Implementation of IFRS in KGHM Polska Miedź

S.A. Capital Group – experiences and challenges

1 4 December 2013

St. Barbara’s Day

Agenda

• Brief description of KGHM Polska Miedź S.A. Capital Group

• 2004/2005 – implementation of IFRS based on IFRS 1 on the

level of consolidated financial statements of the Group

• 2006/2007 - implementation of IFRS based on IFRS 1 on the

level of unit financial statements of KGHM Polska Miedź S.A.

• 2011/2013 - implementation of IFRS based on IFRS 1 on the

level of unit financial statements of selected domestic

companies of the Group

• 2012 – acquisition of Quadra FNX Capital Group – challenges

in scope of integration of accounting policies

• Current implementation of IFRS – challenges and risks

• Summary

2

Brief description of KGHM Polska

Miedź S.A. Capital Group

Organizational structure of KGHM company LGOM Area

4

KGHM Polska Miedź S.A.

KGHM Home Office

ZG Lubin

ZG Rudna

ZG Polkowice-Sieroszowice

Ore Enrichment Plant

Hydrotechnical Plant

HM Głogów

HM Legnica

HM Cedynia

JRGH

COPI

5

Structure of KGHM Polska Miedź S.A. Capital Group

Jednostka Dominująca

KGHM Polska Miedź S.A.

PeBeKa S.A.100%

KGHM CUPRUM sp. z o.o. – CBR100%

KGHM Metraco S.A.100%

Zagłębie Lubin S.A.100%

KGHM TFI S.A.

100%

KGHM Kupferhandelsges. m.b.H.i.L

100%

KGHM Kupfer AG

100%

„MIEDZIOWE CENTRUM ZDROWIA” S.A.

100%

CBJ sp. z o.o.

100%

KGHM LETIA S.A.

85,45%

INOVA Spółka z o.o.

100%

KGHM ZANAM Sp. z o.o.

100%

KGHM (SHANGHAI) COPPER TRADING CO., LTD.

100%

„Energetyka” sp. z o.o.

100%

„BIOWIND” sp. z o.o.

100%

WPEC w Legnicy S.A.

85,20%

POL-MIEDŹ TRANS Sp. z o.o.

100%

PMT Linie Kolejowe Sp. z o.o.

100%

PHP „MERCUS” sp. z o.o.

100%

PHU „Lubinpex” Sp. z o.o.

100%

BIPROMET S.A.

66%

Przedsiębiorstwo Budowlane Katowice S.A.

58,14%

Bipromet Ecosystem Sp. z o.o.

33,66%

NITROERG S.A.

85%

WFP Hefra SA

98,50%

Ecoren DKE sp. z o.o. w likwidacji

100%

CENTROZŁOM WROCŁAW S.A.

97,96%

WMN „ŁABĘDY” S.A.

84,96%

KGHM Ecoren S.A.

100%

Fundusz Hotele 01 Sp. z o.o.

100%

Fundusz Hotele 01 Sp. z o.o. S.K.A.

100%

INTERFERIE S.A.

67,71%

KGHM I FIZAN

100%

Polska Grupa Uzdrowisk Sp. z o.o.

100%

Polska Grupa Uzdrowisk Sp. z o.o. S.K.A.

100%

Uzdrowiska Kłodzkie S.A. – Grupa PGU

92,57%

Uzdrowisko Połczyn Grupa PGU S.A.

90,45%

„Uzdrowisko Cieplice” Sp. z o.o. – Grupa PGU

91,67%

Interferie Medical SPA Sp. z o.o.

89,46%

Uzdrowisko „Świeradów-Czerniawa” sp. z o.o. –

Grupa PGU

87,74%

KGHM II FIZAN w likwidacji

100%

KGHM III FIZAN

100%

Fermat 1 S.á r.l.

wraz z Grupą Kapitałową

KGHM INTERNATIONAL LTD.

100% (ciąg dalszy na następnej stronie)

Szczebel I

Szczebel II

Szczebel III

Szczebel IV

KGHM IV FIZAN

100%

KGHM V FIZAN

100%

Level I

Fermat 1 S.a.r.l with KGHM

INTERNATIONAL LTD Capital Group

100% (continued on next page)

Level II

Level III

Level IV

Mother Company

6

Structure of KGHM International Ltd Capital Group

Level I

Level II

Level III

Level IV

Level V

Level VI

Level VII

Level VIII

KGHM is a global producer on non-ferrous metals market

7 * TPM – noble metals

KGHM mining projects

KGHM mines

Copper mills

Poland

Polkowice-Sieroszowice mine (Cu, Ag)

Lubin mine (Cu, Ag)

Rudna mine (Cu, Ag)

Głogów Copper Plant

Legnica Copper Plant

Exploration in the region

Greenland

Malmbjerg (Mo)

Germany

Weisswasser

(Cu, Ag)

Canada

McCreedy (Cu, Ni, TPM*)

Morrison (Cu, Ni, TPM)

Podolsky (Cu, Ni, TPM)

Victoria (Cu, Ni, TPM)

Chile

Franke (Cu)

Sierra Gorda (Cu, Mo, Au)

USA

Robinson (Cu, Au, Mo)

Carlota (Cu)

Canada

Afton-Ajax (Cu, Au)

Stage I - 2004/2005 Implementation of IFRS on the level of consolidated financial

statements of KGHM Polska Miedź S.A. Capital Group

Stage II - 2006/2007 Implementation of IFRS on the level of unit financial statements

of KGHM Polska Miedź S.A.

Project organization - 2004

• Creating project implementation structures, involving

employees of both accounting and engineering services

of mother company as well as those of key subsidiaries,

with participation of a consultant,

• Analysis and identification of main areas of IFRS

implementation in consolidated financial statements,

• Developing implementation schedule,

• Defining the list of deliverables: accounting policy,

reporting package for consolidation purposes, financial

statements template, instructions

9

Implementation of IFRS - 2004-2005

All areas of divergence between Polish balance sheet law

and IFRS were identified.

Main differences pertained to:

- tangible fixed assets (IAS 16, IAS 29)

- financial instruments (mostly presentation)

- equity (practically absence of standards)

- template for a reporting package for entities included in

consolidation and template for a financial statement

with required disclosures (IAS1, template statements in

various publications)

10

Greatest challenges and changes

Tangible fixed assets

• Determining the deemed cost of fixed assets as of the day of IFRS

adoption, i.e. 1 January 2004, in accordance with IAS 16. In order to

achieve that, the following were performed (among other things):

- adjusting the value of fixed assets for hyperinflation

environment,

- verification of depreciation periods,

- identification of significant constituent parts,

- adjustment of costs of external financing.

• Many thousands of fixed assets were analyzed individually

(materiality criteria for re-measurement were set)

• As a result of re-measurement, value of the Group’s assets was

increased by 400 million PLN, of which 372 million PLN due to

hyperinflation.

11

Greatest challenges and changes, ctd.

Equity

• need to update the value of base capital for hyperinflation

conditions (IAS 29)

• change of presentation of equity items in the financial

statements – divergence between the principles of

domestic commercial companies law and IFRS in scope

of structure and functions of equity items

• IFRS lacks specific guidance in scope of equity structure

• sensitive area for owners due to potential profit

distribution – concerns about distribution of amounts

resulting purely from accounting operations

12

Results of implementation of Stage I

• Developing new Accounting Policy for KGHM

Polska Miedź S.A. Capital Group, compliant with

IFRS

• Developing a template for consolidated financial

statements compliant with IFRS

• Developing a template reporting package for

presentation of IFRS compliant disclosures for

the mother company and subsidiaries (over 240

reporting notes)

13

Project organization – 2006, Stage II

• In continuing IFRS implementation, which

started in 2004, project teams were

established for main areas: fixed assets,

financial instruments, reporting, chart of

accounts,

• Implementation of IFRS in KGHM accounting

books involved adapting IT systems in scope

of registration and financial reporting, which

resulted in significantly increased complexity of

the implementation.

14

Implementation of IFRS - 2006-2007 Main challenges of this Stage:

• Rebuilding the chart of accounts

• Updating the accounting policy

• Mapping the differences in the area of tangible fixed

assets, identified by type and value, to the accounting IT

system

• Changes in methods of valuation of capital investments

• Implementation, in the IT system, of the reporting

package generated based on data warehouse – BW

• Including differences between Polish accounting law and

IFRS in the Company’s budgeting and planning system.

15

Key areas of change in Stage II

Chart of Accounts: • introducing new categories of assets/liabilities and creating new

accounts, such as e.g. investment properties, significant spare parts and emergency equipment, components, significant renovations and reviews

• reclassification of selected categories of assets/liabilities including new accounting solutions, e.g. reclassification of accruals receivable to accounts receivable and fixed assets

• expanding and increasing the level of detail in accounts so as to adapt them to the balance sheet items, in scope of e.g. financial instruments

• complete restructuring of selected groups of accounts (mostly 7*) due to different grouping of economic operations between activities in the profit and loss account in IFRS as compared to Polish accounting standards.

• expanding independent areas of fixed assets valuation for tax purposes

16

Stage III – years 2011-2013

Implementation of IFRS in

selected domestic companies of

the Capital Group

Implementation of IFRS in companies of the

Group – in statutory reports

• In 2011-2013, IFRS was implemented in 14 significant domestic companies of the Capital Group

• Areas of greatest change were, as usual: tangible fixed assets, developing accounting policies customized for each company individually, adapting IT systems in companies for new needs. To a large extent, it was a roll-out of solutions applied for KGHM.

18

Implementation of IFRS in companies of the

Group, ctd. • Companies, to a larger extent than the mother

company, have used fair value measurement to

value tangible fixed assets as of the day of IFRS

adoption

• IFRS 1 has been significantly modified since

2004 – easier implementation

Results achieved:

• Companies are able to reflect substance of

economic events much better

19

Acquisition and consolidation of

Quadra FNX Capital Group, 2012

First consolidation of Quadra FNX

Capital Group

• Acquisition of Quadra FNX Capital Group

(Currently KGHM International Capital Group)

took place on 5 March 2012.

• First consolidation in statements for Q1 2012

• Before publication of statements for Q1,

preliminary accounting for acquisition price is

necessary, (IFRS3), time: 7-8 weeks,

• Quadra FNX Capital Group has implemented

IFRS as of 2011

21

First consolidation of Quadra FNX Capital

Group - challenges

• Different culture of work organization in Quadra:

fewer formalized procedures, scopes published

in the financial statements served as accounting

policy

• Time pressure – need for immediate integration

of accounting policies in order to ensure

continuity and correctness of reporting on the

level of KGHM Polska Miedź SA Capital Group

22

First consolidation of Quadra FNX Capital

Group – adaptation

Analysis and identification of areas regulated differently in

scope of valuation, qualification and presentation.

Examples of those identified include:

different approach to expenditures for mining activity –

different extraction methods (open pit vs. underground

mine)

different methods of copper concentrate production

(enrichment vs. leeching)

Different methods of depreciation

23

Consolidation of KGHM International Ltd. Capital

Group – adaptation, ctd.

different methods of recognition, classification and

presentation of items in a financial statement

different methods for revenues recognition

Application of IFRS in both organizations allowed

rapid development of joint accounting policy for

„new” KGHM Polska Miedź S.A. Capital Group

(during the quarter) and efficient resolution of

areas of divergence.

24

Current implementation of IFRS changes

in the Group

IFRS – greatest challenges today

• A very large number of small changes to

IAS/IFRS

• Long duration of IASB work on new

standards – weakened involvement in

current monitoring of changes

• Absence of current versions of amended

provisions in local language

26

IFRS – greatest challenges today, ctd.

• IASB publications do not include certain older, but still binding versions of standards, e.g. IAS 39

• Support of mother company for the companies in the Group in scope of monitoring changes to IFRS and assistance in implementation of such changes (lack of appropriately qualified personnel)

• Maintaining high level of the Group’s financial statements

27

IFRS - greatest risk to KGHM CG today

Risk of inconsistent IFRS platform between EU and

other countries applying IFRS.

Since 1 January 2013, KGHM Int. Capital Group must

apply IFRS 10,11,12 (so-called consolidation

package). KGHM Polska Miedź Group is only

obligated to do so since 1 January 2014.

In future, same risk may pertain to IFRS 9 – Financial

Instruments.

Risk resulting from lack of consistency in

interpretation of IFRS principles by audit companies,

mostly the Big Four.

28

SUMMARY

INTERNATIONAL FINANCIAL REPORTING STANDARDS ALLOW

EFFICIENT MERGER OF BUSINESSES AND ENABLE ACCOUNTANTS

WORLDWIDE TO SPEAK THE SAME LANGUAGE OF ACCOUNTING

STANDARDS, RESULTING IN EFFECTIVE MUTUAL UNDERSTANDING.

WE ARE GLAD, THAT AS KGHM POLSKA MIEDŹ S.A. WE ARE A

MEMBER OF GLOBAL FAMILY OF COMPANIES APPLYING IFRS.

BEING A POLISH COMPANY, AS WE PURCHASE MINERAL DEPOSITS

AND BUSINESSES IN REMOTE PARTS OF THE WORLD WE DO NOT

HAVE TO WORRY, AS EXPERIENCE HAS SHOWN THAT WE HAVE A

LOT TO OFFER.

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Thank you for your attention.