Description of the error identified in the consolidated and separate financial statements of Grupa Azoty Zakłady Chemiczne Police S.A.

Transcription

1 Description of the error identified in the consolidated and separate financial statements of Grupa Azoty Zakłady Chemiczne Police S.A. for 2015 On March 11th 2016, on the Warsaw Stock Exchange, the Company issued its separate and consolidated financial statements for In the course of later analysis of the Company s key projects, it was found that the financial statements omitted a number of material pieces of information and thus they fail to correctly reflect the events which occurred at the Group in Given the strategic importance of the information, at its meeting held on May 30th 2016, the of Grupa Azoty Zakłady Chemiczne Police S.A. passed a resolution concerning a material error in the Company s issued separate and financial statements for It should be stressed that the presented changed data is based on the documents and decisions which were available to the Company as at December 31st The set of erroneously presented figures refers to African Investment Group S.A., a subsidiary with its registered office in Senegal ( AFRIG ), which in 2015 acted only as an intermediary handling supplies of phosphate rock to Grupa Azoty Zakłady Chemiczne Police S.A. It is the s opinion that both the financial statements and the Directors Report on the Company s and Group s operations in 2015 should present the situation of the Senegalese subsidiary in a reliable and matter-of-fact manner, to ensure equal access to information for shareholders, investors and the rest of the business environment. The Company s would like to emphasise that in 2015 African Investment Group S.A. not produce phosphate rock from its own fields, but only acted as an intermediary in purchases of the raw material from third parties in Africa. The reason for this is that the Lam Lam field had already been depleted in 2014, and the quantity of the produced raw material was significantly below earlier estimates. The Lam Lam field is one of the two assets purchased as part of the acquisition of the controlling interest in AFRIG in The acquisition was initially accounted for in the financial statements for The value of the field was estimated at PLN 126m and its resources at 1.5m tonnes. The other asset is the Kebemer field. As at the acquisition date, its value was initially estimated at PLN 168m and the resources at 56m tonnes. As at the end of the next reporting period (the end of 2014 final accounting for the acquisition), the separate values of those two assets changed dramatically, with a greater amount allocated to the Kebemer field, and a simultaneous reduction of the amount of the Lam Lam field. The aggregate total amount of the both fields remained similar to the amount disclosed as at the end of the preceding reporting period. The subsidiary AFRIG is currently conducting exploratory activities in the Kebemer field; however, given that as at December 31st 2015 AFRIG had not obtained a production licence, nor had it any appropriate production infrastructure in place, the assumption that the production will start in 2016 and all the more so that the Company would receive significant volumes of phosphate rock from the field in 2016 has been, in the Company s opinion, groundless. Page 1 of 5

2 Presentation of the material error identified in the separate financial statements of Grupa Azoty Zakłady Chemiczne Police S.A. for 2015 In its issued separate financial statements for 2015, the Company presented a net profit of PLN 168,094 thousand and total assets of PLN 2,012,843 thousand. The material error having been identified, these two important parameters are now disclosed at the following amounts: the net profit for 2015 is PLN 58,900 thousand, i.e. PLN 109,888 thousand less than originally disclosed, while total assets amount to PLN 1,902,955 thousand. Below is presented the effect of the corrections on the separate financial statements for the period ended December 31st Note 10 Property, plant and equipment Capital expenditure on assets under construction of PLN 3,150 thousand was charged to expenses of The amount was expensed in 2013 and 2014 on the task Supervision of the preparation of the Kebemer mine project. In 2013 and 2014, the progress of the project was not sufficient enough for the expenses to be recognised as capital expenditure. Capitalisation of the amount expensed should have raised doubts of the and of the auditors, as no grounds for such presentation of the expenses existed. As at December 31st 2015, the status of geological survey was subject to so high an error that the construction of the Kebemer mine must not have been presented as certain, as it misleads the stakeholders. Any decisions concerning construction of the mine and subsequent supervision of the construction process, if any, is the next stage of the project. Given the progress of work and the current status of the project, it has been resolved to charge the expenditure to other expenses. Note 13 Financial assets Investments in subordinated entities The 2015 expenses were increased by recognising a PLN 86,606 thousand impairment loss on the equity interest in African Investment Group S.A. following a decrease in the subsidiary s assets. A detailed description of the impairment test carried out as at December 31st 2015, upon recognition of the events and facts known to the Company as at the reporting date, was disclosed in Note 10 Property, plant and equipment to the consolidated financial statements. Note 16 Trade and other receivables The 2015 expenses were increased by recognising a PLN 44,640 thousand impairment losses on trade receivables for fertilizers sold in to African Investment Group S.A. On December 22nd 2015, the Company s signed an agreement on repayment of the receivables by December 31st 2016 at the latest. Knowledge about the subsidiary s economic and financial standing, available to the Company as at the reporting date, as well as the fact that the subsidiary s activities in the entire 2015 consisted in the intermediation in sales of phosphate rock supported the conclusion that execution of the agreement just a few days before the end of the reporting period was but a disguise. The receivables were not and will not be recoverable by December 31st 2016, and the purpose of the agreement was to mislead the readers of the financial statements. In 2015, African Investment Group S.A. reported a loss, and the receivables account for almost 50% of the Company s revenue. Considering the above, the concludes that the presentation of the receivables is incorrect as all data necessary for correct recognition was already available as at the reporting date. Page 2 of 5

3 Presentation of the material error identified in the consolidated financial statements of Grupa Azoty Zakłady Chemiczne Police S.A. for 2015 In its issued consolidated financial statements for 2015, the Company presented a net profit of PLN 164,789 thousand and total assets of PLN 2,183,704 thousand. The material error having been identified, these two important parameters are now disclosed at the following amounts: net loss for 2015 is PLN 71,651 thousand, i.e. it grew by PLN 236,440, while total assets amount to PLN 1,889,777 thousand. Below is presented the effect of the corrections on the consolidated financial statements for the period ended December 31st Note 10 Property, plant and equipment Write-off of expenditure on tangible assets under construction See Note 10 Property, plant and equipment to the separate financial statements Notes on impairment test on mineral deposits In accordance with IAS 36, at the end of each reporting period an entity is required to assess whether there is any indication that an asset may be impaired. [ ] When assessing whether there exists any indication that an assets may be impaired, an entity is required to analyse at least the following indicators: External indicators of impairment [ ] Internal indicators of impairment [ ] As at December 31st 2015, AFRIG s mineral deposits were tested for impairment. The value of the mineral deposits was assessed at PLN 283m based on the revenue model. The entire value was generated by the non-producing Kebemer field. The adopted key value drivers were unrealistic as were the deadlines assumed for the valuation purposes. The issued Directors Reports and financial statements contain neither a description of the adopted assumptions nor the results of impairment tests. As at December 31st 2015, the Company had no grounds to uphold the assumptions for launching production of phosphate rock and its estimated amount and to conclude that the test results were correct. In October 2015, the subsidiary filed an application for a production licence, with an attached Feasibility Study in which the Company presented the amount of expenditure and project delivery dates, and defined the time required to reach the maximum assumed production capacity. Because the did not take into account the internally-sourced information in the presentation of data as at the year s end, the, having read all the documents available as at the reporting date, concluded that the impairment test results should be regarded as a material error. Bringing the assumptions in line with data available in the Companies documents, the key assumptions were updated, namely: the deposit size (which has the least effect on valuation), possible annual production levels, date of production launch, rescheduling of capital expenditure and its amounts. Accordingly, the fair value of the deposit was reduced to PLN 17,479 thousand. The weighted average cost of capital used in the valuation was 16.5% (in the short-term horizon) and 22.2% (in the long-term horizon), determined on a real basis. The market risk premium was assumed at 5.5%, and the Senegalese corporate income tax rate at 30%. Considering the test results, and having brought the assumptions in line with the knowledge available as at December 31st 2015, an impairment loss of PLN 255,780 thousand was recognised on mineral deposits. Page 3 of 5

4 Note 12 Intangible assets Notes on exploration and evaluation of mineral resources In August 2015, an independent external firm presented the results of its CAPEX and OPEX analysis for alternative exploration projects undertaken by the Company. In October 2015, the of African Investment Group S.A. was informed that the market value of recoverable resources did not cover the operating expenses under the projects. Furthermore, as the Lam Lam facility was no longer operating in 2015, there was no justification for keeping the related intangible assets on the balance sheet. Based on facts known to the Company as at December 31st 2015, the determined that such presentation of the assets was an error and recognised an impairment loss on exploration and evaluation expenditures, with the related loss totalling PLN 14,915 thousand charged to other expenses. Note 15 Inventories Notes on work in progress (phosphate rock) The value of semi-finished products and work in progress presented by the subsidiary as at December 31st 2015 was PLN 10,557 thousand. Based on the state of knowledge as at the reporting date, the inprogress inventories were not suitable for use and required further processing. To bring them into usable condition, full-scale extraction operations had to be launched. Taking into account the current project status and the need to adopt a prudent approach to asset measurement, the Management Board determined that such presentation was an error and resolved to write down inventories in AFRIG for their full amount of PLN 10,557 thousand. It should be noted that as at the reporting date there was no justification for presenting the item at its full value. Notes on fertilizer inventories Due to slow sales on the Senegalese market and high levels of unsold inventories in AFRIG and, further, considering a downtrend in fertilizer prices prevailing in 2015, inventories were written down 50%, or PLN 1,609 thousand. The problems with selling the stocks of finished goods were known to the Group, if only for unsuccessful sale attempts by the GA ZCh Police S.A. sales force. Note 16 Trade and other receivables Notes on past due receivables As at the date of the consolidated financial statements, the joint-stock company African Investment Group carried receivables past due more than six months. The relevant accounting policy applied by GA ZCh Police S.A. requires that an impairment loss be recognised on such receivables. Therefore the Company analysed the provisions of the 2014 sales contract the performance of which led to the high level of past due receivables. An external law firm prepared an opinion which clearly states that the contract documents are legally unsound, both in terms of form and content. The standard contractual clauses are missing, ineffective or contradictory, and fail to provide legal protection against nonpayment of amounts owed to AFRIG. Given that the transaction documents have existed at the Group since 2014, the understands that both the management and the auditor had access to them at that time and were able to perform a reliable assessment of the transaction. In light of the foregoing, the found that the presentation of receivables in their full amount in the issued financial statements was an error and recognised a PLN 18,081 thousand impairment loss on past due trade receivables in AFRIG. Page 4 of 5

5 Signatures of Members of the Wojciech Wardacki, Ph.D. President of the Tomasz Panas Anna Zarzycka-Rzepecka Rafał Kuźmiczonek Person in charge of maintaining accounting records Józefa Żurawska Chief Accountant Police, May 30th 2016 Page 5 of 5