Implementation of IFRS in KGHM Polska Miedź S.A. Capital Group – experiences and challenges 1 4 December 2013 St. Barbara’s Day
Implementation of IFRS in KGHM Polska Miedź
S.A. Capital Group – experiences and challenges
1 4 December 2013
St. Barbara’s Day
Agenda
• Brief description of KGHM Polska Miedź S.A. Capital Group
• 2004/2005 – implementation of IFRS based on IFRS 1 on the
level of consolidated financial statements of the Group
• 2006/2007 - implementation of IFRS based on IFRS 1 on the
level of unit financial statements of KGHM Polska Miedź S.A.
• 2011/2013 - implementation of IFRS based on IFRS 1 on the
level of unit financial statements of selected domestic
companies of the Group
• 2012 – acquisition of Quadra FNX Capital Group – challenges
in scope of integration of accounting policies
• Current implementation of IFRS – challenges and risks
• Summary
2
Brief description of KGHM Polska
Miedź S.A. Capital Group
Organizational structure of KGHM company LGOM Area
4
KGHM Polska Miedź S.A.
KGHM Home Office
ZG Lubin
ZG Rudna
ZG Polkowice-Sieroszowice
Ore Enrichment Plant
Hydrotechnical Plant
HM Głogów
HM Legnica
HM Cedynia
JRGH
COPI
5
Structure of KGHM Polska Miedź S.A. Capital Group
Jednostka Dominująca
KGHM Polska Miedź S.A.
PeBeKa S.A.100%
KGHM CUPRUM sp. z o.o. – CBR100%
KGHM Metraco S.A.100%
Zagłębie Lubin S.A.100%
KGHM TFI S.A.
100%
KGHM Kupferhandelsges. m.b.H.i.L
100%
KGHM Kupfer AG
100%
„MIEDZIOWE CENTRUM ZDROWIA” S.A.
100%
CBJ sp. z o.o.
100%
KGHM LETIA S.A.
85,45%
INOVA Spółka z o.o.
100%
KGHM ZANAM Sp. z o.o.
100%
KGHM (SHANGHAI) COPPER TRADING CO., LTD.
100%
„Energetyka” sp. z o.o.
100%
„BIOWIND” sp. z o.o.
100%
WPEC w Legnicy S.A.
85,20%
POL-MIEDŹ TRANS Sp. z o.o.
100%
PMT Linie Kolejowe Sp. z o.o.
100%
PHP „MERCUS” sp. z o.o.
100%
PHU „Lubinpex” Sp. z o.o.
100%
BIPROMET S.A.
66%
Przedsiębiorstwo Budowlane Katowice S.A.
58,14%
Bipromet Ecosystem Sp. z o.o.
33,66%
NITROERG S.A.
85%
WFP Hefra SA
98,50%
Ecoren DKE sp. z o.o. w likwidacji
100%
CENTROZŁOM WROCŁAW S.A.
97,96%
WMN „ŁABĘDY” S.A.
84,96%
KGHM Ecoren S.A.
100%
Fundusz Hotele 01 Sp. z o.o.
100%
Fundusz Hotele 01 Sp. z o.o. S.K.A.
100%
INTERFERIE S.A.
67,71%
KGHM I FIZAN
100%
Polska Grupa Uzdrowisk Sp. z o.o.
100%
Polska Grupa Uzdrowisk Sp. z o.o. S.K.A.
100%
Uzdrowiska Kłodzkie S.A. – Grupa PGU
92,57%
Uzdrowisko Połczyn Grupa PGU S.A.
90,45%
„Uzdrowisko Cieplice” Sp. z o.o. – Grupa PGU
91,67%
Interferie Medical SPA Sp. z o.o.
89,46%
Uzdrowisko „Świeradów-Czerniawa” sp. z o.o. –
Grupa PGU
87,74%
KGHM II FIZAN w likwidacji
100%
KGHM III FIZAN
100%
Fermat 1 S.á r.l.
wraz z Grupą Kapitałową
KGHM INTERNATIONAL LTD.
100% (ciąg dalszy na następnej stronie)
Szczebel I
Szczebel II
Szczebel III
Szczebel IV
KGHM IV FIZAN
100%
KGHM V FIZAN
100%
Level I
Fermat 1 S.a.r.l with KGHM
INTERNATIONAL LTD Capital Group
100% (continued on next page)
Level II
Level III
Level IV
Mother Company
6
Structure of KGHM International Ltd Capital Group
Level I
Level II
Level III
Level IV
Level V
Level VI
Level VII
Level VIII
KGHM is a global producer on non-ferrous metals market
7 * TPM – noble metals
KGHM mining projects
KGHM mines
Copper mills
Poland
Polkowice-Sieroszowice mine (Cu, Ag)
Lubin mine (Cu, Ag)
Rudna mine (Cu, Ag)
Głogów Copper Plant
Legnica Copper Plant
Exploration in the region
Greenland
Malmbjerg (Mo)
Germany
Weisswasser
(Cu, Ag)
Canada
McCreedy (Cu, Ni, TPM*)
Morrison (Cu, Ni, TPM)
Podolsky (Cu, Ni, TPM)
Victoria (Cu, Ni, TPM)
Chile
Franke (Cu)
Sierra Gorda (Cu, Mo, Au)
USA
Robinson (Cu, Au, Mo)
Carlota (Cu)
Canada
Afton-Ajax (Cu, Au)
Stage I - 2004/2005 Implementation of IFRS on the level of consolidated financial
statements of KGHM Polska Miedź S.A. Capital Group
Stage II - 2006/2007 Implementation of IFRS on the level of unit financial statements
of KGHM Polska Miedź S.A.
Project organization - 2004
• Creating project implementation structures, involving
employees of both accounting and engineering services
of mother company as well as those of key subsidiaries,
with participation of a consultant,
• Analysis and identification of main areas of IFRS
implementation in consolidated financial statements,
• Developing implementation schedule,
• Defining the list of deliverables: accounting policy,
reporting package for consolidation purposes, financial
statements template, instructions
9
Implementation of IFRS - 2004-2005
All areas of divergence between Polish balance sheet law
and IFRS were identified.
Main differences pertained to:
- tangible fixed assets (IAS 16, IAS 29)
- financial instruments (mostly presentation)
- equity (practically absence of standards)
- template for a reporting package for entities included in
consolidation and template for a financial statement
with required disclosures (IAS1, template statements in
various publications)
10
Greatest challenges and changes
Tangible fixed assets
• Determining the deemed cost of fixed assets as of the day of IFRS
adoption, i.e. 1 January 2004, in accordance with IAS 16. In order to
achieve that, the following were performed (among other things):
- adjusting the value of fixed assets for hyperinflation
environment,
- verification of depreciation periods,
- identification of significant constituent parts,
- adjustment of costs of external financing.
• Many thousands of fixed assets were analyzed individually
(materiality criteria for re-measurement were set)
• As a result of re-measurement, value of the Group’s assets was
increased by 400 million PLN, of which 372 million PLN due to
hyperinflation.
11
Greatest challenges and changes, ctd.
Equity
• need to update the value of base capital for hyperinflation
conditions (IAS 29)
• change of presentation of equity items in the financial
statements – divergence between the principles of
domestic commercial companies law and IFRS in scope
of structure and functions of equity items
• IFRS lacks specific guidance in scope of equity structure
• sensitive area for owners due to potential profit
distribution – concerns about distribution of amounts
resulting purely from accounting operations
12
Results of implementation of Stage I
• Developing new Accounting Policy for KGHM
Polska Miedź S.A. Capital Group, compliant with
IFRS
• Developing a template for consolidated financial
statements compliant with IFRS
• Developing a template reporting package for
presentation of IFRS compliant disclosures for
the mother company and subsidiaries (over 240
reporting notes)
13
Project organization – 2006, Stage II
• In continuing IFRS implementation, which
started in 2004, project teams were
established for main areas: fixed assets,
financial instruments, reporting, chart of
accounts,
• Implementation of IFRS in KGHM accounting
books involved adapting IT systems in scope
of registration and financial reporting, which
resulted in significantly increased complexity of
the implementation.
14
Implementation of IFRS - 2006-2007 Main challenges of this Stage:
• Rebuilding the chart of accounts
• Updating the accounting policy
• Mapping the differences in the area of tangible fixed
assets, identified by type and value, to the accounting IT
system
• Changes in methods of valuation of capital investments
• Implementation, in the IT system, of the reporting
package generated based on data warehouse – BW
• Including differences between Polish accounting law and
IFRS in the Company’s budgeting and planning system.
15
Key areas of change in Stage II
Chart of Accounts: • introducing new categories of assets/liabilities and creating new
accounts, such as e.g. investment properties, significant spare parts and emergency equipment, components, significant renovations and reviews
• reclassification of selected categories of assets/liabilities including new accounting solutions, e.g. reclassification of accruals receivable to accounts receivable and fixed assets
• expanding and increasing the level of detail in accounts so as to adapt them to the balance sheet items, in scope of e.g. financial instruments
• complete restructuring of selected groups of accounts (mostly 7*) due to different grouping of economic operations between activities in the profit and loss account in IFRS as compared to Polish accounting standards.
• expanding independent areas of fixed assets valuation for tax purposes
16
Stage III – years 2011-2013
Implementation of IFRS in
selected domestic companies of
the Capital Group
Implementation of IFRS in companies of the
Group – in statutory reports
• In 2011-2013, IFRS was implemented in 14 significant domestic companies of the Capital Group
• Areas of greatest change were, as usual: tangible fixed assets, developing accounting policies customized for each company individually, adapting IT systems in companies for new needs. To a large extent, it was a roll-out of solutions applied for KGHM.
18
Implementation of IFRS in companies of the
Group, ctd. • Companies, to a larger extent than the mother
company, have used fair value measurement to
value tangible fixed assets as of the day of IFRS
adoption
• IFRS 1 has been significantly modified since
2004 – easier implementation
Results achieved:
• Companies are able to reflect substance of
economic events much better
19
Acquisition and consolidation of
Quadra FNX Capital Group, 2012
First consolidation of Quadra FNX
Capital Group
• Acquisition of Quadra FNX Capital Group
(Currently KGHM International Capital Group)
took place on 5 March 2012.
• First consolidation in statements for Q1 2012
• Before publication of statements for Q1,
preliminary accounting for acquisition price is
necessary, (IFRS3), time: 7-8 weeks,
• Quadra FNX Capital Group has implemented
IFRS as of 2011
21
First consolidation of Quadra FNX Capital
Group - challenges
• Different culture of work organization in Quadra:
fewer formalized procedures, scopes published
in the financial statements served as accounting
policy
• Time pressure – need for immediate integration
of accounting policies in order to ensure
continuity and correctness of reporting on the
level of KGHM Polska Miedź SA Capital Group
22
First consolidation of Quadra FNX Capital
Group – adaptation
Analysis and identification of areas regulated differently in
scope of valuation, qualification and presentation.
Examples of those identified include:
different approach to expenditures for mining activity –
different extraction methods (open pit vs. underground
mine)
different methods of copper concentrate production
(enrichment vs. leeching)
Different methods of depreciation
23
Consolidation of KGHM International Ltd. Capital
Group – adaptation, ctd.
different methods of recognition, classification and
presentation of items in a financial statement
different methods for revenues recognition
Application of IFRS in both organizations allowed
rapid development of joint accounting policy for
„new” KGHM Polska Miedź S.A. Capital Group
(during the quarter) and efficient resolution of
areas of divergence.
24
Current implementation of IFRS changes
in the Group
IFRS – greatest challenges today
• A very large number of small changes to
IAS/IFRS
• Long duration of IASB work on new
standards – weakened involvement in
current monitoring of changes
• Absence of current versions of amended
provisions in local language
26
IFRS – greatest challenges today, ctd.
• IASB publications do not include certain older, but still binding versions of standards, e.g. IAS 39
• Support of mother company for the companies in the Group in scope of monitoring changes to IFRS and assistance in implementation of such changes (lack of appropriately qualified personnel)
• Maintaining high level of the Group’s financial statements
27
IFRS - greatest risk to KGHM CG today
Risk of inconsistent IFRS platform between EU and
other countries applying IFRS.
Since 1 January 2013, KGHM Int. Capital Group must
apply IFRS 10,11,12 (so-called consolidation
package). KGHM Polska Miedź Group is only
obligated to do so since 1 January 2014.
In future, same risk may pertain to IFRS 9 – Financial
Instruments.
Risk resulting from lack of consistency in
interpretation of IFRS principles by audit companies,
mostly the Big Four.
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SUMMARY
INTERNATIONAL FINANCIAL REPORTING STANDARDS ALLOW
EFFICIENT MERGER OF BUSINESSES AND ENABLE ACCOUNTANTS
WORLDWIDE TO SPEAK THE SAME LANGUAGE OF ACCOUNTING
STANDARDS, RESULTING IN EFFECTIVE MUTUAL UNDERSTANDING.
WE ARE GLAD, THAT AS KGHM POLSKA MIEDŹ S.A. WE ARE A
MEMBER OF GLOBAL FAMILY OF COMPANIES APPLYING IFRS.
BEING A POLISH COMPANY, AS WE PURCHASE MINERAL DEPOSITS
AND BUSINESSES IN REMOTE PARTS OF THE WORLD WE DO NOT
HAVE TO WORRY, AS EXPERIENCE HAS SHOWN THAT WE HAVE A
LOT TO OFFER.
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Thank you for your attention.