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This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this presentation without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this presentation, and, to the extent permitted by law, PricewaterhouseCoopers, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this presentation or for any decision based on it. Without prior permission of PricewaterhouseCoopers, the contents of this presentation may not be quoted in whole or in part or otherwise referred to in any documents.

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Issue 1 Component: Assets / Property plant and equipment (IAS 16) Major replacements/ overhauls to components of plant and equipment such as "pot lining" Issue It is common in the metals industry that major components of some items of property, plant and equipment are replaced or subject to major overhauls at regular intervals. For example, the "lining" of an aluminium smelter's kiln is typically replaced every four years or so. The rest of the fixed asset last considerably longer. How should this expenditure be accounted for? Solution Components, such as pot lining, are accounted for as separate assets because they have useful lives different from those of the larger items of plant and equipment of which they are a part. The expenditure incurred in replacing or renewing the component is accounted for as the acquisition of a separate, new asset and the replaced asset is written off according to IAS 16 R.27. The costs of a major inspection or overhaul should be expensed as incurred except if: a) the components which are being replaced or restored have already been previously identified and depreciated so as to reflect the consumption of the economic benefits provided by them; b) it is probable that future economic benefits will flow from the asset being inspected or overhauled; and c) the cost of the major inspection or overhaul can be measured reliably. Therefore, if these three criteria are met, the expenditures should be capitalised as a component of the asset. Management should identify the components of plant and equipment (such as pot lining) that will need a major overhaul and replacement at the time of acquisition of the asset. These components are recognised as separate assets. The initial cost of the equipment should be apportioned between these components and the remainder of the asset. The components subject to overhaul and replacement should be depreciated over the period to the next overhaul. The remainder of the cost of the equipment is depreciated to its residual value over the full useful life.

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Issue 2 Accounting for expenditures after the initial commissioning of an asset expense vs. capitalise Issue It is common in the metals industry for companies to have complex capital projects involving long installation processes with modifications and improvements continuing after the initial commissioning and use of the asset. The issue is whether the subsequent expenditures should be capitalised or expensed. Solution IAS 16 R.16 requires that the cost of an item of property, plant and equipment should include the directly attributable costs of bringing the asset to working condition for its intended use. Subsequent expenditures may be recognised in the carrying amount of a fixed asset if they meet certain recognition criteria [IAS 16 R.12-14]. The cost of an item of property, plant and equipment is recognised as an asset if it is probable that future economic benefits will flow to the entity and the cost can be measured reliably. Subsequent expenditure is capitalised if it extends the useful life of the asset or expands its capacity. For an illustrative example please refer to the Appendix 2 "Accounting for expenditures after the initial commissioning of an asset expense vs. capitalise" (page 40)..10.

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Issue 3 Accounting for government grants and disclosure of government assistance Issue Metals companies often receive investment grants from governments as a contribution towards capital expenditures. The government grant may take the form of a transfer of a non-monetary asset, such as land, for use by the company or cash. When and how should the company recognise such government grants and how should these grants be measured? Solution IAS 20 "Accounting for Government Grants and Disclosure of Government Assistance" provides accounting and disclosure standards for government grants and other forms of government assistance to business enterprises. The grant should be recognised when there is reasonable assurance that the enterprise will comply with the conditions attached and that the grants will be received [IAS 20.7]. The reporting entity should have fulfilled all conditions attached to the grant. Grants that require the recipient to purchase, construct, or otherwise acquire long-lived assets, including intangible assets, should be recognised either by setting up the grant as deferred income (a liability) or by deducting the grant from the carrying amount of the asset [IAS 20.24]. Deferred income must be recognised in the income statement on a systematic and rational basis over the useful life of the asset. Non-monetary grants that are intended to compensate an enterprise for specific costs should be recognized systematically as income over the periods necessary to match those grants with the costs they are intended to compensate [IAS 20.12]. Non-monetary grants (such as transfer of land) may be reported at the nominal amount or at fair value [IAS 20.23]. Grants related to assets may be reported as a reduction in the cost of the asset. However, valuing non-monetary assets at fair value and recognising an asset with a corresponding deferred income is preferable, as it more fully reflects the substance of the underlying arrangement. For an illustrative example please refer to the Appendix 3 "Accounting for government grants and disclosure of government assistance" (page 41).

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Issue 4 Component: Assets retirement obligations (Liabilities / Provisions (IAS 37) and Assets (IAS 37) Issue The cost of an item of property, plant and equipment should include the estimated cost of dismantling and removing the asset and restoring the site, to the extent that it is recognised as a provision under IAS 37, Provisions, Contingent Liabilities and Contingent Assets. The question is how should management recognise the estimated cost of dismantling and removing the asset and restoring the site? Solution Provisions are discounted, where the effect is material [IAS 37 R.46]. The amount of a provision is the present value of the expenditures expected to be required to settle the obligation. The discount rate should be a pre-tax rate that reflects current market assessments of the time value of money. For example, a steel mill has an obligation, at the date of installation, to decommission liquid waste storage at the end of its thirty-year life in accordance with local legislative requirements. The decommissioning costs for the equipment are estimated to be US$ 140,000,000. Management has estimated a discount rate is of 10%. The net present value of the decommissioning costs obligation was estimated at US$ 8,000,000. Management should include US$ 8,000,000, in the carrying amount of the liquid waste storage at the time of its installation. A provision for US$ 8,000,000. is created because the obligating event is the installation of the storage. The double entry required for the recognition of the asset and the liability will be: DR PPE constructions CR Provisions decommissioning US$ 8,000,000 US$ 8,000,000

The amount included in Property, Plant and Equipment will be depreciated with the rest of the cost of the storage in the usual way. Where discounting is used, the carrying amount of a provision is increased in each period to reflect the passage of time. This increase is recognised as borrowing cost [IAS 37 R.60].

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Each year an adjustment is made for the amount of borrowing cost; calculated as the current balance of provision multiplied by the discount rate. The following table summaries the calculation of the borrowing costs for the whole period: (provision opening Year Provision Opening Balance US$ Interest (Provision opening balance*10% 800,000 880,000 12,730,000 Provision Closing Balance (Provision opening balance + Interest)US$ 8,800,000 9,710,000 140,000,000

1 2 30

8,000,000 8,800,000 127,270,000

Therefore in the next two years and the last year borrowing cost adjustments will be: Year/Accounting DR, US$ CR, US$ Year/ Accounting DR, US$ CR, US$ Year 1 Interest expense 800,000 Provisions decommissioning 800,000 Year 2 Interest expense 880,000 Provisions decommissioning 880,000 The last year entry will be: Year 30 Interest expense 12,730,000 Provisions decommissioning 12,730,000