1. General information
Note 1.1 Corporate information
KGHM Polska Miedź S.A. (“the Parent Entity”) with its registered office in Lubin at 48 M.Skłodowskiej-Curie Street is a joint stock company registered at the Regional Court for Wrocław Fabryczna, Section IX (Economic) of the National Court Register, entry no. KRS 23302, on the territory of the Republic of Poland.
KGHM Polska Miedź S.A. has a multi-divisional organisational structure, comprised of a Head Office and 10 divisions: 3 mines (Lubin Mine Division, Polkowice-Sieroszowice Mine Division, Rudna Mine Division), 3 metallurgical plants (Głogów Smelter/Refinery, Legnica Smelter/Refinery, Cedynia Wire Rod Division), the Concentrator Division, the Tailings Division, the Mine-Smelter Emergency Rescue Division and the Data Center Division.
The shares of KGHM Polska Miedź S.A. are listed on the Warsaw Stock Exchange.
The Parent Entity’s principal activities include:
- the mining of copper and non-ferrous metals ores; and
- the production of copper, precious and non-ferrous metals.
In addition, the Group conducts other activities, which are described in the Management Board’s report on the activities of KGHM Polska Miedź S.A and KGHM Polska Miedź S.A. Group in 2016 (appendix 4).
The consolidated financial statements were prepared under the assumption that the Group companies will continue as a going concern during a period of at least 12 months from the end of the reporting period in an unaltered form and business scope, and there are no reasons to suspect any intentional or forced discontinuation or significant limitation of its current activities. As at the date of signing of the consolidated financial statements the Management Board of the Parent Entity was not aware of any facts or circumstances that may cast doubt about the going concern in the foreseeable future. Impairment losses on assets recognised in the current period, settled in financial result before taxation in the amount of PLN (6 022) million, generated a loss for 2016, but they did not impact the net cash generated from operating activities which amounted to PLN 4 212 million, and therefore they do not pose a threat to the going concern.
The KGHM Polska Miedź S.A. Group carries out exploration and mining of copper, nickel and precious metals based on concessions given for Polish deposits to KGHM Polska Miedź S.A., and also based on legal titles held by KGHM INTERNATIONAL LTD. and KGHM AJAX MINING INC. for the exploration for and mining of these resources in the USA, Canada, and Chile. Detailed information is presented in the Management Board’s report on the activities of KGHM Polska Miedź S.A and KGHM Polska Miedź S.A. Group in 2016 (point 2.4) and in Information on segments (Part 2).
In 2016, the Parent Entity of the Group consolidated 72 subsidiaries and used the equity method to account for the shares of three joint ventures (Sierra Gorda S.C.M., “Elektrownia Blachownia Nowa” sp. z o.o. in liquidation and NANO CARBON Sp. z o.o.).
The changes to the Group’s structure are presented in the Consolidated financial statements, in Note 1.5.
The consolidated financial statements were authorised for issue and signed by the Management Board of the Parent Entity on 15 March 2017.
Note 1.2 Basis of preparation and presentation
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union, on the historical cost basis, except for available-for-sale financial assets and derivatives measured at fair value.
The accounting policies of the Group which apply to the consolidated financial statements as a whole, as well as significant estimates and their impact on amounts presented in the consolidated financial statements were presented in the following note.
|Topic||Accounting policies||Significant estimates|
|Consolidation principles||The consolidated financial statements include the financial statements of the parent entity and its subsidiaries. Subsidiaries are understood as entities which are either directly controlled by the Parent Entity or indirectly through its subsidiaries.|
Obtaining control of a subsidiary, which is a business, is accounted for using the acquisition method.
Subsidiaries are fully consolidated from the date on which control is obtained to the date on which control ceases.
Balances, income, expenses and unrealised gains from intra-group transactions, recognised in assets, are eliminated.
|Determining whether the parent entity has control over a company requires an assessment whether it has rights to direct relevant activities of the company.|
Determining what constitutes relevant activities of the company and by which investor it is controlled requires a judgement.
The following factors are taken into consideration when assessing the situation and determining the nature of relationships: voting rights, relative voting power, dilution of voting rights of other investors and their ability to appoint members of key management personnel or members of the supervisory board.
|Fair value measurement||Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. For financial reporting purposes, a fair value hierarchy was established that categorises the inputs into three levels. The fair value hierarchy levels are as follows:|
|Fair value presents current estimates which may be subject to change in subsequent reporting periods due to changes in market conditions or due to other factors. There are many methods of measuring fair value, which may result in differences in fair values.|
Moreover, assumptions constituting the basis of fair value measurement may require estimating the changes in costs/prices over time, the discount rate, inflation rate or other significant variables.
|Financial statements of subsidiaries, presented in a functional currency other than PLN||For purposes of preparing the consolidated financial statements in the presentation currency of the KGHM Polska Miedź S.A. Group, i.e. in PLN, individual items of financial statements of foreign operations whose functional currencies are other than PLN are translated in the following manner:|
|The consolidated financial statements are presented in PLN, which is also the functional currency of the Parent Entity and the Group’s subsidiaries, with the exception of subsidiaries of a subgroup KGHM INTERNATIONAL LTD. in which the US dollar (USD) is the functional currency.|
Exchange differences from the translation of financial statements of KGHM INTERNATIONAL LTD. amount to:
For a greater understanding of the data presented in the consolidated financial statements, important principles of measurement and accounting policies are presented in individual, detailed notes specified below:
|Note||Title||Amount recognised in the financial statements||Accounting policies||Accounting policies|
|2.3||Sales revenue||19 156||20 008||X|
|3||Impairment of assets||(6 022)||(7 609)||X||X|
|5.1||Income tax presented in the consolidated statement of profit or loss||(648)||113||X|
|5.1.1||Deferred income tax presented in the consolidated statement of profit or loss||125||1 008||X||X|
|6.1||Joint ventures accounted for using the equity method||27||562||X||X|
|6.2||Loans granted to joint ventures||4 313||7 504||X||X|
|7.3||Other financial instruments measured at fair value||633||663||X||X|
|7.4||Other non-current financial assets||930||735||X||X|
|8.2||Equity||(15 911)||(20 414)||X|
|8.4||Borrowings||(8 098)||(7 015)||X|
|8.5||Cash and cash equivalents||860||461||X|
|9.1||Mining and metallurgical property, plant and equipment and intangible assets||17 691||17 403||X||X|
|9.2||Other property, plant and equipment and intangible assets||2 799||2 894||X|
|9.4||Provisions for decommissioning costs of mines and other facilities*||(1 500)||(1 496)||X||X|
|10.1||Inventories||3 497||3 382||X||X|
|10.2||Trade receivables||1 292||1 541||X|
|10.3||Trade payables||(1 613)||(1 598)||X|
|11.1||Employee benefits liabilities||(2 647)||(2 739)||X||X|
|12.4||Other liabilities||(2 046)||(2 029)||X|
* In the statement of financial position, current provisions for decommissioning costs of mines and other technological facilities are recognised in the item “other liabilities”.
The accounting policies described in this note and in individual notes were applied by the Group in a continuous manner to all presented periods.
Note 1.3 Impact of new and amended standards and interpretations
New and amended standards which were applied by the Group and which came into force in the financial year beginning on 1 January 2016, did not have a material impact on the Group’s accounting policy, with the exception of applying, in order to prepare the consolidated financial statements for the year ended 31 December 2015 and before their effective dates, of amendments to IAS 1 Presentation of Financial Statements – the disclosure initiative and IFRS 8 Operating segments (Annual improvements to IFRS, 2010-2012 Cycle) – with respect to disclosing information on judgments made by management when combining the operating segments.
Note 1.4 Published standards and interpretations, which are not yet in force and were not applied earlier by the Group
In these consolidated financial statements, the Group did not decide for earlier application of the following published standards, interpretations or amendments to already existing standards prior to their effective date. Apart from the following new standards, other changes are not applicable to the Group’s activities nor will they impact the consolidated financial statements.
IFRS 9 ”Financial Instruments”
On 24 July 2014, the IASB published a new IFRS 9 Financial Instruments, effective for annual periods beginning on or after 1 January 2018, which will replace the current IAS 39 Financial Instruments: Recognition and Measurement. The European Commission, in its Regulation No 2016/2067 of 22 November 2016, adopted the version of IFRS 9 Financial Instruments which was published by IASB on 24 July 2014.
In the fourth quarter of 2016, the Group commenced a two-stage IFRS 9 implementation project (“the project”):
- stage I: gap analysis and preliminary estimates of impact
- stage II: implementation of IFRS9 on the basis of the developed concept.
The project engages different organisational units responsible for financial accounting and reporting, as well as business units and market and credit risk management units. At the moment of preparation of the Consolidated financial statements, the first stage was completed and the preparations for the second stage have begun.
Recognition and measurement
IFRS 9 removes categories of financial assets currently found in IAS 39. In accordance with IFRS 9, the classification of financial assets depends on the business model for managing financial assets and characteristics of contractual cash flows. Pursuant to the standard, financial assets may be classified only to the following three categories:
- financial assets measured at fair value, with an option to recognise changes in measurement in profit or loss;
- financial assets measured at fair value, with an option to recognise changes in measurement in other comprehensive income; or to
- financial assets measured at amortised cost.
The Group has completed the initial assessment of financial assets regarding their classification under the requirements of IFRS 9. Based on this initial assessment, in the Group’s opinion the majority of financial assets currently classified to loans and receivables (including trade receivables) and cash will meet the criteria of the business model whose objective is to hold assets in order to collect contractual cash flows, which results in a measurement at amortised cost if the cash flows test is passed. The Group is analysing the appropriateness of identifying another business model for receivables due to factoring agreements, which may result in the necessity to measure these receivables at fair value through profit or loss. Due to the short-term character of these assets, this change should not have a significant impact on the measurement of the portfolio of receivables at the initial application of IFRS 9.
Moreover, the Group preliminarily assessed the characteristics of contractual cash flows in its financial debt assets agreements and did not identify any financial instruments for which cash flows were anything more than the repayment of the principal amount and interest. Due to the above, the majority of assets meeting the current definition of loans and receivables will still be able to be measured at amortised cost. Moreover, the Group modified terms of inter-group loans agreements, which resulted in a necessity to conduct an analysis of impact of these changes on their carrying amounts. Due to the aforementioned changes to terms of agreements, this impact on the profit or loss will be immaterial.
Pursuant to the new standard’s requirements, the equity instruments will have to be measured at fair value, while the Group will be able to classify them as financial assets measured at fair value through profit or loss or make an irrevocable choice to measure them at fair value in other comprehensive income. If the Group chooses to recognise equity instruments at fair value in other comprehensive income, the result of measurement at fair value will be recognised in other comprehensive income, the impairment loss will not be recognised in profit or loss, and in the case of sale of a given instrument, profit/loss will not be reclassified to profit or loss, which constitutes a significant change as compared to the current requirements of IAS 39 concerning available-for-sale instruments. At the moment of preparing the financial statements, the Group has not yet made a decision in this regard. A decision on how to recognise the measurement of equity instruments (i.e. in other comprehensive income or in profit or loss) will concern shares held, and therefore, in the Group’s opinion, this decision may have a significant impact on the financial statements from the impact analysis of IFRS 9’s point of view. Moreover, the Group will have to perform a re-measurement of shares which are currently recognised in the accounting books at cost.
In the Group’s opinion, this standard will not have an impact on the measurement of derivatives or of financial liabilities.
IFRS 9 introduces a new approach for the estimation of losses on financial assets measured at amortised cost. This approach will be based on estimating expected losses, unlike in the current model from IAS 39 which is based on the concept of incurred losses. In the Group’s opinion, this change in concept – from the incurred losses to expected losses will have significant consequences for modelling parameters of credit risk and the final amount of impairment allowances on receivables (including receivables due to loans granted).
Currently, the Group only recognises incurred losses, mainly on the basis of individual analysis. The implementation of IFRS 9 will result in the necessity to estimate, after taking into account the macroeconomic data, of risk parameters for several scenarios. Moreover, the Group contemplates the idea of applying practical solutions for trade receivables by using payment delay matrixes, which would base on historical data taking into account the standard’s requirements concerning the current and forecasted future economic conditions.
From the consolidated financial statement’s point of view, the most significant group of financial assets subject to requirements to estimate the allowance for impairment are loans granted to a joint venture. Following the initial estimation of impact as at 31 December 2016, the assumed carrying amounts of loans, estimated pursuant to IFRS 9 (and for which, pursuant to IAS 39, no allowance for impairment was identified) would be immaterial. The impact analysis was conducted using an estimate of probability of failure of investments on the basis of comparable market data. In case of loans with impairment recognised as at 31 December 2016, the Group does not predict any significant changes to the amount of impairment allowances as compared to the amounts disclosed in Part 3, mainly due to small differences in methodology between IAS 39 and IFRS 9 with respect to the portfolio of impaired receivables.
The next significant category of financial assets falling under the requirement of assessing the impairment are trade receivables not subjected to factoring agreements and measured at amortised cost. The Group plans to apply simplified approach, which is allowed for this group of assets under IFRS 9 and the measurement of impairment allowance on the basis of lifetime expected credit losses.
According to the conducted analysis of IFRS 9’s impact on the financial statements, the impact of new principles concerning the impairment on measurement of trade receivables not subjected to factoring would be negligible.
IFRS 9 has new guidelines concerning hedge accounting, aiming to simplify current solutions and to better reflect principles of risk management. These guidelines increase the number of items which may be designated as hedged items. The additional disclosures required by this standard will provide the information on the impact of hedge accounting on the financial statements and on the risk management strategy. According to IFRS 9, on the day of implementing IFRS 9 the Company may make a decision, which would be a part of the accounting policy, to continue to apply the existing accounting requirements of IAS 39 and therefore to not implement hedge accounting requirements of IFRS 9.
The Group has completed its analysis of the IFRS 9’s impact on hedge accounting. In the Group’s opinion, current hedging relations may be continued after implementing the new standard, nevertheless the hedge accounting’s documentation and efficiency testing requirements will have to be changed. In the Group’s opinion, the application of IFRS 9 would make it possible to designate new hedging relations. After completing the analysis of risks and gains related to adopting solutions for hedge accounting introduced by IFRS 9, the Company will make a decision whether it will apply IFRS 9 on the day of implementation of IFRS 9 or if it will stay with the requirements of IAS 39 with respect to hedge accounting.
The Group has completed work related to the assessment of the new standard’s impact (the project’s first stage). A preliminary assessment of business models and cash flows was completed, and therefore assets were identified for which the measurement method must be changed to the one used for fair value measurement. The Group assessed the standard’s impact on hedge accounting and will make a decision in 2017 as to its adoption date. In 2017, the Group will put an emphasis on work related to assessing the expected impairment. In the later stage, the Group will take care of the scope of disclosures required by the standard. In the Group’s opinion, changes arising from adopting IFRS 9 will have an impact on policies and procedures, which will have to be adjusted to new requirements, and that will be the goal of the project’s second stage. In the Group’s opinion, the adoption of IFRS 9 will not make it necessary to significantly change the current IT systems.
IFRS 15 ”Revenue from contracts with customers” and Amendments to IFRS 15, clarifying some of the standard’s requirements
IFRS 15 was adopted for use by the European Union and is effective for annual periods beginning on or after 1 January 2018. Amendments to IFRS 15 are still pending their adoption by the European Union. The new standard will replace the current standards IAS 11 and 18, as well as the following interpretations: IFRIC 13, 15, 18 and SIC 31. The Group will apply IFRS 15 from 1 January 2018.
The standard applies to all contracts resulting in revenues. A fundamental principle of the new standard is recognising revenues at the amount of the transaction price, at the moment when a given good is delivered or service is rendered to a customer, which is when the customer obtains control over these assets. All goods and services which are sold in bundles and which may be separately identifiable should be recognised separately. Moreover, all discounts and rebates influencing the transaction price should, as a rule, be allocated to individual parts of a bundle. If the amount of revenue is variable, the variable amounts are recognised as revenues if it is highly probable that a reversal in the amount of revenue will not occur as a result of a revaluation. In addition, in accordance with IFRS 15, costs incurred to obtain and fulfil a contract with a customer should be capitalised and amortised when benefits of this contract are consumed.
The Group analysed the impact of applying IFRS 15 on recognising revenues from contracts concluded by the Group. The first phase of work concerned the analysis of differences between IFRS 15 and current principles governing the recognition of revenues. In the next step, the Group aggregated contracts concluded with its customers in 2016 by bundling them and adopting, as the primary criteria of bundling them, the moment of transferring control over promised goods or services to a customer. The KGHM Polska Miedź S.A. Group mainly concludes sales contracts for produced copper, precious metals and other by-products of copper production, which constitutes approx. 98% of its total revenues from sales. These contracts make use of International Commercial Terms (“Incoterms”) to determine the terms of delivery. Therefore, the moment of transferring control to the client was determined by analysing these terms.
The bundles created from aggregated contracts were analysed in order to identify the performance obligations towards the clients in these contracts, and to identify all goods or services (or a bundle of goods or services) or a bundle of distinct goods or services, the transfer of which to the customer has identical characteristics. Based on the aforementioned analyses and taking into account the fact that the moment of transferring control over the promised goods and services to a client is precisely described in the delivery conditions, it was determined that:
- in the case of most contracts, control is transferred to the customer after delivery of the goods. It applies to sales concluded on the basis of the following INCOTERMS: DAP, FCA, EX WORKS and FOB. In these cases, pursuant to IFRS 15, all goods and services promised in the contract (e.g. transport, customs clearance) should be considered to be a single performance obligation and recognise revenues once, in a given moment,
- in the case of other contracts, control over goods is transferred to the customer before the delivery is made, i.e. transport services, and the Group is obliged to organise the completion of this service. It applies to sales concluded on the basis of the following INCOTERMS: CFR, CIF, CPT and CIP. In such a case, the obligation to sale goods and obligation to perform a transport service should be considered to be different services promised in the contract and properly allocate to them the transaction price arising from the contract and separately recognise their revenues. Pursuant to IFRS 15, revenues from sales of goods should be recognised once in a given moment, while revenues from services rendered should be recognised over time, proportionally to the progress towards complete satisfaction of that performance obligation. However, due to the relatively immaterial share of transport services’ costs and services associated with it as compared to the revenues from sales and that the time of delivery of such shipments does not exceed 7 weeks, in the Group’s opinion the impact on current method of recognising revenues will be immaterial.
Based on the conducted analysis, the Group determined that there are no further differences between IFRS 15 and IAS 11 and 18 and interpretations IFRIC 13, 15 and 18 and SIC 31 that may result in a significant change in the current method of recognising revenues from contracts concluded with customers.
With respect to disclosures required by IFRS 15, in the Group’s opinion, due to the relatively homogenous character of the Group’s operating activities, the impact of IFRS 15 will not be significant. However, it is possible that the current scope of disclosures will be modified if the change will allow the financial statements’ users to have better understanding of the character, amounts, date of obtaining and the uncertainty related to revenues and cash flows arising from contracts with customers.
At the same time, the Group plans to implement a procedure aimed at ensuring continuous analysis and assessment of impact of terms and conditions of new or renegotiated contracts, to recognise revenues from sales.
Moreover, the Group will update its Accounting Policy with respect to recognising revenues, mainly in order to adjust its terminology to IFRS 15.
IFRS 16 „Leases”
IFRS 16 will be effective for annual periods beginning on or after 1 January 2019 and its awaiting the adoption by the European Union.
The Group will apply IFRS 16 from 1 January 2019. The new standard provides a single model for recognising leases in the lessee’s accounting books. According to initial estimates, the application of IFRS 16 will result in recognition in the statement of financial position of the Group of agreements currently classified as operating leases and perpetual usufruct agreements not recognised in the statement of financial position. Nevertheless, the Group has not yet finished the detailed impact analysis, which is planned to be conducted in 2017/2018.
Other standards and interpretations published, but not yet in force are not applicable to the Group’s activities nor will they have an impact. These are as follows:
- Amendments to IFRS 10 and IAS 28 with respect to the sale or contribution of assets between an investor and its associate or joint venture;
- Amendments to IAS 12 with respect to recognising deferred tax assets arising from unused tax losses;
- Amendments to IAS 7 – the disclosure initiative – this change will not have an impact on the consolidated financial statements because the Group currently presents a reconciliation of net debt;
- Amendments to IFRS 2 in relation to the classification and measurement of share-based payment transactions;
- Amendments to IFRS 4 with respect to applying IFRS 9 with IFRS 4;
- Amendments to IAS 40 regarding transfers of investment property;
- IFRIC 22 Interpretation on foreign currency transactions and advance consideration;
- Annual improvements to IFRS Standards, 2014-2016 Cycle.
The aforementioned standards are awaiting the adoption by the European Union, and the Group aims to apply all of the amendments at their effective dates.
Note 1.5 Significant changes in the structure of the KGHM Polska Miedź S.A. Group
On 20 December 2016 (”merger date”), there was a merger of three Luxembourg subsidiaries: Fermat 1 S.á r.l., Fermat 2 S.á r.l. and Fermat 3 S.á r.l. (“acquired companies”) with the Polish subsidiary Future 1 Sp. z o.o. (“acquiring company”). The mergers took place in the following order:
1st merger: Fermat 1 S.á r.l. was merged with Future 1 Sp. z o.o. (“1st merger”). After finalising the 1st merger, Future 1 Sp. z o.o. became a direct shareholder in the companies Fermat 2 S.á r.l and Fermat 3 S.á r.l.,
2nd merger: Fermat 3 S.á r.l merged with Future 1 Sp. z o.o.,
3rd merger: Fermat 2 S.á r.l merged with Future 1 Sp. z o.o.
All of the mergers took place on the same day.
Pursuant to the accounting policy chosen by Future 1 Sp. z o.o., the transaction of merging the jointly-controlled companies was recognised by applying the purchase price method.
As part of the 1st merger, Future 1 Sp. z o.o. increased its share capital by PLN 2 401 million, which was acquired by KGHM Polska Miedź S.A. in exchange for the net assets of the company Fermat 1 S.á r.l.
Other changes to the Group structure in 2016 were described in detail in the Management Board’s report on the activities of KGHM Polska Miedź S.A and KGHM Polska Miedź S.A. Group (point 2.3).