BlueScope Steel Ltd. Interim financial report - 31 December Contents ABN

Transcription

1 ABN Interim financial report - Contents Page Directors' report 2 Half-year financial report Consolidated income statement 7 Consolidated balance sheet 8 Consolidated statement of recognised income and expense 9 Consolidated cash flow statement Directors' declaration 40 Independent review report to the members 41

2 Directors' report Your directors present their report on the consolidated entity consisting of BlueScope Steel Ltd and the entities it controlled at the end of, or during, the half-year ended. Directors The following persons were directors of BlueScope Steel Ltd during the half-year and up to the date of this report: G J Kraehe, AO R J McNeilly K C Adams D J Grady H K McCann, AM P J Rizzo Y P Tan Review of operations A summary of consolidated revenues and results by reporting segments is set out below: Segment revenues Segment EBIT $m $m $m $m Hot Rolled Products 1, , New Zealand and Pacific Steel Products Coated and Building Products Australia 1, ,509.2 (30.4) (83.5) Coated and Building Products Asia (4.4) 44.5 Coated and Building Products North America Corporate and Group (42.3) (16.7) Intersegment eliminations (1,089.2) (1,218.9) (20.1) (41.1) Operating revenue/ebit 3, , Unalllocated revenue less unallocated expenses (33.2) (20.9) Profit before income tax Income tax expense (104.1) (173.7) Profit for the half-year (Profit)/loss attributable to minority interest Profit attributable to members of BlueScope Steel Ltd Earnings per share (cents per share): Basic earnings per share Diluted earnings per share The Company's revenue at $3,891.7 million was in line with the previous comparative period. Revenue was maintained through domestic price increases and higher sales volumes, not withstanding significant reductions in international steel prices and a strengthening of the Australian dollar. Net profit after tax decreased by $190.3 million (38%) to $312.0 million. This reduction was due primarily to a $120 million increase in raw material costs mainly for iron ore and coal, together with steel feed to the mid and downstream businesses in Asia and North America. In addition, a fire at the Western Port site (Coated and Building Products Australia) cost the company $28 million in additional costs and lost margins, earnings from North Star BlueScope Steel were down $25 million due to hot rolled coil prices declining more than the price of scrap feed, and there were $20 million higher pre-production, start-up and business development costs related to growth activities. Across the Group, selling prices were $60 million higher than the previous period with a significant decrease in the price of export products being more than offset by domestic price increases. -2-

3 Directors' report Review of operations Hot Rolled Products The earnings contribution from the Hot Rolled Products segment decreased as a result of a substantial increase in the cost of coking coal and iron ore, lower hot rolled coil and slab pricing to export customers, and lower earnings from North Star BlueScope Steel due to hot rolled coil prices declining more than the price of scrap feed. These were partly offset by higher domestic and inter-segment prices to Coated and Building Products Australia and additional sales volumes resulting from higher raw steel production. New Zealand and Pacific Steel Products The earnings contribution from the New Zealand and Pacific Steel Products segment decreased as a result of declining export prices, the impact of higher maintenance downtime on production volumes and costs, together with higher coal and electricity costs. These were partly offset by higher domestic prices across the full product range. Coated and Building Products Australia The Coated and Building Products Australia segment was in a loss position in the half year, however, this reflected an improvement over the previous comparative period. The improvement reflected higher domestic selling prices for all products, partly offset by higher steel feed costs from Hot Rolled Products. The current half year was also negatively affected by a fire at the Western Port hot strip mill which closed the line for 12 weeks and reduced sales volumes and increased costs. Coated and Building Products Asia The Coated and Building Products Asia segment decreased to a small loss during the half year. Earnings in this segment were significantly affected by rapidly declining steel prices from their peak in the second half of FY2005. The price paid for purchased steel feed costs could not be fully passed on to domestic customers. In addition, domestic customers held back on orders in anticipation of further price reductions, and there were higher pre-production and start-up costs related to growth projects in Thailand, Vietnam, India and China. Coated and Building Products North America The Coated and Building Products North America segment showed a modest improvement over the previous comparative. Improved margins were largely offset by extended start-up costs at the Jackson, Tennessee plant. -3-

4 Directors' report Significant changes in the state of affairs The Company is progressing a range of growth initiatives aimed at expanding the manufacture and distribution of metallic coating and painted steel products. The following projects are progressing: Commenced production during the half year: Thailand: installation of a second metallic coating line (capacity: 200,000 tonnes per annum) at the Map Ta Phut plant. The facility commenced operation in August 2005; Vietnam: the construction of a new metallic coating (capacity: 125,000 tonnes per annum) and painting (capacity: 50,000 tonnes per annum) facility. The facility commenced operation in November Approved projects during the half year: Indonesia: installation of a second metallic coating line (capacity: 170,000 tonnes per annum) at the Cilegon plant. The facility is expected to cost approximately $145 million and is expected to commence production early calendar 2008; India: a new metal coating (capacity: 250,000 tonnes per annum) and paint line facility (capacity: 150,000 tonnes per annum). The facility is expected to cost approximately $265 million (100% basis) and is expected to commence operations during calendar year The development, which is a 50:50 joint venture with Tata Steel, was formalised in November 2005 subject to certain conditions precedent which are expected to be resolved in the second half of the financial year 2006; Previously approved projects under construction: China: a new metallic coating (capacity: 250,000 tonnes per annum) and paint line facility (capacity: 150,000 tonnes per annum). The facility will cost approximately $280 million and is expected to commence operation in the second half of calendar year 2006; China: the Group's first Butler PEB/Lysaght facility. The facility will cost approximately $35 million and is expected to commence operation mid calendar year 2006; India: three new facilities delivering a range of Lysaght and Butler products. The facilities will cost approximately $90 million (100% basis) and will progressively commence operations during 2006 and 2007; Australia: a new painting facility (capacity: 120,000 tonnes per annum) in western Sydney. The facility will cost approximately $130 million and is expected to commence operation in early calendar year 2007; Australia: an expansion of the Hot Strip Mill (capacity increase: 2.4 to 2.8 million tonnes per annum) at the Port Kembla Steelworks. The expansion will cost approximately $100 million and is expected to commence operation in the second half of calendar year 2006; and The company refinanced and increased its syndicated loan note facility during the period. The facility increased from $600 million to $1,200 million. In addition, the company increased its working capital facilities from $50 million to $350 million. Matters subsequent to the end of the financial year Subsequent to, the company announced that Kathryn Fagg, President Australian Building and Logistics Solutions, has been appointed President, Asian Building and Manufacturing Markets, effective 1 March, following Mike Courtnall's planned retirement on 28 February, Auditors' Independence Declaration The auditors' independence declaration for the half-year ended has been received from Ernst & Young. This can be referred to on page 6 of the directors' report. -4-

5 Directors' report Rounding of amounts The company is of a kind referred to in Class Order 98/0100, issued by the Australian Securities & Investments Commission, relating to the 'rounding off' of amounts in the directors' report and half-year financial report. Amounts in the directors' and financial report have been rounded off in accordance with that Class Order to the nearest hundred thousand dollars. This report is made in accordance with a resolution of directors. G J Kraehe, AO Chairman Kirby Adams Managing Director & CEO Melbourne 17 February

6 Directors' report Auditor's Independence Declaration to the Directors of BlueScope Steel Limited We have obtained the following independence declaration from our auditors, Ernst & Young. In relation to our review of the financial report of BlueScope Steel Limited for the half-year ended, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct. Alan I Beckett Partner Melbourne 17 February 2006 Ernst & Young -6-

7 Consolidated income statement For the half-year ended Half-year $m $m Revenue from continuing operations 3, ,880.8 Other income Changes in inventories of finished goods and work in progress Raw materials and consumables used (1,885.4) (1,556.4) Employee benefits expense (709.0) (664.8) Depreciation and amortisation expense (143.9) (140.8) Diminution in value of non-current assets (0.6) (0.6) Freight on external despatches (256.5) (241.4) External services (479.4) (412.4) Finance costs (34.7) (22.9) Other expenses (249.9) (297.7) Shares of net profits of associates and joint venture partnership accounted for using the equity method Profit before income tax Income tax expense (104.1) (173.7) Profit for the half-year (Profit)/loss attributable to minority interest Profit attributable to members of BlueScope Steel Ltd Cents Cents Earnings per share for profit attributable to the ordinary equity holders of the company: Basic earnings per share Diluted earnings per share The above consolidated income statement should be read in conjunction with the accompanying notes. -7-

8 Consolidated balance sheet As at 31 December 30 June $m $m ASSETS Current assets Cash and cash equivalents Receivables 1, ,052.8 Inventories 1, ,152.2 Derivative financial instruments Other Total current assets 2, ,329.0 Non-current assets Receivables Retirement benefit assets Inventories Investments accounted for using the equity method Other financial assets Property, plant and equipment 3, ,374.4 Deferred tax assets Intangible assets Other Total non-current assets 4, ,056.7 Total assets 6, ,385.7 LIABILITIES Current liabilities Payables Interest bearing liabilities Current tax liabilities Provisions Deferred income Total current liabilities 2, ,780.4 Non-current liabilities Payables Interest bearing liabilities Deferred tax liabilities Provisions Retirement benefit obligations Total non-current liabilities 1, ,344.9 Total liabilities 3, ,125.3 Net assets 3, ,260.4 EQUITY Contributed equity 1, ,747.5 Reserves (7.2) (65.3) Retained profits 1, ,535.0 Parent entity interest 3, ,217.2 Minority interest Total equity 3, ,260.4 The above consolidated balance sheet should be read in conjunction with the accompanying notes. -8-

9 Consolidated statement of recognised income and expense For the half-year ended Half-year $m $m Cash flow hedges: Gain taken to equity Net gain/(loss) on hedge of net investments (18.7) - Exchange differences on translation of foreign operations 67.2 (70.8) Actuarial gain/(loss) on defined benefit plans 41.0 (51.7) Income tax on items taken directly to or transferred from equity Net income/(expense) recognised directly in equity 92.3 (119.2) Profit for the half-year Total recognised income and expense for the year Total recognised income and expense for the half-year is attributable to: Members of BlueScope Steel Ltd Minority interest 1.4 (5.6) The above consolidated statement of recognised income and expense should be read in conjunction with the accompanying notes. -9-

10 Consolidated cash flow statement For the half-year ended Half-year $m $m Cash flows from operating activities Receipts from customers (inclusive of goods and services tax) 4, ,140.7 Payments to suppliers and employees (inclusive of goods and services tax) (3,873.0) (3,569.6) Dividends received Joint venture partnership distributions received Interest received Other revenue Financing costs paid (31.1) (8.7) Income taxes paid (239.5) (185.4) Net cash flows used in operating activities (59.6) Cash flows from investing activities Payment for purchase of subsidiary, net of cash acquired (2.7) (0.3) Payments for property, plant and equipment (353.4) (256.2) Payments for intangibles (12.7) (3.4) Payments for investment in joint venture partnership (0.6) (0.6) Payments for investment in associates - (0.5) Payments for investment in business assets (11.3) (41.8) Proceeds from sale of property, plant and equipment Proceeds from sale of business assets Associate loan receivable repaid Net cash flows used in investing activities (365.4) (268.0) Cash flows from financing activities Proceeds from issues of shares Payments for shares bought back (74.4) (74.9) Proceeds from borrowings 3, ,416.0 Repayment of borrowings (3,019.5) (1,284.6) Dividends paid to company s shareholders (313.4) (209.8) Dividends paid to minority interests in subsidiaries (2.5) (3.3) Capital return to minority interests in subsidiary (0.3) - Net cash flows from financing activities (120.7) Net increase (decrease) in cash and cash equivalents (7.3) (1.0) Cash and cash equivalents at the beginning of the half-year Effects of exchange rate changes on cash and cash equivalents 1.9 (13.3) Cash and cash equivalents at end of the half-year The above consolidated cash flow statement should be read in conjunction with the accompanying notes. -10-

11 Contents of the notes to the financial statements Page 1 Summary of significant accounting policies 12 2 Critical accounting estimates 23 3 Segment information 24 4 Equity securities issued 25 5 Dividends 26 6 Contingencies 26 7 Events occurring after the balance sheet date 27 8 Unusual items 27 9 Explanation of transition to Australian equivalents to IFRSs

12 1 Summary of significant accounting policies This general purpose financial report for the interim half year reporting period ended has been prepared in accordance with Accounting Standard AASB 134 Interim Financial Reporting, the Corporations Act 2001 and other mandatory professional reporting requirements. This interim financial report does not include all the notes of the type normally included in an annual financial report. Accordingly, this report is to be read in conjunction with the annual report for the year ended 30 June 2005 and any public announcements made by BlueScope Steel Ltd during the interim reporting period in accordance with the continuous disclosure requirements of the Corporations Act The annual report for the year ended 30 June 2005 was prepared in accordance with Australian Accounting Standards in force at that date. (a) Basis of preparation of half-year financial report The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. This interim financial report complies with Australian equivalents to International Financial Reporting Standards ('AIFRS'). Impact of amended standards not adopted Apart from the revised AASB 119 Employee Benefits (issued in December 2004), changes to Australian Accounting Standards that have recently been amended or issued but are not yet effective, have not been adopted for the period ending 31 December The amended or new standards are not expected to materially change these accounting policies. Application of AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards This interim financial report is the first BlueScope Steel Ltd interim financial report to be prepared in accordance with AIFRS. AASB 1 has been applied in preparing these financial statements. Financial statements of BlueScope Steel Ltd until 30 June 2005 had been prepared in accordance with Australian Accounting Standards in force at that date. Australian Accounting Standards in force at that time differ in certain respects from AIFRS. When preparing the BlueScope Steel Ltd interim financial report for the half year ended, management has amended certain accounting and valuation methods applied in the previous financial statements to comply with AIFRS. With the exception of financial instruments, the comparative figures were restated to reflect these adjustments. Reconciliations and descriptions of the effect of transition from previous Accounting Standards to AIFRS on the Group's balance sheet and net income are provided in note 9. AASB 1 Transitional exemptions The Group has made its election in relation to the transitional exemption allowed by AASB 1 'First time adoption of Australian Equivalents to International Financial Reporting Standards' as follows: AASB 2 Share-Based Payments is applied only to equity instruments granted after 7 November 2002 that had not vested on or before 1 January AASB 3 Business Combinations was not applied retrospectively to business combinations that occurred before 1 July AASB 132 Financial Instruments: Presentation and Disclosure and AASB 139 Financial Instruments: Recognition and Measurement is only applied from 1 July 2005 and is therefore not reflected in the comparative information presented. Outlined as part of this summary of significant accounting policies are policies applicable from 1 July 2005 under AASB 132 and AASB 139, as well as policies used from 1 July 2004 to 30 June 2005, prior to the adoption of these standards. Early adoption of standard The Group has elected to apply AASB 119 Employee Benefits (issued in December 2004) to the reporting periods beginning 1 July This includes applying AASB 119 to the comparative period. Historical cost convention The half-year financial report has been prepared on a historical cost basis, except for derivative financial instruments and available-for-sale financial assets measured at fair value. (b) Principles of consolidation (i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of BlueScope Steel Ltd (''company'' or ''parent entity'') as at and the results of all subsidiaries for the half-year then ended. BlueScope Steel Ltd and its subsidiaries together are referred to in this financial report as the Group or the consolidated entity. -12-

13 1 Summary of significant accounting policies Subsidiaries are all those entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group (refer to note 1(i)). Intercompany transactions, balances and profits and losses resulting from transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Minority interests in the results and equity of subsidiaries are shown separately in the consolidated income statement and balance sheet respectively. (ii) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for in the consolidated financial statements using the equity method of accounting, after initially being recognised at cost. The Group s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition. The Group s share of its associates post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends receivable from associates reduce the carrying amount of the investment. When the Group s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. (iii) Joint venture entities The interest in a joint venture partnership is accounted for in the consolidated financial statements using the equity method. Under the equity method, the share of the profits or losses of the partnership is recognised in the income statement, and the share of movements in reserves is recognised in reserves in the balance sheet. (c) Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment and is subject to risks and returns that are different from those of segments operating in other economic environments. (d) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The consolidated financial statements are presented in Australian dollars, which is BlueScope Steel Ltd s functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. -13-

14 1 Summary of significant accounting policies (iii) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each income statement are translated at average exchange rates (unless this 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 dates of the transactions); and all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders equity. When a foreign operation is disposed of such exchange differences are recognised 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 rate. (e) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: (i) Sale of goods Control of the goods has passed to the buyer. This is considered to have occurred when legal title of the product is transferred to the customer and the Company is no longer responsible for the product. The point at which title is transferred is dependent upon the specific terms and conditions of the contract under the sale. (ii) Rendering of services Contract revenue is recognised in accordance with the percentage of completion method unless the outcome of the contract cannot be reliably estimated. Where the outcome of the contract cannot be reliably estimated, contract costs are recognised as an expense as incurred, and where it is probable the costs will be recovered, revenue is recognised to the extent of costs incurred. (iii) Interest Revenue is recognised as the interest accrues (using the effective interest method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument) to the net carrying amount of the financial asset. (iv) Dividends Revenue is recognised when the shareholders' right to receive the payment is established. (f) Income tax Deferred income tax is provided on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences: except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised: -14-

15 1 Summary of significant accounting policies except where the deferred income tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement. (g) Other taxes Revenues, expenses and assets are recognised net of the amount of Goods and Services Tax (GST) except: where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet. Cash flows are included in the Cash Flow Statement on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cashflows. (h) Leases Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease s inception at the lower of the fair value of the leased property and the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in current and non-current interest bearing liabilities. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the asset s useful life and the lease term. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement over the period of the lease. (i) Acquisitions of assets The purchase method of accounting is used to account for all acquisitions of assets (including business combinations) regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable to the acquisition. Where equity instruments are issued in an acquisition, the value of the instruments is their published market price as at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity. -15-

16 1 Summary of significant accounting policies Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group s share of the identifiable net assets acquired is recorded as goodwill (refer to note 1(q)). If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Restructuring costs associated with an acquisition are brought to account on the basis described in note 1(x). (j) Impairment of assets Assets that have an indefinite useful life (eg. goodwill) are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation (eg. property, plant and equipment and intangible assets) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units or 'CGUs'). Where the recoverable amount of a CGU is less than the carrying amount, an impairment loss is recognised. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. (k) Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within current interest bearing liabilities on the balance sheet. (l) Trade receivables Trade receivables, which generally have day terms, are recognised and carried at cost less any provision for doubtful debts. Collectibility of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows. The amount of the provision is recognised in the income statement. (m) Inventories Inventories are valued at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: (i) Raw materials and stores Purchase cost on a first-in-first-out basis. (ii) Finished goods and work in progress Cost of direct material and labour and a proportion of manufacturing overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. (n) Investments and other financial assets From 1 July 2004 to 30 June 2005 In accordance with Australian Accounting Standards in force at that time, interests in unlisted securities, other than subsidiaries and associates and other financial assets, were brought to account at cost. -16-

17 1 Summary of significant accounting policies From 1 July 2005 The Group classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for whic the investments were acquired. Management determines the classification of its investments at initial recognition and re-evaluates th designation at each reporting date. (i) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss on initial recognition. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. The policy of management is to designate a financial asset if there exists the possibility it will be sold in the short term and the asset is subject to frequent changes in fair value. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realised within 12 months of the balance sheet date. (ii) Loans and receivables Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of selling the receivable. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date are classified as non-current assets. Loans and receivables are included in receivables in the balance sheet. (iii) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group s management has the positive intention and ability to hold to maturity. (iv) Available-for-sale financial assets Available-for-sale financial assets, comprising principally marketable equity securities, are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Purchases and sales of investments are recognised on the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit and loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method. Realised and unrealised gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are included in the income statement in the period in which they arise. Unrealised gains and losses arising from changes in the fair value of non monetary securities classified as available-for-sale are recognised in equity in the available-for-sale investments revaluation reserve. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains and losses from investment securitie The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include reference to the fair values of rece arm s length transactions, involving the same instruments or other instruments that are substantially the same, discounted cash flow analysis, and option pricing models refined to reflect the issuer s specific circumstances. The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a secur below its cost is considered in determining whether the security is impaired. If any such evidence exists for available-for-sale financial assets, 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 and loss - is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. -17-

18 1 Summary of significant accounting policies (o) Derivatives From 1 July 2004 to 30 June 2005 BlueScope Steel's policy when undertaking risk mitigation transactions was to apply hedge accounting principles whereby derivatives were matched to the specifically identified commercial risks being hedged. These matching principles were applied to both realised and unrealised transactions. Derivatives undertaken as hedges of anticipated transactions were recognised when such transactions were recognised. Upon recognition of the underlying transaction, derivatives were valued at the appropriate market spot rate. When an underlying transaction could no longer be identified, gains and losses arising from a derivative that had been designated as a hedge of that transaction was included in the income statement. Where a hedge was terminated, the deferred gain or loss that arose prior to termination was: (a) deferred and included in the measurement of the anticipated transaction when it occurred; or (b) included in the income statement where the anticipated transaction was no longer expected to occur. Costs arising at the time of entering into hedging activities were included in other assets and deferred and included in the settlement of the underlying transaction. Forward exchange contracts Forward exchange contracts were recognised at the date the contract was entered into. Exchange gains or losses on forward exchange contracts were recognised in the income statement except those relating to hedges of specific commitments that were deferred and included in the measurement of the sale of purchase. Interest rate swaps It was the company's policy to not recognise interest rate swaps in the financial statements. From 1 July 2005 Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value. The method of recognising 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. The Group designates certain derivatives as either; (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges); or (2) hedges of highly probable forecast transactions (cash flow hedges). The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. (i) Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. (ii) Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset or liability. When a hedging instrument expires or is sold or terminated, 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 recognised when the forecast transaction is ultimately recognised 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. -18-

19 1 Summary of significant accounting policies (iii) Net investment hedges 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 recognised in the foreign currency translation reserve; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses deferred in the foreign currency translation reserve are recognised immediately in the income statement when the foreign operation is disposed of. (iv) Derivatives that do not qualify for hedge accounting Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the income statement. (p) Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation is calculated on a straight line basis to write off the net cost or revalued amount of each item of property, plant and equipment (excluding land) over its expected useful life. Estimates of remaining useful lives are made on a regular basis for all assets. The expected useful lives are as follows: Category Buildings Plant, machinery and equipment Useful life Up to 40 years Up to 30 years The assets' carrying values are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount (note 1(j)). Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the income statement on a net basis as either income (a gain) or an expense (a loss). (q) Intangible assets (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill acquired in business combinations is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing (refer note 1(j)). (ii) Patents and trademarks Patents and trademarks have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight line method to allocate the cost of trademarks and licences over their estimated useful lives. (iii) Research and development costs Expenditure for research and development is included in the income statement as and when incurred on the basis that continuing research and development is part of the overall cost of being in business, except to the extent that future benefits deriving from development costs are expected beyond any reasonable doubt to exceed those costs, in which case the development costs are capitalised and amortised over the period of expected benefit. The carrying amount of development costs is reviewed for impairment annually when the asset is not yet in use, or more frequently when an indicator of impairment arises during the reporting year indicating that the carrying value may not be recoverable. -19-