REG - Fresnillo Plc - Full Year 2016 Preliminary Results <Origin Href="QuoteRef">FRES.L</Origin> - Part 3

FresnilloAnnouncement

28/02/2017 07:08

- Part 3: For the preceding part double click  ID:nRSb0000Yb 

standard, the most relevant
are set out below. 
 
 Nature of change                                        IFRS 9 addresses the classification and measurement of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets.  The derecognition rules are consistent with those under IAS 39.  
 Main impact                                             IFRS 9 makes significant changes in the classification of financial assets. Whereas under IAS 39, the default classification for financial assets was available-for-sale financial assets, under IFRS 9 the residual category is to recognise fair value through 
                                                         profit or loss (FVTPL).Generally under IFRS 9, investments in equity instruments are recognised as FVTPL unless the group makes an election, in respect of investments that are not held for trading, to measure the instruments at fair value through OCI      
                                                         (FVOCI). The group expects to designate all investments currently recognised in Available-for-sale financial assets as FVOCI. In accordance with IFRS 9, this means that all movements relating to such assets are recognised in OCI. Neither gains nor losses  
                                                         on disposal or significant or prolonged declines in the value of these investments are recognised in profit or loss.Hedge accountingThe new hedge accounting rules will align the accounting for hedging instruments more closely with the Group's risk         
                                                         management practices.IFRS 9 changes the accounting requirements for the time value of purchased options where only the intrinsic value of such options has been designated as the hedging instrument. In such cases, changes in the time value of options are   
                                                         initially recognised in OCI. Amounts related to the time value of options are reclassified to profit or loss or as a basis adjustment to assets or liabilities upon maturity of the hedged item, or, in the case of a hedged item that realises over time, over 
                                                         the life of the hedged item. Under IAS 39, the change in time value of options is recorded in the income statement.Impairment modelThe new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than 
                                                         on the basis of credit losses incurred as is the case under IAS 39.  It will apply to Group's financial assets classified at amortised cost and debt instruments measured at FVOCI.IFRS 9 also sets out a simplified approach for traded and lease receivables  
                                                         that do not contain a significant financing component in accordance with IFRS 15.                                                                                                                                                                               
 Expected date of adoption by Group and considerations.  The Group plans to adopt IFRS 9 effective 1 January 2018 and plans to apply the limited exemption relating to transition for classification and measurement and impairment, and accordingly will not restate comparative periods in the year of initial         
                                                         application. Generally, the change in hedge requirements are accounted for prospectively; however, in the case of the recognition of time value of options in OCI, this is adjusted for retrospectively. The group expects the adjustment from retained earnings 
                                                         to hedging reserve as at 1 January 2017, the beginning of the comparative period for the year of implementation, to be US$ 23.0 million, reflecting the time value of the open positions as at 1 January 2017. In the year ended 31 December 2016, this amount  
                                                         was recognised in finance cost, in accordance with IAS 39.                                                                                                                                                                                                      
 
 
IFRS 15 Revenue from Contracts with Customers: IFRS 15 was issued in May 2014 and establishes a five-step model to account
for revenue arising from contracts with customers. The new revenue standard will supersede all current revenue recognition
requirements under IFRS. Early adoption is permitted.  IFRS 15 is effective for annual periods beginning on or after 1
January 2018, with early application permitted. The Group plans to adopt IFRS 15 Revenue from Contracts with Customers from
the mandatory effective date. The Group has completed a preliminary assessment of the expected major impacts of this
standard, the most relevant are set out below. 
 
 Nature of change                                       IFRS 15 establishes a comprehensive framework for recognition of revenue from contracts with customers based on a core principle that an entity should recognise revenue representing the transfer of promised goods or services to customers at an amount that 
                                                        reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.                                                                                                                                                  
 Main impact                                            As described in the accounting policies section, The Group's revenue is derived from one revenue stream that corresponds to the sale of goods (concentrates, precipitates and doré bars). The Group has evaluated recognition and measurement of revenue based  
                                                        on the five-step model in IFRS 15 and has not identified any material expected financial impacts.IFRS 15 includes disclosure requirements to enable users of the financial statements to understand the amount, timing, risk and judgements related to revenue  
                                                        recognition and related cash flows. Certain disclosures will change as a result of the requirements of IFRS 15. The Group expects this to include a breakdown of revenue from customers and revenue from other sources, including the movement in the value of  
                                                        embedded derivatives in sales contracts.                                                                                                                                                                                                                        
 Expected date of adoption by Group and considerations  The Group plans to adopt IFRS 15 effective 1 January 2018 and to apply the simplified transition method, hence the cumulative effect of adoption, if any, will be recognised in retained earnings. The Group currently expects the cumulative effect to be nil. 
 
 
IFRS 16 Leases 
 
IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all
leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a
right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its
obligation to make lease payments. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17.
Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two
types of leases differently. These amendments are effective for annual periods beginning on or after 1 January 2019 and
earlier application is permitted. However, as there are several interactions between IFRS 16 and IFRS 15 Revenue from
contracts with customers, early application is restricted to entities that also early adopt IFRS 15. The Group is currently
assessing the impact of IFRS 16 and is considering early adoption in 2018 to align with the adoption of IFRS 9 and IFRS
15. 
 
Amendments to IAS 7 Disclosure Initiative 
 
The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in
liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. The
amendments do not prescribe a specific format to disclose financing activities; however, an entity may fulfil the
disclosure objective by providing reconciliation between the opening and closing balances in the statement of financial
position for liabilities arising from financing activities. 
 
The amendments apply prospectively for annual periods beginning on or after 1 January 2017 with earlier application
permitted.  Entities are not required to present comparative information for earlier periods. The amendments to this
standard are not expected to have any impact in the financial information of the Group. 
 
Amendments to IAS 12 Income Taxes 
 
The amendments to IAS 12 clarify the accounting for deferred tax where an asset is measured at fair value and that fair
value is below the asset's tax base. They also clarify certain other aspects of accounting for deferred tax assets. These
amendments are effective for annual periods beginning on or after 1 January 2017 with early adoption permitted. The
amendments to this standard are not expected to have any impact in the financial information of the Group. 
 
IFRIC 22 Foreign currency transactions and advance consideration 
 
IFRIC 22 provides requirements about which exchange rate to use in reporting foreign currency transactions when payment is
made or received in advance. The interpretation requires the company to determine a "date of transaction" for the purposes
of selecting an exchange rate to use on initial recognition of the related asset, expense or income. In case there are
multiple payments or receipts in advance, the entity should determine a date of the transaction for each flow of advance
consideration. IFRIC 22 is applicable for annual periods beginning on or after 1 January 2018 and earlier adoption is
permitted. The interpretation is not expected to have any impact in the financial information of the Group. 
 
The IASB has issued other amendments to standards that management considers do not have any impact on the accounting
policies, financial position or performance of the Group. 
 
The Group has not early adopted any standard, interpretation or amendment that was issued but is not yet effective. 
 
(c) Significant accounting judgments, estimates and assumptions 
 
The preparation of the Group's consolidated financial statements in conformity with IFRS requires management to make
judgements, estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at
the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting
period. These judgements and estimates are based on management's best knowledge of the relevant facts and circumstances,
with regard to prior experience, but actual results may differ from the amounts included in the consolidated financial
statements. Information about such judgements and estimates is contained in the accounting policies and/or the notes to the
consolidated financial statements. 
 
Judgements 
 
Areas of judgement, apart from those involving estimations, that have the most significant effect on the amounts recognised
in the consolidated financial statements are: 
 
Determination of functional currency (note 2(d)): 
 
The determination of functional currency requires management judgement, particularly where there may be several currencies
in which transactions are undertaken and which impact the economic environment in which the entity operates. 
 
Evaluation of the status of projects (note 2(e)): 
 
The evaluation of project status impacts the accounting for costs incurred and requires management judgement. This includes
the assessment of whether there is sufficient evidence of the probability of the existence of economically recoverable
minerals to justify the commencement of capitalisation of costs, the timing of the end of the exploration phase and the
start of the development phase and the commencement of the production phase. These judgements directly impact the treatment
of costs incurred and proceeds from the sale of metals from ore produced. 
 
Stripping costs (note 2(e)): 
 
The Group incurs waste removal costs (stripping costs) during the development and production phases of its surface mining
operations. During the production phase, stripping costs (production stripping costs) can be incurred both in relation to
the production of inventory in that period and the creation of improved access and mining flexibility in relation to ore to
be mined in the future. The former are included as part of the costs of inventory, while the latter are capitalised as a
stripping activity asset, where certain criteria are met. 
 
Once the Group has identified production stripping for a surface mining operation, judgment is required in identifying the
separate components of the ore bodies for that operation, to which stripping costs should be allocated. Generally a
component is a specific volume of the ore body that is made more accessible by the stripping activity. In identifying
components of the ore body, the Group works closely with the mining operations personnel to analyse each of the mine plans.
The mine plans and, therefore, the identification of components, will vary between mines for a number of reasons. These
include, but are not limited to, the type of commodity, the geological characteristics of the ore body, the geographical
location and/or financial considerations. The Group reassesses the components of ore bodies annually in line with the
preparation of mine plans. In the current year, this reassessment did not give rise to any changes in the identification of
components. 
 
Once production stripping costs have been identified, judgement is also required to identify a suitable production measure
to be used to allocate production stripping costs between inventory and any stripping activity asset(s) for each component.
The Group considers that the ratio of the expected tonnes of waste to be stripped for an expected tonnes of ore to be mined
for a specific component of the ore body is the most suitable production measure. 
 
Furthermore, judgements and estimates are also used to apply the units of production method in determining the depreciable
lives of the stripping activity asset(s). 
 
Qualifying assets (note 2(e)): 
 
All interest-bearing loans are held by the parent company and were not obtained for any specific asset's acquisition,
construction, or production. Funds from these loans are transferred to subsidiaries to meet the strategic objectives of the
Group or are otherwise held centrally. Due to this financing structure, judgement is required in determining whether those
borrowings are attributable to the acquisition, construction or production of a qualifying asset. Therefore, Management
determines whether borrowings are attributable to an asset or group of assets based on whether the investment in an
operating or development stage project is classified as contributing to achieving the strategic growth of the Group. 
 
Contingencies (note 26) 
 
By their nature, contingencies will be resolved only when one or more uncertain future events occur or fail to occur. The
assessment of the existence and potential quantum of contingencies inherently involves the exercise of significant
judgement and the use of estimates regarding the outcome of future events. 
 
Estimates and assumptions 
 
Significant areas of estimation uncertainty considered by management in preparing the consolidated financial statements
include: 
 
Estimated recoverable ore reserves and mineral resources, note 2(e): 
 
Ore reserves are estimates of the amount of ore that can be economically and legally extracted from the Group's mining
properties; mineral resources are an identified mineral occurrence with reasonable prospects for eventual economic
extraction. The Group estimates its ore reserves and mineral resources based on information compiled by appropriately
qualified persons relating to the geological and technical data on the size, depth, shape and grade of the ore body and
suitable production techniques and recovery rates, in conformity with the Joint Ore Reserves Committee (JORC) code 2012.
Such an analysis requires complex geological judgements to interpret the data. The estimation of recoverable ore reserves
and mineral resources is based upon factors such as geological assumptions and judgements made in estimating the size and
grade of the ore body, estimates of commodity prices, foreign exchange rates, future capital requirements and production
costs.. 
 
As additional geological information is produced during the operation of a mine, the economic assumptions used and the
estimates of ore reserves and mineral resources may change. Such changes may impact the Group's reported balance sheet and
income statement including: 
 
·      The carrying value of property, plant and equipment and mining properties may be affected due to changes in
estimated future cash flows, which consider both ore reserves and mineral resources; 
 
·      Depreciation and amortisation charges in the income statement may change where such charges are determined using the
unit-of-production method based on ore reserves; 
 
·      Stripping costs capitalised in the statement of financial position, either as part of mine properties or inventory,
or charged to profit or loss may change due to changes in stripping ratios; 
 
·      Provisions for mine closure costs may change where changes to the ore reserve and resources estimates affect
expectations about when such activities will occur; 
 
·      The recognition and carrying value of deferred income tax assets may change due to changes regarding the existence
of such assets and in estimates of the likely recovery of such assets. 
 
Determination of useful lives of assets for depreciation and amortisation purposes, notes 2 (e) and 12: 
 
Estimates are required to be made by management as to the useful lives of assets. For depreciation calculated under the
unit-of-production method, estimated recoverable reserves are used in determining the depreciation and/or amortisation of
mine specific assets. Depreciation/amortisation charge is proportional to the depletion of the estimated remaining life of
mine of production. Estimated useful lives of other assets are based on the expected usage of the asset. Each item's life,
which is assessed annually, has regard to both its physical life limitations and to expectations of the use of the asset by
the Group, including with reference to present assessments of economically recoverable reserves of the mine property at
which the asset is used. 
 
Silverstream, note 14: 
 
The valuation of the Silverstream contract as a derivative financial instrument requires significant estimation by
management. The term of the derivative is based on Sabinas life of mine which is currently 20 years and the value of this
derivative is determined using a number of estimates, including the estimated recoverable ore reserves and mineral
resources and future production profile of the Sabinas mine, the estimated recoveries of silver from ore mined, estimates
of the future price of silver and the discount rate used to discount future cash flows. For further detail on the inputs
that have a significant effect on the fair value of this derivative, see note 30. The impact of changes in silver price
assumptions, foreign exchange, inflation and the discount rate is included in note 31. 
 
Assessment of recoverability of property plant and equipment  and impairment charges, note 2 (f): 
 
The recoverability of an asset requires the use of estimates and assumptions such as long-term commodity prices, reserves
and resources and the associated production profiles, discount rates, future capital requirements, exploration potential
and operating performance. Changes in these assumptions will affect the recoverable amount of the property, plant and
equipment. 
 
Estimation of the mine closure costs, notes 2 (l) and 21: 
 
Significant estimates and assumptions are made in determining the provision for mine closure cost as there are numerous
factors that will affect the ultimate liability payable. These factors include estimates of the extent and costs of
rehabilitation activities, technological changes, regulatory changes, cost increases, mine life and changes in discount
rates. Those uncertainties may result in future actual expenditure differing from the amounts currently provided. The
provision at the balance sheet date represents management's best estimate of the present value of the future closure costs
required. 
 
Income tax, notes 2 (r) and 10: 
 
Deferred tax assets, including those arising from un-utilised tax losses require management to assess the likelihood that
the Group will generate taxable earnings in future periods, in order to utilise recognised deferred tax assets. Estimates
of future taxable income are based on forecast cash flows from operations and the application of existing tax laws in each
jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of
the Group to realise the net deferred tax assets recorded at the balance sheet date could be impacted. 
 
(d) Foreign currency translation 
 
The Group's consolidated financial statements are presented in US dollars, which is the parent company's functional
currency. The functional currency for each entity in the Group is determined by the currency of the primary economic
environment in which it operates. For all operating entities, this is US dollars. 
 
Transactions denominated in currencies other than the functional currency of the entity are translated at the exchange rate
ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are re-translated
at the rate of exchange ruling at the balance sheet date. All differences that arise are recorded in the income statement.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange
rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are
translated into US dollars using the exchange rate at the date when the fair value is determined. 
 
For entities with functional currencies other than US dollars as at the reporting date, assets and liabilities are
translated into the reporting currency of the Group by applying the exchange rate at the balance sheet date and the income
statement is translated at the average exchange rate for the year. The resulting difference on exchange is included as a
cumulative translation adjustment in other comprehensive income. On disposal of an entity, the deferred cumulative amount
recognised in other comprehensive income relating to that operation is recognised in the income statement. 
 
(e) Property, plant and equipment 
 
Property, plant and equipment is stated at cost less accumulated depreciation and impairment, if any. Cost comprises the
purchase price and any costs directly attributable to bringing the asset into working condition for its intended use. The
cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production
overheads. 
 
The cost less the residual value of each item of property, plant and equipment is depreciated over its useful life. Each
item's estimated useful life has been assessed with regard to both its own physical life limitations and the present
assessment of economically recoverable reserves of the mine property at which the item is located. Estimates of remaining
useful lives are made on a regular basis for all mine buildings, machinery and equipment, with annual reassessments for
major items. Depreciation is charged to cost of sales on a unit-of-production (UOP) basis for mine buildings and
installations, plant and equipment used in the mine production process or on a straight line basis over the estimated
useful life of the individual asset when not related to the mine production process. Changes in estimates, which mainly
affect unit-of-production calculations, are accounted for prospectively. Depreciation commences when assets are available
for use. Land is not depreciated. 
 
The expected useful lives are as follows: 
 
                                           Years  
 Buildings                                 6      
 Plant and equipment                       4      
 Mining properties and development costs1  16     
 Other assets                              3      
 
 
1 Depreciation of mining properties and development cost are determined using the unit-of-production method. 
 
An item of property, plant and equipment is de-recognised upon disposal or when no future economic benefits are expected
from its use or disposal. Any gain or loss arising at de-recognition of the asset (calculated as the difference between the
net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year that the asset
is de-recognised. 
 
Non-current assets or disposal groups are classified as held for sale when it is expected that the carrying amount of the
asset will be recovered principally through sale rather than through continuing use. Assets are not depreciated when
classified as held for sale. 
 
Disposal of assets 
 
Gains or losses from the disposal of assets are recognised in the income statement when all significant risks and rewards
of ownership are transferred to the customer, usually when title has been passed. 
 
Mining properties and development costs 
 
Payments for mining concessions are expensed during the exploration phase of a prospect and capitalised during the
development of the project when incurred. 
 
Purchased rights to ore reserves and mineral resources are recognised as assets at their cost of acquisition or at fair
value if purchased as part of a business combination. 
 
Mining concessions, when capitalised, are amortised on a straight line basis over the period of time in which benefits are
expected to be obtained from that specific concession. 
 
Mine development costs are capitalised as part of property, plant and equipment. Mine development activities commence once
a feasibility study has been performed for the specific project. When an exploration prospect has entered into the advanced
exploration phase and sufficient evidence of the probability of the existence of economically recoverable minerals has been
obtained pre-operative expenses relating to mine preparation works are also capitalised as a mine development cost. 
 
The initial cost of a mining property comprises its construction cost, any costs directly attributable to bringing the
mining property into operation, the initial estimate of the provision for mine closure cost, and, for qualifying assets,
borrowing costs. The Group cease the capitalisation of borrowing cost when the physical construction of the asset is
complete and is ready for its intended use. 
 
Revenues from metals recovered from ore mined in the mine development phase, prior to commercial production, are credited
to mining properties and development costs. Upon commencement of production, capitalised expenditure is depreciated using
the unit-of-production method based on the estimated economically proven and probable reserves to which they relate. 
 
Mining properties and mine development are stated at cost, less accumulated depreciation and impairment in value, if any. 
 
Construction in progress 
 
Assets in the course of construction are capitalised as a separate component of property, plant and equipment. On
completion, the cost of construction is transferred to the appropriate category of property, plant and equipment. The cost
of construction in progress is not depreciated. 
 
Subsequent expenditures 
 
All subsequent expenditure on property, plant and equipment is capitalised if it meets the recognition criteria, and the
carrying amount of those parts that are replaced, is de-recognised. All other expenditure including repairs and maintenance
expenditure is recognised in the income statement as incurred. 
 
Stripping costs 
 
In a surface mine operation, it is necessary to remove overburden and other waste material in order to gain access to the
ore bodies (stripping activity). During development and pre-production phases, the stripping activity costs are capitalised
as part of the initial cost of development and construction of the mine (the stripping activity asset) and charged as
depreciation or depletion to cost of sales, in the income statement, based on the mine's units of production once
commercial operations begin. 
 
Removal of waste material normally continues throughout the life of a surface mine. At the time that saleable material
begins to be extracted from the surface mine the activity is referred to as production stripping. 
 
Production stripping cost is capitalised only if the following criteria is met: 
 
·      It is probable that the future economic benefits (improved access to an ore body) associated with the stripping
activity will flow to the Group; 
 
·      The Group can identify the component of an ore body for which access has been improved; and 
 
·      The costs relating to the improved access to that component can be measured reliably 
 
If not all of the criteria are met, the production stripping costs are charged to the income statement as operating costs
as they are incurred. 
 
Stripping activity costs associated with such development activities are capitalised into existing mining development
assets, as mining properties and development cost, within property, plant and equipment, using a measure that considers the
volume of waste extracted compared with expected volume, for a given volume of ore production. This measure is known as
"component stripping ratio", which is revised annually in accordance with the mine plan. The amount capitalised is
subsequently depreciated over the expected useful life of the identified component of the ore body related to the stripping
activity asset, by using the units of production method. The identification of components and the expected useful lives of
those components are evaluated annually. Depreciation is recognised as cost of sales in the income statement. 
 
The capitalised stripping activity asset is carried at cost less accumulated depletion/depreciation, less impairment, if
any. Cost includes the accumulation of costs directly incurred to perform the stripping activity that improves access to
the identified component of ore, plus an allocation of directly attributable overhead costs. The costs associated with
incidental operations are excluded from the cost of the stripping activity asset. 
 
In identifying components of the ore body, the Group works closely with the mining operations personnel for each mining
operation to analyse each of the mine plans. Generally, a component will be a subset of the total ore body and a mine may
have several components that are identified based on the mine plan. The mine plans and therefore the identification of
components can vary between mines for a number of reasons including but not limited to, the type of commodity, the
geological characteristics of the ore body, the geographical location and/or financial considerations. 
 
(f) Impairment of non-financial assets 
 
The carrying amounts of non-financial assets are reviewed for impairment if events or changes in circumstances indicate
that the carrying value may not be recoverable. At each reporting date, an assessment is made to determine whether there
are any indications of impairment. If there are indicators of impairment, an exercise is undertaken to determine whether
carrying values are in excess of their recoverable amount. Such reviews are undertaken on an asset by asset basis, except
where such assets do not generate cash flows independent of those from other assets or groups of assets, and then the
review is undertaken at the cash generating unit level. 
 
If the carrying amount of an asset or its cash generating unit exceeds the recoverable amount, a provision is recorded to
reflect the asset at the recoverable amount in the balance sheet. Impairment losses are recognised in the income
statement. 
 
The recoverable amount of an asset 
 
The recoverable amount of an asset is the greater of its value in use and fair value less costs of disposal. In assessing
value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset. Fair value is based on an
estimate of the amount that the Group may obtain in an orderly sale transaction between market participants. For an asset
that does not generate cash inflows largely independently of those from other assets, or groups of assets, the recoverable
amount is determined for the cash generating unit to which the asset belongs. The Group's cash generating units are the
smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from
other assets or groups of assets. 
 
Reversal of impairment 
 
An assessment is made each reporting date as to whether there is any indication that previously recognised impairment
losses may no longer exist or may have decreased. If such an indication exists, the Group makes an estimate of the
recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in estimates used
to determine the asset's recoverable amount since the impairment loss was recognised. If that is the case, the carrying
amount of the asset is increased to the recoverable amount. That increased amount cannot exceed the carrying amount that
would have been determined, net of depreciation, had no impairment loss been recognised in previous years. Such impairment
loss reversal is recognised in the income statement. 
 
(g) Financial assets and liabilities 
 
Financial assets are recognised when the Group becomes party to contracts that give rise to them and are classified as
financial assets at fair value through profit or loss; held to maturity investments; available-for-sale financial assets;
or loans and receivables or derivatives designated as hedging instruments, as appropriate. The Group determines the
classification of its financial assets at initial recognition and re-evaluates this designation at each balance sheet date.
When financial assets are recognised initially, they are measured at fair value, plus, in the case of financial assets not
at fair value through profit or loss, directly attributable transaction costs. 
 
The Group recognises financial liabilities on its balance sheet when, and only when, it becomes a party to the contractual
provisions of the instrument. Financial liabilities are classified at fair value through profit or loss, loans and
borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All
financial liabilities are initially recognised at the fair value of the consideration received, including any transaction
costs incurred. 
 
Financial assets and liabilities at fair value through profit or loss 
 
Financial assets and liabilities classified as held-for-trading and other assets or liabilities designated as fair value
through profit or loss at inception are included in this category. Financial assets or liabilities are classified as
held-for-trading if they are acquired or incurred for the purpose of selling or repurchasing in the short term.
Derivatives, including separated embedded derivatives are also classified as held-for-trading unless they are designated as
effective hedging instruments as defined by IAS 39. Financial assets or liabilities at fair value through profit or loss
are carried in the balance sheet at fair value with gains or losses arising from changes in fair value, presented as
finance costs or finance income in the income statement. 
 
Loans and receivables 
 
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market, do not qualify as trading assets and have not been designated as either fair value through profit and loss
or available-for-sale. 
 
After initial measurement, such assets are subsequently carried at amortised cost using the effective interest method less
any allowance for impairment. Gains or losses are recognised in income when the loans and receivables are derecognised or
impaired, as well as through the amortisation process. 
 
Current trade receivables are carried at the original invoice amount less provision made for impairment of these
receivables. Non-current receivables are stated at amortised cost. Loans and receivables from contractors are carried at
amortised cost. 
 
Loans and borrowings 
 
After initial recognition at fair value, net of directly attributable transaction costs, interest-bearing loans are
subsequently measured at amortised cost using the effective interest rate (EIR) method. The EIR amortisation is included as
finance costs in the income statement. Gains and losses are recognised in profit or loss, in the income statement, when the
liabilities are derecognised as well as through the EIR amortisation process. 
 
The Group adjusts the carrying amount of the financial liability to reflect actual and revised estimated cash flows. The
carrying amount is recalculated by computing the present value of estimated future cash flows at the financial instrument's
original effective interest rate or, when applicable, the revised effective interest rate. Any adjustment is recognised in
profit or loss as income or expense. 
 
This category generally applies to interest-bearing loans and borrowings. For more information, refer to note 20. 
 
Available-for-sale financial assets 
 
Available-for-sale financial assets are those non-derivative financial assets that are designated as such or are not
classified in any of the preceding categories and are not held to maturity investments. 
 
Available-for-sale financial assets represent equity investments that have a quoted market price in an active market;
therefore, a fair value can be reliably measured. After initial measurement, available-for-sale financial assets are
measured at fair value with mark-to-market unrealised gains or losses recognised as other comprehensive income in the
available-for-sale reserve until the financial asset is de-recognised. 
 
Financial assets classified as available-for-sale are de-recognised when they are sold, and all the risks and rewards of
ownership have been transferred. When financial assets are sold, the accumulated fair value adjustments recognised in other
comprehensive income are included in the income statement within other operating income or expense. 
 
De-recognition of financial assets and liabilities 
 
A financial asset or liability is generally de-recognised when the contract that gives rise to it is settled, sold,
cancelled or expires. 
 
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the
terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition
of the original liability and the recognition of a new liability, such that the difference in the respective carrying
amounts together with any costs or fees incurred are recognised in profit or loss. 
 
The difference between the carrying amount of a financial liability (or part of a financial liability) extinguished or
transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed,
is recognised in the income statement. 
 
(h) Impairment of financial assets 
 
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of
financial assets is impaired. 
 
Assets carried at amortised cost 
 
If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been
incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of
estimated future cash flows (excluding future expected credit losses that have not been incurred) discounted at the
financial asset's original effective interest rate (i.e., the effective interest rate computed at initial recognition). The
carrying amount of the asset is reduced through use of an allowance account. The amount of the loss is recognised in profit
or loss. 
 
The Group first assesses whether objective evidence of impairment exists individually for financial assets that are
individually significant, and individually or collectively for financial assets that are not individually significant. If
it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether
significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that
group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and
for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. 
 
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an
event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent
reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset
does not exceed its amortised cost at the reversal date. 
 
In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the
probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect
all of the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced through
use of an allowance account. Impaired receivables are de recognised when they are assessed as uncollectible. 
 
Available-for-sale financial assets 
 
If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal
payment and amortisation) and its current fair value, less any impairment loss previously recognised in the income
statement, is transferred from equity to the income statement. In assessing whether there is an impairment, the Group
considers whether a decline in fair value is either significant or prolonged, by considering the size of the decline in
this value, the historic volatility in changes in fair value and the duration of the sustained decline. Reversals in
respect of equity instruments classified as available-for-sale are not recognised in the income statement. 
 
(i) Inventories 
 
Finished goods and work in progress inventories are measured at the lower of cost and net realisable value. Cost is
determined using the weighted average cost method based on cost of production which excludes borrowing costs. 
 
For this purpose, the costs of production include: 
 
personnel expenses, which include employee profit sharing, materials and contractor expenses which are directly
attributable to the extraction and processing of ore; 
 
the depreciation of property, plant and equipment used in the extraction and processing of ore; and 
 
related production overheads (based on normal operating capacity). 
 
Operating materials and spare parts are valued at the lower of cost or net realisable value. An allowance for obsolete and
slow-moving inventories is determined by reference to specific items of stock. A regular review is undertaken by management
to determine the extent of such an allowance. 
 
Net realisable value is the estimated selling price in the ordinary course of business less any further costs expected to
be incurred to completion and disposal. 
 
(j) Short-term investments 
 
Where the Group invests in short-term instruments which are either not readily convertible into known amounts of cash or
are subject to risk of changes in value that are not insignificant, these instruments are classified as short-term
investments. Short-term investments are classified as loans and receivables. 
 
(k) Cash and cash equivalents 
 
For the purposes of the balance sheet, cash and cash equivalents comprise cash at bank, cash on hand and short-term
deposits held with banks that are readily convertible into known amounts of cash and which are subject to insignificant
risk of changes in value. Short-term deposits earn interest at the respective short-term deposit rates between one day and
four months. For the purposes of the cash flow statement, cash and cash equivalents as defined above are shown net of
outstanding bank overdrafts. 
 
(l) Provisions 
 
Mine closure cost 
 
A provision for mine closure cost is made in respect of the estimated future costs of closure, restoration and for
environmental rehabilitation costs (which include the dismantling and demolition of infrastructure, removal of residual
materials and remediation of disturbed areas) based on a mine closure plan, in the accounting period when the related
environmental disturbance occurs. The provision is discounted and the unwinding of the discount is included within finance
costs. At the time of establishing the provision, a corresponding asset is capitalised where it gives rise to a future
economic benefit and is depreciated over future production from the mine to which it relates. The provision is reviewed on
an annual basis by the Group for changes in cost estimates, discount rates or life of operations. Changes to estimated
future costs are recognised in the balance sheet by adjusting the mine closure cost liability and the related asset
originally recognised. If, for mature mines, the revised mine assets net of mine closure cost provisions exceed the
recoverable value, the portion of the increase is charged directly as an expense. For closed sites, changes to estimated
costs are recognised immediately in profit or loss. 
 
(m) Employee benefits 
 
The Group operates the following plans: 
 
Defined benefit pension plan 
 
This funded plan is based on each employee's earnings and years of service. This plan was open to all employees in Mexico
until it was closed to new entrants on 1 July 2007. The plan is denominated in Mexican Pesos. For members as at 30 June
2007, benefits were frozen at that date subject to indexation with reference to the Mexican National Consumer Price Index
(NCPI). 
 
The cost of providing benefits under the defined benefit plan is determined using the projected unit credit actuarial
valuation method and prepared by an external actuarial firm as at each year-end balance sheet date. The discount rate is
the yield on bonds that have maturity dates approximating the terms of the Group's obligations and that are denominated in
the same currency in which the benefits are expected to be paid. Actuarial gains or losses are recognised in OCI and
permanently excluded from profit or loss. 
 
Past service costs are recognised as an expense on a straight line basis over the average period until the benefits become
vested. If the benefits have already vested following the introduction of, or changes to, a pension plan, the past service
cost is recognised immediately. 
 
The defined benefit asset or liability comprises the present value of the defined benefit obligation less the fair value of
plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the present
value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to
the plan. 
 
Net interest cost is recognised in finance cost and return on plan assets (other than amounts reflected in net interest
cost) is recognised in OCI and permanently excluded from profit or loss. 
 
Defined contribution pension plan 
 
A defined contribution plan is a post-employment benefit plan under which the Group pays fixed contributions into a
separate entity and has no legal or constructive obligation to pay further amounts. Obligations for contributions to
defined contribution pension plans are recognised as an employee benefit expense in profit or loss when they are due. The
contributions are based on the employee's salary. 
 
This plan started on 1 July 2007 and it is voluntary for all employees to join this scheme. 
 
Seniority premium for voluntary separation 
 
This unfunded plan corresponds to an additional payment over the legal seniority premium equivalent to approximately 12
days of salary per year for those unionised workers who have more than 15 years of service. Non-unionised employees with
more than 15 years of service have the right to a payment equivalent to 12 days for each year of service. For both cases,
the payment is based on the legal current minimum salary. 
 
The cost of providing benefits for the seniority premium for voluntary separation is determined using the projected unit
credit actuarial valuation method and prepared by an external actuarial firm as at each year-end balance sheet date.
Actuarial gains or losses are recognised as income or expense in the period in which they occur. 
 
Other 
 
Benefits for death and disability are covered through insurance policies. 
 
Termination payments for involuntary retirement (dismissals) are charged to the income statement, when incurred. 
 
(n) Employee profit sharing 
 
In accordance with the Mexican legislation, companies in Mexico are subject to pay for employee profit sharing ('PTU')
equivalent to ten percent of the taxable income of each fiscal year. 
 
PTU is accounted for as employee benefits and is calculated based on the services rendered by employees during the year,
considering their most recent salaries. The liability is recognised as it accrues and is charged to the income statement.
PTU, paid in each fiscal year, is considered deductible for income tax purposes. 
 
(o) Leases 
 
The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at
inception date including whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or
the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the
following applies: 
 
a) There is a change in contractual terms, other than a renewal or extension of the arrangement; 
 
b) A renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included
in the lease term; 
 
c) There is a change in the determination of whether fulfilment is dependent on a specified asset; or 
 
d) There is a substantial change to the asset. 
 
Group as a lessee 
 
Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased
item, are capitalised at the inception of the lease at the fair value of the leased asset, or if lower, at the present
value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease
liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are
reflected in the income statement. 
 
Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if
there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. 
 
Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease
term. 
 
Group as a lessor 
 
Leases where the Group does not transfer substantially all the risks and benefits of ownership of the asset are classified
as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of
the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as
revenue in the period in which they are earned. 
 
Where a reassessment is made, lease accounting commences or ceases from the date when the change in circumstances gave rise
to the reassessment for scenarios a), c) or d) and at the date of renewal or extension period for scenario b) above. 
 
For arrangements entered into prior to 1 January 2005, the date of inception is deemed to be 1 January 2007, in accordance
with the transitional requirements of IFRIC 4. 
 
(p) Revenue recognition 
 
Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and the revenue can
be reliably measured. Revenue is measured at the fair value of consideration received excluding discounts, rebates, and
other sales taxes. 
 
Sale of goods 
 
Revenue is recognised in the income statement when all significant risks and rewards of ownership are transferred to the
customer, usually when title has been passed. Revenue excludes any applicable sales taxes. 
 
The Group recognises revenue on a provisional basis at the time concentrates, precipitates and doré bars are delivered to
the customer's smelter or refinery, using the Group's best estimate of contained metal. Revenue is subject to adjustment
once the analysis of the product samples is completed, contract conditions have been fulfilled and final settlement terms
are agreed. Any subsequent adjustments to the initial estimate of metal content are recorded in revenue once they have been
determined. 
 
In addition, sales of concentrates and precipitates throughout each calendar month, as well as doré bars that are delivered
after the 20th day of each month, are 'provisionally priced' subject to a final adjustment based on the average price for
the month following the delivery to the customer, based on the market price at the relevant quotation point stipulated in
the contract. Doré bars that are delivered in the first 20 days of each month are finally priced in the month of delivery. 
 
For sales of goods that are subject to provisional pricing, revenue is initially recognised when the conditions set out
above have been met using the provisional price. The price exposure is considered to be an embedded derivative and hence
separated from the sales contract. At each reporting date, the provisionally priced metal is revalued based on the forward
selling price for the quotation period stipulated in the contract until the quotation period ends. The selling price of the
metals can be reliably measured as these are actively traded on international exchanges. The revaluing of provisionally
priced contracts is recorded as an adjustment to revenue. 
 
The customer deducts treatment and refining charges before settlement. Therefore, the fair value of consideration received
for the sale of goods is net of those charges. 
 
The Group recognises in selling expenses a levy in respect of the Extraordinary Mining Right as sales of gold and silver
are recognised.The Extraordinary Mining Right consists of a 0.5% rate, applicable to the owners of mining titles. The
payment must be calculated over the total sales of all mining concessions. The payment of this mining right must be
remitted no later than the last business day of March of the following year and can be credited against corporate income
tax. 
 
The Group also recognises in selling expenses a discovery premium royalty equivalent to 1% of the value of the mineral
extracted and sold during the year from certain mining titles granted by the Mexican Geological Survey (SGM) in the San
Julian mine. The premium is settled to SGM on a quarterly basis. 
 
Other income 
 
Other income is recognised in the income statement when all significant risks and rewards of ownership are transferred to
the customer, usually when title has been passed. 
 
(q) Exploration expenses 
 
Exploration activity involves the search for mineral resources, the determination of technical feasibility and the
assessment of commercial viability of an identified resource. 
 
Exploration expenses are charged to the income statement as incurred and are recorded in the following captions: 
 
Cost of sales: costs relating to in-mine exploration, that ensure continuous extraction quality and extend mine life, and 
 
Exploration expenses: 
 
o  Costs incurred in geographical proximity to existing mines in order to replenish or increase reserves, and 
 
o  Costs incurred in regional exploration with the objective of locating new ore deposits in Mexico and Latin America and
which are identified by project. Costs incurred are charged to the income statement until there is sufficient probability
of the existence of economically recoverable minerals and a feasibility study has been performed for the specific project. 
 
(r) Taxation 
 
Current income tax 
 
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be
recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that
are enacted or substantively enacted, at the reporting date in the country the Group operates. 
 
Deferred income tax 
 
Deferred income tax is provided using the liability method on temporary differences at the balance sheet date between the
tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. 
 
Deferred income tax liabilities are recognised for all taxable temporary differences, except: 
 
where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a
transaction that is not a business combination and, at the time of transaction, affects neither the accounting profit nor
taxable profit loss; and 
 
in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint
ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the
temporary differences will not reverse in the foreseeable future. 
 
Deferred income tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and
unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible
temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except: 
 
where the deferred income tax asset relating to deductible temporary differences 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 

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