2.1 Basis of preparing financial statements
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union, on the historical cost basis (adjusted for the effects of hyperinflation in respect of property, plant and equipment and equity), except for available-for-sale financial assets, derivatives and investment properties measured at fair value.
The carrying amount of recognised hedged assets and financial liabilities is adjusted for the changes in fair value attributable to the hedged risk.
The accounting policies described in note 2.2 were applied in a continuous manner to all presented periods.
2.1.1 New standards
From 1 January 2014 the following new and changed standards and interpretations are binding for the Group:
- IFRS 10 Consolidated Financial Statements, which superseded the existing IAS 27 Consolidated and Separate Financial Statements and SIC 12 Consolidation – Special Purpose Entities. The standard specifies the principles of determining control, presentation and preparation of consolidated financial statements for entities which control one or more entities. The application of this standard did not change the judgment as to the existence of control and therefore did not change the scope of recognition of consolidated entities.
- IFRS 11 Joint Arrangements, the new standard supersedes the existing IAS 31 Interests In Joint Ventures and SIC 13 Jointly Controlled Entities – Non-Monetary Contributions by Ventures.The new standard describes two types of joint arrangements: joint operations and joint ventures.The type of joint arrangement is determined based on analysis of the rights and obligations of the parties resulting primarily from the structure and legal form of the arrangement. If the contractual terms grant the parties the right to the assets of the joint arrangement as well as obligations for the liabilities relating to the arrangement, then we identify the joint arrangement as a joint operation. However, if the terms of the arrangement grant the parties the right to the net assets of the joint arrangement, then we identify the joint arrangement as a joint venture, which the parties account for in their respective financial statements using the equity method. This standard is effective in the European Union for annual periods beginning on or after 1 January 2014. The Group classified its jointly-controlled entities as joint ventures. This classification did not cause changes in its recognition in the consolidated financial statements.
- IFRS 12 Disclosure of Interests in Other Entities, this standard concerns the financial statements entities having interests in subsidiaries, joint arrangements, associates or unconsolidated structured entities. The new standard combines the disclosure requirements regarding interests in other entities which are currently described in IAS 27, IAS 28 and IAS 31, introducing uniformity and completeness in disclosures, and also expands their scope. The purpose of introducing the changes was to ensure that users of financial statements have a better opportunity to evaluate the nature of, and risks associated with, the interests of a given entity in other entities, and to understand the effects of those interests on the investor's financial position, financial result and cash flows. The standard sets forth the minimum scope of disclosures which may be expanded by the entity if it decides that additional disclosures are necessary in order to meet the objectives set by the standard. Application of this standard resulted in a broader scope of obligatory disclosures in these consolidated financial statements with respect to interest in entities accounted for using the equity method and subsidiaries in which there is a significant, non-controlling interest. Additional information may be found in notes 9 and 19.2.
- Amended IAS 27 Separate Financial Statements, superseded the existing IAS 27 Consolidated and Separate Financial Statements in that part involving separate financial statements. The existing scope of IAS 27 was divided between IFRS 10 Consolidated Financial Statements and IAS 27 - which deals with separate financial statements. The requirements regarding separate financial statements set forth in IAS 28 and IAS 31 were transferred to the amended IAS 27.
- Amended IAS 28 Investments in Associates and Joint Ventures,
- Amendments to IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities
- Amendments to IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities: Transition Guidance,
- Investment Entities – changes to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements,
- Amended IAS 36 Impairment of Assets,
- Amended IAS 39 Financial Instruments: Recognition and Measurement titled Novation of Derivatives and Continuation of Hedge Accounting.
The above changes to the standards have been approved for use by the European Union up to the date of publication of these financial statements. Besides the impact described above, application of these standards and amendments to standards did not have a material impact on the Group’s accounting policy or on these consolidated financial statements.
For the purposes of preparing the financial statements for the financial year ending 31 December 2014, the Group applied IFRIC 21 Levies prior to its effective date. These Interpretations are effective for annual periods beginning on or after 1 January 2014. The Group applies IFRIC 21 in the recognition of fees due to mining usufruct, which were set for a period of 50 years, i.e. from 1 January 2014 to 31 December 2063 with respect to recognition of the fixed and variable parts of fees payable to the Polish State Treasury.
According to the terms of the signed agreement, beginning from 1 January 2014 the Parent Entity recognised liabilities in the amount of PLN 144 million, at the discounted amount of the fixed fee for the life of the agreement, and simultaneously recognised intangible assets due to the acquired right to extract ore.
Liabilities due to the variable part of the fee are computed at the amount of 30% of the mining fee and charged to costs of the current period, reflecting the current update of the mining fee respectively to the amount extracted. As the obligating event for recognising the liability due to the variable fee to the State Treasury is actual extraction, the liability will be recognised progressively over subsequent reporting periods, respectively to the amount extracted. The application of IFRIC 21 does not affect the application of existing principles for recognising other levies.
Non-obligatory standards and interpretations approved for use by the European Union which the Group did not apply prior to their effective date:
- Amendments to IAS 19 Employee benefits titled Defined Benefit Plans: Employee Contributions. The purpose of the amendment is to explain that contributions related to work performed by employees or third parties under specific benefits programs reduce employee costs (a) in specific periods of employment, if the amount of the contribution is linked to the number of years worked, or (b) in the attributable period of work, if the amount of the contribution is not linked to the number of years worked.
The amendments are effective for annual periods beginning on or after 1 July 2014, although under the Regulation of the European Commission the above amendments are effective for annual periods beginning on or after 1 February 2015. The Group will apply them starting with the annual period beginning on 1 January 2016, although they will not affect the consolidated financial statements.
- Annual Improvements to IFRS, 2010-2012 cycle. As a result of a review of IFRS the following minor amendments were made to seven standards:
- in IFRS 2 Share-based Payment the definitions of „vesting condition” and „market condition” were adjusted and two new definitions were introduced: „performance condition” and „service condition,
- in IFRS 3 Business Combinations it was clarified that recognition of a contingent consideration which meets the definition of a financial liability shall be measured to fair value at the end of the reporting period, and the result of measurement shall be recognised in the statement of profit or loss,
- IFRS 8 Operating Segments introduces among others requirements to disclose the judgements made by management in applying aggregation criteria to operating segments, as mentioned in para. 12 of IFRS 8, along with a brief description of these segments and the measures used to indicate the common economic traits of the segments aggregated on this basis
- in IFRS 13 Fair Value Measurement amendments are introduced to the Basis of Conclusions for IFRS 13, clarifying that the removal of paragraph B5.4.12 from IFRS 9 and OS79 from IAS 39 should not be intrepreted as an intention by the IASB to remove the ability to measure non-interest bearing short-term trade receivables and payables measured at their nominal invoiced amounts, if the impact of the discount on these items is immaterial,
- in IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets information is clarified on the manner of adjusting carrying amount and the depreciation of revalued property, plant and equipment measured at the date of the revaluation,
- in IAS 24 Related Party Disclosures a clause was added clarifying the definition of relations between entities.
These amendments are effective for annual periods beginning on or after 1 July 2014, although in the EU they will be effective for annual periods beginning on or after 1 February 2015. The Group will apply them starting with the annual period beginning on 1 January 2016.
- Annual Improvements to IFRSs, 2011-2013 Cycle. As a result of a review, minor amendments were made to the following standards:
- IFRS 1 First-time Adoption of International Financial Reporting Standards,
- IFRS 3 Business Combinations,
- IFRS 13 Fair Value Measurement,
- IAS 40 Investment Property.
The above amendments are effective for annual periods beginning on or after 1 July 2014, although in the EU they will be effective for annual periods beginning on or after 1 January 2015 and will not affect the consolidated financial statements of the Group.
Standards and interpretations which are not in force and have not been adopted by the European Union up to the date of publication of these financial statements.
- IFRS 9 Financial instruments. As a result of many years of work by the International Accounting Standards Board (IASB) on the project to supersede IAS 39 Financial instruments: Recognition and Measurement, in 2014 a new standard was published, IFRS 9 Financial instruments, which entirely replaces IAS 39. The document published in 2014 represents a complete version of the standard, comprising all of the elements of IFRS 9 published in prior years. The new standard contains amended and simplified principles in the following scope:
- the classification and measurement of financial assets, introducing the category of financial assets measured at fair value and at amortised cost based on the assets management business model applied by the entity,
- the classification and measurement of financial liabilities, retaining most of the principles formerly applied by IAS 39. The new standard requires however that any change in the fair value of a financial liability which is initially recognised at fair value through profit or loss, in that part arising from its own credit risk, be presented in other comprehensive income,
– hedge accounting, which makes hedge accounting more similar to the manner of risk management applied by an entity, introducing a more principle-based approach to hedge accounting,
– the model for recognising impairment to financial assets. The Board replaced the previously-applied model of „incurred loss” with the „expected loss” model, which is based on estimating expected credit losses arising from a given asset at initial recognition of the asset, and then at each subsequent reporting date.
Due to the broad scope of amendments to IFRS 9 as compared to IAS 39, the significant value of financial instruments in the consolidated financial statements and the application by the Group of hedge accounting, it is crucial that a cautious and in-depth approach be taken when evaluating the impact of IFRS 9 on the Group’s financial statements. As a result, an estimation of the impact of the new standard on the consolidated financial statements is not currently possible.
IFRS 9 will be effective for annual periods beginning on or after 1 January 2018 and the period beginning on
1 January 2018 is the latest period in which the Group will apply the standard.
- IFRS 14 Regulatory Deferral Accounts. In IFRS 14 the IASB introduced the requirement to make a separate presentation in the financial statements of amounts that arise when an entity provides goods or services at a price or rate that is subject to rate regulation as well as deferred recognition.
The new standard will be effective for annual periods beginning on or after 1 January 2016, and as it will only effect first-time adopters of IFRS it will not affect the consolidated financial statements of the Group.
- Amendments to IFRS 11 Joint arrangements titled Accounting for Acquisitions of Interests in Joint Operations. In IFRS 11 the IASB added the requirement to account for the acquisition of interests in joint operations, which is an arrangement as defined by IFRS 3, in accordance with the principles regarding accounting for joint arrangements described in this standard.
These amendments will be effective for annual periods beginning on or after 1 January 2016.
- Amendments to IAS 16 Property, plant and equipment and IAS 38 Intangible assets titled Clarification of Acceptable Methods of Depreciation and Amortisation. The amendment prohibits the application of a revenue-based depreciation method. The use of this type of depreciation method is only permissable under specific circumstances for intangible assets.
These amendments will be effective for annual periods beginning on or after 1 January 2016, and will not affect the consolidated financial statements of the Group.
- IFRS 15 Revenue from contracts with customers. The new standard supersedes IAS 11 Construction contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers, and SIC-31 Revenue - Barter Transactions Involving Advertising Services.
IFRS 15 unifies the principles for recognising revenue from various types of agreements and from various sources. The core principle for recognising revenue will be to accurately reflect the obligation to provide promised goods, merchandise or services to customers. The estimated revenue should reflect the amount of the agreed consideration to which an entity is entitled in exchange for goods or merchandise delivered or services rendered. Revenue is recognised at the moment when a given merchandise or good is delivered or service rendered to a customer, while an asset will be deemed as delivered when control over the asset is passed to the customer. The new standard contains a broader scope of guidelines for recognising revenue arising from complex contracts with multiple elements, and also contains a cohesive list of requirements regarding informational requirements.
IFRS 15 will be effective for annual periods beginning on or after 1 January 2017. Due to the type of sales contracts signed by the Group, it is expected that the standard will not have a significant impact on the consolidated financial statements of the Group.
- Amendments to IAS 16 Property, plant and equipment and IAS 41 Agriculture titled Agriculture: Bearer Plants. In accordance with the amendments introduced, bearer plants related to agricultural activities will be recognised and measured based on the principles of IAS 16, and agricultural products obtained from the bearer plants will remain in the scope of IAS 41.
These amendments will be effective for annual periods beginning on or after 1 January 2016, and will not affect the consolidated financial statements of the Group.
- Amendments to IAS 27 Separate Financial Statements titled Equity Method in Separate Financial Statements. The amendments allow entities to apply the equity method as one of the optional methods for recognising investments in subsidiaries, joint ventures and associates.
These amendments will be effective for annual periods beginning on or after 1 January 2016 and will not affect the consolidated financial statements of the Group.
- Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures titled Sale or Contribution of Assets between an Investor and its Associate or Joint Venture. The IASB introduced an amendment to remove inconsistencies between IFRS 10 and IAS 28 with respect to the accounting recognition of the loss of control over a subsidiary. An amendment was also introduced regarding the limitations on the recognition of profit or loss resulting from the transfer of non-financial assets to an associate or joint venture. Under IFRS 10, if a parent entity loses control over a subsidiary which is not a business as defined in IFRS 3 as the result of a transaction with its associate or joint venture accounted for using the equity method, the parent entity recognises a gain or loss on the transaction only up to the percentage held by investors not related with the given associate or joint venture. The remaining amount of gain or loss and the relevant amount of the carrying amount of the existing investment in the associate or joint venture is excluded.
For these reasons IAS 28 clarifies that when a non-financial asset is sold or transferred to an associate or joint venture it constitutes a business as defined in IFRS 3, as the investor then recognises the full profit or loss from the transaction; in the opposite case the investor recognises profit or loss from the transaction only in an amount proportional to the interests of other investors in this associate or joint venture.
These amendments will be effective for annual periods beginning on or after 1 January 2016.
- Annual Improvements to IFRS, 2012-2014 Cycle. As a result of a review of IFRS minor amendments were made to the following standards:
– IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, shows how to account for a change in the manner of disposal of assets previously designated as held for sale or for distribution to owners,
– IFRS 7 Financial Instruments: Disclosures, specifies the criteria for evaluating service contracts in the context of continued involvement with the given asset,
– IAS 19 Employee Benefits, introduces the requirement to make reference to market yields on government bonds in a given currency (and not only in a given currency in a given country) in the discount rate used to measure post-employment employee benefits, if there are no highly-liquid, low-risk corporate bonds,
– IAS 34 Interim Financial Reporting, with respect to disclosing information elsewhere in the interim financial report.
These amendments will be effective for annual periods beginning on or after 1 January 2016, and will not significantly affect the consolidated financial statements of the Group.
- Amendments to IAS 1 Presentation of Financial Statements titled Disclosure Initiative. This document introduces guidelines on questions involving the evaluation by preparers of financial statements of the materiality of presented financial data, their aggregation and disaggregation, in terms of both the amount and nature, the manner of presenting partial data and the need to analyse disclosures required by the standards in terms of their materiality. An entity should not present immaterial information, even if a given standard describes it as the minimum scope of disclosure. An entity may however provide information which is not required if it could lead to a better understanding by the user of the financial statements of the impact of particular transactions on an entity’s assets and financial results.
These amendments will be effective for annual periods beginning on or after 1 January 2016, and will not significantly affect the consolidated financial statements of the Group.
- Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint Ventures titled Investment Entities: Applying the Consolidation Exception.
The amendments in IFRS 10 confirm that parent entities which are subsidiaries of investment entities are also excluded from the requirement to prepare consolidated financial statements under condition that all of the subsidiaries are measured by their parent entities at fair value through profit or loss.
These amendments will be effective for annual periods beginning on or after 1 January 2016, and will not affect the consolidated financial statements of the Group.
2.2 Accounting policies
2.2.1 Property, plant and equipment
Property, plant and equipment are tangible items that:
- are held by the Group for use in production, supply of goods and services or for administrative purposes;
- are expected to be used during more than one year;
- are expected to generate future economic benefits that will flow to the Group; and
- have value that can be measured reliably.
The most important property, plant and equipment of the Group is property, plant and equipment related to the mining and metallurgical operations, comprised of land, buildings, water and civil engineering structures, mining infrastructure (including in underground mines, such mine facilities as: shafts, wells, galleries, drifts, primary chambers) as well as machines, technical equipment, motor vehicles and other movable fixed assets.
Upon initial recognition, items of property, plant and equipment are measured at cost.
Upon initial recognition, in the costs of property, plant and equipment the anticipated costs of future assets’ dismantling and removal and cost of restoring the sites on which they are located, the obligation for which an entity incurs either when the item is installed or as a consequence of having used the item for purposes other than to produce inventories are included. In particular, the initial cost of Group items of property, plant and equipment includes discounted decommissioning costs of assets relating to underground mining, as well as of other facilities which, in accordance with binding laws, must be liquidated upon the conclusion of activities. Principles for the recognition and measurement of decommissioning costs are described in note 2.2.16. Mine decommissioning costs recognised in the initial cost of an item of property, plant and equipment are depreciated in the same manner as the item of property, plant and equipment to which they relate, beginning from the moment an item of property, plant and equipment is brought into use, throughout the period set out in the asset group decommissioning plan within the schedule of mines decommissioning.
Borrowing costs incurred for the purchase or construction of a qualifying item of property, plant and equipment are recognised in the initial cost. The principlies for recognition and measurement of borrowing costs are described in note 2.2.2. As at the end of the reporting period, items of property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. (Details on impairment of non–financial assets are described in note 2.2.4)
Subsequent expenditures on items of property, plant and equipment (for example to increase the usefulness of an item, for spare parts or renovation) are recognised in the carrying amount of a given item only if it is probable that future economic benefits associated with these expenditures will flow to the Group, and the cost of the expenditures can be measured reliably. All other expenditures on repairs and maintenance are recognised in profit or loss in the period in which they are incurred.
Items of property, plant and equipment (excluding land) are depreciated, depending on the model of consuming the economic benefits from the given item of property, plant and equipment:
- using the straight-line method, for items which are used in production at an equal level throughout the period of their usage, and
- using the natural depreciation method (units of production method), for those assets in respect of which the consumption of economic benefits is directly related to the amount of mineral extracted from a deposit or the quantity of units produced, and this extraction or production is not spread evenly through the period of their usage. In particular this refers to buildings and mining facilities, as well as to mining machinery and equipment.
The useful lives, and therefore the depreciation rates of fixed assets used in the production of copper, are adapted to the plans for the closure of operations. For individual groups of fixed assets, estimated based on expected mine life reflecting ore content, the following useful lives have been adopted:
- buildings and civil engineering objects, including stripping costs: 25 - 60 years;
- technical equipment and machines: 4 - 15 years;
- motor vehicles: 3 - 14 years; and
- other property, plant and equipment, including tools and instruments: 5 – 10 year.
In addition, the Group performs annual regular reviews of its property, plant and equipment in terms of the adequacy of applied useful lives to current operating conditions. The results of the review of depreciation rates performed in 2014 are presented in this report in note 3.2.
Depreciation begins when an item of property, plant and equipment is available for use. Depreciation ceases at the earlier of the two dates:when the asset is classified as held for sale (or included as part of a disposal group which is classified as held for sale) in accordance with IFRS 5 Non-current assets held for sale and discontinued operations or when it is derecognised upon disposal or retirement.
The individual significant parts of an item of property, plant and equipment (components), whose useful lives are different from the useful life of the given fixed asset as a whole and whose cost is significant in comparison to the cost of the item of property, plant and equipment as a whole, are depreciated separately, applying depreciation rates reflecting their anticipated useful lives.
An asset’s carrying amount includes the costs of necessary regular major overhauls, including costs of overhauls for the purpose of certification.
Specialised spare parts and spare equipment with a significant initial cost and an anticipated useful life of more than 1 year are recognised as an item of property, plant and equipment. Other spare parts and servicing-related equipment with an insignificant cost are recognised as inventories and accounted for in profit or loss at the moment they are used.
A fixed asset is derecognised when it is sold or if no future economic benefits are expected to be derived from its use or disposal.
Stripping costs in the production phase of a surface mine
In the surface mines operated by Group subsidiaries, activities are undertaken involving pre-stripping during the production phase in the mines to gain access to ore (so-called accessing work).
The material removed through stripping during the production phase is often a combination of waste and ore (depending on the deposit). In particular, strip activity can bring economic benefits by obtaining ore that can be used to produce inventory or to gain access to deeper parts of the deposit that will be mined in future periods. To the extent that the benefit obtained by the Group from stripping activity is achieved by:
- the production of inventories, the Group accounts for the cost of such stripping in accordance with IAS 2 Inventories, as a manufacturing cost of products sold. As regards unsold production the said cost is capitalised as inventory; or
- the cost of work to gain access to deeper areas of ore, the Group recognises under non-current assets as “Surface mine stripping assets” (presented in property, plant and equipment under the buildings group), if the following conditions are met: (a) future economic benefits are expected to be derived from the stripping activity, (b) the Group is able to identify that part of the ore deposit to which better access was gained and (c) the stripping costs of this part of the deposit can be reliably measured.
When the cost of the stripping activity asset and the inventory produced are not separately identifiable, the Group allocates these costs between the inventory produced and the stripping activity fixed asset by using a method which is based on a relevant production measure. The production measure for a given area in the Group’s mines is the stripping ratio, i.e. the volume of waste extracted compared to expected volume, for a given volume of ore production.
2.2.2 Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset when the flow of economic benefits is probable and the costs can be measured reliably.
Other borrowing costs are recognised as an expense when incurred.
Borrowing costs are interest and other costs incurred by an entity in connection with the borrowing of funds. Borrowing costs include in particular:
- interest expenses calculated based on the effective interest method in accordance with IAS 39;
- financial costs due to financial leasing contracts recognised in accordance with IAS 17;
- exchange differences arising from foreign currency borrowings, to the extent that they are regarded as an adjustment of interest costs.
Eligible for capitalisation are: specific financing costs (the amount being the difference between the actual borrowing costs and the revenues from the temporary investment of the borrowed funds) and general financing costs (costs recognised using the capitalisation rate).
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
The capitalisation of borrowing costs starts with the joint fulfilment of the following conditions:
a/ expenditures for the asset are being incurred,
b/ borrowing costs are incurred, and
c/ actions necessary to prepare the asset for the intended use or sale, are in progress.
The capitalisation of borrowing costs ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
The capitalisation of borrowing costs is suspended during prolonged breaks in the active performance of investment activity in relation to the qualifying assets, unless such a break is a normal element for the given type of investment. The borrowing costs incurred during the time of the break not constituting the normal element for the given investment, affect the costs of the period.
Exchange differences on borrowings drawn in a foreign currency affect the initial value of the qualifying asset to the extent in which it represents an adjustment of interest costs. To calculate the borrowing costs eligible for capitalisation, both from targeted financing and general financing, only exchange differences which are adjustments to interest costs are taken into account. The amount of the exchange differences adjusting the interest cost is the difference between the cost of interest on equivalent financing which an entity would have drawn in its functional currency and the financing cost incurred in the foreign currency.
The exchange differences which are the adjustment to the borrowing costs are settled in the annual reporting period.
If the capitalised borrowing costs increase the value of the qualifying asset and it exceeds its recoverable value, an impairment loss is recognised by the Group.
If the initial value of the qualifying asset was written down, then in the calculation of the capitalisation rate the gross initial value of this asset is taken into account.
2.2.3 Intangible assets
Intangible assets include the following identifiable non-monetary assets without physical substance:
- Development costs;
- Acquired property rights (concessions, patents, licenses, mining rights – mining usufruct rights);
- Other intangible assets;
- Exploration and evaluation assets ( intangible assets not yet available for use); and
- Other intangible assets not yet available for use (under construction).
On initial recognition, items of intangible assets are measured at cost. As at the end of the reporting period, items of intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses. (Details on the impairment of non–financial assets are described in note 2.2.4).
Amortisation of intangible assets (excluding goodwill, water rights, exploration and evaluation assets and intangible assets not yet available for use) is done using the straight line method, based on expected useful lives, which for individual groups of intangible assets is:
- development costs: 5 – 15 years;
- software: 2 – 5 years;
- acquired property rights (concessions, patents, licenses, mining usufruct rights): 5 – 50 years; and
- other intangible assets, including the right to geological information: 50 years.
The amortisation method and the amortisation rate of intangible assets are subject to review at least at the end of each financial year.
Intangible assets not yet available for use (under construction), goodwill and water rights (assets with indefinite useful lives) are subject to review for impairment at least at the end of each financial year. Eventual impairment loss is recognised in profit or loss.
Exploration and evaluation assets
Intangible assets and property, plant and equipment used in the exploration for and evaluation of mineral resources are recognised as exploration and evaluation assets, but they do not include expenditures on development work related to mineral resources or expenditures incurred:
a) prior to the commencement of exploration for and evaluation of mineral resources, i.e. expenditures incurred prior to obtaining the legal rights to carry out exploratory activities within a specified area, and
b) after the technical feasibility and commercial viability of extracting a mineral resource is demonstrable.
Intangible assets include among others acquired exploration rights, expenditures on drilling, stripping work, sampling, the topographical, geological, geochemical and geophysical analysis of deposits, remuneration and related costs and other employee benefits of individual employees and employees engaged in teams or designated units or those delegated to the supervision or operation of individual projects and other direct costs related to the acquisition or construction of exploration and evaluation intangible assets pursuant to IFRS 6.
If an exploration right could not be exercised without the acquisition of the land in which it is situated, the acquired land rights together with the respective concession are classified as intangible assets at the stage of exploration for and evaluation of mineral resources.
Exploration and evaluation assets are recognised and presented as a separate group of intangible assets not available for use.
The following expenditures are classified as exploration and evaluation assets:
- work on geological projects;
- obtaining environmental decisions;
- obtaining concessions and mining usufruct for geological exploration;
- work related to drilling (drilling; geophysical and hydrogeological research; geological, analytical and geotechnical services, etc.);
- the purchase of geological information;
- the preparation of geological documentation and its approval;
- the execution of economic and technical assessments of resources for the purpose of obtaining decisions on the application for mine operating concessions; and
- equipment usage costs (property, plant and equipment) used in exploratory work.
Exploration and evaluation assets are measured at the moment of initial recognition at cost. For purposes of subsequent measurement the Group applies a measurement model based on cost less any accumulated impairment.
The Group is required to test a separate entity (project) for impairment when:
- the technical feasibility and commercial viability of extracting a mineral resource is demonstrable, i.e. prior to reclassification of these assets to another asset group (including to fixed assets under construction or intangible assets not yet available for use other than exploration and evaluation assets);and
- the facts and circumstances indicate that the carrying amount of exploration and evaluation assets may exceed their recoverable amount.
Any potential impairment losses are recognised prior to reclassification resulting from the demonstration of the technical and economic feasibility of extracting the mineral resources.
Other intangible assets
The following are recognised by the Group under other intangible assets, among others:
- water rights in Chile, in the KGHM INTERNATIONAL LTD. Group – due to the specific nature of this asset, i.e. the inexhaustibility of the source, the Group adopted an indefinite period of use for these rights and in accordance with IAS 36 does not amortise this asset. Annual testing for impairment is performed however.
- the fee for managing the jointly-controlled venture Sierra Gorda S.C.M. and intangible assets due to signed contracts for the sale of services, which were identified and measured during the process of accounting for the combination of KGHM INTERNATIONAL LTD. pursuant with IFRS 3. For these assets, the Group adopted
a 22-year long amortisation period.
2.2.4 Impairment of non-financial assets
Goodwill, water rights, and other intangible assets with indefinite useful lives, are tested annually for impairment.
Other non-financial assets are tested for impairment whenever an event or change in circumstances indicates that its carrying amount may not be recoverable. Amongst the fundamental external indications of possible impairment of assets for Group companies which are listed on active markets are the continuation over the long term of a situation in which the carrying amount of these companies’ net assets exceeds their market value. Additionally, amongst the most significant indications are unfavourable technical, market and economic changes to the environment in which the Group’s companies operate, including on the destination markets for products of the Group’s companies, as well as an increase in market interest rates and premiums for risk reflected in calculations of the discount rates used to calculate the value in use of these companies’ assets. Internal factors taken into account in determining whether assets have been impaired primarily include any substantial decrease in actual net cash flow in relation to the net cash flow from operating activities assumed in the Budget, and, with respect to individual assets, any physical damage, loss of utility and the generation of lower economic benefits than expenditures incurred on their acquisition or construction, if a given asset independently generates cash flow.
An impairment loss is recognised as the amount of the carrying value of the given asset or cash-generating unit which exceeds its recoverable amount. The recoverable amount is the higher of two amounts: fair value less costs to sell, and value in use.
For the purpose of impairment assessment, assets are grouped at the lowest level at which they generate cash inflows that are independent of those from other assets (cash-generating units). Cash-generating units are determined separately, each time an impairment test is to be performed.
If an impairment test indicates that the recoverable amount (i.e. the higher of the asset’s fair value less costs to sell and its value in use) of a given asset or cash-generating unit is lower than its carrying amount, an impairment loss is recognised as the difference between the recoverable amount and the carrying amount of a given asset or cash-generating unit. Any impairment loss is initially allocated to goodwill, if it exists. The remaining amount of the impairment is allocated to assets within the cash-generating units proportionally to their share of the carrying amount of the entire unit. If such allocation is made, the carrying amount of the asset may not be lower than the highest of the following amounts: fair value less costs to sell, value in use and zero.
Impairment losses are recognised in the statement of profit or loss.
Non-financial non-current assets, other than goodwill, for which an impairment loss was recognised in prior periods, are tested at the end of each reporting period as to whether there is any indication of the possibility that an impairment loss may be reversed.
2.2.5 Investment property
Investment property is property which the Group treats as a source of income from rentals, or for capital appreciation, or both. Investment property is initially measured at cost. Transaction costs are included in the initial measurement.
At the end of subsequent reporting periods ending the financial year investment property is measured at fair value. Any gain or loss arising from a change in the fair value of the investment property affects profit or loss for the period in which it arises.
Investment property is derecognised from the statement of financial position on disposal, or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal.
2.2.6 Investments in subsidiaries and consolidation principles
Subsidiaries in the consolidated financial statements of the Group are those entities which are controlled by the Parent Entity, either directly or indirectly through its subsidiaries. The Parent Entity controls an entity only if it has all of the following:
a) power over the entity,
b) exposure, or rights, to variable returns from its involvement with the entity,
c) the ability to use its power over the entity to affect the amount of its returns.
Power over an entity is usually exercised through ownership of the majority of the total number of votes in the governing bodies of such entities, if decisions concerning the relevant activities of the entity are made by exercising these votes. The existence and effect of potential voting power (provided that it is significant) is considered when assessing whether the Parent Entity controls a given entity. In doubtful situations, a factor indicating whether the Parent Entity has power over the entity is the actual ability to direct the entity’s relevant activities (i.e. the activities that significantly affect the entity’s financial results) or existence of a special relationship.
The purchase method is used to account for the acquisition of subsidiaries by the Group.
The carrying amount of investments held by the Group in each subsidiary is eliminated, along with the respective portion of equity of each subsidiary.
Recognised as goodwill are the excess of the payment made by an acquirer, the amount of all non-controlling shares in an acquiree, and fair value of an ownership interest of the acquiree at the acquisition date, belonging to the acquirer prior to obtaining control, over the net amount set at the acquisition date of the value of identifiable acquired assets and liabilities of the acquired subsidiary. The excess of the Group share in the fair value of net assets over the purchase price, which is the gain on a bargain purchase, is recognised directly in profit or loss.
The payment for acquisition is measured at fair value, being the total fair value of the transferred assets, outstanding liabilities and issued equities at the acquisition date. The payment for acquisition also includes all assets and liabilities resulting from decisions in respect of contingent payments, if such decisions are made. Costs associated with acquisition are settled as costs of the period in which they are incurred, while marginal costs of issuing debt and equity instruments are recognised as decreases in the value of these instruments at initial recognition.
Identifiable assets acquired and liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest.
Inter–company transactions, balances, income, expenses and unrealised gains recognised in assets are eliminated. Unrealised losses are also eliminated, unless the transaction provides evidence of the impairment of the asset transferred. The consolidated financial statements are prepared using uniform accounting policies for similar transactions and other events in similar circumstances.
Non-controlling interest in the net assets of consolidated subsidiaries is recognised as a separate item of equity, “Non-controlling interest”.
Consolidation of subsidiaries is discontinued from the date on which control ceases.
Changes in the share of ownership of the Group which do not result in a loss of control of a subsidiary are recognised as an equity transaction. The carrying amount of the shares granting control and not granting control are adjusted, reflecting the change in the share of ownership in a given subsidiary. The difference between the amount to be paid due to the increase or decrease of shares and the carrying amount of the respective shares not granting control is recognised directly in equity attributable to the shares granting control.
2.2.7 Investments accounted for using the equity method
The Group classifies as investments accounted for using the equity method the interest in joint arrangements, identified as joint ventures in which jointly-controlling parties have the right to the net assets of a given entity.
Joint control is the contractually agreed sharing of control over joint arrangements which occurs only when decisions about the relevant activities require the unanimous consent of the jointly-controlling parties. Relevant activities are understood as activities which significantly impact the amount of returns made by these joint arrangements.
These investments are initially recognised at cost. The net value of Group investments in an entity which is recognised in the statement of financial position also includes, as set on the date control was acquired, goodwill and identified items not recognised in the statement of financial position of the acquired entity measured at fair value.
The Group’s share of post-acquisition profits or losses of entities accounted for using the equity method is recognised in profit or loss, and its share of post-acquisition movements in accumulated other comprehensive income is recognised in the respective item of accumulated other comprehensive income. The cumulative post-acquisition movements in equity are adjusted against the carrying amount of the investment. When the Group’s share of losses of entities accounted for using the equity method equals or exceeds its interest in the entity, the Group discontinues recognising its share of further losses, unless it has incurred obligations or made payments on behalf of the entity.
2.2.8 Financial Instruments
18.104.22.168 Classification of financial instruments
Financial instruments are classified into one of the following categories:
- financial assets measured at fair value through profit or loss,
- loans and receivables,
- available-for-sale financial assets,
- financial liabilities measured at fair value through profit or loss,
- other financial liabilities,
- derivative hedging instruments.
Financial instruments are classified based on their characteristics and the purpose for which they were acquired. Classification is made upon initial recognition of the financial asset or liability. Classification of derivatives depends on their purpose and on whether they qualify for hedge accounting according to the requirements of IAS 39. Derivatives are classified as: derivative hedging instruments, trade instruments and instruments initially designated as hedging instruments excluded from hedge accounting.
The carrying amount of cash flows due to financial instruments with a maturity period of more than 12 months from the end of the reporting period is classified as a non-current asset or non-current liability. The carrying amount of cash flows due to financial instruments with a maturity period of less than 12 months from the end of the reporting period is classified as a current asset or current liability.
The following principles for the classification of financial instruments have been adopted for the above specified categories of financial assets and liabilities:
Financial assets and liabilities measured at fair value through profit or loss
This category includes financial assets and financial liabilities held for trading and financial assets and liabilities designated at fair value through profit or loss at their initial recognition.
A financial asset is classified to this category if it is acquired principally for the purpose of selling in the near term or if it is designated by the Group upon initial recognition as at fair value through profit or loss. A financial asset or financial liability may be designated by the Group when initially recognised as measured at fair value through profit or loss only if:
a) such classification eliminates or significantly reduces any inconsistency in respect of measurement or recognition (also defined as “an accounting mismatch”), that would otherwise arise from measuring assets or liabilities or recognising gains or losses using a different basis; or
b) a group of financial instruments is managed properly and the performance of the group is evaluated on the fair value basis, in accordance with a documented risk management or investment strategy.
Available-for-sale financial assets and liabilities include derivatives, unless they have been designated as hedging instruments and instruments initially designated as hedging instruments excluded from hedge accounting.
Assets and liabilities in this category are classified as current if the carrying amount is realised within a period of up to 12 months from the end of the reporting period.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market.
Loans and receivables are included in trade and other receivables in the statement of financial position.
Cash and cash equivalents and financial assets for mine closure and the restoration of tailings storage facilities are also classified as loans and receivables. In the statement of financial position both cash and cash equivalents, and financial assets for mine closure and the restoration of tailing storage facilities, are separate items.
Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets that are either designated as “available-for-sale” or not classified to any of the other categories. This category primarily includes financial assets which do not have a fixed maturity date and which do not meet the criteria for being included in other categories.
Available-for-sale financial assets are included in non-current assets unless the Group intends to dispose of the investment within 12 months from the end of the reporting period.
Other financial liabilities
Financial liabilities included in this category are those that were not classified by the Group at their initial recognition as measured at fair value through profit or loss.
Derivatives designated and qualifying for hedge accounting are classified into a separate category called: Hedging instruments. The Group presents as hedging instruments the entire fair value of instruments designated to this category and qualifying for hedge accounting, even if the Group excludes the time value of a derivative from effectiveness measurement.
22.214.171.124 Initial measurement and derecognition of financial instruments
Transactions respecting the purchase and sale of investments, including regular way purchases or sales, are recognised at the trade date, initially at the fair value plus transaction costs, with the exception of financial assets and liabilities measured at fair value through profit or loss, which initially are recognised at fair value.
Investments are derecognised when the rights to the cash flows from the investments have expired or have been transferred and the Group has transferred substantially all of the risks and rewards of their ownership. Where substantially all of the risks and rewards of ownership of an asset have not been transferred, investments are derecognised when the Group loses control over a given asset.
126.96.36.199 Measurement of financial instruments at the end of the reporting period
Financial assets and financial liabilities measured at fair value through profit or loss, available-for-sale financial assets and hedging instruments
Financial assets and financial liabilities measured at fair value through profit or loss, available-for-sale financial assets and derivative hedging instruments are subsequently measured at fair value. Available-for-sale financial assets, which do not have a fixed maturity date, and the fair value of which cannot be determined in a reliable manner, are carried at cost less impairment.
Gains and losses on financial assets which are classified as financial assets measured at fair value through profit or loss are recognised in profit or loss in the period in which they arise.
Gains and losses on financial assets which are classified as available-for-sale are recognised in other comprehensive income, except for impairment losses and exchange gains or losses on monetary assets and gains or losses on interest which would be recognised at the measurement of these items using amortised cost and applying the effective interest rate, and which are recognised in profit or loss. When available-for-sale financial assets are derecognised, the total cumulative gains and losses which had been recognised in other comprehensive income are reclassified to profit or loss as an adjustment from reclassification.
The disposal of investments of the same type but with a different cost is accounted for using the FIFO method.
Loans and receivables
Loans and receivables are measured at amortised cost using the effective interest rate method.
Other financial liabilities
After initial recognition, the Group measures all financial liabilities, apart from those classified as at fair value through profit or loss, at amortised cost using the effective interest rate method except for:
– financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition; and
– financial guarantee agreements, which are measured at the higher of two amounts: the amount determined in accordance with point 2.2.16 Provisions, or the amount initially recognised less cumulative amortisation recognised according to IAS 18 Revenue.
188.8.131.52 Fair value
The fair value of an asset or liability is the price at which the asset could be sold or the price which would be paid to transfer the liability (exit price) in an arm’s-length transaction between market participants at the measurement date. Fair value is considered to be the purchase price of a financial instrument or, in case of financial liabilities, the sales price of an instrument, unless there are any indicators that a financial instrument was not purchased at fair value.
At the end of the reporting period, the fair value of financial instruments, for which an active market exists, is established based on the most representative price from this market at the measurement date. If the market for a financial asset or liability is not active (and including non-quoted securities), the Group establishes fair value using appropriate valuation techniques based on maximum utilisation of appropriate observable inputs and minimum utilisation of unobservable inputs. Valuation techniques used include comparison with recent arm’s length market transactions, reference to the current fair value of other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques/models which are commonly used by market participants, adjusted to the characteristics and parameters of the fairly valued financial instrument and the situation of the issuer.
In the case of derivatives, estimated fair value reflects the amount recoverable or payable to close out an outstanding position at the end of the reporting period. Where possible, transactions are fairly valued based on market prices. In the case of purchase or sale of commodity forwards, fair value was estimated based on forward prices for the maturity dates of specific transactions. In the case of copper, the official London Metal Exchange closing prices and volatility estimates as at the end of the reporting period are obtained from the Reuters news service. For silver and gold, the London Bullion Market Association fixing price at the end of the reporting period is used. In the case of volatility and forward prices, quotations of banks/brokers are used.
Currency interest rates and currency volatility ratios obtained from Reuters are used. Forwards and swaps on the copper market are priced based on a forward market curve. Silver and currency forward prices are calculated based on fixing price and respective interest rates. Levy approximation to the Black-Scholes model is used for Asian options pricing on commodity markets, whereas the standard German-Kohlhagen model is used for European options pricing on currency markets.
The fair value of negatively-valued derivatives takes into account adjustments for the risk of non-performance, which includes a credit risk assessment of the relevant entity of the Group. The fair value of positively-valued derivatives takes into account adjustments for credit risk related to a counterparty, i.e. the risk of the counterparty becoming insolvent prior to the expiry of the relevant contract. The Group’s entities quantify their own credit risk and counterparty credit risk when measuring financial instruments at fair value, using the simulation of future exposures approach with data implied from the current market quotations of financial instruments.
The fair value of unquoted debt instruments is determined as the present value of future cash flows discounted using the prevailing interest rate.
The fair value hierarchy
Assets and liabilities measured at fair value in the statement of financial position, or those which are not measured at fair value but for which information about their fair value is disclosed, are classified by the Group using the fair value hierarchy that categorises the inputs into three levels, depending on their availability:
- level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;
- level 2 inputs are inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly; and
- level 3 inputs are unobservable inputs for the asset or liability.
In cases where the inputs used to measure the fair value of an asset or a liability might be categorised within different levels of the fair value hierarchy, the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.
The fair value measurement of the Group’s derivatives is classified under level 2 of the fair value hierarchy, while measurement of equity instruments is classified under level 1 of the fair value hierarchy.
184.108.40.206 Impairment of financial assets
At the end of each reporting period an assessment is made of whether there is objective evidence that a financial asset or a group of financial assets is impaired. The following are considered significant objective indicators (impairment indicators): significant financial difficulty of the debtor, legal action being taken against the debtor, the occurrence of significant unfavourable changes in the economic, legal or market environment of the issuer of a financial instrument, and the prolonged significant decrease of the fair value of an equity instrument below its cost.
If any such evidence exists in the case of available-for-sale financial assets, the cumulative loss that had been recognised directly in other comprehensive income – calculated as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from other comprehensive income and reclassified to profit or loss as a reclassification adjustment. Impairment losses on equity instruments recognised in profit or loss are reversed through other comprehensive income. The reversal of impairment losses on debt financial instruments is recognised in profit or loss if, in periods subsequent to the period of the recognition of the impairment loss, the fair value of these instruments increased due to events occurring after the recognition of the impairment loss.
If evidence of potential impairment of loans and receivables or of held-to-maturity investments measured at amortised cost exists, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate (i.e. the effective interest rate calculated at the initial recognition for fixed interest rate assets, and the effective interest rate computed as at the last revaluation for variable interest rate assets). Any impairment loss is recognised in profit or loss.
Receivables and loans which are measured at amortised cost, are individually tested for impairment at the end of each reporting period. Receivables, against which no impairment allowance was made, but for which the possibility of impairment exists due to their specific credit risk (related for example to the type of activity or structure of the clients) are tested for impairment as a group (assets portfolio).
An impairment allowance is reversed, if in subsequent periods the impairment is reduced, and this reduction may be attributed to events occurring after recognition of the impairment allowance. The reversal of an impairment allowance is recognised in profit or loss.
220.127.116.11 Hedge accounting
Hedging, for accounting purposes, involves proportional offsetting of the effects of changes in the fair value or changes in cash flows arising from a hedging instrument and a linked hedged item.
Financial assets which are not derivatives, or financial liabilities which are not derivatives, may be designated as hedging instruments only for currency risk hedging.
The Group uses natural hedging through the use of hedge accounting for loans denominated in USD, and designates them as hedging instruments for foreign currency risk, which relates to future revenues of the Group from sales of copper, silver and other metals, denominated in USD.
The Group uses hedge accounting for cash flow hedges.
Derivatives used in cash flow hedges
The Group hedges cash flow.
In a cash flow hedge, a derivative used as a hedging instrument is an instrument which:
- hedges the exposure to volatility of cash flows which are attributable to a particular type of risk associated with an asset or liability recognised in the statement of financial position, or a highly probable forecast transaction; and
- will affect profit or loss.
Gains and losses arising from changes in the fair value of a hedging instrument in a cash flow hedge are recognised in other comprehensive income, to the extent by which the change in fair value represents an effective hedge of the associated hedged item. The portion which is ineffective is recognised in profit or loss as other operating income or costs. Gains or losses arising from the hedging instrument in cash flow hedges are recognised in profit or loss as a reclassification adjustment, in the same period or periods in which the hedged item affects profit or loss.
Hedge effectiveness is the degree to which changes in the cash flows of the hedged item that are attributable to the hedged risk are offset by changes in the cash flows of the hedging instruments.
If the hedged firm commitment or forecast future transaction subsequently results in the recognition of a non-financial asset or non-financial liability in the statement of financial position, then, at the time the item is recognised, all associated gains and losses are included in the initial cost or other carrying amount of the asset or liability.
The designated hedges relate to the future transactions forecasted as assumed in the Sales Plan for a given year. These plans are prepared based on the production capacities for a given period. The Group estimates that the probability of these transactions occurring is very high, as from a historical point of view, sales were always realised at the levels assumed in Sales Plans.
When entering into hedging transactions, the Group documents the relationship between hedging instruments and the linked hedged items, as well as the objective of entering into a particular transaction. The Group also documents its assessment, both at the date of inception of the hedge as well as on an on-going basis, of whether the hedging instruments are and will be highly effective in offsetting changes in the cash flows of the hedged items.
Discontinuation of hedge accounting
The Group ceases to account for derivatives as hedging instruments when they expire, are sold, terminated or settled, or when the Group revokes its designation of a given instrument as a hedging instrument. The Group may designate a new hedging relationship for a given derivative, change the intended use of the derivative, or designate it to hedge another type of risk. In such a case, for cash flow hedges, gains or losses which arose in the periods in which the hedge was effective are retained in accumulated other comprehensive income until the hedged item affects profit or loss.
If the hedge of a firm commitment or forecasted future transaction ceases to exist, because the hedged item no longer meets the definition of a firm commitment, or because it is probable that the forecasted transaction will not occur, then the net gain or loss recognised in other comprehensive income is immediately transferred to profit or loss as a reclassification adjustment.
Inventories consist of the following:
- half-finished products and work in progress, including mainly copper ore, copper concentrate undergoing processing, copper ore undergoing leaching, copper blister, and convertor and anode copper;
- finished goods, including mainly copper concentrate designated for sale, copper cathode, silver, copper rod; and
- merchandise, including purchased or granted certificates of origin for energy from renewable energy resources, cogeneration and granted energy efficiency certificates.
The Group measures inventories, including work in progress in respect of ore being processed into copper concentrate through flotation, in the following manner:
Inventory additions are measured in accordance with the following principles:
- materials and merchandise – at cost;
- property rights to coloured energy and energy efficiency certificates – property rights at cost,
- certificates at fair value
- finished goods, half-finished products – at actual manufacturing cost; and
- work in progress – based on weighted average actual manufacturing costs.
Inventory disposals are measured as follows:
- materials and merchandise – at average cost based on the weighted average cost of a given item;
- property rights to coloured energy and energy efficiency certificates - using the FIFO method; and
- finished goods, half-finished products and work in progress – based on weighted average actual
- manufacturing cost.
Inventories are measured as follows:
- materials and merchandise – at average cost as set for inventory disposal;
- property rights to coloured energy and energy efficiency certificates – at cost less impairment loss, but not
- higher than the net realisable value; and
- finished goods, half-finished products and work in progress – based on weighted average manufacturing
- costs, including the balance at the beginning of the reporting period.
For production in which the Group obtains cathodes through the process of leaching, work in progress means extracted ore placed in a heap leach pad for further processing. The amount of copper produced is calculated as an estimate based on the expected content of copper in ore and the quality of copper in ore. Estimates of copper content in ore located on a heap leach pad used in the measurement of inventories are continuously reviewed with the actual amount of copper produced. Inventories are measured quarterly, based on average weighted cost of production.
At the end of the reporting period inventories are measured, using the above-mentioned policies, but not higher than the net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
Estimates of net realisable value are based on the most reliable evidence available at the time of preparing such estimates as regards anticipated amounts realisable from the sale of inventories.
The net realisable value of inventories held to satisfy firm sales is based on the contract price.
Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost.
2.2.10 Trade and other receivables
Trade receivables are recognised initially at fair value. After initial recognition, trade receivables are measured at amortised cost using the effective interest rate, less allowance for impairment, while trade receivables with a maturity period of up to 12 months from the receivable origination date are not discounted.
Impairment allowances on trade receivables are recognised when there is objective evidence that the Group will not be able to collect all amounts due. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the impairment allowance is recognised in profit or loss.
Receivables not representing financial assets are recognised initially at their nominal value and measured at the end of the reporting period at the amount due.
Receivables with a maturity period of over 12 months from the end of the reporting period are classified as non-current assets. Current assets include receivables with a maturity period of up to 12 months from the end of the reporting period.
The following are regarded as receivables:
- trade receivables – these are receivables which arise from the core operating activities of the Group,
- other receivables, including:
- loans granted,
- other financial receivables, i.e. receivables meeting the definitions of financial assets;
- other non-financial receivables, including among others advances for deliveries, fixed assets, fixed assets under construction, intangible assets and for shares, receivables from employees, if they are settled other than by cash payment, and also government receivables; and
2.2.11 Cash and cash equivalents
Cash and cash equivalents includes cash in hand and in bank accounts, on-demand deposits, other safe current investments with original maturities of three months or less from the date of their placement, acquisition or issuance and with high liquidity. Cash and cash equivalents also include interest on cash equivalents.
Equity consists of:
Equity attributable to shareholders of the Parent Entity:
- share capital;
- revaluation reserve from the measurement of financial instruments, of which:
- revaluation reserve from the measurement of cash flow hedging instruments;
- revaluation reserve from the measurement of available-for-sale financial assets;
- exchange differences from the translation of foreign operations statements to the Group’s presentation currency;
- actuarial gains/losses on post employment benefits;
- retained earnings, composed of:
- undistributed profit or unabsorbed losses from previous years;
- reserve capital created in accordance with the Commercial Partnerships and Companies Code;
- reserve capital created and used in accordance with the Statutes;
- capital from valuation of put options for employee shares;
- profit or loss for the period, and
Equity attributable to non-controlling interests.
The non-controlling interests are the equity of subsidiaries, which cannot be attributed directly or indirectly to the Parent Entity.
Liabilities are present obligations of the Group arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.
- liabilities arising from bank loans, debt instruments, other loans (borrowings) and finance lease liabilities;
- trade payables;
- other financial liabilities;
- liabilities arising from the acquisition or construction of tangible and intangible assets; and
- other non-financial liabilities.
Liabilities are measured at amortised cost in accordance with IAS 39. Current trade payables are recognised in the statement of financial position at their nominal value. The carrying amount of these liabilities is similar to the amount of their amortised cost, calculated using the effective interest rate.
Liabilities not classified as financial liabilities are measured at the amount due.
A lease is classified as a finance lease if it transfers to the lessee substantially all of the risks and rewards incidental to ownership of assets. The leased asset is capitalised at the inception of the lease at an amount equal to the fair value of the leased asset or, if lower, the present value of the minimum lease payments.
Where the substantial part of the risks and rewards incidental to ownership of an asset is retained by the lessor, a lease contract is classified as an operating lease. Payments under operating leases are settled using the straight line method over the life of the contract. Group liabilities due to operating leases not recognised in the statement of financial position, in particular with regard to payments to the State Treasury and to local government entities due to perpetual usufruct of land, as well as liabilities due to other operating leases agreements.
2.2.14 Accrued expenses
Accrued expenses are due and payable liabilities arising from goods received or services performed, for which the payment has not yet been made, an invoice has not been received or a formal agreement not been reached with the supplier, including amounts payable to employees.
Accruals include among others:
- remuneration and the related surcharges paid on a one-off basis, relating to annual periods;
- costs recorded in accounting books related to taxes and local fees;
- short-term accruals for unused annual leave;
- accruals for costs of purchase of property rights resulting from certificates of origin of energy from renewable resources and cogeneration; and
- accruals for the costs of depreciation of CO2 emissions allowances.
2.2.15 Deferred income
Deferred income includes mainly:
- cash received to finance the purchase or construction of fixed assets under construction or development work, which are recognised in profit or loss on a systematic basis over the useful life of the asset i.e. in accordance with the depreciation charges of the respective assets financed from these sources, and
- prepayment by Franco Nevada under an agreement for the supply of 50% of gold, platinum and palladium content in ore extracted by the KGHM INTERNATIONAL LTD. Group, and
- granted allowances of ETS, according to emission rights schemes (CO2) and granted energy efficiency certificates.
The value of fixed assets, fixed assets under construction and intangible assets acquired for free as grants, is accounted for in accordance with the description in point 2.2.24.
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, such that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.
Provisions are recognised, in particular, in respect of the following:
- future costs of mine decommissioning, after the conclusion of mining activities;
- future costs of decommissioning of technological facilities (in the copper smelters) and other facilities in cases where the law provides for the obligation to dismantle and remove such assets after the conclusion of mining activities and to restore the sites to their original condition;
- future costs of decomissioning of the tailings pond;
- the effects of court proceedings and of disputed issues; and
- guarantees granted.
Provisions are recognised in an amount representing the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. If the effect of the time value of money is material, the amount of the provision shall be the present value of the expenditure expected to be required to settle the obligation.
The provision for future decommissioning costs of mines and other technological facilities is recognised based on the estimated expected costs of decommissioning of such facilities and of restoring the sites to their original condition. Estimation of this provision is based on specially-prepared studies using ore extraction forecasts (for mining facilities), and feasibility studies prepared either by specialist firms or by the Parent Entity. Provisions are reviewed at the end of the reporting period.
All changes arising from changes in the amount of provisions are recognised in accordance with IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities.
Revaluations of the provision reflect:
- decreases due to its utilisation;
- increases due to the passage of time (unwinding of the discount) – recognition in finance costs;
- increases/decreases due to changes in the discount rate and due to changes in assumptions, including
- changes in construction-assembly prices – recognition in the initial value of property, plant and equipment*;
- increases due to the acquisition of new assets under the future decommissioning program;
- decreases due to early, unplanned liquidation of assets under the future decommissioning program;
- increases/decreases due to changes in the time horizon of realising liabilities resulting in a decrease or
- increase of the number of discount periods, as well as of the present value of the provision.
*Changes in the discount rate or in the estimated decommissioning cost adjust the value of the relevant item of property, plant and equipment, unless the amount of this change exceeds the carrying amount o the item of property, plant and equipment. A surplus above this amount is immediately recognised in profit or loss of the current period in other operating income.
The discount rate calculation methodology used to measure provisions is described in note 3.17.
2.2.17 Employee benefits
The Group is obliged to pay benefits due to one-off retirement-disability rights, post-mortem benefits, coal equivalent payments and jubilee bonuses according to the Collective Labour Agreements.
The amount of the liability due to these benefits is equal to the present value of the defined benefit obligation at the end of the reporting period, and reflects actuarial gains and losses and the costs of past employment. The value of defined benefit obligations is estimated at the end of the reporting period by independent actuaries using the Projected Unit Credit Method. The present value of the defined benefit obligation is determined by discounting estimated future cash outflow using the interest rates on treasury bonds expressed in the currency of the future benefits payments, with maturities similar to those of the liabilities due to be paid.
According to IAS 19 Employee benefits, the discount rate should be based on the market yields of highly liquid commercial bonds with low risk. Should there be no developed market for such bonds, and such a situation does exist in Poland, the market yield on government bonds at the end of the reporting period should be applied. Market yields used for estimating provisions are discussed in note 3.16.
Actuarial gains and losses from the measurement of specified benefits programs following the period of employment are recognised in other comprehensive income in the period in which they arose. Actuarial gains/losses from other benefits (for example benefits due to jubilee bonuses) are recognised in profit or loss. Costs of past employment related to defined benefit plans are recognised in profit or loss on a one-off basis
in the period in which they arose.
2.2.18 Income tax
Income tax recognised in profit or loss comprises: current tax and deferred tax.
Current income tax is calculated in accordance with current tax laws.
Deferred tax is determined using tax rates and laws that are expected to apply to the period when the asset is realised or the liability is settled based on tax rates and tax laws that have been enacted or substantively enacted at the end of the reporting period.
A deferred tax liability is recognised for all taxable temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. This liability is not discounted.
A deferred tax asset is recognised for all deductible temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets are recognised if it is probable that taxable profit will be available against which the deductible temporary differences and carry-forward of unused tax losses can be utilised.
Deferred tax assets and deferred tax liabilities are not recognised if they arise 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.
A deferred tax liability is likewise not recognised on temporary differences arising from the initial recognition of goodwill.
Deferred tax is recognised in profit or loss for a given period, unless the deferred tax:
- arises from transactions or events which are directly recognised in other comprehensive income – in which case the deferred tax is also recognised in other comprehensive income, or
- arises from a business combination – in which case the deferred tax affects goodwill or gains on a bargain purchase.
Deferred tax assets and deferred tax liabilities are offset if the Group entities have a legally enforceable right to set off current tax assets and current tax liabilities, and if the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority.
2.2.19 Contingent assets and liabilities
A contingent asset is:
a) a possible asset that arises from past events, and
b) whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group.
Contingent assets are assessed systematically and are recognised in the off-balance sheet register if an inflow of economic benefits to the Group is probable.
If it has become virtually certain that an inflow of economic benefits will arise, the asset and the related revenue are recognised in the financial statement of the period in which the change occurs.
A contingent liability is:
- a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity, or
- a present obligation that arises from past events but is not recognised because:
- it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
- the amount of the obligation (liability) cannot be measured with sufficient reliability.
Contingent liabilities include, among others:
- guarantees and promissory notes issued for the benefit of third-parties in connection with contracts;
- liabilities due to compensation for damages arising in the course of business activities, resulting from matters which remain unresolved;
- conditionally-suspended penalties for economic use of the natural environment; and
- other contingent liabilities arising from contracts.
2.2.20 Presentation of income and costs in the reporting period
The Group presents information on income and costs and gains and losses in the reporting period in the statement of profit or loss and in the statement of comprehensive income.
The statement of profit or loss (profit or loss) for a given period contains the aggregated amount of all revenues and other income, costs and charges in a reporting period, excluding items of other comprehensive income. The cost of sales format is applied as the basic costs accounting method. The result of the period in the statement of profit or loss is the profit/loss for the period.
The statement of comprehensive income contains the total amount of the net result of the period transferred from the statement of profit or loss as well as items of other comprehensive income. Under other comprehensive income the Group recognises gains and losses which, under individual standards, should be recognised apart from the statement of profit or loss. In addition the Group presents items of other comprehensive income in two groups, separating those items which, under other IFRS, will be reclassified subsequently to profit or loss when specified conditions are met from those items which will not be reclassified.
Consequently, in the group of items which, under IFRS, will be reclassified to profit or loss when specified conditions are met, the following are recognised:
- gains and losses of the period regarding the fair value measurement of available-for-sale financial assets;
- gains and losses from the fair value measurement of the effective portion of future cash flow hedging instruments; and
- exchange differences from the translation of foreign operations statements, including the related tax effect.
In the group of items which will not be reclassified to profit or loss are actuarial gains or losses including related tax effect.
Profit for the period in the statement of comprehensive income is the total comprehensive income for the period, being the sum of profit or loss for the period and other comprehensive income.
Sales revenues are recognised at the fair value of the consideration received or receivable, less VAT, rebates and discounts. In the case of metals sales, mainly copper products and silver, for which the price is set after the date of recognition of a given sale, revenues are accounted for based on the forward prices from the date of sale. Sales revenues which are recognised at such an amount are adjusted at the end of each reporting period by any change in the fair value of embedded derivatives, which are separated from the host sales contract. Sales revenues are adjusted by the gain or loss from the settlement of derivative cash flow hedges, in accordance with the general principle that the portion of gain or loss on a derivative hedging instrument that is determined to be an effective hedge is recognised in the same item of profit or loss in which the measurement of the hedged item is recognised at the moment when the hedged item affects profit or loss.
Recognised in sales are revenues arising from current operating activities of the Group, i.e. revenues from sales of products, services, merchandise and materials, reflecting any rebates granted and any other reductions in selling prices.
Income of the reporting period affecting the profit or loss of the period also includes:
other operating income, indirectly associated with the conducted activities, i.e.:
- income and gains from financial investments (including income from dividends and interest);
- gains from the measurement and realisation of trading derivatives and the ineffective portion of gains from the realisation and fair value measurement of derivative hedging instruments;
- foreign exchange gains, with the exception of exchange differences arising on liabilities representing sources of finance for the Group’s activities;
- reversal of impairment losses on held-to–maturity investments, available-for-sale financial assets and loans;
- release of unused provisions, previously charged to other operating costs;
- gains on disposal of property, plant and equipment and intangible assets; and
- received subsidies and donations.
finance income, representing primarily income related to financing of the activities of the Group, including:
- net foreign exchange gains arising exclusively on liabilities from sources of financing of Group activities (bank and other loans, bonds, finance leases etc.); and
- income from the realisation and fair value measurement of derivatives related to liabilities financing the Group’s activities.
Moment of recognition of revenues
Sales revenues from products, merchandise and materials are realised when:
- the Group has transferred to the buyer the significant risks and rewards of ownership of the merchandise, finished goods and materials;
- the Group neither retains continuing involvement in the management of merchandise, finished goods and materials sold to the extent associated with the management function for inventories to which it has ownership rights, nor effective control over those items;
- the amount of revenue can be measured in a reliable manner;
- it is probable that the economic benefits associated with the transaction will flow to the Group; and
- the costs incurred or to be incurred by the Group in respect of the transaction can be measured reliably.
The transfer of ownership of the subject of a transaction is done when substantially all of the risks and rewards of ownership of the merchandise are transferred to the buyer, in accordance with the INCOTERMS delivery base used for a given transaction.
Revenues from the sale of services are realised when:
- the amount of revenue can be measured reliably,
- it is probable that the economic benefits associated with the transaction will flow to the Group,
- the stage of completion of the transaction at the end of the reporting period can be measured reliably, and
- the costs connected with the transaction and the costs to complete the transaction can be measured reliably.
Revenues from the realisation of construction contracts
In a case where the outcome of a construction contract can be estimated reliably, the Group recognises contract revenue and contract costs respectively to the degree of completion of the contract at the end of the reporting period. Depending on the nature of the contract, the degree of realisation is either measured as the proportion of costs incurred to the total estimated costs of the contract, or else is based on real measurement of completion of the contract work.
Contract revenue comprises the initial amount of revenue described in a contract and any changes in the scope of work, claims and premiums to the extent to which it is probable that they will result in revenue and it is possible to reliably determine their value, and that the party requesting such changes agrees to them.
In a case where the outcome of a construction contract cannot be reliably estimated, the Group recognises revenue from this contract at the amount of costs incurred, in respect of which it is probable that they will be recovered. Contract-related costs are recognised as costs of the period in which they were incurred.
In a case where it is probable that the total costs of a contract exceed total contract revenue, the anticipated loss on the contract is recognised immediately as a cost.
Interest income is recognised on an accrual basis, using the effective interest method.
Income from dividends is recognised when the shareholder's right is set.
The Group recognises as costs any probable decrease, in the reporting period, of economic benefits of a reliably-determined amount, in the form of a decrease in the value of assets, or an increase of provisions and liabilities, which lead to a decrease in equity or an increase in negative equity in a manner other than through distributions to equity participants.
Costs are recognised in profit or loss based on the direct relation between costs incurred and specific income achieved, i.e. applying the matching principle, through prepayments and accruals. In the case of purchases of copper-bearing materials for which the price is set after the date of recognition of a given purchase, inventories are accounted for at the expected purchase price on the date of recognition of the inventories. Cost of sales at the end of each reporting period is adjusted by any change in the fair value of embedded derivatives, which are separated from the host purchase contract.
Costs are accounted for both by nature and by the cost centers, and are reported in profit or loss using the costs by function (cost of sales) format as the primary cost reporting format.
The total cost of products, merchandise and materials sold comprises:
- the manufacturing cost of products sold;
- the cost of merchandise and materials sold;
- selling costs; and
- administrative expenses.
In addition, costs for the given reporting period which affect profit or loss for the period include:
other operating costs, indirectly connected with operating activities, including in particular:
- costs and losses on financial investments;
- losses from the measurement and realisation of traded derivatives and the ineffective portion of losses arising from the realisation and fair value measurement of derivative hedging instruments;
- foreign exchange losses, with the exception of exchange differences arising on liabilities representing sources of finance for the Group’s activities;
- impairment losses on held-to–maturity investments, available-for-sale financial assets, loans and other investments;
- provisions recognised for disputed issues, penalties, compensation and other costs indirectly related to operating activities;
- donations granted;
- losses on disposal of property, plant and equipment and intangible assets; and
finance costs related to financing of the activities of the Group, including in particular:
- overdraft interest;
- interest on short- and long-term loans, bank loans, debt instruments and other sources of finance, including unwinding of the discount from non-current liabilities;
- net foreign exchange losses arising on liabilities from sources of financing of the Group’s activities;
- costs from the realisation and fair value measurement of derivatives related to the liabilities used to finance the Group’s activities; and
- changes in provisions arising from the approach of the maturity date of a liability (the so-called unwinding of the discount effect).
2.2.23 Foreign currency transactions and the measurement of items denominated in foreign currencies
Functional and presentation currency
Items included in the financial statements of Group entities are measured using the currency of the primary economic environment in which the Group’s entities operate, i.e. in the functional currency. The functional currency of individual Group entities is the currency in which the given entity generates and expends cash, in particular:
- the functional currency of entities operating in Poland is the złoty (zł., PLN);
- the functional currency of entities operating in the subgroup KGHM INTERNATIONAL LTD. is the US dollar ($, USD);
- the functional currency of the remaining entities is the currency of the given economic environment.
The consolidated financial statements of the Group are presented in the Polish złoty (PLN).
Transactions and balances
At the moment of initial recognition, foreign currency transactions are translated into the functional currency:
- at the actual exchange rate applied, i.e. at the buy or sell exchange rate applied by the bank in which the transaction occurs, in the case of the sale or purchase of currencies and the payment of receivables or liabilities; and
- at the average exchange rate set for a given currency, prevailing on the date of the transaction for other transactions. In particular for the entities operating in Poland the exchange rate prevailing on the date of the transaction is the average NBP rate announced on the last working day preceeding the transaction day.
At the end of each reporting period:
- foreign currency monetary items are translated at the closing rate prevailing on that date;
- non-monetary items measured at historical cost in a foreign currency are translated using the exchange rate prevailing on the transaction date; and
- non-monetary items measured at fair value in a foreign currency are translated using the exchange rate at the date when the fair value was determined.
Foreign exchange gains or losses arising on the settlement of a foreign currency transaction, or on the measurement and translation of foreign currency monetary assets and liabilities (other than derivatives), are recognised in profit or loss.
Foreign exchange gains or losses arising on the measurement of foreign currency derivatives, are recognised in profit or loss as a fair value measurement provided they do not represent the change in the fair value of the effective cash flow hedge. In such a case they are recognised in other comprehensive income, in accordance with hedge accounting principles.
Foreign exchange gains or losses arising on non-monetary items, such as equity instruments, are recognised as an element of changes in fair value, if such instruments are measured at fair value through profit or loss, or in other comprehensive income at fair value, if such equity instruments are classified as available-for-sale financial assets.
2.2.24 Government grants
Government grants are not recognised until there is a reasonable assurance that the entity will comply with the conditions attaching to them, and that the grants will be received.
Monetary government grants for assets are presented in the statement of financial position as deferred income These grants are recognised systematically as income over the periods necessary to match them with the related costs which they are intended to compensate, on a systematic basis. They are not credited directly to equity.
Grants related to energy efficiency certificates (grants related to assets) are recognised in the statement of profit or loss as other operating income systematically in accordance with the depreciation of property, plant and equipment, whose purchase/manufacturing resulted in the creation of energy efficiency confirmed by energy efficiency certificates (white certificates).
Grants related to income in the statement of profit or loss compensate costs to which they relate up to the value of these costs. Grants which exceed the value of the cost to which it relates are recognised as other operating income.
Grants related to property rights to coloured energy decrease the production cost of energy.
Grants related to CO2 emission rights decrease the value of the provision which is created in accordance with the obligation for their depreciation (submission).
Grants are recognised uniformly, regardless of whether they were received in the form of cash or as a decrease of liabilities.
2.2.25 Segment reporting
Segment reporting involves the grouping of segments by the component parts of the Group:
- that engage in business activities from which the component may earn revenues and incur expenses,
- whose operating results are reviewed regularly by the Group's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and
- for which discrete financial information is available.
The Management Board of KGHM Polska Miedź S.A. is the main body responsible for making decisions as to the allocation of resources and for assessing segment results (the chief operating decision maker or CDM). As a result of analysis of the manner of supervision of subsidiaries and of management of the Group, reflecting aggregation criteria and quantitative thresholds from IFRS 8, the reporting segments were identified which are presented in note 5.
2.2.26 Earnings per share
Earnings per share for each period are calculated by dividing the profit for the given period attributable to the shareholders of the Parent Entity by the average weighted number of shares in that reporting period.
2.2.27 Statement of cash flows
Cash flows from operating activities are presented using the indirect method.
2.2.28 Management of capital
The Group manages its capital in order to maintain the capacity to continue its operations, including the realisation of planned investments, in a manner enabling it to generate returns for the shareholders and benefits to other stakeholders.
In accordance with market practice, the effective use of capital is monitored among others on the basis of the following ratios:
- the equity ratio, calculated as the relation of net tangible assets (equity less intangible assets) to total assets, and
- the ratio showing the relationship of net debt to EBITDA. Net debt is the total amount of borrowings and finance lease liabilities less free cash and cash equivalents and short term investments with a maturity up to 1 year. EBITDA is operating profit plus depreciation/amortisation.
In order to maintain financial liquidity and the creditworthiness to obtain external financing at a reasonable cost, the Group assumes that the equity ratio shall be maintained at a level of not less than 0.5, and the ratio of Net Debt/EBITDA at a level of up to 2.0.