales fell by 4.6%. In Q4 2020, production of coke rose by 9.1% and the slight decrease in sales resulted from a much lower coke inventories available in Q4 2020.

Coke continued to be dispatched to overseas markets and the demand on the European market grew noticeably.

Sales of JSW products were conducted mainly on the basis of long-term contracts, in which recovery to full contractual amounts is taking place.

ANNOUNCEMENT OF FORCE MAJEURE IN JSW

On 2 April 2020, JSW announced the occurrence of force majeure in JSW and notified the Group’s business partners of its occurrence and the consequences for some of the liabilities stemming from the concluded commercial agreements. The foregoing decision was made in connection with the spread of the SARS-CoV-2 virus and the related restrictions. The force majeure was terminated on 9 July 2020. As a result of the actions taken by JSW to mitigate the consequences of the obstacle to the performance of its contractual obligations, it was possible to substantially minimize the adverse business effects for JSW related to the SARS-CoV-2 coronavirus pandemic. In the said period JSW took a number of preventive measures aimed at averting the dissemination of coronavirus and implemented a contingency plan to ensure operational continuity and performance of the existing contracts.

IMPACT OF THE PANDEMIC ON THE FINANCIAL STANDING AND VALUATION OF ASSETS AND LIABILITIES

Costs incurred

In 2020 the Group incurred significant labor costs related to employees contracting COVID-19, their quarantine, the execution of preventive measures involving the need of phasing in “downtime” and costs related to handling and organizing the overall process to ensure that the pandemic’s repercussions are as least onerous as possible. In connection with the preventive measures taken, the Group incurred costs associated with, among others, the purchase of tents, non-contact thermometers, biological suits, medical masks, gloves, disinfectants and disinfection equipment. The Group also supported state institutions in combating the SARS-CoV-2 coronavirus pandemic, making financial and in-kind donations in the amount of PLN 3.3 million.

The total costs incurred for combating the COVID-19 pandemic in the Group were PLN 93.2 million, of which PLN 90.3 was recognized in other costs, PLN 2.2 million in cost of products, materials and goods sold and the remaining part was charged to selling and distribution expenses and administrative expenses.

Revenues earned

In 2020, in connection with the COVID-19 pandemic, the Group took advantage of the aid solutions offered by the State under the Anti-Crisis Shield, including mainly the co-funding of employee salaries from the Guaranteed Employee Benefits Fund for the maximum period of 3 months in the amount of PLN 182.5 million (the amount was fully captured in the financial result in 2020 and presented in other revenues – Note 4.3). The Group also received financial support from the Polish Development Fund (“PFR”) under the Financial Shield for Large Companies in the form of a preferential and liquidity loan, which is described in greater detail in Note 6.1. On account of the preferential interest rate on PFR loans, the Parent Company achieved revenue of PLN 27.4 million, which is the difference between the fair value of the loans and the amount received (the amount recognized in other revenues – Note 4.3).

The PFR’s financial aid was granted to cover the losses suffered in 2020 in connection with the COVID-19 pandemic and therefore the above revenue on account of the preferential interest rate was fully captured in the 2020 financial result.

Total revenues associated with the COVID-19 pandemic, which were received by the Group under the Anti-Crisis Shield and captured in other revenues amount to PLN 210.3 million. 

Impairment of non-current assets

The details of the completed impairment tests are presented in Note 7.5.

Impact of the SARS-COV-2 coronavirus pandemic on the assessment of expected credit losses

The level of impairment losses recognized in 2020 on trade receivables was affected by the deterioration of ratings of some business partners and recognition of the impact of the SARS-CoV-2 coronavirus pandemic on the credit quality of clients.

To take into account the impact of the SARS-CoV-2 coronavirus on the credit quality of the customers from the coal and coke trade receivables group, the Parent Company has adjusted the probability of default on the basis of external ratings through including an additional bonus for the risk associated with the economic situation and forecasts for the future. The effect of including the impact of the coronavirus on the amount of the impairment allowance recognized as at 31 December 2020 for coal and coke trade receivables was PLN 1.1 million.

The impairment allowance recognized for coal and coke trade receivables in the amount of PLN 15.3 million (Note 7.11) was additionally affected by a significant downgrading of the rating of one of the business partners (in the group of business partners with contribution to sales revenues above 2.5%), which resulted in an increase of the impairment allowance by PLN 11.2 million.

The Group is currently analyzing the impact of the COVID-19 pandemic on the market situation and signals that may indicate a deteriorating financial standing of the business partners caused by the pandemic and, if necessary, will continue to update the estimates adopted to calculate the expected credit losses in next reporting periods.

The above assessment has been made to the best of the Group’s knowledge as at the date of preparation of these consolidated financial statements. The actual scale of the future effects of the SARS-CoV-2 coronavirus pandemic and their impact on the activity and the financial and operational standing and prospects of the Group is currently unknown and impossible to estimate and depends on factors which are beyond the Group’s control and are subject to dynamic changes.

Liquidity position

The COVID-19 pandemic caused a temporary reduction of production, which has direct impact on the Group’s current activity, including the level of earned revenues and incurred costs, and, as a result, the Group’s financial liquidity and debt level. Accordingly, the Group is taking efforts to mitigate the impact of the pandemic on the Group’s liquidity, by taking advantage of the solutions available on the market to support working capital management and is applying for the public financial aid available on the market and funding available as part of the anti-crisis shield (more in Note 9.5 Financial risk management).

2.3.3 SUPPORTING SOLUTIONS APPLIED AS PART OF THE ANTI-CRISIS SHIELD

Because of the entry into force, on 1 April 2020, of the Act of 31 March 2020 on amending the act on special solutions associated with preventing, counteracting and combating COVID-19, other contagious diseases and crisis situations they precipitate and certain other acts, introducing solutions aimed at, among other things, supporting undertakings in the crisis caused by the COVID-19 pandemic (“Anti-Crisis Shield”), the Group takes advantage of support solutions, including mainly:

1. Deferral of the payment deadline of the fee for perpetual usufruct of land from 31 March 2020 to 30 June 2020.
2. Property tax: JSW and Group companies took advantage of the possibility of deferring the payment of property tax. The deferred tax was paid on the agreed dates.
3. Deferral of the payment deadline for personal income tax.
4. Deferral of the payment deadline for social insurance and health insurance, Labor Fund, Guaranteed Employee Benefit Fund, Bridge Pension Fund and Solidarity Fund contributions after the applications to defer the payment dates of ZUS contributions filed by JSW, JSW KOKS and PBSz are accepted.
5. Assistance Program of the Polish Development Fund (“PFR”) JSW and JSW KOKS submitted applications to PFR under the Financial Shield for Large Companies for financial support in connection with combating the effects of the COVID-19 pandemic. In December 2020, the above companies signed loan agreements (for the liquidity and preferential loans) for the total amount of PLN 1,198.5 million. The loans were disbursed fully in December 2020. The loans may be used only to finance the current activity, including working capital. The loan agreements mentioned above are described in detail in Note 6.1.
6. The Group obtained co-funding to employee salaries from the Guaranteed Employee Benefit Fund in the amount of PLN 182.5 million.
   On 30 July 2020, JSW submitted an application to the Voivodeship Labor Office in Katowice for co-funding of employee salaries from the Guaranteed Employee Benefit Fund for the maximum period of 3 months in the amount of PLN 166.9 million. The application was accepted by the Voivodeship Labor Office on 4 August 2020. In August 2020, JSW’s bank account was credited with the first tranche in the amount of PLN 55.6 million and in September 2020 with the remaining PLN 111.3 million. On 30 October 2020, JSW settled the received support and repaid the amount of PLN 6.5 million. The total amount of the support received on this account is PLN 160.4 million.
   On 29 July 2020, JSW KOKS submitted an application to the Voivodeship Labor Office in Katowice for subsidy to employee salaries from the Guaranteed Employee Benefit Fund for the period of 1 month in the amount of PLN 5.7 million, and on 7 August 2020 the same application for a subsidy for the period of 2 months in the amount of PLN 11.5 million. In August and September, the Voivodeship Labor Office in Katowice transferred to JSW KOKS’ bank account cash in the amount of PLN 17.1 million. In August and October 2020, after the settlement JSW KOKS repaid the subsidy in the amount of PLN 0.3 million. The total amount of the received support is PLN 16.8 million.
   Also JSW SiG took advantage of the subsidy to employee salaries from the Guaranteed Employee Benefit Fund obtaining a subsidy in the amount of PLN 5.0 million and JSU obtained a subsidy in the amount of PLN 0.3 million.
7. In accordance with the Regulation issued by the Finance Minister on 27 March 2020, some subsidiaries have taken advantage of the prolongation of the deadline for submitting the statement on the amount of earned income (incurred loss) and payment of tax due by payers of corporate income tax for 2019 until 31 May 2020.

Other aid solutions, which the Group takes advantage of, are presented in Section 1.5. Management Board Report on the activity of Jastrzębska Spółka Węglowa S.A. and the Jastrzębska Spółka Węglowa S.A. Group for the financial year ended 31 December 2020.

2.4. 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 policy adopted by the Group is consistent with the policy applied in the previous financial year, except for the adoption of new and amended standards as described in Note 2.6.

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.

In Q1 2020, there were no significant changes of estimates and the estimation methodology that could affect the current period. On the other hand, in Q2-Q4 2020, changes related to the economic effects of COVID-19 were observed that affected the values of the estimates and the methodology of such estimates in the current period. These changes include an adjustment to expected credit losses related to a change in ratings of counterparties related to coal and coke receivables and the risk of debt collection from those counterparties in connection with the current economic situation and the future forecasts, which was described in Note 2.3. The overall effects and their scale are difficult to estimate at this moment. What will matter is the duration of the epidemic, its intensity and scope.

Items of the consolidated financial statements, which are exposed to material risk of significant adjustments to the carrying amount of assets and liabilities are described in the individual notes of these consolidated financial statements.

2.5. 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.

2.6. New standards, interpretations and their amendments

4.2. Cost of products, materials and goods sold

SELECTED ACCOUNTING POLICIES

COST OF PRODUCTS, MATERIALS AND GOODS SOLD

The total cost of products, materials and goods sold consists of:

• the cost of manufacturing products incurred in a given reporting period, adjusted for the change in products and adjusted for the value of performances and property, plant and equipment produced for own use and expensable mining pits,
• selling and distribution expenses and administrative expenses incurred in the reporting period, which are presented separately in the statement of profit or loss and other comprehensive income,
• cost of products and materials sold.

Manufacturing costs, which may be tied directly to revenues earned by the Group influence the financial result for the reporting period in which they occurred.

Manufacturing costs, which may be tied only indirectly to revenues or other benefits achieved by the Group affect the Group’s financial result to the extent they pertain to the reporting period, ensuring their commensurability to revenues or other economic benefits.

COST OF PRODUCTS, MATERIALS AND GOODS SOLD

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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

SELECTED ACCOUNTING POLICIES

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

Income tax captured in net result:

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Income tax captured in other comprehensive income

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Reconciliation of the theoretical tax calculated on pre-tax profit/(loss) and the statutory tax rate to the income tax liability shown in net result is as follows:

5.2. Deferred tax

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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Change in deferred tax is as follows:

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Change in deferred tax asset and liabilities before offsetting

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Settlement periods of deferred tax assets

The table below presents the periods in which deferred tax assets on tax loss may be settled in accordance with the Corporate Income Tax Act, resulting from the forecasts prepared by Group companies envisaging that taxable profits would be earned in the subsequent years:

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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.

Loans and borrowings taken as at 31 December 2020, by maturity:

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

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

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Average (nominal) 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.

LOAN AGREEMENTS FOR THE GOVERNMENT PROGRAM ENTITLED “THE POLISH DEVELOPMENT FUND’S FINANCIAL SHIELD FOR LARGE COMPANIES”

1. LIQUIDITY LOAN GRANTED TO JSW BY THE POLISH DEVELOPMENT FUND

On 9 December 2020, a liquidity loan agreement was signed between JSW, Polski Fundusz Rozwoju S.A. (“PFR”) and JZR as one of the guarantors. Under the agreement, a liquidity loan in the amount of PLN 1.0 billion will be granted to the Parent Company under the government program entitled “The Polish Development Fund’s Financial Shield for Large Companies”. The loan may be used only to finance the current activity, including working capital. The loan in the amount of PLN 1.0 billion was drawn down on 17 December 2020. The loan will be repaid quarterly, from June 2021 to 30 September 2024. The annual interest rate for the loan is fixed and in each year of financing it is equal to the margin stipulated for that year (1.25% in the 1st year, 1.75% in the 2nd and 3rd year, 2.75% in the 4th year from the date of signing the loan agreement).

2. PREFERENTIAL LOAN GRANTED TO JSW BY THE POLISH DEVELOPMENT FUND

On 23 December 2020, a loan agreement was signed between JSW, Polski Fundusz Rozwoju S.A. (“PFR”) and JZR and JSW KOKS as guarantors of the loan. Under the agreement, a preferential loan in the amount of PLN 173.6 million was granted to the Parent Company under the government program entitled “The Polish Development Fund’s Financial Shield for Large Companies”. The loan may be used only to finance the current activity, including working capital. The loan in the amount of PLN 173.6 million was drawn down on 30 December 2020. The loan will be repaid quarterly, from June 2021 to 30 September 2024. The annual interest rate for the loan is fixed and in each year of financing it is equal to the margin stipulated for that year (1.25% in the 1st year, 1.75% in the 2nd and 3rd year, 2.75% in the 4th year from the date of signing the loan agreement). The final maturity of the liabilities under the loan is 30 September 2024. At the same time, JSW may apply to PFR to cancel part of the loan in accordance with the terms and conditions set forth in the agreement and the Regulations of the “Polish Development Fund’s Financial Shield for Large Companies”, i.e. up to 75% of the “Actual COVID Loss”. The decision on the possible cancellation will be made by PFR.

On 15 December 2020, an intercreditor agreement was concluded between JSW, PFR and JSW’s financial creditors, who were parties to the Consortium financing contract of 9 April 2019. The signing of the contract was the main condition precedent allowing PFR to disburse the liquidity loan and the preferential loan.

The liquidity loan and preferential loan agreements provided for collateral in the form of sureties extended in favor of PFR by the following subsidiaries:

• JZR, up to the total amount of PLN 300.0 million (as at 31 December 2020, a surety in the amount of PLN 300.0 million has been established),
• JSW KOKS, up to the total amount of PLN 1,375.1 million (as at 31 December 2020, a surety in the amount of PLN 434.0 million has been established),

3. PREFERENTIAL LOAN GRANTED TO JSW KOKS BY THE POLISH DEVELOPMENT FUND

On 23 December 2020, a loan agreement was signed between JSW KOKS and PFR. Under the agreement, a preferential loan in the amount of PLN 24.9 million was granted to JSW KOKS under the government program entitled “The Polish Development Fund’s Financial Shield for Large Companies”. The loan will be repaid quarterly, from June 2021 to 30 September 2024. The annual interest rate for the loan is fixed and in each year of financing it is equal to the margin stipulated for that year (1.25% in the 1st year, 1.75% in the 2nd and 3rd year, 2.75% in the 4th year from the date of signing the loan agreement). The loan in the amount of PLN 24.9 million was drawn down in December 2020. JSW KOKS may apply to PFR to cancel part of the loan in accordance with the terms and conditions set forth in the agreement and the Regulations of the “Polish Development Fund’s Financial Shield for Large Companies”, i.e. up to 75% of the “Actual COVID Loss”. The decision on the possible cancellation will be made by PFR.

Financial support under the governmental program entitled “The Polish Development Fund’s Financial Shield for Large Companies” was granted on preferential terms. In accordance with the requirements of IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance” the loan received on preferential terms is recognized in the balance sheet at fair value. The Group has made such a measurement and presents the loan including the value of market interest. Because of the above, the actual value of debt is different from the liability as at the final date of the reporting period. On account of the preferential interest rate on PFR loans, the Parent Company achieved revenue of PLN 27.4 million, which it recognized fully in the 2020 financial result in other revenues (Note 4.3).

CONSORTIUM FINANCING CONTRACT

On 9 April 2019, a financing 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 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 obtained funds are to focus, among others, on financing the Group’s investments, other general corporate needs of the Group, and financing the JSW’s acquisition of a 95.01% stake in Przedsiębiorstwo Budowy Szybów S.A.

As at 30 September 2020, this requirement was not satisfied, however JSW asked the Consortium to set less restrictive benchmarks for selected covenants for the duration of the SARS-CoV-2 coronavirus pandemic.

On 9 December 2020, the Consortium agreed to suspend the sanctions resulting from a failure to meet the following covenants:

• the net financial debt/EBITDA ratio for Q4 2020 and Q1 2021,
• the obligation that the total share of EBITDA of the sureties (JSW KOKS and JZR) and JSW in the Group’s total EBITDA be no less than 85% in Q3 and Q4 2020 and in Q1 2021.

The funds invested in the FIZ asset portfolio are an important element of the “Cash Buffer”.

On 18 August 2020, JSW signed Annex no. 1 to the Financing Contract with the Consortium of financial institutions under which, among others, the required Cash Buffer was reduced to PLN 760.0 million (till 31 December 2021) and the allowed debt limits were increased. The Annex came into force upon satisfaction of the conditions precedent, i.e. on 12 October 2020. As at 31 December 2020 and in the periods subject to verification in accordance with the Financing Contract, as at the date of approval of these consolidated financial statements the condition regarding maintaining the Cash Buffer was satisfied.

FINANCING CONTRACT WITH THE EUROPEAN INVESTMENT BANK

On 9 April 2019, a financing 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 for JSW and JSW KOKS.

On 15 October 2020, the JSW Management Board adopted a resolution to terminate, by mutual consent of the parties, the financing contract with EIB. The agreement terminating the EIB contract was finally signed on 20 October 2020 and, as at the date of preparing these consolidated financial statements, the process of releasing the collateral established in favor of EIB for this funding is being finalized.

PREFERENTIAL LOAN AGREEMENT WITH NFOŚIGW

On 9 December 2019, a preferential loan was partly released in the amount of PLN 36.9 million by JSW KOKS from the National Fund for Environmental Protection and Water Management in Warsaw (NFOŚiGW”), 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 S.A.” related to the construction of a power unit in the Radlin Coking Plant. The loan was granted at an interest rate of 0%. Due to delays in project work caused by changes in the schedule of the General Contractor for the Investment, the transferred funds were not used. In accordance with §4 of the Regulation of the Minister of Development and Finance of 7 December 2017 on advance payments under programs financed with the participation of European funds (Journal of Laws of 2017, item 2367), the unused tranche of the loan in the amount of PLN 22.8 million was returned on 5 March 2020 and the previously calculated preferential interest rate on the loan was adjusted. On 9 June 2020, the loan tranche in the amount of PLN 22.8 million was drawn down again. By 7 September 2020, PLN 16.4 million was utilized to settle investment invoices and PLN 6.4 million was returned to the Ministry of Finance. The next loan tranche in the amount of PLN 22.8 million was received on 12 October 2020. JSW KOKS also received three disbursements in the form of a refund in the total amount of PLN 7.1 million in Q4 2020. As at 31 December 2020, the outstanding debt amount is PLN 60.4 million. In accordance with the requirements of IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance” the loan received on preferential terms is recognized in the balance sheet at fair value. JSW KOKS has made such a measurement and presents the loan including the value of market interest, while the difference is recognized as deferred income and will be written off to other operating income based on the depreciation period of the fixed assets financed by the loan. Because of the above, the actual value of debt is different from the liability as at the final date of the reporting period.

The loan will be amortized quarterly, starting from September 2022.

According to the agreement, the loan is secured by a PLN 167.5 million mortgage on real estate, an assignment of rights from the insurance policy and a blank promissory note with a promissory note declaration guaranteed by JSW..

LOAN AGREEMENT WITH NFOŚiGW

On 27 June 2014, JSW KOKS signed a preferential loan agreement with the National Fund for Environmental Protection and Water Management to implement the project entitled “Upgrade of the BTX plant with associated hydrocarbons facilities at the Radlin Coking Plant”. As at 31 December 2020, the outstanding debt amount is PLN 22.5 million.

NON-RENEWABLE LOAN AGREEMENT WITH BOŚ S.A.

On 14 May 2019, a non-renewable loan agreement was signed between 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.

As at the end of the reporting period, the loan has not been drawn down.

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.

MULTI-PURPOSE FACILITY AGREEMENT WITH BGK

On 23 January 2020, a multi-purpose overdraft facility agreement in the amount of PLN 20.0 million was concluded by and between PBSz and Bank Gospodarstwa Krajowego. In accordance with the signed agreement, PBSz may use the granted limit in the form of:

• a current account overdraft up to the full amount of the limit,
• bank guarantees cumulatively up to the maximum exposure amount of PLN 5.0 million.

The total exposure in respect of all products must not exceed the limit amount of PLN 20.0 million.

In accordance with the agreement, the multi-purpose facility is secured by:

1. a mortgage on real property in the amount of PLN 30.0 million and an assignment of rights under an insurance policy,
2. an assignment of receivables under the agreement.

At the end of the reporting period, PLN 0.5 million of the multi-purpose facility has been used for a bank guarantee.

MULTI-PURPOSE OVERDRAFT AGREEMENT WITH PKO BP S.A.

On 17 February 2020, a multi-purpose overdraft facility agreement of PLN 20.0 million was concluded by and between PBSz and PKO BP. In accordance with the signed agreement, PBSz may use the granted limit in the form of:

• a current account overdraft up to PLN 15.0 million,
• bank guarantees cumulatively up to the maximum exposure amount of PLN 5.0 million.

In accordance with the agreement, the multi-purpose overdraft facility is secured by:

1. a mortgage on real property in the amount of PLN 30.0 million and an assignment of rights under an insurance policy,
2. an assignment of receivables under the agreement.

PREFERENTIAL LOAN AGREEMENT WITH WFOŚiGW

On 12 August 2020, JSW KOKS signed a preferential loan agreement for PLN 34.0 million with the Voivodship Fund for Environmental Protection and Water Management (“WFOŚiGW”) in Katowice. The purpose of the agreement is to co-finance, through a preferential loan, the investment task entitled “Construction of a power unit in the Radlin Coking Plant”. The loan was granted within the framework of the horizontal aid for environmental protection program. The loan will be repaid quarterly, starting from December 2022. As at 31 December 2020, the outstanding balance on the loan is PLN 25.0 million.

Under to the agreement, the preferential loan is secured with a mortgage on real property in the amount of PLN 42.1 million and an assignment of rights under an insurance policy.

LOAN AGREEMENT WITH WFOŚiGW

On 22 May 2017, JSW started utilizing a loan of PLN 10.0 million from the Voivodship Fund for Environmental Protection and Water Management in Katowice under an agreement signed on 23 March 2017. The loan will be amortized quarterly, in installments of PLN 0.5 million, starting from September 2017. The loan bears interest at a floating interest rate. In connection with the partial repayment of the loan from the Voivodship Fund for Environmental Protection and Water Management in Katowice, on 20 March 2020 the lender agreed for a partial release of the loan repayment collateral in the form of an assignment of receivables from a term deposit account, which, after the change, amounts to PLN 5.1 million. On 23 December 2020, JSW signed an agreement with WFOŚiGW in Katowice in the matter of a partial forgiveness of the loan of PLN 3.0 million. In accordance with the agreement, part of the loan may be forgiven if it is allocated for the execution of an environmental investment resulting in an environmental effect up until 31 March 2022. By 30 September 2022, JSW must confirm the environmental effect by providing appropriate documents. As at 31 December 2020, JSW has not recognized any indebtedness on account of this loan.

OTHER COLLATERAL FOR LOANS AND BORROWINGS

(in addition to the collateral described above):

• mortgage on real properties in the amount of PLN 56.3 million,
• registered pledges on movable assets of PLN 56.3 million,
• assignments of receivables under bank agreements/accounts.

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. Lease liabilities

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

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Lease liabilities captured in the consolidated statement of financial position:

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In its measurement of lease liabilities, the Group includes variable lease payments associated with reference interest rates.

The subsidiary PBSz has at its disposal unused lease limits of PLN 16.2 million (PLN 2.2 million granted by PEKAO LEASING Sp. z o.o. with its registered office in Warsaw and PLN 14.0 million granted by ING Lease Polska Sp. z o.o.).

SALE AND LEASEBACK

In 2020, as part of the master agreement to grant a lease limit of PLN 34.5 million with PEKAO LEASING Sp. z o.o., JZR signed sale and leaseback agreements. The subject matter of the agreements included machinery and equipment and means of transportation with total worth of PLN 34.4 million. The purchase and sale transactions pertaining to those assets had no effect on the result due to the fact that the sale and leaseback were made at the same amount.

In connection with the entry into force, on 1 April 2020, of the Act of 31 March 2020 on amending the act on special solutions associated with preventing, counteracting and combating COVID-19, other infectious diseases and crisis situations they precipitate and certain other acts, the Group has taken advantage of the implemented support solutions permitting an extension of payment due dates for perpetual usufruct of land.

6.3. Reconciliation of debt

The table below depicts the movement in debt as at 31 December 2020:

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

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7.2. Goodwill

Selected accounting policies

Goodwill

Goodwill is measured at initial value less impairment losses, if any. Goodwill is not amortized but is subject to an annual impairment test, irrespective of whether there is any indication of impairment.

The 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 shall:

• 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.

The Group has recognized the operating segment as the lowest level in the Group, to which goodwill may be classified and at which goodwill is monitored for internal management purposes. Goodwill is recognized in a separate item of the consolidated statement of financial position.

Material estimates

Impairment

Goodwill is subject to an impairment test annually and on each date ending the reporting period, as at which the relevant indications exist. Impairment tests for goodwill are carried out in accordance with the accounting principles presented in Note 7.5.

Goodwill

In 2019, the Group carried out a purchase price allocation for the acquisition of shares in Przedsiębiorstwo Budowy Szybów S.A. (“PBSz”) in Tarnowskie Góry, which is discussed in detail in Note 10.3. 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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Given the accounting policy in effect in the Group, the JSW Management Board believes that, for impairment testing purposes, the goodwill obtained in the purchase price allocation process for PBSz shares should be allocated to the cash generating unit, i.e. PBSz, which is part of the Other segment.

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

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7.3. Intangible assets

Selected accounting policies

Intangible assets

The Group holds the following main items of intangible assets:

Material estimates

Impairment
As at every day ending the reporting period, the Group estimates whether objective indications have occurred that may point to impairment of the above intangible assets. Impairment tests for intangible assets are carried out in accordance with the accounting principles presented in Note 7.5.

Periods of useful life for intangible assets

The Group sets the estimated useful lives and consequently the amortization 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 conducted in Q4 2019 resulted in a decrease in amortization in 2020 vs. the previous year by PLN 0.4 million.

Intangible assets

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Amortization of intangible assets

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

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Other information concerning intangible assets

As at 31 December 2020, the net value of intangible assets items securing the repayment of liabilities is PLN 15.3 million (as at 31 December 2019: PLN 10.8 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 2020 and in 2019, there were no capitalized costs of external financing of intangible assets in the Group.

7.4. Right-of-use asset

Selected accounting policies

Right-of-use asset

At the commencement date of a lease, the Group recognizes a right-of-use asset and a lease liability. The rules for recognizing lease liabilities are presented in Note 6.

Under lease contracts, the Group uses 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 amortization and any accumulated impairment losses and adjusted for any revaluation of the lease liability other than unwinding of the discount.

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

Determination of the amortization rate

The Group sets amortization rates individually for each item right-of-use assets. 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. In the case of agreements concluded for an indefinite term, the amortization period is set based on the most likely useful life period of the asset, or the useful life of the Company is used as its amortization period, whichever better reflects the period, in which there is reasonable assurance that the Group will not exercise the termination option.
If the Group has reasonable assurance that it will exercise the purchase option, the right-of-use asset is amortized over the useful life of that asset.

Impairment

As at every day ending the reporting period, the Group estimates whether objective indications have occurred that may point to impairment of right-of-use assets. Impairment tests are carried out in accordance with the accounting principles presented in Note 7.5.

Right-of-use asset

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Costs of leases

Amounts related to leases that are presented in the statement of profit or loss and other comprehensive income:

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Other information on right-of-use assets

As at 31 December 2020, the net value of right-of-use assets securing the repayment of liabilities is PLN 53.1 million (as at 31 December 2019: PLN 51.0 million) and constitutes 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 2020 and in 2019, there were no capitalized costs of external financing of right-of-use asset in the Group.

7.5. Impairment of non-financial non-current assets

Selected accounting policies

Impairment of non-financial non-current assets

Goodwill is subject to annual tests to verify whether an impairment has occurred, and in each instance when indications of impairment arise. Other non-financial non-current assets (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 value 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”). 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. Information on the specification of the CGU, to which goodwill is allocated, is presented in Note 7.2.

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. Impairment losses pertaining to goodwill cannot 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.

Material estimates

As at each day ending the reporting period, the Group estimates whether objective indications have occurred that may point to impairment of non-financial non-current assets. When analyzing the occurrence of the indications, the Group reviews external as well as internal factors.

Impairment of non-current assets is analyzed by estimating the recoverable amounts of cash-generating units and is based on a number of assumptions, which are discussed further in this Note.

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.

In the current reporting period, the Group analyzed the signs of impairment of the carrying amount of assets under IAS 36 Impairment of Assets, in order to verify whether any further impairment of assets may have occurred.

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

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Coal segment

Coke segment

The Group believes that the impact of COVID-19 on the coke segment should not be long term. After a short drop in Q2 2020, in H2 2020 the production capacity utilization and sales volumes showed a steady upward trend. The ratio of coke to coal prices, both the one achieved in 2020 and forecast for 2021, stays at a level favorable for the Group. According to the current knowledge, the projected ratios of coke to coal prices point to the capacity to achieve positive financial results in 2021.

Accordingly, as at the final day of the reporting period, no grounds were found for carrying out an impairment test for JSW KOKS’ assets.

OTHER SEGMENTS

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 (“CGU”), i.e. PBSz.
The assumptions regarding, among others, the projected revenues, costs, capital expenditures, result from the financial forecasts prepared on the basis of the strategy of PBSz that the company intends to implement over the next 5 years, the discount rate at 5.99% (in real terms) (in 2019, the discount rate should be at 6.81%).

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 results of the tests performed as at 31 December 2020 and as at 31 December 2019 indicated no need to recognize impairment loss for the Group’s asset (goodwill).

7.6. Investment property

Selected accounting policies

Investment property

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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Rental income from and cost associated with investment property:

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7.7. Investments in the fiz asset portfolio

Selected accounting policies

Investments in the fiz asset portfolio

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 and receivables resulting from 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 and on realization of the FIZ portfolio 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”, “Fund”). 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.

The carrying amount of investments in the FIZ asset portfolio as at 31 December 2020 was PLN 612.0 million, while it was PLN 1,874.0 million as at 31 December 2019.

The funds invested in the FIZ asset portfolio are an important element of the “Cash Buffer”, i.e. the obligation resulting from financing contract signed with the Consortium. On 12 October 2020, Annex no. 1 to the Financing Contract with the Consortium entered into force. Under the annex, among others, the required Cash Buffer was reduced to PLN 760.0 million (till 31 December 2021) and the allowed debt limits were increased. As at 31 December 2020 and in the periods subject to verification in accordance with the Financing Contract, as at the date of approval of these consolidated financial statements the condition regarding maintaining the Cash Buffer was satisfied.

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.

On 28 May 2020, the Investor Meeting of the JSW Stabilization Closed-end Investment Fund adopted a resolution to amend the articles of association of FIZ. The changes affected mainly the investment policy, among others extension of the category of treasury instruments issuers, increase of the permitted maturity of money market bank debt instruments.

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. Bonds of the European Investment Bank may represent up to 20% of the Fund’s asset value.
4. Deposits in a single domestic bank, foreign bank or credit institution must not account for more than 20% of the Fund’s asset value.
5. 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.
6. 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.
7. 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).
8. Debt securities and money market instruments issued by Bank Gospodarstwa Krajowego will represent no more than 20% of the net asset value.

The following table presents the structure of the Fund’s net asset portfolio 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.

Considering the significant value of the Fund’s liabilities as at the end of the reporting period, the Group presented the Fund’s liabilities in the consolidated statement of financial position in a separate line item “FIZ liabilities”. The net value of the Fund’s assets constitutes the Parent Company’s actual exposure to the Investment Certificates issued by the Fund and, as at 31 December 2020, amounted to PLN 490.7 million.

In 2020, in exchange for the redemption of Investment Certificates of the JSW Stabilization FIZ, recognized in the consolidated financial statements as investments in the FIZ asset portfolio, the Group obtained proceeds in the amount of PLN 1,398.8 million. The redemption of certificates was preceded by the sale of financial assets invested in FIZ.

• In connection with resolution of the JSW Management Board adopted on 8 January 2020 and approval of the JSW Supervisory Board of 13 January 2020, the Investment Certificates of the JSW Stabilization Closed-end Investment Fund (FIZ) were redeemed in the amount of PLN 400.0 million for series A and PLN 300.0 million for series B. On 26 February 2020, the Parent Company’s bank account was credited with the funds in the amount of PLN 300.7 million and on 3 April 2020 the amount of PLN 391.7 million.
• In connection with resolution of the JSW Management Board adopted on 29 April 2020 and approval of the JSW Supervisory Board from the same date, the Investment Certificates of the JSW Stabilization Closed-end Investment Fund (FIZ) were redeemed in the total estimated amount of PLN 400.0 million for series A and series B. On 19 June 2020, the Parent Company’s bank account was credited with the funds in the amount of PLN 200.9 million and on 3 July 2020 the amount of PLN 100.8 million. On 3 September 2020, the amount of PLN 102.1 million was credited to the Parent Company’s bank account.
• In connection with resolution of the JSW Management Board adopted on 8 October 2020 and approval of the JSW Supervisory Board from the same date, the Investment Certificates of the JSW Stabilization Closed-end Investment Fund (FIZ) were redeemed in the total estimated amount of PLN 300.0 million for series A. As a result of the above decisions, on 4 and 26 November 2020, the account of the Parent Company was credited with cash in the total amount of PLN 302.6 million.

The monies obtained from the redemption of the FIZ assets are used for the Group’s current operations as well as for its investment activity. The Group strives to keep the Fund and rebuild its value when the market conditions are favorable.

The funds invested in the FIZ asset portfolio are an important element of the “Cash Buffer”, i.e. the obligation resulting from financing contract signed with the Consortium.

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. The disclosures of the assessment of credit quality on the basis of external ratings for cash and deposits constituting the fund’s assets are presented in Note 9.5.1(d).

The table does not include the Fund’s liabilities and therefore it does not reconcile with the table presenting the structure of the Fund’s net assets at the end of the reporting period.

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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

Other non-current financial assets

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 Parent 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 mine. The charge for the Mine Closure Fund in 2020 was set in the amount of 3% of the depreciation charge on the property, plant and equipment of mines set in accordance with income tax laws.

Cash and cash equivalents of the Mine Closure Fund, due to restrictions on their disposal, are presented in the consolidated 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 into account the allowance for expected credit losses.

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.

Cash and cash equivalents of the Mine Closure Fund were classified as Stage 1 of the impairment classification and the amount of the impairment allowance is insignificant.

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

7.9. Inventories

Selected accounting policies

Inventories

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).

Finished products inventories include mainly the inventory of coal and coke produced in the Group.

The Group recognizes proprietary rights from energy efficiency certificates as goods. White certificates are certificates confirming the saving of a specific quantum of energy as a result of completing investments to enhance energy efficiency. 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. 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.

The consumption of finished products is determined using the weighted average method. The value of consumption of materials and goods is determined using the "first in first out" (FIFO) method.

Material estimates

Impairment loss for inventories

If any events occur that cause 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.

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. The prices of metallurgical (coking) coal are set quarterly, based on the quotations of Australian coal, which are the benchmark for global prices, while steam coal prices are set annually based on the lowest current contractual price.

Impairment losses on inventories of finished products, both recognition and reversal, is captured as cost of the period when the charge took place.

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 2020 included, among others, inventories of 2,180.0 thousand tons of coal produced by the Group worth PLN 629.9 million and inventories of 183.1 thousand tons of coke produced by the Group worth PLN 122.4 million (as at 31 December 2019: 1,789.4 thousand tons of coal worth PLN 587.9 million and 485.8 thousand tons of coke worth PLN 378.3 million).

Impairment losses for inventories

The table below presents 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 2020 refer to finished products and materials and merchandise.

7.10. Other current financial assets

Selected accounting policies

Other current financial assets

In other current financial assets the Group recognizes mainly bank term deposits. 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:

      (a) the Group’s intention is to maintain these financial assets to receive the contracted cash flow, and

      (b) 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.

Other current financial assets are presented in the following table:

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As at 31 December 2020 and 31 December 2019, bank term deposits were classified 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. The disclosures of the assessment of credit quality on the basis of external ratings and information on credit risk concentration are presented in Note 9.5.1(d).

7.11. Trade and other receivables

Selected accounting policies

Trade and other receivables

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 measured 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

As at the date ending the reporting period, the Group 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 was used and the impairment loss was measured 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 similarity 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 basisof 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 net trade and other receivables is not significantly different from their carrying amount.

The Group is exposed to credit risk resulting from trade receivables. Credit risk management (including credit risk concentration) is presented in Note 9.5.1.

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

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Impairment losses for trade receivables

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

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

The level of impairment losses recognized in 2020 on trade receivables was affected by the deterioration of ratings of some business partners and recognition of the impact of the SARS-CoV-2 coronavirus pandemic on the credit quality of clients.

To take into account the impact of the SARS-CoV-2 coronavirus pandemic on the credit quality of the customers from the coal and coke trade receivables group, the Group has adjusted the probability of default on the basis of external ratings through including an additional bonus for the risk associated with the economic situation and forecasts for the future. The effect of including the impact of the coronavirus on the amount of the impairment allowance recognized as at 31 December 2020 for coal and coke trade receivables was PLN 1.1 million.

The amount of the PLN 32.0 million allowance for trade receivables recognized in 2020 was affected mainly by the recognition of an allowance of PLN 14.8 million for coal and coke receivables (including PLN 11.2 million due to a rating downgrade of one of the business partners).

The structure of trade receivables and impairment losses, broken down by trade receivables grouped by similarity of the credit risk characteristics is presented in the table below:

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The table below presents the age structure of trade receivables as at 31 December 2020:

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As at 31 December 2020, PLN 84.5 million of trade receivables was past due. That figure included PLN 27.4 million of receivables that were not found impaired and an impairment loss of PLN 15.4 million was recognized for them in 2020, while PLN 57.1 million were found impaired and an impairment loss of PLN 6.4 million in respect of them was recognized in 2020.

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

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7.12. Cash and cash equivalents

Selected accounting policies

Cash and cash equivalents

Cash and cash equivalents comprise cash in hand, call deposits in banks, other short-term investments with high liquidity and original maturity 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 contract 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 impairment losses calculated in accordance with the expected loss model.

Material estimates

Impairment losses for cash and cash equivalents

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.

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The value of restricted cash as at 31 December 2020 was PLN 60.3 million (as at 31 December 2019: PLN 70.2 million) and included funds deposited in the VAT account (under the split-payment arrangement), bid bonds and performance bonds and funds 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 course of its business, the Group makes payments on the above accounts on an ongoing basis.

As at 31 December 2020 and 31 December 2019, cash and cash equivalents were classified 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. This is why no movements in this impairment allowance were presented in 2020 and 2019. The disclosures of the assessment of credit quality on the basis of external ratings and information on credit risk concentration are presented in Note 9.5.1(d).

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

Share capital

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 2020, 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.

The Parent Company's share capital as at 31 December 2020 consists of the following share series:

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As at 31 December 2020 and as at the date of these consolidated financial statements, the structure of JSW's shareholders was as follows*:

* According to Current Report No. 8/2021 of 19 February 2021, the only shareholder with at least 5% of votes at the last JSW Shareholder Meeting held on 19 February 2021 was the State Treasury with 64,387,333 votes or a 54.84% share of all the votes.

JSW does not have a detailed list of the shareholder structure as at 31 December 2020 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 2020 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

Selected accounting policies

Capital on revaluation of financial instruments

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

Change in capital on revaluation of financial instruments

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In the current reporting period, as a result of the measurement of transactions to hedge future cash flow, the amount of PLN 22.1 million was recognized in other comprehensive income, of which:

• PLN 0.7 million is the positive valuation driven by the change in fair value of the effective part of hedging instruments,
• PLN (29.4) million is the negative valuation driven by the change in fair value of the effective part of hedging instruments,
• PLN 2.5 million is the positive valuation driven by the change in fair value of the effective part of hedging instruments (loan),
• PLN 53.4 million is the value posted to the period’s profit or loss if the hedged position is realized (bonds, loans and forward contracts),
• PLN (5.1) 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 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).

7.13.3. Retained earnings

As at 31 December 2020, retained earnings of the Jastrzębska Spółka Węglowa S.A. Group amounted to PLN 4,761.9 million (PLN 6,326.9 million as at 31 December 2019). 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. Non-controlling interest

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

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Change in the balance of non-controlling interest

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

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7.13.5. Dividends paid and proposed

Selected accounting policies

Dividends

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 2019 profit

On 30 June 2020, the Ordinary Shareholder Meeting of JSW made a decision on the distribution of net profit for the financial year ended 31 December 2019 in the amount of PLN 330.4 million. With this distribution, it made an allocation to cover the net loss incurred on the first application date of IFRS 16 Leases in the amount of PLN 37.6 million and to cover the net loss incurred in Other comprehensive income in the amount of PLN 33.5 million. The Shareholder Meeting decided to allocate the remaining portion of the 2019 financial result in the amount of PLN 259.3 million, to supplementary capital.

Proposal to cover the loss for 2020

In 2020, the Parent Company incurred a net loss of PLN 1,541.1 million, which the JSW Management Board will propose to cover with supplementary capital.

In accordance with the agreements on the liquidity loan and the preferential loan under the governmental program entitled “The Polish Development Fund’s Financial Shield for Large Companies” signed by JSW in December 2020, and described in more detail in Note 6.1, JSW’s Management Board is obliged, inter alia, not to recommend to the Shareholder Meeting to adopt resolutions on distribution of dividend, interim dividend, or any other remuneration, including remuneration on the account of retired shares or another amount on or in respect of its share capital.

7.14. Employee benefit liabilities

Selected accounting policies

Employee benefit liabilities

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 (retirement and disability severance awards, adjustment disability benefits, write-offs for the Company Social Benefit Fund for old-age and disability pensioners) and jubilee awards 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 of unused holiday leave at the end of the previous financial year and previous years plus the number of holiday leave days to which employees are entitled on the end date of the reporting period, less the number of days of holiday leave used from 1 January to the end of the reporting period, multiplied by the daily holiday rate with obligatory charges. The calculated amount of the provision for unused holiday leave is recognized after analysis, in the amount approved by the Management Board.

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 2020 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.

Change in employee benefit liabilities

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* Effects of changes in economic assumptions include discounting changes and projected increases in benefit bases. Effects of changes in demographic assumptions include changes in the assumed employee turnover, mortality rates and the number of employees leaving the company to collect disability benefits. Other changes include not only changes in other assumptions but also all updates of valuation data.

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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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

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 2020 and 31 December 2019 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.

Sensitivity analysis as at 31 December 2020:

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Sensitivity analysis as at 31 December 2019:

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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

Results of actuarial valuation of employee benefit liabilities as at 31 December 2020, by maturities:

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

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7.15. Provisions

Selected accounting policies

Provisions

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. 7,073.3 million tons of resources of coal, including approx. 1,233.4 million tons of recoverable coal reserves (based on mine resource appraisal reports as at 31 December 2020).

Recoverable coal reserves in respective mines:

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As at the final date of the reporting period, JSW remeasured the provision for mine closure costs. The provision was measured by using the projected inflation rate and the updated value of expected liquidation costs of the individual mines. Remeasurement of the provision as at 31 December 2020 entailed an increase in the provision by PLN 107.6 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 2020 was PLN 363.3 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 144.0 million of the provision will be used in 2021. The remaining amount of this provision will be used in the period from 2022 to 2028. 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 PROTECTION

As at 31 December 2020, the Parent Company recognized a provision for environmental protection associated with biological reclamation of land in the total amount of PLN 84.2 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 2019, 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 9.7 million as at 31 December 2020 (PLN 14.3 million as at 31 December 2019).
OTHER PROVISIONS
Other provisions include mainly:

• the provision for the liquidation costs of the Dębieńsko Coking Plant in the amount of PLN 18.6 million PLN 13.4 million as at 31 December 2019),
• 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 Krupiński Mine. The total amount of this provision is PLN 8.7 million (PLN 12.8 million as at 31 December 2019),
• provision created by JSW KOKS for the reclamation fund of the waste storage yard in the amount of PLN 4.6 million (PLN 4.6 million as at 31 December 2019),
• 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 2020, the provision amounts to PLN 1.8 million (PLN 1.8 million as at 31 December 2019),
• provision for the claim of Agencja Rozwoju Przemysłu S.A. and Towarzystwo Finansowe „Silesia” Sp. z o.o. resulting from the share purchase agreement pertaining to Wałbrzyskie Zakłady Koksownicze Victoria S.A. in connection with a failure to satisfy the commitments under the contract (adjustment of the sales price based on the accumulated EBITDA of WZK Victoria for years 2016-2019) in the amount of PLN 1.8 million,
• provision for the litigation against JSW filed by FAMUR S.A. for payment of a due amount. The total provision amount is PLN 1.1 million,
• provision for penalties for failing to adhere to a contract (including PLN 19.1 million of provisions for lawsuits brought by natural persons against the Parent Company).

7.16. Trade and other liabilities

Selected accounting policies

Trade and other liabilities

Current liabilities comprise trade and other liabilities maturing within 12 months of the final day of the reporting period. Initially liabilities are recognized at fair value, but this measurement, because of the short-term nature of the liabilities, corresponds to the nominal value 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.

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 assurance 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.
Subsidies also include benefits arising from loans received from state institutions, if the interest rate is below market rates. Liabilities on account of such loans are initially recognized at fair value and the difference between such initial value of the loan and the amount received constitutes a subsidy from the state. The subsidy is initially captured in deferred income and recognized in the financial result in correspondence with the costs that such a subsidy is intended to compensate.
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 2020 amounted to PLN 38.6 million (in 2019: PLN 30.0 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

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The Group has received subsidies under which it is obligated to use the funds received solely and exclusively for the performance of tasks specified in the relevant subsidy agreements and to meet the conditions set forth in the agreements. In 2020 and 2019, those conditions were satisfied. The subsidy amount recognized in profit or loss is specified in Note 4.3.
In connection with the entry into force, on 1 April 2020, of the Act of 31 March 2020 on amending the act on special solutions associated with preventing, counteracting and combating COVID-19, other infectious diseases and crisis situations they precipitate and certain other acts, the Group has taken advantage of the implemented support solutions permitting an extension of payment due dates for civil and public law liabilities.

8.1. Net cash from operating activities

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Reconciliation of changes in employee benefit liabilities in the consolidated statement of cash flows: