Critical accounting estimates and judgements in applying accounting policies
The Group makes estimates and assumptions that affect the amounts recognised in the consolidated financial statements and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include:
Provisions for mine Solikamsk-2 flooding
On 18 November 2014, a burst of suprasalt water was detected into the mined-out area of Solikamsk-2 (“SKRU-2”), which was caused by the negative development of the 1995 accident related to a mass collapse of the rock and subsequent substantial destruction of the water-proof layer – emergency circumstances which could not be prevented.
Comprehensive mitigation plan was developed immediately and has been executed throughout 2016 and 2015.
In line with the accident mitigation plan, the Group continues to comprehensively monitor the situation. Currently the Group is implementing a number of engineering and other arrangements to minimise the impact of the accident and reduce suprasalt water inflows into the mine.
During the twelve months ended 31 December 2015, the Group re-estimated costs required for liquidation of the accident consequences and updated provision for future expenses as at 31 December 2015 (Note 16).
The most significant estimates and judgements associated with the provision for mine Solikamsk-2 flooding are as follows:
- Period of time over which expenses are expected to be incurred. The major cash outflows are expected to be incurred up to 2023; and
- In 2016 management applied discount rates ranging from 8.2% to 8.4% (from 2015: 9.7% to 10.1%).
As at the date of approval of these consolidated financial statements there are no lawsuits against the Group for reimbursement of expenses resulting from the negative impact of the accident in the Solikamsk-2 mine.
Management believes that there are no liabilities relating to the Solikamsk-2 flooding other than those disclosed in the consolidated financial statements for the year ended 31 December 2016.
Provisions for mine Berezniki-1 flooding
Since 28 October 2006, the Group ceased production operations at the Berezniki-1 mine due to natural groundwater inflow that reached a level which could not be properly controlled by the Group.
In January 2007 the Government Committee for the prevention of negative consequences of the accident caused by the flooding of a mine in the Verkhnekamskoye field in Perm Region was set up. The Committee is still working, and a series of measures to prevent any negative consequences of the accident in Berezniki-1 are in place. The Company conducts constant monitoring of the mined-out area and is involved in other monitoring and prevention activities.
Management believes that as at 31 December 2016 there are no liabilities relating to the Berezniki-1 flooding which are not recorded or not disclosed in the consolidated financial statements.
Provision for filling cavities
A provision has been established in the consolidated financial statements for the Group’s obligation to replace the ore and waste extracted from the Solikamsk mines and Berezniki-2 and Berezniki-4 mine (Note 16).
Management initially estimated the amount of legal obligations for filling cavities within fixed assets and subsequent change in estimates is recognised as change in assets and depreciated over its useful life using the straight-line method of depreciation. Remeasurement of an existing amount of these cavities that result from changes in estimates of mine surveys is recorded as an asset and is depreciated over its useful life using the straight-line method of depreciation. Unwinding of the discount is recognised in profit or loss in finance income and finance costs.
The amount of expenses incurred due to filling of the cavities for other reasons is recognised in the current period in the consolidated statement of profit or loss.
The major uncertainties that relate to the amount and timing of the cash outflows related to filling cavities and judgements made by management in respect of these uncertainties are as follows:
- Estimated time to fill cavities. Cash flow payments are expected to occur principally between 2023 and 2080;
- The extent of the filling cavities work which will have to be performed in the future may vary depending on the actual environmental situation. Management believes that the legal obligation to replace the ore and waste mined is consistent with the cavities filling plan agreed with the State Mine Supervisory Body;
- The future unit cost of replacing one cubic meter of the ore and waste mined may vary depending on the technology and the cost of methods utilised. Management estimates that the unit cost of replacing a cubic meter of waste and ore mined in future years, for the period of the current filling cavities plan, adjusted for the effect of inflation, will not be materially different from the actual cost incurred in the current period. The forecasted inflation rate in the Russian Federation is expected to be in the range of 4.5% to 5.4% for the period starting from 2017 till 2019 (2015: from 5.0% to 7.3%). Starting from 2020, the expected inflation rate in the Russian Federation is forecasted to be 4.7% (2015: 5.0%); and
- In 2016, management applied discount rates ranging from 8.2% to 8.6% (2015: from 9.7% to 10.1%).
The Group accrued a provision for the closing down of the processing and carnallite plants subdivision at Berezniki 1 (Note 16).
The major uncertainties that relate to the amount and timing of the cash outflows related to the restructuring works and assumptions made by management in respect of these uncertainties are as follows:
- Estimated costs of dismantling and restoration works for the dismantling of the processing and carnallite plants at Berezniki-1;
- Estimated time to complete works. Major cash outflows are expected to occur till 2019;
- In 2016 management applied discount rates ranging from 8.3% to 8.4% (2015: from 10.0% to 10.1%).
Provision for asset retirement obligations
The Group has recorded a provision relating to asset retirement obligations (Note 16), which will be settled at the end of estimated lives of mines, therefore requiring estimates to be made over a long period.
Environmental laws, regulations and interpretations by regulatory authorities, as well as circumstances affecting the Group’s operations could change, either of which could result in significant changes to its current mining plans.
The recorded provision is based on the best estimate of costs required to settle the obligations, taking into account the nature, extent and timing of current and proposed restoration and closure techniques in view of present environmental laws and regulations. It is reasonably possible that the ultimate costs could change in the future and that changes to these estimates could have a material effect on the Group’s consolidated financial statements.
The estimation of asset retirement obligation costs depends on the development of environmentally acceptable closure and post-closure plans. The Group uses appropriate technical resources, including internal consultants from scientific institutes JSC “NII Galurgii” and JSC “VNII Galurgii”, to develop specific site closure and post-closure plans in accordance with the requirements of the legislation of the Russian Federation.
The major uncertainties that relate to the amount and timing of the cash outflows related to the asset retirement obligations and assumptions made by management in respect of these uncertainties are as follows:
- Mine life estimates. Cash flow payments are expected to occur principally between 2026 and 2069. These estimates are based on the management’s current best assessment of the Group’s current reserves;
- The extent of the restoration works which will have to be performed in the future may vary depending on the actual environmental situation. Management believes that the legal obligation for decommissioning of the underground and surface complex is consistent with the terms of licences;
- The future unit cost of decommissioning works may vary depending on the technology and the cost of resources used, as well as the inflation rate. The forecasted inflation rate in the Russian Federation is expected to be in the range of 4.5% to 5.4% for the period starting from 2017 till 2019 (2015: from 5.0% to 7.3%). Starting from 2020, the expected inflation rate in the Russian Federation is forecasted to be 4.7% (2015: 5.0%); and
- In 2016, management applied discount rates ranging from 8.5% to 8.6% (2015: from 9.3% to 9.5%).
Remaining useful life of property, plant and equipment and mining licences
Management assesses the remaining useful life of property, plant and equipment in accordance with the current technical condition of assets and estimated period during which these assets will be bringing economic benefits to the Group (Note 8).
The Group holds operating mining licences for the production of potassium salts, magnesium and sodium which were extended to 2018-2021 upon their expiry on 1 April 2013. In 2016 licenсes previously valid until 2018 were prolonged to 2043 - 2055 (north part of Solikamskiy plot, Bigelsko-Troitsky and Novo-Solikamskiy plots). Management assesses the remaining useful life of mining licences on the basis of the expected mining reserves (Note 10).
The estimated remaining useful life of certain property, plant and equipment and mineral resources is beyond the expiry date of the relevant operating licences (Note 1). Management believes that in future the licences will be further renewed in due order at nominal cost. Any changes to this assumption could significantly affect prospective depreciation and amortisation charges and asset carrying values.
The Group tests goodwill for impairment at least annually. The main assumptions used in value-in-use calculations are described in Note 9.
Management makes estimates, judgements and significant assumptions to assess whether the recoverable amount of the licences exceeds their carrying value. This largely depends on the estimates about a range of technical and economic factors, including technology for construction of the mines, the level of capital expenditure needed to develop the deposit, the expected start of the production, the future potash prices and exchange rates. Since the assumptions used to estimate the above factors might change from period to period, the results of management estimates might also change from period to period.
Income tax prepayment
The Group has recorded an income tax prepayment recoverable after more than 12 months in the consolidated financial statements. There is an uncertainty in terms of using this payment to cover current liabilities of the Company to pay income taxes. As a consequence, the asset carrying amount may vary depending on the Company's financial performance in future periods.
Russian tax, currency and customs legislation is subject to varying interpretations (Note 28.2).