Consolidated financial statement of JSW S.A. Capital Group for 2012

2.5. Property, plant and equipment

Property, plant and equipment are the assets:

• which are held by the Group in order to be used in the production process, in deliveries of goods and provision of services for administrative purposes,
• which are expected to be used for a period longer than one year,
• for which it is probable that the entity will obtain economic benefits in the future associated with the asset component, and
• the value of which may be reliably determined.

As at the initial recording date, property, plant and equipment is measured at the purchase price or manufacturing cost.

Upon initial recording, the purchase price (production cost) of property, plant and equipment includes the expected cost of dismantling and removing them and restoring the place where the asset component is located to its initial state; the obligation to perform those actions arises upon installation or use of the asset component. In particular, the initial value of property, plant and equipment includes the discounted liquidation cost of property, plant and equipment used in underground mining activity which, according to the applicable Geological and Mining Law Act, must be liquidated after the operations are discontinued.

The mine liquidation costs included in the initial value of property, plant and equipment are depreciated with the depreciation method used for depreciation of the property, plant and equipment to which they are related, starting from the moment the given property, plant and equipment item is commissioned for use, throughout the period set in the liquidation plan of facility groups being part of the anticipated mine liquidation schedule.

Specialized spare parts with significant initial value, the use of which is expected after a period longer than one year, are classified as property, plant and equipment. The same approach is adopted for those maintenance-related spare parts and equipment which may only be used for specific items of property, plant and equipment. Other maintenance-related spare parts of insignificant value are classified as inventories and recognized in the financial result upon their utilization.

The value of property, plant and equipment includes costs of regular and material inspections (including certification inspections) which are mandatory.

On the date ending the financial period, property, plant and equipment items are measured at purchase price or manufacturing cost plus the expected cost of dismantling and removing the property, plant and equipment item and minus the accumulated depreciation charges and impairment charges.

The subsequent expenditures are recognized in the book value of the property, plant and equipment item or captured as a separate property, plant and equipment item (where applicable) only when it is probable that the Group will obtain economic benefits from this item and the cost of this item may be measured reliably. All other expenditures towards repairs and maintenance are posted in the financial result of the financial period in which they are incurred.

Depreciation of property, plant and equipment, with the exception of operational headings, is calculated using the linear method to distribute their initial values or restated values, minus their final values, over their useful life periods, which are as follows for respective groups of property, plant and equipment:

• Buildings and structures (including capital pits) 10-65 years;
• Technical equipment and machinery 2-40 years;
• Means of transportation 5-27 years;
• Other property, plant and equipment 3-20 years.

In the case of the Parent Company, these periods may not be longer than the useful life of the mine.

Land is not depreciated.

Depreciation begins when a property, plant and equipment item is available for use. Depreciation is discontinued on the earlier of the following dates: when the property, plant and equipment item is classified as held for sale (or included in the group classified as held for sale) in accordance with IFRS 5 “Non-Current Assets Held For Sale And Discontinued Operations” or removed from the accounting records as a result of its liquidation, sale or retirement.

Depreciation charges are calculated based on the initial value of property, plant and equipment minus their estimated final value.

Certain significant component parts of property, plant and equipment (components) the useful life of which differs from the useful life of the whole property, plant and equipment item and the purchase price (manufacturing cost) of which is significant as compared to the purchase price (manufacturing cost) of the whole property, plant and equipment item are depreciated separately, using the depreciation rates reflecting the expected period of their use.

The correct application of depreciation periods and rates and the final value are subject to verification annually (in the fourth quarter) in order to make appropriate adjustments to depreciation rates in the subsequent financial years.

If the book value of a given property, plant and equipment item exceeds its estimated recoverable value then its book value is subject to an impairment charge down to the amount of its recoverable value. The principles for making impairment charges are described in Note 2.8.

Profits and losses on the sale of property, plant and equipment are determined by comparing proceeds on the sale with their book value and recognized in the financial result as other net profits/losses item.

The property, plant and equipment that is being built or installed is measured at purchase price or manufacturing cost minus any impairment charges and are not depreciated until the building process is completed.

Expensable mining pits

Upon initial recognition, mine workings that are used to access operational mining pits, i.e. expensable mining pits, are measured at the accumulated cost incurred to build them, minus the value of coal mined during their construction measured at the normative production cost of the mined coal. Capitalized cost of expensable mining pits (which are classified as prepayments and accruals) are presented in the consolidated financial statements as a separate item of property, plant and equipment. The expenditures for expensable mining pits are settled pro rata to the production of coal in respective wall areas. This is presented as depreciation in the financial result.