Arctic Paper S.A.

Annual Report (ESEF) • Mar 17, 2021

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In the event of any discrepancy in interpreting the terminology in Polish version is binding. Table of contents Letter by the President of the Management Board of Arctic Paper S.A. Information on the report Definitions and abbreviations Forward looking statements Forward looking statements relating to risk factors Selected consolidated financial data Description of the business of the Arctic Paper S.A. Group General information Capital Group structure Changes in the capital structure of the Arctic Paper Group Changes to the core management principles Shareholding structure Market environment Development directions and strategy Sales structure Sales markets Buyers Vendors & Suppliers Information on the seasonal or cyclical nature of business Research and development Employee matters Environment Summary of the consolidated financial results Selected items of the consolidated income statement Selected items of the consolidated statement of financial position Selected items of the consolidated cash flow statement Relevant information and factors affecting the financial results and the assessment of the financial standing. Key factors affecting the performance results Unusual events and factors Impact of changes in Arctic Paper Group’s structure on the financial result Other material information Factors influencing the development of the Arctic Paper Group Information on market trends Factors influencing the financial results in the perspective of the next year Risk factors Supplementary information The Management Board position on the possibility to achieve the projected financial results published earlier Dividend information Changes to the bodies of Arctic Paper S.A. Changes to the share capital of Arctic Paper S.A. Remuneration paid to Members of the Management Board and the Supervisory Board Agreements with Members of the Management Board guaranteeing financial compensation Changes in holdings of the Issuer’s shares or rights to shares by persons managing and supervising Arctic Paper S.A. Management of financial resources Capital investments Information on financial instruments Information of sureties, guarantees and pledges Material off-balance sheet items Assessment of the feasibility of investment plans Information on court and arbitration proceedings and proceedings pending before public administrative authorities Information on transactions with related parties executed on non-market terms and conditions Information on agreements resulting in changes to the proportions of share holdings Information on purchase of treasury shares Information on remuneration of the entity authorised to audit the financial statements Headcount Report on non-financial information Statement on the application of the Corporate Governance Rules Corporate Governance Rules Information on the extent the Issuer waived the provisions of the Corporate Governance Rules Internal control and risk management systems with reference to the development processes of financial statements Shareholders that directly or indirectly hold major packages of shares Securities with special control rights Information on major restrictions on transfer of title to the Issuer’s securities and all restrictions concerning the exercising of voting rights Description of the principles of amending the Issuer’s Articles of Association Description of the functioning of the General Meeting Operation of the Issuer’s managing and supervising bodies and its committees as well as information on the composition of those bodies Information compliant with the requirements of Swedish regulations concerning corporate governance. General Meeting of Shareholders Appointment of governing bodies of the Company Tasks of the bodies of the Company Size and composition of the Company’s bodies Chairpersons of the bodies of the Company Procedures of the bodies of the Company Remuneration of members of the bodies of the Company and management staff Information on corporate governance Information by the Management Board of Arctic Paper S.A. on selection of the audit firm Statements of the Management Board Accuracy and reliability of the presented reports Consolidated Financial Statements Consolidated statement of profit and loss Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated cash flow statement Consolidated statement of changes in equity Accounting principles (policies) and additional explanatory notes 1. General information 2. Composition of the Group 3. Management and supervisory bodies 4. Approval of the financial statements 5. Material values based on professional judgement and estimates 6. Basis of preparation of the consolidated financial statements 7. Changes to the applied accounting principles and data comparability 8. New standards and interpretations that have been published and are not yet effective 9. Major accounting policies 10. Operational segments 11. Income and costs 12. Components of other comprehensive income 13. Income tax 14. Earnings per share 15. Dividend paid and proposed 16. Tangible fixed assets 17. Leases 18. Investment properties 19. Intangible assets and goodwill 20. Business combinations and acquisition of non-controlling interests 21. Other assets 22. Impairment test for tangible fixed assets and intangible assets 23. Employment benefits 24. Inventories 25. Trade and other receivables 26. Cash and cash equivalents 27. Share capital and reserve capital/other reserves 28. Interest-bearing bank loans, bonds and borrowings and other financial liabilities 29. Provisions 30. Trade payables, other liabilities and accruals and deferred income 31. Investment plans 32. Contingent liabilities 33. Information on related entities 34. Information on the agreement and remuneration of the statutory auditor or entity authorised to audit financial statements 35. Financial risk management objectives and policies 36. Financial instruments 37. Capital management 38. Employment structure 39. Certificates in cogeneration 40. Grants and operation in SEZ (Special Economic Zone) 41. Material events after the balance sheet date Letter by the President of the Management Board of Arctic Paper S.A. Dear Sirs, 2020 WAS A CHALLENGING YEAR, BUT THANKS TO THE RIGHT STRATEGY AND THE COMMITMENT OF THE ENTIRE TEAM, IT WAS ONE OF THE BEST YEARS IN THE GROUP'S HISTORY 2020 was undoubtedly one of the most turbulent years in history and presented the Arctic Paper Group with new challenges. After an excellent business start to the year and a record-breaking first quarter, the situation has changed radically. The COVID-19 pandemic has had a major impact on the global economy and also on the operations of the Arctic Paper Group. The restrictions and countermeasures introduced by the governments of individual countries changed the functioning of economies, hindered the flow of goods and had a negative impact on many industries, including the demand for the Group's products. The decrease in demand for the paper we produce by about 1/3 in the second quarter (compared to the first quarter) forced major organizational changes in the operations of our factories. The priority was to ensure safe conditions for our employees. The implemented procedures and activities, combined with the mobilization of the team, brought the intended results, thanks to which we avoided production downtime caused by high absenteeism of employees. We have also maintained the continuity of supplies of raw materials and supplies of paper and pulp to our customers. Thanks to the commitment and creativity of the sales team, we took advantage of the improvement in the market situation and gradually increased sales and production in the second half of last year. The pulp segment struggled last year with reduced demand and unfavourable currency fluctuations. The paper segment, thanks to, among others, stable raw material prices and taking advantage of all market opportunities, recorded very good financial results, despite the inability to fully use the production capacity of the factories. The results achieved once again showed how optimal is the combination in one Group of both closely related business segments – pulp and paper. Consolidated results over the years show stable growth and fluctuations in the economic situation in both segments compensate each other. Despite the pandemic, in 2020 the Arctic Paper Group consistently implemented its operational projects. We are constantly increasing our presence in the packaging sector, work on new products is underway, and we are continuing the energy transformation of individual factories. At the end of 2020, we completed a large energy investment – we launched an extensive hydroelectric power plant in the paper mill in Munkedal, which will double the amount of electricity produced on site. We have also obtained a permit to build a heat plant using biomass. Sustainability is critical to us and our customers; we have had high ambitions in this area for a long time. The year 2020 – as the year of the COVID-19 pandemic – changed the functioning of many industries, including ours. However, we quickly adapted to the new situation – we organised our work differently, we communicate differently, probably all companies have redefined the way they operate. Probably all these changes will stay with us for longer, they will affect us and the economy in the coming years. You have to rethink business models, logistic chains and work organization. The conclusions we draw from this will better prepare us for the next challenges. I would like to thank the entire team of the Arctic Paper Group for their hard work in 2020. Despite the pandemic, thanks to your commitment, enthusiasm and initiative, we have once again achieved excellent business and operational results. We are entering the next year richer with new experiences and motivated to continue. Sincerely yours, Michał Jarczyński President of the Management Board of Arctic Paper S.A. ‎ . ‎ Information on the report This Consolidated Annual Report for 2020 was prepared in accordance with the Regulation of the Minister of Finance of 19 February 2009 on the current and periodic information provided by securities issuers and on the conditions for recognizing information required by the law of a non‐member state as equivalent information (Journal of Laws of 2009, No. 33, item 259, as amended) and a part of the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), approved by the EU (IFRS, EU). As at the approval date of these Consolidated Financial Statements for publication, in light of the current process of IFRS endorsement in the European Union and the nature of the Group’s activities, there is no difference between the effective IFRS standards and the IFRS standards endorsed by the European Union. IFRS cover standards and interpretations approved by the International Accounting Standards Board (IASB). Certain selected information contained in this report comes from the Arctic Paper Group management accounting system and statistics systems. This Consolidated Annual Report presents data in PLN, and all figures, unless otherwise specified, are disclosed in PLN ‘000. ‎ Definitions and abbreviations Unless the context requires otherwise, the following definitions and abbreviations are used in the whole document: Abbreviations applied to business entities, institutions and authorities of the Company Arctic Paper, Company, Issuer, Parent Entity, AP Arctic Paper Kostrzyn Spółka Akcyjna with its registered office in Kostrzyn nad Odrą, Poland Capital Group, Group, Arctic Paper Group, AP Group Capital Group comprised of Arctic Paper Spółka Akcyjna and its subsidiaries as well as joint ventures Arctic Paper Kostrzyn, AP Kostrzyn, APK Arctic Paper Kostrzyn Spółka Akcyjna with its registered office in Kostrzyn nad Odrą, Poland Arctic Paper Munkedals, AP Munkedals, APM Arctic Paper Munkedals AB with its registered office in Munkedal Municipality, Västra Götaland County, Sweden Arctic Paper Mochenwangen, AP Mochenwangen, APMW Arctic Paper Mochenwangen GmbH with its registered office in Mochenwangen, Germany Arctic Paper Grycksbo, AP Grycksbo, APG Arctic Paper Grycksbo AB with its registered office in Kungsvagen, Grycksbo, Sweden Paper Mills Arctic Paper Kostrzyn, Arctic Paper Munkedals, Arctic Paper Grycksbo Arctic Paper Investment AB, API AB Arctic Paper Investment AB with its registered office in Göteborg, Sweden Arctic Paper Investment GmbH, API GmbH Arctic Paper Investment GmbH with its registered office in Wolpertswende, Germany Arctic Paper Verwaltungs Arctic Paper Verwaltungs GmbH with its registered office in Wolpertswende, Germany Arctic Paper Immobilienverwaltungs Arctic Paper Immobilienverwaltungs GmbH & Co. KG with its registered office in Wolpertswende, Germany Kostrzyn Group Arctic Paper Kostrzyn Spółka Akcyjna with its registered office in Kostrzyn nad Odrą and EC Kostrzyn Sp. z o.o. with its registered office in Kostrzyn nad Odrą Mochenwangen Group Arctic Paper Investment GmbH, Arctic Paper Mochenwangen GmbH, Arctic Paper Verwaltungs GmbH, Arctic Paper Immobilienverwaltungs GmbH & Co.KG Grycksbo Group Arctic Paper Grycksbo AB and Arctic Paper Investment AB Sales Offices Arctic Paper Papierhandels GmbH with its registered office in Vienna (Austria) Arctic Paper Benelux SA with its registered office in Oud-Haverlee (Belgium) Arctic Paper Danmark A/S with its registered office in Greve (Denmark) Arctic Paper France SA with its registered office in Paris (France) Arctic Paper Deutschland GmbH with its registered office in Hamburg, (Germany) Arctic Paper Italia Srl with its registered office in Milan (Italy) Arctic Paper Baltic States SIA with its registered office in Riga (Latvia) Arctic Paper Norge AS with its registered office in Oslo (Norway) Arctic Paper Polska Sp. z o.o. with its registered office in Warsaw (Poland) Arctic Paper España SL with its registered office in Barcelona (Spain) Arctic Paper Finance AB with its registered office in Munkedal (Sweden) Arctic Paper Schweiz AG with its registered office in Derendingen (Switzerland) Arctic Paper UK Ltd with its registered office in London (UK) Arctic Paper East Sp. z o.o. with its registered office in Kostrzyn nad Odrą (Poland) Arctic Paper Finance AB Arctic Paper Finance AB with its registered office in Göteborg, Sweden Rottneros, Rottneros AB Rottneros AB with its registered office in Sunne (Sweden) Rottneros Group, Rottneros AB Group Rottneros AB with its registered office in Söderhamn, Sweden; Rottneros Bruk AB with its registered office in Rottneros, Sweden; Utansjo Bruk AB with its registered office in Söderhamn, Sweden, Vallviks Bruk AB with its registered office in Vallvik, Sweden; Rottneros Packaging AB with its registered office in Sunne, Sweden; SIA Rottneros Baltic with its registered office in Kuldiga, Latvia; since 1 January 2020 – Nykvist Skogs AB with its registered office in Gräsmark, Sweden Pulp Mills Rottneros Bruk AB with its registered office in Rottneros, Sweden; Vallviks Bruk AB with its registered office in Vallvik, Sweden Rottneros Purchasing Office SIA Rottneros Baltic with its registered office in Kuldiga, Latvia Office Kalltorp Kalltorp Kraft Handelsbolaget with its registered office in Trollhattan, Sweden Nemus Holding AB Nemus Holding AB with its registered office in Göteborg, Sweden Thomas Onstad The Issuer’s core shareholder, holding directly and indirectly over 50% of shares in Arctic Paper S.A.; a member of the Issuer’s Supervisory Board Management Board, Issuer’s Management Board, Company’s Management Board, Group’s Management Board Management Board of Arctic Paper S.A. Supervisory Board, Issuer’s Supervisory Board, Company’s Supervisory Board, Group’s Supervisory Board, SB Supervisory Board of Arctic Paper S.A. AGM, GM, General Meeting, Issuer’s General Meeting, Company’s General Meeting Annual General Meeting of Arctic Paper S.A. EGM, Extraordinary General Meeting, Issuer’s Extraordinary General Meeting, Company’s Extraordinary General Meeting Extraordinary General Meeting of Arctic Paper S.A. Articles of Association, Issuer’s Articles of Association, Company’s Articles of Association Articles of Association of Arctic Paper S.A. SEZ Kostrzyńsko-Słubicka Special Economic Zone Court of Registration District Court Poznań-Nowe Miasto i Wilda in Poznań Warsaw Stock Exchange, WSE Giełda Papierów Wartościowych w Warszawie Spółka Akcyjna KDPW, Depository Krajowy Depozyt Papierów Wartościowych Spółka Akcyjna with its registered office in Warsaw PFSA Polish Financial Supervision Authority SFSA Swedish Financial Supervisory Authority, equivalent to PFSA NASDAQ in Stockholm, Nasdaq Stock Exchange in Stockholm, Sweden CEPI Confederation of European Paper Industries EURO-GRAPH The European Association of Graphic Paper Producers Eurostat European Statistical Office GUS Central Statistical Office of Poland NBSK Northern Bleached Softwood Kraft BHKP Bleached Hardwood Kraft Pulp Definitions of selected terms and financial indicators and abbreviations of currencies Sales profit margin Ratio of gross profit (loss) on sales to sales revenues from continuing operations EBIT Profit on continuing operating activities EBIT profitability, operating profitability, operating profit margin Ratio of operating profit (loss) to sales revenues from continuing operations EBITDA Operating profit from continuing operations plus depreciation and amortisation and impairment allowances EBITDA profitability, EBITDA margin Ratio of operating profit plus depreciation and amortisation and impairment allowances of assets to sales revenues from continuing operations Gross profit margin Ratio of gross profit (loss) to sales revenues from continuing operations Sales profitability ratio, net profit margin Ratio of net profit (loss) to sales revenues Return on equity, ROE Ratio of net profit (loss) to equity income Return on assets, ROA Ratio of net profit (loss) to total assets EPS Earnings Per Share, ratio of net profit to the weighted average number of shares BVPS Book Value Per Share, Ratio of book value of equity to the number of shares Debt-to-equity ratio Ratio of total liabilities to equity Equity to fixed assets ratio Ratio of equity to fixed assets Interest-bearing debt-to-equity ratio Ratio of interest-bearing debt and other financial liabilities to equity Net debt-to-EBITDA ratio Ratio of interest-bearing debt minus cash to EBITDA from continuing operations EBITDA-to-interest coverage ratio Ratio of EBITDA to interest expense from continuing operations Current ratio Ratio of current assets to short-term liabilities Quick ratio Ratio of current assets minus inventory and short-term accruals and deferred income to short-term liabilities Acid test ratio Ratio of total cash and cash equivalents to short-term liabilities DSI Days Sales of Inventory, ratio of inventory to cost of sales multiplied by the number of days in the period DSO Days Sales Outstanding, ratio of trade receivables to sales revenues from continuing operations multiplied by the number of days in the period DPO Days Payable Outstanding, Ratio of trade payables to cost of sales from continuing operations multiplied by the number of days in the period Operating cycle DSI + DSO Cash conversion cycle Operating cycle – DPO FY Financial year Q1 1st quarter of the financial year Q2 2nd quarter of the financial year Q3 3rd quarter of the financial year Q4 4th quarter of the financial year H1 First half of the financial year H2 Second half of the financial year YTD Year-to-date Like-for-like, LFL Analogous, with respect to operating result. p.p. Percentage point, difference between two amounts of one item given in percentage PLN, zł, złoty Monetary unit of the Republic of Poland gr grosz – 1/100 of one zloty (the monetary unit of the Republic of Poland) Euro, EUR Monetary unit of the European Union GBP Pound sterling, monetary unit of the United Kingdom SEK Swedish Krona – monetary unit of the Kingdom of Sweden USD United States dollar, the legal tender in the United States of America IAS International Accounting Standards IFRS International Financial Reporting Standards IFRS EU International Financial Reporting Standards endorsed by the European Union GDP Gross Domestic Product Other definitions and abbreviations Series A Shares 50,000 Shares of Arctic Paper S.A. A series ordinary shares of PLN 1 each Series B Shares 44,253,500 Shares of Arctic Paper S.A. B series ordinary shares of PLN 1 each Series C Shares 8,100,000 Shares of Arctic Paper S.A. C series ordinary shares of PLN 1 each Series E Shares 3,000,000 Shares of Arctic Paper S.A. E series ordinary shares of PLN 1 each Series F Shares 13,884,283 Shares of Arctic Paper S.A. F series of the nominal value of PLN 1 each Shares, Issuer’s Shares Series A, Series B, Series C, Series E, and Series F Shares jointly ‎ Forward looking statements The information contained in this report which does not relate to historical facts relates to forward looking statements. Such statements may, in particular, concern the Group’s strategy, business development, market projections, planned investment outlays, and future revenues. Such statements may be identified by the use of expressions pertaining to the future such as, e.g., “believe”, “think”, “expect”, “may”, “will”, “should”, “is expected”, “is assumed”, and any negations and grammatical forms of these expressions or similar terms. The statements contained in this report concerning matters which are not historical facts should be treated only as projections subject to risk and uncertainty. Forward-looking statements are inevitably based on certain estimates and assumptions which, although our management finds them rational, are naturally subject to known and unknown risks and uncertainties and other factors that could cause the actual results to differ materially from the historical results or the projections. For this reason, we cannot assure that any of the events provided for in the forward-looking statements will occur or, if they occur, about their impact on the Group’s operating activity or financial situation. When evaluating the information presented in this report, one should not rely on such forward-looking statements, which are stated only as at the date they are expressed. Unless legal regulations contain detailed requirements in this respect, the Group shall not be obliged to update or verify those forward-looking statements in order to provide for new developments or circumstances. Furthermore, the Group is not obliged to verify or to confirm the analysts’ expectations or estimates, except for those required by law. Forward looking statements relating to risk factors In this report we described the risk factors that the Management Board of our Group considers specific to the sector we operate in; however, the list may not be exhaustive. Other factors may arise that have not been identified by us and that could have material and adverse impact on the business, financial condition, results on operations or prospects of the Arctic Paper Group. In such circumstances, the price of the shares of the Company listed at the Warsaw Stock Exchange or at NASDAQ in Stockholm may decrease, investors may lose their invested funds in whole or in part and the potential dividend disbursement by the Company may be limited. We ask you to perform a careful analysis of the information disclosed in ‘Risk factors’ of this report – the section contains a description of risk factors and uncertainties related to the business of the Arctic Paper Group. ‎ ‎ Selected consolidated financial data Period ‎ from 01.01.2019 ‎ to 31.12.2019 Period ‎ from 01.01.2019 ‎ to 31.12.2019 Period ‎ from 01.01.2019 ‎ to 31.12.2019 Period ‎ from 01.01.2019 ‎ to 31.12.2019 PLN ‘000 PLN ‘000 EUR ‘000 EUR ‘000 Continuing operations Sales revenues 2 847 450 3 117 118 640 604 725 107 Operating profit (loss) 158 242 191 422 35 600 44 529 Gross profit (loss) 122 318 157 931 27 518 36 738 Net profit (loss) for the financial year 103 586 124 681 23 304 29 003 Net profit (loss) for the financial year attributable to the shareholders of the Parent Entity 111 070 82 709 24 988 19 240 Net cash flows from operating activities 211 464 342 290 47 574 79 624 Net cash flows from investing activities (141 239) (121 834) (31 775) (28 341) Net cash flows from financing activities (100 950) (152 939) (22 711) (35 577) Change in cash and cash equivalents (30 725) 67 517 (6 912) 15 706 Weighted average number of ordinary shares 69 287 783 69 287 783 69 287 783 69 287 783 Diluted weighted average number of ordinary shares 69 287 783 69 287 783 69 287 783 69 287 783 EPS (in PLN/EUR) 1,60 1,19 0,36 0,28 Diluted EPS (in PLN/EUR) 1,60 1,19 0,36 0,28 Mean PLN/EUR exchange rate 4,4449 4,2988 As at ‎ 31 December 2020 As at ‎ 31 December 2019 As at ‎ 31 December 2020 As at ‎ 31 December 2019 PLN ‘000 PLN ‘000 EUR ‘000 EUR ‘000 Assets 2 136 646 2 035 753 462 999 478 045 Long-term liabilities 464 596 477 127 100 675 112 041 Short-term liabilities 639 016 688 098 138 471 161 582 Equity 1 033 033 870 528 223 852 204 421 Share capital 69 288 69 288 15 014 16 270 Number of ordinary shares 69 287 783 69 287 783 69 287 783 69 287 783 Diluted number of ordinary shares 69 287 783 69 287 783 69 287 783 69 287 783 Book value per share (in PLN/EUR) 14,91 12,56 3,23 2,95 Diluted book value per share (in PLN/EUR) 14,91 12,56 3,23 2,95 Declared or paid dividend (in PLN/EUR) - - - - Declared or paid dividend per share (in PLN/EUR) - - - - PLN/EUR exchange rate at the end of the period - - 4,6148 4,2585 * – Profit and loss and cash flow statement items have been translated at the mean arithmetic exchange rates published by the National Bank of Poland, prevailing in the period that the presented data refers to. ** – Balance sheet items and book value per share have been translated at the mean arithmetic exchange rates published by the National Bank of Poland, prevailing on the balance sheet date. ‎ ‎ ‎ Description of the business of the Arctic Paper S.A. Group General information The Arctic Paper Group is a leading European producer in terms of production volume of bulky book paper, offering a broad range of products in the segment and one of the leading producers of high-quality graphic paper in Europe. The Group produces numerous types of uncoated and coated wood-free paper as well as wood-containing uncoated paper for printing houses, paper distributors, book and magazine publishing houses and the advertising industry. In connection with acquisition of the Rottneros Group in December 2012, the Group’s assortment was expanded with the production of pulp. As at 31 December 2020, the Arctic Paper Group employs over 1,500 people in its Paper Mills, companies involved in sale of paper and in pulp producing companies, procurement office and a company producing food packaging. Our Paper Mills are located in Poland and Sweden, and have total production capacity of over 685,000 tonnes of paper per year. Our Pulp Mills located in Sweden have aggregated production capacities of over 400,000 tonnes of pulp annually. As at 31 December 2020, the Group had 14 Sales Offices ensuring access to all European markets, including Central and Eastern Europe. Our consolidated sales revenues for 12 months of 2020 amounted to PLN 2,847 million. Arctic Paper S.A. is a holding company set up in April 2008. The Parent Entity is entered in the register of entrepreneurs of the National Court Register maintained by the District Court in Poznań – Nowe Miasto i Wilda, 8th Commercial Division of the National Court Register, under KRS number 0000306944. The Parent Entity holds statistical number REGON 080262255. The Company has a foreign branch in Göteborg, Sweden. Business objects The principal business of the Arctic Paper Group is paper production and sales. The Group’s additional business, partly subordinate to paper and pulp production, covers: —generation of electricity, —transmission of electricity, —electricity distribution, —heat production, —heat distribution, —logistics services, —paper distribution. Our production facilities As on 31 December 2020, as well as on the day hereof, the Group owned the following Paper Mills: —the Paper Mill in Kostrzyn nad Odrą (Poland) has the production capacity of about 315,000 tonnes per year and mainly produces uncoated wood-free paper for general printing use such as printing books, brochures and forms, and for producing envelopes and other paper products; —the Paper Mill in Munkedal (Sweden) has the production capacity of about 160,000 tonnes and mainly produces fine uncoated wood-free paper used primarily for printing books and high-quality brochures; —the Paper Mill in Grycksbo (Sweden) has the production capacity of about 210,000 tonnes per year and produces coated wood-free paper used for printing maps, books, magazines, posters and printing of advertising materials. As on 31 December 2020, as well as on the day hereof, the Group owned the following Pulp Mills: —the Pulp Mill in Rottneros (Sweden) has the production capacity of about 160,000 tonnes annually and produces mainly two types of mechanical pulp: groundwood and chemo thermo mechanical pulp (CTMP); —the pulp mill in Vallvik (Sweden) has the annual production capacity of about 240,000 tonnes and produces two types of long-fibre sulphate pulp: fully bleached sulphate pulp and unbleached sulphate pulp. The most of Vallvik Pulp Mill production is known as NBSK pulp. The unbleached sulphate pulp produced by the Pulp Mill is characterised by very high purity and is primarily used to produce transformers and in cable industry. Our products The product assortment of the Arctic Paper Group covers: —Uncoated wood-free paper, in particular: ›white offset paper that we produce and distribute primarily under the Amber brand which is one of the most versatile types of paper destined for various applications; ›woodfree bulky book paper that we produce under the Munken brand, used primarily for book printing; ›high quality graphic paper with very smooth surface, used for printing of various advertising and marketing materials that we produce under the Munken brand; —Coated wood-free paper, in particular: ›coated woodfree paper, manufactured under the G and Arctic brands, used primarily for printing of books, magazines, catalogues, maps, personalised direct mail correspondence. —Uncoated wood-containing paper, in particular: ›premium wood containing bulky book paper that we produce and distribute under the Munken brand, was developed specially for multi-colour and B/W printing of books; — Unbleached sulphate pulp: ›fully bleached sulphate pulp and unbleached sulphate pulp used primarily to produce printing and writing paper, cardboard, toilet paper and white packaging paper. —Mechanical fibre pulp: ›chemi-thermo mechanical pulp (CTMP) and groundwood which are used mainly for production of printing and writing papers; Capital Group structure The Arctic Paper Capital Group comprises Arctic Paper S.A., as the Parent Entity, and its subsidiaries, as well as joint ventures. Since 23 October 2009, Arctic Paper S.A. has been listed on the primary market of the Warsaw Stock Exchange and since 20 December 2012 in the NASDAQ stock exchange in Stockholm. The Group operates through its Paper Mills and Pulp Mills and its subsidiary producing packaging as well as its sales Offices and Procurement Offices. Detailed information on the organisation of the Arctic Paper Capital Group with identification of the consolidated entities is provided in the section ‘Accounting principles (policies)’ and in note to the consolidated financial statements (note 1 and 2). Changes in the capital structure of the Arctic Paper Group In 2020, no material changes in the capital structure of the Arctic Paper Group occurred. Changes to the core management principles In 2020, there were no material changes to the core management principles. Shareholding structure Nemus Holding AB, a company under Swedish law (a company owned indirectly by Mr Thomas Onstad), is the majority shareholder of Arctic Paper S.A., holding (as at 31 December 2020) 40,381,449 shares of our Company, which constitutes 58.28% of its share capital and corresponds to 58.28% of the total number of votes at Annual General Meetings. Thus Nemus Holding AB is the Parent Entity of the Issuer. Additionally, Mr Thomas Onstad, an indirect shareholder of Nemus Holding AB, holds directly 6,223,658 shares representing 8.98% of the total number of shares in the Company, and via another entity – 600,000 shares accounting for 0.87% of the total number of shares of the Issuer. Mr Thomas Onstad’s total direct and indirect holding in the capital of Arctic Paper S.A. as at 31 December 2020 was 68.13% and has not changed until the date hereof. as at 16.03.2021 Shareholder Number of shares Share in the share capital ‎ [%] Number of votes Share in the total number of votes ‎ [%] Thomas Onstad 47 205 107 68,13% 47 205 107 68,13% - indirectly via 40 981 449 59,15% 40 981 449 59,15% Nemus Holding AB 40 381 449 58,28% 40 381 449 58,28% other entity 600 000 0,87% 600 000 0,87% - directly 6 223 658 8,98% 6 223 658 8,98% Other 22 082 676 31,87% 22 082 676 31,87% Total 69 287 783 100,00% 69 287 783 100,00% Treasury shares - 0,00% - 0,00% Total 69 287 783 100,00% 69 287 783 100,00% The data in the above tables is provided as of the date of approval hereof, which has not changed in comparison to the ones as at 31 December 2020 and as of the publication date of the quarterly report for Q3 2020. Market environment Segments of the graphic paper market The graphic paper market is split into three core segments: —coated and uncoated fine paper, —newsprint paper, —magazine paper. The Group operates solely in the segment of high quality graphic papers. We are not present in the segment of newsprint paper and photocopy or office paper. Below is a description of segments in the graphic market: —fine paper is wood-free paper where minimum 90% of fibre mass is pulp fibres obtained with chemical methods: ›uncoated wood-free paper made of pulp. It may be subject to additional processing like surface sizing, calendering, surface or mass dyeing. ›two core categories of the paper include graphic paper (used e.g. to print books, handbooks and catalogues) and office copying paper. ›coated wood-free paper made of pulp is subject to coating with pigment and glue mixtures (kaolin, calcium carbonate). The coating may be performed on paper machines (online) or outside paper machines (offline). Coating of paper improves its smoothness and transparency of the background, improves the quality of colour reproduction. —Wood-containing paper is most often manufactured of mechanical pulp or recycled-paper pulp, without or with small quantities of filler. It contains lignin which increases the opacity of the paper but accelerates ageing. ›uncoated wood-containing paper is manufactured of mechanical pulp, used to print magazines with rotogravure and offset techniques (newsprint) and to print single-colour publications. Products of the Group in that segment are usually used to print paperbacks. ›coated wood-containing paper is manufactured of mechanical pulp, it is double coated. It is used to print multi-colour magazines and catalogues. In that product group there is e.g.: SC (Super Calendared), MFC (Machine Finished Coated), LWC (Light Weight Coated), ULWC (Ultra-Light Weight Coated) MWC (Medium Weight Coated). The paper in the form of rolls is used for heat-set printing. Additional information on the market environment is provided further in this report in the section: Information on market trends. Segments of the pulp market Since December 2012, along with the acquisition of Rottneros AB, our assortment has been expanded by: —fully bleached sulphate pulp and unbleached sulphate pulp used primarily to produce printing and writing paper, cardboard, toilet paper and white packaging paper, —chemi-thermo mechanical pulp (CTMP) and groundwood which are used mainly for production of printing and writing papers. Development directions and strategy In the last period of the year, the Management Board approved its new strategy for the Group’s paper business “A Future in Paper – Strategic Agenda 2022” which aims at developing the business and improving the profitability of the segment. The new business strategy relies on six strategic initiatives: —Business development by focusing on selected profitable segments and markets, including technical paper, packaging and premium products, in the growing East European markets and in new markets outside of Europe. —New innovative products developed in close cooperation with customers. —Development of strong brands for the premium segment in order to increase revenues per one tonne of paper or one tonne of pulp. —Optimisation of all processes in order to reduce costs. —Reinforcement of the efficiency culture among employees, based on clear and measurable objectives. —Sustainable activities based on products that may be recycled and on renewable materials. ‎ Sales structure In 2020 and in 2019, the sales structure by main product lines was as follows: thousand tons 2020 share % 2019 share % Paper 575 59% 608 61% Amber 295 30% 291 29% G-Print 83 9% 108 11% Munken 93 10% 102 10% Arctic 93 10% 100 10% AP Tech 8 1% 5 1% Other 3 0% 2 0% Pulp 401 41% 384 39% NBSK 231 24% 216 22% Groundwood 71 7% 74 7% CTMP 99 10% 94 9% Total paper and pulp 976 100% 992 100% PLN ‘000 2020 share % 2019 share % Paper 1 990 774 70% 2 206 814 71% Amber 950 237 33% 1 029 238 33% G-Print 264 120 9% 342 341 11% Munken 429 341 15% 476 581 15% Arctic 311 022 11% 334 608 11% AP Tech 27 691 1% 19 290 1% Other 8 362 0% 4 757 0% Pulp 856 677 30% 910 304 29% NBSK and derivatives 514 428 18% 540 182 17% Groundwood 119 808 4% 137 685 4% CTMP 161 328 6% 201 168 6% Other 61 113 2% 31 270 1% Total paper and pulp 2 847 450 100% 3 117 118 100% In 2020, there were no material changes to the sales structure of paper and pulp by the Group or in the revenue structure from sales of paper and pulp by the Group by its products, except for the quantitative and qualitative decrease in the share of G-Print sales. Sales markets In 2020, the proportion of the Group's sales outside of Poland in PLN thousand was 88% and was not changed versus 2019 (88%). This year, similarly to previous years, sales were focused on European markets. The share of those markets in the overall value of sales was 89% in 2020 (2019: 90%). The geographical structure of sales revenues by the main markets in 2020 and in 2019 is presented in note 10.1 to the consolidated financial statements. Buyers The base of our customers covers both direct and indirect buyers. Direct buyers purchase the Group’s products at our Paper Mills. Indirect buyers do not buy the Group’s products on their own and they resort to the services of advertising companies or paper wholesalers, nevertheless, they constitute an important target group of marketing activities of Arctic Paper since it is indirect buyers that recommend the use of the Group’s papers to direct buyers. The groups of direct and indirect buyers of products include: —printing houses – they are direct buyers straight from the Group’s Paper Mills, —wholesalers – they are direct buyers of paper manufactured by the Group for further re-sale, —publishers – they are direct and indirect buyers of paper manufactured by the Group straight from the Group for their publishing business and instruct or recommend the use of our paper to printing houses to which they commission the printing of books and other publications, —advertising agencies – they are mainly indirect buyers that do not buy our products directly; however, they play an important role in commissioning and recommending our products to printing houses, in particular high quality paper to print annual reports of companies, brochures, leaflets and packaging, —final buyers – those are direct and indirect buyers that buy our products directly; they also play an important role in commissioning and recommending our products to printing houses to which they commission printing services. Pulp Mill products are mainly bought by customers that produce paper for printing, paper hygienic products and cardboard as well as electrical devices and filters. Pulp is supplied to entities that do not have the capacity to produce pulp by themselves and to buyers that produce certain types of pulp and look for suppliers of other types of pulp. In our opinion, we are not materially dependent on any single specific buyer. The Group’s consolidated revenues for 2020 show that the share of the largest buyer did not exceed 15% of total sales revenues. Vendors & Suppliers In its business, the Group relies on the following goods and services: —Pulp for Paper Mills, —Wood for Pulp Mills, —Chemicals, —Electricity, —Transport services. Pulp Pulp is the core material used by the Group to produce paper. The Group acquires pulp on the basis of revolving annual contracts concluded under framework agreements or one-off transactions. As a result of the acquisition of the Rottneros Group in December 2012, a part of pulp is provided to the Pulp Mills from the Rottneros Group Pulp Mills. Wood Wood is the core material used by the Pulp Mills to produce pulp. The Rottneros Group has a procurement department placing orders with sawmills in Sweden as well as its subsidiary company – SIA Rottneros Baltic, purchasing wood for the Pulp Mill in Vallvik in Eastern Europe, primarily in Latvia and Russia. Chemicals The core chemicals used to produce papers are fillers (mainly calcium carbonate), starch (of maize, potatoes, tapioca), optical bleaching agents and other chemicals. The chemicals are also used to produce pulp, mainly NBSK. Electricity In its production processes, the Group uses electricity and heat energy. The entire demand for electricity and heat energy for the Paper Mill in Kostrzyn is covered with its own heat and power plant using natural gas. The gas is supplied pursuant to a contract with a Polish supplier (PGNiG) at annual indexed prices in line with changes to the sectoral indicators published by GUS [Central Statistical Office of Poland] subject to negotiations of the indexation formula when the contractual change levels are exceeded. Gas is acquired from deposits located close to Kostrzyn nad Odrą and delivered to the Paper Mill with a local pipeline. In the analysed period, electricity for the Paper Mill in Munkedal was purchased from external suppliers. We were also buying heating oil to cover our needs for heat energy. Energy for the Paper Mill Arctic Paper Grycksbo AB is obtained from biomass and electricity is partly acquired from external suppliers. The Rottneros Pulp Mill covers its entire demand for electricity with purchases from external suppliers. The Vallvik Pulp Mill provides for about 75% of its demand for electricity with its own resources. The remaining demand for electricity is covered with purchases from external suppliers. Transport services The Group does not operate its own means of transportation and resorts to specialised external entities for distribution of its products from Paper Mills and warehouses to buyers. Entities in the Group are not dependent on those providers. The Group’s consolidated revenues for 2018 show that the share of the largest service provider did not exceed 10% of total sales revenues. Information on the seasonal or cyclical nature of business The demand for the Group’s products is subject to slight variations throughout the year. Reduced demand for paper occurs each year during summer holidays and around Christmas when some printing houses, in particular in Western Europe are closed. Changes in the demand for paper are not material versus the demand for paper in other periods of the year. Research and development The Arctic Paper Group conducts primarily development works aimed at enhancing and modernising production processes and improving the quality of products on offer and expanding the assortment thereof. In the period covered with this report, the Paper Mills and Pulp Mills carried out development works to improve production processes, in particular to shorten the idle time of paper machines as well as works aimed at improving the paper/pulp quality and extending the assortment and to improve quality properties of the products. An important goal of development works last year was the development of new products, especially packaging and barrier papers. In the area of packaging papers, the work focused on obtaining a product with increased resistance to water and fats. The global trend of replacing plastic packaging with cellulose and paper packaging is expected, especially in the food packaging segment. A subsidiary of Arctic Paper Kostrzyn concluded an agreement with the National Centre for Research and Development for co-financing the project "Development and implementation of high-barrier biodegradable packaging paper production technology" under the Intelligent Development Operational Program 2014-2020. The total net project value is over PLN 20 million with the maximum amount of co-financing of about PLN 8.3 million. The aim of the project is to develop and implement technology for manufacturing of a new product: high-barrier, biodegradable, antibacterial and anti-fungal packaging paper. Product innovation will introduce to the segment of packaging papers products characterised by high barrier properties and suitable for biodegradation combined with maintaining the properties of high-quality printing. This is especially important in times of a pandemic. Employee matters Matters relating to the Group's employees are described in detail in the separately published document "Non-financial information of the Arctic Paper S.A. Capital Group. – Corporate Social Responsibility Report 2020 ” Environment Our Group complies with environmental standards set forth in numerous applicable regulations and in administrative decisions. The standards are aimed at ensuring protection of soil, air and water against pollution as well as noise and electromagnetic fields. Below, we provide a description of how environmental regulations affect the operations of our Paper Mills and Pulp Mills: Kostrzyn Paper Mill Pursuant to a decision of the Governor of the Lubuskie Province of 8 December 2005, Kostrzyn obtained an integrated permit to operate a paper production installation with a fuel combustion installation at the facility in Kostrzyn nad Odrą. In the case of Kostrzyn, the need for such permit was due to its paper production capacity in excess of 20 tonnes per day. This permit has been updated many times, adjusting the plant to the applicable legal requirements. The last update took place on 17 December 2019 by the decision of the Marshal of the Lubuskie Province. The condition for receiving the integrated permit is that the installation meets the environmental protection requirements resulting, among others, from best available techniques (BAT). In particular, the election must not exceed the applicable emission standards. In order to comply with the requirements specified in the environmental permit and other environmental standards related to waste management, Kostrzyn has entered into a number of contracts covering collection and recycling of production waste. In May 2008, a new sewage treatment plan was opened at the facility in Kostrzyn nad Odrą. Pursuant to a decision of the Governor of the Lubuskie Province of 14 August 2007, Kostrzyn obtained a water law permit to discharge rainwater and melt water and to construct a discharge dock to the River of Warta (valid until 1 August 2017). In 2017, a new water law permit was obtained to discharge rain and melt water, valid until 25 June 2027. AP Kostrzyn participates in the EU Emissions Trading System (ETS) for greenhouse gases. A permit to emit greenhouse gases was obtained by AP Kostrzyn pursuant to a decision of the Governor of the Lubuskie Province of 9 November 2016 for the paper production installation with the production capacity in excess of 20 tonnes per day located in the facility in Kostrzyn nad Odrą (as amended on 26.02.2019 and 14.04.2020). The permit was granted for an indefinite period of time. In connection with the permit, Kostrzyn is obliged to monitor the volumes of CO2 emissions and to file annual report on the emissions. In connection with environmental protection, Kostrzyn has made major investments, inter alia, into a new gas fuelled heat and power plant that was opened in 2007 stage I and in 2009 stage II. The Paper Mill in Kostrzyn nad Odrą holds compliance certificates with the following standards: OHSAS 18001, ISO 14001, ISO 9001 and EMAS. Additionally, the paper produced at the facility has obtained special FSC® and PEFC™ certificates. The certificates are to document that the pulp used to produce the paper comes from forests used in a sustainable manner. The FSC (Forest Stewardship Council) certificate is a major certificate granted to paper producing companies. In 2006, the first FSC certificate was granted to the paper manufactured at AP Kostrzyn. Now, the Amber branded paper produced at Kostrzyn nad Odrą relies in 64% on pulp certified by FSC and 36% on pulp certified by PEFC (Programme for the Endorsement of Forest Certification). ‎ Munkedals Paper Mill The business of Munkedals is subject to environmental management systems EMAS and ISO 14001. EMAS (Eco-Management and Audit Scheme) is a voluntary system applied by the European Union which applies to enterprises outstanding for their constantly improved environmental protection level within their business. Companies registered with EMAS comply with environmental protection regulations, maintain an environmental management system and publish information on environmental protection in their business in the form of a separate verified statement on compliance with environmental protection regulations. ISO, International Standards Organisation, has been developing various standards. ISO 14000 is a group of one of the best known environmental management standards (i.e. activities undertaken by entrepreneurs in order to (i) reduce the harmful impact of their activities on the environment and (ii) ensure continuous improvement of the level of environmental protection). Certain properties owned by Munkedals are located in the Natura 2000 area. Areas in the Natura 2000 constitute wild nature reservations established on the basis of a decision of the District Council of Munkedal (Sweden) in 2005. The objective to establish the Natura 2000 network was to preserve the natural habitats and vegetation and animal species most endangered with extinction all over Europe. The extent of the coverage and the restrictions concerning business operations are set forth in the Council Directive 92/43/EEC on the conservation of natural habitats and of wild fauna and flora (Habitat Directive) and in the Council Directive 79/409/EEC on the conservation of wild birds (Birds Directive) of 2 April 1979 and the applicable domestic regulations. The protection level of habitats and birds in Natura 2000 areas is subject to the occurrence of specific species and/or habitats that are protected. On 24 June 2020, the entire range produced at the Munkedals factory was certified by the Cradle to Cradle Products Innovation Institute (C2CPII). The entire production process of the paper mill in Munkedal has been audited and has reached the bronze level which is the overall level of product certification. The Cradle to Cradle Certified ™ program is an internationally recognised standard for safe and sustainable development. It assesses the environmental impact of products throughout their entire life cycle. Cradle to Cradle design means not only minimizing negative impacts on the environment, but above all leaving a positive footprint. Grycksbo Paper Mill Paper production in the Paper Mill Arctic Paper Grycksbo AB has been carried out in compliance with the environmental permit of March 2007. The permit was issued by the Swedish Environmental Protection Tribunal for the production of up to 310,000 tonnes annually. Additionally, the Paper Mill holds a CO2 emission permit issued by the regional authorities of the province of Dalarna. Since 1997 Arctic Paper Grycksbo AB has held an ISO 14001 certificate and our environmental activities are reported in compliance with EMAS. The core objective of EMAS is to encourage its member companies to enhance their efforts to protect the natural environment in a systematic and consistent manner, to an extent even beyond legislative requirements. This is achieved by establishing a programme composed of specific action plans and assessment of all effects for the environment resulting from the activities pursued. Companies are obliged to prepare annual reports on the results of their pro-environmental activities. Independent inspectors ensure that companies comply with their obligations. Arctic Paper Grycksbo AB participates in the EU Emissions Trading System (ETS) for greenhouse gases. 2010 was the first year when zero CO2 emissions from fossil fuels were declared. That was made possible as a result of a reconstruction of the boiler combined with an investment in equipment to handle biofuels, electrical filters for flue gas particles and reconstruction to turbine generating electricity from renewable sources. In numbers, the switch to biofuels means annual reduction of CO2 emissions from fossil fuels by about 70,000 tonnes. The reconstructed turbine provides for 20% of demand for electricity by the Paper Mill with renewable energy sources that it generates itself which in turn results in reduction of CO2 emissions by another 4,000 tonnes. The Paper Mill has implemented an energy management system in compliance with ISO 50001 (Energy Management System). Our products are verified within the “Chain of Custody” in compliance with FSC (Forest Stewardship Council) and in compliance with PEFC (Programme for the Endorsement of Forest Certification) as well as they meet the requirements of the standards of Nordic Ecolable (the Nordic Swan). In 2020, a project related to the application for Cradle to Cradle certification has started, the mill expects to complete the certification in 2021. Pulp Mills Environmental issues are central to the corporate culture at Rottneros and a natural part of the Group’s DNA. Products from the forest are part of the solution for the climate and Rottneros aims to be a leading player in the industry. Development is constantly underway to improve environmental performance. The long-term goal for the Group is to be completely fossil-free. Rottneros operates in an industry that is part of the solution to global warming. Carbon dioxide is absorbed by the growing forest and is thereby stored in the products that are manufactured from it. Intensive research is underway in many places to develop new products that replace fossil-based raw material with bio-based. Rottneros does not own any forest, but contributes to sustainable forestry in many ways. Both of the Group's mills have environmental management systems and are certified according to ISO 14001. The environmental management system includes well-established routines for follow-up, taking samples and dealing with deviations. Suppliers and raw materials are carefully selected. The Rottneros Group is certified under FSC® and PEFCTM and has been purchasing raw materials primarily from certified suppliers for many years. In cases where suppliers are not certified, they are carefully evaluated in order to live up to customer demands in accordance with our certificates. The company’s efficient use of raw materials in production provides advantages from both an environmental and economic perspective. Rottneros Mill uses 95–98 per cent of the raw material. At Vallvik Mill, about 44–47 per cent of the raw material becomes pulp. Residual products from production are mainly used as energy. To reduce the environmental impact of transports, raw material is purchased locally. Vallvik Mill buys about 50 per cent and Rottneros Mill about 75 per cent of pulp wood from sources located within a 100-kilometre radius.Planning is carried out to reduce transport distances and to coordinate transports within the Group and with other companies as far as possible. Rottneros’ production processes are associated with various risks that affect the environment. Rottneros Mill has a mechanical production process and the greatest environmental risks are energy consumption and emission to water. Energy consumption is substantial and the focus has been on reducing fossil dependence by designing more efficient equipment and by changing the product composition. At Vallvik Mill, where pulp is produced with chemical processes, the greatest environmental risks are posed by chemical handling and by emissions to water and air. To safeguard the environment and to prevent any infringements of applicable provisions and requirements relating to emissions, the Group has a continuous sampling system with alarm functions linked to the mills' control systems. Random manual samples are taken in addition to this. The Group’s long-term target is to be fossil-free. The plan is to have fossil-free production by 2030. One challenge that remains involves replacing the fossil fuels used for startup of production, especially at Vallvik Mill, in conjunction with production disruptions and planned maintenance shutdowns. Another challenge that still remains is to ensure that purchased electricity comes from fossil-free sources. Eliminating indirect carbon dioxide emissions that occur outside the gates of the operation is yet another long-term challenge for achieving a completely fossil-free Rottneros. This aspect mainly involves vehicles for transporting deliveries to and from the mills that are used by subcontractors working for the Group, as well as suppliers and customers. In 2020, Rottneros Mill invested 18 MSEK in a methane gas burner as part of the initiative to achieve the target of a fossil-free production process. The methane gas that forms as a by-product is collected during the biological water treatment process. It can then be used as a source of energy for the flash dryers where the pulp is dried. The investment will result in both reduced consumption of fossil fuels and lower variable costs. The mill has therefore largely achieved the target of a fossil-free production process. Through an array of investments in recent years the mill has reduced its annual oil consumption by on the order of 7,000 cubic metres, at the same time that production volume has sharply increased. According to the Group's policy, all employees in relevant positions must have the necessary expertise in the environmental field. Senior environmental staff within the Group undertake continuous professional training. Vallvik Mill has been certified to meet environmental management standards since 2000. Rottneros Bruk also updated its energy management system in 2020 and was certified to the ISO 50001 standard. A key component of this effort involved creating an energy management group to work proactively on energy-related issues. The group conducted an analysis to identify everything that causes electricity consumption in the plant. Summary of the consolidated financial results Selected items of the consolidated income statement PLN ‘000 2020 2019 Change % 2020/2019 Sales revenues 2 847 450 3 117 118 (8,7) of which: Sales of paper 1 990 774 2 206 815 (9,8) Sales of pulp 856 677 910 304 (5,9) Profit on sales 541 791 585 506 (7,5) % of sales revenues 19,03 18,78 0,2 p.p. Selling and distribution costs (336 524) (336 862) (0,1) Administrative expenses (76 348) (88 527) (13,8) Other operating income 65 280 78 111 (16,4) Other operating expenses (35 957) (46 806) (23,2) EBIT 158 242 191 422 (17,3) % of sales revenues 5,56 6,14 (0,6) p.p. EBITDA 271 368 278 031 (2,4) % of sales revenues 9,53 8,92 0,6 p.p. Financial income 710 1 149 (38,2) Financial expenses (36 633) (34 640) 5,8 Gross profit (loss) 122 318 157 931 (22,5) Income tax (18 733) (33 250) (43,7) Net profit (loss) 103 586 124 681 (16,9) % of sales revenues 3,64 4,00 (0,4) p.p. Net profit/(loss) attributable to the shareholders of the Parent Entity 111 070 82 709 34,3 Net profit / (loss) per share (PLN) attributable to the shareholders of the Parent Entity 1,60 1,19 34,3 Revenues In 2020, the consolidated sales revenues amounted to PLN 2,847,450 thousand as compared to PLN 3,117,118 thousand in the previous year and decreased by 8.7% (PLN 269,668 thousand). Sales revenues from paper decreased by 9.8% (PLN 216,041 thousand), while sales revenues from pulp increased by 5.9% (PLN 53,627 thousand) versus 2019. Paper sales volume in 2020 amounted to 575 thousand tonnes and was by 33 thousand tonnes lower than in the previous year. This means a decrease in sales volume by 5.4%. Pulp sales volume in 2020 amounted to 401 thousand tonnes and was by 17 thousand tonnes higher than in the previous year. This means an increase in sales volume by 4.4%. Profit on sales, costs of sales, selling and distribution costs, and administrative expenses Profit on sales in 2020 was by 7.5% lower than in the previous year. Sales profit margin in the current year stood at 19.03% compared to 18.78% (+0.2 p.p.) in the previous year. The decrease in profit on sales in 2020 compared to 2019 was primarily due to the decrease in sales revenues from the sale of paper and pulp due to both lower volumes and a decrease in PLN-denominated selling prices for paper and a decrease in selling prices for pulp. In 2020, selling and distribution costs amounted to PLN 336,524 thousand and decreased versus 2019 by 0.1%. The selling and distribution costs comprise particularly transportation costs. In 2020, the administrative expenses amounted to PLN 76,348 thousand as compared to PLN 88.527 thousand in 2019 which was a decrease by 13.8%. The main reason of the decrease was lower costs related to consulting services rendered to the Group by third parties. Other operating income and expenses Other operating income amounted to PLN 65,280 thousand in 2020, which was a decrease versus the previous year by PLN 12,831 thousand. In 2020, other operating expenses amounted to PLN 35,957 thousand, which was a decrease versus the previous year by PLN 10,849 thousand. A major part of the other operational revenue and expenses includes revenues and costs of sales of sold energy and other materials. The decrease in revenues and costs of sales of other materials and profit on sales of the right to emit CO2 resulted mainly in a decrease of other operating income and expenses in 2020. Additionally, in 2019 the Group generated profit on sale of land in AP Mochenwangen. Financial income and financial expenses In 2020, the financial income amounted to PLN 710 thousand and was by PLN 439 thousand lower than generated in 2019. The financial expenses in 2020 amounted to PLN 36,633 thousand as compared to PLN 34,640 thousand in 2019. Higher financial expenses in 2020 were primarily due to higher net FX losses offset in part by lower interest expense. Income tax In 2020, income tax amounted to PLN -18,733 thousand, while in 2019 it was PLN -33,250 thousand. The relatively low effective tax rate on gross profit in 2020 of 15% (2019: 21%) results from the use of tax losses for which a deferred tax asset was previously unrecognised within the Swedish tax group. Profitability analysis EBITDA in 2020 was PLN 271,368 thousand, while in 2019 it was PLN 278,031 thousand. The decrease in EBITDA in 2020 is mainly the result of lower sales revenues from the sale of paper and pulp, compensated by a decrease in production costs, primarily the cost of raw materials, including pulp. In the reporting period, the EBITDA margin was 9.53 % versus 8.92 % in 2019. In 2020, the profit on operations amounted to PLN 158,242 thousand, while in 2019 it was PLN 191,422 thousand. The operational profit margin in 2020 was +5.56% versus +6.14% in 2019. The lower operating profit in 2020 was due to lower EDITDA and higher depreciation/amortisation expense in 2020. The net profit in 2020 amounted to PLN 103,586 thousand, while in 2019 it was PLN 124,681 thousand. Net profit margin in 2020 amounted to +3.64% as compared to +4.00% in 2019. ‎ PLN ‘000 2020 2019 Change % 2020/2019 Profit on sales 541 791 585 506 (7,5) % of sales revenues 19,03 18,78 0,2 p.p. EBITDA 271 368 278 031 (2,4) % of sales revenues 9,53 8,92 0,6 p.p. EBIT 158 242 191 422 (17,3) % of sales revenues 5,56 6,14 (0,6) p.p. Net profit/(loss) 103 586 124 681 (16,9) % of sales revenues 3,64 4,00 (0,4) p.p. Return on equity / ROE (%) 10,0 14,3 (30,0) Return on assets / ROA (%) 4,8 6,1 (20,8) In 2020, return on equity was +10.0%, while in 2019 it was +14.3%. In 2020, return on assets was +4.8%, while in 2019 it was +6.1%. The decrease in return on equity and return on assets in 2020 was mainly due to the decrease in net profit achieved in 2020 compared to 2019. Selected items of the consolidated statement of financial position PLN ‘000 31.12.2020 31.12.2019 Change ‎ 31/12/2020 ‎ -31/12/2019 Fixed assets 1 194 503 1 080 905 113 598 Inventories 365 491 353 774 11 717 Receivables 302 751 307 445 (4 694) including trade receivables 297 543 302 121 (4 579) Other current assets 18 337 27 744 (9 408) Cash and cash equivalents 255 563 265 885 (10 321) Total assets 2 136 646 2 035 753 100 893 Equity 1 033 033 870 528 162 505 Short-term liabilities 639 016 688 098 (49 082) of which: trade and other payables 379 445 435 366 (55 922) interest-bearing debt 148 426 161 591 (13 165) other non-financial liabilities 111 146 91 141 20 005 Long-term liabilities 464 596 477 127 (12 531) of which: interest-bearing debt 241 144 263 268 (22 124) other non-financial liabilities 223 452 213 858 9 594 Total equity and liabilities 2 136 646 2 035 753 100 893 As at 31 December 2020 total assets amounted to PLN 2,136,646 thousand, as compared to PLN 2,035,753 thousand at the end of 2019. Fixed assets As at the end of December 2020 fixed assets amounted to PLN 1,194,503 thousand and accounted for 55.9% of total assets as compared to PLN 1.080.905 thousand as at the end of 2019 (53.1% of total assets). The increase in non-current assets was mainly due to investment purchases. Current assets As at the end of December 2020, current assets amounted to PLN 942,142 thousand as compared to PLN 954,848 thousand at the end of December 2019. As part of the current assets, inventories increased by PLN 11,717 thousand, receivables decreased by PLN 4,694 thousand, other current assets decreased by PLN 9,408 thousand, while cash and cash equivalents decreased by PLN 10,321 thousand. Current assets represented 44.1% of total assets as at the end of December 2020 (46.9% as at the end of 2019) and included inventories – 17.0% (17.3% as at the end of 2019), receivables – 14.2% (15.1% as at the end of 2019), other current assets – 0.9% (1.4% as at the end of 2019) and cash and cash equivalents – 12.0% (13.1% as at the end of 2019). Equity As at the end of 2020, the equity amounted to PLN 1,033,033 thousand as compared to PLN 870,528 thousand at the end of 2019. As at the end of December 2020, equity accounted for 48.3% of total equity and liabilities (42.8% as at 31 December 2019). The increase in equity was the result of the net profit for 2020 and an increase in positive FX differences from the valuation of subsidiaries partially offset by a decrease in the valuation of financial instruments treated as hedges of future cash flows and actuarial losses. Short-term liabilities As at the end of December 2020, short-term liabilities amounted to PLN 602,250 thousand (28.2% of balance sheet total) as compared to PLN 688,098 thousand (33.8% of balance sheet total) as at the end of 2019. In 2020, a decrease in short-term liabilities occurred by PLN 86,848 thousand, mainly due to a decrease in trade payables as well as loans, bonds and borrowings. As at 31 December 2019, some loans (PLN 61,404 thousand) were reclassified to the short-term portion due to failure to meet the ratios under loan agreements. Long-term liabilities As at the end of December 2020, long-term liabilities amounted to PLN 501,362 thousand (23.5% of balance sheet total) as compared to PLN 477,127 thousand (23.4% of balance sheet total) as at the end of 2019. In the analysed year there was a growth of long-term liabilities by PLN 24,235 thousand. The increase in long-term liabilities was the result of an increase in liabilities for loans, borrowings and bonds. The analysis should also take into account the change in the presentation of loans, bonds and borrowings to the short-term part as at 31 December 2019, described above. ‎ Debt analysis 2020 2019 Change 2019/2018 Debt to equity ratio (%) 106,8 133,9 (27,0) p.p. Equity to fixed assets ratio (%) 86,5 80,5 5,9 p.p. Interest-bearing debt-to-equity ratio (%) 37,7 48,8 (11,1) p.p. Net debt to EBITDA ratio for the last 12 months (x) 0,49x 0,57x (0,08) EBITDA to interest expense ratio (x) 13,7x 11,8x 1,9 As at the end of December 2020, the debt to equity ratio was 106.8% and was lower by 27.0 p.p. versus the end of December 2019. The decrease of the ratio was due to decreased debt, mainly under loans, borrowings and bonds and trade and other payables and an increase of equity. The ratio of fixed assets to equity stood at 86.5% at the end of 2020, 5.9 p.p. higher than at the end of December 2019 as a result of higher growth in equity than in non-current assets. The interest-bearing debt to equity ratio was 37.7% at the end of 2020 and was by 11.1 p.p. lower versus the ratio calculated at the end of December 2019, both due to a decrease of interest-bearing debt than an increase of equity. The net debt to EBITDA ratio for the last 12 months of 2020 was 0.49x, 0.08 lower than the level of this ratio for 2019 mainly due to a decrease in net debt calculated as interest payable less cash. The ratio of interest expense to EBITDA for the last 12 months of 2020 was 13.7x, and was 1.9 higher than the level of this ratio for 2019 mainly due to the decrease in interest expense. Liquidity analysis 2020 2019 Change 2019/2018 Current ratio 1,5x 1,4x 0,1 Quick ratio 0,9x 0,9x 0,0 Acid test ratio 0,4x 0,4x 0,0 DSI (days) 57,1 50,3 6,8 DSO (days) 37,6 34,9 2,7 DPO (days) 59,2 61,9 (2,7) Operational cycle (days) 94,7 85,2 9,5 Cash conversion cycle (days) 35,4 23,3 12,1 The current ratio at the end of December 2020 was 1.6x and was higher than at the end of December 2019 (by 0.1), mainly due to an increase in inventories. The quick ratio and cash solvency ratios did not change at the end of December 2020 compared to the end of December 2019. The cash conversion cycle for 2020 (35.4 days) increased by 12.1 days compared to 2019 (23.3 days) as a result of an increase in inventory and receivables turnover. Selected items of the consolidated cash flow statement PLN ‘000 2020 2019 Change % 2020/2019 Cash flows from operating activities 211 464 342 290 (38,2) of which: Gross profit/(loss) 122 318 157 931 (22,5) Depreciation/amortisation and impairment allowance 113 126 86 609 30,6 Changes to working capital (25 051) 78 703 (131,8) Other adjustments 1 072 19 047 (94,4) Cash flows from investing activities (141 239) (121 834) 15,9 Cash flows from financing activities (100 950) (152 939) (34,0) Total cash flows (30 725) 67 517 (145,5) Cash flows from operating activities In 2020, net cash flows from operating activities amounted to PLN 211,464 thousand as compared to PLN 342,290 thousand in 2019. Lower cash flows from operating activities in 2020 was due to an increase in working capital. Cash flows from investing activities In 2020, cash flows from investing activities amounted to PLN -141,239 thousand as compared to PLN -121,834 thousand in 2019, and covered mostly expenses related to purchases of tangible fixed assets. Cash flows from financing activities In 2020, cash flows from financing activities amounted to PLN -100,950 thousand as compared to PLN -152,939 thousand in 2019. The decrease in negative cash flows from financing activities in 2020 was primarily due to lower debt repayments mainly under overdraft facilities. ‎ Relevant information and factors affecting the financial results and the assessment of the financial standing. Key factors affecting the performance results The Group’s operating activity has been and will continue to be historically influenced by the following key factors: —macroeconomic and other economic factors, —demand growth for products based on natural fibres, —reduced demand for certain paper types, —fluctuations of paper prices, —pulp price fluctuations for Paper Mills, timber for Pulp Mills and energy prices, —FX rates fluctuation. Macroeconomic and other economic factors We believe that a number of macro-economic and other economic factors have a material impact on the demand for high-quality paper, and they may also influence the demand for the Group’s products and the Group’s operating results. Those factors include: —GDP growth, —net income – as a metric of income and affluence of the population, —production capacity – the surplus of supply in the high quality paper segment over demand and decreasing sales margins on paper, —paper consumption, —technology development. Demand growth for products based on natural fibres The trend observed in developed societies concerning a reduction of man’s adverse impact on the environment, in particular reduction of use of disposable, plastic packaging that may not be recycled, offers new opportunities for the development of the pulp & paper sector. In many companies, work has been under way to develop new methods of packaging and production of packaging with natural materials, including pulp, so that it can be recycled. Arctic Paper is also involved in such research. In the near future, the product segment is expected to increase its percentage share in the volumes and revenues of the Arctic Paper Group. Reduced demand for certain paper types Development of new technologies, in particular in the areas of information and communication, results in decreasing demand for certain paper types – in particular, this affects newsprint and to a lesser extent – graphic papers. However, despite the increasing popularity of e-books, the volume of book paper produced and sold by Arctic Paper has been stable in the recent years, less sensitive to changing market conditions. Nevertheless, in its strategy Arctic Paper has set a direction of activity so that within several years, the segment of non-graphic papers (that is technical or packaging paper) accounts for 1/5 of its consolidated revenues. Paper prices Paper prices undergo cyclic changes and fluctuations, they depend on global changes in demand and overall macroeconomic and other economic factors such as indicated above. Prices of paper are also influenced by a number of factors related to the supply, primarily changes in production capacities at the worldwide and European level. Costs of raw materials, energy and transportation The main elements of the Group’s operating expenses include raw materials, energy and transportation. The costs of raw materials include mainly the costs of pulp for Paper Mills, timber for Pulp Mills and chemical agents used for paper and pulp production. Our energy costs historically include mostly the costs of electricity, gas and rights to CO2 emissions. The costs of transportation include the costs of transportation services provided to the Group mainly by external entities. Taking into account the share of those costs in total operating expenses of the Group and the limited possibility of controlling these costs by the Group Companies, their fluctuations may have a major impact on the Group’s profitability. A part of pulp supplies to our Paper Mills is made from our own Pulp Mills. The remaining part of pulp manufactured at our Pulp Mills is sold to external customers. Currency rate fluctuations The Group's operating results are significantly influenced by currency rate fluctuations. In particular, the Group's revenues and costs are expressed in different foreign currencies and are not matched, therefore, the appreciation of the currencies in which we incur costs towards the currencies in which we generate revenues, will have an adverse effect on the Group's results. Our products are primarily sold to euro zone countries, Scandinavia, Poland and the UK, thus our revenues are largely denominated in EUR, GBP, SEK and PLN while revenues from the pulp mills are primarily denominated in USD. The Group’s operating expenses are primarily expressed in USD (pulp costs for Paper Mills), EUR (costs related to pulp for Paper Mills, energy, transportation, chemicals), PLN (the majority of other costs incurred by the Paper Mill in Kostrzyn nad Odrą) and SEK (the majority of other costs incurred by the Munkedal and Grycksbo Paper Mills as well as the Rottneros and Vallvik Pulp Mills). Exchange rates also have an important impact on results reported in our financial statements because of changes in exchange rates of the currencies in which we generate revenues and incur costs, and the currency in which we report our financial results (PLN). Unusual events and factors In 2020, there were no unusual events or factors. Impact of changes in Arctic Paper Group’s structure on the financial result In 2020, there were no material changes in the Arctic Paper Group’s structure that would have material influence on the financial result generated. As of 1 January 2020, the group via Rottneros AB, took control over Nykvist Skogs AB, which is further described in note 20 of the consolidated financial statement. Other material information Covid-19 In connection with the epidemic coronavirus Covid-19 The Board has estimated its potential impact on the accountability of the Group, more detailed description is provided in note 6 .2 Support received by companies from the Arctic Paper Group in order to minimise the effects of the COVID-19 epidemic With reference to the risks described in the annual report for 2019, related to the spread of the SARS-CoV-2 coronavirus responsible for the COVID-19 epidemic in Poland and worldwide, and the current report No. 5/2020 of 7 April 2020 on actions taken within the Arctic Paper Group to minimise the impact of the epidemic, the Management Board informs that the total assistance from the governments of the countries of the Group’s registered officers or local authorities received by the Group’s companies in was approx. PLN 10.3 million. ‎ Decision on approval of compensation from the Energy Regulatory Office for Arctic Paper Kostrzyn SA On 31 July 2020, the Issuer’s subsidiary company – Arctic Paper Kostrzyn SA received a decision granting it public aid to cover the purchase costs of emission rights within the meaning of the Act on the emission trading scheme to emit hothouse gases with respect to the prices of electricity used to manufacture product in energy-intensive sectors or sub-sectors. The amount of the approved compensation is PLN 5.3 million was disbursed in Q3 2020. New technologies at Arctic Paper Kostrzyn S.A. co-financed by Narodowe Centrum Badań i Rozwoju [National Centre for Research and Development] [NCBiR] In September 2020, a subsidiary of Arctic Paper Kostrzyn S.A. signed an agreement with the National Centre for Research and Development (“NCBiR”) for co-financing of a project titled: “Development and implementation of technology for production of high-barrier biodegradable packaging paper” as part of the Smart Growth Operational Programme 2014-2020 (“the Project”). The total net project value is PLN 20,224,638.37 with the maximum amount of co-financing of PLN 8,343,568.42. The remaining Project expenditures will be covered by the Company with its own funds. The aim of the Project is to develop and implement technology for manufacturing of a new product: high-barrier, biodegradable packaging paper. This manufacturing innovation will introduce products into the packaging paper segment featuring high barrier properties and biodegradability, while maintaining high printing quality. This will allow to extend the range of offered products with packaging papers with special properties and improve the margins achieved. The period of cost eligibility for the Project commences on 1 September 2020 and ends on 31 May 2023. The subsidiary agreed to ensure the sustainability of the Project financed with structural funds for 5 years from Project completion (Project sustainability period). The subsidiary is obliged to accomplish the assumed objective and ratios of the Project, as specified in the application for co-financing, and to complete the Project as planned as well as to implement the results of industrial research and development within 3 years of Project completion, as specified in the application for co-financing. The terms and conditions of the Agreement do not differ from standard terms and conditions used in agreements of this type. Extending the Revolving Loan On 27 October 2020 and again on 12 January 2021 and 11 February 2021, the Lenders (BNP Paribas Bank Polska S.A., Santander Bank Polska S.A.) extended the Company's availability of the Renewable Loan. The loan availability was extended until 31 March 2021 on the terms and conditions adopted so far. The Revolving Loan was granted to the Company for the total amount of EUR 19,800,000 and PLN 20,000,000 and was provided primarily to refinance the Company’s intragroup liabilities or to finance intragroup loans. The availability of the Revolving Loan has been extended as the Company is working on the possibilities of simplifying the current structure of the Group's debt and further optimizing the conditions and reducing the costs of its servicing. Commencement of negotiations for the conclusion of a Financing Agreement On 5 February 2021, the Management Board of the Company began negotiating a new loan agreement with selected banks in order to obtain funds for: (i)refinancing the existing financial debt of the Company and its subsidiaries; (ii)financing transaction costs (including costs, commissions and fees related to refinancing the existing financial debt); (iii)financing the current operations of the corporate capital group of the Company. Based on the preliminary financing offers received from banks, the Company anticipates the following main conditions for New Financing: 1. total amount of financing: the equivalent of PLN 300,000,000 (three hundred million zlotys); 2. currency: PLN and EUR; 3. loans: a term loan in the total amount of PLN 150,000,000 (one hundred and fifty million zlotys) divided into two equal tranches in PLN and EUR and a revolving loan in the total amount of the EUR equivalent of PLN 150,000,000 (one hundred and fifty million zlotys); 4.financing period: 5 years for a term loan and 3 years for a revolving loan with the possibility of extending it for an additional 2 years (provided that the agreed extension conditions are met); 5. loan repayment terms: repayment of the term loan in equal half-yearly instalments starting from November 2021 and repayment of the revolving loan on the final repayment date; 6. interest rate: variable based on the WIBOR base rate in the case of financing in PLN and the EURIBOR base rate in the case of financing in EUR and a variable margin, the level of which will depend on the level of the net debt to EBITDA ratio; and 7. collateral: the collateral package will include collaterals customarily established in this type of transactions, such as: a registered pledge and a financial pledge on shares of Arctic Paper Kostrzyn S.A., pledges on shares of Swedish companies Arctic Paper Munkedals AB and Arctic Paper Grycksbo AB, statements of submission enforcement by the Company and Arctic Paper Kostrzyn SA, registered pledges and financial pledges on the bank accounts of the Company and Arctic Paper Kostrzyn SA, pledges on bank accounts of Arctic Paper Munkedals AB and Arctic Paper Grycksbo AB, mortgages on the real estate of the Company and Arctic Paper Kostrzyn SA, mortgages on the properties of Arctic Paper Munkedals AB and Arctic Paper Grycksbo AB, a registered pledge on the assets of Arctic Paper Kostrzyn SA and an assignment agreement to secure rights under property insurance policies. The above-mentioned parameters of New Financing are preliminary and may be changed by negotiation with banks. Additionally, New Financing negotiations with banks may or may not result in a new loan agreement. The company will provide information on the completion of negotiations and their result in a separate current report. Complete early redemption of the Bonds issued by Arctic Paper S.A. On 8 February 2021, the Company's Management Board adopted a resolution on the early redemption of all Series A Bonds (marked with ISIN code: PLARTPR00038), the issue of which the Company reported in current report No. 24/2016 of 30 September 2016. The early redemption of the Bonds, was carried out on 1 March 2021. On the Early Redemption Date, the Company redeemed 100,000 (in words: one hundred thousand) Bonds with a total nominal value of PLN 58,500,000 (in words: fifty-eight million five hundred zlotys). The consideration per Bond amounted to PLN 585, plus accrued interest and a premium, calculated in accordance with the terms and conditions of the Bond issue. The redeemed Bonds were cancelled. ‎ Factors influencing the development of the Arctic Paper Group Information on market trends Supplies of fine paper In Q4 2020 the Arctic Paper Group recorded an increased level of orders versus Q3 2020 by 2.2% and a decrease of orders versus the equivalent period of 2019 by 2.8%. Source of data: Analysis by Arctic Paper Paper prices As at the end of Q4 2020, the average prices of high-quality UWF papers decreased by 6.1% while the prices of CWF papers decreased by 6.5% versus the prices at the end of 2019. In the period from October to December 2020, the prices of uncoated wood-free paper (UWF) and coated wood-free paper (CWF) for selected markets: Germany, France, Spain, Italy and the UK, expressed in EUR and GBP, experienced a decrease by: 0.6% for UWF papers and 1.1% for CWF papers respectively. The average prices invoiced by Arctic Paper in EUR for comparable products in the segment of uncoated wood-free paper (UWF) at the end of 2020 were lower by 7.3% versus the end of 2019, while in the segment of coated wood-free paper (CWF) the prices decreased by 5.9%. Source: For market data – RISI, price changes for selected markets in Germany, France, Spain, Italy and the UK in local currencies for graphic papers similar to the product portfolio of the Arctic Paper Group. The prices are expressed without considering specific rebates for individual clients and they include neither additions nor price reductions in relation to the publicly available price lists. The estimated prices for each month reflect orders placed in the month while the deliveries may take place in the future. Because of that, RISI price estimates for a particular month do not reflect the actual prices at which deliveries are performed but only express ordering prices. For Arctic Paper products, the average invoiced sales prices for all served markets in EUR. Pulp prices At the end of Q4 2020, the pulp prices were as follows: NBSK 879.4 USD/tonne and BHKP 680 USD/tonne. The average price of NBSK in Q4 2020 was higher by 3.5% compared to the equivalent period of the previous year while the price of BHKP was by 2.4% lower. The average pulp price in Q4 2020 was higher by 1.6% for NBSK and lower by 3.1% for BHKP remained unchanged. The average cost of pulp per tonne of produced paper as calculated for the AP Group, expressed in PLN, in Q4 2020 decreased by 2.3% versus Q3 2020 and decreased by 10.2% versus Q4 2019. The share of pulp costs in cost of paper sales in Q4 of the current year amounted to 51% and decreased compared to the level recorded in Q4 2019 (57%). In the four quarters of 2019, the AP Group used pulp in the production process in the following structure: BHKP 72%, NBSK 20% and other 8%. Source of data: www.foex.fi analysis by Arctic Paper. Currency exchange rates The EUR/PLN exchange rate at the end of Q4 2020 amounted to 4.6148 and was higher by 1.9% than at the end of Q3 2020 and higher by 8.4% than at the end of Q4 2019. The average exchange rate in Q4 2020 was higher by 1.5% than in Q3 2020 and amounted to 4.5072 versus 4.4425. The average exchange rate in Q4 2020 was by 5.1% higher than in Q4 2019. The EUR/SEK exchange rate at the end of December 2020 was 10.0365 versus 10.5372 at the end of Q3 2020, and 10.4554 at the end of Q4 2019 which was a depreciation of EUR to SEK by 4.8% and 4% respectively. For this pair, the mean exchange rate in Q4 was by 0.9% lower compared to Q3 2020. The mean exchange rate in Q4 2020 was by 3.5% lower than in the corresponding period of 2019. The changes mean an appreciation of SEK vis-a-vis EUR in Q4 2020 which had an unfavourable impact on the Group’s financial results, primarily with reference to the sales revenues generated by the Swedish factories that rely on prices in EUR. At the end of Q4 2020, the USD/PLN rate recorded a decrease by 2.8% versus the end of Q3 2020 and amounted to 3.7584. In Q4 2020, the mean exchange rate amounted to 3.7804 compared to 3.8022 in Q3 2020. That was a PLN appreciation to USD by 0.6%. At the end of Q4 2020, the USD/SEK rate amounted to 8.1740 and was by 9.2% lower than at the end of Q3 2020. The mean exchange rate in Q4 2020 amounted to 8.6165 which was a decrease by 10.4% compared to Q4 2019. The changes of the USD/SEK exchange rates favourably affected the costs incurred in USD by the Swedish Paper Mills, in particular the costs of pulp. For the Paper Mill in Kostrzyn, the changes of monthly average USD/PLN exchange rate also had a beneficial impact on USD-denominated expenses, in particular the cost of pulp. At the end of December 2020, the EUR/USD rate amounted to 1.2279 compared to 1.1710 at the end of Q3 2019 and to 1.1213 at the end of December 2019. In terms of percentage, that means an appreciation of EUR to USD by 4.9% versus Q3 2020 and an appreciation of the currency by 9.5% versus the equivalent period of the previous year. In Q4 2020, the mean exchange rate of the pair amounted to 1.1927 compared to 1.1689 in Q3 2020 (+2%). The appreciation of SEK versus EUR has adversely affected the Group's financial profit, mainly due to decreased sales revenues generated in EUR and translated into SEK. The appreciating PLN versus USD in Q4 2020, positively affected the purchase prices of raw materials for the Paper Mill in Kostrzyn. SEK appreciating vis-a-vis USD positively affected the costs in the Paper Mills in Sweden. Factors influencing the financial results in the perspective of the next year The material factors that have an impact on the financial results over the next quarter, include: — Demand for fine paper in Europe. Over the recent years there has been a major decrease of demand for fine paper in Europe (level of executed orders). Further adverse developments in the market situation may negatively affect the levels of orders placed with the Group’s Paper Mills and, as a result, will have an adverse impact on the financial results of the Group. Price changes of fine paper. In particular, the possibility to raise the prices of Arctic Paper products in local currencies in view of the declining supply/demand in Europe and in the context exchange rates fluctuations, will have a material influence on the financial results. Paper prices are going to be of particular importance for the Paper Mill of Grycksbo which – in connection with the market changes – experiences the greatest adverse impact of drop of sales volumes, prices as well as of exchange rate fluctuations. —Price fluctuations of raw materials, including pulp for Paper Mills and electricity for all operational entities. In particular, financial results of Paper Mills may be negatively influenced by increasing pulp prices, particularly BHKP. On the other hand, decreasing NBSK pulp prices may negatively affect the financial results of Pulp Mills. Fluctuations of electricity prices in Sweden may also have a material impact on the results generated by the Group. In the future, such market changes may translate into changes of sales profitability in Paper Mills of AP Munkedals and AP Grycksbo as well as in Pulp Mills of Rottneros and Vallvik. —Changes in currency rates, in particular, the appreciation of PLN and SEK in relation to EUR and GBP, the appreciation of PLN in relation to SEK, and the depreciation of PLN and SEK in relation to USD, may have an adverse effect on the financial results. However, the Group’s Pulp Mills may benefit from the appreciation of USD in relation to SEK. Risk factors Major changes to risk factors In 2020, there was a new risk factor – the COVID19 coronavirus pandemic This factor will significantly affect the market situation and demand for paper in the second quarter of 2020. The lockdowns introduced in many European countries – the main sales markets of the Group – resulted in limited economic activity and thus a decrease in demand. The group adjusted the work organization to the reduced demand of those implementing scheduled downtimes. The priority was to reduce the risk for employees, therefore a new work organization was implemented in individual organizational units, and some employees worked in a remote system for many weeks and months. The measures taken have brought the expected effect and there have been no reports of numerous cases or factory closures for this reason. Risk factors related to the environment in which the Group operates The sequence in which the risk factors are presented below does not reflect the likelihood of occurrence, extent or materiality of the risks. The risk related to intensifying competition in the paper market in Europe Our Group operates in a very competitive market. The achievement of the strategic objectives assumed by the Group may be made difficult by operations of competitors, particularly integrated paper producers operating on a larger scale than our Group. Any more intensified competition resulting from a potential growth of production capacity of our competitors and thus an increased supply of paper to the market, may adversely affect the achievement of the planned revenues and thus the ability to achieve the underlying financial and operational assumptions. Risk of changing legal regulations Our Group operates in a legal environment characterised with a high level of uncertainty. The regulations affecting our business have been frequently amended and often there are no consistent interpretations which generates a risk of violating the existing regulations and the resultant consequences even if such breach was unintentional. Additionally, amendments to regulations relating to environmental protection and other regulations may generate the need to incur material expenditures to ensure compliance, inter alia, more restrictive regulations or stricter implementation of the existing regulations concerning the protection of surface waters, soil waters, soil and atmospheric air. FX risk Revenues, expenses and results of the Group are exposed to FX risk, in particular relating to exchange rates of PLN and SEK to EUR, GBP and other currencies. Our Group exports a majority of its produced paper to European markets, generating a material part of its sales revenues in EUR, GBP, PLN and SEK. Sales revenues of pulp in the Pulp Mills are subject to USD FX risk. The purchase costs of materials for paper production, in particular pulp for Paper Mills are paid primarily in USD and EUR. Additionally, we hold loan liabilities mainly in PLN, EUR and SEK. PLN is the currency used in our financial statements and therefore our revenues, expenses and results generated by the subsidiary companies domiciled abroad are subject to FX exchange rate fluctuations. Thus FX rate fluctuations may have a strong adverse effect on the results, financial conditions and prospects of the Group. Interest rate risk The Group is exposed to interest rate risk in view of the existing interest-bearing debt. The risk results from fluctuations of such interest rates as WIBOR for debt in PLN, EURIBOR for debt in EUR and STIBOR for debt in SEK. Unfavourable changes of interest rates may adversely affect the results, financial condition and prospects of the Group. Risk related to increasing importance of alternative media Trends in advertising, electronic data transmission and storage and in the Internet have adverse impact on traditional printed media and thus on the products of the Group and its customers. Continuation of such changes may adversely affect the results, financial condition and prospects of the Group. The objectives and methods of financial risk management in the Group along with hedging methods of major transactions are detailed in note 39 to the consolidated financial statements. Risk factors relating to the business of the Group The sequence in which the risk factors are presented below does not reflect the likelihood of occurrence, extent or materiality of the risks. Risk related to relatively low operational margins Historically, the operational results of the Group are characterised by relatively high volatility and low profit margins on operations. Reduced revenues resulting e.g. from changes to production capacity, output, pricing policies or increased operating expenses that primarily comprise costs of raw materials (mainly pulp for Paper Mills) and energy, may mean the Group’s losses in earning capacity. Material adverse changes to profitability may result in reduced prices of our stock and reduced capacity to generate working capital thus adversely affecting our business and deteriorating our prospects. Risk of price changes to raw materials, energy and products We are exposed to the risk of price changes of raw materials and energy, primarily related to price fluctuations of pulp, gas and electricity. Paper Mills buy pulp under frame agreements or in one-off transactions and do not hedge against fluctuations of pulp prices. A part of pulp is supplied to our Paper Mills from the Pulp Mills of the Rottneros Group. The risk of changing prices of raw materials is related primarily to changing prices of paper and pulp in the markets to which we sell our products. A material growth of prices of one or more raw materials and energy may adversely affect the operating results and financial condition of the Group. Risk of disruption to production processes Our Group holds three Paper Mills operating jointly seven production lines with total annual production capacity of over 700,000 tonnes of paper and two Pulp Mills with a total production capacity of 400,000 tonnes of pulp. Long-lasting disruption to the production process may result from a number of factors, including a breakdown, human error, unavailability of raw materials, natural catastrophes and other that are beyond our control. Each such disruption, even relatively short, may have material impact on our production and profitability and result in material costs for repairs, liabilities to buyers whose orders we are not able to satisfy and other expenses. Risk related to our investments Investments by the Group aimed at expanding the production capacity of the Group require material capital outlays and a relatively long time to complete. As a result, the market conditions under which we operate may be materially changed in the period between our decision to incur investment outlays to expand production capacity and the completion time. Changes of market conditions may result in a volatile demand for our products which may be too low in the context of additional production capacities. Differences between demand and investments in new production capacities may result in failure to utilise the expanded production capacity to the full extent. This may have adverse effect on the operating results and financial condition of the Group. Risk factors relating to the debt of the Group Our Group has the largest portion of its debt under a loan agreement with a consortium of banks (European Bank for Reconstruction and Development, Santander Bank S.A. and BNP Paribas S.A. of 9 September 2016, loans from Danske Bank, Nordea Bank , and under lease contracts. Failure by the Group to comply with its obligations, including the agreed levels of financial ratios (covenants) resulting from the agreements, will result in default under those agreements. Events of default may in particular result in demand for repayment of our debt, banks taking control over important assets like Paper Mills or Pulp Mills and loss of other assets which serve as collateral, deterioration of creditworthiness and lost access to external funding which will be converted into lost liquidity and which in turn may materially adversely affect our business and development prospects and our stock prices. Risk related to insurance limits In the context of deteriorating situation in paper industry and the results of the Arctic Paper Group, our suppliers, in particular suppliers of such raw materials as pulp, may have problems with acquiring insurance limits (sale on credit) and thus they may lose the possibility of offering deferred payment terms to the Arctic Paper Group. Such situation may result in deteriorated financial situation and loss of financial liquidity of operating units and as a result this may adversely affect the situation in the entire Group. Risk of restricted supplies of natural gas Polskie Górnictwo Naftowe i Gazownictwo S.A (PGNiG) is the sole supplier of natural gas used by AP Kostrzyn to generate heat and electrical energy for paper production. (PGNiG). In this context, the business and costs of paper production at AP Kostrzyn is materially affected by availability and price of natural gas. Potential disruptions of supplies of natural gas to the Paper Mill in Kostrzyn nad Odrą may have adverse effect on production, results on operations and financial condition of the Group. Risk of loss of tax relieves related to the operation of AP Kostrzyn AP Kostrzyn has been using a major tax relief resulting from its operations in the Kostrzyńsko-Słubicka Specjalna Strefa Ekonomiczna. The relief was granted until 2026 and is subject to compliance by AP Kostrzyn of the applicable laws, regulations and other conditions relating to the relief, including compliance with certain criteria concerning employment and investment outlays. Tax regulations and interpretations thereof are subject to very frequent changes in Poland. Changes to the regulations applicable to the tax relief or breach by AP Kostrzyn of the applicable conditions may result in loss of the relief and have material adverse impact on the results of operations and financial condition of the Group. Risk related to consolidation and liquidity of key customers Consolidation trends among our existing and potential customers may result in a more concentrated customer base covering a few large buyers. Such buyers may rely on their improved bargaining position in negotiating terms of paper purchases or decide to change the supplier and acquire products from our competitors. Additionally, in the context of the deteriorating condition in printing industry, such customers as paper distributors, printing houses or publishers may not be able to obtain insurance limits (sale on credit) or have problems with financial liquidity which may result in their bankruptcy and adversely affect our financial results. The above factors may have adverse impact on the operational results and financial condition of the Group. Risk related to compliance with regulations on environmental protection and adverse impact of the production process on the environment The Group meets the requirements related to environmental protection; however, no certainty exists that it will always be able to comply with its obligations and that in the future it will avoid material expenses or that it will not incur material obligations related to the requirements or that it will be able to obtain all permits, approvals and other consents to carry on its business as planned. Similarly, considering that paper and pulp production is related to potential hazards relating to waste generated in Paper Mills and Pulp Mills and contamination with chemicals, no certainty exists that in the future the Group is not charged with liability for environmental pollution or that no event that may underlie the liability of the Group has not already occurred. Thus the Group may be required to incur major expenses in connection with the need to remove contamination and land reclamation. Risk related to CO2 emissions Our Paper Mills and Pulp Mills are provided with free carbon dioxide emission rights for each period. The emission rights are awarded within the EU Emission Trading Scheme. Should such free carbon dioxide emission rights be cancelled and replaced with a system of paid emission rights, our costs of energy generation will grow accordingly. Additionally, we may be forced to incur other unpredictable expenses in connection with the emission rights or changing legal regulations and the resultant requirements. Due to the above we may be forced to reduce the quantity of generated energy or to increase the production costs which may adversely affect our business, financial condition, operational results or development prospects. Risk related to dividend distribution The Issuer is a holding company and therefore its capacity to pay dividend is subject to the level of potential disbursements from its subsidiary companies involved in operational activity, and the level of cash balances. Certain subsidiaries of the Group involved in operational activity may be subject to certain restrictions concerning disbursements to the Issuer. No certainty exists that such restrictions will have no material impact on the business, results on operations and capacity of the Group to distribute dividend. In connection with the term and revolving loan agreements signed on 9 September 2016, the agreements related to the bond issue pursuant to which on 30 September 2016 the Company issued bonds and the intercreditor agreement (described in more detail in note 32.2 “Obtaining of new financing” in the Annual report for 2016), the possibility of the Company to pay dividend is subject to satisfying certain financial ratios by the Group in two periods preceding such distribution (as the term is defined in the term and revolving loan agreements) and no occurrence of any events of default (as defined in the term and revolving loan agreements). ‎ Supplementary information The Management Board position on the possibility to achieve the projected financial results published earlier The Management Board of Arctic Paper S.A. did not publish projections of financial results for 2020 and has not published and does not intend to publish projections of financial results for 2021. Dividend information The Company’s General Meeting held on 31 August 2020 did not make any decision on dividend disbursement. Changes to the bodies of Arctic Paper S.A. As at 31 December 2020, the Company’s Supervisory Board was composed of: —Per Lundeen – Chairman of the Supervisory Board appointed on 22 September 2016 (appointed to the Supervisory Board on 14 September 2016); —Roger Mattsson – Deputy Chairman of the Supervisory Board appointed on 22 September 2016 (appointed as a Member of the Supervisory Board on 16 September 2014); —Thomas Onstad – Member of the Supervisory Board appointed on 22 October 2008; —Mariusz Grendowicz – Member of the Supervisory Board appointed on 28 June 2012 (independent member); —Dorota Raben – Member of the Supervisory Board appointed on 28 May 2019 (independent member). Until the date hereof, there were no changes to the composition of the Supervisory Board of the Parent Entity. The Management Board of the Parent Entity as at the publication hereof was composed as follows: —Michał Jarczyński – President of the Management Board —Göran Eklund – Member of the Management Board Until the date hereof, there were no changes to the composition of the Management Board of the Parent Entity. Changes to the share capital of Arctic Paper S.A. In 2020, there were no changes to the Company’s share capital. Remuneration paid to Members of the Management Board and the Supervisory Board The table below presents information on the total amount of remuneration and other benefits paid or payable to members of the Management Board and of the Supervisory Board of the Parent Entity in the period from 01 January 2020 to 31 December 2020 (data in PLN). ‎ Managing and supervising persons Remuneration (base salary and overheads) ‎ for the functions performed at Arctic Paper S.A. Retirement plan Other Total Management Board Michał Jarczyński 696 000 - 315 702 1 011 702 Göran Eklund 816 035 333 760 253 700 1 403 495 Supervisory Board Per Lundeen 300 000 - - 300 000 Roger Mattsson 210 000 - - 210 000 Thomas Onstad 150 794 - - 150 794 Mariusz Grendowicz 181 906 - - 181 906 Dorota Raben 155 223 - - 155 223 Agreements with Members of the Management Board guaranteeing financial compensation As at 31 December 2020, and as at the approval date of this annual report, Members of the Management Board are entitled to compensation in case of their resignation or dismissal from their respective positions with no valid reason or when they are dismissed or their employment is terminated as a result of a merger of the Issuer by take-over. The amount of such compensation will correspond to their remuneration for 6 to 24 months. Changes in holdings of the Issuer’s shares or rights to shares by persons managing and supervising Arctic Paper S.A. Managing and supervising persons Number of shares ‎ or rights to shares ‎ as at 16.03.2021 Number of shares ‎ or rights to shares ‎ as at 31.12.2020 Number of shares ‎ or rights to shares ‎ as at 16.11.2020 Change Management Board Michał Jarczyński - - - - Göran Eklund - - - - - - - Supervisory Board - - - Per Lundeen 34 760 34 760 34 760 - Thomas Onstad 6 223 658 6 223 658 6 223 658 - Roger Mattsson - - - - Mariusz Grendowicz - - - - Dorota Raben - - - - Management of financial resources As of the date hereof, the Company held sufficient funds and creditworthiness to ensure financial liquidity of the Group of Arctic Paper. Capital investments In 2020, the companies in the Arctic Paper Group invested its funds solely in standard short-term deposits, including overnight deposits. In 2020, the Group made no financial investments. Information on financial instruments Information regarding financial instruments on: a) risk: price changes, credit risk, significant cash flow disruptions and loss of financial liquidity to which the Group is exposed, and b) the objectives and methods of financial risk management adopted by the entity, including methods of securing significant types of planned transactions for which hedge accounting is applied, are presented in the consolidated financial statements in Notes 35 and 36 Information of sureties, guarantees and pledges As at 31 December 2020, the Capital Group reported: — pledge on properties of Arctic Paper Grycksbo AB resulting from an FPG agreement in favour of the mutual life insurance company PRI for SEK 50,000 thousand; —contingent liability under a guarantee for FPG in favour of the mutual life insurance company PRI for SEK 1,271 thousand at Arctic Paper Grycksbo AB and for SEK 762 thousand at Arctic Paper Munkedals AB; —pledge on properties of Arctic Paper Munkedals AB resulting from an FPG contract in favour of the mutual life insurance company PRI for SEK 50,000 thousand; —a bank guarantee in favour of Skatteverket Ludvika for SEK 135 thousand; —a contingent liability of Arctic Paper Munkedals AB related to a surety for the obligations of Kalltorp Kraft HB in the amount of SEK 402 thousand; —pledge on properties held by Arctic Paper Munkedals Kraft AB as required by loan agreements with Nordea Bank for SEK 80,000 thousand (related to the investment in the hydro power plant); —pledges on shares in subsidiaries in the Rottneros Group for SEK 284,730 thousand; under loan agreements concluded with Danske Bank; —margin on hedging transactions in the bank account of Rottneros with SEB for SEK 53,600 thousand. In connection with the term and revolving loan agreements, agreements relating to the bond issue and the intercreditor agreement (described in more detail in the note “Obtaining new financing”) signed on 9 September 2016, on 3 October 2016 the Company signed agreements and statements pursuant to which collateral to the above debt and other claims would be established in favour of Bank BNP Paribas S.A., acting as the Collateral Agent, that is 1. under Polish law – Collateral Documents establishing the following Collateral: ›financial and registered pledges on all shares and interests registered in Poland, owned by the Company and the Guarantors, in companies in the Company Group (with the exception of Rottneros AB, Arctic Paper Mochenwangen GmbH and Arctic Paper Investment GmbH), except the shares in the Company; ›mortgages on all properties located in Poland and owned by the Company and the Guarantors; ›registered pledges on all material rights and movable assets owned by the Company and the Guarantors, constituting an organised part of enterprise, located in Poland (with the exception of the assets listed in the Loan Agreement); ›assignment of (existing and future) insurance policies covering the assets of the Company and the Guarantors (with the exception of insurance policies listed in the Loan Agreement); ›declaration by the Company and the Guarantors on voluntary submission to enforcement, in the form of a notary deed; ›financial pledges and registered pledges on the bank accounts of the Company and the Guarantors, registered in Poland; ›powers of attorney to Polish bank accounts of the Company and the Guarantors, registered in Poland; ›subordination of the debt held by intragroup lenders (specified in the Intercreditor Agreement). 2. under Swedish law – Collateral Documents establishing the following Collateral: ›pledges on all shares and interests registered in Poland, owned by the Company and the Guarantors, in Group companies, with the exception of the shares in the Company, as well as pledged on the shares in Rottneros (with the exception of the free package of shares in Rottneros); ›mortgages on all properties located in Sweden and owned by the Company and the Guarantors as long as such collateral covers solely the existing mortgage deeds; ›corporate mortgage loans granted by the Guarantors registered in Sweden as long as such collateral covers solely the existing mortgage deeds; ›assignment of (existing and future) insurance policies covering the assets of the Company and the Guarantors (with the exception of insurance policies listed in the Loan Agreement); ›pledges on Swedish bank accounts of the Company and the Guarantors as long as such collateral is without prejudice to free management of funds deposited on bank accounts until an event of default specified in the Loan Agreement. Material off-balance sheet items The information regarding off-balance sheet items is disclosed in note 36 to the consolidated financial statements. Assessment of the feasibility of investment plans In view of the improved financial results and subject to accomplishment of the current financial objectives, the Company plans to carry out the investments in line with its financial plan. The core objective of the investments is to develop new products, minimise production costs, including the costs of electricity, and to improve the effectiveness of the production process. The Group intends to finance its investment plan for 2021 with its own funds and external funding sources. Information on court and arbitration proceedings and proceedings pending before public administrative authorities During the period under report, Arctic Paper S.A. and its subsidiaries were not a party to any proceedings pending before a court, arbitration or public administrative authority, the individual or joint value of which would equal or exceed 10% of a given entity’s equity. Information on transactions with related parties executed on non-market terms and conditions During the period under report, Arctic Paper S.A. and its subsidiaries did not execute any material transactions with related entities on non-market terms and conditions. Information on agreements resulting in changes to the proportions of share holdings Otherwise than stated herein, the Issuer is not aware of any agreements that may in the future generate changes to the proportions of shareholdings by the existing shareholders and bond holders. Information on purchase of treasury shares In 2020 and in 2019 the Parent Entity did not buy any treasury shares. Information on remuneration of the entity authorised to audit the financial statements On 20 January 2021, Arctic Paper S.A. entered into a contract with KPMG Audyt Spółka z ograniczoną odpowiedzialnością sp.k. for audit of the Company’s financial statements and consolidated financial statements of the Group for the year ended on 31 December 2020 and ending on 31 December 2021. The contract was concluded for the time required to perform the above services. Other information on the entity authorised to audit the financial statements is provided in note 38 to the standalone financial statements. Headcount Information on the headcount is provided in note 42 to the consolidated financial statements. Report on non-financial information Apart from this report, the Group publishes a separate report on non-financial information for the Arctic Paper Capital Group.. ‎ Statement on the application of the Corporate Governance Rules Corporate Governance Rules On 1 January 2016, the new set of corporate governance rules became effective under the name of “Best Practice of GPW Listed Companies 2016”, attached to Resolution No. 26/1413/2015 of the Supervisory Board of the Warsaw Stock Exchange of 13 October 2015. The text of the “Best Practice of GPW Listed Companies 2016” is available at: https://www.gpw.pl/pub/GPW/files/PDF/GPW_1015_17_DOBRE_PRAKTYKI_v2.pdf Pursuant to Article 29.3 of the Warsaw Stock Exchange Rules, the Management Board of ARCTIC PAPER S.A. on 19 January 2021 published an EBI report concerning the exclusion of certain rules of the Best Practice. Information on the extent the Issuer waived the provisions of the Corporate Governance Rules Arctic Paper S.A. was striving at applying corporate governance rules as set forth in the document “Best Practice of GPW Listed Companies”. In 2020, Arctic Paper S.A. did not apply the following rules: Best practice – Information Policy, Communication with Investors Recommendation I.R.2 “Where a company pursues sponsorship, charity or other similar activities, it should publish information about the relevant policy in its annual report from operations.” Explanation: The Company is not involved in any sponsorship, charity or similar activities. Principle No. 1.Z.1.10 “A company operates a corporate website and publishes on it, in a legible form and in a separate section, in addition to information required under the legislation: financial projections, if the Company has decided to publish them – published at least in the last 5 years, including information about the degree of their implementation” Explanation: According to a decision by the Management Board, the Company does not publish projections. Principle No. I.Z.1.15: “A company operates a corporate website and publishes on it, in a legible form and in a separate section, in addition to information required under the legislation: information about the Company’s diversity policy applicable to the company’s governing bodies and key managers; the description should cover the following elements of the diversity policy as: gender, education, age, professional experience, and specify the goals of the diversity policy and its implementation in the reporting period; where the Company has not drafted and implemented a diversity policy, it should publish the explanation of its decision on its website” Explanation: The Company has not drafted a diversity policy; however, the Issuer’s Management Board has been striving to employ competent, creative people, holding appropriate qualifications, professional experience and education, compliant with the Company’s needs. Principle No. 1.Z.1.16 “A company operates a corporate website and publishes on it, in a legible form and in a separate section, in addition to information required under the legislation: information about the planned transmission of a general meeting, not later than 7 days before the date of the general meeting”. Explanation: The Company does not plan to broadcast its General Meetings. Principle I.Z.1.20 ‎ “A company should operate a corporate website and publish on it, in a legible form and in a separate section, in addition to information required under the applicable laws: a recorded transmission of a general meeting, in audio or video form”. Explanation: Publication of the entire recording from a general meeting, in audio or video form, might infringe interests of shareholders. Information on the approved resolutions is published by the Company in the form of current reports. When this solution becomes more popular in the market, the Company will consider implementing it. Best practice – Systems and internal functions Recommendation III.R.1 “The company’s structure includes separate units responsible for the performance of tasks in individual systems or functions, unless the separation of such units is not justified by the size or type of the Company’s activity”. Explanation: The recommendation is not followed due to the size of the Company. The Management Board is responsible for controlling the Company’s operations, including controlling its internal operational processes along with risk management processes. Principle No. III.Z.2 “Subject to Principle No. III.Z.3, persons responsible for risk management, internal audit and compliance report directly to the president or other member of the management board and are allowed to report directly to the supervisory board or the audit committee”. Explanation: The Company has not established dedicated units to be involved in risk management, internal audit and compliance. However, the Company states that managers of each division of the Company report directly to the relevant members of the Management Board. The external entities that provide consultancy services, including legal consulting and performing audits, have regular and direct contact with the Company’s Management Board. Principle No. III.Z.3. “The independence rules defined in generally accepted international standards of the professional internal audit practice apply to the person heading the internal audit function and other persons responsible for such tasks”. Explanation: The Company has no dedicated internal audit unit and there is no identified position of a person heading the function. An audit committee operates within the Supervisory Board. Minimum two members of the Supervisory Board meet the independence criteria as specified in the Company’s Articles of Association and in the Regulations of the Supervisory Board. Additionally, persons performing audits and statutory auditors are independent of the Company. Principle No. III.Z.4. “The person responsible for internal audit (if the function is separated in the Company) and the management board report to the supervisory board at least once per year with their assessment of the efficiency of the systems and functions referred to in Principle No. III.Z.1 and submit a relevant report”. Explanation: An Audit Committee operates within the Supervisory Board. Members of the Supervisory Board are elected by the General Meeting. Best practice – General Meeting and Relations with Shareholders Recommendation IV.R.2 “If justified by the structure of shareholders or expectations of shareholders notified to the Company, and if the Company is in a position to provide the technical infrastructure necessary for a general meeting to proceed efficiently using electronic communication means, the Company should enable its shareholders to participate in a general meeting using such means, in particular through: 1) real-life broadcast of the general meeting, 2) two-way communication in real time, under which the shareholders may speak at the General Meeting of Shareholders, while not present at the place where the General Meeting of Shareholders is held, 3) exercise, either in person or through a proxy, the right to vote at the General Shareholders Meeting”. Explanation: Considering the need of multiple technical and organisational operations and the related costs and risks, the Company has not decided for the time being to hold electronic general meetings. With a gradual popularisation of the technical solution and ensuring appropriate security, the Company will re-consider implementing the recommendation. Principle No. IV.Z.2. “If there is justification due to the shareholding structure, the company ensures the public broadcast of the General Shareholders Meeting in real time”. Explanation: Considering the need to carry out a number of technical and organisational activities, and the related costs and risks, the Company has decided not to organise electronic general meetings. With a gradual popularisation of the technical solution and ensuring appropriate security, the Company will re-consider implementing the recommendation. Best practice – Remuneration Principle No. VI.Z.2 To tie the remuneration of members of the management board and key managers to the Company’s long-term business and financial goals, the period between the allocation of options or other instruments linked to the Company’s shares under the incentive scheme and their exercisability should be no less than two years. Explanation: Variable Remuneration for the Members of the Management Board may be determined under the Annual Incentive Programme. . A decision on inclusion of a Member of the Management Board in the Annual Incentive Programme shall be taken by the Supervisory Board by way of resolution. Principle No. VI.Z.4. In this report from operations, the Company should report on the remuneration policy including at least the following: —general information on remuneration system adopted by the Company, —information on conditions and amount of remuneration granted to each member of the Management Board, split into fixed and variable components, specifying key parameters used to determine variable components of remuneration and rules for the payment of retirement allowance and other payments related to termination of the employment contract, commission or other legal relationship of similar nature – separately for the Company and each entity belonging to the Capital Group, —information about non-financial remuneration components due to each management board member and key manager, —material amendments of the remuneration policy in the last financial year or information about their absence, —assessment of the functioning of the remuneration policy from the viewpoint of implementation of its objectives, in particular long-term growth of value for shareholders and sustainability of the Company. Explanation: The Supervisory Board prepares an annual remuneration report presenting a comprehensive review of remuneration, including all benefits, regardless of their form, received by individual Members of the Management Board and Supervisory Board or due to individual members of the Management Board and Supervisory Board in the last financial year, in accordance with the Remuneration Policy. Internal control and risk management systems with reference to the development processes of financial statements The Management Board of Arctic Paper S.A. is responsible for the internal control system in the Company and in the Group and for its efficiency in the development process of consolidated financial statements and interim reports, prepared and published in compliance with the rules of the Regulation of the Minister of Finance on current and periodical disclosure by issuers of securities and conditions to recognise as equivalent the information that is required by the law in Non-Member States of 29 March 2018. The Company’s financial division headed by the Chief Financial Officer is responsible for the preparation of the Group’s consolidated financial statements and interim reports. The Company prepares its financial statements and periodic reports on the basis of the procedures of making and publishing periodic reports and consolidated reports, in force at Arctic Paper S.A. The financial data underlying the Group’s consolidated financial statements comes from monthly reporting packages and extended quarterly packages sent to the Issuer by Group member companies. After closing of the books for each calendar month, top management of the Group member companies analyse the financial results of the companies versus their budgets and the results generated in the previous reporting period. The Group performs an annual review of its strategy and development prospects. The budgeting process is supported by medium- and top-level management of the Group member companies. The budget drafted for the next year is accepted by the Company’s Management Board and approved by the Supervisory Board. During the year, the Company’s Management Board compares the generated financial results to the adopted budget. The Company’s Management Board systematically assesses the quality of internal control and risk management systems with reference to the preparation process of consolidated financial statements. On the basis of such review, the Company’s Management Board found that as at 31 December 2020 there were no weaknesses that could materially affect the effectiveness of internal control with respect to financial reporting. Shareholders that directly or indirectly hold major packages of shares Information on the shareholders that directly or indirectly hold large packages of shares is presented in the table below – the table presents the situation as of the publication date of the annual report. ‎ as at 16.03.2021 Shareholder Number of shares Share in the share capital Number of votes Share in the total number of votes [%] [%] Thomas Onstad 47 205 107 68,13% 47 205 107 68,13% - indirectly via 40 981 449 59,15% 40 981 449 59,36% Nemus Holding AB 40 381 449 58,28% 40 381 449 58,28% other entity 600 000 0,87% 600 000 0,87% - directly 6 223 658 8,98% 6 223 658 8,98% Other 22 082 676 31,87% 22 082 676 31,87% Total 69 287 783 0,00% 69 287 783 31,87% Treasury shares - 0,00% - 0,00% Total 69 287 783 0,00% 69 287 783 31,87% Securities with special control rights There are no securities in the Company with special control rights – in particular, no shares in the Company are privileged. Information on major restrictions on transfer of title to the Issuer’s securities and all restrictions concerning the exercising of voting rights The Company’s Articles of Association do not provide for any restrictions concerning transfer of title to the Issuer’s securities. Such restrictions are specified in law, including in Chapter 4 of the Act on Public Offering and on Conditions Governing the Introduction of Financial Instruments to Organised Trading and on Public Companies of 29 July 2005, Article 11 and Article 19 and Section VI of the Act on Trading in Financial Instruments of 29 July 2005, the Act on Competition and Consumer Protection of 16 February 2007 and the Council Regulation (EC) No. 139/2004 on the control of concentrations between undertakings of 20 January 2004. Additional restrictions related to purchases and sales of the Issuer’s securities by persons in managerial functions and their closely related persons are set forth in Regulation (EU) No. 596/2014 of the European Parliament and of the Council on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC (“MAR”). Each share in Arctic Paper S.A. authorises to one vote at General Meetings. The Company’s Articles of Association provide for no restrictions as to the exercising of voting rights of shares in Arctic Paper S.A., such as any restrictions on voting rights, such as limitations of the voting rights of holders of a given percentage or number of votes, deadlines for exercising voting rights, or systems whereby, with the Company’s cooperation, the financial rights attaching to securities are separated from the holding of securities. A ban on voting rights by shareholders may result from Article 89 of the Act of on Offering and Marketing of Financial Instruments to Organised Trading Systems and on Public Companies of 29 July 2005 if such shareholder breaches the regulations provided in Chapter 4 of the Act on Offering. According to Article 6 § 1 of the Code of Commercial Companies, if the Parent Entity fails to notify its capital subsidiary company of the occurrence of a domination relationship within two weeks of the occurrence thereof, the voting rights will be suspended with respect to the shares held by the Parent Entity representing more than 33% of the subsidiary’s share capital. ‎ Description of the principles of amending the Issuer’s Articles of Association Changes to the Company’s Articles of Association fall within the sole competences of the General Meeting. Unless the Code of Commercial Companies or the Articles of Association of the Company provide otherwise, resolutions of the General Meeting require an absolute majority of votes; Description of the functioning of the General Meeting The rules of procedure of the General Meeting and its core competences result straight from applicable laws and are partly incorporated in the Company’s Articles of Association. The Company’s Articles of Association are available at: https://www.arcticpaper.com/Global/IR%20Documents/Cororate%20Documents/Arctic_Paper_Statut_tekst_jednolity_aktualny_2019_PL.pdf General Meetings are held in accordance with the following basic rules: —General Meetings are held in the Company’s offices or in Warsaw; —General Meetings may be ordinary or extraordinary; —Ordinary General Meetings shall be held within six months after the end of the financial year; —General Meetings are opened by the Chairperson of the Supervisory Board or a person designated by him/her which is followed by election of the Chairperson of the General Meeting; —Voting shall be open unless a Shareholder demands a secret ballot or a secret ballot is required by the provisions of the Code of Commercial Companies; —Unless the Code of Commercial Companies or the Articles of Association of the Company provide otherwise, resolutions of the General Meeting require an absolute majority of votes; —In compliance with the Company’s Articles of Association, the following matters fall within the exclusive competences of the General Meeting: ›review and approval of the Management Board’s report from operations of the Company and financial statements of the Company for the previous financial year; ›granting a vote of approval to members of the Management Board and members of the Supervisory Board for the performance of their duties; ›decisions concerning distribution of profit or coverage of losses; ›changes to the business objects of the Company; ›changes to the Articles of Association of the Company; ›increase or decrease in the Company’s share capital; ›merger of the Company with another company or other companies, split of the Company or transformation of the Company; ›dissolution and liquidation of the Company; ›issues of convertible bonds or pre-emption bonds and issues of subscription warrants; ›purchase and sale of properties; ›sale and lease of the entire enterprise or an organised part thereof or establishment of limited rights in rem thereon; ›all other issues for which these Articles of Association or the Code of Commercial Companies require a resolution of the General Meeting. General Meetings may approve resolutions in the attendance of minimum one half of the Company’s share capital. General Meetings approve resolutions with an absolute majority of votes unless the Articles of Association or applicable regulations require a qualified majority. The shareholders’ rights and the way to enforce them result explicitly from law that has been partly incorporated in the Company’s Articles of Association. Operation of the Issuer’s managing and supervising bodies and its committees as well as information on the composition of those bodies Management Board Composition of the Management Board —The Management Board is composed of one to five members, including President of the Management Board; —The Management Board is appointed and dismissed by the Supervisory Board for a joint term of office; —The term of office of members of the Management Board is 3 (three) years; —When the Management Board is composed of more than one person, the Supervisory Board – upon a proposal by the President – may appoint up to three Deputy Presidents from among members of the Management Board. Deputy Presidents may be dismissed subject to a resolution of the Supervisory Board; —A member of the Management Board may be dismissed by the Supervisory Board at any time; —A member of the Management Board may be dismissed or suspended in their duties at any time by the General Meeting. Core competences of the Management Board —The Management Board directs the affairs of the Company and represents the Company; —If the Management Board is composed of more than one person, declarations of intent on the Company’s behalf shall be made by the President of the Management Board individually or two Members of the Management Board acting jointly or a Member of the Management Board acting jointly with a Proxy; —The Management Board is obliged to exercise their duties with due diligence and comply with law, the Company’s Articles of Association, approved regulations and resolutions of the Company’s bodies; decisions shall be taken in line with reasonable economic risk with a view to the interests of the Company and its shareholders; —The Management Board is obliged to manage the assets and business of the Company and perform its duties subject to due diligence required in business operations and subject to strict compliance with applicable laws, provisions of the Articles of Association and internal regulations as well as resolutions approved by the General Meeting and the Supervisory Board; —The Company’s Management Board shall not be entitled to take decisions on share issues and redemption. —Each member of the Management Board shall be liable for any damage inflicted upon the Company as a result of their actions or omissions breaching the provisions of law or the Company’s Articles of Association; —The responsibilities of the Management Board include – in compliance with the Code of Commercial Companies – all affairs of the Company not reserved to the General Meeting of the Supervisory Board; —Guided with the interests of the Company, the Management Board defines the strategy and core objectives of the Company’s business; —The Management Board shall comply with the regulations relating to confidential information within the meaning of the Act on Trading and to comply with all the duties resulting therefrom. Otherwise, the individual members of the Management Board shall be responsible for their running of the affairs of the Company as resulting from the internal delegation of duties and functions approved by a decision of the Management Board. The Management Board may approve resolutions at meetings or outside meetings in writing or with the use of direct means of remote telecommunications. The Management Board approves resolutions with a majority of votes cast. Resolutions shall be valid if minimum one half of members of the Management Board are present at the meeting. In case of equal number of votes, the President of the Management Board shall have the casting vote. The detailed mode of operation of the Management Board is set forth in the Regulations of the Management Board with its updated version available at: http://www.arcticpaper.com/Global/IR%20Documents/Cororate%20Documents/Regulamin%20Zarzadu%20AP%20SA.pdf The Management Board of the Company as at the publication hereof was composed as follows: —Michał Jarczyński – President of the Management Board appointed on 1 February 2019; —Göran Eklund – Member of the Management Board appointed on 30 August 2017. Supervisory Board Composition and organisation of the Supervisory Board —The Supervisory Board is composed of 5 (five) to 7 (seven) members elected by the General Meeting for a joint three-year term of office. A member of the Supervisory Board may be dismissed at any time; —The Supervisory Board is composed of the Chairperson, Deputy Chairpersons and other members. The Chairperson of the Supervisory Board and Deputy Chairperson are elected by the Supervisory Board from among its members at the first meeting and – if so required – during the term of office in by-elections; —Since the General Meeting approved resolutions on the first public issue of shares and having them listed, two members of the Supervisory Board have to be independent; —When an independent member of the Supervisory Board is nominated, resolutions on the following matters require consent of minimum one independent member of the Supervisory Board: ›any benefits to be provided by the Company and any entity related to the Company for members of the Management Board; ›consent to the Company or its subsidiary entity to enter into a material agreement with a member of the Supervisory Board or the Management Board and with their related entities, other than agreements concluded in the normal course of the Company’s business subject to normal terms and conditions applied by the Company; ›election of auditor to perform audits of the Company’s financial statements; —For the avoidance of doubt, it is assumed that loss of the independent status by a member of the Supervisory Board and failure to appoint an independent member of the Supervisory Board shall not invalidate the decisions approved by the Supervisory Board. Loss by an Independent Member of their independent status during the performance of their function of a member of the Supervisory Board shall not affect the validity or expiry of their mandate; —In case of expiry of the mandate of a Member of the Supervisory Board before the term of office, the other Members of the Supervisory Board shall be entitled to co-opt a new Member of the Supervisory Board is such vacated position by way of a resolution approved with an absolute majority of the other Members of the Supervisory Board. The mandate of such co-opted Member of the Supervisory Board shall expire if the first Ordinary General Meeting to be held after such Member has been co-opted, fails to approve such Member. At any time, only two persons elected as Members of the Supervisory Board in the co-option procedure and who were not approved as candidates by the Ordinary General Meeting, may act as Members of the Supervisory Board. Expiry of the mandate of a co-opted Member of the Supervisory Board as a result of failure to approve such candidate by the Ordinary General Meeting may not be treated as finding any resolution approved with the participation of such Member as invalid or ineffective. —Chairperson and Deputy Chairperson of the Supervisory Board: ›maintain contact with the Company’s Management Board; ›manage the operations of the Supervisory Board; ›represent the Supervisory Board in external contacts and in contacts with the other bodies of the Company, including in contacts with members of the Company’s Management Board; ›approve the presentation of initiatives and proposals submitted for meetings of the Supervisory Board; ›take other actions as specified in the Company’s Regulations and Articles of Association; ›Members of the Supervisory Board should not resign from their function during the term of office if that could prevent the operation of the Supervisory Board, in particular prevent timely approval of major resolutions; ›Members of the Supervisory Board shall be loyal to the Company. Should a conflict of interests arise, members of the Supervisory Board shall report it to other members of the Supervisory Board and refrain from participating in discussions and from voting on the issue to which the conflict of interests is related; ›Members of the Supervisory Board shall comply with law, the Company’s Articles of Association and Regulations of the Supervisory Board. Competences of the Supervisory Board —The Supervisory Board performs overall supervision over the business of the Company in all areas of its operation; —The Supervisory Board approves resolutions, issues recommendations and opinions and submits proposals to the General Meeting; —The Supervisory Board may not issue binding instructions to the Management Board concerning the management of the Company’s affairs; —Disputes between the Supervisory Board and the Management Board shall be resolved by the General Meeting; —In order to exercise their rights, the Supervisory Board may review the business of the Company in any respect, request the presentation of any documents, reports and clarification from the Management Board and issue opinions on issues related to the Company and submit proposals and initiatives to the Management Board; —Apart from other issues specified in law or in the Company’s Articles of Association, the competences of the Supervisory Board include, inter alia: ›review of the financial statements of the Company; ›review of the Management Board’s report from operations of the Company and proposals of the Management Board concerning profit distribution and coverage of losses; ›submission to the General Meeting of an annual report from results of the above reviews; ›appointment and dismissal of members of the Management Board, including the President and Deputy Presidents, and setting the remuneration of members of the Management Board; ›appointment of the auditor of the Company; ›suspension of Members of the Management Board in their functions for valid reasons; ›approval of annual financial plans for the capital group of which the Company and its subsidiary companies are members; ›approving terms and conditions of bond issues by the Company (other than convertible bonds or bonds with priority rights, referred to in Article 393.5 of the Code of Commercial Companies) and issues of other debt securities, provision of consent to contract financial liabilities or taking actions resulting in contracting any financial liabilities, such as borrowings, loans, overdraft facilities, conclusion of factoring, forfaiting, lease contracts and other generating liabilities in excess of PLN 10,000,000; ›approving the principles and amounts of remuneration of members of the Management Board and other persons in key management functions in the Company as well as approval of any incentive programme, including incentive programmes for members of the Management Board, persons in key management functions in the Company or any persons cooperating with or related to the Company, including incentive programmes for employees of the Company; —Annually the Supervisory Board submits to the General Meeting a brief assessment of the Company’s condition ensuring that it is made available to all shareholders at a time that they are able to review it before the Ordinary General Meeting; —The Supervisory Board concludes contracts with members of the Management Board on behalf of the Company and represents the Company in disputes with members of the Management Board. The Supervisory Board may authorise by way of a resolution one or more of its members to perform such legal actions. The Supervisory Board may approve resolutions in writing or with the use of direct means of remote telecommunications. Resolutions approved as specified above shall be valid if all members of the Supervisory Board were notified of the content of the draft resolution. The approval date of the resolution approved as above shall be equivalent to the date of signing by the last member of the Supervisory Board; Resolutions of the Supervisory Board may be approved when all members have been notified by registered letter, fax or e-mail message, sent minimum 15 days in advance and the meeting is attended by a majority of members of the Supervisory Board. Resolutions may be approved without formal convening a meeting when all members of the Supervisory Board agreed to vote on the specific issue or to the content of the resolution to be approved; Resolutions of the Supervisory Board require a simple majority of votes; in case of equal votes, the Chairperson of the Supervisory Board shall have the casting vote. The detailed mode of operation of the Supervisory Board is set forth in the Regulations of the Supervisory Board with its updated version available at: http://www.arcticpaper.com/Global/IR%20Documents/Dokumenty%20korporacyjne/1_11_2016_appendix%20PL_AP%20SA%20-%20Regulamin%20Rady%20Nadzorczej_fin.pdf The Supervisory Board of the Company as at the publication hereof was composed as follows: —Per Lundeen – Chairman of the Supervisory Board appointed on 14 September 2016; —Roger Mattsson – Deputy Chairman of the Supervisory Board appointed on 16 September 2014; —Thomas Onstad – Member of the Supervisory Board appointed on 22 October 2008; —Mariusz Grendowicz – Member of the Supervisory Board appointed on 28 June 2012 (independent member); —Dorota Raben – Member of the Supervisory Board appointed on 28 May 2019 (independent member). In 2020, the Supervisory Board held meetings on: 20 February, 2 April, 16 April, 30 April, 14 May, 28 May, 17 June, 18 August, 10 November, 17 December 2020. Audit Committee Composition and organisation of the Audit Committee —The Audit Committee is composed of minimum three members of the Supervisory Board, including the Chairperson of the Committee, elected by the Supervisory Board from among its members in compliance with the Articles of Association and Regulations of the Supervisory Board. Minimum one member of the Audit Committee shall hold qualifications and experience in the sphere of accounting and finances; —Members of the Audit Committee shall be appointed for three-year terms of office, however no longer than the term of office of the Supervisory Board; —The Chairperson of the Audit Committee, elected with a majority of votes from among its members, shall be an independent member; —The Audit Committee operates on the basis of the Act on Statutory Auditors, Best Practice of GPW Listed Companies, Regulations of the Supervisory Board and the Regulations of the Audit Committee; —The Audit Committee performs advisory and consulting functions, operates as a collective body within the Company’s Supervisory Board; —The Audit Committee carries out its tasks by providing the Supervisory Board with its proposals, opinions and reports on its scope in the form of resolutions; —At least one member of the audit committee shall have knowledge and skills in terms of accounting or auditing financial statements. The Supervisory Board is of the opinion that the requirement of competences in the sphere accounting and financial audit is recognised as satisfied if a member of the Audit Committee has a major experience in financial management in commercial partnerships, internal audit or audit of financial statements, and additionally: ›has the title of a certified auditor or equivalent international certificate, or ›has an academic degree in the field of accounting or financial audit, or ›has long-term experience as a financial director in public companies or in working in an audit committee of such companies; —Members of the Audit Committee shall have knowledge and skills relating to the industry in which the Issuer operates. This condition is recognised as satisfied if at least one member of the Audit Committee has knowledge and skills relating to that industry or individual members within specific scopes have knowledge and skills relating to the scope of that industry. The Supervisory Board is of the opinion that the requirement of competences relating to the industry is recognised as satisfied if a member of the Audit Committee has information on the characteristics of the sector, that allows him to obtain a complete picture of the sector’s complexity or has knowledge on part of the chain of activities carried out by the Company. Competences of the audit committee —The basic task of the Audit Committee is advisory to the Supervisory Board on issues of proper implementation and control of the financial reporting processes in the Company, effectiveness of the internal control and risk management systems and cooperation with statutory auditors; —The tasks of the Audit Committee resulting from supervising the Company’s financial reporting process, ensuring the effectiveness of the Company’s internal control systems and monitoring of internal audit operations, include in particular: ›control if the financial information provided by the Company is correct, including the accuracy and consistency of the accounting principles applied in the Company and its Capital Group as well as the consolidation principles of financial statements; ›assessment minimum once a year of the internal control and management systems in the Company and its Capital Group in order to ensure adequate recognition and management of the Company; ›ensuring the effective functioning of internal control, in particular by providing recommendations to the Supervisory Board with respect to: ›strategic and operational internal audit plans and material changes to such plans; ›internal audit policies, strategy and procedures, developed in compliance with the approved internal audit standards; ›audits of specific areas of the Company’s operations; —The tasks of the Audit Committee resulting from monitoring the independence of the statutory auditor and the entity authorised to audit financial statements, include in particular: ›issue of recommendations to the Supervisory Board relating to the election, appointment and re-appointment and dismissal of the entity acting as the statutory auditor; ›control of independence and impartiality of the statutory auditor, in particular with a view to replacing the statutory auditor, the level of its remuneration and other relationships with the Company; ›verification of the effectiveness of the works performed by the statutory auditor; ›review of reasons of resignation by the statutory auditor; —The Audit Committee may resort to advisory services and assistance by external legal, accounting or other advisers if it finds it necessary to perform its duties; —The Audit Committee is obliged to file annual reports from its operations to the Supervisory Board by 30 September in each calendar year. Meetings of the Audit Committee shall be held minimum twice a year. In 2020, the Audit Committee held 2 meetings on: 19 March and 22 October. As at 19 July 2019, the Audit Committee was composed of: —Mariusz Grendowicz – a member meeting the independence criteria. Mr Mariusz Grendowicz being a member of the Supervisory Board for over five years, including being a member of the Audit Committee, has experience and qualifications relating to the scope of the industry in which the Company operates. —Roger Mattsson – due to his long-term experience as the financial controller at the Arctic Paper Group and over three years in the Audit Committee, Mr Roger Mattsson meets the requirement of knowledge and know-how of the Company’s business as required of members of the Audit Committee. Additionally, he has knowledge and skills in the sphere of accounting or auditing financial statements; —Dorota Raben – a member meeting the independence criteria. The detailed mode of operation of the Audit Committee is set forth in the Regulations of the Audit Committee. Core assumptions underlying the policy of selecting an audit firm to conduct audits —According to the regulations applicable to the Company, the Company’s Supervisory Board shall select – by way of a resolution and acting under a recommendation of the Audit Committee – the auditor authorised to carry out the audit; —The selection is made taking into account the principles of impartiality and independence of the audit firm and the analysis of the audit firm’s work carried out in the Company which falls beyond the scope of the audit of financial statements, in order to avoid any conflict of interest (observance of impartiality and independence). —A request for proposals concerning the selection of an audit firm for statutory audit of the Company’s financial statements is developed by the Audit Committee in cooperation with the Company’s Chief Financial Officer; —After analysing the submitted offers, the Audit Committee shall develop a recommendation with conclusions from the selection procedure to be approved by the Audit Committee and shall submit a recommendation on the selection of the audit firm to the Supervisory Board within such time that will support a resolution on audit firm selection; —The Supervisory Board shall select the audit firm on the basis of the submitted offers and after becoming acquainted with the Audit Committee’s opinion and recommendation; —If the Supervisory Board’s decision differs from the recommendation of the Audit Committee, the Supervisory Board shall justify the reasons for its failure to comply with the Audit Committee’s recommendation and shall submit such justification to the body approving the financial statements. —The Company’s Management Board shall enter into a contract with the selected audit firm for the audit of financial statements of the Company. —The first contract is concluded for minimum 2 years and it may be extended for another two or three years. The duration of the cooperation shall be counted from the first financial year covered by the audit contract, in which the authorised auditor was appointed for the first time to carry out the consecutive statutory audits of the Company. —After expiry of the maximum period of the cooperation, the authorised auditor or, where applicable, any member of its network, may not undertake a statutory audit of the Company’s financial statements for further 4 years. —The key statutory auditor may not perform a statutory audit in the Company for a period longer than 5 years. The key statutory auditor may conduct a statutory audit again after the expiry of 3 years. —The maximum period of uninterrupted performance of statutory audits by the same audit firm or an audit firm related to that audit firm or any member of the network operating in the European Union of which the audit firms are members, may not exceed 5 years. Core assumptions underlying the policy of the provision of permitted services other than audit services by the audit firm performing the audit, by entities related to the audit firm and by a member of the audit firm’s network; —The Audit Committee of Arctic Paper S.A. shall be responsible for the policy covering the provision of permitted services other than audit services by the audit firm performing the audit, by entities related to the audit firm and by a member of the audit firm’s network; —The Audit Committee of Arctic Paper S.A. controls and monitors the independence of the auditor and the audit firm, in particular if the audit firm provides other services than audit of statutory financial statements to Arctic Paper S.A.; —The Audit Committee of Arctic Paper S.A., when so requested by a competent body or person, approves the provision of permitted services by the auditor that are not an audit of Arctic Paper S.A. —The prohibited services do not include: ›carrying out due diligence procedures for economic and financial condition, ›issue of letters of support, ›attestation services related to pro forma financial information, forecast of results, or estimation of results, contained in the issue prospectus of the audited entity; ›review of historic financial information for projects referred to in the Commission Regulation (EC) No 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisement; ›verifying consolidation packages; ›confirming the fulfilment of terms and conditions of concluded loan agreements on the basis of the analysis of financial information from the financial statements audited by the audit firm; ›attestation services related to reporting on corporate governance, risk management, and corporate social responsibility; ›services consisting in assessing the conformity of information disclosed by financial institutions and investment firms with requirements for disclosure of information on capital adequacy and variable remuneration components; ›certifying financial statements or other financial information intended for supervisory authorities, supervisory board or other supervisory body of the Company or owners, which falls beyond the scope of statutory audit and helps these bodies to fulfil their statutory obligations. —Provision of the above services is possible solely to the extent not related to the entity’s tax policies after a review by the Audit Committee of hazards and mitigants of the audit firm’s independence as referred to in Article 69-73 of the Act on Certified Auditors, Audit Firms and Public Supervision. On 23 October 2019, the Supervisory Board of Arctic Paper S.A., by way of resolution, selected audit firm KPMG Audyt Spółka z ograniczoną odpowiedzialnością sp.k. to audit the Company's financial statements for the financial years 2020-2022. The Supervisory Board selected the audit firm on the basis of a recommendation by the Audit Committee. The recommendation of the Audit Committee was issued as a result of the selection procedure in compliance with the “Policy and selection procedure of the audit firm to perform statutory and voluntary audit of consolidated and stand-alone financial statements of Arctic Paper S.A. with its registered office in Poznań”. KPMG Audyt Spółka z ograniczoną odpowiedzialnością sp.k., entities related to the audit firm and members of its audit firm network, in the period covered by the audit did not provide any permitted services to the issuer that are not a statutory audit. The audit firm and members of its team performing the audit comply with the requirements to make an impartial and independent report from the audit of the annual consolidated and standalone financial statements of the Arctic Paper Group and of the Company in compliance with the applicable regulations, professional standards and the rules of professional ethics. The recommendation of the Audit Committee was free of third party impact and was developed on the basis of the “Policy and selection procedure of the audit firm to perform statutory and voluntary audit of consolidated and stand-alone financial statements of Arctic Paper S.A.” Remuneration Committee Composition and organisation of the Remuneration Committee —The Remuneration Committee is composed of minimum two members of the Supervisory Board, including the Chairperson of the Committee, elected by the Supervisory Board from among its members in compliance with the Articles of Association and Regulations of the Supervisory Board. —Members of the Remuneration Committee shall be appointed for three-year terms of office, however no longer than the term of office of the Supervisory Board; —The Chairperson of the Remuneration Committee shall be elected with a majority of votes of its members; —The Remuneration Committee operates pursuant to the Regulations of the Supervisory Board and the Regulations of the Remuneration Committee; —The Remuneration Committee performs advisory and consulting functions, operates as a collective body within the Company’s Supervisory Board; —The Remuneration Committee carries out its tasks by providing the Supervisory Board with its proposals, opinions and reports in the form of resolutions. Competences of the Remuneration Committee —The basic task of the Remuneration Committee is advisory support to the Supervisory Board on issues related to remuneration policy, bonus policy and other issues related to the remuneration of the employees, members of the Company’s authorities and the authorities of Capital Group companies; —The tasks of the Remuneration Committee resulting from supervision over the Company’s remuneration policy and ensuring the effective functioning of the Company’s remuneration policy, is to provide recommendations to the Supervisory Board in particular with respect to: ›approval and changes to the remuneration principles of members of the Company’s bodies; ›the amount of total remuneration to members of the Company’s Management Board; ›legal disputes between the Company and Members of the Management Board with respect to the tasks of the Committee; ›proposing remuneration and approving additional benefits to individual members of the Company’s bodies, in particular under management option plans (convertible into shares of the Company); ›strategy of the Company’s remuneration and bonus policies and HR policies; —The Remuneration Committee may resort to advisory services and assistance by external legal or other advisers if it finds it necessary to perform its duties; —The Remuneration Committee is obliged to file annual reports from its operations to the Supervisory Board by 30 September in each calendar year. —On 31 August 2020, the General Meeting of the Company, bearing in mind Art. 90d.1 in connection with Art. 90c.2.1 of the Act of 29 July 2005 on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and Public Companies (i.e. Journal of Laws of 2019, item 623 as amended amended) adopted the "Remuneration Policy for Members of the Management Board and Members of the Supervisory Board of Arctic Paper SA". Under the above-mentioned Acts of public companies, including the Company, were obliged to adopt, by resolution, the Remuneration Policy of Management Board and Supervisory Board Members, which is the rules for determining the remuneration of Members of the Management Board and Supervisory Board, by the General Meeting of Shareholders, and to publish a remuneration report. The Company shall pay remuneration to the Members of the Management Board and the Supervisory Board solely in compliance with the adopted Policy. The policy prepared by the Company was drawn up in accordance with the principles set out in the above-mentioned Act and refers to the required elements related to remuneration and other terms of employment for Members of the Management Board and Members of the Supervisory Board. The policy received an opinion from the Remuneration Committee operating at the Supervisory Board, as well as by the Supervisory Board. The Remuneration Committee held meetings on 15 January, 23 January, 19 February and 13 March 2020. Since 9 February 2017 the Remuneration Committee has been operating in the following composition: —Per Lundeen —Thomas Onstad —Roger Mattsson The detailed mode of operation of the Remuneration Committee is set forth in the Regulations of the Remuneration Committee. Risk Committee Composition and organisation of the Risk Committee —The Risk Committee is composed of minimum three members of the Supervisory Board, including the Chairperson of the Committee, elected by the Supervisory Board from among its members. Minimum one member of the Risk Committee shall be independent and hold qualifications and experience in the sphere of finances; —Members of the Risk Committee shall be appointed for three-year terms of office, however no longer than the term of office of the Supervisory Board; —The Chairperson of the Risk Committee shall be elected with a majority of votes of its members; —The Risk Committee operates on the basis of commonly accepted corporate risk management models (e.g. COSO-ERM); —The Risk Committee performs advisory and consulting functions, operates as a collective body within the Company’s Supervisory Board; —The Risk Committee carries out its tasks by providing the Supervisory Board with its proposals, opinions and reports in the form of resolutions; Competences of the Risk Committee —The basic task of the Risk Committee is advisory support to the Supervisory Board on issues related to the proper identification, assessment and control of potential risks, i.e. opportunities and threats to realization of the Company’s strategic goals, with particular consideration for financial risk, related to both external factors (such as volatility of exchange rates, interest rates, general international economic condition) and internal factors (such as cash flows, liquidity management, variation of budget and financial forecasts); —The tasks of the Risk Committee resulting from the supervision over the risk management process, include in particular: ›Supervision over correct identification, analysis and assigning priority to types of risk inherent in the operational strategy and business pursued; ›Confirmation to the identified risk appetite of the Company; ›Verification if actions used to mitigate risk are planned and implemented so that the risk is mitigated to a level acceptable by the Company; ›Monitoring verifying correct risk assessment by the Management Board and the effectiveness of control tools; ›Supervision over correct notification of stakeholders on the risks, risk strategies and control tools. —The Risk Committee may resort to advisory services and assistance by external advisers if it finds it necessary to perform its duties; Since 22 September 2016 the Risk Committee has been operating in the following composition: —Per Lundeen —Mariusz Grendowicz —Roger Mattsson ‎ Information compliant with the requirements of Swedish regulations concerning corporate governance. Arctic Paper S.A. is a company registered in Poland which stock has been admitted to trading at the Warsaw Stock Exchange and at NASDAQ in Stockholm. The Company’s primary market is in Warsaw with a parallel market in Stockholm. Companies not registered in Sweden which shares have been admitted to trading at NASDAQ in Stockholm are obliged to comply with: —the corporate governance rules in force in the country of their registration or —the corporate governance rules in force in the country where they have their primary trading market, or —the Swedish corporate governance code (hereinafter the “Swedish Code”). Arctic Paper S.A. follows the principles set forth in the “Best Practice of GPW Listed Companies 2016” (hereinafter the “Best Practice”) that may be applied by companies listed at the Warsaw Stock Exchange and not the Swedish Code. As a result, the conduct of Arctic Paper S.A. is different from the one set forth in the Swedish Code in the following material aspects. General Meeting of Shareholders The core documents related to General Meetings of Shareholders, such as notices, reports and approved resolutions, are made in Polish and in English instead of Swedish. Appointment of governing bodies of the Company The Polish corporate governance model provides for a two-tier system of the Company’s bodies which is composed of the Management Board being the executive body appointed by the Management Board which in turns supervises the Company’s operations and is appointed by the General Meeting of Shareholders. Auditors are selected by the Supervisory Board. Neither the Best practice, nor any other Polish regulations require the establishment of a commission in the Company to elect candidates and therefore such commission does not exist among the bodies of the Company. Each shareholder may propose candidates to the Supervisory Board. Appropriate information on candidates proposed to the Supervisory Board is published on the Company’s website with appropriate advance so that all shareholders could take an informed decision when voting on the resolution appointing a new member of the Supervisory Board. Tasks of the bodies of the Company In compliance with the two-tier system of the Company’s bodies, the tasks usually performed by the management of Swedish-registered companies are performed by the Management Board or the Supervisory Board of companies subject to Polish law. In accordance with the Polish applicable regulations, members of the Management Board, including its General Director who is the President of the Management Board, may not get involved in competitive activities outside the Company. Pursuing of other business outside the Company is not regulated either in the Best Practice or other Polish regulations; however, certain restrictions are usually incorporated in individual employment contracts. Size and composition of the Company’s bodies The composition of the Supervisory Board should reflect the independence criteria, just like those specified in the Swedish Code. However, the Management Board being the executive body is composed of persons in executive positions at Arctic Paper S.A., and these members may not be treated as independent of the Company. The terms of office of members of the Management Board – just like the members of the Supervisory Board – lasts three years. Chairpersons of the bodies of the Company It is the Supervisory Board and not the General Meeting that elects the chairperson and the deputy chairperson from its members. Procedures of the bodies of the Company The Regulations of the Management Board are approved by the Supervisory Board, and the Regulations of the Supervisory Board are approved by the Supervisory Board. The Regulations are not reviewed each year – they are reviewed and modified as need arises. The same principles apply to regulations of committees operating within the Supervisory Board that are approved by the Supervisory Board. The operation of the General Director is not regulated separately since he/she also acts as the President of the Management Board. Remuneration of members of the bodies of the Company and management staff The rules of remuneration and the amount of remuneration of members of the Management Board are set by the Supervisory Board and the Remuneration Committee acting with the Supervisory Board. The remuneration of members of the Supervisory Board fall within the competences of the General Meeting of Shareholders. Incentive programmes are set up by the Supervisory Board. Members of the Supervisory Board are entitled to participate in such programmes established for the management staff. There are no restrictions as to the amount of remuneration during the employment contract notice period or to the amount of severance pay. Information on corporate governance The Polish Corporate Governance Rules do not require the same detail as to the disclosed information as required by the Swedish Code. However, information on members of the Company’s bodies, company’s Articles of Association, internal regulations and a summary of material differences between the Swedish and Polish approach to corporate governance and shareholders’ rights is published on the Company’s website. ‎ Information by the Management Board of Arctic Paper S.A. on selection of the audit firm On the basis of a statement made by the Supervisory Board of Arctic Paper S.A. on the selection of the audit firm to audit the annual consolidated financial statements of the Arctic Paper Group and standalone financial statements of the Company for the financial year ended on 31 December 2020 in compliance with applicable laws and on the basis of a statement received from KPMG Audyt spółka z ograniczoną odpowiedzialnością spółka komandytowa, the Company’s Management Board informs that the audit firm and members of its team performing the audit have complied with the requirements to make an impartial and independent report from the audit of the annual consolidated financial statements of the Arctic Paper Group and standalone financial statements of the Company for the financial year ended on 31 December 2020 in compliance with the applicable laws, professional standards and the rules of professional ethics. The Management Board of the Company also informs that the applicable laws with regard to a change of the audit firm and the key statutory auditor, as well as mandatory periods of grace have been complied with. The Arctic Paper Group has a policy relating to the selection of the auditing company and a policy of the provision of services that are not an audit by the audit firm, entities related to the audit firm or a member of its group, including services that are not covered with the ban on being provided by audit firms. Signatures of the Members of the Management Board Position First and last name Date Signature President of the Management Board ‎ Chief Executive Officer Michał Jarczyński 16 March 2021 signed with a qualified electronic signature Member of the Management Board ‎ Chief Financial Officer Göran Eklund 16 March 2021 signed with a qualified electronic signature ‎ Statements of the Management Board Accuracy and reliability of the presented reports Members of the Management Board of Arctic Paper S.A. represent that to the best of their knowledge: —The consolidated financial statements of the Arctic Paper Capital Group for the year ended on 31 December 2020 and the comparable data were prepared in compliance with the applicable accounting principles and they reflect the economic and financial condition of the Capital Group and its financial result for 2020 in a true, reliable and clear manner. —The Management Board’s Report from operations of the Arctic Paper Capital Group in 2020 contains a true image of the development, achievements and condition of the Arctic Paper Capital Group, including a description of core hazards and risks. Signatures of the Members of the Management Board Position First and last name Date Signature President of the Management Board ‎ Chief Executive Officer Michał Jarczyński 16 March 2021 signed with a qualified electronic signature Member of the Management Board ‎ Chief Financial Officer Göran Eklund 16 March 2021 signed with a qualified electronic signature ‎ ‎ Consolidated Financial Statements Consolidated statement of profit and loss Note Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Continuing operations Revenues from sales of paper and pulp 10.1 2 847 450 3 117 118 Sales revenues 2 847 450 3 117 118 Costs of sales 11.5 (2 305 659) (2 531 612) Gross profit (loss) on sales 541 791 585 506 Selling and distribution costs 11.5 (336 524) (336 862) Administrative expenses 11.5 (76 348) (88 527) Other operating income 11.1 65 280 78 111 Other operating expenses 11.2 (35 957) (46 806) Operating profit (loss) 158 242 191 422 Financial income 11.3 710 1 149 Financial expenses 11.4 (36 633) (34 640) Gross profit (loss) 122 318 157 931 Income tax 13 (18 733) (33 250) Net profit (loss) for the financial year 103 586 124 681 Attributable to: The shareholders of the Parent Entity 111 070 82 709 The non-controlling shareholder (7 485) 41 971 103 586 124 681 Earnings per share: – basic earnings from the profit (loss) for the period attributable to the shareholders of the Parent Entity 14 1,60 1,19 – diluted earnings from the profit for the period attributable to the shareholders of the Parent Entity 14 1,60 1,19 ‎ Consolidated statement of comprehensive income Note Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Net profit / (loss) for the reporting period 103 586 124 681 Items to be reclassified to profit/loss: FX differences on translation of foreign operations 27.2 77 882 (19 412) Measurement of financial instruments 12 (23 149) (55 809) Deferred income tax on the measurement of financial instruments 13.1 5 185 12 309 Items not to be reclassified to profit /loss: Actuarial profit (loss) for defined benefit plans 11.7 (969) (13 319) Deferred income tax on actuarial profit (loss) relating to defined benefit plans 13.1 (29) 2 428 Other comprehensive income 58 920 (73 803) Total comprehensive income 162 505 50 877 Attributable to: The shareholders of the Parent Entity 143 068 30 266 To the non-controlling shareholder 19 437 20 611 ‎ Consolidated statement of financial position Note As at 31 December 2020 As at 31 December 2019 ASSETS Fixed assets Tangible fixed assets 16 1 085 121 979 851 Investment properties 18 3 086 4 128 Intangible assets 19 43 251 38 471 Goodwill 19 9 656 Interests in joint ventures 1 678 1 412 Other financial assets 21.1 23 996 30 658 Other non-financial assets 21.2 2 598 2 039 Deferred income tax assets 13.3 25 117 24 346 1 194 503 1 080 905 Current assets Inventories 24 365 491 353 774 Trade and other receivables 25 297 543 302 121 Corporate income tax receivables 5 209 5 324 Other non-financial assets 21.2 6 149 8 909 Other financial assets 21.1 12 188 18 835 Cash and cash equivalents 26 255 563 265 885 942 142 954 848 TOTAL ASSETS 2 136 646 2 035 753 ‎ Note As at 31 December 2020 As at 31 December 2019 EQUITY AND LIABILITIES Equity Equity (attributable to the shareholders of the Parent Entity) Share capital 27.1 69 288 69 288 Reserve capital 27.3 407 976 407 976 Other reserves 27.4 160 376 139 035 FX differences on translation 27,2 15 827 (28 863) Retained earnings / Accumulated losses 27.5 96 510 19 473 749 977 606 909 Non-controlling interests 27.6 283 056 263 619 TOTAL EQUITY 1 033 033 870 528 Long-term liabilities Interest-bearing loans, bonds and borrowings 28 211 094 233 745 Provisions 29 137 373 124 942 Other financial liabilities 28 30 050 29 523 Deferred income tax liability 13.3 71 448 70 823 Accruals and deferred income 30.2 14 631 18 094 464 596 477 127 Short-term liabilities Interest-bearing loans, bonds and borrowings 28 136 278 149 983 Provisions 29 756 5 008 Other financial liabilities 28 12 148 11 608 Trade and other payables 30.1 379 445 435 366 Income tax liability 11 037 4 284 Accruals and deferred income 30.2 99 353 81 849 639 016 688 098 TOTAL LIABILITIES 1 103 612 1 165 225 TOTAL EQUITY AND LIABILITIES 2 136 646 2 035 753 ‎ Consolidated cash flow statement Note 12-month period ‎ ended on ‎ 31 December 2020 12-month period ‎ ended on ‎ 31 December 2019 Cash flows from operating activities Gross profit (loss) 122 318 157 931 Adjustments for: Depreciation/amortisation 11.6 113 126 86 609 FX gains / (loss) 1 608 748 Net interest and dividends 19 127 22 682 Profit / loss from investing activities 277 (14 196) Increase / decrease in receivables and other non-financial assets 39 918 46 633 Change to inventories 23 291 114 714 Increase / decrease in liabilities except for loans and borrowings (85 383) (74 184) Change in accruals and prepayments (2 878) (8 460) Change in provisions (6 618) 13 278 Income tax paid (11 514) (10 271) Co-generation certificates (1 832) 7 274 Other 22 (470) Net cash flows from operating activities 211 464 342 290 Cash flows from investing activities Disposal of tangible fixed assets and intangible assets 1 349 15 809 Purchase of tangible fixed assets and intangible assets (136 499) (137 643) Acquisition of a subsidiary 20 (6 089) - Net cash flows from investing activities (141 239) (121 834) Cash flows from financing activities Change to overdraft facilities 0 (92 605) Repayment of leasing liabilities (10 514) (8 964) Inflows/outflows from other financial liabilities 422 404 Inflows under contracted loans, borrowings and bonds 15 266 61 116 Repayment of loans and borrowings (87 519) (49 067) Interest paid (18 605) (22 281) Dividend disbursed to non-controlling shareholders 27.6 - (41 542) Net cash flows from financing activities (100 950) (152 939) Change in cash and cash equivalents (30 725) 67 517 Net FX differences 20 403 (3 722) Cash and cash equivalents at the beginning of the period 26 265 885 202 090 Cash and cash equivalents at the end of the period 26 255 563 265 885 Consolidated statement of changes in equity Note Attributable to the shareholders of the Parent Entity Equity attributable to non-controlling shareholders Total equity Share capital Reserve capital FX differences on translation of foreign operations Other reserves Retained earnings / (Accumulated losses) Cumulated other comprehensive income related to discontinued operations Total As at 01 January 2020 69 288 407 976 (28 863) 139 035 19 473 - 606 909 263 619 870 528 Net profit (loss) for the financial year - - - - 111 070 - 111 070 (7 485) 103 586 Other comprehensive income for the year - - 44 690 (11 694) (998) - 31 998 26 922 58 920 Total comprehensive income for the year - - 44 690 (11 694) 110 072 - 143 068 19 437 162 505 Profit distribution 27.5 - - - 33 035 (33 035) - - - 0 As at 31 December 2020 69 288 407 976 15 827 160 376 96 510 - 749 977 283 056 1 033 033 ‎ Note Attributable to the shareholders of the Parent Entity Equity attributable to non-controlling shareholders Total equity Share capital Reserve capital FX differences on translation of foreign operations Other reserves Retained earnings / (Accumulated losses) Cumulated other comprehensive income related to discontinued operations Total As at 01 January 2019 69 288 407 976 (12 338) 151 110 (27 745) (11 649) 576 643 284 550 861 193 Net profit (loss) for the financial year - - - - 82 709 82 709 41 971 124 681 Other comprehensive income for the year - - (9 954) (31 599) (10 891) (52 443) (21 360) (73 803) Total comprehensive income for the year - - (9 954) (31 599) 71 819 30 266 20 611 50 877 Profit distribution 27.5 - - - 19 523 (19 523) - - - 0 Discontinued operations 14 - - (6 572) - (5 077) 11 649 - - 0 Dividend distribution to non-controlling entities 27.6 (41 542) (41 542) As at 31 December 2019 69 288 407 976 (28 863) 139 035 19 473 - 606 909 263 619 870 528 Accounting principles (policies) and additional explanatory notes 1.General information The Arctic Paper Group is a producer of bulky book paper, offering a broad range of products in the segment, and of high-quality graphic paper. The Group produces numerous types of uncoated and coated wood-free paper as well as wood-containing uncoated paper for printing houses, paper distributors, book and magazine publishing houses and the advertising industry. As at 31 December 2020, the Arctic Paper Group employs over 1,500 people in its Paper Mills, companies involved in sale of paper and in pulp producing companies, procurement office and a company producing food packaging. Our Paper Mills are located in Poland and in Sweden. Pulp Mills are located in Sweden. As at 31 December 2020, the Group had 14 Sales Offices ensuring access to all European markets, including Central and Eastern Europe. Our consolidated sales revenues for 12 months of 2020 amounted to PLN 2,847 million. Arctic Paper Spólka Akcyjna is a holding company set up in April 2008. As a result of capital restructuring carried out in 2008, the Paper Mills Arctic Paper Kostrzyn (Poland) and Arctic Paper Munkedals (Sweden), Distribution Companies and Sales Offices have become the properties of Arctic Paper S.A. Previously they were owned by Arctic Paper AB (later Trebruk AB), the indirect Parent Entity of Arctic Paper S.A. In addition, in its expansion, the Group acquired the Paper Mill Arctic Paper Mochenwangen (Germany) in November 2008 and the Paper Mill Grycksbo (Sweden) in March 2010. In December 2012, the Group acquired a controlling package of shares in Rottneros AB, a company listed on NASDAQ in Stockholm, Sweden, holding interests in two pulp companies (Sweden). The Parent Entity is entered in the register of entrepreneurs of the National Court Register maintained by the District Court in Zielona Gora (Poland), 8th Commercial Division of the National Court Register, under KRS number 0000306944. The Parent Entity holds statistical number REGON 080262255. The Company has its seat in Poland, Kostrzyn nad Odra (Fabryczna st. 1) and also has a foreign branch in Göteborg, Sweden. 1.1.Business objects The principal business of the Arctic Paper Group is the production of paper and pulp. The Group’s additional business, subordinate to paper and pulp production, covers: —generation of electricity, —transmission of electricity, —electricity distribution, —heat production, —heat distribution, —logistics services, —paper distribution. ‎ 1.2.Shareholding structure as at 31.12.2020 as at 31.12.2019 Shareholder Number of shares Share in the share capital ‎ [%] Number of votes Share in the total number of votes ‎ [%] Number of shares Share in the share capital ‎ [%] Number of votes Share in the total number of votes ‎ [%] Thomas Onstad 47 205 107 68,13% 47 205 107 68,13% 47 205 107 68,13% 47 205 107 68,13% - indirectly via 40 981 449 59,15% 40 981 449 59,15% 40 981 449 59,15% 40 981 449 59,15% Nemus Holding AB 40 381 449 58,28% 40 381 449 58,28% 40 381 449 58,28% 40 381 449 58,28% other entity 600 000 0,87% 600 000 0,87% 600 000 0,87% 600 000 0,87% - directly 6 223 658 8,98% 6 223 658 8,98% 6 223 658 8,98% 6 223 658 8,98% Other 22 082 676 31,87% 22 082 676 31,87% 22 082 676 31,87% 22 082 676 31,87% Total 69 287 783 100,00% 69 287 783 100,00% 69 287 783 100,00% 69 287 783 100,00% Treasury shares - 0,00% - 0,00% - 0,00% - 0,00% Total 69 287 783 100,00% 69 287 783 100,00% 69 287 783 100,00% 69 287 783 100,00% Nemus Holding AB, a company under Swedish law (a company owned indirectly by Mr Thomas Onstad), is the majority shareholder of Arctic Paper S.A., holding (as at 31 December 2020) 40,381,449 shares of our Company, which constitutes 58.28% of its share capital and corresponds to 58.28% of the total number of votes at Annual General Meetings. Thus Nemus Holding AB is the Parent Entity of the Issuer. Additionally, Mr Thomas Onstad, an indirect shareholder of Nemus Holding AB, holds directly 6,223,658 shares representing 8.98% of the total number of shares in the Company, and via another entity – 600,000 shares accounting for 0.87% of the total number of shares of the Issuer. Mr Thomas Onstad’s total direct and indirect holding in the capital of Arctic Paper S.A. as at 31 December 2020 was 68.13% (31 December 2019: 68.13%) and has not changed until the date hereof. The top owner of the Group is Mr. Thomas Onstad. ‎ 2.Composition of the Group The Group is composed of Arctic Paper S.A. and the following subsidiaries: Unit Registered office Business objects Group’s interest in the equity of the ‎ subsidiary entities as at 16 March 2021 31 ‎ December ‎ 2020 31 ‎ December ‎ 2019 Arctic Paper Kostrzyn S.A. Poland, Fabryczna 1, ‎ 66-470 Kostrzyn nad Odrą Paper production 100% 100% 100% Arctic Paper Munkedals AB Sweden, SE 455 81 Munkedal Paper production 100% 100% 100% Arctic Paper Mochenwangen GmbH Germany, Fabrikstrasse 62, ‎ DE-882, 84 Wolpertswende Non-active company 99,74% 99,74% 99,74% Arctic Paper Grycksbo AB Sweden, Box 1, SE 790 20 Grycksbo Paper production 100% 100% 100% Arctic Paper UK Limited United Kingdom, 8 St Thomas Street ‎ SE1 9RR London Trading company 100% 100% 100% Arctic Paper Baltic States SIA Latvia, K. Vardemara iela 33-20, ‎ Riga LV-1010 Trading company 100% 100% 100% Arctic Paper Deutschland GmbH Germany, Am Sandtorkai 72, 20457 Hamburg Trading company 100% 100% 100% Arctic Paper Benelux S.A. Belgium, Ophemstraat 24, ‎ B-3050 Oud-Heverlee Trading company 100% 100% 100% Arctic Paper Schweiz AG Switzerland, Gutenbergstrasse 1, ‎ CH-4552 Derendingen Trading company 100% 100% 100% Arctic Paper Italia srl Italy, Via Cavriana 7, 20 134 Milan Trading company 100% 100% 100% Arctic Paper Danmark A/S Denmark, Korskildelund 6 ‎ DK-2670 Greve Trading company 100% 100% 100% Arctic Paper France SAS France, 43 rue de la Breche aux Loups, 75012 Paris Trading company 100% 100% 100% Arctic Paper Espana SL Spain, Avenida Diagonal 472-474, ‎ 9-1 Barcelona Trading company 100% 100% 100% Arctic Paper Papierhandels GmbH Austria, Hainborgerstrasse 34A, ‎ A-1030 Wien Trading company 100% 100% 100% Arctic Paper Polska Sp. z o.o. Poland, Okrężna 9, ‎ 02-916 Warszawa Trading company 100% 100% 100% Arctic Paper Norge AS Norway, Eikenga 11-15, NO-0579 Oslo Trading company 100% 100% 100% Arctic Paper Sverige AB Sweden, SE 455 81 Munkedal Trading company 100% 100% 100% Arctic Paper East Sp. z o.o. Poland, Fabryczna 1, ‎ 66-470 Kostrzyn nad Odrą Trading company 100% 100% 100% Arctic Paper Investment GmbH * Germany, Fabrikstrasse 62, ‎ DE-882, 84 Wolpertswende Activities of holding companies 100% 100% 100% Arctic Paper Finance AB Sweden, Box 383, 401 26 Göteborg Activities of holding companies 100% 100% 100% Arctic Paper Verwaltungs GmbH * Germany, Fabrikstrasse 62, ‎ DE-882, 84 Wolpertswende Activities of holding companies 100% 100% 100% Arctic Paper Immobilienverwaltung ‎ GmbH&Co. KG Germany, Fabrikstrasse 62, ‎ DE-882, 84 Wolpertswende Activities of holding companies 94,90% 94,90% 94,90% Unit Registered office Business objects Group’s interest in the equity of the ‎ subsidiary entities as at 16 March 2021 31 ‎ December ‎ 2020 31 ‎ December ‎ 2019 Arctic Paper Investment AB ** Sweden, Box 383, 401 26 Göteborg Activities of holding companies 100% 100% 100% EC Kostrzyn Sp. z o.o. Poland, ul. Fabryczna 1, ‎ 66-470 Kostrzyn nad Odrą Rental of properties and machines and equipment 100% 100% 100% Munkedals Kraft AB Sweden, 455 81 Munkedal Production of hydropower 100% 100% 100% Rottneros AB Sweden, Söderhamn Activities of holding companies 51,27% 51,27% 51,27% Rottneros Bruk AB Sweden, Rottneros Pulp production 51,27% 51,27% 51,27% Utansjo Bruk AB Sweden, Söderhamn Non-active company 51,27% 51,27% 51,27% Vallviks Bruk AB Sweden, Vallvik Pulp production 51,27% 51,27% 51,27% Nykvist Skogs AB Sweden, Sunne Comapny grouping private owners of forests 51,27% 51,27% na Rottneros Packaging AB Sweden, Sunne Production of food packaging 51,27% 51,27% 51,27% SIA Rottneros Baltic Sweden, Sunne Procurement bureau 51,27% 51,27% 51,27% * – companies established for the purpose of the acquisition of Arctic Paper Mochenwangen GmbH ** – company established to acquire Grycksbo Paper Holding AB (closed in 2015) and indirectly Arctic Paper Grycksbo AB As at 31 December 2020 and as well as on the day hereof, the percentage of voting rights held by the Group in its subsidiaries corresponded to the percentage held in the share capital of those entities. All subsidiaries within the Group are consolidated under the full method from the day of obtaining control by the Group and cease to be consolidated from the day the control has been transferred out of the Group. 3.Management and supervisory bodies 3.1.Management Board of the Parent Entity As at 31 December 2020, the Parent Entity’s Management Board was composed of: —Michał Jarczyński – President of the Management Board appointed on 1 February 2019; —Göran Eklund – Member of the Management Board appointed on 30 August 2017. Since 31 December 2020 until the publication of these annual consolidated financial statements there were no changes to the composition of the Management Board of the Parent Entity. 3.2.Supervisory Board of the Parent Entity As at 31 December 2020, the Parent Entity’s Supervisory Board was composed of: —Per Lundeen – Chairman of the Supervisory Board appointed on 22 September 2016 (appointed to the Supervisory Board on 14 September 2016); —Roger Mattsson – Deputy Chairman of the Supervisory Board appointed on 22 September 2016 (appointed as a Member of the Supervisory Board on 16 September 2014); —Thomas Onstad – Member of the Supervisory Board appointed on 22 October 2008; —Mariusz Grendowicz – Member of the Supervisory Board appointed on 28 June 2012 (independent member); —Dorota Raben – Member of the Supervisory Board appointed on 28 May 2019 (independent member). Until the date hereof, there were no changes to the composition of the Supervisory Board of the Parent Entity. 3.3.Audit Committee of the Parent Entity As at 31 December 2020, the Parent Entity’s Audit Committee was composed of: Mariusz Grendowicz – Chairman of the Audit Committee appointed on 18 September 2017 (appointed as a Member of the Audit Committee on 20 February 2013). Roger Mattsson – Member of the Audit Committee appointed on 23 June 2016; Dorota Raben – Member of the Audit Committee appointed on 19 July 2019. Until the date hereof, there were no changes in the composition of the Audit Committee of the Parent Entity. 4.Approval of the financial statements These Consolidated Financial Statements were approved for publication by the Management Board on 16 March 2021. 5.Material values based on professional judgement and estimates 5.1.Professional judgement In the process of applying accounting policies to the areas presented below, professional judgement of the management has the most significant effect, apart from accounting estimates. Identification of control over the acquired entities and joint ventures If interests in other entities are acquired, the Management Board of the Parent Entity makes a professional judgement if it exercises full control or co-control thereof and with respect to the recognition method of the transaction in the consolidated financial statements pursuant to the guidelines set forth in IFRS 10, IFRS 3 and IFRS 11. In particular, this applies to the moment of taking control, taking into account the de facto control analysis. For more information, see Note 9.7.1. and 20. Liabilities under leases – the Group as the lessee The Group has lease contracts which it recognizes in accordance with IFRS 16. IFRS 16 introduces a uniform lessee accounting model and requires the lessee to recognize the assets and liabilities arising from each lease. On the lease commencement date, the lessee recognizes an asset with respect to the right to use the underlying asset and a lease liability that reflects the lessee’s obligation to make lease payments. The Management Board of the Parent Entity makes professional judgment, inter alia whether a given contract meets the conditions of the lease and in terms of determining the lease term in the event of an option to extend the term of the contract and makes an estimate when determining the lease rate based on the requirements of IFRS 16. For more information, see Note 17. 5.2.Uncertainty of estimates The basic assumptions for the future and other key sources of uncertainties as at the balance sheet date that affect the risk of major adjustments in the carrying amount of assets and liabilities in the next financial year are presented below. Impairment of tangible and intangible fixed assets in Arctic Paper Grycksbo Due to the Covid-19 pandemic and weaker than expected financial results of Arctic Paper Grycksbo in previous years, after the annual assessment of the triggers for impairment of property, plant and equipment and intangible assets, the Management Board found the need to conduct impairment tests for non-financial fixed assets for the Paper Mill. In connection with the test, the Company makes many estimates, the greatest impact of which on the value in use of assets is the forecasted sales volume, selling prices, purchase prices of raw materials, energy prices, and the discount rate. Some of the assumptions used to determine the value in use of assets are based on unobservable input data and therefore are subject to estimation uncertainty. The results of completed test as at 31 December 2020 and 31 December 2019 did not change the impairment allowance. Impairment of goodwill As at 31 December 2020, in accordance with the requirements of IFRS EU, Rottneros conducted an impairment test for goodwill arising in connection with the acquisition of a subsidiary in January 2020. The test did not show the need to make an impairment allowance for this asset. The results of the test as at 31 December 2020 are presented in note 22.1. Retirement benefits and other post-employment benefits The costs of retirement post-employment benefits is determined with actuarial techniques. The estimates were presented in note 26. Actuarial measurements require certain assumptions as to the applicable discount rates, anticipated salary increases, mortality ratio and projected growth of retirement benefits. Due to the long-term nature of the programmes, the estimates are subject to certain uncertainties. For more information, see Note 23. Deferred income tax asset The Group recognises a deferred income tax asset assuming that taxable profit will be generated in the future to utilise the asset. Material deterioration of the generated taxable profit in the future could render this assumption unjustified. The calculation of the deferred income tax asset is presented in note 13.3. Fair value of financial instruments Fair value of financial instruments for which there is no active market is measured using the appropriate valuation techniques. The Group uses professional judgement to select adequate methods and to make assumptions. The fair value of financial instruments is presented in note 36.1. Depreciation/amortisation rates Depreciation/amortisation rates are determined on the basis of the anticipated useful lives of tangible fixed assets and intangible assets. Every year, the Group reviews the approved economic useful lives on the basis of current estimates. The approved economic useful lives for each tangible fixed asset are presented in note 9.5 and for intangible assets in note 9.7. Uncertainties related to tax settlements Regulations related to VAT, corporate income tax and charges related to social insurance are subject to frequent changes. Those frequent changes result in unavailability of appropriate points of reference, inconsistent interpretations and few precedents that could apply. Additionally, the applicable regulations contain also certain ambiguities that result in differences of opinion as to legal interpretations of tax regulations – among public authorities and between public authorities and enterprises. Therefore, the amounts presented and disclosed in the financial statements may change in the future as a result of final decisions by tax inspection authorities. The Group recognises and measures current and deferred income tax assets or liabilities applying the requirements of IAS 12 Income Taxes, on the basis of profit (tax loss), taxation base, carried forward tax losses, unutilised tax credits and applicable tax rates, and further subject to uncertainties related to tax settlements. When an uncertainty exists if and to what extent the tax authority accepts tax settlements to specific transactions, the Group recognises those settlements subject to uncertainty assessment. Impairment allowances to inventories and receivables The Group estimates its impairment allowance to receivables in the amount of anticipated credit losses over the whole life of the receivables since the initial recognition. The amount of impairment for receivables is the difference between the carrying amount of the receivables and the estimated probable collectible amount. Impairment allowances for inventories are made when the carrying amount of a specific assortment is lower than its net realisable price. The net sales price is estimated as the realisable price of the assortment net of selling and distribution costs. More information on impairment allowances on inventories is included in note 24, and impairment allowances on receivables in note 25. ‎ 6.Basis of preparation of the consolidated financial statements These Consolidated Financial Statements have been made in accordance with the historical cost convention, with the exception of investment properties and derivative financial instruments that are measured at fair value. Financial instruments measured at fair value through profit or loss include FX forward contracts, contracts for the purchase of electricity, contracts for the sale of pulp, floor options and interest rate SWAPs. These Consolidated Financial Statements are presented in the Polish Zloty (“PLN”), and all values, unless indicated otherwise, are stated in PLN ‘000. These Consolidated Financial Statements have been prepared based on the assumption that the Group will continue as a going concern in the foreseeable future. 6.1.Compliance statement These Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), endorsed by the European Union (“EU IFRS”). As at the balance sheet date, in light of the current process of IFRS endorsement in the European Union and the nature of the Group’s activities, there is no difference between the IFRS that have become effective and the IFRS endorsed by the European Union. IFRS cover standards and interpretations approved by the International Accounting Standards Board (IASB). Certain subsidiaries of the Group maintain their books of account in compliance with the accounting policies (principles) as set forth in the Accounting Act of 29 September 1994 (“Act”) as amended, and the regulations issued pursuant thereto (“Polish accounting standards”) or in compliance with other local accounting standards applicable to foreign operations. The consolidated financial statements contain adjustments that are not incorporated in the books of account of the Group entities, implemented to make the financial data of those entities compliant with EU IFRS. 6.2.Covid-19 The COVID 19 coronavirus pandemic had a huge impact on the functioning of the global economy in 2020, as well as on the activities of the Arctic Paper group. On 11 March 2020, the World Health Organisation recognised the coronavirus epidemic as a pandemic. In order to reduce the major threat to public health posed by COVID-19, the authorities of individual Member States of the European Union and worldwide, while awaiting further developments, have taken measures to stop the epidemic, including restrictions on the movement of persons, banning activities in certain sectors. In particular, the organisation of mass events has been suspended, the functioning of cultural facilities has been restricted, public transport has been restricted, retail outlets have been closed down, excluding grocery stores and pharmacies. Some companies have also advised their employees to work remotely from home. These events have the following consequences in a macroeconomic perspective: —disruption of supply chains of goods, in particular for cross-border and transcontinental supplies; —major reduction of the capability to provide services or production, in certain sectors and regions. The affected sectors are mainly trade and transport, travel and tourism, trade fair and exhibition organisations, cultural activities and entertainment and education; —a major decrease in demand for non-essential goods and services; —increased economic uncertainty, reflected by fluctuations in asset prices and foreign exchange rates. The Arctic Paper Group operates in the pulp and paper sector, which, at the time of preparing these consolidated financial statements, was affected by the COVID-19 epidemic by significantly reducing the demand for paper. According to statistical data, the decrease in demand for paper grades produced by the Group was approx. 25% compared to 2019. As of 31 December 2020, the Group’s current ratio was 1.4x and the net debt-to-EBITDA ratio for the last 12 months was 0.57x. The Group has unused credit lines and unused factoring limits. Under the Group’s cash-pool agreement, cash available within individual units can be freely disposed of. The management of the Group has considered the following operational risks, which may have an adverse impact on the Group: —unavailability of staff for a long time; —interruptions in the transport of production materials and products that would disrupt distribution; —recession in the economy of developed countries, which would reduce the purchasing power of consumers, resulting in reduced sales of non-essential goods. In order to mitigate the risks arising from potential adverse scenarios, the management of the Group has implemented measures, which include in particular: —implementation of employee protection programmes, including the introduction of personal protection solutions and shift work; —confirmation with the suppliers of key materials, the capability to deliver the volumes ordered and an estimation of the sufficiency of the stock held, in particular cellulose; —contractual arrangements with transport companies to ensure uninterrupted circulation of materials and products; —adjusting the scale of the Group’s operations in response to a possible temporary decrease in demand for its goods; —securing financial liquidity as a result of working capital management and securing possible bridge financing. In the opinion of the Group's management, the above circumstances and the uninterrupted operation of post-reporting units throughout 2020 justify the assumption that the Group is well prepared for the risk of a pandemic also in 2021 and will have sufficient resources to continue its business activities for at least 12 months from the balance sheet date. The management of the Group concluded that the impact of the possible scenarios considered in making this judgement does not create material uncertainty about events or circumstances that would cast serious doubt on the Group’s ability to continue as a going concern. ‎ 6.3.Currency of the financial statements and functional currencies The Group’s consolidated financial statements are presented in PLN which is also the functional currency of the Parent Entity. A functional currency is determined for each subsidiary and the assets and liabilities of each entity are measured in its relevant functional currency. The functional currencies of the Group companies included in these consolidated financial statements are as follows: Polish zloty (PLN), Swedish krona (SEK), euro (EUR), Norwegian krone (NOK), Danish krone (DKK), pound sterling (GBP) and Swiss franc (CHF). ‎ 7.Changes to the applied accounting principles and data comparability 7.1.Changes to the existing accounting principles The accounting principles (policies) applied to prepare the these consolidated financial statements are compliant with those applied to the consolidated financial statements of the Group for the year ended on 31 December 2019, with the following exceptions: —Amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors – applicable to annual periods beginning on or after 1 January 2020; The amendments harmonise and clarify the definition of “Material” and provide guidelines in order to improve consistency in applying the concept in International Financial Reporting Standards. —Amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments and IFRS 7 Financial Instruments: Disclosures – applicable to annual periods beginning on or after 1 January 2020; The amendments are mandatory and apply to all hedge relationships affected by the uncertainty resulting from the reformed interest rates. The amendments provide for a temporary waiver of the use of certain hedge accounting requirements so that the interest rate reform does not cancel hedge accounting. The key waivers concerning the amendments refer to: the requirement that flows are “highly probable”, risk components, prospective assessment, retrospective tests of effectiveness (applies to IAS 39), reclassification of provisions under cash flow hedges. The amendments further require that entities disclose additional information to investors on hedge relationships that affect the above uncertainties. —Amendments to IFRS 3 Business Combinations; effective for annual periods beginning on or after 1 January 2020. Those amendments have not yet been endorsed by the EU. The changes restrict and clarify the definition of business. They also support a simplified assessment if a set of assets and activities constitutes a group of assets and not a business. The aforesaid amendments did not have any major impact on the Group’s financial statements. The Group did not decide to adopt earlier any other standards, interpretations or amendments that were issued but are not yet effective for periods commencing on 01 January 2020. 7.2.Data comparability In 2020, there were no events requiring the adjustment of comparative data. 8.New standards and interpretations that have been published and are not yet effective The following standards and interpretations were issued by the International Accounting Standards Board but are not yet effective: —Amendments to IFRS 4 Insurance Contracts; effective for annual periods beginning on or after 01 January 2021). Amendments extend the period of temporary exemption from the application of IFRS 9 Financial Instruments by two years to annual periods beginning on 1 January 2023 in order to align with the first application of IFRS 17 Insurance Contracts, which replaces IFRS 4 Insurance Contracts. —Amendments to IFRS 16 Leases Rent reliefs related to Covid-19 ( effective for annual periods beginning on or after 1 July 2020, earlier application possible). The amendments allow lessees not to assess whether the Covid-19 rent reliefs are a change to their lease agreements. Therefore, under the appropriate conditions, lessees who apply a practical solution will recognize the rent reliefs received until 31 June 2021 in profit or loss for the period in which the relief was granted. In the absence of a practical solution, the relief would be recognised in profit and loss over the term of the contract. —Amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments and IFRS 7 Financial Instruments: Disclosure of IFRS 4 Insurance Contracts and IFRS 16 Leases: Interest rate benchmark reform – Step 2 (effective for annual periods beginning on or after 1 January 2021). The purpose of the amendments is to make it easier for entities to provide users of financial statements and to assist entities that prepare IFRS-compliant financial statements with useful information when the contractual cash flows or hedging relationships change due to a change in the reference rate ratio. The amendments provide for a practical solution for certain changes in contractual cash flows and an exemption for certain hedge accounting requirements. 8.1.Implementation of new standards As at the date of approval of these Consolidated Financial Statements for publication, the Management Board does not expect material impact of the introduction of other standards and interpretations on the accounting principles (policy) applied by the Group with respect to the Group’s operations or its financial results. ‎ 9.Major accounting policies 9.1.Consolidation principles These Consolidated Financial Statements cover financial statements of Arctic Paper S.A. and its subsidiaries for the year ended on 31 December 2020. The financial statements of subsidiary entities, subject to adjustments to achieve compliance with EU IFRS, are made for the same reporting period as the financial statements of the patent entity relying on consistent accounting principles, applied to similar transactions and economic events. In order to eliminate any discrepancies in the applied accounting standards, adjustments are made. All material balances and transactions among Group entities, including unrealised profit on transactions within the Group, have been fully eliminated. Unrealised losses are eliminated unless they evidence impairment. The subsidiaries are consolidated from the day of obtaining control by the Group and cease to be consolidated from the day the control discontinues. Control is exercised by the Parent Entity when: —it exercises power over the entity, —it is exposed to variable return or is entitled to variable return as a result of its involvement in the entity, —it is able to exercise its power to affect the level of generated return. The Company verifies its effective control over other entities if a situation occurs that may indicate a change to one or more of the above requirements for control to be effective. When the Company holds less than a majority of votes in an entity but the held voting rights are sufficient to unilaterally direct the essential matters of the entity, this means that control is exercised. When assessing if the voting rights in an entity are sufficient to ensure power, the Company analyses all material circumstances, such as: —the volume of the package of voting rights versus the volumes of other packages and distribution of voting rights held by other shareholders; —potential voting rights held by the Company, other shareholders or other parties; —rights resulting from contractual arrangements; and —additional circumstances that may prove if the Company is or is not able to direct material operations when decisions are taken, including voting schemes observed at earlier general meetings. Change to the holdings by the Parent Entity that do not result in loss of control over subsidiary entities, are recognised as capital transactions. In such instances, in order to reflect the changes in relative interests in subsidiary entities, the Group adjusts the carrying amount of controlling interests and non-controlling interests. All differences between the adjustment amounts to non-controlling interests and the fair value of the amount paid or received, are recognised to equity and attributed to the owners of the Parent Entity. 9.2.Involvement in joint ventures Joint ventures are contractual arrangements pursuant to which two or more parties take up economic operations that is subject to joint control. The Group’s investments in joint ventures are recognised in the consolidated financial statements with the equity method. In accordance with the equity method, investments in joint ventures are initially recognised at cost and afterwards adjusted to reflect the Group’s share in the financial result and other comprehensive income of the joint venture. If the Group’s share in losses of a joint venture exceeds the value of its interest in the entity, the Group discontinues disclosing its share in further losses. Additional losses are recognised solely to the extent corresponding to legal or customary obligations assumed by the Group or payments made on behalf of the joint venture. Investments in joint ventures are disclosed with the equity method since the day the entity has obtained the status of a joint venture. On the day the investment is made in a joint venture, the amount by which the investment costs exceed the Group’s interest in the net fair value of identifiable assets and liabilities of the entity, is recognised as goodwill and included in the carrying amount of the investment. The amount by which the Group’s interest in the net fair value of identifiable assets and liabilities exceeds the costs of the investment, is recognised directly in profit and loss of the period in which the investment was made. If necessary, the entire carrying amount of the investment is tested for impairment in compliance with IAS 36 Impairment of Assets as a single asset and its realisable value is compared to the carrying amount. Such recognised impaired value constitutes a part of the carrying amount of the investment. Such impairment is reversed in compliance with IAS 36 to the extent corresponding to a subsequent increase in the realisable value of the investment. The Group discontinues applying the equity method on the day the investment stops being a joint venture and when it is reclassified to assets available for sale. The difference between the carrying amount of a joint venture as at the day the equity method is no longer applied and the fair value of retained interests and proceeds from the sale of certain interests in the entity, is taken into account when calculating the profit or loss on disposal of such joint venture. If the Group decreases its interests in a joint venture and continues to account for it with the equity method, in its financial result it recognises the part of profit or loss previously recognised in other comprehensive income corresponding to the reduced interest if such profit or loss is subject to re-classification to financial result at disposal of the related assets or liabilities. Gains/losses on measurement of interests in joint ventures are recognised as other financial income/expenses. 9.3.Fair value measurement The Group measures financial instruments such as derivative instruments and non-financial assets such as investment properties at fair value as at each balance sheet date. Additionally, the fair value of financial instruments measured at amortised cost is disclosed in note 36.1. The fair value is understood as the price that could be received for the sale of an asset or paid as a result of transfer of a liability subject to ordinary sale of such asset between market players as at the measurement date at the prevailing market conditions. Fair value measurement is based on an assumption that the sale transaction of an asset or transfer of a liability is executed either: in the main market for such asset or liability, if no main market exists, in the most advantageous market for such asset or liability. Both the main and most advantageous market must be accessible to the Group. The fair value of an asset or liability is measured subject to an assumption that market players act in their best economic interests when setting the price of such asset or liability. The measurement of the fair value of a non-financial asset provides for the possibility of a market player to generate economic benefits as a result of most intensive and best use of the asset or sale thereof to another market player that would ensure the most intensive and best use of such asset. The Group applies measurement techniques that are adequate to the circumstances at hand and when adequate data is available to measure the fair value with maximum use of adequate observable input data and minimum use of non-observable input data. All assets and liabilities that are measured at fair value or their fair value is disclosed in the financial statements, are classified in the hierarchy of fair value in the way described below to the lowest level of input data which is material for the measurement at fair value treated as a whole: —Level 1 – Listed (unadjusted) market prices in an active market for identical assets or liabilities, —Level 2 – Measurement techniques for which the lowest level of input data that is material for the measurement at fair value as a whole is observable or indirectly observable, —Level 3 – Measurement techniques for which the lowest level of input data that is material for the measurement at fair value as a whole is not observable, As at each balance sheet date, for assets and liabilities occurring as at each balance sheet date in the financial statements, the Group assesses if there have been transfers between the hierarchy levels by re-assessment of the classification to each level, following the materiality of the input data from the lowest level which is material for measurement at fair value treated as a whole. Summary of material accounting principles relating to measurement at fair value. The management boards of subsidiary companies or the Management Board of Arctic Paper S.A. determine the principles and procedures relating both to systematic measurement at fair value, e.g. of investment properties and unlisted financial assets, as well as one-off measurements. Independent appraisers are retained to measure material assets such as properties as at the end of each financial year. Measurement at fair value of financial instruments is performed by independent financial institutions specialised in the measurement of such instruments. For the disclosure of results of such measurement at fair value, the Group has defined classes of assets and liabilities on the basis of the type, features and risks related to individual assets and liabilities and the level in the hierarchy of fair value, as described above. 9.4.Foreign currency translation Transactions denominated in currencies other than the functional currency of the entity are translated into the presentation currency at the foreign exchange rate prevailing on the transaction date. On the balance sheet date, monetary assets and liabilities expressed in currencies other than the functional currency of the entity are translated into the functional currency using the mean foreign exchange rate prevailing for the presentation currency as at the end of the reporting period. Foreign exchange differences from translation are recognised under financial income or financial expenses or are capitalised as cost of assets, as defined in the accounting policies. Non-monetary foreign currency assets and liabilities recognised at historical cost are translated at the historical foreign exchange rates prevailing on the transaction date. Non-monetary assets and liabilities denominated in a currency other than the functional currency, recognised at fair value are translated into the functional currency using the rate of exchange prevailing on the date of revaluation to fair value. The functional currencies of the foreign subsidiaries are EUR, SEK, DKK, NOK, GBP and CHF. As on the balance sheet date, the assets and liabilities of those subsidiaries are translated into the presentation currency of the Group (PLN) at the rate of exchange prevailing on the balance sheet date and their income statements are translated using the average weighted exchange rates for the relevant reporting period. The FX differences on translation are recognised in other total comprehensive income and cumulated in a separate equity item. On disposal of a foreign operation, the cumulative amount of the deferred exchange differences recognised in equity and relating to that particular foreign operation shall be recognised in the income statement. Exchange differences on loans treated in compliance with IAS 21 as investments in subsidiaries are recognised in the consolidated financial statements in other comprehensive income. The following exchange rates were used for book valuation purposes: As at ‎ 31 December 2020 As at ‎ 31 December 2019 USD 3,7584 3,7977 EUR 4,6148 4,2585 SEK 0,4598 0,4073 DKK 0,6202 0,5700 NOK 0,4400 0,4320 GBP 5,1327 4,9971 CHF 4,2641 3,9213 ‎ Mean foreign exchange rates for the reporting periods are as follows: 01/01 - 31/12/2020 01/01 - 31/12/2019 USD 3,8978 3,8399 EUR 4,4449 4,2988 SEK 0,4240 0,4061 DKK 0,5963 0,5758 NOK 0,4145 0,4365 GBP 4,9974 4,8988 CHF 4,1534 3,8644 9.5.Tangible fixed assets Tangible fixed assets are measured at purchase price or construction cost reduced by accumulated depreciation and all impairment allowances. The initial value of fixed assets comprises their purchase price and any directly attributable costs of bringing the asset to working condition for its intended use. The cost also comprises the expenses for replacement of fixed asset components when incurred, if the recognition criteria are met. Subsequent expenditures, such as repair or maintenance costs, are expensed in profit and loss account in the reporting period in which they were incurred. Upon purchase, fixed assets are divided into components which represent items with a major value that can be allocated a separate economic useful life. Overhauls also represent asset components. Property, plant and equipment are depreciated using the straight-line method over their estimated useful lives as follows: Type Period Buildings and structures 25 - 50 years Plant and machinery 5 - 20 years Office equipment 3 - 10 years Motor vehicles 5 - 10 years Computers 1 - 10 years Residual values, useful lives and depreciation methods of asset components are reviewed annually and, if necessary, adjusted retrospectively i.e. with effect from the beginning of the financial year that has just ended. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its further use. Any profit or loss arising on derecognition of an asset (calculated as the difference between the potential net disposal proceeds and the carrying amount of the asset) is recognised in the profit and loss account for the period in which such derecognition took place. Assets under construction (construction in progress) include assets in the course of construction or assembly and are recognised at purchase price or cost of construction less any impairment allowances. Assets under construction are not depreciated until completed and brought into use. 9.5.1. Right-of-use assets and leasing In accordance with IFRS 16, the Group applies a uniform lessee accounting model, which requires the lessee to recognize assets and liabilities resulting from each lease. On the lease commencement date, the lessee recognizes an asset with respect to the right to use the underlying asset and a lease liability that reflects the lessee’s obligation to make lease payments. The lessee separately recognizes depreciation of an asset with respect to the right of use and interest on the lease liability. The lessee updates the measurement of the lease liability after the occurrence of certain events (e.g. changes in the lease period, changes in future lease payments resulting from a change in the index or the rate used to determine such payments). In such instances, the lessee recognises the revaluation of the lease liability as an adjustment to the value of the asset with respect to the right of use. As at 1 January 2019, the Group applied IFRS 16 for the first time and introduced a prospectively uniform lessee accounting model, accounting for a lease agreement with a period exceeding 12 months, in accordance with the standard, unless the underlying asset had a value not greater than EUR 5,000 .. The Group is a lessee primarily in case of perpetual usufruct right of land, rental contracts for office space, lease of motor vehicles and machines and equipment. 9.6.Investment properties The initial recognition of investment properties is at the purchase price, including transactional costs. The carrying amount of an asset covers the replacement cost of the component of the investment property when incurred as long as the recognition criteria are satisfied, and it does not include the current maintenance costs of such properties. After initial recognition, investment properties are disclosed at fair value. Gains or losses resulting from changes to the fair value are recognised in the profit or loss in the period they arose, subject to the related impact on deferred income tax. investment properties are derecognised from the balance sheet when they are sold or when they are permanently abandoned, when no future benefits from sale thereof are anticipated. Any profit or loss arising on derecognition of an investment property from the balance sheet are recognised as profit or loss in the period when such derecognition occurred. Assets are transferred to investment properties only when a change of their use takes place, confirmed with the end of use of such asset by the owner or conclusion of an operational lease contract. If an asset is used by the owner – the Group, it becomes an investment property when the Group applies the principles described in the section Tangible fixed assets (note 9.5) until the date the use of the property is changed. When an asset is transferred from inventories to investment properties, the difference between the fair value of the property set as at the transfer date and its previous carrying amount is recognised in profit or loss. When an investment property is transferred to assets used by the owner or to inventories, the alleged cost of such asset to be applied to recognise it in another category, shall be equal to the fair value of the property determined as at the date its mode of use was changed. 9.7.Intangible assets and goodwill 9.7.1.Intangible assets Intangible assets acquired separately or constructed (if they meet the recognition criteria for development costs) are measured on initial recognition at cost or construction costs. The cost of intangible assets acquired in a business combination is equal to their fair value as at the date of combination. Following initial recognition, intangible assets are recognised at purchase cost or construction cost reduced by any accumulated amortisation and impairment allowances. Expenditures incurred for internally generated intangible assets, excluding capitalised development costs, are not capitalised and are charged to the costs in the period in which they were incurred. The useful lives of intangible assets are assessed by the Group to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with limited useful live is recognised in profit or loss in the expense category consistent with the function of the intangible asset. Intangible assets with indefinite useful lives and those that are not in use are tested for impairment annually either individually or at the cash generating unit level. Useful lives are reviewed on an annual basis and, if necessary, are adjusted with effect from the beginning of the financial year that has just ended. A summary of the principles applied to the Group’s intangible assets is as follows: Goodwill Relations with customers Trademarks Software Useful life Unspecified 10 years Unspecified 2-5 years Depreciation method Is not depreciated 10 years with the straight-line method Is not depreciated 2-5 years with the straight-line method Internally generated or acquired Acquired Acquired Acquired Acquired Impairment test Annual verification and in case of any impairment indications Annual assessment of any impairment indications Annual verification and in case of any impairment indications Annual assessment of any impairment indications After analysing the relevant factors, for trademarks the Group does not define any time limit of their useful life. The intention of the Group is to operate for an indefinite period under the same trademark and it is believed that it will not become impaired. Consequently, and in accordance with IAS 38, the Group does not amortise intangible assets with indefinite useful lives. Useful life of such resources should be reviewed in each reporting period, in order to determine whether events and circumstances continue to confirm the assumption of the indefinite useful life of such asset. Profit or loss arising from derecognition of an intangible asset are measured as the difference between the net sales proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is derecognised. 9.7.2.Goodwill Goodwill resulting from acquisition of an entity is initially recognised at the purchase prices being the amount of surplus: —of the sum of: ›payment transferred, ›amount of all non-controlling interests in the acquired entity, and ›in case of a combination of entities carried out in stages, the fair value as at the acquisition of an interest in the capital of the acquired entity held previously by the acquiring entity. —over the fair value determined as at the acquisition date of the acquired identifiable acquired assets and liabilities. After initial recognition, the goodwill is recognised at the purchase cost reduced by all accumulated impairment allowances. An impairment test is held annually or more often if required. Goodwill is not amortised. As at the acquisition date, goodwill is allocated to all cash generating centres that may benefit from combination synergies. Each centre or group of centres to which goodwill has been attributed: —corresponds to the lowest level in the Group at which goodwill is monitored for internal management purposes, and —is not larger than one operational segment determined in compliance with IFRS 8 Operating Segments. Impairment allowances are determined on the basis of an estimated value of each cash generating centre to which the goodwill was allocated. When the recoverable value of a cash generating centre is lower than its carrying amount, an impairment allowance is recognised. When the goodwill constitutes a part of a cash generating centre and a part of the business within the centre is sold, the goodwill related to such sold operations is included in its carrying amount to determine profit or losses on the sale. Under the circumstances, the sold goodwill is determined on the basis of a relative value of the sold operation and the value of the retained part of the cash generating centre. 9.7.3.Emission rights The Group owns a heat and power plant and as a result holds rights to emissions generated in its operations. The Group discloses its rights to emit greenhouse gases in a net amount. This means that the rights acquired free of charge are recognised in the balance sheet at “zero” while the provision related to the obligation to redeem the relevant number of rights is established when a deficit of such rights arises. When emission rights to greenhouse gases are acquired to cover a future deficit, at acquisition the rights are recognised as intangible assets. The provision for a deficit of emission rights is then measured at the value of the acquired intangible assets. The provision is recognised in the amount relying on the annual limit of emission rights. 9.7.4.Certificates in cogeneration As an entity generating electricity in cogeneration, the Group receives certificates of origin (“certificates”). Revenues from the certificates are recognised as a cost reduction at the time of production and measured at the prevailing market price provided the market for such certificates is active. Otherwise, the revenues are recognised at sale of the certificates. Material rights resulting from the measurement are disclosed in intangible assets. The details of the certificates received in the current year are disclosed in note 39. 9.8.Impairment of non-financial fixed assets An assessment is made by the Group as at each balance sheet date to determine whether there is any indication that a component of non-financial fixed assets may be impaired. If such indications exist, or in case an annual impairment test is required, the Group makes an estimate of the recoverable value of the asset or the cash generating unit that the asset is a part of. The recoverable amount of an asset or a cash-generating unit is the fair value of such asset or cash-generating unit reduced by costs to sell or its value in use, whichever is higher. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment allowances of continuing operations are recognised in the expense categories consistent with the function of the impaired asset. An assessment is made by the Group as at each balance sheet date as to whether there is any indication that previously recognised impairment allowances may no longer be required or may be reduced. If such indications exist, the Group makes an estimate of the recoverable amount of the asset. A previously recognised impairment allowance is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment allowance was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined (net of depreciation or amortisation), had no impairment allowance been recognised for the asset in prior years. Reversal of impairment allowance to assets is recognised immediately as income. After a reversal of an impairment allowance is recognised, the depreciation (amortisation) charge for the asset is adjusted in future periods to allocate the asset’s carrying amount, reduced by its residual value (if any), on a systematic basis over its remaining useful life. 9.9.External borrowing costs Borrowing costs are capitalised as part of the cost of the manufacturing of fixed assets, investment properties and intangible assets. External borrowing costs include interest calculated using the effective interest rate method, finance charges in respect of finance leases and foreign exchange differences incurred in connection with the external financing to the extent that they are regarded as an adjustment to interest expense. 9.10.Financial assets In compliance with IFRS 9, the Group classifies financial assets to one of the following categories: —measured at amortised cost: To measure its financial assets measured at amortised cost, the Group applies the effective interest rate method; those are trade receivables, loans granted, other financial receivables and cash and cash equivalents. After initial recognition, trade receivables are measured at amortised cost with the effective interest rate method subject to impairment allowances’ trade receivables due within 12 months of the day of their origin (without financing elements) and not forwarded to factoring, are not discounted and are measured at nominal value; —measured at fair value through other total comprehensive income: profit and loss on a financial asset being a capital instrument which is subject to a measurement option via other comprehensive income, are recognised in other comprehensive income with the exception of dividend received; —measured at fair value through profit or loss: profit or loss resulting from measurement of financial assets, classified as measured at fair value through profit and loss, are recognised through profit or loss in the period in which it was generated; those are primarily derivative instruments not designated for hedge accounting. Profit or loss resulting from measurement of items measured at fair value through profit and loss covers also interest and dividend income. —hedging financial instruments: Hedging financial instruments are measured in compliance with the principles of hedge accounting. The Company classifies debt financial assets to an appropriate category subject to the business model of managing financial assets and to the characteristics of contractual cash flows for each financial asset. 9.11.Impairment of financial assets As at each balance sheet date, the Group assesses whether there is any objective evidence that a financial asset or a group of financial assets is impaired. In accordance with IFRS 9, the Company measures allowances for expected credit losses in the amount equal to the 12-month expected credit losses or expected credit losses in the life of the financial instrument. In case of trade receivables, the Company applies a simplified approach and estimates allowances for anticipated credit loss equal to anticipated credit loss over the life of the receivables which does not exceed 12 months. Trade receivables are the most important financial asset in the Group’s financial statements that are subject to the principles of calculating anticipated credit losses. The Group applies a simplified model to recognise impairment allowances to trade receivables. In the simplified model, the Group does not monitor changes to credit risk level over the life of the instrument and estimates anticipated credit losses over the horizon until the maturity of the instrument. In order to estimate the anticipated credit loss, the Group applies a provision matrix estimated on the basis of historic collectibility levels and recoveries from counterparties. The anticipated credit loss is calculated at the time the receivables are recognised in the statement of financial position and it is updated as at each closing of reporting periods, subject to the number of overdue dates. The Group divides trade receivables into insurance receivables and uninsured receivables, and on the basis of historical data and taking into account expected future factors, it calculates the percentage of expected loss for each aging range of trade receivables. The receivables aging ranges are as follows: maturity range, up to 30 days, up to 60 days, up to 90 days, up to 120 days, up to 360 days and over 360 days. 9.12.Financial derivatives and hedges The Group uses derivative financial instruments such as forward currency contracts and interest rate swaps to hedge the risks associated with interest rate and foreign FX rates fluctuation Such derivative financial instruments are measured at fair value. Such derivatives are stated as assets when the value is positive and as liabilities when the value is negative. Any gains or losses arising from changes in the fair value of the derivatives that do not qualify for hedge accounting are recognised directly in the net profit or loss for the financial year. The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate swap contracts is determined based on a valuation model which takes into account observable market data, particularly including current term interest rates. For the purpose of hedge accounting, hedges are classified as: —fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability, or —cash flow hedges when hedging exposure to variability in cash flows that is attributable to a particular risk inherent in the recognised asset or liability or a forecast transaction, or —hedges of interests in net assets in a foreign entity. Hedges of foreign currency risk in an unrecognised firm commitment are accounted for as cash flow hedges. When a hedge is established, the Group formally identifies and documents the hedging relationship, as well as the objective of risk management and the hedging strategy. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and the assessment method of the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Hedges are expected to be highly effective in offsetting the exposure to changes in the fair value or cash flows attributable to the hedged risk. Hedge effectiveness is assessed on a regular basis to check if the hedge is highly effective throughout all reporting periods for which it was designated. 9.12.1.Fair value hedges Fair value hedge is a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss. In the case of a fair value hedge, any profit or loss on the hedged item attributable to the hedged risk is adjusted against the carrying amount of the hedged item, the hedging instrument is re-measured to fair value and the gains and/or losses on the hedging instrument and hedged item are recognised in profit or loss. For fair value hedges relating to items recognised at amortised cost, the adjustment to the carrying amount is amortised and recognised in profit or loss over the remaining term to maturity of the instrument. When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding profit or loss recognised in profit or loss. The changes to the fair value of the hedging instrument are also recognised in profit or loss. The Group discontinues hedge accounting if the hedging instrument expires, or is sold, terminated or exercised, or the hedge no longer qualifies for hedge accounting, or the Group revokes the designation. Any adjustment to the carrying amount of a hedged financial instrument for which the effective interest method is used is amortised and the allowances are recognised in profit or loss. Amortisation may begin as soon as an adjustment is made, however no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. 9.12.2.Cash flow hedge Cash flow hedges are hedges securing for the risk of cash flow fluctuations which can be attributed to a particular kind of risk inherent in the given item of assets or liabilities or in a contemplated investment of high probability, and which could influence profit or loss. The part of profit or loss related to the hedging instrument which constitutes an effective hedge is recognised directly in other comprehensive income and the non-effective part is recognised in profit or loss. If a hedged intended transaction subsequently results in the recognition of a financial asset or financial liability, the associated gains or losses that were recognised in other comprehensive income and accumulated in equity shall be reclassified to profit and loss account in the same period or periods in which the asset acquired or liability assumed affects profit or loss. If a hedge of a intended transaction subsequently results in the recognition of a non-financial asset or a non-financial liability, or a forecast transaction for a non-financial asset or non-financial liability becomes a firm commitment for which fair value hedge accounting is applied, then gains and losses that were recognised in other comprehensive income are reclassified from equity to profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are recognised directly to net financial result for the period. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or the hedge no longer qualifies for hedge accounting. At that point in time, any cumulative profit or loss on the hedging instrument that has been recognised directly in other comprehensive income and accumulated in equity, remains recognised in equity until the forecast transaction occurs. If the forecast transaction is no longer expected to occur, the net cumulative profit or loss recognised in equity is recognised in net profit or loss for the period. 9.13.Inventories Inventories are valued at the lower of purchase price/construction cost and realisable net selling price. Purchase price or construction cost of every item of inventories includes all purchase expenses, transformation expenses and other costs incurred in bringing each inventory item to its present location and conditions are accounted for as follows for both the current and previous year: Goodwill Relations with customers Trademarks Software Useful life Unspecified 10 years Unspecified 2-5 years Depreciation method Is not depreciated 10 years with the straight-line method Is not depreciated 2-5 years with the straight-line method Internally generated or acquired Acquired Acquired Acquired Acquired Impairment test Annual verification and in case of any impairment indications Annual assessment of any impairment indications Annual verification and in case of any impairment indications Annual assessment of any impairment indications Net realisable value is the estimated selling price in the ordinary course of economic activity, reduced by estimated costs of necessary to finish the items and to finalise the sale. 9.14.Budgetary receivables Receivables from the state budget are presented under other receivables, except for corporate income tax receivables, which constitute a separate item in the balance sheet. 9.15.Cash and cash equivalents Cash and short-term deposits in the balance sheet comprise cash at bank and on hand and short-term deposits with an original maturity of three months or less. For the purpose of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above. 9.16.Interest-bearing loans, borrowings and bonds All bank loans, borrowings and bonds are initially recognised at fair value reduced by costs associated with obtaining the loan or borrowing. After initial recognition, interest-bearing loans, borrowings and bonds are subsequently measured at amortised cost using the effective interest rate method. The amortised cost is calculated by taking into account any costs associated with obtaining the loan or borrowing, and any discount or premium received in relation to the liability. Revenues and expenses are recognised in profit or loss when the liabilities are derecognised from the balance sheet or accounted for with the effective interest method. 9.17.Financial liabilities Financial liabilities are classified as measured at fair value through profit or loss or at amortised cost. Financial liabilities at fair value through profit or loss include financial liabilities held for trading, derivative instruments and financial liabilities initially classified as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are acquired for the purpose of re-sale in the near term. Derivatives, including separated embedded derivatives are also classified as held for trading unless they are determined to be effective hedging instruments. Financial liabilities may be designated at initial recognition as measured at fair value through profit or loss if the following criteria are met: - such qualification eliminates or significantly reduces the inconsistency of treatment, when both the valuation and the rules for recognizing losses or gains are subject to different regulations; or - liabilities are part of a group of financial liabilities that are managed and assessed on the basis of fair value, in accordance with a documented risk management strategy; or - financial liabilities contain embedded derivatives that should be separately recognised. Financial liabilities measured at fair value through profit or loss are measured at fair value, reflecting their market value as at the balance sheet date without taking sales transaction costs into account. Changes in fair value of those instruments are recognised in the profit or loss as financial income or expenses. Other financial liabilities other than financial instruments at fair value through profit or loss are measured at amortised cost using the effective interest rate method. Interest costs and FX gains / (loss) are recognised in profit or loss. Any gains or losses arising from exclusion from the balance sheet are also recognised in profit or loss. The Company excludes a financial liability from its report from financial activities when the liability has expired – that is, when the obligation specified in the contract has been fulfilled, cancelled or expired. Replacement of an existing debt instrument with an instrument with basically different conditions, made between the same entities, is recognised by the Company as expiry of the original financial liability and recognition of a new financial liability. Upon derecognition of a financial liability from the balance sheet, the difference between the carrying amount of the expiring liability and the value of the payment (including all non-cash assets transferred or liabilities assumed) is recognised in the income statement. Similarly, major changes to the terms of an agreement relating to an existing financial liability are recognised by the Company as the expiry of the original and the recognition of a new financial liability measured at fair value. The difference of the respective carrying amounts arising from the replacement is recognised in profit or loss. Other non-financial liabilities include, in particular, liabilities to the tax office due to tax on goods and services and liabilities due to received advance payments, which will be settled by the delivery of goods. Other non-financial liabilities are recognised at the amount payable. Modification of financial liabilities If the contractual terms of a financial liability are modified and the existing liability is not derecognised, the profit or loss is recognised immediately in profit or loss. The profit or loss is calculated as the difference between the present value of the modified and original cash flows, discounted using the original effective interest rate of the liability. 9.18.Provisions Provisions are created when the Group is charged with a (legal or customary) obligation relating to past events, and when it is likely that satisfaction of such obligation shall result in a necessity of an outflow of economic benefits and an amount of such obligation may be reliably estimated. Where the Group expects some or all of the provisioned costs to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the profit and loss account after the deduction of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the estimated future cash flows to their present value using a discount rate that reflects current market assessments of the time value of money and, where appropriate, the risks inherent in the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as financial expenses. Financial assets and liabilities are offset, and the net amount is shown in the statement of financial position only if the Group has a valid legal title to set off and intends to settle these amounts net or to realize the asset and settle the liability at the same time. 9.19.Retirement allowance In accordance with the Group’s remuneration principles, the employees of the Group are entitled to a retirement allowance. It is a one-off payment due to employees upon their retirement. The amount of retirement allowance depends on the seniority and the average salary of the employee. The Group sets up a provision for future retirement allowance liabilities in order to allocate the costs to the relevant periods. In accordance with IAS 19, retirement allowances are defined post-employment benefit plans. The present value of the liabilities is calculated by an independent actuary as at each balance sheet date. The accrued liability is equal to discounted payments to be made in the future subject to staff rotation and applies to the period until the balance sheet date. Demographic information and information on staff rotation is based on historical data. On the basis of measurements performed by professional actuarial companies, the Group recognises a provision for future employee benefits. Re-measurement of employee benefits related to defined benefit plans, covering actuarial gains and losses, is recognised in other comprehensive income and is not later re-classified to profit or loss. The Group recognises the following changes to its net liabilities relating to defined benefit plans within costs of sales, administrative expenses, selling and distribution costs and financial costs, composed of: —service costs (including, inter alia, the current service costs, future service costs) —net interest on the net liability under the defined benefit plans. 9.20.Revenues from contracts with customers and other revenues Pursuant to IFRS 15, the Group applies a five-step model to recognise revenues from contracts with customers. —Requirements applicable to identifying contracts with customers: contracts with customers meet the definition when all of the following criteria have been satisfied: the parties to the contract have concluded the contract and are obliged to perform their obligations; the Group is able to identify the rights of each party concerning the goods and services to be provided; the Group is able to identify the payment terms for the goods and services to be provided; the contract has economic content and it is likely that the Group will receive its remuneration due to it in exchange for the goods and services to be provided to the customer. —Identification of obligations to perform the service: at contract conclusion the Group assesses the goods and services promised in the contract and identifies each promise as a liability for delivery to the customer: the goods or services (or a package of goods or services) that may be identified or a group of separate goods or services that are basically the same and when the delivery has the same nature. —Identification of the transactional price: in order to determine the transactional price, the Group takes the contractual conditions into account as well as its customary commercial practices. The transactional price is the amount that – as the Group expects – will be due to it in exchange for the delivery of the promised goods or services to the customer, net of any amounts collected on behalf of third parties. The contractual remuneration may cover fixed amounts, variable amounts or both types; in order to estimate the variable remuneration, the Group has decided to apply the most probable value method. —The allocation of the transactional price of each liability to perform: The Group allocates the transactional price to each obligation to perform (or for separate goods or separate services) in an amount that reflects the remuneration amount, in line with the Group’s expectations – it is due to the Group in exchange for the delivery of the promised goods or services to the customer. —Revenue recognition when the obligation to perform is being executed: The Group recognises revenues at completion (or during completion) of its obligation to perform by delivery of the promised goods or services (an asset) to the customer (the customer acquires control over the asset). Revenues are recognised in the remuneration amount which – as expected by the entity – is due to it in exchange for the goods or services promised to customers. The following criteria are also applicable to recognition of revenues. 9.20.1.Sale of goods and products Revenue is recognised if control over the goods or products have been transferred to another entity. 9.20.2.Provision of services Group trading companies provide sales services to the Paper Mills. For the service, they are paid a commission computed on the actual value of product sales in each market. This means that profit on the sales services is recognised at the same time as product sales. Sales revenues include only revenues of Paper Mills outside the Group. 9.20.3.Interest Interest income is recognised as interest accrues (using the effective interest rate method that is the rate that discounts the estimated future cash receipts over the anticipated life of the financial instrument) to the net carrying amount of the financial asset. 9.20.4.Dividend Dividend is recognised when the shareholders’ rights to receive dividend are established. 9.20.5.Rental revenues Rental revenues from investment properties are recognised with the straight-line method throughout the lease term for all open contracts. 9.20.6.Government grants If it is certain that a grant will be obtained and all the related conditions will be satisfied, then public grants are recognised at fair value. If the grant applies solely to a specific cost item, then it is recognised as revenues commensurate to the costs that the grant is to compensate. If the grant applies to an asset, then its fair value is recognised in the account of deferred income and then gradually – in equal annual charges – it is recognised in profit or loss over the estimated useful life of the asset. 9.21.Taxes 9.21.1.Current tax Current income tax liabilities and receivables for the current period and previous periods are measured at amounts projected to be paid to tax authorities (to be recovered from tax authorities) with tax rates and based on tax regulations legally or actually applicable as at the balance sheet date. 9.21.2.Deferred income tax For financial reporting purposes, deferred income tax is recognised, using the liability method, regarding temporary differences as at the balance sheet date between the tax value of assets and liabilities and their carrying amount disclosed in the financial statements. Deferred tax provision is recognised for all positive temporary differences: —except where the deferred income tax provision arises from the initial recognition of goodwill, an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit or loss nor taxable profit or loss; and —in respect of positive differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income asset is recognised for all negative temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and unused tax losses can be utilised: —except where the deferred tax asset relating to the negative temporary difference 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 the accounting profit nor taxable profit or loss; and —in respect of negative temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, the deferred income tax asset is recognised in the balance sheet solely to the extent to which it is probable that in the foreseeable future the above differences will be reversed and sufficient taxable income to deduct such temporary negative differences. The carrying amount of the deferred tax asset is reviewed as at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax asset is reassessed as at each balance sheet date and is recognised to the extent that it has become probable that future taxable profit will be available that will allow the deferred tax asset to be recovered. Deferred tax asset and provisions are measured at the tax rates that are expected to apply in the period in which the asset is realised or the provision applied, based on tax rates (and tax laws) that have been enacted or substantively enacted as at the balance sheet date. Income tax relating to items recognised outside profit or loss is recognised outside profit or loss: in other comprehensive income in correlation items recognised in other comprehensive income or directly in equity with reference to items recognised directly in equity. Deferred income tax asset and deferred income tax liability are offset, if a legally enforceable right exists to set off current income tax asset against current income tax liability and the deferred income tax relates to the same taxable entity and the same tax authority. 9.21.3.Deferred income tax related to the activity in the Special Economic Zone The Group operates in the Kostrzyńsko-Słubicka Special Economic Zone and it benefits from an investment tax relief up to the value of its investments. When the actually incurred investment outlays are higher than income for the relevant tax year, then – in compliance with the Regulation of the Council of Ministers of 14 September 2004 on the Kostrzyńsko-Słubicka Special Economic Zone (Journal of Laws No. 222, item 2252 of 13 October 2004) – the Group recognises a deferred income tax asset for the discounted surplus outlays up to the amount with respect to which it is highly likely that it will be utilised. The asset is utilised in the text taxable period when a sufficient taxable amount is generated. 9.21.4.Value added tax Revenues, expenses, assets and liabilities are recognised after the deduction of the amount of VAT, except: —where VAT incurred on a purchase of assets or services is not recoverable from the tax authority, in which case VAT is recognised as part of the cost of purchase of the asset or as part of the expense item as applicable and —receivables and payables which are disclosed with the VAT amount inclusive. The net amount of VAT recoverable from or payable to the tax authority is included as part of receivables or payables in the balance sheet. 9.21.5.Excise tax The amount of excise tax payable on the generated electricity is recognised in the profit and loss account in the period to which it applies and as a liability. Excise tax on the energy used for internal purposes is recognised as costs of sales in the profit and loss account. 9.22.Net profit per share Net earnings per share are calculated by dividing the net profit and the net profit on continuing operations for the period, attributable to the shareholders of the Parent Entity, by the weighted average number of shares outstanding in the reporting period. Diluted earnings per share are calculated by dividing the net profit and the net profit on continuing operations for the period, attributable to the shareholders of the Parent Entity, by the diluted weighted average number of shares outstanding in the reporting period. ‎ ‎ 10.Operational segments Operational segments cover continuing activities. The core activity of the Group comprises production of paper presented as “Uncoated” and “Coated” segments and covering the financial results of the Mochenwangen Group and three Paper Mills: —Arctic Paper Kostrzyn S.A. (Poland) – producer of high quality uncoated graphic paper under the Amber brand; —Arctic Paper Munkedals AB (Sweden) – a producer of high quality uncoated graphic paper under the Munken brand; —Arctic Paper Grycksbo (Sweden) – production of coated wood-free paper under the brands of G-Print and Arctic. The “Pulp” operating segment is related to the purchase of the Rottneros Group in December 2012 and covers, inter alia, two Pulp Mills: —the Pulp Mill in Rottneros (Sweden) produces mainly two types of mechanical pulp: groundwood and chemo-thermo mechanical pulp (CTMP), production level of about 160,000 tonnes annually; —the Pulp Mill in Vallvik (Sweden) produces two types of long-fibre sulphate pulp: fully bleached sulphate pulp and unbleached sulphate pulp. The most of Vallvik Pulp Mill production is known as NBSK pulp. Production level of about 240,000 tonnes annually. The Group identifies the following business segments: —Uncoated paper – paper for printing or other graphic purposes, including wood-free and wood-containing paper. Uncoated wood-free paper may be produced from various types of pulp, with different filler content, and can undergo various finishing processes, such as surface sizing and calendering. Two main categories of this type of paper are graphic paper (used for example for printing books and catalogues) and office papers (for instance, photocopy paper); however, the Group currently does not produce office paper. Uncoated wood paper from mechanical pulp intended for printing or other graphic purposes. That type of paper is used to print magazines with rotogravure and offset techniques. The Group’s products in this segment are usually used for printing paperbacks, —Coated paper – wood-free paper for printing or other graphic purposes, one-side or two-side coated with mixtures containing mineral pigments, such as china clay, calcium carbonate, etc. The coating process can involve different methods, both on-line and off-line, and can be supplemented by super-calendering to ensure a smooth surface. Coating improves the printing quality of photographs and illustrations, —Pulp – fully bleached sulphate pulp and unbleached sulphate pulp which is used mainly for the production of printing and writing papers, cardboard, toilet paper and white packaging paper as well as chemo-thermo mechanical pulp (CTMP) and groundwood which are used mainly for production of printing and writing papers, The exclusions include the exclusions of turnover and settlements between segments and the results of operations of Arctic Paper SA and Arctic Paper Finance AB. The split of segments into the uncoated and coated paper segments and pulp is due to the following factors: —Demand for products and their supply as well as the prices of products sold in the market are affected by operational factors characteristic for each segment, such as e.g. the production capacity level in the specific paper and pulp segment, —The key operating parameters such as inflow of orders or the level of production costs are determined by the factors that are similar for each paper and pulp segment, —The products manufactured at the Paper Mills operated by the Group may (with certain restrictions) be allocated to production in other entities within the same paper segment which to a certain extent distorts the financial results generated by each Paper Mill, —The results of the Arctic Paper Group are under the pressure of global market trends with respect to the prices of paper and pulp, and to a lesser extent are subject to the specific conditions of the production entities. Every month, on the basis of internal reports received from companies (apart from companies of the Rottneros Group), the results in each operating segment are analysed by the management of the Group. The financial results of companies in the Rottneros Groups are analysed on the basis of quarterly financial results published on the websites of Rottneros AB. The operating results are measured primarily on the basis of EBITDA calculated by adding depreciation/amortisation and impairment allowances to tangible fixed assets and intangible assets to operating profit (loss), in each case in compliance with EU IFRS. In accordance with EU IFRS, EBITDA is not a metric of operating profit (loss), operational results or liquidity. EBITDA is a metric that the Management Board uses to manage the operations. Transactions between segments are concluded at arms’ length like between unrelated entities. The table below presents data concerning revenues and profit as well as certain assets and liabilities under continuing operations, split by segments of the Group for the period of 12 months ended on 31 December 2020 and as at 31 December 2020. 12-month period ended on 31 December 2020 and as at 31 December 2020 Uncoated Coated Pulp Total Exclusions Total continuing opetations Revenues Sales to external customers 1 449 226 541 548 856 677 2 847 450 - 2 847 450 Sales between segments - 23 350 30 779 54 129 (54 129) - Total segment revenues 1 449 226 564 898 887 456 2 901 579 (54 129) 2 847 450 Result of the segment EBITDA 212 924 27 990 35 908 276 823 (5 455) 271 368 Depreciation/amortisation (66 694) (4 621) (40 790) (112 105) (1 021) (113 126) Operating profit (loss) 146 230 23 369 (4 882) 164 718 (6 476) 158 242 - Interest income 343 117 - 460 248 708 Interest expense (3 486) (3 846) (8 056) (15 388) (4 442) (19 830) FX gains and other financial income 7 207 210 - 7 417 (7 415) 2 FX losses and other financial expenses (10 471) (3 279) (8 056) (21 806) 5 002 (16 804) Gross profit (loss) 139 823 16 572 (20 994) 135 401 (13 083) 122 318 Assets of the segment 1 019 390 313 735 1 013 394 2 346 519 (236 669) 2 109 850 Liabilities of the segment 446 214 409 052 386 692 1 241 957 (209 793) 1 032 164 Capital expenditures (71 437) (13 342) (51 660) (136 440) (59) (136 499) Interests in joint ventures 1 678 - - 1 678 - 1 678 ‎ The table below presents data concerning revenues and profit as well as certain assets and liabilities under continuing operations, split by segments of the Group for the period of 12 months ended on 31 December 2019 and as at 31 December 2019. 12-month period ended on 31 December 2019 and as at 31 December 2019 Uncoated Coated Pulp Total Exclusions Total continuing opetations Revenues Sales to external customers 1 567 762 639 053 910 304 3 117 118 - 3 117 118 Sales between segments - 27 694 54 706 82 400 (82 400) - Total segment revenues 1 567 762 666 747 965 010 3 199 519 (82 400) 3 117 118 Result of the segment EBITDA 117 524 14 470 152 040 284 034 (6 003) 278 031 - - Depreciation/amortisation (62 866) 11 136 (33 792) (85 522) (1 088) (86 609) Operating profit (loss) 54 658 25 606 118 248 198 512 (7 090) 191 422 - - Interest income 2 820 288 - 3 108 (2 256) 852 Interest expense (4 204) (4 098) (8 529) (16 831) (6 680) (23 511) FX gains and other financial income 2 210 369 2 437 5 016 (4 719) 297 FX losses and other financial expenses (8 108) (3 442) - (11 549) 421 (11 128) Gross profit (loss) 47 377 18 723 112 156 178 256 (20 325) 157 931 Assets of the segment 943 630 273 031 939 444 2 156 105 (146 109) 2 009 996 Liabilities of the segment 456 538 412 808 346 612 1 215 958 (121 555) 1 094 402 Capital expenditures (91 396) (2 521) (43 648) (137 565) (77) (137 643) Interests in joint ventures 1 412 - - 1 412 - 1 412 — Revenues from inter-segment transactions are eliminated on consolidation. — The results of the segments do not cover financial income (PLN 1.149 thousand, of which PLN 852 thousand is interest income) and financial expenses (PLN 34,640 thousand, of which PLN 23.511 thousand is interest expense), depreciation/amortisation (PLN 86,609 thousand), impairment of non-financial assets (PLN 0 thousand) and income tax liability (PLN 33,250 thousand). —Assets of segments do not contain any deferred income tax (asset: PLN 24,346 thousand) and those items are managed at the Group level. They also do not contain shares in joint ventures (PLN 1,412thousand) in companies operating within the Group. Segment liabilities do not include deferred tax (PLN 70,823 thousand), as this item is managed at the Group level. ‎ 10.1.Revenues from contracts with customers The table below presents the Group’s revenues from sales of paper and pulp to external customers in each segment, split by countries and regions, in 2020 and 2019: Geographical information Year ended on 31 December 2020 Revenues from sales of paper and pulp from external customers by segment: Uncoated Pulp Pulp Total Germany 334 517 121 777 121 691 577 985 France 144 300 37 344 8 056 189 701 United Kingdom 128 241 69 712 17 808 215 761 Scandinavia 108 542 77 999 255 145 441 686 Western Europe (other countries) 230 040 15 994 197 165 443 199 Poland 279 295 44 174 6 644 330 113 Central and Eastern Europe (other than Poland) 167 935 147 887 24 169 339 990 Outside Europe 56 356 26 661 225 998 309 014 Total segment revenues 1 449 226 541 548 856 677 2 847 450 Year ended on 31 December 2019 Revenues from sales of paper and pulp from external customers by segment: Uncoated Pulp Pulp Total Germany 371 511 135 396 132 811 639 717 France 152 288 34 802 10 154 197 243 United Kingdom 154 832 87 889 19 089 261 809 Scandinavia 112 713 115 305 238 098 466 116 Western Europe (other countries) 157 238 18 694 211 604 387 535 Poland 285 556 48 026 33 333 366 915 Central and Eastern Europe (other than Poland) 306 911 149 246 28 837 484 994 Outside Europe 26 713 49 696 236 379 312 788 Total segment revenues 1 567 762 639 053 910 304 3 117 118 Sales revenues related to the item “Western Europe” cover mainly sales in Belgium, the Netherlands, Austria, Switzerland, Italy and Spain. Sales revenues related to the item “Central and Eastern Europe” cover mainly sales in Ukraine, the Czech Republic, Slovakia, Hungary and Bulgaria. Sales revenues related to the item “Outside Europe” cover mainly sales in China and the USA. Sales to no buyer exceed 10% of total revenues. 10.2.Fixed assets by countries and regions The table below presents the Group’s fixed assets reduced by deferred income tax asset split by country and region, as at 31 December 2020 and 31 December 2019: Geographical information ‎ Fixed assets: As at 31 December 2020 As at 31 December 2019 Germany 4 970 5 021 France 1 436 1 720 Scandinavia 774 238 646 663 Western Europe (other countries) 981 809 Poland 387 630 402 069 Central and Eastern Europe (other than Poland) 131 278 Total fixed assets 1 169 386 1 056 560 The growth of fixed assets in the Group results primarily from investment outlays on tangible fixed assets made in the Group’s Paper Mills and Pulp Mills in 2020. ‎ 11.Income and costs 11.1.Other operating income Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Reversal of provisions 27 998 Damages received 9 777 538 Rental income 2 407 2 941 Sales of services 1 897 1 297 Subsidies 3 316 3 569 Sale of utilities 26 817 23 944 Sale of materials 6 189 12 524 Profit on disposal of tangible fixed assets 1 003 15 174 Profit on sale of CO2 emission rights 8 251 11 373 Other 5 596 5 754 Total 65 280 78 111 11.2.Other operating expenses Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Real estate tax (1 003) (912) Costs of sales of utilities (22 528) (21 112) Costs of sales of materials (7 153) (15 443) Reorganisation costs in subsidiary entity (1 238) (3 873) Loss on disposal of tangible fixed assets (34) (251) Decreasing the value of real estate investments (1 042) (108) Other (2 959) (5 107) Total (35 957) (46 806) 11.3.Financial income Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Interest income on funds in bank accounts 433 349 Interest income on receivables 272 480 Other interest income 2 20 Profit on interests in joint ventures - 265 Other financial income 3 34 Total 710 1 149 ‎ 11.4.Financial expenses Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Interest on bank loans measured at amortised cost (16 177) (18 384) Interest on other financial liabilities (1 756) (2 427) Interest on actuarial provisions (1 179) (1 998) Financial expenses under finance lease agreements (718) (719) FX losses (10 429) (3 384) Measurement effect of the adjusted purchase price (3 680) (4 326) Other financial expenses (2 695) (3 402) Total (36 633) (34 640) The costs related to the measurement effect to the adjusted purchase price relate to changed margin. 11.5.Prime costs Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Depreciation/amortisation (113 126) (86 609) Consumption of materials and energy (1 653 812) (1 912 912) Third party services (419 992) (422 946) Taxes and charges (9 579) (10 861) Employee benefit costs (395 503) (390 751) Other prime costs (72 454) (81 418) Value of goods sold (5 363) (7 942) Prime costs (2 669 829) (2 913 439) Impairment allowances to non-financial assets - - Changes in product inventories (24 498) (39 105) Change to impairment allowances to receivables (24 204) (4 457) TOTAL (2 718 531) (2 957 001) of which: Items recognised as internal costs of sales (2 305 659) (2 531 612) Items recognised as selling and distribution costs (336 524) (336 862) Items recognised as administrative expenses (76 348) (88 527) ‎ 11.6.Depreciation/amortisation expense and impairment allowances recognised in income statement Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Items recognised as internal costs of sales: Depreciation of fixed assets and amortisation of intangible assets (106 450) (79 957) Impairment of tangible fixed assets - - Impairment of intangible assets - - Items recognised as selling and distribution costs: Depreciation of fixed assets and amortisation of intangible assets (3 556) (3 495) Impairment of tangible fixed assets - - Impairment of intangible assets - - Items recognised as administrative expenses Depreciation of fixed assets and amortisation of intangible assets (3 120) (3 158) Impairment of tangible fixed assets - - Impairment of intangible assets - - 11.7.Employee benefit costs Note Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Salary costs (315 565) (298 916) Social insurance premiums (76 635) (79 812) Costs of retirement benefits 23.1 (4 272) (25 341) Total costs of employee benefits, ‎ of which: (396 472) (404 069) Items recognised as internal costs of sales (295 655) (284 686) Items recognised as selling and distribution costs (48 058) (48 493) Items recognised as administrative expenses (51 790) (57 571) Items recognised as other comprehensive income (969) (13 319) ‎ 12.Components of other comprehensive income The components of other total comprehensive income for the year ended on 31 December 2020 and 31 December 2019 that are re-classified to profit or loss, are as follows: Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Cash flow hedges Profit (loss) for the period resulting from contracts settled during the reporting period (15 130) (42 185) Profit (loss) for the period resulting from contracts not settled as the reporting date (8 019) (13 624) Adjustments resulting from re-classification to profit (loss) - - Total other comprehensive income (23 149) (55 809) Cash flow hedges are described in detail in note 36.4 to this report. 13.Income tax 13.1.Tax liability The major components of income tax liabilities for the year ended on 31 December 2020 and on 31 December 2019 are as follows: Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Consolidated income statement Current income tax Current income tax liability (17 009) (12 253) Adjustments related to current income tax from previous years (1 269) (10) Deferred income tax Resulting from the establishment and reversal of temporary differences (454) (20 987) Tax credit/ (liability) disclosed in the consolidated income statement (18 733) (33 250) Consolidated statement of changes in equity Current income tax Tax effects of the costs of increase of share capital - - Tax benefit (tax liability) recognised in equity - - Consolidated statement of total comprehensive income Deferred income tax Deferred income tax on the measurement of hedging instruments 5 185 12 309 Deferred income tax on actuarial profit/loss (29) 2 428 Tax benefit (tax liability) recognised in other comprehensive income 5 156 14 737 13.2.Recognition of effective tax rate A reconciliation of income tax expense applicable to gross profit (loss) before income tax at the statutory income tax rate, to income tax expense at the Group’s effective income tax rate for the year ended on 31 December 2020 and 31 December 2019 is as follows: Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Gross profit (loss) before tax 122 318 157 931 Tax at the statutory rate prevailing in Poland in ‎ 2008-2020, of 19% (23 240) (30 007) - Tax adjustments from previous years, recognised in the current income tax (1 269) (10) Difference resulting from income tax rates in force in other countries (923) (3 945) Tax loss not incorporated in deferred income tax assets calculation (1 528) (3 441) Use of tax losses not recognised earlier 63 3 492 Non-taxable revenues 3 114 3 662 Costs that are not tax deductible (2 839) (3 001) Effects of the tax group in Sweden 8 644 (0) Change of tax rates in Sweden (754) - Tax at the effective tax rate of 20% (2019: 21%) (18 732) (33 250) Income tax (charge) stated in the consolidated income statement (18 733) (33 250) The change to tax rates for the year ended on 31 December 2020 relates to companies in Sweden whereas from 01 January 2021 the corporate income tax rate was changed from 21.4% to 20.6%. The low effective income tax rate in 2020 results from the use of tax losses within the Swedish tax group. These losses in previous years were not the basis for the deferred income tax. The amount of unrecognised deferred income tax asset relates mainly to tax losses that are expected to be time barred before realised, as well as those temporary differences that in the Group’s opinion may not be used for tax purposes. Deferred income tax asset is recognised for tax losses carried forward to the extent that realisation of the related tax benefit through future taxable profit is probable. The Polish tax system provides for restrictions in cumulating tax losses by legal persons that remain under joint control which is the case for Group member companies. Therefore, each subsidiary of the Group in Poland may utilise solely their own tax losses in order to reduce taxable income in subsequent years. The amounts and expiry dates of tax losses for which deferred tax assets were not recognised are as follows: 2020 Termination period 2019 Termination period Expiring tax losses 47 059 2021-2025 47 193 2020-2024 Tax losses and temporary differences without time limit 2 842 43 520 TOTAL 49 901 90 713 The potential tax effect of the non-capitalised tax losses and temporary differences amounts to PLN 9,481 thousand. 13.3.Deferred income tax Deferred income tax relates to the following items: Consolidated balance sheet Consolidated income statement for the year ended as at 31 December 2020 31 December 2019 31 December 2020 31 December 2019 Deferred income tax liability Fixed assets 77 272 74 444 (2 828) (18 364) Co-generation certificates - - - 1 299 Hedging instruments 1 896 5 903 4 007 12 881 Gross deferred income tax provision 79 168 80 347 1 179 (4 184) Consolidated balance sheet Consolidated income statement for the year ended as at 31 December 2020 31 December 2019 31 December 2020 31 December 2019 Deferred income tax asset Post-employment payments 9 249 7 519 1 730 1 430 Accruals and deferred income and provisions 3 939 4 013 (73) 122 Inventories 2 026 1 135 891 (250) Trade receivables 3 561 3 642 (81) 19 Investments tax credits – activity in ‎ Kostrzyńsko-Słubicka Specjalna Strefa Ekonomiczna - 4 621 (4 621) (1 913) Losses deductible from future taxable income 14 061 12 940 1 122 (521) Gross deferred income tax asset 32 837 33 869 (1 033) (1 114) FX differences 4 555 (956) Total, of which 4 701 (6 253) Changes to deferred income tax recognised in other comprehensive income 5 156 14 737 Changes to deferred income tax recognised in income statement (454) (20 987) Net deferred income tax asset/provision ‎ of which: - Adjustment to presentation (7 720) (9 524) - Deferred income tax asset 25 117 24 346 - Deferred income tax liability 71 448 70 823 The table shows the sum of positive and negative temporary differences for each Group company, without netting them at the unit level. In the presentation adjustment, the assets and the provision are netted off at the individual company level. The Management Board made an assessment of recoverability of the deferred income tax asset related to tax losses and determined the asset was recoverable, inter alia, due to the fact that AP Grycksbo and AP Munkedals are part of a tax group in Sweden, and tax regulations in Sweden do not temporarily limit the use of tax losses incurred in previous years. The Group did not recognise any deferred income tax asset on the tax losses suffered by Arctic Paper S.A. due to the limited period of applying the losses in the coming years when the Company does not expect to generate taxable income to be offset against the losses. The decision to create or not create an asset is dictated by the recoverability of the asset at the entity level. 14.Earnings per share Earnings per share are established by dividing the net profit (loss) or net profit (loss) from continuing operations for the reporting period attributable to the Company’s ordinary shareholders by the weighted average number of ordinary shares outstanding in the reporting period. The information regarding profit (loss) and the number of shares which constituted the base to calculate earnings per share and diluted earnings (loss) per share is presented below (all shares are ordinary shares and belong to the same class): Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Net profit (loss) period from continuing operations attributable to the shareholders of the Parent Entity 111 070 82 709 Profit (loss) for the financial year from discontinued operations attributable to the shareholders of the Parent Entity - - Net profit (loss) for the reporting period attributable to the shareholders of the Parent Entity 111 070 82 709 Number of ordinary shares – A series 50 000 50 000 Number of ordinary shares – B series 44 253 500 44 253 500 Number of ordinary shares – C series 8 100 000 8 100 000 Number of ordinary shares – E series 3 000 000 3 000 000 Number of ordinary shares – F series 13 884 283 13 884 283 Total number of shares 69 287 783 69 287 783 Weighted average number of shares 69 287 783 69 287 783 Diluted weighted average number of ordinary shares 69 287 783 69 287 783 Profit (loss) per share (in PLN) – basic earnings from the profit/(loss) for the period attributable to the shareholders of the Parent Entity 1,60 1,19 – basic earnings from the profit/(loss) from continuing operations for the period attributable to the shareholders of the Parent Entity 1,60 1,19 Diluted profit (loss) per share (in PLN) – from the profit/(loss) for the period attributable to the shareholders of the Parent Entity 1,60 1,19 – from the profit/(loss) for the period from continuing operations attributable to the shareholders of the Parent Entity 1,60 1,19 In the period between the balance sheet date and the date hereof there were no other transactions related to ordinary shares or potential ordinary shares. 15.Dividend paid and proposed Dividend is paid based on the net profit disclosed in the standalone annual financial statements of Arctic Paper S.A. after covering losses carried forward from the previous years. As on the date hereof, the Company had no preferred shares. The possibility of disbursement of potential dividend by the Company to its shareholders depends on the level of payments received from its subsidiaries. The risk associated with the Company’s ability to disburse dividend was described in the part “Risk factors” of the annual report for 2020. In 2019 the Company did not pay out dividend. On 30 April 2020, the Management Board of Arctic Paper S.A. approved a decision concerning a change to its recommendation on dividend distribution from 2019 profit, originally published in current report No. 4/2020 of 27 February 2020. The Company’s Management Board approved a resolution to recommend to the Company’s General Meeting no dividend distribution from the profit for the financial year ended on 31 December 2019. The change of the previous recommendation of the Company’s Management Board is related to a change of demand for products of the Arctic Paper Group companies as a result of the COVID-19 pandemic as well as no possibility to assess the impact of the pandemic on economic situation in Q2 and Q3 2020. At its meeting of 30 April 2020, the Company’s Supervisory Board provided its positive opinion to the above proposal of the Management Board on no distribution of dividend from the profit for the financial year ended on 31 December 2019. The Company’s General Meeting held on 31 August 2020 did not make any decision on dividend disbursement. According to the current report no. 7/2021 published on 26 February 2021, Taking into account the preliminary financial results of the Company and the Arctic Paper S.A. Group of 2020, the Management Board of the Company decided to recommend to the Annual General Meeting of the Company the payment of dividend from the Company's net profit of 2020 in the amount of PLN 0.30 gross per share. Dividend payment restrictions are described in note 27.5. 16.Tangible fixed assets Tangible fixed assets include property, plant and equipment excluding right-of-use assets and right-of-use assets. Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Tangible fixed assets without assets with the right of use 1 047 972 941 366 Right-of-use assets 37 150 38 485 TOTAL 1 085 121 979 851 ‎ 16.1.Tangible fixed assets without assets with the right of use Land and buildings Plant and machinery Fixed assets under construction Total Net book value as at 01 January 2019 188 929 617 666 95 365 901 960 Increase due to purchase 24 690 20 616 91 962 137 268 Increase due to transfer of tangible fixed assets under construction 18 016 109 059 (127 074) - Decreases due to disposal - (1 418) - (1 418) Decreases due to liquidation - (400) - (400) Depreciation allowance for the period (15 709) (59 516) - (75 225) FX differences on translation (2 660) (11 310) (2 418) (16 388) Transfer to right-of-use assets - (4 431) - (4 431) Net book value as at 31 December 2019 213 267 670 264 57 835 941 366 Net book value as at 01 January 2020 213 267 670 264 57 835 941 366 Increase due to purchase 10 068 49 279 70 382 129 729 Increase due to transfer of tangible fixed assets under construction 22 087 67 985 (90 071) - Zwiększenia wskutek nabycia jednostki zależnej (Nota 23) - 2 120 - 2 120 Decreases due to disposal - (447) - (447) Decreases due to liquidation (31) (18) - (49) Depreciation allowance for the period (18 715) (82 321) - (101 037) Change to presentation within groups - (226) - (226) FX differences on translation 16 222 56 137 4 155 76 515 - Net book value as at 31 December 2020 242 898 762 773 42 300 1 047 972 Balance as at 01 January 2019 Gross book value 449 429 1 970 631 95 365 2 515 426 Depreciation/amortisation and impairment charges (260 501) (1 352 964) - (1 613 465) Net book value 188 929 617 666 95 365 901 960 Balance as at 31 December 2019 Gross book value 483 098 2 047 940 57 835 2 588 872 Depreciation/amortisation and impairment charges (269 831) (1 377 675) - (1 647 506) Net book value 213 267 670 264 57 835 941 366 Balance as at 01 January 2020 Gross book value 483 098 2 047 940 57 835 2 588 872 Depreciation/amortisation and impairment charges (269 831) (1 377 675) - (1 647 506) Net book value 213 267 670 264 57 835 941 366 Balance as at 31 December 2020 Gross book value 555 708 2 335 094 42 300 2 933 102 Depreciation/amortisation and impairment charges (312 810) (1 572 320) - (1 885 130) Net book value 242 898 762 773 42 300 1 047 972 Impairment of tangible fixed assets for the year ended on 31 December 2020 was PLN 0 thousand (in the year ended on 31 December 2019: PLN 0 thousand). Property, plant and equipment excluding the right-of-use assets with the carrying amount of PLN 498,818 thousand (as at 31 December 2019: PLN 493,666 thousand) are subject to mortgage to secure the bank loans (note 32). The amount of capitalised external funding costs and FX gains/losses in the year ended on 31 December 2020 was PLN 0 thousand (in the year ended on 31 December 2019: PLN 4 thousand). 16.2.Right-of-use assets Land and buildings Plant and machinery Total Net carrying amount as at 01 January 2019 34 774 7 909 42 683 of which transfers from tangible fixed assets without right-of-assets Increase due to purchase 1 652 3 624 5 276 Decreases due to disposal - (92) (92) Depreciation allowance for the period (6 113) (2 672) (8 786) FX differences on translation (476) (120) (597) Net carrying amount as at 31 December 2019 29 836 8 649 38 485 Net carrying amount as at 01 January 2020 29 836 8 649 38 485 Increase due to purchase 2 246 3 941 6 187 Decreases due to disposal - (572) (572) Decreases due to liquidation (27) - (27) Depreciation allowance for the period (5 970) (3 327) (9 297) FX differences on translation 1 446 927 2 373 - Net carrying amount as at 31 December 2020 27 532 9 618 37 150 Balance as at 01 January 2019 Gross carrying amount 34 774 9 155 43 928 Depreciation/amortisation and impairment allowances - (1 246) (1 246) Net carrying amount 34 774 7 909 42 683 Balance as at 31 December 2019 Gross carrying amount 35 949 12 554 48 504 Depreciation/amortisation and impairment allowances (6 113) (3 906) (10 019) Net carrying amount 29 836 8 649 38 485 Balance as at 01 January 2020 Gross carrying amount 35 949 12 554 48 504 Depreciation/amortisation and impairment allowances (6 113) (3 906) (10 019) Net carrying amount 29 836 8 649 38 485 Balance as at 31 December 2020 Gross carrying amount 40 584 16 887 57 471 Depreciation/amortisation and impairment allowances (13 052) (7 269) (20 321) Net carrying amount 27 532 9 618 37 150 Assets with the right to use with the carrying amount as at 31 December 2020 of PLN 9,618 thousand (as at 31 December 2019: PLN 8,649 thousand) are covered by a mortgage / pledge established to secure the lease liabilities. 17.Leases The Group entered into lease contracts covering selected motor vehicles, technical equipment, offices and warehouses and perpetual usufruct right of land. As at 31 December 2020 and 31 December 2019 the future minimum lease fees and the present value of minimum net lease fees were as follows: Year ended on 31 December 2020 Year ended on 31 December 2019 according to IFRS 16 according to IFRS 16 Minimum fees Present value of the fees Minimum fees Present value of the fees In 1 year 10 523 9 765 9 102 8 692 In 1 to 5 years 13 574 11 200 15 503 13 398 Over 5 years 50 059 14 756 53 164 16 125 Total minimum lease fees 74 156 35 720 77 770 38 215 Minus financial expenses (38 436) (39 557) Value of present minimum ‎ lease fees, of which: 35 720 35 720 38 215 38 215 - short-term 9 765 8 692 - long-term 25 956 29 523 18.Investment properties 2020 2019 Opening balance as at 01 January 4 128 4 236 Increases (subsequent expenditures) - - Sale of properties - - Profit/loss on fair value measurement (1 042) (108) - Closing balance as at 31 December 3 086 4 128 Investment properties include undeveloped plots of land in Warsaw. Investment properties were disclosed at fair value as a result of an appraisal by an accredited appraiser. The appraisal was made with a comparative approach, the adjusted average price method. The property appraiser holds a license in property appraising granted by the President of the Housing and City Development Office. The market value of a property is the most likely price that may be realised in the market, determined with reference to transactional prices and subject to the following assumptions: —the parties to the transaction were independent of each other, were not forced to act and were willing to enter into the transaction, —sufficient time has expired to expose the property to the market and to negotiate contractual terms and conditions. The market value for the current method of use (WRU) was appraised subject to: —purpose of the appraisal, —type and location of the property, —function in the local development plan, —existence of technical infrastructure, —condition of the property, —available data on prices of similar properties. The appraisal was made with a comparative approach, the adjusted average price method. The current costs incurred in 2020 included real estate tax of PLN 11 thousand (2019: PLN 10 thousand). 19.Intangible assets and goodwill Goodwill Relations with customers Trademarks Co-generation certificates Other Total Net value as at 01 January 2020 - - 30 949 747 6 775 38 471 Increases 8 553 - - 3 096 841 12 490 Decreases - - - (749) - (749) Depreciation for the period - - - - (2 792) (2 792) FX differences on translation 1 103 - 3 819 24 540 5 486 - Net value as at 31 December 2020 9 656 - 34 768 3 118 5 365 52 907 - As at 01 January 2020 Gross value - 35 115 81 384 747 39 990 157 235 Depreciation/amortisation and impairment allowances - (35 115) (50 435) - (33 215) (118 764) - Net value - - 30 949 747 6 775 38 471 As at 31 December 2020 Gross value 9 656 35 115 91 704 3 118 42 717 182 309 Depreciation/amortisation and impairment allowances - (35 115) (56 936) - (37 352) (129 402) - Net value 9 656 - 34 768 3 118 5 365 52 907 * – The item Other contains mainly computer software. ‎ Status as at 31 December 2019 Relations with customers Trademarks Co-generation certificates Other Total Net value as at 01 January 2019 - 31 880 8 307 8 973 49 160 Increases - - 1 162 447 1 609 Decreases - - (8 682) 177 (8 505) Depreciation for the period - - - (2 600) (2 600) FX differences on translation - (931) (40) (222) (1 194) Net value as at 31 December 2019 - 30 949 747 6 775 38 471 As at 01 January 2019 Gross value 35 115 83 900 8 307 37 405 164 727 Depreciation/amortisation and impairment allowances (35 115) (52 020) - (28 432) (115 566) Net value - 31 880 8 307 8 973 49 160 As at 31 December 2019 Gross value 35 115 81 384 747 39 990 157 235 Depreciation/amortisation and impairment allowances (35 115) (50 435) - (33 215) (118 764) Net value - 30 949 747 6 775 38 471 * – The item Other contains mainly computer software. As at 31 December 2020 and 31 December 2019, the trademarks include those of Arctic Paper, AP Grycksbo and Rottneros. The trademarks of Arctic paper and Rottneros are not subject to impairment allowances. Trademarks in AP Grycksbo are fully covered by an impairment charge. From 1 January 2019, as a result of changes in legal regulations, AP Kostrzyn is not entitled to receive cogeneration certificates. Impairment of intangible assets for the year ended on 31 December 2020 was PLN 0 thousand (in the year ended on 31 December 2019: PLN 0 thousand). The value of fixed assets and intangible assets of the Rottneros Group incorporated in the consolidation of the Arctic Paper Group is measured below the values disclosed in the consolidated financial statements of the Rottneros Group. For this reason, the impairment analysis of the assets allocated to the cash generating unit in the form of the Rottneros Group was based on the impairment analysis prepared by the Rottneros Group. Goodwill and a trademark with an indefinite useful life are allocated to the unit. The recoverable amount of the unit has been determined based on value in use using the discounted cash flow method. As at 31 December 2020, the total net assets tested for impairment amounted to PLN 651,151 thousand (including goodwill PLN 9,565 thousand) and the trademark PLN 33,449 thousand. A discount rate (WACC) in the range of 10%-11% and a forecast period from 2021 to a maximum of 2027 were used to calculate the value in use of the net assets attributable to the cash-generating unit. The projected flows include a residual period of more than 5 years due to the group’s strategy of operating the unit for an indefinite period of time. The recoverable amount of the net assets allocated to the cash-generating units was higher than the carrying amount of these assets and therefore the test did not indicate an impairment of the Rottneros Group's property, plant and equipment and intangible assets (including trademark and goodwill) recognised in these consolidated financial statements as at 31 December 2020 and 31 December 2019. Intangible assets with carrying amount of PLN 5,660 thousand (as at 31 December 2019: PLN 3,543 thousand). constituted security to bank loans (note 28.2). The goodwill was described in note 20. 20.Business combinations and acquisition of non-controlling interests ‎ On January 1, 2020, the Group, through Rottneros AB, took control of Nykvist Skogs AB. Through the acquisition of Nykvist Skogs AB, the Group strengthened its cellulosic wood supply through increased access to wood from private forest owners. This group accounts for around half of Sweden's forest ownership, and private forests play an increasing role in the timber supply to the industry. Goodwill, as calculated below, has been attributed to the Group's broader access to raw materials in the long run. Nykvist Skogs AB had no contingent liabilities that would need to be recognized as part of the merger settlement. The table below shows the determined fair values of the main identifiable assets acquired and liabilities assumed as at the acquisition date: ‘000 SEK Price paid for shares 24 400 Receivables and payables to Nykvist prior to acquisition 2 000 Purchase price 26 400 Property, plant and equipment 5 021 Inventories 1 513 Trade and other receivables 22 340 Cash and cash equivalents 9 245 Commitments 32 554 Net assets (5 565) Recognised goodwill 20 835 Recognised goodwill in thousands PLN 8 524 Recognition of acquisition of shares in the consolidated statement of cash flows ‘000 SEK Price paid for shares (24 400) Cash and cash equivalents at the date of acquisition of shares 9 245 Flows related to the acquisition of shares (15 155) Flows related to the acquisition of shares in EUR thousand PLN (6 089) ‎ 21.Other assets 21.1.Other financial assets Note Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Hedging instruments 36.4.3. 13 107 29 458 Investments in equity instruments 3 678 3 258 Receivables from pension fund 19 398 16 776 Total 36 184 49 492 - short-term 12 188 18 835 - long-term 23 996 30 658 The Other item contains other interest-earning receivables. 21.2.Other non-financial assets Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Insurance costs 1 352 2 255 Lease fees 35 231 Advance payments for services 3 981 3 580 Rent 140 755 Receivables from pension fund 2 283 1 731 Other 956 2 396 Total 8 747 10 948 - short-term 6 149 8 909 - long-term 2 598 2 039 22.Impairment test for tangible fixed assets and intangible assets 22.1.Goodwill In accordance with the requirements of IFRS EU, as at 31 December 2020, the Rottneros Group performed an impairment test for goodwill using the discounted cash flow method. The test did not show the need to write off the goodwill. 22.2.Arctic Paper Grycksbo As at 31 December 2020 and 31 December 2019 earlier impairment tests were conducted at Arctic Paper Grycksbo with reference to tangible fixed assets and intangible assets. The impairment test as at 31 December 2020 in Arctic Paper Grycksbo was related to the Covid-19 epidemic and its impact on the Company's future results. In the previous years, it was associated with the achievement of lower results than those expected by the Group's Management. The results were adversely affected by market conditions such as unfavourable price fluctuations of raw materials, intensified competition in the segment of the paper produced by Grycksbo. The test did not show any changes to the value of impairment losses as at 31 December 2020. The total accumulated impairment loss for Arctic Paper Grycksbo as at 31 December 2020 amounted to PLN 324,619 thousand. PLN (31 December 2019: PLN 287,554 thousand). The difference in the value of the write-down results from the valuation of the write-down from previous years denominated in SEK against the presentation currency, ie PLN. 23.Employment benefits 23.1.Retirement benefits and other post-employment benefits Group entities pay post-employment benefits to its retiring employees in amounts set forth in Poland’s Labour Code in case of Arctic Paper Kostrzyn S.A. and on the basis of existing agreements with trade unions in case of Arctic Paper Munkedals AB, Arctic Paper Kostrzyn S.A and Arctic Paper Grycksbo AB which additionally has set up a Social Fund for future retirees. Moreover, due to legal regulations, Arctic Paper Mochenwangen GmbH is still obliged to recognize the provision for retirement benefits. In this connection, on the basis of measurement performed in each country by professional actuarial companies, the Group establishes a provision for future benefits. Re-measurement of employee benefits related to defined benefit plans, covering actuarial gains and losses, is recognised in other comprehensive income and is not later re-classified to profit or loss. The Group recognises the following changes to its net liabilities relating to defined benefit plans within costs of sales, administrative expenses or selling and distribution costs, composed of: service costs (including, inter alia, the current service costs, future service costs) net interest on the net liability under the defined benefit plans. The net cost of employee benefits is presented in the table below: Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Current headcount costs 2 124 10 023 Interest expense on employee benefit liabilities 1 179 1 999 Actuarial (profit) / loss 969 13 319 - Total costs of benefit in the plan 4 272 25 341 of which: recognised in the income statement 3 303 12 022 recognised in other comprehensive income 969 13 319 ‎ The justification presenting changes in the provisions for the years ended on 31 December 2020 and 31 December 2019 is presented in the table below. Defined benefit plan ‎ in Sweden (AP SA branch) Defined benefit plan ‎ in Sweden (Munkedals) Defined benefit plan ‎ in Sweden (Grycksbo) Defined benefit plan ‎ in Sweden (Rottneros Group) Defined benefit plan ‎ in Poland (Kostrzyn) Defined benefit plan ‎ in Germany Total Provisions for pensions and similar obligations as at 01 January 2020 2 150 31 564 49 141 16 699 10 841 14 161 124 556 Current headcount costs 687 - - 848 589 - 2 124 Interest expense - 377 593 - 209 - 1 179 Actuarial Loss (Profit) - 103 301 - 565 - 969 Benefits paid - (844) (4 251) - (597) - (5 692) FX differences on translation of foreign plans - 4 038 6 051 2 224 - 1 185 13 498 Provisions for pensions and similar benefits as at 31 December 2020 2 837 35 238 51 835 19 771 11 607 15 346 136 634 Defined benefit plan ‎ in Sweden (AP SA branch) Defined benefit plan ‎ in Sweden (Munkedals) Defined benefit plan ‎ in Sweden (Grycksbo) Defined benefit plan ‎ in Sweden (Rottneros Group) Defined benefit plan ‎ in Poland (Kostrzyn) Defined benefit plan ‎ in Germany Total Provisions for pensions and similar obligations as at 01 January 2019 1 854 28 936 46 493 7 562 8 093 12 648 105 585 Current headcount costs 297 - - 9 341 385 - 10 023 Interest expense - 565 916 - 234 284 1 999 Actuarial Loss (Profit) - 3 695 5 433 - 2 501 1 689 13 319 Benefits paid - (760) (2 297) - (372) (322) (3 751) FX differences on translation of foreign plans - (872) (1 405) (204) - (138) (2 618) Provisions for pensions and similar benefits as at 31 December 2019 2 150 31 564 49 141 16 699 10 841 14 161 124 556 The provision for retirement benefits and similar benefits is presented in the consolidated statement of financial position under long-term and short-term provisions, respectively (see note 33). ‎ The core assumptions made by actuary as at each balance sheet date to calculate the amounts of the obligations are as follows: As at 31 December 2020 As at 31 December 2019 Discount rate (%) Plan in Sweden 0,9% 1,3% Plan in Poland 1,5% 2,0% Plan in Germany 1,3% na Anticipated salary growth rate (%) Plan in Sweden 0,0% 0,0% Plan in Poland 3,0% 3,0% Plan in Germany na na Remaining employment period (in years) Plan in Sweden 15,0 16,0 Plan in Poland 15,0 14,9 Plan in Germany nd na * AP Mochenwangen is not a business operator and therefore changes in interest rates and the duration of employment do not affect the value of the provision for retirement benefits in Germany. The table below presents a sensitivity analysis of the provision for retirement benefits: Increase by 1 p.p. Dcrease by 1 p.p. 31 December 2019 in thousands PLN in thousands PLN Impact on the liabilities under defined benefit plans (without tax effect in Sweden) (23 235) 12 414 31 December 2018 Impact on the liabilities under defined benefit plans (without tax effect in Sweden) (21 394) 11 513 Change to the anticipated salary growth rate by 1 percentage point Increase by 1 p.p. Dcrease by 1 p.p. 31 December 2019 in thousands PLN in thousands PLN Impact on the liabilities under defined benefit plans 1 586 (1 314) 31 December 2018 Impact on the liabilities under defined benefit plans 1 382 (1 155) ‎ 24.Inventories Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Materials (at purchase prices) 145 949 126 921 Production in progress (at manufacturing costs) 8 075 5 928 Finished products, goods, of which: At purchase price / manufacturing costs 149 921 210 411 At net realisable price 61 522 10 413 Advance payments for deliveries 24 101 Total inventories, at the lower of: ‎ purchase price / manufacturing costs or net realisable price 365 491 353 774 Impairment allowance to inventories 34 216 10 012 Total inventories before impairment allowance 399 707 363 786 The value of the goods was PLN 472 thousand as at 31 December 2020 (31 December 2019: PLN 748 thousand). In the year ended on 31 December 2020 the Group increased impairment allowances to inventories for PLN 24,204 thousand (2019: PLN 4,457 thousand). The difference in the impairment allowances is referred to costs of sales in the income statement. The impairment allowance is related to finished products and slowly (including spare parts) rotating materials and exposed to the risk of damage, obsolescence or non-use for internal needs. In the financial year ended on 31 December 2020 the Group had a pledge agreement on its entire movable assets understood as inventories, trade receivables and cash for PLN 453,512 thousand, SEK 624,865 thousand, NOK 58 thousand. In the financial year ended on 31 December 2019 the Group had a pledge agreement on its entire movable assets understood as inventories, trade receivables and cash for PLN 472,723 thousand, SEK 624,865 thousand. 25.Trade and other receivables Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Trade receivables 253 977 262 903 VAT receivables 35 273 32 998 Other third party receivables 4 972 3 005 Other receivables from related entities 3 320 3 215 Total (net) receivables 297 543 302 121 Impairment allowances to receivables 18 680 19 222 Gross receivables 316 223 321 343 All the trade receivables specified above are receivables under contracts with customers and they do not contain any material financing element. The terms and conditions of transactions with related entities are presented in note 33. Trade receivables do not earn interest and have customary payment terms of 30 to 90 days. The Group has an appropriate policy of selling solely to verified customers. Therefore, in the opinion of the management, there is no additional credit risk in excess of the level identified with the impairment allowance to uncollectible receivables characteristic for the Group’s trade receivables. As at 31 December 2020, trade receivables of PLN 18,680 thousand (as at 31 December 2019: PLN 19,222 thousand) were deemed as uncollectible and therefore subject to an impairment allowance. The changes to impairment allowances to receivables were as follows: Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Impairment allowance as at 01 January 19 222 17 074 Increase 715 1 809 Utilisation (1 541) (82) Write-back of unutilised amounts (130) (89) FX differences on translation of foreign operations 414 510 Impairment allowance as at 31 December 18 680 19 222 The impairment allowance fully refers to receivables under contracts with customers. Below is an analysis of trade receivables that as at 31 December 2020 and 31 December 2019 were overdue but not treated as uncollectible: Total Not overdue Overdue but collectible < 30 days 30-60 days 60-90 days 90-120 days >120 days As at 31 December 2020 253 977 225 075 26 327 1 081 321 14 1 159 As at 31 December 2019 262 903 207 231 50 447 2 534 1 438 94 1 159 Receivables over 120 days in the prospective assessment of the Company’s management qualify as collectible and therefore no impairment was recognised. The maturities of other receivables from third parties do not exceed 360 days. Receivables from related entities cover primarily receivables from the core shareholder of AP S.A. and will be settled at dividend distribution. ‎ The policy regarding the recognition of impairment allowances on receivables is described in Notes 9.11 and 35.4. ‎ 26.Cash and cash equivalents Cash at bank earns interest at variable interest rates based on overnight bank deposit rates. As at 31 December 2020, the fair value of cash and cash equivalents was PLN 255,563 thousand (31 December 2019: PLN 265.885 thousand). PLN). As at 31 December 2020, the Group held undrawn funds under overdraft facilities of PLN 195,057 thousand (31 December 2019: PLN 168,447 thousand). As at 31 December 2020, the Group utilised its overdraft facilities for PLN 0 thousand (31 December 2019: PLN 0 thousand). . The balance of cash and cash equivalents disclosed in the cash flow statement consisted of the following items: Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Cash in bank and on hand 255 563 265 885 Short-term deposits - - Cash in transit - - Cash and cash equivalents in the consolidated balance sheet 255 563 265 885 Cash in bank and on hand attributable to discontinued operations - - Cash and cash equivalents in the consolidated cash flow statement 255 563 265 885 Since 2017, cash pooling in EUR and in PLN has been operating within the Arctic Paper Group companies. The operation consists in pooling cash balances held by the individual system participants and setting them off with temporary shortages of funds with the other cash-pool participants. The solution is aimed at supporting effective cash management in the Group and minimising the costs of external funding sources by using the Group’s own cash. ‎ 27.Share capital and reserve capital/other reserves 27.1.Share capital Share capital As at 31 December 2020 As at 31 December 2019 series A ordinary shares of the nominal value of PLN 1 each 50 000 50 000 series B ordinary shares of the nominal value of PLN 1 each 44 253 500 44 253 500 series C ordinary shares of the nominal value of PLN 1 each 8 100 000 8 100 000 series E ordinary shares of the nominal value of PLN 1 each 3 000 000 3 000 000 series F ordinary shares of the nominal value of PLN 1 each 13 884 283 13 884 283 Amount of shares 69 287 783 69 287 783 Value of share capital (in PLN) 69 287 783 69 287 783 27.1.1.Changes to the share capital of Arctic Paper S.A. In 2020 and 2019 there were no changes to the share capital of Arctic Paper S.A. 27.1.2.Nominal value of shares The shares have a nominal value of PLN 1 and have been fully paid. 27.1.3.Shareholders’ rights Shares in all series are entitled to one vote and they have equal privileges as to dividend and capital refund. 27.2.FX differences on translation of foreign operations The item is adjusted for FX differences on translation of financial statements of foreign operations that have a functional currency other than PLN, to the presentation currency of these financial statements being PLN. The rules of translation along with the applied FX rates are described in note 9.4. 27.3.Reserve capital Reserve capital is made up of the issue price of shares of Arctic Paper S.A. in excess of their nominal value reduced by the costs of the issues that took place in 2009, 2010 and 2013, equal to PLN 134,257 thousand, reduction of the nominal price of the shares from PLN 10 to PLN 1 in 2012 of PLN 498,632 thousand and a portion of retained profit and accumulated loss resulting from profit distribution by Arctic Paper S.A. of PLN -224,913 thousand. The table below presents changes to the reserve capital in the year ended on 31 December 2020 and 31 December 2019: Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Reserve capital at the beginning of period 407 976 407 976 Profit/loss distribution - - Reserve capital at end of the period 407 976 407 976 27.4.Other reserves Other reserves cover a portion of retained profit and accumulated loss resulting from profit distribution by Arctic Paper S.A. and capital from revaluation of hedging transactions. The table below presents changes to the reserve capitals in the year ended on 31 December 2020 and 31 December 2019: As at 31 December 2020 As at 31 December 2019 Other reserves at the beginning of period 139 035 151 110 Changes to cash flow hedges Change of measurement of financial instruments, of which: (15 088) (40 536) - Forward for electricity (15 915) (44 176) - interest rate SWAP 591 715 - Forward for pulp 236 2 925 Deferred income tax on the change of measurement of financial instruments, including: 3 394 8 937 - Forward for electricity 3 276 9 564 - interest rate SWAP - - - Forward for pulp 118 (627) Other changes Transfer of profit to reserve capital 33 035 19 523 Other reserves at the end of period 160 376 139 035 27.5.Retained profit/accumulated loss and restrictions to dividend distribution The item of retained profit/accumulated loss covers retained profit/accumulated loss of the financial year and actuarial gains/losses on actuarial measurement of provisions for retirement benefits. Retained profit/accumulated loss in the consolidated financial statements may contain amounts that are not distributable – such that may not be distributed as dividend. The statutory financial statements of the entities are made in compliance with the local accounting standards (with the exception of Arctic Paper Kostrzyn S.A. and Arctic Paper S.A.) and the Articles of Association of those companies. Dividend to the Parent Entity may be distributed out of net profit disclosed in their standalone financial statements made for statutory purposes. Such local definition of undistributed profit often differs from the definition of undistributed profit resulting from EU IFRS which may restrict profit distribution. For instance, local legal regulations often require allocations to certain reserves on account of potential future losses. Application of different accounting principles may generate differences between statutory financial statements and reporting packages for consolidation purposes. Dividend for shareholders of the parent entity may be distributed out of net profit disclosed in the standalone annual financial statements of Arctic Paper S.A. made for statutory purposes. In accordance with provisions of the Code of Commercial Companies, the Parent Entity is obliged to establish reserve capital to cover potential losses. At least 8% of the profit for the financial year disclosed in the standalone financial statements of the Parent Entity should be transferred to the category of capital until the capital has reached the amount of at least one third of the share capital of the Parent Entity. The use of reserve capital and reserve funds is determined by the General Meeting; however, a part of reserve capital equal to one third of the share capital can be used solely to cover the losses disclosed in the standalone financial statements of the Parent Entity and cannot be distributed to other purposes. In connection with the term and revolving loan agreements signed on 9 September 2016, agreements related to the bond issue pursuant to which on 30 September 2016 the Company issued bonds and the creditor agreement (described in more detail in note 32.2 “Obtaining of financing” in the Annual Report for 2016), the possibility of the Company to pay dividend is subject to satisfying certain financial ratios by the Group in two periods preceding such distribution (as the term is defined in the term and revolving loan agreements) and no occurrence of any events of default (as defined in the term and revolving loan agreements). As at 31 December 2020, there were no other restrictions concerning dividend distribution. The retained profit/accumulated loss in the balance sheet as at 31 December 2020 and 31 December 2019 is composed of the following items: As at 31 December 2020 As at 31 December 2019 Consolidated gains / losses attributable to the parent company 27 274 (83 797) Consolidated profit / loss from the distribution of profit / loss of the parent company, inclluding: 81 891 114 926 - from the distribution of profit / loss for the last year (33 035) (19 523) Profit / loss on the acquisition/sale of Rottneros AB shares from non-controlling shareholders, including: 23 193 23 193 - profit 29 353 29 353 - loss (6 160) (6 160) Actuarial profit/loss (35 847) (34 849) Retained gains / losses at the end of the period 96 510 19 474 27.6.Non-controlling interests As at 31 December 2020 As at 31 December 2019 As at beginning of the period 263 619 284 550 Dividend disbursed by subsidiary entities - (41 542) Share in other comprehensive income of subsidiary entities 19 437 20 611 At the end of period 283 056 263 619 Non-controlling interests cover a portion of the Group’s equity attributable primarily to the non-controlling shareholders in Rottneros AB. The table below presents the main financial data for the Rottneros Group disclosed in the consolidation of the Arctic Paper Group, taking into account the settlement of the fair value of the assets acquired as at the date of taking control of the Rottneros Group: ‎ Consolidated income statement Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Revenues from sales of products 856 677 910 304 Operating expenses (858 850) (794 517) Operating profit (loss) (2 174) 115 787 Financial income/expenses (16 069) (49 830) Gross profit (loss) (18 242) 65 957 Income tax 2 873 (23 534) Net profit/(loss) (15 369) 42 423 As at As at Consolidated balance sheet 31 December 2020 31 December 2019 Fixed assets 476 582 401 559 Current assets, of which: 434 093 429 975 Inventories 160 594 152 147 Receivables and other assets 121 765 124 683 Cash and cash equivalents 151 734 153 145 TOTAL ASSETS 910 675 831 535 Equity 480 460 440 589 Long-term liabilities 258 791 240 195 Short-term liabilities 171 424 150 750 TOTAL EQUITY AND LIABILITIES 910 675 831 535 Consolidated cash flow statement Year ended 31 December 2020 Year ended 31 December 2019 Cash flows from operating activities 46 148 192 715 Cash flows from investing activities (56 477) (43 241) Cash flows from financing activities (8 904) (93 425) Change in cash and cash equivalents (19 233) 56 049 Cash and cash equivalents at the beginning of the period 153 145 99 984 Net FX differences 17 822 (2 888) Cash and cash equivalents at the end of the period 151 734 153 145 In 2020, Rottneros AB did not pay dividends. In 2019, Rottneros AB distributed dividend totalling PLN 85,302 thousand (SEK 214 million), of which PLN 41,542 thousand referred to non-controlling shareholders. ‎ 28.Interest-bearing bank loans, bonds and borrowings and other financial liabilities Short-term liabilities Note Repayment date As at 31 December 2020 As at 31 December 2019 Other financial liabilities: Lease liabilities 17 do 31-12-2021 9 765 8 692 Hedging instruments 36.4 2 195 2 748 Other liabilities do 31-12-2021 188 168 Total other short-term financial liabilities 12 148 11 608 Interest-bearing loans, borrowings and bonds: Loan from EBRD TA (short-term portion) in EUR 36.3 do 31-12-2021 9 552 25 237 Loan from EBRD Capex A (short-term portion) in EUR 36.3 do 31-12-2021 8 383 19 654 Loan from EBRD Capex B (short-term portion) in EUR 36.3 do 31-12-2021 15 826 41 032 Loan from Santander (short-term portion) in PLN 36.3 31-08-2021 2 293 4 584 Loan from BNP (short-term portion) in EUR 36.3 31-08-2021 2 389 4 382 Loan from a bank consortium: Santander and BNP in PLN 36.3 31-01-2021 2 876 14 348 Bonds in PLN 36.3 31-08-2021 58 194 19 166 Loan from Nordea Bank Abp in SEK 36.3 do 31-12-2021 36 766 - Loan from the owner /core shareholder in EUR (short-term portion) 36.3 30-04-2020 - 21 579 Total short-term interest-bearing loans, borrowings and bonds 136 278 149 983 Total short-term financial liabilities 148 426 161 591 Long-term liabilities Note Maturity As at 31 December 2020 As at 31 December 2019 Other financial liabilities: Lease liabilities 17 do 31-12-2089 25 956 29 523 Hedging instruments 36.4 3 175 - Other liabilities 920 - Total other long-term financial liabilities 30 050 29 523 Interest-bearing loans, borrowings and bonds: Loan from EBRD TA (long-term portion) in EUR 36.3 do 31-08-2022 8 815 - Loan from EBRD Capex A (long-term portion) in EUR 36.3 do 31-08-2022 4 928 - Loan from EBRD Capex B (long-term portion) in EUR 36.3 do 31-08-2022 14 350 - Bonds in PLN 36.3 31-08-2021 - 54 549 Bonds in SEK 36.3 01-09-2022 183 000 161 291 Loan from Nordea Bank Abp in SEK 36.3 do 31-12-2021 - 17 905 Total long-term interest-bearing loans, borrowings and bonds 211 094 233 745 Total long-term financial liabilities 241 144 263 268 * the loan as at 31 December 2019 is fully disclosed as short-term due to failure to comply with covenants under the bank agreement ‎ 28.1.Bank loans, bonds and borrowings The amount of long-term and short-term interest bearing loans and borrowings as at 31 December 2020 decreased by PLN 36,355 thousand versus 31 December 2019, primarily due to decreased debt under revolving loans and repayment of the loan to a majority shareholder. In the same period, APM Kraft increased its loan debt with Nordea Bank Abp for investment purchases. Loan tranches were disbursed and repaid in line with the agreement of 9 September 2016. In connection with the term and revolving loan agreements, agreements related to bond issues, signed on 9 September 2016, the Group agreed to maintain specified financial ratios that are calculated at the end of each quarter. As at 31 December 2019, the Arctic Paper Group failed to comply with the limit of investment outlays (Capex) and the Guarantors' asset value ratio (described in more detail in the consolidated financial statements for 2019) set forth in the loan agreement due to an additional investment in the hydro-electric power station at Arctic Paper Munkedals Kraft. On 12 March 2020 the bank consortium approved a modified method to calculate the ratios and not to include the investment in them. However, since the approval had not been granted before 31 December 2019, then in compliance with IAS 1 bank loans for PLN 61,404 thousand were disclosed as short-term loans. ‎ As at 31 December 2020, the Group met the required financial ratios. 28.2.Collateral to loans 2020 The collateral related to the term and revolving loan agreements, agreements related to the bond issue and the intercreditor agreement, signed in 2016, was not changed in 2020. Apart from the above, as at 31 December 2020 the Group disclosed: 1)collateral on assets related to the obligations contracted by Rottneros AB with Danske Bank – this is: pledge on assets for SEK 284,730 thousand (PLN 115,970 thousand). 2)collateral on assets under the liabilities of AP Kraft with Nordea Bank - these are: mortgage on assets for the amount of PLN 80,000 thousand SEK (PLN 36,784 thousand). 2019 In connection with the term and revolving loan agreements, agreements relating to the bond issue and the intercreditor agreement, signed on 9 September 2016, on 3 October 2016 the Company signed agreements and statements pursuant to which collateral to the above debt and other claims would be established in favour of Bank BNP Paribas S.A., acting as the Collateral Agent, that is 1. under Polish law – Collateral Documents establishing the following Collateral: —financial and registered pledges on all shares and interests registered in Poland, owned by the Company and the Guarantors (AP Kostrzyn, AP Munkedals, AP Grycksbo), in companies in the Company Group (with the exception of Rottneros AB, Arctic Paper Mochenwangen GmbH and Arctic Paper Investment GmbH), except the shares in the Company; —mortgages on all properties located in Poland and owned by the Company and the Guarantors; —registered pledges on all material rights and movable assets owned by the Company and the Guarantors, constituting an organised part of enterprise, located in Poland (with the exception of the assets listed in the Loan Agreement); —assignment of (existing and future) insurance policies covering the assets of the Company and the Guarantors (with the exception of insurance policies listed in the Loan Agreement); —declaration by the Company and the Guarantors on voluntary submission to enforcement, in the form of a notary deed; —financial pledges and registered pledges on the bank accounts of the Company and the Guarantors, registered in Poland; —powers of attorney to Polish bank accounts of the Company and the Guarantors, registered in Poland; —subordination of the debt held by intragroup lenders (specified in the Intercreditor Agreement). ‎ 2. under Swedish law – Collateral Documents establishing the following Collateral: —pledges on all shares and interests registered in Poland, owned by the Company and the Guarantors, in Group companies, with the exception of the shares in the Company, as well as pledged on the shares in Rottneros (with the exception of the free package of shares in Rottneros); —mortgages on all properties located in Sweden and owned by the Company and the Guarantors as long as such collateral covers solely the existing mortgage deeds; —corporate mortgage loans granted by the Guarantors registered in Sweden as long as such collateral covers solely the existing mortgage deeds; —assignment of (existing and future) insurance policies covering the assets of the Company and the Guarantors (with the exception of insurance policies listed in the Loan Agreement); —pledges on Swedish bank accounts of the Company and the Guarantors as long as such collateral is without prejudice to free management of funds deposited on bank accounts until an event of default specified in the Loan Agreement. Apart from the above, as at 31 December 2019 the Group disclosed: 2) collateral on assets related to the obligations contracted by Rottneros AB with Danske Bank – this is: ›pledge on assets for SEK 284,730 thousand (PLN 118,334 thousand). 3) pledge on 19,950,000 shares of Rottneros AB resulting from the loan agreement for EUR 10,000 granted by Arctic Paper Finance AB to Arctic Paper S.A. and EUR 10,000 thousand granted by Mr Thomas Onstad to Arctic Paper Finance AB. 29.Provisions 29.1.Change in provisions The table below presents changes to provisions in for 2020-2019: Post-employment payments Other provisions Total As at 01 January 2020 124 556 5 394 129 949 Established during the financial year 4 272 - 4 272 Applied (5 692) (4 235) (9 927) Reversed - - - Adjustment due to FX differences 13 498 337 13 835 As at 31 December 2020, of which: 136 634 1 496 138 129 - short-term 640 116 756 - long-term 135 994 1 379 137 373 As at 01 January 2019 105 585 2 200 107 784 Established during the financial year 25 341 3 252 28 592 Applied (3 429) - (3 429) Reversed - - - Adjustment due to FX differences (2 941) (57) (2 997) As at 31 December 2019, of which: 124 556 5 394 129 950 - short-term 837 4 171 5 008 - long-term 123 719 1 223 124 942 Provisions for post-employment benefits are described in detail in note 26 to this report. Other provisions as at 1 December 2020 and 31 December 2019 cover mainly a provision for rights to emit CO2. 29.2.Provisions for complaints and returns Provisions for complaints and returns are established on the basis of complaints and returns made in the previous years. Due to regular outlays on improvement of the quality of production processes and products, the Group did not recognise a provision for complaints and returns as at the end of 2020 and 2019. 30.Trade payables, other liabilities and accruals and deferred income 30.1.Trade payables and other short-term liabilities As at 31 December 2020 As at 31 December 2019 Trade payables, of which: Due to related entities 505 451 Due to other entities 321 640 376 621 322 145 377 072 Taxes, customs duties, social insurance and other VAT 6 975 8 348 Excise tax 1 161 604 Personal Income Tax 8 351 4 422 Real estate tax 719 727 Social benefit liabilities 17 088 14 577 34 293 28 678 Other liabilities Payable to employees as salaries 3 295 7 686 Retirement liabilities 4 343 3 256 Investment commitments 7 444 10 425 Liabilities related to environmental protection 260 196 Prepayments 1 815 1 826 Other liabilities 5 851 6 226 23 008 29 615 TOTAL 379 445 435 366 Principles and payment terms of the liabilities presented above: —the terms and conditions of transactions with related entities are presented in note 33.3; —trade payables are interest free and are usually payable within 60 days; —other liabilities are interest free and the usual payment term is 1 month; —the amount of the difference between VAT payable and receivable is paid to the relevant tax authorities on a monthly basis. ‎ 30.2.Accruals and deferred income As at 31 December 2020 As at 31 December 2019 Accruals and deferred income Employee expenses 72 353 60 589 Audit and legal services 596 535 Transport costs 5 060 6 938 Costs of complaints 1 921 2 226 Utility costs 2 397 917 Costs of uninvoiced services 5 046 1 813 Other 6 362 6 577 93 735 79 594 Deferred income Subsidies from Ekofundusz 8 103 9 466 Subsidies from NFOŚiGW 5 912 6 918 Grants in Sweden 3 219 - Other 3 016 3 965 20 249 20 349 TOTAL 113 984 99 943 - short-term 99 353 81 849 - long-term 14 631 18 094 The core items of accruals and deferred income include annual holiday benefits and bonus for employees. These costs also include the costs related to termination of employment. 31.Investment plans As at 31 December 2020, the Group plans to make expenditures on tangible fixed assets in 2021 of minimum PLN 110 million. These amounts will be allocated to the purchase of new machinery and equipment. As at 31 December 2019, the Group planned expenditures on tangible fixed assets of no less than PLN 90 million in 2020. 32.Contingent liabilities As at 31 December 2020, the Company held the following contingent liabilities: —contingent liability under a guarantee for FPG in favour of the mutual life insurance company PRI for SEK 1,271 thousand (PLN 584 thousand) at Arctic Paper Grycksbo AB and for SEK 762 thousand (PLN 350 thousand) at Arctic Paper Munkedals AB; —a bank guarantee in favour of Skatteverket Ludvika for SEK 135 thousand (PLN 62 thousand). 32.1.Legal claims Arctic Paper S.A. and its subsidiaries are not a party to any legal cases filed in court against them. 32.2.Tax settlements Tax settlements and other areas of activity subject to specific regulations (like customs or FX matters) may be inspected by administrative bodies that are entitled to impose high penalties and sanctions. No reference to stable legal regulations in Poland results in lack of clarity and consistency in the regulations. Frequent differences of opinion as to legal interpretation of tax regulations – both inside state authorities and between state authorities and enterprises – generate areas of uncertainty and conflicts. As a result, tax risks in Poland are much higher than in countries with a more developed tax system. Tax settlements may be subject to inspections for five years from the end of the year in which the tax was paid. As a result of inspections, the tax liability of the Group may be increased by additional tax liability. In the Group’s opinion, tax liabilities as at 31 December 2020 were adequate to the recognised and quantifiable task risk and therefore there is no need to establish additional provisions. 33.Information on related entities The related entities to the Arctic Paper S.A. Group are as follows: —Thomas Onstad – majority shareholder, —Nemus Holding AB – Parent Entity for Arctic Paper S.A., —Munkedal Skog – a subsidiary of Nemus Holding AB, —IPM Sp.z o.o. Sp.k. – a company related to the President of the Management Board. The top management staff is composed of the President and Members of the Management Board of the Parent Entity as well as the Chairperson and Members of the Supervisory Board of the Parent Entity when in office. The table below presents the total values of transactions with related parties in 2020-2019: ‎ Data for the period from 01 January 2020 to 31 December 2019 and as at 31 December 2020 (PLN ‘000). Related Entity Sales to related entities Purchases from related entities Interest – financial income Interest – ‎ financial expense Receivables from related entities Loan receivables Liabilities to related entities Nemus Holding AB 417 864 - - 3 320 - 7 Thomas Onstad - - - 714 - - - Kalltorp Kraft AB - - - - - - - Munkedal Skog - 140 - - - - 52 IPM 1 125 446 Total 417 2 129 - 714 3 320 - 505 The receivables from Nemus Holding AB are overdue as at 31 December 2020 but they are compensated with payables for the provision of services. Data for the period from 01 January 2019 to 31 December 2019 and as at 31 December 2019 (PLN ‘000). Related Entity Sales to related entities Purchases from related entities Interest – financial income Interest – ‎ financial expense Receivables from related entities Loan receivables Liabilities to related entities Nemus Holding AB - 1 194 - - 3 215 - - Thomas Onstad - - - 1 316 - - 21 574 Munkedal Skog - 198 - - - - 46 IPM - 724 - - - - 405 Total - 2 116 - 1 316 3 215 - 22 025 33.1.Ultimate Parent Entity of the Group The Ultimate Parent Entity of the whole Group is Incarta Development S.A. In the financial years ended on 31 December 2020 and 31 December 2019 there were no transactions between the Group and Incarta Development S.A. 33.2.Parent Entity Nemus Holding AB is the Parent Entity for the Arctic Paper S.A. Group which as at 31 December 2020 held 58.28% ordinary shares in Arctic Paper S.A. 33.3.Terms and conditions of transactions with related entities Trade receivables and payables usually have a payment term of between 14 and 30 days for related entities. Transactions with related entities are carried out at arm’s length. 33.4.Remuneration of top managerial staff of the Parent Entity Key management staff of the Company as at 31 December 2020 comprises two persons: President of the Management Board and a Member of the Management Board. The remuneration of the management staff in the year ended on 31 December 2020 amounted to PLN 2,415 thousand (PLN 1,974 thousand in the year ended on 31 December 2019). The table below presents the remuneration of the Company’s key management staff in the Parent Entity: Management Board Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Short-term employee benefits 2 082 1 724 Post-employment retirement and medical benefits 333 250 Employment termination benefits - - Total amount of remuneration of top managerial staff 2 415 1 974 Supervisory Board Short-term employee benefits 998 987 33.5.Loan granted to members of the Management Board In 2019-2020 neither the Parent Entity, nor its subsidiary companies granted any loans to Members of the Management Board. 33.6.Other transactions with the involvement of Members of the Management Board In the period covered with these Consolidated Financial Statements there were no other transactions between the subsidiary companies and Members of the Management Board. 34.Information on the agreement and remuneration of the statutory auditor or entity authorised to audit financial statements On 20 January 2020, Arctic Paper S.A. entered into a contract with KPMG Audyt Spółka z ograniczoną odpowiedzialnością sp.k. for audit of the Company’s financial statements and consolidated financial statements of the Group for the year ended on 31 December 2020 and ending on 31 December 2021. The table below presents the remuneration of the statutory auditor, paid or payable for the year ended on 31 December 2020 and 31 December 2019 by category of services: Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Service type Statutory audit of the annual financial statements 195 170 Review of interim financial statements 83 83 Statutory audit of the annual financial statements (branch AP S.A.) 13 26 Other services 35 35 Total 326 314 The fees do not include services provided to the other Group companies. 35.Financial risk management objectives and policies The Group’s principal financial instruments comprise bank loans, borrowings, bonds. The main purpose of those financial instruments is to raise finance for the Group’s operations. The Group companies also conclude lease agreements. The Group also uses factoring without recourse for trade receivables. The main purpose for using the financial instrument is to quickly raise funds. The receivables covered with factoring were derecognised from the consolidated balance sheet since conditions have been met to derecognise the assets in compliance with IFRS 9. The Group has various other financial instruments such as trade receivables and payables which arise directly from its operations. The core risks arising from the Group’s financial instruments include: interest rate risk, liquidity risk, FX risk and credit risk. The Management Board reviews and approves policies for managing each of those risks. In the opinion of the Management Board – in comparison to the annual consolidated financial statements made as at 31 December 2019 there have been no major changes of the financial risk. There have been no changes to the objectives and policies of the management of the risk. 35.1.Interest rate risk The Group is exposed to interest rate changes primarily with respect to its long-term financial liabilities. The Group did not have bank deposits as at 31 December 2020 and 31 December 2019. Interest rate risk – sensitivity to fluctuations The table below presents the sensitivity of gross profit to rationally feasible interest rate changes assuming no change to other factors (related to liabilities based on variable interest rates). The calculations cover loans, SEK bonds and lease contracts with variable interest rates. For each currency the same growth of interest rate was assumed by 1 percentage point. At the end of each reporting period, the loans in each currency, SEK bonds and lease contracts were grouped and on the sums a growth by 1 percentage point was calculated. Year ended on 31 December 2020 PLN SEK EUR Long-term portion of loans and bonds - 219 767 28 093 Long-term portion of lease liabilities 13 178 7 316 5 461 Less loans and bonds covered by SWAP - - (28 093) The basis for calculating the impact of a change in the interest rate 13 178 227 083 5 461 Effect on profit before tax of a 1 percentage point increase in interest rates (132) (2 271) (55) - - - Year ended on 31 December 2019 PLN SEK EUR - - - Long-term portion of loans and bonds 54 549 179 195 - Long-term portion of lease liabilities 13 751 11 372 6 030 Less loans and bonds covered by SWAP (54 549) - - The basis for calculating the impact of a change in the interest rate 13 751 190 567 6 030 Effect on profit before tax of a 1 percentage point increase in interest rates (138) (1 906) (60) As a result of hedging a major part of the Group’s debt resulting from the PLN and EUR loan agreements with the bank consortium at the end of 2016 and PLN bonds with interest rate SWAPs, the Group’s exposure to the risk of interest rate fluctuations was much mitigated. Note 40.3 presents loans, borrowings, bonds and leases with variable and fixed interest rates as at 31 December 2020 and 31 December 2019. 35.2.FX risk The Group is exposed to transactional FX risk. This risk also takes place in the case of transactions in other currencies than the entity’s measurement currency. The table below presents the sensitivity of the financial result and comprehensive income to rationally feasible fluctuations of USD, EUR, GBP and SEK rates assuming no changes to any other factors. The calculations cover only the impact of FX rate fluctuations on FX balance sheet items and a rate increase or decrease for each currency of 5% was applied. At the end of each reporting period, assets and liabilities were grouped by currency and a rate increase or decrease by 5% was calculated on the net position in each currency – assets minus liabilities. During the year, FX assets and liabilities remained stable. ‎ As at 31 December 2020 Basis of calculation for impact Impact of FX rate changes on gross profit of change of currency rate FX rate growth Total impact FX rate drop Total impact PLN – EUR (41 705) +5% (2 085) -5% 2 085 PLN – USD (24 631) +5% (1 232) -5% 1 232 PLN – GBP 9 891 +5% 495 -5% (495) PLN – SEK (9 170) +5% (458) -5% 458 SEK – EUR 54 113 +5% 2 706 -5% (2 706) SEK – USD 53 831 +5% 2 692 -5% (2 692) SEK – GPB 16 220 +5% 811 -5% (811) Impact of financial instruments on other comprehensive income (due to differences on translation of foreign operations) FX rate growth Total impact FX rate drop Total impact PLN – SEK +5% 12 143 -5% (12 143) PLN – EUR +5% (550) -5% 550 As at 31 December 2019 Basis of calculation for impact Impact of FX rate changes on gross profit of change of currency rate FX rate growth Total impact FX rate drop Total impact PLN – EUR (70 627) +5% (3 531) -5% 3 531 PLN – USD (27 771) +5% (1 389) -5% 1 389 PLN – GBP 15 181 +5% 759 -5% (759) PLN – SEK (8 497) +5% (425) -5% 425 SEK – EUR 53 024 +5% 2 651 -5% (2 651) SEK – USD 14 266 +5% 713 -5% (713) SEK – GBP 25 858 +5% 1 293 -5% (1 293) Impact of financial instruments on other comprehensive income (due to differences on translation of foreign operations) FX rate growth Total impact FX rate drop Total impact PLN – SEK +5% 8 964 -5% (8 964) PLN – EUR +5% (720) -5% (720) 35.3.Risk of changing prices of goods and raw materials The Group is exposed to the risk of decreasing sales prices as a result of intensifying competition in the market and the risk of growing prices of raw materials due to restricted supply of raw materials in the market. The Group uses derivative instruments to manage market risk. The Rottneros Group hedges the changes in the prices of its cellulose product. The Group hedges the risk of changes in energy prices in order to limit their impact on the volatility of the result. Details on all hedging instruments used by the Group are presented in note 36.4. 35.4.Credit risk Credit risk is the risk of financial loss by the Group when a customer or a counterparty to a financial instrument contract defaults under the contract. Credit risk is primarily related to receivables. The Group enters into transactions solely with companies of a good financial standing. All customers who wish to use merchant credit are subject to preliminary verification procedures. Additionally, due to monitoring of the status of receivables on an ongoing basis, the Group’s exposure to the risk of uncollectible receivables is limited. In compliance with the new standard, the Group recognises impairment allowances to financial assets (allowance for anticipated credit losses) classified as financial assets measured at amortised cost or financial assets measured at fair value through profit and loss. If credit risk related to a specific financial instrument has increased materially since initial recognition, the Group estimates the allowance for anticipated credit losses related to the financial instrument equal to anticipated credit losses throughout the lifetime of the instrument. If as at the reporting date, credit risk related to a financial instrument has not increased materially since its initial recognition, the Group assesses the allowance for anticipated losses related to that financial instrument in an amount equal to 12-month anticipated credit losses. Due to the fact that the Group’s trade receivables do not contain a material funding component, the impairment allowance for trade receivables is calculated on the basis of the anticipated credit losses throughout the lifetime of the financial instrument. The table below presents the calculation of the allowance for trade receivables in terms of expected credit losses and specific risk (allowance) : As at 31 December 2020 Weighted average percentage of the expected loss for uninsured receivables Gross value of uninsured receivables Weighted average percentage of expected credit losses insured receivables Gross value of insured receivables Allowance for expected loss on uninsured receivables Allowance for expected loss on insured receivables Specific allowance Total allowance for receivables Not overdue 0,38% 75 117 0,00% 150 247 288 1 - 289 < 30 dni 0,98% 2 665 0,00% 23 688 26 0 - 26 30 - 60 dni 1,50% 334 0,02% 753 5 0 - 5 60 - 90 dni 1,55% 137 0,01% 286 2 0 99 101 90 - 120 dni 9,77% 9 0,02% 19 1 0 13 14 120-360 dni 16,50% 2 987 0,05% 716 493 0 2 052 2 545 >360 dni 15 699 0,00% - - - 15 699 15 699 - 96 948 - 175 709 815 1 17 863 18 680 The Group treats all receivables that are not overdue and are not subject to any impairment allowance, as collectible. With respect to other financial assets of the Group such as cash and cash equivalents, the Group’s exposure to credit risk arises from default of the counterparty. The Group has no major concentration of credit risk. The maximum amount exposed to credit risk is equal to the carrying value of the financial instruments held. 35.5.Liquidity risk The Group monitors its risk of a shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of both its financial investments and financial assets (e.g. accounts receivables, other financial assets) and projected cash flows from operating activities. The Group’s objective is to maintain balance between continuity and flexibility of funding by resorting to various funding sources such as overdraft facilities, bank loans, borrowings and bonds, financial lease contracts and hire purchase contracts. The table below summarises the Group’s financial liabilities at 31 December 2020 and as at 31 December 2019 by maturity based on contractual undiscounted payments. ‎ As at 31 December 2020 Upon request Less than 3 months 3 to 12 months 1 to 5 years Over 5 years Total Interest-bearing loans, borrowings and bonds - 92 856 23 119 222 604 31 126 369 705 Financial lease 89 2 888 7 547 13 574 50 059 74 156 Trade and other payables 465 335 685 13 729 - - 349 879 Other financial liabilities 188 - 1 874 4 094 - 6 156 741 431 429 46 269 240 273 81 185 799 897 As at 31 December 2019 Upon request Less than 3 months 3 to 12 months 1 to 5 years Over 5 years Total Interest-bearing loans, borrowings and bonds - 30 340 69 140 310 384 - 409 864 Financial lease - 2 620 6 482 15 503 53 168 77 772 Trade and other payables 3 377 409 842 58 142 15 - 471 376 Other financial liabilities 168 - 2 748 - - 2 916 3 545 442 802 136 511 325 902 53 168 961 928 Due to the fact that the required level of the capital expenditure limit ratio Capex was exceeded, the Guarantors' asset threshold as at 31 December 2019 (described in more detail in note 32.1) specified in the loan agreement due to an additional investment in a hydroelectric plant in Arctic Paper Munkedals Kraft, the Group presented day all financing under the 2016 banking agreement with Konsorcjum Banks as short-term. The Parties further agreed that the loan repayment schedule will remain unchanged versus the original repayment schedules while the applicable interest rates will not be increased. As a result, in the table above as at 31 December 2019 the Group disclosed the financing by the anticipated maturities – that is in line with the original repayment schedules. Additionally, the Group holds contingent liabilities totalling PLN 996 thousand as at 31 December 2020 (31 December 2019: PLN 1,094 thousand). ‎ The table below shows the reconciliation of the items in the table above to the data from the balance sheet or note 31 December 2020 Note/balance Value according to the note or balance Interest payable until repayment Value according to the table Interest-bearing loans, borrowings and bonds balance 347 372 22 334 369 705 Leasing 19. 35 720 38 436 74 156 Trade and other payables 34.1. 329 590 na 329 590 Accrued accruals and deferred income 34.2. 93 735 na 93 735 Income tax liability balance 11 037 na 11 037 Trade and other payables 434 361 Other financial liabilities 32. 6 477 nd 6 477 31 grudnia 2019 roku Note/balance Value according to the note or balance Interest payable until repayment Value according to the table Interest-bearing loans, borrowings and bonds balance 383 727 26 136 409 864 Leasing 19. 38 215 39 557 77 772 Trade and other payables 34.1. 387 497 na 387 497 Accrued accruals and deferred income 34.2. 79 594 na 79 594 Income tax liability balance 4 284 na 4 284 Trade and other payables 471 376 Other financial liabilities 32. 2 916 na 2 916 36.Financial instruments The Company uses the following financial instruments: cash on hand and in bank accounts, bank loans, borrowings, bonds, receivables, liabilities under leases, SWAP interest rate contracts, floor interest rate option, forward FX contracts, forward contracts for sales of pulp and forward contracts for the purchase of electricity. 36.1.Fair value of each category of financial instruments Due to the fact that the carrying amounts of the financial instruments held by the Group do not materially differ from their fair value (except those listed in the table below), the table below presents all financial instruments by their carrying amounts, split into classes and categories of assets and liabilities. ‎ Carrying amount Fair value Category in compliance ‎ with IFRS 9 As at ‎ 31 December ‎ 2020 As at ‎ 31 December ‎ 2019 As at ‎ 31 December ‎ 2020 As at ‎ 31 December ‎ 2019 Financial assets Trade receivables and other financial receivables WwZK 262 269 269 123 *** *** Hedging instruments IRZ 13 107 29 458 *** *** Other financial assets (net of loans and hedging instruments)* WwWGpWF 23 076 20 034 *** *** Cash and cash equivalents WwZK 255 563 265 885 *** *** Financial Liabilities Bonds in SEK WwZK 183 000 161 291 189 254 167 400 Bonds in PLN WwZK 58 194 73 715 58 500 75 100 Loans and advances WwZK 106 178 148 721 106 899 150 865 Leasing liabilities, of which: 35 720 38 215 *** *** - long-term WwZK 25 956 29 523 *** *** - short-term WwZK 9 765 8 692 *** *** Trade payables, purchase of tangible and intangible fixed assets and other financial liabilities WwZK 330 697 387 666 *** *** Hedging instruments IRZ 5 370 2 748 *** *** * derivative hedging instruments meeting the requirements of hedge accounting ** primarily investments in equity instruments *** financial assets and liabilities with fair values close to their carrying amounts Abbreviations used: WwZK – Financial assets/liabilities measured at amortised cost IRZ – hedge accounting instruments WwWGpWF – financial assets/liabilities measured at fair value through profit and loss The fair value of hedging instruments was determined on the basis of observable data from active markets that are not market quotations. The fair value of the PLN bonds and loans was determined with the discounted cash flow method. The fair value of the bonds in SEK as at 31 December 2020 was determined based on the last transaction on Nasdaq in 2020 and quoted on Bloomberg as at 31 December 2019. As at 31 December 2020 and 31 December 2019, financial instruments by the measurement hierarchy are qualified to level 3 with the exception of SEK bonds (level 1) and derivative instruments (level 2). The table below presents items of revenues, expenses, profit and loss recognised in the profit and loss account, split into categories of financial instruments for the years ended on 31 December 2020 and 31 December 2019: 36.2.Changes to liabilities resulting from financing activity Year ended on 31 December 2020 Note 01 January 2018 Changes resulting from cash flows from financing activity Effects of currency exchange rate fluctuations Change to fair values Other changes 31 December 2018 Interest-bearing loans, borrowings and bonds (short-term and long-term) 32 383 727 (72 253) 30 053 5 844 - 347 372 Lease liabilities (short-term and long-term) 32 38 215 (10 514) 2 431 5 588 - 35 720 Financial derivatives and hedges (short-term and long-term) 32 2 748 - 247 2 375 - 5 370 Other (short-term and long-term) 32 168 422 (298) - 815 1 107 Total liabilities resulting from financing activity 424 859 (82 345) 32 433 13 808 815 389 570 Other changes include other liabilities covered by the acquisition of a subsidiary. 36.3.Interest rate risk The table below presents the carrying amount of the financial instruments held by the Group, exposed to interest rate risk, split into specific age baskets: 31 December 2020 ‎ Variable interest rate <1 year 1-2 years 2-3 years 3-4 years 4-5 years >5 years Total Other financial liabilities: Lease liabilities 9 765 3 840 2 780 2 307 2 274 14 755 35 720 Loans, borrowings and bonds Loan from Nordea Bank Abp in SEK - - - - - 36 766 36 766 Bonds in SEK 36 766 183 000 - - - - 219 767 Total loans, borrowings and bonds 36 766 183 000 - - - 36 766 256 533 TOTAL 46 531 186 840 2 780 2 307 2 274 51 522 292 254 ‎ 31 December 2019 ‎ Variable interest rate <1 year 1-2 years 2-3 years 3-4 years 4-5 years >5 years Total Other financial liabilities: Lease liabilities 8 692 6 328 3 029 2 138 1 903 16 125 38 215 Loans, borrowings and bonds Revolving credit facility with BNP in EUR - 17 905 - - - - 17 905 Bonds in SEK - - 161 291 - - - 161 291 Total loans, borrowings and bonds - 17 905 161 291 - - - 179 195 TOTAL 8 692 24 233 164 320 2 138 1 903 16 125 217 410 The table below presents the carrying amount of the financial instruments held by the Group, not exposed to interest rate risk, split into specific age baskets: 31 December 2020 ‎ Fixed interest rate <1 year 1-2 years 2-3 years 3-4 years 4-5 years >5 years Total Loans, borrowings and bonds Loan from EBRD TA in EUR 9 552 8 815 - - - - 18 367 Loan from EBRD Capex A in EUR 8 383 4 928 - - - - 13 311 Loan from EBRD Capex B (short-term part) in EUR 15 826 14 350 - - - - 30 176 Loan from Santander in PLN 2 293 - - - - - 2 293 Loan from BNP in EUR 2 389 - - - - - 2 389 Loan from a bank consortium: Santander and BNP in PLN 2 876 - - - - - 2 876 Bonds in PLN 58 194 - - - - - 58 194 TOTAL 99 512 28 093 - - - - 127 605 31 December 2019 ‎ Fixed interest rate <1 year 1-2 years 2-3 years 3-4 years 4-5 years >5 years Total Loans, borrowings and bonds Loan from EBRD TA in EUR 25 237 - - - - - 25 237 Loan from EBRD Capex A in EUR 19 654 - - - - - 19 654 Loan from EBRD Capex B (short-term part) in EUR 41 032 - - - - - 41 032 Loan from Santander in PLN 4 584 - - - - - 4 584 Loan from BNP in EUR 4 382 - - - - - 4 382 Loan from a bank consortium: Santander and BNP in PLN 14 348 - - - - - 14 348 Bonds in PLN 19 166 54 549 - - - - 73 715 Loan from the owner/ the core shareholder in EUR 21 579 - - - - - 21 579 TOTAL 149 983 54 549 - - - - 204 532 The data in the above table as at 31 December 2019 is presented taking into account the failure to meet the level of ratios (described in more detail in note 28.1) resulting from the banking agreement with the Consortium of Banks of 2016. Fixed interest rates on bank loans and bonds result from the existing SWAP instruments. 36.4.Collateral As at 31 December 2020, the Group used cash flow hedge accounting for the following hedging items: —Arctic Paper S.A. designated SWAP derivatives to hedge accounting to hedge interest payments in EUR on a bank loan in EUR, —Arctic Paper S.A. designated SWAP derivatives to hedge accounting to hedge interest payments in PLN on a bank loan in PLN, —Arctic Paper Munkedals AB, Arctic Paper Grycksbo AB and the companies of the Rottneros Group designated for cash flow hedge accounting the forward derivatives in order to hedge future purchases of electricity, —the Companies of the Rottneros Group designated for cash flow hedge accounting the FX forward derivatives for the sale of pulp in order to hedge the sale prices of pulp in SEK. As at 31 December 2020, the Group used fair value hedge accounting for the following hedging items: —Arctic Paper S.A. designated floor option derivatives to hedge accounting to hedge fair value, entitling to reduce EURIBOR for the interest rate of a part of the bank loan in EUR to the market level if the market EURIBOR falls under 0%. 36.4.1.Cash flow hedges As at 31 December 2020, the Group’s cash flows were hedged with a forward contract for purchase of electricity, a forward contract for sale of pulp, an interest rate SWAP. Hedge accounting of cash flows from sales of pulp The table below presents detailed information concerning the hedging relationship in cash flow hedge accounting regarding sales of pulp: Type of hedge Cash flow hedge related to sales of pulp Hedged position The hedged position is a part of highly likely future cash inflows for pulp sales Hedging instruments Forward contracts are used as the hedging item wherein the Company agrees to sell pulp for SEK Contract parameters: Contract conclusion date 2019-2020 Maturity date: subject to contract; by 30.06.2021 Hedged quantity of pulp 6,000 tonnes Term price SEK 8,870/tonne Cash flow hedge accounting related to electricity purchases with the use of forward transactions The table below presents detailed information concerning the hedging relationship in the cash flow hedge accounting related to electricity purchases: Type of hedge Cash flow hedge related to planned purchases of electricity Hedged position The hedged position is a part of highly likely future cash flows for electricity purchases Hedging instruments Forward contract for the purchase of electricity at Nord Pool Exchange Contract parameters: Contract conclusion date subject to contract; from 01.05.2016 Maturity date: subject to contract; by 31.12.2025 Hedged quantity of electricity 1,787,664 MWh Term price from 21.30 to 38.45 EUR/MWh Cash flow volatility hedge accounting related to variable loan interest rate of the long-term loan with the use of SWAP transactions The table below presents detailed information concerning the hedging relationship in the cash flow hedge accounting related to payment of interest in EUR and PLN on the loan in EUR and PLN: Interest rate SWAPs EUR PLN Type of hedge Hedge of cash flows related to variable interest rate on the EUR long-term loan Hedge of cash flows related to variable interest rate on the PLN long-term loan Hedged position Future EUR interest flows on EUR loan calculated on the basis of 6M EURIBOR Future PLN interest flows on PLN loan calculated on the basis of 6M WIBOR Hedging instruments SWAP transaction under which the Company agreed to pay interest in EUR on the EUR loan on the basis of a fixed interest rate SWAP transaction under which the Company agreed to pay interest in PLN on the PLN loan on the basis of a fixed interest rate Currency Date PLN amount as at 31.12.2020 EUR 2016-11-21 - 2022-08-31 18 362 EUR 2016-11-21 - 2022-08-31 2 389 EUR 2017-07-18 - 2022-08-31 8 142 EUR 2018-07-27 - 2022-08-31 5 169 EUR 2019-10-15 - 2022-08-31 30 176 64 238 PLN 2016-11-21 - 2021-08-31 58 194 PLN 2018-07-31 - 2021-01-29 2 876 PLN 2016-11-21 - 2022-08-31 2 293 - 63 363 Amount hedged by interest rate SWAPs as at 31.12.2020 127 600 ‎ 36.4.2.Fair value hedges As at 31 December 2020, the Group had floor options as hedge to fair value. Interest rate floor option EUR Type of hedge The right to reduce cash flows under payment of interest due to decrease of EURIBOR below 0% Hedged position The hedged item are future EUR interest flows in EUR related to a loan in EUR calculated on the basis of 6M EURIBOR Hedging instruments The hedging item is a floor option under which the Company acquires the right to pay interest in EUR on the basis of EURIBOR below 0% Currency Date PLN amount as at 31.12.2020 EUR 2016-11-21 - 2022-08-31 18 362 EUR 2017-07-18 - 2022-08-31 8 142 EUR 2018-07-27 - 2022-08-31 5 169 EUR 2019-10-15 - 2022-08-31 30 176 61 849 36.4.3.Other information on derivative instruments The table below presents the fair value of hedging instruments in cash flow hedge, fair value hedge and corridor options accounting as at 31 December 2020 and the comparative data: Status as at 31 December 2020 Status as at 31 December 2019 Assets Equity and liabilities Assets Equity and liabilities Forward on pulp sales 3 678 - 2 444 - SWAP - 2 572 - 3 163 Floor option - (377) - (415) Forward for electricity 9 429 3 175 27 014 - Total hedging derivative instruments 13 107 5 370 29 458 2 748 The table below presents the nominal value of derivative instruments as at 31 December 2020: Up to 1 year 1 to 5 years Over 5 years Total Forward for electricity: Purchased energy (PLN ‘000) 71 990 176 192 - 248 182 Forward on pulp sales Pulp sold (in tonnes) 6 000 - - 6 000 interest rate SWAP principal repayment (PLN ‘000) 99 512 28 088 - 127 600 The table below presents the amounts related to hedge accounting that were recognised in 2020 by the Group in profit and loss and in the total comprehensive income statement: Year ended on 31 December 2020 Other reserves in the part related to revaluation as at 31 December 2020 – changes of fair value measurement of hedging derivative instruments due to the hedged risk, corresponding to effective hedging 13 446 Ineffective part of the change in fair value measurement due to the hedged risk, recognised in financial income or expenses - The period of the anticipated hedged flows 01 January 2021 – 31 December 2025 The table below presents changes to other reserves in the part related to measurement under hedge accounting in 2020: Year ended on 31 December 2020 Other reserves in the part related to revaluation as at 01 January 2020 25 140 Deferral to changes of fair value measurement of the hedging derivative instruments due to the hedged risk, corresponding to the effective hedge (11 694) The amount of the deferred changes of fair value measurement of the hedging derivative instruments due to the hedged risk, removed from other reserves and transferred to financial income or expenses - Other reserves in the part related to revaluation as at 31 December 2020 13 446 The amounts in the table disclose the effect of deferred income tax. 37.Capital management The primary objective of the Group’s capital management is to maintain a strong credit rating and healthy capital ratios in order to support the Group’s business operations and maximise the shareholder value. The Group manages its capital structure and makes adjustments to it, in light of changes in the economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to its shareholders, return capital to the shareholders or issue new shares. No changes were made in the objectives, policies or processes during the year ended on 31 December 2020 and 31 December 2019. The Group monitors its equity using a leverage ratio, which is net debt divided by total equity plus net debt. The Group’s policy is to keep the leverage ratio between 0.30 and 0.55. The Group includes interest bearing loans and borrowings, trade and other payables, net of cash and cash equivalents within its net debt. ‎ Arctic Paper S.A. Group Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Interest-bearing loans, borrowings and debt instruments and other financial liabilities 389 569 424 859 Trade and other payables 379 445 435 366 Minus cash and cash equivalents (255 563) (265 885) Net debt 513 451 594 341 Equity 1 033 033 870 528 Equity and net debt 1 546 484 1 464 869 Leverage ratio 0,33 0,41 In comparison to the annual financial statements for 2019, the financial gearing ratio decreased from 0.41 to 0.33. 38.Employment structure The average headcount in the Group in the years ended on 31 December 2020 and 31 December 2019 was as follows: Year ended on ‎ 31 December 2020 Year ended on ‎ 31 December 2019 Management Board of the Parent Entity 2 2 Management Boards of Group entities 37 34 Administration 97 99 Sales Department 124 132 Production Division 1 100 1 085 Other 162 146 Total 1 522 1 498 39.Certificates in cogeneration Property rights to certificates of origin confirming the cogeneration of electricity are held by AP Grycksbo and companies in the Rottneros Group. For the cogeneration of electricity, in 2020 the AP Grycksbo acquired the following rights: green certificates 594 MWh (2019: 8 996 MWh). In 2020 revenues obtained from the sale of the certificates was PLN 1 thousand (2019: PLN 252 thousand). For the cogeneration of electricity, in 2020 the companies in the Rottneros Group acquired the following rights: green certificates 22,659 MWh (2019: 21 140 MWh). In 2020 revenues obtained from the sale of the certificates was PLN 119 thousand (2019: PLN 609 thousand). . Revenues related to the certificates in cogeneration are recognised as a reduction of costs of sales in the income statement. 40.Grants and operation in SEZ (Special Economic Zone) 40.1.Government grants In 2020, the companies of the Group received funding to cover operating costs as part of support for the Covid 19 pandemic in the amount of PLN 10,266 thousand. This support has been included as a reduction in operating costs. In the current year, the Group companies have not received any other material grants. 40.2.Operations in the Special Economic Zone Arctic Paper Kostrzyn S.A. operates in the Kostrzyńsko-Słubicka Specjalna Strefa Ekonomiczna (Special Economic Zone – KSSSE). The Company is entitled to use the permit by 2026 or by the date SSE exist in Poland pursuant to the applicable regulations. The company meets the conditions for taking advantage of the exemption. The conditions of the exemption have not changed in the reporting period. The Company has not been inspected by any competent body. During the period from 25 August 2006 to 31 December 2020, the Company incurred eligible investment expenditures classified as (non-discounted) expenditure in KSSSE in the amount of PLN 227,102 thousand. During the period, the discounted amount of related public aid was PLN 66,358 thousand. As at 31 December 2020, the Group had used all the tax benefits related to the expenses incurred in the KSSSE and therefore did not recognise any deferred tax asset on that account. 41.Material events after the balance sheet date 41.1.Extending the Revolving Loan On 27 October 2020 and again on 12 January 2021 and 11 February 2021, the Lenders (BNP Paribas Bank Polska S.A., Santander Bank Polska S.A.) extended the Company's (Arctic Paper SA) availability of the Renewable Loan. The loan availability was extended until 31 March 2021 on the terms and conditions adopted so far. The Revolving Loan was granted to the Company for the total amount of EUR 19,800,000 and PLN 20,000,000 and was provided primarily to refinance the Company’s intragroup liabilities or to finance intragroup loans. The availability of the Revolving Loan has been extended as the Company is working on the possibilities of simplifying the current structure of the Group's debt and further optimizing the conditions and reducing the costs of its servicing. 41.2.Commencement of negotiations for the conclusion of a Financing Agreement On 5 February 2021, the Management Board of the Company began negotiating a new loan agreement with selected banks in order to obtain funds for: (i)refinancing the existing financial debt of the Company and its subsidiaries; (ii)financing transaction costs (including costs, commissions and fees related to refinancing the existing financial debt); (iii)financing the current operations of the corporate capital group of the Company. Based on the preliminary financing offers received from banks, the Company anticipates the following main conditions for New Financing: 1. total amount of financing: the equivalent of PLN 300,000,000 (three hundred million zlotys); 2. currency: PLN and EUR; 3. loans: a term loan in the total amount of PLN 150,000,000 (one hundred and fifty million zlotys) divided into two equal tranches in PLN and EUR and a revolving loan in the total amount of the EUR equivalent of PLN 150,000,000 (one hundred and fifty million zlotys); 4.financing period: 5 years for a term loan and 3 years for a revolving loan with the possibility of extending it for an additional 2 years (provided that the agreed extension conditions are met); 5. loan repayment terms: repayment of the term loan in equal half-yearly instalments starting from November 2021 and repayment of the revolving loan on the final repayment date; 6. interest rate: variable based on the WIBOR base rate in the case of financing in PLN and the EURIBOR base rate in the case of financing in EUR and a variable margin, the level of which will depend on the level of the net debt to EBITDA ratio; and 7. collateral: the collateral package will include collaterals customarily established in this type of transactions, such as: a registered pledge and a financial pledge on shares of Arctic Paper Kostrzyn S.A., pledges on shares of Swedish companies Arctic Paper Munkedals AB and Arctic Paper Grycksbo AB, statements of submission enforcement by the Company and Arctic Paper Kostrzyn SA, registered pledges and financial pledges on the bank accounts of the Company and Arctic Paper Kostrzyn SA, pledges on bank accounts of Arctic Paper Munkedals AB and Arctic Paper Grycksbo AB, mortgages on the real estate of the Company and Arctic Paper Kostrzyn SA, mortgages on the properties of Arctic Paper Munkedals AB and Arctic Paper Grycksbo AB, a registered pledge on the assets of Arctic Paper Kostrzyn SA and an assignment agreement to secure rights under property insurance policies. The above-mentioned parameters of New Financing are preliminary and may be changed by negotiation with banks. Additionally, New Financing negotiations with banks may or may not result in a new loan agreement. The company will provide information on the completion of negotiations and their result in a separate current report. 41.3.Complete early redemption of the Bonds issued by Arctic Paper S.A. On 8 February 2021, the Company's Management Board adopted a resolution on the early redemption of all Series A Bonds (marked with ISIN code: PLARTPR00038), the issue of which the Company reported in current report No. 24/2016 of 30 September 2016. The early redemption of the Bonds, was carried out on 1 March 2021. On the Early Redemption Date, the Company redeemed 100,000 (in words: one hundred thousand) Bonds with a total nominal value of PLN 58,500,000 (in words: fifty-eight million five hundred zlotys). The consideration per Bond amounted to PLN 585, plus accrued interest and a premium, calculated in accordance with the terms and conditions of the Bond issue. The redeemed Bonds were cancelled. From the balance sheet date until the day of publishing of these consolidated financial statements, there were no other events which might have a material impact on the Company’s financial and capital position. Signatures of the Members of the Management Board Position First and last name Date Signature President of the Management Board ‎ Chief Executive Officer Michał Jarczyński 16 March 2021 signed with a qualified electronic signature Member of the Management Board ‎ Chief Financial Officer Göran Eklund 16 March 2021 signed with a qualified electronic signature