1. General information
Note 1.1 Corporate information
KGHM Polska Miedź S.A. (“the Company”) 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 Company’s principal activities include:
- the mining of copper and non-ferrous metals ores; and
- the production of copper, precious and non-ferrous metals.
KGHM Polska Miedź S.A. carries out copper ore mining activities based on concessions given for specific mine deposits, and also based on mining usufruct agreements and mine operating plans.
The financial statements were authorised for issue and signed by the Management Board of the Company on 15 March 2017.
Note 1.2 Basis of preparation
These 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 Company, described in subsequent notes, were applied in a continuous manner to all presented periods. The accounting policies and important estimates and judgements for significant items of the financial statements were presented in individual notes of these financial statements.
|Note||Title||Amount recognised in the financial statements||Accounting policy||Important estimates and judgements|
|2||Sales revenue||15 112||15 939||x|
|5.1||Income tax in the statement of profit or loss||(710)||(850)||x|
|5.1.1||Deferred income tax||-||(66)||x||x|
|3||Impairment of assets||(6 256)||(5 319)||x||x|
|6.1||Investments in subsidiaries and joint ventures||2 002||6 858||x|
|6.2||Loans granted*||7 330||6 755||x||x|
|7.3||Other financial instruments measured at fair value||576||579||x||x|
|7.4||Other non-current financial assets||320||291||x||x|
|8.2||Equity||(15 900)||(20 279)||x|
|8.4||Borrowings||(7 932)||(6 822)||x|
|8.5||Cash and cash equivalents||482||158||x|
|9.1||Mining and metallurgical property, plant and equipment and intangible assets||14 886||13 386||x||x|
|9.2||Other property, plant and equipment and intangible assets||101||257||x||x|
|9.4||Provision for decommissioning costs of mines and other technological facilities**||(770)||(892)||x||x|
|11.1||Employee benefits||(2 311)||(2 380)||x||x|
*Amounts include data on long-term and short-term loans. In the statement of financial position, short-term loans are recognised in the item “other assets”.
**Amounts include data on non-current and current provisions for decommissioning costs of mines and other technological facilities. In the statement of financial position, current provisions for decommissioning costs of mines and other technological facilities are recognised in the item “other liabilities”.
Note 1.3 Foreign currency transactions and the measurement of items denominated in foreign currencies
The financial statements are presented in Polish zloty (PLN), which is both the functional and presentation currency of the Company.
At the moment of initial recognition, foreign currency transactions are translated into the functional currency:
- at the actual exchange rate applied, i.e. at the buy or sell exchange rate applied by the bank in which the transaction occurs, in the case of the sale or purchase of currencies and the payment of receivables or liabilities;
- at the average exchange rate set for a given currency, prevailing on the date of the transaction for other transactions. The exchange rate prevailing on the date of the transaction is the average NBP rate announced on the last working day preceding the transaction date.
At the end of each reporting period, foreign currency monetary items are translated at the closing rate prevailing on that date.
Foreign exchange gains or losses on the settlement of foreign currency transactions, and on the measurement of foreign currency monetary assets and liabilities (other than derivatives), are recognised in profit or loss.
Foreign exchange gains or losses on the measurement of foreign currency derivatives are recognised in profit or loss as a fair value measurement, provided they do not represent a change in the fair value of the effective cash flow hedge. In such a case, in accordance with hedge accounting policies, they are recognised in other comprehensive income.
Note 1.4 Impact of new and amended standards and interpretations
New and amended standards which were applied by the Company and which came into force in the financial year beginning on 1 January 2016, did not have a material impact on the Company’s accounting policy, with the exception of applying, in order to prepare the 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.
Published standards and interpretations, which are not yet in force and were not applied earlier by the Company
In these financial statements, the Company 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 Company’s activities nor will they impact the financial statements of the Company.
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 Company 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.
At the moment of preparation of these financial statements, the first stage was completed and the preparations for the second stage have begun. The project engages different organisational units responsible for financial accounting and reporting, as well as business units and market and credit risk management units.
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 Company has completed the initial assessment of financial assets regarding their classification under the requirements of IFRS 9. Based on this initial assessment, in the Company’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 Company 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 Company 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. In addition, the Company has modified the terms and conditions of inter-group loans agreements, which impacted the necessity to conduct an analysis on estimating impact of these changes on their carrying amount. The aforementioned changes in terms and conditions of these agreements will have a rather immaterial impact on profit or loss.
Pursuant to the new standard’s requirements, the equity instruments will have to be measured at fair value, while the Company 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 Company 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 Company 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 Company’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 Company will have to perform a re-measurement of shares which are currently recognised in the accounting books at cost.
In the Company’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 Company’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 the Company’s receivables (including receivables due to loans granted).
Currently, the Company 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 Company 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 separate financial statement’s point of view, the most significant group of financial assets falling under the requirement of assessing the impairment are inter-group loans. Following the initial estimation of impact as at 31 December 2016, the assumed carrying amount of loans, estimated pursuant to IFRS 9 (and for which, in accordance with 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 Company 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 Company 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 Company has completed its analysis of the IFRS 9’s impact on hedge accounting. In the Company’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 Company’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 Company 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 Company assessed the standard’s impact on hedge accounting and will make a decision in 2017 as to its adoption date. In 2017, the Company will put an emphasis on work related to assessing the expected impairment. In the later stage, the Company will take care of the scope of disclosures required by the standard. In the Company’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 Company’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 Company 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 Company analysed the impact of applying IFRS 15 on recognising revenues from contracts concluded by the Company. 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 Company 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. KGHM Polska Miedź S.A. 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 Company 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 negligible 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 Company’s opinion the impact on current method of recognising revenues will be immaterial.
Based on the conducted analysis, the Company 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 Company’s opinion, due to the relatively homogenous character of the Company’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 Company 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 Company 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 Company 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 agreements currently classified as operating leases and perpetual usufruct agreements not recognised in the statement of financial position. Nevertheless, the Company 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 Company’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 financial statements because the Company 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 Company aims to apply all of the amendments at their effective dates.