Auditor's opinion on the consolidated financial statements
To Shareholders and the Supervisory Board of KGHM Polska Miedź S.A.
Report on the Audit of the Annual Consolidated Financial Statements
We have audited the annual consolidated financial statements of the group (the “Group”) with KGHM Polska Miedź S.A. as the parent (the “Parent”), which comprise the consolidated statement of financial position as at December 31, 2018, and the consolidated statement of profit or loss, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory information (the “consolidated financial statements”).
In our opinion, the accompanying consolidated financial statements:
- give a true and fair view of the economic and financial position of the Group as at December 31, 2018, and of its financial performance and its cash flows for the year then ended in accordance with the applicable International Financial Reporting Standards, as endorsed by the European Union, and the adopted accounting policies;
- comply, as regards their form and content, with the applicable laws and the articles of association of the Parent.
Our opinion is consistent with the Additional Report to the Audit Committee, which we issued on March 13, 2019.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (“ISAs”) in a version adopted by the National Council of Statutory Auditors as the Polish Standards on Auditing (“PSAs”) and in compliance with the Act on Statutory Auditors, Audit Firms and Public Oversight of 11 May 2017 (the “Act on Statutory Auditors”, Journal of Laws of 2017, item 1089, as amended) as well as Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities (“EU Regulation”, Official Journal of the European Union L158). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report.
We are independent of the Group in accordance with the International Federation of Accountants’ Code of Ethics for Professional Accountants (“IFAC Code”), adopted by resolution of the National Council of Statutory Auditors, together with the ethical requirements that are relevant to the audit of the financial statements in Poland, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IFAC Code. Throughout the audit, both the key statutory auditor and the audit firm remained independent of the Group in accordance with the independence requirements set out in the Act on Statutory Auditors and in the EU Regulation.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. They encompass the most significant assessed risks of material misstatement, including assessed risks of material misstatement due to fraud. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon. We summarized our response to those risks and, where appropriate, we presented the key findings related to those risks. We do not provide a separate opinion on these matters.
|Key audit matter||How we addressed the matter|
Impairment testing of assets
In part 3 of the consolidated financial statements for the year 2018 the Group has presented disclosure about the impairment testing of the assets of the KGHM INTERNATIONAL LTD. Group, for which indicators of possible change in the recoverable amounts were identified. Tested cash generating units (CGU) includes: Sudbury Basin, the Franke mine, involvement in joint venture Sierra Gorda. The presented disclosures relates to the basis macroeconomic assumptions, other key assumptions made to estimate the fair value of assets of cashgenerating units (CGU) and the results of the test.
The Management Board of the Parent, in line with IFRS, evaluates the indications of impairment as at the end of every financial year. If there are indications of impairment, the Management Board of the Parent tests assets for impairment. The tests involve judgements as regards e.g. the adopted calculation methods as well as the need for a range of various assumptions.
As a result of the tests, performed for involvement in joint venture Sierra Gorda, the reversal of allowance for impairment on loans granted to the joint venture Sierra Gorda S.C.M. of PLN 733 million, was recognised. Results of tests performed for CGU Sudbury and CGU Franke confirmed that their fair value is equal to their carrying amounts.
We have analysed the impairment test due to the materiality of the item in the consolidated financial statements and the complexity of the issue and sensitivity of the results of the impairment test on the assumptions.
In particular, our audit procedures included:
- an analysis and assessment of the procedure of identification of indications of the impairment of assets and the correctness of the method applied to the test in line with relevant standards of financial reporting;
- verification of the mathematical correctness and methodological consistency of the evaluation model adopted by the Management Board of the Parent;
- a critical assessment of the assumptions and estimates made by the Management Board of the Parent. The key assumptions underlying the tests were made as regards the projected prices of raw materials, including copper, as well as the discount rates applied to specific production assets and projects in the preoperational phase. The evaluation was made by local internal specialists;
- an analysis of the cash flow projections and their comparison with a mine life cycle and available operational plans. We involved component’s auditors to analyse the operational assumptions of the mines and cash flow projections in the preoperational phase;
- verification of the correctness and completeness of disclosures as regards the impairment tests in the financial statements.
|Recognition of sales revenue in a correct reporting period |
In part 2 of the consolidated financial statements for the year 2018 the Group presented information about sales revenue by the range of products and by the location of end users.
The Group sells goods and products using various terms and conditions of deliveries (Incoterms) and resulting various points of transfer risk and rewards on the counterparty. Financial closing involves verification of every open selling position.
We have analysed the correctness of recognition of sales revenue over the period due to the materiality of the item in the consolidated financial statements and the exposure to the risk of deliberate misstatement.
|In particular, our audit procedures included:|
- understanding and evaluation of the internal control environment with respect to the system used to reflect the terms and conditions of transactions (Incoterms) in connection with revenue recognition and identification of the right moment of recognition of the transfer of risk and rewards;
- evaluation of the correctness of recognition of sales in the right reporting period, in line with the transfer of risk and rewards on the counterparty in line with the terms and conditions of the delivery. Verification was performed for a sample of transactions concluded as at the end of one year and beginning of another year, including bill and hold arrangements.
- evaluation of the disclosures as regards the policy of recognition and presentation of sales revenue.
Responsibilities of the Management Board and the Supervisory Board of the Parent for the Consolidated Financial Statements
The Parent’s Management Board is responsible for the preparation of consolidated financial statements which give a true and fair view of the economic and financial position of the Group and of its financial performance in accordance with the applicable International Financial Reporting Standards, as endorsed by the European Union,] the adopted accounting policies as well as the applicable laws and articles of association of the Parent, and for such internal control as the Parent’s Management Board determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the Parent’s Management Board is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Parent’s Management Board either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
The Management Board and members of the Supervisory Board of the Parent are obliged to ensure that the consolidated financial statements meet the requirements of the Accounting Act of 29 September 1994 (the “Accounting Act”, Journal of Laws of 2019, item 351). Members of the Parent’s Supervisory Board are responsible for overseeing the financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with PSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
The scope of an audit does not include an assurance about the future profitability of the Group or the effectiveness or efficiency of the Parent’s Management Board in managing the Group’s affairs at present or in the future.
As part of an audit in accordance with PSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
- identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
- obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control;
- evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Parent’s Management Board;
- conclude on the appropriateness of the Parent’s Management Board’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern;
- evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation;
- obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.
We communicate with the Parent’s Supervisory Board regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the Parent’s Supervisory Board with a statement that we have complied with relevant ethical requirements regarding independence, and that we will communicate with it all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the Parent’s Supervisory Board, we determined those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Other Information, Including the Report on the Activities
Other information includes: a report on the Group’s activities in the financial year ended December 31, 2018 (the “Report on the Activities”), together with a statement of compliance with corporate governance principles, which constitutes separate part of the Report and a non-financial information report (together: the “Other Information”).
Responsibilities of the Management Board and the Supervisory Board
The Parent’s Management Board is responsible for the preparation of the Other Information in accordance with the applicable laws.
The Management Board and members of the Supervisory Board of the Parent are obliged to ensure that the Report on the Activities, along with the separate parts, meet the requirements of the Accounting Act.
Our opinion on the consolidated financial statements does not cover the Other Information. In connection with our audit of the consolidated financial statements, our responsibility is to read the Report on the Activities and, in doing so, consider whether the Report on the Activities is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this Report on the Activities, we are required to report that fact in our auditor’s report. Additionally, under the Act on Statutory Auditors we are obliged to express an opinion on whether the Report on the Activities has been prepared in accordance with the applicable laws and whether it is consistent with the information contained in the consolidated financial statements. Furthermore, we are obliged to state whether a non-financial information statement has been prepared by the Group and to express an opinion on whether the Group has included the necessary information in the statement of compliance with corporate governance principles.
Opinion on the Report on the Activities
Based on our work performed during the audit, we are of the opinion that the Report on the Activities:
- has been prepared in accordance with Article 49 of the Accounting Act and par. 71 of the Regulation of the Minister of Finance of 29 March 2018 on current and periodic information published by issuers of securities and the rules of equal treatment of the information required by the laws of non-member states (the “Current Information Regulation”, Journal of Laws of 2018, item 757);
- is consistent with the information contained in the consolidated financial statements.
Furthermore, in the light of the knowledge and understanding of the Group and its environment obtained in the course of the audit, we have not identified any material misstatements of the Report on the Activities.
Opinion on the Statement of Compliance with Corporate Governance Principles
In our opinion, the statement of compliance with corporate governance principles contains the information referred to in par. 70.6.5 of the Current Information Regulation. We are also of the opinion that the information referred to in par. 70.6.5(c)-(f), (h) and (i) of the Regulation, as contained in the statement of compliance with corporate governance principles, is in accordance with the applicable laws and consistent with the information included in the consolidated financial statements.
Information on Non-Financial Information
In accordance with the requirements of the Act on Statutory Auditors, we would like to inform you that the Group does not prepare a non-financial information statement, relying on the exemption under Article 55.2c of the Accounting Act. In the Report on the Activities, the Group included information concerning the preparation of a separate non-financial report and its publication on the Group’s website within six months of the balance sheet date. By the date of this report, the Group had prepared a separate non-financial information report and not published it on its website.
We have not performed any assurance services relating to the separate non-financial information report and we do not express any form of assurance conclusion thereon.
Report on Other Legal and Regulatory Requirements
Statement Concerning Provision of Non-Audit Services
To the best of our knowledge and belief, we represent that non-audit services which we have provided to the Parent and to its subsidiaries are in accordance with the laws and regulations applicable in Poland and that we have not provided any non-audit services which are prohibited under Article 5.1 of the EU Regulation and Article 136 of the Act on Statutory Auditors. The non-audit services which we provided to the Parent and to its subsidiaries in the audited period have been listed in Note 12.11 of the separate and consolidated financial statements.
Appointment of the Auditor
We were appointed as the auditor of the Group’s consolidated financial statements by resolution no. 23/IX/2016 of the Parent’s Supervisory Board of March 15, 2016. Our total uninterrupted period of engagement to audit the Group’s consolidated financial statements is 3 consecutive financial years, i.e. starting from the financial year ended December 31, 2016.
The key statutory auditor on the audit resulting in this independent auditor’s report is Adrian Karaś.
Acting on behalf of Deloitte Audyt Spółka z ograniczoną odpowiedzialnością Sp. k. with its registered seat in Warsaw, entered under number 73 on the list of audit firms, in the name of which the consolidated financial statements have been audited by the key statutory auditor:
Registered under number 12194
Warsaw, March 13, 2019