Notes to the consolidated financial statements
(continued)
FOR THE
YEAR ENDED 31 DECEMBER 2005
50 Annual
Report 2005 Randgold Resources
2 SIGNIFICANT ACCOUNTING POLICIES (continued)
ratio are deferred. These mining costs, which are commonly referred to as “deferred stripping” costs, are incurred in mining
activities that are generally associated with the removal of waste rock. The deferred stripping method is generally accepted
in the mining industry where mining operations have diverse grades and waste-to-ore ratios. However industry practice does
vary. Stripping costs (including any adjustment through the deferred stripping asset) is treated as a production cost and
included in its valuation of inventory. The expected pit life stripping ratios are recalculated annually in light of additional
knowledge and changes in estimates.
These ratios are calculated as the ratio of the total of waste tonnes deferred at the calculation date and future anticipated
waste to be mined, to anticipated future ore to be mined. Changes in the mine plan, which will include changes in future ore
and waste tonnes to be mined, will therefore result in a change of the expected pit life average stripping ratio, which will
impact prospectively on amounts deferred or written back. If the expected pit life average stripping ratio is revised upwards,
relatively lower stripping costs will, in the future, be deferred in each period, or a relatively higher amount of charges will be
written back, thus impacting negatively upon earnings. The opposite is true when the expected pit life average stripping
ratio is revised downwards, resulting in more costs being deferred and a positive impact on earnings during the period of
cost deferral. Any costs deferred will be expensed in future periods over the life of the pit, resulting in lower earnings in future
periods. This method of accounting has the effect of smoothing costs over the life of the project. The directors believe that
the method used is the same as the method used by many mining companies in the industry with open pit mines.
INVENTORIES: Include ore stockpiles, gold in process and supplies and spares, and are stated at the lower of cost or net
realisable value. The cost of ore stockpiles and gold produced is determined principally by the weighted average cost
method using related production costs. Costs of gold produced inventories include all costs incurred up until production of
an ounce of gold such as milling costs, mining costs and mine G&A but excluding transport, refining and taxes. Net
realisable value is determined with reference to current market prices. Stockpiles consist of two types of ore, high grade and
medium grade ore, which will be processed through the processing plant. In the case of Morila, high grade ore is defined
as ore above 4g/t and medium grade is defined as ore above 2g/t. For Loulo, high grade ore is defined as ore above 3.7g/t
and medium grade is defined as ore above 1.5g/t. Both high and medium grade stockpiles are currently being processed
and all ore is expected to be fully processed within the life of mine. This does not include high grade tailings at Morila which
are carried at zero value due to uncertainty as to whether they will be processed through the plant. The processing of ore
in stockpiles occurs in accordance with the life of mine processing plan that has been optimised based on the known mineral
reserves, current plant capacity and mine design. Stores and materials consist of consumable stores and are valued at
weighted average cost after appropriate impairment of redundant and slow moving items.
INTEREST: Is recognised on a time proportion basis, taking into account the principal outstanding and the effective rate over
the period to maturity. Borrowing cost is expensed as incurred except to the extent that it relates to the construction of
property, plant and equipment during the time that is required to complete and prepare the asset for its intended use, when
it is capitalised as part of property, plant and equipment.
FINANCIAL INSTRUMENTS: These are measured as set out below. Financial instruments carried on the balance sheet
include cash and cash equivalents, investments in subsidiaries and joint venture, receivables, accounts payable, borrowings
and derivative financial instruments.
INVESTMENTS IN SUBSIDIARIES AND JOINT VENTURE: Are stated at amortised cost less any provisions for impairment in
the financial statements of the company. Dividends are accounted for when declared. On the disposal of an investment, the
difference between the net disposal proceeds and the carrying amount is charged or credited to the income statement.
DERIVATIVES: Derivatives are initially recognised at fair value on the date a derivative contract is entered into (trade date)
and are subsequently remeasured at their fair value, unless they meet the criteria for the “normal purchases normal sales”
exemption. On the date a derivative contract is entered into, the group designates the derivative for accounting purposes
as either a hedge of the fair value of a recognised asset or liability (fair value hedge) or a hedge of a forecasted transaction
(cash flow hedge). Certain derivative transactions, while providing effective economic hedges under the group’s risk
management policies, do not qualify for hedge accounting. Changes in the fair value of a derivative that is highly effective
in offsetting changes in the cash flow of the hedged item, and that is designated and qualifies as a cash flow hedge, are
recognised directly in equity. Amounts deferred in equity are included in the income statement in the same periods during
which the hedge firm commitment or forecasted transaction affects net profit or loss. Recognition of gains and losses on
derivatives which meet the criteria for own use are deferred until settlement. Changes in the fair value of derivatives that do
not qualify for hedge accounting are recognised in the income statement. The group formally documents all relationships
between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking
various hedge transactions. This process includes linking derivatives designated as hedges to specific assets and liabilities
or to specific firm commitments for forecasted transactions. The group formally assesses, both at the hedge inception and
on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes
in the fair value or cash flows of the hedged item. When a hedging instrument expires or is sold, or when a hedge no longer
meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is
recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is
no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income
statement. The group does not have any fair value hedges.
RECEIVABLES: Are recognised initially at fair value. There is a rebuttable presumption that the transaction price is fair value
unless this could be refuted by reference to market indicators. Subsequently, receivables are measured at amortised cost,
less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence
that the group will not be able to collect all amounts due according to the original terms of receivables. The amount of the
provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows,
discounted at the effective interest rate. The amount of the provision is recognised in the income statement.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents are carried in the balance sheet at cost. For the purpose of
the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, other short
term highly liquid investments with a maturity of three months or less at the date of purchase and bank overdrafts. In the
balance sheet, bank overdrafts are included in borrowings in current liabilities.
REHABILITATION COSTS: The net present value of estimated future rehabilitation cost is recognised and provided for in the
financial statements and capitalised within mining assets on initial recognition. Rehabilitation will generally occur on closure
or after closure of a mine. Initial recognition is at the time of the disturbance occurring and thereafter as and when additional
