5th May 2005 07:01
Rio Tinto PLC05 May 2005 Adoption of International Financial Reporting Standards Rio Tinto will report its results for the six months to 30 June 2005 andsubsequent periods in accordance with International Financial ReportingStandards (IFRS). This statement presents the Group's IFRS balance sheets as at31 December 2004 and 30 June 2004 together with the Group's IFRS results andcash flows for the periods then ended. It also presents and explains thedifferences between the Group's results and shareholders' equity under IFRS andthe amounts previously reported for these periods under UK Generally AcceptedAccounting Principles (UK GAAP). Salient points for year ended 31 December 2004 • The change to reporting under IFRS does not affect the cash flow generation of Rio Tinto's businesses and hence will not affect any commercial decisions. • 2004 IFRS reported cash flow from operations, which includes dividends from equity accounted joint ventures and associates, is $4.5 billion pre-tax. • Net debt of $3.8 billion is practically unchanged under IFRS. • IFRS Net Earnings were $405 million higher than UK GAAP Net Earnings (which included the amortisation of goodwill). • To enhance understanding of the performance of Rio Tinto's businesses an alternative earnings measure, Underlying Earnings, will be presented in addition to Net Earnings. • IFRS Underlying Earnings for 2004 were $2,272 million which compares with $2,221 million for UK GAAP Adjusted Earnings (which included the amortisation of goodwill). • Shareholders' equity at 31 December 2004 is $707 million (six per cent) lower than UK GAAP. IFRS is continuing to evolve through the issue and/or endorsement of newStandards and Interpretations and developments in the application of recentlyissued Standards. For that reason, it is possible that the amounts included inthis announcement will change before they are presented as comparatives to theIFRS financial information issued by the Group in respect of the periods to 30June 2005 and 31 December 2005. The amounts presented in this release do notreflect IAS 39 "Financial Instruments: Recognition and Measurement" which willbe adopted with effect from 1 January 2005. All dollars are US dollars unless otherwise stated Net Earnings and Underlying Earnings Year ended 31 December 2004 IFRS UK GAAP US$ millions Net Earnings 3,218 2,813 Items excluded from Underlying Earnings/Adjusted Earnings Asset write downs and provision for contract obligation 321 321 Profit on disposals of interests in businesses (1,175) (913) Effect of exchange on US dollar debt (80) - Mark to market of derivatives (12) - Underlying Earnings/Adjusted Earnings 2,272 2,221 All numbers are stated net of tax and outside interests Under UK GAAP, Rio Tinto presented an alternative measure of earnings, AdjustedEarnings, to provide insight into the underlying performance of its business.To achieve the same aim under IFRS, Rio Tinto will present Underlying Earningsas well as Net Earnings. The complexity of IFRS results in a greater number ofitems that need to be excluded from Net Earnings to provide a measure ofunderlying performance. Underlying Earnings will exclude impairments of noncurrent assets and gains and losses from disposals of interests in businesses.It will also exclude certain items that, although included in the IFRS IncomeStatement, do not reflect the economic impact of the related transaction. Forexample, exchange differences on US dollar debt that are included in the USdollar IFRS Income Statement will be excluded from Underlying Earnings.Finally, as with Adjusted Earnings, Underlying Earnings will excludetransactions that are of a nature and size to require exclusion in order toachieve its aim of providing insight into the underlying performance of thebusiness. The outcome is a measure of underlying performance that is similar toAdjusted Earnings. A fuller description of the exclusions from UnderlyingEarnings is on page 18. Reconciliation of UK GAAP Earnings to IFRS Earnings Year ended 31 December 2004 Adjusted Earnings/Underlying US$ millions Earnings Net Earnings UK GAAP 2,221 2,813 Reversal of goodwill amortisation 77 Post retirement benefits 25 Share based payments (27) Deferred tax (7) Other (17) 51 51 Profits on disposals of interests in businesses 262 Effect of exchange on US dollar debt 80 Mark to market of derivatives 12 IFRS 2,272 3,218 All adjustments are stated net of tax and outside interests Reconciliation of shareholders' equity under UK GAAP to shareholders' equityunder IFRS US$ millions 31 Dec 1 Jan 2004 2004 Shareholders' equity under UK GAAP 12,584 10,037 Deferred tax (899) (885) Post retirement benefits (764) (659) Dividends 626 469 Exchange differences on capital expenditure hedges 162 93 Goodwill 74 - Mark to market of derivatives 99 139 Other (5) 6 Shareholders' equity under IFRS 11,877 9,200 All adjustments are stated net of tax and outside interests The Group's transition date for IFRS is 1 January 2004. The principaldifferences between UK GAAP and IFRS are described below. All financial numbersare stated after tax and outside shareholders' interests. Reversal of goodwill amortisation The systematic amortisation of goodwill under UK GAAP, by an annual charge tothe profit and loss account, will cease under IFRS. It will be replaced byannual impairment reviews of the carrying value of goodwill. Impairment chargesrelating to goodwill are quite likely in future reporting periods due to thefinite life of the associated ore body. The charges may vary significantly fromperiod to period. The impact on Net Earnings in 2004 was a $77 million reduction (to zero) of thecharge for amortisation of goodwill. At 31 December 2004, this increases thegoodwill balance under IFRS by $74 million because the goodwill amortised underUK GAAP in 2004 has been reversed. Post-retirement benefits Under UK GAAP, the Group applied SSAP 24, 'Accounting for Pension Costs' underwhich post retirement benefit surpluses and deficits were spread over theexpected average remaining service lives of relevant current employees. TheInternational Accounting Standards Board (IASB) issued an amendment to IAS 19 "Employee Benefits" in December 2004. In preparing the IFRS information in thisrelease, the directors have assumed that this revised standard will be endorsedby the EU and adopted in the Group's 2005 financial statements. Under IAS 19the basis of calculating the surplus or deficit under IFRS differs from SSAP 24.In addition, IAS 19 permits three alternative ways in which the surplus ordeficit can be recognised. The Group has chosen to recognise actuarial gainsand losses directly in shareholders' equity via the Statement of RecognisedIncome and Expense. The annual service cost and net financial income on theassets and liabilities of the Group's post retirement benefit plans arerecognised through Net Earnings. The impact on Net Earnings in 2004 was a $25 million reduction in the charge forpost retirement benefits. At 31 December 2004, the different bases for calculating the surplus or deficitand determining the amounts recognised on the balance sheet results inadditional provisions of $764 million (net of deferred tax and outsideinterests) in the IFRS balance sheet compared to the UK GAAP balance sheet. Share based payments Under UK GAAP, no cost was recognised in respect of the Group's share optionschemes. IFRS requires the economic cost of share option plans to be recognisedby reference to fair value on the grant date, and charged to the IncomeStatement over the expected vesting period. The IFRS charge in 2004 was $27million and is included in Underlying Earnings. Deferred tax on fair value adjustments arising on acquisitions UK GAAP requires the recognition of deferred tax on all fair value adjustmentsto monetary items, and on fair value adjustments which reduce the carrying valueof non-monetary items. IFRS requires deferred tax to be recognised on all fairvalue adjustments, other than those recorded as goodwill. IFRS Net Earningswill therefore benefit as the additional deferred tax provisions on upwardrevaluations of non-monetary items are released to the Income Statement in linewith the amortisation of the related fair value adjustments. For future acquisitions, these additional deferred tax provisions will be offsetby increases to the value of goodwill or other acquired assets. Foracquisitions prior to 1 January 2004, the increase in provisions has beenreflected as a reduction in opening shareholders' equity. The impact on IFRS Net Earnings for 2004 was an increase of $29 million. At 31December 2004, the IFRS balance sheet includes additional provisions of $720million relating to deferred tax on fair value adjustments for prior yearacquisitions. Deferred tax on unremitted earnings Under UK GAAP, tax was only provided on unremitted earnings to the extent thatdividends were accrued or if there was a binding agreement for the distributionof earnings at the reporting date. Under IFRS, full provision must be made fortax arising on unremitted earnings from subsidiaries, joint ventures andassociated companies, except to the extent that the Group can control the timingof remittances and remittance is not probable in the foreseeable future. The impact on IFRS net earnings was a reduction of $16 million. At 31 December2004, the IFRS balance sheet includes additional provisions of $74 millionrelating to deferred tax balances on unremitted earnings. Deferred tax related to closure costs Under IFRS, deferred tax is not provided on the depreciation of capitalisedclosure costs except to the extent that the capitalised amount was firstrecognised in accounting for an acquisition. This reduced IFRS Net Earnings for2004 by $20 million and reduced IFRS shareholders' equity at 31 December 2004 by$105 million. Profits on disposal of subsidiaries, joint ventures, associates and undevelopedproperties Differences occur in the measurement of the accounting gain on such transactionswhere there are differences in the book value of assets under the respectiveaccounting rules. In 2004, the majority of the additional profit under IFRSarose because under UK GAAP goodwill that had been eliminated against reservesat the time of acquisition was reinstated and charged against earnings at thetime of disposal. Such reinstatement does not apply under IFRS. In 2004 thisincreased IFRS Net Earnings by $262 million. Exchange differences on net debt The Group finances its operations primarily in US dollars, which is the currencyin which the majority of its revenues are denominated. A substantial part ofthe Group's US dollar debt is located in subsidiaries having functionalcurrencies other than the US dollar. Under IFRS, exchange gains and lossesrelating to US dollar debt and certain intragroup financing balances areincluded in the Group's US dollar Income Statement, whereas under UK GAAP theywere taken to reserves. In 2004 this increased IFRS net earnings by $80 million.Under both IFRS and UK GAAP the offsetting differences arising on thetranslation into US dollars of the local currency balance sheets are taken toreserves. There is no difference between the IFRS Balance Sheet and the UK GAAP BalanceSheet due to these items. At 1 January 2005, the main currency exposures arising from net debt andintragroup financing balances were liabilities of US$1.7 billion accounted forin Australian dollars and liabilities of US$0.5 billion accounted for inCanadian dollars. The exchange differences recorded in the Income Statement area function not only of fluctuations in exchange rates but also fluctuations inthe level of these balances during the period. Mark to market of derivative contracts It remains the Group's general policy not to hedge on-going exposures tofluctuations in exchange rates, prices or interest rates although the Group isparty to some derivative contracts. For example, the Group holds derivativecontracts taken out by Group companies prior to their acquisition and from timeto time the Group has used forward foreign currency contracts to hedge the nonUS dollar component of capital projects. Some derivative contracts that qualified for hedge accounting under UK GAAP donot qualify for hedge accounting under IFRS because the instrument is notlocated in the operation which carries the exposure. These contracts are markedto market under IFRS, thereby giving rise to charges or credits to the IncomeStatement in periods before the hedged transaction is recognised. At 31 December 2004, the marked to market value of derivative contracts, thatunder UK GAAP would have been eligible for hedge accounting, increasesshareholders' equity by $99 million. Exchange differences on capital expenditure hedges Some of the derivative contracts that were taken out to fix the non US dollarcomponent of capital expenditure in previous periods do not qualify for hedgeaccounting under IFRS. The adjustment to the carrying value of property, plant& equipment that under UK GAAP had been stated net of realised exchange gainsand losses on forward contracts hedging capital expenditure, increasesshareholders' equity by $162 million. Dividends Under IFRS, dividends that do not represent a present obligation at thereporting date are not included in the balance sheet. Hence, the Companies'proposed dividends are not recognised in the Group accounts until the period inwhich they are declared by the directors. This has no effect on Net Earnings or Underlying Earnings, but increasesshareholders' equity at 31 December 2004 by $626 million. Functional currencies From 2005, the functional currencies of Rio Tinto's operations will be theirlocal currencies with the exception of Escondida, Grasberg JV and Lihir forwhich the functional currency is the US dollar. IAS 39 and IAS 32 The Group has elected to adopt IAS 32 "Financial Instruments: Disclosure andPresentation" and IAS 39 "Financial Instruments: Recognition and Measurement"with effect from 1 January 2005 with no restatement of comparative information.The financial information for 30 June 2004 and 31 December 2004 does nottherefore incorporate the effect of these Standards. Subsidiaries, joint ventures and associates The basis for determining the presentation of partially owned operations in theGroup's financial statements differs in certain respects between IFRS and UKGAAP. The Group has decided to adopt equity accounting for all jointlycontrolled entities. Kennecott Energy's Colowyo operation, which under UK GAAP was equity accounted,is consolidated under IFRS. Anglesey Aluminium, which was consolidated is nowequity accounted. Boyne Island Smelters, Queensland Alumina Limited, Eurallumina and NZAS whichwere proportionately consolidated under UK GAAP will be equity accounted underIFRS. This results in significant increases in accounts receivable and accountspayable in the Group balance sheet because amounts due to or from theseoperations by the rest of the Group are no longer eliminated on consolidation. Rio Tinto Coal Australia's Bengalla, Mount Thorley, Blair Athol, Hail Creek,Kestrel and Warkworth mines, Kennecott Minerals' Greens Creek mine and theGrasberg Joint Venture which were equity accounted under UK GAAP will beproportionately consolidated under IFRS. Cash flow statement and net debt The pre-tax cash flow from operations of $4,452 million, including dividendsfrom equity accounted joint ventures and associates, is practically the sameunder IFRS as it was under UK GAAP. Some operations previously equity accountedunder UK GAAP are proportionately consolidated under IFRS and vice versa, withthe effect that the increase in cash flow from subsidiary operations is largelyoffset by lower reported dividends from equity accounted joint ventures andassociates. These reclassifications are explained fully above. Similarly, net debt of $3,809 million is only $58 million higher under IFRSreflecting changes between equity accounting and proportionate consolidation forsome operations. A sizeable proportion of Rio Tinto's borrowings aredenominated in currencies other than US dollar and then swapped into US dollars.Under UK GAAP, these borrowings are accounted for as if they were in USdollars. Under IFRS, the exchange gains and losses on the swaps must be shownseparately in the balance sheet as financial assets or financial liabilities asappropriate. A reconciliation of net debt to the various balance sheetcategories is shown on page 19. There is no change to the Group's treasurypolicy, which is to manage net debt after taking account of such currency swaps. Gearing increases from 22 per cent under UK GAAP to 23 per cent under IFRSbecause of the reduction in shareholders' equity shown above. IFRS interestcover is 20 times (UK GAAP 20 times). Non IFRS changes to segmental analysis In addition to the differences in accounting rules laid down by IFRS, thefollowing changes have been made to the way Rio Tinto presents its results. Product groups/Business segments The presentation of performance by business unit has been amended to reflectrecent changes in management responsibilities. Rio Tinto Brasil is reported aspart of the Iron Ore product group and Kennecott Land is reported in "otheroperations". Both were previously reported as part of the Copper product group. Reflecting the new management structure implemented in 2004, the results ofCoal & Allied are combined with those of Rio Tinto Coal Australia. In line withits obligations as a listed company Coal & Allied Industries Limited willcontinue to report its results separately. US tax group Certain adjustments relating to deferred taxation in operations in the US taxgroup, which were previously reported in "other items", are reported within theUS business units. This presentation more accurately reflects the performanceof those business units. Exploration incurred by business units In addition to expenditure managed by Rio Tinto's Exploration group, the chargeto the Income Statement for exploration and evaluation includes expenditure onearly stage evaluation of exploration discoveries and near mine explorationexpenditure managed by Rio Tinto's product groups and business units. Infuture, all near mine exploration will be reported as part of the respectiveproduct group to reflect the management accountability for the expenditure. The tax and exploration reallocations above have not been reflected in the UKGAAP columns of the business unit tables on pages 21-22 and pages 29-30. For further information, please contact: LONDON AUSTRALIA Media Relations Media Relations Lisa Cullimore Ian HeadOffice: +44 (0) 20 7753 2305 Office: +61 (0) 3 9283 3620Mobile: +44 (0) 7730 418 385 Mobile: +61 (0) 408 360 101 Investor Relations Investor Relations Nigel Jones Dave SkinnerOffice: +44 (0) 20 7753 2401 Office: +61 (0) 3 9283 3628Mobile: +44 (0) 791 722 7365 Mobile: +61 (0) 408 335 309Richard Brimelow Susie CreswellOffice: +44 (0) 20 7753 2326 Office: +61 (0) 3 9283 3639Mobile: +44 (0) 7753 783 825 Mobile: +61 (0) 418 933 792 Website: www.riotinto.com Rio Tinto restatement of 2004 Financial Information under IFRS INTRODUCTION The European Union (EU) approved a Regulation in 2002 that requires listedcompanies in the EU (including Rio Tinto plc) to prepare consolidated financialstatements for accounting periods beginning on or after 1 January 2005 inaccordance with the Standards and Interpretations included within InternationalFinancial Reporting Standards (IFRS) that have been endorsed by the EU.Similarly, Australian companies (including Rio Tinto Limited) are required toadopt IFRS from 1 January 2005. Accordingly, Rio Tinto will prepare itsconsolidated accounts for the six months ending 30 June 2005 and subsequentreporting periods on the basis of the Standards and Interpretations within IFRSthat have been (or, in the case of the interim accounts, are expected to be)endorsed by the EU. As part of the Group's transition to IFRS, the directors have prepared IFRSfinancial information for the six months ended 30 June 2004 and the year ended31 December 2004 (hereinafter 'the 2004 IFRS financial information'), which isincluded on pages 23 to 30 and pages 15 to 22 of this Press Releaserespectively. It is intended that this financial information will be includedas comparative information in the Group's half year report for the period ending30 June 2005 and its financial statements for the year ending 31 December 2005respectively. The basis of preparation and accounting policies used in preparing the 2004 IFRSfinancial information are set out below, which describe how IFRS has beenapplied under IFRS 1, including the assumptions made by the Group about theStandards and Interpretations expected to be effective, and the policiesexpected to be adopted, when the Group issues its first complete set of IFRSfinancial statements for the year ending 31 December 2005. However, the basisof preparation and accounting policies may require adjustment before the Groupissues its first complete set of IFRS financial statements. This is because Standards currently in issue and endorsed by the EU are subjectto Interpretations issued from time to time by the International FinancialReporting Interpretations Committee ('IFRIC'), and further Standards may beissued by the International Accounting Standards Board ('IASB') that will beadopted by the Group in its first complete set of IFRS financial statements forthe year ending 31 December 2005. Also, the directors have assumed that theGroup's first complete set of IFRS financial statements will be able to reflectcertain Standards and Interpretations currently in issue which have yet to beendorsed by the EU. Additionally, IFRS is currently being applied in a large number of countries forthe first time. Due to a number of new and revised Standards included withinIFRS, there is not yet a significant body of established practice on which todraw in forming opinions regarding interpretation and application. Accordingly,practice is continuing to evolve. At this preliminary stage, therefore, the full financial effect of reportingunder IFRS as it will be applied in the Group's first complete set of IFRSfinancial statements for the year ending 31 December 2005 may be subject tochange. BASIS OF PREPARATION Except as described below, the 2004 IFRS financial information on pages 15 to 30has been prepared on the basis of all IFRS Standards and Interpretationspublished by 31 December 2004. A number of IFRS Standards and Interpretations are not yet mandatory but can beadopted early under their respective transition arrangements. The Group hasearly adopted IFRS 6 'Exploration for and Evaluation of Mineral Resources', theamendment to IAS 19 'Employee Benefits: Actuarial Gains and Losses, Group Plansand Disclosures' and IFRIC 5 'Rights to Interests arising from Decommissioning,Restoration and Environmental Rehabilitation Funds'. These Standards andInterpretations have not yet been endorsed by the EU. In preparing the 2004 IFRS financial information, the Group has not applied thefollowing pronouncements for which adoption is not mandatory until the yearending 31 December 2006 and which have not yet been endorsed by the EU: IFRIC 3 'Emission Rights' IFRIC 4 'Determining Whether an Arrangement Contains a Lease' The Group is currently evaluating the impact of these pronouncements and maydecide to adopt them in the year ending 31 December 2005, assuming they areendorsed by the EU - in which case the 2004 IFRS financial information will needto be restated. The Group's transition date to IFRS is 1 January 2004. The rules for first-timeadoption of IFRS are set out in IFRS 1 'First-time adoption of InternationalFinancial Reporting Standards'. In preparing the 2004 IFRS financialinformation, these transition rules have been applied to the amounts reportedpreviously under generally accepted accounting principles in the United Kingdom('UK GAAP'). IFRS 1 generally requires full retrospective application of the Standards andInterpretations in force at the first reporting date. However, IFRS 1 allowscertain exemptions in the application of particular Standards to prior periodsin order to assist companies with the transition process. Rio Tinto has appliedthe following exemptions: • The Group has not restated business combinations that occurred before the date of transition to comply with IFRS 3 'Business Combinations'. This means that: - The 1995 merger of the economic interests of Rio Tinto plc and Rio Tinto Limited into the dual listed companies ('DLC') structure continues to be accounted for as a merger; - Additional deferred tax provisions recognised in respect of upward revaluations of non-monetary assets held by previously acquired entities have been recognised as a reduction of shareholders' funds on the date of transition; • The Group has deemed cumulative translation differences for foreign operations to be zero at the date of transition. Any gains and losses on subsequent disposals of foreign operations will not therefore include translation differences arising prior to the transition date; • The Group has elected to adopt IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition and Measurement' with effect from 1 January 2005, with no restatement of comparative information for 2004. Accounting policy note (p) explains the basis of accounting for financial instruments in the 2004 IFRS financial information; • The Group has elected to adopt IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations' with effect from 1 January 2005, with no restatement of comparative information for 2004; and • The Group has applied IFRS 2 'Share-based Payment' retrospectively to all share-based payments which had not vested at 1 January 2004, the date chosen by the Group as the effective date for application of IFRS 2. In addition, IFRS 1 requires that estimates made under IFRS must be consistentwith estimates made for the same date under UK GAAP except where adjustments arerequired to reflect any differences in accounting policies. UK GAAP FINANCIAL INFORMATION The UK GAAP financial information for the year ended 31 December 2004, presentedon pages 15 to 22, is based on the Group's full financial statements for thatyear, which were prepared in accordance with UK GAAP and on the historical costbasis. These financial statements have been filed with the Registrar ofCompanies and the Australian Securities and Investment Commission. The auditors' report on the financial statements for the year ended 31 December2004 was unqualified and did not contain statements under section 237(2) of theUnited Kingdom Companies Act (regarding adequacy of accounting records andreturns) or under section 237(3) (regarding provision of necessary informationand explanations). The UK GAAP financial information for the period ended 30 June 2004, presentedon page 23 to 30, is based on the Group's half year report for that period,which was prepared using accounting policies consistent with those applied inthe Group's full financial statements for the year ended 31 December 2004. Thisinterim financial information is unaudited. Certain changes have been made to the presentation of the UK GAAP financialinformation reported in the Group's full financial statements for the year ended31 December 2004 and half year report for the period ended 30 June 2004, asfollows: • The formats of the balance sheet, profit and loss account and cash flow statement have been modified to align them with the IFRS formats, to simplify presentation of the adjustments required to arrive at the IFRS figures; • Turnover has been restated to gross up certain amounts charged to customers for freight and handling, which previously were deducted from operating costs. This has no effect on shareholders' equity, Net earnings or Underlying earnings; • The presentation of performance by business unit has been amended to reflect recent changes in management responsibilities. Rio Tinto Brasil is reported as part of the Iron Ore product group and Kennecott Land is reported in 'other operations'. Both were previously reported as part of the Copper product group. Reflecting the new management structure implemented in 2004, the results of Coal & Allied is combined with those of Rio Tinto Coal Australia. In line with its obligations as a listed company Coal & Allied Industries Limited will continue to report its results separately. PRESENTATIONAL CHANGES Certain items previously reported as 'central items' within the financialinformation by Business Units have now been allocated to the Business Units towhich they relate. This reflects the way in which this information will bepresented in the Group's first complete set of IFRS financial statements for theyear ending 31 December 2005. ACCOUNTING POLICIES ADOPTED UNDER IFRS a Accounting convention The 2004 IFRS financial information has been prepared under the historical costconvention as modified by the revaluation of certain derivative contracts as setout in note (p) below. b Basis of consolidation The financial statements consist of the consolidation of the accounts of RioTinto plc and Rio Tinto Limited (together 'the Group') and their respectivesubsidiaries. Subsidiaries: Subsidiaries are entities over which the Group has the power togovern the financial and operating policies in order to obtain benefits fromtheir activities. Control is presumed to exist where the Group owns more thanone half of the voting rights (which does not always equate to percentageownership) unless in exceptional circumstances it can be demonstrated thatownership does not constitute control. Control does not exist where jointventure partners hold veto rights over significant operating and financialdecisions. The consolidated financial statements include all the assets,liabilities, revenues, expenses and cash flows of the parent and itssubsidiaries after eliminating intercompany balances and transactions. Forpartly owned subsidiaries, the net assets and net earnings attributable tominority shareholders are presented as 'Outside equity shareholders' interests'on the consolidated balance sheet and consolidated income statement. Associates: An associate is an entity that is neither a subsidiary nor jointventure over whose operating and financial policies the Group exercisessignificant influence. Significant influence is presumed to exist where theGroup has between 20 per cent and 50 per cent of the voting rights, but can alsoarise where the Group holds less than 20 per cent if it is actively involved andinfluential in policy decisions affecting the entity. The Group's share of thenet assets, post tax results and reserves of associates are included in thefinancial statements using the equity accounting method. This involvesrecording the investment initially at cost to the Group and then, in subsequentperiods, adjusting the carrying amount of the investment to reflect the Group'sshare of the associate's results less any impairment of goodwill and any otherchanges to the associate's net assets such as dividends. Joint ventures: A joint venture is a contractual arrangement whereby two or moreparties undertake an economic activity that is subject to joint control. Jointcontrol is the contractually agreed sharing of control such that significantoperating and financial decisions require the consent of more than one venturer.The Group has two types of joint ventures: Jointly controlled entities ('JCEs'): A JCE is a joint venture that involvesthe establishment of a corporation, partnership or other entity in which eachventurer has a long term interest. JCEs are accounted for using the equityaccounting method. Jointly controlled assets ('JCAs'): A JCA is a joint venture in which theventurers have joint control over the assets contributed to or acquired for thepurposes of the joint venture. JCAs do not involve the establishment of acorporation, partnership or other entity. This includes situations where theparticipants derive benefit from the joint activity through a share of theproduction, rather than by receiving a share of the results of trading. TheGroup's proportionate interest in the assets, liabilites, revenues, expenses andcash flows of JCAs are incorporated into the Group's financial statements underthe appropriate headings. Acquisitions and disposals: The results of businesses acquired during the yearare brought into the consolidated financial statements from the date ofacquisition; the results of businesses sold during the year are included in theconsolidated financial statements for the period up to the date of disposal.Gains or losses on disposal are calculated as the difference between the saleproceeds (net of expenses) and the net assets attributable to the interest whichhas been sold. Where a disposal represents a separate major line of business orgeographical area of operations, the net results attributable to the disposalare shown separately. c Turnover Turnover comprises sales to third parties at invoiced amounts, with most salesbeing priced ex works, free on board (f.o.b.) or cost, insurance and freight(c.i.f.). Amounts billed to customers in respect of shipping and handling areclassed as turnover where the Group is responsible for carriage, insurance andfreight. All shipping and handling costs incurred by the Group are recognised asoperating costs. If the Group is acting solely as an agent, amounts billed tocustomers are offset against the relevant costs. Turnover excludes any applicable sales taxes. Mining royalties are presented asan operating cost. Gross turnover shown in the income statement includes theGroup's share of the turnover of equity accounted JCEs and associates.By-product revenues are included in turnover. A large proportion of Group production is sold under medium to long termcontracts, but turnover is only recognised on individual sales when persuasiveevidence exists indicating that all of the following criteria are met: - the significant risks and rewards of ownership of the product have been transferred to the buyer; - neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold has been retained; - the amount of revenue can be measured reliably; - it is probable that the economic benefits associated with the sale will flow to the Group; - the costs incurred or to be incurred in respect of the sale can be measured reliably. These conditions are generally satisfied when title passes to the customer. Inmost instances turnover is recognised when the product is delivered to thedestination specified by the customer, which is typically the vessel on which itwill be shipped, the destination port or the customer's premises. The turnover from sales of many products is subject to adjustment based on aninspection of the product by the customer. In such cases, turnover is initiallyrecognised on a provisional basis using the Group's best estimate ofcontained metal. Any subsequent adjustments to the initial estimate of metalcontent are recorded in turnover once they have been determined. Certain products are 'provisionally priced', i.e. the selling price is subjectto final adjustment at the end of a period normally ranging from 30 to 180 daysafter delivery to the customer, based on the market price at the relevantquotation point stipulated in the contract. Turnover is initially recognisedwhen the conditions set out above have been met, using market prices at thatdate. At each reporting date the provisionally priced metal is marked tomarket, with adjustments recorded in turnover, based on the forward sellingprice for the quotational period stipulated in the contract until thequotational period expires. For this purpose, the selling price can be measuredreliably for those products, such as copper, for which there exists an activeand freely traded commodity market such as the London Metals Exchange and thevalue of product sold by the Group is directly linked to the form in which it istraded on that market. d Currency translation The functional currency for each entity in the Group is determined as thecurrency of the primary economic environment in which it operates. For mostentities, this is the local currency of the country in which it operates.Transactions other than those in the functional currency of the entity aretranslated at the exchange rate ruling at the date of the transaction. Monetaryassets and liabilities denominated in foreign currencies are retranslated atyear end exchange rates. On consolidation, income statement items are translated into US dollars, whichis the Group's presentation currency, at average rates of exchange. Balancesheet items are translated into US dollars at year end exchange rates. Exchangedifferences on the translation of the net assets of entities with functionalcurrencies other than the US dollar, and any offsetting exchange differences onnet debt hedging those net assets, are dealt with through reserves. Exchange gains and losses which arise on balances between Group entities aretaken to reserves where that balance is, in substance, part of a parent's netinvestment in its subsidiary. The Group finances its operations primarily in US dollars and a substantial partof the Group's US dollar debt is located in subsidiaries having functionalcurrencies other than the US dollar. Except as noted above, exchange gains andlosses relating to such US dollar debt are charged or credited to the Group'sincome statement in the year in which they arise. This means that the impact offinancing in US dollars on the Group's income statement is dependent on thefunctional currency of the particular subsidiary where the debt is located. Except as noted above, or in note (p) below relating to derivative contracts,all exchange differences are charged or credited to the income statement in theyear in which they arise. e Goodwill and intangible assets Goodwill represents the difference between the cost of acquisition and the fairvalue of the identifiable net assets acquired. Goodwill on acquisition ofsubsidiaries and JCAs is separately disclosed and goodwill on acquisitions ofassociates and JCEs is included within investments in equity accounted entities. In 1997 and previous years goodwill was eliminated against reserves in the yearof acquisition as a matter of accounting policy, as was then permitted under UKGAAP. Such goodwill was not reinstated under subsequent UK accounting standardsor on transition to IFRS. Goodwill on the Group's opening IFRS balance sheet inrespect of acquisitions prior to 1 January 2004 is therefore stated at itscarrying amount on that date under UK GAAP. Goodwill is not amortised; rather it is tested annually for impairment and,under IFRS 1, was reviewed for impairment at the transition date. Goodwill isallocated to the cash generating unit or group of cash generating units expectedto benefit from the related business combination for the purposes of impairmenttesting. Finite life intangible assets are amortised over their useful economic lives ona straight line or units of production basis as appropriate. f Exploration and evaluation The Group has continued its UK GAAP policy for the recognition and measurementof exploration and evaluation expenditure, in accordance with IFRS 6'Exploration for and Evaluation of Mineral Resources'. Exploration and evaluation expenditure comprises costs which are directlyattributable to: - researching and analysing existing exploration data; - conducting geological studies, exploratory drilling and sampling; - examining and testing extraction and treatment methods; and - compiling pre-feasibility and feasibility studies. Exploration and evaluation expenditure also includes the costs incurred inacquiring mineral rights, the entry premiums paid to gain access to areas ofinterest and amounts payable to third parties to acquire interests in existingprojects. Capitalisation of exploration expenditure commences on acquisition of abeneficial interest or option in mineral rights. Capitalised explorationexpenditure is reviewed for impairment at each balance sheet date. Fullprovision is made for impairment unless there is a high degree of confidence inthe projects viability. If a project does not prove viable, all irrecoverablecosts associated with the project and the related impairment provisions arewritten off. When it is decided to proceed with development, any impairment provisions raisedin previous years are reversed to the extent that the relevant costs areexpected to be recovered. If the project proceeds to development, the amountsincluded within intangible assets are transferred to property, plant andequipment. g Property, plant and equipment The cost of property, plant and equipment comprises its purchase price and anycosts directly attributable to bringing the asset to the location and conditionnecessary for it to be capable of operating in the manner intended bymanagement. Once a mining project has been established as commercially viable,expenditure other than that on land, buildings, plant and equipment iscapitalised under 'Mining properties and leases' together with any amounttransferred from 'Exploration and evaluation'. This includes costs incurred inpreparing the site for mining operations, including stripping costs (see below).Costs associated with commissioning new assets, in the period before they are capable of operating in the manner intended by management, are capitalised. Development costs incurred after the commencement of production are capitalised to the extent they give rise to a future economic benefit. Interest on borrowings related to construction or development projects is capitaliseduntil the point when substantially all the activities that are necessary to make the asset ready for its intended use are complete. h Mining properties and leases As noted above, stripping (ie overburden and other waste removal) costs incurredin the development of a mine before production commences are capitalised as partof the cost of constructing the mine and subsequently amortised over the life ofthe operation. These may relate to a discrete section of the ore body, forexample. The Group defers stripping costs incurred subsequently, during the productionstage of its operations, for those operations where this is the most appropriatebasis for matching the costs against the related economic benefits. This isgenerally the case where there are fluctuations in stripping costs over the lifeof the mine, and the effect is material. Deferred stripping costs are presentedwithin 'Mining properties and leases'. The amount of stripping costs deferred isbased on the ratio ('Ratio') obtained by dividing the tonnage of waste minedeither by the quantity of ore mined or by the quantity of minerals contained inthe ore. Stripping costs incurred in the period are deferred to the extent thatthe current period Ratio exceeds the life of mine Ratio. Such deferred costsare then charged against reported profits to the extent that, in subsequentperiods, the Ratio falls short of the life of mine Ratio. The life of mineRatio is based on proven and probable reserves of the operation. In some operations, there are distinct periods of new development during theproduction stage of the mine. The new development will be characterised by amajor departure from the life of mine stripping Ratio. Excess stripping costsduring such periods are deferred and charged against reported profits insubsequent periods on a units of production basis. If the Group were to expense production stage stripping costs as incurred, therewould be greater volatility in the year to year results from operations andexcess stripping costs would be expensed at an earlier stage of a mine'soperation. Deferred stripping costs form part of the total investment in the relevant cashgenerating unit, which is reviewed for impairment if events or changes incircumstances indicate that the carrying value may not be recoverable. Amortisation of deferred stripping costs is included in depreciation of'Property, plant and equipment' or in the Group's share of the results of itsequity accounted operations, as appropriate. Changes to the life of minestripping Ratio are accounted for prospectively. i Depreciation and impairment Property, plant and equipment is depreciated over its useful life, or over theremaining life of the mine if shorter. The major categories of property, plantand equipment are depreciated on a units of production and/or straight-linebasis as follows: Units of production basis For mining properties and leases and certain mining equipment, the economicbenefits from the asset are consumed in a pattern which is linked to theproduction level. Except as noted below, such assets are depreciated on a unitsof production basis. Straight line basis Assets within operations for which production is not expected to fluctuatesignificantly from one year to another or which have a physical life shorterthan the related mine are depreciated on a straight line basis as follows: Buildings 10 to 40 yearsPlant and equipment 3 to 35 yearsLand Not depreciated Residual values and useful lives are reviewed, and adjusted if appropriate, ateach balance sheet date. Changes to the estimated residual values or usefullives are accounted for prospectively. In applying the units of productionmethod, depreciation is normally calculated using the quantity of materialextracted from the mine in the period as a percentage of the total quantity ofmaterial to be extracted in current and future periods based on proven andprobable reserves (and, for some mines, mineral resources). Development coststhat relate to a discrete section of an ore body and which only provide benefitover the life of those reserves, are depreciated over the estimated life of thatdiscrete section. Development costs incurred which benefit the entire ore bodyare depreciated over the estimated life of the ore body. Property, plant and equipment and finite life intangible assets are reviewed forimpairment if there is any indication that the carrying amount may not berecoverable. This applies to the Group's share of the assets held by associatesand joint ventures as well as the assets held by the Group itself. When a review for impairment is conducted, the recoverable amount is assessed byreference to the higher of 'value in use' (being the net present value ofexpected future cash flows of the relevant cash generating unit) or 'fair valueless costs to sell'. Where there is no binding sale agreement or activemarket, fair value less costs to sell is based on the best information availableto reflect the amount the Group could receive for the cash generating unit in anarm's length transaction. Future cash flows are based on: - estimates of the quantities of the reserves and mineral resources for which there is a high degree of confidence of economic extraction; - future production levels; - future commodity prices (assuming the current market prices will revert to the Group's assessment of the long term average price, generally over a period of three to five years); and - future cash costs of production, capital expenditure, close down, restoration and environmental clean up. IAS 36 'Impairment of assets' includes a number of restrictions on the futurecash flows that can be recognised in respect of future restructurings andimprovement related capital expenditure. When calculating 'value in use', italso requires that calculations should be based on exchange rates current at thetime of the assessment. For operations with a functional currency other than the US dollar, theimpairment review is undertaken in the relevant functional currency. Theseestimates are based on detailed mine plans and operating budgets, modified asappropriate to meet the requirements of IAS 36. The discount rate applied is based upon the Group's weighted average cost ofcapital with appropriate adjustment for the risks associated with the relevantcash flows, to the extent that such risks are not reflected in the forecast cashflows. j Determination of ore reserves The Group estimates its ore reserves and mineral resources based on informationcompiled by Competent Persons as defined in accordance with the AustralasianCode for Reporting of Mineral Resources and Ore Reserves of December 2004 (theJORC code). Reserves, and for certain mines resources, determined in this wayare used in the calculation of depreciation, amortisation and impairmentcharges, the assessment of life of mine stripping ratios and for forecasting thetiming of the payment of close down and restoration costs. In assessing the life of a mine for accounting purposes, mineral resources areonly taken into account where there is a high degree of confidence of economicextraction. k Provisions for close down and restoration and for environmental clean up costs Close down and restoration costs include the dismantling and demolition ofinfrastructure and the removal of residual materials and remediation ofdisturbed areas. Close down and restoration costs are provided for in theaccounting period when the obligation arising from the related disturbanceoccurs, whether this occurs during the mine development or during the productionphase, based on the net present value of estimated future costs. Provisions forclose down and restoration costs do not include any additional obligations whichare expected to arise from future disturbance. The costs are estimated on thebasis of a closure plan. The cost estimates are calculated annually during thelife of the operation to reflect known developments and are subject to formalreview at regular intervals. The amortisation or 'unwinding' of the discount applied in establishing the netpresent value of provisions is charged to the income statement in eachaccounting period. The amortisation of the discount is shown as a financingcost, rather than as an operating cost. Other movements in the provisions forclose down and restoration costs, including those resulting from newdisturbance, updated cost estimates, changes to the lives of operations andrevisions to discount rates are capitalised within property, plant andequipment. These costs are then depreciated over the lives of the assets towhich they relate. Where rehabilitation is conducted systematically over the life of the operation,rather than at the time of closure, provision is made for the outstandingcontinuous rehabilitation work at each balance sheet date. All other costs ofcontinuous rehabilitation are charged to the income statement as incurred. Provision is made for the estimated present value of the costs of environmentalclean up obligations outstanding at the balance sheet date. These costs arecharged to the income statement. Movements in the environmental clean upprovisions are presented as an operating cost, except for the unwind of thediscount which is shown as a financing cost. l Inventories Inventories are valued at the lower of cost and net realisable value on a firstin, first out ('FIFO') basis. Cost for raw materials and stores is purchaseprice and for partly processed and saleable products is generally the cost ofproduction, including the appropriate proportion of depreciation and overheads.For this purpose the costs of production include: - labour costs, materials and contractor expenses which are directly attributable to the extraction and processing of ore; - the depreciation of mining properties and leases and of property, plant and equipment used in the extraction and processing of ore; and - production overheads. Stockpiles represent ore that has been extracted and is available for furtherprocessing. If there is significant uncertainty as to when the stockpiled orewill be processed it is expensed as incurred. Where the future processing ofthis ore can be predicted with confidence because it exceeds the mine's cut offgrade, it is valued at the lower of cost and net realisable value. If the orewill not be processed within the 12 months after the balance sheet date it isincluded within non-current assets. Work in progress inventory includes orestockpiles and other partly processed material. Quantities are assessedprimarily through surveys and assays. m Deferred tax Full provision is made for deferred taxation on all temporary differencesexisting at the balance sheet date with certain limited exceptions. Temporarydifferences are the difference between the carrying value of an asset orliability and its tax base. The main exceptions to this principle are asfollows: - tax payable on the future remittance of the past earnings of subsidiaries, associates and joint ventures is provided for except where Rio Tinto is able to control the remittance of profits and it is probable that there will be no remittance in the foreseeable future; - deferred tax is not provided on the initial recognition of an asset or liability in a transaction that does not affect accounting profit or taxable profit and is not a business combination. Furthermore, deferred tax is not recognised on subsequent changes in the carrying value of such assets and liabilities, for example where they are depreciated; and - deferred tax assets are recognised only to the extent that it is more likely than not that they will be recovered. n Employee benefits For defined benefit post-employment plans, the difference between the fair valueof the plan assets (if any) and the present value of the plan liabilities isrecognised as an asset or liability on the balance sheet. Actuarial gains andlosses arising in the year are taken to the Statement of Recognised Income andExpense. For this purpose, actuarial gains and losses comprise both the effectsof changes in actuarial assumptions and experience adjustments arising becauseof differences between the previous actuarial assumptions and what has actuallyoccurred. Other movements in the net surplus or deficit are recognised in the incomestatement, including the current service cost, any past service cost and theeffect of any curtailment or settlements. The interest cost less the expectedreturn on assets is also charged to the income statement. The amount charged tothe income statement in respect of these plans is included within operatingcosts or in the Group's share of the results of equity accounted operations asappropriate. The values attributed to plan liabilities are assessed in accordance with theadvice of independent qualified actuaries. The Group's contributions to defined contribution pension plans are charged tothe income statement in the period to which the contributions relate. o Cash and cash equivalents Cash and cash equivalents are carried in the balance sheet at cost. Cash andcash equivalents comprise cash on hand, deposits held on call with banks,short-term, highly liquid investments that are readily convertible into knownamounts of cash and which are subject to insignificant risk of changes in value,and bank overdrafts which are repayable on demand. p Financial instruments The Group's policy with regard to 'Treasury management and financialinstruments' is set out in the Financial Review on page 35 of the Group's 2004Annual Report and financial statements. When the Group enters into derivativecontracts these transactions are designed to reduce exposures related to assetsand liabilities, firm commitments or anticipated transactions. Derivative contracts held by the Group are accounted for as follows: - Amounts receivable and payable in respect of interest rate swaps are recognised as adjustments to net interest over the life of the contract. - Derivative contracts which have been entered into by the Group in respect of its firm commitments or anticipated transactions, in order to hedge its exposure to fluctuations in exchange rates against the US dollar, and which are located in the entity with the exposure, are accounted for as hedges: gains and losses are deferred and subsequently recognised when the hedged transaction occurs. Where such contracts are not located in the entity with the exposure they are marked to market atRelated Shares:
Rio Tinto