Annual report and accounts 2012

Basis for preparation of the consolidated financial statements

OAO Severstal and Subsidiaries
Notes to the Consolidated Financial Statements
2. Basis for preparation of the consolidated financial statements

for the years ended December 31, 2012, 2011 and 2010
(Amounts expressed in thousands of US dollars, except as otherwise stated)

Statement of compliance

These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board.

The Group additionally prepared IFRS consolidated financial statements presented in Russian rubles and in Russian language in accordance with the Federal Law No. 208 – FZ ‘On consolidated financial reporting’.

Basis of measurement

The consolidated financial statements are prepared on the historic cost basis except for financial instruments at fair value through profit and loss and available-for-sale financial assets stated at fair value.

The Group’s statutory financial records are maintained in accordance with the legislative requirements of the countries in which the individual entities are located, which differ in certain respects from IFRS. The accounting policies applied in the preparation of these consolidated financial statements are set out in Note 3.

Critical accounting judgments, estimates and assumptions

Preparation of the consolidated financial statements in accordance 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. The determination of estimates requires judgments which are based on historical experience, current and expected economic conditions, and other available information. Actual results could differ from those estimates.

The most significant areas requiring the use of management estimates and assumptions relate to:

  • useful lives of property, plant and equipment;
  • impairment of assets;
  • allowances for doubtful debts, obsolete and slow-moving inventories;
  • decommissioning liability;
  • retirement benefit liabilities;
  • litigations; and
  • deferred income tax assets.

Useful lives of property, plant and equipment

The Group assesses the remaining useful lives of items of property, plant and equipment at least at each financial year-end and, if expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. These estimates may have a material impact on the amount of the carrying values of property, plant and equipment and on depreciation expense for the period.

Impairment of assets

The Group reviews the carrying amount of its tangible and intangible assets to determine whether there is any indication that those assets are impaired. In making the assessments for impairment, assets that do not generate independent cash flows are allocated to an appropriate cash-generating unit. Subsequent changes to the cash-generating unit allocation or to the timing of cash flows could impact the carrying value of the respective assets.

Allowance for doubtful debts

The Group makes allowance for doubtful receivables to account for estimated losses resulting from the inability of customers to make required payments. When evaluating the adequacy of an allowance for doubtful debts, management bases its estimates on the current overall economic conditions, the ageing of accounts receivable balances, historical write-off experience, customer creditworthiness and changes in payment terms. Changes in the economy, industry or specific customer conditions may require adjustments to the allowance for doubtful accounts recorded in the consolidated financial statements.

Allowance for obsolete and slow-moving inventories

The Group makes allowance for obsolete and slow-moving raw materials and spare parts. In addition, certain finished goods of the Group are carried at net realizable value. Estimates of net realizable value of finished goods are based on the most reliable evidence available at the time the estimates are made. These estimates take into consideration fluctuations of price or cost directly relating to events occurring subsequent to the end of the reporting period to the extent that such events confirm conditions existing at the end of the period.

Decommissioning liability

The Group reviews its decommissioning liability, representing site restoration provisions, at each reporting date and adjusts it to reflect the current best estimate in accordance with IFRIC 1 “Changes in Existing Decommissioning, Restoration and Similar Liabilities”. The amount recognized as a provision is the best estimate of the expenditures required to settle the present obligation at the reporting date based on the requirements of the current legislation of the country where the respective operating assets are located. The risks and uncertainties that inevitably surround many events and circumstances are taken into account in reaching the best estimate of a provision. Considerable judgment is required in forecasting future site restoration costs. Future events that may affect the amount required to settle an obligation are reflected in the amount of a provision when there is sufficient objective evidence that they will occur.

Retirement benefit liabilities

The Group uses an actuarial valuation method for measurement of the present value of post-employment benefit obligations and related current service cost. This involves the use of demographic assumptions about the future characteristics of the current and former employees who are eligible for benefits (mortality, both during and after employment, rates of employee turnover, disability and early retirement, etc.) as well as financial assumptions (discount rate, future salary and benefit levels, etc.).

Litigations

The Group exercises judgment in measuring and recognizing provisions and the exposure to contingent liabilities related to pending litigations or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgment is necessary in assessing the likelihood that a pending claim will succeed, or liability will arise, and to quantify the possible range of the final settlement. Because of the inherent uncertainties in this evaluation process, actual losses may be different from the originally estimated provision. These estimates are subject to change as new information becomes available, primarily with the support of internal specialists or with the support of outside consultants. Revisions to the estimates may significantly affect future operating results.

Deferred income tax assets

Deferred tax assets are reviewed at each reporting 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 tax asset to be utilized. The estimation of that probability includes judgments based on the expected performance. Various factors are considered to assess the probability of the future utilization of deferred tax assets, including past operating results, operational plans, expiration of tax losses carried forward, and tax planning strategies. If actual results differ from that estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be negatively affected. In the event that the assessment of future utilization of deferred tax assets must be reduced, this reduction will be recognized in the income statement. 

Functional and presentation currency

The presentation currency of these consolidated financial statements is the US dollar.

The functional currency is determined separately for each of the Group’s entities. For most Russian entities the functional currency is the Russian ruble. The functional currency of the Group’s entities located in North America is the US dollar. The functional currency of the majority of the Group’s entities located in Western Europe is the Euro.

The translation into the presentation currency is made as follows:

  • all assets and liabilities, both monetary and non-monetary, are translated at the closing exchange rates at the dates of each statement of financial position presented;
  • all income and expenses in each income statement are translated at the average exchange rates for the periods presented; and
  • all resulting exchange differences are recognized as a separate component in other comprehensive income.

Any conversion of amounts into US dollars should not be construed as a representation that such amounts have been, could be, or will be in the future, convertible into US dollars at the exchange rates used, or at any other exchange rate.

Adoption of amended and revised Standards and Interpretations

A number of amendments to Standards and Interpretations were adopted for the year ended December 31, 2012, and have been applied in these consolidated financial statements.

Standards and InterpretationsEffective for annual periods
beginning on or after
IAS 12 (Amended) "Income taxes"January 1, 2012
IFRS 1 (Amended) "First-time adoption of international financial reporting standards"July 1, 2011
IFRS 7 (Amended) "Financial instruments: disclosures"July 1, 2011
IFRIC 20 "Stripping costs in the production phase of a surface mine"January 1, 2013

Amended IAS 12 Income taxes provided an exception to the general principles of IAS 12 for investment property measured using the fair value model. For the purpose of measuring deferred tax, the amendments introduced a rebuttable presumption that the carrying amount of such an asset will be recovered entirely through sale. The amendment also introduced similar guidance for measuring deferred tax on non-depreciable assets measured using the revaluation model in IAS 16. These requirements were previously included into SIC-21 Income taxes-recovery of revalued non-depreciable assets. Amended IAS 12 did not have a significant effect on the Group’s consolidated financial statements.

IFRS 1 First-time Adoption of International Financial Reporting Standards replaced references to a fixed date of '1 January 2004' with 'the date of transition to IFRSs', thus eliminating the need for companies adopting IFRSs for the first time to reconstruct transactions that occurred before the date of transition to IFRSs. The standard also provided guidance on how an entity should present financial statements in accordance with IFRSs after a period when its functional currency was subject to severe hyperinflation. Amended IFRS 1 did not have a significant effect on the Group’s consolidated financial statements.

IFRS 7 Financial Instruments: disclosures introduces additional disclosure requirements for transfers of financial assets in situations where assets are not derecognized in their entirety or where the assets are derecognized in their entirety but a continuing involvement in the transferred assets is retained. The amendments help users of financial statements evaluate the risk exposures relating to transfers of financial assets and the effect of those risks on an entity’s financial position and promote transparency in the reporting of transfer transactions, particularly those that involve securitization of financial assets. Amended IFRS 7 did not have a significant effect on the Group’s consolidated financial statements.

In January 2012, the Group early adopted of IFRIC 20 Stripping costs in the production phase of a surface mine. IFRIC 20 addresses accounting for stripping costs that are incurred in a surface mining activity during the production phase ('production stripping costs'). Under the interpretation, production stripping costs that provide access to ore to be mined in the future are capitalized as non-current assets if the component of the ore body for which access has been improved can be identified and future benefits arising from the improved access are both probable and reliably measurable. The interpretation also addresses how capitalized production stripping costs should be depreciated and how capitalized amounts should be allocated between inventory and the stripping activity asset. IFRIC 20 requires prospective application to production stripping costs incurred on or after the beginning of the earliest period presented.

The effect of the early adoption of IFRIC 20 is presented below:

 Year ended December 31, 2012
Increase in property, plant and equipment47,406
Decrease in cost of sales47,406

New accounting pronouncements

A number of new Standards and amendments to Standards were not yet effective for the year ended December 31, 2012, and have not been applied in these consolidated financial statements.

StandardsEffective for annual periods
beginning on or after
IAS 1 (Amended) "Presentation of financial statements"July 1, 2012, January 1, 2013
IAS 16 (Amended) "Property, Plant and Equipment"January 1, 2013
IAS 27 (Amended) "Separate financial statements"January 1, 2013, January 1, 2014
IAS 28 (Amended) "Investments in associates and joint ventures"January 1, 2013
IAS 32 (Amended) "Financial instruments: presentation"January 1, 2013, January 1, 2014
IAS 34 (Amended) "Interim Financial Reporting"January 1, 2013
IFRS 1 (Amended) "First-time adoption of international financial reporting standards"January 1, 2013
IFRS 7 (Amended) "Financial instruments: disclosure"January 1, 2013
IFRS 9 (Amended) "Financial instruments"January 1, 2015
IFRS 10 (Amended) "Consolidated financial statements"January 1, 2013, January 1, 2014
IFRS 11 (Amended) "Joint arrangements"January 1, 2013
IFRS 12 (Amended) "Disclosure of interests in other entities"January 1, 2013, January 1, 2014
IFRS 13 " Fair value measurement"January 1, 2013

The adoption of the pronouncements listed above is not expected to have a significant impact on the Group’s consolidated financial statements in future periods except for those discussed below.

Amended IAS 1 Presentation of Financial Statements requires a separate presentation of items of other comprehensive income that may be reclassified to profit or loss in the future from those that will never be reclassified to profit or loss. Amended IAS 1 will be effective for annual periods beginning on or after 1 July, 2012 and requires retrospective application.

Amended IAS 34 Interim Financial Reporting requires a separate presentation of total assets and liabilities for a particular reportable segment if such amounts are regularly provided to the Group’s management and if there has been a material change from the amount disclosed in the last annual financial statements for that reportable segment. Amended IAS 34 will be effective for annual periods beginning on or after 1 January, 2013 and requires retrospective application.

IFRS 9 Financial Instruments becomes effective for annual periods beginning on or after 1 January 2015. The new standard is to be issued in several phases and is intended to replace IAS 39 Financial Instruments: Recognition and Measurement.

The first and second phases of IFRS 9 were finalised in November 2009 and October 2010, respectively, and relate to the recognition and measurement of financial assets and liabilities. The Group recognises that the new standard introduces many changes to the accounting for financial instruments and is likely to have a significant impact on the Group’s consolidated financial statements. The impact of these changes will be analysed during the course of the project as further phases of the standard are issued.

IFRS 11 Joint Arrangements supersedes IAS 31 Interests in Joint Ventures and introduces a classification of all joint arrangements either as joint operations, which are consolidated on a proportionate basis, or as joint ventures, for which the equity method is applied. IFRS 11 will be effective for annual periods beginning on or after 1 January 2013 and requires retrospective application.

IFRS 12 Disclosure of interests in other entities requires extended disclosures for interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 will be effective for annual periods beginning on or after 1 January 2013 and requires retrospective application.

IFRS 13 Fair value measurement provides a revised definition of fair value, establishes a framework for measuring fair value and sets out expanded disclosure requirements for fair value measurements. IFRS 13 will be effective for annual periods beginning on or after 1 January 2013 and requires prospective application.