| |
The principal accounting policies of the group and the disclosures made in the annual financial statements comply with International Financial Reporting Standards effective for the group’s financial year.
The financial statements are prepared on the historical cost basis modified by the restatement of financial instruments and biological assets to fair value.
Where comparative financial information is reported, the accounting policies have been applied consistently for all periods, changes are set out in note 2.
Basis of consolidation
The group annual financial statements present the consolidated financial position and changes therein, operating results and cash flow information of the company and its subsidiaries. Subsidiaries are those entities in which the group has an interest of more than one half of the voting rights or the power to exercise control so as to obtain benefits from their activities.
The results of subsidiaries are included for the duration of the period in which the group exercises control over the subsidiary. All intercompany transactions and resultant profits and losses between group companies are eliminated on consolidation. Where necessary, accounting policies for subsidiaries are changed to ensure consistency with the policies adopted by the group. If it is not practical to change the policies, the appropriate adjustments are made on consolidation to ensure consistency within the group.
The results of special purpose entities that, in substance, are controlled by the group, are consolidated.
The company carries its investments in subsidiaries at cost less accumulated impairment losses.
Goodwill
Goodwill is reflected at cost less accumulated impairment losses, if any. It represents the excess of the cost of a business combination over the fair value of the group’s share of the identifiable net assets of that entity at the date of acquisition. Goodwill is assessed for impairment on an annual basis.
The gain or loss on disposal of an entity includes the balance of goodwill relating to the entity.
Negative goodwill arising on a business combination represents the excess of the fair value of the net identifiable assets and contingent liabilities of the entity acquired over the cost of acquisition, and is recognised immediately in profit or loss.
Investments in associates and joint ventures
The company carries its investments in associates and joint ventures at cost less accumulated impairment losses.
An associate is an entity over which the group has the ability to exercise significant influence, but which it does not control.
A joint venture is an entity jointly controlled by the group and one or more other venturers in terms of a contractual arrangement requiring unanimous consent for strategic financial and operating decisions. It may involve a corporation, partnership or other entity in which the group has an interest.
Investments in associates are accounted for in the group financial statements using the equity method for the duration of the period in which the group has the ability to exercise significant influence. Equity accounted income represents the group’s proportionate share of profits of these entities and the share of taxation thereon. The retained earnings of an associate, net of any dividends, are classified as distributable reserves.
Where the group’s share of losses of an associate exceeds the carrying amount of the associate, the investment in the associate is carried at a nil value. Additional losses are only recognised to the extent that the group has incurred obligations in respect of the associate.
Investments in joint ventures are accounted for in the group financial statements using the proportionate consolidation method.
Where necessary, the results of associates and joint ventures are restated to ensure consistency with group policies. Unrealised profits and losses are eliminated.
The group’s interest in associates and joint ventures is carried in the balance sheet at an amount that reflects its share of the net assets and the unimpaired portion of goodwill on acquisition. Goodwill on the acquisition of associates and joint ventures is treated in accordance with the group’s accounting policy for goodwill.
Property, plant and equipment
Land and extensions under construction are stated at cost and are not depreciated. Buildings, including certain non-mining residential buildings and all other items of property, plant and equipment are reflected at cost less accumulated depreciation and accumulated impairment losses.
Depreciation is charged on a systematic basis over the estimated useful lives of the assets after taking into account the estimated residual value of the assets. Useful life is either the period of time over which the asset is expected to be used or the number of production or similar units expected to be obtained from the use of the asset.
Moulds and refractory furnace relines are depreciated based on the usage thereof.
Items of property, plant and equipment are capitalised in components where components have a different useful life to the main item of property, plant and equipment to which the component can be logically assigned.
The estimated useful life of assets and their residual values, are reassessed periodically with any changes in such accounting estimates being adjusted in the current financial year of reassessment and applied prospectively.
The estimated useful lives of items of property, plant and equipment are: |
| |
Maintenance and repairs which neither materially add to the value of assets nor appreciably prolong their useful lives are charged against income.
Direct attributable expenses relating to mining and other major capital projects, site preparations and exploration are capitalised until the asset is brought to a working condition for its intended use. These costs include dismantling and site restoration costs to the extent these are recognised as a provision.
Financing costs directly associated with the construction or acquisition of qualifying assets are capitalised at interest rates relating to loans specifically raised for that purpose, or at the average borrowing rate where the general pool of group borrowings was utilised. Capitalisation of borrowing costs ceases when the asset is substantially complete.
Directly attributable costs associated with the acquisition, development and installation of certain software are capitalised. Such assets are depreciated using the amortisation methods and periods applicable to computer equipment.
Profits and deficits on the disposal of property, plant and equipment are taken to profit or loss.
Leased assets
Leases involving plant and equipment whereby the lessor provides finance to the group with the asset as security and where the group assumes substantially all the benefits and risks of ownership are classified as finance leases. Assets acquired in terms of finance leases are capitalised at the lower of fair value and the present value of the minimum lease payments at inception of the lease and depreciated over the useful life of the asset. The capital element of future obligations under the leases is included as a liability in the balance sheet. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest element of the finance charge is charged against income over the lease period using the effective interest rate method.
For a sale and leaseback transaction that results in a finance lease, any excess of sales proceeds over the carrying amount is deferred and recognised on the straight-line basis over the period of the lease.
Leases of assets to the group under which all the risks and benefits of ownership are effectively retained by the lessor, are classified as operating leases. Payments made under operating leases are charged against income on the straight-line basis over the period of the lease.
Arrangements that contain the right to use an asset are evaluated for recognition, classification as a finance- or operating lease, and are measured and accounted for accordingly.
Biological assets
Biological assets are measured on initial recognition and at each balance
sheet date at their fair value less estimated point-of-sale costs and any
change in value is included in the net profit or loss for the period in
which it arises. Plantations are measured at their fair value less estimated
point-of-sale costs. The fair value of the plantations is determined by
an independent appraiser, based on the Faustman Formula as applied within
the forestry industry. Livestock is measured at fair value less estimated
point-of-sale costs, fair value being determined by the age and size of
the animals and market price. Market price is determined on the basis that
the animal is sold to be slaughtered. Livestock held for sale is classified
as consumable biological assets. Game is measured at their fair value less
estimated point-of-sale costs, fair value being determined as market price.
Market price is determined on the live auction selling prices. Game held
for sale is classified as consumable biological assets.
Intangible assets
An intangible asset is recognised at cost if it is probable that future economic benefits will flow to the enterprise. Amortisation is charged on a systematic basis over the estimated useful lives of the intangible assets.
The estimated maximum useful lives of intangible assets in respect of patents, licences and franchises are 20 years.
Subsequent expenditure on capitalised intangible assets is capitalised only if it increases the future benefits embodied in the specific asset to which it relates. The carrying amounts are reviewed at each balance sheet date to determine whether there is any indication of impairment.
Research, development and exploration costs
Research, development and exploration costs are charged against income until they result in projects that are evaluated as being technically or commercially feasible, the group has sufficient resources to complete development and can demonstrate how the asset will generate future economic benefits, in which event these costs are capitalised and amortised on the straight-line basis over the estimated useful life of the project or asset. The carrying amounts are reviewed at each balance sheet date to determine whether there is any indication of impairment.
Impairment of assets
The carrying amounts of assets mentioned in the accounting policy notes are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount is estimated as the higher of the net selling price and the value in use.
In assessing value in use, the expected future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognised whenever the carrying amount exceeds the recoverable amount.
For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised whenever the carrying amount of the cash-generating unit exceeds its recoverable amount.
A previously recognised impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount, however, not to an amount higher than the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised in prior years. For goodwill a recognised impairment loss is not reversed.
Financial instruments
Recognition
Financial instruments are recognised on the balance sheet when the group becomes a party to the contractual provisions of a financial instrument. All purchases of financial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases) are recognised at trade date, which is the date on which the group commits to purchase the asset. Financial liabilities are recognised when the group becomes a party to the contractual provisions of the financial instrument.
Measurement
Financial instruments are initially measured at cost, which includes transaction costs. Subsequent to initial recognition these instruments are measured as set out below.
Investments
Marketable securities are carried at market value, which is calculated by reference to stock exchange quoted bid prices at the close of business on the balance sheet date. Other investments are shown at fair value. Gains and losses are recognised in profit or loss.
Trade and other receivables
Trade and other receivables originated by the group are stated at amortised cost less provision for doubtful debts.
Cash and cash equivalents
Cash and cash equivalents are measured at fair value.
Financial liabilities
Financial liabilities are recognised at amortised cost, namely original debt less principal payments and amortisations, except for derivatives which are subsequently measured at fair value. If a financial liability is designated as a hedged item, it is subject to measurement under hedge accounting provisions.
Derivative instruments
Derivative instruments are measured at fair value.
Gains and losses on subsequent measurement
Gains and losses on subsequent measurement are recognised as follows:
- Gains and losses arising from a change in the fair value of financial instruments that are not part of a hedging relationship are included in net profit or loss for the period in which they arise.
- Gains and losses from measuring fair value hedging instruments, including fair value hedges for foreign currency denominated transactions, are recognised immediately in net profit or loss.
- The effective portion of gains and losses from remeasuring cash flow hedging instruments, including cash flow hedges for forecast foreign currency denominated transactions and for interest rate swaps, are initially recognised directly in equity. Should the hedged firm commitment or forecast transaction result in the recognition of an asset or a liability, then the cumulative amount recognised in equity is adjusted against the initial measurement of the asset or liability. For other cash flow hedges, the cumulative amount recognised in equity is included in net profit or loss in the period when the commitment or forecast transaction affects profit or loss.
- When a hedging instrument or hedge relationship is terminated, but the hedged transaction is still expected to occur, the cumulative unrealised gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer probable, the cumulative unrealised gain or loss recognised in equity is recognised in the income statement immediately.
Offset
Where a legally enforceable right of offset exists for recognised financial assets and financial liabilities, and there is an intention to settle the liability and realise the asset simultaneously, or to settle on a net basis, all related financial effects are offset.
Exchange rates used
The average US dollar/rand, where applicable, of US$1: R6,70 (2005: US$1: R6,30) has been used to translate the income and cash flow statements while the balance sheet has been translated at the closing rate at the last day of the reporting period US$1: R6,98 (2005: US$1: R6,33).
Inventories
Inventories are valued at the lower of cost, determined on the moving average basis, and net realisable value. The cost of finished goods and work-in-progress comprises raw materials, direct labour, other direct costs and fixed production overheads, but excludes interest charges. Fixed production overheads are allocated on the basis of normal capacity. Write-downs to net realisable value and inventory losses are expensed in the period in which the write-downs or losses occur.
Foreign currencies
Transactions and balances
Transactions denominated in foreign currencies are translated at the rate of exchange ruling at the transaction date. Monetary items denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. Gains or losses arising on translation are credited to or charged against income.
Foreign entities
The financial statements of foreign entities are translated into South African rand as follows:
- Assets and liabilities at rates of exchange ruling at balance sheet date.
- Income, expenditure and cash flow items at weighted average rates.
- Goodwill and fair value adjustments arising on acquisition at rates of exchange ruling at balance sheet date.
All resulting exchange differences are reflected as part of shareholders’ equity. On disposal, such translation differences are recognised in the income statement as part of the cumulative gain or loss on disposal.
Foreign currency hedges
Foreign currency hedges are dealt with in the financial instruments accounting policy.
Revenue recognition
Revenue, which excludes value added tax and sales between group companies, represents the gross value of goods invoiced. Export revenues are recorded according to the relevant sales terms, when the risks and rewards of ownership are transferred.
Revenue from the sale of goods is recognised when significant risks and rewards of ownership of the goods are transferred to the buyer.
Revenue arising from services and royalties is recognised on the accrual basis in accordance with the substance of the relevant agreements.
Interest and dividend income
Interest is recognised on the time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the group.
Dividends are recognised when the right to receive payment is established.
Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Provisions
Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, for which it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Where the effect of discounting to present value is material, provisions are adjusted to reflect the time value of money, and where appropriate, the risk specific to the liability.
Decommissioning and environmental rehabilitation
Provision is made for environmental rehabilitation costs where either a legal or constructive obligation is recognised as a result of past events. Estimates are based upon costs that are regularly reviewed and adjusted as appropriate for new circumstances.
Where a provision is made for dismantling and site restoration costs, an asset of similar initial value is raised and amortised in accordance with the group’s accounting policy for property, plant and equipment.
Annual contributions are made to the group’s Environmental Rehabilitation Trust Fund, created in accordance with statutory requirements, to provide for the funding of the estimated cost of pollution control and rehabilitation during, and at the end of, the life of mines. The Environmental Rehabilitation Trust Fund is consolidated.
Expenditure on plant and equipment for pollution control is capitalised and depreciated over the useful lives of the assets whilst the cost of ongoing current programmes to prevent and control pollution and to rehabilitate the environment is charged against income as incurred.
Deferred taxation
Deferred taxation is provided using the balance sheet liability method on all temporary differences between the carrying amounts for financial reporting purposes and the amounts used for taxation purposes.
A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the associated unused tax losses and deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred taxation is calculated using taxation rates that have been enacted at balance sheet date. The effect on deferred taxation of any changes in taxation rates is charged to the income statement, except to the extent that it relates to items previously charged or credited directly to equity.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the group intends to settle its current tax assets and liabilities on a net basis.
Employee benefits
Post-employment benefits
Retirement
The group provides defined contribution retirement funds for the benefit of employees, the assets of which are held in separate funds. These funds are funded by payments from employees and the group, taking account of the recommendations of independent actuaries. The group’s contribution to the defined contribution fund is charged to the income statement in the year to which it relates.
Exxaro is also a participating employer in two closed defined benefit funds for its pensioner members who retired before the unbundling from Mittal SA in 2001. Exxaro does not, however, provide employee benefits in defined benefit funds for its employees.
Statutory actuarial valuations on the defined contribution plans are performed every three years. Interim valuations are also performed on an annual basis. Valuations are performed on a date which coincides with the balance sheet date. Consideration is given to any event that could impact the funds up to balance sheet date. The group does not provide guarantees in respect of returns in the defined contribution funds.
Medical
No contributions are made to the medical aid of retired employees.
Short and long-term benefits
The cost of all short-term employee benefits, such as salaries, bonuses, housing allowances, medical and other contributions, are recognised during the period in which the employee renders the related service.
The vesting portion of long-term benefits is recognised and provided for at balance sheet date, based on current total cost to company.
Termination benefits
Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits.
The group recognises termination benefits when it has demonstrated its commitment to either terminate the employment of current employees according to a detailed formal plan without possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. If the benefits fall due more than 12 months after balance sheet date, they are discounted to present value.
Equity compensation benefits
Senior management, including executive directors, have been granted share options. Grants are based on existing ordinary shares and can be purchased or the purchase can be deferred. The option or purchase price equals market price on the date preceding the date of the grant.
When the options are exercised they can either be:
- purchased and if vesting according to the rules of the scheme, recorded in share capital and share premium at the amount of the option price; or
- payment can be deferred resulting in no increase in share capital or share premium until paid for and vesting according to the rules of the scheme.
The fair value of the options granted to senior management including executive directors, has been determined at grant date using a suitable option pricing model and expensed over the vesting period of the options with a corresponding increase in equity.
For cash-settled share-based payments, a liability equal to the portion of the goods or services received is recognised at the current fair value determined at each balance sheet date.
Dividend
Dividends paid are recognised by the company when the shareholder’s right to receive payment is established. These dividends are recorded and disclosed as dividends paid in the statement of changes in equity. Dividends proposed or declared subsequent to the year-end are not recognised at the balance sheet date, but are disclosed in the notes to the financial statements.
Secondary tax on companies
Taxation costs incurred on dividends are included in the taxation line in the income statement in the year in which the related dividends are declared.
Discontinuing operations and non-current assets held for sale
Discontinuing operations are significant, distinguishable components of an enterprise that have been sold, abandoned or are the subject of formal plans for disposal or discontinuance.
The profit or loss on the sale or abandonment of a discontinuing operation is determined from the formalised discontinuance date.
If the carrying amount of a non-current asset or disposal group will be recovered principally through a sale transaction rather than through continuing use such an asset is classified as non-current assets held for sale and measured at the lower of carrying amount and fair value less cost to sell. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.
Segment reporting
The primary business segments are coal, heavy minerals, base metals, and industrial minerals, whilst a significant equity accounted interest is held in iron ore.
On a secondary segment basis, significant geographic marketing regions have been identified.
The basis of segment reporting is representative of the internal structure used for management reporting.
Cash and cash equivalents
For the purpose of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held on call, and investments in money market instruments, net of bank overdrafts, all of which are available for use by the group unless otherwise stated.
Comparatives
Where necessary, the December 2005 figures have been adjusted to conform with changes in presentation for the current period, and are set out in note 2.
Judgements made by management
The following judgements, apart from those involving estimates (as mentioned below) have been made by management in the process of applying the group’s accounting policies that have the most significant effect on the amounts recognised in the financial statements:
- The identification of special purpose entities controlled by the group which must be consolidated (refer note 31);
- In applying IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, management had to make judgements as to which non-current assets and discontinued operations fall within the scope of the standard and had to be reclassified and measured in terms of IFRS 5;
- In applying IFRS 2, Share-based Payment, management had to make certain judgements in respect of the fair value option pricing models to be used in determining the various share-based arrangements in respect of employees, as well as the variable elements used in these models (refer note
33);
- In applying IFRIC 4, Determining whether an arrangement contains a lease, and IAS 17, Leases, contractual agreements were assessed to determine whether they convey the right to use an asset and their classification as either an operating or finance lease.
Key assumptions made by management in applying accounting policies
The following key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year:
- Estimates made in determining the present obligation of environmental and decommissioning provisions, which include the actual estimate, the discount rate used and the expected date of closure of mining activities in determining the present value of environmental and decommissioning provisions (refer note
25);
- Estimates made in determining the recoverable amount of assets where there is an indication that an asset may be impaired, this includes the estimation of cash flows and the discount rates used;
- Estimates made in determining the probability of future taxable income thereby justifying the recognition of a deferred tax asset;
- Estimates made in determining changes in the estimated useful lives of assets and their residual values;
- Estimates made of legal or constructive obligations resulting in the raising of provisions, and the expected date of probable outflow of economic benefits to assess whether the provision should be discounted;
- Estimates made of contingent liabilities disclosed; and
- Estimates of mineral resources and ore reserves in accordance with the SAMREC code (2000) for South African properties and the JORC code (2004) for Australian properties. Such estimates relate to the category for the resource (measured, indicated or inferred), the quantum and the grade.
Black economic empowerment (BEE) credentials
The difference between the fair value of equity instruments issued as part of an empowerment transaction, and the identifiable consideration received for such issue, represents a BEE credential expense that does not meet the recognition criteria of an intangible asset and has been expensed through the income statement.
Adoption of new and revised standards
At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue but not yet effective:
- IFRIC 7 Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies, effective for annual periods beginning on or after 1 March 2006.
- IFRIC 8 Scope of IFRS 2, effective for annual periods beginning on or after 1 May 2006.
- IFRIC 9 Reassessment of Embedded Derivatives, effective for annual periods beginning on or after
1 June 2006.
- IFRIC 10 Interim Financial Reporting and Impairment, effective for annual periods beginning on or after
1 November 2006.
- IFRIC 11, IFRS 2: Group and Treasury Share transactions, effective for annual periods beginning on or after 1 March 2007.
- IFRC 12, Service Concession Arrangements, effective for annual periods beginning on or after
1 January 2008.
- IFRS 7 Financial Instruments: Disclosure, effective for annual periods beginning on or after
1 January 2007.
- IFRS 8 Operating Segments, effective for annual periods beginning on or after
1 January 2009.
The directors believe that none of these new or revised standards and interpretations will have an effect other than enhanced disclosure. |
Online Annual Report by