Ciech S.A.

Quarterly Report • Mar 29, 2022

FINANCIAL STATEMENTS of CIECH S.A. for 2021 We are providing a courtesy English translation of our financial statements which were originally written in Polish. We take no responsibility for the accuracy of our translation. For an accurate reading of our financial statements, please refer to the Polish language version of our financial statements. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 2 CIECH S.A. – SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA in thousand PLN in thousand EUR 12 months ended 31.12.2021 12 months ended 31.12.2020 12 months ended 31.12.2021 12 months ended 31.12.2020 Sales revenues on continued operations 1,618,680 1,654,075 353,617 369,692 Operating profit/(loss) on continued operations (37,589) 64,082 (8,212) 14,323 Profit/(loss) before tax on continued operations 77,430 177,890 16,915 39,759 Net profit for the period 133,206 155,287 29,100 34,707 Other comprehensive income net of tax 45,726 (24,725) 9,989 (5,526) Total comprehensive income 178,932 130,562 39,089 29,181 Cash flows from operating activities 39,141 66,310 8,551 14,821 Cash flows from investment activities 289,353 (303,166) 63,212 (67,759) Cash flows from financial activities (126,523) 327,809 (27,640) 73,267 Total net cash flows 201,971 90,953 44,123 20,329 Earnings (loss) per ordinary share (in PLN/EUR) 2.53 2.95 0.55 0.66 as at 31.12.2021 as at 31.12.2020 as at 31.12.2021 as at 31.12.2020 Total assets 4,612,557 4,357,634 1,002,861 944,274 Total non-current liabilities 1,991,470 40,973 432,985 8,879 Total current liabilities 1,006,486 2,722,893 218,830 590,035 Total equity 1,614,601 1,593,768 351,046 345,360 Share capital 287,614 287,614 62,533 62,324 The above selected financial data were converted into EUR in accordance with the following principles: • items in the statement of financial position were converted using the average exchange rate determined by the National Bank of Poland on the last day of the reporting period, • items in the statement of profit or loss, statement of other comprehensive income and statement of cash flows were converted using the exchange rate constituting the arithmetic mean of rates determined by the National Bank of Poland on the last day of each calendar month of the reporting period. as at 31.12.2021 as at 31.12.2020 12 months ended 31.12.2021 12 months ended 31.12.2020 EUR 1 = PLN 4.5994 EUR 1 = PLN 4.6148 EUR 1 = PLN 4.5775 EUR 1 = PLN 4.4742 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 3 TABLE OF CONTENTS STATEMENT OF PROFIT OR LOSS OF CIECH S.A. ............................................................................................................................................................... 4 STATEMENT OF OTHER COMPREHENSIVE INCOME OF CIECH S.A.................................................................................................................................... 5 STATEMENT OF FINANCIAL POSITION OF CIECH S.A. ....................................................................................................................................................... 6 STATEMENT OF CASH FLOWS OF CIECH S.A. .................................................................................................................................................................... 7 STATEMENT OF CHANGES IN EQUITY OF CIECH S.A. ........................................................................................................................................................ 8 1. GENERAL INFORMATION ...................................................................................................................................................................................... 9 1.1. INFORMATION ON THE COMPANY’S ACTIVITIES .................................................................................................................................................. 9 1.2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING PRINCIPLES ............................................................................... 10 1.3. FUNCTIONAL AND REPORTING CURRENCY ......................................................................................................................................................... 11 1.4. ACCOUNTING POLICIES ....................................................................................................................................................................................... 11 1.5. CHANGES IN ACCOUNTING POLICIES AND THE SCOPE OF DISCLOSURES ............................................................................................................ 12 2. SEGMENT REPORTING ........................................................................................................................................................................................ 13 3. NOTES TO THE STATEMENT OF PROFIT OR LOSS AND STATEMENT OF OTHER COMPREHENSIVE INCOME ........................................................ 19 3.1. SALES REVENUES ................................................................................................................................................................................................ 19 3.2. COST OF SALES, SELLING COSTS, GENERAL AND ADMINISTRATIVE EXPENSES .................................................................................................... 20 3.3. COSTS BY TYPE .................................................................................................................................................................................................... 20 3.4. OTHER OPERATING INCOME AND EXPENSES ...................................................................................................................................................... 21 3.5. FINANCIAL INCOME AND EXPENSES ................................................................................................................................................................... 22 3.6. COMPONENTS OF OTHER COMPREHENSIVE INCOME ........................................................................................................................................ 24 4. INCOME TAX, DEFERRED TAX ASSETS AND LIABILITY .......................................................................................................................................... 25 4.1. MAIN COMPONENTS OF TAX EXPENSE ............................................................................................................................................................... 25 4.2. EFFECTIVE TAX RATE ........................................................................................................................................................................................... 25 4.3. DEFERRED INCOME TAX...................................................................................................................................................................................... 26 5. NOTES TO ASSETS REPORTED IN THE STATEMENT OF FINANCIAL POSITION ...................................................................................................... 29 5.1. PROPERTY, PLANT AND EQUIPMENT .................................................................................................................................................................. 29 5.2. RIGHT-OF-USE ASSETS ........................................................................................................................................................................................ 31 5.3. INTANGIBLE ASSETS ............................................................................................................................................................................................ 33 5.4. LONG-TERM FINANCIAL ASSETS.......................................................................................................................................................................... 34 5.5. INVENTORIES ...................................................................................................................................................................................................... 38 5.6. SHORT-TERM RECEIVABLES ................................................................................................................................................................................ 38 5.7. SHORT-TERM FINANCIAL ASSETS ........................................................................................................................................................................ 40 5.8. CASH AND CASH EQUIVALENTS .......................................................................................................................................................................... 42 5.9. DISCONTINUED OPERATIONS, NON-CURRENT ASSETS AND LIABILITIES CONNECTED WITH NON-CURRENT ASSETS CLASSIFIED AS HELD FOR SALE .................................................................................................................................................................................................................... 42 6. EQUITY ................................................................................................................................................................................................................ 44 6.1. CAPITAL MANAGEMENT ..................................................................................................................................................................................... 44 6.2. EQUITY ................................................................................................................................................................................................................ 44 6.3. DIVIDENDS PAID OR DECLARED .......................................................................................................................................................................... 46 6.4. BUSINESS COMBINATIONS AND ACQUISITION OF INTEREST .............................................................................................................................. 46 6.5. EARNINGS PER SHARE ......................................................................................................................................................................................... 49 7. LIABILITIES, PROVISIONS, EMPLOYEE BENEFITS .................................................................................................................................................. 50 7.1. INFORMATION ABOUT FINANCIAL LIABILITIES .................................................................................................................................................... 50 7.2. OTHER NON-CURRENT LIABILITIES...................................................................................................................................................................... 51 7.3. CURRENT TRADE AND OTHER LIABILITIES ........................................................................................................................................................... 52 7.4. LEASES ................................................................................................................................................................................................................ 53 7.5. PROVISIONS FOR EMPLOYEE BENEFITS............................................................................................................................................................... 56 7.6. OTHER PROVISIONS ............................................................................................................................................................................................ 57 8. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT ....................................................................................................................... 58 8.1. FINANCIAL INSTRUMENTS .................................................................................................................................................................................. 58 8.2. FINANCIAL INSTRUMENTS DESIGNATED FOR HEDGE ACCOUNTING ................................................................................................................... 61 8.3. FINANCIAL RISK MANAGEMENT ......................................................................................................................................................................... 63 8.4. DETERMINATION OF FAIR VALUE ....................................................................................................................................................................... 70 9. OTHER NOTES ..................................................................................................................................................................................................... 73 9.1. NOTES TO THE STATEMENT OF CASH FLOWS ..................................................................................................................................................... 73 9.2. INFORMATION ON CHANGES IN CONTINGENT ASSETS AND LIABILITIES AND OTHER MATTERS ........................................................................ 73 9.3. INFORMATION ON TRANSACTIONS WITH RELATED PARTIES .............................................................................................................................. 77 9.4. INFORMATION ABOUT AGREEMENTS CONCLUDED WITH THE ENTITY AUTHORISED TO AUDIT THE FINANCIAL STATEMENTS OF CIECH S.A. ... 80 9.5. EVENTS AFTER THE BALANCE SHEET DATE ......................................................................................................................................................... 80 9.6. INFORMATION ON THE CURRENT SITUATION IN CONNECTION WITH THE IMPACT OF THE RUSSIAN INVASION ON UKRAINE ON THE ACTIVITIES OF CIECH S.A. ...................................................................................................................................................................................................... 80 9.7. INFORMATION ON THE CURRENT SITUATION IN CONNECTION WITH THE IMPACT OF THE COVID-19 CORONAVIRUS PANDEMIC ON CIECH S.A.’S ACTIVITIES ................................................................................................................................................................................................. 83 REPRESENTATION BY THE MANAGEMENT BOARD ........................................................................................................................................................ 86 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 4 STATEMENT OF PROFIT OR LOSS OF CIECH S.A. note 01.01.-31.12.2021 01.01.-31.12.2020 CONTINUING OPERATIONS Sales revenues 3.1 1,618,680 1,654,075 Cost of sales 3.2 (1,429,542) (1,409,843) Gross profit on sales 189,138 244,232 Other operating income 3.4 14,089 5,590 Selling costs 3.2 (136,165) (108,042) General and administrative expenses 3.2 (98,333) (64,322) Other operating expenses 3.4 (6,318) (13,376) Operating profit (37,589) 64,082 Financial income 3.5 330,865 286,286 Profit from financial instruments 3.5 97,329 66,612 Financial expenses 3.5 (215,846) (172,478) (Loss) from financial instruments 3.5 (168,290) (128,963) Net financial income/(expenses) 115,019 113,808 Profit before tax 77,430 177,890 Income tax 4.1, 4.2 14,095 (23,056) Net profit on continuing operations 91,525 154,834 DISCONTINUED OPERATIONS Net profit/(loss) on discontinued operations 5.9 41,681 453 Net profit for the year 133,206 155,287 Earnings per share (in PLN): Basic 2.53 2.95 Diluted 2.53 2.95 Earnings per share (in PLN) from continuing operations: Basic 1.74 2.94 Diluted 1.74 2.94 The statement of profit or loss of CIECH S.A. should be analysed together with additional notes and explanations which constitute an integral part of the financial statements. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 5 STATEMENT OF OTHER COMPREHENSIVE INCOME OF CIECH S.A. note 01.01.-31.12.2021 01.01.-31.12.2020 Net profit on continuing operations 91,525 154,834 Net profit/(loss) on discontinued operations 41,681 453 Net profit for the year 133,206 155,287 Other comprehensive income before tax that may be reclassified to the statement of profit or loss 3.6 56,541 (30,466) Cash flow hedge reserve 3.6 56,541 (30,466) Other comprehensive income before tax that may not be reclassified to the statement of profit or loss 3.6 (89) (57) Actuarial gains 3.6 (89) (51) Other components of other comprehensive income - (6) Income tax attributable to other comprehensive income 4.1 (10,726) 5,798 Income tax attributable to other comprehensive income that may be reclassified to the statement of profit or loss 4.1 (10,743) 5,788 Income tax attributable to other comprehensive income that may not be reclassified to the statement of profit or loss 4.1 17 10 Other comprehensive income net of tax 45,726 (24,725) TOTAL COMPREHENSIVE INCOME 178,932 130,562 The statement of other comprehensive income of CIECH S.A. should be analysed together with additional notes and explanations which constitute an integral part of the financial statements. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 6 STATEMENT OF FINANCIAL POSITION OF CIECH S.A. note 31.12.2021 31.12.2020 ASSETS Property, plant and equipment 5.1 13,287 11,805 Intangible assets 5.3 72,316 57,428 Long-term financial assets 5.4 3,158,160 2,538,642 Deferred income tax assets 4.3 6,990 - Rights to use an asset 5.2 22,235 26,057 Total non-current assets 3,272,988 2,633,932 Inventory 5.5 5,162 6,394 Short-term financial assets 5.7 662,051 1,189,162 Income tax receivables 37 - Trade and other receivables 5.6 204,844 232,895 Cash and cash equivalents 5.8 467,475 265,287 Non-current assets held for sale - 29,964 Total current assets 1,339,569 1,723,702 Total assets 4,612,557 4,357,634 EQUITY AND LIABILITIES Share capital 6.2 287,614 287,614 Share premium 470,846 470,846 Cash flow hedge reserve 8.2 20,085 (25,713) Actuarial gains (150) (78) Other reserve capitals 6.2 422,699 422,699 Retained earnings 413,507 438,400 Total equity 1,614,601 1,593,768 Loans, borrowings and other debt instruments 7.1 1,854,153 - Lease liabilities 7.4 18,513 21,792 Other non-current liabilities 7.2 118,070 18,198 Employee benefits reserve 7.5 734 979 Deferred income tax liability 4.3 - 4 Total non-current liabilities 1,991,470 40,973 Loans, borrowings and other debt instruments 7.1 397,099 2,238,619 Lease liabilities 7.4 5,407 6,332 Trade and other liabilities 7.3 569,006 438,836 Income tax liabilities - 4,539 Employee benefits reserve 7.5 413 826 Other provisions 7.6 34,561 33,741 Total current liabilities 1,006,486 2,722,893 Total liabilities 2,997,956 2,763,866 Total equity and liabilities 4,612,557 4,357,634 The statement of financial position of CIECH S.A. should be analysed together with additional notes and explanations which constitute an integral part of the financial statements. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 7 STATEMENT OF CASH FLOWS OF CIECH S.A. note 01.01.-31.12.2021 01.01.-31.12.2020 Cash flows from operating activities Net profit for the period 133,206 155,287 Amortisation/depreciation 18,677 18,839 Recognition of impairment allowances 1,998 15,508 Foreign exchange (profit) /loss (4,152) (39,199) (Profit) / loss on investment activities (43,888) 461 (Profit) / loss on disposal of property, plant and equipment (47) (174) Dividends and interest (213,850) (171,669) Income tax (14,095) 23,056 Change in liabilities due to loan arrangement fee (7,318) 2,226 Value of derivatives 47,750 20,240 Other (89) - Cash from operating activities before changes in working capital and provisions (81,808) 24,575 Change in receivables 9.1 33,179 131,642 Change in inventory 1,232 24,300 Change in current liabilities 9.1 140,608 (57,121) Change in provisions and employee benefits 162 (1,180) Cash generated from operating activities 93,373 122,216 Interest paid (46,032) (47,943) Income tax (paid) (8,200) (7,963) Net cash from operating activities 39,141 66,310 Cash flows from investment activities Disposal of a subsidiary 74,289 104 Disposal of intangible assets and property, plant and equipment 139 3,566 Dividends received 204,619 181,903 Interest received 48,761 37,713 Proceeds from repaid borrowings 1,952,358 433,850 Reduction of capital for remuneration in a subsidiary 80,449 - Acquisition of a subsidiary (6,105) (4,918) Acquisition of intangible assets and property, plant and equipment (28,267) (11,710) Raise capital expenditures and extra charge on capital (29,847) (4,855) Borrowings paid out (2,005,133) (937,299) Cash pooling outflows (1,910) (1,520) Net cash from investment activities 289,353 (303,166) Cash flows from financial activities Proceeds from loans and borrowings 7.1 385,493 662,787 Cash pooling inflows 4,046 19,442 Dividends paid to parent company (158,099) - Repayment of loans and borrowings 7.1 (351,790) (347,813) Payments of lease liabilities 7.4 (6,173) (6,607) Net cash from financial activities (126,523) 327,809 Total net cash flows 201,971 90,953 Cash and cash equivalents as at the beginning of the period 265,287 169,984 Impact of foreign exchange differences 217 4,350 Cash and cash equivalents as at the end of the period 5.8 467,475 265,287 Cash pooling – presentation in cashflow: • Investing activities – the company presents the change in receivables from cash pooling • Financing activities – the company presents the change in liabilities on account of cash pooling The statement of cash flows of CIECH S.A. should be analysed together with additional notes and explanations which constitute an integral part of the financial statements. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 8 STATEMENT OF CHANGES IN EQUITY OF CIECH S.A. Total equity Share capital Share premium Cash flow hedge reserve Other reserve capitals Actuarial gains Retained earnings note 6.2 8.2 6.2 01.01.2021 287,614 470,846 (25,713) 422,699 (78) 438,400 1,593,768 Transactions with shareholders included directly in equity - - - - - (158,099) (158,099) Dividend payment - - - - - (158,099) (158,099) Total comprehensive income for the period - - 45,798 - (72) 133,206 178,932 Net profit / (loss) for the period - - - - - 133,206 133,206 Other comprehensive income - - 45,798 - (72) - 45,726 31.12.2021 287,614 470,846 20,085 422,699 (150) 413,507 1,614,601 01.01.2020 287,614 470,846 (1,035) 76,199 (37) 629,619 1,463,206 Transactions with shareholders included directly in equity - - - 346,500 - (346,500) - Reserve fund for the purchase of own shares - - - 346,500 - (346,500) - Total comprehensive income for the period - - (24,678) - (41) 155,281 130,562 Net profit / (loss) for the period - - - - - 155,287 155,287 Other comprehensive income - - (24,678) - (41) (6) (24,725) 31.12.2020 287,614 470,846 (25,713) 422,699 (78) 438,400 1,593,768 The statement of changes in equity of CIECH S.A. should be analysed together with additional notes and explanations which constitute an integral part of the financial statements. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 9 1. GENERAL INFORMATION 1.1. INFORMATION ON THE COMPANY’S ACTIVITIES Company Name CIECH S.A. Legal form Joint-stock Company Registered office Warsaw, Poland Address ul. Wspólna 62, 00-684 Warszawa, Polska KRS (National Court Register number) 0000011687 (District Court for the capital city of Warsaw in Warsaw 12 th Commercial Division of the National Court Register) Country of registration Poland Statistical identification number (REGON) 011179878 Tax ID No (NIP) 118-00-19-377 BDO Registry Number 000015168 Website www.ciechgroup.com Branches held CIECH S.A.’s Branch in Romania CIECH S.A.’s Branch in Germany Parent company KI Chemistry s. à r. l (a subsidiary of Kulczyk Investments) Ultimate parent company Luglio Limited CIECH S.A. is a holding company that manages and provides support services to its subsidiaries — domestic and foreign manufacturing, trade and service companies of the CIECH Group. The CIECH Group is an international, professionally managed group with a well-established position of a leader of the chemical sector in Central and Eastern Europe. It manufactures products which are used in the production of articles necessary in everyday life of people all over the world – state-of-the- art products of the highest, world quality. Taking advantage of the support of a reliable strategic investor – Kulczyk Investments – it implements the strategy of global development. Key products manufactured by the CIECH Group include: soda ash, sodium bicarbonate, evaporated salt, agrochemical products, polyurethane foams, lanterns and jars, sodium and potassium silicates. The core sales market for the CIECH Group is the European Union, including mainly Poland, Germany and Central Eastern European countries. Products manufactured by the CIECH Group are also exported to overseas markets. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 10 1.2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS AND ACCOUNTING PRINCIPLES 1.2.1. REPRESENTATION BY THE MANAGEMENT BOARD These financial statements of CIECH S.A. for the period from 1 January 2021 to 31 December 2021, including comparative data, were approved by the Management Board of CIECH S.A. on 29 March 2022. The Management Board of CIECH S.A. represents that these separate financial statements for the current and comparable period have been prepared in compliance with International Financial Reporting Standards approved by the European Union and related interpretations issued by the European Commission in the form of Regulations (IFRS). The Management Board of CIECH S.A. represents that to the best of its knowledge these separate financial statements, including corresponding figures, have been prepared in accordance with the generally acceptable accounting principles and that they represent a true, accurate and fair reflection of CIECH S.A.’s financial position and the results of operations. Furthermore, the Management Board of CIECH S.A. represents that the Directors’ report on operations of the CIECH Group and CIECH S.A. in 2021 contains a true image of the Company’s developments, achievements, and condition, including the description of major risks and threats. The Management Board of CIECH S.A. represents that Deloitte Audyt Spółka z ograniczoną odpowiedzialnością Sp. k. with its registered office in Warsaw, entered into the list of entities authorised to audit financial statements under the registry No 73 kept by the National Chamber of Statutory Auditors was chosen in accordance with the binding legal regulations for the auditor of these separate financial statements. The above entity, including the certified auditors performing the audit, satisfy all the conditions required in order to issue an unbiased and independent audit report, pursuant to the applicable domestic legal regulations. 1.2.2. BASIS OF PREPARATION On 31 January 2007, the Extraordinary General Meeting of Shareholders of CIECH S.A. adopted resolution No 4, concerning the preparation of separate financial statements in accordance with International Financial Reporting Standards as approved by the European Union. Due to the adopted resolution, since 2007 the reports of CIECH S.A. have been prepared in accordance with the IFRS using the valuation of assets and liabilities and the measurement of net profit/loss. Major accounting principles applied in the preparation of these financial statements are listed in note 1.4. These principles have been applied on a continuous basis in all presented periods. The financial statements of CIECH S.A. have been prepared on the historical cost basis except for financial assets and liabilities (derivative instruments) measured at fair value through profit or loss. These financial statements were prepared under the assumption that CIECH S.A. will continue as a going concern in the foreseeable future. As at the date of approval of these financial statements, no facts or circumstances are known that would indicate any threat to the Company continuing as a going concern. The financial year for CIECH S.A is the calendar year. These financial statements, except for the separate statement of cash flows, have been prepared on the accrual basis. The statement of profit or loss of CIECH S.A. is prepared in the cost by function format. The statement of cash flows is prepared using the indirect method. Preparation of the financial statement in accordance with IFRS requires the Management Board to make own assessments and apply certain assumptions and accounting estimates as part of the application of accounting principles adopted by the Company. Issues which require significant assessments or areas where the assumptions and estimates made have a significant impact on these financial statements have been described in note 1.4. CIECH S.A. also prepares consolidated financial statements available at https://ciechgroup.com/relacje- inwestorskie/raporty/raporty-okresowe/. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 11 1.3. FUNCTIONAL AND REPORTING CURRENCY The Polish zloty (PLN) is the functional currency of CIECH S.A., and the reporting currency of these financial statements. Unless stated otherwise, all financial data in these financial statements have been presented in thousands of Polish zlotys (PLN ’000). CIECH S.A. has Branches (in Romania and Germany) whose accounting records are kept in local currencies (RON and EUR). For the purpose of preparing the financial statements of CIECH S.A., accounting records of the Branch in Romania are translated using the transaction exchange rates and the accounting records of the Branch in Germany – at the average NBP rate for a given period. Due to an insignificant value of transactions, translation at this exchange rate does not result in a material distortion of results. 1.4. ACCOUNTING POLICIES To ensure more legible presentation and better understanding of the information disclosed in the financial statements, key accounting principles applicable in CIECH S.A. as well as judgements and estimates made have been presented in separate notes. Note Title Accounting principles Judgements and estimates 3.1. Sales revenues x 3.2. Cost of sales x 3.4.; 3.5. Other income and expenses x x 4.1. Income tax x 4.3. Deferred income tax x x 5.1. Property, plant and equipment x x 5.2. Right-of-use assets x x 5.3. Intangible assets x x 5.4. Long-term financial assets x x 5.5. Inventories x x 5.6. Short-term receivables x x 5.7. Short-term financial assets x x 5.8. Cash and cash equivalents x x 5.9. Discontinued operations, assets and liabilities classified as held for sale x x 6.2. Equity x x 7.1 Information on financial liabilities x 7.2. Other long-term liabilities x x 7.3. Current trade and other liabilities x x 7.4. Leases x x 7.5. Provisions for employee benefits x x 7.6. Other provisions x x 8.1. Financial instruments x x 8.2. Financial instruments designated for hedge accounting x x 9.2. Information on changes in contingent assets and liabilities and other matters x x FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 12 1.5. CHANGES IN ACCOUNTING POLICIES AND THE SCOPE OF DISCLOSURES Amendments to IAS/IFRS and their potential impact on the Company’s financial statements are presented below: New Standards, amendments to Standards and Interpretations: Approved by the IASB for application as at the balance sheet date Impact on the financial statements Effective year in the EU Amendments to IFRS 9 “Financial Instruments”, IAS 39 “Financial Instruments: Recognition and Measurement” and IFRS 7 “Financial Instruments: Disclosures”, IFRS 4 “Insurance Contracts” and IFRS 16 “Leases” – Reform of the Benchmark Interest Rate – Stage 2 No material impact on the financial statements is estimated 2021 Amendment to IFRS 16 “Leases” – Covid-19-related rent concessions No material impact on the financial statements is estimated 2021 New standards and interpretations entering into force after the balance sheet date As at the date of approval of these financial statements, amendments to IFRS 4 "Insurance Contracts" entitled “Extension of the Temporary Exemption from Applying IFRS 9” have been issued by the International Accounting Standards Board (IASB) and adopted by the European Union on 16 December 2020, and are effective as of a later date No material impact on the financial statements is estimated The expiry date of the temporary exemption from IFRS 9 has been extended from 1 January 2021 to annual periods beginning on 1 January 2023 New standards and interpretations pending endorsement by the European Union Impact on the financial statements Effective year in the EU IFRS 14 “Regulatory Deferral Accounts” No material impact on the financial statements is estimated The European Commission has decided not to launch the endorsement process of this interim standard until the final IFRS 14 is issued. Amendments to IAS 1 “Presentation of financial statements” – classification of liabilities as current or non-current No material impact on the financial statements is estimated 2023 Amendments to IAS 1 “Presentation of financial statements” – disclosures of accounting policies applied No material impact on the financial statements is estimated 2023 Amendments to IAS 8 “Accounting policies, changes in accounting estimates and errors” – definition of accounting estimates No material impact on the financial statements is estimated 2023 Amendments to IAS “12 Income Tax” – deferred tax related to assets and liabilities arising from a single transaction No material impact on the financial statements is estimated 2023 Amendments to IFRS 16 “Property, plant and equipment” proceeds before intended use No material impact on the financial statements is estimated 2022 Amendments to IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” – onerous contracts – cost of fulfilling the contract No material impact on the financial statements is estimated 2022 Amendments to IFRS 3 “Business Combinations” – amendments to references in the Conceptual Framework along with amendments to IFRS 3 No material impact on the financial statements is estimated 2022 Amendments to IFRS 10 “Consolidated Financial Statements” and IAS 28 “Investments in Associates and Joint Ventures” – sale or contribution of assets between an investor and its associate or joint venture, and further amendments No material impact on the financial statements is estimated The effective date has been postponed Amendments to various standards resulting from “Annual Improvements to IFRS Standards 2018–2020 Cycle” – amendments made as part of the annual IFRS improvements project (IFRS 1, IFRS 9, IAS 16 and IAS 41) primarily to correct conflicts and clarify wording (amendments to IFRS 1, IFRS 9 and IAS 41 No material impact on the financial statements is estimated 2022 IFRS 17 “Insurance Contracts” No material impact on the financial statements is estimated 2023 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 13 2. SEGMENT REPORTING Note 2.5 to the Financial Statements of CIECH S.A. for 2020 contains a detailed description of the allocation of operating segments to the new business structure. The change in presentation was made as of 2020 for all reporting periods presented as comparatives. CIECH S.A.’s operating segments are designated on the basis of internal reports prepared in the Company and regularly reviewed by the Management Board, which is responsible for operating decisions aimed at allocating resources to segments and assessing the subsidiaries performance. CIECH S.A. has been divided into the following operating segments: Soda segment (comprising BU Soda, and BU Salt) – the most important manufactured goods in the scope of the Soda Segment products are: light and dense soda ash, evaporated salt, sodium bicarbonate and calcium chloride. The products of this Segment are sold mainly by the parent company CIECH S.A. Production of the Soda Segment goods manufactured by the CIECH Group is implemented in CIECH Soda Polska S.A., the Romanian company CIECH Soda Romania S.A. (until September 2019) and in the German company CIECH Soda Deutschland GmbH&Co. KG. (the German company sells its products on its own). Soda Segment products are used in the glass, food, detergent and pharmaceutical industries. Agro Segment – the CIECH Group is a manufacturer of crop protection products used in agriculture and produced by the companies: CIECH Sarzyna S.A. and Proplan Plant Protection Company, S.L. and CIECH S.A. was the supplier of raw materials for production for CIECH Sarzyna S.A. and provided support services within this segment. Resins Segment – the CIECH Group was a producer of a variety of organic compounds manufactured by CIECH Żywice Sp. z o.o. In 2020 and in the first quarter of 2021, it was producing, among others, epoxy resins and polyester resins. These products are used in the following industries: automotive, paints and electronics. On 1 March 2021, CIECH Żywice Sp. z o.o. was sold to LERG S.A., and its figures are reported as discontinued operations. The figures for discontinued operations include the result of CIECH S.A. obtained from the transactions with CIECH Żywice Sp. z o.o., and from the sale of this company. Foams Segment – within the Foams Segment, CIECH S.A. provides support services to CIECH Pianki Sp. z o.o., which is a producer of polyurethane foams. Silicates Segment – CIECH S.A. sells the Silicates and Glass segment products manufactured by CIECH Soda Romania S.A. In 2021, key products in this group included glassy sodium silicate and sodium water glass. These products are used by the construction industry and in the production of detergents. CIECH S.A. provides support services within Silicates Segment. Packaging Segment – within this segment, CIECH S.A. provides support services to CIECH Vitro S.A., which manufactures glass packaging - lanterns and jars, used for the production of headstone lamps and in the food industry. Other activities Segment – it covers mainly services rendered outside the Group and goods sold by CIECH S.A. outside the scope of the above segments. The data concerning individual segments also includes support services provided by CIECH S.A. to the CIECH Group companies, such as accounting, controlling, legal, administrative and IT services. The financing is managed (including finance expenses and incomes with the exception of interest on trade receivables and liabilities) and income tax is calculated on the Company level. The data concerning these areas is not allocated to particular segments. CIECH S.A. has been divided into the following geographical areas: Poland, European Union, Other European countries, Africa, Asia, Other regions. Information on the Company’s geographical areas is established based on the location of its assets. Revenues and costs, assets and liabilities of segments are recognised and measured in a manner consistent with the method used in the separate financial statements. Operational segments results are assessed by the CIECH S.A’s Management Board on the basis of sales revenue, operating profit, level of EBITDA and adjusted EBITDA. No need to separate additional segments under IFRS 8 regulations has been identified. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 14 EBITDA should be viewed as a supplement not as a substitute for the business performance presented in accordance with IFRS. EBITDA is a useful ratio of the ability to incur and service debt. EBITDA and adjusted EBITDA levels are not defined by the IFRS and can be calculated in a different manner by other entities. The reconciliation and definitions applied by CIECH S.A. when determining these measures are presented below. 01.01.-31.12.2021 01.01.-31.12.2020 Net profit/(loss) on continuing operations 91,525 154,834 Income tax (14,095) 23,056 Financial expenses 215,846 172,478 Financial income (330,865) (286,286) Amortisation/depreciation 18,677 18,839 EBITDA on continued operations (18,912) 82,921 EBITDA on discontinued operations (3,414) 2,400 EBITDA on continued and discontinued operations (22,326) 85,321 01.01.-31.12.2021 01.01.-31.12.2020 EBITDA on continued operations (18,912) 82,921 One-offs including: (6,411) (1,016) Impairment (a) (210) - Cash items (b) (7,505) 840 Non-cash items (without impairment) (c) 1,304 (1,856) Adjusted EBITDA on continued operations (25,323) 81,905 Adjusted EBITDA on discontinued operations (3,414) 2,400 Adjusted EBITDA on continued and discontinued operations (28,737) 84,305 (a) Impairment losses are associated with the recognition/reversal of impairment write-downs of assets value. (b) Cash items: • gain/loss on sale of property, plant and equipment, • fees and compensations received, • donations given, • fortuitous events. (c) Non-cash items: • fair value measurement of investment properties, • costs of liquidation of inventories and property, plant and equipment, • costs of suspended investments, • restructuring costs, • environmental provisions, provisions for liabilities and compensation and other items (including extraordinary costs and other provisions). The above catalogue for year 2021 is complete, but adjusted EBITDA may also be adjusted for other untypical non-recurring events not listed above. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 15 OPERATING SEGMENTS Revenue and costs data as well as assets, equity and liabilities data of particular CIECH S.A.’s operating segments for periods disclosed in statements are presented in the tables below. OPERATING SEGMENTS 01.01.-31.12.2021 Soda segment Agro segment Foams segment Silicates segment Packaging segment Other operations segment Corporate functions TOTAL Total sales revenues 1,490,385 19,129 10,244 20,348 1,230 77,344 - 1,618,680 Cost of sales (1,313,044) (17,773) (1,438) (19,066) (1,201) (77,020) (1,429,542) Gross profit /(loss) on sales 177,341 1,356 8,806 1,282 29 324 - 189,138 Selling costs (134,956) (51) - (898) - (260) - (136,165) General and administrative expenses 2,276 - (3) 20 - (8,167) (92,459) (98,333) Result on management of receivables 200 28 - 1 - 585 - 814 Result on other operating activities 4,107 4,218 - - - (71) (1,297) 6,957 Operating profit /(loss) 48,968 5,551 8,803 405 29 (7,589) (93,756) (37,589) Exchange differences and interest on trade settlements 568 (79) (1) 5 - (521) 162 134 Borrowing costs - - - - - - (10,765) (10,765) Result on financial activity (non-attributable to segments) - - - - - - 125,650 125,650 Profit /(loss) before tax 49,536 5,472 8,802 410 29 (8,110) 21,291 77,430 Income tax - - - - - - - 14,095 Net profit /(loss) on continuing operations - - - - - - - 91,525 Net profit /(loss) on discontinued operations - - - - - - - 41,681 Net profit /(loss) for the period - - - - - - - 133,206 Amortization/depreciation 3,356 35 - - - 673 14,613 18,677 EBITDA from continuing operations 52,324 5,586 8,803 405 29 (6,916) (79,143) (18,912) Adjusted EBITDA from continuing operations 49,041 1,310 8,803 405 29 (6,890) (78,021) (25,323) * Adjusted EBITDA for the 12-month period ended 31 December 2021 is calculated as EBITDA adjusted for untypical one-off events, including: net gain from restructuring PLN 3,263 thousand, penalty fees and compensation received: PLN 3,353 thousand, other: PLN -187 thousand. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 16 OPERATING SEGMENTS 01.01.-31.12.2020 Soda segment Agro segment Foams segment Silicates segment Packaging segment Other operations segment Corporate functions TOTAL Total sales revenues 1,407,865 106,351 100,511 30,828 194 8,326 - 1,654,075 Cost of sales (1,182,762) (99,198) (93,210) (27,703) (186) (6,784) (1,409,843) Gross profit /(loss) on sales 225,103 7,153 7,301 3,125 8 1,542 - 244,232 Selling costs (103,883) 455 (2,294) (1,889) - (431) (108,042) General and administrative expenses (7,791) - - (4) - - (56,527) (64,322) Result on management of receivables (8,925) (158) - (3) - 15 44 (9,027) Result on other operating activities 1,959 (69) - - - (302) (347) 1,241 Operating profit /(loss) 106,463 7,381 5,007 1,229 8 824 (56,830) 64,082 Exchange differences and interest on trade settlements (310) (1,467) (1,402) - - (396) (10) (3,585) Borrowing costs - - - - - - (13,656) (13,656) Result on financial activity (non-attributable to segments) - - - - - - 131,049 131,049 Profit /(loss) before tax 106,153 5,914 3,605 1,229 8 428 60,553 177,890 Income tax - - - - - - - (23,056) Net profit /(loss) on continuing operations - - - - - - 154,834 Net profit /(loss) on discontinued operations - - - - - - 453 Net profit /(loss) for the period - - - - - - 155,287 Amortization/depreciation 3,526 44 - - - 417 14,852 18,839 EBITDA from continuing operations 109,989 7,425 5,007 1,229 8 1,241 (41,978) 82,921 Adjusted EBITDA from continuing operations 108,860 7,425 5,007 1,229 8 1,241 (41,865) 81,905 * Adjusted EBITDA for the 12-month period ended 31 December 2020 is calculated as EBITDA adjusted for untypical one-off events such as: reversal of provisions for liabilities: PLN 1,856 thousand; donations given: PLN -881 thousand; other: PLN 41 thousand. There are no significant customers outside the CIECH Group from whom the Company would earn 10% of its total revenues. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 17 ASSETS AND LIABILITIES BY OPERATING SEGMENTS ASSETS LIABILITIES 31.12.2021 31.12.2020 31.12.2021 31.12.2020 Soda Segment 90,758 85,672 424,241 263,849 Agro Segment 3,972 9,858 2,177 4,129 Resins Segment - 97,228 - 38,192 Foam Segment 1,011 1,326 12 9 Silicates Segment 4,307 4,224 1,856 9,636 Packaging Segment 315 83 - - Other operations Segment 17,948 13,901 13,745 16,191 Corporate functions 4,494,246 4,145,342 2,555,925 2,431,860 TOTAL 4,612,557 4,357,634 2,997,956 2,763,866 Assets associated with discontinued operations. For detailed information on discontinued operations, see Note 5.9 to these statements. At CIECH S.A., capital expenditure for 2021 in the amount of PLN 29,592 thousand and for 2020 in the amount of PLN 17,072 thousand was recognised in the Segment “Corporate functions”. SALES REVENUES BY BUSINESS SEGMENTS At CIECH S.A., sales revenues are recognized upon the provision of services or delivery of goods. For detailed information on the recognition of sales revenue, please refer to Note 3.1 to these financial statements. 01.01.-31.12.2021 01.01.-31.12.2020 Change 2021/2020 Change % Soda segment, including: 1,490,385 1,407,865 82,520 5.9% Dense soda ash 797,947 814,859 (16,912) (2.1%) Light soda ash 305,715 227,365 78,350 34.5% Salt 192,643 190,410 2,233 1.2% Sodium bicarbonate 111,015 105,770 5,245 5.0% Calcium chloride 33,194 18,111 15,083 83.3% Other goods and services 49,871 51,350 (1,479) (2.9%) Agro segment, including: 19,129 106,351 (87,222) (82.0%) Raw materials for production of plant pro-tection products 13,534 98,137 (84,603) (86.2%) Other goods and services 5,595 8,214 (2,619) (31.9%) Foam segment, including: 10,244 100,511 (90,267) (89.8%) Raw materials for the production of polyu-rethane foams - 96,928 (96,928) - Other goods and services 10,244 3,583 6,661 185.9% Silicates segment, including: 20,348 30,828 (10,480) (34.0%) Sodium silicates 11,007 11,279 (272) (2.4%) Other goods and services 9,341 19,549 (10,208) (52.2%) Packaging segment, including: 1,230 194 1,036 534.0% Other goods and services 1,230 194 1,036 534.0% Other segment, including: 77,344 8,326 69,018 828.9% Revenues from third parties 77,344 8,326 69,018 828.9% TOTAL 1,618,680 1,654,075 (35,395) (2.1%) FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 18 INFORMATION ON GEOGRAPHICAL AREAS Information on CIECH S.A.’s geographical areas is established based on the location of its assets. ASSETS 31.12.2021 31.12.2020 Poland 2,462,473 2,204,723 European Union (excluding Poland) 2,149,546 2,152,810 Other European countries - 51 Africa 538 - Asia - 50 TOTAL 4,612,557 4,357,634 The Company’s non-current assets are located in Poland and the European Union. As regards the European Union, the most significant non-current assets comprise shares in subsidiaries having their registered offices mainly in Romania (PLN 30,551 thousand), Germany (PLN 838,346 thousand) and Spain (PLN 203,866 thousand). Trade and other receivables constitute the main component of current assets presented in individual geographical areas 01.01.-31.12.2021 01.01.-31.12.2020 Poland 1,013,829 1,124,908 European Union (excluding Poland) 523,361 450,247 Germany 133,917 113,253 Romania 42,269 20,593 Czech Republic 149,894 143,580 Italy 5,946 5,342 The Netherlands 47,923 51,417 Finland 19,033 27,580 Sweden 22,753 21,168 Belgium 22,213 8,485 United Kingdom 3,683 2,880 Denmark 14,112 7,325 France 14,179 11,643 Luxembourg - 1,046 Lithuania 8,755 6,996 Other EU countries 38,684 28,939 Other European Countries 57,600 64,482 Switzerland 3,764 2,393 Norway 44,375 43,486 Russia 1,717 1,016 Other European countries 7,744 17,587 Africa 8,007 9,355 Asia 13,616 4,300 Indie - 121 Singapur 6,819 1,043 Other Asian countries 6,797 3,136 Other regions 2,267 949 Hedge accounting - (166) TOTAL 1,618,680 1,654,075 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 19 3. NOTES TO THE STATEMENT OF PROFIT OR LOSS AND STATEMENT OF OTHER COMPREHENSIVE INCOME 3.1. SALES REVENUES Accounting policy The Entity recognises revenues based on the so-called 5-step model – when it satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset. When (or as) a performance obligation is satisfied, the Entity recognises as revenues the amount of the transaction price that is allocated to that performance obligation. At CIECH S.A., revenues from the sale of goods are recognised upon their delivery in accordance with the INCOTERMS terms and conditions contained in contracts with customers. The company usually sells using the following delivery bases: DAP, FCA, DDP. Revenues from the sale of services are recognised when the service is provided. CIECH S.A. enters into agreements with counterparties concerning the provision of CIECH S.A. products through consignment warehouses owned by the counterparties. Control of delivered products is passed to the customer when they are accepted for storage and at that point in time sales revenues are recognised along with the corresponding cost of sales. CIECH S.A. grants discounts to selected customers, and the value of these discounts reduces the value of sales revenues. Revenues from the sales of products and goods are recognised in profit or loss at the NBP’s average exchange rate from the date preceding the date of invoice, except for sales revenues earned by the Branch of CIECH S.A. in Germany whose currency translation principle is described in Note 1.3. For detailed information on sales revenues by operating segment and by geographical market, please refer to Note 2 to these financial statements. Payment terms Commercial contracts concluded by CIECH S.A. include various terms of payment of trade receivables depending on the type of transaction, market characteristics and trade conditions. The most common payment terms are: 14, 30 and 60 days. CIECH S.A. uses non-recourse factoring and detailed information is provided in Note 5.6 to these financial statements. SALES REVENUES 01.01.-31.12.2021 01.01.-31.12.2020 Revenues from sales of products and services 97,223 113,513 - services 97,223 113,513 Revenues from sales of goods and materials 1,521,457 1,540,562 - goods 1,521,457 1,540,562 Net sales of products, goods and materials 1,618,680 1,654,075 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 20 3.2. COST OF SALES, SELLING COSTS, GENERAL AND ADMINISTRATIVE EXPENSES Accounting policy Expenses are probable decreases in economic benefits in the form of outflows or depletions of assets or increases in liabilities and provisions. Cost of sales comprises the production cost of services sold and the cost of goods and materials sold. Selling costs include, among others: costs of transport, sales commissions and the costs of advertising, promotion and distribution. General and administrative expenses are expenses associated with activities of the entity’s management or those of general functions. Provisions for liabilities to employees arising from the employment relationship (salaries, bonuses, holiday entitlements, etc.) are recognised in costs of sales, general and administrative expenses and in selling expenses. Provisions for liabilities to former key employees (compensation for termination of contracts, non-competition clauses, etc.) are recognised in general and administrative expenses or selling expenses. Provisions for length-of-service awards, retirement and disability benefits are recognised in other operating expenses. Amortisation and depreciation In this item, the Company recognises the cost of accrued depreciation charges on property, plant and equipment, amortisation charges on intangible assets, and depreciation charges on right-of-use assets. Depreciation and amortisation charges are recognised as operating expenses depending on where they arise. COST OF SALES, SELING COST AND ADMINISTRATIVE EXPENSES 01.01.-31.12.2021 01.01.-31.12.2020 Cost of manufacture of products and services sold (81,044) (94,108) Cost of sold goods and materials sold (1,348,498) (1,315,735) Cost of sales (1,429,542) (1,409,843) Selling costs (136,165) (108,042) General and administrative expenses (98,333) (64,322) 3.3. COSTS BY TYPE COST BY KIND (SELECTED) 01.01.-31.12.2021 01.01.-31.12.2020 Amortisation (17,666) (18,409) Consumption of materials and energy (4,409) (2,727) Employee benefits, including: (74,898) (83,740) - payroll (67,097) (70,768) - social security and other benefits (6,167) (9,324) - other (1,359) (1,119) External services (185,983) (153,653) FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 21 3.4. OTHER OPERATING INCOME AND EXPENSES Accounting policy The reporting period’s results are also affected by other operating income and expenses indirectly related to the Company's core operations. The key items include: ✓ recognition / reversal of provisions, such as for liabilities, employee benefits, ✓ gains/ losses on disposal and liquidation of non-financial non-current assets, ✓ recognition/ reversal of impairment losses (including allowances for doubtful receivables), ✓ penalty fees and compensation paid/ received; ✓ income from rental of investment property is recognised in profit or loss on a straight-line basis over the lease term. Any lease incentives granted are an integral part of the net consideration agreed for the use of the asset. Judgements and estimates – Impairment of non-financial assets The carrying amounts of the Company’s non-financial assets, other than inventory and deferred tax assets, are reviewed at reporting date to determine whether there is any indication of impairment. If any such indication exists, then the Company estimates the recoverable amount of the respective cash-generating unit. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use. The recoverable amount is determined for individual assets, unless the asset does not generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. If the asset's carrying amount exceeds its recoverable amount, an impairment loss is recognised against the carrying amount of the asset. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. Impairment losses are recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the unit (group of units) and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. Impairment losses are recognised in profit or loss. Impairment losses in respect of assets are recognised in those expense categories that correspond to the function of the asset to which they relate. OTHER OPERATING INCOME 01.01.-31.12.2021 01.01.-31.12.2020 Rents/lease income 1,216 433 Gain on disposal of non-financial non-current assets 56 186 Reversal of impairment allowances on receivables 1,976 656 Reversal of impairment losses on property, plant and equipment and intangible assets 210 - Reversal of provisions on employee benefits 370 158 Reversal of provisions for liabilities – changing the base 168 2,172 Penalty fees and compensations received 3,353 1 Car sale - lease 83 320 Revenues from sublease 1,333 570 Income from restructuring 4,271 - Other 1,053 1,094 TOTAL 14,089 5,590 OTHER OPERATING EXPENSES 01.01.-31.12.2021 01.01.-31.12.2020 Rental costs (1,424) (766) Recognition of impairment losses on receivables (1,162) (9,683) Recognition of provisions for liabilities (85) (316) Sublease costs (1,629) (721) Other (2,018) (1,890) TOTAL (6,318) (13,376) FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 22 As at 31 December 2021, CIECH S.A. made an assessment of premises, originating both from external and internal sources of information, of indicators of impairment of non-financial assets. These analyses did not indicate a need to perform impairment tests. 3.5. FINANCIAL INCOME AND EXPENSES Accounting policy Financial income and expenses relate to an entity’s financing activities including the acquisition and disposal of equity, securities, drawing of loans and borrowings, issuance of debt securities. Key items of financing activities include: ✓ interest on borrowings determined based on the effective interest method, ✓ impairment losses on financial assets, ✓ interest earned by the Company on cash and cash equivalents (bank deposits and accounts loans granted and receivables) – accounted for in the profit and loss on accrual basis using the effective interest method, ✓ dividend income – recognised in profit or loss when the Company’s right to receive payment is established, ✓ net foreign exchange gains or losses, ✓ gains/(losses) on sales of financial assets, ✓ gains/(losses) on derivative instruments. Judgements and estimates At each reporting date the Company assesses whether there is any evidence that a financial asset or a group of financial assets is impaired. Where such evidence exists, the Company tests the value of interests in subsidiaries. The recoverable value is defined as the higher of value in use and fair value less costs to sell. Value in use is determined using the discounted cash flow model. The cash flows are based on financial plans covering a period of the next five years, excluding the effects of restructuring, or significant future investments that can improve the operating results of assets being part of the tested cash-generating unit. The recoverable amount is sensitive to the discount rate used in the discounted cash flow model, as well as the expected future cash flows and growth rate adopted for the residual period. Where it is necessary to recognise impairment losses on involvement in other companies, such losses are recognised in the following order: on shares, on loans granted, on interest on loans. Accounting policy concerning financial instruments is presented in note 8.1. NET FINANCIAL INCOME (EXPENSES) 01.01.-31.12.2021 01.01.-31.12.2020 Interest 48,866 46,299 Dividends and shares in profit 204,620 181,903 Net foreign exchange gains 5,192 35,793 Reversal of impairment losses 11,719 9,131 Profits from derivatives 36,794 11,589 Other 23,674 1,571 Total financial income 330,865 286,286 Interest (51,721) (55,405) Recognition of other impairment losses (13,860) (24,642) Bank fees and commissions (7,881) (3,540) Recognition of provision for anticipated losses (921) (1,119) Loss due to derivatives (105,264) (70,906) Guarantees costs (14,893) (15,171) Costs of disposal of financial assets (19,715) (565) Other (1,591) (1,130) Total financial expenses (215,846) (172,478) Net Financial income (expenses) 115,019 113,808 This includes, among other things, recognised and reversed impairment losses on financial assets, as described in more detail in Notes 5.4, 5.7. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 23 In 2021, CIECH S.A. received the highest dividends from the following companies: • CIECH Soda Polska S.A., in the amount of PLN 96,841 thousand, • CIECH Vitrosilicon S.A., in the amount of PLN 43,802 thousand, • Proplan Plant Protection Company, in the amount of PLN 24,068 thousand, • CIECH Pianki Sp. z o.o., in the amount of PLN 23,776 thousand, • CIECH Soda Deutschland GmbH, in the amount of PLN 15,606 thousand, • Ciech Finance Sp. z o.o., in the amount of PLN 350 thousand, • Gamma Finanse Sp. z o.o., in the amount of PLN 88 thousand, • Ciech Transclean Sp. z o.o., in the amount of PLN 50 thousand, • Verbis ETA Sp. z o.o., in the amount of PLN 39 thousand. CIECH S.A. recorded the following gains/losses on the settlement of derivative instruments: • gain on CIRS, in the amount of PLN 7,753 thousand, • loss on Forward, in the amount of PLN 8,905 thousand, • loss on SWAP, in the amount of PLN 11,441 thousand. CIECH S.A. recorded the following gains/losses on changes in valuation of derivative instruments: • loss on valuation of CIRS, in the amount of PLN 53,466 thousand, • gain on valuation of Forward, in the amount of PLN 13,174 thousand, • gain on valuation of SWAP, in the amount of PLN 3,377 thousand. The item in the statement of profit or loss “Gains/losses on financial instruments” comprises the following values: 01.01.-31.12.2021 01.01.-31.12.2020 Gains on financial instruments 97,329 66,612 Interest 48,866 46,299 Gains on derivative instruments 36,794 11,182 Write-offs 11,669 9,131 Losses on financial instruments (168,290) (128,963) Interest (51,721) (55,405) Losses on derivative instruments (105,264) (70,906) Write-offs (11,305) (2,652) FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 24 3.6. COMPONENTS OF OTHER COMPREHENSIVE INCOME 01.01.-31.12.2021 01.01.-31.12.2020 Tax effect of each component of other comprehensive income of the CIECH Group Before tax Tax After tax Before tax Tax After tax Cash flow hedge 56,541 (10,743) 45,798 (30,466) 5,788 (24,678) Valuation of actuarial provisions (89) 17 (72) (51) 10 (41) Other components of other comprehensive income - - - (6) - (6) TOTAL 56,452 (10,726) 45,726 (30,523) 5,798 (24,725) Income tax and reclassification adjustments in other comprehensive income Other comprehensive income before tax 01.01.-31.12.2021 01.01.-31.12.2020 Cash flow hedge 56,541 (30,466) fair value remeasurement in the period 37,765 (34,661) reclassification to profit or loss 18,776 4,195 Valuation of actuarial provisions (89) (51) remeasurement for the current period (89) (51) Other components of other comprehensive income - (6) remeasurement for the current period - (6) reclassification to profit or loss - - Income tax attributable to other components of other comprehensive income (10,726) 5,798 accrued for the current period (7,158) 6,596 reclassification to profit or loss (3,568) (798) Other comprehensive income net of tax 45,726 (24,725) FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 25 4. INCOME TAX, DEFERRED TAX ASSETS AND LIABILITY Accounting policy Current tax receivables and liabilities for the current and prior periods are measured in the amount of the expected tax amount to be paid to tax authorities (recoverable from tax authorities) using tax rates and tax laws that are legally or substantively enacted at the reporting date. 4.1. MAIN COMPONENTS OF TAX EXPENSE The main components of tax expense include: THE MAIN COMPONENTS OF TAX EXPENSE (TAX INCOME) 01.01.-31.12.2021 01.01.-31.12.2020 Current income tax (3,623) (15,088) Income tax for the reporting period (2,426) (14,449) Adjustment to tax for previous years (1,197) (639) Deferred tax 17,718 (7,968) Origination/reversal of temporary differences 49,350 7,120 Unrecognized deferred tax assets (31,632) (15,088) INCOME TAX RECOGNISED IN STATEMENT OF PROFIT OR LOSS 14,095 (23,056) For a detailed description of proceedings concerning tax settlements, see note 9.2 to these financial statements. INCOME TAX RECOGNISED IN OTHER COMPREHENSIVE INCOME 01.01.-31.12.2021 01.01.-31.12.2020 Cash flow hedge (10,743) 5,788 Valuation of actuarial provisions 17 10 TOTAL (10,726) 5,798 4.2. EFFECTIVE TAX RATE The following represents a reconciliation of income tax calculated by applying the currently enacted statutory tax rate to the Company’s pre-tax financial result to income tax calculated based on the effective tax rate: EFFECTIVE TAX RATE 01.01.-31.12.2021 01.01.-31.12.2020 Profit/(loss) before tax 77,430 177,890 Tax calculated at the applicable tax rate (14,712) (33,799) Difference resulting from the application of tax rates applicable in other countries (949) (1,152) Tax effect of revenues adjusting profit (loss) before tax (permanent difference) 41,485 53,735 Tax effect of expenses adjusting profit (loss) before tax (permanent difference) 10,417 (24,842) Income tax for the previous years recognised in the statement of profit or loss - (2,421) Deferred tax asset for tax losses carried forward (1,197) 1,470 Tax losses for the reporting period for which a deferred tax asset has not been recognised (18,532) (15,961) Other (2,417) (86) Income tax recognised in statement of profit or loss 14,095 (23,056) EFFECTIVE TAX RATE (18.2%) 13.0% The Branch of CIECH S.A. in Romania is subject to a tax rate of 16% and the Branch of CIECH S.A. in Germany – to a tax rate of 30.88%. The tax rates were applied continuously in both periods. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 26 The main items included in the amount of revenues which are not revenues according to tax regulations result from dividend income in subsidiaries. The main items included in the amount of non-tax deductible expenses result from cancellation of shares in subsidiaries and the difference in the value of shares sold. 4.3. DEFERRED INCOME TAX Accounting policy Deferred tax is recognised in respect of temporary differences between the tax values of assets and liabilities and the carrying amounts recognised in the financial statements. Deferred tax liability is recognised for all taxable temporary differences, unless: ✓ the deferred tax liability arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction affects neither accounting profit nor taxable profit, or ✓ the investor is able to control the timing of the reversal of temporary differences in respect of investments in subsidiaries, associates and joint ventures, and it is probable that the temporary differences will not reverse in the foreseeable future. A deferred tax asset is recognised for all deductible temporary differences and for unused tax credits and tax losses carried forward to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and losses can be utilised: ✓ unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction affects neither accounting profit nor taxable profit, and ✓ deductible temporary differences in respect of investments in subsidiaries, associates and joint ventures are recognised in statement of financial position only to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised. The carrying amount of a deferred tax asset is reviewed at the end of every reporting period and is reduced to the extent that it is no longer probable that sufficient taxable income will be available against which the asset can be utilised. Any previously unrecognised deferred tax asset is reassessed at each reporting date and is recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the tax rates and laws that have been enacted at the reporting date or whose application in the future is certain at the reporting date. Income tax related to items recognised outside profit or loss is itself recognised either in other comprehensive income, when it relates to items recognised in other comprehensive income, or directly in equity, when it relates to items recognised directly in equity. Deferred tax assets and liabilities are offset solely if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity. The Company does not recognise deferred tax on leases. Judgements and estimates Deferred income tax is based on the assumption that future taxable profit will allow for its usage. In determining the amount of deferred tax assets, CIECH S.A. bases its calculations on estimates related to the term and amount of future taxable income. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 27 Deferred income tax is attributable to the following items: DEFERRED INCOME TAX ASSETS AND DEFERRED INCOME TAX LIABILITY 31.12.2021 31.12.2020 Total asset Total liability Net value Total asset Total liability Net value Property, plant and equipment - 6,046 (6,046) 40 3,407 (3,367) Financial assets 368 14,568 (14,200) 6,399 10,197 (3,798) Inventory - 290 (290) - 70 (70) Trade and other receivables 39 - 39 117 - 117 Provisions for employee benefits 142 - 142 187 - 187 Tax losses carried forward 52,106 - 52,106 15,088 - 15,088 Foreign exchange differences - 1,375 (1,375) - 4,073 (4,073) Liabilities 26,101 2,813 23,288 10,954 47 10,907 Other 46 - 46 93 - 93 Deferred tax assets/liability 78,802 25,092 53,710 32,878 17,794 15,084 Set - off of deferred tax assets/ liability (25,092) (25,092) - (17,790) (17,790) - Unrecognized deferred tax assets (46,720) - (46,720) (15,088) - (15,088) Deferred tax assets/liability recognised in the statement of financial position 6,990 - 6,990 - 4 (4) The Company estimates that within more than 12 months from the period of the financial statements presentation the deferred tax asset will be utilised in the amount of PLN 3,190 thousand. In the same period, the estimated amount of settlement of the deferred tax liability will be PLN 22,029 thousand. The Company recognises deferred tax liabilities and deferred tax assets on the basis of temporary differences between the carrying amounts of assets and liabilities and their tax bases and tax losses deductible in the future as well as other unused tax credits relating to corporate income tax. Temporary differences can be: • taxable, resulting in taxable amounts to be included in the determination of taxable income (tax loss) in future periods when the carrying amount of the asset or liability is recovered or settled, or • deductible, resulting in deductible amounts in the determination of taxable income (tax loss) in future periods when the carrying amount of the asset or liability is recovered or settled. CHANGE IN TEMPORARY DIFFERENCES IN THE PERIOD 01.01.2021 Change in temporary differences recognised in the statement of profit or loss Change in temporary differences recognised in other comprehensive income 31.12.2021 Property, plant and equipment (17,721) (14,100) - (31,821) Financial assets (19,991) 1,792 (56,543) (74,742) Inventories (368) (1,153) - (1,521) Trade and other receivables 616 (411) - 205 Provisions for employee benefits 984 (326) 89 747 Tax losses carried forward 79,412 194,830 - 274,242 Foreign exchange differences (21,437) 14,206 - (7,231) Liabilities 57,404 65,154 - 122,558 Other 489 (246) - 243 TOTAL 79,388 259,746 (56,454) 282,680 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 28 CHANGE IN TEMPORARY DIFFERENCES IN THE PERIOD 01.01.2020 Change in temporary differences recognised in the statement of profit or loss Change in temporary differences recognised in other comprehensive income 31.12.2020 Property, plant and equipment (181) (17,540) - (17,721) Financial assets (49,105) (1,352) 30,466 (19,991) Inventories (930) 562 - (368) Trade and other receivables 621 (5) - 616 Provisions for employee benefits 1,263 (336) 57 984 Tax and other losses carried forward 1,740 77,672 - 79,412 Foreign exchange differences 13,405 (34,842) - (21,437) Liabilities 44,584 12,820 - 57,404 Other 489 - - 489 TOTAL 11,886 36,979 30,523 79,388 The Company did not recognise a deferred tax asset in the total amount of PLN 46,720 thousand. The Company has not recognised a deferred tax asset in respect of the tax loss generated on the capital source in 2018-2021 (PLN 146,376 thousand). The Company determined that recovery of this asset over the next 5 years is less than more probable. In the light of provisions of the General Anti-Avoidance Rule (“GAAR”), applicable as of 15 July 2016 and aimed at preventing the origination and use of factitious legal structures designed to avoid payment of taxes in Poland, the Management Board of CIECH S.A. considered the impact of transactions which could potentially be subject to the GAAR regulations on the deferred tax, tax value of assets and deferred tax provisions. In the opinion of the Management Board, the analysis conducted did not demonstrate the need to adjust the reported current and deferred income tax items. However, in the opinion of the Management Board, there is an inherent uncertainty arising from GAAR that tax authorities will interpret these provisions differently, will change their approach to their interpretation or the rules themselves will change, which may affect the ability to utilise the deferred tax assets in future periods and the possible payment of an additional tax for past periods. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 29 5. NOTES TO ASSETS REPORTED IN THE STATEMENT OF FINANCIAL POSITION 5.1. PROPERTY, PLANT AND EQUIPMENT Accounting policy Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and all other costs directly attributable to the acquisition of the asset and bringing it to a working condition for its intended use. The cost also includes the cost of replacing components of machinery and equipment when incurred if the recognition criteria are met. Subsequent expenditure The cost of replacing a part of an item of property, plant and equipment are capitalised. Other costs are capitalised only to the extent that it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. Other subsequent costs are recognised in the profit or loss statement as incurred expenses. A separate component of an item of property, plant and equipment, requiring replacement at regular intervals, is depreciated over its economic useful life. The Company increases the value of property, plant and equipment by the value of outlays for periodic major overhauls, necessary for the functioning of a given item of property, plant and equipment. These expenditures are treated as a separate item of property, plant and equipment and depreciated through the anticipated period to the next planned overhaul. Upon capitalisation of new costs of overhauls, the non-depreciated value of previous repairs is allocated to operating expenses. Upon the acquisition or creation of an item of property, plant and equipment, the Company separates from the cost a value equal to the expenditures that need to be made during the next overhaul of a given item of property, plant and equipment and depreciates it through the anticipated period left until the next planned overhaul. Depreciation Items of property, plant and equipment, and also their significant and separate components, are depreciated on a straight-line basis over their respective estimated useful lives. Land is not depreciated. The estimated useful lives are as follows: Judgements and estimates Depreciation rates are determined on the basis of the expected useful lives of property, plant and equipment, and are subject to annual verification. Any adjustments resulting from the verification are made prospectively as a change in estimate. Impairment losses on non-financial assets — detailed principles of estimation of impairment losses are described in accounting policies, in note 3.4. Buildings 5-7 years Machinery and equipment 2-5 years Other 5 years FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 30 01.01.-31.12.2021 Buildings offices and land and water engineering facilities Machinery and equipment Means of transport Other tangible fixed assets Tangible fixed assets under construction TOTAL Gross value of property, plant and equipment at the beginning of the period 543 25,073 142 1,516 4,283 31,557 Investment outlays - - - - 4,347 4,347 Reclassification 4 5,023 - 56 (5,083) - Sales - (748) - (85) - (833) Other - 459 (98) 11 - 372 Gross value of property, plant and equipment at the end of the period 547 29,807 44 1,498 3,547 35,443 Accumulated depreciation at the beginning of the period (275) (18,324) (99) (1,054) - (19,752) Depreciation for the period (96) (2,380) 69 3 - (2,404) Annual depreciation charge (96) (3,123) (14) (82) - (3,315) Sales - 743 - 85 - 828 Other - - 83 - - 83 Accumulated depreciation at the end of the period (371) (20,704) (30) (1,051) - (22,156) Impairment losses at the beginning of the period - - - - - - Impairment losses at the end of the period - - - - - - Carrying amount of property, plant and equipment at the beginning of period 268 6,749 43 462 4,283 11,805 Carrying amount of property, plant and equipment at the end of the period 176 9,103 14 447 3,547 13,287 01.01.-31.12.2020 Buildings offices and land and water engineering facilities Machinery and equipment Means of transport Other tangible fixed assets Tangible fixed assets under construction TOTAL Gross value of property, plant and equipment at the beginning of the period 550 24,612 138 1,732 3,785 30,817 Purchase/Reclassification from investments - 1 472 - 312 5 336 7 120 Reclassification - - - - (1 784) (1 784) Sales - (191) - (319) (3 040) (3 550) Deficiencies revealed during the inventory - (813) - (114) - (927) Other (7) (7) 4 (95) (14) (119) Gross value of property, plant and equipment at the end of the period 543 25,073 142 1,516 4,283 31,557 Accumulated depreciation at the beginning of the period (184) (15,107) (31) (1,364) - (16,686) Depreciation for the period (91) (3,217) (68) 310 - (3,066) Annual depreciation charge (97) (4,183) (69) (213) - (4,562) Sales - 190 - 319 - 509 Deficiencies revealed during the inventory - 776 - 111 - 887 Other 6 - 1 93 - 100 Accumulated depreciation at the end of the period (275) (18,324) (99) (1,054) - (19,752) Impairment losses at the beginning of the period - - - - - - Impairment losses at the end of the period - - - - - - Carrying amount of property, plant and equipment at the beginning of period 366 9,505 107 368 3,785 14,131 Carrying amount of property, plant and equipment at the end of the period 268 6,749 43 462 4,283 11,805 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 31 Depreciation of property, plant and equipment was charged to the following line items in the statement of profit or loss: PROPERTY, PLANT AND EQUIPMENT DEPRECIATION CHARGES 01.01.-31.12.2021 01.01.-31.12.2020 General and administrative expenses (3,315) (4,562) TOTAL (3,315) (4,562) In the current period changes in accounting estimates did not have a material impact and it is not expected that they will have a material impact in future periods. In 2021 and 2020, CIECH S.A. did not receive from third parties for impaired property, plant and equipment. As at 31 December 2021, all items of property, plant and equipment at CIECH S.A. were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. Future commitments arising from agreements concerning acquisition of property, plant and equipment amounted to PLN 24 thousand in the current period; there were no such commitments in the corresponding period. 5.2. RIGHT-OF-USE ASSETS Accounting policy Initial measurement of right-of-use assets At the commencement date, the Company measures the right-of-use asset at cost. The cost of the right-of-use asset comprises: a) the amount of the initial measurement of the lease liability, b) any lease payments made at or before the commencement date, less any lease incentives received; c) any initial direct costs incurred by the lessee; and d) an estimate of costs to be incurred by the lessee in 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. Subsequent measurement of right-of-use assets After initial recognition, the Company measures the right-of-use asset at cost less any accumulated depreciation and any accumulated impairment losses, and adjusted for any remeasurement of the lease liability. In the case of leasehold improvements, expenditures on the purchase or production of third-party fixed assets, once incurred, do not result in the necessity to make payments in the future, and therefore do not meet the definition of lease. The recognition of these expenditures is regulated by IAS 16. If the lease transfers ownership of the underlying asset to the Company by the end of the lease term or if the cost of the right-of-use asset reflects that the Company will exercise a purchase option, the Company depreciates the right-of-use asset from the commencement date to the end of the useful life of the underlying asset. Otherwise, the Company depreciates the right-of-use asset from the commencement date to the earlier of the end of the useful life of the right- of-use asset or the end of the lease term. The Company applies IAS 36 Impairment of Assets to determine whether the right-of-use asset is impaired and to account for any impairment loss identified. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 32 Changes in carrying amounts of right-of-use assets in the period of 12 months ended 31 December 2021 are as follows: 01.01.-31.12.2021 Buildings offices and land and water engineering facilities Machinery and equipment Means of transport TOTAL CHANGE OF RIGHTS TO USE ASSETS Gross value at the beginning of the period 31,914 - 4,376 36,290 Conclusion of new lease agreements - 483 1,654 2,137 Modification of the leasing contract (1,021) - (35) (1,056) Gross value at the end of the period 30,893 483 5,995 37,371 Accumulated depreciation at the beginning of the period (8,098) - (2,135) (10,233) Depreciation for the period (3,204) (110) (1,589) (4,903) Annual depreciation charge (3,204) (110) (1,589) (4,903) Accumulated depreciation at the end of the period (11,302) (110) (3,724) (15,136) Net value of rights to use assets at the beginning of the period 23,816 - 2,241 26,057 Net value of rights to use assets at the end of the period 19,591 373 2,271 22,235 01.01.-31.12.2020 Buildings offices and land and water engineering facilities Means of transport TOTAL CHANGE OF RIGHTS TO USE ASSETS Gross value at the beginning of the period 32,906 1,051 33,957 Conclusion of new lease agreements - 3,401 3,401 Modification of the leasing contract (962) 14 (948) Closing of the contract (30) (90) (120) Gross value at the end of the period 31,914 4,376 36,290 Accumulated depreciation at the beginning of the period (3,959) (662) (4,621) Depreciation for the period (4,139) (1,473) (5,612) Annual depreciation charge (4,139) (1,473) (5,612) Accumulated depreciation at the end of the period (8,098) (2,135) (10,233) Net value of rights to use assets at the beginning of the period 28,947 389 29,336 Net value of rights to use assets at the end of the period 23,816 2,241 26,057 In 2019, CIECH S.A. implemented IFRS 16 “Leases”. Under this standard, leases of office and warehouse space, as well as leases of passenger cars were identified in the company as lease agreements. CIECH S.A. is a lessee of office and warehousing space, in which the largest item (approx. 2 thousand m 2 ) is the office in Warsaw at Wspólna Street, where the Company’s registered office is located. The term of the lease agreement expires in 2028. CIECH S.A. also leases passenger cars. The value of these cars includes the value of discounted lease payments at the moment of concluding the lease agreement, less the accumulated depreciation for this group of fixed assets. Some agreements are denominated in foreign currencies and indexed to price indices. Some agreements contain an extension option. For detailed information on lease liabilities, see Note 7.4. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 33 5.3. INTANGIBLE ASSETS Accounting policy Intangible assets acquired by the company are measured at cost less accumulated amortisation and accumulated impairment losses. Any expenditure on internally generated goodwill and brands, is recognised in the profit or loss as incurred. Subsequent expenditure Subsequent expenditure on existing intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other subsequent expenditure is expensed as incurred. Amortisation Intangible assets are amortised on a straight-line basis over their estimated useful lives. The estimated useful lives of the following categories of intangible assets are as follows: Judgements and estimates Amortisation rates are determined on the basis of the expected useful lives of intangible assets, and are subject to periodical verification. Any adjustments resulting from the verification are made prospectively as a change in estimate. Impairment losses on non-financial assets — detailed principles of estimation of impairment losses are described in accounting policies, in note 3.4. Patents and licences 8 years Other 2-5 years 01.01.-31.12.2021 Licences,patents, permits, etc. obtained Intangible assets under development Other intangible assets TOTAL Gross value of intangible assets at the beginning of the period 57,684 12,966 18,979 89,629 Investment outlays - 25,401 - 25,401 Reclassifications 17,228 (17,234) 6 - Activated costs - (875) - (875) Gross value of intangible assets at the end of the period 74,912 20,258 18,985 114,155 Accumulated amortisation at the beginning of the period (18,233) - (13,758) (31,991) Amortisation for the period (7,096) - (2,752) (9,848) Annual amortisation charge (7,096) - (2,752) (9,848) Accumulated amortisation at the end of the period (25,329) - (16,510) (41,839) Impairment losses at the beginning of the period - (210) - (210) Impairment losses at the end of the period - (210) 210 - Net value of intangible assets at the beginning of the period 39,451 12,756 5,221 57,428 Net value of intangible assets at the end of the period 49,583 20,048 2,685 72,316 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 34 01.01.-31.12.2020 Licences,patents, permits, etc. obtained Intangible assets under development Other intangible assets TOTAL Gross value of intangible assets at the beginning of the period 73,672 6,173 18,979 98,824 Investment outlays - 11,736 - 11,736 Reclassifications 4,943 (4,943) - - Liquidation (20,931) - - (20,931) Gross value of intangible assets at the end of the period 57,684 12,966 18,979 89,629 Accumulated amortisation at the beginning of the period (33,204) - (10,996) (44,200) Amortisation for the period 14,971 - (2,762) 12,209 Annual amortisation charge (5,903) - (2,762) (8,665) Exchange differences (39) - - (39) Liquidation 20 931 - - 20 931 Accumulated amortisation at the end of the period (18,233) - (13,758) (31,991) Impairment losses at the beginning of the period - (210) - (210) Impairment losses at the end of the period - (210) - (210) Net value of intangible assets at the beginning of the period 40,468 5,963 7,983 54,414 Net value of intangible assets at the end of the period 39,451 12,756 5,221 57,428 In 2021, the capitalisation rate applied to determine the amount of borrowing costs to be capitalised was approx. 1.9%, whereas in 2020 it amounted to approx. 2.5%. CIECH S.A. is the owner of all intangible assets held. The largest item in the Company’s intangible assets is the SAP accounting system with the gross carrying amount of PLN 52,789 thousand (net carrying amount: PLN 42,421 thousand). As at 31 December 2021, all intangible assets at CIECH S.A. were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. An increase in capital expenditure in 2021 was driven by expenditure related to the implementation of the SAP system. Amortisation of intangible assets was included in the following line items of the statement of profit or loss: AMORTISATION CHARGES ON INTANGIBLE ASSETS 01.01.-31.12.2021 01.01.-31.12.2020 General and administrative expenses (7,100) (5,917) Selling costs (2,748) (2,748) TOTAL (9,848) (8,665) The Company does not have intangible assets with indefinite useful life. In the current period changes in accounting estimates did not have a material impact and it is not expected that they will have a material impact in future periods. As at 31 December 2021, future commitments arising from agreements concerning acquisition of intangible assets amounted to PLN 4,300 thousand (in the comparable period: PLN 411 thousand). In the reporting period and in the presented comparable period, the Company did not incur any expenditure on development activities. 5.4. LONG-TERM FINANCIAL ASSETS Accounting policy Shares in subsidiaries and associates are stated at purchase price less any impairment losses. Loans are measured at nominal value plus interest and net of any impairment losses due to the insignificant difference compared to measurement at amortised cost. Accounting policy concerning financial instruments is presented in note 8.1. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 35 Judgements and estimates Accounting policy concerning judgements and estimates is presented in note 3.5. NON-CURRENT FINANCIAL ASSETS 31.12.2021 31.12.2020 Shares 2,066,181 2,137,655 Loans granted 1,091,317 400,413 Derivatives 662 574 TOTAL 3,158,160 2,538,642 Change in long-term stocks and shares 01.01.-31.12.2021 01.01.-31.12.2020 Gross value at the beginning of the period 2,237,330 2,328,605 Purchase 30,847 17,752 Writing-off/redemption (80,449) (1,012) Transfer to assets held for sale - (30,015) Sales/liquidation (98,440) (78,000) Other 154 - Gross value at the end of the period 2,089,442 2,237,330 Impairment update at the beginning of the period (99,675) (156,334) Recognition (2,311) (21,839) Reversal/usage 78,725 77,436 Transfer to assets held for sale - 50 Other - 1,012 Impairment update at the end of the period (23,261) (99,675) Net value of the shares at the beginning of the period 2,137,655 2,172,271 Net value of the shares at the end of the period 2,066,181 2,137,655 CHANGE IN LONG-TERM LOANS 31.12.2021 31.12.2020 Gross value at the beginning of the period 403,276 243,123 Grant 1,326,132 - Reclassification to long-term positions (637,695) 160,153 Foreign exchange differences 7,076 - Gross value at the end of the period 1,098,789 403,276 Impairment update at the beginning of the period (2,863) (3,306) Recognition (7,472) (1,422) Reversal 2,863 1,865 Closing balance (7,472) (2,863) Carrying amount of loans at the beginning of period 400,413 239,817 Carrying amount of loans at the end of the period 1,091,317 400,413 Change in the gross value of long-term shares results primarily from: • acquisition of shares in the increased share capital of CIECH Salz Deutschland GmbH – PLN 27,852 thousand (EUR 6,000 thousand), • acquisition of shares in the increased share capital of CIECH Services Sp. z o.o. – PLN 1,995 thousand, • purchase of shares in CIECH Ventures Sp. z o.o. – PLN 1,000 thousand, • as a result of the demerger of CIECH Vitrosilicon S.A. and the separation of a part of the business to CIECH Vitro Sp. z o.o., CIECH S.A. became the sole shareholder of CIECH Vitrosilicon S.A. and acquired shares in CIECH Vitro S.p. o.o. with a value of PLN 1,708 thousand in 2021, FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 36 • cancellation against consideration of shares in CIECH Soda Romania S.A. in the amount of PLN 80,449 thousand described in detail in Note 6.4 hereto, • cancellation, partly against consideration and partly without consideration, of shares in CIECH Trading Sp. z o.o. described in detail in Note 6.4 hereto (sale of shares in the amount of PLN 88,904 thousand and reversal of the impairment loss of PLN 72,693 thousand), • cancellation, against consideration, of shares in CIECH Transclean Sp. z o.o. described in detail in Note 6.4 hereto (sale of shares in the amount of PLN 9,536 thousand and reversal of the impairment loss of PLN 6,032 thousand), • recognition of impairment losses on shares held by CIECH S.A. in CIECH Trading Sp. z o.o., CIECH Group Financing AB and CIECH Nieruchomości Sp. z o.o. Material items affecting the change in long-term loans are as follows: • granting a loan to the SDC Group companies: CIECH Soda Deutschland GmbH&CO KG and CIECH Energy Deutschland GmbH in the amount of PLN 319,064 thousand (nominal value of EUR 69,000 thousand, whole amount as refinancing for a loan with longer maturity), • granting a loan to CIECH Salz Deutschland GmbH in the amount of PLN 993,154 thousand (nominal value of EUR 215,500 thousand, including EUR 152 000 thousand as refinancing for a loan with longer maturity), • granting a loan to Proplan Plant Protection in the amount of PLN 13,914 thousand (nominal value of PLN 3,000 thousand). The change in long-term loans granted also resulted from reclassification of loans granted from non-current to current and their subsequent repayment, as well as unrealised exchange differences arising from the revaluation of loans as at the balance sheet date. As at 31 December 2021, all long-term receivables from loans at CIECH S.A. were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. As at 31 December 2021, shares in CIECH Soda Polska S.A., CIECH Sarzyna S.A., CIECH Pianki Sp. z o.o., CIECH Cargo Sp. z o.o., CIECH Vitrosilicon S.A., CIECH Vitro Sp. z o.o., CIECH Soda Deutschland GmbH & Co. KG, CIECH Energy Deutschland GmbH and CIECH Salz Deutschland Gmbh, who are guarantors of the term loan, revolving credit facilities and overdraft facilities, were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. CIECH S.A. analyses its involvement in the subsidiaries on the basis of their net assets as at the balance sheet date. If any evidence of impairment is identified, the Company estimates the recoverable amount. Due to the occurrence of premises, CIECH S.A. analysed the recoverability of involvement in subsidiaries. The recoverable value applied was the value in use estimated based on the discounted cash flows determined based on five-year financial plans of the subsidiaries. The following assumptions were applied in the impairment tests: • the weighted average cost of capital for domestic companies was: 8.4% – for cash flows in PLN, 5.3% – for cash flows in EUR and 6.5% – for cash flows in USD; • the weighted average cost of capital for SDC GmbH and CIECH Salz Deutschland GmbH for cash flows in EUR was 4.6%; • the weighted average cost of capital for Proplan Plant Protection Company, S.L. was 5.3% – for cash flows in EUR and 6.9% – for cash flows in USD; • the assumed growth rate for the residual period was 2.0% for both the domestic and foreign companies. Based on analyses conducted, the Management Board of CIECH S.A. decided to recognise/reverse impairment losses on involvement in, among others, the following companies: • recognition of impairment losses: o CIECH Trading Sp. z o.o. – impairment loss on shares in the amount of PLN 939 thousand; In the first quarter of 2021, the Management Board of CIECH Trading Sp. z o.o. decided to discontinue the company's business activities. o CIECH Group Financing AB – impairment loss on shares in the amount of PLN 103 thousand; o CIECH Nieruchomości Sp. z o.o. – impairment loss on shares in the amount of PLN 1,269 thousand. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 37 CARRYING AMOUNT OF SHARES IN RELATED ENTITIES 31.12.2021 31.12.2020 The Company’s direct share in the share capital/ total number of votes as at 31 December 2021 The Company’s direct share in the share capital/ total number of votes as at 31 December 2020 Core activities Subsidiaries (registered office) SDC GmbH (Stassfurt – Germany) 797,471 797,471 100% 100% Manufacture of other basic inorganic chemicals, wholesale of chemical products, power generation and distribution. CIECH Soda Polska S.A. (Inowrocław) 553,097 553,097 100% 100% Manufacture of other basic inorganic chemicals, wholesale of chemical products, power generation and distribution. CIECH Sarzyna S.A. (Nowa Sarzyna) 266,867 266,867 100% 100% Manufacture of resins, manufacture of pesticides and other chemical products. CIECH Soda Romania S.A. (Rm. Valcea , Romania) 30,551 111,000 98.74% 98.74% Manufacture of other basic inorganic chemicals, wholesale of chemical products. CIECH Trading Sp. z o.o. (Warsaw) 5,291 22,441 100% 100% The company is preparing for the liquidation process, operations are being phased out. CIECH Pianki Sp. z o.o. (Bydgoszcz) 57,451 57,451 100% 100% Manufacture of organic and other inorganic chemicals. VERBIS ETA Sp. z o.o. SKA (Warsaw) 37,971 37,971 100% 100% Financing activities, direct lending to the CIECH Group companies. CIECH R&D Sp. z o.o. (Warsaw) 47,915 47,915 100% 100% Granting licences to the CIECH Group companies to use the trademarks: “Ciech”, “Ciech Trading” and “Sól Kujawska naturalna czysta” for business activity purposes, research and developments activities. CIECH Vitrosilicon S.A. (Iłowa) 10,594 12,302 100.00% 83.03% Production of other basic inorganic chemicals, manufacture of hollow glass and technical glassware, manufacture of plastic packaging goods, manufacture of other plastic products. CIECH Vitro Sp. z o.o. (Iłowa) 2,108 400 39.41% 100.00% Production of other basic inorganic chemicals, manufacture of hollow glass and technical glassware, manufacture of plastic packaging goods, manufacture of other plastic products. CIECH Transclean Sp. z o.o. (Bydgoszcz) 105 3,455 100% 100% International transport of liquid chemicals Gamma Finanse Sp. z o.o. (Warsaw) 2,889 2,889 100% 100% Financing activities. Ciech Group Financing AB (Sweden) 1,374 1,477 100% 100% Financing activities. VERBIS ETA Sp. z o.o. (Warsaw) 5 5 100% 100% Other activities. CIECH Serwis i Remonty Sp.z o.o. 450 450 100% 100% Other research and experimental development on natural sciences and engineering. Ciech Nieruchomości S.A. (Warsaw) 2,597 3866 99.18% 99.18% Buying and selling of own real estate. Proplan Plant Protection Company S.L. (Madrid) 203,866 203,866 100% 100% Production and sales of crop protection chemicals. CIECH Salz Deutschland GbmH 40,875 13,022 100% 100% Production and sales of salt products. CIECH SERVICES Sp. z o.o. (Bydgoszcz) 2,000 5 100% 100% Provision of support services to CIECH Group companies. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 38 31.12.2021 31.12.2020 The Company’s direct share in the share capital/ total number of votes as at 31 December 2021 The Company’s direct share in the share capital/ total number of votes as at 31 December 2020 Core activities CIECH Ventrures Sp. z o.o. (Warsaw) 1,000 - 100% - Holding activities, other financial activities. Other subsidiaries 842 842 Associates 863 863 Carrying amount of shares in related entities 2,066,181 2,137,655 5.5. INVENTORIES Accounting policy Raw materials and goods are measured at cost being the purchase price increased by other costs incurred in bringing the asset to its present location and condition or place on the market but not higher than the selling price possible to achieve. The cost of inventory is measured using the weighted average method. Judgements and estimates CIECH S.A. recognises inventory impairment allowances for damaged and slow moving inventory. Inventory impairment allowances are also recognised for inventory with a carrying amount that exceeds the realisable net selling price. Reversal occurs as a result of the use or sales of inventory in the course of business activities while usage is the result of inventory being scrapped. INVENTORY 31.12.2021 31.12.2020 Materials 15 16 Goods 5,147 6,378 TOTAL 5,162 6,394 In the reporting periods, no inventories were written down to their net selling prices. The value of inventories (taking into account write-downs to net selling prices) recognised as costs in 2021 amounted to PLN 1,371,223 thousand (in the comparable period: PLN 1,449,934 thousand). As at 31 December 2021, all inventories at CIECH S.A. were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. 5.6. SHORT-TERM RECEIVABLES Accounting policy After initial recognition, current trade and other receivables are measured at the amortised cost using the effective interest method less any impairment losses. Receivables denominated in foreign currencies are recognised at the average NBP exchange rate effective on the working day immediately preceding the date of the transaction, unless a different exchange rate was indicated in the customs declaration or another binding document. At the reporting date, receivables denominated in foreign currencies are translated at the average exchange rate established for that date by the NBP except for prepayments made for deliveries, which are translated using sell exchange rate of the bank effective on the payment date. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 39 Factoring The Company uses non-recourse factoring services. The factor transfers advance payments to the Company’s account in the full amount of invoices accepted for financing. The financing of receivables transferred is provided in various timeframes, therefore, as at the balance sheet date, there may be receivables which have not been financed yet and are reported as factoring receivables. Advance payments received are posted as factoring liabilities. In the statement of financial position, factoring receivables and liabilities are recognised on a net basis up to 95% of the value of advance payments received from the factor (the 95% limit results from the level of the receivables insurance). The remaining 5% of receivables value is reported as factoring receivables, and 5% of the value of advance payments received is reported as factoring liabilities. Judgements and estimates Impairment allowances are recognised on interest receivable on late payments of receivables, in the full amount of interest accrued. These allowances are recognised upon accrual, as at the due date or balance sheet date, and deducted from finance income from interest accrued. The Entity estimates allowances always at the amount of long-term expected credit losses, regardless of whether there is an evidence of a material increase in credit risk. At each balance sheet date, the Entity estimates allowances for all receivables regardless of their repayment status. The Entity estimates impairment allowances primarily on the basis of portfolio PD ratios estimated on the basis of historical observations for debt portfolios with similar characteristics. If it is not possible to estimate portfolio ratios, the Group permits the use of individual parameters (benchmark or expert parameters). In addition, regardless of the foregoing, the Entity recognises impairment allowances in respect of receivables: 1. from debtors in liquidation or bankruptcy, up to the amount not guaranteed or secured in another manner, as reported to a receiver or judge-commissioner during bankruptcy proceedings; 2. from debtors where a bankruptcy petition has been dismissed, if the debtor's assets are not sufficient to cover the cost of bankruptcy proceedings – in full; 3. contested by debtors (disputed receivables) and where payments due are delayed and either the debtor’s financial standing makes the collection no longer probable – up to the amount of receivables not guaranteed or secured in another manner; 4. receivables claimed in court. Moreover, allowances in the full amount of receivables are recognised in relation to receivables that are more than 180 days past their maturity as at the balance sheet date. The amount established as a result of the abovementioned allowances may be decreased if the Management Board is in possession of reliable documents, indicating that the receivables were secured and their payment is highly probable. Impairment allowances on receivables are charged to other operating expenses. TRADE AND OTHER RECEIVABLES 31.12.2021 31.12.2020 Trade receivables, including: 110,720 170,758 - up to 12 months 109,409 169,664 - over 12 months 628 - - prepayments for inventory 683 1,094 Public and legal receivables (excluding income tax) 36,763 8,621 Factoring receivables 21,437 35,946 Assets due to continuous involvement 2,370 513 Receivables from cashpool 3,912 7,992 Receivables from sales of stocks and shares 19,330 - Other receivables 10,312 9,065 NET TRADE AND OTHER RECEIVABLES 204,844 232,895 Impairment allowances with respect to trade receivables including (20,422) (20,733) - impairment allowance recognized in the current reporting period (1,151) (9,642) Impairment allowances with respect to other current receivables including (16,741) (16,114) - impairment allowance recognized in the current reporting period (11) (43) GROSS TRADE AND OTHER RECEIVABLES 242,007 269,742 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 40 Fair value of trade receivables and other receivables does not differ significantly from their carrying value. As at the balance sheet date, continuing involvement is reported. It is calculated as a product of the financing received, interest and the period of delay in payments. As at 31 December 2021, the asset from continuing involvement amounted to PLN 2,370 thousand. The value of factoring assets derecognised from the statement of financial position is PLN 192,557 thousand (PLN 129,777 thousand in the comparable period). CHANGE IN IMPAIRMENT ALLOWANCES ON SHORT-TERM RECEIVABLES 01.01.-31.12.2021 01.01.-31.12.2020 Opening balance (36,847) (28,554) Recognized (1,162) (9,685) Reversed 2,138 869 Used 1 466 Exchange differences (675) (292) Other (618) 349 Closing balance (37,163) (36,847) The principles for recognising impairment allowances for short-term receivables are described above, in the “Accounting Policy” section. AGEING OF PAST DUE TRADE RECEIVABLES 31.12.2021 31.12.2020 Up to 1 month 5,438 17,657 Between 1 and 3 months 3,620 8,065 3 to 6 months 9 65 6 months to 1 year 1,354 303 Above 1 year 20,182 20,733 Total (gross) past due trade receivables 30,603 46,823 Impairment allowances on past due trade receivables (20,135) (20,530) Total (net) past due trade receivables 10,468 26,293 Terms of transactions with related entities have been presented in note 9.3. Commercial contracts concluded by CIECH S.A. include various terms of payment of trade receivables depending on the type of transaction, market characteristics and trade conditions. The most common payment terms are: 14, 30 and 60 days. As at 31 December 2021, all receivables (both long- and short-term) at CIECH S.A. were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. 5.7. SHORT-TERM FINANCIAL ASSETS Accounting policy Loans after initial recognition are measured at amortised cost using the effective interest method less any impairment losses. Accounting policy concerning financial instruments is presented in note 8.1. Judgements and estimates Accounting policy concerning judgements and estimates is presented in note 3.5. SHORT-TERM FINANCIAL ASSETS 31.12.2021 31.12.2020 Derivatives 102,220 1,261 Loans granted 559,831 1,187,901 Total (net) short-term financial assets 662,051 1,189,162 Impairment of short-term financial assets (3,833) (8,494) Total (gross) short-term financial assets 665,884 1,197,656 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 41 CHANGE IN SHORT-TERM LOANS 31.12.2021 31.12.2020 Gross value at the beginning of the period 1,196,395 795,377 Granted 737,607 957,503 Change of liabilities presented (2,001,110) (452,951) Reclassification to long-term positions 637,695 (160,153) Exchange differences (6,923) 56,619 Gross value at the end of the period 563,664 1,196,395 Impairment update at the beginning of the period (8,494) (14,382) Recognition (3,832) (1,228) Reversal 8,493 7,116 Closing balance (3,833) (8,494) Carrying amount of loans at the beginning of period 1,187,901 780,995 Carrying amount of loans at the end of the period 559,831 1,187,901 As at 31 December 2021, all short-term receivables from loans at CIECH S.A. were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. Material items affecting the change in short-term loans including interests are as follows: • granting a loan to CIECH Soda Deutschland GmbH&CO KG in the amount of PLN 52,565 thousand (nominal value of EUR 8,224 thousand), • granting a loan to CIECH Soda Polska S.A. in the amount of PLN 414,765 thousand (nominal value of PLN 402,000 thousand), • granting a loan to CIECH Vitrosilicon S.A. in the amount of PLN 172,091 thousand (nominal value of PLN 171,000 thousand), • granting a loan to CIECH Sarzyna S.A. in the amount of PLN 64,125 thousand (nominal value of PLN 62,800 thousand), • granting a loan to CIECH Vitro Sp. z o.o. in the amount of PLN 2,282 thousand (nominal value of PLN 2,250 thousand), • granting a loan to CIECH Services Sp. z o.o. in the amount of PLN 3,288 thousand (nominal value of PLN 3,245 thousand), • granting a loan to El Pomiar Sp. z o.o. in the amount of PLN 272 thousand (nominal value of PLN 270 thousand), • repayment of loans (with interest) by subsidiaries: o CIECH Salz Deutschland GmbH in the amount of PLN 751,002 thousand (including EUR 152 000 thousand as refinancing for a loan with longer maturity), o SDC Group in the amount of PLN 596,892 thousand (including EUR 69 000 thousand as refinancing for a loan with longer maturity), o CIECH Soda Polska S.A. in the amount of PLN 414,765 thousand, o CIECH Vitrosilicon S.A. in the amount of PLN 86,091 thousand, o CIECH Sarzyna S.A. in the amount of PLN 59,076 thousand, o Proplan Plant Protection in the amount of PLN 14,310 thousand, o CIECH Nieruchomości Sp. z o.o. in the amount of PLN 6,821 thousand, o CIECH Vitro Sp. z o.o. in the amount of PLN 2,282 thousand, o CIECH Services Sp. z o.o. in the amount of PLN 2,038 thousand. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 42 5.8. CASH AND CASH EQUIVALENTS Accounting policy Cash and cash equivalents include cash in hand and bank deposits repayable on demand. Current investments that are not subject to significant changes in value and that may be easily exchanged for a determinable amount of cash and that form an integral part of the Entity’s cash management are recognised as cash and cash equivalents for the purposes of the statement of cash flows. At the reporting date, any foreign currencies in bank accounts and on hand are measured at the average exchange rate for a given currency, quoted by the President of the NBP. For cash and cash equivalents, impairment allowances are estimated using individual parameters determined on the basis of benchmarks (using information on bank ratings). For cash and cash equivalents for which there is evidence of impairment due to credit risk, the Entity analyses recoveries using probability-weighted scenarios. CASH AND CASH EQUIVALENTS 31.12.2021 31.12.2020 Bank accounts 210,697 263,110 Short-term deposits 257,013 2,313 Cash in hand 9 14 Impariment in accordance with IFRS 9 (244) (150) Cash and cash equivalents – presented in the statement of financial position 467,475 265,287 Cash and cash equivalents – presented in the cash flow statement 467,475 265,287 The effective interest rates of short-term bank deposits are similar to the nominal interest rates, and fair value of short-term bank deposits is not significantly different from carrying value. Interest rates are based on WIBOR, EURIBOR and LIBOR. As at 31 December 2021, all cash and cash equivalents at CIECH S.A. were pledged as collateral for financial liabilities on account of the term loan, revolving facility and overdraft facilities. Restricted cash represented the funds in the VAT account due to the introduction of "split payment" procedures. As at 31 December 2021, they amounted to PLN 2,239 thousand. As at 31 December 2020, restricted cash in CIECH S.A. amounted to PLN 1,930 thousand. Cash and cash equivalents are covered only by an allowance for expected credit losses in accordance with IFRS 9. 5.9. DISCONTINUED OPERATIONS, NON-CURRENT ASSETS AND LIABILITIES CONNECTED WITH NON-CURRENT ASSETS CLASSIFIED AS HELD FOR SALE As at 31 December 2020, the value of shares held in CIECH Żywice Sp. z o.o. was reported in CIECH S.A. as non-current assets held for sale, in connection with the signing of a preliminary agreement for the sale of shares in the aforementioned company to LERG S.A. The value of these shares was PLN 29,964 thousand. Following the sale of the company as described below, as at 31 December 2021 CIECH S.A. carries no non-current assets held for sale. Discontinued operations On 1 March 2021, CIECH S.A. entered into an agreement for the sale of 74,677 shares in CIECH Żywice Sp. z o.o. with LERG S.A. with its registered office in Pustków-Osiedle, accounting for 100% of shares in the share capital of CIECH Żywice Sp. z o.o. The value of the Agreement (equal to the enterprise value being sold) is PLN 157,410 thousand. The final price of the Shares Accounting policy Assets and liabilities classified as held for sale Non-current assets are classified as held for sale when their carrying amounts are expected to be recovered primarily through a sale transaction and when they are available for sale in their current condition with such transaction being highly probable. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 43 being sold was determined in accordance with the rule arising from the Agreement and amounted to PLN 74,289 thousand. For details of the transaction, see current reports No 27/2020 and 4/2021. Cash received from sale of shares 74,289 Cash received from repayment of debt (including loans repaid) 83,121 TOTAL Value of the Agreement 157,410 * The loan of PLN 27 million was repaid on 30 July 2021. The accounting principles applied in the preparation of the statement of profit or loss for discontinued operations are consistent with the Company's accounting policy. The separate results of discontinued operations include: results of CIECH S.A. generated from transactions with the entity reported under discontinued operations, CIECH Żywice Sp. z o.o. and results from the sale of the company in connection with the conclusion of the agreement for the sale of 74,677 shares in CIECH Żywice Sp. z o.o. to LERG S.A. Below is the separate result on discontinued operations (in the resins area) of CIECH S.A. CIECH S.A. 01.01.-31.12.2021 01.01.-31.12.2020 Net sales revenues 30,804 151,432 Cost of sales (30,584) (147,458) Gross profit/(loss) on sales 220 3,974 Selling costs (96) (1,574) General and administrative expenses (3,538) - Operating profit/(loss) (3,414) 2,400 Financial income 821 375 Financial expenses - (2,322) Net financial income/(expenses) 821 (1,947) Profit/(loss) before tax (2,593) 453 Income tax - - Net profit/(loss) (1) (2,593) 453 Income from the sale of CIECH Żywice Sp. z o.o. 74,289 - Value of shares sold (30,015) - Separate gain on disposal of CIECH Żywice Sp. z o.o. (2) 44,274 - Total net profit/(loss) on discontinued operations (1+2) 41,681 453 Cash received from the sale of shares in CIECH Żywice Sp. z o.o. amounted to PLN 74,289 thousand and was reported in the statement of cash flows of CIECH S.A. under “Disposal of a subsidiary”. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 44 6. EQUITY 6.1. CAPITAL MANAGEMENT Capital structure management CIECH S.A.’s capital structure consist of its debts, including the credit facilities presented in note 7.1, cash and cash equivalents and equity, including shares issued, reserve capital and retained earnings. CIECH S.A. manages its capital in order to ensure its ability to continue as a going concern and, at the same time, maximize returns for stakeholders by optimising the debt to equity ratio. In 2020-2021 there were no changes in aims, principles and processes of capital management. 6.2. EQUITY Accounting policy CIECH S.A.’s share capital is disclosed at nominal value, adjusted by the effects of hyperinflation in the years 1989-1996. When shares are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognised as a change in equity. The purchased shares are presented as a deduction from total equity. A liability for a dividend payable is recognised when authorised. Net profit (loss) is presented in equity under retained earnings. As at 31 December 2021, the carrying amount of the share capital of CIECH S.A. amounted to PLN 287,614 thousand and comprised the share capital from the share issues and from the hyperinflation adjustment. As at the date of adopting the IFRS, i.e. 1 January 2004, the share capital of the Company was adjusted for hyperinflation between 1989 and 1996. The hyperinflation adjustment of PLN 24,114 thousand was charged to retained earnings. The shares of CIECH S.A. are listed on Warsaw Stock Exchange and on Frankfurt Stock Exchange. The share capital of CIECH S.A. amounts to PLN 263,500,965 and is divided into 52,699,909 shares with a nominal value of PLN 5 each, including: • 20,816 A-series ordinary bearer shares, • 19,775,200 B-series ordinary bearer shares, • 8,203,984 C-series ordinary bearer shares, • 23,000,000 D-series ordinary bearer shares, • 1,699,909 E-series ordinary bearer shares. The shares of all series are ordinary shares and do not carry any additional rights, preferences or restrictions as to dividend distribution or return of capital. Share capital is fully paid up. To the best knowledge of the Company, as at the day of approving this report, entities holding significant blocks of shares (at least 5%) are the entities listed below: FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 45 Shareholder structure of CIECH S.A. as at the date of approval of the report (according to the best knowledge of the Company) Shareholder Type of shares Number of shares Number of votes at the General Meeting of Shareholders Share in the total number of votes at the General Meeting of Shareholders Stake in share capital (%) KI Chemistry s. à r. l. with its registered office in Luxembourg Ordinary bearer 26,952,052 26,952,052 51.14% 51.14% Nationale-Nederlanden Otwarty Fundusz Emerytalny Ordinary bearer 2,729,000 2,729,000 5.18% 5.18% Aviva Otwarty Fundusz Emerytalny Aviva Santander *** Ordinary bearer 3,084,470 3,084,470 5.85% 5.85% Other Ordinary bearer 19,934,387 19,934,387 37.83% 37.83% * In accordance with information dated 9 June 2014 provided by Shareholder under Article 77(7) and Article 69(1)(1) of the Act of 29 July 2005 on Public Offering and Conditions Governing the Introduction of Financial Instruments to Organised Trading, and on Public Companies (CR 26/2014). On the basis of the list of shareholders holding at least 5% of votes at the Extraordinary General Meeting of Shareholders of CIECH S.A. on 26 October 2021, CR 36/2021 prepared and published pursuant to Article 70(3) of the Act of 29 July 2005 on Public Offering and Conditions Governing the Introduction of Financial Instruments to Organised Trading, and on Public Companies (Journal of Laws of 2009, No 185, item 1439). On the basis of the list of shareholders holding at least 5% of votes at the Extraordinary General Meeting of Shareholders of CIECH S.A. on 26 October 2021, CR 36/2021 prepared and published pursuant to Article 70(3) of the Act of 29 July 2005 on Public Offering and Conditions Governing the Introduction of Financial Instruments to Organised Trading, and on Public Companies (Journal of Laws of 2009, No 185, item 1439). The percentage share of above-listed shareholders in the share capital of CIECH S.A. equals the percentage share in the number of votes at the General Shareholders Meeting of CIECH S.A. Since the date of the Extraordinary Shareholders' Meeting of CIECH S.A., i.e. 26 October 2021, CIECH S.A. has not received any information about a change in interests held by shareholders in the total number of shares. Treasury shares In 2021 and in the comparable period, CIECH S.A. did not purchase or hold treasury shares. Share premium The share premium arose from the surplus in excess of nominal value achieved upon the issue of C, D and E series shares. Other reserve capital The table below presents the balances of other reserve capital, consisting of the following items: OTHER RESERVE CAPITAL BY PURPOSE 31.12.2021 31.12.2020 Commercial risk fund 3,330 3,330 Fund for purchasing soda companies 15,200 15,200 Development funds 57,669 57,669 Fund for the purchase of treasury shares 346,500 346,500 TOTAL 422,699 422,699 On 21 May 2020, the Annual General Meeting of CIECH S.A. authorised the Management Board of CIECH S.A. to purchase fully paid shares issued by CIECH S.A. from one or more of CIECH S.A.'s shareholders. Treasury Shares may be acquired in particular for the purpose of: ✓ their cancellation by way of reduction of the share capital of CIECH S.A., ✓ their resale against remuneration; ✓ using them to acquire or exchange shares or interest in any other companies. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 46 The maximum amount of remuneration for shareholders will not be higher than PLN 346,500 thousand and a reserve fund has been created for this purpose in this amount. For details, see current report No 24/2020. Cash flow hedge reserve The cash flow hedge reserve reflects the valuation and settlement of hedging instruments to which the hedge accounting applies. Detailed information is presented in note 8.2. Actuarial gains Actuarial valuation reserve comprises actuarial gains or losses, i.e. the effects of differences between the previous assumptions made in the valuation of employee benefit provisions and what has actually occurred and the effects of changes in assumptions for these provisions, including change in discount rate. 6.3. DIVIDENDS PAID OR DECLARED Until the date of approval of the financial statements for publication, the Management Board of CIECH SA has not adopted a resolution on the proposed distribution of net profit for 2021. On 22 June 2021, the Annual General Meeting of CIECH S.A. resolved to: 1. allocate the entire net profit of CIECH S.A. for 2020 in the amount of PLN 155,287 thousand to the payment of a dividend; 2. transfer PLN 2,812 thousand from profit capital reserves, which may be allocated to dividend payments, to dividend payments; 3. pay out a dividend of PLN 158,099 thousand, i.e. PLN 3 per share, from the net profit of CIECH S.A. for 2020, increased by the amount transferred from the capital reserves created from profits. At the same time, the Annual General Meeting of CIECH S.A. set the dividend record date for 30 June 2021 and the dividend payment date for 8 July 2021. 6.4. BUSINESS COMBINATIONS AND ACQUISITION OF INTEREST There were no business combinations in the presented periods. In 2021, changes in the CIECH Group’s structure that occurred in relation to the companies in which CIECH S.A. held shares, either directly or indirectly, were related to, among others: • CIECH Żywice Sp. z o.o. On 1 March 2021, CIECH S.A. entered into an agreement for the sale of 74,677 shares in CIECH Żywice Sp. z o.o. with LERG S.A. with its registered office in Pustków-Osiedle, accounting for 100% of shares in the share capital of CIECH Żywice Sp. z o.o. The value of the Agreement (equal to the enterprise value being sold) is PLN 157,410 thousand. The final price of the Shares being sold was determined in accordance with the rule arising from the Agreement. For details of the transaction, see current reports No 27/2020 and 4/2021. • CIECH Vitro Sp. o.o. – demerger of the company On 25 February 2021, the Extraordinary General Meeting was held to resolve on the demerger of the Company by transferring a part of the assets of the Demerged Company, CIECH Vitrosilicon S.A., to the Acquiring Company, CIECH Vitro Sp. z o.o., in exchange for the shares to be received by the shareholders of the Demerged Company in the increased share capital of the Acquiring Company – demerger by spin-off. An organised part of the business (OPB) was spun off from CIECH Vitrosilicon S.A. The OPB may constitute an independent enterprise independently performing the tasks of production and sales, in particular of glass packaging in the form of lanterns and utility jars (the "Packaging Business"). The Extraordinary Shareholders’ Meeting of CIECH Vitro sp. z o.o., in connection with the demerger of CIECH Vitrosilicon S.A. (the “Demerged Company”), increased the share capital of the Company from PLN 5 thousand to PLN 1,135.5 thousand, i.e. by the amount of PLN 1,130.5 thousand, through the creation of 22,610 new shares in CIECH Vitro sp. z o.o. with a nominal value of PLN 50 per share and a total nominal value of PLN 1,135.5 thousand, which were granted to shareholders of the FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 47 Demerged Company using the following share exchange ratio: 6,679,109 shares in the Demerged Company entitled to the receipt of 22,610 shares in CIECH Vitro sp. z o.o. (the “Acquirer”) (i.e. 295.4 shares in the Demerged Company entitled to the receipt of 1 share in the Acquirer) in the following manner: • CIECH Soda Polska S.A., in exchange for 1,133,246 shares in the Demerged Company (constituting all shares in the Demerged Company held by CIECH Soda Polska S.A.), took up 13,759 shares in CIECH Vitro sp. z o.o., which were covered by a part of the OPB acquired from CIECH Vitrosilicon S.A, • CIECH S.A., in exchange for 728,982 shares in the Demerged Company (representing a part of shares in the Demerged Company held by CIECH S.A.), took up 8,851 shares in CIECH Vitro sp. z o.o., which were covered by a part of the OPB acquired from CIECH Vitrosilicon S.A. As of the date of registration of the share capital increase by the court, the capital structure was as follows: • CIECH Soda Polska S.A. holds 13,759 shares, representing 60.59% of the share capital, • CIECH S.A. holds 8,951 shares, representing 39.41% of the share capital. On 1 April 2021, the Court registered the demerger of CIECH Vitrosilicon S.A., the reduction of the share capital of CIECH Vitrosilicon S.A. and the increase of the share capital of CIECH Vitro Sp. z o.o. As of 1 April 2021, CIECH S.A. is the sole shareholder of CIECH Vitrosilicon S.A. • CIECH Trading Sp. z o.o. On 2 March 2021, the Extraordinary Shareholders’ Meeting of CIECH Trading Sp. z o.o. approved the decision of the Company's Management Board to discontinue the business activity specified in the Company's Articles of Association, and obliged the Company's Management Board to take all necessary actions to cease and wind up the business activity, and upon completion of the above measures to take a decision to dissolve the Company pursuant to Article 270 of the Code of Commercial Companies. On 25 May 2021, two Extraordinary General Meetings of CIECH Trading sp. z o.o. were held regarding cancellation of shares, i.e: EGM - cancellation against consideration and amendment to the Company's Articles of Association: 1) • cancellation of 1,524,390 shares in the Company's share capital with a total nominal value of PLN 76,219.5 thousand in exchange for consideration of PLN 9.84 per canceled share, i.e. for total consideration amounting to PLN 15,000 thousand by way of purchase of the above shares on the basis of an agreement to sell the shares by the Company against the above consideration, • The Management Board of the Company was authorised to purchase the shares (conclude an agreement) in order to cancel them, • the share capital will be reduced from PLN 107,455.4 thousand (by PLN 76,219.5 thousand) to PLN 31,235.9 thousand through the cancellation of 1,524,390 shares with a total value of PLN 76,219.5 thousand. Following the reduction of the Company's share capital, it will be divided into 624,718 shares, • the Company's Articles of Association will be amended. 2) EGM – cancellation without consideration and amendment to the Company's Articles of Association: • cancellation of 504,000 shares in the Company's share capital with a total nominal value of PLN 25,200 thousand (with the shareholder's consent), by way of purchase of the above shares on the basis of an agreement to sell the shares by the Company without consideration for CIECH S.A. • The Management Board of the Company was authorised to purchase the shares in order to cancel them (with the shareholder's consent), • the Company’s share capital will be reduced from PLN 31,235.9 thousand (by PLN 25,200 thousand) to PLN 6,035.9 thousand through the cancellation of 504,000 shares with a total value of PLN 25,200 thousand. Following the reduction of the Company's share capital, it will be divided into 120,718 shares, • the Company's Articles of Association will be amended. CIECH S.A. is and will remain the sole shareholder of the Company. The reduction of the share capital of CIECH Trading Sp. z o.o. described above took place after both reductions of the share capital have been registered by the Court on 28 December 2021. • CIECH VENTURES Sp. z o.o. On 25 February 2021, the Deed of Incorporation of CIECH VENTURES sp. z o.o., of which CIECH S.A. is the sole shareholder, was drawn up. The company was established with the share capital of PLN 1,000 thousand, divided into 20 thousand shares FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 48 with a nominal value of PLN 50 each. The shares were acquired by CIECH S.A. in exchange for cash. The Company was registered by the court on 23 June 2021. CIECH S.A. is the sole shareholder of the Company. • CIECH Soda Romania S.A. On 24 May 2021, an Extraordinary Shareholders' Meeting of CIECH Soda Romania S.A. was held to resolve to reduce the Company's share capital against consideration by reducing the value of shares by RON 0.11, i.e. from RON 0.25 to RON 0.14 per share. Following the reduction of the share value, the Company's share capital was reduced from RON 199,244,501.75 to RON 111,576,920.98 and is divided into 796,978,007 shares with a nominal value of RON 0.14 each. The number of shares and shareholders remains unchanged. On 17 August 2021, the reduction of the share capital of CIECH Soda Romania S.A. became final. The consideration for the capital reduction payable to CIECH S.A. amounted to RON 86,560 thousand. • CIECH Agro Romania S.R.L. CIECH Sarzyna S.A. established a new company – Ciech Agro Romania S.R.L. with its registered office in Ramnicu Valcea (Romania). The Articles of Incorporation were drawn up on 26 March 2021, and the company was registered on 6 April 2021. The Company's share capital amounts to RON 4.87 thousand and is divided into 487 shares with a value of RON 10 per share. The sole shareholder of the Company is CIECH Sarzyna S.A. • CIECH Transclean sp. z o.o. On 21 July 2021, the Extraordinary Shareholders’ Meeting of CIECH Transclean Sp. z o.o. was held regarding cancellation of shares against consideration and reduction of the share capital: • cancellation of 8,548 shares in the Company's share capital with a total nominal value of PLN 4,274 thousand in exchange for consideration of PLN 506.56 per canceled share, i.e. for total consideration amounting to PLN 4,330 thousand by way of purchase of the above shares on the basis of an agreement to sell the shares by the Company against the above consideration, • The Management Board of the Company was authorised to purchase the shares (conclude an agreement) in order to cancel them, • following the cancellation of shares, the share capital will be reduced from PLN 4,322 thousand (by PLN 4,274 thousand) to PLN 48 thousand through the cancellation of 8,548 shares with a total value of PLN 4,274 thousand. Following the reduction of the Company's share capital, it will be divided into 96 shares, • the Company's Articles of Association will be amended. The reduction of the share capital of CIECH Trasclean Sp. z o.o. described above took place the reduction has been registered by the Court on 3 February 2022. • CIECH Services sp. z o.o. On 15 July 2021, the Extraordinary Shareholders’ Meeting of CIECH Services Sp. z o.o. increased the Company's share capital by PLN 1,995 thousand, i.e. from PLN 5 thousand to PLN 2,000 thousand through creation of 39,900 new, equal and indivisible shares with a nominal value of PLN 50 per share. The right to subscribe for all 39,900 newly created shares in the Company's share capital was granted to the existing shareholder, CIECH S.A. The newly created shares were subscribed in exchange for a cash contribution of PLN 1,995 thousand. The court registered the increase in the share capital of CIECH Services Sp. z o.o. on 25 August 2021.As a result of the increase, the share capital of CIECH Services Sp. z o.o. is divided into 4 thousand shares, with a total nominal value of PLN 2,000 thousand (the nominal value for 1 share is PLN 500). CIECH S.A. was and remained the sole shareholder of the Company. • Smart Fluid S.A. (former name: Smart Fluid sp. z o.o.) On 7 June 2021, an Extraordinary Shareholders' Meeting was held concerning the transformation of a limited liability company (spółka z ograniczoną odpowiedzialnością) into a joint stock company (spółka akcyjna). Following the transformation, the share capital of Smart Fluid S.A. amounts to PLN 106 thousand and is divided into 1,060,000 series A registered shares of the value of PLN 0.10 each, which were acquired by: FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 49 a) CIECH R&D Sp. z o.o. with its registered office in Warsaw (a subsidiary of CIECH S.A.) – 560,000 series A registered shares with a total nominal value of PLN 56 thousand, representing 52.83% of the share capital, b) Others – 500,000 series A registered shares with a total value of PLN 50 thousand, representing 47.17% of the share capital. On 9 September 2021, the court registered the transformation of Smart Fluid Sp. z o.o. into Smart Fluid S.A. The share capital of the Joint Stock Company, in order to bring its amount in line with the minimum amount of share capital of a joint stock company specified in Article 308 § 1 of the Code of Commercial Companies, was determined and covered as follows: • the amount of PLN 10.6 thousand represents the amount of the share capital of the limited liability company; • the amount of PLN 95.4 thousand was covered from the supplementary capital of the limited liability company. • Cerium Sp. z o.o. w likwidacji (in liquidation) On 31 August 2021, the court struck Cerium Sp. z o.o. in liquidation from the Register of Entrepreneurs. • CIECH Salz Deutschland GmbH On 26 October 2021, the Shareholders' Meeting of CIECH Salz Deutschland GmbH resolved to increase the Company's share capital by EUR 5,975 thousand by establishing one new share with a nominal value of EUR 5,975 thousand, which was taken up by CIECH S.A. in exchange for cash. As a result of the increase, the share capital increased from EUR 3,025 thousand to EUR 9,000 thousand. The court registered the share capital increase on 18 November 2021. CIECH S.A. was and remained the sole shareholder of the Company. • CIECH Sól Sp. z o.o. On 13 December 2021, the Deed of Incorporation of CIECH Sól Sp. z o.o., with a share capital of PLN 5 thousand, divided into 100 shares with a nominal value of PLN 50 each, was drawn up. The share capital was fully covered with cash, all shares were taken up by CIECH S.A. The court, by decision of 7 February 2022, registered CIECH Sól Sp. z o.o. CIECH S.A. is the sole shareholder of the Company. 6.5. EARNINGS PER SHARE Accounting policy Basic earnings per share is the net profit for the year attributable to ordinary shareholders of the company divided by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is the net profit for the year attributable to ordinary shareholders of the company divided by the weighted average number of ordinary shares outstanding during the year adjusted for the effects of all dilutive potential ordinary shares. The table below presents profit and shares data used in the calculation of the basic and diluted earnings per share: 01.01.-31.12.2021 01.01.-31.12.2020 Net profit (loss) on continuing operations 91,525 154,834 Net profit (loss) on discontinued operations 41,681 453 Basic and diluted net earnings per share from continuing operations 1.74 2.94 Basic and diluted net earnings per share from discontinued operations 0.79 0.01 Weighted average number of ordinary shares outstanding used to calculate basic and diluted earnings per share 52,699,909 52,699,909 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 50 7. LIABILITIES, PROVISIONS, EMPLOYEE BENEFITS 7.1. INFORMATION ABOUT FINANCIAL LIABILITIES LOANS, BORROWINGS AND OTHER DEBT INSTRUMENTS 31.12.2021 31.12.2020 LONG-TERM 1,854,153 - Loans and borrowings 1,854,153 - SHORT-TERM 397,099 2,238,619 Loans and borrowings 255,396 2,095,105 Cash pooling liabilities 141,703 143,514 TOTAL 2,251,252 2,238,619 Reconciliation of changes in liabilities resulting from financing activities – liabilities in respect of credits and loans 01.01.-31.12.2021 01.01.-31.12.2020 Opening balance 2,095,105 1,758,368 Proceeds from debt incurred 385,493 662,788 financing received 385,493 662,788 Accrual of interest 38,196 47,853 Repayment of debt (397,822) (395,756) repayment of principal (351,790) (347,813) interest paid (46,032) (47,943) Realised exchange differences on foreign currency debt 18,998 - Foreign exchange differences on measurement of liabilities (22,880) 19,598 Other (7,540) 2,254 Closing balance 2,109,549 2,095,105 * The loan repayment in the amount of PLN 1,669,403 thousand was settled without any flow through the accounts of CIECH S.A. (refinancing of the loan). Debt financing CIECH S.A.’s debt financing is secured mainly through facilities made available to CIECH S.A. under facilities agreements: 1. the Facilities Agreement signed with a consortium of banks dated 16 March 2021 with the total value of approx. PLN 2,115,000 thousand: • amortised term facility in tranches in PLN and EUR in the amount of PLN 540,700 thousand and EUR 4,231 thousand (the facility is fully drawn down), • non-amortised term facility in tranches in PLN and EUR in the amount of PLN 1,260,100 thousand and EUR 9,844 thousand (the facility is fully drawn down), • revolving credit facility in the amount of up to PLN 250,000 thousand (the amount of used credit as at 31 December 2021 was PLN 0), Accounting policy Financial liabilities are an entity’s liabilities to deliver financial assets to another entity or to exchange a financial instrument with another entity under conditions that are unfavourable. When a financial liability is recognised initially, an entity shall measure it at its fair value plus, in the case of a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial liability. Interest accrued is recognised under finance costs or, if it is subject to capitalisation, to property, plant and equipment or intangible assets. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 51 2. Overdraft facilities up to PLN 100,000 thousand and EUR 10,000 thousand under agreements dated 28 and 29 August 2018 (as at 31 December 2021, the amount used was PLN 0 thousand). The total value of facilities available under the aforesaid agreements is PLN 2,261,531 thousand; the limits are drown down in the amount of PLN 1,865,537 thousand. Detailed information about loan liabilities is disclosed in the Directors’ Report for the CIECH Group and CIECH S.A. for 2021, in Section 4.6. As at 31 December 2021, CIECH S.A. has a short-term liability on account of intercompany loans received in the amount of PLN 255,219 thousand, including: • a loan from Gamma Finanse Sp. z o.o. in the amount of PLN 105,000 thousand, • a loan from Verbis Eta Sp. z o.o. SKA in the amount of PLN 85,000 thousand, • a loan from CIECH Pianki Sp. z o.o. in the amount of PLN 65,000 thousand, • interest accrued on loans in the amount of PLN 219 thousand. Interest rate: The Loans bear interest at a floating rate determined on the basis of the WIBOR / EURIBOR base rate, plus margin, the level of which depends on the level of the net debt to EBITDA, such that if the level of the ratio is lower, the margin applied will also be lower. The financial terms of the Facilities Agreement do not differ from those commonly used for this type of agreements. Information about the financial covenants included in loan agreements During the period covered by these financial statements, no loan agreement was called to maturity and there were no violations of payment terms for repayment of principal or interest due in relation to financial liabilities recognised in the balance sheet. Under the Facilities Agreement dated 16 March 2021, CIECH S.A. and its selected subsidiaries were obliged to, among others, maintain a certain level of: • net leverage ratio for the Group specified in the Facilities Agreement (the ratio of the CIECH Group’s consolidated net debt to consolidated EBITDA of the CIECH Group calculated according to the guidelines) in the amount of at least 4.0x,, measured at the end of a year and first six months of a year. As at the balance sheet date, i.e. 31 December 2021, this ratio was maintained and amounted to 1.6. • the guarantor coverage ratio (share of subsidiaries being guarantors in the consolidated EBITDA of the CIECH Group, calculated according to the guidelines) at a level of at least 80%; this ratio was met as at the balance sheet date and amounted to 89.6%. 7.2. OTHER NON-CURRENT LIABILITIES Accounting policy, judgements and estimates Accounting policy concerning financial instruments is presented in note 8.1. OTHER NON-CURRENT LIABILITIES 31.12.2021 31.12.2020 Derivatives 91,857 14,327 Liabilities due to purchase of shares and other financial assets - 3,871 Other 26,213 - TOTAL 118,070 18,198 As at the end of 2020, the long-term portion of IRS transactions designated for hedge accounting is not reported. These transactions hedge the interest rate on loans that have been recognised as short-term liabilities due to a breach of one of the covenants at the balance sheet date. For details, see Section 7.1. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 52 In the corresponding period, long-term liabilities due to purchase of shares include the long-term portion of the deferred payment for the acquisition of Proplan Plant Protection Company, S.L., i.e.: • EUR 2,929 thousand of discounted deferred payment (the remaining 10% of the purchase price), payable in cash in 4 installments of EUR 1,115 thousand on subsequent anniversaries (in 2019-2022 respectively – the first payment was made in July 2019) of the takeover of control over Proplan (nominal value of EUR 4,461 thousand). At the end of 2021, these liabilities are presented as current liabilities in Note 7.3. The item of other long-term liabilities includes the value of the three-year Long-term Incentive Plan of the CIECH Group for 2019-2021 for the key management personnel of the CIECH Group. The intention of introducing the Plan was to harmonize the activities of the key managers of the CIECH Group with the achievement of the goals set out in the Strategy of the CIECH Group for 2019-2021. The main criterion authorizing the implementation of the Plan will be the development by the CIECH Group in the years 2019- 2021 of an increase in value at the level of at least 11% of the base year, i.e. 2018. The generated value was calculated as the difference of the value of the CIECH Group generated at the end of 2021 compared to this value at the end of 2018. The value of the CIECH Group, for the purposes of the Long-Term Incentive Plan, is measured by the so-called TSR (Total Shareholder Return) ratio taking into account, among others: the normalized EBITDA of the CIECH Group, the assumed multiplier for the EBITDA of the normalized CIECH Group, the consolidated net debt of the CIECH Group, the value of dividends paid and cash inflows / outflows resulting from the issue / redemption of the Company's shares. The TSR ratio for the CIECH Group is calculated on the basis of the financial data contained in the audited consolidated financial statements of the CIECH Group. Due to the achievement of the Earned Value at the level of at least 11% of the base year (2018), the bonus pool amounted to 12% of the Earned Value and was adjusted by the effective number of units allocated to the Plan participants. The bonus pool will be paid out in the years 2022-2024, in equal parts each year. As at 31 December 2021, 574 units out of 1,000 issued were granted, while the discounted value of the program attributable to CIECH S.A. at the end of the entire Program, it amounted to PLN 42,286 thousand. To measure the liability, the Group used a discount rates of 2.94% -3.47% (depending on the date of the planned liability repayment). 7.3. CURRENT TRADE AND OTHER LIABILITIES Accounting policy Trade and other liabilities are classified as current or non-current based on the following principles: ✓ trade liabilities are reported as current liabilities, regardless of maturity, ✓ other liabilities due to be settled within 12 months of the balance sheet date are classified as current liabilities, ✓ other payables, which do not meet the current liability conditions, are classified as non-current liabilities. Liabilities denominated in foreign currencies are recognised at the NBP’s average exchange rate effective on the last working day before the date of transaction. At the reporting date foreign currency denominated liabilities are translated at the average exchange rate announced for that day by the NBP except for received prepayments. Currency translation differences arising upon the repayment of a liability (realised) or its valuation (unrealised) are presented within financial income or expense. Prepayments for deliveries denominated in foreign currencies are recognised at the exchange rate applicable as at the transaction day. Factoring The Company uses non-recourse factoring services. The factor transfers advance payments to the Company’s account in the full amount of invoices accepted for financing. The financing of receivables transferred is provided in various timeframes, therefore, as at the balance sheet date, there may be receivables which have not been financed yet and are reported as factoring receivables. Advance payments received are posted as factoring liabilities. In the statement of financial position, factoring receivables and liabilities are recognised on a net basis up to 95% of the value of advance payments received from the factor (the 95% limit results from the level of the receivables insurance). The remaining 5% of receivables value is reported as factoring receivables, and 5% of the value of advance payments received is reported as factoring liabilities. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 53 Judgements and estimates At the reporting date trade payables are measured at amortised cost (i.e. they are discounted using the effective interest method) and increased by any applicable late interest accrued. Late interest is not accrued when a formal waiver is received from the counterparty. In all other cases such interest is accrued and recognised in accordance with the following principles: ✓ on an ongoing basis, based on interest notes received; ✓ in estimated amounts, with such estimates based on comparison of interest charged in the past by a counterparty to the related amounts owed. CURRENT TRADE AND OTHER LIABILITIES 31.12.2021 31.12.2020 Trade liabilities and advances taken 442,031 332,006 Public and legal liabilities (excluding income tax) 2 3,762 Liabilities for purchase of property, plant and equipment 9,526 8,401 Financial instruments liabilities 59,843 45,119 Liabilities to employees 3,284 4,136 Payroll liabilities 25,402 13,943 Holiday leave accrual 4,904 3,213 Social security and other employee benefits 1,992 2,258 Factoring liabilites 8,244 6,830 Liabilities due to the purchase of shares, stocks and other financial assets 4,921 5,255 Other 8,857 13,913 TOTAL 569,006 438,836 Trade liabilities do not bear interest. Commercial contracts concluded by CIECH S.A. include various terms of payment of trade liabilities depending on the type of transaction, market characteristics and trade conditions. The standard payment term is 60 days. 7.4. LEASES Accounting policy On 1 January 2019, CIECH S.A. adopted a new financial reporting standard, IFRS 16 Leases. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company combines two or more contracts entered into at or near the same time with the same counterparty (or related parties of the counterparty), and account for the contracts as a single contract if one or more of the following criteria are met: a) the contracts are negotiated as a package with an overall commercial objective that cannot be understood without considering the contracts together; b) the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or c) the rights to use underlying assets conveyed in the contracts (or some rights to use underlying assets conveyed in each of the contracts) form a single lease component. A contract contains a lease if: a) it concerns an identified asset that is explicitly specified in the contract (e.g. using an inventory number, address (for premises), etc.) or implicitly specified at the time that the asset is made available for use by the customer, and the supplier does not have the substantive right to substitute the asset throughout the period of use and b) the lessee receives essential all of the economic benefits from such assets during the period of use, i.e. both basic benefits and the benefits derived from it (if any); and c) the lessee has the right to specify the method in which it uses the identified asset. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 54 Initial measurement of the lease liability The lease payments included in the measurement of the lease liability comprise the following payments that are not paid: a) fixed payments (including in-substance fixed payments), less any lease incentives receivable; b) variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; c) amounts expected to be payable by the lessee under residual value guarantees; d) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and e) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease and it is highly likely that this option will be exercised. Subsequent measurement of the lease liability After the commencement date, the Company measures the lease liability by: a) increasing the carrying amount to reflect interest on the lease liability; b) reducing the carrying amount to reflect the lease payments made; and c) remeasuring the carrying amount to reflect any reassessment or lease modifications. The Company, as a lessee, recognises in profit or loss of the current period both: a) interest on the lease liability; and b) variable lease payments not included in the measurement of the lease liability in the period in which the event or condition that triggers those payments occurs, unless these costs are included in the carrying amount of another asset in accordance with the accounting policy for property, plant and equipment. In-substance fixed lease payments In-substance fixed lease payments are payments that may, in form, contain variability but that, in substance, are unavoidable. In-substance fixed lease payments exist, for example, if: a) payments are structured as variable lease payments, but there is no genuine variability in those payments. Those payments contain variable clauses that do not have real economic substance. Examples of those types of payments include: • payments that must be made only if an asset is proven to be capable of operating during the lease, or only if an event occurs that has no genuine possibility of not occurring; or • payments that are initially structured as variable lease payments linked to the use of the underlying asset but for which the variability will be resolved at some point after the commencement date so that the payments become fixed for the remainder of the lease term. Those payments become in-substance fixed payments when the variability is resolved, b) there is more than one set of payments that a lessee could make, but only one of those sets of payments is realistic. In this case, an entity considers the realistic set of payments to be lease payments. c) there is more than one realistic set of payments that a lessee could make, but it must make at least one of those sets of payments. In this case, an entity considers the set of payments that aggregates to the lowest amount (on a discounted basis) to be lease payments. Variable lease payments Variable lease payments that depend on an index or a rate include, for example, payments linked to a consumer price index, payments linked to a benchmark interest rate (such as WIBOR) or payments that vary to reflect changes in market rental rates (e.g. periodical changes in perpetual usufruct rates, in connection with the revision of a valuation report). Variable lease payments that do not depend on an index or a rate, i.e. depend on the use, are not included in the measurement of lease liabilities (e.g. fees for exceeding the mileage limit). Exemptions/ simplifications applied The Company applies the simplifications for short-term leases and low-value asset leases provided for in the standard. It is assumed that assets whose unit value does not exceed approximately PLN 20 thousand, which corresponds to approximately USD 5 thousand, are low-value assets. Short-term leases are those whose term is shorter than 12 months. Judgements and estimates Adoption of IFRS 16 entailed also the need to make estimates and judgments which are reflected in the measurement of lease liabilities and right-of-use assets, including: • assessing whether a contract contains a lease in accordance with IFRS 16, FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 55 • determining the duration of contracts (including contracts with an indefinite term or with an extension option): With respect to contracts for an indefinite term, the Company, when estimating the irrevocable lease term, assumed the period in which it intends to use the underlying assets, also taking into account the rights of termination of the parties and the existence of significant penalties in the contracts. The lease term over which the lease liability is recognised also includes any periods resulting from an extension or early termination if any of the above scenarios is sufficiently certain in the entity's judgement. In the case of contracts with an extension option, the lease liability would be respectively higher, while termination options resulted in a reduction in the liability amount. • assessing lease payments as either fixed or variable, • determining depreciation and amortisation rates. • determining the interest rate to be used in discounting future cash flows: Discount rate The present value of future lease payments is calculated using the lease rate. If the lease rate is not known, the Company applies the incremental borrowing rate for a given lease agreement, i.e. the rate of interest that the Company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. Assets used in CIECH S.A. under lease agreements include passenger cars and premises – mainly office and warehouse space. The lease agreement for cars is a renewable agreement, making it possible to acquire an asset at its estimated market value at the end of its use. The Company is not obliged to purchase the leased assets. To calculate discount rates for the purposes of IFRS 16, the Company assumes that the discount rate should reflect the cost that it would have to pay to borrow the funds necessary to purchase the leased asset.The calculation of interest rates took account of credit risk (reflected in the margin assumed), economic conditions in which the transactions took place (country, currency of the contract) and the duration of the contract (preparation of calculations for the relevant periods within which the Company holds lease contracts). Interest rates range from 1.91% to 5.07% (for PLN 1.91%-5.07%; for EUR 3.07%). A single discount rate was applied to the entire contract portfolio. The nominal value and the value lease interest are as follows: LEASE LIABILITIES Nominal payments Effective interest Discounted lease liability 31.12.2021 0–6 months 2,783 225 2,558 Up to 1 year 3,049 200 2,849 1–2 years 8,117 573 7,544 2–5 years 6,061 331 5,730 More than 5 years 5,343 104 5,239 TOTAL 25,353 1,433 23,920 31.12.2020 0–6 months 2,943 23 2,920 Up to 1 year 3,493 81 3,412 1–2 years 9,593 589 9,004 2–5 years 9,233 1,176 8,057 More than 5 years 5,836 1,105 4,731 TOTAL 31,098 2,974 28,124 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 56 Reconciliation of changes in liabilities resulting from financing activities – lease liabilities 01.01.-31.12.2021 01.01.-31.12.2020 Opening balance 28,124 29,440 Modifications of agreements (1,030) (962) Signing new agreements 2,680 3,415 Early termination of agreement - (120) Interest accrued 532 1,109 Repayment of liability (6,387) (6,607) Foreign exchange differences 1 1,849 Closing balance 23,920 28,124 The total lease cash outflow is as follows: 01.01-31.12.2021 01.01-31.12.2020 Payment of liabilities, including: 9,267 10,812 Principal amount 5821 5,483 Interest 566 1,124 Variable payments other than those linked to an index/rate 2,074 3,268 Low-value leases 806 937 The following table presents lease costs not included in the calculation of carrying amounts in accordance with IFRS 16 for the period: 01.01-31.12.2021 01.01-31.12.2020 Costs of lease of low-value assets (806) (938) Costs related to variable lease payments not included in the measurement of lease liabilities (2,074) (3,269) For details of the right-of-use assets resulting from leases see Note 5.2 7.5. PROVISIONS FOR EMPLOYEE BENEFITS Accounting policy Provisions for retirement and disability benefits Based on the Company’s remuneration plan, the employees of CIECH S.A. are entitled to retirement and disability benefits. The Company’s obligations in respect of the above benefits is the amount of benefit entitlement that employees have earned as a result of their service in the current and prior years. Net defined benefit liabilities are calculated separately for each plan by estimation of future payments required to settle the obligation resulting from employee service in the current and prior periods (discounted to its present value). The discount rate is the rate of return for low-risk debt securities with similar maturity date as the Company’s liabilities as at the end of the reporting period. An appropriate estimation is made by an authorised actuary with the application of forecast discounted unit right method. The use of such provisions results in a decrease in the provision, while the reversal of the said provision increases other operating income. The increase in the provision for employment costs is recognised respectively in other operating expenses. Changes in provisions resulting from the passage of time (i.e. the unwinding of the discount) and the effect resulting from changes in discount rates are always presented in financing activities. The Company recognises in other comprehensive income actuarial gains and losses – changes in provisions for retirement benefits resulting differences between the previous actuarial assumptions and what has actually occurred and the effects of changes in actuarial assumptions and change in discount rate. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 57 Judgements and estimates The amount of the provision for employee benefits is determined based on actuarial valuations performed by independent professional firms. By actuarial valuation estimates are made regarding the rotation in employment, wage growth, discount rates and inflation. PROVISIONS FOR EMPLOYEE BENEFITS LONG-TERM SHORT-TERM 01.01.- 31.12.2021 01.01.-31.12.2020 01.01.-31.12.2021 01.01.-31.12.2020 Opening balance 979 1,089 826 2,312 Use and reversal (58) - (339) (1,595) Other (187) (110) (74) 109 Closing balance 734 979 413 826 In 2021, an amount of PLN 89 thousand (PLN 51 thousand in the corresponding period) was recognised in other comprehensive income. This is a change in provisions for retirement benefits resulting from differences between the previous actuarial assumptions and what has actually occurred as well as from changes in the parameters and assumptions used in the calculations, such as the discount rate, the salary growth rate, and assumptions concerning the future mobility of employees. Employee benefits are measured on the basis of actuarial valuations and including provision for retirement and disability benefits. A discount rate of 3.3% p.a. was applied in order to determine the current value of future liabilities due to employee benefits. The discount rate applied is established in nominal value. At the same time, future inflation in the amount of 2.5% per annum was taken into account. The remuneration growth rates of 3.5% and 5.0% were applied for 2022 and subsequent years, respectively. Staff turnover ratio is established based on historic data, adjusted for employment restructuring plans. According to the Company’s estimations, a change in actuarial assumptions will not have a significant impact on financial results. 7.6. OTHER PROVISIONS Accounting policy A provision is recognised if, as a result of a past event, the Company has a present obligation and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. A provision for restructuring is recognised when the Management Board has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly and a reliable estimate can be made. Judgements and estimates For measurement of the provisions, the Company is required to make estimates, assumptions regarding discount rates, expected costs and payment terms. CHANGE IN OTHER SHORT-TERM PROVISIONS Provisions for liabilities TOTAL 01.01.-31.12.2021 Opening balance 33,741 33,741 Recognition 988 988 Use and reversal (168) (168) Closing balance 34,561 34,561 01.01.-31.12.2020 Opening balance 33,325 33,325 Recognition 1,435 1,435 Use and reversal (2,172) (2,172) Other 1,153 1,153 Closing balance 33,741 33,741 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 58 The amount of provisions is an estimated value and may be subject to change during utilisation. Short-term provisions of PLN 34,561 thousand are related to potential claims (principal liability plus interest payable) resulting from litigation. 8. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT 8.1. FINANCIAL INSTRUMENTS Accounting policy Principles of measurement after initial recognition/at the end of reporting period and presentation of financial instruments in financial statements Category of assets or liabilities Measurement Recognition Assets at fair value through profit or loss At fair value Remeasurement changes adjust the carrying amount of the asset and are recognised in current period profit or loss. Financial assets measured at amortised cost At amortised cost using the effective interest rate (EIR) Remeasurement changes adjust the carrying amount of the asset and are recognised in current period profit or loss. Financial assets at fair value through other comprehensive income At fair value Changes from remeasurement at fair value are recognised in other comprehensive income. For debt instruments interest is recognised directly in profit or loss under finance income. Liabilities at fair value through profit or loss At fair value Remeasurement changes adjust the carrying amount of the asset and are recognised in current period profit or loss. Impairment of financial assets At each balance sheet date, the Entity assesses whether there has been a significant increase in credit risk for a single financial asset (financial instrument) since its initial recognition (not applicable to assets measured through profit or loss or equity investments designated as measured at fair value through other comprehensive income). If such a significant increase has taken place, the Entity estimates allowances in the amount of long-term expected credit losses. Otherwise, the Entity estimates allowances in the amount of 12-month expected credit losses, even if in previous periods allowances were recognised in the amount of long-term expected credit losses. The Entity assumes that in the case of financial instruments that meet the definition of a low credit risk instrument as at a given balance sheet date, there has been no significant increase in credit risk and therefore the allowance is estimated at the amount of 12-month expected credit losses. The credit risk on a financial instrument is considered low for these purposes, if: a) the financial instrument has a low risk of default, b) the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and c) adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. The Entity considers that there has been a significant increase in credit risk for a given financial instrument, if there has been a delay in contractual payments of more than 30 days. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 59 For a financial asset that is credit-impaired at the reporting date, but that is not a purchased or originated credit-impaired financial (POCI) asset, the Entity measures the expected credit losses as the difference between the asset's gross carrying amount and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. Any adjustment is recognised in profit or loss as an impairment gain or loss. A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about the following events: a) significant financial difficulty of the issuer or the borrower; b) a breach of contract, such as a default or past due event; c) the lender(s) of the borrower, for economic or contractual reasons relating to the borrower's financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider; d) it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; e) the disappearance of an active market for that financial asset because of financial difficulties; or f) the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses. It may not be possible to identify a single discrete event—instead, the combined effect of several events may have caused financial assets to become credit-impaired. Regardless of the above criteria, the Entity considers that there has been an impairment loss in the event of a delay in payment of more than 180 days, as it believes that the risk of default by counterparties increases significantly after that date. The amount established as a result of the abovementioned allowances may be decreased if the Management Board is in possession of reliable documents, indicating that the receivables were secured and their payment is highly probable. Impairment allowances are estimated using individual parameters determined on the basis of benchmarks (using information on bank ratings) or values provided by experts, scaled down to the horizon for estimating expected credit losses. For trade receivables, the Entity chose a simplified approach whereby lifetime expected credit losses are estimated from the moment of initial recognition of exposures. The main financial instruments disclosed in the statement of financial position of CIECH S.A. as at 31 December 2021 include: Financial assets: • cash and cash equivalents, • loans granted, • financial instruments with positive valuation, • trade receivables, • factoring receivables, • cash pooling receivables. Financial liabilities: • term loan liabilities, revolving facility liabilities and overdraft liabilities, • trade payables, • financial instruments with negative valuation, • lease liabilities, • loan liabilities, • cash pooling liabilities, • factoring liabilities. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 60 Carrying amount of financial instruments CLASSES OF FINANCIAL INSTRUMENTS note 31.12.2021 31.12.2020 CATEGORIES OF FINANCIAL INSTRUMENTS Cash and cash equivalents 5.8 467,475 265,287 Measured at amortized cost Loans granted 5.4;5.7 1,651,148 1,588,314 Measured at amortized cost Trade receivables 5.6 110,037 169,664 Measured at amortized cost Factoring receivables 5.6 21,437 35,946 Measured at amortized cost Hedging derivatives with positive value 5.4;5.7 88,783 1,835 Valued in fair value through income statement Derivative instruments recognized in financial assets designated as hedging instruments 5.4;5.7 14,099 - Financial assets valued at fair value through other comprehensive income Cash pooling receivables 5.6 3,912 7,992 Measured at amortized cost ASSETS 2,356,891 2,069,038 Trade liabilities 7.3 (442,025) (332,006) Measured at amortized cost Loans and borrowings 7.1 (2,109,549) (2,095,105) Measured at amortized cost Lease liabilities 7.4 (23,920) (28,124) Measured at amortized cost Factoring liabilities 7.3 (8,244) (6,830) Measured at amortized cost Hedging derivatives with negative value 7.2;7.3 (151,564) (27,702) Valued in fair value through income statement Derivative instruments with negative value 7.2;7.3 (136) (31,744) Financial liabilities valued at fair value through other comprehensive income Cash pooling liabilities 7.3 (141,703) (143,514) Measured at amortized cost LIABILITIES (2,877,141) (2,665,025) Selected trade receivables in CIECH S.A. are subject to factoring. This is factoring with the assumption of insolvency risk whereby the factor assumes the risk in the amount specified in the insurance policy. CIECH S.A. also uses reverse factoring. Due to the terms of the agreements, these liabilities are reported as trade liabilities. Revenues, costs, profit and loss recognised in the income statement by the category of financial instruments. Items of revenues, costs, profits and losses recognized in the statement of profit or loss – for continued and discontinued operations 01.01.- 31.12.2021 01.01.- 31.12.2020 Categories of financial instruments Revenues/(costs) due to interests, including those calculated using the effective interest rate method (143) (7,891) 48,844 46,268 Financial assets valued at amortized cost (48,479) (53,049) Financial liabilities valued at amortized cost (508) (1,110) Financial liabilities excluded from IFRS 9 Profits/(losses) due to exchange differences 5,863 33,471 5,863 33,471 Financial assets valued at amortized cost Recognition of impairment losses - - Financial liabilities excluded from IFRS 9 Reversal of impairment losses (1,167) (9,690) Financial assets valued at amortized cost Income/expenses due to the use of derivative financial instruments 2,138 675 Financial assets valued at amortized cost Profits/(losses) due to exchange differences (79,859) (63,852) FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 61 Items of revenues, costs, profits and losses recognized in the statement of profit or loss – for continued and discontinued operations 01.01.- 31.12.2021 01.01.- 31.12.2020 Categories of financial instruments (68,470) (59,317) Assets/financial liabilities valued in fair value through income statement (11,389) (4,535) Hedging instruments 44,274 (461) Assets/financial liabilities valued in fair value through income statement TOTAL (28,894) (47,748) 8.2. FINANCIAL INSTRUMENTS DESIGNATED FOR HEDGE ACCOUNTING Accounting policy Hedge accounting recognises the offsetting effects on profit or loss of changes in the fair values of the hedging instrument and the hedged item. Derivatives such as options, forwards, swaps are held to hedge the fair value of assets or liabilities or expected future cash flows. For the hedging instruments, the Entity may apply hedge accounting if, and only if, all the following conditions are met: ✓ the hedging relationship consists only of eligible hedging instruments and eligible hedged items. ✓ at the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entity's risk management objective and strategy for entity the hedge. That documentation shall include identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the entity will assess whether the hedging relationship meets the hedge effectiveness requirements (including its analysis of the sources of hedge ineffectiveness and how it determines the hedge ratio). ✓ the hedging relationship meets all of the following hedge effectiveness requirements: a) there is an economic relationship between the hedged item and the hedging instrument; b) the effect of credit risk does not dominate the value changes that result from that economic relationship; and c) the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the entity actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item. However, that designation shall not reflect an imbalance between the weightings of the hedged item and the hedging instrument that would create hedge ineffectiveness (irrespective of whether recognised or not) that could result in an accounting outcome that would be inconsistent with the purpose of hedge accounting. Cash flow hedge: A cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with all, or a component of, a recognised asset or liability (such as all or some future interest payments on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss. Cash flow hedge shall be accounted for as follows: a) the separate component of equity associated with the hedged item (cash flow hedge reserve) is adjusted to the lower of the following (in absolute amounts): i. the cumulative gain or loss on the hedging instrument from inception of the hedge; and ii. the cumulative change in fair value (present value) of the hedged item (i.e. the present value of the cumulative change in the hedged expected future cash flows) from inception of the hedge. b) the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge (i.e. the portion that is offset by the change in the cash flow hedge reserve calculated in accordance with (a)) shall be recognised in other comprehensive income. c) any remaining gain or loss on the hedging instrument (or any gain or loss required to balance the change in the cash flow hedge reserve calculated in accordance with (a)) is hedge ineffectiveness that shall be recognised in profit or loss. The effective portion of the hedge is transferred to profit or loss as a reclassification adjustment in the period or periods when the hedged expected future cash flows affect profit or loss. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 62 The table below presents a summary of specific groups of relationships existing in 2021, designated for hedge accounting: 31.12.2021 31.12.2020 Type of instrument Hedged item Nominal value/Volume Maturity Value in financial assets Value in financial liabilities Value in financial assets Value in financial liabilities Derivative instruments – cash flow hedge Interest rate risk Interest rate swap – 6M EURIBOR to fixed rate Interest payments on debt in EUR with a maximum nominal amount of EUR 14,075 thousand EUR 14,075 thousand 2025 526 - - - Interest rate swaps – 6M WIBOR to fixed rate Interest payments on term loan contracted by CIECH S.A. with initial nominal amount of PLN 1,212,520 thousand PLN 1,212,520 thousand 2026 13,437 - - (31,126) Interest rate swap – 6M EURIBOR to fixed rate Interest payments on term loan contracted by CIECH S.A. with initial nominal amount of EUR 30,000 thousand EUR 30,000 thousand 2022 - - - (618) 31.12.2021 31.12.2020 Before tax Tax After tax Before tax Tax After tax Cash flow hedge reserve as at the beginning of the period (31,744) 6,032 (25,713) (1,278) 243 (1,035) Effective portion of gains/(losses) on hedging instruments: - interest rate risk 37,765 (7,175) 30,590 (34,661) 6,586 (28,075) Reclassification to profit or loss: - currency risk (sales revenues) - - - (166) 32 (134) - interest rate risk (interest expense) 18,776 (3,568) 15,208 4,361 (829) 3,532 Cash flow hedge reserve as at the end of the period 24,797 (4,711) 20,085 (31,744) 6,032 (25,713) The aim of CIECH S.A. when taking the decision concerning the implementation of the principles of cash flow hedging was to reduce the influence of interest rate movements and exchange rates differences from valuation of financial instruments on the statement of profit or loss by reflecting their hedging nature in the financial statements. In the reporting period, there were no instances of identifying the inability to realise a future transaction in respect of which the cash flow hedge accounting was applied. Sales revenues designated to hedge accounting are considered as highly probable. Their occurrence is anticipated in the Company’s long-term financial forecast. Additionally, majority of these transactions are concluded with regular customers of CIECH S.A., which supports the probability of their occurrence. In IRS transactions, in order to identify sources of ineffectiveness of the hedge, key parameters of the hedged credit and IRS transactions (nominal amount, interest rate, interest periods) were compared. Credit risk is considered negligible. No sources of ineffectiveness were identified. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 63 8.3. FINANCIAL RISK MANAGEMENT Risk management principles CIECH S.A. actively manages operational and financial risk, striving to reduce the fluctuation of cash flows and maximise the companies’ market value. CIECH S.A.’s policy assumes natural hedging of imports and exports and hedging of up to 90% of net exposure to currencies exchange rate change by using derivative instruments and 100% exposure to interest rate risk. In 2021, forward currency and interest rate risk hedging transactions (forwards, IRSs and CIRSs) were entered into (or continued to exist after being entered into in previous years) at the company. Cash management CIECH S.A. cooperates with bank service providers of high credit rating and with substantial experience in the cash management area. Allocation of financial resources is performed through the use of intra-group loans, dividends payout by subsidiaries, participation in a cash management system (cash pooling) and increase of share capital in the subsidiaries. Quantitative and qualitative information on financial risks CIECH S.A. manages financial risks based on, among others, the developed and adopted market risk hedging strategy. The aim of the financial risk management policy is to identify areas requiring risk analysis to determine methods to identify and measure it, to determine activities undertaken in relation to identified risk areas and to define organisational solutions in the risk management process. In fulfilling its main goals, CIECH S.A. aims to avoid excessive market risk. This goal is realised by identifying, monitoring and hedging cash flow fluctuation risk and monitoring the size and costs of the Company’s debt. When assessing risk, the Company takes into account the risk portfolio effect resulting from the variety of conducted business activities. Effects of the risk are reflected in the financial statements. Financial risk management covers processes of identifying, measuring and establishing the manner of responding to that risk, including processes related to currency exchange rates and interest rate fluctuations. CIECH S.A. monitors risk areas which are most important for its activities. Interest rate risk CIECH S.A. finances its activity mainly through term loans. The amount of the costs of interest-bearing debt held by the Company depends on the reference rate. This refers to term loans made available under a facilities agreement dated 16 March 2021 in the amount of PLN 1,801 million and EUR 14 million, a revolving credit facility in the amount of up to PLN 250 million (as at the end of 2021, the debt amounted to PLN 0), overdraft facilities (as at the end: PLN 0 thousand) and a part of lease and factoring contracts. Therefore, the Company is exposed to risk of change in finance costs due to changing interest rates on existing debt. This may result in increased financial costs and, consequently, deterioration of the Company’s financial performance. The risk is partially reduced by: ✓ assets owned by CIECH S.A. (bank deposits), earning interest at variable interest rate, ✓ hedging transactions concluded. In 2021, CIECH S.A. used the following interest rate hedging transactions: • interest rate swap transaction to hedge the variable interest rate levels applicable to the calculation of interest on the term loan made available in March 2021. The transaction hedges indebtedness in the amount of EUR 14 million, amortised in accordance with the schedule of the IRS transaction; • currency and interest rate swap transactions to hedge the variable interest rate levels applicable to the calculation of interest on the term loan made available in March 2021. The transaction hedges indebtedness in the initial nominal amount of 1,212 million, amortised in accordance with the schedule of the CIRS transaction. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 64 The table below presents the consolidated statement of financial position items (without derivative instruments) exposed to interest rate risk: Total carrying amount 31.12.2021 31.12.2020 Fixed interest rate instruments 1,024,037 990,508 Financial assets 1,024,037 990,508 Financial liabilities - - Floating interest rate instruments (1,176,674) (1,395,492) Financial assets 1,098,498 871,085 Financial liabilities (2,275,172) (2,266,577) The table below shows the effects of a change in the interest rate by 100 basis points in relation to the floating interest rate instruments presented in the statement of financial position. Statement of profit or loss Equity increase by 100 bp decrease by 100 bp increase by 100 bp decrease by 100 bp 31.12.2021 Floating interest rate instruments (11,767) 11 767 - - Interest rate swaps (IRS) 52,085 (55,141) 5,439 (5,638) Sensitivity of cash flows (net) 40,318 (43,374) 5,439 (5,638) 31.12.2020 Floating interest rate instruments (13,955) 13,955 - - Interest rate swaps (IRS) 2,617 (2,690) 15,878 (16,409) Sensitivity of cash flows (net) (11,338) 11,265 15,878 (16,409) * Do not include the impact of profit/loss on equity. Currency risk Currency risk is an inevitable component of commercial activity denominated in foreign currencies. Due to the nature of conducted import and export operations, CIECH S.A. is subject to currency exposure related to the significant lead of export over import. Sources of currency risk to which the Company was exposed in 2021 included: purchase of raw materials, product sales, loans taken out and cash in foreign currencies. Unfavourable changes in currency exchange rates may worsen the Company’s financial results. In 2021, CIECH S.A. used hedging contracts, such as forward options, to partially cover currency risk. CIECH S.A. tries to naturally hedge the foreign currency exposure, including matching of currency flows arising from sales and purchases as well as strategic debt denominated in EUR, in order to fit it to the expected exposure to currency risk in operations. The table below presents the estimated currency exposure of CIECH S.A. in EUR and USD as at 31 December 2021 and 2020 due to financial instruments: Exposure to currency risk in EUR (figures in EUR) 31.12.2021 31.12.2020 Impact on the statement of profit or loss Impact on the statement of other comprehensive income Assets Loans granted sensitive to FX rate changes 224,000 215,955 x Trade and other receivables 2,681 7,849 x Cash including bank deposits 2,475 315 x Liabilities Trade and other liabilities (172) (1,675) x Term loan liabilities (14,075) (30,000) x Working capital facility liabilities - (25,000) x Other liabilities in respect of credits and loans (3,577) (13,030) x FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 65 Exposure to currency risk in EUR (figures in EUR) 31.12.2021 31.12.2020 Impact on the statement of profit or loss Impact on the statement of other comprehensive income Forward not designated to hedge accounting) (192,913) (214,025) x CIRS (403,590) (60,000) x Total exposure (385,171) (119,611) * Measurement of financial instruments designated for hedge accounting is referred to other comprehensive income while ineffectiveness is recognised in the profit or loss statement. Exposure to currency risk in USD (figures in USD) 31.12.2021 31.12.2020 Impact on the statement of profit or loss Impact on the statement of other comprehensive income Assets Trade and other receivables 127 29 x Cash including bank deposits 77 142 x Liabilities Trade and other liabilities (33) (111) x Total exposure 171 60 * Measurement of financial instruments designated for hedge accounting is referred to other comprehensive income while ineffectiveness is recognised in the profit or loss statement. The table contains an analysis of the sensitivity of individual statement of financial position items to exchange rate changes as at 31 December 2021. Figures in EUR Impact on the statement of profit or loss Impact on the statement of other comprehensive income Analysis of sensitivity to currency risk – EUR, 2021 Foreign-currency balance sheet items (3,852) (3,852) - Analysis of sensitivity to currency risk – EUR, 2020 Foreign-currency balance sheet items (1,196) (1,196) - * Increase of EUR/PLN exchange rate by 1 grosz. Figures in USD Impact on the statement of profit or loss Impact on the statement of other comprehensive income Analysis of sensitivity to currency risk – USD, 2021 Foreign-currency balance sheet items 2 2 - Analysis of sensitivity to currency risk – USD, 2020 Foreign-currency balance sheet items 1 1 - * Increase of USD/PLN exchange rate by 1 grosz. Raw material price risk A significant portion of CIECH S.A.’s activity is the import and export of chemical raw materials. The raw materials markets are characterised by a cyclical nature related to fluctuations of the global economy. The growing prices of raw materials cause a decrease in margins of trade intermediaries and a decrease of demand generated by recipients. On the other hand, the falling prices are usually a symptom of a decreasing demand and the beginning of an economic downturn. On the domestic market, raw materials are subject to similar tendencies. The maintenance of a stable pace of economic growth and stable prices of chemical raw materials will have a positive impact on the commercial activity of CIECH S.A. Considerable fluctuations of demand and prices caused either by fast economic growth or economic stagnation will have a negative influence on the activity related to trading in chemical raw materials by the Company. CIECH S.A. reduces price risk through concluding agreements with suppliers with appropriate price formula. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 66 Credit risk Credit risk means a threat of the counterparty not fulfilling the obligations stipulated in the agreement, exposing the lender to financial loss. From the CIECH S.A.'s point of view, credit risk is linked to: • trade receivables from customers, • loans granted, • cash and bank deposits, • guarantees and sureties granted. CIECH S.A. is exposed to credit risk connected with the credit rating of customers being parties to products and goods sales transactions. That risk is limited by using internal procedures to establish amounts of credit limits for customers and to manage trade receivables (the Company uses securities in the form of a letter of credit, bank guarantees, mortgages, receivables insurance and non-recourse factoring). Customers’ creditworthiness is assessed and appropriate collateral is obtained from the borrowers, allowing for a reduction of potential losses in the case of failure to repay the debt. Credit risk assessment for customers is performed prior to concluding an agreement and periodically at subsequent deliveries of goods in accordance with the binding procedures. The risk of the receivables portfolio is assessed on a weekly basis. On selected markets, where more risky payment deadlines are applied, the Company makes use of services provided by companies specialising in insuring receivables. Credit risk connected with cash in bank and bank deposits is low as CIECH S.A. enters into transactions with high-rating banks with stable market position. The table below presents the maximum exposure of financial assets to credit risk as at the end of reporting period. 31.12.2021 31.12.2020 Cash and cash equivalents 467,475 265,287 Loans granted 1,651,148 1,588,314 Trade receivables 110,037 169,664 Factoring receivables 21,437 35,946 Cash pooling receivables 3,912 7,992 Assets due to valuation of derivatives 102,882 1,835 TOTAL 2,356,891 2,069,038 The fair value of financial assets exposed to credit risk is similar to their carrying amount. At the end of 2021, there was one loan granted to an unrelated party with a nominal value of PLN 120 thousand. The Company has no material items which would be uncollectible as at the reporting date and not covered by an impairment allowance. Information on guarantees and sureties granted is provided in Note 9.2 to these statements. Trade receivables and factoring receivables (net value) Loans granted (net value) 31.12.2021 31.12.2020 31.12.2021 31.12.2020 Poland 103,197 181,672 627,110 597,805 European Union 27,641 23,837 1,024,038 990,509 Other European countries 98 51 - - Africa 538 - - - Asia - 50 - - TOTAL 131,474 205,610 1,651,148 1,588,314 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 67 Trade receivables and factoring receivables (net value) Loans granted (net value) 31.12.2021 31.12.2020 31.12.2021 31.12.2020 Soda Segment 104,619 114,333 - - Agro Segment 3,972 8,294 - - Foams Segment 1,011 995 - - Resins Segment - 64,890 - - Silicates Segment 4,307 4,224 - - Packaging Segment 315 83 - - Other activities 17,250 12,791 1,651,148 1,588,314 TOTAL 131,474 205,610 1,651,148 1,588,314 Assets associated with discontinued operations. For detailed information on discontinued operations, see Note 5.9 to these statements. Impairment of financial assets Changes in the gross carrying amounts of trade receivables and loans with reconciliation of write-downs as at 31 December 2021 and as at 31 December 2020 to opening balances are presented in the table below: Trade receivables Loans Stage 2 Stage 3 TOTAL Stage 1 Stage 2 Stage 3 TOTAL Lifetime ECL – not impaired Lifetime ECL – impaired 12-month ECL Lifetime ECL Lifetime ECL Gross carrying amount as at 01.01.2021 169,867 20,530 190,397 1,596,870 - 2,801 1,599,671 Recognised 808,575 910 809,485 2,015,131 - - 2,015,131 Interest accrued 151 151 48,615 - - 48,615 Written-down - 1 1 - - - Repaid (878,925) (1,941) (880,866) (2,001,117) - - (2,001,117) Foreign exchange differences 10,565 726 11,291 153 - - 153 Gross carrying amount as at 31.12.2021 110,233 20,226 130,459 1,659,652 - 2,801 1,662,453 Opening balance of write-downs as at 01.01.2021 (203) (20,530) (20,733) (8,556) - (2,801) (11,357) Change in write-downs 7 304 311 52 - - 52 Closing balance of write-downs as at 31.12.2021 (196) (20,226) (20,422) (8,504) - (2,801) (11,305) Net carrying amount as at 31.12.2021 110,037 - 110,037 1,651,148 - - 1,651,048 Trade receivables Loans Stage 2 Stage 3 TOTAL Stage 1 Stage 2 Stage 3 TOTAL Lifetime ECL – not impaired Lifetime ECL – impaired 12-month ECL Lifetime ECL Lifetime ECL Gross carrying amount as at 01.01.2020 286,152 12,200 298,352 1,035,699 - 2,801 1,038,500 Recognised 1,036,789 9,596 1,046,385 918,823 - - 918,823 Interest accrued - - - 38,680 - - 38,680 Written-down - (829) (829) - - - - Repaid (1,152,447) (466) (1,152,913) (452,951) - - (452,951) Foreign exchange differences (627) 29 (598) 56,619 - - 56,619 Gross carrying amount as at 31.12.2020 169,867 20,530 190,397 1,596,870 - 2,801 1,599,671 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 68 Trade receivables Loans Stage 2 Stage 3 TOTAL Stage 1 Stage 2 Stage 3 TOTAL Lifetime ECL – not impaired Lifetime ECL – impaired 12-month ECL Lifetime ECL Lifetime ECL Opening balance of write-downs as at 01.01.2020 (157) (12,200) (12,357) (14,887) - (2,801) (17,688) Change in write-downs (46) (8,330) (8,376) 6,331 - - 6,331 Closing balance of write-downs as at 31.12.2020 (203) (20,530) (20,733) (8,556) - (2,801) (11,357) Net carrying amount as at 31.12.2020 169,664 - 169,664 1,588,314 - - 1,588,314 The net carrying amount of trade receivables and loans reflects the maximum exposure to credit risk. Calculation of impairment losses on loans granted As at the date of initial application of IFRS 9, the Company, in accordance with the three-stage expected credit loss model, calculated the expected credit loss on the basis of the probability of default (calculated based on the assessment of credit risk, i.e. the Company's rating). All loans were classified by the Company in Stage 1 (loans for which no significant deterioration in credit quality was observed and expected credit losses are estimated in the period of 12 months after the reporting date). As at 31 December 2020 and 31 December 2021, loans were not reclassified to Stage 2 or Stage 3. The following tables present the reconciliation of impairment losses on financial assets. 31.12.2021 31.12.2020 Gross carrying amount 1,662,453 1,599,671 Write-off (11,305) (11,357) TOTAL 1,651,148 1,588,314 The following table presents an analysis of the credit risk stages of loans measured at amortised cost. 31.12.2021 31.12.2020 Estimated Rating Stage 1 Stage 3 TOTAL Stage 1 Stage 3 TOTAL 12-month ECL Lifetime ECL 12-month ECL Lifetime ECL Rating CIECH S.A. (Ba3 Moody’s) 1,662,453 - 1,662,453 1,599,671 - 1,599,671 Gross carrying amount 1,662,453 - 1,662,453 1,599,671 - 1,599,671 Impairment losses (11,305) - (11,305) (11,357) - (11,357) Net carrying amount 1,651,148 - 1,651,148 1,588,314 - 1,588,314 CIECH S.A.'s rating was estimated on the basis of Moody's methodology (Rating Scorecard) and the most recent financial data of CIECH S.A., according to which the calculated rating of CIECH S.A. is Ba3. Calculation of impairment allowances for trade receivables The following tables present the reconciliation of impairment allowances for financial assets in accordance with IFRS 9. TOTAL Non past due receivables Not past due, 0-30 days 30-60 days > 90 days > 180 days Gross carrying amount of receivables as at 31.12.2021 130,459 99,856 5,438 3,620 9 21,536 Default rate 0.13% 0.03% 0.26% 0.18% 94% Total expected losses 20,422 228 3 9 - 20,182 from collective analysis 195 130 3 9 - 53 from case-by-case analysis 20,227 98 - - - 20,129 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 69 TOTAL Non past due receivables Not past due, 0-30 days 30-60 days > 90 days > 180 days Gross carrying amount of receivables as at 31.12.2020 190,397 143,575 17,657 8,064 65 21,036 Default rate - 0.07% 0.03% 0.36% 0.15% 100.00% Total expected losses 20,733 101 5 29 - 20,598 from collective analysis 203 101 5 29 - 68 from case-by-case analysis 20,530 - - - - 20,530 Liquidity risk CIECH S.A. is exposed to risk connected with maintaining liquidity due to the considerable share of external financing (due to the term loan, working capital facility and lease agreements) in relation to operating results, the limited ability to obtain new financing due to the existing high level of indebtedness and the risk of losing the existing long-term financing as a result of violating covenants stipulated in the bond issue terms and loan agreements. The following measures are applied to reduce liquidity risk: • current monitoring of liquidity of CIECH S.A., • monitoring and optimisation of the level of working capital, • adjusting the level and schedule of capital expenditure, • intragroup borrowings and sureties for the liabilities from the CIECH Group’s companies, • current monitoring of the settlement of liabilities under the loan agreements conditions. The CIECH S.A.’s debt financing is ensured by a term loan. In addition, a revolving credit facility in the amount of PLN 250 million, constituting an additional source of current liquidity and working capital financing (as at 31 December 2021, the facility was drawn down in the amount of PLN 0 million), and overdraft facilities (as at the end of 2021, they were drown down in the amount of PLN 0 thousand) have been made available to the Company. The table below presents financial liabilities at face value grouped by maturity. 31.12.2021 Carrying amount Contractual cash flows Below 6 months up to 12 months 1–2 years 3–5 years Over 5 years Other financial liabiliies: (2,701,521) (2,875,356) (611,380) (288,750) (112,782) (1,862,444) - Trade liabilities (442,025) (442,025) (442,025) - - - - Loans and borrowings (2,109,549) (2,283,384) (19,408) (288,750) (112,782) (1,862,444) - Factoring liabilities (8,244) (8,244) (8,244) - - - - Cash pooling liabilities (141,703) (141,703) (141,703) - - - - Lease liabilities (23,920) (25,353) (2,571) (2,894) (7,843) (9,270) (2,775) Derivative instruments with negative value (151,564) (271,529) (16,215) - - (255,315) - Hedging derivatives with negative value (136) (84) (39) (30) (15) - - Total financial liabilities (2,877,141) (3,172,323) (630,205) (291,674) (120,640) (2,127,028) (2,775) As at 31 December 2020, one of the ratios contained in the facility agreement was not met: the share of the subsidiaries in the consolidated EBITDA value, which are guarantors, in the facilities agreement did not exceed the required threshold of 80%. Accordingly, the total value of loans made available under the above agreements was reclassified to short-term liabilities on account of loans. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 70 31.12.2020 Carrying amount Contractual cash flows Below 6 months up to 12 months 1–2 years 3–5 years Over 5 years Other financial liabiliies: (2,577,455) (2,607,704) (2,424,637) (183,067) - - - Trade liabilities (332,006) (332,006) (332,006) - - - - Loans and borrowings (2,095,105) (2,125,354) (1,942,287) (183,067) - - - Factoring liabilities (6,830) (6,830) (6,830) - - - - Cash pooling liabilities (143,514) (143,514) (143,514) - - - - Lease liabilities (28,124) (31,098) (2,943) (3,493) (9,593) (9,233) (5,836) Derivative instruments with negative value (27,702) (27,739) (8,208) (5,167) (14,364) - - Hedging derivatives with negative value (31,744) (31,452) (31,452) - - - - Total financial liabilities (2,665,025) (2,697,993) (2,467,240) (191,727) (23,957) (9,233) (5,836) Detailed information concerning revenues and costs pertaining to financial instruments, recognised in the statement of profit or loss has been presented in note 8.1. CIECH S.A.’s liquidity Liquidity ratios as at 31 December 2021 increased significantly as compared to their level as at 31 December 2020. This is due to the non-fulfilment of the ratio level set in the facility agreement at the end of 2020. The current ratio, calculated as the ratio of total current assets to total current liabilities, amounted to 1.33 as at 31 December 2021. 31.12.2021 31.12.2020 Current ratio 1.33 0.63 Quick current ratio 1.33 0.63 8.4. DETERMINATION OF FAIR VALUE The following list presents the fair value of financial instruments. 31.12.2021 31.12.2020 Carrying amount Fair value Carrying amount Fair value Cash and cash equivalents 467,475 467,475 265,287 265,287 Loans granted 1,651,148 1,651,148 1,588,314 1,588,314 Trade receivables 110,037 110,037 169,664 169,664 Assets due to valuation of derivatives 88,783 88,783 1,835 1,835 Derivative instruments recognized in financial assets designated as hedging instruments 14,099 14,099 - - Cash pooling receivables 3,912 3,912 7,992 7,992 Factoring receivables 21,437 21,437 35,946 35,946 ASSETS 2,356,891 2,356,891 2,069,038 2,069,038 Loans and borrowings (2,109,549) (2,120,932) (2,095,105) (2,089,233) Trade liabilities (442,025) (442,025) (332,006) (332,006) Liabilities due to valuation of derivatives (151,564) (151,564) (27,702) (27,702) Derivative instruments recognized in financial liabilities designated as hedging instruments (136) (136) (31,744) (31,744) Cash pooling liabilities (141,703) (141,703) (143,514) (143,514) Factoring liabilities (8,244) (8,244) (6,830) (6,830) LIABILITIES (2,853,221) (2,864,604) (2,636,901) (2,631,029) FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 71 The fair value of financial assets and liabilities corresponds with the amounts for which these instruments may be exchanged in a market transaction between well informed parties. The following assumptions were made in establishing the fair value: • cash, trade receivables and liabilities are not measured at fair value – it is assumed that the carrying amount is the closest to fair value due to the short maturities of these instruments. • fair value of financial assets and liabilities recognised in the statement of financial position at amortised cost for which no active market exists was established as the present value of future cash flows discounted at market interest rate. The carrying amount is the net amount, loans are based on a variable rate, commissions and fees are not amortised. Measurement at fair value is grouped according to three-level hierarchy: • Level 1 – fair value based on market listing stock exchange prices (unadjusted) offered for identical assets or liabilities on active markets – did not occur. • Level 2 – CIECH S.A. measures derivatives at fair value by using measurement models for financial instruments and applying generally available interest rates, currency exchange rates etc. • Level 3 – fair value estimated on the basis of various valuation techniques which are not based on observable market inputs - did not occur. Assets and liabilities measured at fair value 31.12.2021 31.12.2020 Level 2 Level 2 ASSETS 102,882 1,835 Hedging instruments 14,099 - Derivative instruments measured at fair value through profit or loss 88,783 1,835 LIABILITIES (151,700) (59,446) Hedging instruments (136) (31,744) Derivative instruments measured at fair value through profit or loss (151,564) (27,702) TOTAL (48,818) (57,611) As at 31 December 2021, CIECH S.A. held the following types of financial instruments measured at fair value: interest rate swap contracts, currency forward contracts EUR/PLN and CIRS (currency and interest rate swap) contract EUR/PLN. The IRS contract hedging the interest rate is designated for hedge accounting. The fair value of the interest rate swap contract is determined as a difference in the discounted interest rate cash flow (cash flow based on a floating rate, the so-called floating leg, and a fixed rate, the so-called fixed leg). The input data for the method is the market data for interest rates provided by Reuters. The fair value of the CIRS contract is determined as a difference in discounted interest and capital cash flows. The input data for the method is the market data for interest rates and cross currency basis-swaps quotations provided by Reuters. The fair value of the currency forward is determined as a difference between the transaction rate and the forward rate at the valuation date multiplied by the nominal value of the contract in the foreign currency. The input data for the method is the market data for interest rates and cross currency basis-swaps quotations provided by Reuters. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 72 Fair value of financial instruments Long-term financial assets Short-term financial assets Other long-term liabilities Trade and other liabilities TOTAL 31.12.2021 IRS EUR 662 - - (136) 526 IRS PLN - 13,437 - - 13,437 CIRS - 85,607 (91,857) (59,707) (65,957) Forward EUR/PLN - 3,176 - - 3,176 TOTAL 662 102,220 (91,857) (59,843) (48,818) 31.12.2020 IRS EUR - - - (618) (618) IRS PLN - - - (31,126) (31,126) CIRS 574 1,261 (14,327) - (12,492) Forward EUR/PLN - - - (13,375) (13,375) TOTAL 574 1,261 (14,327) (45,119) (57,611) As at the end of 2020, the long-term portion of IRS transactions designated for hedge accounting is not reported. These transactions hedge the interest rate on loans that have been recognised as short-term liabilities due to a breach of one of the covenants at the balance sheet date. The above financial instruments were classified at level 2 of the fair value hierarchy. In 2021, there were no transfers within the fair value hierarchy of instruments measured at fair value. Financial instruments not measured at fair value CIECH S.A. has taken out term and revolving credit facilities whose book value, as at 31 December 2021, is PLN 1,854,330 thousand, and whose fair value amounts to PLN 1,865,713 thousand (Level 2 of fair value hierarchy). In the case of the remaining financial instruments held by CIECH S.A. (classified mainly as cash and cash equivalents, financial assets and liabilities measured at amortised cost), the fair value is close to the book value. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 73 9. OTHER NOTES 9.1. NOTES TO THE STATEMENT OF CASH FLOWS The tables below present the reasons for the differences between the changes of particular items of the statement of financial position and changes resulting from the statement of cash flows: 31.12.2021 31.12.2020 Change in receivables reported in the statement of financial position 28,014 144,972 Receivables from the purchase of shares 19,175 (12,891) Reclassification of cash pooling receivables (4,047) 1,496 Reclassification of receivables from the sale of fixed assets - (143) Compensation of receivables with liabilities for loans (10, 000) Reclassification of income tax receivables 37 (1,792) Change in receivables in the statement of cash flows 33,179 131,642 31.12.2021 31.12.2020 Change in liabilities reported in the statement of financial position 312,211 336,207 Change in financial liabilities (14,444) (336,571) Change in income tax liabilities 4,539 (2,396) Change in liabilities relating to non-current assets (1,125) (5,341) Reclassification of cash pooling liabilities 1,811 (19,364) Measurement of financial instruments (170,534) (34,426) Change in lease liabilities 4,204 1,316 Change in liabilities on account of purchase of financial assets 3,871 3,607 Other 75 (145) Change in liabilities in the statement of cash flows 140,608 (57,121) 9.2. INFORMATION ON CHANGES IN CONTINGENT ASSETS AND LIABILITIES AND OTHER MATTERS Accounting policy Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the Company. Contingent assets are not recognised in the statement of financial position since this may result in the recognition of income that may never be realised. A contingent liability is a possible future obligation, whose existence will be confirmed by the occurrence or non- occurrence of uncertain future events not wholly within the Company’s control. These are also liabilities that arose from past events but were not recognised in the financial statements because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or the amount of obligation cannot be measured with sufficient reliability. Contingent liabilities are not recognised in the statement of financial position. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 74 Significant disputed liabilities of CIECH S.A. As at 31 December 2021, CIECH S.A. did not have any significant disputed liabilities pursued in all types of proceedings before court, body appropriate for arbitration proceedings or public administration bodies, except for the cases described in section “Audits of tax settlements at CIECH S.A.” in this chapter. Significant disputed receivables of the CIECH Group As at 31 December 2021, CIECH S.A. did not hold any significant disputed receivables pursued in all types of proceedings before court, body appropriate for arbitration proceedings or public administration bodies, apart from the case disclosed below in section “Contingent assets and contingent liabilities including guarantees and sureties”. Contingent assets and liabilities including guarantees and sureties, excluding liabilities related to proceedings before administrative authorities The amounts of contingent liabilities related to proceedings before administrative authorities and changes therein in 2021 are described in the note below under the heading: “Audits of tax settlements at the CIECH Group and related contingent liabilities”. Contingent assets and contingent liabilities including guarantees and sureties 31.12.2021 31.12.2020 Contingent assets 18,864 18,864 Other contingent receivables 18,864 18,864 Contingent liabilities 1,764,507 1,371,155 Guarantees and sureties granted 1,539,555 1,150,213 Tax liabilities (including interests) 10,160 9,584 Letters of support 214,792 211,358 Contingent asset in the amount of PLN 18,864 thousand related to the action against GZNF “FOSFORY” Sp. z o.o. for the payment of compensation for making an alleged untrue declaration by GZNF “FOSFORY” Sp. z o.o. to CIECH S.A. about the condition of Agrochem Człuchów Sp. z o.o. with its registered office in Człuchów. ** Including: • guarantees for the liabilities of subsidiaries in connection with a reverse factoring agreement in the amount of PLN 269,175 thousand, • guarantee for the liabilities of the subsidiary CIECH Sarzyna S.A. in the amount of PLN 3,000 thousand, • guarantee for the liabilities of a subsidiary, CIECH Salz Deutschland GmBH , in the amount of PLN 152,470 thousand (EUR 33,150 thousand), • guarantees for the liabilities of the SDC Group companies in the amount of PLN 1,114,910 thousand (EUR 242,403 thousand). As at 31 December 2021, contingent liabilities amounted to PLN 1,764,507 thousand and increased as compared to 31 December 2020 by PLN 393,352 thousand. The change was mainly due to the expiry of the guarantees granted under the term credit facility and revolving credit facilities agreement, which were repaid on 5 May 2021. On the other hand, the value of guarantees granted for the liabilities of the subsidiaries described in the table below also changed significantly. Sureties and guarantees granted as at 31 December 2021 Beneficiary’s name Total amount of liabilities covered by guarantee/surety in whole or in specific part Financial terms, including guarantee fee due to the company; guarantee period Principal currency PLN CIECH S.A. Landesamt fuer Geologie und Bergwesen Sachsen- Anhalt EUR 8,403 thousand 38,650 thousand Commission of 1.5% p.a. of the guaranteed liability; collateral pertaining to liability; no time limit CIECH Soda Deutschland GmbH&Co. KG. (subsidiary) FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 75 Beneficiary’s name Total amount of liabilities covered by guarantee/surety in whole or in specific part Financial terms, including guarantee fee due to the company; guarantee period Principal currency PLN Axpo Solutions AG EUR 34,000 thousand 156,380 thousand Commission of 1.5% p.a. of the guaranteed liability; collateral pertaining to claims related to the agreement; until 31 December 2023 Ciech Energy Deutschland GmbH (subsidiary) Investitionsbank_Sachsen- Anhalt (IBSA) EUR 11,250 thousand 51,743 thousand Commission of 1.5% p.a. of the guaranteed liability; collateral pertaining to claims related to the subsidy; CIECH Salz Deutschland GmbH (subsidiary) Evatherm AG EUR 21,900 thousand 100,727 thousand Commission of 1.5% p.a. of the guaranteed liability; collateral pertaining to liability; until the liabilities arising from the agreement between Evatherm AG and CIECH Salz Deutschland GmbH have been settled CIECH Salz Deutschland GmbH (subsidiary) BNP Paribas S.A. EUR 200,000 thousand 919,880 thousand Commission of 1.5% p.a. of the guaranteed liability; ISDA agreement – liabilities under the agreement; indefinite term CIECH Soda Deutschland GmbH & Co. KG; Ciech Energy Deutschland GmbH BNP Paribas S.A. PLN 62,500 thousand 62,500 thousand Commission of 0.55% p.a. of the guaranteed liability; supplier financing agreement; until all obligations have been repaid no later than 36 months after the date of termination CIECH Soda Deutschland GmbH & Co. KG; Ciech Energy Deutschland GmbH BNP Paribas Faktoring Sp. z o.o. PLN 150,000 thousand 150,000 thousand Commission of 0.55% p.a. of the guaranteed liability; supplier financing agreement; indefinite term CIECH S.A., CIECH Sarzyna S.A., CIECH Pianki Sp. z o.o., CIECH Soda Polska S.A., CIECH Vitrosilicon S.A. mBank S.A. PLN 3,000 thousand 3,000 thousand Commission of 1.5% p.a. of the guaranteed liability; collateral pertaining to claims under the Guarantee agreement; until 30 June 2023 CIECH Sarzyna S.A. (subsidiary) CITI Handlowy (reverse faktoring) PLN 56,675 thousand 56,675 thousand Commission 0.55% p.a. of the guaranteed liability; 12.03.2022 (automatically extended) CIECH S.A., CIECH Sarzyna S.A., CIECH Pianki Sp. z o.o., CIECH Soda Polska S.A., CIECH Vitrosilicon S.A. Total nominal amount of contractual commitments for which guarantees and sureties were granted PLN 1,539,555 thousand Letters of support As at 31 December 2021, CIECH S.A. was the obliged party in the letter of support (Patronatserklärung) regarding CIECH Soda Deutschland GmbH&Co. KG seated in Staßfurt (CSD) granted to Innogy Gas Storage NWE GmbH (“Innogy”) relating to liabilities of CSD resulting from the agreement dated 5 May 2009 on salt caverns construction for the purpose of natural gas storage on the Staßfurt mining field according to which CSD received payments of EUR 46.7 million from Innogy by 31 December 2021. In the letter of support, CIECH S.A. has committed, among other things, to ensure that CSD will have sufficient funds to fulfil its financial commitments against Innogy resulting from the above-mentioned agreement. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 76 Audits of tax settlements and related contingent liabilities In 2021, the following audits and proceedings were carried out at CIECH S.A.: 1. audit concerning Corporate Income Tax settlements for 2012 (CIT 2012) – court stage 2. audit concerning Corporate Income Tax settlements for 2013 (CIT 2013) – court stage 3. a customs and fiscal audit concerning Corporate Income Tax settlements for 2014 (CIT 2014) 4. a customs and fiscal audit concerning Corporate Income Tax settlements for 2016 (CIT 2016). CIT audit for 2012 at CIECH S.A. was initiated by the Head of the Małopolskie Province Customs and Tax Office in Kraków on 5 April 2018. CIECH S.A. received the outcome of the audit on 4 July 2018. The tax authority challenged the transaction concerning the capital increase in the former subsidiary. In the opinion of the authority, making a cash contribution by means of a contractual set-off of mutual receivables gives rise to income on the part of the Company for which, according to the auditors, the company cannot recognise a cost. The company's management board and its tax advisors do not agree with the findings made by the auditors In December 2018, the company received a decision of the Head of the Małopolskie Province Customs and Tax Office in Kraków, upholding the previous position of the authority. The Company contested the position and filed an appeal. In April 2019, the Company received a decision of the second instance, upholding the decision of the first instance. In April and May 2019, the Company paid up the outstanding tax along with interest in three tranches in the total amount of PLN 66.4 million (tax: PLN 43.7 million, interest: PLN 22.7 million). The disputed amount of tax and interest were covered by the provision recognised in 2018, which was used as a result of their payment. CIECH S.A. appealed against the decision of the second instance to the Provincial Administrative Court in Kraków. On 9 October 2019, the Provincial Administrative Court issued a ruling in which it confirmed the approach presented by the authority. The court indicated that the company was obliged to recognise the income and did not have the right to recognise the tax deductible cost. After receipt of a written statement of reasons, the company lodged a cassation complaint with the Supreme Administrative Court on 23 December 2019. At present, the company is waiting for the date of the hearing to be set. CIT audit for 2013 at CIECH S.A. was initiated by the Tax Audit Office in Warsaw on 30 November 2016. The tax audit report was issued on 16 May 2017. The authority claims that the Company has overestimated the tax deductible cost of interest on cash obtained as a result of the issue of bonds and allocated to the reserve capital of CIECH Soda Deutschland GmbH & Co. KG. Moreover, the authority is of the opinion that the fee for the “CIECH” trademark should not be recognised by CIECH S.A. as a tax deductible cost. The tax base challenged by the authority is PLN 9.4 million (after taking into account the tax loss incurred in the audited year), which translates into a tax of PLN 1.8 million. The company and its advisors did not agree with the findings of the auditors and as a result of the tax proceedings, the Decision of the First Instance was issued, against which the company filed an appeal in 2017. On 14 March 2018 CIECH S.A. received the decision of the Second Instance in which the auditors upheld their findings contained in the Decision of the First Instance. The company appealed to the Provincial Administrative Court against this decision. Despite this, the company decided to pay tax in the amount of PLN 1.8 million and interest (PLN 0.3 million) on 10 April 2018. The Court made its decision on 6 June 2019. The Court complied with the CIECH S.A. appeal as regards the costs of trademark fees, repealing the decision of the second instance. However, as regards the costs of consulting and financing of Soda Deutschland, the Court adjudicated that said costs could not constitute tax costs. After receipt of a written statement of reasons, the company lodged a cassation complaint with the Supreme Administrative Court in September 2019. At present, the company is waiting for the date of the hearing to be set. CIT audit for 2014 at CIECH S.A. was initiated by the Head of the Małopolskie Province Customs and Tax Office in Kraków (hereinafter: Head of the Małopolskie Province Customs and Tax Office in Kraków) on 13 November 2019. The Company received the outcome of the audit on 22 May 2020. The authority claims that the Company has overestimated the tax deductible cost by including interest on external financing contributed to the capital reserves of Soda Deutschland Ciech GmbH (hereinafter: SDC) and the costs of obtaining this financing in tax deductible costs. Moreover, the authority is of the opinion that expenses incurred on account of trade mark fees paid to the CIECH Group company should not be recognised by CIECH S.A. as a tax deductible cost. The taxable amount challenged by the authority is PLN 32.5 million which translates into a potential tax liability of PLN 6.2 million. The Company does not agree with the findings made by the auditors As a result, the customs and fiscal audit was converted into tax proceedings. On 15 October 2020, the Company received a report on the audit of the books in which the Head of the Małopolskie Province Customs and Tax Office leaves only the charge that the FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 77 company overestimated the tax deductible cost by including interest on external financing contributed to the capital reserves of SDC and the costs of obtaining this financing in tax deductible costs (the taxable amount is PLN 22.6 million which translates into a potential tax liability of PLN 4.3 million). Thus, the office has refrained from questioning the expenses incurred for trade mark fees as a tax deductible cost. In the same month, the company submitted objections to the report on the audit of the books. On 28 February 2022, the Company received the Order of the Head of the Małopolskie Province Customs and Tax Office to suspend the Tax proceedings, in which the Auditing Authority indicates that the consideration of the case and the issue of the decision depends on the resolution of the preliminary issue by another authority or court, and the proceedings before the Supreme Administrative Court regarding the dispute on the settlement of the corporate income tax for 2013 is directly related to the correct settlement of the corporate income tax for 2014. In addition, on 6 October 2020 the company received from the Head of the Małopolskie Province Customs and Tax Office a notice of suspension, as of 1 September 2020, of the statute of limitations for tax liabilities for 2014 due to initiation of proceedings for fiscal offences. CIT audit for 2016 at CIECH S.A. On 25 May 2021, CIECH S.A. received an authorisation from the Head of the Małopolskie Province Customs and Tax Office in Kraków to carry out a customs and fiscal audit with regard to corporate income tax (CIT) for 2016. Tax audit is currently underway. The Company estimated that the potential impact on income tax expense (in the form of additional tax liabilities), in connection with the above events which are or may continue to be challenged, would amount to PLN 52.7 million if it were no longer probable that the Company would be able to uphold its tax interpretations before the tax authorities. From the above-mentioned amount of PLN 52.7 million due to the audits conducted, despite appeals to the court against the tax assessment decisions received, the Company paid a tax of PLN 45.5 million. The remaining amount, i.e. PLN 7.2 million, is reported as a contingent liability. On the other hand, PLN 1.8 million of the tax paid is reported as receivable from the Tax Office. The company has recognised an impairment loss on this amount receivable. In addition, the Company paid PLN 23.0 million in interest. 9.3. INFORMATION ON TRANSACTIONS WITH RELATED PARTIES 9.3.1. TRANSACTIONS WITH RELATED PARTIES IN TOTAL Detailed information about transactions between CIECH S.A. and other related entities (i.e. companies controlled by the parent company at the highest level in relation to CIECH S.A. — Kulczyk Investments S.A.) as well as subsidiaries and associates of CIECH S.A. is presented below: CIECH S.A.’S TRANSACTIONS WITH RELATED ENTITIES Subsidiaries Associates Other related parties TOTAL 01.01.-31.12.2021 Sales revenues 223,598 16,976 - 240,574 Financial income, including: 316,009 - - 316,009 Dividend 204,620 - - 204,620 Purchases of products, goods, materials and services, including: 1,310,969 25,546 5,828 1,342,343 KI One SA - - 199 199 Financial expenses 76,889 - - 76,889 31.12.2021 Receivables 74,873 609 - 75,482 Loans granted 1,651,026 - - 1,651,026 Trade and other liabilities 548,277 2,098 45 550,420 Loans received 255,219 - - 255,219 01.01.-31.12.2020 Sales revenues 529,147 25,602 - 554,749 Financial income, including: 290,244 114 - 290,358 Dividend 181,789 114 - 181,903 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 78 CIECH S.A.’S TRANSACTIONS WITH RELATED ENTITIES Subsidiaries Associates Other related parties TOTAL Purchases of products, goods, materials and services, including: 1,169,256 13,041 6,002 1,188,299 KI One SA - - 242 242 Financial expenses 52,238 - - 52,238 31.12.2020 Receivables 128,907 372 - 129,279 Loans granted 1,588,191 - - 1,588,191 Trade and other liabilities 405,656 1,226 48 406,930 Loans received 192,380 - - 192,380 Terms of transactions with related entities Material sales to and purchases from related entities are carried out on terms which do not differ from arm’s length terms. Overdue liabilities and receivables are not secured and are settled through bank transfers. No material non-standard or non-routine transactions were concluded with related entities in 2021 except for the ones presented in section 9.3.3. In the presented period, the key management personnel of CIECH S.A. did not conclude any material transactions with members of the CIECH Group. 9.3.2. SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES OTHER THAN ON AN ARM’S LENGTH BASIS To the best of the Company’s judgement, there were no transactions with related entities in CIECH S.A. on other than market conditions in 2021. 9.3.3. DESCRIPTION OF NON-ROUTINE TRANSACTIONS WITH RELATED PARTIES Information on significant transactions with related parties is provided in note 6.4 to these financial statements. 9.3.4. TRANSACTIONS CONCLUDED WITH KEY MANAGERIAL PERSONNEL Key managerial personnel comprises persons who are authorised to and are responsible for direct and indirect planning, managing and controlling the activities of CIECH S.A. Remuneration of the Management Board of CIECH S.A. The following table presents the amount of remuneration and additional benefits paid or payable to particular Members of the Management Board in 2021 and in the comparable period. In the years 2020-2021, members of the Management Board of CIECH S.A. did not receive any remuneration for holding a position in the Supervisory Boards or any other functions performed in the subsidiaries of the CIECH Group, except for Mr. Mirosław Skowron, who sat on the Supervisory Board of the Company Ciech Salz Deutchland GmbH. 31.12.2021 Short-term employee benefits Post-employment benefits Termination benefits TOTAL Management Board 9,230 - - 9,230 Former members of the Management Board - 524 - 524 TOTAL 9,230 524 9,754 31.12.2020 TOTAL Management Board 6,231 - - 6,231 Former members of the Management Board 1,361 1,202 1,258 3,821 TOTAL 7,592 1,202 1,258 10,052 FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 79 Members of the Management Board are employed based on employment contracts. Remuneration of the Management Board Members are set out in individual employment contracts. Members of the Management Board are also entitled to: • discretionary bonus in the amount determined by the Supervisory Board of CIECH S.A.; • annual bonus determined in individual employment contracts, • payments from the Long-Term Incentive Plan for the years 2019-2021, adopted on the basis of a decision of the Supervisory Board, with payments in three consecutive years after the end of the reference period. Remuneration of the Managing Director The following table presents the amount of remuneration and additional benefits paid or payable to the Managing Director in 2021. During this period, the Managing Director received remuneration for serving on the Supervisory Boards of: Polsin Overseas Shipping Ltd. Sp. z o.o. and Proplan Plant Protection Company S.L. Short-term employee benefits 01.01 – 31.12.2021 01.06 – 31.12.2020 Rafał Czubiński 1,019 1,096 The Managing Director is employed under an employment contract which specifies the basic remuneration and the applicable rules of the bonus system. Remuneration of the Supervisory Board of CIECH S.A. Short-term employee benefits Remuneration received from CIECH S.A. in 2021 Remuneration received from CIECH S.A. in 2020 Sebastian Kulczyk - -* Natalia Scherbakoff - - Artur Olech 447 387 Marek Kośnik 476 372 Łukasz Rędziniak 368 181 Martin Laudenbach 209 118 Piotr Augustyniak 108 483 Tomasz Mikołajczak - 88 Mariusz Nowak - 24 TOTAL 1,609 1,653 From 1 April 2016, Chairman of the Supervisory Board, Mr. Sebastian Kulczyk does not receive any remuneration due to the waiver of the claim for remuneration for the position of the Chairman of the Supervisory Board. ** On 16 March 2021, Mr Piotr Augustyniak resigned as Member of the Supervisory Board of CIECH S.A. *** Appointed to the Supervisory Board on 26 October 2021. In accordance with a Resolution of the Extraordinary General Shareholders’ Meeting, as of 1 November 2017 Members of the Supervisory Board are entitled to a monthly gross remuneration computed as a percentage of the calculation base. The calculation base is the average monthly remuneration in the sector of enterprises with profit distributions for the month preceding the calculation, announced by the President of the Central Statistical Office. This remuneration is paid in the following amount: • to the Chairman of the Supervisory Board – 400% of the calculation base, • to the Deputy Chairman – 350% of the calculation base, • to a Board Member – 300% of the calculation base. The Chairman of the Audit Committee is entitled to an additional gross monthly remuneration amounting to 150% of the remuneration payable to a Member of the Supervisory Board. Members of the Audit Committee are entitled to an additional gross monthly remuneration amounting to 100% of the remuneration payable to a Member of the Supervisory Board. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 80 9.4. INFORMATION ABOUT AGREEMENTS CONCLUDED WITH THE ENTITY AUTHORISED TO AUDIT THE FINANCIAL STATEMENTS OF CIECH S.A. The entity authorised to audit financial statements for the period from 1 January 2021 to 31 December 2021 was Deloitte Audyt Spółka z ograniczoną odpowiedzialnością Sp. k. with its registered office in Warsaw. On 14 May 2020, CIECH S.A. signed an agreement with Deloitte Audyt Spółka z ograniczoną odpowiedzialnością Sp. k. on the review of semi-annual and audit of annual financial statements for the years 2020 and 2021. Value of agreements concluded with Deloitte Audyt Spółka z ograniczoną odpowiedzialnością Sp. k. is presented below: 31.12.2021 31.12.2020 Audit of the annual financial statements 623 529 Other attestation services 45 45 TOTAL 668 574 * The above amounts do not include additional costs, such as travel, accommodation and nourishment costs – additional costs may amount to a maximum of approx. 10% of the agreement value. 9.5. EVENTS AFTER THE BALANCE SHEET DATE • On 3 February 2022, the District Court in Bydgoszcz registered a reduction of the capital of the subsidiary CIECH Transclean Sp. z o.o. as a result of the cancellation of shares made at the Extraordinary Shareholders' Meeting on 21 July 2021, according to which 8,548 shares with a total nominal value of PLN 4,274 thousand were cancelled in exchange for a total consideration of PLN 4,330 thousand, by way of the purchase of the above shares by the Company from the shareholder under the agreement on the purchase of shares against consideration, concluded on 10 November 2021. Following the cancellation of shares, the share capital of CIECH Transclean Sp. z o.o. was reduced from PLN 4,322 thousand (by PLN 4,274 thousand) to PLN 48 thousand. • On 23 February 2022, a letter of intent was signed between the CIECH S.A., CIECH Soda Polska S.A., Budimex S.A., EEW Energy from Waste GmbH, EEW Energy from Waste Polska sp. z o.o, FBSerwis S.A. and the City of Inowrocław, on their cooperation in the preparation of conditions for making a decision on the investment consisting in the construction by EEW, EEW Polska and FBSerwis, on the property owned by CIECH Soda Polska S.A., a thermal waste treatment installation. For details on the letter, see current report No 2/2022. 9.6. INFORMATION ON THE CURRENT SITUATION IN CONNECTION WITH THE IMPACT OF THE RUSSIAN INVASION ON UKRAINE ON THE ACTIVITIES OF CIECH S.A. The Russian invasion of Ukraine has brought about unprecedented risks. These risks have a potentially high impact on ensuring the operational continuity. The Group's Management Board has been monitoring the situation on an ongoing basis and analysing various scenarios for market reactions and administrative decisions. A description of the potential impact of the invasion of Ukraine on operations of the Company and due to the fact that it is the parent company and the Company’s role in the CIECH GROUP also on individual business segments of the Group is presented below: • Soda Segment – the Company, as the only recipient of soda products manufactured in Polish plants located in Inowrocław and Janikowo, is directly exposed to the effects of events affecting the operation of soda plants. Supplies of power coal and anthracite are critical for maintaining operational continuity of the soda plants located in Poland. Coal is supplied to the production plants from Polish suppliers and the raw material comes from Polish mines. The CIECH Group purchases power coal based on annual contracts. There is a potential risk of problems with the availability of coal from Polish mines in a situation where domestic demand for coal is redirected, as a priority, towards securing raw materials for the production of electricity and heat for the public and for production facilities of strategic importance to national security. From a long-term perspective, it should be emphasized that the Soda Segment is an important part of the Polish energy and fuel ecosystem and is of strategic importance for the entire economy due to satisfying the demand for soda in many industries. In addition, the segment is a key recipient of brine from caverns, which are used as reservoirs for the state's FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 81 strategic oil and gas reserves. The supply of brine as well as the maintenance of the operational continuity of soda plants in Poland is crucial for maintaining the storage capacity of crude oil and gas in Poland. In connection with the above, it can be concluded that the Soda Segment is high in the hierarchy of security of coal supplies from Polish mines, and thus - the Management Board assesses the risk of interrupting supplies as low. In turn, in the short term, it should be assumed that with the end of the heating season, the demand for heat will decline, hence the Management Board assesses the risk as even lower in the coming quarters. The second important raw material necessary for the production of soda is anthracite, which the Group, like its competitors producing soda using the Solvay method in Europe, imports from Russia. Anthracite, which is used as a furnace fuel in the limestone firing process, can be replaced by coke, which is currently available from Polish suppliers, but its price is significantly higher than that of the anthracite used to date. Therefore, relying solely on coke would result in increased costs for soda plants. At present, the Group's plants hold several weeks' worth of stocks of power resources. For the soda segment plants located in Stassfurt, the key power resource is gas, 40% of which is imported into the Federal Republic of Germany from Russia. Additionally, about 1/3 of the gas consumed by the Stassfurt plant comes from a local source, which significantly reduces the risk of interrupting the continuity of gas supplies. As in the case of Poland, the Soda Segment plays a very important role in the country's energy system. The caverns from which the brine is obtained are used as natural gas storage facilities. If Germany diversifies its gas sources and moves from Russian gas pipelines to gas terminals supplied to the gas network, it may be important, as the demand for the use of storage capacity should increase. The soda segment and the related glass industry, especially in the eastern federal states of Germany, is very important both in economic and social terms, therefore the risk of interrupting gas supplies to the Stassfurt plant is assessed as very low. A potential threat to continuity of brine supply should also be indicated. In the case of brine supplies - for Polish soda plants, a hypothetical situation may arise in case of a threat to state security when a decision could be taken by the Polish government to release fuel reserves stored in caverns, and then the brine will be used by the state-owned operator of liquid fuel storage facilities to pumping them out. In the opinion of the Management Board, the risk of such a situation is not high, however, if it did, it could (depending on the level of strategic reserves activation) have an impact on the stability and continuity of production. Furthermore, in addition to possible limitations in the availability of raw materials, the segment has already been affected by increases in the prices of the listed power resources, and the increase in fuel prices also translates into increased prices for transport services. The CIECH Group assumes that it will manage to pass on most of the increase in costs of power resources to customers through higher product prices. In terms of sales, the Soda Segment has not concluded any significant contracts with customers in the Ukrainian, Russian and Belarusian markets, hence the Group does not recognise any risk of decreased revenues in this area caused by the inability to supply these markets. In turn, some risks and difficulties can be observed with respect to the availability of transport services - due to the fact that before the conflict, a large proportion of truck drivers were from Ukraine, now, following the invasion of this country, they stayed in their homeland due to the general military mobilisation or left Poland. The resulting shortage of drivers on the market has reduced the availability of transport services. • Agro Segment – there were no companies from the markets affected by the ongoing war among the suppliers of raw materials and consumables for the production plant in Nowa Sarzyna, hence the situation does not have a significant impact on the supply of raw materials. Also the increase in the cost of power resources will not significantly affect the segment. However, the shortage of drivers in transport operators and difficulties in accessing these services are likely to be experienced. At present, the segment does not sell to Belarusian, Ukrainian and Russian markets. Even before the outbreak of war, the sale of technical MCPA to a Russian customer was suspended – this decision, however, was dictated by reduced production at the plant in Nowa Sarzyna due to the shortage of raw material for its production. Also for this reason, the segment does not supply technical MCPA to customers in the Ukrainian and Belarusian markets. In the current situation, it has been assumed that this product will not be sold to eastern markets in 2022. The associated loss of margin will not be material at the segment level. • Foams Segment – Sales to Russia, Ukraine and Belarus were marginal; however, the conflict will have an impact on furniture manufacturers in the domestic market. There is a risk of problems with the availability of furniture boards manufactured from wood originating in Belarus and Ukraine. Thus, there is a risk of a decrease in furniture production and thus demand for foams manufactured by the Bydgoszcz plant. Given the increased prices of power resources, the segment expects an increase in the prices of raw materials required for the manufacture of foams. Like other segments, the plant in Bydgoszcz will also experience an increase in the cost of transport services due to rising fuel prices and a shortage of drivers on the market. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 82 • Silicates Segment and Packaging Segment – as long as the Soda Segment continues to supply the soda necessary for the production of silicates and packaging, these segments do not anticipate any problems with continuity of production. It should be noted that CIECH S.A. is a soda supplier to the discussed segments. A possible suspension of supplies from Polish soda plants or the lack of raw material collection by plants in Iłowa and Żary would mean a loss of revenue and margin for the Company. The segments may experience a significant increase in the price of gas, while it should be noted that nitrogenous gas extracted in Poland is used locally as a power resource, so there is no risk of suspension of its supply (the use of this gas is strictly limited and in the event of a suspension of gas supplies from Russia, it cannot be fed into the pipelines of the country's main gas pipeline network). The Silicates and Packaging Segments have already been affected by the rising costs of transport services and the shortage of drivers, and thus the unavailability of transport services. Both segments made no sales and had no customers in eastern markets. On the other hand, they felt increased competition from this direction. At present, the pressure of competition from this direction is negligible and it is likely to remain so until the end of the conflict. It should be mentioned that the Group has already observed an increase in the risk of cyberattacks. Accordingly, appropriate security updates were implemented, prevention measures were strengthened and monitoring of unusual events, logs and operations was enhanced. All these measures have been implemented as part of the IT security policy and information security policy. An intensive information campaign is also underway to build staff awareness of any unusual operations or incidents. Another significant issue affecting the Group in connection with Russia's invasion of Ukraine, having an impact on all segments and the Group as a whole, is that prices in the financial markets, including commodity prices, exchange rates and interest rates, become highly volatile. In the wake of the war between Russia and Ukraine, prices of assets perceived as more risky weakened considerably, which translated into the depreciation of PLN against, among others, EUR and USD. The Group has a significant exposure to the EUR/PLN exchange rate (total position of EUR 389.9 million) and a relatively low exposure to USD/PLN (total position of USD 1.5 million). In the short term, the weakening of the PLN against the EUR leads to an increase in negative valuations of derivatives contracted that are sensitive to the EUR/PLN exchange rate (forward and CCIRS transactions), foreign currency credit facilities in EUR and trade payables in EUR, which is offset by an increase in the valuation of loans granted in foreign currency, receivables and cash held in foreign currency and an increase in the expected value of future revenues in foreign currency. Taking into account the hedging relationships regarding future revenues in foreign currencies, the impact of changes in the EUR/PLN rate on the current profit/loss is limited (the position affecting the current profit/loss is EUR 27.5 million). The valuation of derivatives contracted does not involve any cash margin and an increase in the negative valuation of transactions does not have a negative impact on the Group's current liquidity. The conflict has led to an increase in inflationary expectations globally and in the Polish market, associated in particular with an increase in the prices of oil derivatives, which may lead to an increase in the Group's operating expenses and also have implications in terms of further increases in market interest rates. Market interest rate risk in respect of the Group's term loans has been fully hedged with PLN IRS and CCIRS transactions entered into in May 2021 following the refinancing of the loan, therefore an increase in market interest rates would have a limited impact on the Group's cash flows. The CIECH Group enters into derivative transactions to hedge commodity risks, including regarding the sale of electricity, the purchase of natural gas and CO 2 emission allowance units (EUAs). Due to significant changes in the prices of these raw materials, there were significant changes in valuations of hedging transactions concluded (increase in positive valuation of gas futures contracts, increase in negative valuation of energy futures contracts, decrease in positive valuation of EUA futures contracts). Excluding transactions for the purchase of CO 2 emission allowance units, some of which are entered into on an exchange, day-to-day changes in the valuation of the derivatives contracted do not involve cash margin and have no impact on the Group's current liquidity. The Company's liquidity situation is stable, and the Company has sufficient cash and available sources of financing to be able to meet their obligations on time, even if current cash flows deteriorate and access to new sources of financing becomes limited. As at 31 December 2021, the Company held cash of (PLN 467 million) and limits available under committed credit facilities of (PLN 396 million). The Company had access to funds made available under committed facility agreements (syndicated facility agreement with a total value of PLN 2,115 million) and additional sources of financing in the form of FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 83 receivables factoring agreements, reverse factoring agreements and overdraft facilities. At present, the Group also does not identify any risk of default on repayment liabilities under the loan agreements or risk of loans being called in due to failure to meet the level of ratios tested under the loan agreements. The ratio of the Group's consolidated net debt to consolidated EBITDA tested under the loan agreements was 1.6x at the end of 2021, compared to the maximum level of 4.0x, as set out in the agreement. The entire debt on account of the syndicated facility agreement is of a long-term nature, and no principal payments are due until 30 June 2023. The CIECH Group has not reported any negative impact of the sanctions imposed following the outbreak of war on its ability to execute and settle transactions. As at the date of these statements, the Group's analyses did not reveal any indications of an increased risk of impairment of property, plant and equipment and intangible assets in use or investments in progress. Nevertheless, due to the uncertainty related to the conflict and its consequences for the global economy, the valuation of individual balance sheet items, including: fixed assets and intangible assets, inventories, receivables, valuations of financial instruments as well as provisions and liabilities, may change in subsequent reporting periods. It should be emphasized once again that the Group's Management Board monitors the situation related to the conflict on an ongoing basis and takes steps to ensure the continuity of the Group as well as maintaining the assumed margin levels. 9.7. INFORMATION ON THE CURRENT SITUATION IN CONNECTION WITH THE IMPACT OF THE COVID-19 CORONAVIRUS PANDEMIC ON CIECH S.A.’S ACTIVITIES During 2021, CIECH S.A., whose performance is closely related to the operation of the CIECH Group, continued to operate under an ongoing pandemic, hence the current situation was strongly affected by various restrictions. For this reason, the priority in 2021 was to protect the health and lives of the Group's employees and third parties. In the period under review, the Company was adversely affected by the pandemic, which translated in many different ways into the achievement of the objectives set for the Company and the entire CIECH Group. When describing the impact of the COVID-19 pandemic on the Group in 2021, it should be noted that the first half of last year was marked by continuing restrictions and lockdowns of the economies in Poland and Europe, which translated into market problems for key sectors that are customers of individual segments of the CIECH Group. In particular, these problems were experienced by the automotive, HoReCa and construction industries. Still during the first half of the year, with the gradual unfreezing of economies in Europe, signs of economic recovery began to appear, which the Group observed to their full extent during the second half of the year. The second half of the year saw a full recovery, where customers of the CIECH Group and individual segments fully restored their production capacities and began to make up for the losses incurred due to the restrictions and lockdowns experienced in the first half of the year. However, this has resulted in a significant increase in the price of raw materials and utilities, and a shortage of raw materials on the markets, which is difficult to predict. For the CIECH Group and individual raw materials, shortages and increases in the prices of raw materials and utilities translated directly into an unplanned increase in the cost of products manufactured. Apart from the external factors caused by the pandemic in 2021, throughout the year the CIECH Group continued to comply with the measures taken back in 2020 to protect the health and lives of employees, third-party employees and business partners. Procedures were in place throughout the year under which direct interpersonal contact was limited and employees were able to work remotely (where possible). In the case of groups of employees where it was not possible to work in a remote manner (production workers), procedures were in place at individual plants to keep direct contact between shifts to a necessary minimum, and the necessary required protective measures were still in place to minimise the risk of infection and disease outbreaks. Owing to the vaccination process launched at the beginning of 2021, there were no outbreaks of infections in the CIECH Group throughout 2021, which would result in the suspension of operations, in any of the production plants. Throughout 2021, none of the Group's business areas was affected by the need to close or curtail operations. Owing to the measures taken and procedures implemented, the Group's Management Board achieved its key objectives, which were to ensure the health and safety of employees, to ensure the continuity of operations at the Group's production plants and to avoid disruption to the supply chain. On the other hand, from the point of view of achieving the Group's business objectives, the adverse impact of the COVID-19 pandemic and its effects was experienced by the Group in the second half of 2021 due to the onset of problems with the FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 84 availability of raw materials (in particular coal) and an unforeseeable significant increase in the prices of raw materials and utilities. This phenomenon affected, to a greater or lesser extent, most of the Group's business segments. In 2021, the situation in the individual business segments of the CIECH Group was as follows: • The Soda Segment, which is key to the CIECH Group in terms of maintaining business continuity in a pandemic situation, did not record any negative events or incidents. The safety measures and procedures in place, as well as the vaccination process, resulted in the only isolated cases of virus infection and quarantine of employees in the soda segment production plants, without affecting the continuity of the plants' operations. On the demand side, the first half of the year was marked by lower-than-expected demand for products manufactured, which can be explained by the prevailing restrictions in the economy and a slowdown in such sectors as the construction, automotive and HoReCa industries. Around the mid-year point, with the improvement of the epidemic situation in Europe and the opening up of individual economies, economic recovery and increased demand for soda segment products came into view. As mentioned above, the economic recovery was accompanied by a previously unanticipated increase in raw material prices, which directly translated into an increase in the costs of operation of the soda segment plants. In addition, in the case of automotive customers, the previously communicated interruptions in the operations of car manufacturing plants began to materialise in the third quarter, due to the lack of availability of car electronics from Asia, necessary for the production of new cars. Other sectors that are customers of the soda segment operated smoothly and continuously from the second half of 2021, increasing the demand for soda. As a result, the soda segment met its sales targets, fulfilling its obligations under the contacts signed for 2021. With regard to salt products, the first half of the year performed below expectations, mainly in the HoReCa sector, as a result of long-term restrictions. From the second half of the year onwards, there was an increase in demand due to the opening up of the economies. Unfortunately, there were technical failures in the power generation area at the production plants, which led to the segment not being able to manufacture the targeted volumes and thus failing to meet its sales targets at the end of 2021. It should also be mentioned that in 2021 the construction of the new saltworks in Germany was completed and works began on the commissioning of the new plant. The commissioning process for the new saltworks in Germany was not completed until the end of 2021. • The Silicates Segment was unaffected by the pandemic throughout 2021 and operated in a smooth and uninterrupted manner. Both production and sales levels were in line with plans. At the Żary plant, the Group completed an investment project to build a new furnace, which enabled the segment to increase its silicate production capacity by 30%. The increased capacity of the Iłowa plant was immediately placed on the market. In the second half of the year, the segment was adversely affected by the increase in gas prices, which resulted in higher production costs; however, the materialised risk of gas price increases was largely mitigated by the hedging policy in place. However, it should be emphasized that the vast majority of the volume is sold based on price formulas, which to a large extent allows to maintain a constant margin. • The Packaging Segment also proved resilient to COVID-19 in 2021. The segment managed to meet its targets for the year, although at the end of the third quarter there were still some concerns that the situation seen in 2020 would reoccur, when cemeteries were closed for the 1 November holiday by government decision and the segment's customers entered 2021 with a high stock of unsold lanterns. This situation was experienced by the segment through weaker demand for its products in early 2021. Last year, in 2021, the cemeteries were not closed on the November holiday, allowing the Ilowa plant to meet its volume and value targets. Among unfavourable events, it should be mentioned that the packaging segment was adversely affected by rising gas prices and increased production costs in the second half of 2021. • The Foams Segment – in the first half of last year, the Bydgoszcz plant struggled with two main risks, i.e. the lack of raw materials necessary for foam production (in particular, the lack of polyols and TDI) and rising prices of raw materials (an increase in raw material prices by over 90% compared to the previous year, 2020). This resulted in the need to ration foams to customers and to raise prices. In the second half of 2021, the availability of key raw materials (polyols and TDI) improved, whereas, as a result of the economic recovery, demand for other raw materials that are also used by other industries increased. This situation resulted in problems with the availability of raw materials, such as melamine, which is necessary for the plant in Bydgoszcz to manufacture non-flammable foams. Problems with the availability of raw materials were also associated with an increase in their prices. At the same time, the market has seen a weakening in customer demand for new furniture. This has led to an oversupply of foams on the market. Price competition and customer pressure to reduce foam prices has increased among foam manufacturers. Despite these adverse developments, the segment met its targets for 2021. FINANCIAL STATEMENTS OF CIECH S.A. FOR 2021 (in PLN thousand) 85 • In 2021, the Agro Segment proved to be resilient to COVID-19 and did not experience any reduction in production due to infections among employees and decline in demand from customers. The problems that the segment had to face in 2021 included a significant increase in the price of materials and raw materials and an increase in the cost of logistics services. Despite these adverse developments, the Agro segment increased year-on-year, posting higher sales results and increasing its market share. In 2021, a new herbicide, Halvetic, based on the innovative BGT (Better Glyphosate Technology) that halves the amount of the active ingredient – glyphosate – while maintaining herbicide efficacy like standard products on the market, was added to the Agro segment's product portfolio. Owing to the application of this state-of-the-art technology, the new product has proved to be a sales hit for the segment and has ideally fitted in with the segment's activities as part of the implementation of the EU strategy "From field to table" by promoting and implementing environmentally friendly and safe solutions. In other areas of the Company’s and the CIECH Group's operations, no adverse effects of the ongoing COVID-19 pandemic were recorded in 2021, and: • In the area of investment projects, in 2021, the CIECH Group continued and completed the projects started, including work on the construction and commissioning of the new saltworks in Stassfurt, Germany. Other projects planned and necessary for the Group's operations were also completed without any obstacles. An unfavourable development experienced by the Group, which was triggered by the COVID-19 pandemic and the rapid economic recovery, was a higher than expected increase in prices of materials, particularly the increase in steel prices. The Group's analyses did not reveal any indications of an increased risk of impairment of property, plant and equipment and intangible assets in use or investments in progress was found. • The Company’s and the Group's liquidity situation in 2021 remained stable, and the CIECH Group Companies had sufficient cash and available sources of financing to be able to meet their obligations on time. In the past year, the CIECH Group increased its liquidity security by signing in March 2021 a new Facilities Agreement of PLN 2,115 million with a 5-year repayment period, in order to refinance the existing debt. The facilities agreement was signed on 16 March 2021. Under the new facilities agreement, the following loans were made available: an amortised term loan (PLN 560 million), an unamortised term loan (PLN 1,305 million) and a revolving credit facility of PLN 250 million. The agreement signed provides for a grace period of over 2 years for the repayment of the term loan (the first repayment is required on 30 June 2023), during which no principal repayment of the loan will be required. • During 2021, net cash flow from operating activities of PLN 39 million and net cash flow from investing activities were positive and amounted to PLN 289 million. As at 31 December 2021, the Company held cash of PLN 467 million and limits available under committed credit facilities of PLN 396 million. In 2021, the Company had access to funds made available under committed facility agreements (syndicated facility agreement with a total value of approx. PLN 2,115 million as at 31 December 2021) and additional sources of financing in the form of receivables factoring agreements, reverse factoring agreements and overdraft facilities. The Company’s liquidity security was largely supported by the fact that in March 2021 the Management Board of CIECH S.A. signed a new Facilities Agreement with a value (on the date of signing) of PLN 2,115 million and a 5-year repayment period, in order to refinance the existing debt. • Moreover, in 2021 the Company also did not identify any risk of default on repayment liabilities under the loan agreements or risk of loans being called in due to failure to meet the level of ratios tested under the loan agreements. • Moreover, no deterioration of receivables repayment dates was found. The share of receivables overdue by more than 7 days in total receivables as at 31 December 2021 decreased compared to the level on 31 December 2020. The vast majority of the Company's receivables were insured and financed through non-recourse factoring. • The pandemic also did not have a negative impact on the Company's working capital. In 2021, during the COVID-19 pandemic, the Company did not experience any risk of non-performance of contracts at a higher level than in the course of its day-to-day operations in the absence of the pandemic. • In 2021, no additional impairment losses on non-current or current assets were recognised. There was also no need to recognise additional provisions other than allowances and provisions which are recognised in the course of the Company's ordinary activities. • The Management Board estimates that in 2022 the Company will continue as going concerns to a materially unchanged extent for at least 12 months from the date of the financial statements. However, it should be stated that the pandemic situation creates economic uncertainty and therefore it is not possible to fully predict its effects, including the impact of the pandemic on the financial statements, including the performance and measurement of individual items in the statement of financial position in subsequent reporting periods. REPRESENTATION OF THE MANAGEMENT BOARD REPRESENTATION BY THE MANAGEMENT BOARD These financial statements of CIECH S.A. for the financial year ended 31 December 2021 were approved by the Company’s Management Board on 29 March 2022. Warsaw, 29 March 2022 (signed on the polish original) ……………………………................................................ Dawid Jakubowicz — President of the Management Board of CIECH Spółka Akcyjna (signed on the polish original) ……………………………………………………………………………… Jarosław Romanowski — Member of the Management Board of CIECH Spółka Akcyjna (signed on the polish original) ……………………………………………………………………………… Mirosław Skowron — Member of the Management Board of CIECH Spółka Akcyjna (signed on the polish original) …………………………………………………………………..………….. Katarzyna Rybacka — Chief Accountant of CIECH Spółka Akcyjna