3

Critical accounting estimates and judgements

 The preparation of the financial statements in conformity with IFRS requires the group’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
  
 Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
  
 The resulting accounting estimates may differ from actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:
 

3.1

Impairment of mining assets

  The recoverable amount of mining assets is generally determined utilising discounted future cash flows. Management also considers such factors as the quality of the individual orebody, market risk, asset specific risks and country risk in determining the fair value.
   
  Key assumptions for the calculations of the mining assets’ recoverable amounts are the gold price, exchange rates, marketable discount rates (cost-to-sell) and the annual life-of-mine plans. In determining the gold price to be used, management assess the long-term views of several reputable institutions on the gold price and based on this, derive the gold price. The life-of-mine plans are based on the proven and probable reserves as included in the reserve declaration, which are determined in terms of SAMREC and JORC, as well as resources where management has high confidence in the orebody and economical recovery of gold, based on historic and similar geological experience.
   
  During the year under review, the group calculated the recoverable amounts (generally fair value less costs to sell) based on updated life-of-mine plans, a gold price of R275 000 per kilogram (US$1 050 per ounce) and a post-tax real discount rate, which ranges between 5.92% and 10.72% depending on the asset (2009: R225 000 per kilogram (US$750 per ounce) and a 9.34% discount rate). Cash flows used in the impairment calculations are based on life-of-mine plans which exceed five years for the majority of the mines. Refer to note 5 for details of impairments recorded.
   
  Should management’s estimate of the future not reflect actual events, further impairments may be identified. Factors affecting the estimates include:
  • changes to proved and probable mineral reserves;
  • economical recovery of resources;
  • the grade of the mineral reserves which may vary significantly from time to time;
  • review of strategy;
  • differences between actual commodity prices and commodity price assumptions;
  • unforeseen operational issues at the mines; and
  • changes in capital, operating mining, processing and reclamation costs.
  Sensitivity analysis
  One of the most significant assumptions influencing life-of-mine plans and therefore impairments, is the expected gold price. A 10% decrease in the gold price at the reporting date would have resulted in an additional impairment at Steyn 2 shaft of R14 million (US$1.8 million). This analysis assumes that all other variables remain constant.
 

3.2

Impairment of investments in associates

  Investments in associates are evaluated annually for impairment by comparing the entire carrying value of the investment to the recoverable amount, which is the higher of value in use or fair value less costs to sell.
 

3.3

Valuation of available-for-sale financial assets

  If the value of financial instruments cannot be obtained from an active market, the group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models refined to reflect the issuer’s specific circumstances. When considering indications of an impairment, management considers a prolonged decline to be longer than 12 months. The significance of the decline is assessed for each security individually.
 

3.4

Estimate of exposure and liabilities with regard to rehabilitation costs

  Estimated long-term environmental obligations, comprising pollution control, rehabilitation and mine closure, are based on the group’s environmental management plans in compliance with current technological, environmental and regulatory requirements.
   
  Significant judgement is applied in estimating ultimate rehabilitation cost that will be required in future to rehabilitate the group’s mines. Ultimate cost may significantly differ from current estimates.
   
  Management used an inflation rate of 6.23 % (2009: 6%) and the expected life of the mines according to the life-of-mine plans in the calculation of the estimated net present value of the rehabilitation liability. The discount rates used for the calculation are dependent on the shaft’s life of mine and are as follows: for 12 months – 6.75% (2009: 6.75%); for 1 – 5 years – 8% (2009: 8.25%); for 6 – 9 years – 8.5% (2009: 8.25%) and for 10 years or more – 9% (2009: 8.75%). These estimates were based on recent yields determined on government bonds.
 

3.5

Estimate of employee benefit liabilities

  An updated actuarial valuation is carried out at the end of each financial year. Assumptions used to determine the liability include a discount rate of 10.3%, no increases in employer subsidies (in terms of the agreement) and mortality rates according to the SA 1956/62 mortality table (SA "a mf" tables) (60 years) and a medical inflation rate of 8.14% (2009: discount rate of 10%, 60 years and 7.8% inflation rate).
   
  Management determined the discount rate by assessing financial instruments with similar terms to the liability. The changes to the discount rate and medical inflation rate are similar to changes in interest and inflation rates in South Africa.
 

3.6

Estimate of taxation

  The group is subject to income tax in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The group recognises liabilities for anticipated tax audit queries based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters are different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
   
  Management has to exercise judgement with regards to deferred tax assets. Where the possibility exists that no future taxable income may flow against which these assets can be offset, the deferred tax assets are not recognised.
   
  Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are measured using the average tax rates that are expected to apply to the taxable profit (tax loss) of the periods in which the temporary differences are expected to reverse. At the group’s South African operations, such average tax rates are directly impacted by the profitability of the relevant mine. The deferred tax rate is therefore based on the current estimate of future profitability of an operation when temporary differences will reverse, based in tax rates and tax laws that have been enacted at the balance sheet date. Refer to note 13 for further details.
   
  The future profitability of each mine, in turn, is determined by reference to the life-of-mine plan for that operation. The life-of-mine plan is influenced by factors as disclosed in note 3.1, which may differ from one year to the next and ultimately result in the deferred tax rate changing from one year to the next.
 

3.7

Fair value of share-based payments

   The fair value of options granted are being determined using either a binominal, Black-Scholes or a Monte Carlo valuation model. The significant inputs into the model are: vesting period, risk-free interest rate, volatility, price on date of grant and dividend yield. (Refer to note 34 for details on each of the share option schemes).
 

3.8

Impairment of goodwill

  Due to the wasting nature of mining assets and the finite life of a mine’s reserves, the allocation of goodwill to a shaft will eventually result in an impairment charge for the goodwill. The group tests annually whether separately identifiable goodwill has suffered any impairment, in accordance with the accounting policy stated in note 2.8. These calculations require the use of estimates as stated in note 3.1.
 

3.9

Gold in lock-up

  Gold in lock-up is estimated based on the expected volumes treated and calculated plant call factor. Plant call factor is the efficiency measurement of the percentage of gold extracted from the ore. Management needs to exercise judgement with regard to lock-up volumes, life-of-mine plans, gold prices, exchange rates and post tax real discount rates.
 

3.10

Assessment of contingencies

  Contingencies will only realise when one or more future events occur or fail to occur. The exercise of significant judgement and estimates of the outcome of future events are required during the assessment of the impact of such contingencies.
 

3.11

Gold mineral reserves and resources

  Gold mineral reserves and resources are estimates of the amount of ounces that can be economically and legally extracted from the group’s properties. In order to calculate the gold mineral reserves and resources, estimates and assumptions are required about a range of geological, technical and economic factors, including quantities, grades, production techniques, recovery rates, production costs, commodity prices and exchange rates.
   
  Because the economic assumptions used to estimate the gold mineral reserves and resources change from year to year, and because additional geological data is generated during the course of operations, estimates of the mineral reserves and resources may change from year to year. Changes in the reserves and resources may affect the group’s financial results and financial position in a number of ways, including:
  • asset carrying values may be affected due to changes in estimated cash flows;
  • depreciation and amortisation charged in the income statement may change as they are calculated on the units-of-production method; and
  • environmental provisions may change as the timing and/or cost of these activities may be affected by the change in mineral reserves.
  At the end of each financial year, the estimate of proved and probable gold mineral reserves and resources is updated. Depreciation of mining assets is prospectively adjusted, based on these changes.
 

3.12

Production start date

  Various relevant criteria are considered in order to assess when the mine is substantially complete and ready for its intended use and to move into the production phase. Some of the criteria would include but are not limited to the following:
  • the level of capital expenditure compared to the total project cost estimates;
  • the ability to produce gold in a saleable form (where more than an insignificant amount of gold has been produced); and
  • the ability to sustain the on-going production of gold.