REG - Fresnillo Plc - Full Year 2017 Preliminary Results <Origin Href="QuoteRef">FRES.L</Origin> - Part 3
27/02/2018 07:06
- Part 3: For the preceding part double click ID:nRSa9902Fb
guidance to have a significant
impact on the classification and measurement of its financial assets for the
following reasons:
Classification and measurement
The equity instruments that are currently classified as available-for-sale
financial assets satisfy the conditions for classification as at fair value
through other comprehensive income (FVOCI). Under IFRS 9, gains and losses
accumulated in OCI are not recycled to the income statement. There are no
other significant changes to the accounting for these assets. Also, embedded
derivatives resulting for the sales of goods as described in note 2(p) will be
no longer separated from the host contract. Instead, the entire receivable
will be measured at fair value through profit or loss. Management does not
expect this to result in a significant impact on the measurement of the
receivable.
There will be no impact on the Group's accounting for financial liabilities,
as the new requirements only affect the accounting for financial liabilities
that are designated at fair value through profit or loss and the Group does
not have any such liabilities.
Derecognition
The derecognition rules have been transferred from IAS 39 Financial
Instruments: Recognition and Measurement and have not been changed.
Hedge accounting
The new hedge accounting rules will align the accounting for hedging
instruments more closely with the Group's risk management practices. At this
stage the Group does not expect to designate any new hedge relationships
except for the derivatives corresponding to purchase of property, plant and
equipment. The Group's existing hedge relationships qualify as continuing
hedges upon the adoption of IFRS 9. As a consequence, the Group does not
expect an impact on the accounting for its hedging relationships.
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. Where the hedged item is transaction
related, amounts initially recognised in OCI related to the change in the time
value of options are reclassified to profit or loss or as a basis adjustment
to non-financial assets or liabilities upon maturity of the hedged item, or,
in the case of a hedged item that realises over time, the amounts initially
recognised in OCI are amortised to profit or loss on a systematic and rational
basis over the life of the hedged item. Under IAS 39, the change in time value
of options is recorded in the income statement. The initial credit
adjustment from retained earnings to hedging reserve as at 1 January 2017
would be US$23.0 million and the adjustment decreasing financial cost for the
year ended 31 December 2017 US$42.1 million.
Impairment
IFRS 9 requires the Group to now use an expected credit loss model for its
trade receivables measured at amortised cost, either on a 12-month or lifetime
basis. Given the short term nature of these receivables, the Group does not
expect these changes will have a significant impact.
Presentation and disclosure
The new standard also introduces expanded disclosure requirements and changes
in presentation. These are expected to change the nature and extent of the
Group's disclosures about its financial instruments particularly in the year
of the adoption of the new standard.
IFRS 15 Revenue from Contracts with Customers
The IASB has issued a new standard for the recognition of revenue arising from
contracts with customers. The new revenue standard will supersede all current
revenue recognition requirements under IFRS.
The new standard is based on the principle that revenue is recognised when
control of a good or service transfers to a customer. The Group has evaluated
recognition and measurement of revenue based on the five-step model in IFRS 15
and has not identified any financial impacts, hence no adjustments are
expected to result from the adoption of IFRS 15. The Group has elected to
adopt the new standard from 1 January 2018 applying the modified retrospective
adoption method.
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.
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 has decided to adopt the standard
when it becomes effective.
IFRIC 22 Foreign currency transactions and advance consideration
IFRIC 22 clarifies 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 the case that 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.
IFRIC 23 Uncertainty over Income Tax treatments
This Interpretation clarifies how to apply the recognition and measurement
requirements in IAS 12 when there is uncertainty over income tax treatments.
The interpretation is to be applied to the determination of taxable profit
(tax loss), tax bases, unused tax losses, unused tax credits and tax rates,
when there is uncertainty over income tax treatments. Application of tax law
can be complex and requires judgement to assess risk and estimate outcomes
where the amount of tax payable or recoverable is uncertain. The Group is
working to identify potential uncertainties based on previous resolutions of
tax authorities. IFRIC 23 is applicable for annual periods beginning on or
after 1 January 2019 and earlier adoption is permitted.
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 more than one currency 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 balance sheet, 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. The 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 estimation by management. The term of the derivative is
based on Sabinas life of mine 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, the currency in which the cost will be
incurred, 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:
The recognition of 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 costs(1) 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 less cost of disposal 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 financial 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, work in progress and ore stockpile 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
transaction, affects neither the accounting profit nor taxable profit or loss;
and
in respect of deductible temporary differences associated with investments in
subsidiaries, associates and interests in joint ventures, deferred income tax
assets are recognised only to the extent that it is probable that the
temporary differences will reverse in the foreseeable future and taxable
profit will be available against which the temporary differences can be
utilised.
The carrying amount of deferred income tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable
that sufficient taxable profit will be available to allow all or part of the
deferred income tax asset to be utilised.
Unrecognised deferred income tax assets are reassessed at each balance sheet
date and are recognised to the extent that it has become probable that future
taxable profit will allow the deferred tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the tax rates that
are expected to apply to the year 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 balance sheet date.
Deferred income tax relating to items recognised directly in other
comprehensive income is recognised in equity and not in the income statement.
Deferred income tax assets and deferred income tax liabilities are offset, if
a legally enforceable right exists to set off current tax assets against
current income tax liabilities and the deferred income taxes relate to the
same taxable entity and the same taxation authority.
Mining Rights
The Special Mining Right is considered an income tax under IFRS and states
that the owners of mining titles and concessions are subject to pay an annual
mining right of 7.5% of the profit derived from the extractive activities. The
Group recognises deferred tax assets and liabilities on temporary differences
arising in the determination of the Special Mining Right (See note 10).
Sales tax
Expenses and assets are recognised net of the amount of sales tax, except:
When the sales tax incurred on a purchase of assets or services is not
recoverable from the taxation authority, in which case, the sales tax is
recognised as part of the cost of acquisition of the asset or as part of the
expense item, as applicable;
When receivables and payables are stated with the amount of sales tax
included.
The net amount of sales tax recoverable from, or payable to, the taxation
authority is included as part of receivables or payables in the balance sheet.
(s) Derivative financial instruments and hedging
The Group uses derivatives to reduce certain market risks derived from changes
in foreign exchange and commodities price which impact its financial and
business transactions. Hedges are designed to protect the value of expected
production against the dynamic market conditions.
Such derivative financial instruments are initially recognised at fair value
on the date on which a derivative contract is entered into and are
subsequently remeasured at fair value. Derivatives are carried as assets when
the fair value is positive and as liabilities when the fair value is negative.
The full fair value of a derivative is classified as non-current asset or
liability if the remaining maturity of the item is more than 12 months.
Any gains or losses arising from changes in fair value on derivatives during
the year that do not qualify for hedge accounting are taken directly to
the income statement.
Derivatives are valued using valuation approaches and methodologies (such as
Black Scholes and Net Present Value) applicable to the specific type
of derivative instrument. The fair value of forward currency and commodity
contracts is calculated by reference to current forward exchange rates
for contracts with similar maturity profiles, European foreign exchange
options are valued using the Black Scholes model. The Silverstream contract is
valued using a Net Present Value valuation approach.
At the inception of a hedge relationship, the Group formally designates and
documents the hedge relationship to which the Group wishes to apply hedge
accounting and the risk management objective and strategy for the undertaken
hedge. The
- More to follow, for following part double click ID:nRSa9902Fd nged.
Hedge accounting
The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group's risk
management practices. At this stage the Group does not expect to designate any new hedge relationships except for the
derivatives corresponding to purchase of property, plant and equipment. The Group's existing hedge relationships qualify as
continuing hedges upon the adoption of IFRS 9. As a consequence, the Group does not expect an impact on the accounting for
its hedging relationships.
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. Where the hedged item is transaction related, amounts initially recognised in OCI related to the change
in the time value of options are reclassified to profit or loss or as a basis adjustment to non-financial assets or
liabilities upon maturity of the hedged item, or, in the case of a hedged item that realises over time, the amounts
initially recognised in OCI are amortised to profit or loss on a systematic and rational basis over the life of the hedged
item. Under IAS 39, the change in time value of options is recorded in the income statement. The initial credit adjustment
from retained earnings to hedging reserve as at 1 January 2017 would be US$23.0 million and the adjustment decreasing
financial cost for the year ended 31 December 2017 US$42.1 million.
Impairment
IFRS 9 requires the Group to now use an expected credit loss model for its trade receivables measured at amortised cost,
either on a 12-month or lifetime basis. Given the short term nature of these receivables, the Group does not expect these
changes will have a significant impact.
Presentation and disclosure
The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change
the nature and extent of the Group's disclosures about its financial instruments particularly in the year of the adoption
of the new standard.
IFRS 15 Revenue from Contracts with Customers
The IASB has issued a new standard for the recognition of revenue arising from contracts with customers. The new revenue
standard will supersede all current revenue recognition requirements under IFRS.
The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a
customer. The Group has evaluated recognition and measurement of revenue based on the five-step model in IFRS 15 and has
not identified any financial impacts, hence no adjustments are expected to result from the adoption of IFRS 15. The Group
has elected to adopt the new standard from 1 January 2018 applying the modified retrospective adoption method.
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.
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 has decided
to adopt the standard when it becomes effective.
IFRIC 22 Foreign currency transactions and advance consideration
IFRIC 22 clarifies 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 the case that 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.
IFRIC 23 Uncertainty over Income Tax treatments
This Interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty
over income tax treatments. The interpretation is to be applied to the determination of taxable profit (tax loss), tax
bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments.
Application of tax law can be complex and requires judgement to assess risk and estimate outcomes where the amount of tax
payable or recoverable is uncertain. The Group is working to identify potential uncertainties based on previous resolutions
of tax authorities. IFRIC 23 is applicable for annual periods beginning on or after 1 January 2019 and earlier adoption is
permitted.
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 more than one
currency 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 balance sheet, 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. The 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 estimation by management. The term
of the derivative is based on Sabinas life of mine 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, the currency in which the cost will be incurred, 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:
The recognition of 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 less cost of disposal
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 financial 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, work in progress and ore stockpile 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
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