Basis of Reporting

REPORTING ENTITY

AECI Limited (“AECI” or “the Company”) is a public company domiciled in South Africa. The address of the Company’s registered office is First Floor, AECI Place, 24 The Woodlands, Woodlands Drive, Woodmead, Sandton. The consolidated Financial Statements of the Company as at and for the year ended 31 December 2011 comprise the Company and its subsidiaries (together referred to as “the Group” and individually as “Group entities” or “business entities”) and the Group’s interest in associates and jointly-controlled entities. The Group is involved primarily in the manufacture and distribution of commercial explosives, mainly to the mining sector; chemicals for the mining and manufacturing sectors; specialty fibres, mainly for industrial purposes; as well as the realisation of property assets surplus to the Group’s operational requirements.

BASIS OF PREPARATION

STATEMENT OF COMPLIANCE

The consolidated Financial Statements and the separate Financial Statements have been prepared in compliance with IFRS, AC 500, the JSE Listings Requirements and in accordance with the requirements of the Companies Act.

The following accounting Standards, interpretations and amendments to published accounting Standards, which are relevant to the Group but not yet effective, have not been adopted in the current year and will be applied in the reporting period in which they become effective:

• IFRS 9 – relating to the recognition and measurement of financial instruments (effective for annual periods commencing on or after 1 January 2015).
  
  IFRS 9 is a new Standard which will replace IAS 39. Due to the phased approach adopted to replacing IAS 39, components of both IFRS 9 and IAS 39 would have to be applied without a full understanding of the entire revised Standard and its implications. As a result, an assessment of the impact of IFRS 9 on the consolidated Financial Statements has not been performed. This assessment will be performed when all three phases have been completed or better clarity on the application of IFRS 9 is presented.
  
  
• IFRS 10 – relating to consolidated Financial Statements (effective for annual periods commencing on or after 1 January 2013).
  
  IFRS 10 is a new Standard which will replace IAS 27 and SIC-12. The Standard identifies the concept of control as the determining factor for inclusion in consolidated Financial Statements and provides additional guidance on determining control in cases where this is difficult to assess. IFRS 10, which will become mandatory for the Group’s 2013 consolidated Financial Statements, is not expected to have a significant impact on the consolidated Financial Statements, subject to the determination of the impact of IFRS 11.
  
  
• IFRS 11 – relating to joint arrangements (effective for annual periods commencing on or after 1 January 2013).
  
  IFRS 11 is a new Standard which will replace IAS 31 – Interests in Joint Ventures. The Standard focuses on the rights and obligations of the arrangement, rather than on legal form; amends the definition of joint control; specifies two types of joint arrangements, as well as defining the requirements for each type; and the methods for accounting for each type of joint arrangement. The key amendments relate to the definition of joint control; the two types of arrangements; the accounting treatment of each type of arrangement; and the concept of proportional consolidation has been removed. IFRS 11 will become mandatory for the Group’s 2013 consolidated Financial Statements. The extent of the impact of IFRS 11 has not yet been determined.
  
  
• IFRS 12 – relating to the disclosure of interests in other entities (effective for annual periods commencing on or after 1 January 2013).
  
  IFRS 12 is a new Standard addressing the disclosure requirements of all forms of interests in other entities including joint arrangements, associates, special purpose vehicles and other off-balance sheet vehicles. The Standard relates to disclosures to enable users to evaluate the nature of, and risks associated with, an entity’s interests in other entities; and the effects of those interests on the entity’s Financial Position, Financial Performance and Cash Flows. IFRS 12, which will become mandatory for the Group’s 2013 consolidated Financial Statements, is not expected to have a significant impact on the consolidated Financial Statements but will require more disclosure in respect of these interests.
  
  
• IFRS 13 – relating to guidance for fair value measurement and disclosure requirements (effective for annual periods commencing on or after 1 January 2013).
  
  IFRS 13 is a new Standard which defines fair value, establishes a single framework for measuring fair value and requires disclosure related to fair value. IFRS 13, which will become mandatory for the Group’s 2013 consolidated Financial Statements, is not expected to have a significant impact on the consolidated Financial Statements but will require expanded disclosure in respect of fair value determination.
  
  
• IAS 1 – relating to the revision of the Standard on the presentation of Financial Statements (effective for annual periods commencing on or after 1 July 2012).
  
  The amendment to IAS 1 requires grouping of items within other Comprehensive Income that may be reclassified to the profit or loss section of the Income Statement in order to assist with assessing their impact on the overall performance of an entity. The amendment to IAS 1, which will become mandatory for the Group’s 2013 consolidated Financial Statements, is not expected to have a significant impact on the consolidated Financial Statements.
  
  
• IAS 12 – relating to the revision of the Standard on income taxes (effective for annual periods commencing on or after 1 January 2012).
  
  The amendment to IAS 12 introduced a rebuttable presumption that an investment property will be recovered in its entirety through sale. The amendment to IAS 12, which will become mandatory for the Group’s 2012 consolidated Financial Statements, is not expected to have a significant impact on the consolidated Financial Statements as the Group measures investment property using historical cost.
  
  
• IAS 19 – relating to employee benefits (effective for annual periods commencing on or after 1 January 2013).
  
  The amendments to IAS 19 introduce changes to accounting for current and future obligations resulting from defined-benefit plans and amended disclosure requirements. The accounting changes relate to the recognition of remeasurements in Other Comprehensive Income and not in the Income Statement and the recognition of a net interest income or expense, which is based on the discount rate used for a plan, instead of recognising interest cost on the liabilities and expected return on plan assets. Remeasurements include actuarial gains and losses, both from experience and changes in underlying assumptions, and the difference between the interest cost and expected return on plan assets and the net interest income or expense recognised in the Income Statement. The presentation of the post-retirement benefit cost has been addressed with a requirement to separate the components of the post-retirement benefit cost into an employment component, included in operating costs, a financing component recognised in finance costs and a remeasurement component recognised in Other Comprehensive Income. Disclosures will also be expanded to include information on the characteristics of and risks associated with defined-benefit plans, identification and explanation of the effects on the Financial Statements and how defined-benefit plans affect the amount, timing and uncertainty of future cash flows. The amendments to IAS 19 will become mandatory for the Group’s 2013 consolidated Financial Statements and the extent of the impact has not yet been determined.

BASIS OF MEASUREMENT

The consolidated Financial Statements and the separate Financial Statements have been prepared on the going-concern basis using the historical cost convention, except for available-for-sale financial assets, derivative instruments, the Pension Fund employer surplus accounts and liabilities and for cash-settled share-based payment arrangements which are measured at fair value.

FUNCTIONAL AND PRESENTATION CURRENCY

The consolidated Financial Statements and the separate Financial Statements have been prepared in South African rand, which is the Company’s functional currency. All the financial information has been rounded to the nearest million of rand, except where otherwise stated.

JUDGEMENTS MADE BY MANAGEMENT AND SOURCES OF ESTIMATION UNCERTAINTY

The preparation of the Financial Statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which estimates are revised and in any future periods affected.

The Accounting Policies which have been identified as involving particularly complex or subjective judgements or assessments are as follows:

DEFERRED TAX ASSETS

Deferred tax assets are recognised to the extent that it is probable that taxable income will be available in future against which they can be utilised. Future taxable profits are estimated based on business plans which include estimates and assumptions regarding economic growth, interest and inflation and competitive forces.

ENVIRONMENTAL REMEDIATION

Estimating the future costs of environmental and rehabilitation obligations is complex and requires management to make estimates and judgements because most of the obligations will be fulfilled in the future and laws are often not clear regarding what is required. The resulting provisions are influenced further by changing technologies and political, environmental, safety, business and statutory considerations. As explained in note 15 to the Financial Statements, the Group has to apply judgement in determining the environmental remediation provision. The provision may need to be adjusted when detailed characterisation of the land is performed or when the end use is determined.

ASSET LIVES AND RESIDUAL VALUES

Property, plant and equipment, investment property and intangible assets are depreciated or amortised over their estimated useful lives taking into account residual values, where appropriate. The actual lives of the assets and residual values are assessed annually and may vary depending on a number of factors. In reassessing asset lives, factors such as technological innovation, product lifecycles and maintenance programmes are taken into account. Residual value assessments consider issues such as current market conditions, the remaining useful life of an asset and disposal values.

POST-RETIREMENT BENEFIT OBLIGATIONS

Post-retirement defined benefits are provided for certain existing and former employees. Actuarial valuations are based on assumptions which include employee turnover, mortality rates, the discount rate, the expected long-term rate of return of retirement plan assets, healthcare inflation costs and rates of increase in compensation costs. The net present value of current estimates for post-retirement medical aid benefits has been discounted to its present value at 9,25% per annum (2010: 9,0%), being the estimated investment return assuming the liability is fully funded. Medical cost inflation of 7,9% per annum has been assumed (2010: 7,1%). See note 30 to the Financial Statements.