6-K 1 d807689d6k.htm FORM 6-K Form 6-K
Table of Contents

 

 

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

For the month of June, 2019

Commission File Number 33-99720

 

 

ARAUCO AND CONSTITUTION PULP INC.

(Translation of registrant’s name into English)

 

 

El Golf 150

Fourteenth Floor

Santiago, Chile

(Address of principal executive offices)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F  ☒            Form 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes  ☐            No  ☒

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-             

 

 

 


Table of Contents

ARAUCO AND CONSTITUTION PULP INC

TABLE OF CONTENTS

 

Item         Page  

1.

   Ratio Analysis of the Interim Consolidated Financial Statements      1  

2.

   Unaudited Interim Consolidated Statements of Financial Position      7  

3.

   Unaudited Interim Consolidated Statements of Profit or Loss      9  

4.

   Unaudited Interim Consolidated Statements of Comprehensive Income      10  

5.

   Unaudited Interim Consolidated Statements of Changes in Equity      11  

6.

   Unaudited Interim Consolidated Statements of Cash Flow      12  

7.

   Unaudited Notes to the Interim Consolidated Financial Statements      13  
   Annex: Press Release   


Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

1. ANALYSIS OF FINANCIAL POSITION

 

  a)

Statement of Financial Position

The principal components of assets and liabilities at each period are as follows:

 

Assets

   06-30-2019
ThU.S.$
     12-31-2018
ThU.S.$
 

Current assets

     3,829,928        3,441,160  

Non-current assets

     11,833,650        11,152,588  
  

 

 

    

 

 

 

Total assets

     15,663,578        14,593,748  
  

 

 

    

 

 

 

Liabilities

   06-30-2019
ThU.S.$
     12-31-2018
ThU.S.$
 

Current liabilities

     1,381,901        1,579,764  

Non-current liabilities

     6,807,140        5,675,013  

Non–parent participation

     37,675        37,192  

Net equity attributable to parent company

     7,436,862        7,301,779  
  

 

 

    

 

 

 

Total net equity and liabilities

     15,663,578        14,593,748  
  

 

 

    

 

 

 

As of June 30, 2019, total assets increased MU.S.$1,070 compared to December 31, 2018, equivalent to a 7.33% variation. This variation was driven mainly by increases in the balance of property, plant and equipment, inventories, cash and cash equivalents, trade and other current receivables, which were partially offset by a decrease in investment in related parties.

In turn, total liabilities increased by MU.S.$934 principally due to an increase in financial liabilities (mainly bonds issuances), partially offset by decreases in tax liabilities and current non-financial liabilities (minimum dividend).

The main financial and operational indicators as of the dates and periods indicated below are as follows:

 

Liquidity ratios

   06-30-2019      12-31-2018  

Current Liquidity (current assets / current liabilities)

     2.77        2.18  

Acid ratio ((current assets-inventories, biological assets) / current liabilities)

     1.71        1.33  

Debt indicators

   06-30-2019      12-31-2018  

Debt to equity ratio (total liabilities / equity)

     1.10        0.99  

Short-term debt to total debt (current liabilities / total liabilities)

     0.17        0.22  

Long-term debt to total debt (non-current liabilities / total liabilities)

     0.83        0.78  
     06-30-2019      06-30-2018  

Financial expenses coverage ratio (earnings before taxes + interest expense / interest expense)

     2.82        6.44  

Activity ratio

   06-30-2019      12-31-2018  

Inventory turnover-time (cost of sales / inventories + current biological assets)

     2.71        2.95  

Inventory turnover-time (excluding biological assets) (Cost of sales /inventory)

     3.49        3.92  

Inventory permanence-days ((inventories + biological assets) /cost of sales)

     132.62        121.96  

Inventory permanence-days (excluding biological assets) (inventory / cost of sales)

     103.13        91.80  

 

1


Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

As of June 30, 2019, the short-term debt to total debt ratio represented 17% of total liabilities (22% as of December 31, 2018).

Our financial expenses coverage ratio decreased from 6.44 to 2.82, mainly due to lower earnings before taxes for the six month period ended June 30, 2019, compared to the same period of 2018.

 

  b)

Statement of profit or loss

Profit before income tax

Profit before income tax registered a profit of approximately MU.S.$230 compared to a profit of approximately MU.S.$560 in the same period of 2018. The negative variation of MU.S.$330 is explained by the factors described in the following table:

 

Item

   MU.S.$  

Gross profit

     (332

Distribution and Administrative Expenses

     (25

Other income and expenses

     49  

Other financial income and expenses

     (17

Others

     (5
  

 

 

 

Net change in profit before income tax

     (330
  

 

 

 

The main indicators related to result accounts and the details of revenues and operation costs are as follows:

 

Revenues

   06-30-2019
ThU.S.$
     06-30-2018
ThU.S.$
 

Pulp

     1,235,207        1,556,917  

Timber

     1,423,715        1,386,546  

Forestry

     65,475        61,906  

Other

     15,359        18,622  
  

 

 

    

 

 

 

Total revenues

     2,739,756        3,023,991  
  

 

 

    

 

 

 

Sales costs

   06-30-2019
ThU.S.$
     06-30-2018
ThU.S.$
 

Wood

     395,485        355,838  

Forestry work and other services

     280,481        332,029  

Depreciation and amortization

     234,608        192,343  

Other costs

     995,297        977,852  
  

 

 

    

 

 

 

Total sales costs

     1,905,871        1,858,062  
  

 

 

    

 

 

 

Profitability index

   06-30-2019      12-31-2018  

Profitability on equity

     4.96        10.05  

Profitability on assets

     2.43        5.08  

Return on operating assets

     3.57        8.19  

Profitability ratios

   06-30-2019      06-30-2018  

Income per share (U.S.$) (1)

     1.62        3.86  

Profit after tax (ThU.S.$) (2)

     183,527        435,944  

Gross margin (ThU.S.$)

     883,885        1,165,929  

Finance costs (ThU.S.$)

     (126,940      (103,081

 

(1)

Earnings per share refer to the profit to net equity to parent company.

 

(2)

Includes non-controlling interest.

 

2


Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

EBITDA

   06-30-2019
ThU.S.$
     06-30-2018
ThU.S.$
 

Profit (loss)

     183,527        435,944  

Finance costs

     126,940        103,081  

Finance income

     (14,845      (7,345

Income tax expense

     46,965        124,696  

EBIT

     342,587        656,376  

Depreciation and amortization

     253,343        206,727  

EBITDA

     595,930        863,103  

Cost at fair value of the harvest

     154,421        158,834  

Gain from changes in fair value of biological assets

     (74,410      (51,876

Exchange difference

     7,219        16,230  

Others*

     15,010        9,047  

Adjusted EBITDA

     698,169        995,338  

 

*

Considers impairment provision for property, plant and equipment.

2. MAIN SOURCES OF FINANCING

Arauco’s financing needs are mainly covered through the capital markets, with bond issuances and credits obtained from banks and financial institutions serving as the main sources of financing. For short-term borrowing, Arauco follows a liquidity policy which indicates the amounts and institutions from which it can borrow according to several conditions defined in the policy. In the case of long-term debt, corporate bond issuances in the local market and also in international markets are used as sources of new resources. Another source of long-term financing corresponds to borrowings from banks and financial institutions around the world.

3. DIFFERENCE BETWEEN ECONOMIC VALUES AND BOOK ASSETS

Assets and liabilities are presented in the Interim Consolidated Financial Statements according to International Financial Reporting Standards and instructions issued by Chilean Commission for the Financial Market. We believe that there are no material differences between the economic value of our assets and the value reflected in these Financial Statements.

4. MARKET SITUATION

Pulp Division

In the second quarter of 2019, pulp revenues were 11% lower, explained by decreases of 9% in volumes and 2% in prices. The market scenario continued deteriorating due to a lower demand and high inventory levels, deepening the downward trend in pulp prices. The stability that was seen by the end of the first quarter, did not remain in this period. The uncertainty on the macro economic situation, largely because ofthe China-US trade war, impacted negatively on the paper and packaging demand and therefore on pulp demand.

Asian markets, especially China, had the most relevant prices decreases because of historically high inventory levels concentrated in some producers. In Europe, prices were also down compared to the first quarter, even though in lesser magnitude than the deterioration in Asia, but still significant and coupled with a slow demand in many regions. On the supply side, as happened in the first quarter, we didn’t have unexpected events that could limit pulp production, such us weather problems, strikes or unexpected plant stoppages. Our production, during the second quarter, was higher than the last quarter by 6.1% and slightly lower when compared to the same period of 2018 due to some programmed maintenance stoppages in this quarter.

 

3


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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

Composite Panel

Sales increased compared to the previous quarter, with sales volume going up 6.0% (including MDF and PBO), which was slightly offset by a 0.3% average price decrease. The Latin American market remained balanced, even though it was affected by a slow economic growth and in a lower level, by some oversupply coming from Brazil. In this country, markets were complicated during the second quarter of the year due to MDF supply growth and a sluggish local economy. In Argentina, we had a more stable quarter compared to the beginning of the year, with less fluctuations in the exchange rate. However, political uncertainties may affect the whole market down the road. In the US and Canada, the shutdown of three plants of a relevant competitor resulted in better sales conditionsfor PB during the second quarter. Regarding MDF, supply and demand were balanced, and market outlook will depend on the general economy.

Sawn timber

Second quarter results still don’t reflect the effects of the US-China trade war in prices and volumes. Lower dynamism in the markets and higher sawn timber supply, especially from Brazil, Canada and Europe are affecting demand, prices and volumes. In remanufacturing wood products, we had higher demand than supply in some products, resulting in better prices. In general, sales were very stable, driven by a healthy demand in the US and lower supply from foreign competitors (higher duties to Chinese imports).

Plywood

Plywood market faced the same challenging scenario as Sawn timber, with most of the markets showing a lower demand, except North America. This demand situation, the oversupply coming from Brazil, Chile and China and the strong competition of substitute products such as MDF and OSB (Oriented Stranded Boards), affected volumes and prices.

 

4


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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

5. ANALYSIS OF CASH FLOW

The main components of cash flow in each period are as follows:

 

     06-30-2019
ThU.S.$
     06-30-2018
ThU.S.$
 

Positive (negative) Cash flow

     

Net cash flows from operating activities

     132,035        503,721  

Cash flows from (used in) financing activities:

     

Loan and bond obtention and payments

     886,306        16,603  

Payment of lease liabilities

     (43,040      (24,612

Dividends paid

     (182,109      (114,442

Others

     (5,554      (763

Cash flows from (used in) investment activities:

     

Purchase and sale of property, plant and equipment

     (437,315      (243,607

Purchase and sale of biological assets

     (130,747      (117,727

Purchase and sale of intangible assets

     (8,788      (472

Additions (Disposals), Investments in joint ventures and associates

     (49,252      (17,283

Dividends received

     6,705        2,910  

Others

     168        (47
  

 

 

    

 

 

 

Positive (negative) net cash flow

     168,409        4,281  
  

 

 

    

 

 

 

Cash flow from operating activities shows a lower positive balance of MU.S.$132 for the current period, representing a variation in respect of the previous period (MU.S.$504), resulting mainly from higher tax payments and higher payments to accounts payables.

The financing cash flow shows a positive balance of MU.S.$656 for the current period, representing a variation in respect of the previous period (negative balance of MU.S.$123), resulting mainly from bonds issuances, which was offset by higher dividends payments.

Regarding the investment cash flow, as of the closing of the current period, it shows a higher negative balance of MU.S.$619 (MU.S.$376 for the 2018 period), mainly due to higher disbursements for the purchase of property, plant and equipment and purchase of plants to Masisa in Mexico, offset by the disposal of Puertos y Logística S.A.

 

5


Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

6. MARKET RISK ANALYSIS

In respect of the economic risks resulting from interest rate variations, the Company maintains, as of June 30, 2019, a ratio of fixed rate debt to total consolidated debt of approximately 89.4%, which it believes is consistent with industry standards.

Regarding variations in prices of pulp and forestry products, the Company does not participate in futures trading as to maintain one of the lowest cost structures in the industry, the risks for price fluctuations are bounded.

The Company and most of its subsidiaries maintain their accounting records and prepare their financial statements in U.S. dollars. Both the accounts receivable and most financial liabilities are denominated in U.S. dollars or are covered by an exchange rate swap, as well as most of their revenues. As a result, exposure to changes in the exchange rate has decreased significantly.

In the Interim Consolidated Financial Statements as of June 30, 2019, a detailed analysis of the risks associated with the business of Arauco is available (See Note 23).

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

     Note      06-30-2019
ThU.S.$
     12-31-2018
ThU.S.$
 

Assets

        

Current Assets

        

Cash and cash equivalents

     5-23        1,250,863        1,075,942  

Other current financial assets

     23        1,027        497  

Other current non-financial assets

     25        192,934        129,854  

Trade and other current receivables

     23        851,994        839,184  

Accounts receivable from related companies

     13        4,445        7,324  

Current inventories

     4        1,153,685        1,030,196  

Current biological assets

     20        308,589        315,924  

Current tax assets

        60,723        36,513  

Total Current Assets other than assets or disposal groups classified as held for sale

        3,824,260        3,435,434  

Non-Current Assets or disposal groups classified as held for sale

     22        5,668        5,726  

Non-Current Assets or disposal groups classified as held for sale or as held for distribution to owners

        5,668        5,726  

Total Current Assets

        3,829,928        3,441,160  

Non-Current Assets

        

Other non-current financial assets

     23        49,165        20,346  

Other non-current non-financial assets

     25        114,187        86,948  

Trade and other non-current receivables

     23        11,334        15,149  

Accounts receivable from related companies, non-current

     13        —          481  

Investments accounted for using equity method

     15-16        304,971        358,053  

Intangible assets other than goodwill

     19        96,720        90,093  

Goodwill

     17        66,299        65,851  

Property, plant and equipment

     7        7,810,175        7,174,693  

Non-current biological assets

     20        3,374,596        3,336,339  

Deferred tax assets

     6      6,203        4,635  

Total Non-Current Assets

        11,833,650        11,152,588  

Total Assets

        15,663,578        14,593,748  
     

 

 

    

 

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

 

7


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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)

 

     Note    06-30-2019
ThU.S.$
    12-31-2018
ThU.S.$
 

Equity and Liabilities

       

Liabilities

       

Current Liabilities

       

Other current financial liabilities

   23      544,377       537,596  

Trade and other current payables

   23      696,657       659,618  

Accounts payable to related companies

   13-23      8,099       10,229  

Other current provisions

   18      1,279       413  

Current tax liabilities

   6      7,196       153,642  

Current provisions for employee benefits

   10      5,973       5,656  

Other current non-financial liabilities

   25      118,320       212,610  

Total Current Liabilities other than assets included in disposal groups
classified as held for sale

        1,381,901       1,579,764  

Total Current Liabilities

        1,381,901       1,579,764  

Non-Current Liabilities

       

Other non-current financial liabilities

   23      5,191,161       4,044,279  

Non-current payables

        2,591       2,230  

Other non-current provisions

   18      34,114       33,884  

Deferred tax liabilities

   6      1,389,959       1,417,658  

Non-current provisions for employee benefits

   10      68,968       64,895  

Other non-current non-financial liabilities

   25      120,347       112,067  

Total Non-Current Liabilities

        6,807,140       5,675,013  

Total Liabilities

        8,189,041       7,254,777  

Equity

       

Issued capital

   3      353,618       353,618  

Retained earnings

        7,925,144       7,824,045  

Other reserves

        (841,900     (875,884

Equity attributable to parent company

        7,436,862       7,301,779  

Non-controlling interests

        37,675       37,192  

Total Equity

        7,474,537       7,338,971  

Total Equity and Liabilities

        15,663,578       14,593,748  
     

 

 

   

 

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

INTERIM CONSOLIDATED STATEMENTS OF PROFIT OR LOSS

 

            January-June     April-June  
            2019     2018     2019     2018  
     Note      ThU.S.$     ThU.S.$     ThU.S.$     ThU.S.$  

Statements of profit or loss

           

Revenue

     9        2,739,756       3,023,991       1,351,570       1,559,337  

Cost of sales

     3        (1,905,871)       (1,858,062)       (965,993     (936,471

Gross profit

        833,885       1,165,929       385,577       622,866  

Other income

     3        131,952       66,459       86,413       29,227  

Distribution costs

     3        (288,178     (267,705     (143,282     (135,305

Administrative expenses

     3        (287,504     (282,467     (146,224     (140,942

Other expense

     3        (50,006     (33,619     (27,689     (16,792

Profit from operating activities

        340,149       648,597       154,795       359,054  

Finance income

     3        14,845       7,345       8,099       2,563  

Finance costs

     3        (126,940     (103,081     (69,549     (51,419

Share of profit of associates and joint ventures accounted for using equity method

     3-15        9,657       24,009       5,294       18,164  

Exchange rate differences

        (7,219     (16,230     (9,346     (17,279

Profit before income tax

        230,492       560,640       89,293       311,083  

Income tax expense

     6        (46,965     (124,696     (31,865     (72,855

Net Profit

        183,527       435,944       57,428       238,228  
     

 

 

   

 

 

   

 

 

   

 

 

 

Net profit attributable to

           

Net profit attributable to Parent company

        183,159       436,235       57,323       238,429  

Net profit attributable to Non-controlling interests

        368       (291     105       (201

Net Profit

        183,527       435,944       57,428       238,228  
     

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share (in U.S.$ per share)

           

Basic and diluted earnings per share from continuing operations

        1.6186       3.8550       0.5066       2.1070  
     

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share

        1.6186       3.8550       0.5066       2.1070  
     

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

            January-June     April-June  
            2019     2018     2019     2018  
     Note      ThU.S.$     ThU.S.$     ThU.S.$     ThU.S.$  

Net profit

        183,527       435,944       57,428       238,228  

Components of other comprehensive income that will not be reclassified to profit or loss before tax:

           

Other comprehensive income before tax actuarial gain (losses) on defined benefit plans

     10        499       (1,685     (312     (1,367

Other Comprehensive Income that will not be reclassified to profit or loss before tax

        499       (1,685     (312     (1,367

Components of other comprehensive income that will be reclassified to profit or loss before tax:

           

Exchange differences on translation

           

Gains (losses) on exchange differences on translation, before tax

     11        13,479       (167,860     22,101       (162,335

Other Comprehensive Income before tax exchange differences on translation

        13,479       (167,860     22,101       (162,335

Cash flow hedges

           

Gains (losses) on cash flow hedges, before tax

     23        32,398       51,391       37,221       25,550  

Recycle of cash flow hedges to profit or loss before tax

     23        (12,907     (6,120     (10,759     (4,220

Other Comprehensive Income before tax Cash flow hedges

        19,491       45,271       26,462       21,330  

Share of other comprehensive income of associates and joint ventures accounted for using equity method that will be reclassified to profit or loss before tax

        8,162       (508     7,570       (2,202

Share of other comprehensive income of associates and joint ventures accounted for using equity method that will be reclassified to profit or loss before tax

        8,162       (508     7,570       (2,202

Other Comprehensive income that will be reclassified to profit or loss before tax

        41,132       (123,097     56,133       (143,207

Income tax relating to components of other comprehensive Income that will not be reclassified to profit or loss before tax

           

Income tax relating to actuarial losses on defined benefit plans

        (135     455       64       370  

Income tax relating to components of other comprehensive income that will not be reclassified to profit or loss before tax

        (135     455       64       370  

Income tax relating to components of other comprehensive Income that will be reclassified to profit or loss before tax

           

Income tax relating to cash flow hedges

     6        (5,159     (12,292     (8,877     (5,888

Income tax relating to share of other comprehensive income of associates and joint ventures accounted for using equity method that will be reclassified to profit or loss

        (2,171     (1,522     (2,034     (1,099

Income tax relating to components of other comprehensive income that will be reclassified to profit or loss

        (7,330     (13,814     (10,911     (6,987

Other comprehensive income (loss)

        34,166       (138,141     44,974       (151,191

Comprehensive income (loss)

        217,693       297,803       102,402       87,037  
     

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income (loss) attributable to

           

Comprehensive income (loss), attributable to Owners of parent company

        217,143       302,211       101,867       91,041  

Comprehensive income (loss), attributable to Non-controlling interests

        550       (4,408     535       (4,004

Total comprehensive income (loss)

        217,693       297,803       102,402       87,037  
     

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

06-30-2019

   Issued
Capital
ThU.S.$
     Reserve of
exchange
differences
on
translation
ThU.S.$
    Reserve
of cash
flow
hedges
ThU.S.$
     Reserve
of
actuarial
losses on
defined
benefit
plans
ThU.S.$
    Other
Reserves
ThU.S.$
    Total
other
Reserves
ThU.S.$
    Retained
Earnings
ThU.S.$
    Equity
attributable
to owners of
parent

ThU.S.$
    Non-
controlling
interests
ThU.S.$
    Total
Equity
ThU.S.$
 

Opening balance at 01-01-2019

     353,618        (872,395     13,395        (17,571     687       (875,884     7,824,045       7,301,779       37,192       7,338,971  

Increase (decrease) for changes in accounting policies

     —          —         —          —         —         —         (107     (107     —         (107

Restated opening balance

     353,618        (872,395     13,395        (17,571     687       (875,884     7,823,938       7,301,672       37,192       7,338,864  

Changes in Equity:

                      

Comprehensive income

                      

Net profit

     —          —         —          —         —         —         183,159       183,159       368       183,527  

Other comprehensive income, net of tax

     —          13,297       14,332        364       5,991       33,984       —         33,984       182       34,166  

Comprehensive income

     —          13,297       14,332        364       5,991       33,984       183,159       217,143       550       217,693  

Dividends

     —          —         —          —         —         —         (80,992     (80,992     (91     (81,083

Increase (decrease) from transfers and other changes

     —          —         —          —         —         —         (961     (961     24       (937

Changes in equity

     —          13,297       14,332        364       5,991       33,984       101,206       135,190       483       135,673  

Closing balance at 06-30-2019

     353,618        (859,098     27,727        (17,207     6,678       (841,900     7,925,144       7,436,862       37,675       7,474,537  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

06-30-2018

   Issued
Capital
ThU.S.$
     Reserve of
exchange
differences
on
translation
ThU.S.$
    Reserve of
cash flow
hedges
ThU.S.$
     Reserve of
actuarial
losses on
defined
benefit
plans
ThU.S.$
    Other
Reserves
ThU.S.$
    Total other
Reserves
ThU.S.$
    Retained
Earnings
ThU.S.$
    Equity
attributable
to owners of
parent

ThU.S.$
    Non -
controlling
interests
ThU.S.$
    Total
Equity
ThU.S.$
 

Opening balance at 01-01-2018

     353,618        (691,772     4,752        (18,926     2,168       (703,778     7,425,133       7,074,973       41,920       7,116,893  

Increase (decrease) for changes in accounting policies

     —          —         —          —         —         (1,918     (1,956     (3,874     —         (3,874

Restated opening balance

     353,618        (691,772     2,834        (18,926     2,168       (705,696     7,423,177       7,071,099       41,920       7,113,019  

Changes in Equity:

                      

Comprehensive income

                      

Net profit

     —          —         —          —         —         —         436,235       436,235       (291     435,944  

Other comprehensive income, net of tax

     —          (163,743     32,979        (1,230     (2,030     (134,024     —         (134,024     (4,117     (138,141

Comprehensive income

     —          (163,743     32,979        (1,230     (2,030     (134,024     436,235       302,211       (4,408     297,803  

Dividends

     —          —         —          —         —         —         (189,546     (189,546     (54     (189,600

Increase (decrease) from transfers and other changes

     —          —         —          —         —         —         (171     (171     (33     (204

Changes in equity

     —          (163,743     32,979        (1,230     (2,030     (134,024     246,518       112,494       (4,495     107,999  

Closing balance at 06-30-2018

     353,618        (855,515     35,813        (20,156     138       (839,720     7,669,695       7,183,593       37,425       7,221,018  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the years ended June 30,  
     2019
ThU.S.$
    2018
ThU.S.$
 

STATEMENTS OF CASH FLOWS

    

Cash Flows from (used in) Operating Activities

    

Classes of cash receipts from operating activities

    

Receipts from sales of goods and rendering of services

     2,926,536       2,924,236  

Other cash receipts from operating activities

     200,672       207,165  

Classes of cash payments

    

Payments to suppliers for goods and services

     (2,258,263     (2,095,089

Payments to and on behalf of employees

     (327,293     (295,463

Other cash payments from operating activities

     (84,321     (134,239

Interest paid

     (111,297     (85,882

Interest received

     12,136       3,959  

Income taxes paid

     (222,651     (19,455

Other inflows (outflows) of cash, net

     (3,484     (1,511

Net Cash flow from Operating Activities

     132,035       503,721  
  

 

 

   

 

 

 

Cash flows from (used in) Investing Activities

    

Cash flow from loss of control of subsidiaries and other businesses

     102,080       —    

Cash flow used in obtaining control of subsidiaries or other businesses

     (150,862     (16,551

Cash used for the purchase of non-controlling interests

     (470     (732

Proceeds from sale of property, plant and equipment

     6,322       5,578  

Purchase of property, plant and equipment

     (443,637     (249,185

Purchase of intangible assets

     (8,788     (472

Proceeds from sales of other long-term assets

     2,304       763  

Purchase of other non-current assets

     (133,051     (118,490

Dividends received

     6,705       2,910  

Other inflows (outflows) of cash, net

     168       (47

Cash flows from (used in) Investing Activities

     (619,229     (376,226
  

 

 

   

 

 

 

Cash flows from (used in) Financing Activities

    

Total borrowings obtained

     1,088,036       284,474  

Debt obtained in long-term

     1,073,536       84,000  

Debt obtained in short-term

     14,500       200,474  

Repayments of borrowings

     (201,730     (267,871

Payments of lease liabilities

     (43,040     (24,612

Dividends paid

     (182,109     (114,442

Other outflows of cash, net

     (5,554     (763

Cash flows from (used in) Financing Activities

     655,603       (123,214
  

 

 

   

 

 

 

Net increase (decrease) in Cash and Cash Equivalents before effect of exchange rate changes

     168,409       4,281  

Effect of exchange rate changes on cash and cash equivalents

     6,512       (22,341
  

 

 

   

 

 

 

Net increase (decrease) of Cash and Cash Equivalents

     174,921       (18,060

Cash and cash equivalents, at the beginning of the period

     1,075,942       589,886  

Cash and cash equivalents, at the end of the period

     1,250,863       571,826  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these interim consolidated financial statements.

 

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Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2019 AND 2018 AND DECEMBER 31, 2018

NOTE 1. PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Entity Information

Celulosa Arauco y Constitución S.A. and subsidiaries, (hereafter “Arauco” or the “Company”), tax identification number 93,458,000-1, is a closely held corporation, that was registered in the Securities Registry (the “Registry”) of the Chilean Commission for the Financial Market (“CMF”) as No. 042 on June 14, 1982. Additionally, the Company is registered as a non-accelerated filer in the Securities and Exchange Commission (SEC) of the United States of America.

The Company’s head office address is El Golf Avenue 150, 14th floor, Las Condes, Santiago, Chile.

Arauco is principally engaged in the production and sale of products related to the forestry and timber industries. Its main operations are focused on business areas of pulp, wood products and forestry.

As of June 30, 2019, Arauco is controlled by Empresas Copec S.A., tax identification number 90,690,000-9, which owns 99.9780% of Arauco, and is registered in the Securities Registry as No. 0028. Each of the above mentioned companies is subject to the oversight of the CMF.

Moreover, Empresas Copec S.A. is controlled by the public corporation AntarChile S.A., tax identification number 96,556,310-5, which owns 60.8208% of Empresas Copec S.A. Furthermore, the ultimate shareholders of AntarChile S.A. and, consequently, of Empresas Copec S.A., are Mrs. María Noseda Zambra de Angelini, Mr. Roberto Angelini Rossi and Mrs. Patricia Angelini Rossi. It is noted in this regard, that Mrs. María Noseda Zambra de Angelini passed away on April 15, 2018, and the effective possession of her property is in process. More details of the control of Celulosa Arauco y Constitución S.A. can be obtained from its Annual Report 2018, which appears on its website.

Arauco’s Interim Consolidated Financial Statements were prepared on a going concern basis.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

Presentation of Interim Consolidated Financial Statements

The Interim Consolidated Financial Statements presented by Arauco are comprised by the following:

 

   

Interim Consolidated Statements of Financial Position as of June 30, 2019 and December 31, 2018.

 

   

Interim Consolidated Statements of Profit or Loss for the periods ended June 30, 2019 and 2018.

 

   

Interim Consolidated Statements of Comprehensive Income for the periods ended June 30, 2019 and 2018.

 

   

Interim Consolidated Statements of Changes in Equity for the periods ended June 30, 2019 and 2018.

 

   

Interim Consolidated Statements of Cash Flows for the periods ended June 30, 2019 and 2018.

 

   

Explanatory disclosures (notes)

Period Covered by the Interim Consolidated Financial Statements

Six month period ended June 30, 2019 and 2018.

Date of Approval of the Interim Consolidated Financial Statements

These interim consolidated financial statements were approved by the Board of Directors of the Company (the “Board”) at the Extraordinary Meeting No. 615 on August 19, 2019.

Abbreviations used in this report:

IFRS - International Financial Reporting Standards

IASB - International Accounting Standards Board

IAS - International Accounting Standards

IFRIC - International Financial Reporting Standards Interpretations Committee

MU.S.$ - Millions of U.S. dollars

ThU.S.$ - Thousands of U.S. dollars

U.F. - Inflation index-linked units of account

UTA - Annual Tax Unit

ICMS - Tax movement of inventories and services (Brazil)

Functional and Presentation Currency

Arauco and most of its subsidiaries determined the United States (“U.S.”) Dollar as its functional currency since the majority of its revenues from sales of its products are derived from exports denominated in U.S. Dollars, while their costs of sales are to a large extent related or indexed to the U.S. Dollar.

For the pulp reportable segment, most of the sales are exports denominated in U.S. Dollars and costs are mainly related to plantation costs which are settled in U.S. Dollars.

For the wood products and forestry reportable segments, although total sales include a mix of domestic and exports sales, prices of the products are established in U.S. Dollars, which is also the case for the cost structure of the related raw materials.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

In relation to the cost of sales, although labor and services costs are generally billed and paid in local currency, these costs are not as significant as the costs of raw materials, which are driven mainly by global markets and therefore, influenced mostly by the U.S. Dollar.

The currency used to finance operations is mainly the U.S. Dollar.

The presentation currency of the interim consolidated financial statements is the U.S. Dollar. Figures on these interim consolidated financial statements are presented in thousands of U.S. Dollar (ThU.S.$).

Summary of significant accounting policies

 

a)

Basis for preparation of the interim consolidated financial statements

The interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and they represent the explicit and unreserved adoption of IFRS.

The interim consolidated financial statements have been prepared on a historical cost basis, except for biological assets and certain derivative financial instruments which are measured at revalued amounts or fair value at the end of each period as explained in the following significant accounting policies.

 

b)

Critical accounting estimates and judgments

The preparation of these interim consolidated financial statements, in accordance with IFRS, requires management to make estimates and assumptions that affect the carrying amounts reported. These estimates are based on historical experience and various other assumptions that are considered to be reasonable. Actual results may differ from these estimates. Management believes that the accounting policies below are the critical judgments that have the most significant effect on the amounts recognized in the interim consolidated financial statements.

- Biological Assets

The recovery of forest plantations is based on discounted cash flow models which means that the fair value of biological assets is calculated using cash flows from continuing operations on a discounted basis, based on our sustainable forest management plans and the estimated growth of forests.

These discounted cash flows require estimates in growth, harvest, sales prices and costs; therefore, it is important that management makes appropriate estimates of future levels and trends for sales and costs, as well as conduct regular surveys of the forests to establish the volumes of wood available for harvesting and their current growth rates. The main considerations used to measure forest plantations are presented in Note 20, including a sensitivity analysis.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

- Goodwill

Goodwill represents the excess of the acquisition cost over the fair value of the Group’s holding in the identifiable net assets of the acquired subsidiary at the date of acquisition. The aforementioned fair value is determined whether based on assessments and/or the discounted future flow method using hypotheses in their determination, such as sales prices and industry indexes, among others. See Note 17.

- Litigation and Contingencies

Arauco and its subsidiaries are subject to certain litigation proceedings. Future impact on Arauco’s financial condition derived from such litigations is estimated by management, in collaboration with its legal advisors. Arauco applies judgment when interpreting the reports of its legal advisors who provide updated estimates of the legal contingencies at each reporting period and/or at each time a modification is determined to be necessary. For a description of current litigations see Note 18.

 

c)

Consolidation

The interim consolidated financial statements include all entities over which Arauco has the power to direct the relevant financial and operating activities. Subsidiaries are consolidated from the date on which control is obtained and up to the date that control ceases.

Specifically, a company controls an investee or subsidiary if, and only if, they have all of the following:

(a) power over the investee, i.e. the investor has existing rights which give it the ability to direct the relevant activities (the activities that significantly affect the investee’s returns);

(b) exposure or rights to variable returns from involvement with the investee; and

(c) the ability to use power over the investee to affect the amount of the investor’s returns.

When Arauco holds less than the majority of the voting rights in a company in which it participates, it nonetheless has the power over said company - when these voting rights are enough - to grant it in practice the ability to unilaterally direct said company’s relevant activities. Arauco takes into account all facts and circumstances in order to assess if the voting rights in a company in which it participates are enough for granting it the power, including:

a) the size of the investor’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders;

b) potential voting rights held by the investor, other vote holders or other parties;

c) rights arising from other contractual arrangements; and

d) any additional facts and circumstances that indicate the investor has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.

The Company will reevaluate whether or not it holds control of a company in which participates if the facts and circumstances indicate that changes have occurred in one or more of the three elements of control mentioned above.

 

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Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee. An entity includes the income and expenses of an acquired or sold subsidiary in the consolidated financial statements from the date it gains control until the date when the entity ceases to control the subsidiary.

The profit or loss of each component of other comprehensive income is attributed to owners of the parent company and the non-controlling interest, as appropriate. Total comprehensive income is attributed to the owners of the parent company and non-controlling interests even if the results of the non-controlling interest have a deficit balance.

If a subsidiary uses accounting policies other than those adopted in the consolidated financial statements for transactions and other events in similar circumstances, appropriate adjustments are made to the interim consolidated financial statements of subsidiaries in order to ensure compliance with Arauco’s accounting policies.

All intercompany transactions and unrealized gains and losses from subsidiaries have been fully eliminated from these interim consolidated financial statements and non-controlling interest is presented in the interim consolidated statement of financial position within equity, separately from the equity of the owners of the parent company.

The interim consolidated financial statements at the end of this period include the assets, liabilities, income and expenses of the subsidiaries shown in Note 13.

Certain consolidated subsidiaries have Brazilian Real, Argentine Pesos, Canadian Dollars and Chilean Pesos as their functional currencies. For consolidation purposes, the financial statements of those subsidiaries have been prepared in accordance with IFRS and translated as indicated in Note 1 (e) (ii).

A parent company will present non-controlling interests in the interim consolidated statement of financial position within equity, separately from the equity of the owners of the parent company.

 

d)

Segments

Arauco has defined its reportable segments according to its business areas, based on the products and services sold to its customers. This definition is consistent with the management, resource allocation and performance assessment made by key personnel responsible for making relevant decisions related to the Company’s operation. The personnel responsible for making such decisions are the Executive Vice-president and the Chief Executive Officer who are the highest authorities for making decisions and are supported by the Corporate Managing Directors of each segment.

Based on the aforementioned process, the Company has established reportable segments according to the following business units:    

 

   

Pulp

 

   

Wood products

 

   

Forestry

Refer to Note 24 for detailed financial information by reportable segment.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

e)

Functional currency

 

(i)

Functional currency

All items in the financial statements of Arauco and each of its subsidiaries, associates and jointly controlled entities are measured using the currency of the primary economic environment in which each entity operates (the functional currency). The interim consolidated financial statements are presented in U.S. dollars, which is Arauco’s functional and presentation currency.

 

(ii)

Translation to the presentation currency of Arauco

For the purposes of presenting interim consolidated financial statements, assets and liabilities of Arauco’s operations in a functional currency different from Arauco’s are translated into U.S. dollars using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange rate differences are recognized in other comprehensive income and accumulated in “Other reserves” within–equity.

 

(iii)

Foreign Currency Transactions

Transactions in currencies other than the functional currency are recognized at the exchange rates prevailing at the dates of the transactions. Profit or loss on transactions in currencies other than the functional currency resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies, are recognized in the statements of profit or loss, except those which are recorded in other comprehensive income and accumulated in equity such as cash flows hedging derivatives.

 

f)

Cash and cash equivalents

Cash and cash equivalents include cash-on-hand, deposits held on demand at financial entities and other short term highly liquid investments with an original maturity of three months or less and which are subject to an insignificant risk of changes in value.

 

g)

Financial Instruments

Financial assets

Initial classification

Arauco classifies its financial assets into the following categories: fair value through profit or loss and amortized cost.

Arauco does not have financial assets at fair value through other comprehensive income.

The classification is based on the business model used to manage the assets and the characteristics of their contractual cash flows.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

Management determines the classification of its financial assets at the time of their initial recognition.

(a) Financial assets at fair value through profit or loss: these instruments are initially measured at fair value. Net income and losses, including any income from interest or dividends, are registered in the profit or loss of the period. Financial assets are classified in the category of financial assets at fair value through profit or loss when they are maintained for negotiation or designated in their initial registration as assets at fair value through profit or loss. A financial asset can be classified in this category if it is acquired mainly for the purposes of being sold in the short-term. Gain or losses of assets held for negotiations are registered in the consolidated statements of Profit or Loss, and the related interest is registered independently as financial income. Derivatives are classified as acquired for negotiation also unless they are designated as hedging instruments.

(b) Assets measured at amortized cost: they are initially registered at the fair value of the transaction, adding or subtracting the transaction costs that are directly attributable to the issuance of the financial asset or financial liability. The financial asset is maintained within a business model, the objective of which is to maintain financial assets to obtain contractual cash flows and the contractual conditions of the asset give rise, on specified dates, to cash flows that are solely payments of principal and interests (“SPPI”) over the amount of the outstanding principal.

Subsequent measurement

Financial instruments are subsequently measured at fair value through profit or loss or amortized cost.

The classification is based on two criteria: i) the Company’s business model for the management of financial instruments, and ii) whether the contractual cash flows related to the financial instruments represent “Solely Payments of Principal and Interests”.

a) Financial assets at fair value through profit or loss: these instruments are subsequently measured at fair value. Net earnings and losses, including income from interests and dividends, are registered as profits or losses for the period. These instruments are held for negotiation and they are mainly acquired to be sold in the short term. Derivatives are also classified as held for negotiation, unless they are registered as hedging instruments. Financial instruments of this type are classified as Other Current and Non-Current Financial Assets. They are subsequently valuated by determining their fair value, registering changes in value in the interim consolidated statements of Profit or Loss, in the items of Financial Income or Financial Costs.

b) Financial assets measured at amortized cost: These instruments are subsequently measured at amortized cost minus accumulated amortizations, using the effective interest method and adjusted by loss allowance and volume discounts, in the case of financial assets. Financial income and expenses, foreign exchange income and losses, and impairment are registered in results. Any earnings or losses due to initial or subsequent reductions of the value of the asset are registered in the statement of profit or loss of the period. Loans and receivables are non-derivative financial instruments with fixed or determinable payments not traded in any active market. They are registered at amortized cost, registering accrued conditions directly in profit or loss.

 

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June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

Arauco measures accumulated losses in a quantity equivalent to expected credit losses during the lifelong commitment. Expected credit losses are based on contractual cash flow differences based on the allowance of each contract and the cash flows that Arauco expects. The difference is then discounted based on an approximation of the asset’s original effective interest rate. The asset’s carrying value is reduced as the allowance is used, and the loss is recognized in sales expenses in the financial statements. When an account receivable cannot be collected, it is regularized against the allowance account for receivables. Subsequent recoveries of previously impaired amounts are recognized as a debit in distribution costs.

Derivative financial instruments are explained in Note 1 h).

Financial liabilities

Arauco classifies its financial liabilities as follows: fair value through profit or loss, derivatives designated as effective hedging instruments and amortized costs.

Management determines the classification of its financial liabilities upon initial recognition. Financial liabilities are derecognized when the obligation is cancelled, settled or expired. When an existing financial liability is replaced with another of the same provider under substantially different terms, or where the terms of an existing liability are substantially amended, such exchange or modification is treated as a write-off of the original liability, with a new liability being recognized, and the difference between the respective carrying amounts is recognized in the interim consolidated statement of profit or loss.

Financial liabilities are initially recognized at fair value, and in the case of loans, they include the costs directly attributable to the transaction. The subsequent measurement of the financial liabilities depends on their classification:

Financial Liabilities at fair value through profit or loss

Financial liabilities are included in the category of financial liabilities at fair value through profit or loss when they are held for trading or originally designated at fair value through profit or loss. Income and losses from liabilities held for trading are recognized in profit or loss. This category includes non-designated derivatives for hedging accounting.

Financial Liabilities at amortized cost

Other financial liabilities are subsequently valued at their amortized cost based on the effective interest rate method. The amortized cost is calculated taking into account any premium or acquisition discount, and includes the costs of transactions that are an integral part of the effective interest rate. This category includes Commercial Accounts Payable and Other Accounts Payable, lease liabilities, as well as the loans included in Other Current and Non-Current Financial Liabilities.

 

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June 30, 2019

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h)

Derivative financial instruments

(i) Derivative Financial Instruments - The Company enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risks, including foreign exchange forward contracts, interest rate swaps, currency swaps and zero cost collar contracts. The Company’s policy is to enter into derivatives contracts only for economic hedging purposes and there are no instruments with speculation objectives.

Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently re-measured at fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss unless the derivative is designated as a hedging instrument and complies with hedge accounting requirements, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

(ii) Embedded derivatives - The Company assesses the existence of embedded derivatives in financial instrument contracts. Derivatives embedded in non-derivative host contracts are treated as separate derivatives when they meet the definition of a derivative, their risks and characteristics are not closely related to those of the host contracts and the contracts are not measured at FVTPL as a whole. Arauco has determined that no embedded derivatives currently exist.

(iii) Hedge accounting - The Company designates certain hedging instruments as either fair value hedges or cash flow hedges.

At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, Arauco documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk.

-Fair Value Hedges - Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.

-Cash flow hedges - The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss, and is included in the Finance costs line item in the interim consolidated statement of profit or loss. Amounts previously recognized in other comprehensive income are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognized hedged item.

Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognized in other comprehensive income and accumulated in equity at that time remains in equity and is recognized when the forecasted transaction is ultimately recognized in profit or loss. When a forecasted transaction is no longer expected to occur, the gain or loss accumulated in equity is recognized immediately in profit or loss.

 

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Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

i)

Inventories

Inventories are measured at the lower of cost or net realizable value. Cost is determined using the weighted average cost method.

The cost of finished and in process products includes the cost of raw materials, direct labor, other direct costs and manufacturing overhead expenses.

Initial costs of harvested wood are determined at fair value less cost of sale at the point of harvest.

Biological assets are transferred to inventories when forests are harvested.

Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

When market conditions result in the production costs of a product exceeding its net realizable value, the inventories are written-down to their net realizable value. This write-down also includes obsolescence amounts resulting from slow moving inventories and technical obsolescence.

Spare parts that will be consumed in a period of less than twelve months are presented in inventories and recognized as an expense when they are consumed.

 

j)

Non-current assets held for sale

The Group classifies certain property, plant and equipment, intangible assets, investments in associates and disposal groups (groups of assets to be sold together with their directly associated liabilities) as non-current assets held for sale which as of the date of the interim consolidated statements of financial position are the subject of active sale efforts which are estimated to be highly probable.

These assets or disposal groups are measured at the lower of the carrying amount or the fair value less the costs to sell, and are no longer depreciated or amortized from the time they are classified as non-current assets held for sale.

 

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June 30, 2019

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k)

Business Combinations

Arauco applies the acquisition method to account for a business combination. This method requires the identification of the acquirer, determination of the acquisition date, recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; and recognition and measurement of goodwill or a gain from a bargain purchase. Identifiable assets acquired and liabilities assumed and any contingent liabilities in a business combination are initially measured at fair value at the acquisition date, except:

-deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with IAS 12 Income Taxes and IAS 19 respectively;

-liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 3 at the acquisition date; and

-assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with such standard.

Acquisition-related costs are accounted for as expenses when they are incurred, except for costs to issue debt or equity securities which are recognized in accordance with IAS 32 and IFRS 9.

A parent will present non-controlling interests in the interim consolidated statement of financial position within equity, separately from the equity of the owners of the parent company.

Changes in the ownership interest of a parent in its subsidiary that do not result in a loss of control are treated as equity transactions. Any difference between the amount by which non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the parent company. No adjustment is made to the carrying amount of goodwill, neither gains nor losses are recognized in the statement of profit or loss.

Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may initially be measured either at fair value or at the present ownership instruments’ proportionate share of non-controlling interests, in the recognized amounts of the acquirer’s identifiable net assets. The choice is made on a transaction-by-transaction basis.

Arauco measures the fair value of the acquired company in the business combination achieved in each stage (“step acquisition”), recognizing the effects of remeasurement of previously held equity in the acquiree in the statements of profit or loss.

If the initial accounting for a business combination is not completed by the end of the reporting period in which the combination occurs, Arauco reports preliminary amounts for the items for which the accounting is incomplete. During the measurement period (no more than one year), these preliminary amounts are retrospectively adjusted, or additional assets or liabilities are recognized to reflect new information about facts and circumstances that existed at the acquisition date, if known, would have affected the amounts recognized at that date.

 

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June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

Business combinations that are under common control transactions are accounted using as a reference the pooling of interest. Under this method, assets and liabilities related to the transaction carry over the previous carrying values. Any difference between assets and liabilities included in the consolidation and the consideration transferred, is accounted in equity.

 

l)

Investments in associates and joint arrangements

Associates are entities over which Arauco exercises significant influence, but not control. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

Joint arrangement is defined as an entity over which there is joint control, which exists only when the decisions about strategic of activities, both financial and operational, require the unanimous consent of the parties sharing control.

Investments in joint arrangements are classified as a joint venture or as a joint operation. A joint operation is a joint arrangement in which the parties that have joint control of the arrangement (i.e. joint operators) have rights to the assets and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement in which the parties that have joint control of the arrangement (i.e., participants in a joint venture) have rights to the net assets of the arrangement.

Investments in associates and joint ventures are accounted for using the equity method and are initially recognized at cost. Their carrying amount is increased or decreased to recognize the portion corresponding to the statement of profit or loss or to the statement of comprehensive income. Dividends received are recognized by deducting the amount received from the carrying amount of the investment. Arauco’s investment in associates includes goodwill (both net of any accumulated impairment loss).

The investments in joint operations are recognized through consolidation of assets, liabilities and results of operations in relation to Arauco’s ownership percentage.

If the acquisition cost is lower than the fair value of the net assets of the associate acquired, the difference is recognized directly in statement of profit or loss in line Other gains (losses).

Investments in associates and joint ventures are presented in the interim consolidated statement of financial position in the line item “Investments accounted for using equity method”.

If Arauco’s share of losses of an associate or joint venture equals or exceeds its interest in the associate or joint venture, Arauco discontinues recognizing its share of further losses. After Arauco’s carrying value in the investee is reduced to zero, additional losses are provided for, and a liability is recognized, only to the extent that Arauco has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. If the associate or joint venture subsequently reports profits, Arauco resumes recognizing its share of those profits only after its share of the profits equals the share of losses not recognized.

 

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June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

m)

Intangible assets other than goodwill

After initial recognition, intangible assets with finite useful lives are carried at cost less any accumulated amortization and impairment losses.

Amortization of an intangible asset with a finite useful life is allocated over the asset’s useful life. Amortization begins when the asset is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management.

 

(i)

Computer Software

Computer software licenses are capitalized in terms of the costs incurred to acquire and make them compatible with existing software. These costs are amortized over the estimated useful lives of the software.

 

(ii)

Water Rights, Easements and Other Rights

This item includes water rights, easements and other acquired rights recognized at historical cost which have indefinite useful lives as there is no foreseeable limit to the period over which these assets are expected to generate future cash flows. These rights are not amortized, but are tested for impairment at least annually, or when there is any indication that the assets might be impaired.

 

(iii)

Customers and trade relations with customers

Correspond to the valuation over the time of the established relationship with customers, from the sale of products and services through its sales team. These relations will materialize in sales orders, which generate revenue and cost of sales. The useful life has been determined to be 15 years.

 

n)

Goodwill

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquired company, and the fair value of the acquirer’s previously held equity interest in the acquired company (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If the total of consideration transferred, non-controlling interest recognized and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the statements of profit or loss.

Goodwill is not amortized but tested for impairment on annual basis.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For purposes of impairment testing, goodwill in a business combination is allocated as of the acquisition date to the cash generating unit or a group of cash generating units expected to benefit from the synergies of the combination irrespective of whether other assets or liabilities of the acquired company are allocated to those units or group of units.

The goodwill generated on acquisitions of foreign companies, is expressed in the functional currency of such foreign company.

 

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June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

Goodwill recognized in subsidiaries Arauco Canada Ltd., Arauco do Brasil S.A. and Arauco Argentina S.A., generated on subsidiaries acquisitions whose functional currency is different from the functional currency of the parent company and presentation of these financial statements, are translated into U.S. Dollars at the closing exchange rate.

 

o)

Property, Plant and Equipment

Property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment. The cost includes expenditures that are directly attributable to the acquisition of the assets.

Subsequent costs, such as improvements and replacement of components, are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to Arauco and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized from property, plant and equipment. All other repairs and maintenance costs are expensed in the period in which they are incurred.

Arauco capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets as part of the cost of those assets, until the assets are ready for their intended use (See Note 12).

Depreciation is calculated by components using the straight-line method.

The useful lives of the items of property, plant and equipment is estimated according to the expected use of the assets. The residual values and useful lives of assets are reviewed and adjusted, if appropriate, annually.

 

p)

Leases

Arauco applies IFRS 16 for recognizing leases in a manner consistent with contracts with similar features and akin circumstances.

At the beginning of a contract, Arauco assesses whether the contract is, or if it contains, a lease. A contract is, or contains, a lease if it transfers the right to control the use of a given asset for a certain period of time, in exchange for consideration.

As of the initial date for recording a lease, Arauco, as lessee, recognizes an asset by the right of use at cost.

The cost of the asset for right of use comprises:

 

  -

The amount of the initial measurement of the lease liability. This measurement is at present value of the payments for leases that have not been disbursed as of that date. Payments for leases are discounted using the incremental interest rate for financial loans;

 

  -

Payments for leases performed prior to or as of the initiation date, minus the lease incentives that have been received;

 

  -

The initial direct costs incurred by the lessee; and

 

  -

An estimation of the costs to be incurred by the lessee when dismantling and eliminating the underlying asset, restoring the location where the same is located, or restoring the underlying asset to the condition required under the terms and conditions of the lease, unless such costs are incurred in order to produce

 

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June 30, 2019

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  inventories. The lessee assumes obligations stemming from such costs either at the commencement date, or as a result of having used the underlying asset during a specific period.

After the initial recognition, Arauco, as lessee, recognizes its asset for right of use by applying the cost model, minus the accumulated depreciation and the impairment losses, and adjusted for remeasurement of the liability for lease.

At the beginning, Arauco in the capacity of lessee, recognizes the lease liability at present value of the lease payments that have not been disbursed as of that date. Lease payments are discounted using the incremental interest rate for financial loans.

After the initial recognition, Arauco, as lessee, recognizes a liability for leases by increasing the book value, so as to reflect the interest over the liability for lease, reducing the amount in order to reflect the payments for leases that have been performed and once again recognizing the book value, so as to reflect the remeasurement and also to reflect the essential fixed payments for leases that have been revised.

Arauco presents the assets by right of use in the Interim Consolidated Statement of Financial Position, within Properties, Plants and Equipment, and are further disclosed in Note 7. Likewise, lease liabilities are included in the Interim Consolidated Statement of Financial Position within Other Current and Non-Current Financial Liabilities, and further disclosed as Lease liabilities in note 23.

q) Biological Assets

IAS 41 requires that biological assets, such as standing trees, are measured at fair value less cost to sell in the statement of financial position. Forestry plantations are accounted for at fair value less costs to sell, based on the presumption that fair values of these assets can be measured reliably.

The measurement of forestry plantations is based on discounted cash flow models whereby the fair value of the biological assets is determined using estimated future cash flows from continuing operations calculated using our sustainable forest management plans and including the estimated growth of the forests. This valuation is performed on the basis of each identifiable farm block and for each type of tree.

The measurement of new forestry plantations made during the current year is made at cost, which corresponds to the fair value at that date. After twelve months, the valuation methodology used is that explained in the preceding paragraph.

Biological assets shown as current assets correspond to those forestry plantations that will be harvested in the short term.

Biological growth and changes in fair value of forestry plantations are recognized in the line item “Other income” in the interim consolidated statement of profit or loss.

 

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June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

r)

Income taxes

The tax liabilities are recognized in the interim consolidated financial statements based on the determination of taxable income for the year and calculated using the tax rates in force in the countries where Arauco operates.

Deferred income tax is recognized using liability method, on the temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated annual accounts. Deferred income tax is determined using tax rates contained in laws adopted as of the date of the financial statements and that are expected to be applicable when the related deferred tax asset is realized or the deferred income tax liability is settled.

Deferred taxes are recognized in accordance with the standards established in IAS 12 - Income Tax.

The goodwill arising on business combinations does not give rise to deferred tax.

The deferred tax assets and tax credits are generally recognized for all deductible temporary differences to the extent that it is probable that future taxable profit will be available against which those deductible temporary differences can be utilized.

 

s)

Provisions

Provisions are recognized when the Company has a present obligation, legal or constructive, as a result of past events, under which, it is probable that an outflow of resources will be required to settle the obligation; and when a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period.

 

t)

Revenue recognition

Revenues are valued at fair value of the consideration received or to be received, derived from them.

Arauco analyses and takes under consideration all relevant facts and circumtances to apply the five-step model established under IFRS 15 to customer contracts: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price, and (v) recognise revenue. Aditionally, Arauco evaluates the incremental costs of obtaining a contract and the costs incurred to comply with a contract.

Arauco recognizes revenues when the steps established in IFRS have been satisfactorily complied with.

Accounts receivable are recognized when control over goods or services has been transferred to the customer, because at this point of the time collection is unconditional and the passage of time is only needed to receive payment.

 

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June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

(i)

Revenue recognition from the Sale of Goods

Revenue from the sale of goods is recognized when Arauco has transferred to the buyer the significant risks and rewards of ownership of the committed goods, when the amount of revenue can be reliably measured, when Arauco does not retain any managerial involvement over the goods sold and when it is probable that the economic benefits associated with the transaction will flow to Arauco and the costs incurred in respect of the transaction can be measured reliably. Revenue from the sale of goods are recognized when there is no obligation unsatisfied that could affect the customer’s acceptance of the product. The delivery is effective when the products are sent to the specific location, the risks of obsolescence and loss have been transferred to the customer and when Arauco has objective evidence that all acceptance criteria have been satisfied.

Sales are recognized in terms of the price agreed to in the sales contract, less any volume discounts and estimated product returns at the date of the sale. There is no significant financing component given that receivables from sales are collected within a short period, which is in line with market practices.

The structure for recognizing revenue from export sales is based on the 2010 Incoterms, which are the official rules for the interpretation of commercial terms issued by the International Chamber of Commerce.

The main Incoterms used by Arauco are the following:

“CFR (Cost and freight)”, where the company bears all costs including main transportation, until the products arrives at its port of destination. The risk is transferred to the purchaser once the products have been loaded onto the vessel, in the country of origin.

“CIF (Cost Insurance & Freight)”, where the Company organizes and pays for external freight services and some other expenses. Arauco is no longer responsible for the products once they have been delivered to the ocean carrier company. The point of sale is the delivery of the products to the carrier chartered by the seller.

 

(ii)

Revenue recognition from Rendering of Services

Revenue from the rendering of services is recognized as long as the performance obligation have been satisfied.

Revenue is recognized considering the stage of completion of the transaction at the date of the reporting period, when Arauco has the enforceable right of payment from the rendering of the services.

There is no significant financing component, given that sales are made with a reduced average collection period, which is in line with market practice.

Arauco mainly provides power supply services which are transacted principally in the spot market of the Sistema Eléctrico Nacional (SEN) (“National Electrical System”). According to current regulations, the prices on that market called “Marginal Costs” are calculated by the Coordinador Eléctrico Nacional (CEN) (“National Electrical Coordinator”) and are generally recognized in the period in which the services are rendered.

 

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June 30, 2019

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Electrical power is generated as a by-product of the pulp and wood process and is a complementary business to it, which is initially supplied to the group’s subsidiaries and any surplus is sold to the SEN.

Arauco provides other non-core services such as port services and pest control whose revenues are derived from fixed price service contracts are recognized considering the stage of completion of the services rendered at the date of reporting, generally during the period of the service contract on a straight-line basis over the term of the contract.

Revenues from reportable segments mentioned in Note 24 are measured in accordance with the policies indicated in the preceding paragraphs.

Revenues from inter-segment sales (which are made at market prices) are eliminated in the interim consolidated financial statements.

 

u)

Minimum dividend

Article No. 79 of the Chilean Corporations Law states that, unless otherwise unanimously agreed by the shareholders, corporations must distribute annually at least 30% of net income for the current year as cash dividend to shareholders determined in proportion to their shares or in the proportion established in the by-laws for preferred shares, if any, except where necessary to absorb accumulated losses from prior years.

The General Shareholders’ Meeting of Arauco agreed to distribute annual dividends at 40% of net distributable income, including an interim dividend to be distributed at year end. Dividends payable are recognized as a liability in the interim consolidated financial statements in the period when they are declared and approved by the Arauco’s shareholders or when arises the corresponding present obligation based on existing legislation or distribution policies established by the Shareholders’ Meeting.

The dividends payable provision is registered for 40% of the liquid distributable profit and against a lower equity, based on the yearly resolution of the Shareholders’ Meeting.

Dividends payable are presented in the line item “Other current non-financial liabilities” in the interim consolidated statement of financial position.

 

v)

Earning per share

Basic earnings per share are calculated by dividing the net profit for the period attributable to the parent company by the weighted average number of ordinary shares outstanding during the period, excluding the average number of shares in the Company held by a subsidiary, if such circumstance exists. Arauco has not performed any type of transaction with a potential dilutive effect that would cause diluted earnings per share to be different from basic earnings per share.

 

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June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

w)

Impairment

Non-financial Assets

The recoverable amount of property, plant and equipment and other long-term assets with finite useful lives are measured whenever there are any circumstances indicating that the assets have to recognize an impairment loss. Among the circumstances to consider as evidence of impairment are significant declines in the assets’ market value, significant adverse changes in the technological environment, obsolescence or physical damages of assets and changes in the manner in which the asset is used or expected to be used). Arauco evaluates at the end of each reporting period whether there is any evidence of the indications above mentioned.

A previously recognized impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount however a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years.

For the purposes of assessing impairment losses, assets are grouped at the lowest level for which there is identifiable cash flows separately for each cash-generating unit. Non-financial assets, other than goodwill, which had recognized an impairment loss, are reviewed at the end of each reporting period whether there are any circumstances indicating that an impairment loss previously recognized may no longer exists or has decreased.

“Cash-generating units” are the smallest identifiable groups of those cash inflows that are largely independent of the cash inflow from other assets or groups of assets.

Goodwill

Goodwill and intangible assets with indefinite useful life are tested annually for impairment or whenever circumstances indicate it. The recoverable amount of an intangible asset is the higher of its fair value less costs to sell and its value in use. An impairment loss is recognized whenever the carrying amount exceeds the recoverable amount.

A cash-generating unit, for which goodwill has been allocated, is tested for impairment annually or more frequently when there are circumstances indicating that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other assets pro rata based on the carrying amount of each asset in the unit. Any impairment loss of goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods.

Goodwill is allocated to cash-generating units for impairment testing purposes. The allocation is made between cash-generating units or groups of cash generating units expected to benefit from the synergies of the combination.

Financial Assets

At the end of each reporting period, an assessment is performed in order to identify whether there is any objective evidence that a financial asset or a group of financial assets may have been impaired.

 

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Amounts in thousands of U.S. dollars, except as indicated

 

 

An allowance for doubtful accounts is established based on a measurement of expected losses using a simplified approach.

The allowance for doubtful accounts is measured as the difference between the carrying amount of receivables and the present value of estimated future cash flows. The carrying amount of the receivable is reduced through the use of the allowance. If the impairment loss decreases in later periods, it is reversed either directly or by adjusting the provision for doubtful accounts, with effect in profit or loss.

 

x)

Employee Benefits

Arauco constitutes labor obligations for severance payable in all circumstances for certain of its employees with at least 5 years of work in the Company, based on the terms of the staff’s collective and individual bargaining agreements.

The related provision is an estimate of the years of service to be recognized as a future labor obligation liability, in accordance with contracts between Arauco and its employees and pursuant to actuarial valuation criteria for this type of liability. This post-employment benefit is considered a defined benefit plan.

The main factors considered for calculating the actuarial value of severance obligation for years of service are employee turnover, salary increases and life expectancy of the workers included in this benefit.

Actuarial gains and losses are recognized in other comprehensive income in the year they are incurred.

These obligations are related to post-employee benefits in accordance with current standards.

 

y)

Employee Vacations

Arauco recognizes the expense for employee vacation according to labor legislation in each country on an accrual basis.

This obligation is presented in line item “Trade and Other current payables” in the interim consolidated statements of financial position.

 

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AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

z)

Recent accounting pronouncements

a) Standards, interpretations and amendments that are mandatory for the first time for annual periods beginning on January 1, 2019:

 

Standards and
   interpretations   

  

Content

  

Mandatory application
for annual periods
  beginning on or after  

IFRS 16   

Leases

The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value.

   January 1, 2019
IFRIC 23   

Uncertain tax positions

It clarifies the method for applying the acknowledgment and measurement requirements of IAS 12 when there is uncertainty regarding the fiscal treatments.

   January 1, 2019

 

Amendments and

   improvements   

  

Content

  

Mandatory application
for annual periods
  beginning on or after  

IAS 19   

Employee Benefits

Prescribe the accounting and disclosure for employee benefits, requiring an entity to recognise a liability where an employee has provided service and an expense when the entity consumes the economic benefits of employee service.

   January 1, 2019
IAS 28   

Investments in associates and joint ventures

It clarifies that an entity applies IFRS 9 Financial Instruments to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied.

   January 1, 2019
IFRS 9   

Financial instruments

Allows assets to be measured at amortised cost.

   January 1, 2019
IFRS 3   

Business Combinations

Clarifies that when an entity obtains control of a business that is a joint operation, it is a business combination achieve by steps.

   January 1, 2019
IFRS 11   

Joint Arrangements

Clarifies that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business.

   January 1, 2019
IAS 12   

Income taxes

Clarifies the income tax consequences of dividends from financial instruments at amortized cost should be recognized according to the past transactions or events that generated distributable profits.

   January 1, 2019
IAS 23   

Borrowing Costs

Clarifies that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the general borrowings.

   January 1, 2019

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

The adoption of the standards, amendments and interpretations described above do not have a significant impact on Arauco’s Interim Consolidated Financial Statements during its initial application period, with exception of the following paragraphs related to IFRS 16.

IFRS 16 - Leases

Arauco has decided to apply IFRS 16 for the first time, starting on January 1, 2019.

IFRS 16 introduces a single lessee accounting model. The lessee is required to recognize an asset a right of use representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. There are recognition exceptions for short-term leases or low-value leases. Accounting for lessors remains similar to IAS 17, that means, lessors continue classifiying the leases as financial or operational.

Entities can apply IFRS 16 using either a full retrospective or a modified retrospective approach for leases. If the company applies the modified retrospective approach it is not required to restate the comparative financial information and the cumulative effect of the initial application of IFRS 16 must be presented as an adjustment to the opening balances of retained earnings.

Arauco has adopted to recognize the cumulative effect of the initial application of the standard as an adjustment to the opening balance of retained earnings as of January 1, 2019. Given this alternative, it is not required to restate the comparative information

The following table shows the initial effects of the adoption of IFRS 16 as of January 1, 2019 on the Arauco Interim Consolidated Financial Statements:

 

     January 1, 2019
ThU.S.$
 

Right of use assets

     286,387  

Advances granted

     (4,308

Sublease

     1,540  

Lease liabilities

     283,619  

Advances granted are presented net in the line of other financial liabilities.

Sublease has a net impact on the Acumulated earnings on January 1, 2019 of ThU.S.$ 107.

 

     January 1, 2019
ThU.S.$
 

Right of use assets under IFRS 16

     286,387  

Assets from leasings under IAS 17

     72,252  

Increase (decrease) for changes in accounting policies

     358,639  

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

b) Standards, interpretations and amendments, the application of which is not yet mandatory, which have not been adopted in advance:

 

Standards and
   interpretations   

  

Content

  

Mandatory application
for annual periods
  beginning on or after  

IFRS 17   

Insurance Contracts

Supersedes IFRS 4. It changes mainly the accounting for insurance contracts and inverstments contracts.

   January 1, 2021

Amendments and

   improvements   

  

Content

  

Mandatory application
for annual periods
  beginning on or after  

IFRS 10 y IAS 28- Amendments    Sale or Contribution of assets among an Investor and its Associates or Joint Ventures. Definition of a Business Narrows the definitions of a business    Indeterminate
IAS 1 y IAS 8    Presentation of Financial Statementes and Accounting Policies, Changes in Accounting Estimates and Errors. Clarifies the definition of material and align the definition used in the Conceptual Framework and the standards themselves.    January 1, 2020
IFRS 3   

Definition of a Business

Narrows the definitions of a business

   January 1, 2020

Arauco estimates that the adoption of the standards, amendments and interpretations described above do not have a significant impact on Arauco’s Interim Consolidated Financial Statements during its initial application period.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 2. ACCOUTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES

Changes to accounting policies

Arauco has decided to apply IFRS 16 Leases, in accordance with the transition options of this standard, retroactively with the accumulated effect of the initial application, recognized on January 1, 2019, without re-expressing its comparative financial statements as of December 31, 2018.

Arauco has adopted IFRS 16, recognizing liabilities in connection with leases that had been previously classified as operating leases under IAS 17 - Leases.

The lease liabilities under IFRS 16 were measured at the present value of the remaining payments for leases, discounted using the average incremental rate of 3.99%, applied as of January 1, 2019.

The assets by right of use were measured by an amount equivalent to the lease liability, adjusted by the amount of any lease payment that was prepaid or accumulated, in connection with the lease recognized in the balance sheet as of December 31, 2018.

As a consequence of the adoption of IFRS 16, Properties, Plants and Equipment increased by ThU.S.$286,387 and Other Financial Liabilities by ThU.S.$283,619 on January 1, 2019. The following table shows a reconciliation between both amounts.

 

     January 1, 2019
ThU.S.$
 

Right of use assets

     286,387  

Advances granted

     (4,308

Sublease

     1,540  

Lease liabilities

     283,619  

Advances granted are presented net in the line of other financial liabilities.

Sublease has a net impact on the Acumulated earnings on January 1, 2019 of ThU.S.$ 107.

Upon applying IFRS 16, Arauco chose not to apply the requirements for recognizing a liability and an asset for right of use for the leases which term expires within the 12 months following January 1, 2019 and for those where the underlying asset had insignificant value.

Changes to accounting estimates

As of June 30, 2019, there have been no changes regarding the accounting estimates with respect to the 2018 financial year.

 

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AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 3. DISCLOSURE OF OTHER INFORMATION

 

a)

Disclosure of information on Issued Capital

At the date of these interim consolidated financial statements the share capital of Arauco is ThU.S.$353,618.

100% of Capital corresponds to ordinary shares.

 

     06-30-2019    12-31-2018

Description of Ordinary Capital Share Types

   100% of Capital corresponds
to ordinary shares

Number of Authorized Shares by Type of Capital in Ordinary Shares

   113,159,655

Nominal Value of Shares by Type of Capital in Ordinary Shares

   ThU.S.$0.0031210 per share

Amount of Capital in Shares by Type of Ordinary Shares that Constitute Capital

   ThU.S.$353,618
     06-30-2019    12-31-2018

Number of Shares Issued and Fully Paid by Type of Capital in Ordinary Shares

   113,159,655

 

b)

Dividends paid

The interim dividend paid in December 2018 was equivalent to 20% of the distributable net profit calculated as of the end of September 2018 and was considered a decrease in the interim consolidated statements of changes in equity.

The final dividend paid each year in May corresponds to the difference between the 40% of the prior year distributable net profit and the amount of the interim dividend paid, which is considered a decrease to the interim dividend already paid.

The amount of ThU.S.$80,992 (ThU.S.$ 189,546 as of June 30, 2018) presented in the interim consolidated statements of changes in equity correspond to the minimum dividend provision recorded for the period 2019.

In the interim consolidated statements of cash flows, the Dividends Paid line shows an amount of ThU.S.$ 182,109 as of June 30, 2019 (ThU.S.$ 114,442 as of June 30, 2018), of which ThU.S.$ 182,040 (ThU.S.$ 113,773 as of June 30, 2018) correspond to the payment of dividends of the Parent Company.

The following are the dividends paid and the corresponding per share amounts during the periods 2019 and 2018:

 

Detail of Dividend Paid, Ordinary Shares

  

Dividend Paid

   Final Dividend

Type of Shares for which there is a Dividend Paid

   Ordinary Shares

Date of Dividend Paid

   05-08-2019

Amount of Dividend

   ThU.S.$ 182,040

Number of Shares for which Dividends are Paid

   113,159,655

Dividend per Share

   U.S.$ 1.60870

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

Detail of Dividend Paid, Ordinary Shares

  

Dividend Paid

   Interim Dividend

Type of Shares for which there is a Dividend Paid

   Ordinary Shares

Date of Dividend Paid

   12-12-2018

Amount of Dividend

   ThU.S.$ 142,256

Number of Shares for which Dividends are Paid

   113,159,655

Dividend per Share

   U.S.$ 1.25712

 

Detail of Dividend Paid, Ordinary Shares

  

Dividend Paid

   Final Dividend

Type of Shares for which there is a Dividend Paid

   Ordinary Shares

Date of Dividend Paid

   05-10-2018

Amount of Dividend

   ThU.S.$113,773

Number of Shares for which Dividends are Paid

   113,159,655

Dividend per Share

   U.S.$ 1.00542

 

c)

Disclosure of Information on Reserves

Other reserves comprise reserves of exchange differences on translation, reserves of cash flow hedges and other reserves. Arauco does not have any restrictions associated with these reserves.

Reserves of exchange differences on translation

Reserves of exchange differences on translation correspond to exchange differences relating to the translation of the results and net assets of Arauco’s subsidiaries whose functional currency is other than Arauco’s presentation currency.

Reserves of cash flow hedges

The hedging reserve includes the cash flow hedge reserve and the costs of hedging reserve. The cash flow hedge reserve is used to recognise the effective portion of gains or losses on derivatives that are designated and qualify as cash flow hedges.

Reserve of Actuarial Losses in Defined Benefit Plans

This corresponds to changes in the present value of the obligation for defined benefits resulting from experience adjustments (the effect of the differences between the previous actuarial assumptions and the events that occurred within the context of the plan) and the effects of the changes in the actuarial assumptions.

Other reserves

This mainly corresponds to the share of other comprehensive income of investments in associates and joint ventures.

 

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AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

d)

Other items in the Interim Consolidated Statements of Profit or Loss

The table below sets forth other income, other expenses, finance income, finance costs and share of profit (loss) of associates and joint ventures for the periods ended June 30, 2019 and 2018 are as follows:

 

     January - June      April - June  
     2019
ThU.S.$
     2018
ThU.S.$
     2019
ThU.S.$
     2018
ThU.S.$
 

Classes of Other Income

           

Other Income, Total

     131,952        66,459        86,413        29,227  

Gain from changes in fair value of biological assets (See note 20)

     74,410        51,876        37,429        22,301  

Net income from insurance compensation

     1,154        1,259        446        1,228  

Revenue from export promotion

     680        2,076        322        1,037  

Lease income

     1,314        1,012        694        299  

Gain on sales of assets

     9,355        6,577        5,087        1,779  

Access easement

     —          145        —          60  

Compensations received

     60        509        27        507  

Gain on sales of associates

     40,842        —          40,842        —    

Other operating results

     4,137        3,005        1,566        2,016  

Classes of Other Expenses by activity

           

Total of Other Expenses by activity

     (50,006      (33,619      (27,689      (16,792

Depreciation

     —          (239      —          (116

Legal expenses

     (3,224      (1,529      (1,886      (760

Impairment provision for property, plant and equipment and others

     (8,801      (8,418      (6,174      (1,403

Operating expenses related to staff restructuring or from plants stoppage or closed

     (4,325      (988      (612      (458

Expenses related to projects

     (9,078      (4,572      (1,746      (2,934

Loss of asset sales

     (4,392      (1,951      (2,981      (1,429

Loss and repair of assets

     (511      (216      (477      (192

Loss of forest due to fires

     (6,209      (629      (6,209      (620

Other Taxes

     (7,789      (8,319      (4,052      (4,983

Research and development expenses

     (1,659      (1,296      (1,072      (998

Fines, readjustments and interests

     (645      (536      (548      (356

Other expenses

     (3,373      (4,926      (1,932      (2,543

Classes of financing income

           

Financing income, total

     14,845        7,345        8,099        2,563  

Financial income from mutual funds - term deposits

     10,192        5,032        5,333        2,658  

Financial income resulting from swap - forward instruments

     168        67        168        (570

Other financial income

     4,485        2,246        2,598        475  

Classes of financing costs

           

Financing costs, Total

     (126,940      (103,081      (69,549      (51,419

Interest expense, Banks loans

     (16,349      (14,594      (9,048      (7,441

Interest expense, Bonds

     (80,040      (71,592      (44,343      (35,923

Interest expense, other financial instruments

     (12,576      (7,074      (6,349      (3,696

Interest expence for right-of-use

     (6,368      —          (3,499      —    

Other financial costs

     (11,607      (9,821      (6,310      (4,359

Share of profit (loss) of associates and joint ventures accounted for using equity method

           

Total

     9,657        24,009        5,294        18,164  

Investments in associates

     1,144        1,523        882        1,352  

Joint ventures

     8,513        22,486        4,412        16,812  

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

The analysis of expenses by nature contained in these interim consolidated financial statements is presented below:

 

     January - June      April - June  

Cost of sales (*)

   2019
ThU.S.$
     2018
ThU.S.$
     2019
ThU.S.$
     2018
ThU.S.$
 

Timber

     395,485        355,838        211,243        177,407  

Forestry labor costs and other services

     280,481        332,029        147,478        173,443  

Depreciation and amortization

     198,138        192,343        101,489        97,320  

Depreciation for right of use

     36,470        —          17,932        —    

Maintenance costs

     139,417        130,622        65,376        65,543  

Chemical costs

     278,775        276,166        137,558        144,216  

Sawmill Services

     76,268        77,309        39,724        38,870  

Other Raw Materials

     105,251        109,720        47,901        53,067  

Other Indirect costs

     81,265        90,980        41,498        42,137  

Energy and fuel

     105,743        97,225        51,205        48,482  

Cost of electricity

     18,258        20,923        9,491        9,799  

Wages and salaries

     190,320        174,907        95,098        86,187  

Total

     1,905,871        1,858,062        965,993        936,471  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(*)

Total amount is composed by the cost of inventory sales for ThU.S.$ 1,880,586 (ThU.S.$1,820,460 at June 30, 2018) and by cost of rendering services for ThU.S.$ 25,285 (ThU.S.$ 37,602 as of June 30, 2018)

 

     January - June      April - June  

Distribution cost

   2019
ThU.S.$
     2018
ThU.S.$
     2019
ThU.S.$
     2018
ThU.S.$
 

Selling costs

     20,074        15,805        10,423        8,026  

Commissions

     6,593        7,627        3,217        3,912  

Insurance

     2,242        2,185        1,325        1,207  

Provision for doubtful accounts

     652        10        860        2  

Other selling costs

     10,587        5,983        5,021        2,905  

Shipping and freight costs

     268,104        251,900        132,859        127,279  

Port services

     16,321        13,859        8,624        5,967  

Freights

     233,873        213,390        114,627        109,380  

Depreciation for right of use

     920        —          920        —    

Other shipping and freight costs (internation, warehousing, stowage, customs and other costs)

     16,990        24,651        8,688        11,932  

Total

     288,178        267,705        143,282        135,305  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     January - June      April - June  

Administrative expenses

   2019
ThU.S.$
     2018
ThU.S.$
     2019
ThU.S.$
     2018
ThU.S.$
 

Wages and salaries

     121,977        122,467        62,628        56,643  

Marketing, advertising, promotion and publications expenses

     11,311        5,750        4,684        3,077  

Insurances

     9,552        7,437        4,616        3,809  

Depreciation and amortization

     13,762        13,703        6,733        6,758  

Depreciation for right of use

     3,287        —          1,156        —    

Computer services

     19,668        15,302        11,642        11,191  

Lease rentals (offices, other property and vehicles)

     4,575        7,262        793        3,147  

Donations, contributions, scholarships

     5,911        5,814        2,485        2,554  

Fees (legal and technical advisors)

     23,352        26,888        12,514        13,395  

Property taxes, city permits and rights

     8,979        9,884        4,993        5,338  

Cleaning services, security services and transportation

     11,437        12,658        5,535        6,207  

Third-party variable services (maneuvers, logistics)

     20,461        22,994        9,987        11,430  

Basic services (electricity, telephone)

     4,640        4,941        2,381        2,424  

Maintenance and repair

     3,254        3,470        1,892        1,717  

Seminars, courses, training materials

     1,329        1,276        742        773  

Other administration expenses (travels, clothing and safety equipment, enviromental expenses, audits and others)

     24,009        22,621        13,443        12,479  

Total

     287,504        282,467        146,224        140,942  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

e)

Auditor Fees and Number of Employees

 

Auditors fees

   06-30-2019
ThU.S.$
     06-30-2018
ThU.S.$
 

Audit services

     1,160        1,413  

Other services

     

Tax services

     746        278  

Others

     138        220  

TOTAL

     2,044        1,911  
  

 

 

    

 

 

 

Number of employees

    
     17,252        15,379  

NOTE 4. INVENTORIES

 

Components of Inventory

   06-30-2019
ThU.S.$
     12-31-2018
ThU.S.$
 

Raw materials

     160,267        111,483  

Production supplies

     124,006        122,794  

Work in progress

     62,208        66,432  

Finished goods

     622,414        554,933  

Spare Parts

     184,790        174,554  

Total Inventories

     1,153,685        1,030,196  
  

 

 

    

 

 

 

Inventories recognized as cost of sales at June 30, 2019 were ThU.S.$1,880,586 (ThU.S.$1,820,460 at June 30, 2018).    

In order to have the inventories recorded at net realizable value at June 30, 2019, a net decrease of inventories was recognized associated with a higher provision of obsolescence of ThU.S.$5,808 (ThU.S.$491 at June 30, 2018). As of June 30, 2019, the amount of obsolescence provision is ThU.S.$32,111 (ThU.S.$26,303 at December 31, 2018).

At June 30, 2019, there were inventory write-offs of ThU.S.$1,166 (ThU.S.$ 851 at June 30, 2018)

The inventory obsolescence provision is calculated based on the sales conditions of products and age of inventory (inventory turnover).

As of the date of these interim consolidated financial statements, there are no inventories pledged as security to report.

 

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Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 5. CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand, bank checking account balances, time deposits and mutual funds. These are short-term highly liquid investments that are readily convertible to known amounts of cash, and are subject to an insignificant risk of changes in value.

The investment objective of time deposits is to maximize the amounts of cash surpluses in the short-term. These instruments are permitted under Arauco’s Investment Policy which allows investing in fixed income securities. These instruments have a maturity of less than three months from the date of acquisition.

Arauco invests in local and international mutual funds in order to maximize the returns of cash surpluses denominated in Chilean Pesos or in foreign currencies such as U.S. Dollars or Euros. These instruments are permitted under Arauco’s Investment Policy.

As of the date of these interim consolidated financial statements, there are no amounts of cash and cash equivalents with restrictions on use.

 

Components of Cash and Cash Equivalents

   06-30-2019
ThU.S.$
     12-31-2018
ThU.S.$
 

Cash on hand

     163        126  

Bank checking account balances

     313,469        327,006  

Time deposits

     643,042        478,775  

Mutual funds

     294,189        270,035  

Total

     1,250,863        1,075,942  
  

 

 

    

 

 

 

The risk classification of the Company’s mutual funds as of June 30, 2019 and December 31, 2018 is shown below.    

 

     06-30-2019
ThU.S.$
     12-31-2018
ThU.S.$
 

AAAfm

     291,990        268,237  

No classification

     2,199        1,798  

Total Mutual Funds

     294,189        270,035  
  

 

 

    

 

 

 

Changes in Financial Liabilities

 

    

Opening balance

01-01-2019
ThU.S.$

     Increase
(decrease)
for
changes in
accounting
policies
ThU.S.$
    

Re-

expressed
opening
balance
ThU.S.$

     Cash Flow                            
     Borrowings
obtained
ThU.S.$
     Borrowings
paid
ThU.S.$
    Interest
paid
ThU.S.$
    Accrued
interest
ThU.S.$
     Inflation
adjustment
ThU.S.$
     Non-cash
movements
ThU.S.$
    Closing
balance
06-30-2019
ThU.S.$
 

Borrowings from banks

     940,435        —          940,435        95,466        (80,230     (17,195     16,735        750        (1,274     954,687  

Hedging liabilities

     71,599        —          71,599        —          —         (9,973     9,973        —          (41,756     29,843  

Bonds and promissory notes

     3,501,654        —          3,501,654        992,570        (121,499     (77,900     83,722        51,811        (12,810     4,417,548  

Lease liabilities (IFRS 16)

     68,187        283,619        351,806        —          (43,041     (6,229     6,234        3,790        20,900       333,460  

Total

     4,581,875        283,619        4,865,494        1,088,036        (244,770     (111,297     116,664        56,351        (34,940     5,735,538  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

    

Opening
balance

01-01-2018
ThU.S.$

     Cash Flow                       

Closing
balance

12-31-2018
ThU.S.$

 
     Borrowings
obtained
ThU.S.$
     Borrowings
paid
ThU.S.$
    Interest
paid
ThU.S.$
    Accrued
interest
ThU.S.$
     Inflation
adjustment
ThU.S.$
    Non-cash
movements
ThU.S.$
 

Borrowings from banks

     858,457        534,474        (453,789     (28,397     30,133        761       (1,204     940,435  

Hedging liabilities

     5,393        —          —         (803     —          (138     67,147       71,599  

Bonds and promissory notes

     3,302,685        329,077        (21,495     (143,080     144,116        (112,773     3,124       3,501,654  

Total

     4,166,535        863,551        (475,284     (172,280     174,249        (112,150     69,067       4,513,688  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

42


Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 6. INCOME TAXES

The tax rates applicable in the countries in which Arauco operates are 27% in Chile, 30% in Argentina, 34% in Brazil, 25% in Uruguay and 21% in the United States (federal tax).

On December 22, 2017, a new law was enacted in the United States that amended several articles of the Income Tax Act. The most relevant amendments of this law include the reduction of the income tax rate, from 35% as to 21% by 2018 fiscal year. This amendment generated a benefit of ThU.S.$ 17,600 for Arauco’s subsidiaries in that country as of December 31, 2017, as a result of the reduction of the net deferred liabilities generated by the reduction of the federal income tax rate.

On December 29, 2017, Law No. 27,430 was enacted in the Official Gazette of Argentina, which amended several articles of the Income Tax Act. The most relevant amendments include the reduction of the federal income tax rate from 35% to 30% by 2018 and 2019 fiscal years, and 25% by 2020. This amendment generated a benefit of ThU.S$ 62,677 for Arauco’s subsidiaries in that country as of December 31, 2017, as a result of the reduction of the net deferred liabilities generated by the reduction of the federal income tax rate.

On March 25, 2019, the subsidiary Arauco Argentina S.A. chose to conduct the Tax Reappraisal set forth in Title X - Chapter 1 of Law No. 27,430. The option was exercised for all Properties, Plants and Equipments included in the category of amortizable movable assets, pursuant to the income tax law, which were adjusted to inflation using the coefficients published in such law for the purposes of calculating the aforementioned tax. The effect of the special tax in the presentation was $122,835,595 argentine pesos (equivalent to ThU.S.$2,892 as of June 30, 2019), which was paid in five instalments during year 2019. Additionally, the increase of the value of these tax assets, arising from this adjustment, generated a decrease of the liabilities for deferred taxes as of June 30, 2019 of to approximately ThU.S.$16,177. Both the loss for the special tax as well as the profits for the decrease of the deferred tax, are shown in the Income tax line.

 

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Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

Deferred Tax Assets

The following table sets forth the deferred tax assets as of the dates indicated:

 

Deferred Tax Assets

   06-30-2019
ThU.S.$
     12-31-2018
ThU.S.$
 

Deferred tax Assets relating to Provisions

     6,201        6,105  

Deferred tax Assets relating to Accrued Liabilities

     6,987        10,906  

Deferred tax Assets relating to Post-Employment benefits

     20,279        19,072  

Deferred tax Assets relating to Property, Plant and equipment

     8,999        10,125  

Deferred tax Assets relating to Financial Instruments

     24,046        9,761  

Deferred tax Assets relating to Tax Loss Carryforward

     136,956        109,320  

Deferred tax Assets relating to Inventories

     6,552        5,532  

Deferred tax Assets relating to Provisions for Income

     7,702        7,443  

Deferred tax Assets relating to Allowance for Doubtful Accounts

     5,210        5,001  

Intangible revaluation differences

     7,871        7,651  

Deferred tax Assets relating to Other Deductible Temporary Differences

     38,414        21,108  

Total Deferred Tax Assets

     269,217        212,024  
  

 

 

    

 

 

 

Offsetting presentation

     (263,014      (207,389
  

 

 

    

 

 

 

Net Effect

     6,203        4,635  
  

 

 

    

 

 

 

Certain subsidiaries of Arauco mainly in Chile, Brazil and Uruguay, as of the date of these interim consolidated financial statements, present tax losses for which we estimate that, given the projection of future profits, will allow the recovery of these assets. The total amount of these tax losses is ThU.S.$491,260 (ThU.S.$ 368,938 at December 31, 2018), which are mainly originated by operational and financial losses.

In addition, as of the closing date of these interim consolidated financial statements there are ThU.S.$144,787 (ThU.S.$ 183,162 at December 31, 2018) of non-recoverable tax losses from companies in Uruguay as joint operations based on the participation of Arauco and subsidiaries in USA, for which deferred tax assets have not been recognized. The estimated recovery period exceeds the expiry date of such tax losses.

Deferred Tax Liabilities

The following table sets forth the deferred tax liabilities as of the dates indicated:

 

Deferred Tax Liabilities

   06-30-2019
ThU.S.$
     12-31-2018
ThU.S.$
 

Deferred tax Liabilities relating to Property, Plant and Equipment

     846,203        829,288  

Deferred tax Liabilities relating to Financial Instruments

     21,363        14,225  

Deferred tax Liabilities relating to Biological Assets

     646,470        661,582  

Deferred tax Liabilities relating to Inventory

     43,673        39,025  

Deferred tax Liabilities relating to Prepaid Expenses

     45,934        37,897  

Deferred tax Liabilities relating to Intangible

     20,921        20,240  

Deferred tax Liabilities relating to Other Taxable Temporary Differences

     28,409        22,790  

Total Deferred Tax Liabilities

     1,652,973        1,625,047  
  

 

 

    

 

 

 

Offsetting presentation

     (263,014      (207,389
  

 

 

    

 

 

 

Net Effect

     1,389,959        1,417,658  
  

 

 

    

 

 

 

The effect of changes in current and deferred tax liabilities related to financial hedging instruments corresponds to a debit of ThU.S.$5,159 as of June 30, 2019 (compared to a credit of ThU.S.$ 12,292 for the period ended June 30, 2018), which is presented net in Reserves for Cash Flow Hedges in the Interim Consolidated Statement of Changes in Equity.

 

44


Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

Reconciliation of deferred tax assets and liabilities

 

    

Opening
Balance
01-01-2019

     Deferred tax
Expenses
(Income)
    Deferred tax of
items charged
to other
comprehensive
income
    Increase
(decrease)
through
business
combinations
     Increase
(decrease)
Net exchange
differences
    Closing
balance
06-30-2019
 

Deferred Tax Assets

   ThU.S.$      ThU.S.$     ThU.S.$     ThU.S.$      ThU.S.$     ThU.S$  

Deferred tax Assets relating to Provisions

     6,105        (171     —         244        23       6,201  

Deferred tax Assets relating to Accrued Liabilities

     10,906        (4,197     —         197        81       6,987  

Deferred tax Assets relating to Post-Employment benefits

     19,072        1,172       (133     150        18       20,279  

Deferred tax Assets relating to Property, Plant and equipment

     10,125        (1,126     —         —          —         8,999  

Deferred tax Assets relating to Financial Instruments

     9,761        17,184       (2,898     —          (1     24,046  

Deferred tax Assets relating to Tax Loss Carryforward

     109,320        25,737       —         1,505        394       136,956  

Deferred tax Assets relating to Inventories

     5,532        740       —         279        1       6,552  

Deferred tax Assets relating to Provisions for Income

     7,443        132       —         112        15       7,702  

Deferred tax Assets relating to Allowance for Doubtful Accounts

     5,001        131       —         68        10       5,210  

Intangible revaluation differences

     7,651        163       —         —          57       7,871  

Deferred tax Assets relating to Other Deductible Temporary Differences

     21,108        16,566       —         731        9       38,414  

Total Deferred Tax Assets

     212,024        56,331       (3,031     3,286        607       269,217  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     Opening
Balance
01-01-2019
IAS 39
     Deferred tax
Expenses
(Income)
    Deferred tax of
items charged
to other
comprehensive
income
    Increase
(decrease)
through
business
combinations
    

Increase

(decrease)
Net exchange
differences

    Closing
balance
06-30-2019
 

Deferred Tax Liabilities

   ThU.S.$      ThU.S.$     ThU.S.$     ThU.S.$      ThU.S.$     ThU.S$  

Deferred tax Liabilities relating to Property, Plant and Equipment

     829,288        12,633       —         4,234        48       846,203  

Deferred tax Liabilities relating to Financial Instruments

     14,225        7,138       —         —          —         21,363  

Deferred tax Liabilities relating to Biological Assets

     661,582        (16,001     —         —          889       646,470  

Deferred tax Liabilities relating to Inventory

     39,025        4,602       —         —          46       43,673  

Deferred tax Liabilities relating to Prepaid Expenses

     37,897        7,966       —         69        2       45,934  

Deferred tax Liabilities relating to Intangible

     20,240        484       —         —          197       20,921  

Deferred tax Liabilities relating to Other Taxable Temporary Differences

     22,790        4,968       —         182        469       28,409  

Total Deferred Tax Liabilities

     1,625,047        21,790       —         4,485        1,651       1,652,973  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

     Opening
Balance
01-01-2018
IAS 39
     Amounts
restated
     Opening
Balance
01-01-2018
IFRS 9
     Deferred tax
Expenses
(Income)
    Deferred tax of
items charged
to other
comprehensive
income
    Increase
(decrease)
Net
exchange
differences
    Closing
balance
12-31-2018
 

Deferred Tax Assets

   ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$     ThU.S.$     ThU.S.$     ThU.S$  

Deferred tax Assets relating to Provisions

     7,433           7,433        (1,015     —         (313     6,105  

Deferred tax Assets relating to Accrued Liabilities

     11,267           11,267        (361     —         —         10,906  

Deferred tax Assets relating to Post-Employment benefits

     19,276           19,276        297       (504     3       19,072  

Deferred tax Assets relating to Property, Plant and equipment

     11,657           11,657        (1,532     —         —         10,125  

Deferred tax Assets relating to Financial Instruments

     4,348        709        5,057        (507     5,211       —         9,761  

Deferred tax Assets relating to Tax Loss Carryforward

     62,706           62,706        53,103       —         (6,489     109,320  

Deferred tax Assets relating to Inventories

     5,941           5,941        (378     —         (31     5,532  

Deferred tax Assets relating to Provisions for Income

     21,354           21,354        (13,910     —         (1     7,443  

Deferred tax Assets relating to Allowance for Doubtful Accounts

     5,149        918        6,067        (843     —         (223     5,001  

Intangible revaluation differences

     10,389           10,389        (1,244     —         (1,494     7,651  

Deferred tax Assets relating to Other Deductible Temporary Differences

     27,364           27,364        (3,838     —         (2,418     21,108  

Total Deferred Tax Assets

     186,884        1,627        188,511        29,772       4,707       (10,966     212,024  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     Opening
Balance
01-01-2018
IAS 39
     Amounts
restated
     Opening
Balance
01-01-2018
IFRS 9
     Deferred tax
Expenses
(Income)
    Deferred tax of
items charged
to other
comprehensive
income
   

Increase

(decrease)
Net
exchange
differences

    Closing
balance
12-31-2018
 

Deferred Tax Liabilities

   ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$     ThU.S.$     ThU.S.$     ThU.S$  

Deferred tax Liabilities relating to Property, Plant and Equipment

     860,498        —          860,498        (23,428     —         (7,782     829,288  

Deferred tax Liabilities relating to Financial Instruments

     12,684        —          12,684        1,542       —         (1     14,225  

Deferred tax Liabilities relating to Biological Assets

     676,876        —          676,876        2,060       —         (17,354     661,582  

Deferred tax Liabilities relating to Inventory

     32,580        —          32,580        6,445       —         —         39,025  

Deferred tax Liabilities relating to Prepaid Expenses

     41,600        —          41,600        (3,703     —         —         37,897  

Deferred tax Liabilities relating to Intangible

     22,014        —          22,014        (562     —         (1,212     20,240  

Deferred tax Liabilities relating to Other Taxable Temporary Differences

     17,731        —          17,731        6,450       —         (1,391     22,790  

Total Deferred Tax Liabilities

     1,663,983        —          1,663,983        (11,196     —         (27,740     1,625,047  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

Temporary Differences

The following tables summarize the deductible and taxable temporary differences:

 

     06-30-2019      12-31-2018  

Detail of classes of Deferred Tax Temporary Differences

   Deductible
Difference
ThU.S.$
     Taxable
Difference
ThU.S.$
     Deductible
Difference
ThU.S.$
     Taxable
Difference
ThU.S.$
 

Deferred Tax Assets

     132,261           102,704     

Deferred Tax Assets - Tax loss carryforward

     136,956           109,320     

Deferred Tax Liabilities

        1,652,973           1,625,047  

Total

     269,217        1,652,973        212,024        1,625,047  
  

 

 

    

 

 

    

 

 

    

 

 

 
     January - June      April - June  

Detail of Temporary Difference Income and Loss Amounts

   2019
ThU.S.$
     2018
ThU.S.$
     2019
ThU.S.$
     2019
ThU.S.$
 

Deferred Tax Assets

     30,594        (23,456      11,299        (9,150

Deferred Tax Assets - Tax loss carryforward

     25,737        17,774        8,601        8,270  

Deferred Tax Liabilities

     (21,790      5,059        (20,300      (62

Total

     34,541        (623      (400      (942
  

 

 

    

 

 

    

 

 

    

 

 

 

Income Tax Expense

Income tax expense consists of the following:

 

     January - June      April - June  

Income Tax composition

   2019
ThU.S.$
     2018
ThU.S.$
     2019
ThU.S.$
     2018
ThU.S.$
 

Current income tax expense

     (81,699      (123,709      (34,874      (71,354

Tax benefit arising from unrecognized tax assets previously used to reduce current tax expense

     3,771        2,714        3,771        2,714  

Prior period current income tax adjustments

     (2,871      (1,766      (56      (2,412

Other current benefit tax (expenses)

     (707      (1,312      (306      (861

Current Tax Expense, Net

     (81,506      (124,073      (31,465      (71,913

Deferred tax expense relating to origination and reversal of temporary differences

     8,804        (18,397      (9,001      (9,212

Tax benefit arising from previously unrecognized tax loss carryforward

     25,737        17,774        8,601        8,270  

Total deferred Tax benefit (expense), Net

     34,541        (623      (400      (942

Income Tax benefit (expense), Total

     (46,965      (124,696      (31,865      (72,855
  

 

 

    

 

 

    

 

 

    

 

 

 

 

46


Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

The following table presents the current income tax expense detailed by foreign and domestic (Chile) companies at June 30, 2019 and 2018:

 

     January - June      April - June  
     2019
ThU.S.$
     2018
ThU.S.$
     2019
ThU.S.$
     2018
ThU.S.$
 

Foreign current income tax expense

     (17,336      (12,667      (8,033      (3,790

Domestic current income tax expense

     (64,170      (111,406      (23,432      (68,123

Total current income tax expense

     (81,506      (124,073      (31,465      (71,913

Foreign deferred tax benefit (expense)

     32,098        (1,749      12,237        (5,893

Domestic deferred tax benefit (expense)

     2,443        1,126        (12,637      4,951  

Total deferred tax benefit (expense)

     34,541        (623      (400      (942

Total income tax benefit (expense)

     (46,965      (124,696      (31,865      (72,855
  

 

 

    

 

 

    

 

 

    

 

 

 

Reconciliation of income tax expense from statutory tax rate to the effective tax rate.

The reconciliation of income tax expense is as follows:

 

     January - June     April - June  

Reconciliation of Income tax from Statutory Rate to Effective Tax Rate

   2019
ThU.S.$
    2018
ThU.S.$
    2019
ThU.S.$
    2018
ThU.S.$
 

Statutory domestic (Chile) income tax rate

     27.0     27.0     27.0     27.0

Tax Expense at statutory tax rate

     (62,233     (151,373     (24,109     (83,993

Tax effect of foreign tax rates

     858       2,827       306       2,830  

Tax effect of revenues exempt from taxation

     44,451       31,185       5,989       12,562  

Tax effect of not deductible expenses

     (44,235     (9,414     (20,463     (3,049

Tax rate effect of tax loss carry forwards

     —         374       —         126  

Tax effect of Previously Unrecognized Tax Benefit in the Income Statement

     —         108       —         108  

Tax effect of a new evaluation of assets for deferred not recognized taxes

     16,041       —         4,488       —    

Tax rate effect of adjustments for current tax of prior periods

     (2,871     (1,766     (56     (2,412

Other tax rate effects

     1,024       3,363       1,980       973  

Total adjustments to tax expense at applicable tax rate

     15,268       26,677       (7,756     11,138  

Tax benefit (expense) at effective tax rate

     (46,965     (124,696     (31,865     (72,855
  

 

 

   

 

 

   

 

 

   

 

 

 

Current tax assets and liabilities

The current tax assets and liabilities balances are as follow:

 

Current tax Assets

   06-30-2019
ThU.S.$
     12-31-2018
ThU.S.$
 

Monthly Provisional Payments (MPP)

     85,236        1,662  

Income tax receivable

     27,023        19,538  

Provision tax income

     (63,901      (1,371

Other tax receivables

     12,365        16,684  

Total

     60,723        36,513  
  

 

 

    

 

 

 

Current tax Liabilities

   06-30-2019
ThU.S.$
     12-31-2018
ThU.S.$
 

Provision tax income (First category)

     11,850        260,538  

Monthly Provisional Payments (MPP)

     (6,067      (107,023

Other tax payables

     1,413        127  

Total

     7,196        153,642  
  

 

 

    

 

 

 

 

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CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

 

     06-30-2019      12-31-2018  

Property, Plant and Equipment

   ThU.S.$      ThU.S.$  

Property, Plant and Equipment

     7,473,712        7,174,693  

Property, Plant and Equipment by right of use

     336,463        —    

Total

     7,810,175        7,174,693  
  

 

 

    

 

 

 

Property, Plant and Equipment

 

     06-30-2019      12-31-2018  

Property, Plant and Equipment, Net

   ThU.S.$      ThU.S.$  

Construction work in progress

     1,281,658        1,030,730  

Land

     982,975        972,143  

Buildings

     2,127,157        2,062,887  

Plant and equipment

     2,913,716        2,921,462  

Information technology equipment

     21,584        23,292  

Fixtures and fittings

     10,137        15,906  

Motor vehicles

     13,983        14,916  

Other property, plant and equipment

     122,502        133,357  

Total Net

     7,473,712        7,174,693  
  

 

 

    

 

 

 

Property, Plant and Equipment, Gross

     

Construction work in progress

     1,281,658        1,030,730  

Land

     982,975        972,143  

Buildings

     4,092,962        3,959,186  

Plant and equipment

     6,567,255        6,388,843  

Information technology equipment

     89,474        86,558  

Fixtures and fittings

     41,649        44,694  

Motor vehicles

     54,379        53,507  

Other property, plant and equipment

     141,246        157,301  

Total Gross

     13,251,598        12,692,962  
  

 

 

    

 

 

 

Accumulated depreciation and impairment

     

Buildings

     (1,965,805      (1,896,299

Plant and equipment

     (3,653,539      (3,467,381

Information technology equipment

     (67,890      (63,266

Fixtures and fittings

     (31,512      (28,788

Motor vehicles

     (40,396      (38,591

Other property, plant and equipment

     (18,744      (23,944

Total

     (5,777,886      (5,518,269
  

 

 

    

 

 

 

Description of Property, Plant and Equipment Pledged as Security for Liabilities

As of June 30, 2019, there are no significant assets pledged as collateral to be disclosed in these interim consolidated financial statements.

Disbursements commitments for the acquisition of property, plant and equipment and disbursements for property, plant and equipment under construction.

 

     06-30-2019      12-31-2018  
     ThU.S.$      ThU.S.$  

Amount committed for the acquisition of property, plant and equipment

     994,626        798,631  

 

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Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

Reconciliation of Property, Plant and Equipment

The following tables set forth the reconciliation of the carrying amount of property, plant and equipment as of June 30, 2019 and December 31, 2018:

 

Reconciliation of Property, Plant and Equipment

  Construction
work in
progress
ThU.S.$
    Land
ThU.S.$
    Buildings
ThU.S.$
    Plant and
equipment
ThU.S.$
    IT
Equipment
ThU.S.$
    Fixtures
and
fittings
ThU.S.$
    Motor
vehicles
ThU.S.$
    Other
Property,
Plant and
Equipment
ThU.S.$
    TOTAL
ThU.S.$
 

Opening Balance 01-01-2019

    1,030,730       972,143       2,062,887       2,921,462       23,292       15,906       14,916       133,357       7,174,693  

Increase (decrease) for changes in accounting policies

    —         —         —         (55,015     —         —         —         (17,237     (72,252

Restated opening balance

    1,030,730       972,143       2,062,887       2,866,447       23,292       15,906       14,916       116,120       7,102,441  

Changes

                 

Additions

    442,398       6,821       2,362       9,594       466       213       1,499       9,145       472,498  

Acquisitions through business combinations

    12,839       3,865       22,431       80,355       168       197       1       6,272       126,128  

Disposals

    —         (1,109     (4,455     (1,352     —         (4     (4     —         (6,924

Withdrawals

    (4,888     (499     (1,401     (7,013     (1     (1     (11     (1,589     (15,403

Depreciation

    —         —         (62,876     (147,866     (3,108     (1,301     (2,067     (599     (217,817

Impairment loss recognized in profit or loss

    —         —         (7     (1     —         (9     —         —         (17

Increase (decrease) through net exchange differences

    (1,038     1,097       6,324       5,655       56       12       56       (311     11,851  

Reclassification to assets held for sale

    —         —         —         (101     —         —         —         —         (101

Increase (decrease) through transfers from construction in progress

    (198,383     657       101,892       106,952       711       (4,876     (417     (6,536     —    

Reclassification of assets from leasing

    —         —         —         1,046       —         —         10       —         1,056  

Total changes

    250,928       10,832       64,270       47,269       (1,708     (5,769     (933     6,382       371,271  

Closing balance 06-30-2019

    1,281,658       982,975       2,127,157       2,913,716       21,584       10,137       13,983       122,502       7,473,712  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of Property, Plant and Equipment

  Construction
work in
progress
ThU.S.$
    Land
ThU.S.$
    Buildings
ThU.S.$
    Plant and
equipment
ThU.S.$
    IT
Equipment
ThU.S.$
    Fixtures
and
fittings
ThU.S.$
    Motor
vehicles
ThU.S.$
    Other
Property,
Plant and
Equipment
ThU.S.$
    TOTAL
ThU.S.$
 

Opening Balance 01-01-2018

    597,351       1,008,310       2,135,201       3,112,755       22,665       12,297       15,959       129,761       7,034,299  

Changes

                 

Additions

    660,918       3       6,949       42,467       1,125       1,146       2,352       15,516       730,476  

Acquisitions through business combinations

    —         3,900       —         4,887       —         —         —         —         8,787  

Disposals

    (1,994     (448     (770     (702     (42     —         (129     (528     (4,613

Withdrawals

    (6,269     (4,466     (1,656     (17,680     (42     (28     (84     (5,599     (35,824

Depreciation

    —         —         (125,407     (316,118     (5,791     (2,870     (3,920     (3,660     (457,766

Impairment loss recognized in profit or loss

    —         —         (654     (356     (5     (20     —         —         (1,035

Increase (decrease) through net exchange differences

    (4,115     (34,204     (15,444     (42,059     (175     (210     (217     (6,332     (102,756

Reclassification to assets held for sale

    —         (2,193     (5     5,323       —         —         —         —         3,125  

Increase (decrease) through transfers from construction in progress

    (215,161     1,241       64,673       132,945       5,557       5,591       955       4,199       —    

Total changes

    433,379       (36,167     (72,314     (191,293     627       3,609       (1,043     3,596       140,394  

Closing balance 12-31-2018

    1,030,730       972,143       2,062,887       2,921,462       23,292       15,906       14,916       133,357       7,174,693  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

The depreciation expense for the period ending June 30, 2019 and 2018 is as follows:

 

     January - June      April - June  

Depreciation for the year

   2019
ThU.S.$
     2018
ThU.S.$
     2019
ThU.S.$
     2018
ThU.S.$
 

Cost of sales

     198,138        192,343        101,489        97,320  

Administrative expenses

     7,520        7,769        3,663        3,860  

Other expenses

     766        680        429        333  

Total

     206,424        200,792        105,581        101,513  
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation charged to profit or loss differs from the movement of the period for Property, Plant and Equipment. This is mainly due to the periodic cost processes in which a portion of the depreciation charge remains in the Inventories. Furthermore, this deviation is also affected by the conversion differences of the companies with a functional currency other than U.S. dollars.

The useful lives of property, plant and equipment are estimated based on the expected use of the assets. The average useful lives by asset class are as follow:

 

     Years of Useful Life
(Average)
 

Buildings

     58  

Plant and equipment

     30  

Information technology equipment

     8  

Fixtures and fittings

     28  

Motor vehicles

     7  

Other property, plant and equipment

     14  

See Note 12 for details of capitalized borrowing costs.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

Property, Plant and Equipment by Right of Use

 

     06-30-2019  
     ThU.S.$  

Property, Plant and Equipment by right of use, Net

  

Land

     67,106  

Buildings

     18,113  

Plant and equipment

     91,686  

Information technology equipment

     246  

Fixtures and fittings

     1,383  

Motor vehicles

     141,231  

Other property, plant and equipment

     16,698  

Total Net

     336,463  
  

 

 

 

Property, Plant and Equipment by right of use, Gross

  

Land

     70,480  

Buildings

     20,837  

Plant and equipment

     108,784  

Information technology equipment

     315  

Fixtures and fittings

     1,595  

Motor vehicles

     159,483  

Other property, plant and equipment

     17,489  

Total Gross

     378,983  
  

 

 

 

Accumulated depreciation and impairment by right of use

  

Land

     (3,374

Buildings

     (2,724

Plant and equipment

     (17,098

Information technology equipment

     (69

Fixtures and fittings

     (212

Motor vehicles

     (18,252

Other property, plant and equipment

     (791

Total

     (42,520
  

 

 

 

Reconciliation of Property, Plant and Equipment by Right of Use

The following tables set forth the reconciliation of the carrying amount of property, plant and equipment by right of use as of June 30, 2019:

 

Reconciliation of Property, Plant and Equipment by
right of use

   Land
ThU.S.$
    Buildings
ThU.S.$
    Plant and
equipment
ThU.S.$
    IT
Equipment
ThU.S.$
    Fixtures
and
fittings
ThU.S.$
    Motor
vehicles
ThU.S.$
    Other
Property,
Plant and
Equipment
ThU.S.$
    TOTAL
ThU.S.$
 

Opening Balance 01-01-2019

     —         —         —         —         —         —         —         —    

Increase (decrease) for changes in accounting policies

     65,363       20,837       111,537       308       —         143,361       17,233       358,639  

Restated opening balance

     65,363       20,837       111,537       308       —         143,361       17,233       358,639  

Changes

                

Additions

     4,264       51       817       —         1,595       16,062       1,893       24,682  

Withdrawals

     —         —         (4,652     —         —         —         —         (4,652

Depreciation

     (3,374     (2,724     (17,098     (69     (212     (18,252     (1,377     (43,106

Increase (decrease) through net exchange differences

     853       41       (291     7       —         60       5       675  

Increase (decrease) through others

     —         (92     1,373       —         —         —         —         1,281  

Reclassification of assets from leasing

     —         —         —         —         —         —         (1,056     (1,056

Total changes

     1,743       (2,724     (19,851     (62     1,383       (2,130     (535     (22,176
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Closing balance 06-30-2019

     67,106       18,113       91,686       246       1,383       141,231       16,698       336,463  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

 

The following table set forth the composition of the initial impact of the IFRS 16 enactment on Property, Plant and Equipment by right of use:

 

     January
01, 2019
 
     ThU.S.$  

Right of use assets under IFRS 16

     286,387  

Assets from leasings under IAS 17

     72,252  

Increase (decrease) for changes in accounting policies

     358,639  
  

 

 

 

The depreciation expense for the period ending June 30, 2019 Property, Plant and Equipment by right of use is as follows:

 

     January - June      April - June  
     2019      2019  

Depreciation for the period

   ThU.S.$      ThU.S.$  

Cost of sales

     36,470        17,932  

Distribution costs

     920        920  

Administrative expenses

     3,287        1,156  

Total

     40,677        20,008  
  

 

 

    

 

 

 

Depreciation charged to profit or loss differs from the movement of the period for Property, Plant and Equipment for right of use. This is mainly due to the periodic cost processes in which a portion of the depreciation charge remains in the Inventories. Furthermore, this deviation is also affected by the conversion differences of the companies with a functional currency other than U.S. dollars.

Additionally, Arauco has recognized directly in the interim consolidated statement of profit or loss, the following leases concepts excluded from the application of IFRS 16:

 

     January - June  
     2019  

Depreciation for the year

   ThU.S.$  

Expenses from payments of variable leases

     53,534  

Expenses from low value leases

     293  

Expenses from short-term leases

     11,667  

Total

     65,494  
  

 

 

 

 

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CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 8. LEASES

Arauco acting as lessee

Arauco has adopted IFRS 16 - Leases, the effects of initial application of the standard have been disclosed in Note 2 - Changes in policies and accounting estimates. Assets by rights of use and lease liabilities have been included in Notes 7 and 23, respectively.

Arauco acting as lessor

IFRS 16 substantially maintains the accounting requirements of the lessor of IAS 17. Consequently, Arauco has continued to classify its leases as operating or financial.

Reconciliation of Financial Lease Minimum Payments:

 

     06-30-2019  
     Gross      Interest      Present Value  

Periods

   ThU.S.$      ThU.S.$      ThU.S.$  

Less than one year

     1,252        24        1,228  

Between one and five years

     427        —          427  

More than five years

     —          —          —    

Total

     1,679        24        1,655  
  

 

 

    

 

 

    

 

 

 
     12-31-2018  
     Gross      Interest      Present Value  

Periods

   ThU.S.$      ThU.S.$      ThU.S.$  

Less than one year

     1,180        49        1,131  

Between one and five years

     837        —          837  

More than five years

     —          —          —    

Total

     2,017        49        1,968  
  

 

 

    

 

 

    

 

 

 

Financial lease receivables are presented in the interim consolidated statements of financial position in line items “Trade and other current receivable” and “Trade and other non-current receivable” depending on their maturities stated above.

Arauco accounts for its lease contracts as financial leases. These lease contracts are for a term of less than five-years at market interest rates and leased assets are forestry machinery and equipment. They also include an early termination option, under general and special conditions stipulated in each contract.

Arauco holds leases as lessee and lessor, described in the previous tables, for which there are no impairment contingent payments or restrictions to report.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

 

NOTE 9. REVENUE

 

     January - June      April - June  

Classes of revenue

   2019
ThU.S.$
     2018
ThU.S.$
     2019
ThU.S.$
     2018
ThU.S.$
 

Revenue from sales of goods

     2,704,086        2,965,069        1,332,833        1,527,190  

Revenue from rendering of services

     35,670        58,922        18,737        32,147  

Total

     2,739,756        3,023,991        1,351,570        1,559,337  
  

 

 

    

 

 

    

 

 

    

 

 

 

The reportable segments revenues by business area and by geographical area are presented in Note 24.

NOTE 10. EMPLOYEE BENEFITS

Classes of Benefits and Expenses by Employee

 

     January - June      April - June  
     2019
ThU.S.$
     2018
ThU.S.$
     2019
ThU.S.$
     2018
ThU.S.$
 

Employee expenses

     332,933        307,945        173,702        165,159  

Wages and salaries

     323,567        291,897        168,960        160,480  

Severance indemnities

     9,366        16,048        4,742        4,679  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     06-30-2019     12-31-2018  

Discount rate

     5.91     5.91

Inflation

     3.00     3.00

Annual rate of wage growth

     5.22     5.22

Mortality rate (1)

     RV-2014       RV-2014  

 

(1)

For the purposes of determining the technical reserves, Chilean annuity providers are required by law to utilize the mortality tables specified by the SVS (currently Chilean Commission for the Financial Market). The most recent table is the RV-2014, which is based on Chilean pensioner experience from 2006-2013 (SP & SVS, 2013). The mortality tables distinguish between males and females.

 

Sensitivities to assumptions

   ThU.S.$  

Discount rate

  

Increase in 100 bps

     (5,327

Decrease in 100 bps

     5,830  

Wage growth rates

  

Increase in 100 bps

     5,259  

Decrease in 100 bps

     (4,644

 

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CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

The following tables set forth the balances and the reconciliation of the present value of severance indemnities obligations as of June 30, 2019 and December 31, 2018:

 

     06-30-2019      12-31-2018  
     ThU.S.$      ThU.S.$  

Current

     5,973        5,656  

Non-current

     68,968        64,895  

Total

     74,941        70,551  
  

 

 

    

 

 

 

Reconciliation of the present value of severance indemnities obligations

   06-30-2019
ThU.S.$
     12-31-2018
ThU.S.$
 

Opening balance

     70,551        71,763  

Bussines combinations

     462        —    

Current service cost

     2,774        5,201  

Interest cost

     2,125        3,723  

(Gains) losses from changes in actuarial assumptions

     —          (172

Actuarial gains and losses arising from experience

     (543      (1,685

Benefits paid

     (1,973      (4,773

Costs from past services

     —          4,710  

Increase (decrease) for foreign currency exchange rates changes

     1,545        (8,216

Closing balance

     74,941        70,551  
  

 

 

    

 

 

 

 

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Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 11. BALANCES IN FOREIGN CURRENCY AND FOREIGN CURRENCY EXCHANGE RATE IMPACT IN PROFIT OR LOSS.

 

     06-30-2019      12-31-2018  
     ThU.S.$      ThU.S.$  

Total Current Assets

     3,829,928        3,441,160  

Cash and Cash Equivalents

     1,250,863        1,075,942  

U.S Dollar

     937,839        834,513  

Euros

     18,838        8,295  

Brazilian Real

     44,493        44,605  

Argentine Pesos

     3,016        2,854  

Mexican Pesos

     5,944        1,461  

Other currencies

     2,734        3,914  

Chilean Pesos

     237,999        180,300  

Other current financial assets

     1,027        497  

U.S Dollar

     1,027        497  

Other current non-financial assets

     192,934        129,854  

U.S Dollar

     86,124        49,170  

Euros

     100        125  

Brazilian Real

     14,637        19,018  

Argentine Pesos

     6,992        5,855  

Mexican Pesos

     703        42  

Other currencies

     7,073        5,283  

Chilean Pesos

     77,305        50,361  

Trade and other current receivables

     851,994        839,184  

U.S Dollar

     611,077        631,047  

Euros

     4,213        7,399  

Brazilian Real

     65,450        66,500  

Argentine Pesos

     21,660        15,044  

Mexican Pesos

     42,822        8,576  

Other currencies

     8,655        6,882  

Chilean Pesos

     94,217        99,950  

U.F.

     3,900        3,786  

Accounts receivable from related companies

     4,445        7,324  

U.S Dollar

     814        591  

Brazilian Real

     231        83  

Chilean Pesos

     2,833        6,169  

U.F.

     567        481  

Current Inventories

     1,153,685        1,030,196  

U.S Dollar

     1,038,778        957,529  

Brazilian Real

     81,524        72,667  

Mexican Pesos

     33,383        —    

Current biological assets

     308,589        315,924  

U.S Dollar

     245,953        253,672  

Brazilian Real

     62,636        62,252  

Current tax assets

     60,723        36,513  

U.S Dollar

     11,717        16,042  

Euros

     25        262  

Brazilian Real

     7,464        4,978  

Mexican Pesos

     1,802        102  

Other currencies

     2,604        1,399  

Chilean Pesos

     37,111        13,730  

Non-current assets or disposal groups classified as held for sale

     5,668        5,726  

U.S Dollar

     5,039        5,152  

Brazilian Real

     580        574  

Mexican Pesos

     49        —    

 

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Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Unaudited Interim Consolidated Financial Statements

June 30, 2019

Amounts in thousands of U.S. dollars, except as indicated

 

 

     06-30-2019      12-31-2018  
     ThU.S.$      ThU.S.$  

Total Non Current Assets

     11,833,650        11,152,588  

Other non-current financial assets

     49,165        20,346  

U.S Dollar

     49,165        20,346  

Other non-current non-financial assets

     114,187        86,948  

U.S Dollar

     106,688        79,615  

Brazilian Real

     5,005        4,946  

Argentine Pesos

     1,262        1,427  

Mexican Pesos

     897        640  

Other currencies

     90        90  

Chilean Pesos

     245        230  

Trade and other non-current receivables

     11,334        15,149  

U.S Dollar

     3,612        7,733  

Brazilian Real

     612        1,040  

Other currencies

     25        27  

Chilean Pesos

     3,445        3,267  

U.F.

     3,640        3,082  

Accounts receivable from related companies,