Consolidated financial statements Stelco Holdings Inc. As at and June 30,, and for the six month period ended
KPMG LLP Commerce Place 21 King Street West, Suite 700 Hamilton Ontario L8P 4W7 Canada Telephone (905) 523-8200 Fax (905) 523-2222 To the Board of Directors of Stelco Holdings Inc. INDEPENDENT AUDITORS REPORT We have audited the accompanying consolidated financial statements of Stelco Holdings Inc., which comprise the consolidated statements of financial position as at and June 30,, the consolidated statements of loss and comprehensive loss, changes in equity and cash flows for the six month period ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Stelco Holdings Inc. as at and June 30,, and its consolidated financial performance and its consolidated cash flows for the six month period ended, in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants Hamilton, Canada February 21, 2018 KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG Canada provides services to KPMG LLP.
Consolidated statement of loss and comprehensive loss (In millions of Canadian dollars except where otherwise indicated) Six months ended $ Revenue from sale of goods 788 Cost of goods sold (notes 10 and 20) 716 Gross profit 72 Selling, general and administrative expenses (note 21) 47 Operating income 25 Finance costs (note 19) 33 Share of loss of joint ventures (note 14) 1 Restructuring and other costs 6 Loss before income taxes (15) Income tax expense (note 22) Loss and comprehensive loss for the period (15) Loss per share (dollars) (note 24) Basic and diluted (0.19) See accompanying notes to the consolidated financial statements
Consolidated statements of financial position (In millions of Canadian dollars) June 30, $ $ Assets Current Cash and cash equivalents (note 8) 250 30 Restricted cash 12 22 Trade and other receivables (note 9) 204 169 Inventories (note 10) 448 282 Prepaid expenses (note 11) 18 59 Total current assets 932 562 Property, plant and equipment, net (note 12) 279 270 Intangible assets, net (note 13) 7 8 Investment in joint ventures (note 14) 5 6 Total non-current assets 291 284 Total assets 1,223 846 Liabilities and equity Current Trade and other payables (note 15) 309 94 Other liabilities (note 16) 33 31 Employee benefit commitment (note 25) 32 29 Total current liabilities 374 154 Long-term debt (note 25) 79 Provisions (note 17) 5 5 Other liabilities (note 16) 35 23 Employee benefit commitment (note 25) 312 300 Total non-current liabilities 352 407 Total liabilities 726 561 Equity Common shares (note 18) 512 285 Retained deficit (15) Total equity 497 285 Total liabilities and equity 1,223 846 See accompanying notes to the consolidated financial statements On behalf of the Board of Directors (signed) Brian Levitt, Director (signed) Jeffrey Bunder, Director
Six months ended December 31 Consolidated statement of cash flows (In millions of Canadian dollars) Operating activities Loss for the period (15) Adjustments to reconcile loss to cash provided by (used in) operating activities: Depreciation and amortization 12 Interest expense and foreign exchange 3 Share of loss of joint ventures 1 Provision for pension and other post-employment benefits 8 Bad debt expense 1 Changes in non-cash working capital balances related to operations: Trade and other receivables (35) Inventories (166) Prepaid expenses 41 Trade and other payables 94 Other liabilities 6 Employee benefit commitment (note 25) 15 (45) Cash used in in operating activities (35) Investing activities Purchases of property, plant and equipment (24) Decrease in restricted cash 10 Cash used in investing activities (14) Financing activities Proceeds from issuance of shares 230 Transaction costs on issuance of shares (3) Proceeds from long-term debt 131 Repayment of long-term debt (210) Proceeds from inventory monetization arrangement, net (note 15) 121 Cash provided by financing activities 269 Net increase in cash and cash equivalents 220 Cash and cash equivalents, beginning of period 30 Cash and cash equivalents, end of period 250 $ See accompanying notes to the consolidated financial statements
Consolidated statements of changes in equity (In millions of Canadian dollars except for shares) Number of common shares (note 18) Amount of common shares (note 18) Retained deficit Total equity # $ $ $ As at June 30, 75,283,887 285 285 Loss and other comprehensive loss for the period (15) (15) Total comprehensive loss (15) (15) Share issuance 13,529,750 230 230 Transaction costs (3) (3) As at 88,813,637 512 (15) 497 See accompanying notes to the consolidated financial statements
and June 30, 1. Corporate information Stelco Holdings Inc. ( Stelco Holdings ) was incorporated on September 25, under the Canada Business Corporations Act and issued 10 shares to its immediate parent, Bedrock Industries B.V., on that date. Stelco Holdings was formed for the purposes of completing a public offering ( IPO ) of its common shares. On November 10,, Stelco Holdings completed its initial public offering, listing its common shares on the Toronto Stock Exchange (the TSX ) under the symbol STLC. Following the IPO, Stelco Holdings majority indirect shareholder remains Bedrock Industries L.P. ( Bedrock ) which indirectly owns approximately 85% of the common shares through Bedrock Industries B.V. The principal limited partners of Bedrock are LG Bedrock Holdings LP ( LG Bedrock ), a Delaware limited partnership; and AK Bedrock LLC, a Delaware limited liability company wholly owned by Alan Kestenbaum. The General Partner of Bedrock is Bedrock Industries GP LLC, a Delaware limited liability company whose sole member is LG Bedrock. LG Bedrock s general partner is LG Bedrock Holdings GP LLC, a Delaware limited liability company. On November 10,, Stelco Holdings acquired all of the issued and outstanding shares of Stelco Inc. ( Stelco ) under a common control transaction discussed in note 6 resulting in Stelco becoming a wholly owned subsidiary of Stelco Holdings effective July 1,. Stelco (formerly known as U. S. Steel Canada Inc.) is principally engaged in the production and selling of steel products. Stelco is an integrated steel producer with facilities in two locations, Hamilton and Nanticoke, Ontario, which produces a variety of steel products for customers in the steel service centre, appliance, automotive, energy, construction, pipe and tube industries in North America. Stelco Holdings registered and head offices are located at 386 Wilcox Street, Hamilton, Ontario. 2. Basis of presentation Statement of compliance The accompanying consolidated financial statements of Stelco Holdings have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). All dollar amounts included in these consolidated financial statements are presented in millions of Canadian dollars, except where otherwise indicated. These consolidated financial statements were prepared on a going concern basis under the historical cost method, except for certain financial assets and liabilities, which are measured at fair value as described in note 25. Significant accounting policies are presented in note 3 to these consolidated financial statements and have been consistently applied in each of the periods presented. These consolidated financial statements of Stelco Holdings were authorized for issue in accordance with a resolution of the directors on February 21, 2018. 1
and June 30, 3. Summary of significant accounting policies Principles of consolidation Subsidiaries The consolidated financial statements comprise the financial statements of Stelco Holdings and its subsidiaries (collectively the Company ). All intercompany balances, transactions, income and expenses and gains or losses have been eliminated on consolidation. Subsidiaries are consolidated where the Company has the ability to exercise control. Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Company re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more elements of control. The Stelco Holdings subsidiaries include: Stelco Inc. The Steel Company of Canada Limited The Stelco Plate Company Ltd. Stelco Algae Holdings Inc. On August 8,, former subsidiaries of the Company, 4347226 Canada Inc., U. S. Steel Tubular Products Canada GP Inc. and U. S. Steel Tubular Products Canada Limited Partnership were dissolved. Common control transaction Stelco Holdings acquisition of Stelco on November 10, is a business acquisition involving entities under common control in which all of the combining entities are ultimately controlled by Bedrock Industries, both before and after the transaction was completed. Business combinations involving entities under common control are outside the scope of IFRS 3, Business Combinations. The Company accounts for this common control transaction in a manner similar to a pooling of interest method applied from June 30, which is the date that Bedrock Industries acquired Stelco. This method requires the financial statements to be restated for periods prior to the date of obtaining common control, to reflect the combination as if it had occurred from the beginning of the period that the entities were under common control, regardless of the actual date the common control transaction closed. Transaction costs associated with a common control transaction are recognized as an expense in the period incurred. Joint arrangements A joint arrangement is defined as an arrangement in which two or more parties have joint control. Joint control is the contractually agreed sharing of control over an arrangement between two or more parties. This exists only when the decisions about the relevant activities that significantly affect the returns of the arrangement require the unanimous consent of the parties sharing control. 2
and June 30, A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. The Company s investments in joint ventures are accounted for using the equity method. Under the equity method, the investment in joint ventures is initially recognized at cost. The carrying amount of the investment is adjusted to recognize changes in the Company s share of net assets of the joint venture since the acquisition date. Stelco s 50% interest in Baycoat Limited Partnership ( Baycoat ) and 50% interest in D.C. Chrome Limited ( DC Chrome ) have been accounted for as joint ventures. The consolidated statements of loss reflects the Company s share of the profit or loss of the joint ventures. Any change in other comprehensive loss ( OCI ) of those investees is presented as part of the Company s OCI. When there has been a change recognized directly in the equity of the joint ventures, the Company recognizes its share of any changes, when applicable, in the consolidated statements of changes in equity. Unrealized gains and losses resulting from transactions between the Company and the joint ventures are eliminated to the extent of the interest in the joint ventures. The financial statements of the joint ventures are prepared for the same reporting period as the Company. When necessary, adjustments are made to bring the accounting policies in line with those of the Company. The Company evaluates impairment of its equity method investments whenever circumstances indicate that there is objective evidence that an investment in a joint venture is impaired. If there is such evidence, the Company calculates the amount of impairment as the difference between the recoverable amount of the joint venture and its carrying value. Foreign currency translation The functional currency of the Company, for each subsidiary and for joint arrangements, is the currency of the primary economic environment in which it operates. The functional currency of all of the Company s operations is the Canadian dollar. Once the Company determines the functional currency of an entity, it is not changed unless there is a change in the relevant underlying transactions, events and circumstances. Any change in an entity s functional currency is accounted for prospectively from the date of the change, and the consolidated statements of financial position are translated using the exchange rate as at that date. At the end of each reporting period, the Company translates foreign currency balances as follows: Monetary items are translated at the closing rate in effect as at the consolidated statements of financial position date; Non-monetary items that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Items measured at fair value are translated at the exchange rate in effect at the date the fair value was measured; and Revenue and expenses are translated using the exchange rate at the date of the transaction. Differences arising on settlement or translation of monetary items are recognized in profit or loss. The gain or loss arising on translation of non-monetary items measured at fair value are treated in line with the recognition of the gain or loss on the change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognized in OCI or profit or loss, are also recognized in OCI or profit or loss, respectively). 3
and June 30, Cash and cash equivalents Cash and cash equivalents comprises cash at banks and on hand, as well as short-term deposits with a remaining maturity as of the date of acquisition of three months or less, which are subject to an insignificant risk of changes in value. The Company places its cash and short-term deposits in high quality overnight deposits issued by government agencies, financial institutions and major corporations, and limits the amount of credit exposure by diversifying its holdings. Restricted cash On September 16, 2014, Stelco applied for relief from its creditors pursuant to Canada s Companies Creditors Arrangement Act ( CCAA ). Ernst & Young Inc. was appointed by the court as the Monitor ( Monitor ). As part of the CCAA arrangement, restricted cash is required to be maintained as financial assurances held for the Ministry of the Environment and various other required disbursements held by the Monitor. Inventories Inventories are measured at the lower of cost and net realizable value. Net realizable 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. Cost to complete are based on management s best estimate as at the consolidated statements of financial position date. A net realizable value impairment may be reversed in a subsequent period if the circumstances that triggered the impairment no longer exist. The cost of raw materials, semi-finished products and finished products are determined based on a first in, first out basis. Any provision for obsolescence is determined by reference to specific items. A regular review is undertaken to determine the extent of any provision for obsolescence. Costs of finished products include direct costs of materials, an appropriate share of production overhead, and labour related directly to processing activities. Abnormal costs are expensed in the period incurred. Financial instruments The Company s financial assets and liabilities ( financial instruments ) include cash and cash equivalents, restricted cash, trade and other receivables, derivative financial instruments, trade and other payables, long-term debt as well as employee benefit commitments. The Company classifies its financial instruments into the following categories: Loans and receivables Fair value through profit or loss Financial liabilities carried at amortized cost Appropriate classification of financial instruments is determined at the time of initial recognition or when reclassified in the consolidated statements of financial position. Financial instruments are recognized on the trade date, being the date on which the Company becomes a party to the contractual provisions of the instrument. 4
and June 30, Receivables are categorized as loans and receivables and include originated and purchased non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Assets in this category are included within trade and other receivables in the consolidated statements of financial position as well as other non-current assets. Loans and receivables are initially recognized at fair value plus transaction costs. They are subsequently measured at amortized cost using the effective interest method less any impairment. The employee benefit commitment was initially recorded at its fair value using discounted cash flow analysis and subsequently accounted for at amortized cost using the effective interest method. The determination of fair value involves making various assumptions. These include the determination of the expected cash flows and discount rate. Due to the nature of the underlying assumptions and its long-term nature, the employee benefit commitment is highly sensitive to changes in these assumptions. Further details about the assumptions used are provided in note 25. Trade and other payables, long-term debt, the employee benefit commitment as well as the finance lease obligations are subsequently measured at amortized cost using the effective interest rate method. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees. The effective interest rate accretion is included as finance costs in the consolidated statements of loss. The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled. Derivative financial instruments are classified as fair value through profit or loss and are recognized at fair value with changes in fair value recognized in profit or loss. The Company uses derivative financial instruments to manage its risks related to foreign currency exchange rate fluctuations. The Company does not apply hedge accounting. Derivative financial instruments are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative in the consolidated statements of financial position. The fair value of derivative instruments is recorded in trade and other payables. Property, plant and equipment Items of property, plant and equipment are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing part of the plant and equipment and borrowing costs for long-term construction projects if the recognition criteria are met. When significant parts of plant and equipment are required to be replaced at intervals, such as relining of a blast furnace, the Company depreciates them separately based on their specific useful lives. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are expensed as incurred. Property, plant and equipment that consist of parts that have a cost that is significant in relation to the item of property, plant and equipment to which it relates are treated as separate components of an item of property, plant and equipment and depreciated on a straight-line basis during the estimated period of service, taking into account any residual value at the end of the period. Division into different components occurs only if major components with divergent useful lives can be identified. Land is not depreciated. Major repairs and upgrades are recognized separately and depreciated over their useful lives. An item of property, plant and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated statement of loss when the asset is derecognized. 5
and June 30, The residual values, useful lives and methods of depreciation of property, plant and equipment are reviewed at each financial year-end and any changes are adjusted prospectively. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows: Machinery and equipment Vehicles 5 40 years 4 6 years As at June 30,, a third party valuation of property, plant and equipment was performed with fair value adjustments being reflected on the consolidated statement of financial position. Projected useful lives were estimated by the valuator and applied to property, plant and equipment as at June 30,. The useful lives established by management, as noted in the policy above, differ from the useful lives prescribed by the valuator. Intangibles Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated statement of loss in the expense category that is consistent with the function of the intangible assets. Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually, either individually or at the cash-generating unit level, or more frequently if indicators of impairment exist. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is considered a change in accounting estimate and accounted for on a prospective basis. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statement of loss when the asset is derecognized. Leases The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset (or assets) and the arrangement conveys a right to use the asset (or assets), even if that asset is (or those assets) are not explicitly specified in an arrangement. 6
and June 30, A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Company is classified as a finance lease. When a lease includes both land and building elements, the classification of each element as a finance or an operating lease is assessed separately to the extent that the land element is material. Finance leases are capitalized at the commencement of the lease at the inception date fair value of the leased item or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in finance costs in the consolidated statement of loss. The finance lease assets are measured initially at an amount equal to the lower of their fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Assets held under leases that are not classified as finance leases are classified as operating leases and are not recognized in the Company s consolidated statements of financial position. Payments made under an operating lease are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as a reduction to the total lease expense over the term of the lease. Emission allowances Ontario s Cap and Trade Program under the Climate Change Mitigation and Low-carbon Economy Act, 2016 (the Cap and Trade program), sets out a framework for the reduction in greenhouse gas ( GHG ) emissions for the province of Ontario, which came into effect on January 1,. The legislation establishes targets for the reduction of GHG emissions and requires the Ontario government to prepare an action plan to achieve those targets. Stelco is a mandatory participant in the program as Stelco emits more than 25,000 tonnes of GHG per year and is considered a large final emitter. The first compliance period for Ontario s Cap and Trade program is January 1, to 2020 in which most large final emitters are expected to receive most of the emission allowances they require free of charge, with the number of allowances allocated decreasing each year. Stelco has received free GHG emission allowances in which are reasonably expected to exceed Stelco s GHG emissions during the year. The allowances are granted on an annual basis and, in return, the Company is required to remit allowances equal to its actual emissions at the end of the compliance period. In the absence of specific IFRS guidance, the Company has adopted the net liability approach, whereby a provision is only recognized when actual emissions exceed the emission allowances granted and held for the current compliance period. Impairment of non-financial assets For property, plant and equipment, the Company assesses, as at each reporting date, whether there is an indication that an asset may be impaired. If an indicator of impairment exists, the Company assesses impairment by estimating the asset s recoverable amount, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined at the cash generating unit ( CGU ) level. A CGU is a single asset or a group of assets with independent cash inflows. The recoverable amount of an asset or CGU is the higher of its fair value less costs of disposal and its value in use. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. 7
and June 30, 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. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. The Company bases its impairment calculation on detailed budgets and forecast calculations. These budgets and forecast calculations generally cover a period of five years. A long-term growth rate is calculated and applied to projected future cash flows after the fifth year. Impairment losses are recognized in the consolidated statement of loss. An assessment is made as at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the Company estimates the asset s or CGU s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statements of loss. Impairment of financial assets A financial asset is deemed to be impaired if there is objective evidence of impairment as a result of an event that has occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows of the financial asset that can be reliably estimated. Evidence of impairment may include indications that the debtor is experiencing financial difficulty, which may include default or delinquency in interest or principal payments, the probability that it will enter bankruptcy or other financial reorganization, and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears payments or economic conditions that correlate with defaults. Loans and receivables are considered impaired when there is objective evidence that the full carrying amount of the loan or receivable is not collectible. When an impaired loan or receivable is identified, the amount of the loss is measured as the difference between the asset s carrying amount and the estimated realizable amount, which is measured by discounting the expected future cash flows at the original effective interest rate of the loan or receivable. This difference between the carrying amount and the estimated realizable value of the loan or receivable represents an impairment loss that is recognized in net income (loss). Loans and receivables, together with the associated allowance, are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Company. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or decreased by adjusting the carrying value of the loan or receivable. If a past write-off is later recovered, the recovery is recognized in net income (loss). 8
and June 30, Provisions The Company s provisions are comprised of environmental remediation. The provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to a provision is presented in the consolidated statements of net income (loss) net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost. Pension and other employee benefits The Company sponsors a compensated absences benefit plan which is unfunded. The obligations and costs of providing benefits are determined using the projected unit credit method. Service costs including past service, gains and losses from curtailment and non-routine settlements and net interest are recognized through profit or loss. Actuarial gains and losses resulting from remeasurements are recognized immediately through other comprehensive income (loss) in the period in which they occur. Remeasurements are not reclassified to profit or loss in subsequent periods. Fair value is based on market price information, and in the case of quoted securities, is the published bid price. The value of any defined benefit asset recognized is restricted to the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. Income taxes Current and deferred tax expense is recognized in the consolidated statement of loss, unless it relates to items recognized outside the consolidated statements of loss. Current and deferred tax expense relating to items recognized outside of the consolidated statements of loss is recognized in correlation to the underlying transaction in either OCI or equity. Current tax expense is based on substantively enacted statutory tax rates and tax laws as at the consolidated statements of financial position date. Deferred tax is provided using the liability method on temporary differences between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes as at the reporting date. Deferred tax liabilities are recognized for all taxable temporary differences, except in respect of taxable temporary differences associated with investments in subsidiaries, and interests in joint arrangements, when 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. 9
and June 30, Deferred tax assets are recognized for all deductible temporary differences, the carry-forward of unused tax credits and any unused tax losses. Deferred tax assets are recognized 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 credits and unused tax losses can be utilized, within their respective expiry periods. In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, deferred tax assets are recognized only 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 utilized. The carrying amount of deferred tax assets is reviewed as at each reporting 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 tax asset to be utilized. Unrecognized deferred tax assets are re-assessed as at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates and tax laws that have been substantively enacted as at the reporting date. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured, regardless of when the payment is received. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The Company has concluded that it is the principal in all of its revenue arrangements since it is the primary obligor in all the revenue arrangements, has pricing latitude, and is also exposed to inventory and credit risks. Revenue from the sale of goods includes sale of goods from the Company s production of steel products. Revenue from the sale of goods is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on shipment of the products from the Company s steel production facilities. Revenue from sale of goods under bill and hold arrangements is recognized when the buyer takes title to the goods and accepts billing, it is probable that the delivery will be made, the item is on hand, identified and ready for delivery, the buyer specifically acknowledges the deferred delivery instructions, and the usual payment terms apply. Revenue from the sale of products is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts and volume rebates. Shipping and other transportation costs charged to buyers are recorded in both sales and the related costs recorded in cost of sales. 10
and June 30, Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, which is described as follows, based on the lowest-level input that is significant to the fair value measurement as a whole: Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2 Quoted prices in markets that are not active or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable, supported by little or no market activity. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. For items that are recognized at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by reassessing their classification at the end of each reporting period. During the period ended, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into or out of Level 3 fair value measurements. Segment reporting Segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker ( CODM ). The CODM, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Chairman and Chief Executive Officer ( CEO ). Income (loss) per share Basic income (loss) per common share is calculated by dividing income (loss) for the period attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Common shares issued as part of the consideration transferred in the common control transaction are included in the weighted average number of common shares starting from the date that common control was established. Diluted income (loss) per common share is calculated giving effect to the potential dilution that would occur if all outstanding dilutive instruments were exercised or converted to common shares. The weighted average number of common shares outstanding during the period is adjusted by the incremental number of shares calculated in accordance with the treasury stock method. The treasury stock method assumes that the proceeds received from the exercise of all potentially dilutive instruments are used to repurchase common shares at the volume weighted average market price during the period. 11
and June 30, 4. New accounting pronouncements Standards and amendments issued, that are effective prior to, and subsequent to, the date of issuance of these consolidated financial statements, are described below. The following discussion is of the standards, amendments and interpretations issued that the Company reasonably expects to be applicable at a future date. The Company intends to adopt these standards when they become effective. IFRS 9, Financial Instruments ( IFRS 9 ) In July 2014, the IASB issued the final version of IFRS 9. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The standard contains requirements in the following areas: classification and measurement; impairment; hedge accounting and de-recognition. The Company has evaluated the implications of adopting IFRS 9 and does not expect it to have a material impact on the consolidated financial statements. Based on an evaluation of the financial instruments held and economic conditions as at, the measurement of the Company s financial instruments is expected to be substantially similar with measurement under current guidance. IFRS 9 also amends and expands the disclosure requirements under IFRS 7 and the Company is currently in the process of evaluating responsive disclosures for implementation of the standard. IFRS 15, Revenue from Contracts with Customers ( IFRS 15 ) IFRS 15 was issued in May 2014 and additionally clarified in April 2016. It establishes a five-step model to account for revenue arising from contracts with customers and outlines two approaches to recognizing revenue: at a point in time or over time. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after January 1, 2018 with early adoption permitted. The Company will adopt the new standard on the required effective date using the modified retrospective application method with no restatement of comparative information. The Company has evaluated the implications of adopting IFRS 15 and does not expect it to have a material impact on the consolidated financial statements. Based on an evaluation of the current contracts and revenue streams, the timing and amount of revenue recorded under IFRS 15 is expected to be substantially similar with treatment under current guidance. IFRS 15 also provides for enhanced disclosure requirements surrounding revenue recognition and the Company is currently in the process of evaluating responsive disclosures for implementation of the standard. IFRS 16, Leases ( IFRS 16 ) IFRS 16 introduces a single, on-balance sheet accounting model for lessees. A lessee recognizes a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are optional exemptions for short-term leases and leases of low value items. Lessor accounting remains similar to the current standard i.e. lessors continue to classify leases as finance or operating leases. IFRS 16 replaces existing leases guidance including IAS 17, Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease ( IFRIC 4 ), SIC-15 Operating Leases Incentives, and SIC-27, Evaluating the Substance of Transactions Involving the legal Form of a Lease. The standard is effective for annual periods beginning on or after January 1, 2019. Obligations under operating leases would be recorded on the consolidated statements of financial position. The Company is currently in the process of evaluating the consolidated financial statement implications of adopting IFRS 16. 12
and June 30, IFRIC 23, Uncertainty over Income Tax Treatments ( IFRIC 23 ) In June, the IASB issued IFRIC 23 to clarify the accounting for uncertainties in income taxes. The interpretation provides guidance and clarifies the application of the recognition and measurement criteria in IAS 12, Income Taxes, when there is uncertainty over income tax treatments. The interpretation is effective for annual periods beginning on or after January 1, 2019, and the Company is currently assessing the impact of IFRIC 23 on its consolidated financial statements. Other than the above, there have been no additional accounting pronouncements issued by the IASB that would have a material impact on the Company s consolidated financial statements. 5. Significant accounting judgments, estimations and assumptions The preparation of the Company s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. Judgments In the process of applying the Company s accounting policies, impairment has been identified as an area where judgements have been made that may have a significant effect on the amounts recognized in the consolidated financial statements. Also, in assessing for impairment, judgment is required in determining the aggregation of the Company s assets into CGUs, which is based on economic and commercial influences as well as the interdependence of cash inflows of the Company s operating facilities. The Company has determined that its operations comprise of a single CGU. Estimations and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Company based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising that are beyond the control of the Company. Such changes are reflected in the assumptions when they occur. Pension and other post-employment benefits The cost of defined benefit pension plans and other post-employment benefits and the present value of the obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions. These include the determination of the discount rate, future salary increases, mortality rates and projected retirement age. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. Further details about the assumptions used are provided in note 23. 13