Financial report
Contents
Income statements
Balance sheets
Statements of changes in equity
Cash flow statements
Note 1 Summary of significant accounting policies
Note 2 Financial risk management
Note 3 Critical accounting estimates and judgements
Note 4 Segment information
Note 5 Revenue
Note 6 Expenses
Note 7 Income tax expense
Note 8 Cash and cash equivalents
Note 9 Trade and other receivables
Note 10 Inventories
Note 11 Derivative financial instruments
Note 12 Assets available for sale or development
Note 13 Investments accounted for using the equity method
Note 14 Other financial assets
Note 15 Property, plant and equipment
Note 16 Intangible assets
Note 17 Deferred tax assets
Note 18 Trade and other payables
Note 19 Borrowings
Note 20 Provisions
Note 21 Current tax liabilities
Note 22 Deferred tax liabilities
Note 23 Contributed equity
Note 24 Reserves and retained profits
Note 25 Dividends
Note 26 Earnings per share
Note 27 Minority interest
Note 28 Reconciliation of operating profit after income tax to net cash inflow (outflow) from operating activities
Note 29 Subsidiaries
Note 30 Investments in associates
Note 31 Interests in joint ventures
Note 32 Investments in jointly controlled entities
Note 33 Key management personnel disclosures
Note 34 Employee benefits
Note 35 Retirement benefit obligations
Note 36 Related parties
Note 37 Contingent liabilities
Note 38 Commitments for expenditure
Note 39 Remuneration of auditors
Note 40 Share-based payments
Note 41 Events occurring after the balance sheet date
Directors' declaration
This financial report covers both the separate financial statements of Coal & Allied Industries Limited as an individual entity and the financial statements for the consolidated entity consisting of Coal & Allied and its controlled entities. The financial report is presented in Australian currency.
A description of the nature of the consolidated entity's operations and its principal activities is included in the review of operations in the directors' report, which is not part of this financial report.
The financial report was authorised for issue by the directors on 27 February 2009. The company has the power to amend and reissue the financial report.
Note 1 Summary of significant accounting policies
The principal accounting policies adopted in the preparation of the Financial Report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The Financial Report includes separate financial statements for Coal & Allied Industries Limited ("parent entity") as an individual entity and the consolidated entity consisting of Coal & Allied Industries Limited and its controlled entities (the "Group").
(a) Basis of preparation
This general purpose financial report has been prepared in accordance with Australian equivalents to International Financial Reporting Standards (AIFRS), other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001.
Compliance with IFRS
Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards (AIFRS). Compliance with AIFRS ensures that the financial statements and notes of Coal & Allied comply with International Financial Reporting Standards (IFRS).
Historical cost convention
These financial statements have been prepared under the historical cost convention, financial assets and liabilities (including derivative instruments) at fair value through profit or loss, certain classes of property, plant and equipment and investment property.
Comparative information
Where appropriate comparative amounts have been reclassified to align with changes made to current year presentation in order to improve relevance and comparability.
Rounding of amounts
Coal & Allied is a company of a kind referred to in Class Order 98/0100, dated 10 July 1998, issued by the Australian Securities and Investment Commission, relating to the "rounding off" of amounts in the directors' report. Amounts in the directors' report have been rounded off to the nearest tenth of a million dollars, in accordance with that Class Order, unless specifically stated to be otherwise.
Critical accounting estimates
The preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial report are disclosed in the note on critical accounting estimates and judgements.
(b) Principles of consolidation
(i) Subsidiaries
The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Coal & Allied ("company" or "parent entity") as at 31 December 2008 and the results of all subsidiaries for the year then ended. Coal & Allied and its subsidiaries together are referred to in this financial report as the Group or the consolidated entity.
Subsidiaries are all those entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.
Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date control ceases.
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group (refer to the note on business combinations within the summary of significant accounting policies).
The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of the identifiable net assets of the subsidiary.
Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
Minority interests in the results and equity of subsidiaries are shown separately in the consolidated income statement and balance sheet respectively.
Investments in subsidiaries are accounted for at cost in the individual financial statements of Coal & Allied.
(ii) Associates
Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20 per cent and 50 per cent of the voting rights. Investments in associates are accounted for in the parent entity financial statement using the cost method and in the consolidated financial statements using the equity method of accounting, after initially being recognised at cost. The Group's investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition.
The Group's share of its associates' post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends receivable from associates are recognised in the parent entity's income statement, while in the consolidated financial statements they reduce the carrying amount of the investment.
When the Group's share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associates.
Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.
(iii) Joint Ventures
Joint ventures are defined as those entities over whose activities the consolidated entity has joint control as established by contractual agreement.
Jointly controlled assets
The proportionate interests in the assets, liabilities and expenses of the joint venture activity have been incorporated in the financial statements under the appropriate headings. Details of jointly controlled assets are set out in the note on 'interests in joint ventures'.
Joint venture entities
The interest in a joint venture entity is accounted for in the consolidated financial statements using the equity method and is carried at cost by the parent entity. Under the equity method, the share of the profits or losses of the entity is recognised in the income statement, and the share of movements in reserves is recognised in reserves in the balance sheet. Details relating to the joint venture entities are set out in the note on 'investments in jointly controlled entities'.
Profit or losses on transactions establishing the joint venture entity and transactions with the joint venture are eliminated to the extent of the Group's ownership interest until such time as they are realised by the joint venture entity on consumption or sale, unless they relate to an unrealised loss that provides evidence of the impairment of an asset transferred.
(c) Segment reporting
A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different to those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment subject to risks and returns that are different from those of segments operating in other economic environments.
(d) Foreign currency translation
(i) Functional and presentation currency
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The consolidated financial statements are presented in Australian dollars, which is Coal & Allied's functional and presentation currency.
(ii) Transactions and balances
Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges.
Translation differences on financial assets and liabilities carried at fair value are reported as part of the fair value gain or loss.
(e) Revenue recognition
(i) Coal sales
Revenue comprises sales to third parties at invoiced amounts, with most sales being priced free on board (f.o.b.) or costs, insurance and freight (c.i.f.). Amounts billed to customers in respect of shipping and handling are classed as revenue where the Group is responsible for carriage, insurance and freight. All shipping and handling costs incurred by the Group are recognised as operating costs. Gross revenue shown in the income statement includes the Group's share of the revenue of jointly controlled entities. The Group acts as principal for coal sales from the Mount Thorley Co-venture which are therefore shown at one hundred per cent; being inclusive of the twenty per cent outside participant's interest which is then offset within the income statement as purchased coal.
Revenue is recognised on individual sales when persuasive evidence exists indicating that all of the following criteria are met:
• the significant risks and rewards of ownership of the product have been transferred to the buyer;
• neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold has been retained;
• the amount of revenue can be measured reliably;
• it is probable that the economic benefits associated with the sale will flow to the Group; and
• the costs incurred or to be incurred in respect of the sale can be measured reliably.
These conditions are generally satisfied when title passes to the customer. In most instances revenue is recognised when the product is delivered to the destination specified by the customer, which is typically the vessel on which it will be shipped, the destination port or the customer's premises.
In some circumstances the terms of executed sales agreements allow for an adjustment to the sales price based on the globalCoal index. These adjustments are settled quarterly in arrears. Revenue on such provisionally priced sales is initially recognised at estimated fair value of the total consideration to be received. The fair value of the final sales price adjustment is continually re-estimated and measured with reference to the global coal index. The associated fair value movement is recognised as an adjustment to sales revenue.
(ii) Interest income
Interest income is recognised on a time proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate.
(iii) Dividends
Dividends are recognised as revenue when the right to receive payment is established.
(f) Income tax
The income tax expense or benefit for the period is the tax payable or receivable on the current period's taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax assets are realised or the deferred income tax liability is settled.
Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.
Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity.
Tax consolidation legislation
The head entity, Coal & Allied, and the controlled entities in the tax consolidated Group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated Group continues to be a stand alone taxpayer in its own right.
In addition to its own current and deferred tax amounts, Coal & Allied also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated Group.
Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from and payable to other entities in the Group. Details about the tax funding agreements are disclosed in the note on 'income tax expense'.
Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities.
(g) Leases
Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as financial leases. Finance leases are capitalised at the leases' inception at the lower of the fair value of the leased property and the present value of the minimum lease payments. The corresponding rental obligations, net of financial charges, are included in other short-term and long-term payables. Each lease payment is allocated between the liability and finance costs. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset's useful life and the lease term.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
(h) Business combinations
The purchase method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, equity instruments issued or liabilities incurred or assumed at the date of exchange plus costs directly attributable to the acquisition. Where equity instruments are issued in an acquisition, the fair value of the instruments is their published market price as at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity.
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the Group's share of the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement, but only after a reassessment of the identification and measurement of the net assets acquired.
Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity's incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions.
(i) Impairment of assets
Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate they might be impaired. Other assets are reviewed whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which they are separately identifiable cash inflows which are largely independent of the cash flows of other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.
(j) Cash and cash equivalents
For cash flow purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.
(k) Trade receivables
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Trade receivables are generally due for settlement within thirty days.
Collectibility of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than thirty days overdue) are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial.
The amount of the loss is recognised in the income statement within 'other expenses'. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against other expenses in the income statement.
(l) Inventories
Raw materials and stores, work in progress and finished goods
Inventories of coal are physically measured or estimated and valued at the lower of cost and net realisable value. Cost is determined as follows:
• Coal Stocks - cost comprises average mining cost under normal mining conditions or actual purchase price and, where applicable, overburden removal, coal preparation expenditure, fixed and variable overhead costs and transportation costs.
• Stores - cost comprises average cost or purchase price and associated charges. A regular and ongoing review is undertaken to establish the extent of surplus items, and a provision is made for any potential loss on their disposal.
Net realisable value is the amount estimated to be obtained from sale of the inventory in the normal course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
(m) Non-current assets (or disposal groups) held for sale
Non-current assets (or disposal groups) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. They are measured at the lower of their carrying amount and fair value less costs to sell, except for assets such as deferred tax assets, assets arising from employee benefits, financial assets, and investment property that are carried at fair value.
An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair values less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset (or disposal group) is recognised at the date of derecognition.
Non-current assets (including those that are part of a disposal group) are not depreciated or amortised while they are classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale continue to be recognised.
Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the balance sheet.
A discontinued operation is a component of the entity that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately on the face of the income statement.
Land held for resale
Land held for resale is stated at the lower cost of cost and fair value less costs to sell. Cost is assigned by specific identification and includes the cost of acquisition, and development and borrowing costs during development. When development is completed any subsequent borrowing costs and other holding charges are expensed as incurred.
(n) Investments and other financial assets
Classification
The Group classifies its investments and other financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and, in the case of assets classified as held to maturity, re-evaluates this designation at each reporting date.
(i) Financial assets at fair value through profit or loss
This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss on initial recognition. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. The policy of management is to designate a financial asset if there exists the possibility it will be sold in the short term and the asset is subject to frequent changes in fair value. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realised within 12 months of the balance sheet date.
(ii) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date which are classified as non-current assets. Loans and receivables are included in receivables in the balance sheet.
(iii) Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the positive intention and ability to hold to maturity. If the Group were to sell other than an insignificant amount of held-to-maturity financial assets, the whole category would be tainted and reclassified as available-for-sale. Held-to-maturity financial assets are included in non-current assets, except for those with maturities less than twelve months from the reporting date, which are classified as current assets.
(iv) Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.
Recognition and derecognition
Regular purchases and sales of investments and other financial assets are recognised on trade-date being the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit and loss are initially recognised at fair value and transaction costs are expensed through the income statement. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.
When securities classified as available-for-sale are sold, the accumulated fair value adjustments recognised in equity are included in the income statement as gains and losses from investment securities.
Subsequent measurement
Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest rate method.
Available-for-sale financial assets and financial assets at fair value through profit and loss are subsequently carried at fair value. Realised and unrealised gains and losses arising from changes in the fair value of the 'financial assets at fair value through profit or loss' category are presented in the income statement in the period in which they arise. Unrealised gains and losses arising from changes in the fair value of non monetary securities classified as available-for-sale are recognised in equity. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement.
Fair value
The fair values of quoted investments are based on current market prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include reference to the fair values of recent arm's length transactions, involving the same instruments or other instruments that are substantially the same, discounted cash flow analysis and option pricing models refined to reflect the issuer's specific circumstances.
Impairment
The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered in determining whether the security is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit and loss - is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments classified as available-for-sale are not reversed through the income statement.
(o) Derivatives
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either; (1) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); or (2) hedges of the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges) at each reporting date.
The Group documents at the inception of the hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items.
The fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedging item is more than twelve months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than twelve months. Trading derivatives are classified as a current asset or liability.
(i) Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss relating to the effective portion of coal price swaps is recognised in the income statement with sales or purchased coal. The gain or loss relating to the ineffective portion is recognised in the income statement within other income or other expenses.
(ii) Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement.
Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). The gain or loss relating to the effective portion of coal price swaps, hedging physical indexed coal sales to fixed price coal sales in periods where there were high levels of exposure to the thermal coal market, is recognised in the income statement with sales. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory), the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset. The deferred amounts are ultimately recognised in profit or loss as cost of goods sold in the case of inventory.
When a hedging instrument expires or is terminated any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a hedge no longer meets the criteria for hedge accounting or a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.
(iii) Derivatives that do not qualify for hedge accounting
Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the income statement and are included in other income or other expenses.
(p) Fair value estimation
The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes.
The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price, the appropriate quoted market price for financial liabilities is the current ask price.
The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) are determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of interest-rate swaps is calculated as the present value of the estimated future cash flows.
Derivative contracts classified as held for trading are fair valued by comparing the contracted rate to the current market rate for a contract with the same remaining period to maturity.
The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values due to their short term nature. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.
(q) Property, plant and equipment
Property, plant and equipment are stated at historical cost less depreciation. The cost of a tangible fixed asset comprises its purchase price and any costs directly attributable to the acquisition of the item and of bringing it into working condition for its intended use. Cost may also include transfers from equity of any gains or losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment.
Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the reporting period in which they are incurred.
Increases in the carrying amounts arising on revaluation of land and buildings are credited, net of tax, to other reserves in shareholder's equity. To the extent that the increase reverses a decrease previously recognised in profit or loss, the increase is first recognised in profit or loss. Decreases that reverse previous increases of the same asset are first charged against revaluation reserves directly in equity to the extent of the remaining reserve attributable to the asset; all other decreases are charged to the income statement. Each year, the difference between depreciation based on the revalued carrying amount of the asset charged to the income statement and depreciation based on the asset's original cost, net of tax, is transferred from the property, plant and equipment revaluation reserve to retained earnings.
Once a mining project has been established as commercially viable, expenditure other than that on land, buildings, plant and equipment is capitalised under "Operational mining properties" together with any amount transferred from "Exploration and evaluation".
In open pit mining operations, it is necessary to remove overburden and other barren waste materials to access the coal seams. The process of mining overburden and waste materials is referred to as stripping. During the development of a mine, before production commences, stripping costs are capitalised as part of the investment in construction of the mine.
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. Development costs incurred after the commencement of production are capitalised to the extent they give rise to a future economic benefit.
Interest payable on borrowings related to qualifying construction or development projects is capitalised up to the point when substantially all the activities that are necessary to make the asset ready for use are complete.
An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.
Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. When revalued assets are sold, it is Group policy to transfer the amounts included in other reserves in respect of those assets to retained earnings.
(r) Deferred stripping
As noted above, stripping (i.e. overburden and other waste removal) costs incurred in the development of a mine before production commences are capitalised as part of the cost of constructing the mine and subsequently amortised over the life of the operation.
In the production stage of some operations, further development of the mine requires a phase of unusually high overburden removal activity that is similar in nature to preproduction mine development. The costs of such unusually high overburden removal activity are deferred and charged against reported profits in subsequent periods on a units of production basis, related to the coal exposed, where the effect is material.
The amount of stripping costs deferred is based on the ratio ('Ratio') obtained by dividing the amount of waste mined by the amount of coal mined. Stripping costs incurred in the period are deferred to the extent that the current period Ratio exceeds the life of mine Ratio. Such deferred costs are then charged against reported profits to the extent that, in subsequent periods, the current period Ratio falls short of the life of mine Ratio. The life of mine Ratio is based on proved and probable reserves of the operation.
Deferred stripping costs are included in "Operational mining properties', within "Property, plant and equipment'. These form part of the total investment in the relevant cash generating unit, which is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable. Amortisation of deferred stripping costs is included in operating costs.
(s) Depreciation and impairment
Assets are fully depreciated over their economic lives, or over the remaining life of the mine if shorter. For certain assets, the economic benefits from the asset are consumed in a pattern than is linked to the level of production. In such cases, depreciation is generally charged on a unit-of-production basis. The straight-line method is used for some operations where this provides a suitable alternative because production is not expected to fluctuate significantly from one year to another. Assets for which consumption of economic benefits is linked to passage of time are depreciated on a straight-line basis.
Land is not depreciated unless acquired for mining purposes in which case it is included in mining properties. The estimated expected useful lives are as follows:
• Mining properties - remaining marketable reserves utilised on a unit or production basis;
• Machinery and equipment - the shorter of applicable mine life and 5-15 years depending on the nature of the asset; and
• Buildings not being part of mining properties - 40 years.
The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at balance sheet date.
Development costs that relate to a discrete section of an ore body and which only provide benefit over the life of those reserves are depreciated over the estimated life of that discrete section. Tangible and intangible fixed assets are reviewed for impairment if there is any indication that the carrying amount may not be recoverable. This applies to the Group's share of the fixed assets held by associates and joint ventures as well as the fixed assets held by the Group itself.
When a review for impairment is conducted, the recoverable amount is assessed by reference to the net present value of expected future cash flows before tax of the relevant cash generating unit, or disposal value if higher. Future cash flows are based on:
• estimates of the quantities of the reserves and certain mineral resources for which there is a high degree of confidence of economic extraction;
• future production levels;
• future commodity prices (assuming the current market prices will revert to the Group's assessment of the long term average price, generally over a period of three to five years);
• exchange rates current at the time of the assessment; and
• future cash costs of production, capital expenditure, close down, restoration and environmental clean up.
These estimates are based on detailed mine plans and operating budgets, modified as appropriate to meet the requirements of AASB 136 Impairment of Assets.
The discount rate applied is based upon the Group's weighted average cost of capital with appropriate adjustment for the risks associated with the relevant cash flows, to the extent that such risks are not reflected in the forecast cash flows.
(t) Exploration and evaluation expenditure
Exploration and evaluation expenditure comprises costs which are directly attributable to:
• researching and analysing existing exploration data;
• conducting geological studies, exploratory drilling and sampling;
• examining and testing extraction and treatment methods; and
• compiling pre-feasibility and feasibility studies.
Exploration and evaluation expenditure also includes the costs incurred in acquiring mineral rights, the entry premiums paid to gain access to areas of interest and amounts payable to third parties to acquire interests in existing projects.
Capitalisation of exploration expenditure commences when there is a high degree of confidence in the project's viability and hence it is probable that future economic benefits associated with that area of interest will flow to the Group.
(u) Determination of ore reserves
The Group estimates its ore reserves and mineral resources based on information compiled by Competent Persons (as defined in accordance with Australasian Code for Reporting of Exploration Results. Mineral Resources and Ore Reserves of December 2004). Reserves, and, for certain mines' resources, determined in this way are used in the calculation of depreciation, amortisation and impairment changes, the assessment of life of mine stripping ratios and for forecasting the timing of the payment of close down and restoration costs.
(v) Intangible assets
Computer software
Where material, when computer software is not an integral part of the related hardware, it is treated as an intangible asset. Computer software for a computer-controlled machine tool that cannot operate without that specific software is considered an integral part of the related hardware and is treated as property, plant and equipment. The same applies to the operating system of a computer.
All current computer software has finite useful lives and is carried at cost less accumulated amortisation. Amortisation is calculated over the estimated useful life of the software.
(w) Trade and other payables
These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition.
(x) Borrowings
Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities, which are not an incremental cost relating to the actual draw-down of the facility, are recognised as prepayments and amortised on a straight-line basis over the term of the facility.
Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in other income or other expenses.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.
Cash flow hedge
The accounting for subsequent changes in the fair values of foreign currency borrowings depends on whether the borrowing is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain US dollar borrowings as a cash flow hedge of its US dollar sales revenue over the term of the debt. The exchange movements on the effective portion of the US dollar borrowings are deferred to the hedging reserve and released to the income statement as coal sales revenue as the designated US dollar sales revenue is realised.
(y) Borrowing costs
Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. The capitalisation rate used to determine the amount of borrowing costs to be capitalised is the weighted average interest rate applicable to the entity's outstanding borrowings during the year.
Other borrowing costs are expensed.
(z) Provisions
Provisions for legal claims are recognised when:
• the Group has a present legal or constructive obligation as a result of past events;
• it is probable that an outflow of resources will be required to settle the obligation; and
• the amount has been reliably estimated.
Provisions are not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of management's best estimate of the expenditure required to settle the present obligation at the balance sheet date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense.
Provisions for close down and restoration and for environmental clean up costs
Close down and restoration costs include the dismantling and demolition of infrastructure and the removal of residual materials and remediation of disturbed areas. Close down and restoration costs are provided for in the accounting period when the obligation arising from the related disturbance occurs, whether this occurs during the mine development or during the production phase, based on the net present value of estimated future costs.
The costs are estimated on the basis of a closure plan. The cost estimates are calculated annually during the life of the operation to reflect known developments and are subject to formal review at regular intervals.
The amortisation of "unwinding" of the discount period applied in establishing the net present value of provisions is charged to the income statement in each accounting period. The amortisation of the discount is shown as a financing cost, rather than as an operating cost. Other movements in the provisions for close down and restoration costs, including those resulting from new disturbance, updated cost estimates, changes to the lives of operations and revisions to discount rates are capitalised within fixed assets. These costs are then depreciated over the lives of the asset to which they relate.
Where rehabilitation is conducted systematically over the life of the operation, rather than at the time of closure, provision is made for the outstanding continuous rehabilitation work at balance sheet date. All other costs of continuous rehabilitation are charged to the income statement as incurred.
Provision is made for the estimated present value of the costs of environmental clean up obligations outstanding at the balance sheet date. These costs are charged to the income statement. Movements in the environmental clean up provisions are presented as an operating costs, except for the unwind of the discount which is shown as a financing cost.
(aa) Employee benefits
(i) Wages and salaries, annual leave and sick leave
Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees' services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and measured at the rates paid or payable.
(ii) Long Service Leave
The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the project unit credit method. Consideration is given to expect future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows.
Additional long service leave payments are made monthly to the Coal Mining Industry (Long Service Leave Funding) Corporation based on the eligible monthly payroll of employees involved in the mining of black coal. Reimbursement is sought from the fund when long service leave is paid to employees involved in the mining of black coal. An asset for the amount recoverable from the Coal Mining Industry (Long Service Leave Funding) Corporation is recognised in trade and other receivables.
(iii) Retirement benefit obligations
The Group operates and participates in the following superannuation plans in which employees are entitled to benefits on retirement, disability or death:
Rio Tinto Staff Superannuation Fund
The Fund has both a defined benefit and a defined contribution section. Contributions to the defined contribution superannuation plans are expensed in the income statement when incurred.
For the defined benefit plan, as there is no agreement in place for charging the net defined benefit cost for the plan as a whole to individual Rio Tinto group entities, the company recognises a cost in the income statement equal to the contribution payable for the period. The cash contributions to the Fund are made through reference to a percentage of base salary contribution per defined benefit employee as determined by the fund actuary advised by the fund trustee and applied to those defined benefit employees of the Fund. Rio Tinto Services Limited as the sponsoring entity of the Fund discloses the defined benefit obligation and associated charges to the income statement.
Industry funds
Under the terms of the Coal and Oil Shale Mine Workers (Superannuation) Act 1941, the Group is required to make contributions to the industry superannuation fund on behalf of employees engaged at the Group's mine sites. The defined benefit section of the scheme is now closed to new members. The latest actuarial report prepared by Mercer Consulting, as at 30 June 2006, stated that the fund is in a satisfactory condition and the value of the assets was adequate to meet the liabilities of the fund. Contributions to this fund are expensed as incurred.
(iv) Share-based payments
The executives and employees of the company are eligible to participate in various share-based payment plans as part of the Coal & Allied's membership of the Rio Tinto Group.
Share options granted before 7 November 2002 and/or vested before 1 January 2005
These options are excluded from the scope of AASB 2 Share-based Payment under the exemptions contained in AASB 1 First-time Adoption of Australian Equivalents to IFRS. As such the shares are not recognised until the options are exercised, at which time any shortfall between the exercise price paid by the employee of the company and the market price of the Rio Tinto Limited shares at the date of exercise may be charged by Rio Tinto to the company. For those options issued under the Rio Tinto Share Savings Plan at a 20 per cent discount to market price at grant date, the company recognises the 20 per cent discount over the vesting period. Any shortfall/excess between the current market price and the market price at grant date will be recognised as an employee benefits expense in the Income Statement. For other equity-settled share-based payments an employee benefit expense is recognised when the charge is received from Rio Tinto.
Share options granted after 7 November 2002 and vested after 1 January 2005
The fair value of options granted under the equity-settled share-based payment plans are recognised as an employee benefit expense and an increase in the share-based investment reserve over the expected vesting period. The fair value of the share plans is determined at the date of grant, taking into account any market-based vesting conditions attached to the award. When market prices are not available, fair values are used that are provided by independent actuaries based on an actuarial binomial model.
The fair value of the options granted is adjusted to reflect market vesting conditions, but excludes the impact of any non-market based vesting conditions. Non-market based vesting conditions are taken into account in estimating the number of awards likely to vest. The estimate of the number of awards likely to vest is reviewed at each balance sheet date up to the vesting date, at which point the estimate is adjusted to reflect the actual awards issued. No adjustment is made after the vesting date even if the awards are forfeited or not exercised.
For cash-settled share-based payments, a liability equal to the portion of the goods or services received is recognised at the current fair value determined at each reporting date.
(v) Short term incentive plans
The Group recognises a liability and an expense for bonuses based on a formula that takes into consideration key performance indicators including, but not necessarily limited to, safety performance and financial performance. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation.
(vi) Termination benefits
Termination benefits are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than twelve months after reporting date are discounted to present value.
(ab) Preference shares
The company has on issue 1,857,180 (2007: 1,857,180) non-redeemable, cumulative, non participating shares at 50 cents each that confer the right to a fixed preferential dividend at the rate of seven per cent per annum on the amount of paid up capital. They have no conversion rights and have no right to participate in any other distributions. Each preference shareholder is entitled to one vote per share at shareholders meetings.
These preference shares are classified as debt rather than equity and are included in non-current borrowings. Dividends on preference shares are classified as interest and are charged to the income statement as finance costs. Preference shares are not potential ordinary shares and are not included in the calculation of either basic or diluted earnings per share.
(ac) Contributed equity
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options for the acquisition of a business are not included in the cost of the acquisition as part of the purchase consideration.
If the entity reacquires its own equity instruments, e.g. as the result of a share buy-back, those instruments are deducted from equity and the associated shares are cancelled. No gain or loss is recognised in the profit or loss and the consideration paid including any directly attributable incremental costs (net of income taxes) is recognised directly in equity.
(ad) Dividends
Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the year but not distributed at balance date.
(ae) Earnings per share
Basic earnings per share
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the year, adjusted for bonus elements in ordinary shares issued during the financial year.
Diluted earnings per share
Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares.
(af) Goods and Services Tax (GST)
Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense.
Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet.
Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable, to the taxation authority are presented as operating cash flow.
(ag) New accounting standards and UIG interpretations
Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2008 reporting periods. The Group's assessment of the impact of these new standards and interpretations is set out below where relevant:
(i) AASB 8 Operating Segments and AASB 2007-3 Amendments to Australian Accounting Standards arising from AASB 8 are effective for annual reporting periods commencing on or after 1 January 2009. AASB 8 will result in a significant change in the approach to segment reporting, as it requires adoption of a "management approach" to reporting on the financial performance. The information being reported will be based on what the key decision-makers use internally for evaluating segment performance and deciding how to allocate resources to operating segments. The Group has decided not to early adopt AASB 8. Application of AASB 8 may result in different segments, segment results and different type of information being reported in the segment note of the financial report. However, it will not affect any of the amounts recognised in the financial statements.
(ii) Revised AASB 123 Borrowing Costs and AASB 2007-6 Amendments to Australian Accounting Standards arising from AASB 123 [AASB 1, AASB 101, AASB 107, AASB 111, AASB 116 and AASB 138 and interpretations 1 and 12 are applicable to annual reporting periods on or after 1 January 2009. The revised AASB 123 has removed the option to expense all borrowing costs and - when adopted - will require the capitalisation of all borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. There will be no impact on the financial report of the Group, as the Group does already capitalise borrowing costs relating to qualifying assets.
(iii) Revised AASB 101 Presentation of Financial Statements and AASB 2007-8 Amendments to Australian Accounting Standards arising from AASB 101 was issued in September 2007 and is applicable for annual reporting periods beginning on or after 1 January 2009. It requires the presentation of a statement of comprehensive income and makes changes to the statement of changes in equity but will not affect any of the amounts recognised in the financial statements. If an entity has made a prior period adjustment or a reclassification of items in the financial statements, it will need to disclose a third balance sheet (statement of financial position), this one being at the beginning of the comparative period. The Group intends to apply the revised standard from 1 January 2009.
(iv) AASB 2008-1 Amendments to Australian Accounting Standard - Share-based Payments: Vesting Conditions and Cancellations was issued in February 2008 and is applicable for annual reporting periods on or after 1 January 2009. The revised standard clarifies that vesting conditions are service conditions and performance conditions only and that other features of a share-based payment are not vesting conditions. It also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group will apply the revised standard from 1 January 2009, but it is not expected to affect the accounting for the Group's share-based payments.
(v) AASB 2008-7 Amendments to Australian Accounting Standards - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate. In July 2008, the AASB approved amendments to AASB 1 First-time Adoption of International Financial Reporting Standards and AABS 127 Consolidated and Separate Financial Statements. The new rules will apply to financial reporting periods commencing on or after 1 January 2009. The Group will apply the revised rules prospectively from 1 January 2009. After that date, all dividends received from investments in subsidiaries, jointly controlled entities or associates will be recognised as revenue, even if they are paid out of pre-acquisition profits, but the investments may need to be tested for impairment as a result of the dividend payment. Furthermore, when a new intermediate parent entity is created in internal reorganisations it will measure its investment in subsidiaries at the carrying amounts of the net assets of the subsidiary rather than the subsidiary's fair value.
(vi) AASB Interpretation 15: Agreements for the Construction of Real Estate was issued in July 2008 and is applicable for annual reporting periods commencing on or after 1 January 2009. The interpretation provides guidance on determining whether an agreement is a construction contract, an agreement for the rendering of services or for the sale of goods. The Group intends to apply the interpretation from 1 January 2009. It has no current contracts for the construction of real estate. Consequently, it does not expect to make any adjustment on the initial application of AASB-15.
(vii) Revised AASB 3: Business Combinations, Revised AASB 127: Consolidated and Separate Financial Statements and AASB 2008-3: Amendments to Australian Accounting Standards arising from AASB 3 and AASB. Revised accounting standards for business combinations and consolidated financial statements were issued in March 2008 and are operative for annual reporting periods beginning on or after 1 July 2009, but may applied earlier. The Group has not yet decided when it will apply the revised standards. However, the new rules generally apply only prospectively to transactions that occur after the application date of the standard. Their impact will therefore depend on whether the Group will enter into any business combinations or other transactions that affect the level of ownership held in the controlled entities in the year of initial application. For example, under the new rules:
• all payments (including contingent consideration) to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments subsequently remeasured at fair value through income;
• all transaction cost will be expensed;
• the Group will need to decide whether to continue calculating goodwill based only on the parent's share of net assets or whether to recognise goodwill also in relation to the non-controlling (minority) interest; and
• when control is lost, any continuing ownership interest in the entity will be remeasured to fair value and a gain or loss recognised in profit or loss.
Note 2 Financial risk management
Coal & Allied carries out risk management under policies approved by the board of directors. The board provides principles for overall risk management, as well as written policies covering specific areas, such as mitigating interest rate and other risks, use of derivative and non-derivative financial instruments.
The Group's business is coal mining and not trading. Accordingly, the Group only contracts to sell coal that it plans to produce, however, purchasing coal for resale may be required in circumstances where actual production falls short of contracted sales volumes. The Group operates entirely in Australia and is exposed primarily to Australian dollar denominated costs, although some inputs such as fuel are quoted in US dollars. Export coal sales are denominated in US dollars. Deposits are denominated in Australian dollars. Borrowings that are denominated in US dollars are designated as effective hedges against consolidated US dollar coal sales revenue in the Group.
Hedging is undertaken to a limited degree as described in the sections on currency, interest rate, coal price exposure and treasury management below.
(a) Market risk
(i) Foreign exchange risk
Export coal sales are denominated in US dollars. A strengthening of the Australian dollar against the US dollar has an adverse impact on earnings and cash flow.
A portion of the Group's debt is denominated in US dollars and is designated as a cash flow hedge. Accordingly, a strengthening of the Australian dollar against the US dollar will result in net gains for debt denominated in US dollars.
Group sensitivity
At 31 December 2008, had the Australian dollar weakened/strengthened by 10 per cent against the US dollar with all other variables held constant, the Group's post-tax profit for the year would have been $11.0 million higher/$8.9 million lower (2007: $8.8 million higher/$7.2 million lower), mainly as a result of foreign exchange gains/losses on translation of US dollar denominated trade receivables, and derivatives used for hedging purposes. Profit is more sensitive to movements in the Australian dollar/US dollar exchange rates in 2008 than 2007 because of the increased amount of US dollar denominated trade receivables. Equity would have been $19.7 million lower/$16.2 million higher (2007: $26.3 million lower/$21.5 million higher) had the Australian dollar weakened/strengthened by 10 per cent against the US dollar, arising mainly from US dollar denominated borrowings and US dollar coal swaps designated as effective cash flow hedges. Equity is less sensitive to movements in the Australian dollar/US dollar exchange rates in 2008 than 2007 because of decreased US dollar denominated coal price swaps designated as cash flow hedges.
Parent entity sensitivity
At 31 December 2008, had the Australian dollar weakened/strengthened by 10 per cent against the US dollar with all other variables held constant, the parent entity's post-tax profit for the year would have been $17.8 million lower/$14.6 million higher (2007: $14.9m lower/$12.2 million higher), mainly as a result of US dollar borrowings. Parent entity profit is more sensitive to movements in the Australian dollar/US dollar exchange rates in 2008 than in 2007, mainly as a result of increased US dollar borrowings. Parent entity equity would have been unaffected (2007: unaffected).
(ii) Coal price risk
The Group's policy is to sell coal at prevailing market prices. Typically, this means annual bi-lateral price negotiations with major customers. A small proportion of sales are sold spot and a small proportion is sold under longer term fixed pricing arrangements. Fixed pricing beyond twelve months will normally include a price escalation arrangement in the pricing. The Group uses "coal swaps" to fix some of its spot price sales. This is limited to approximately 10 per cent of total sales volume for any single year.
Group sensitivity
At 31 December 2008, had the coal price weakened/strengthened by 10 per cent with all other variables held constant, the Group's post-tax profit for the year would have been unchanged (2007: $0.2 million higher/$0.1 million lower), mainly as a result of gains/losses on financial assets at fair value through profit or loss and derivatives held for trading. Profit is less sensitive to movements in the coal price in 2008 than 2007 because of the reduced net amount of fair value derivates. Equity would have been $10.7 million higher/$12.0 million lower (2007: $23.4 million higher/$30.5 million lower) had the coal price weakened/strengthened by 10 per cent, arising mainly from coal price swap contracts designated as effective cash flow hedges.
Parent entity sensitivity
The parent entity's post-tax profit and equity for the years ended 31 December 2008 and 2007 is unaffected by coal price risk.
(iii) Cash flow and fair value interest rate risk Group
The Group's interest rate management policy is generally to borrow at floating rates.
The Group has interest-bearing deposits and borrowings held at variable rates, the Group and parent entity's main interest rate risk arises from deposits and is offset partially by term borrowings. Cash deposits and borrowings issued at variable rates expose the Group and parent entity to cash flow interest rate risk. Cash deposits and borrowings issued at fixed rates expose the Group and parent entity to fair value interest rate risk. For each class of financial asset and liability refer to the respective notes for interest rate exposure.
During 2008 the deposits were at variable rates and were held in Australian dollars. During 2008, the borrowings were at variable rates and were denominated in both US dollars and Australian dollars. The Australian dollar denominated borrowings were settled in March 2008 and were replaced with US dollar denominated borrowings. During 2007, the borrowings were denominated in both US dollars and Australian dollars.
Coal & Allied acquired US dollar interest rate swaps as part of the acquisition of Peabody's Australian coal assets. The interest rate swaps provided an effective hedge to increasing rates on a borrowing facility. At 31 December 2006, these interest rate swaps were reclassified as ineffective hedges following the repayment of the facility to which they were designated as hedges. The interest rate swaps were consequentially reclassified as other financial liabilities and recognised at fair value through the profit and loss. The notional value of the interest rate swaps reduced over the term from April 1998 to June 2008 at a fixed interest rate of 6.07 per cent and a variable interest rate of between 2.37 per cent and 4.56 per cent. The fair value of the interest rate swaps as at 31 December 2008 was $nil million as they have been settled in June 2008 (2007: $0.2 million).
Derivative financial assets and liabilities are carried at fair value which is based on the present value of the estimated future cash flows at prevailing market rates.
Group sensitivity
At 31 December 2008, if interest rates had changed by -/+ one per cent from the year end rates with all other variables held constant, post-tax profit would have been $3.7 million lower/higher as a result of lower /higher net interest income from these net financial assets (2007: $2.9 million higher/lower as a result of lower/higher net interest expense on net debt).
Parent entity sensitivity
At 31 December 2008, if interest rates had changed by -/+ one per cent from the year end rates with all other variables held constant, post-tax profit would have been $3.6 million lower/higher as a result of lower /higher net interest income from these net financial assets (2007: $2.3 million higher/lower as a result of lower/higher net interest expense on net debt).
(iv) Summarised sensitivity analysis
The following table summarises the sensitivity of the Group's and parent entity's financial assets and financial liabilities to interest rate risk, foreign exchange risk and coal price risk at 31 December 2008.
The following table summarises the sensitivity of the Group's and parent entity's financial assets and financial liabilities to interest rate risk, foreign exchange risk and coal price risk at 31 December 2007.
(b) Credit risk
Approximately 50 per cent of the Group's sales are made to Japan and accordingly Japanese customers represent the highest concentration of credit risk. The Group has policies in place to ensure that sales of products are made to customers with an appropriate credit quality. The Group does not hold any collateral as security. Derivative counterparties and cash transactions are limited to high credit quality financial institutions. The Group has policies that limit the amount of credit exposure to any one financial institution.
(c) Liquidity and capital risk
The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Group's strategy has not changed since 2007.
Credit facilities are maintained with Rio Tinto that are sufficient to meet contractual cash obligations arising in the ordinary course of business (see note 19(f)).
The capital structure of the Group consists of borrowings, cash and cash equivalents and equity attributable to equity holders of the parent, including issued capital, reserves and retained earnings.
The Group does not have a target debt to equity ratio, but has a policy of maintaining a flexible financing structure to be able to fund capital expenditure programmes, pay dividends and fund expansion opportunities as they arise. This policy is balanced against the desire to ensure efficiency in the debt/equity structure of the Group's balance sheet in the longer term through pro-active capital management programmes.
The gearing ratios at 31 December 2008 and 31 December 2007 were as follows:
Note 3 Critical accounting estimates and judgements
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Group and that are believed to be reasonable under the circumstances.
Coal & Allied makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related 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 together with critical judgements in applying accounting policies.
(i) Mine closure and rehabilitation provisions estimates
The calculation of rehabilitation and closure provisions (and corresponding capitalised closure cost assets where necessary) rely on estimates of costs required to rehabilitate and restore disturbed areas of land to their original condition. The costs are estimated on the basis of a closure plan. Significant judgement is required in determining the provision as there are many transactions and other factors that will affect the ultimate liability payable. Factors that will affect this liability include future disturbances caused by further development, changes in technology and restoration techniques, changes in the timing of rehabilitation expenditure due, for example, to changes in ore reserves or production rates, changes in regulations, price increases and changes in discount rates. These estimates are regularly reviewed and adjusted in order to ensure the most up to date data is used to calculate these balances. When these factors change in the future, such differences will impact the provision in the period in which they change or become known. Closure and rehabilitation provisions are disclosed in note 20.
(ii) Determination of coal reserves and resources
The Group estimates its coal reserves and coal resources based on information compiled by Competent Persons as defined in accordance with the Australasian Code for Reporting of Mineral Resources and Ore Reserves of December 2004 (the "JORC code"). Reserves determined in this way are used in the calculation of depreciation, amortisation and impairment charges, and the assessment of mine lives and for forecasting the timing of the payment of closure and rehabilitation costs.
(iii) Impairment
Assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount exceeds its recoverable amount. The assessment of the carrying amount often requires estimates of future cash flows including future coal prices and foreign exchange rates.
Note 4 Segment information
Description of segments
Primary reporting - business segment
The consolidated entity operates, through a Management Services Agreement with Rio Tinto Coal Australia Pty Limited, an integrated approach to managing and organising its operating companies. Its operating companies derive revenue solely from coal mining and related coal preparation.
Secondary reporting - geographic segment
The consolidated entity operates predominantly in the Hunter Valley of New South Wales, Australia.
(e) Tax consolidation legislation
Coal & Allied and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The accounting policy in relation to this legislation is set out in note 1(f).
On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing agreement which, in the opinion of the directors, limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity, Coal & Allied Industries Limited.
The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Coal & Allied for any current tax payable assumed and are compensated by Coal & Allied for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Coal & Allied under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities' financial statements. The amounts receivable/payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. The funding amount is recognised as current inter-company receivables (note 9) or payables (note 18).
(a) Related parties
Further information relating to receivables from related parties is set out in note 36.
(b) Fair value and credit risk
Due to the short-term nature of these receivables, their carrying value is assumed to approximate their fair value.
Approximately 50 per cent of the Group's sales are made to Japan and accordingly Japanese customers represent the highest concentration of credit risk. The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivables mentioned above. The Group does not hold any collateral as security. Refer to note 2 for more information on the risk management policy of the Group.
As at the date of this report, all trade receivables at balance date have been settled in full. All other receivables are considered recoverable.
(c) Interest rate risk and foreign exchange risk
Receivables are non-interest bearing. The carrying amounts of the Group's and parent entity's trade and other receivables are denominated in the following currencies:
(a) Instruments used by the Group
The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in coal prices, interest rates and foreign exchange rates in accordance with the Group's financial risk management policies (note 2).
(i) Cash flow hedges
Interest rate swap contracts
Coal & Allied acquired US dollar denominated interest rate swaps as part of the acquisition of Peabody's Australian coal assets. The interest rate swaps provided an effective hedge to increasing rates on the original borrowing facility. At 31 December 2006, these interest rate swaps were reclassified as ineffective hedges following the repayment of the facility to which they were designated as hedges. The interest rate swaps were consequentially as other financial liabilities and recognised at fair value through profit or loss. In the year ended 31 December 2008, $0.1 million loss (2007: $0.3 million gain) was transferred to profit and loss. The notional value of the interest rate swap reduced over the term from April 1998 to June 2008 at a fixed interest rate of 6.07 per cent and a variable interest rate of between 2.37 per cent and 4.56 per cent. The fair value of the interest rate swaps as at 31 December 2008 were $nil million (2007: $0.2 million liability) as they had fully matured in June 2008.
Derivative financial assets and liabilities are carried at fair value which is based on the present value of the estimated future cash flows at prevailing market rates.
At 31 December 2008, the notional principal amounts and period of expiry of the interest rate swap contracts are as follows:
| 2008 $m | 2007 $m | |
| 0-1 years | - | 27.4 |
The contracts required settlement of net interest receivable or payable each 182 days.
Coal swap contracts
The consolidated entity has entered into coal swap contracts in order to manage price risk and to balance exposure to the thermal coal market. Cash flow hedges have been implemented to reduce exposure to market indexes in periods where physical coal sales have led to larger than targeted exposure to an index. The contracts are timed to mature when the shipments of coal are made.
At balance date the details of outstanding contracts to swap indexed US$ prices to fixed US$ prices are:
The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity. When the underlying sale cash flow occurs, the amount deferred in equity is released to the income statement and included in revenue. In the year ended 31 December 2008, a loss of $162.8 million (2007: $24.6 million loss) was transferred to profit and loss.
At balance date these contracts were net liabilities with fair value of $24.7 million (2007: $136.2 million).
(ii) Fair value hedges
Coal swap contracts
The consolidated entity has entered into coal swap contracts in order to manage price risk and to balance the exposure to the thermal and semi-soft coal markets. Fair value hedges have converted physical fixed price coal purchases to indexed coal purchases in periods where there were high levels of exposure to the thermal coal market for purchases. The consolidated entity has also entered into a limited number of coal swaps converting fixed price coal sales to indexed coal prices in order to maintain the stated policy of achieving prevailing market price for coal sales.
The contracts are timed to mature when the shipments of coal are made.
Changes in the fair value of derivatives are recorded in the income statement.
In the year ended 31 December 2008, a loss of $53.6 million was transferred to the profit and loss to recognise the changes in fair value and the cash settlement cost on maturity (2007: $1.1 million loss).
Derivative financial assets and liabilities are carried at fair value which is based on the present value of the estimated future cash flows at prevailing market rates.
At balance date these contracts were net liabilities with a fair value of $1.1 million (2007: $0.8 million liability). The details of outstanding contracts to swap fixed US$ prices to indexed US$ prices are as follows:
(b) Credit risk exposures
Credit risk arises from the potential failure of counterparties to meet their obligations under the respective contracts at maturity. This arises with amounts receivable from unrealised gains on derivative financial instruments. At balance date $6.8 million (Australian dollar equivalent) is receivable by the Group from unrealised commodity gains on coal swap contracts designated as cash flow or fair value hedges (2007: $11.9 million). No collateral is held as security.
(c) Interest rate and foreign currency risk
Derivative financial instruments relating to coal swaps are non-interest bearing. For an analysis of the sensitivity of derivatives to interest rate and foreign currency exchange risk refer to (note 2).
(d) Net fair value of financial assets and liabilities
The fair value of derivative financial instruments reflects their carrying value.
a) Shares in associates
Investments in associates are accounted for in the consolidated financial statements using the equity method of accounting and are carried at cost by the parent entity (note 30).
(b) Shares in jointly controlled entities
Investments in jointly controlled entities are accounted for in the consolidated financial statements using the equity method of accounting and are carried at cost by the investing entity (note 32).
(a) Bank overdraft - consolidated
The unsecured bank overdraft amounts to nil (2007: $35.7 million) and during the year interest rates were between 4.20 per cent and 7.20 per cent (2007: between 6.00 per cent and 6.50 per cent). The interest rate as at 31 December 2008 is 4.20 per cent. The interest rate is re-priced monthly.
(b) Leases
Leases are secured by the plant and equipment to which they relate and bear a weighted average interest rate of 7.75 per cent (2007: 6.93 per cent). The interest rate as at 31 December 2008 is 7.43 per cent. The interest rates are re-priced quarterly and half yearly.
(c) Loan from related entities
The loan from related parties can be drawn in either US dollars or Australian dollars. It is unsecured.
An unsecured loan of 250 million US dollars was drawn down from Rio Tinto Finance Limited in December 2006. As at 31 December 2008 the balance was reduced to 83.3 million US dollars. The loan was at floating interest rates during the year (re-priced monthly), which were between 2.02 per cent and 4.77 per cent (2007: between 5.37 per cent and 6.07 per cent). The interest rate as at 31 December 2008 is 2.12 per cent.
An unsecured loan of 100 million US dollars was drawn down from Rio Tinto Finance Limited in March 2008. As at 31 December 2008 the balance was reduced to 75 million US dollars. The loan was at floating interest rates during the year (re-priced monthly), which were between 1.92 per cent and 4.86 per cent (2007: between 5.37 per cent and 6.07 per cent). The interest rate as at 31 December 2008 is 1.46 per cent.
A loan of 100 million Australian dollars was drawn down from Rio Tinto Finance Limited in instalments commencing February 2007. The loan was at floating interest rates during the year (re-priced monthly), which were between 7.39 per cent and 7.78 per cent (2007: between 6.62 per cent and 7.52 per cent). This loan was fully repaid in March 2008.
The Peabody interest rate swap does not relate to these loans.
All loans are in compliance with their covenants.
Cash flow hedge
The Group has designated these US dollar borrowings as a hedge of its US dollar sales revenue over the term of the debt. The exchange movements on the US dollar borrowings are deferred to the hedging reserve (note 24) and written off to the income statement as the designated US dollar sales revenue is realised. In the year ended 31 December 2008, a $3.1 million gain (2007: $5.8 million) was transferred to profit and loss.
For an analysis of borrowings to interest rate and foreign currency risks refer to note 2.
(i) Preference shares
The 1,857,180 (2007: 1,857,180) preference shares on issue confer the right to a preferential dividend of 7.00 per cent on the amount of paid up capital.
Effective 1 July 1998, the Company Law Review Act abolished the concept of par value shares and the concept of authorised capital. Accordingly, the Company does not have authorised capital or par value in respect of its issued shares.
Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders meetings. In the event of winding up the company ordinary shareholders rank after all other shareholders and creditors and are fully entitled to any proceeds of liquidation.
(c) Nature and purpose of reserves
Asset revaluation reserve
The asset revaluation reserve was used to record increments and decrements on the revaluation of non-current assets. The balance standing to the credit of the reserve may be used to satisfy the distribution of bonus shares to shareholders and is only available for the payment of cash dividends in limited circumstances as permitted by law.
Hedging reserve - cash flow hedges
The hedging reserve is used to record gains or losses on cash flow hedges that are recognised directly in equity. Amounts are recognised in profit and loss when the associated hedged transaction affects profit and loss.
Share-based payment reserve
The share-based payments reserve is used to recognise the fair value of options issued but not exercised.
| Note 25 Dividends |
Parenty Entity |
Parent Entity |
|
2008 $m |
2007 $m | |
| (a) Ordinary share | ||
| Final dividend for the year ended 31 December 2007 was 25 cents paid on 20 March 2008 (2006: 25 cents paid on 20 March 2007) |
21.6 |
21.6 |
| Interim dividend for the year ended 31 December 2008 was 160 cents paid on 29 August 2008 (2007: nil cents) |
138.6 |
- |
| Total dividends |
160.2 |
21.6 |
Franking of dividends
All dividends paid to ordinary shareholders and preference shareholders in 2008 and 2007 are fully franked.
(b) Dividends not recognised at year end
In addition to the above dividends, since year end the directors have resolved to pay a final dividend of 550 cents per fully paid ordinary share, fully franked based on tax paid at 30 per cent.
| Aggregate amount of the proposed dividends expected to be paid on 20 March 2009 out of retained profits at 31 December 2008, but not recognised as liabilities at year end | 476.2 | 21.6 |
(c) Franked dividends
The franked dividends declared for 2008 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ending 31 December 2008.
| Franking credits available for subsequent financial years based on a tax rate of 30 per cent (2007: 30 per cent). | 556.8 | 263.2 |
The above amounts represent the balances of the franking accounts as at the end of the financial year, adjusted for:
(a) franking credits that will arise from the payment of the amount of the provision for income tax;
(b) franking debits that will arise from the payment of dividends recognised as a liability at reporting date;
(c) franking credits that will arise from the receipt of dividends recognised as receivables at reporting date; and
(d) franking credits that may be prevented from being passed to the parent entity.
The consolidated amounts include franking credits that would be available to the parent entity if distributable profits of subsidiaries were paid as dividends.
The impact on the franking account of the dividend recommended by the directors since year-end but not recognised as a liability at year end will be a reduction in the franking account of $204.1 million (2007: $9.3 million).
| Note 26 Earnings per share | Consolidated | Consolidated |
| 2008 cents |
2007 cents | |
| Basic earnings per share | 928.3 | 126.8 |
| Diluted earnings per share | 928.3 | 126.8 |
| Weighted average number of ordinary shares used as the denominatorin the calculation of both basic and diluted earnings per share | 86,584,735 | 85,584,735 |
| 2008 | 2007 | |
| $m | $m | |
| Reconciliation of earnings used in calculating both basic and diluted earnings per share | ||
| Profit attributable to members of Coal & Allied Industries Limited | 803.8 | 109.8 |
| Profit attributable to the ordinary equity holdings of the company used in calculating both basic and diluted earnings per share | 803.8 | 109.8 |
Information concerning the classification of securities
Preference shares are not considered potential ordinary shares and are therefore excluded from the above calculations (note 1(ab)).
| Note 27 Minority interest | Consolidated | Consolidated |
| 2008 $m | $2007 $m | |
| Interest in share capital | 1.4 | 1.4 |
Note 28 Reconciliation of profit for the year to net cash inflow (outflow) from operating activities
Note 29 Subsidiaries
The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(b).
Notes:
A These wholly-owned companies and the parent entity have entered into a deed of cross guarantee under which each company guarantees the debts of the others. By entering into the deed, the wholly-owned entities are relieved from the requirement to prepare a Financial Report and directors' report under Australian Securities and Investment Commission Class Order 98/1418. These companies represent a "Closed Group" for the purposes of the Class Order, and as there are no other parties to the deed of cross guarantee that are controlled by the parent entity, they also represent the "Extended Closed Group".
A consolidated Income statement and consolidated Balance sheet, comprising Coal & Allied and subsidiaries which are party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee, at 31 December 2008 is set out below.
The proportion of ownership interest is equal to the proportion of voting power held.
B Book value of investments ($5 only).
C Book value of investments ($2 only).
D Book value of investments ($1 only)
E A further 13 per cent interest is held by R W Miller (Holdings) Limited
F Book value of investments ($80 only).
G Outside equity interest in controlled entities refer to note 27.
H Book value of investments ($100 only).
I Book value of investments ($3 only).
J Book value of investments ($203 only).
K Book value of investments ($12 only).
L Book value of investments ($15 only).
M Book value of investments ($44 only).
N Book value of investments ($6 only).
O Non-beneficially controlled.
P Liquidated during 2008.
Q Incorporated during 2008.
Note 30 Investments in associates
Investments in associates are accounted for in the consolidated financial statements using the equity method of accounting and are carried at cost by the parent entity. The equity method became applicable with effect from 1 July 1999 when Coal & Allied determined that it achieved the capacity to significantly influence Port Waratah Coal Services Limited ("PWCS"). Coal & Allied's investment has been adjusted to reflect its share of PWCS operating profit after tax and dividends since the date of its original investment - the last reporting date of PWCS was 31 December 2008.
PWCS is an unlisted entity, which is incorporated in Australia.
Note 31 Interests in joint ventures
At 31 December 2008 and 2007, controlled entities of Coal & Allied participated in the following joint venture assets:
| Name of Joint Venture | Principal activity | Share of interest % |
| Mount Thorley Co-venture (1) | Coal mining, processing and marketing | 80.000 |
| Warkworth Associates (1) | Coal mining, processing and marketing | 55.574 |
| Bengalla Joint Venture | Coal mining, processing and marketing | 40.000 |
(1) Mt Thorley Warkworth Operational Integration Agreement
Coal & Allied holds an 80 per cent interest in the Mount Thorley Co-Venture and a 55.574 per cent interest in Warkworth Associates. In 2004 these two joint ventures entered into an Operational Integration Agreement (OIA) that allows the two joint ventures to be managed as a single operation. Under the terms of the OIA production can be sourced from either mining lease and is allocated between the two joint ventures based on a tonnage ratio that is contractually agreed between the two joint ventures. The tonnage ratio is agreed at the beginning of each year. Since entering into the OIA the tonnage commitment ratio has been Warkworth Associates 65 per cent and Mount Thorley Co-Venture 35 per cent. In effect, Warkworth Associates receives 65 per cent and the Mount Thorley Co-Venture receives 35 per cent of the output from the combined mining leases with each joint venture then being responsible for the marketing and sale of its respective tonnage received. Production costs are shared on the same basis as the tonnage ratio. The OIA provides for compensation to be made for the use of each joint venture's assets and resource depletion.
The consolidated entity's interests in assets employed in the joint ventures are included in the consolidated balance sheet under the classifications shown below.
Note 32 Investments in jointly controlled entities
Bengalla Coal Sales Company Pty Limited, Warkworth Coal Sales Ltd and Warkworth Tailings Treatment Pty Ltd are equity accounted as they are considered to be jointly controlled entities.
Information relating to the jointly controlled entities is set out below:
Note 34 Employee benefits
(a) Loans and other transactions with key management personnel
There were no loans or other transactions with key management personnel in either 2008 or 2007.
(b) Superannuation
The consolidated entity operates and participates in the Rio Tinto Staff Superannuation Fund.
Under the terms of the Coal and Oil Shale Mine Workers (Superannuation) Act 1941, the Group is required to make contributions to the industry superannuation fund on behalf of employees engaged at the Group's mine sites. The defined benefit section of the scheme is now closed to new members. The latest actuarial report prepared by Mercer Consulting, as at 30 June 2006, stated that the fund is in a satisfactory condition and the value of the assets was adequate to meet the liabilities of the fund.
(c) Long service leave (Coal Industry)
Commonwealth legislation enacted in 1992 established a statutory corporation to assume responsibility for funding of the payment of long service leave entitlements to persons employed in the black coal industry. The Coal Mining Industry (Long Service Leave Funding) Corporation raised a levy on mine workers' wages and a reimbursement is made to employers when long service leave payments are made. The obligation for long service leave entitlements rests with the employer as part of the conditions of employment. The centralised method of financing the payment of long service leave is consistent with the entitlement to be paid long service leave being based on cumulative employment within the coal industry rather than service with a single employer.
The consolidated entity's obligations to employees, including related on-costs, and the right of reimbursement from the statutory corporation have been included in the balance sheet under the heading "employee entitlements" and comprise:
(d) Rio Tinto Share Savings Plan ("SSP")
Coal & Allied recognises as an employee benefit expense the fair value of the SSP options on a pro-rata basis over the life of the plan. Refer to note 40 for information regarding SSP.
Note 35 Retirement benefit obligations
Many employees of the company are members of the Rio Tinto Staff Superannuation Fund ("the Fund"). The Fund has both a defined benefit and defined contribution section. The defined benefit section is wholly funded and provides lump sum benefits based on years of service and final average salary. Due to the terms of the agreement between the members of the defined benefit section of the Fund it is accounted for as a defined contribution plan. Further relevant details of the defined benefit section of the Fund are noted below:
Employer contributions
Employer contributions to the defined benefit section of the Fund are based on recommendations by the Fund's actuary. A review of the funding position is undertaken every six months.
The Trustee and Rio Tinto have agreed a Contribution Management Strategy that seeks to minimise volatility in the position of the Fund, avoid the need for lump-sum contributions and to ensure that any deficiency of assets compared with vested benefits is rectified within three years.
Based on this strategy, the actuary recommended that as from 1 January 2009 contributions be made at 77.4 per cent of salaries of Rio Tinto's defined benefit members. Contributions to the Fund by member companies for 2009 are estimated to be $206.3 million.
Net financial position of the plan
In accordance with AAS25 Financial Reporting by Superannuation Plans the plan's net financial position is determined as the difference between the present value of the accrued benefits and the net market value of plan assets. This was published in the most recent Financial Report of the superannuation fund (30 June 2008) based on the last actuarial review of the accrued benefits (as at 30 June 2008) as an excess of assets over accrued benefits of $5.0 million.
Note 36 Related parties
The consolidated entity operates, through a Management Services Agreement with Rio Tinto Coal Australia Pty Limited ("RTCA"), an integrated approach to managing and organising its operating companies. Directly attributable costs are charged to Coal & Allied and costs that are incurred by RTCA on behalf of Coal & Allied are charged based on an estimate of time spent providing the service.
(a) Parent entities
The immediate parent entity is Australian Coal Holdings Pty Ltd which at 31 December 2008 owned 75.71 per cent (2007: 75.71 per cent) of the issued ordinary shares of Coal & Allied. The ultimate parent entity is Rio Tinto Limited which at 31 December 2008 owned 75.71 per cent (2007: 75.71 per cent) of the issued ordinary shares of Australian Coal Holdings Pty Ltd.
(b) Ownership interests in related parties
Interests held in the following classes of related parties are set out in the following notes:
(i) associates - note 30
(ii) joint venture interests - note 31
(iii) jointly controlled entities - note 32
(c) Key management personnel
Disclosures relating to key management personnel are set out in the directors' report.
(d) Transactions within the wholly-owned group
Coal & Allied is the parent entity in the wholly-owned consolidated entity comprising the company and its wholly-owned controlled entities. Loans to/ from controlled entities are set out in note 9 and note 18.
(e) Transactions with other related parties
All transactions with other related parties are made on normal commercial terms and conditions.
Note 39 Remuneration of auditors
During the year the following fees were paid or payable for services provided by the auditor of the parent entity.
Note 40 Share-based payments
Coal & Allied participates in a number of share-based payment plans administered by Rio Tinto Limited, which are described in detailed in the Remuneration Report. These plans have been accounted for in accordance with the fair value recognition provisions of AASB2, 'Share-based Payments' which means that AASB2 has been applied to all grants of employee share-based payments that had not vested as at 1 January 2004.
The fair value of share options is estimated as at the date of grant using a lattice-based option valuation model. The significant assumptions used in the valuation model are disclosed below. Expected volatilities are based on the historical volatility of Rio Tinto's share returns under the United Kingdom ("UK") and Australian listings. Historical data were used to estimate employee turnover rates within the valuation model. Under the SOP, it is assumed that after options have vested, 20 per cent per annum of participants will exercise their options when the market price is at least 20 per cent above the exercise price of the option. Participants in the SSP are assumed to exercise their options immediately after vesting. The implied lifetime of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate used in the valuation model is equal to the yield available on UK and Australian zero-coupon government bonds (for plc and Limited options respectively) at the date of grant with a term equal to the expected term of the options.
(a) Mining Companies Comparative Plan ("MCCP")
Under this plan, executive directors and eligible senior executives are granted a conditional right to receive shares or the equivalent cash value subject to the satisfaction of performance conditions approved by the Rio Tinto Remuneration committee. Awards are not pensionable. Senior executives also participate in the plan at appropriate levels of award.
Awards under this plan are accounted for in accordance with the requirements applying to cash-settled share-based payment transactions. If any awards are ultimately settled in shares, the liability is transferred direct to equity as the consideration for the equity instruments issued. The grant date fair value of the awards is taken to be the market value of the shares at the date of award reduced by 50 per cent for anticipated relative TSR performance. In addition for the valuations after 2005 the market value is reduced for non-receipt of dividends between measurement date and date of vesting. Forfeitures are assumed prior to vesting at 3 per cent per annum of outstanding awards. In accordance with the method of accounting for cash-settled awards, fair values are subsequently remeasured each year to reflect the number of awards expected to vest based on the current and anticipated TSR performance.
A summary of the status of shares granted under the share plan at 31 December 2008, and changes during the year, is presented below.
The cash-settled MCCP liability as at 31 December 2008 is $0.1 million (2007: $0.3 million) and relates only to those executives who are directly employed by Coal & Allied.
The weighted average remaining contractual life of share options outstanding at the end of the financial period was 1.0 year (2007: 1.1 years).
(b) Management Share Plan ("MSP")
The Management Share Plan was introduced in 2007 and is described in the Remuneration Report. The awards will be settled in equity including the dividends accumulated from date of award to vesting. The awards are accounted for in accordance with the requirements applying to equity-settled share-based payment transactions. The fair value of each award on the day of grant is set equal to share price on the day of grant. Forfeitures are assumed prior to vesting at 3 per cent per annum of outstanding awards.
A summary of the status of shares granted under the share plan at 31 December 2008, and changes during the year, is presented below.
The weighted average share price at the date of exercise of options exercised regularly during the year ended 31 December 2008 was $nil (2007: nil). The weighted average remaining contractual life of share options outstanding at the end of the period was 2.8 years (2007: 3 years).
(c) Share Option Plan ("SOP")
An annual grant of options to purchase shares in the future at current market prices at date of grant is made to executive directors and eligible senior executives.
The Group has a policy of settling these awards in equity, although the participants at their discretion can offer a cash alternative. The awards are accounted for in accordance with the requirements applying to equity-settled share-based payment transactions. The performance conditions in relation to Total Shareholder Return have been incorporated in the measurement of fair value for these awards by modelling the correlation between Rio Tinto's TSR and that of the index. The relationship between Rio Tinto's TSR and the index was simulated many thousands of times to derive a distribution which, in conjunction with the lattice-based option valuation model, was used to determine the fair value of the options.
A summary of the status of options granted under the plan at 31 December 2008, and changes during the year, is presented below:
The weighted average share price at the date of exercise of options exercised regularly during the year ended 31 December 2008 was $138.10 (2007: $102.04). The weighted average remaining contractual life of share options outstanding at the end of the period was 3 years (2007: 3 years). The weighted average fair value, at grant date, of options granted during the year was $nil (2007: $14.37).
The model inputs for options granted during the year ended 31 December 2008 included:
(i) options are granted for no consideration and have a three year life
(ii) exercise price: nil options granted in 2008 (2007: $75.12)
(iii) grant date: nil options granted in 2008 (2007: 13 March 2007)
(iv) expiry date: nil options granted in 2008 (2007: 13 March 2017) subject to the satisfaction of a graduated performance conditions set for the Remuneration committee
(v) share price at grant date: nil options granted in 2008 (2007: $75.57)
(vi) expected price volatility of the company's shares: nil options granted in 2008 (2007: 27.0 per cent)
(vii) expected dividend yield: nil options granted in 2008 (2007: 2.2 per cent)
(viii) risk-free interest rate: nil options granted in 2008 (2007: 5.8 per cent)
The expected volatility is based on the historical volatility (based on the remaining life of the options), adjusted for any expected changes to future volatility due to publicly available information.
(d) Employee Share Savings Plan ("SSP")
Awards under these plans are settled in equity and accounted for accordingly. The fair value of each award on the day of grant was estimated using a lattice-based option valuation model, including allowance for the exercise price being at a discount to market price.
All "qualifying employees" who have had six months continuous employment with a Rio Tinto Group company at the date of offer and who are not under notice of termination and who do not participate in any other Rio Tinto savings related share scheme, are eligible to participate in the SSP. The number of options issued to an employee is based on the fixed month savings amount as selected by the employee when joining the SSP, multiplied by the months in the selected savings period, plus savings account interest earned, the total of which is divided by the exercise price.
Options granted under the SSP are exercisable from 1 January following either the third or fifth anniversary of the grant, depending on the savings term nominated by the employee. If an employee leaves the Rio Tinto Group, a proportion of the options may be exercised early in certain circumstances. Options expire in six months after the exercise date. Options have no voting rights to dividends until they are exercised and shares issued. Shares provided under the SSP rank equally with other fully paid shares on issue.
A summary of the status of options granted under the plan at 31 December 2008, and changes during the year, is presented below:
The weighted average share price at the date of exercise of options exercised regularly during the year ended 31 December 2008 was $128.19 (2007: $81.13). The weighted average remaining contractual life of share options outstanding at the end of the period was 3.92 years (2007: 3.86 years). The weighed average fair value, at grant date, of options granted during the year was $5.15 (2007: $34.13).
The model inputs for options during the year ended 31 December 2008 included:
(i) options are granted for no consideration and have a three or five year life
(ii) exercise price: $82.19 (2007: $79.27)
(iii) grant date: 6 October 2008 (2007: 6 October 2007)
(iv) expiry date: 3 year plan - 1 July 2012, 5 year plan - 1 July 2014 (2007: 3 year plan - 1 July 2011,
5 year plan - 1 July 2013)
(v) share price at grant date: $66.01 (2007: $106.28)
(vi) expected price volatility of the company's shares: 31.0 per cent (2007: 28.0 per cent)
(vii) expected dividend yield: 3.1 per cent (2007: 1.4 per cent)
(viii) risk-free interest rate: 4.6-5.0 per cent (2007: 5 year plan 6.5 per cent, 3 year plan 6.5 per cent)
The expected volatility is based on the historical volatility (based on the remaining life of the options), adjusted for any expected changes to future volatility due to publicly available information.
(e) Expenses arising from share-based payment transactions
Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows:
| Consolidated | Consolidated | Parent entity | Parent entity | |
| 2008 $m | 2007 $m | 2008 $m | 2007 $m | |
| Options issued under employee option plan |
1.2 |
1.8 |
- |
- |
Note 41 Events occurring after the balance sheet date
Other than as disclosed in this report, there has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the company, to affect significantly the operations of the Group entity, the results of those operations, or the state of affairs of the Group, in future financial years.
