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Whitehaven Coal Limited : Annual Report 2012
Whitehaven Coal Limited -- Annual Report 2012 81 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2012 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) f) Inventories Inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of coal inventories is determined using a weighted average basis. Cost includes direct material, overburden removal, mining, processing, labour, mine rehabilitation costs incurred in the extraction process and other fixed and variable overhead costs directly related to mining activities. Inventory are classified as follows: • Run of mine: material extracted through the mining process. • Finished goods: products that have passed through all stages of the production process. • Consumables: goods or supplies to be either directly or indirectly consumed in the production process. g) Derivative financial instruments The consolidated entity uses derivative financial instruments to hedge its risks associated with foreign currency rate fluctuations arising from operating activities. Derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into, and are subsequently remeasured to fair value. Any gains and losses arising from changes in the fair value of derivatives are accounted for as described below: • The fair values of forward exchange contracts are calculated by reference to current forward exchange rates for contracts with similar maturity profiles. • All attributable transaction costs are recognised in the statement of comprehensive income as incurred. Cash flow hedges Cash flow hedges are hedges of the consolidated entity's exposure to variability in cash flows that is attributable to a particular risk associated with forecast sales and purchases that could affect profit or loss. Changes in the fair value of the hedging instrument designated as a cash flow hedge are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in profit or loss. Amounts taken to equity are transferred out of equity and included in the measurement of the hedged transaction (coal sales and asset purchases) when the forecast transaction occurs. The consolidated entity tests each of the designated cash flow hedges for effectiveness at each balance date, both retrospectively and prospectively, by using the dollar offset method. If the testing falls within the 80:125 range, the hedge is considered to be highly effective and continues to be designated as a cash flow hedge. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if it no longer meets the criteria for hedge accounting (due to it being ineffective),then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains in equity until the forecast transaction occurs. Economic hedges Derivatives which do not qualify for hedge accounting are measured at fair value with changes in fair value recognised in profit or loss.
Annual Report 2011
Annual Report 2013