Xstrata Plc - annual report 2005

Notes to the Financial Statements

1. Corporate Information

The consolidated financial statements were authorised for issue in accordance with a Directors' resolution on 10 March 2006. The ultimate parent entity of the Group, Xstrata plc, is a publicly traded limited company incorporated in England and Wales and domiciled in Switzerland. Its ordinary shares are traded on the London and Swiss stock exchanges.

The financial information for the full preceding year is based on the statutory accounts for the financial year ended 31 December 2004, restated for the effects of the adoption of IFRS.

The principal activities of the Group are described in note 10.

2. Statement of compliance

The accounting policies adopted are in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC), as adopted by the European Union, effective for the Group's reporting for the year ended 31 December 2005.

3. Basis of preparation

The consolidated financial statements are presented in US dollars, which is the parent's functional and presentation currency, and all values are rounded to the nearest 0.1 million except where otherwise indicated.

The accounting policies in note 6 have been applied in preparing the financial statements. Where the Group has applied different policies since its transition to IFRS on 1 January 2004, this is explained in note 5.

The consolidated financial statements for the year ended 31 December 2005 have been prepared under the historical cost convention, except for derivatives, financial instruments classified as fair value through profit and loss, available-for-sale financial assets, pension assets and deficits and biological assets that have been measured in accordance with applicable IFRS. The carrying values of recognised assets and liabilities that are hedged items in fair value hedges, and are otherwise carried at cost, are adjusted to record changes in the fair values attributable to the risks that are being hedged.

4. Significant accounting judgements and estimates

Estimates

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual outcomes could differ from these estimates.

5. First time adoption of IFRS and changes in accounting policies

To comply with European Union legislation, the Group has adopted IFRS from 1 January 2005. The date of transition is 1 January 2004 and as a result the 2004 comparative information has been adjusted to conform with IFRS. Under IFRS 1 'First time adoption of International Financial Reporting Standards', IFRS are applied retrospectively at the transition balance sheet date with all adjustments to assets and liabilities as stated under UK Generally Accepted Accounting Practices (GAAP) taken to retained earnings unless certain exemptions are applied. The primary exemptions that have been applied by the Group are:

IFRS 2 has only been applied to equity-settled share-based payment awards that were granted after 7 November 2002 that had not vested prior to 1 January 2005;
IFRS 3, IAS 36 (revised) and IAS 38 (revised) are not retrospectively applied to business combinations occurring before 1 January 2004;
The cumulative surpluses or deficits of defined benefit pension schemes and similar benefits at transition date have been recognised in full; and
2004 comparative information is not presented or prepared in accordance with IAS 32 and IAS 39. Financial instruments and hedges are accounted for in accordance with UK GAAP prior to 1 January 2005.

Early adoption of other International Financial Reporting Standards

The Group has resolved to early adopt the following new or revised standards and interpretations from the date of transition:

IFRS 6 'Exploration for and Evaluation of Mineral Resources';
IFRIC 4 'Determining whether an Arrangement contains a Lease';
IFRIC 5 'Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds'; and
Amendment to IAS 19 'Employee Benefits', effective for annual periods beginning on 1 January 2006.

Adoption of IFRS 5

IFRS 5 'Non-current assets held for sale and discontinued operations' has been applied prospectively from 1 January 2005. The comparative balance sheet has not been adjusted to reflect non-current assets held for sale but the income statement has been adjusted to present the forestry division, sold in 2005, as a discontinued operation in the comparative year.

Further information regarding the impact of the adoption of IFRS on the Group is found in the change in accounting policies in note 6 and IFRS Reconciliation to UK GAAP in note 7.

New standards and interpretations not applied

During the year, the IASB and IFRIC have issued the following standards and interpretations which will impact the Group with an effective date after the date of these financial statements:

New standards and interpretations
		Effective date
IFRS 1	Amendment relating to IFRS 6	1 Jan 2006
IFRS 4 and IAS 39	Amendment to IAS 39 and IFRS 4 - Financial guarantee contracts	1 Jan 2006
IFRS 6	Amendment relating to IFRS 6	1 Jan 2006
IFRS 7	Financial instruments: Disclosures	1 Jan 2007
IAS 1	Amendment: Capital disclosures	1 Jan 2007
IAS 21	Amendments to IAS 21 - The effects of changes in foreign exchange rates - Net investment in foreign operations	1 Jan 2006
IAS 39	Fair value option	1 Jan 2006
IAS 39	Cash flow hedge accounting for forecast intra-group transactions	1 Jan 2006
IFRIC 8	Scope of IFRS 2	1 May 2006
IFRIC 9	Re-assessment of embedded derivatives	1 Jun 2006

The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group's financial statements in the period of initial application.

Upon adoption of IFRS 7, the Group will have to disclose additional information about its financial instruments, their significance and the nature and extent of risks that they give rise to. More specifically the Group will need to disclose the fair value of its financial instruments and its risk exposure in greater detail. There will be no impact on income or net assets.

Certain transactions that the Group may undertake in the future could result in the Group receiving consideration of less than the fair value of equity instruments granted. Should this occur, the guidance in IFRIC 8 will be followed.

The principal changes to the Group's accounting policies adopted in the previous financial year arising as a result of the adoption of IFRS are discussed below and the effect on earnings and the balance sheet is outlined in the IFRS Reconciliation to UK GAAP section in note 7.

Share-based Payments

IFRS requires an expense to be recognised where the Group buys goods or services in exchange for shares or rights over shares (equity-settled transactions), or in exchange for other assets equivalent in value to a given number of shares or rights over shares (cash-settled transactions). The main impact of this on the Group is the expensing of the employees' and Directors' share options and other share-based incentives by using an option-pricing model, with a credit to equity or liabilities for equity-settled and cash-settled options respectively.

The Group has taken advantage of the transitional provisions of IFRS 2 in respect of equity-settled awards and has applied this accounting standard only to equity-settled awards granted after 7 November 2002 that had not vested prior to 1 January 2005.

Under UK GAAP, the Group recognised only the intrinsic value or cost of the potential awards for long term incentive plans as an expense. The cost of these awards were accrued over the performance period of each plan based on the intrinsic value of equity-settled awards or estimated cost of cash-settled awards, and an adjustment was made to the latter to reflect the actual costs incurred.

Business Combinations, Impairment of Assets and Intangible Assets

IFRS 3 has been applied to accounting for business combinations for which the agreement date is on or after 1 January 2004. Consequently the Group has adopted the revised IAS 36 and 38 as at 1 January 2004.

Upon acquisition, the Group initially measures the identifiable assets, liabilities and contingent liabilities, acquired at their fair values as at the acquisition date hence causing any minority interest in the acquiree to be stated at the minority proportion of the net fair values of those items.

The adoption of IFRS has resulted in the Group ceasing annual goodwill amortisation from 1 January 2004 and the requirement to test goodwill for impairment annually (unless an event occurs during the year which requires the goodwill to be tested more frequently) from 1 January 2004. The useful lives of intangible assets are now assessed as having either a finite or indefinite life. Where an intangible asset has a finite life, it has been amortised over its useful life. Amortisation periods and methods for intangible assets with finite useful lives are reviewed annually or earlier where an indicator of impairment exists. Intangible assets assessed as having indefinite useful lives are not amortised, as there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Group. However, the intangible assets are reviewed annually for impairment, regardless of whether an indicator of impairment is present.

Under UK GAAP the Group amortised goodwill over its estimated useful life of 20 years and only tested goodwill and intangible assets with indefinite lives for impairment when circumstances indicated that the carrying amount of the asset may have exceeded its recoverable amount.

Dividends

Dividends are provided for when they meet the recognition criteria of a liability. Xstrata recognises a liability for the dividends once appropriate approval is granted and the payment is no longer at the discretion of the entity.

Under UK GAAP dividends were provided for in the financial statements despite the fact they may not have been approved at a general meeting until after the balance sheet date.

Income Taxes

IFRS requires deferred tax to be recognised on temporary differences. Temporary differences are recognised as the differences between the tax base of the asset or liability and its carrying amount in the balance sheet.

Under UK GAAP, deferred tax is provided on timing differences. Timing differences are differences between an entity's taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in financial statements.

Under both IFRS and UK GAAP, in certain instances deferred tax is not recognised. Refer to note 6 for more details.

Employee Benefits

IFRS requires defined benefit plan assets to be recognised in the balance sheet at fair value, and liabilities to be recognised in the balance sheet based on an actuarial valuation.

Actuarial gains or losses are recognised directly in equity through the statement of recognised income and expenses, while the charge to the income statement reflects the Group's past and current service costs for the defined benefit plan, financing costs of the plan assets and liabilities and the expected return on plan assets.

Under UK GAAP the Group accounted for its defined benefit pension plans and post retirement healthcare plans under SSAP 24, whereby the costs are charged to operating profit so as to spread the cost over the remaining average service lives of current employees in the scheme. Differences between contributions paid and the cumulative amounts charged to profit were shown as prepayments or accruals. Under SSAP 24 the assets and liabilities of the plan were not recognised on the balance sheet.

The Effects of Changes in Foreign Exchange Rates

IFRS requires foreign currency gains and losses on the translation of foreign operations to be recorded in a separate component of equity. Under UK GAAP such amounts were not included as a separate component of equity.

Under IFRS upon full or partial disposal or the repayment of a portion of a net investment in a foreign operation, the cumulative amount of the exchange differences are recognised in the income statement when the gain or loss on disposal, or on repayment of a loan forming part of the net investment occurs. Under UK GAAP such amounts were not recycled through the profit and loss account.

Investments in Associates

Net income from associates is reported after interest and taxation on one line in the consolidated income statement. Previously the Group's share in the associates operating profit was disclosed separately on the face of the income statement and the share of the associates finance income, finance cost and income tax expense were included within the respective headings in the income statement. This reclassification has no impact on the Group's profit for the years 2004 and 2005.

Interest in Joint Ventures

The results, assets and liabilities and cash flows of jointly controlled entities are proportionately consolidated on a line-by-line basis in the Group financial statements. Under UK GAAP, the Group's share in the joint ventures' turnover and operating profit was disclosed separately on the face of the income statement and the share of the joint ventures' finance income, finance cost and income tax expense were included within the respective headings in the income statement. This change has no impact on the Group profit for the year or the Group net assets. For ventures which were classified as joint arrangements not creating an entity (JANEs) under FRS 9 in UK GAAP and classified as 'Jointly controlled assets' or 'Jointly controlled operations' under IFRS, the treatment adopted is similar to UK GAAP.

Non-current Assets Held for Sale and Discontinued Operations

On 1 January 2005, the Group prospectively adopted IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. Under this accounting policy, non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. The Group must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

Non-current assets (or disposal groups) held for sale are carried at the lower of the carrying amount prior to being classified as held for sale, and the fair value less costs to sell. A non-current asset is not depreciated while classified as held for sale.

A non-current asset held for sale is presented separately in the balance sheet. The assets and liabilities of a disposal group classified as held for sale are presented separately as one line in the assets and liabilities sections on the face of the balance sheet.

Under UK GAAP such amounts were not disclosed separately on the face of the balance sheet.

As this standard was applied to the forestry operations, which were disposed of prior to 31 December 2005 no amounts are shown on the balance sheet at this date.

A discontinued operation, is a component of an entity whose operations and cash flows are clearly distinguished, operationally and for financial reporting purposes from the rest of the entity, that has been disposed of or classified as held for sale, provided that certain criteria in IFRS 5 are met. Where the operation is discontinued at the balance sheet date, the results are presented in one line on the face of the income statement, and prior period results are represented as discontinued. This approach has been adopted for the forestry operations.

Financial Instruments

The change to the Group's accounting policies adopted in the current financial year arise as a result of the first time adoption of IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition and Measurement'. The effect of the adoption of these standards on the balance sheet at 1 January 2005 are outlined below.

The application of IAS 32 and IAS 39 was deferred to 1 January 2005 and as permitted, the 2004 comparatives have not been restated. The main impact of these standards for the Group are:

Derivative financial instruments are initially recorded at fair value and then for reporting purposes re-measured to fair value at subsequent balance sheet dates.
Changes in the fair value of derivative financial instruments that are designated as and are effective as cash flow hedges of a highly probable forecast transactions are recognised directly in equity. Amounts deferred in this way are recognised in the income statement in the same period in which the hedged highly probable commitments or forecasted transactions are recognised in the income statement.
Changes in the fair value of derivative financial instruments that are designated as and are effective as fair value hedges of assets or liabilities are taken to the income statement. The carrying value of the hedged item is adjusted for the gains or losses attributed to the risk being hedged, with the gain or loss being recorded in the income statement.
Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. For a cash flow hedge at that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is retained there until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement for the period.
Financial assets are classified and measured in accordance with IAS 39. The impact of this on the Group is that available-for-sale financial assets are initially reported at fair value plus transaction costs when entered into and then for reporting purposes are re-measured to fair value at subsequent balance sheet dates with the movements in the fair value being deferred in a separate component of equity until the investment is impaired or disposed of, when the cumulative gain or loss deferred in equity is reclassified in the income statement.
The liability component of convertible financial instruments is measured using a market rate for an equivalent non-convertible instrument with the difference between the proceeds received on issuing the instrument and the liability component being allocated to a separate component of equity. The liability component is re-measured on an amortised cost basis until extinguished on conversion or redemption. On conversion, the carrying amount of the liability component is allocated to equity, with no gain or loss being recognised. On redemption, any difference between the amount of the liability component and payments made is recognised in the income statement.

Under UK GAAP:

Gains or losses on the hedging instrument are recognised in the period to which the gains and losses on the underlying transactions relate. Where the underlying hedged transaction can no longer be identified, gains and losses on the hedge instrument are recognised in the profit and loss account.
The investments in the rehabilitation trust funds are measured at fair value based on the market price of investments held by the trust fund. Other investments are carried at cost less any provision for impairments.
Convertible financial instruments are recognised at inception at the fair value of the proceeds received net of issue costs. The carrying amount of the instrument is increased by the finance cost for each period less payments made. On redemption, any difference between the carrying amount of the liability and the payments made is recognised in the profit and loss account. On conversion, the carrying amount is allocated to equity, with no gain or loss recognised on conversion.

The main differences that arise as a result of the changes in policy are outlined in the reconciliation below and relate to:

All derivatives being brought onto the balance sheet at fair value.
Instruments classified as available-for-sale being measured at fair value.
The liability component of convertible financial instruments being re-measured with an adjustment to equity.

A reconciliation between the IFRS Balance Sheet at 31 December 2004 and 1 January 2005 upon adoption of IAS 32 and IAS 39 is provided below:

Reconciliation between the IFRS Balance Sheet at 31 December 2004 and 1 January 2005 upon adoption of IAS 32 and IAS 39
US$m	at 31.12.04	Adoption of IAS 32 & 39	at 01.01.05
Assets
Non-current assets
Intangible assets	1,523.9	-	1,523.9
Property, plant and equipment	8,128.5	-	8,128.5
Biological assets	32.2	-	32.2
Inventories	83.2	-	83.2
Trade and other receivables	61.1	-	61.1
Investment in associates	48.9	-	48.9
Available-for-sale financial assets	-	6.9	6.9
Derivative financial assets	-	25.1	25.1
Other financial assets	77.2	-33.5	43.7
Pension asset	2.7	-	2.7
Prepayments	15.9	-	15.9
Deferred tax assets	2.0		2.0
Other assets	73.4	-	73.4
	10,049.0	-1.5	10,047.5
Current assets
Inventories	825.9	-	825.9
Trade and other receivables	794.0	-	794.0
Prepayments	103.9	-	103.9
Derivative financial assets	-	85.6	85.6
Other financial assets	53.8	-25.9	27.9
Cash and cash equivalents	459.6	-	459.6
	2,237.2	59.7	2,296.9
Total assets	12,286.2	58.2	12,344.4

Reconciliation between the IFRS Balance Sheet at 31 December 2004 and 1 January 2005 upon adoption of IAS 32 and IAS 39
US$m	at 31.12.04	Adoption of IAS 32 & 39	at 01.01.05
Equity and liabilities
Capital and reserves - attributable to equity holders of Xstrata plc
Issued capital	315.8	-	315.8
Share premium	2,481.5	-	2,481.5
Own shares	-91.7	-	-91.7
Convertible borrowings - equity component	-	63.4	63.4
Other reserves	3,490.1	2.5	3,492.6
Retained earnings	622.9	-8.8	614.1
	6,818.6	57.1	6,875.7
Minority interests	506.6	-	506.6
Total equity	7,325.2	57.1	7,382.3
Non-current liabilities
Trade and other payables	15.7	-	15.7
Interest-bearing loans and borrowings	1,232.7	-	1,232.7
Convertible borrowings	590.4	-43.5	546.9
Derivative financial liabilities	-	21.2	21.2
Provisions	480.3	-	480.3
Pension deficit	27.7	-	27.7
Deferred tax liabilities	1,357.7	11.0	1,368.7
Other liabilities	6.2	-	6.2
	3,710.7	-11.3	3,699.4
Current liabilities
Trade and other payables	788.8	-	788.8
Interest-bearing loans and borrowings	108.5	-	108.5
Derivative financial liabilities	-	12.4	12.4
Provisions	94.7	-	94.7
Income taxes payable	238.7	-	238.7
Other liabilities	19.6	-	19.6
	1,250.3	12.4	1,262.7
Total liabilities	4,961.0	1.1	4,962.1
Total equity and liabilities	12,286.2	58.2	12,344.4

Notes to the reconciliation between the IFRS Balance Sheet at 31 December 2004 and 1 January 2005 upon adoption of IAS 32 and IAS 39:

Investments in listed and unlisted shares of US$5.6 million have been reclassified from non-current Other financial assets to Available-for-sale financial assets. An unrealised fair value adjustment of US$1.3 million was recorded to the Available-for-sale financial assets, adjusting Other reserves by US$1.3 million.
Foreign currency cash flow hedges of US$2.2 million and the cross currency swap of US$21.8 million was reclassified to current Derivative financial assets from current Other financial assets.
The fair values of foreign currency hedges and commodity hedges of US$14.0 million in non-current Derivative financial assets, US$59.3 million in current Derivative financial assets, US$21.2 million in non-current Derivative financial liabilities and US$12.4 million in current Derivative financial liabilities have been recognised. The book value of commodity hedges of US$27.9 million in non-current Other financial assets and US$1.9 million in current Other financial assets were derecognised. A deferred tax liability of US$11.0 million was recorded in relation to these foreign currency and commodity hedges and US$1.1 million decrease was recorded in Other reserves.
The fair value of the liability component of the convertible borrowings on issue date was determined using a market rate for a non-convertible instrument. The remaining balance of US$63.4 million was allocated to a separate component of equity, net of issue costs. The amortised cost adjustment on the liability component of US$10.0 million was adjusted to Retained earnings. The interest payable on the bond was swapped from a fixed to floating interest rate and the fair value of this interest rate swap of US$11.1 million has been recorded in non-current Derivative financial assets, US$9.9 million adjusted against the carrying value of the Convertible borrowings and US$1.2 million adjusted to Retained earnings.
An interest rate swap from floating to fixed rates with a fair value of US$2.3 million has been recorded in current Derivative financial assets and Other reserves.

Refer to note 6 for further details of IFRS financial instruments accounting policies.

This reconciliation differs from the reconciliation provided in the 30 June 2005 interim report as follows:

The adjustment to recognise available-for-sale financial assets has decreased by US$82.3 million due to the early adoption of IFRIC 5 and the accounting for the rehabilitation trust fund as an Other financial asset and the classification of coal port assets in Australia. This has no net effect on total financial assets.
Commodity hedge assets of US$29.8 million have been derecognised with an adjustment to Other reserves, as they had been incorrectly recorded on adoption of IAS 32 and IAS 39.
The fair value of the interest rate swap adjusted against the convertible borrowings has decreased by US$1.2 million with an adjustment against retained earnings.
Derivative financial assets and liabilities have been separately disclosed.

6. Principal Accounting Policies

This note outlines the Group's IFRS compliant accounting policies. Refer to note 5 for the exemptions the Group has taken in applying IFRS for the first time.

Basis of consolidation

The financial statements consolidate the financial statements of Xstrata plc and its subsidiaries. All inter-entity balances and transactions, including unrealised profits and losses arising from intra-group transactions, have been eliminated in full. The results of subsidiaries acquired or sold are consolidated for the periods from or to the date on which control passes. Control is achieved where the Group has the power to govern the financial and operating policy of an entity so as to obtain benefits from its activities. Where there is a loss of control of a subsidiary, the financial statements include the results for the part of the reporting period during which Xstrata plc has control. Subsidiaries use the same reporting period and same accounting policies as Xstrata plc.

Interests in Joint Ventures

A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. The financial statements of the joint ventures are prepared for the same reporting period as the Company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

Jointly controlled operations

A jointly controlled operation involves the use of assets and other resources of the Group and other venturers rather than the establishment of a corporation, partnership or other entity.

The Group accounts for the assets it controls and the liabilities it incurs, the expenses it incurs and the share of income that it earns from the sale of goods or services by the joint venture.

Jointly controlled assets

A jointly controlled asset involves joint control and offers joint ownership by the Group and other venturers of assets contributed to or acquired for the purpose of the joint venture, without the formation of a corporation, partnership or other entity.

The Group accounts for its share of the jointly controlled assets, any liabilities it has incurred, its share of any liabilities jointly incurred with other ventures, income from the sale or use of its share of the joint venture's output, together with its share of the expenses incurred by the joint venture, and any expenses it incurs in relation to its interest in the joint venture.

Jointly controlled entities

A jointly controlled entity involves the establishment of a corporation, partnership or other legal entity in which the Group has an interest along with other venturers.

The Group recognises its interest in jointly controlled entities using the proportionate method of consolidation whereby the Group's share of each of the assets, liabilities, income and expenses of the joint venture are combined with the similar items, line by line, in its consolidated financial statements.

When the Group contributes or sells assets to a joint venture, any portion of gain or loss from the transaction is recognised based on the substance of the transaction. When the Group has transferred the risk and rewards of ownership to the joint venture, the Group will generally only recognise the portion of the gain or loss attributable to the other ventures, unless the loss is reflective of an impairment, in which case the loss is recognised in full. When the Group purchases assets from the joint venture, it does not recognise its share of the profits of the joint venture from the transaction until it resells the assets to an independent party. Losses are accounted for in a similar manner unless they represent an impairment loss, in which case they are recognised immediately.

Joint ventures are accounted for in the manner outlined above, until the date on which the Group ceases to have joint control over the joint venture.

Investments in Associates

Entities in which the Group has significant influence and which are neither subsidiaries nor joint ventures, are associates, and are accounted for under the equity method of accounting.

Under the equity method of accounting, the investment in the associate is recognised in the balance sheet on the date of acquisition at the fair value of the purchase consideration and therefore includes any goodwill on acquisition which is not amortised. The carrying amount is adjusted by the Group's share of the post acquisition profit or loss; depreciation, amortisation or impairment arising from fair value adjustments made at date of acquisition and certain inter-entity transactions together with a reduction for any dividends received or receivable from the associate. Where there has been a change recognised directly in the equity of the associate, the Group recognises its share of such changes in equity.

The financial statements of the associates are prepared for the same reporting period as the Company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. Adjustments are made in the consolidated financial statements to eliminate the Group's share of unrealised gains and losses on transactions between the Group and its associates.

The Group discontinues its use of the equity method from the date at which it ceases to have significant influence, and shall from that date, account for the investment in accordance with IAS 39 (with its initial cost, being the carrying amount of the associate at that date), provided the investment does not then qualify as a subsidiary or joint venture.

The Group's income statement reflects the share of associates results after tax and the Group's statement of recognised income and expense includes any amounts recognised by associates outside of profit and loss.

Business Combinations

Business combinations after 1 January 2004, are accounted for in accordance with the below policy. Business combinations that occurred prior to this date have not been adjusted (refer to note 5).

On the acquisition of a subsidiary, the purchase method of accounting is used whereby the purchase consideration is allocated to the identifiable assets, liabilities and contingent liabilities (identifiable net assets) on the basis of fair value at the date of acquisition. Those mineral reserves and resources that are able to be reliably valued are recognised in the assessment of fair values on acquisition. Other potential reserves, resources and mineral rights, for which in the Directors' opinion, values cannot be reliably determined, are not recognised.

When the cost of acquisition exceeds the fair values attributable to the Group's share of the identifiable net assets the difference is treated as purchased goodwill which is not amortised but is reviewed for impairment annually and where there is an indication of impairment. If the fair value attributable to the Group's share of the identifiable net assets exceeds the cost of acquisition the difference is immediately recognised in the income statement.

Minority interests represent the portion of profit or loss and net assets in subsidiaries that is not held by the Group and is presented in equity in the consolidated balance sheet, separately from the parent shareholders' equity.

Similar procedures are applied in accounting for the purchases of interests in associates or jointly controlled entities. Any goodwill arising on such purchases is included within the carrying amount of the investment in associates or jointly controlled entity, but not thereafter amortised. Any excess of the Group's share of the net fair value of the associate's or jointly controlled entity's identifiable assets, liabilities and contingent liabilities over the cost of the investment is included in income in the period of the purchase.

Foreign currencies

Financial statements of subsidiaries, joint ventures and associates, are maintained in their functional currencies and converted to US dollars for consolidation of the Group results. The functional currency of each entity is determined after consideration of the primary economic environment of the entity. Transactions in foreign currencies are translated at the exchange rates ruling at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at year end exchange rates. All differences that arise are recorded in the income statement except when hedge accounting is applied. Non-monetary assets measured at historical cost in a foreign currency are translated using the exchange rates at the date of the initial transactions. Where non-monetary assets are measured at fair value in a foreign currency, they are translated at the exchange rates when the fair value was determined. Where the exchange differences relates to an item which has been recorded in equity, the related exchange difference is also recorded in equity.

On consolidation of foreign operations into US dollars, income statement items are translated at weighted average rates of exchange where this is a reasonable approximation of the exchange rate at the dates of the transactions. Balance sheet items are translated at closing exchange rates. Exchange differences on the re-translation of the investments in overseas subsidiaries, joint ventures and associates at closing rates, together with differences between income statements translated at average and at closing rates, are recorded in a separate component of equity. Exchange differences relating to quasi equity inter-company loan balances with the foreign operations which form part of the net investment in the foreign operation are also recognised in this component of equity. On disposal or partial disposal of a foreign entity or on repayment of loans forming part of the net investment in the foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.

Exchange differences on foreign currency borrowings to finance net investments and tax charges/credits attributable to those exchange differences are also recorded in a separate component of equity to the extent that the hedge is effective. Upon full or partial disposal or repayment of the net investment in the foreign operation (including loans that form part of the net investment), the cumulative amount of the exchange differences are recognised in the income statement when the gain or loss on disposal or on loan repayment is recognised.

The following exchange rates to the US dollar (US$) have been applied:

Exchange rates to the US dollar (US$)
	31 December 2005	Average 12 months 2005	31 December 2004	Average 12 months 2004
Argentine pesos (US$:ARS)	3.0300	2.9224	2.9720	2.9416
Australian dollars (AUD:US$)	0.7328	0.7624	0.7802	0.7370
Canadian dollars (US$:CAD)	1.1620	1.2113	n/a	n/a
Chile pesos (US$:CLP)	n/a	n/a	557.40	611.45
Euros (EUR:US$)	1.1850	1.2444	1.3554	1.2442
Great Britain pounds (GBP:US$)	1.7229	1.8195	1.9179	1.8335
South African rands (US$:ZAR)	6.3288	6.3661	5.6650	6.4341
Swiss francs (US$:CHF)	1.3134	1.2463	1.1403	1.2421

Revenue

Revenue associated with the sales of commodities is recognised when all significant risks and rewards of ownership of the asset sold are transferred to the customer, usually when title and insurance risk has passed to the customer and the commodity has been delivered to the shipping agent. Sales revenue is recognised at the fair value of consideration received, which is invoiced amounts, with most sales being priced free on board (FOB), free on rail (FOR) or cost, insurance and freight (CIF). Revenues from the sale of by-products are also included in sales revenue. Revenue is recognised, at fair value of the consideration receivable, to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. Revenue excludes treatment and refining charges unless payment of these amounts can be enforced by the Group at the time of the sale.

Interest income

Interest income is recognised as earned on an accruals basis using the effective interest method in the income statement.

Non-trading items

Non-trading items represent material items of income and expense which due to their nature or expected infrequency of the events giving rise to them, are presented separately on the face of the income statement to give a better understanding to shareholders of the elements of financial performance in the year, so as to facilitate comparison with prior periods and to assess better trends in financial performance. Non-trading items include but are not limited to acquisition costs which have not been capitalised, profits and losses on sale of investments, profits and losses from the sale of operations, recycled gains and losses from the foreign currency translation reserve, restructuring and closure costs, loan issue costs written-off on facility refinancing and the related tax impacts for these items.

Property, plant and equipment
Land and buildings, plant and equipment

On initial acquisition, land, property, plant and equipment are valued at cost, being the purchase price and the directly attributable costs of acquisition or construction required to bring the asset to the location and condition necessary for the asset to be capable of operating in the manner intended by management.

In subsequent periods, property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value, whilst land is stated at cost less any impairment in value and is not depreciated.

Depreciation is provided so as to write off the cost, less estimated residual values of property, plant and equipment (based on prices prevailing at the balance date) on the following bases:

Mine production assets are depreciated using a unit of production method based on estimated economically recoverable reserves, which results in a depreciation charge proportional to the depletion of reserves. Buildings, plant and equipment unrelated to production are depreciated using the straight-line method based on estimated useful lives.

Where significant parts of an asset have differing useful lives, depreciation is calculated on each separate part. Each item or part's estimated useful life has due regard to both its own physical life limitations and the present assessment of economically recoverable reserves of the mine property at which the item is located, and to possible future variations in those assessments. Estimates of remaining useful lives and residual values are reviewed annually. Changes in estimates which affect unit of production calculations are accounted for prospectively.

The expected useful lives are as follows:

expected useful lives
Buildings	15-40 years
Plant and Equipment	4-30 years
Furniture and Fixtures	5-15 years
Other	3-5 years

The net carrying amounts of mine buildings, machinery and equipment at each mine property are reviewed for impairment either individually or at the cash-generating unit level when events and changes in circumstances indicate that the carrying amount may not be recoverable. To the extent to which these values exceed their recoverable amounts, that excess is fully provided against in the financial year in which this is determined.

Expenditure on major maintenance or repairs includes the cost of replacement of parts of assets and overhaul costs. Where an asset or part of an asset is replaced and it is probable that future economic benefits associated with the item will be available to the Group, the expenditure is capitalised and the carrying amount of the item replaced derecognised. Similarly, overhaul costs associated with major maintenance are capitalised where it is probable that future economic benefits will be available and any remaining carrying amounts of the cost of previous overhauls are derecognised. All other costs are expensed as incurred.

Where an item of property, plant and equipment is disposed of, it is derecognised and the difference between its carrying value and net sales proceeds is disclosed as a profit or loss on disposal in the income statement.

Any items of property, plant or equipment that cease to have future economic benefits expected to arise from the continued use or disposal of them are derecognised with any gain or loss included in the income statement in the financial year in which the item is derecognised.

Exploration and evaluation expenditure

Exploration and evaluation expenditure relates to costs incurred on the exploration and evaluation of potential mineral reserves. Exploration and evaluation expenditure for each area of interest, other than that acquired from the purchase of another mining company, is carried forward as an asset provided that one of the following conditions is met:

such costs are expected to be recouped in full through successful development and exploration of the area of interest or alternatively, by its sale; or
exploration and evaluation activities in the area of interest have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in relation to the area are continuing, or planned for the future.

Purchased exploration and evaluation assets are recognised as assets at their cost of acquisition or at fair value if purchased as part of a business combination.

An impairment review is performed, either individually or at the cash generating unit level, when there are indicators that the carrying amount of the assets may exceed their recoverable amounts. To the extent that this occurs, the excess is fully provided against, in the financial period in which this is determined. Exploration assets are reassessed on a regular basis and these costs are carried forward provided that at least one of the conditions outlined above is met.

Mineral properties and mine development expenditure

The cost of acquiring mineral reserves and mineral resources are capitalised on the balance sheet as incurred. Capitalised costs (development expenditure) include interest and financing costs relating to the construction of plant and equipment and costs associated with a start up period where the asset is available for use but incapable of operating at normal levels without a commissioning period.

Mineral reserves and capitalised mine development expenditure are, upon commencement of production, depreciated using a unit of production method based on the estimated economically recoverable reserves to which they relate or are written-off if the property is abandoned. The net carrying amounts of mineral reserves and resources and capitalised mine development expenditure at each mine property are reviewed for impairment either individually or at the cash-generating unit level when events and changes in circumstances indicate that the carrying amount may not be recoverable. To the extent to which these values exceed their recoverable amounts, that excess is fully provided against in the financial year in which this is determined.

Capital work in progress

Assets in the course of construction are capitalised in the capital work in progress account. On completion, the cost of construction is transferred to the appropriate category of property, plant and equipment.

The cost of a property, plant and equipment comprises its purchase price and any costs directly attributable to bringing it into working condition for its intended use.

Costs associated with a start up period are capitalised where the asset is available for use but incapable of operating at normal levels without a commissioning period.

Capital work in progress is not depreciated.

The net carrying amounts of capital work in progress at each mine property are reviewed for impairment either individually or at the cash-generating unit level when events and changes in circumstances indicate that the carrying amount may not be recoverable. To the extent to which these values exceed their recoverable amounts, that excess is fully provided against in the financial period in which this is determined.

Leasing and hire purchase commitments

Assets held under finance leases, where substantially all the risks and rewards of ownership of the asset have passed to the Group, and hire purchase contracts are capitalised in the balance sheet at the lower of the fair value of the leased property or the present value of the minimum lease payments during the lease term calculated using the interest rate implicit in the lease agreement. These amounts are determined at the inception of the lease and are depreciated over the shorter of their estimated useful lives or lease term. The capital elements of future obligations under leases and hire purchase contracts are included as liabilities in the balance sheet. The interest elements of the lease or hire purchase obligations are charged to the income statement over the periods of the leases and hire purchase contracts and represent a constant proportion of the balance of capital repayments outstanding.

Leases where substantially all the risks and rewards of ownership have not passed to the Group are classified as operating leases. Rentals payable under operating leases are charged to the income statement on a straight-line basis over the lease term.

Biological assets

Biological assets, being cattle and plantations, are carried at their fair value less estimated selling costs. Any changes in fair value less estimated selling costs are included in the income statement in the period in which they arise.

Deferred overburden removal expenditure

In open pit mining operations, it is necessary to remove overburden and other waste in order to access the ore body. During the pre-production phase, these costs are capitalised as part of the cost of the mine property.

The costs of removal of the waste material during a mine's production phase are deferred, where appropriate. The deferral of these costs, and subsequent charges to the income statement are determined with reference to the mine's strip ratio. This ratio represents the ratio of the estimated total volume of waste, to the estimated total quantity of economically recoverable ore, over the life of the mine. Deferral of these costs is made where the actual stripping ratios vary from the mine's strip ratio. The costs charged to the income statement are based on application of the mine strip ratio to the quantity of ore mined in the period. Where the ore is expected to be evenly distributed, waste removal is expensed as incurred.

Intangible assets

Purchased intangible assets are recorded at the cost of acquisition including expenses incidental to the acquisition, less accumulated amortisation and any impairment in value.

Intangible assets acquired as part of an acquisition of a business are capitalised separately from goodwill if the asset is separable or arises from contractual or legal rights, and the fair value can be measured reliably on initial recognition.

Internally generated goodwill is not recognised.

Intangible assets are amortised using a straight-line method based on estimated useful lives, except goodwill and those intangible assets which the Directors regard as having indefinite useful lives, which are not amortised but are reviewed for impairment at least annually, and whenever events or circumstances indicate that the carrying amount may not be recoverable. Intangible assets are regarded as having an indefinite life when, based on an analysis of all the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash flows. Such analyses are performed annually. Estimated useful lives are determined as the period over which the Group expects to use the asset or the number of production (or similar) units expected to be obtained from the asset by the Group and for which the Group retains control of access to those benefits.

For intangible assets with a finite useful life, the amortisation method and period are reviewed annually and impairment testing is undertaken when circumstances indicate the carrying amount may not be recoverable.

Where an intangible asset is disposed of, it is derecognised and the difference between its carrying value and the net sales proceeds is reported as a profit or loss on disposal in the income statement.

Coal Export Rights

Coal export rights are carried at cost and are considered to have an indefinite useful life. As a result they are not amortised but are subject to an asset impairment review at least annually and more regularly if indicators of impairment exist.

Software and Technology patents

Software and Technology patents are carried at cost and amortised over a period of 3 years and 20 years respectively.

Impairment of assets

The carrying amounts of non-current assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. If there are indicators of impairment, a review is undertaken to determine whether the carrying values are in excess of their recoverable amount. The recoverable amount is determined as the higher of an asset's fair value less costs to sell and its value in use. Such review is undertaken on an asset by asset basis, except where such assets do not generate cash flows independent of other assets, when the review is undertaken at the cash generating unit level.

Where a cash generating unit, or group of cash generating units, has goodwill allocated to it, or includes intangible assets which are either not available for use or which have an indefinite useful life (and which can only be tested as part of a cash generating unit), an impairment test is performed at least annually or whenever there is an indication that the carrying amount of such assets may be impaired.

If the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recorded in the income statement to reflect the asset at the lower amount. In assessing recoverable amount for assets, the relevant future cash flows expected to arise from the continuing use of such assets and from their disposal have been discounted to their present value using a market-determined pre-tax discount rate which reflects current market assessments of the time value of money and asset-specific risks for which the cash flow estimates have not been adjusted.

An impairment loss is reversed in the income statement if there is a change in estimates used to determine recoverable amount since the prior impairment loss was recognised. The carrying amount is increased to recoverable amount but not beyond the carrying amount net of depreciation or amortisation which would have arisen if the prior impairment loss had not been recognised. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset's revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Goodwill impairments are not reversed.

Non-current assets held for sale and discontinued operations
Non-current assets held for sale

Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. The Group must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

Discontinued Operations

the operation must represent a separate major line of business or geographical area of operations;
the operation must be part of a single coordinated plan to dispose of a separate major line of business or geographical areas of operations; or
the operation must be a subsidiary acquired exclusively with a view for resale.

Where the operation is discontinued at the balance sheet date, the results are presented in one line on the face of the income statement, and prior period results are represented as discontinued.

Financial instruments
Investments and other financial assets

As outlined in note 5 the Group has not retrospectively applied the requirements of IAS 32 and of IAS 39. Investments and other financial assets are accounted for in accordance with UK GAAP prior to 1 January 2005.

IFRS Accounting Policy

Financial assets are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments or available-for-sale financial assets, as appropriate. The Group determines the classification of its financial assets at initial recognition (which in the case of financial assets existing at the transition date, includes designation at that date). Where as a result of a change in intention or ability, it is no longer appropriate to classify an investment as held to maturity, the investment is reclassified into the available-for-sale category. When financial assets are recognised initially, they are measured at fair value on the trade date, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs.

Financial assets at fair value through profit or loss

Financial assets classified as held for trading are included in the category 'financial assets at fair value through profit or loss'. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated as and are effective hedging instruments. Other assets can be designated to this category on initial recognition. Gains or losses on these items are recognised in income.

Held-to-maturity investments

Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification. Other long term investments that are intended to be held-to-maturity, such as bonds, are subsequently measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in income when the investments are derecognised or impaired, as well as through the amortisation process.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated as either fair value through profit and loss or available for sale. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in income when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition available-for sale financial assets are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the income statement.

Listed share investments are carried at fair value based on stock exchange quoted prices at the balance sheet date. Unlisted shares are carried at fair value where it can be reliably obtained, otherwise they are stated at cost less any impairment.

Fair values

The fair value of quoted financial assets is determined by reference to bid prices at the close of business on the balance sheet date. Where there is no active market, fair value is determined using valuation techniques. These include recent arm's length market transactions; reference to current market value of another instrument which is substantially the same; discounted cash flow analysis and pricing models.

Derivative financial instruments are valued using applicable valuation techniques such as those outlined above.

Derecognition of financial assets and liabilities
Financial assets

A financial asset is derecognised where:

the rights to receive cash flows from the asset have expired;
the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass-through' arrangement; or
the Group has transferred its rights to receive cash flows from the asset and either has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, it continues to recognise the financial asset to the extent of its continuing involvement in the asset.

Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Gains on derecognition are recognised within finance income and losses within finance costs.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss.

Impairment of financial assets

The Group assesses at each balance sheet date whether a financial asset is impaired.

Financial assets carried at amortised cost

If there is objective evidence that an impairment loss on loans and receivables and held to maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate (ie the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced and the amount of the loss is recognised in the income statement.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.

Assets carried at cost

If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value (because its fair value cannot be reliably measured), the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

Available-for-sale financial assets

If an available-for-sale financial asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in profit or loss, is transferred from equity to the income statement. Reversals in respect of equity instruments classified as available-for-sale are not recognised in profit. Reversals of impairment losses on debt instruments are reversed through profit or loss, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in profit or loss.

Rehabilitation Trust Fund

Investments in the rehabilitation trust funds are measured at fair value based on the market price of investments held by the trust. In accordance with IFRIC 5, movements in the fair value are recognised in the income statement. Such amounts relate to trusts in South Africa which receive cash contributions to accumulate funds for the Group's rehabilitation liability relating to the eventual closure of the Group's coal operations.

Derivative financial instruments and hedging

The Group uses derivative financial instruments such as interest rate swaps, forward currency and commodity contracts to hedge its risks associated with interest rate, foreign currency and price fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to profit or loss for the year.

The fair value of forward currency and commodity contracts are calculated by reference to current forward exchange rates and prices for contracts with similar maturity profiles. The fair value of interest rate swap contracts is determined by reference to market values for similar instruments.

For the purpose of hedge accounting, hedges are classified as:

fair value hedges;
cash flow hedges; or
hedges of a net investment in a foreign operation.

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument's effectiveness in offsetting the exposure to changes in the hedged item's fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

Hedges which meet the strict criteria for hedge accounting are accounted for as follows:

Fair value hedges

Fair value hedges are hedges of the Group's exposure to changes in the fair value of a recognised asset or liability that could affect profit or loss. The carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged, the derivative is re-measured at fair value and gains and losses from both are taken to profit or loss.

For fair value hedges relating to items carried at amortised cost, the adjustment to carrying value is amortised through profit or loss over the remaining term to maturity. Any adjustment to the carrying amount of a hedged financial instrument for which the effective interest method is used is amortised to profit or loss.

Amortisation begins when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged.

The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation.

Cash flow hedges

Cash flow hedges are a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in profit or loss.

Amounts taken to equity are transferred to the income statement when the hedged transaction affects profit or loss. Where the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability.

If the forecast transaction is no longer expected to occur, amounts previously recognised in equity are transferred to profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amount is taken to profit or loss.

Hedges of a net investment

Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised directly in equity while any gains or losses relating to the ineffective portion are recognised in profit or loss. On disposal of the foreign operation, the cumulative value of any such gains or losses recognised directly in equity is transferred to profit or loss.

UK GAAP Accounting Policy

The investments in the rehabilitation trust funds are measured at fair value based in the market price of investments held by the trust fund. Other investments are carried at cost less any provision for impairments which are recognised when it is assessed that the carrying amount of the asset is no longer recoverable.

The Group is exposed to foreign exchange, interest rate and commodity price risks. The Group may use forward, swap, option and collar contracts to reduce its exposure to foreign exchange, interest rate and commodity price risks movements. Hedge accounting is applied whereby gains and losses on these contracts are recognised in the period to which the gains and losses of the underlying transactions relate. Where the underlying transaction can no longer be identified, gains or losses on the hedge contract are recognised in the profit and loss account. Where the hedge contracts are terminated early and the underlying transaction can no longer be identified, the gain or loss on the terminated hedge contract is recognised in the profit and loss account. Where the hedged transaction is still expected to occur, the gain or loss on the terminated hedge transaction is deferred until the underlying transaction occurs. Where a borrowing is used as a hedge of a net investment in a foreign operation and is used to reduce the exposure to foreign currency risk, the gains or losses on the retranslation of the instrument are transferred to equity.

Own shares

The cost of purchases of own shares held by the Employee Share Ownership Plan (ESOP) trust are deducted from equity. Where they are issued to employees or sold, no gain or loss is recognised in the income statement. Any proceeds received on disposal of the shares or transfer to employees are also recognised in equity.

Own shares purchased under the Equity Capital Management Program (ECMP) are deducted from equity. No gain or loss is recognised in the income statement on the purchase, sale, issue or cancellation of such shares. Such gains and losses are recognised directly in equity.

Interest-bearing loans and borrowings

Loans are recognised at inception at fair value of the proceeds received, net of directly attributable transaction costs. Subsequently they are measured at amortised cost using the effective interest method. Finance costs are recognised in the income statement using the effective interest method.

Convertible borrowings

As outlined in note 5, the Group has not retrospectively applied the requirements of IAS 32 and 39. Convertible borrowings are accounted for in accordance with UK GAAP prior to 1 January 2005.

IFRS Accounting Policy

On issue of a convertible borrowing, the fair value of the liability component is determined by discounting the contractual future cash flows using a market rate for a non-convertible instrument with similar terms. This value is carried as a liability on the amortised cost basis until extinguished on conversion or redemption. The remainder of the proceeds is allocated to a separate component of equity, net of issue costs, which remains constant in subsequent periods. Issue costs are apportioned between the liability and equity components based on their respective carrying amounts when the instrument was issued.

On conversion, the liability is reclassified to equity and no gain or loss is recognised in the profit or loss. Where the convertible borrowing is redeemed early or repurchased in a way that does not alter the original conversion privileges, the consideration paid is allocated to the liability and equity components. The consideration relating to the equity component is recognised in equity and the amount of gain or loss relating to the liability element in profit or loss.

The finance costs recognised in respect of the convertible borrowings will include the accretion of the liability component to the amount that will be payable on redemption.

UK GAAP Accounting Policy

Shares are included in shareholders' funds. Other instruments are classified as liabilities if they contain an obligation to transfer economic benefits and if not they are included in shareholders' funds. Convertible financial instruments are recognised at inception at the fair value of the proceeds received net of issue costs in liabilities. The carrying amount of the convertible borrowing is increased by finance cost in respect of each period less any payments made. On redemption, any difference between the carrying amount of the liability and the payment made is recognised in the profit and loss account. On conversion, the carrying amount is allocated to equity, with no gain or loss recognised on conversion.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on a weighted average basis or using first-in-first-out basis and includes all costs incurred in the normal course of business including direct material and direct labour costs, and an allocation of production overheads, depreciation and amortisation and other costs, based on normal production capacity, incurred in bringing each product to its present location and condition. Cost of inventories includes the transfers from equity of gains and losses on qualifying cash flow hedges in respect of the purchase of materials. Inventories are categorised, as follows:

Raw materials and consumables: Materials, goods or supplies (including energy sources) to be either directly or indirectly consumed in the production process.
Work in progress: Items stored in an intermediate state that have not yet passed through all the stages of production.
Finished goods: Products and materials that have passed all stages of the production process.

Net realisable value represents estimated selling price in the ordinary course of business less any further costs expected to be incurred to completion and disposal.

Trade and other receivables

Trade and other receivables are recognised and carried at the lower of their original invoiced value and recoverable amount. Where the time value of money is material, receivables are carried at amortised cost. A provision is made where the estimated recoverable amount is lower than the carrying amount. Where trade receivables are used to factor debt they are derecognised where the Group has transferred its rights to receive the cash flow to a third party and if all the significant risks and rewards relating to the financial assets in question have been transferred to the third party.

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank, cash in hand and short-term deposits with an original maturity of three months or less. For the cash flow statement, cash and cash equivalents includes certain bank overdrafts where the facility forms part of the working capital cash management activities.

Government grants

Government grants are recognised where there is reasonable assurance that the grant will be received and all the attaching conditions will be complied with. Government grants in respect of capital expenditure are credited to the carrying amount of the related asset and are released to the income statement over the expected useful lives of the relevant assets. Grants which are not associated with an asset are credited to income so as to match them with the expense to which they relate.

Environmental protection, rehabilitation and closure costs

Provision is made for close down, restoration and for environmental rehabilitation costs (which include the dismantling and demolition of infrastructure, removal of residual materials and remediation of disturbed areas) in the financial period when the related environmental disturbance occurs, based on the estimated future costs using information available at the balance sheet date. The provision is discounted using a current market-based pre-tax discount rate and the unwinding of the discount is included in interest expense. At the time of establishing the provision, a corresponding asset is capitalised, where it gives rise to a future benefit, and depreciated over future production from the mine to which it relates.

The provision is reviewed on an annual basis for changes to obligations or legislation or discount rates that effect change in cost estimates or life of operations. The cost of the related asset is adjusted for changes in the provision resulting from changes in the estimated cash flows or discount rate, and the adjusted cost of the asset is depreciated prospectively.

Rehabilitation trust funds holding monies committed for use in satisfying environmental obligations are included within Other financial assets on the balance sheet.

Employee Entitlements

Provisions are recognised for short-term employee entitlements, on an undiscounted basis, for services rendered by employees that remain unpaid at the balance sheet date.

Provisions for long-term employee entitlements are measured using the projected unit credit method and discounted at an interest rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the plan liabilities.

In some of the Group's Australian operations, long service leave (an employee entitlement for which a provision is recorded) is administered by an independent fund. The fund collects levies from employers throughout the industry based on the expected cost of future liabilities. When the Group makes long service leave payments to employees covered by the fund, it is reimbursed for the majority of the payment. To reflect the expected reimbursement for future long service leave payments from the fund, a receivable is recorded based on the present value of the future amounts expected to be reimbursed.

Other Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive), as result of past events, and it is probable that an outflow of resources that can be reliably estimated will be required to settle the obligation. Where the effect is material, the provision is discounted to net present value using an appropriate current market-based pre-tax discount rate and the unwinding of the discount is included in finance costs.

Taxation

Current tax

Current tax for each taxable entity in the Group is based on the local taxable income at the local statutory tax rate enacted or substantively enacted at the balance sheet date and includes adjustments to tax payable or recoverable in respect of previous periods.

Deferred tax

Deferred tax is recognised using the balance sheet method in respect of all temporary differences between the tax bases of assets and liabilities, and their carrying amounts for financial reporting purposes, except as indicated below:

Deferred income tax liabilities are recognised for all taxable temporary differences, except:

where the deferred income tax liability arises from the initial recognition of goodwill, or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised, except:

where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. To the extent that an asset not previously recognised fulfils the criteria for recognition, a deferred income tax asset is recorded.

Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which the asset is realised or the liability is settled, based on tax rates and tax laws enacted or substantively enacted at the balance sheet date.

Current and deferred tax relating to items recognised directly in equity are recognised in equity and not in the income statement.

Pensions and other post-retirement obligations

The Group's contributions to its defined contribution pension plans are charged to the income statement in the year to which they relate.

The Group contributed to separately administered defined benefit pension plans.

Plan assets are measured at fair value, while plan liabilities are measured on an actuarial basis using the projected unit credit method and discounted at an interest rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the plan liabilities. The expected return on plan assets is based on an assessment made at the beginning of the year of long term market returns on scheme assets, adjusted for the effect on the fair value of plan assets of contributions received and benefits paid during the year. In measuring its defined benefit liability past service costs are recognised as an expense on a straight-line basis over the period until the benefits become vested. To the extent that the benefits vest immediately following the introduction of, or changes to, a defined benefit plan, the past service costs are recognised immediately. When a settlement (eliminating all obligations for part or all of the benefits that have already accrued) or a curtailment (reducing future obligations as a result of material reduction in the scheme membership or a reduction in future entitlement) occurs the obligation and related plan assets are re-measured using current actuarial assumptions and the resultant gain or loss recognised in the income statement during the period in which the settlement or curtailment occurs.

The service cost of providing pension benefits to employees for the year is determined using the projected unit method and is recognised in the income statement. The difference between the expected return on plan assets and the unwinding of the discount on plan liabilities is recognised in the income statement.

Actuarial gains or losses are recognised directly in equity through the statement of recognised income and expenses. The full pension surplus or deficit is recorded in the balance sheet, with the exception of the impact of any recognition of past service costs. Surpluses recorded are restricted to the sum of any unrecognised past service costs and present value of any amounts the Group expects to recover by way of refunds from the plan or reductions in future contributions.

The Group also provides post-retirement healthcare benefits to certain employees in South Africa. These are accounted for in a similar manner to the defined benefit pension plans. These benefits are unfunded.

Ordinary share capital

Ordinary shares issued by the Company are recorded at the net proceeds received, which is the fair value of the consideration received less costs that are incurred in connection with the share issue. The nominal par value of the shares issued is taken to the share capital account and any excess is recorded in the share premium account, including the costs that were incurred with the share issue.

Share-based compensation plans

The Group makes share-based awards, including free shares and options, to certain employees.

Equity-settled awards

For equity-settled awards, the fair value is charged to the income statement and credited to retained earnings, on a straight line basis over the vesting period, after adjusting for the estimated number of awards that are expected to vest (taking into account the achievement of non-market based performance conditions). The fair value of the equity-settled awards is determined at the date of the grant. In calculating fair value, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of the Company (market conditions). The fair value is determined by external experts using the models outlined in note 37. At each balance sheet date prior to vesting, the cumulative expense representing the extent to which the vesting period has expired and managements best estimate of the awards that are ultimately expected to vest is computed (after adjusting for non-market performance conditions). The movement in cumulative expense is recognised in the income statement with a corresponding entry within equity.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.

Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified over the original vesting period. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification, over the remainder of the new vesting period.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. Any compensation paid up to the fair value of the awards at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the income statement. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the new awards are treated as if they are a modification of the original award, as described in the previous paragraph.

Cash-settled awards

For cash-settled awards, the fair value is re-calculated at each balance date until the awards are settled based on the estimated number of awards that are expected to vest adjusting for market and non-market based performance conditions. During the vesting period, a liability is recognised representing the portion of the vesting period which has expired at the balance sheet date times the fair value of the awards at that date. After vesting the full fair value of the unsettled awards at each balance date is recognised as a liability. Movements in the liability are recognised in the income statement. The fair value is recalculated using an option pricing model (refer to note 37).

The Group has taken advantage of the transitional provisions of IFRS 2 in relation to unvested equity-settled awards and has applied this accounting standard only to awards granted after 7 November 2002 that had not vested prior to 1 January 2005.

Comparatives

Where applicable, prior year figures have been adjusted to disclose them on the same basis as current period figures except for the adoption of IAS 32, IAS 39 and IFRS 5 on 1 January 2005 as explained above.

7. IFRS Reconciliation to UK GAAP

Balance sheet reconciliations

A reconciliation between the UK GAAP and IFRS Consolidated Balance Sheet at 1 January 2004 (date of transition to IFRS) is provided below:

Reconciliation between the UK GAAP and IFRS Consolidated Balance Sheet at 1 January 2004
	UK GAAP US$m	Reclassi- fications US$m	Subtotal US$m	Adjustments US$m	Notes	IFRS US$m
Non-current assets
Intangible assets	1,333.5	4.2	1,337.7	-		1,337.7
Property, plant and equipment	7,614.8	-25.6	7,589.2	-3.7	i	7,585.5
Biological assets	-	30.1	30.1	-		30.1
Inventories	-	120.5	120.5	-		120.5
Investment in associates	-	-	-	49.3	i	49.3
Other financial assets	81.0	40.3	121.3	-43.7	i	77.6
Pension asset	-	-	-	2.8	iii	2.8
Prepayments	-	9.4	9.4	-		9.4
Deferred tax assets	-	106.7	106.7	-104.5	iv	2.2
Other assets	250.3	-156.4	93.9	-		93.9
	9,279.6	129.2	9,408.8	-99.8		9,309.0
Current assets
Inventories	802.8	-129.2	673.6	-		673.6
Trade and other receivables	702.1	-58.6	643.5	-1.9	i	641.6
Prepayments	-	36.5	36.5	-		36.5
Assets held for resale	31.1	-	31.1	-		31.1
Other financial assets	-	22.1	22.1	-		22.1
Cash and cash equivalents	255.1	-	255.1	-		255.1
	1,791.1	-129.2	1,661.9	-1.9		1,660.0
Total assets	11,070.7	-	11,070.7	-101.7		10,969.0
Equity and liabilities
Capital and reserves - attributable to equity holders of Xstrata plc
Issued capital	315.8	-	315.8	-		315.8
Share premium	2,481.5	-	2,481.5	-		2,481.5
Own shares	-40.8	-	-40.8	-		-40.8
Other reserves	1,240.7	1,739.6	2,980.3	-		2,980.3
Retained earnings	2,487.7	-1,739.0	748.7	-1,061.6		-312.9
	6,484.9	0.6	6,485.5	-1,061.6		5,423.9
Minority interests	614.6	-	614.6	-141.1	vii	473.5
Total equity	7,099.5	0.6	7,100.1	-1,202.7	x	5,897.4
Non-current liabilities
Trade and other payables	-	40.9	40.9	-		40.9
Interest-bearing loans and borrowings	1,658.5	-	1,658.5	-		1,658.5
Convertible borrowings	588.7	-	588.7	-		588.7
Provisions	621.6	-193.7	427.9	2.9	viii	430.8
Pension deficit	-	26.4	26.4	1.2	iii	27.6
Deferred tax liabilities	-	117.1	117.1	1,180.5	iv	1,297.6
Other liabilities	-	5.0	5.0	-		5.0
	2,868.8	-4.3	2,864.5	1,184.6		4,049.1
Current liabilities
Trade and other payables	1,102.4	-330.1	772.3	-83.6	ix	688.7
Interest-bearing loans and borrowings	-	229.4	229.4	-		229.4
Provisions	-	81.1	81.1	-		81.1
Income taxes payable	-	23.3	23.3	-		23.3
	1,102.4	3.7	1,106.1	-83.6		1,022.5
Total liabilities	3,971.2	-0.6	3,970.6	1,101.0		5,071.6
Total equity and liabilities	11,070.7	-	11,070.7	-101.7		10,969.0

Reconciliation between the UK GAAP and IFRS Consolidated Balance Sheet at 1 January 2004
	UK GAAP US$m	Reclassi- fications US$m	PSV US$m	Subtotal US$m	Adjustments US$m	Notes	IFRS US$m
Non-current assets
Intangible assets	1,505.2	6.7	-	1,511.9	12.0	ii	1,523.9
Property, plant and equipment	7,858.6	-26.1	299.8	8,132.3	-3.8	i	8,128.5
Biological assets	-	32.2	-	32.2	-		32.2
Inventories	-	83.2	-	83.2	-		83.2
Trade and other receivables	-	61.1	-	61.1	-		61.1
Investment in joint ventures:
- Share of gross assets	621.5	-	-621.5	-	-		-
- Share of gross liabilities	-252.3	-	252.3	-	-		-
	369.2	-	-369.2	-	-		-
Investment in associates	-	-	-	-	48.9	i	48.9
Other financial assets	87.9	57.4	-23.0	122.3	-45.1	i	77.2
Pension asset	-	-	-	-	2.7	iii	2.7
Prepayments	-	15.9	-	15.9	-		15.9
Deferred tax assets	-	235.6	-	235.6	-233.6	iv	2.0
Other assets	476.0	-402.6	-	73.4	-		73.4
	10,296.9	63.4	-92.4	10,267.9	-218.9		10,049.0
Current assets
Inventories	729.9	-96.0	192.0	825.9	-		825.9
Trade and other receivables	928.9	-125.1	-9.8	794.0	-		794.0
Prepayments	-	103.9	-	103.9	-		103.9
Other financial assets	-	53.8	-	53.8	-		53.8
Cash and cash equivalents	477.3	-	-17.7	459.6	-		459.6
	2,136.1	-63.4	164.5	2,237.2	-		2,237.2
Total assets	12,433.0	-	72.1	12,505.1	-218.9		12,286.2
Equity and liabilities
Capital and reserves - attributable to equity holders of Xstrata plc
Issued capital	315.8	-	-	315.8	-		315.8
Share premium	2,481.5	-	-	2,481.5	-		2,481.5
Own shares	-91.7	-	-	-91.7	-		-91.7
Other reserves	1,245.3	2,411.3	-	3,656.6	-166.5	vi	3,490.1
Retained earnings	4,069.4	-2,411.3	-	1,658.1	-1,035.2		622.9
	8,020.3	-	-	8,020.3	-1,201.7		6,818.6
Minority interests	635.7	-	-	635.7	-129.1	vii	506.6
Total equity	8,656.0	-	-	8,656.0	-1,330.8	x	7,325.2
Non-current liabilities
Trade and other payables	-	15.7	-	15.7	-		15.7
Interest-bearing loans and borrowings	1,232.7	-	-	1,232.7	-		1,232.7
Convertible borrowings	590.4	-	-	590.4	-		590.4
Provisions	662.3	-204.4	13.6	471.5	8.8	viii	480.3
Pension deficit	-	27.1		27.1	0.6	iii	27.7
Deferred tax liabilities	-	155.4	-	155.4	1,202.3	iv	1,357.7
Other liabilities	-	6.2	-	6.2	-		6.2
	2,485.4	-	13.6	2,499.0	1,211.7		3,710.7
Current liabilities
Trade and other payables	1,291.6	-459.5	56.5	888.6	-99.8	ix	788.8
Interest-bearing loans and borrowings	-	108.4	0.1	108.5	-		108.5
Provisions	-	92.8	1.9	94.7	-		94.7
Income taxes payable	-	238.7	-	238.7	-		238.7
Other liabilities	-	19.6	-	19.6	-		19.6
	1,291.6	-	58.5	1,350.1	-99.8		1,250.3
Total liabilities	3,777.0	-	72.1	3,849.1	1,111.9		4,961.0
Total equity and liabilities	12,433.0	-	72.1	12,505.1	-218.9		12,286.2

Notes to the Balance Sheet and Equity Reconciliation at 1 January 2004 and 31 December 2004

UK GAAP

The UK GAAP balance sheets are derived from the UK GAAP balance sheets as reported in the prior year financial statements. They have however been amended to an IFRS presentation and the main adjustments are as follows:

Minority interests have been reclassified to a separate component of equity. Under UK GAAP they were reported as a liability.
Other non-current assets represents amounts disclosed as 'Debtors: amounts falling due after more than one year' in the UK GAAP balance sheets.
Current Trade and other receivables represents amounts disclosed as 'Debtors: amounts falling due within one year' in the UK GAAP balance sheets.
Current trade and other payables represents amounts disclosed as 'Creditors: amounts due within one year' in the UK GAAP balance sheets.
Various other categories have been renamed in accordance with IFRS.

Reclassifications:

The adoption of IFRS has resulted in the requirement to reclassify several items from their existing UK GAAP classifications. The main reclassifications are as follows:

At transition date US$30.1 million and at 31 December 2004 US$32.2 million of plantations and cattle have been reclassified from Property, plant & equipment and Inventories to Biological assets.
At transition date US$4.2 million and at 31 December 2004 US$6.7 million of software assets have been reclassified from Property, plant & equipment to intangible assets.
At transition date US$40.3 million and at 31 December 2004 US$90.0 million for various recognised hedging assets and loans have been reclassified from Other non-current assets to Other financial assets.
Various current hedging assets with a value of US$22.1 million at transition date and US$21.2 million at 31 December 2004 have been reclassified from Trade and other receivables to other current financial assets.
At transition date US$106.7 million and at 31 December 2004 US$235.6 million of Deferred tax assets has been reclassified from Other non-current assets.
At transition date US$36.5 million and at 31 December 2004 US$103.9 million of current Prepayments have been reclassified from Trade and other receivables. At transition date US$9.4 million and at 31 December 2004 US$15.9 million of non-current Prepayments have been reclassified from Other non-current assets.
At transition date US$120.5 million and at 31 December 2004 US$83.2 million of non-current Inventories has been reclassified from current Inventories.
Provisions included US$0.6 million at transition date and Other reserves included US$4.6 million at 31 December 2004 for share-based compensation plan awards that have been reclassified to retained earnings.
At transition date US$1,739.6 million and at 31 December 2004 US$2,411.3 million of foreign currency translation adjustments of subsidiary net assets and loans has been reclassified from Retained earnings to Other reserves.
At transition date US$117.1 million and at 31 December 2004 US$155.4 million of Deferred tax liabilities has been reclassified from non-current Provisions.
At transition date US$229.4 million and at 31 December 2004 US$108.4 million of current Interest-bearing loans and borrowings have been reclassified from current Trade and other payables.
At transition date US$81.1 million and at 31 December 2004 US$92.8 million of current Provisions have been reclassified from current Trade and other payables.
At transition date US$23.3 million and at 31 December 2004 US$238.7 million of Income tax payable have been reclassified from current Trade and other payables.
Various reclassifications between current and non-current have occurred as a result of the IFRS opening balance sheet requiring more detailed classifications.

Accounting for Alloys Pooling and Sharing Venture (PSV):

Under UK GAAP, the Group's investment in the PSV was treated as a joint venture and was gross equity accounted, with its share of the PSV's assets and liabilities being recorded in two lines on the face of the balance sheet 'Share of gross assets of JV', and 'Share of gross liabilities of JV'. Under IAS 31 'Interests in Joint Ventures', the investment is accounted for as a jointly controlled operation.

The Group accounts for the assets it controls and the liabilities it incurs, the expenses it incurs and the share of income that it earns from the sale of goods and services by the joint venture.

Adjustments:

Reclassification of Investment in associates
Under UK GAAP, the investment in Richards Bay Coal Terminal Company Limited (RBCT) was classified and accounted for as a joint arrangement not creating an entity (JANE). Under IAS 28 'Investments in Associates' the investment in RBCT is classified as an associate. As a result, the Group's proportional share of RBCT's assets and liabilities has been deconsolidated.
Under UK GAAP, an investment in a port facility in Australia was classified and accounted as an Investment. On transition to IFRS it was determined that the Group had significant influence over the investment and consequently it has been classified as an associate which is equity accounted. This treatment should also have been adopted under UK GAAP. The impact of this adjustment is to reclassify the asset and the income recorded, but does not affect profits reported previously as all profits of the investment have been distributed.
Goodwill
Under IFRS 3 'Business Combinations' goodwill is no longer amortised but subject to an annual impairment test, resulting in the reversal of the UK GAAP amortisation charge for the year ended 31 December 2004. As required by IFRS, an impairment test was carried out at the date of transition to IFRS. No impairment was identified and no other adjustment was made to the goodwill balance except for minor foreign exchange differences.
Pension assets and deficits
Defined benefit pension plans with a net surplus of US$2.8 million and a net deficit of US$1.2 million at transition date and net surplus of US$2.7 million and a net deficit of US$0.6 million at 31 December 2004 have been adjusted against the UK GAAP carrying amounts in accordance with the amended IAS 19 'Employee Benefits'.
Deferred taxation
Under IAS 12 'Income Taxes' deferred tax is recognised on temporary differences as opposed to timing differences as under UK GAAP. Temporary differences are defined as differences between the carrying amount of an asset or liability in the balance sheet and its tax base which is broader in application than the timing difference approach. For fair value adjustments to mineral reserves, mineral resources and other property, plant and equipment acquired in a business combination, the tax base is normally nil since generally no tax deduction for amortisation is obtained in the jurisdictions in which the Group operates. Under UK GAAP no deferred tax liability arose as the non-deductible amortisation was a permanent difference, however under IFRS the difference between the carrying amounts and the asset's tax base is treated as a temporary difference and gives rise to the recognition of a deferred tax liability. In both periods, the liability recognised in relation to the fair value adjustments to mineral reserves, mineral resources and other assets is approximately US$1.1 billion. Under IFRS, the recognition of such deferred tax liabilities also results in the recognition of previously unrecognised deferred tax assets, mainly relating to tax losses of US$153.7 million at transition date and US$13.9 million at 31 December 2004, on the basis that these additional deferred tax liabilities will give rise to future taxable temporary differences against which the losses will be recovered. The tax loss adjustment at 31 December 2004 has been reduced from transition date due to utilisation of part of these losses during 2004 and as a result of the recognition of a significant portion of these losses under UK GAAP. Other adjustments to the deferred tax liability relate to miscellaneous other temporary differences not recognisable under UK GAAP.
Such deferred tax assets are netted against deferred tax liabilities to the extent that:
- the Group has a legally enforceable right to set off current tax assets against current tax liabilities; and
- the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either:
  - the same taxable entity; or
  - different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recorded.
Equity-settled share-based payments
Under IFRS 2 'Share-based payments', the fair value of equity-settled options issued under the Long Term Incentive Plan (LTIP) at grant date is recognised in the income statement over the vesting period, and the corresponding entry to equity recorded in retained earnings.
Foreign currency translation reserve (FCTR)
This adjustment reflects the impact on the FCTR balance of the various IFRS adjustments to the balance sheet and the recycling of FCTR balance through the income statement. Under IAS 21 'The effects of changes in foreign exchange rates' upon full or partial disposal of a foreign operation or repayment of a portion of the net investment in such foreign operations, FCTR balances are recycled through the Income Statement. For the year ended 31 December 2004 this amounted to US$68.6 million.
Minority interests
This adjustment primarily represents the minority interest's share of the increased deferred tax liability.
Provisions
Under IFRS 2 'Share-based Payment' the fair value of cash-settled options issued under the LTIP is provided for over the vesting period, with subsequent movement in fair value after the vesting date recorded in the income statement as they arise. A provision of US$2.9 million at transition date and US$8.8 million at 31 December 2004 for the estimate of the future cost of the cash-settled share-based payment awards has been recognised.
Reversal of dividend accrual
The decrease to Trade and other payables represents the reversal of the dividend accrual of $83.6 million at transition date and US$99.8 million at 31 December 2004 against Retained earnings. Under IAS 10 'Events after the balance sheet date', the Group may only accrue for a dividend if this dividend has been appropriately approved and the payment is no longer at the discretion of the ent

Annual Report 2005

Notes to the Financial Statements

1. Corporate Information

2. Statement of compliance

3. Basis of preparation

4. Significant accounting judgements and estimates

Estimates

5. First time adoption of IFRS and changes in accounting policies

Early adoption of other International Financial Reporting Standards

Adoption of IFRS 5

New standards and interpretations not applied

Share-based Payments

Business Combinations, Impairment of Assets and Intangible Assets

Dividends

Income Taxes

Employee Benefits

The Effects of Changes in Foreign Exchange Rates

Investments in Associates

Interest in Joint Ventures

Non-current Assets Held for Sale and Discontinued Operations

Financial Instruments

Under UK GAAP:

Notes to the reconciliation between the IFRS Balance Sheet at 31 December 2004 and 1 January 2005 upon adoption of IAS 32 and IAS 39:

6. Principal Accounting Policies

Basis of consolidation

Interests in Joint Ventures

Jointly controlled operations

Jointly controlled assets

Jointly controlled entities

Investments in Associates

Business Combinations

Foreign currencies

Revenue

Interest income

Non-trading items

Property, plant and equipmentLand and buildings, plant and equipment

Exploration and evaluation expenditure

Mineral properties and mine development expenditure

Capital work in progress

Leasing and hire purchase commitments

Biological assets

Deferred overburden removal expenditure

Intangible assets

Coal Export Rights

Software and Technology patents

Impairment of assets

Non-current assets held for sale and discontinued operationsNon-current assets held for sale

Discontinued Operations

Financial instrumentsInvestments and other financial assets

IFRS Accounting Policy

Financial assets at fair value through profit or loss

Held-to-maturity investments

Loans and receivables

Available-for-sale financial assets

Fair values

Derecognition of financial assets and liabilitiesFinancial assets

Financial liabilities

Impairment of financial assets

Financial assets carried at amortised cost

Assets carried at cost

Available-for-sale financial assets

Rehabilitation Trust Fund

Derivative financial instruments and hedging

Fair value hedges

Cash flow hedges

Hedges of a net investment

UK GAAP Accounting Policy

Own shares

Interest-bearing loans and borrowings

Convertible borrowings

IFRS Accounting Policy

UK GAAP Accounting Policy

Inventories

Trade and other receivables

Cash and cash equivalents

Government grants

Environmental protection, rehabilitation and closure costs

Employee Entitlements

Other Provisions

Taxation

Property, plant and equipment
Land and buildings, plant and equipment

Non-current assets held for sale and discontinued operations
Non-current assets held for sale

Financial instruments
Investments and other financial assets

Derecognition of financial assets and liabilities
Financial assets