24. MIGRATION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS BEGINNING JANUARY 1, 2012
IFRS, as issued and interpreted by the IASB, no later than January 1, 2012, these are CEMEX's last consolidated financial statements prepared under MFRS. For this transition, CEMEX gathered the necessary material and human resources required for the identification and quantification of the differences between MFRS and IFRS for purposes of the opening IFRS balance sheet dated January 1, 2010, as well as for the conversion to IFRS of its financial information systems beginning in 2012. As of December 31, 2011, the migration process to IFRS had been substantially completed. CEMEX is currently in the process of finalizing its financial statements under IFRS for the years ended December 31, 2011 and 2010, using for these purposes IFRS effective as of December 31, 2011, and which are expected to be issued during the first quarter of 2012.
In preparing its opening IFRS balance sheet, based on IFRS 1, "First time adoption of IFRS" ("IFRS 1"), CEMEX has adjusted the amounts previously reported in financial statements prepared under MFRS. A description of how the transition from MFRS to IFRS has affected CEMEX's financial position is described below:
A) IFRS 1 EXEMPTION OPTIONS
Set out below are the applicable IFRS 1 exemptions applied in the conversion from MFRS to IFRS:
Exemption for cumulative translation differences
IFRS 1 permits cumulative translation gains and losses on the conversion and consolidation of foreign subsidiaries' financial statements and equity method investments that were generated under MFRS to be reset to zero at the transition date. This provides relief from determining cumulative currency translation differences in accordance with IAS 21, "The effects of changes in foreign exchange rates" ("IAS 21"), from the date a subsidiary or equity method investee was formed or acquired. CEMEX elected to reset to zero all cumulative translation gains and losses against the opening balance of retained earnings under IFRS at its transition date.
Exemption for fair value as deemed cost
IFRS 1 provides the option to measure at its fair value an item of property, plant and equipment, and certain intangibles at the date of transition to IFRS and use such fair value as its deemed cost at that date or to use a previous GAAP (Generally Accepted Accounting Principles) revaluation, if the revaluation is broadly comparable to: a) fair value; or b) cost or depreciated cost in accordance with IFRS, adjusted to recognize the inflation index changes.
CEMEX elected, at its transition date, to measure its mineral reserves, buildings and major machinery and equipment at fair value in those instances when the carrying amounts under MFRS did not comply with IFRS 1. CEMEX also elected to use the revaluation of its property, plant and equipment related to its acquisition of Rinker Group Limited, which was determined in 2007 before the date of transition to IFRS. For the minor equipment, CEMEX elected to use its MFRS revaluation as deemed cost under IFRS. The net effect from revaluation was recognized against the opening balance of retained earnings under IFRS at its transition date. Going forward, CEMEX will adopt the policy of cost method for its property, plant and equipment in accordance with IFRS.
Exemption for employee benefits
In connection with defined benefit plans, IFRS 1 provides retrospective relief from applying IAS 19, "Employee Benefits" ("IAS 19"), for the recognition of actuarial gains and losses. In line with this exemption, CEMEX elected to recognize all cumulative actuarial gains and losses that existed at its transition date against the opening balance of retained earnings under IFRS for all its defined benefit plans. Going forward, CEMEX will adopt a policy of recognizing all actuarial gains and losses immediately in the period in which they occur against other comprehensive income (equity reserves) as permitted under IAS 19.
Exemption for investments in subsidiaries, jointly controlled entities and associates
When an a entity has elected the cost model and not fair value, to account for investments in subsidiaries, jointly controlled entities and associates in its separate financial statements, IFRS 1 permits to measure that investment at one of the following amounts on date of transition: a) cost, in accordance with IAS 27, "Consolidated and separate financial statements" ("IAS 27"); or b) deemed cost. The deemed cost of such an investment shall be either: i) fair value at the entity's date of transition to IFRS in its separate financial statements; or ii) the previous GAAP carrying amount at that date.
CEMEX, S.A.B de C.V. elected to measure its investments in subsidiaries, jointly controlled entities and associates in its separate financial statements at its MFRS carrying amount at its date of transition. Prospectively, CEMEX, S.A.B de C.V. will adopt the policy to recognize its investments in subsidiaries, jointly controlled entities and associates in its separate financial statements at cost.
Exemption for assets and liabilities of subsidiaries, associates and joint ventures
IFRS 1 permits that if a parent entity becomes a first-time adopter later than its subsidiary, in its consolidated financial statements, it shall measure its assets and liabilities of the subsidiary (or associate or joint venture) on the date of transition at the same carrying amounts as in the IFRS financial statements of the subsidiary (or associate or joint venture), after adjusting for consolidation and equity accounting adjustments and for the effects of the business combination in which the entity acquired the subsidiary.
Based on this exemption, CEMEX elected to measure the assets and liabilities of its subsidiaries in Ireland, United Arab Emirates, Croatia, Guatemala, Panama, Dominican Republic, Costa Rica and Nicaragua that have already adopted IFRS prior to CEMEX, S.A.B. de C.V. at the same carrying amounts as in the IFRS financial statements of those subsidiaries after adjustments to homologate the group´s accounting policies.
Exemption for asset retirement obligations included in the cost of property, plant and equipment
IFRS 1 provides retrospective relief from applying IFRIC 1, "Changes in existing decommissioning, restoration and similar liabilities" ("IFRIC 1"), to changes in these liabilities that occurred before the transition date and provides a shortcut method to determine the cost of decommissioning at the date of transition, by means of which, initially, the decommissioning, restoration or similar liability is estimated at the date of transition in accordance with IAS 37 "Provisions, contingent liabilities and contingent assets" ("IAS 37"); secondly, the amount that would have been included in the cost of the related asset when the liability first arose is estimated by discounting the liability to that date using the best estimate of the historical risk-adjusted discount rate that would have applied for that liability; and finally, the accumulated depreciation on that amount is calculated as at the date of transition to IFRS on the basis of the current estimate of the useful life of the asset according to the depreciation policy under IFRS.
CEMEX elected to use this exemption and applied the shortcut method at its transition date.
Exemption for borrowing costs
IFRS 1 permits an entity to apply the transitional provisions set out in the revised IAS 23, "Borrowing costs" ("IAS 23"), with any reference to the effective date being interpreted as January 1, 2009, or the date of transition to IFRS whichever is later.
For any borrowing costs not being capitalized at the date of transition, CEMEX elected to apply this exemption and capitalized borrowing costs prospectively as from the transition date.
Exemption for business combinations
IFRS 1 provides the option to apply IFRS 3, "Business Combinations" ("IFRS 3"), prospectively from the transition date or from a specific date prior to the transition date. An entity electing to restate business combinations from a specific date prior to the transition date should include all acquisitions that occurred during such period. This option provides relief from full retrospective application that would require restatement of all business combinations that occurred prior to the transition date.
CEMEX elected to apply IFRS 3 prospectively to business combinations occurring after its transition date. Business combinations occurring prior to the transition date were not restated; consequently, goodwill balances under MFRS at the transition date were not affected by the migration to IFRS except, that according to the IFRS 1 requirements, the assets or liabilities segregation that under the previous GAAP was not allowed its recognition, and which were segregated to goodwill.
B) IFRS 1 MANDATORY EXCEPTIONS
Set out below are the applicable mandatory exceptions in IFRS 1 applied by CEMEX in the conversion from MFRS to IFRS:
Exception for accounting estimates
IFRS estimates at transition date shall be consistent with estimates made for the same date in accordance with previous GAAP unless there is objective evidence that those estimates were in error. CEMEX reviewed its estimates at transition date and there were no modifications to previous estimates.
C) RECONCILIATIONS OF MFRS TO IFRS
As of December 31, 2011, CEMEX's presentation of amounts under IFRS represent its best estimates and are subject to further adjustments resulting from the ongoing review and audit process. Considering the disclosure requirements of Interpretation 19 under MFRS and IFRS 1, the following tables present the reconciliations from MFRS to IFRS of the main accounts of the consolidated balance sheet as of January 1, 2010:
D) NOTES TO THE RECONCILIATIONS FROM MFRS TO IFRS
a) Derecognition of financial assets and liabilities
As mentioned in note 5, CEMEX has securitization programs in several countries with various financial institutions under which, in accordance with MFRS and considering the surrender of control associated with the trade receivables sold and that there is no guarantee or obligation to reacquire the assets, the accounts receivable are removed from the balance sheet at the moment of the sale, except for the amounts that were reclassified to other short-term accounts receivable. IAS 39 does not permit many securitizations to qualify for derecognition. Hence, under IFRS, except for non-recourse factoring transactions, CEMEX´s securitization programs of accounts receivable at the IFRS transition date did not qualify for derecognition as they include some ongoing involvement of CEMEX that causes it to retain some of the risks and rewards related to the transferred assets. The impact from the recognition of accounts receivables and the corresponding liability under IFRS was an increase of approximately $7,193 in other accounts receivable against other financial obligations as of January 1, 2010.
b) Fair value of derivative financial instruments
IAS 39 requires that the fair value of derivative financial instruments reflects its credit quality, in comparison with MFRS that does not provide any related guidance. The effect of including the credit risk within CEMEX´s derivative financial instruments represents an increase of $97 against retained earnings in the opening balance sheet.
In order to comply with IFRS presentation requirements, there are certain reclassifications between line items in the opening balance sheet for a net amount of approximately $137.
d) Storage costs
According to IAS 2, storage costs that are incurred during the production process should be excluded from the cost of inventories and are required to be expensed in the period in which they are incurred, in comparison to MFRS, which does not provide any explicit guidance in this regard. Storage cost recognized within Inventories under MFRS were canceled onder IFRS, representing a reduction of $11 against retained earnings in the opening balance sheet.
e) Property, machinery and equipment
As permitted by IFRS 1, in its opening balance sheet under IFRS as of January 1, 2010, CEMEX applied the fair value as deemed cost exemption to mineral reserves, as well as certain buildings and major machinery and equipment located in several countries. The appraisal reports prepared on these items as of January 1, 2010 determined a fair value of approximately $201,233, which resulted in a decrease of approximately $2,918 as compared to the carrying amount of such assets under MFRS, which was recognized against retained earnings in the opening balance sheet under IFRS.
As of January 1, 2010, certain major components of machinery and equipment were classified as inventories under MFRS. These items met the definition of property, plant and equipment in accordance with IAS 16 under IFRS. Therefore, in its opening balance sheet under IFRS, CEMEX reclassified these components from inventories under MFRS to property, machinery and equipment under IFRS for approximately $675. CEMEX adopted the same approach under MFRS in 2010 (note 10); therefore, there is no effect arising from this difference in the balance sheet as of December 31, 2011 and 2010 under MFRS as compared to IFRS.
Under IFRS, the threshold to consider whether an economy is hyperinflationary, in order to restate certain components of the financial statements by inflation is reached when the accumulated inflation rate over the last three years is approaching or exceeds 100%; whereas under MFRS, such threshold is met at 26% during the same period. Consequently, in its opening balance sheet under IFRS as of January 1, 2010, CEMEX eliminated inflation, restatement effects of property, machinery and equipment and intangible assets recognized under MFRS for approximately $5,081 against the initial balance of retained earnings. Upon transition to IFRS as of January 1, 2010, the 100% threshold was not reached in any country in which CEMEX operates.
f) Intangible assets
Rights for using rented quarries that were recognized as part of property, plant and equipment under MFRS for approximately $4,258 as of January 1, 2010, were reclassified to intangibles assets according to IAS 38 under IFRS. In addition, as required by IFRS 1, CEMEX performed the identification and separation of certain, significant, intangible assets that were recognized within goodwill. As a result, extraction permits in the cement and ready-mix concrete sectors, were reclassified from goodwill to intangible assets. Additionally, some extraction permits were measured at fair value, resulting in a net decrease of intangible assets for approximately $12,134.
g) Deferred financing costs
A portion of the balance of costs associated with CEMEX's Financing Agreement in 2009 that were deferred under MFRS for approximately $5,048 as of January 1, 2010, did not meet all the requirements for capitalization and deferral under IAS 39 and were immediately recognized upon transition against retained earnings in the opening balance sheet, decreasing the balance of intangible assets and other deferred charges under IFRS as of January 1, 2010.
h) Fair value of the Financing Agreement
As described in note 12A, CEMEX entered into a Financing Agreement with its major creditors, by means of which, among other things, CEMEX extended the maturities of its syndicated and bilateral loans, private placements and other obligations. Under both MFRS and IFRS, the Financing Agreement qualified as the emission of new debt and the extinguishment of the old facilities. Nonetheless, based on IAS 39, the new debt should be initially measured at fair value; resulting in a decrease of debt in the opening balance sheet under IFRS of $150, recognized against opening retained earnings.:
i) Pensions and other postretirement employee benefits
As previously mentioned, CEMEX elected to apply the IFRS 1 employee benefits exemption. Accordingly, cumulative net actuarial losses pending for amortization under MFRS as of January 1, 2010 for approximately $5,730 were immediately recognized in opening retained earnings under IFRS, increasing the employee benefits' liability.
Upon transition to IFRS as of January 1, 2010, CEMEX has also eliminated the employee termination benefits component from the employee benefits liability accrued under MFRS for approximately $345 against retained earnings in the opening balance sheet under IFRS, as termination benefits are only accrued in accordance with IAS 19 when the entity is demonstrably committed to paying the legal obligation to an employee; otherwise, they are expensed as incurred. Under MFRS they are accrued if payment is probable considering the historical behavior of redundancy payments.
j) Asset retirement obligations
As previously mentioned, CEMEX elected to use the exemption provided in IFRS 1 to account for the changes in asset retirement obligations (decommissioning costs) and related assets at the transition date using the shortcut method. The impact of this change on the liability was an increase of approximately $433 as of January 1, 2010, which was recognized against the related assets in the opening balance sheet under IFRS.
k) Deferred income taxes
Changes in deferred tax assets and liabilities as of January 1, 2010, represent the impact of deferred taxes on the adjustments necessary for the transition to IFRS. As a result, deferred tax assets recognized under MFRS increased by approximately $2,963, while deferred tax liabilities decreased by approximately $1,344, in both cases recognized against retained earnings in the opening balance sheet under IFRS as of January 1, 2010.
l) Uncertain tax positions
Under MFRS, the income tax effects from an uncertain tax position are recognized following a cumulative probability model; meanwhile, under IFRS, the tax effects of a position are measured using either an expected value approach or a single best estimate of the most likely outcome only if it is "more-likely-than-not" to be sustained based on its technical merits as of the reporting date. In making this assessment, CEMEX has assumed that the tax authorities will examine each position and have full knowledge of all relevant information. Each position has been considered on its own, regardless of its relation to any other broader tax settlement. The more-likely-than-not threshold represents a positive assertion by management that CEMEX is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained, no benefits of the position are to be recognized. As a result of the difference in the measurement and recognition of the effects related to uncertain tax positions between MFRS and IFRS described above, in its opening balance sheet under IFRS as of January 1, 2010, CEMEX increased the provision for uncertain tax positions recorded under MFRS for approximately $13,265 against the opening balance of retained earnings.
m) Cumulative translation adjustment
In its opening balance sheet under IFRS as of January 1, 2010, according to the election provided by IFRS 1, CEMEX elected to reset to zero the cumulative translation adjustment account accrued under MFRS at the same date for approximately $28,668 against the opening balance of retained earnings. Total stockholders' equity was not changed as a result of this reclassification.