Mining industry in Mexico - Deloitte US
Transcript of Mining industry in Mexico - Deloitte US
Mining industry in Mexico
May 2012Vancouver, Canada
2 © Deloitte & Touche LLP and affiliated entities.
Highlights
A large country…•Population:109million(World’s11thlargest)•Area:2.0millionkm(World’s5thlargest)•GDP:$1.0trillion(Latam´s2ndlargest)•GeographicalproximitytotheUnitedStates(“US”)
… with a strong economy…•Politicalstability
•RealGDPgrowth:1.5%(2008),5.5%(2010)
•Inflation:6.5%(2008),3.6%(2009),4.4%(2010)
•Rating:Baa1(Moody’s),BBB(Fitch)
•Foreigndirectinvestment:$27billion(2008),$16billion(2009),$20billion(2010)
… and an attractive financial market…•125listedcompanieswithover$802billionmarketcap
•Thecompanieslistedinthestockexchangerepresentapproximately69%ofMexico´stotalGDP
•Continuedcreditgrowthremainsakeyfactorexplainingtheexpectedincreaseinprivateconsumptiongrowth
•Bankfinancingisprovidingsupporttoeconomicgrowth,particularlyasexchangeratevolatilitymaybedrivingsomecompaniestoincreasetheirborrowinginlocalcurrency
Source:SIEM
Geographic overview by number of companies
México - Overview
2,088
203 154 41
1,034
370
-
500
1,000
1,500
2,000
2,500
Brazil Chile Peru Uruguay Mexico Argentina
Gross Domestic Product 2010 (US$Bn)
GDP - Latin America Comparison
Source:DeloitteResearch(fromthedataoftheEIU)
Mining industry in Mexico
0 to 4,499
4,500 to 9,900
10,000 to 49,900
More than 50,000
Mexico, a country with a mining history, still weighs amongst the world’s largest metal producers.
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Breakdown of the Mexican mining production - 2010
Mining industry in Mexico
Silver Fluorite Bismuth Celestite Sodium sulfate 1st 2nd 3rd 3rd 3rd 19.0% 19.5% 12.9% 3.2% 5.6%
Wollastonite Lead Molybdenum Diatomite Cadmium 4th 5th 5th 5th 6th 8.3% 4.8% 4.6% 5.0% 6.3%
Graphite Baryta Salt Plaster Manganese 7th 7th 7th 7th 8th 0.6% 1.9% 3.2% 3.2% 1.4%
Zinc Gold Feldspar Sulfur Copper 8th 11th 11th 11th 12th 3.9% 3.0% 3.9% 2.8% 1.7%
Iron Phosphate 14th 14th 0.5% 0.8%
Source: Mineral Commodity Summaries, U.S. Geological Survey, 2011 INEGI
Source: INEGI
11,786
4,299
4,716
5,651
6,937
7,088
14,170
22,696
28,993
36,288
5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
Other
Lead
Molybdenum
Coal
Coke
Iron
Zync
Copper
Silver
Gold
Value of the Mexican mining production - 2010
Mexico’s position in mining production - 2010Mining Industry in Mexico
Mining sector in Mexico•Thecountry’sgeologicalpotentialisstillgrowing,attractingmorethan280nationalandforeigncompaniestostartnewexplorationprojects,mainlyinthenorthernstates(Sonora,ZacatecasandChihuahua)
•Attheendof2010,theminingsectorrepresentedmorethan8%ofMexico’sGDP.
•During2010,thecountryregainedtheworld´sfirstplaceinsilverproductionandalsorecordedmajorproductionofcopper,goldandzinc.
Breakdown of the Mexicanmining production - 2010
Gold26%
Silver20%
Copper16%
Zync10%
Iron5%
Coke5%
Coal4%
Lead3%
Molubdenum3%
Other8%
Value of the Mexican mining production - 2010 (Millions of pesos)
Source:INEGI
Source:MineralCommoditySummaries,U.S.GeologicalSurvey
Source:INEGI
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Mining industry in Mexico
Canada in Mexico•Canadarepresents75%ofthetotalforeigninvestmentrelatedtotheminingsectorinMexico.
•OfthetotalforeignminingcompaniesinMexico,73%areCanadian,representing44%ofCanada’stotalinvestmentinMexico.
Stock Market•AsofDecember2010,therewere141MexicancompanieslistedintheTorontoStockExchangeVenture(TSXV).
•AsofDecember2010,therewere59MexicancompanieslistedintheTorontoStockExchange(TSX).
•AccordingtothepresidentoftheMexicanStockExchange(BMV),LuisTellez,theBMVisworkingwiththeTSXtoreviewitslistingrulesinordertopromotethelistingamongsmallcompaniesinMexicoandCanada.
•TheCanadianambassadorinMexico,GuillermoRischchynski,statedthattheregulationstothemininglaw,havecontributedtothesuccessoftheCanadianminingprojectsinMexico.
Impact of Canada in the Mexican mining sector
2009 2010 2011
Total M&A Transactions 25 44 48
Canada as a Buyer 15 24 20
%ofTotalTransactions 60.0% 54.5% 41.7%
Mexico as a Buyer 5 10 8
%ofTotalTransactions 20.0% 22.7% 16.7%
Source:CapitalIQ
Main companies
AgnicoEagle FirstMajestic Goldcorp
AlamosGold FronteraCopper PanAmericanSilver
FarallonResources GammonLake TeckCominco
Canadian Companies in Mexico
Investment in the mining industry
Local and Foreign Investment•Intermsofmininginvestmentattraction,MexicoranksfourthintheworldandfirstinLATAM.
•During2010,totalinvestmentrelatedtotheminingindustryinMexicoincreasedby16%toUS$3.3bn.Investmentin2007-2010periodwasUS$11.9bn.
•In2010,theglobalinvestmentrelatedtominingexplorationaccountedforUS$11.5bn,anincreaseof45%comparedto2009.
•70%oftotalexplorationinvestmentintheMexicanminingindustryismadebyforeigncompanies;however,60%ofthetotalproductionvalueisgeneratedbyMexicancompanies.
Source: Cámara Minera de México
Mining sector investment - activity breakdown(US$ millions)
970
707 663 485 491
1,681
1,077
848 760
365
$0
$400
$800
$1,200
$1,600
$2,000
Equipment acquisition
Expansion projects
Exploration projects
New projects Other
2010 2011E
Source: Cámara Minera de México
Investment in mining exploration - 2010
70%
30%
Foreign
Mexican
Source: Cámara Minera de México
Local & foreign investment(US$ millions)
258 348585
9121,257
2,156
3,656
2,858
3,316
4,731 4,561
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E
Investment in mining exploration (2010)
Local & Foreign Investment (US$ millions)
Mining Sector Investment- Activity Breakdown (US$ millions)
Source: Cámara Minera de México
Mining sector investment - activity breakdown(US$ millions)
970
707 663 485 491
1,681
1,077
848 760
365
$0
$400
$800
$1,200
$1,600
$2,000
Equipment acquisition
Expansion projects
Exploration projects
New projects Other
2010 2011ESource:CámaraMineradeMéxico
Source:CámaraMineradeMéxico
Source:CámaraMineradeMéxico
M&A Canada-Mexico
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Impact of Canada in the Mexican mining sector
2009 2010 2011
Total M&A Transactions 25 44 48
Canada as a Buyer 15 24 20
%ofTotalTransactions 60.0% 54.5% 41.7%
Mexico as a Buyer 5 10 8
%ofTotalTransactions 20.0% 22.7% 16.7%
Main companies
AgnicoEagle FirstMajestic Goldcorp
AlamosGold FronteraCopper PanAmericanSilver
FarallonResources GammonLake TeckCominco
Canadian Companies in Mexico
M&A Canada-Mexico
Mining in Mexico - Top tax issues to keep in mind
Upcoming presidential elections
MexicowillhavepresidentialandcongresselectionsinJuly2012andthenewpresidentwillenterintoofficeonDecember1,2012.Atthistime,thereisnoclearexpectationastowhowillwin.
OneofthemajorissueseverypartyseemstoagreeuponisthatthereisneedforintegraltaxreforminMexicothatwouldshakeupthecurrentsystem.However,thelegislatorshavenotbeenabletoarrivetoaconsensusastothedetailsofthereform.Weexpectthetalksonthismattertointensifyoncethenewregimecomesintopower,andiftherulingpartyalsoobtainsmajorityinCongress,thereisahigherchancethatsomeofthesereformsmighttakeplace.
Mining royalty discussions
UnlikeotherLatinAmericanjurisdictionssuchasChile,Peruandothers,Mexicodoesnotcurrentlyhaveanyminingtaxes.WehaveseenproposalsintheearlystagesofdiscussionforanewminingtaxinMexico;howeverthesehavenotpassedtheinitialstages.TheseinitiativesintheMexicanCongressaskfor4%ongrossrevenue,3%onEBITDA,andalsoanunassignedratetothetotalmineralsalesbasedonanaveragemarketprice.
Eventhoughtheseroyaltyproposalshavenothadsuccess,theinternationaltrendintheminingindustryhasbeentoenactorenhanceroyalties,soitmaybejustamatteroftimeuntilMexicofollowsthetrend–butnotuntilthenewregimecomesintooffice.
Permanent establishments
Significantprojectsundertakenbynon-residentsinMexicowithouttheuseofaMexicansubsidiarycorporationcanresultinthenon-residentbeingsubjecttotaxinMexico.TheIncomeTaxLawand/ortaxtreatiesraisethe
thresholdofactivitythatneedstobereachedinorderforthenon-residenttobetaxableinMexico,requiringthepresenceofa“permanentestablishment”(“PE”).IfsignificantprojectsareundertakeninMexico,thepossibilityoftaxationinMexicoshouldbeexamined.
Employee tax residency
Itiscommonforexecutivesfromanon-residentparentcompanytotravelintoMexicotooverseeoperations.Particularlywhenthesevisitsexpandtoseveralweeksduringtheyear,theremightbeaneedtoreviewtheirimmigrationstatusintoMexicoaswellasthetaxresidencyastherecouldbeelementstostatethattheyhavebecometaxresidentsofMexico.
IftherearesignificantdaysspentinMexico,anindepthreviewshouldbeperformedinordertotakethenecessarystepstomitigatetaxrisksfortheindividualaswellasthecompany,suchasuseofashadowpayroll,forexample.
Management fee charges from Canada to Mexico
ThereareanumberofservicesthattheCanadiancorporateofficemayperformforthebenefitoftheMexicanoperationsdirectlyfromCanada.IftheMexicancompanydidnothavethecorportateofficetoassistonthefunctionstheyperform,itmightbewillingtopayathirdpartyforthosegeological,geophysical,financial,operational,administrativeandotherservicesforexample.
ItispossibletopushdownthosecostsincurredinCanadathataretothebenefitoftheMexicanoperations,eveniftheprojectisstillinexplorationphase.Manyofthesechargesarenotsubjecttowithholdingtax.Specificdocumentationrequirements,togetherwithevidencesupportingtheservicewasactuallyrendered,areneededtobemetinordertohavefulldeductibilityofthesecosts.
Top tax issues
Our mining industry leaders have analyzed the current tax and business environment in Mexico and share the main tax related issues mining companies should take into consideration when investing in Mexico.
6 © Deloitte & Touche LLP and affiliated entities.
IVA recoveries
UnlikeotherjurisdictionsthatallowtheValueAddedTaxorIVA(acronyminMexico)toberecoveredonlyonexports,MexicanIVALawallowsforcompaniesinexplorationphasetobeabletorecouptheIVA(16%)paidonexpenses,eveniftheentityisintheexplorationphaseaslongastheyhaveafavorablebalance–whichisusuallythecaseatthisstageindevelopment.
IthasbeenourexperiencethattheMexicangovernmenthasbeenscrutinizingtherefundclaimsmoreindepththaninthepast.Asaresult,thereareconsiderabledelaysinthereimbursementoftheIVA.FulldocumentalsupportandcontinuedpersistencebeforethetaxauthoritiesiskeytobeabletogettheIVArefunded.
Differentthanwhatoccurswithotherfederaltaxeslikeincometax,VATreturnsarefiledonamonthlybasis.Thereisnoneedtowaituntiltheendofthefiscalyeartoclaimarefundonanaggregatedamount,sothetaxpayercanfilemonthlyrefundrequestsandexpeditetheprocess.
Share dispositions
Duringthisperiodofgrowth,companieshavebeenundertakingsignificantM&Aactivity,aswellasinternallyrestructuringtostreamlineoperations.Atthetimeofasharedisposition(andtheacquisition)ofaMexicanownedentity,thereareproceduresthatneedtobefollowedinMexicothatminingcompaniesinvolvedinshouldtakeintoconsideration.
IncaseofaMexicansharedisposition/acquisitiontransactionamongnonresidentcompaniesofMexico,thegainsareconsideredtobesourcedinMexico.Theseller’sgrossproceedsaretaxedat25%,withnodeduction.However,thereisapossibilitytobetaxedon30%ofthenetgain,throughcertaintimesensitivetaxfilings.Onthebuyerside,itisrecommendedtocheckthatthesellercomplieswiththeserequirementssinceifthisisnotthecasetheMexicanentitycouldbejointlyliableforanyomittedtax.
Option contracts
Thetaxtreatmentonanoptioncontracttobuyamineralpropertyasopposedtoacquiresharesisvastlydifferent.Furthermore,ifamineralpropertyoptioncontractiscelebratedwithanindividual,asopposedwithaMexicancorporation,theremaybeISRandIVAwithholdingobligationsbytheholderoftheoptiondependingonthetaxregimeoftheindividual.
Tax Consolidation regime
IftheexplorationandoperatingactivitieswithinagroupinMexicoareinseparatelegalentities,theirtaxableprofitsandlosseswouldbeseparateaswell.Tooffsetthegainsinonelegalentitywiththelossesintheotherone,theconsolidationregimemightbeagoodfit.
AnauthorizationbytheMexicanTaxAuthorities(SAT)isneededinordertoenforcethebenefits.Theentitywiththelossesmusthaveprofitsofitsowninthenext5to6years;ifthatisnotthecase,thenthebenefitsoftheconsolidationwouldbereversedandinessence,obtaininga5yeartaxdeferral.
Mining in Mexico - Top tax issues to keep in mind
Top tax issues
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Regular tax compliance
Mexicohasnumeroustaxcomplianceresponsibilitiesthatneedtobeobserved.Someexamplesthesearetheannualtaxreturn(March31),theInformationReturnwherethewithholdings,relatedpartytransactionsandotherinformationisreported;thesocialsecurityremittances(monthlyandbimonthlytype),IVAreturns(monthly),aswellasseveralformalitiestocomplywithatthetimeofissuinganinvoiceortobeverifyingwhenreceivinganinvoicefromsuppliersorvendors;theMexicantaxregimeisstillaformoversubstancesystem.
Someentitiesareobligatedtofilethespecialtaxreport(Dictamen)byJune,withasignoffbyanauthorizedCPA.Thereisathresholdofrevenues($34.8MMXP),assets($69.6MMXP)oremployees(300)thattriggerthisobligation.Additionally,thereisanannualSocialSecurityreportthatismandatoryforcompanieswithover300employees.RecentPresidentialdecreeshavegrantedtheabilitytooptoutofthesetworeportsinexchangeforinformationtobefiledbythetaxpayer.
Leverage opportunities
DependingonthespecificsituationofaCompany,suchasthestageofthebusiness,cashrequirementsandorganizationalstructureamongothers,theremaybepossibilitiestoincreaseinternaldebtleverageintoMexicothustakingadvantageofthetaxshieldleverageprovides.Evenattheexplorationstage,interestchargescouldbeputinplace,dependingonthesituation.Properdocumentationandsupportmustbepreparedinordertoimplementitefficiently.ThetreatytaxwithholdingrateoninterestpaymentsfromMexicancompaniestoaresidentofCanada(andtomanyothernon-residentsofMexicoifthereisataxtreaty)is10%ingeneralwithsomespecificexceptions.
Exploration expenses current year deduction
Theexplorationexpensesgeneraltreatmentisa10%amortizationoncapitalizedexpenses.However,theMexicanlegislationallowsforthecurrentyearexpenseoftheexplorationexpensesincurredinthelocalizationandquantificationofmineraldepositstobefullydeductibleinsaidfiscalyear.Ontheotherhand,itisimportanttobalancethedecisionofmakingthisoptionagainstfutureexpectedrevenuestreamsasthetaxlossesgeneratedbytheseexpensescanonlybecarriedforward(nocarrybackallowed)foraperiodof10years(inflationaryadjustmentsapplyfortaxpurposesonlytothisandotheritems).
Immediatedepreciationopportunities:AspartofthespecialtaxincentivesthattheMexicanTaxLegislationprovides,thereisaspecialincentiverelatedtotheacquisitionofnewfixedassets.70%to87%oftheirvaluecanbeclaimedastaxdepreciationinthefirstyearofacquisition.Theremainingbalancestayswithoutdeduction.Insomecases,thecashtaxsavingsnowcomparedtotheNPVofthenon-depreciatedamountishigher.Certainsupportisneededtobeabletoapplythisincentive.
Everycasecouldhavedifferentfactpatterns,soourminingindustryprofessionalsareabletoassistyouintheseandanyotherissuesthatyouandyourcompanymayneed.
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Mining in Mexico - Top accounting issues to keep in mind
The mining industry in Mexico is flourishing. Numerous and significant investments, domestic and foreign, have poured into the industry over the last several years. Deloitte has been very active in the industry to help its clients.
First-time adoption of IFRS and potential challenges in subsequent Years
Potential implications of adopting IFRS at a statutory level in MexicoManycompaniesareevaluatingthepossibilityofadoptingIFRSatastatutorylevelinMexicotoaligntheirlocalaccountingpolicieswiththoseoftheirparentcompany.Therearemanybenefitsassociatedwiththisdecision;howeveritisimportanttofullyunderstandallthepotentialimplicationsofIFRSadoptiononastatutorylevel(tax,legal).
Principal differences between Mexican Financial Reporting Standards (“MFRS”) and IFRSWhilemanysubsidiariesofpubliccompaniesreportIFRStotheirparentcompaniesforpurposesofissuingconsolidatedfinancialstatements,localmanagementhasoftenbeentrainedfromanMFRSperspectiveandthereforeitisimportanttomaintainsoundcontrolsandprocedurestoensuretheidentificationandadjustmentofpotentialdifferencesbetweenMFRSandIFRS.SomeofthemostcommondifferencesbetweenMFRSandIFRSapplicabletotheminingindustryinclude:impairmentoflong-livedassetsoncertainitems,valuationandmeasurementoffinancialinstruments,recognitionofinflationeffects,effectsofforeignexchangerates,employeebenefits,deferredincometaxes;componentizationofproperty,plantandequipmentandsignificantdisclosuredifferences.
Involving an IFRS specialist can help support local management CompaniesadoptingIFRSfacemanyhurdlesandmaintainingIFRScompliantfinancialstatementsinsubsequentyearscancontinuetopresentunforeseenchallengesgiventhesignificantchangesinaccountingstandardsbeingcontemplatedbytheInternationalAccountingStandardsBoard(“IASB”).ManyIFRSconversionprojectswereledbycorporatemanagementandbecauseofthisariskofthatlocalmanagementisnotfullypreparedtocomplywithIFRSarises.ThereisaneedforIFRStrainingforlocalmanagement
andtherecanbemanybenefitsofinvolvinganexternalIFRSadvisorwhospeaksSpanishandunderstandsthechallengesofworkinginMexico.
Mineral interests
IFRS 6: Exploration for and evaluation of mineral assetsMineralinterestsrepresentasignificantaccountbalanceinaminingentity’sfinancialstatementsandtherearetechnicalanddetailedaccountingrequirementsimpactingtheindustryasitrelatestotheiraccountingdependingonthestageofanentity’sminingoperations.
AnentityshalltreatexplorationandevaluationassetsasaseparateclassofassetsandmakethedisclosuresrequiredbyeitherIAS16(PP&E)orIAS38(Intangibles)consistentwithhowtheassetsareclassified.IFRS6requiresexplorationandevaluationassetstobemeasuredoninitialrecognitionatcost,suchas:acquisitionofrightstoexplore;topographicalandgeologicalstudies;exploratorydrilling;sampling;andactivitiesinrelationtoevaluatingthetechnicalfeasibilityandcommercialviabilityofextractingamineralresource.
Anentityshoulddevelopanaccountingpolicyforthetreatmentofexplorationandevaluationexpenditures,includingborrowingcosts,andapplyitconsistently.
IAS 16: Componentization of property, plant and equipmentIAS16Property,PlantandEquipmentplacesmoreemphasisthanMFRSona“componentization”approachtodepreciation,underwhichcostsareallocatedto“significantparts”ofanassetandeachpartisseparatelydepreciated.Forexample,largecomponentsofamillthatbedepletedatadifferentratefromthemillshouldbeseparatelydepreciated.ThedeterminationofwhatlevelofcomponentstoseparatelyaccountforwillrequiresomethoughtasIAS16alsoprovidesexplicitguidanceontherecognitionoflossesonthereplacementofundepreciatedpartsofassets.
Top accounting issues
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IAS 36: Identification of impairment indicatorsInmanyinstances,theevaluationofimpairmentindicatorsandimpairmenttestingisperformedataconsolidatedlevelandthereforecarefulcommunicationisnecessarywithlocalmanagementtoensureallpotentialissuesarebeingconsidered.
IFRIC 20: Accounting policy for stripping production phase of a surface mineIFRIC20,StrippingCostsintheProductionPhaseofaSurfaceMineiseffectiveJanuary1,2013andrequiresthatthecostsofstrippingactivitytobeaccountedforinaccordancewiththeprinciplesofIAS2Inventoriestotheextentthatthebenefitfromthestrippingactivityisrealizedintheformofinventoryproduced.
Also,thecostsofstrippingactivitywhichprovidesabenefitintheformofimprovedaccesstoorearerecognizedasanon-current‘strippingactivityasset’wherethefollowingcriteriaaremet:itisprobablethatthefutureeconomicbenefit(improvedaccesstotheorebody)associatedwiththestrippingactivitywillflowtotheentity;theentitycanidentifythecomponentoftheorebodyforwhichaccesshasbeenimproved;andthecostsrelatingtothestrippingactivityassociatedwiththatcomponentcanbemeasuredreliably.
Whenthecostsofthestrippingactivityassetandtheinventoryproducedarenotseparatelyidentifiable,productionstrippingcostsareallocatedbetweentheinventoryproducedandthestrippingactivityassetbyusinganallocationbasisthatisbasedonarelevantproductionmeasure.
Astrippingactivityassetisdepreciatedoramortisedonasystematicbasis,overtheexpectedusefullifeoftheidentifiedcomponentoftheorebodythatbecomesmoreaccessibleasaresultofthestrippingactivity.Theunitsofproductionmethodisusedunlessanothermethodismoreappropriate.
Revenue
IAS 18: Revenue recognition regarding the sale of dore bars and concentratesMFRSappliestheguidanceinIAS18,Revenueforpurposesofestablishingrevenuerecognitionaccountingpolicies.AccordingtoIAS18,revenueismeasuredatthefairvalueoftheconsiderationreceivedorreceivable.Revenueisgenerallyrecognizedwhenitisprobablethattheeconomicbenefitwillflowtotheentity,andwhentheamountofrevenuecanbemeasuredreliably,andwhensignificantrisksandrewardshavebeentransferredtobuyer,sellerhaslosteffectivecontrol,andcostcanbereliablemeasured.Productpricingisdeterminedwhenrevenueisrecognizedbyreferencetoactiveandfreelytradedcommoditymarkets.
Asitrelatestotheminingindustrytherearecommonconsiderationsfordefiningthemomentwhenrevenuerecognitionoccurs,whichgenerallydependsonthetermsoftheagreementswiththecustomer.Ordinarily,revenuesfrommetalconcentratearesubjecttoadjustmentuponfinalsettlementofmetalprices.Finalweightsandassaysareadjustedonfinalsettlementwhichcantakemonthsafterthedeliverydate.Anadjustmenttorevenuesbasedonquotedforwardpricesfortheexpectedsettlementperiodisgenerallyrecordedtoreflecttheconsiderationtobereceived.Additionally,adjustmentsforweightsandassaysarerecordedwhenresultsarereasonablydeterminableoronfinalsettlement.Asaresult,thevaluesoftheconcentratereceivablechangesastheunderlyingcommoditymarketpricesvary.Thiscomponentofthecontractisconsideredtobeanembeddedderivative,whichisrecordedatfairvaluewithchangesinfairvaluerecordedinrevenuesandtradereceivables.Refiningandtreatmentchargesarenettedagainstrevenuesfrommetalsconcentratesales.
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Mining in Mexico - Top accounting issues to keep in mind
Top accounting issues
Internal control impacts throughout the revenue cycleCertainsignificantrisksaroundtherevenuecycleinclude:revenuefromthesaleofmetalscanbemisstatedduetorevenuesbeingrecordedatinappropriatemetalpricesandexchangerates,revenuefromthesaleofmetalscanalsobeinaccuratelyrecordediftheyarenotadjustedtoreflectthespecifictermsofestablishedsalescontracts(e.g.,ifthespecificmetalpriceindexandexchangerateindexesasstipulatedinthecontractarenotused);revenuefromthesaleofmetalcanbemisstatedduetousingincorrectmetalpricesandincorrectsettlementdatestorecordadjustmentsbasedonthelagtimeofthesettlementstipulatedintheestablishedcontract(duetofinalsettlementofweightsandassays);revenuefromthesaleofmetalscanbemisstatedduetosalestransactionsrecordedintheincorrectperiod,duetotimingofshipmentsandtherelevantmetalpricesontherecordingdatecomparedtotheactualtransactiondate;and,consolidatedrevenuecanbemisstatedduetointercompanysalesbetweentheparentcompanyanditsMexicansubsidiariesnotbeingcorrectlyeliminatedinconsolidation.
Provisions and contingencies
IAS 37: Accounting for Mexican legal and tax contingenciesAccordingtoIAS37Provisions,ContingentLiabilitiesandContingentAssetsaprovisionshallberecognizedwhenandonlywhen:a)theentityhasapresentobligation(legalorconstructive)asaresultofpastevents;b)itisprobablethatanoutflowofresourcesembodyingeconomicbenefitswillberequiredtosettletheobligationandc)asufficientlyreliableestimateoftheamountoftheobligationcannotbemade.Recognitionofprovisionsisnotallowedifalltheseconditionsarenotsatisfied.
Duetotheeconomic,politicalandsocialenvironmentintheminingindustryinMexico,itisnecessarytocontinuallymonitorandassessthepotentiallegalandtaxcontingenciesandtheirimpactsfrombotharecognitionanddisclosureperspectiveateachfinancialreportingperiod.
Effects of change in foreign exchange rates
IAS 21: Foreign currency mattersAforeignoperationisanentitythatisasubsidiary,associate,jointventureorbranchofareportingentity,theactivitiesofwhicharebasedorconductedinacountryorcurrencyotherthanthoseofthereportingentity.IAS21
prescribestheaccountingtreatmentforanentity’sforeigncurrencytransactionsandforeignoperations.
MostMexicanentitiesoperatingintheminingindustryhavedefinedtheirfunctionalcurrencytobetheUSdollarandthereforetheconversionfromthelocalcurrency(MXP)tothefunctionalcurrencymustbeperformedinaccordancewithIAS21.Risksexistrelatedtothisconversionprocessfromasystemsperspectiveandifacompanyperformsthisconversionusingexcel.
Income taxes
IAS 12: Deferred income taxesCurrenttaxliabilitiesandassetsarerecognisedforcurrentandpriorperiodtaxes,measuredattheratethathasbeenenactedorsubstantiallyenactedbytheendofthereportingperiod.Atemporarydifferenceisadifferencebetweenthecarryingamountofanassetorliabilityanditstaxbase.Deferredassetsandliabilitiesarenotdiscountedtoreflectthetimevalueofmoney.
Deferredtaxliabilitiesarerecognisedforthefuturetaxconsequencesofalltaxabletemporarydifferenceswiththreeexceptions:wherethedeferredtaxliabilityarisesfromtheinitialrecognitionofgoodwill;theinitialrecognitionofanasset/liabilityotherthanabusinesscombinationswhich,atthetimeofthetransaction,doesnotaffecteithertheaccountingorthetaxableprofit(thisexceptionoftenappliestoMexicancompaniesforthepurchaseofvehiclesandforthoseentitiesthattakeanimmediatedeductionregardingthepurchaseofqualifyingproperty,plantandequipment);and,differencesarisingfrominvestmentsinsubsidiaries,branchesandassociatesandinterestsinjointventureswheretheentityisabletocontrolthetimingofthereversalofthedifferenceanditisprobablethatthereversalwillnotoccurintheforeseeablefuture.
Deferredtaxassetsarerecognisedfordeductibletemporarydifferences,unusedtaxlosses,andunusedtaxcredits,totheextentthatitisprobablethattaxableprofitwillbeavailableagainstwhichthedeductibletemporarydifferencescanbeutilized.NetoperatinglosscarryforwardsinMexicoexpirein10years.
Internal control impacts throughout the income tax cycleThemostsignificantrisksaroundtherevenuecycleare:Currenttaxprovisionanddeferredtaxassetorliabilityismisstatedduetoincorrecttaxratesbeingused(Mexican
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taxratesarecurrentlydecreasingandwillreach28%in2014);amathematicalerrorinthecalculation;thetaxratesuseddonotreflectthemannerortiminginwhichtheentityexpectstorecoverthecarryingamountoftherelatingassetorliability;andIncorrecttreatmentofdeductibledifferencesincalculations.GiventhecomplexityoftheMexicanTaxLaws,itisrecommendedtoinvolveanexternaladvisorasneeded.
Employee benefits
Involvement of a qualified actuary and reviewing the assumptions itilized ItisimportanttohireaqualifiedactuarywhoisfamiliarwiththerequirementsofIFRS,especiallyasitrelatestominingcompanies.Inmanycases,theactuariesinMexicoprovidemanagementwiththeirsuggestionregardingthesignificantassumptionstoutilizeforpurposesofcalculatingthefairvalueofplanassetsandpensionliabilitiesanditisimportanttoensurethatlocalmanagementchallengestheactuarialassumptionutilizedtoensuretheyreflecttheconditionsapplicabletotheCompany.
Impacts of adopting IAS 19 (2011)Currently,IAS19EmployeeBenefitsrequiresthatentitiesdetermineanaccountingpolicyfortherecognitionofactuarialgainsandlosses(usingthecorridorapproachtodefersuchamountsandrecognizethemovertheestimatedlaborlifeofemployeesortorecognizethemimmediatelywithinothercomprehensiveincome).
TheimprovementstoIAS19(2011)EmployeeBenefits,eliminatestheuseofthecorridorapproach,whichtendstodefertheactuarialgains/lossesoversubsequentperiodsandrequirescompaniestorecognizeactuarialgainsandlossesimmediatelyinothercomprehensiveincome(suchamountsareneverreclassifiedtoearnings).Additionally,itincludesimprovementstothedisclosuresofdefinedbenefitplans,amendstheaccountingforbenefitsfromtermination,includingthedistinctionbetweenthebenefitsofferedinanexchangeinserviceandthosethatprovidefortheemploymentterminationandaffecttheirrecognitionandmeasurementofthebenefitsfromtermination.Thestandardalsoclarifiestheclassificationoftheemployeebenefits,actualestimatesofmortalityrates,taxandadministrativecostsaswellasrisksandconditionalindexedcharacteristics.IAS19(2011)isapplicabletoperiodsbeginningJanuary1,2013.Earlyadoptionispermitted.
Recognition of Mexican termination benefitsDifferencesbetweenMFRSandIFRSexistwithrespecttotheaccountingforMexicanterminationbenefits,wherebysuchbenefitsaregenerallycalculatedandaccruedforpurposesofMFRSandareonlyrecognizedunderIFRSwhenaconstructiveobligationexistsandtheemployeehasbeennotifiedorhasacceptedthetermsoftheterminationbenefitstobereceived.
Interim financial reporting
IAS 34: Interim reporting matters
IAS34InterimFinancialReportingdescribestheminimumcontentforaninterimfinancialreport,andtheprinciplesforrecognitionandmeasurementincompleteandcondensedfinancialstatementsforaninterimperiod.
Entitiesarerequiredtoprovideanexplanationofeventsandtransactionsthataresignificanttoanunderstandingofthechangesinfinancialpositionandperformanceoftheentitysincetheendofthelastannualreportingperiod.Theinformationdisclosedinrelationtothoseeventsandtransactionsshouldupdatetherelevantinformationpresentedinthemostrecentannualfinancialreport.Thefollowingisanon-exhaustivelistofeventsandtransactionsforwhichdisclosureswouldberequirediftheyaresignificant:thewrite-downofinventoriestonetrealizablevalueandthereversalofanysuchwrite-down;recognitionofalossarisingfromtheimpairmentoffinancialassets,property,plant,andequipment,intangibleassets,orotherassets,andthereversalofanysuchimpairmentloss;acquisitionsanddisposalsofitemsofproperty,plant,andequipment;correctionsofpriorperioderrors;andrelatedpartytransactions.Iftherehasbeenanychangeintheentity’saccountingpoliciessincethemostrecentannualfinancialstatements,theinterimfinancialreportisrequiredtoincludeadescriptionofthenatureandeffectofthechange.
Mexicansubsidiariesofpubliccompaniesgenerallyprepareinternalreportingpackagesforpurposesofprovidingtheirfinancialinformationforpurposesofconsolidation.ExcellentcommunicationbetweentheCompany’slocalandcorporatemanagementaswellasfromtheirexternalauditorisnecessarytoavoidunforeseensurprisesduringtheyear-endcloseprocess.
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Deloitte,oneofCanada’sleadingprofessionalservicesfirms,providesaudit,tax,consulting,andfinancialadvisoryservicesthroughmorethan8,000peoplein56offices.DeloitteoperatesinQuébecasSamsonBélair/Deloitte&Touches.e.n.c.r.l.Deloitte&ToucheLLP,anOntarioLimitedLiabilityPartnership,istheCanadianmemberfirmofDeloitteToucheTohmatsuLimited.
DeloittereferstooneormoreofDeloitteToucheTohmatsuLimited,aUKprivatecompanylimitedbyguarantee,anditsnetworkofmemberfirms,eachofwhichisalegallyseparateandindependententity.Pleaseseewww.deloitte.com/aboutforadetaileddescriptionofthelegalstructureofDeloitteToucheTohmatsuLimitedanditsmemberfirms.
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Contacts
Luis LiñeroPartner,TaxMexicoCity,[email protected]
Jaime CastillaPartner,TaxMonterrey,[email protected]
Brad GordicaPartner,TaxVancouver,[email protected]
Roberto LozanoSeniorManager,TaxVancouver,[email protected]
Norma Kraay Partner,TaxToronto,[email protected]
Bruce McCarley Partner,TaxToronto,[email protected]
Carlos GonzalezDirector,TaxTorreon,[email protected]
Tax
Audit
Cesar GarzaPartner,AuditTorreon,[email protected]
Hector GarciaPartner,AuditMonterrey,[email protected]
Jim BarronPartner,AuditVancouver,[email protected]
Marshall DiazPartner,TechnicalAccountingMonterrey,[email protected]
Gerardo CastilloPartner,AuditTorreon,[email protected]
Jaime NunezManager,AuditVancouver,[email protected]
Roberto BenavidesPartner,AuditMonterrey,[email protected]
Jorge SchaarPartner,FinancialAdvisoryMexicoCity,[email protected]
Financial Advisory
Graeme FalkowskySeniorManager,FinancialAdvisoryVancouver,[email protected]