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 13 March 2018.
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||16 024||15 112||x|
|5.1||Income tax in the statement of profit or loss||(831)||(710)||x|
|5.1.1||Deferred income tax||(54)||-||x||x|
|4.4||Impairment of assets||(966)||(6 256)||x||x|
|4.4||Revelsal of impairment losses||2||5|
|6.1||Investments in subsidiaries and joint ventures||3 013||2 002||x|
|6.2||Loans granted*||4 981||7 330||x||x|
|7.3||Other financial instruments measured at fair value||613||576||x||x|
|7.4||Other non-current financial assets||337||320||x||x|
|8.2||Equity||(17 256)||(15 900)||x|
|8.5||Cash and cash equivalents||234||482||x|
|9.1||Mining and metallurgical property, plant and equipment and intangible assets||15 862||14 886||x||x|
|9.2||Other property, plant and equipment and intangible assets||109||101||x||x|
|9.4||Provision for decommissioning costs of mines and other technological facilities**||(804)||(770)||x||x|
|11.1||Employee benefits||(2 528)||(2 311)||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
As at 1 January 2017 the following amendments to the standards are in force in the Company:
- Amendments to IAS 7 „Statement of Cash Flows” under the Disclosure Initiative,
- Amendments to IAS 12 „Income taxes” concerning the recognition of a deferred tax asset with respect to unrealised losses,
- Annual Improvements to IFRS Standards, 2014-2016 Cycle, clarifying the scope of IFRS 12 “Disclosure of Interests in Other Entities”.
The application of the amendments to the standards did not affect the Company’s accounting policy nor the following financial statements.
The above amendments to the standards were adopted by the European Union.
Published standards and interpretations, which are not yet in force and were not applied earlier by the Company.
While preparing 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.
IFRS 9 “Financial Instruments”
Note 1.4.1 Basic information about the standard
|Date of implementation and transitional rules|
|On 24 July 2014, the IASB published a new IFRS 9 Financial Instruments, effective for annual periods beginning after 1 January 2018, which will replace the current IAS 39 Financial Instruments: Recognition and Measurement with the possibility of earlier implementation.|
|Main changes introduced by the standard|
|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:|
A key change is the requirement placed upon entities to present in other comprehensive income the impact of changes in own credit risk due to financial liabilities which are to undergo fair value measurement through profit or loss, as well as to make a one-off recognition in profit or loss of the impact of changes in the contractual conditions of bank loan agreements which do not result in derecognition of liabilities.
The standard has new guidelines concerning hedge accounting, aiming to simplify current solutions and to better reflect principles of risk management.
As at the moment of preparation of these financial statements, the Company has completed most of its work on implementing the new standard IFRS 9. In the fourth quarter of 2016 the Company had commenced a project to implement IFRS 9 (project), which was planned in two stages:
- stage I: gap analysis and preliminary impact assessment,
- stage II: implementation of IFRS 9 based on the concept developed.
Under this project, the Company made the appropriate changes to its accounting policy and operational procedures. Methods for evaluating business models and cash flow analysis were developed and implemented, including identifying assets, in respect of which following 1 January 2018 there will be a change in valuation method from amortised costs to fair value. With respect to impairment, the Company developed and implemented methods for calculating expected credit losses on trade receivables (simplified approach) and other financial assets (general approach). With respect to hedge accounting, the Company updated the appropriate IT systems in order to modify the manner of recognising changes in the time value of options.
The Company decided to implement the standard as at 1 January 2018, without correcting comparative data, in the scope of IFRS 9.
1.4.3 IMPACT ON EQUITY
Accumulated other comprehensive income
Reclassification of items measured at amortised cost or at cost to measured at fair value for:
|Note 1.4.4 a-b|
|Note 1.4.4 a (i)|
|Noea 1.4.4 a (i)(i)|
| Shares in other entities|
|Note 1.4.4 a (i)(i)(i)|
|Adjustment of impairment allowances for assets measured at amortised cost - loans|
|Note 1.4.4 c|
Note 1.4.4 c (i)(i)
|Reclassification of the change in|
the time value of the option
|Note 1.4.4 d|
|Deferred tax to the aforementioned corrections|
(a) changes in the classification of financial assets
(i) Debt instruments – trade receivables
The Company, based on factoring agreements, sells receivables which, under the evaluation of assets in terms of classification pursuant to IFRS 9, were classified to the assets sale model in order to recover contractual cash flows, which results in the measurement of these receivables to fair value. With respect to the balance of receivables in the amount of PLN 195 million, which as at 31 December 2017 were not yet transferred to factoring, fair value was set as the carrying amount of these receivables due to the short period between the balance sheet date and the receivables sale date.
Trade receivables applying the M+ pricing formula (the final price will be set after the balance sheet date), pursuant to IFRS 9, do not pass the SPPI (solely payments of principal and interest) test, due to the fact that cash flows which arise from these receivables do not solely represent the repayment of principal and interest, as their volatility arises from an embedded derivative instrument which represents the M+ pricing formula. Trade receivables as at 31 December 2017 applying the M+ pricing formula in the amount of PLN 446 million were measured to fair value as at 1 January 2018 in the amount of PLN 462 million, while the impact of measurement in the amount of PLN 16 million will be recognised in retained earnings.
(ii) Debt instruments – loans granted
The Company has a portfolio of loans granted to subsidiaries. Pursuant to IAS 39, these loans were measured at amortised cost. As a result of the SPPI test performed for certain loans (balance of PLN 1 212 million per IAS 39) traits were identified which mean that cash flows are not solely repayments of principal and interest. Consequently, they were classified to the category of items measured at fair value through profit or loss. Measurement to fair value resulted in an increase of the carrying amount of these loans as at 1 January 2018 (as an opening balance sheet for 2018) to the amount of PLN 1 279 million. The difference, in the amount of PLN 67 million, will be recognised in retained earnings. Other loans, in the carrying amount of PLN 3 780 million, in accordance with the SPPI test, were classified as measured at amortised cost, of which PLN 80 million are loans with impairment due to a credit risk at the moment of initial recognition.
(iii) Equity instruments – share in other entities
In accordance with the requirements of the new standard, equity instruments are measured at fair value, though the Company will be able to classify them to financial assets measured at fair value through profit or loss or make an irrevocable choice to measure them at fair value through other comprehensive income. The Company classified all of the equity instruments it held as at 1 January 2018 as being measured at fair value through other comprehensive income and, consequently, the result from measurement to fair value will be recognised in other comprehensive income, the impairment loss will not be recognised in the statement of profit or loss, and in the case of sale of a given instrument, gains/loss will not be reclassified to the statement of profit or loss. The Company has shares of listed companies (carrying amount per IAS 39 – PLN 558 million) and of unlisted companies. Shares of unlisted companies, pursuant to IAS 39, were classified to „available-for-sale financial assets” and are measured at cost (carrying amount PLN 55 million). Pursuant to IFRS 9, shares of other unlisted companies were measured to fair value, and as at 1 January 2018 (as an opening balance sheet for 2018), their carrying amount was PLN 90 million. The difference in the amount of PLN 35 million will be recognised in other comprehensive income. As to the owned shares of listed companies, impairment losses recognised up to 31 December 2017 in retained earnings in the amount of PLN 568 million will be transferred to other comprehensive income.
(b) measurement to fair value - measurement hierarchy
Information on assets measured to fair value per their hierarchy:
|Level 1||Level 2||Total|
|Shares in other entities|
(c) Methodology of evaluating impairment allowances using the expected losses method
Pursuant to IAS 39, in recognising impairment allowances the Company was obliged to assess whether there were indications of impairment and, if determined, to estimate the impairment allowance. IFRS 9 introduces a new approach to estimating losses with respect to financial assets measured at amortised cost. This approach is based on identifying expected losses, regardless of whether or not indications occurred. The standard requires the classification of financial assets in terms of their impairment in three stages:
Stage 1 – the balances for which there was no substantial increase in credit risk from the moment of initial recognition and for which the expected impairment is set based on the probability of insolvency within the next 12 months,
Stage 2 – the balances for which there was a substantial increase in credit risk from the moment of initial recognition and for which the expected impairment is set based on the probability of insolvency within the entire period of credit,
Stage 3 – the impaired balances.
(i) Impairment allowance on trade receivables (simplified approach)
For trade receivables measured at amortised cost, in terms of determining expected impairment, the Company will apply the simplified model and will estimate expected impairment throughout the entire period of life, applying payment provision matrices based on historical data, reflecting the rules of the standard with respect to current and forecasted economic conditions. The impact of the new principles regarding impairment on the measurement of trade receivables measured at amortised cost is immaterial (as at 1 January 2018, an additional impairment allowance was recognised in retained earnings in the amount of PLN 334 thousand due to expected impairment).
(ii) Impairment allowance on loans granted
For loans granted classified to the category of measured at amortised cost in accordance with IFRS 9, it is necessary to calculate the impairment allowance due to the expected impairment. In order to estimate credit losses, an analysis for a single instrument (an exposure) was conducted, classifying it to one of the three stages. Then, an impairment allowance was recognised on the basis of an external rating of a respected rating agency, using market data on the probability of insolvency of the debtor and information on repayment profiles set in the agreements and the possibility of recovering the loan due to hedging. As at 1 January 2018, an additional impairment allowance of PLN 385 million will be recognised in retained earnings.
The amount of expected credit losses estimated by the Company for cash, receivables due to refundable payments to capital and funds of the mining decommissioning fund was immaterial.
(d) Hedge accounting - Changes in the time value of options
Pursuant to IFRS 9, on the date that IFRS 9 is implemented, the Company may make the decision, representing an element of the accounting policy, to continue to apply hedge accounting rules pursuant to IAS 39, thereby refraining from the implementation of hedge accounting rules arising from IFRS 9.
However, the Company decided that, for hedging relationships opened as at 1 January 2018, and for relationships which will be established after 1 January 2018, the Company will apply the hedge accounting rules set forth in IFRS 9. In particular this means a modification of the manner of recognition of changes in the time value of options comprising hedging instruments subject to hedge accounting rules. Until now, changes in the time value of options pursuant to IAS 39 were excluded from measurement of effectiveness and were recognised on an on-going basis in the statement of profit or loss. Pursuant to the new rules of IFRS 9 (par. 6.5.15) changes in the time value of options will be recognised during the life of the hedge relationship in a separate item under equity and reclassified to the statement of profit or loss during the period when the hedged item is realised. IFRS 9 requires that the Company carry out a retrospective recognition of the time value of options pursuant to the new rules for all hedge relationships continued after 31 December 2017. As a result of the above change, the Company will reclassify the change in the time value of options in the amount of PLN 223 million (a loss) from retained earnings to other reserves from measurement of financial instruments.
(e) Corporate financial guarantees
As part of the analysis of the impact of IFRS 9 on the financial statements, the Company determined that it is necessary to recognise the financial guarantees granted to Sierra Gorda, to secure its obligations arising from lease agreements and short-term bank loans, in the accounting books as per paragraph 4.2.1 point c of IFRS 9.
Pursuant to the new regulations, as at 1 January 2018 the Company will recognise receivables, in an amount equal to the present value of future payments due to the guarantees, against the corresponding liabilities and then it will correct the receivables by the unwinding of the discount effect and will recognise the expected impairment for the full amount of receivables, calculated in accordance with IFRS 9. The impact of the aforementioned change on the Company’s financial statements will be immaterial.
IFRS 15 “Revenue from contracts with customers” and Amendments to IFRS 15, clarifying some of the standard’s requirements
Basic information about the standard
|Date of implementation and transitional rules|
|IFRS 15 was adopted for use by the European Union and is effective for annual periods beginning on or after 1 January 2018. 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.|
|Summation of main changes introduced by the standard|
|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. Costs incurred to obtain and fulfil a contract with a customer should be capitalised and amortised when the benefits of this contract are consumed.|
Impact of IFRS 15 on the financial statements
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 2017 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 (“INCOTERMS”), it was determined that:
in the case of most contracts, control is transferred to the customer after delivery of the goods. 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. In such a case, the obligation to sell goods and the obligation to provide a transport service should be considered to be different services promised in the contract, while the transaction price arising from the contract should be properly allocated to them and their revenues separately recognised. Pursuant to IFRS 15, revenues from sales of goods should be recognised once at a specified moment, while revenues from services rendered should be deferred, 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 them as compared to the revenues from sales of the goods and the time of delivery of such shipments, which does not exceed 7 weeks, in the Company’s opinion the impact on the 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. The Company does not plan to make any corrections as at 1 January 2018 due to the implementation of IFRS 15. With respect to disclosures required by IFRS 15, in the Company’s opinion, in order to increase the usefulness of information provided to financial statements’ users, it is possible that the current scope of disclosures will be modified pursuant to IFRS 15.
IFRS 16 “Leases
|Date of implementation and transitional rules|
|IFRS 16 will be effective for annual periods beginning on or after 1 January 2019 and has been adopted by the European Union. It supersedes the current standard IAS 17, interpretation IFRIC 4 and SIC 15 and 27. The Company will apply IFRS 16 from 1 January 2019.|
|Summation of main changes introduced by the standard|
|The new standard introduces a single model for recognising a lease in lessee’s accounting books, conforming to the recognition of a finance lease under IAS 17. Pursuant to IFRS 16, an agreement is a lease or contains a lease if it transfers the rights to control the utilisation of an identified asset for a given period in exchange for compensation. The essential element differentiating the definition of a lease from IAS 17 and from IFRS 16 is the requirement to have control over the utilised, specific asset, indicated directly or indirectly in the agreement. Analysis of agreements in terms of their meeting the new lease definition may also lead to recognising some agreements, which at present are treated as services agreements, as agreements containing a lease, as well as to recognition of some agreements which at present are treated as a lease, in particular operating lease, as services agreements.|
Impact of IFRS 16 on the financial statements
In 2017, the Company commenced an analysis of all realised agreements involving the purchase of services, regardless of their existing classification, the goal of which was to identify those agreements based on which the Company utilises assets belonging to suppliers, and subsequently to make a preliminary assessment of each such agreement as to whether it meets the criteria to be recognised as a lease pursuant to IFRS 16.
As a result of this analysis it was determined that the following assets belonging to suppliers met the condition of right to use:
- technical equipment,
- railroad cars and tankers, cars and other means of transport,
- offices and premises,
- various types of land.
Pursuant to IFRS 16, an agreement is a lease if a customer designed an asset in a way that determines from the start in what manner and for what purpose the asset will be utilised throughout its life. As a result, in the Company’s opinion, pursuant to IFRS 16 the scope of agreements meeting the criteria of containing a lease will be broader than heretofore, in particular with respect to production infrastructure.
Continuing its work on implementing IFRS 16, in 2018 the Company plans to:
expand its preliminary analysis of the control of utilisation of a given asset, i.e. whether the Company has the right to utilise substantially all of the economic benefits deriving from the use of an identified asset as well as the right to direct the use of the identified asset,
- estimate the lease periods for agreements in which the lease period is not definitely indicated in the terms of the agreement,
- calculate the interest rates for discounting lease payments,
- separate lease payments from agreements containing servicing elements,
- evaluate the possibilities of applying exclusions for short-term leases and whose asset value is low,
- determine the manner of presenting leases in the statement of financial position,
- introduce necessary changes to the IT systems employed, and
- select the transitional rules of IFRS 16 to be applied as at 1 January 2019.
According to preliminary analysis, the application of IFRS 16 will lead to the recognition in the Company’s statement of financial position of selected assets and corresponding financial liabilities from agreements treated at present as operating leases and services as well as rights to perpetual usufruct of land which are not currently recognised in the statement of financial position. At this stage, the quantitative assessment of impact of IFRS 16 is not possible.
Other standards and interpretations published but not yet in force are not applicable to the Company’s activities nor will they have an impact on them. 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 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,
- IFRIC 23 interpretation on uncertainty over income tax treatments,
- IFRS 17 Insurance contracts,
- Amendments to IFRS 9 on debt financial assets with early repayment options, which could lead to the arising of a so-called negative compensation,
- Amendments to IAS 28 on long-term interests that form part of the net investments in associates and joint ventures,
- Annual improvements to IFRS Standards, 2014-2016 cycle, clarifying the scope of IAS 28 and IFRS 1,
- Annual improvements to IFRS Standards, 2015-2017 cycle,
- Amendments to IAS 19 on amendments, curtailments or settlements of plans of specified benefits.
The aforementioned standards, with the exception of amendments to IFRS 4, IFRS 2 and annual improvements to IFRS Standards, 2014-2016 Cycle, are awaiting adoption by the European Union. The Company aims to apply all of the amendments at their effective dates.