| Summary of significant accounting policies | 2. Summary of significant accounting
policies
(a) Statement of compliance These consolidated financial statements have been
prepared in accordance with International Financial Reporting
Standards (“IFRS”) as issued by the International
Accounting Standards Board (“IASB”). These consolidated financial statements have been
prepared on a going concern basis, and in making the assessment
that the Company is a going concern, management have taken into
account all available future information, which extends for a
period of at least twelve months from December 31, 2017.
(b) Use of estimates and
judgments The preparation of financial statements requires
management to make assumptions and estimates that affect the
reported amounts and other disclosures in these consolidated
financial statements. Actual results may differ materially from the
amounts included in the consolidated financial statements as the
result of changes to the assumptions and inputs upon which
estimates and judgments are based. Areas in which significant estimates and judgments
are used in the preparation of these consolidated financial
statements are: reserves and resources; recoverable amount of
property, plant and equipment; borrowing costs; depletion and
depreciation of property, plant and equipment; decommissioning
obligations; deferred stripping; deferred income taxes; and the net
realizable value of inventories. Estimates and judgments that are
not explained elsewhere in these consolidated financial statements,
which could result in a material effect in the next financial year
on the carrying amounts of assets and liabilities, are outlined
below.
Reserves and resources Mineral reserve and resource estimates are based on
various assumptions relating to operating matters set forth in
National Instrument 43-101. cut-off 43-101). Estimated recoverable reserves are used to
determine the depreciation of property, plant and equipment at each
operating mine area; to account for capitalized deferred stripping
costs; to perform, when required, assessments of the recoverable
amount of property, plant and equipment; as an input to the
projection of future taxable profits which support assessments of
deferred income tax recoverability; and to forecast the timing of
the payment of decommissioning obligations.
Recoverable amount of property, plant and equipment Property, plant and equipment are tested for
impairment when events or changes in circumstance indicate that the
carrying value may be higher than the recoverable amount. Judgment
is required in assessing whether certain factors would be
considered an indicator of impairment. Management considers both
internal and external information to determine whether there is an
indicator of impairment. When an impairment review is undertaken, the
recoverable amount is assessed by reference to the higher of value
in use and fair value less costs of disposal (“FVLCD”).
FVLCD is estimated either from the value obtained from an active
market where applicable, or by using discounted cash flow
techniques based on detailed life-of-mine The estimates used by management in arriving at its
estimate of recoverable amount are subject to various risks and
uncertainties. It is reasonably possible that changes in estimates
could occur, which may affect the expected recoverability of the
Company’s investments in property, plant and equipment.
Borrowing costs Capitalization of borrowing costs related to
construction or development of a qualifying asset requires
management to make a determination as to whether funds have been
borrowed specifically to finance the asset, or form part of the
Company’s general borrowings. This determination requires
management to exercise judgment based on the characteristics of
third party debt facilities, and the usage of related funds drawn
over the life of these facilities. Factors upon which management
bases its judgment include: the estimated duration over which drawn
funds are invested prior to utilization for capital expenditure;
the quantum and timing of debt drawdown relative to that of
expenditure on qualifying assets; and the impact of borrowings at
the subsidiary entity level (for example whether such arrangements
constitute a refinancing arrangement). Amounts capitalized in
relation to general borrowings differ from amounts that would be
capitalized in the event of the same borrowings being determined as
asset specific.
Depletion and depreciation of property, plant and
equipment Property, plant and equipment is the largest
component of the Company’s assets and, as such, the
depreciation of these assets has a significant effect on the
Company’s financial statements. Mining plant and equipment and other capital assets
are depreciated over their expected economic lives using either the
units of production method or the straight-line method. Depletion
of each mineral property interest is provided on the units of
production basis using estimated proven and probable reserves as
the depletion basis. Significant judgment is involved in the
determination of the useful lives of long-lived assets. A change in
the estimated useful life or residual value of a long-lived asset
would result in a change in the rate of depreciation for that
asset. For long-lived assets that are depleted or
depreciated over proven and probable reserves using the units of
production method, a change in the original estimate of proven and
probable reserves would result in a change in the rate of depletion
or depreciation.
Decommissioning obligations The estimate of decommissioning obligations is
based on future expectations in the determination of closure
provisions. Management makes a number of assumptions and judgments
including: estimating the amount of future reclamation costs and
their timing, inflation rates and risk-free discount rates. The
closure provisions are more uncertain the further into the future
the mine closure activities are to be carried out. Actual costs
incurred in future periods in relation to the remediation of the
Company’s existing assets could differ materially from their
estimated undiscounted future value.
Income taxes The Company must make significant estimates in
respect of the provision for income taxes and the composition of
its deferred income tax assets and deferred income tax liabilities.
The Company’s operations are, in part, subject to foreign tax
laws where interpretations, regulations and legislation are complex
and continually changing. As a result, there are usually some tax
matters in question which may, on resolution in the future, result
in adjustments to the amount of current or deferred income tax
assets or liabilities, and those adjustments may be material to the
Company’s balance sheet and results of operations.
The determination of the ability of the Company to
utilize tax losses carried forward to offset income taxes payable
in the future and to utilize temporary differences which will
reverse in the future requires management to exercise judgment and
make assumptions about the Company’s future performance.
Management is required to assess whether the Company is more likely
than not able to benefit from these tax losses and temporary
differences. Changes in the timing of project completion, economic
conditions, metal prices and other factors having an impact on
future taxable income streams could result in revisions to the
estimates of benefits to be realized or the Company’s
assessments of its ability to utilize tax losses before expiry.
These revisions could result in material adjustments to the
financial statements.
Net realizable value of inventories Inventory, including stockpiles of ore, are valued
at the lower of weighted average cost and net realizable value
(“NRV”). If ore stockpiles are not expected to be
processed within the 12 months after the balance sheet date, they
are included within non-current
(c) Basis of consolidation The financial statements consist of the
consolidation of the accounts of Turquoise Hill and its respective
subsidiaries. All intercompany transactions and balances between
Turquoise Hill and its subsidiaries have been eliminated on
consolidation. Where necessary, adjustments are made to assets,
liabilities, and results of subsidiaries to bring their accounting
policies into line with those used by the Company. Subsidiaries are entities controlled by Turquoise
Hill. The financial statements of subsidiaries are included in the
consolidated financial statements from the date that control
commences until the date that control ceases. The Company controls
an entity if it has power to direct the activities of the entity in
a manner that significantly affects its returns, has exposure or
rights to variable returns from its involvement with the entity and
has the ability to use its power to affect those returns. The Company consolidates all subsidiaries. The
Company’s principal operating subsidiary is Oyu Tolgoi LLC
(“Oyu Tolgoi”). Wholly-owned subsidiaries of Turquoise
Hill together hold a 66.0% interest in Oyu Tolgoi, whose principal
asset is the Oyu Tolgoi copper-gold mine located in Southern
Mongolia. The remaining 34% non-controlling non-recourse non-controlling Non-recourse non-controlling non-recourse
(d) Currency translation and foreign
exchange The Company has determined the U.S. dollar to be
the functional currency of Turquoise Hill and its significant
subsidiaries as it is the currency of the primary economic
environment in which Turquoise Hill and all of its significant
subsidiaries operate. Accordingly, monetary assets and liabilities
denominated in foreign currencies are translated into U.S. dollars
at the exchange rate in effect at the date of the balance sheet and
non-monetary
(e) Sales revenue The Company’s source of revenue is from the
sale of concentrate containing copper, gold and silver. Sales
revenue is only recognized on individual sales when all of the
following criteria are met:
•
the Company has transferred to the buyer the
significant risks and rewards of ownership of the product;
•
the Company retains neither continuing managerial
involvement to the degree usually associated with ownership, nor
effective control over the goods sold;
•
the amount of revenue can be measured reliably;
•
it is probable that the economic benefits
associated with the sale will flow to the Company; and
•
the costs incurred or to be incurred in respect of
the sale can be measured reliably. These conditions are generally satisfied and sales
revenue recognized when the product is delivered as specified by
the customer, which is typically upon loading of the product to the
customer’s truck, train or vessel. The Company recognizes
deferred revenue in the event it receives payment from a customer
before a sales transaction meets all the criteria for revenue
recognition. Sales revenue is subject to adjustment based on the
final determination of contained metal. In such cases, sales
revenue is initially recognized on a provisional basis using the
Company’s best estimate of contained metal and subsequently
adjusted. Copper concentrate is “provisionally
priced” whereby the selling price is subject to final
adjustment at the end of a period normally ranging from 30 to 180
days after delivery to the customer as defined in the sales
contract. The final price is based on the market price at the
relevant quotation point stipulated in the contract which gives
rise to an embedded derivative that is required to be bifurcated
from the host contract. The host contract is the receivable from
the sale of product based on relevant forward market prices at the
time of sale. At each reporting date, the provisionally priced
embedded derivative is marked to market based on the forward
selling price for the quotation period stipulated in the contract.
For this purpose, the selling price can be measured reliably for
those products, such as copper, gold, and silver, for which there
exists an active and freely traded commodity market such as the
London Metals Exchange and the value of product sold by the Company
is directly linked to the form in which it is traded on that
market. The change in fair value of the embedded derivative is
classified as a component of sales revenue. Mining royalties are included in operating
expenses.
(f) Exploration and
evaluation All direct costs related to the acquisition of
mineral property interests are capitalized in the period
incurred. Exploration and evaluation costs are charged to
operations in the period incurred until such time as it has been
determined that a mineral property has proven and probable reserves
and the property is economically viable, in which case subsequent
evaluation costs incurred to develop a mineral property are
capitalized. Exploration and evaluation costs include value-added
taxes incurred in foreign jurisdictions when recoverability of
those taxes is uncertain.
(g) Property, plant and
equipment Property, plant and equipment are recorded at cost,
less accumulated depletion and depreciation and accumulated
impairment losses. The cost of property, plant and equipment
includes the estimated close down and restoration costs associated
with the asset. Once an undeveloped mining project has been
established as commercially viable, including that it has
established proven and probable reserves and approval to mine has
been given, expenditure other than that on land, buildings, plant
and equipment is capitalized under “Mineral property
interests.” Ore reserves may be declared for an undeveloped
mining project before its commercial viability has been fully
determined and approval to mine has been given. Evaluation costs
may be capitalized during the period between declaration of
reserves and approval to mine as further work is undertaken in
order to refine the development case to maximize the
project’s return. Project development expenditures, including costs
to acquire and construct buildings and equipment are capitalized
under “Capital works in progress” provided that the
project has been established as commercially viable. Capital works
in progress are not categorized as mineral property interests,
mining plant and equipment or other capital assets until the
capital asset is in the condition and location necessary for its
intended use. Costs, which are incurred during the commissioning
phase, that are necessary for the successful commissioning of new
assets, are capitalized. Development costs incurred after the
commencement of production are capitalized to the extent they are
expected to give rise to a future economic benefit. Borrowing costs related to construction or
development of a qualifying asset are capitalized until the point
when substantially all the activities that are necessary to make
the asset ready for its intended use are complete. Where funds have
been borrowed specifically to finance an asset, the amount
capitalized is the actual interest on borrowings incurred. Where
the funds used to finance an asset form part of general borrowings,
the amount capitalized is calculated using a weighted average of
rates applicable to relevant general borrowings of the Company
during the period.
(h) Deferred stripping In open pit mining operations, it is necessary to
remove overburden and other waste materials to access ore from
which minerals can be extracted economically. The process of mining
overburden and waste materials is referred to as stripping. During the development of an open pit mine, before
production commences, stripping costs are capitalized as part of
mineral property interests and are subsequently amortized over the
life of the mine on a units of production basis. During the production phase, stripping activity is
undertaken for the dual purpose of extracting inventory for current
production as well as improving access to the ore body. Stripping costs incurred for the purpose of
extracting current inventories are included in the costs of
inventory produced during the period the stripping costs are
incurred. In order for production phase stripping costs to
qualify for capitalization as a stripping activity asset, three
criteria must be met:
•
it must be probable that economic benefit will be
realized in a future accounting period as a result of improved
access to the ore body created by the stripping activity;
•
it must be possible to identify the
“component” of the ore body for which access has been
improved; and
•
it must be possible to reliably measure the costs
that relate to the stripping activity.
When the cost of stripping related to development
which has a future benefit is not distinguishable from the cost of
producing current inventories, the stripping costs are allocated to
each activity based on a relevant production measure. Generally,
the measure would be calculated based on a ratio obtained by
dividing the tonnage of waste mined for the component for the
period by the quantity of ore mined for the component. Stripping
costs incurred in the period related to the component are deferred
to the extent that the current period ratio exceeds the life of
component ratio. The stripping activity asset is depreciated on a
units of production basis based on expected production of ore over
the useful life of the component that has been made more accessible
as a result of the stripping activity. The life of component ratios
are based on proven and probable reserves based on the mine plan;
they are a function of the mine design and therefore changes to
that design will generally result in changes to the ratios. Changes
in other technical or economic parameters that impact reserves may
also impact the life of component ratios. Changes to the life of
component ratios are accounted for prospectively. Deferred stripping costs are included in
“Mineral property interests” within property, plant and
equipment. Amortization of deferred stripping costs is included as
a cost of production in the period.
(i) Depreciation and
depletion Property, plant and equipment is depreciated over
its useful life, or over the remaining life of the mine if that is
shorter. The useful lives of the major assets of a
cash-generating unit are often dependent on the life of the ore
body to which they relate. Where this is the case, the lives of
mining properties, and their associated concentrators and other
long lived processing equipment generally relate to the expected
life of the ore body. The life of the ore body, in turn, is
estimated on the basis of the life-of-mine Development costs that relate to a discrete section
of an ore body, and which only provide benefit over the life of
those reserves, are depreciated over the estimated life of that
discrete section. Development costs incurred that relate to the
entire ore body are depreciated over the estimated life of the
entire ore body. Assets within operations for which production is
not expected to fluctuate significantly from one year to another or
which have a physical life shorter than the mine are depreciated on
a straight-line basis. Depreciation commences when an asset is
available for use.
(j) Impairment of non-current Property, plant and equipment is reviewed for
impairment when events or changes in circumstances indicate that
the full carrying amount may not be recoverable. Impairment is assessed at the level of
cash-generating units which are identified as the smallest
identifiable group of assets capable of generating cash inflows
which are largely independent of the cash inflows from other
assets. When an impairment review is undertaken, the recoverable
amount is assessed by reference to the higher of value in use and
FVLCD. The value in use is the net present value of
expected future pre-tax The best evidence of FVLCD is often the value
obtained from an active market or binding sale agreement. Where
this is not the case, or where neither an active market nor a
binding sale agreement exists, FVLCD is based on the best
information available to reflect the amount a market participant
would pay for the cash-generating unit in an arm’s length
transaction. This is often estimated using discounted post tax cash
flow techniques based on detailed life-of-mine The cash flow forecasts are based on
management’s best estimates of expected future revenues and
costs, including the future cash costs of production, capital
expenditure, closure, restoration and environmental clean-up, Forecast cash flows for impairment purposes are
generally based on management’s price forecasts of commodity
prices, which assume short term observable market prices will
revert to the Company’s assessment of the long term price,
generally over a period of three to five years. These long-term
forecast commodity prices are derived from industry analyst
consensus. The discount rates applied to the future cash flow
forecasts represent an estimate of the rate the market would apply
having regard to the time value of money and the risks specific to
the asset for which the future cash flow estimates have not been
adjusted. Non-current
(k) Decommissioning
obligations The Company recognizes liabilities for statutory,
contractual, legal or constructive obligations associated with the
retirement of property, plant and equipment, when those obligations
result from the acquisition, construction, development or normal
operation of the assets. Initially, a provision for a
decommissioning obligation is recognized at its net present value
in the period in which it is incurred, using a discounted cash flow
technique with market-based risk-free discount rates and estimates
of the timing and amount of the settlement of the obligation. Upon initial recognition of the liability, the
corresponding decommissioning cost is added to the carrying amount
of the related asset. Following initial recognition of the
decommissioning obligation, the carrying amount of the liability is
increased for the passage of time and adjusted for changes to
significant estimates including the current discount rate, the
amount or timing of the underlying cash flows needed to settle the
obligation and the requirements of the relevant legal and
regulatory framework. Subsequent changes in the provisions
resulting from new disturbance, updated cost estimates, changes to
estimated lives of operations and revisions to discount rates are
also capitalized to the related property, plant and equipment.
Amounts capitalized to the related property, plant and equipment
are depreciated over the lives of the assets to which they relate.
The amortization or unwinding of the discount applied in
establishing the net present value of provisions is charged to
expense and is included within finance costs in the consolidated
statement of income.
(l) Inventories Concentrate inventory is valued at the lower of
weighted average cost and net realizable value. Cost comprises
production and processing costs, which includes direct and indirect
labour, operating materials and supplies, applicable transportation
costs and apportionment of operating overheads, including
depreciation and depletion. Net realizable value is the expected
average selling price of the concentrate inventory less applicable
selling and transportation costs. Stockpiles represent ore that has been extracted
and is available for further processing. Stockpiles are valued at
the lower of weighted average production cost and net realizable
value. Production cost includes direct and indirect labour,
operating materials and supplies, applicable transportation costs,
and apportionment of operating overheads, including depreciation
and depletion. Net realizable value is the expected average
selling price of the finished product less the costs to get the
product into saleable form and to the selling location. If the ore
will not be processed and sold within the 12 months after the
consolidated balance sheet date it is included within non-current Mine stores and supplies are valued at the lower of
the weighted average cost and net realizable value.
(m) Taxation Income tax expense comprises current and deferred
tax. Current tax and deferred taxes are recognized in the
consolidated statement of income except to the extent that they
relate to items recognized directly in equity or in other
comprehensive income. Current tax is the expected tax payable or
receivable on the taxable income or loss for the year, using tax
rates enacted or substantively enacted at the reporting date. Deferred tax is recognized in respect of unused tax
losses and credits, as well as temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. Deferred tax
is measured at the tax rates that are expected to be applied to
temporary differences when they reverse, based on enacted or
substantively enacted laws at the reporting date. The Company computes the provision for deferred
income taxes under the liability method. A deferred tax asset is
recognized for unused tax losses, tax credits and deductible
temporary differences, only to the extent that it is probable that
future taxable profits will be available against which they can be
utilized. Future taxable profits are estimated using an income
forecast derived from cash flow projections, based on detailed
life-of-mine Deferred tax is not recognized for the initial
recognition of assets or liabilities in a transaction that is not a
business combination and that affects neither accounting nor
taxable profit or loss, and differences relating to investments in
subsidiaries, associates and joint arrangements to the extent that
it is probable that they will not reverse in the foreseeable
future. The Company is subject to assessments by various
taxation authorities, who may interpret tax legislation differently
from the Company. The final amount of taxes to be paid depends on a
number of factors, including the outcomes of audits, appeals or
negotiated settlements. Such differences are accounted for based on
management’s best estimate of the probable outcome of these
matters. The Company must make significant estimates and
judgments in respect of its provision for income taxes and the
composition and measurement of its deferred income tax assets and
liabilities. The Company’s operations are, in part, subject
to foreign tax laws where interpretations, regulations and
legislation are complex and continually changing. As a result,
there are usually some tax matters in question that may, upon
resolution in the future, result in adjustments to the amount of
deferred income tax assets and liabilities; those adjustments may
be material.
(n) Employee benefits Wages, salaries, contributions to government
pension and social insurance funds, compensated absences and
bonuses are accrued in the year in which the employees render the
associated services.
(o) Cash and cash equivalents For the purposes of the consolidated balance sheet,
cash and cash equivalents comprise cash on hand, demand deposits
and short term, highly liquid investments with an initial maturity
of three months or less that are readily convertible into known
amounts of cash and which are subject to insignificant risk of
changes in value.
(p) Financial instruments
(i) Financial assets The Company categorizes its financial assets in the
following categories: at fair value through profit or loss, loans
and receivables, available for sale or held-to-maturity Management determines the classification of the
Company’s non-derivative held-to-maturity.
a) Loans and receivables Loans and receivables comprise non-derivative
b) Available for sale financial
assets Available for sale financial assets are
non-derivatives
The Company assesses at each balance sheet date
whether there is objective evidence that a financial asset or a
group of financial assets is impaired. In the case of equity
securities classified as available for sale, an evaluation is made
as to whether a decline in fair value is “significant”
or “prolonged”. Impairment losses are recorded in the
consolidated statement of income.
(ii) Financial liabilities Borrowings and other financial liabilities
(including trade payables but excluding embedded derivatives) are
recognized initially at fair value, net of transaction costs
incurred, and are subsequently stated at amortized cost. Any
difference between the amounts originally received for borrowings
and other financial liabilities (net of transaction costs) and the
redemption value is recognized in the consolidated statement of
income over the period to maturity using the effective interest
method.
(iii) Derivative financial
instruments Derivatives are initially recognized at their fair
value on the date the derivative contract is entered into and
transaction costs are expensed in the consolidated statement of
income. The Company’s derivatives are subsequently
re-measured Derivatives embedded in other financial instruments
or other host contracts are treated as separate derivatives when
their risks and characteristics are not closely related to their
host contracts.
(q) Share based payments The Company has an Employees’ and
Directors’ Equity Incentive Plan, a Performance Share Unit
(“PSU”) Plan and a Director Deferred Share Unit
(“DDSU”) Plan. The fair value of stock options at the date of
grant is charged to operations over the vesting period, with an
offsetting credit to contributed surplus. If and when the stock
options are ultimately exercised, the applicable amounts of
contributed surplus are transferred to share capital. The PSUs and DDSUs are accounted for at fair value
upon issuance and remeasured each reporting period, based on the
fair market value of a common share of the Company, and recognized
as an expense on a straight-line basis over the vesting period.
(r) Segment reporting An operating segment is a component of the Company
that engages in business activities from which it may earn revenues
and incur expenses, including revenues and expenses that relate to
transactions with any of the Company’s other components.
Operating segments are reported consistently with internal
information provided to the chief operating decision maker
(“CODM”). The CODM, who is responsible for allocating
resources and assessing performance, has been identified as
Turquoise Hill’s Chief Executive Officer. Based upon
management’s assessment of the above criteria, the Company
has one operating segment, Oyu Tolgoi, with its copper-gold mine in
Southern Mongolia.
(s) New standards and interpretations
not yet adopted A number of new standards, and amendments to
standards and interpretations, are not yet effective for the year
ending December 31, 2017, and have not been applied in
preparing these consolidated financial statements. The following
standards may have an effect on future consolidated financial
statements of the Company:
(i)
IFRS 9, Financial Instruments Financial Instruments: Recognition and
Measurement Financial Instruments: Disclosures The Company has reviewed its financial assets and
liabilities and is expecting the following impact from the adoption
of the new standard on January 1, 2018: The Company expects to make an election upon
initial recognition for equity instruments currently classified as
available for sale, to satisfy the conditions for classification as
fair value through other comprehensive income
(“FVOCI”). Fair value movements and gains or losses
realized on the sale of financial assets at FVOCI will not be
reclassified to the consolidated statement of income.
The Company’s financial assets currently
classified as loans and receivables and measured at amortized cost
will be classified at amortized cost with the exception of the
Company’s investments in money market funds and provisionally
priced trade receivables that will be classified as financial
assets at fair value through profit and loss. There will be no impact on the Company’s
accounting for financial liabilities. The new impairment model requires the recognition
of impairment provisions based on expected credit losses, rather
than only incurred credit losses, as is the case under IAS 39. The
new impairment model applies to the Company’s financial
assets classified at amortized cost. Based on the assessments
undertaken to date, the Company does not expect credit losses to be
material upon adoption of the new standard. The calculation will be
updated at every reporting period. The new standard introduces expanded disclosure
requirements and changes in presentation. These are expected to
change the nature and extent of the Company’s disclosures
about its financial instruments particularly in the year of
adoption of the new standard.
(ii)
IFRS 15, Revenue from Contracts with
Customers Revenue The Compa |
