Introduction to the IAS financial statements

The South African mining industry has been well served by the method of accounting employed by it over the last century. This method, known as the appropriation method of accounting, closely resembles cash flow accounting. It is based on the premise that mines have a finite life. Accordingly, no charge is made for amortisation of mining assets nor is any account taken of depletion of ore reserves. The principle is adopted that shareholders' funds are invested in a wasting asset and the cost of mining assets over and above the initial capital is provided out of profits earned. Profits are appropriated to fund expenditure on mining assets to the extent that this expenditure exceeds capital funds while remaining funds are available for distribution to shareholders. In addition, certain liabilities are treated on a pay-as-you-go basis. The application of this accounting method is the generally accepted standard for the deep-level gold mining industry in South Africa. The financial statements prepared on the appropriation method are consequently used for the statutory requirements of the South African Companies Act and for the Johannesburg Stock Exchange reporting purposes.

The international accounting community has developed a set of standards which are applied on a broad and common front and which require that costs be matched to revenues, a process which would not be possible under the appropriation method. In order to provide additional information to international investors on a basis comparable to that used generally in the broader investment community, including extractive industries, this company has decided that an illustrative application of International Accounting Standards (referred to as the IAS financial statements) be presented. To assist international investors, a translation of convenience into the currency of the United States of America is provided for the IAS financial statements. These translations are based on average rates of exchange for income statement items and at those ruling at the year end for the balance sheet. The cash-flow statement has been translated at average rates to give effect to a transaction-based conversion. Translation differences are accounted for in the statement of shareholders' equity.

The following are the key differences between the two forms of reporting:

Capital expenditure is charged to income by way of appropriation in
the statutory annual financial statements and by way of amortisation and
depreciation in the IAS financial statements;

No provision is made for deferred taxation in the statutory annual
financial statements as the immediate write-off for taxation purposes of
mining assets is considered to be a non-reversible taxation benefit. In
terms of IAS, this is regarded as a temporary difference and requires the
raising of a deferred taxation liability;

Future liabilities of which the amount is uncertain such as rehabilitation
and future employee medical care liabilities accounted for in the statutory
annual financial statements based on the pay-as-you-go approach are
charged to the income statement and carried in the balance sheet in the
IAS financial statements; and

In the statutory annual financial statements, gold in process is appropriated
for out of capital on the establishment of the production pipeline, while in the
IAS financial statements such material is treated as inventory on an estimated
cost basis.

Reconciliations between the two sets of financial statements are shown on page 92.