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Annual Report and Accounts 2011

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Notes to the Annual Financial Statements
For the year ended 30 June 2011

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1. Accounting policies

Petra Diamonds Limited ("Petra" or "the Company" or "the Group"), a limited liability company quoted on AIM, is registered in Bermuda with its group management office domiciled in Jersey. The Company's registered address is 2 Church Street, Hamilton, Bermuda. The financial statements incorporate the principal accounting policies set out below, which are, except as noted below, consistent with those adopted in the previous financial statements.

1.1 Basis of preparation

The Group financial statements are prepared in accordance with International Financial Reporting Standards (IFRS and IFRIC Interpretations) issued by the International Accounting Standards Board ("IASB"), as adopted by the European Union ("IFRS").

Going concern

The Group's business activities, together with factors likely to affect its future development, performance and position are set out in the CEO's Review and the Business Review. The financial position of the Group, its cashflows and borrowing facilities are set out in the CEO's Review and the Financial Review. The notes to the financial statements set out the Group's objectives, policies and processes for managing its capital, exposures to credit risk and liquidity risk. As detailed in note 22(vii), the Group is to repay the deferred Al Rajhi Holdings W.L.L./Cullinan consideration of US$18.7 million in December 2011.

The Directors have reviewed the Group's current cash resources, funding requirements and ongoing trading of the operations. As a result of the review, the going concern basis has been adopted in preparing the financial statements and the Directors have no reason to believe that the Group will not be a going concern in the foreseeable future based on forecasts and available cash resources.

Currency reporting

The functional currency of the Company is pounds sterling (GBP) and the functional currency of the Group's business transactions in Botswana and Tanzania is US dollars. The functional currency of the South African operations is South African rand (ZAR); reference to transactions in South African rand in the Annual Report is denoted by an R. The Group financial statements are presented in US dollars. Also refer to the foreign currency accounting policy in note 1.14. ZAR balances are translated to US dollars at R6.83 (30 June 2010: R7.65) as at 30 June 2011 and at an average rate of R7.00 (30 June 2010: R7.61) for transactions during the year ending 30 June 2011.

1.2 New standards and interpretations applied

The IASB has issued the following new standards, amendments to published standards and interpretations to existing standards with effective dates prior to 1 July 2010 which have been adopted by the Group for the first time this year:

Effective period
commencing on or after
Impact on Group
IAS 32 Amendment – Classification of Rights Issues 1 February 2010 No
IFRS 1 Amendment – First-time Adopters of IFRS 1 July 2010 No
IFRS 1 Additional Exemptions for First-time Adopters 1 January 2010 No
IFRS 2 Amendment – Group Cash-settled Share-based Payment Transactions 1 January 2010 No
General Improvements to IFRS (2009) 1 January 2010 No
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments 1 July 2010 No

New standards and interpretations not yet effective

Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group's accounting periods beginning after 1 July 2011 or later periods and which the Group has decided not to adopt early. These are:

Effective period commencing on or after
IAS 24 Revised – Related Party Disclosures 1 January 2011
IFRIC 14 Amendment – IAS 19 Limit on a Defined Benefit Asset 1 January 2011
Improvements to IFRSs (2010) 1 January 2011
IFRS 7* Amendment – Transfer of Financial Assets 1 July 2011
IFRS 1* Amendment – Severe Hyperinflation and Removal of Fixed Dates
for First-time Adopters 1 July 2011
IAS 12* Amendment – Deferred Tax: Recovery of Underlying Assets 1 January 2012
IAS 1* Amendment – Presentation of Items of Other Comprehensive Income 1 July 2011
IFRS 9* Financial Instruments 1 January 2013
IFRS 10* Consolidated Financial Statements 1 January 2013
IFRS 11* Joint Arrangements 1 January 2013
IFRS 12* Disclosure of Interests in Other Entities 1 January 2013
IFRS 13* Fair Value Measurement 1 January 2013
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine 1 January 2013
IAS 27* Amendment – Separate Financial Statements 1 January 2013
IAS 28* Amendment – Investments in Associates and Joint Ventures 1 January 2013
IAS 19* Amendment – Employee Benefits 1 January 2013

* Not yet adopted by the European Union.

The Group is currently assessing the impact of these standards on the financial statements.

1.3 Basis of consolidation

Subsidiaries

Subsidiaries are those entities over which financial and operating policies the Group has the power to exercise control. The Group financial statements incorporate the assets, liabilities and results of operations of the Company and its subsidiaries. The results of subsidiaries acquired and disposed of during a financial year are included from the effective dates of acquisition to the effective dates of disposal. Where necessary, the accounting policies of subsidiaries are changed to ensure consistency with the policies adopted by the Group.

Business combinations

The results of business combinations are accounted for using the purchase method. In the Consolidated Statement of Financial Position, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the Consolidated Statement of Other Comprehensive Income from the date on which control is obtained. Business combinations are deconsolidated from the date control ceases. The interest of non-controlling shareholders in the acquiree is initially measured at the non-controlling shareholders' proportion of the fair value of the assets, liabilities and contingent liabilities recognised. All costs incurred on business combinations are charged to the Consolidated Income Statement.

Changes in the Group's ownership interests that do not result in a loss of control are accounted for as equity transactions.

Non-controlling interests

Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling shareholder's share of changes in equity since the date of the combination. As a result of the revision to IAS 27 "Consolidated and Separate Financial Statements", the non-controlling interests' share of losses, where applicable, are attributed to the non-controlling interests irrespective of whether the non-controlling shareholders have a binding obligation and are able to make an additional investment to cover the losses.

Associates

An associate is an enterprise over whose financial and operating policies the Group has the power to exercise significant influence and which is neither a subsidiary nor a joint venture of the Group. The equity method of accounting for associates is adopted in the Group financial statements. In applying the equity method, account is taken of the Group's share of accumulated retained earnings and movements in reserves from the effective date on which an enterprise becomes an associate and up to the effective date of disposal.

The share of associated retained earnings and reserves is generally determined from the associate's latest audited financial statements. Where the Group's share of losses of an associate exceeds the carrying amount of the associate, the associate is carried at nil.

Additional losses are only recognised to the extent that the Group has incurred obligations or made payments on behalf of the associate.

Transactions eliminated on consolidation

Intra-group balances and transactions, and any gains or losses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates and jointly controlled entities are eliminated to the extent of the Group's interest in the enterprises. Unrealised gains arising from transactions with associates are eliminated against the investment in the associates. Unrealised losses on transactions with associates are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no evidence of impairment.

1.4 Property, plant and equipment

Property, plant and equipment are stated at historic cost less accumulated depreciation and accumulated impairment losses. Where an item of property, plant and equipment comprises major components with different useful lives, the components are accounted for as separate items of property, plant and equipment. Depreciation is provided on the straight-line basis over the estimated useful lives of assets.

The depreciation rates are as follows:

Mining assets:

Plant, machinery and equipmentUnits of production method
Mineral properties
 
Units of production method
 
Exploration and other assets:
 
Plant and machinery10%–20% straight-line basis
Office equipment10% straight-line basis
Computer equipment25% straight-line basis
Motor vehicles20% straight-line basis

Mineral properties for the Group's operating mines, Cullinan, Williamson, Koffiefontein, Kimberley Underground, Helam, Sedibeng and Star are based on current life of mine plans. The current mine plans indicate useful life of mines of between 12 and 22 years. Resources remaining after the current life of mine plans have not been included in depreciation calculations.

Cullinan mining assets relating to the C-Cut block of the mine have not been depreciated as the C-Cut has not yet been accessed. Assets transferable to the C-Cut phase one development are being depreciated over the specific tonnes associated with the identified areas. All other Cullinan assets are being depreciated over the life of mine of specific areas mined.

Subsequent expenditure relating to an item of property, plant and equipment is capitalised when it is probable that future economic benefits from the use of that asset will be increased. All other subsequent expenditure is recognised as an expense in the Period in which it is incurred.

Expenditure relating to an item of property, plant and equipment considered to be an asset under construction is capitalised when it is probable that future economic benefits from the use of that asset will be realised.

Surpluses/(deficits) on the disposal of property, plant and equipment are credited/(charged) to the Consolidated Income Statement. The surplus or deficit is the difference between the net disposal proceeds and the carrying amount of the asset.

1.5 Leases

Finance leases

Leases that transfer substantially all the risks and rewards of ownership of the underlying asset to the Group are classified as finance leases. Assets acquired under terms of finance leases are capitalised at the lower of fair value and the present value of the minimum lease payments at inception of the lease and depreciated over the estimated useful life of the asset. The capital element of future obligations under the leases is included as a liability in the Consolidated Statement of Financial Position.

Lease payments are allocated using the effective interest rate method to determine the lease finance cost, which is charged against income over the lease period and the capital repayment, which reduces the liability to the lessor.

Operating leases

Leases where the lessor retains the risks and rewards of ownership of the underlying asset are classified as operating leases. Payments made under operating leases are charged against income on a straight-line basis over the period of the lease.

1.6 Exploration and evaluation costs

Exploration and evaluation costs on greenfield sites are written off in the year in which they are incurred. Pre-production expenditure is only capitalised once feasibility studies indicate commercial viability and the Board takes the decision to develop the project further. Capitalisation of pre-production expenditure ceases when the project is capable of commercial production where upon it is amortised on a unit of production basis.

Exploration and evaluation expenditure on brownfield sites, being those adjacent to deposits already being mined or where the economic feasibility of existing deposits has yet to be proven, is capitalised within mineral properties. Amortisation only occurs upon commencement of commercial production.

1.7 Intangible assets

Mineral rights are capitalised at cost and are amortised on a unit of production basis for operating mines and over the estimated useful life for prospecting rights. Amortisation is included within mining and processing costs or exploration expenditure as appropriate.

1.8 Impairment

The carrying amounts of the Group's assets are reviewed at each reporting date to determine whether there is any indication of impairment. If there is any indication that an asset may be impaired, its recoverable amount is estimated. The recoverable amount is the higher of its net selling price and its value in use.

In assessing value in use, the expected future pre-tax cashflows from the asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount.

For an asset that does not generate cash inflows that are largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised in the Consolidated Income Statement whenever the carrying amount of the cash-generating unit exceeds its recoverable amount.

A previously recognised impairment loss is reversed if the recoverable amount increases as a result of a change in the estimates used to determine the recoverable amount, but not to an amount higher than the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised in prior years.

Refer to note 9 for detailed disclosure of the results of reversal of impairments and impairment reviews performed. Reversal of impairments and impairment charges and reversals are credited/(charged) to a separate line item under total costs in the Consolidated Income Statement.

1.9 Financial instruments

Financial assets

The Group classifies its financial assets into one of the following categories and the Group's accounting policy for each category is as follows:

Fair value through profit or loss

This category comprises only in-the-money derivatives that were not designated and effective for hedge accounting at inception. They are carried in the Consolidated Statement of Financial Position at fair value with changes in fair value recognised in the Consolidated Income Statement in the finance income or finance expense line. The Group does not have any assets held for trading nor does it voluntarily classify any financial assets as being at fair value through profit or loss.

Loans and receivables

These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The assets arise principally through the provision of goods and services to customers (e.g. trade receivables), but also incorporate other types of contractual monetary assets including cash and cash equivalents and loans and other receivables. They are initially recognised at the fair value plus transaction costs that are directly attributable to the acquisition or issue and subsequently carried at amortised cost using the effective interest method, less provision for impairment.

Available-for-sale

Non-derivative financial assets not included in the above categories are classified as available for sale and comprise principally of the Group's strategic investment in the entities not qualifying as subsidiaries, associates or jointly controlled entities. The assets are carried at fair value with changes in fair value recognised directly in the Consolidated Statement of Other Comprehensive Income and accumulated in other reserves. Where a decline in the fair value of an available-for-sale financial asset constitutes objective evidence of impairment, the amount of the loss is removed from equity and recognised in the Consolidated Income Statement. Fair values of quoted investments are based on current market prices. The Group only holds quoted investments. Available for sale financial assets are fair valued at each reported date and reviewed as set out above. As at 30 June 2011 a cumulative loss of US$0.5 million (30 June 2010: loss of US$0.1 million) was recorded in other reserves in respect of the available-for-sale financial assets.

Financial liabilities

The Group classifies its financial liabilities into one of two categories, depending on the purpose for which the asset was acquired. Other than financial liabilities in a qualifying hedging relationship (see below), the Group's accounting policy for each category is as follows:

Fair value through profit or loss

This category comprises only out-of-the-money derivatives that were not designated and effective for hedge accounting at inception (see Financial Assets for "in-the-money" derivatives). The liabilities are carried in the Consolidated Statement of Financial Position at fair value with changes in fair value recognised in the Consolidated Income Statement in the finance income or finance expense line.

Other liabilities
Trade payables and other short-term and long-term monetary liabilities

Trade payables and other short-term and long-term monetary liabilities, which are initially recognised at fair value, are subsequently carried at amortised cost using the effective interest method.

Interest-bearing borrowings

Bank borrowings and the debt element of convertible debt issued are recognised initially at fair value less attributable transaction costs. Such interest-bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of liability carried in the Consolidated Statement of Financial Position. "Interest expense" in this context includes initial transaction costs and premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding.

Hedging instruments 

Derivative financial instruments are initially measured at fair value on the contract date and are subsequently re-measured to fair value at each reporting date. On the date that relevant derivative contracts are entered into, the Group may designate the derivative for hedge accounting. Where a hedge instrument is designated for hedge accounting at inception, the Group formally assesses, at inception and on an ongoing basis, whether the derivatives are highly effective in offsetting changes in the fair value or cashflows of the hedged item.

Cashflow hedges

Changes in the fair value of a derivative that is effective in offsetting changes in the cashflow of the hedged item, and that is designated and qualifies as a cashflow hedge, are recognised directly in equity. Changes in the fair value of derivatives that do not qualify for hedge accounting or were not designated for hedge accounting at inception are recognised in the Consolidated Income Statement. Amounts recognised in equity are transferred to the Consolidated Income Statement in the Period during which the hedged forecast impacts net profit or loss. Any ineffective element of a cashflow hedge, which has been designated for hedge accounting, is taken to the Consolidated Income Statement. The Group has not had any hedging instruments designated as cashflow hedges for hedge accounting as at 30 June 2011 or 30 June 2010.

Fair value hedges

Where derivatives are used to hedge the Group's exposure to fair value risk and qualify and are designated as fair value hedges, both the derivative and hedged item are measured at fair value with changes in fair value recognised in the Consolidated Income Statement within financial income/(expense). During the year, the Group has designated forward currency contracts and restricted foreign currency deposits as hedging instruments; representing a fair value hedge of the foreign exchange risk on the firm commitment to purchase the Finsch mine. The hedging instruments are recognised in the Consolidated Statement of Financial Position at fair value and changes in fair value are recognised in the Consolidated Income Statement. The change in the fair value of the unrecognised firm commitment attributable to the hedged risk (foreign exchange variation) is recognised as an "other asset/(liability)" and recognised within the Consolidated Income Statement to the extent that the hedge is effective.

Impairment of financial assets

Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cashflows associated with the impaired receivable. For trade receivables, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the Consolidated Income Statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

Fair value hierarchy

Financial assets and liabilities measured at fair value are classified according to their fair value hierarchy as disclosed in note 26.

1.10 Revenue

Revenue comprises net invoiced diamond sales to customers excluding VAT. Diamond sales are made through a competitive tender process and recognised when significant risks and rewards of ownership are transferred to the buyer, costs can be measured reliably and receipt of future economic benefits is probable. This is deemed to be the point at which the tender is awarded.

Revenue from test production on projects pending confirmation of commercial viability is credited to revenue and an equal amount charged to cost of sales and credited to mineral properties so as to record zero margin.

1.11 Finance and other income

Finance and other income comprise income from interest and other non-operating income. Interest is recognised on a time apportioned basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is probable that such income will accrue to the Group.

1.12 Tax

Current tax comprises tax payable calculated on the basis of the expected taxable income for the year, using the tax rates enacted or substantively enacted at the reporting date, and any adjustment of tax payable for previous years.

Deferred tax is provided using the balance sheet liability method, based on temporary differences. Temporary differences are differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax base. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities using tax rates enacted or substantively enacted at the balance sheet date.

Deferred tax is charged to the Consolidated Income Statement except to the extent that it relates to a transaction that is recognised directly in Other Comprehensive Income, or a business combination that is an acquisition. The effect on deferred tax of any changes in tax rates is recognised in the Consolidated Income Statement, except to the extent that it relates to items previously charged or credited directly to Other Comprehensive Income.

A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the associated unused tax losses and deductible temporary differences can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

1.13 Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, for which it is probable that an outflow of economic benefits will occur and where a reliable estimate can be made of the amount of the obligation. Where the effect of discounting is material, provisions are discounted. The discount rate used is a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

Decommissioning, mine closure and environmental rehabilitation

The estimated cost of decommissioning and rehabilitation will generally occur on or after the closure of the mine, based on current legal requirements and existing technology. A provision is raised based on the present value of the estimated costs. These costs are included in the cost of the related asset. The capitalised assets are depreciated in accordance with the accounting policy for property, plant and equipment. Annual increases in the provision, as a result of the change in the net present value, are charged to the Consolidated Income Statement. Annual increases in the provision due to the unwinding of the discount are recognised as a finance expense. The cost of the ongoing programmes to prevent and control pollution, and ongoing rehabilitation costs of the Group's operations, is charged against income as incurred.

The obligation to restore environmental damage caused through operations is raised as the relevant operations take place. Assumptions have been made as to the remaining life of existing operations based on studies conducted by independent technical advisers.

1.14 Foreign currency

Foreign currency transactions

Transactions in foreign currencies are recorded at rates of exchange ruling at the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the reporting date. Gains and losses arising on translation are credited to, or charged against, income. The issue of shares are included in share capital and share premium at the prevailing US$/sterling spot rate at the date of the transaction.

Financial statements of foreign entities

Assets and liabilities of foreign entities (i.e. those with a functional currency other than US$) are translated at rates of exchange ruling at the financial year end; income and expenditure and cashflow items are translated at rates of exchange ruling at the date of the transaction or at rates approximating the rates of exchange at the date of the translation where appropriate. Fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the exchange rate ruling at the reporting date. Exchange differences arising from the translation of foreign entities are taken directly to a foreign currency translation reserve.

Foreign operations

Unrealised gains and losses arising on the translation of loans to subsidiaries into the currency in which they are denominated and that are not expected to be repaid in the foreseeable future are treated as part of the net investment in foreign operations. The unrealised foreign exchange gains and losses attributable to foreign operations are taken directly to the Consolidated Statement of Other Comprehensive Income and reflected in the foreign currency translation reserve.

Unrealised gains and losses arising on the translation of loans to subsidiaries into the currency in which they are denominated and that are expected to be repaid in the foreseeable future are recognised in the Consolidated Income Statement.

1.15 Short-term employee benefits

The cost of all short-term employee benefits is recognised during the Period in which the employee renders the related service. The provisions for employee entitlements to wages, salaries and annual leave represent the amount which the Group has a present obligation to pay as a result of employees' services provided to the reporting date. The provisions have been calculated based on current wage and salary rates.

1.16 Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, deposits held on call with banks, investments in money market instruments, and net of bank overdrafts, all of which are available for use by the Group unless otherwise stated. Restricted cash represents amounts held by banks as a guarantee in respect of environmental rehabilitation obligations in respect of the Group's South African mines and deposits held in escrow accounts not freely available to the Group.

1.17 Employee pension schemes  

Defined contribution scheme

Obligations for contributions to defined contribution pension schemes are recognised as an expense in the Consolidated Income Statement as incurred.

Defined benefit scheme

The defined benefit liability or asset recognised in the financial statements represents the present value of the defined benefit obligation as adjusted for unrecognised actuarial gains and losses and unrecognised past service costs, and reduced by the fair value of plan assets. Any net asset recognised is limited to unrecognised actuarial losses, plus the present value of available refunds and any reduction in future contributions that the Company is entitled to in terms of Section 15E of the Pension Funds Act in South Africa.

Actuarial gains and losses are recognised to the extent that, at the beginning of the financial period, any cumulative unrecognised actuarial gain or loss exceeds 10% of the greater of the present value of the projected benefit obligation and the fair value of the plan assets ("the corridor"), that portion is recognised in the Consolidated Statement of Other Comprehensive Income over the expected average remaining service lives of participating employees. Actuarial gains or losses within the corridor are not recognised.

The actuarial calculation is performed by a qualified actuary using the projected unit credit method.

1.18 Post-retirement medical fund

The Group operates a post-retirement medical fund, which is unfunded and therefore recognised as a liability on the Consolidated Statement of Financial Position within provisions. The liability is based on an actuarial valuation performed at each year-end reporting date.

1.19 Share-based payments

The fair value of options granted to employees is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the Period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured based on the Black-Scholes model, taking into account the terms and conditions upon which the instruments were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. The exercise price is fixed at the date of grant and no compensation is due at the date of grant. On exercise, equity is increased by the amount of the proceeds received.

1.20 Inventories

Inventories, which include rough diamonds, are stated at the lower of cost of production on the weighted average basis or estimated net realisable value. Cost of production includes direct labour, other direct costs and related production overheads. Net realisable value is the estimated selling price in the ordinary course of business less marketing costs. Consumable stores are stated at the lower of cost on the weighted average basis or estimated replacement value. Work in progress is stated at raw material cost including allocated labour and overhead costs.

1.21 Convertible notes

Convertible notes that can be converted to share capital at the option of the holder, where the number of shares issued does not vary with changes in their fair value, are accounted for as compound financial instruments and are accordingly split between debt and equity in the Group's financial statements. Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components in proportion to the allocation of proceeds. The equity component of the convertible notes is calculated as the excess of the fair value over the present value of the future cashflows, discounted at the market rate of interest applicable to similar liabilities that do not have a conversion option. The interest expense recognised in the Consolidated Income Statement is calculated using the effective interest rate method (also see interest-bearing borrowings in note 1.9).

1.22 Segment reporting

A segment is a distinguishable component of the Group that is engaged either in providing mining or exploration activities, or in providing products or services within a particular economic environment, which is subject to risks and rewards that are different from those of other segments. The basis of segment reporting is representative of the internal structure used for management reporting.

1.23 Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. Other borrowing costs are recognised as an expense in the period in which the borrowing cost is incurred.

1.24 Critical assumptions and judgements

The preparation of the consolidated financial statements requires management to make estimates and judgements and form assumptions that affect the reported amounts of the assets and liabilities, reported revenue and costs during the periods presented therein, and the disclosure of contingent liabilities at the date of the financial statements. Estimates and judgements are continually evaluated and based on management's historical experience and other factors, including future expectations and events that are believed to be reasonable. The estimates and assumptions that have a significant risk of causing a material adjustment to the financial results of the Group in future reporting periods are discussed below.

Judgements

Life of mine and ore reserves

There are numerous risks inherent in estimating ore reserves and the associated life of a mine. Therefore management must make a number of assumptions in making those estimates, including assumptions as to exchange rates, rough diamond and other commodity prices, recovery and production rates. Any such estimates and assumptions may change as new information becomes available. Changes in exchange rates, commodity prices, recovery and production rates may change the economic viability of ore reserves and may ultimately result in the restatement of the ore reserves and potential impairment to the carrying value of the mining assets and life of mine. The determination of the life of mine and ore reserves also impacts the depreciation of mining assets depreciated on a unit of production basis, as set out in note 1.4.

Impairment reviews

While conducting an impairment review of its assets, the Group exercises judgement in making assumptions about future rough diamond prices, ore reserves, rehabilitation costs, feasibility studies, future development and production costs. Changes in estimates used can result in significant changes to the Consolidated Income Statement. The policy in respect of impairment reviews is set out in note 1.8 and details of impairment reviews carried out during the year are set out in note 9.

Taxation judgement

The Group has received a number of historical tax claims in respect of its mining operations, relating to the period prior to the operations being acquired by the Group. Judgement is applied by management, having consulted with local tax advisers, on the probability of payments being made to settle the claims. A provision of US$2.2 million (30 June 2010: US$2.2 million) has been made in respect of these claims.

Capitalisation of feasibility and development costs at the Williamson mine

Judgement has been applied by management during the prior year in determining whether feasibility expenditure should be capitalised or expensed. The Group embarked on a feasibility study at the Williamson mine through an intensive bulk sampling programme with a view to better understanding the ore-body. This was done to optimise the design of the treatment plant to further increase production in the future. Based on management's judgements, direct expenditure was considered to be capital in nature and was capitalised on the basis that the future economic benefits of the mining assets were expected to flow to the Group in line with guidance from IAS 16. All other costs are expensed as care and maintenance costs. During the current year, the Group incurred costs as part of its refurbishment and expansion project to upgrade the plant. All direct costs incurred by the Group, including internal development costs, which are directly attributable to bringing the asset into use and which increase the future economic benefits that will flow to the Group, have been capitalised.

Assumptions and estimates

Provision for rehabilitation

Significant estimates and assumptions are made in determining the amount attributable to rehabilitation provisions. These deal with uncertainties such as the legal and regulatory framework, timing and future costs. In determining the amount attributable to rehabilitation provisions, management used a discount rate range of 8%–9% (30 June 2010: 6%–9%), current life of mine plans of 11 to 53 years (30 June 2010: 11 to 53 years) and an inflation rate range of 6.9%–7.0% (30 June 2010: 5.5%–7.0%). The carrying value of rehabilitation provisions at the reporting date is US$55.8 million (30 June 2010: US$44.7 million).

Valuation of share options

In determining the fair value of share-based payments made during the year to employees, a number of assumptions have been made by management. The details of these assumptions are set out in note 28. The total charge to the Consolidated Income Statement in respect of share-based payments for the year is US$1.9 million (30 June 2010: US$1.7 million).

Valuation of warrants

In determining the fair value of warrants issued during the year, a number of assumptions have been made by management. The details of these assumptions are set out in note 28. The fair value of the warrants is debited against pre-payments until such time as the loan is drawn down. When the loan is drawn down, the fair value is debited against the interest bearing non-current borrowings and the effective interest rate and associated accretion charges adjusted accordingly. The fair value of the warrants for the year is US$7.9 million (30 June 2010: US$nil) of which US$6.8 million (30 June 2010: US$nil) has been debited against the interest-bearing non-current borrowings.

During FY 2010, a number of assumptions were made by management in respect of warrants issued as part of a capital raising exercise. The details of these assumptions are set out in note 28. The fair value of the warrants (US$1.6 million) was debited against the share premium account, being a directly attributable cost of the capital raising exercise.

Deferred tax

Judgement is applied in making assumptions about future taxable income, including diamond prices, production, rehabilitation costs and expenditure to determine the extent to which the Group recognises deferred tax assets.

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