Consolidated financial statements

1.2. COMPOSITION OF THE GROUP

As at 31 December 2022, JSW held, directly or indirectly, shares in 18 related companies, including:

• 17 subsidiaries (direct or indirect),
  1 associated company.

The subsidiaries are consolidated by the full method. JSW Stabilization Closed-end Investment Fund was also consolidated by the full method.
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 Group 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 among others by the macroeconomic situation, the armed conflict in Ukraine and the COVID-19 pandemic. The impact of the armed conflict on the Group’s activities is described in Note 10.6. At the same time, in 2022 the Group did not record any material impact of COVID-19 on its activity. As at the date of these statements, the JSW Management Board has decided that the ongoing armed conflict in Ukraine and the COVID-19 pandemic have no effect on its assessment of the Group’s capacity to continue as a going concern.

As at the date of approval of these consolidated financial statements, no material uncertainties or circumstances have been identified as indicating 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

In recent years, there have been large-scale efforts, both globally and locally, to mitigate climate change globally. Reconstruction of the European economy towards climate neutrality is a means to an end, which is a change of EU’s status as the third largest source of greenhouse gas emissions in the world to the first climate-neutral region.

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 2022.

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. 72% of the carbon footprint).

As part of climate risks, the Group undertook to achieve the strategic goal for 2022-2030, which is to reduce the Group’s carbon footprint by 30% by 2030 in relation to 2018 (Scope 1 and 2) and to strive to achieve climate neutrality no later than by 2050.

The key to the reduction of methane emissions is capture and economic utilization of methane for energy production. The Methane Emission Reduction (MERP) program has been developed as an extension of the Commercial Utilization of Methane (CUOM) program aimed at the installation of methane-fueled engines for cogeneration of electricity and heat, as well as new efforts needed to achieve the intended level of methane capture of more than 50% and its commercial utilization of up to 95%. The capital expenditures incurred by JSW to implement the MERP and CUOM programs in 2022 were PLN 35.2 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 2022 JSW KOKS incurred capital expenditures of PLN 125.3 million).

All the investments planned by 2030 to reduce emissions and protect the environment, set forth in the JSW S.A. Strategy including the JSW 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 (RME), tasks to improve energy efficiency, development of own RES capacity, optimization of energy production and consumption, participation in research on the development of new technologies - ventilation air methane capture (VAM), carbon dioxide capture (CCUS).
The increasing climate and regulatory pressure also influences the overall economic conditions on markets, including availability of financing. Environmental regulations are gradually supplemented by sustainable financing guidelines, under which funds raised must be used for investment projects that reduce the climate change risk and environmental risks. In 2023, the Group plans to raise debt financing, which it intends to use, among others, for the implementation of environmental investments in line with the current Strategy.

When preparing these consolidated financial statements, the Management Board analyzed the impact of climate change on material judgments and estimates made by the Company, especially in the context of the European methane emission reduction and climate neutrality strategy announced in 2020. The analysis failed to show any impact of climate change on impairment of the Group’s assets and reduction of the depreciation period for non-current assets; no need to recognize new provisions was found.

As at the date of approval of these consolidated financial statements, the JSW Management Board does not conclude that the impact of climate change is a threat to continuation of the Group’s business in the foreseeable future.

2.3. ACCOUNTING POLICY AND SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS

The accounting policies adopted by the Group are consistent with the policies applied in the previous financial year, except for the adoption of new and amended standards as described in Note 2.5.

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

The Group updates material assumptions and estimates considering all circumstances of which it is aware, including the impact of war in Ukraine and sanctions imposed on Russia on the macroeconomic situation. As at the date of approval of these consolidated financial statements, the Group is unable to predict the economic effects of the continuing war in Ukraine. The Group analyzes the market situation and if necessary it will revise its estimates in subsequent reporting periods.

In 2022, accidents transpired in KWK Pniówek and in the Zofiówka Section of KWK Borynia-Zofiówka; their effects continue to be analyzed in detail and therefore any estimates made for these mines may be subject to change. As at the date of approval of these consolidated financial statements, the Group is unable to predict the stability of these changes or their economic effects. The Group analyzes the market situation and if necessary it will revise its estimates in subsequent reporting periods.

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.

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

4.2. COST OF PRODUCTS, MATERIALS AND GOODS SOLD

SELECTED ACCOUNTING POLICIES

COST OF PRODUCTS, MATERIALS AND GOODS SOLD

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

• the cost of manufacturing 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 goods 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.

* This item includes the cost of the one-time bonus, with employer’s costs in JSW, in the amount of PLN 472.2 million, which was paid out in July 2022 to JSW employees who remained in employment as at 30 June 2022 and satisfied the conditions for the award, on the basis of the agreement signed on 5 July 2022 between the JSW Management Board and Representative Trade Union Organizations operating in JSW.

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4.3. OTHER REVENUES

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4.4. OTHER COSTS

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4.5. REVENUES / (COSTS) CONNECTED WITH THE TRANSFER OF MINES TO SRK

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 – with a dispositive effect as at 1 January 2022 – of an organized part of JSW’s enterprise in the form of the Jastrzębie III Mining Area of KWK Jastrzębie-Bzie (“OPE”). 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.

On 31 March 2022, with the dispositive effect as of 1 April 2022, JSW and SRK signed an annex to the agreement of 31 December 2021, taking into account the transfer to SRK of the remaining assets of the designated part of the Jastrzębie III mining area, in the form of a system discharge of saline water to the Olza Collector and a system for industrial water supply and a rail siding. The Parent Company had obtained an approval for the transaction from, respectively, the JSW Supervisory Board, expressed in its resolution of 25 February 2022, and the JSW Shareholder Meeting, expressed in its resolution of 30 March 2022.

The agreement and the annex were 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 Non-current assets held for sale and discontinued operations, as at 31 December 2021, assets and liabilities of the Jastrzębie III Mining Area were presented as a disposal group held for sale and measured at the net carrying amount, i.e. including the tax impact of PLN (38.8) million (note 7.13).

Revenues/(expenses) related to the completed transfer of the OPE to SRK were captured as other revenues/(other expenses) in the consolidated statement of profit or loss and other comprehensive income for 2022.

The table below presents the net result achieved in 2022 in connection with the free-of-charge transfer of the Jastrzębie III Mining Area to SRK, as a result of the recognition, in the statement of profit or loss and other comprehensive income, of assets and liabilities included in the disposal group held for sale:

This table does not include the current tax benefit of PLN 12.0 million recognized in the profit or loss for 2022, which is due to the recognition of the value of property, plant and equipment transferred to SRK that have not been depreciated/amortized for tax purposes as tax-deductible expenses. JSW has obtained a tax interpretation confirming that it can lawfully classify in taxable expenses the value of property, plant and equipment and right-of-use assets transferred to SRK that have not been depreciated/amortized for tax purposes.

4.6. OTHER NET GAINS/(LOSSES)

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4.7. FINANCIAL INCOME AND COSTS

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4.8. EARNINGS PER SHARE

SELECTED ACCOUNTING POLICIES

Basic earnings/(loss) per share

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

Diluted earnings/(loss) per share

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

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5.1. INCOME TAX

Income tax captured in net result:

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Income tax captured in other comprehensive income

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

5.2. DEFERRED TAX

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:

* This item does not take into account deferred tax in the amount of PLN 24.0 million related to gratuitous transfer of OG “Jastrzębie III” mine to SRK, which as at 31 December 2021 was reclassified to a disposal group held for sale (Note 7.13.).

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Change in deferred tax asset and liabilities before offsetting

* This item does not take into account deferred tax in the amount of PLN 24.0 million related to gratuitous transfer of OG “Jastrzębie III” mine to SRK, which as at 31 December 2021 was reclassified to a disposal group held for sale (Note 7.13.).

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6.1. LOANS AND BORROWINGS

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Loans and borrowings taken out as at 31 December 2022, by maturity:

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Loans and borrowings taken out as at 31 December 2021, 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.

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

* 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 709 million and is different by PLN 16.3 million from the liability as at the final date of the reporting period (as at 31 December 2021, the nominal value of debt was PLN 974.5 million and was different by PLN 42.7 million from the liability as at the final date of the reporting period – including revenue from preferential interest in the amount of PLN 38.7 million recognized in other revenues – Note 4.3).
** Possibility of extending the repayment term by up to two years.
*** As at 31 December 2022, the outstanding debt amount is PLN 110.5 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 by PLN 16.5 million from the liability as at the final date of the reporting period (as at 31 December 2021, the nominal value of debt was PLN 93.3 million and differed by PLN 14.6 million from the liability as at the final date of the reporting period).

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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. The proceeds from the loans were drawn down in December
2020 in the amount of PLN 1.0 billion (liquidity loan) and PLN 173.6 million (preferential loan). 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. The interest rate of each of the loans is: 0.75% in the 1st year, 1.25% in the 2nd and 3rd year, and 2.25% in the 4th year. The loans are repaid quarterly. The loan installments falling due in December 2022 were repaid in January 2023 as prescribed by the terms of the agreements.

In 2021, a portion of the preferential loan in the total amount of PLN 89.2 million was canceled in accordance with the terms and conditions set forth in the agreement and the Regulations of the Government Program “Polish Development Fund’s Financial Shield for Large Companies”, i.e. up to 75% of the “Actual COVID Loss”.

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 2022, 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 2022, established in the amount of PLN 514.8 million).

In December 2020, JSW KOKS also signed a preferential loan agreement with PFR in the amount of PLN 24.9 million. In 2021, a portion of the preferential loan, i.e. PLN 18.7 million, was canceled in accordance with the terms and conditions set forth in the agreement and the Regulations of the Government Program “Polish Development Fund’s Financial Shield for Large Companies”, i.e. up to 75% of the “Actual COVID Loss”, and the remaining loan amount was repaid.

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.

In connection with the cash surplus achieved, in February 2022, JSW repaid Revolving Credit Facility B in the amount of PLN 360.0 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.

The condition that the net financial debt/EBITDA ratio be maintained and 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 2022 subject to review.

According to tentative estimates as at the date of approval of these consolidated financial statements, the above ratios for 2022 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 for environmental protection program. On 31 January 2022, an annex to the agreement was signed, which updated the loan drawdown and repayment schedule. After the amendments, the loan will be repaid quarterly, starting in June 2024, while the final maturity date did not change.
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”. On 1 September 2022, the annex to the loan agreement was signed, which changed the drawdown schedule.

In 2022, the following types of collateral securing loan repayment was established:

• a mortgage on real properties up to the amount of PLN 84.1 million and an assignment of rights under an insurance policy,
• bank guarantee up to PLN 14.0 million.

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. 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. As at 31 December 2022, the multi-purpose facility has not been used.

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.

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. 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 14 February 2023, an annex to the agreement was signed, which extended its term for the next year, i.e. until 16 February 2024.

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:

• 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.
• 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.
• 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.
• 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 EIB. After the end of the reporting period, in January
  2023, the process of releasing collateral, i.e. the registered pledge up to the maximum collateral amount of EUR 87.8 million, was completed. As at the date of approval of these consolidated financial statements, the process of releasing the remaining 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 370.5 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.

The Group carried out the following loans and borrowings transactions:

* Return of unused loan tranche

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 2022:

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

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7.2. GOODWILL

SELECTED ACCOUNTING POLICIES

Goodwill is initially recognized at cost and is shown in a separate item of the consolidated statement of financial position and then measured at the initial value less accumulated impairment losses. Goodwill is not amortized but, irrespective of whether there is any indication of impairment, it is subject to an annual impairment test for the goodwill acquired in a business combination.

For impairment testing purposes, 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.

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.

Impairment losses recognized for goodwill cannot be reversed in a subsequent period.

MATERIAL ESTIMATES

Impairment

An impairment test for goodwill is carried out annually, as well as whenever there are indications of impairment, based on a number of assumptions, of which some are outside of the Group’s control. Significant changes in these assumptions affect the outcome of impairment tests and, as a consequence, on the Group’s financial standing and financial performance. 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 presented goodwill of PLN 57.0 million in its consolidated statement of financial position.

Given the accounting policy in effect in the Group, the goodwill obtained as a result of business combinations, for impairment testing purposes, was allocated to the cash generating unit, i.e. PBSz, which is part of the Other segment.

As a result of the test carried out as at 31 December 2022, the Group recognized an impairment loss for the cash generating unit to which goodwill was assigned (PBSz)in the amount of PLN 57.0 million, which is described in detail in Note 7.5. As at 31 December 2022, goodwill in the consolidated statement of financial position is zero (PLN 57.0 million as at 31 December 2021

7.3. INTANGIBLE ASSETS

SELECTED ACCOUNTING POLICIES

INTANGIBLE ASSETS

The Group holds the following main items of intangible assets:

MATERIAL ESTIMATES

Impairment

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

Periods of useful life for intangible assets

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

The review of amortization rates for intangible assets carried out in Q4 2021 resulted in a decrease in amortization in 2022 vs. the previous year by PLN 0.6 million.

INTANGIBLE ASSETS

*     In accordance with the decisions of the President of the Energy Regulatory Office to redeem certificates of origin for energy.

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AMORTIZATION OF INTANGIBLE ASSETS

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OTHER INFORMATION CONCERNING INTANGIBLE ASSETS

As at 31 December 2022, the net value of intangible assets items securing the repayment of liabilities is PLN 5.6 million (as at 31 December 2021: PLN 6.3 million) and this is security for the repayment of liabilities under debt financing agreements. The security interest for loans and borrowings is described in Note 6.1.

In 2022 and in 2021, there were no capitalized costs of external financing of intangible assets in the Group.

7.4. RIGHT-OF-USE ASSETS

SELECTED ACCOUNTING POLICIES

RIGHT-OF-USE ASSETS

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, 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.

MATERIAL ESTIMATES

Determination of the amortization rate

The Group sets amortization rates individually for each item right-of-use assets. A right-of-use asset is amortized using a straight-line method over the useful life of assets no longer than the term of the lease based on the concluded agreements. Amortization rates depend on the term of the agreement. In the case of agreements concluded for an indefinite term, the amortization period is set based on the most likely useful life period of the asset, or life expectancy of the unit 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 ASSETS

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COSTS OF LEASES

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OTHER INFORMATION ON RIGHT-OF-USE ASSETS

As at 31 December 2022, the net value of right-of-use assets securing the repayment of liabilities is PLN 69.2 million (as at 31 December 2021: PLN 68.4 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 2022 and in 2021, there were no capitalized costs of external financing of right-of-use asset in the Group.

As at 31 December 2022, the Group had leasing contracts that had not yet been commenced, under which it is bound as a lessee; the value of future cash outflows related to these contracts is PLN 123.0 million (PLN 18.1 million as at 31 December 2021).

7.5. IMPAIRMENT OF NON-FINANCIAL NON-CURRENT ASSETS

Selected accounting policies

Impairment od non-financial 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-generating units). 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 mine closures, i.e. the fact that the closures are not carried out by mining companies but rather by a special-purpose entity established for this purpose (Spółka Restrukturyzacji Kopalń S.A., “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.

As at 31 December 2022, the Group analyzed the indications of possible 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, as well as indications that could point that the impairment loss allowance recognized in previous years had ceased to exist or had decreased. Following the analysis, it was concluded that there were no new indications of impairment of assets; also the indications identified in the past years, which resulted in the recognition of impairment allowances, had not ceased. Accordingly, the Group did not conduct impairment tests for the CGU as at 31 December 2022 (other than the annual impairment test for goodwill).

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

*   In 2021, 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.

*** Reclassification of impairment losses on property, plant and equipment to impairment losses on investment property.

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Coal segment

In 2022, given the negative NPV of KWK Jastrzębie-Bzie in the amount of PLN (1,285.1) million as well as the zero recoverable amount arising from the calculations conducted for the test as at 31 December 2021, with a simultaneous increase in value of non-current assets of KWK Jastrzębie-Bzie and the calculation of KWK Jastrzębie-Bzie’s assets taking into account the provisions, non-current liabilities and working capital, the Group saw it justified to recognize an impairment loss for the assets of the KWK Jastrzębie-Bzie CGU in the amount of PLN 246.9 million in 2022.

Considering the following:

• the existing value of assets of KWK Jastrzębie-Bzie, the Zofiówka Section of KWK Borynia-Zofiówka, the Borynia Section of KWK Borynia-Zofiówka, KWK Knurów-Szczygłowice and KWK Budryk as well as the cash flows generated by them in the 2022-2026 projection period in the JSW S.A. Strategy including the JSW Group’s Subsidiaries for 2022-2030 used for the purposes of the impairment test of the assets as at 31 December 2021,
• no new indications that could affect the value of assets have been found; also, according to the findings the indications identified in the past years, which resulted in the recognition of an impairment of CGU assets, have not ceased.

as at 31 December 2022, the Company did not revise the previously recognized impairment loss allowances for KWK Budryk, KWK Knurów-Szczygłowice, KWK Borynia-Zofiówka, Zofiówka Section and KWK Borynia-Zofiówka, Borynia Section.

In connection with the incident that took place at KWK Pniówek on 20 April 2022 (details in Note 10.6.), due to the estimation of the recoverable amount of the assets that were in the area of the disaster and whose loss was considered highly probable at a level lower than their existing carrying amount, an impairment loss of PLN 21.0 million was recognized as at 31 December 2022 in the Coal Segment.

Since the exact impact of the events in KWK Pniówek and KWK Borynia-Zofiówka, Zofiówka Section on the level of production in subsequent years is difficult to estimate, the Group made a judgment that the incidents do not constitute grounds for impairment of the recoverable amount of the assets.

The impairment loss on non-current assets in the total amount of PLN 267.9 million was recognized in other costs in the consolidated statement of profit or loss and other comprehensive income for 2022.

Coke segment

In the Coke Segment, the indications identified in previous periods persist and given the most current forecasts for the estimated recoverable amount calculated as fair value less cost to sell determined using the income method based on discounted future cash flows, which remains negative for the Jadwiga Coking Plant CGU as at 31 December 2022. The Group has made a judgment that, in connection with the value of capital expenditures incurred for property, plant and equipment of the Jadwiga Coking Plant CGU in 2022, there is a need to recognize an impairment loss for these expenditures as at 31 December 2022 in the amount of PLN 8.9 million.

The Group has also made a judgment that, as at 31 December 2022, it is justified not to remeasure the previously recognized impairment losses for non-financial non-current assets of the remaining CGUs of the Coke segment.

At the same time, in connection with the explosion in the area of the Przyjaźń Coking Plant, which took place on 22 September 2022 and which totally destroyed the effects of modernization works carried out until then, JSW KOKS estimated the degree of destruction and recognized an impairment loss of PLN 21.6 million.

The impairment loss on non-current assets in the Coke Segment in the total amount of PLN 30.5 million was recognized in other costs in the consolidated statement of profit or loss and other comprehensive income for 2022.

Other segment

Impairment of goodwill

A cash-generating unit (“CGU”) to which goodwill has been allocated is tested for impairment annually, or whenever an indication emerges that the unit may be impaired.

The calculation of the impairment test as at 31 December 2022 for the cash-generating unit to which goodwill has been allocated (PBSz) was performed by comparing: the carrying amount of PBSz, including 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 impairment tests were calculated using fair value less cost to sell, where the fair value was calculated using the income method on the basis of estimated discounted future cash flows, which included (in accordance with the conservative valuation principle) the updated structure of contracts in progress and updated assumptions regarding their profitability, taking into account the potential impact of identifiable risks.

Assumptions made

• the recoverable amount was calculated at the level of the cash generating unit (CGU), i.e. PBSz.
• The recoverable amount was calculated based on CGU’s discounted future cash flows from CGU’s financial projections for 2023-2027 (detailed projection period). Adoption of a five-year detailed forecast period is justified due to the fact that in the current economic situation there are no suficiently reliable data for the next reporting periods due to significant volatility of different types of factors,
• due to the fact that the assumed useful economic life of the CGU goes beyond 2027, the residual value of the CGU till 2072 was taken into account in the calculation of the recoverable amount.
• the after-tax weighted average cost of capital (WACC) was applied to the projection period at a level of 11.85%,
• the calculation of WACC took into account the specific risk premium of 2 percentage points, which is associated with uncertainty regarding all elements of the estimated financial forecasts, including all indications emerging for the long-time horizon (years 2030-2050 and especially after 2050) that changes may be introduced in the steel production technology (i.e. anticipated gradual phase-out of carbon emitting technologies),
• the rate of growth of the projected cash flows after the detailed forecast period is 0,
• in order to determine the carrying amount of the CGU assets subject to the test, working capital and non-current liabilities and provisions linked to the CGU were taken into account.

As a result of these calculations, the recoverable amount of the CGU was determined at PLN 172.0 million. Based on results of the test carried out as at 31 December 2022, the goodwill allocated to the cash-generating unit (PBSz) was written off in full and an impairment loss of PLN 57.0 million was recognized.

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

Sensitivity analysis

The sensitivity analysis indicates that material factors impacting the estimates of the recoverable amount of the cash-generating unit to which goodwill has been allocated, include, among others: the level of revenue, discount rates, costs. Below we present how the recoverable amount and the impairment loss allowance will change as a result of changes in the above parameters for the cash-generating unit affected by the impairment loss allowance as at 31 December 2022:

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Impairment of goodwill vs. the comparative peroid, I.E. 2021

As at 31 December 2021, impairment tests were carried out for goodwill by comparing the carrying amount of the CGU including goodwill with its recoverable amount. 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.

As at 31 December 2021, the assumptions adopted e.g. for projected revenues, costs, capital expenditures are the same as the projections included in the JSW Strategy including the JSW Group’s subsidiaries for 2022-2030, discount rate at 8.72% (in real terms). The projections included in the above Strategy were, 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 fair value of the CGU was fully classified to level 3 of the fair value hierarchy (i.e. the valuation contains unobservable inputs).

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

Sensitivity analysis

Presented below are the estimated changes in the recoverable amount and the impairment loss allowance of the assets subject to tests as at 31 December 2021 resulting from 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 41 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 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 uses 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.

MATERIAL ESTIMATES

The Group presents net cash flows from FIZ investments in cash flows from investing activities. The Group recognizes proceeds and expenditures from SBB transactions in investing activities, since these transactions are related to the Fund's investing activities. Cash raised by FIZ (also from SBB transactions) cannot be used for financing the Group’s current operations, but only for the Fund’s acquisition of financial assets in order to maximize its return on these investments. The Group presents cash flows relating to the Fund’s assets and liabilities on a net basis for each category (i.e., settlement of SBB transactions, purchase/sale of FIZ debt securities and covered bonds, purchase/sale of other FIZ assets and liabilities, and payments/withdrawals of funds to/from the Fund) due to the large number of recurring transactions during the reporting period. A reconciliation of the FIZ’s investment flows is presented further in the Note.

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 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 assets in: debt securities, money market instruments, currencies, derivatives, including non-standardized derivatives, provided that they are negotiable, and 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.

The carrying amount of investments in the FIZ asset portfolio as at 31 December 2022 was PLN 7,131.2 million, while it was PLN 767.5 million as at 31 December 2021.

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 as 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 2022 it was PLN 4,893.6 million (PLN 507.7 million as at 31 December 2021).

After the end of the reporting period, i.e. on 4 May 2022, the JSW Management Board adopted a resolution to purchase D series investment certificates and subsequent series issued by the JSW Stabilization FIZ for a total target amount of up to PLN 5.0 billion. JSW obtained the approval from the Supervisory Board on 10 May 2022, and the Shareholder Meeting on 3 June 2022, for the acquisition of the above FIZ certificates. The above action does not constitute a contribution of cash to the Fund. The value of the contribution to the Fund within the aforementioned recapitalization limit will depend each time on JSW's financial capabilities and the recorded financial surpluses, which will be preceded by separate decisions of the Management Board and the Supervisory Board and the Investor Meeting of the Fund.

In 2022, the Group made the following investments in the portfolio of financial assets through the JSW Stabilization FIZ in the total amount of PLN 4.2 billion:

• On 28 March 2022 the JSW Supervisory Board adopted a resolution on issuing a positive opinion on the Management Board’s motion and giving consent to the contribution of up to PLN 700.0 million to the FIZ within the investment sub-portfolio. In April 2022, the Group invested PLN 700.0 million in a financial asset portfolio through the Fund.
• On 15 June 2022 JSW’s Supervisory Board adopted a resolution issuing a positive opinion on the Management Board’s motion and gave its approval for the contribution of up to PLN 1.0 billion to the JSW Stabilization FIZ. In July 2022, the Group invested PLN 1.0 billion in the financial asset portfolio through the Fund.
• On 20 July 2022, JSW’s Supervisory Board adopted a resolution issuing a positive opinion on the Management Board’s motion and gave its approval for the contribution of up to PLN 1.0 billion to the JSW Stabilization FIZ In August 2022, the Group invested PLN 1.0 billion in a financial asset portfolio through the Fund.
• On 30 September 2022 JSW’s Supervisory Board adopted a resolution issuing a positive opinion on the Management Board’s motion and gave its approval for the contribution of up to PLN 1.5 billion to the liquidity and liquidity-investment sub-portfolio of JSW Stabilization FIZ. In October 2022, the Group invested PLN 1.5 billion in the financial asset portfolio through the Fund.

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

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Reconciliation of net cash flows from FIZ investments in the consolidated statement of cash flows:

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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.

The funds invested in the FIZ asset portfolio are an important element of the “Cash Buffer”, i.e. the obligation resulting from financing contract signed with the Consortium. As at 31 December 2022, the due balance of the Cash Buffer is PLN 960.0 million (PLN 760.0 million as at 31 December 2021), In 2022 and in 2021, the Cash Buffer covenant was satisfied.

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 the Fund’s cash 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 2022 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 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 non-current financial assets are denominated in the 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 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).

For steam coal, the lowest price at which coal will be sold to the commercial power sector were applied.

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 2022 included, among others, inventories of 614.8 thousand tons of coal produced by the Group worth PLN 350.9 million and inventories of 246.7 thousand tons of coke produced by the Group worth PLN 209.8 million (as at 31 December 2021: 900.1 thousand tons of coal worth PLN 318.1 million and 239.1 thousand tons of coke worth PLN 132.3 million).

IMPAIRMENT LOSSES FOR INVENTORIES

The table below presents impairment losses for inventories:

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Recognition and reversal of impairment loss amounts for inventories were recognized as costs in the current reporting period.

Impairment losses for inventories recognized in 2022 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.

In the Group’s consolidated financial statements, trade receivables are the largest financial asset category for which expected credit losses are calculated.

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 presents changes in impairment losses for trade receivables:

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

The amount of the PLN 11.0 million impairment allowance for trade receivables recognized in 2022 was driven mainly by the recognition of an impairment allowance for receivables on account of disputed liquidated damages from several business partners.

AGE ANALYSIS OF TRADE RECEIVABLES AND IMPAIRMENT LOSSES

The structure of trade receivables and impairment losses, broken down by trade receivables grouped by similarity of the credit risk characteristics as at 31 December 2022 is presented in the table below:

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The structure of trade receivables and impairment losses, broken down by trade receivables grouped by similarity of the credit risk characteristics as at 31 December 2021 is presented in the table below:

Probability of default (PD) for trade receivables:

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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:

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

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

Other current financial assets are presented in the following table:

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As at 31 December 2022 and 31 December 2021, 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 comprise cash in hand and in bank, call deposits in banks, other short-term investments with high liquidity and original maturity up to three months.

Overdraft facilities are presented in the consolidated statement of cash flows as a component of cash flows from financing activities. The overdraft facility contracted under the financing contract with the Consortium is presented in the consolidated statement of financial position as an element of long-term loans and borrowings in non-current liabilities.

The Group classifies cash and cash equivalents as financial assets measured at amortized cost, while taking into account impairment losses calculated in accordance with the expected credit 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 2022 is PLN 101.3 million (as at 31 December 2021: PLN 137.6 million) and includes funds deposited in the VAT account (under the split-payment arrangement), bid bonds and performance bonds and funds received by JZR under an agreement with the State Treasury Minister to provide support which does not constitute public aid, designated for specific investment projects. In the course of its business, the Group makes payments on the above accounts on an ongoing basis.

As at 31 December 2022 and 31 December 2021, 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 2022 and 2021. 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 are 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, as described in detail in Note 4.5.

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 31 December 2021:

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In connection with the free-of-charge transfer of the Jastrzębie III Mining Area to SRK in 2022, the Group recognized net profit of PLN 38.8 million in the consolidated statement of profit or loss and other comprehensive income (Note 4.5.).

7.14. EQUITY

SELECTED ACCOUNTING POLICIES

SHARE CAPITAL

Common shares are classified as share capital. The share capital is recognized in the amount specified in the articles of association and registered in the court register of the Parent Company, taking into account a hyperinflation adjustment.

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.

SHARE PREMIUM ACCOUNT

Equity created with the share premium account less the costs of the share issue.

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.

RETAINED EARNINGS

Retained earnings include: supplementary capital created and used in accordance with the Commercial Company Code Act, reserve capital designated for financing the investment program, profit/(loss) of the current reporting period, retained financial results, actuarial gains/(losses) related to post-employment benefits, other capital created and used in accordance with the rules of law.

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

7.14.1. SHARE CAPITAL

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As at 31 December 2022, 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 2022 consists of the following share series:

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As at 31 December 2022 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. 7/2023 of 16 March 2023, the only shareholder with at least 5% of votes at the last JSW Extraordinary Shareholder Meeting held on 16 March 2023 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 2022 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 2022 and as at the date of approval and publication of this report was the State Treasury.

7.14.2. RETAINED EARNINGS

As at 31 December 2022, retained earnings of the Jastrzębska Spółka Węglowa S.A. Group amounted to PLN 13,281.9 million (PLN 5,712.0 million as at 31 December 2021). 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.

7.14.3. NON-CONTROLLING INTEREST

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