Consolidated Financial Statements December 31, 2017 and 2016 and report of independent auditor

Transcription

1 Consolidated Financial Statements December 31, 2017 and 2016 and report of independent auditor

2 Contents Consolidated financial statements Consolidated balance sheet... 5 Consolidated statements of income and comprehensive income... 6 Consolidated statements of changes in shareholders equity... 7 Consolidated statements of cash flows... 8 Notes to the consolidated condensed financial statements 1 General information Summary of significant accounting policies Basis of preparation Basis of measurement Consolidation Foreign currency translation Cash and cash equivalents Financial assets Classification Recognition and measurement Offsetting financial instruments Impairment of financial assets Derivative instruments and hedging activities Accounts receivable Inventories Current and deferred income tax Property, plant and equipment Leasing Goodwill and intangibles Impairment of non-financial assets Share capital Accounts payable Loans and financing Provisions Employee benefits Revenue recognition Changes in comparative information Accounting standards and amendments Risk management Financial risk factors Fair value estimates Sensitivity analysis Critical accounting estimates and assumptions Cash and cash equivalents Accounts receivable Inventories Prepaid expenses and other current assets... 33

3 9 Property, plant and equipment Intangible assets Deferred income tax Investments accounted for using the equity method Available-for-sale financial assets Hedge of net investment in foreign entity Other non-current assets Accounts payable and accrued liabilities Dividend payable Loans and financing Post-employment benefit obligations Provisions and other long term liabilities Share capital Expenses by nature Other operating income net Wages and employee benefits expense Financing (income) expense - net Income tax expense Contingencies Commitments Related party transactions Discontinued operations Subsequent event... 56

4 Hgdtwct{!34-!3129! Kpfgrgpfgpv!Cwfkvqtu!Tgrqtv! Vq!vjg!Ujctgjqnfgtu!qh! Xqvqtcpvko!Egogpv!Pqtvj!Cogtkec!Kpe/! Yg!jcxg!cwfkvgf!vjg!ceeqorcp{kpi!eqpuqnkfcvgf!hkpcpekcn!uvcvgogpvu!qh!Xqvqtcpvko!Egogpv!Pqtvj! Cogtkec!Kpe/!cpf!kvu!uwdukfkctkgu-!yjkej!eqortkug!vjg!eqpuqnkfcvgf!uvcvgogpvu!qh!hkpcpekcn!rqukvkqp!cu!cv! Fgegodgt!42-!3128!cpf!3127!cpf!vjg!eqpuqnkfcvgf!uvcvgogpvu!qh!kpeqog!cpf!eqortgjgpukxg!kpeqog-! ejcpigu!kp!ujctgjqnfgtu!gswkv{!cpf!ecuj!hnqyu!hqt!vjg!{gctu!vjgp!gpfgf-!cpf!vjg!tgncvgf!pqvgu-!yjkej! eqortkug!c!uwooct{!qh!ukipkhkecpv!ceeqwpvkpi!rqnkekgu!cpf!qvjgt!gzrncpcvqt{!kphqtocvkqp/! Ocpcigogpvu!tgurqpukdknkv{!hqt!vjg!eqpuqnkfcvgf!hkpcpekcn!uvcvgogpvu! Ocpcigogpv!ku!tgurqpukdng!hqt!vjg!rtgrctcvkqp!cpf!hckt!rtgugpvcvkqp!qh!vjgug!eqpuqnkfcvgf!hkpcpekcn! uvcvgogpvu!kp!ceeqtfcpeg!ykvj!kpvgtpcvkqpcn!hkpcpekcn!tgrqtvkpi!uvcpfctfu-!cpf!hqt!uwej!kpvgtpcn!eqpvtqn! cu!ocpcigogpv!fgvgtokpgu!ku!pgeguuct{!vq!gpcdng!vjg!rtgrctcvkqp!qh!eqpuqnkfcvgf!hkpcpekcn!uvcvgogpvu! vjcv!ctg!htgg!htqo!ocvgtkcn!okuuvcvgogpv-!yjgvjgt!fwg!vq!htcwf!qt!gttqt/! Cwfkvqtu!tgurqpukdknkv{! Qwt!tgurqpukdknkv{!ku!vq!gzrtguu!cp!qrkpkqp!qp!vjgug!eqpuqnkfcvgf!hkpcpekcn!uvcvgogpvu!dcugf!qp!qwt!cwfkvu/! Yg!eqpfwevgf!qwt!cwfkvu!kp!ceeqtfcpeg!ykvj!Ecpcfkcp!igpgtcnn{!ceegrvgf!cwfkvkpi!uvcpfctfu/!Vjqug! uvcpfctfu!tgswktg!vjcv!yg!eqorn{!ykvj!gvjkecn!tgswktgogpvu!cpf!rncp!cpf!rgthqto!vjg!cwfkv!vq!qdvckp! tgcuqpcdng!cuuwtcpeg!cdqwv!yjgvjgt!vjg!eqpuqnkfcvgf hkpcpekcn!uvcvgogpvu!ctg!htgg!htqo!ocvgtkcn! okuuvcvgogpv/! Cp!cwfkv!kpxqnxgu!rgthqtokpi!rtqegfwtgu!vq!qdvckp!cwfkv!gxkfgpeg!cdqwv!vjg!coqwpvu!cpf!fkuenquwtgu!kp! vjg!eqpuqnkfcvgf!hkpcpekcn!uvcvgogpvu/!vjg!rtqegfwtgu!ugngevgf!fgrgpf!qp!vjg!cwfkvqtu!lwfiogpv-! kpenwfkpi!vjg!cuuguuogpv!qh!vjg!tkumu!qh!ocvgtkcn!okuuvcvgogpv!qh!vjg!eqpuqnkfcvgf!hkpcpekcn!uvcvgogpvu-! yjgvjgt!fwg!vq!htcwf!qt!gttqt/!kp!ocmkpi!vjqug!tkum!cuuguuogpvu-!vjg!cwfkvqt!eqpukfgtu!kpvgtpcn!eqpvtqn! tgngxcpv!vq!vjg!gpvkv{u!rtgrctcvkqp!cpf!hckt!rtgugpvcvkqp!qh!vjg!eqpuqnkfcvgf!hkpcpekcn!uvcvgogpvu!kp!qtfgt! vq!fgukip!cwfkv!rtqegfwtgu!vjcv!ctg!crrtqrtkcvg!kp!vjg!ektewouvcpegu-!dwv!pqv!hqt!vjg!rwtrqug!qh!gzrtguukpi! cp!qrkpkqp!qp!vjg!ghhgevkxgpguu!qh!vjg!gpvkv{u!kpvgtpcn!eqpvtqn/!cp!cwfkv!cnuq!kpenwfgu!gxcnwcvkpi!vjg! crrtqrtkcvgpguu!qh!ceeqwpvkpi!rqnkekgu!wugf!cpf!vjg!tgcuqpcdngpguu!qh!ceeqwpvkpi!guvkocvgu!ocfg!d{! ocpcigogpv-!cu!ygnn!cu!gxcnwcvkpi!vjg!qxgtcnn!rtgugpvcvkqp!qh!vjg!eqpuqnkfcvgf!hkpcpekcn!uvcvgogpvu/! Yg!dgnkgxg!vjcv!vjg!cwfkv!gxkfgpeg!yg!jcxg!qdvckpgf!kp!qwt!cwfkvu!ku!uwhhkekgpv!cpf!crrtqrtkcvg!vq!rtqxkfg!c! dcuku!hqt!qwt!cwfkv!qrkpkqp/! RtkegycvgtjqwugEqqrgtu!NNR!! RyE!Vqygt-!29![qtm!Uvtggv-!Uwkvg!3711-!Vqtqpvq-!Qpvctkq-!Ecpcfc!O6L!1D3! V<!,2!527!974!2244-!H<!,2!527!476!9326!! PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

5 Qrkpkqp! Kp!qwt!qrkpkqp-!vjg!eqpuqnkfcvgf!hkpcpekcn!uvcvgogpvu!rtgugpv!hcktn{-!kp!cnn!ocvgtkcn!tgurgevu-!vjg!hkpcpekcn! rqukvkqp!qh!xqvqtcpvko!egogpv!pqtvj!cogtkec!kpe/!cpf!kvu!uwdukfkctkgu!cu!cv!fgegodgt!42-!3128!cpf!3127! cpf!vjgkt!hkpcpekcn!rgthqtocpeg!cpf!vjgkt!ecuj!hnqyu!hqt!vjg!{gctu!vjgp!gpfgf!kp!ceeqtfcpeg!ykvj! Kpvgtpcvkqpcn!Hkpcpekcn!Tgrqtvkpi!Uvcpfctfu/! Ejctvgtgf!Rtqhguukqpcn!Ceeqwpvcpvu-!Nkegpugf!Rwdnke!Ceeqwpvcpvu

6

7 Consolidated Statements of Income and Comprehensive Income Note Revenues $ 918,553 $ 879,641 Cost of sales 22 (660,442) (635,081) Gross profit 258, ,560 Operating expenses Selling 22 (16,839) (16,157) General and administrative 22 (58,165) (60,511) Investment income from equity share in joint ventures 12 10,232 5,479 Other operating income 23 7,287 2,119 (57,485) (69,069) Operating income before financing expenses 200, ,490 Financing expense - net 25 (36,509) (20,875) Income before income tax expense 164, ,615 Provision for income tax expense Current 26 (33,458) (31,857) Deferred 26 (33,576) (12,669) (67,034) (44,526) Income from discontinued operations ,588 2,443 Net income for the period 217, ,532 Other comprehensive loss: Items that will not be reclassified to profit or loss Remeasurements of post employment pension benefit obligations (net of tax of $1.7M, 2016:-$2.3M) 1,913 (6,001) Items that may be subsequently reclassified to profit or loss Accumulated foreign currency translation adjustment (75,357) (28,025) Unrealized gain (loss) on net investment hedge, net of tax 26,630 (12,688) (48,727) (40,713) Other comprehensive loss for the period (46,814) (46,714) Total comprehensive income for the period $ 170,857 $ 65,818 The accompanying notes are an integral part of these consolidated annual financial statements. 6 of 56

8 Consolidated Statements of Changes in Shareholders Equity Retained earnings Accumulated other comprehensive income Share capital Total equity Balance - December 31, 2015 $ 1,220,532 $ 66,771 $ 292,721 $ 1,580,024 Net income for the period - 112, ,532 Other comprehensive income (net of tax) - - (46,714) (46,714) Comprehensive income for the period - 112,532 (46,714) 65,818 Return of capital (598,975) - - (598,975) Foreign currency translation 52, ,202 Transfer of remeasurements of post employment pension benefit obligations - (6,001) 6,001 - Balance - December 31, , , ,008 1,100,069 Net income for the period - 217, ,671 Other comprehensive loss (net of tax) - - (46,814) (46,814) Comprehensive income for the period - 217,671 (46,814) 170,857 Return of capital (361,500) - - (361,500) Foreign currency translation 41,935 18,101-60,036 Dividends - (231,500) - (231,500) Transfer of remeasurements of post employment pension benefit obligations - 1,913 (1,913) - Balance -December 31, 2017 $ 354,345 $ 180,336 $ 203,281 $ 737,962 The accompanying notes are an integral part of these consolidated annual financial statements. 7 of 56

9 Consolidated Statements of Cash Flows Cash flow from operating activities Note 2017 o 2016 Profit before income tax and social contribution $ 164,117 $ 154,614 Gain on sale of discontinued operations 186,710 - Adjustments of items that do not represent changes in cash and cash equivalents Depreciation, amortization and depletion 9 & 10 68,746 62,320 Equity in the results of associates and joint ventures 12 (10,232) (5,480) Gain on sale of property, plant and equipment and intangible assets 25 (4,028) (5,081) Gain on sale of investments, net 25 (173,985) - Allowance for doubtful accounts, net of reversals 6 15 (224) Financial results, net 25 36,509 20, , ,024 Decrease (increase) in current assets Trade & other receivables 47,495 81,103 Inventories 7,606 (18,335) Related parties (1,384) 3,380 Other current assets Increase (decrease) in current liabilities Trade payables (10,897) 2,634 Salaries and social charges 3, Related parties 2,736 1,825 Taxes payable 2,568 (329) 52,430 72,113 Increase (decrease) in long term assets & liabilities Post-employment benefit obligations 1,295 (21) Other (6,561) (1,722) (5,266) (1,743) Cash provided by operational activities 315, ,395 Interest paid 18 (c) (23,804) (423) Income tax and social contribution paid (32,047) (35,573) Net cash provided by operating activities 259, ,399 Cash flow from investment activities Proceeds from disposals of property, plant and equipment and intangible assets 16,248 11,841 Proceeds from disposals of investments Dividends received 11,642 7,189 Proceeds from disposal of Florida operations 413,198 - Acquisition of property, plant and equipment (126,915) (120,489) Acquisition of intangible assets (6,702) (12,277) Acquisition of investments - (2,000) Net cash used in investing activities 307,740 (115,736) Cash flow from financing activities New loans and financing 18 3, ,133 Payments of loans and financing 18 (3,788) (32,675) Capital decrease 21 (140,000) (598,975) Related parties 958 (1,433) Financial costs, except interest (1,897) (1,865) Net cash provided by (used in) financing activities (141,139) (141,815) Increase (decrease) in cash and cash equivalents 425,767 3,848 Increase (decrease) in cash and cash equivalents - discontinued operations - 19,392 Effect of foreign exchange on cash 2, Cash and cash equivalents at the beginning of the period 160, ,324 Beginning cash - discontinued operations (25,834) Cash and cash equivalents at the end of the period $ 562,499 $ 160,317 The accompanying notes are an integral part of these consolidated annual financial statements. 8 of 56

10 1 General information ( VCNA or the company ) was incorporated on June 28, 2006 and is a wholly owned subsidiary of Votorantim Cimentos S.A. ( VCSA or Parent ). VCSA's interest in VCNA is held both directly and indirectly through its subsidiary Votorantim Cimentos EAA Inversiones S.L. (merged with Votorantim Cimentos International (Spain) SE in 2015). The primary activity of VCNA and its subsidiaries (together the group ) is the manufacturing and distribution of cement and construction related materials. The company has facilities in Canada and the United States. The address of the registered office is 55 Industrial St, Toronto, ON, Canada. These consolidated financial statements as at and for the year ended December 31, 2017 were approved by the Board of Directors of the Company on February 23, Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The consolidated financial statements of VCNA have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretation Committee (IFRIC) interpretations as issued by the International Accounting Standards Board (IASB) and detailed in Part I of the Handbook of the Chartered Professional Accountants Canada. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the group s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note Basis of measurement The consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through comprehensive income. 2.3 Consolidation (a) Principal subsidiaries Subsidiaries are all entities (including structured entities) over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases. The group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The group recognises any non-controlling interest 9 of 56

11 in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non- controlling interest s proportionate share of the recognized amounts of acquiree s identifiable net assets. Acquisition-related costs are expensed as incurred. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognized in profit or loss. Any contingent consideration to be transferred by the group is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognized in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognized and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the income statement. Intercompany transactions and balances, as well as unrealized gains and losses on transactions between group companies, are eliminated on consolidation. The accounting policies of the subsidiaries were adjusted, when necessary, to ensure consistency with the accounting policies adopted by the Company. The group had the following subsidiaries at 31 December 2017: Percentage of common shares owned Subsidiaries: Nature of business 31-Dec-17 ol 31-Dec-16 Country St. Marys Cement Inc. (Canada) Cement, ready mix, aggregates producer Canada Rosedale Securities, Ltd. Holding company Canada Holding company Canada VCNA Nova Scotia ULC Holding company Canada Ontario Limited Holding company Canada Ontario Inc. Holding company Canada Ontario Inc. Holding company Canada St. Marys Cement Inc. (US) Cement producer USA VCNA Prairie LLC Ready mix, aggregates producer USA VCNA Prairie Aggregate Holdings Illinois, Inc. Holding company USA VCNA Prestige Concrete Products, Inc. (note 30) Ready mix, block producer USA VCNA Prestige Gunite, Inc. (note 30) Gunite producer USA Sacramento Prestige Gunite, Inc. (note 30) Gunite producer USA VCNA US, Inc. Holding company USA Votorantim Cimentos North America, Inc. Head office USA 313 Ready Mix, LLC Ready mix, aggregates producer USA 10 of 56

12 (b) Joint arrangements Joint arrangements are classified as either joint ventures or joint operations depending on the contractual rights and obligations of each investor. The group has assessed the nature of its joint arrangements and determined the following to be: Percentage of total capital Joint ventures 31-Dec Dec-16 Sumter Cement Co. LLC (*) Trinity Materials, LLC Suwannee American Cement LLC (*) Superior Materials Holdings, LLC Midway Group, LLC Hutton Transport Limited (*) Join ventures sold on November, (note 30) Joint ventures are accounted for using the equity method (note 12). Under the equity method of accounting, interests in joint ventures are initially recognized at cost and adjusted thereafter to recognise the group s share of the post-acquisition profits or losses and movements in other comprehensive income. When the group s share of losses in a joint venture equals or exceeds its interests in the joint ventures (which includes any long-term interests that, in substance, form part of the group s net investment in the joint ventures), the group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the joint ventures. Unrealized gains on transactions between the group and its joint ventures are eliminated to the extent of the group s interest in the joint ventures. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the group. Percentage of total capital Joint operations 31-Dec Dec-16 Great Lakes Slag Inc Bot-Duff Resources Inc Joint operations arise when a joint operator has rights to assets and obligations for the liabilities relating to the arrangement and therefore accounts for its interest in assets/liabilities, revenue and expenses. Intercompany transactions and balances, as well as unrealized gains and losses, are eliminated on consolidation. The accounting policies of the joint operations were adjusted, when necessary, to ensure consistency with the accounting policies adopted by the Company. 2.4 Foreign currency translation (a) Functional and presentation currency of the financial statements Management, after analysis of operations and businesses, concluded that the functional currency of the entities within the Company is either Canadian ($CDN) or US ($US) dollars and is determined as the currency of the primary economic environment in which each entity operates, based on the analysis of the following indicators: 11 of 56

13 - the currency that has significant influence over prices of products and services; - the currency of the country where competition and regulations have a significant influence in the determination of prices of products and services; - the currency that has a significant influence over labour, material and other costs of products or services; - the currency which supports most of the financial activities; and - the currency which supports most of the operating activities. The functional currency of VCNA is the Canadian dollar. All amounts in these financial statements are presented in thousands of US dollars unless otherwise stated. (b) Transactions and balances Transactions in currencies other than the functional currency are translated to the functional currency at the exchange rates at the transaction dates. The foreign exchange gains and losses resulting from the settlement of these transactions and from the conversion of monetary assets and liabilities denominated in foreign currency at the exchange rates in effect at the balance sheet dates are recognized in net income, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges. Foreign exchange gains and losses relating to loans and cash and cash equivalents denominated in foreign currency are presented in the statement of comprehensive income as "Financing income" or "Financing expenses". (c) Translation from functional to presentation currency The results and financial position of all entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and (iii) all resulting exchange differences are recognized as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign operations are taken to equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognized in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing exchange rate. 12 of 56

14 2.5 Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held with banks and other highly liquid investments with a maturity of less than three months at the date of original purchase and which are readily convertible into a known amount of cash and subject to immaterial risk of change in value. 2.6 Financial assets Classification The Company and its subsidiaries classify their financial assets in the following categories: at fair value through profit and loss ("held for trading"), loans and receivables, and available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (a) Held for trading These are financial assets held for active and frequent trading. These assets are measured at their fair value, and any changes are recognized in the income statement under "Financing income (expenses)". Transactions involving derivative financial instruments are also classified in this group and any changes in their fair value are recognized in the same income statement line item impacted by the transaction underlying the hedged instrument. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable instalments that are not quoted in an active market. Loans and receivables are adjusted based on the effective rate of the transaction. The effective rate is that defined in the contract as adjusted by the related costs of each transaction. The Company s loans and receivables comprise mainly "Accounts receivables" and "Cash and cash equivalents" (c) Available for sale financial assets These are financial assets which cannot be classified into any of the above described categories and are not held to maturity. These assets are initially recognized and subsequently carried at fair value. They are included in non-current assets unless management intends to dispose of them within 12 months of the balance sheet date. (d) Fair value Fair values of publicly traded investments are recorded at current trade prices. For financial assets without an active market, the Company determines fair value through valuation methodologies, which include reference to recent transactions with third parties, to other similar instruments, the analysis of discounted cash flows and option pricing models. The Company periodically evaluates whether there are indications that a financial asset or a group of financial assets is impaired in relation to its recoverable value. When applicable, a provision for impairment of this asset is recognized. 13 of 56

15 2.6.2 Recognition and measurement Regular purchases and sales of financial assets are recognized on the trade date - the date on which the Company commits to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs for all financial assets not measured at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred but only if the Company has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are initially recognized at fair value and subsequently carried at amortized cost using the effective interest method. Changes in the fair value of monetary securities denominated in a foreign currency and classified as available for sale are analyzed between translation differences resulting from changes in amortized cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognized in profit or loss; translation differences on non-monetary securities are recognized in net equity. Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognized in equity. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognized in equity are included in the income statement as Financing (income) expense net. Interest on available-for-sale securities calculated using the effective interest method is recognized in the income statement. Dividends on available-for-sale equity instruments, such as shares, are recognized in the income statement as part of other income when the Company s right to receive payments is established Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the company or the counterparty Impairment of financial assets (a) Assets carried at amortized cost The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a "loss event") and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Company uses to determine whether there is objective evidence of an impairment loss include: - Significant financial difficulty of the issuer or obligor; - A breach of contract, such as a default or delinquency in interest or principal payments; - The Company, for economic or legal reasons relating to the borrower's financial difficulty, granting to the 14 of 56

16 borrower a concession that the lender would not otherwise consider; - The probability that the borrower will enter bankruptcy or other financial reorganization; - The disappearance of an active market for that financial asset because of financial distress; or - Observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including: - adverse changes in the payment status of borrowers in the portfolio; or - national or local economic conditions that correlate with defaults on the assets in the portfolio. The Company first assesses whether objective evidence of impairment exists. The amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in the consolidated income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Company may measure impairment on the basis of an instrument's fair value using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor's credit rating), the reversal of the previously recognized impairment loss is recognized in the consolidated income statement. (b) Assets classified as available for sale For debt securities, if any such evidence exists the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the consolidated income statement. For equity investments, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets are impaired. If any such evidence exists the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in profit or loss. Impairment losses recognised in the consolidated income statement on equity instruments are not reversed through the consolidated income statement. 2.7 Derivative instruments and hedging activities Derivatives are initially recognized at fair value on the date the derivative contract is entered into and are subsequently re measured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged, designating certain derivatives as either: 15 of 56

17 (i) hedge of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction (cash flow hedge); or (ii) hedge of a net investment in a foreign operation (net investment hedge). The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of various derivative instruments used for hedging purposes are disclosed in Note 14. (a) Cash flow hedge With the objective of minimizing the exposure to interest rate fluctuations on long term debt, the Company has entered into a series of interest rate swaps and a basis swap. The Company adopts hedge accounting for the derivative instruments contracted for that purpose. The effective portion of the changes in fair value of qualified derivatives designated as cash flow hedges is recognized in shareholders' equity, recorded in "Other comprehensive income". Gains and losses related to the non-effective portions are immediately recognized in the income statement, in the same line item in which the values resulting from the hedged item are recognized. The amounts recognized in shareholders' equity are taken to the income statement upon the date of repayment of hedged loans. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement within "Financing (income) expense net". (b) Net investment hedge In order to mitigate the effects of the volatility of exchange rates in its income statement, the Company designates certain loan and financing agreements in foreign currency as hedges of certain investments in foreign subsidiaries. The effectiveness of these hedge transactions is periodically tested. The portion of foreign exchange gains/losses on such loan and financing agreements is recorded in "Other comprehensive income", in shareholders' equity. This form of hedge accounting is used for foreign investments held in the United States of America. Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in Other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the income statement within "Other financing income, net". Gains and losses accumulated in equity are transferred to the income statement when the foreign operation is partially disposed of or sold. 2.8 Accounts receivable Accounts receivable correspond to the amounts receivable from sales made or services provided in the course of the Company's normal business. If the term of receipt is equivalent to one year or less, the accounts 16 of 56

18 receivable are classified as current assets. If not, they are presented as non-current assets. These accounts receivable are initially recognized at fair value and subsequently measured at amortized cost using the effective rate interest method, less a provision for impairment. Usually, in practice, they are recognized at the amount invoiced, adjusted by the provision for impairment, when necessary. The provision for impairment is established when there is objective evidence that the Company will not be able to collect all the amounts due in accordance with the original terms of the accounts receivable. The calculation of the provision is based on a reasonable estimate to cover expected/probable losses on the realization of receivables, considering the situation of each customer and the respective guarantees, consistent with the impairment policy for financial assets recorded at amortized cost. 2.9 Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined using the Weighted Average Cost method. The cost of finished goods and work in process comprises raw materials, direct labor and other direct costs and related production overheads. The net realizable value is the estimated sales price in the normal course of business, net of the completion costs and selling expenses Current and deferred income tax The tax expense for the period comprises current and deferred tax. Tax is recognized in the income statement, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognized on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill; deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. 17 of 56

19 Deferred income tax assets and liabilities are presented as non-current Property, plant and equipment Property, plant and equipment are stated at cost of purchase or construction, less depreciation. Historical cost also includes costs of financing related to the acquisition or construction of qualifying assets. Subsequent costs are included in the asset s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. Repairs and maintenance costs are charged to the statement of income as incurred. The cost of major renovations is included in the book value of the asset when future economic benefits exceed the original estimated benchmark performance of the asset. Renovations are depreciated over the remaining useful life of the related asset. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: - Buildings years - Equipment 7-25 years - Vehicles 5-10 years The residual values and useful lives of assets are reviewed and adjusted, if appropriate, at the end of each year. Gains and losses on disposals are determined by comparing the proceeds with the book value and are recognized as "Other operating income (expense), net" in the income statement. The Company has certain long-term assets that give rise to asset retirement obligations ( ARO ) as described in note Leasing Leases in which a significant part of the ownership risks and benefits is retained by the lessor are classified as operating leases. Payments for operating leases (net of any incentives received from the lessor) are expensed on the straight-line method over the lease term Goodwill and intangibles (a) Goodwill and business combinations Goodwill is tested on an annual basis to verify probable losses from impairment and recorded at cost less accumulated losses from impairment, which are not reversed. The gains and losses on the disposal of an entity include the book value of the goodwill related to the entity sold. Goodwill is allocated to Cash-Generating Units (CGU) for the purpose of impairment testing. The goodwill is allocated to the Cash-Generating Units or to a group of CGU which benefited from the business combination originating the goodwill. 18 of 56

20 The purchase method of accounting is used to account for transactions classified as business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, liabilities incurred and equity instruments issued. The consideration transferred includes the fair value of an asset or a liability resulting from a contingent consideration agreement, when applicable. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities assumed in a business combination are initially measured at their fair values at the acquisition date. The excess of the consideration transferred and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the group s share of the identifiable net assets acquired is recorded as goodwill. Goodwill is presented in the subgroup Intangible Assets, is not subject to amortization and is tested for impairment on an annual basis. (b) Exploration rights Exploration costs, including any material costs incurred prior to securing the legal right to explore properties, are expensed in the period in which they are incurred. Exploration rights purchased through acquisition or expenses incurred following the issuance of a legal right to explore properties that are intangible in nature are capitalized as an intangible asset. Exploration rights capitalized are amortized over the expected life of the extractable reserves. These rights are assessed for impairment following the guidance of IFRS 6 and IAS 36. (c) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives of three to five years. (d) Contractual customer relationships and non-competition agreements Contractual customer relationships and non-competition agreements acquired as a result of a business combination are recognized at fair value at the acquisition date. The contractual customer relations and noncompetition agreements have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over the estimated useful lives as follows: - Customer relationships 15 years - Non-competition agreements 5 years 2.14 Impairment of non-financial assets The non-financial assets with indefinite useful lives, like goodwill, are not subject to amortization and are tested for impairment annually. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units (CGU)). Non-financial assets, other than goodwill, that suffered impairment are annually reviewed for possible reversal of the impairment. 19 of 56

21 2.15 Share capital Ordinary shares are classified as equity. Mandatorily redeemable preference shares are classified as other non-current liabilities. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any group company purchases the company s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the company s equity holders until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the company s equity holders Accounts payable Accounts payable are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Accounts payable are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. In practice, they are usually recognized at the amount of the related invoice Loans and financing Loans and financing are initially recognized at fair value, net of transaction costs incurred, and are subsequently carried at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the loans and financing using the effective interest method. Loans are classified as non-current liabilities to the extent that they are not due within one year or less. Payments due within one year or less are classified as current portion of long term debt within current liabilities. Fees paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalized as a prepayment for liquidity services and amortized over the period of the facility to which it relates. General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognized in profit or loss in the period in which they are incurred Provisions Provisions for environmental restoration, restructuring costs and legal claims are recognized when: (i) the Company has a present legal or constructive obligation as a result of past events; (ii) it is probable that an outflow of resources will be required to settle the obligation; and (iii) the amount has been reliably estimated. 20 of 56

22 Provisions are not recognized for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as an interest expense Employee benefits (a) Pension obligations Group companies operate various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds, determined by periodic actuarial calculations. The group has both defined benefit and defined contribution plans. A defined contribution plan is a pension plan under which the group pays fixed contributions into a separate entity. The group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. A defined benefit plan is a pension plan that is not a defined contribution plan. Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. Past-service costs are recognized immediately in income. For defined contribution plans, the group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The group has no further payment obligations once the contributions have been paid. The contributions are recognized as an employee benefit expense when they are due. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available. (b) Other post-employment obligations Some group companies provide post-retirement healthcare benefits to their retirees. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment using the same accounting methodology as used for defined benefit pension plans. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. These obligations are valued annually by independent qualified actuaries. 21 of 56