Consolidated financial statements

1.2. Composition of the group

As at 31 December 2021, JSW held, directly or indirectly, shares in 19 related companies, including:

• 18 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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2.2. Going concern assumption

These consolidated financial statements have been prepared based on the assumption that the Company would continue as a going concern in an unchanged form and scope 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 losing liquidity.

Financial projections for the next 12 months assume repayment of incurred debt liabilities in accordance with the repayment schedules and execution of the planned strategic projects.

The JSW Management Board also assumes that in periods of increased demand, the Group will continue to use funds from the Physical Cash Pooling ("PCP") system in place in the Group. In 2021 the main contributor to the PCP was the subsidiary JSW KOKS. JSW's liquidity forecast and the forecast that takes into account the utilization of the PCP indicates that the Company will be able to pay its liabilities on time. The Group does not anticipate any breach of financial covenants under the financing agreement over the coming months.

An analysis of the Group’s financial standing as at the last day of the reporting period and for the next 12 months points to the improvement of financial results, mainly as a result of the rising prices in the coking coal and steel market since the end of Q2 2021 and persisting in 2022.

Coking coal prices remained low until April 2021. The average price of TSI Premium Hard Coking Coal for Q1 2021 was USD/t 127.57 FOB Australia. The process of demand rising clearing started at the end of April 2021, accompanied by supply-side limitations which were the result of the steady growth in coking coal prices, which led to rising prices in Q2, Q3 and Q4 2021: 137.46 USD/t, 263.66 USD/t and 368.67 USD/t FOB Australia, respectively. The demand for coking coal was high not only from China but also from European and South American countries. The demand recovery for coking coal excluding China has narrowed the spread between Asian and Atlantic coking coal prices.

Coking coal prices were also strengthened by continuing supply constraints in China, Australia, Canada, Russia, Columbia and Mongolia, i.e. the main producers and suppliers of this raw material. In view of the poor availability of supplies on the overseas market, subsequent transactions on the spot market were concluded at higher prices which, in turn, affected the levels of global indices. The overseas coking coal market began Q4 2021 with prices at a record-breaking high level. The prices in October and November 2021 were historically high for Australian coking coal, too - LV premium coal prices oscillated around 400 USD/t FOB Australia. At the end of December 2021, the TSI Premium Hard Coking Coal index stood at USD/t 357.25 FOB Australia.

On the coke market, prices of and demand for coke in Europe are high. European coke plants work at full capacity. The prices of blast furnace coke in the European market stood on average in 2021 at USD 460.0 per ton on a CFR Nothern Europe Port basis, representing an increase of 92.6% compared to USD 238.8 per ton on CFR Nothern Europe Port basis in 2020. The prices of Chinese coke went up 64.3% up to the average price of 480.6 USD/t. In December 2021, the price of blast furnace coke on the European market were 630 USD/t CFR Port Northern Europe and the price of Chinese coke at the end of December 2021 was 474 USD/t FOB.

In the near term, the Group’s operations will be significantly affected by the military action taken by the Russian Federation on the territory of Ukraine. Metallurgical production of both these countries is significant and therefore this situation will affect the supply of metallurgical products in the European market, due to trade consequences and sanctions imposed by the European Union on Russia, through disruption in transportation and possible limitation of supply (as a result of war damage). The potential related risks are described in Section 4.2 of the 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 2021.

The outbreak of the war in Ukraine led to a rapid increase in the price of Australian coking coal, which exceeded historic highs by 200 USD/t. The prices of hard coals exceeded USD 660/t (as of 8 March 2022) and the prices of other coal types also sharply increased: PCI above 650 USD/t and semi-soft to 575 USD/t. In addition to the situation in Ukraine and sanctions imposed on Russia, this rapid price growth was driven also adverse weather in Australia, where floods destroyed transportation infrastructure on the east coast, paralysing the export of raw materials. The development of the market situation is exposed to significant risk; while the situation in Australia will normalize in the long term, it is difficult to predict the long-term impact of the war in Ukraine on the European and global markets.

Prices of blast furnace coke have been increasing following the outbreak of war in Ukraine, but the appreciation is less pronounced than for Australian coking coal. The price of Chinese coke CSR 64/62 is 658 USD/t (as of 8 March 2022). Coke prices on the European market are published on a monthly basis and have not been presented after the outbreak of war in Ukraine.

So far the armed conflict in Ukraine has not triggered greater commercial and financial risk in the Group in terms of business partners paying their liabilities. The Group does not collaborate with entities registered in Ukraine or Russia, nor does it make direct deliveries to the above destinations.

The Group is a strategic supplier to steel companies in Central Europe, maintains regular contact with its buyers and meets its contractual obligations fully. Joint monitoring of the market allows for quick response to threats in a volatile market environment.

The lack of supplies of coal, coke and hydrocarbons from Russia and Ukraine will contribute to a higher demand for the Group’s products and high prices will improve the Group’s financial performance. Since the situation is uncertain, it is impossible to predict the duration of such high prices; analysts have ceased to publish forecasts. The crisis in the market for energy raw materials in Europe may lead to changes in climate policy, which may positively influence the Group’s operating conditions in the medium term.

Even though the armed conflict does not affect adversely the Group’s current sales activity, we cannot rule out the possibility that if the conflict escalates, or if economic sanctions are imposed, that might affect the Group’s future operating and investment activity. The possible disruptions are as follows:

• severed or disrupted supply chains that may lead to limitations in the availability of raw materials from Ukraine and Russia that steel companies and coke plants need,

• increase in energy costs as a result of limitations in the supply of gas and coal from Russia,

• disruptions to logistics in ports due to higher overseas imports of raw materials, i.a. iron ore.

Taking account of the above, as at the date of approval of these consolidated financial statements, in spite of the existing market hazards, no material uncertainties or circumstances have been identified (including the events described in Note 9.5) that would indicate a threat to business continuity in the foreseeable future. In view of the above, when considering the factors relating to the current and expected financial position of the Group and the resulting realistic financial projections, the Management Board considers the going concern assumption to be justified.

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 course of ordinary activity.

2.2.1. IMPACT OF CLIMATE CHANGES (RISKS) ON OPERATIONS AND FINANCIAL STANDING

The production processes run by the Group cause a significant consumption of energy and emissions of pollutants into air and water. The main source of greenhouse gas emissions from the Group’s operations is methane, which is removed for safety reasons from mining pits (approx. 74% of the carbon footprint). As a producer of direct and indirect greenhouse gas emissions, the Group is committed to the implementation of the objectives of the Paris Agreement and the European Green Deal, involving transition of the industry towards a climate-neutral economy by 2050. The impact of climate change on the Group’s activity is presented in Sections 9.11. and 9.12. of the 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 2021.

The Group’s strategic objectives for years 2022-2030 include primarily: reducing the carbon footprint of the Group’s organization by 30% by 2030 in relation to 2018 (Scope 1 and 2) and aiming to achieve climate neutrality by 2050 and minimizing environmental impacts in the remaining areas.

The key to the reduction of methane emissions is capture and economic utilization of methane for energy production. In 2021, JSW continued the capital expenditure program pursued since 2018 named Commercial Utilization of Methane (GWM), which aims to install new co-generation engines, increase the use of methane and own production of energy (capital expenditures incurred by JSW in 2021: PLN 82.2 million). The Group also continued the construction of the power unit at JSW KOKS fired by coke oven gas to produce electricity and heat (in 2021 JSW KOKS incurred capital expenditures of PLN 61.9 million). The Group additionally conducts research and development work to transition to low-emission economy (costs incurred in 2021: PLN 13.5 million).

All the investments planned by 2030 to reduce emissions and protect the environment, set forth in the JSW S.A. Strategy including the Group’s Subsidiaries for 2022-2030 (“Strategy”) involve capital expenditures of over PLN 4 billion, of which approximately 71% are for activities related to air protection, including reduction of the carbon footprint. In the efforts to achieve climate neutrality by 2050, the planned directions of development include continuation of reduction of methane emissions, optimization of energy production and consumption, participation in research on the development of new technologies - ventilation air methane capture (VAM), carbon dioxide capture (CCUS) and hydrogen production.

The new strategy, which incorporates new directions and projects supporting the efforts to increase the Group’s shareholder value, including the Group’s environmental priorities counteracting climate change, has been identified as an internal indicator under IAS 36 pointing to the potential impairment of an asset or reversal of impairment loss allowances recognized in previous periods. Detailed information on the impairment tests that we have conducted are presented in Note 7.5 of this report.

2.3. Accounting policy and significant accounting estimates and judgments

Material accounting principles and material figures based on judgments and estimates have been presented as an element of the various explanatory notes to the consolidated financial statements.

The accounting 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 2.5. and changes to the rules of presentation presented 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.

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.

2.4. Principles of consolidation and recognition of investments in associates

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

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

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

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

2.5. New standards, interpretations and their amendments

2.6. Change in presentation

PRESENTATION CHANGE

In the consolidated financial statements for the financial year ended 31 December 2021, the Group decided to change the presentation, in the consolidated statement of profit or loss and other comprehensive income, of the amount resulting from the realization of hedge instruments subject to hedge accounting, reclassified from other comprehensive income to profit or loss. As of 1 January 2021, the Group recognizes the reclassification of the effective result in connection with realization of the hedged position from other comprehensive income to profit or loss, as an adjustment to the hedged position.

As at 31 December 2021, the Group has designated FX forward transactions and an USD-denominated loans for hedge accounting. These instruments hedge the cash flows from coke sales by the Parent Company (as at 31 December 2020, the hedging transactions designated for hedge accounting hedged revenues from the sales of coke and hydrocarbons). According to the accepted change in presentation, upon realization of the hedged position, the effective part of the hedge (i.e. the part of the change in fair value of the hedging instrument that is considered effective and is recognized in other comprehensive income) is reclassified from to profit or loss of the period as an adjustment of sales revenues (while before the change it adjusted other net gains/(losses) in the case of FX forward transactions and financial costs in the case of the USD-denominated loans). The presentation change offers a more correct reflection of the economic content of the transaction and its impact on the financial amounts.

The Group has restated the comparative data presented in the consolidated statement of profit or loss and other comprehensive income. The restatement is shown in the table below.

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4.2. Cost of products, materials and goods sold

COST OF PRODUCTS, MATERIALS AND GOODS SOLD

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

• the cost of manufacturing goods sold 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.

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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)

* Data restated in connection with the change of presentation described in more detail in Note 2.6.

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4.6. Financial income and costs

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4.7. Earnings/(loss) per share

SELECTED ACCOUNTING POLICIES

EARNINGS/(LOSS) PER SHARE

Basic earnings/(loss) per share

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

Diluted earnings/(loss) per share

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

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5.1. Income tax

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 profit/(loss) before tax 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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6.1. Loans and borrowings

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Loans and borrowings taken out as at 31 December 2021, by maturity:

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Loans and borrowings taken out as at 31 December 2020, 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.

Major liabilities on account of loans and borrowings, converted into PLN, are presented in the table below.

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* 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 PLN 974.5 million and is different by PLN 42.7 million from the liability as at the final date of the reporting period (of which revenue from preferential interest in the amount of PLN 38.7 million was recognized in other revenues (NOte 4.3.))

** Possibility of extending the repayment term by up to two years.

*** As at 31 December 2021, the outstanding debt amount is PLN 93.3 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. Because of the above, the actual value of debt differs from the liability as at the final date of the reporting period by PLN 14.6 million.

LOANS UNDER THE GOVERNMENTAL PROGRAM ENTITLED “THE POLISH DEVELOPMENT FUND’S FINANCIAL SHIELD FOR LARGE COMPANIES”

Under the government program entitled “Polish Development Fund’s Financial Shield for Large Companies ”, in December 2020 liquidity and preferential loan agreements were signed between JSW, Polski Fundusz Rozwoju S.A (“PFR”) and Jastrzębskie Zakłady Remontowe Sp. z o.o. (“JZR”) and JSW KOKS S.A. (“JSW KOKS”) as providers of surety for the loans. In December 2020, JSW KOKS also signed an agreement with PFR to grant a preferential loan. The proceeds from the loans were drawn down in December 2020 in the amount of PLN 1.0 million (liquidity loan) and PLN 198.5 million (preferential loan, out of which PLN 173.6 was paid out to JSW and PLN 24.9 million to JSW KOKS). According to the terms of the agreements, the interest rate for the loans is fixed and is equal, for each year of funding, to the margin for that year, calculated from the date of signing the loan agreement. By the power of the annex of 19 May 2021, as of 1 April 2021, the interest rate of the liquidity loan was reduced and after the change it is 0.75% in the 1st year, 1.25% in the 2nd and 3rd year, and 2.25% in the 4th year. Pursuant to the annex of 28 September 2021 to the preferential loan agreement concluded by JSW and the annex of 27 September 2021 to the preferential loan agreement concluded by JSW KOKS under the Government Program entitled "Polish Development Fund’s Financial Shield for Large Companies", the interest rate on the loans was reduced and after the change it is: 0.75% in the 1st year, 1.25% in the 2nd and 3rd year, and 2.25% in the 4th year. The changes entered into force as of 1 July 2021.

On 31 March 2021, JSW and JSW KOKS, in respect to their preferential loans in the total amount of PLN 198.5 million applied to PFR to cancel part of the preferential loans in accordance with the terms and conditions set forth in the agreement and the Regulations of the Government Program named “Polish Development Fund’s Financial Shield for Large Companies”, i.e. up to 75% of the “Actual COVID Loss”. On 23 September 2021, JSW and JSW KOKS received from the PFR "Statements on partial release of debt and the amount of forgiveness of preferential loans” in the amount of PLN 89.2 million and PLN 18.7 million, respectively. As a result of the “Statements on acceptance of the release of debt” submitted to the PFR (JSW submitted its statement on 28 September 2021 and JSW KOKS on 27 September 2021), the preferential loans in the total amount of PLN 107.9 million were forgiven effective as of 24 September 2021, which is recognized in other revenues (Note 4.3.). The forgiveness results in a rescheduling of preferential loan installments proportionally by the amount of the forgiveness.

On 28 June 2021, annexes were signed to the JSW’s preferential loan and liquidity loan agreements, under which the principal installment repayment schedules were changed. The principal installments falling in Q2 and Q3 2021 were reduced in total by PLN 145.7 million, including PLN 122.9 million under the liquidity loan and PLN 22.8 million under the preferential loan. The principal installments payable in subsequent quarters were increased accordingly.

On 29 October 2021, JSW KOKS repaid the remaining balance of the preferential PFR loan in the amount of PLN 4.1 million.

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 2021, established in the amount of PLN 300.0 million),

• JSW KOKS, up to the total amount of PLN 1,064.3 million (as at 31 December 2021, established in the amount of PLN 434.0 million).

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:

• a term loan of PLN 100.0 million,

• term loans facilities A and C in the USD equivalent of PLN 300.0 million,

• renewable loan B in the amount of PLN 360.0 million.

Funds under the Financing Contract were drawn down in 2019-2020 in the amounts of PLN 460.0 million and USD 78.4 million.

The financing contract with the Consortium imposes a number of covenants on JSW and other Group companies. According to contractual clauses, the total share of EBITDA of guarantors (JSW KOKS and JZR) and JSW in the Group’s total EBITDA must be no less than 85% and the net financial debt to EBITDA ratio must be maintained at the level not exceeding 3.3x. According to the provisions of the financing contract, JSW is obligated to present appropriate calculations of the ratios as at the end of each quarter. In 2020, the Parent Company 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 the Company in the Group’s total EBITDA be no less than 85% in Q3 and Q4 2020 and in Q1 2021.

As of 12 October 2020, by the power of an annex to the Financing Contract, 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 funds invested in the FIZ asset portfolio are an important element of the “Cash Buffer”. As at 31 December 2021 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. As of 1 January 2022, the required balance of the Cash Buffer is PLN 960.0 million.

The covenant pertaining to the Net Financial Debt/EBITDA level was satisfied in 2021 in the quarterly periods subject to review. The covenant that the total share of EBITDA of the guarantors (JSW KOKS and JZR) and JSW in the Group’s total EBITDA be no less than 85% was satisfied in the quarterly periods of 2021 subject to review (except for Q1 2021).

According to tentative estimates as at the date of approval of this consolidated report, the above ratios for 2021 will be satisfied.

LOAN AGREEMENTS WITH NFOŚiGW

LOAN AGREEMENTS WITH WFOŚiGW KATOWICE

1. 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 to co-finance the project under the name of “Construction of a power unit at the Radlin Coking Plant”. The loan was granted within the framework of the horizontal aid program for environmental protection. The carrying amount of the loan as at 31 December 2021 is PLN 30.7 million. After the last day of the reporting period, i.e. on 31 January 2022, an annex to the agreement was signed under which the loan drawdown and repayment schedule was updated. After the changes, the loan will be repaid quarterly, starting from June 2024 and the final maturity date has not changed.

2. On 13 December 2021, JSW KOKS signed a co-funding agreement with WFOŚiGW in the form of a loan up to PLN 70.0 million for the project entitled: “Modernization of coke oven battery no. 4 at the Przyjaźń Coking Plant”. The loan will be paid out in tranches. As at 31 December 2021, the loan has not been drawn down. The loan bears interest at a floating interest rate. The loan will be repaid quarterly, starting from March 2025.

The agreement provided for the following types of collateral securing repayment of the loan:

• a mortgage on real properties up to the amount of PLN 84.1 million and an assignment of rights under an insurance policy,

• a bank guarantee up to at least 20% of the co-financing amount.

MULTI-PURPOSE FACILITY AGREEMENT WITH BGK

On 23 January 2020, the subsidiary PBSz and Bank Gospodarstwa Krajowego (“BGK”) signed a multi-purpose overdraft facility agreement in the amount of PLN 20.0 million. 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.

At the end of the reporting period, the multi-purpose facility has not been utilized. After the end of the reporting period, i.e. on 18 January 2022, an annex to the agreement was signed, which extended its term for the next 2 years, i.e. until 22 January 2024.

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.

At the end of the reporting period, the multi-purpose facility has not been utilized. After the end of the reporting period, i.e. on 16 February 2022, an annex to the agreement was signed, which extended its term for the next year, i.e. until 16 February 2023.

OTHER COLLATERAL OF LOANS AND BORROWINGS (in addition to the collateral described above)

As at the final day of the reporting period, the collateral of the finance agreements with the Consortium and the European Investment Bank (“EIB”) is shared based on the pari passu principle:

1. Registered pledges up to the highest collateral amount of PLN 690.0 million, USD 117.8 million and EUR 87.8 million established in favor of PKO BP as the pledge administrator on the following:

• movable assets of Knurów-Szczygłowice OPE, Pniówek OPE, Zofiówka OPE, Bzie-Dębina OPE,

• shares held by JSW in JSW KOKS and PBSz,

• JSW’s bank accounts.

2. Joint contractual mortgages established in favor of PKO BP as the mortgage administrator up to PLN 690.0 million and up to USD 117.8 million and in favor of EIB up to EUR 87.8 million on real properties owned or held in perpetual usufruct by JSW, comprising organized parts of JSW’s enterprise in the form of Knurów-Szczygłowice OPE, Pniówek OPE, Zofiówka OPE, Bzie-Dębina OPE.

3. Surety extended to the Consortium by JSW KOKS up to the amount of PLN 690.0 million and USD 117.8 million and a surety extended to the Consortium by JZR up to the amount of PLN 690.0 million and USD 117.8 million.

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

On 20 October 2020, an agreement was signed terminating the financing agreement with the European Investment Bank. As at the date of approving these consolidated financial statements, the process of releasing collateral established in favor of EIB is still ongoing.

Other collateral for loans and borrowings (for loans and borrowings that have been drawn down):

• mortgage on real properties up to the amount of PLN 325.9 million,

• registered pledges on movable assets up to the amount of PLN 56.3 million,

• assignments of receivables under bank agreements/accounts and term deposit 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.

6.3. Reconciliation of debt

The table below depicts the movement in debt as at 31 December 2021:

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

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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. As a result of this transaction, the Group has recognized the goodwill in the consolidated statement of financial position in the amount of PLN 57.0 million as at 31 December 2021.

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 revision of amortization rates for intangible assets performed in Q4 2020 did not cause material differences in amortization in 2021 vs. the previous year.

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 ON RIGHT-OF-USE ASSETS

As at 31 December 2021, the net value of right-of-use assets securing the repayment of liabilities is PLN 50.1 million (as at 31 December 2020: PLN 53.1 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 2021 and in 2020, there were no capitalized costs of external financing of right-of-use asset 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 6.2.

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 depreciation and any accumulated impairment losses and adjusted for any revaluation of the lease liability other than unwinding of the discount.

In the case of modifications of the lease agreements concerning changes in the lease period, changes in the asset purchase option, changes in future lease payments, withholding and time-shifting of lease payments under the existing agreement (this applied to the lease of longwall shearers and roadheaders), the Group adjusts the value of the right-of-use asset and the lease liability.

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.

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 2021, the net value of right-of-use assets securing the repayment of liabilities is PLN 50.1 million (as at 31 December 2020: PLN 53.1 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 2021 and in 2020, 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 amount is the higher of: fair value of the assets minus the selling and distribution expenses, or value in use.

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

Material estimates and judgments

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.

In calculating the amount of impairment loss in a situation where the discounted cash flows generated by a given CGU take a negative value, the Group takes into account the particular conditions of the hard coal mining sector in Poland and the past history of liquidation of mines, namely that mines are liquidated not by mining companies but rather by a dedicated special-purpose vehicle, SRK, assuming that in such a situation the recoverable amount of the CGU is zero. The assumption of zero value as the bottom limit of recoverable amount in fair value calculation results from the assumption that each hypothetical buyer on the market is entitled to the same support as JSW with respect to closure of unprofitable mines.

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 2021, 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:

* This item concerns the reversal of the impairment loss allowance following tests (in the amount of PLN 335.5 million) and after a fixed asset was transferred from a mine covered by the allowance to a mine not covered by the allowance.
** This item concerns a technical transfer of the impairment loss allowance to accumulated depreciation – with no impact on the financial result.

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Coal segment

Coke segment

OTHER SEGMENTS

Impairment of goodwill

A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or whenever an indication emerges that the unit may be impaired. The tests are carried out by comparing the CGU’s carrying amount, including the goodwill, with its recoverable amount. Recoverable amount is defined as the higher of: fair value less cost to sell, and the value in use. The calculations made as part of the tests assume that the fair value is reduced by cost to sell, which in turn is calculated using the income method based on discounted cash flows.

The recoverable amount was calculated at the level of the cash generating unit, i.e. PBSz, to which the entire goodwill of PLN 57.0 million was allocated.

The assumptions adopted for e.g. projected revenues, costs, capital expenditures are the same as for the projections included in the JSW S.A. Strategy including the JSW Group’s Subsidiaries for 2022-2030, discount rate at 8.72% (in real terms) (in 2020, the discount rate was at 5.99%).

The fair value was fully classified to level 3 of the fair value hierarchy (i.e. the valuation contains unobservable inputs).

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 detailed forecast period is 5 years, while residual value was also taken into account.

The results of the impairment test performed as at 31 December 2021 and as at 31 December 2020 indicated no need to recognize impairment loss for the Group’s asset (i.e. goodwill).

Sensitivity analysis

Below we present how much the recoverable amount and the impairment loss allowance of the tested assets as at 31 December 2021 would change after the following changes in the above parameters:

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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 from 30 to 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 carrying amount of investments in the FIZ asset portfolio as at 31 December 2021 was PLN 767.5 million, while it was PLN 612.0 million as at 31 December 2020.

In 2021, there was no redemption of FIZ assets (in 2020, the Group received proceeds from redemption of FIZ assets in the amount of PLN 1,398.8 million).

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 credit risk, interest rate volatility and limited liquidity risk.

In 2021, the Investor Meeting of the JSW Stabilization Closed-end Investment Fund made a decision to amend the articles of association of FIZ:

• the amendment of 27 July 2021 was related to the Fund’s investment policy to increase the limit of exposure to local government bonds for bonds issued by a single entity,
• the amendment of 29 December 2021 pertained to valuation days.

The following table presents the structure of the Fund’s net asset portfolio at the end of the reporting period.

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Financial assets quoted on an active market are measured at fair value based on prices from such active market and classified as level 1 of the fair value hierarchy.

In the case of financial assets, for which an active market price does not exist, fair value is determined using valuation techniques where all significant inputs are directly or indirectly observable; such assets are classified as level 2 of the fair value hierarchy.

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 2021 it was PLN 507.7 million (PLN 490.7 million as at 31 December 2021).

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” (discussed in greater detail in Note 6.1)

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, 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 2021 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 PLN.

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 Note 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 benchmark price of coking coal is calculated each month as a rolling average of PLV coal prices (published by Platts) for the last 3 months, while applying the relationship of the price of coal from individual mines to the above benchmark price based on the prices commanded in the commercial contract with the largest customer (ArcelorMittal).

Steam coal prices are set annually based on the lowest 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.

INVENTORIES

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The inventories of finished products as at 31 December 2021 included, among others, inventories of 900.1 thousand tons of coal produced by the Group worth PLN 318.1 million and inventories of 239.1 thousand tons of coke produced by the Group worth PLN 132.3 million (as at 31 December 2020: 2,180.0 thousand tons of coal worth PLN 629.9 million and 183.1 thousand tons of coke worth PLN 122.4 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 2021 refer to finished products and materials.

7.10. 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 basis of the probability of insolvency determined on the basis of external ratings and publicly available rating agency information on the probability of default and the expected loss has been calculated on the basis of these probabilities, average maturity for the receivables portfolio and on the basis of the expected recovery rate.

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

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

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

TRADE AND OTHER RECEIVABLES

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The fair value of 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 level of impairment losses recognized in 2021 on trade receivables was affected by the improvement of ratings of some business partners that, despite the recognition of the impact of the SARS-CoV-2 coronavirus pandemic on the credit quality of clients, caused a reduction of the impairment loss allowance from PLN 73.2 million to PLN 58.8 million.

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 pandemic on the impairment loss recognized as at 31 December 2021 for coal and coke trade receivables was PLN 3.4 million (PLN 1.1 million as at 31 December 2020).

The amount of the PLN 6.1 million impairment allowance for trade receivables recognized in 2021 was driven mainly by the recognition of an impairment allowance for receivables on account of disputed liquidated damages, including, for one of the business partners, in the amount of PLN 3.2 million.

The amount of the impairment allowance for trade receivables in the amount of PLN 12.2 million reversed in 2021 was driven mainly by the reversal of the allowance for coal and coke receivables of one of the business partners in the amount of PLN 11.1 million as a result of a rating upgrade and increase of the insurance limits on receivables from this business partner.

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 2021:

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As at 31 December 2021, PLN 124.0 million of trade receivables was past due. That figure included PLN 69.2 million of receivables that were not found impaired and an impairment loss of PLN 12.4 million was reversed in 2021, while PLN 54.8 million were found impaired and an impairment loss of PLN 2.7 million in respect of them was recognized in 2021.

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.

7.11. Other current financial assets

SELECTED ACCOUNTING POLICIES

OTHER CURRENT FINANCIAL ASSETS

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:

1. the Group’s intention is to maintain these financial assets to receive the contracted cash flow, and
2. 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 2021 and 31 December 2020, 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).

7.12. Cash and cash equivalents

SELECTED ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand, cash in bank accounts, bank deposits payable on demand, other short-term investments with high liquidity and with the original maturity date of up to three months.

Overdraft facilities are presented in the consolidated statement of cash flows as a component of cash flows from financing activities. The overdraft facility contracted under the financing 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 2021 was PLN 137.6 million (as at 31 December 2020: PLN 60.3 million) and included funds deposited in the VAT account (under the split-payment arrangement), bid bonds and performance bonds (in the course of its business, the Group makes payments on the above accounts on an ongoing basis).

As at 31 December 2021 and 31 December 2020, 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 2021 and 2020. 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. Disposal group held for sale

SELECTED ACCOUNTING POLICIES

NON-CURRENT ASSETS (OR DISPOSAL GROUP) HELD FOR SALE

Non-current assets (or disposal group) are classified as held for sale if their carrying amount is recovered primarily through a sales transaction (rather than through their continued use) and sale is deemed highly likely. They are recognized at the lower of: their carrying amount or the fair value less costs to sell.

The Group does not depreciate a non-current asset (including one in a disposal group) if it is classified as held for sale. Interest and other expenses related to the liabilities of a disposal group classified as held for sale continue to be recognised.

Non-current assets (or a disposal group) classified as held for sale is presented separately from other assets in the Group’s consolidated statement of financial position. Also, liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the Group’s consolidated statement of financial position.

On 31 December 2021 an agreement was signed by and between JSW and Spółka Restrukturyzacji Kopalń S.A. (“SRK”) on the free-of-charge transfer of an organized part of the enterprise of JSW in the form of the Jastrzębie III Mining Area of KWK Jastrzębie-Bzie (“OPE”) with a dispositive effect as at 1 January 2022. The Parent Company obtained an approval for the transaction from the JSW Supervisory Board expressed in its resolution of 1 December 2021 and the JSW Shareholder Meeting expressed in its resolution of 29 December 2021, respectively. The above agreement was signed on the basis of the procedure prescribed by the Act of 7 September 2007 on the Functioning of the Hard Coal Mining Industry.

The disposal of the OPE by JSW is an effect of the measures taken to optimize the Group’s operations in connection with the phasing out of mining operations in the Jastrzębie III mining area as well as a headcount reduction with the use of state budget funds, which will contribute to the improved efficiency of JSW’s operations (as a result of the OPE disposal agreement, a total of 2,148 people will be transferred to SRK, including 1,234 employees taken over by JSW from other mining companies).

According to IFRS 5, as at 31 December 2021, assets and liabilities of the Jastrzębie III Mining Area relate to the Coal Segment and were presented as a disposal group held for sale and measured at carrying amount in the net amount of PLN (38.8) million.

The carrying amounts of assets and liabilities included in the disposal group, which was classified as held for sale as at the last date of the reporting period:

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As at the date of the free-of-charge transfer of the Jastrzębie III Mining Area to SRK, i.e. as at 1 January 2022, the Group will recognize a net profit of PLN 38.8 million in the consolidated statement of profit or loss and other comprehensive income.

7.14. Equity

7.14.1. SHARE CAPITAL

SELECTED ACCOUNTING POLICIES

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

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

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As at 31 December 2021, 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 2021 consists of the following share series:

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As at 31 December 2021 and as at the date of approval of these consolidated financial statements, the structure of JSW's shareholders was as follows*:

*  According to Current Report No. 41/2021 of 29 December 2021, the only shareholder with at least 5% of votes at the last JSW Shareholder Meeting held on 29 December 2021 was the State Treasury with 64,387,333 votes or a 54.84% share of all votes.

JSW does not have a detailed list of the shareholder structure as at 31 December 2021 or as at the date approval 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 2021 and as at the date of approval and publication of this report was the State Treasury.

7.14.2. 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 2021, as a result of the measurement of cash flow hedge transactions, the amount of PLN (18.9) million was recognized in other comprehensive income, of which:

• PLN 4.4 million is the positive valuation driven by the change in fair value of the effective part of hedging instruments,

• PLN (10.0) million is the negative valuation driven by the change in fair value of the effective part of hedging instruments,

• PLN (20.8) million is the negative valuation driven by the change in fair value of the effective part of hedging instruments (loan),

• PLN 3.1 million is the value posted to the period’s profit or loss if the hedged position is realized (loans and FX forward transactions),

• PLN 4.4 million is the tax effect of the above items (deferred tax).

In the comparative reporting period, as a result of the measurement of transactions to hedge future cash flow, the amount of PLN 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 FX forward transactions),

• PLN 5.1 million is the tax effect of the above items (deferred tax).

7.14.3. RETAINED EARNINGS

As at 31 December 2021, retained earnings of the Jastrzębska Spółka Węglowa S.A. Group amounted to PLN 5,712.0 million (PLN 4,761.9 million as at 31 December 2020). This item includes, among others, the Parent Company’s supplementary capital.

Supplementary capital was created mainly 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.

7.14.4. NON-CONTROLLING INTEREST

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

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

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7.14.5. 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 Parent Company’s shareholders and the number of ordinary shares outstanding as at the dividend record date.

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2021 profit distribution proposal

The JSW Management Board will not recommend the dividend payment for 2021 due to the obligation included in the liquidity loan and preferential loan agreements under the governmental program entitled “The Polish Development Fund’s Financial Shield for Large Companies”. In connection with the above, the JSW Management Board will propose to designate the net profit of PLN 329.9 million earned by JSW in 2021 for supplementary capital.

Covering the loss for 2020

On 25 June 2021, the Ordinary Shareholder Meeting of JSW made a decision to cover the net loss of PLN 1,541.1 and to cover the net loss arising in Other comprehensive income from valuation of post-employment defined benefit plans in the amount of PLN 13.6 million for the financial year ended 31 December 2020 entirely from supplementary capital.

7.15. 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.

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 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 Statistics Poland, as at the measurement date.

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