2. Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2013

Accounting Policies [Abstract]

2. Summary of Significant Accounting Policies

Basis of Presentation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements, including the estimated useful lives of tangible and intangible assets and the asset retirement obligation. Management believes the estimates used in preparing the financial statements are reasonable and prudent. Actual results could differ from these estimates.

Principles of Consolidation

The consolidated financial statements include the financial statements of Lustros, Inc., its subsidiaries Lustros Chile SpA, Mineraltus, Bluestone, and Sulfatos. All significant inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates

The presentation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Foreign Currency Translation

The Company records foreign currency translation adjustments and transaction gains and losses in accordance with ASC 830, Foreign Currency Matters. The functional currency of Bluestone and its subsidiaries is the Chilean Peso ("CLP"). Assets and liabilities of Bluestone and its subsidiaries are translated into United States dollars at the exchange rates as of the balance sheet dates. Revenues and expenses of Bluestone and its subsidiaries are translated into United States dollars at average exchange rates in effect during the period. The resulting cumulative translation adjustments have been recorded as a component of other comprehensive income (loss), included as a separate item in the balance sheet.

For purposes of these consolidated financial statements: (i) the exchange rate was $523.76 CLPs to 1 US dollar at December 31, 2013; and (ii) the average exchange rates were $495.31 CLPs to 1 US dollar during the year ended December 31, 2013.

The Company is exposed to movements in foreign currency exchange rates. In addition, the Company is subject to risks including adverse developments in the foreign political and economic environment, trade barriers, managing foreign operations, and potentially adverse tax consequences. There can be no assurance that any of these factors will not have a material negative impact on the Company's financial condition or results of operations in the future.

Financial Instruments

The Company's financial instruments include cash and cash equivalents, and accounts payable and notes payable. At December 31, 2013, the carrying cost of these instruments approximated their fair value. The authoritative guidance for fair values establishes a three tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Cash Equivalents

Cash equivalents include highly liquid investments with maturities of three months or less.

Inventory

Inventory, which consists primarily of raw copper ore and copper sulfate, is stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.

The Company evaluates the need to record adjustments for impairment of inventory. As of December 31, 2013, the Company has not needed to adjust for impairment.

Income Taxes and Deferred Tax Asset

Accounting Standards Codification Topic No. 740 “Income Taxes” (ASC 740) requires the asset and liability method of accounting be used for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Land is not depreciated.

Depreciation is computed principally on the straight-line method over the estimated useful life of each type of asset which ranges from three to five years. Major improvements are capitalized, while expenditures for repairs and maintenance are expensed when incurred. The depreciation methods, and estimated remaining useful lives are reviewed at least annually. If property and equipment is classified as held for sale, it is reviewed for impairment annually. The impairment charged to the income statement is the excess of the carrying value of the property and equipment over its expected fair value less costs to sell. Upon retirement or disposition, the related costs and accumulated depreciation are removed from the accounts, and any resulting gains or losses are credited or charged to income.

Mining Properties and Equipment

The Company follows the successful efforts method of accounting. All developmental costs are capitalized. Depreciation and depletion of producing properties will be computed on the unit-of-production method based on estimated proved reserves. Repairs and maintenance are expensed, while renewals and betterments are generally capitalized.

At least quarterly, or more frequently if conditions indicate that long-term assets may be impaired, the carrying value of our properties will be compared to management's future estimated pre-tax cash flow from the properties. If undiscounted cash flows are less than the carrying value, then the asset value will be written down to fair value. Impairment of individually significant unproved properties will be assessed on a property-by-property basis, and impairment of other unproved properties is assessed and amortized on an aggregate basis.

The Company reviewed its long term assets as of December 31, 2013 based on ASC 360-10-35-21, Property, Plant, and Equipment - Overall – Subsequent Measurement – Impairment or Disposal of Long-Lived Assets – Long-Lived Assets Classified as Held and Used – When to Test a Long-Lived Asset, for Recoverability. Pursuant to ASC 360-10-35-21, a long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.

Because it has been less expensive to purchase raw materials for the Copper Sulfate Production Plant from third parties than to mine the material from the Anica Mine, Sulfatos was not actively exploiting the mine as of December 31, 2013. Because the useful life of this mine to Sulfatos is currently unknown, the Company elected to impair the full book value of the Anica Mine as of December 31, 2013.

We then reviewed our long lived assets as of December 31, 2013 based on ASC 932-360-35, Extractive Activities-Mining, Property, Plant and Equipment, Subsequent Measurement. ASC 932-360-35 states that all relevant facts and circumstances shall be evaluated when determining whether an entity is making sufficient progress on assessing the reserves and the economic and operating viability of the project.

The required lease payments for the Congo Project have not been made to date and production of the copper sulfate processing plant on the property has not yet begun. The Company is currently in negotiations to amend the original agreement through arbitration but no agreement has been finalized. Because the Company was in default under the original terms of this agreement and the resolution of said default is currently unknown, the Company elected to fully reserve for the $360,000 paid for the right to use as of December 31, 2013.

Derivatives

Under ASC 815, “Derivatives and Hedging”, the initial balance sheet classification of contracts that require net cash settlement are recorded as assets or liabilities and contracts that require settlement in shares are recorded as equity instruments. At each balance sheet date, the Company reviews contracts and equity instruments that are to be settled in common stock to determine if sufficient common shares are available to satisfy the maximum number of shares that could be required to net-share settle the contracts, among other conditions. Changes in fair value are accounted for in the consolidated statement of operations.

Asset Retirement Obligation

The Company follows ASC 410, Asset Retirement and Environmental Obligations, which requires that an asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated asset. The cost of the tangible asset, including the initially recognized ARO, is depleted, such that the cost of the ARO is recognized over the useful life of the asset. The ARO is recorded at fair value, and accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. The fair value of the ARO is measured using expected future cash flow, discounted at the Company’s credit-adjusted risk-free interest rate.

The Company determined that an ARO existed at its Sulfatos Chile property to eventually retire the land where the mine and copper sulfate plant were located. The original ARO was determined to be $936,150 over an estimated 10 year life of the property (beginning January 1, 2012) which represents 15% of original $6.9 million cost incurred for the mine acquisition and plant related assets. The Company used a 10% rate to discount to PV. Even though and impairment charge was taken on the value of the mine at December 31, 2013, ARO is a legal obligation to repair the land which has been altered, accordingly a reasonable estimate for retirement cost would be expected to remain.

To date, the Company estimates that an asset retirement obligation of $433,794 exists. Accordingly, a liability for this amount has been included in long term liabilities. The table below shows the changes in carrying value of ARO from December 31, 2012 through December 31, 2013:

	December 31, 2012		2013 Accretion Expense		December 31, 2013
ARO liability		396,474		37,320		433,794

Revenue Recognition

Revenue is recognized in accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The Company recognizes revenue when the significant risks and rewards of ownership have been transferred to the customer pursuant to applicable laws and regulations, including factors such as when there has been evidence of a sales arrangement, delivery has occurred, or services have been rendered, the price to the buyer is fixed or determinable, and collection is reasonably assured. The Company is responsible for warehousing and shipping the merchandise.

Costs of Goods Sold and Operating Expenses

Costs of goods sold includes the cost of the finished good inventory sold during the period, solvents, chemicals and other consumable materials used in the production of our finished good inventory and packaging materials used to ship our product to customers.

Operating expenses are broken down into General and Administrative which include costs such as rents, utilities, telecommunications, repairs and maintenance, office supplies, insurance, travel, shareholder costs, commissions and consultants; Depreciation which includes all depreciation for fixed assets; Payroll which includes all personnel costs not directly related to the production of finished goods inventory; Legal and Accounting which includes all lawyers’ fees, accounting services, audit and financial reporting costs; Mining costs which includes any costs related to the mine which do not produce revenue; and Research and Development which include costs to improve our products or processes.

Earnings/(Loss) Per Common Share

ASC Topic 260, “Earnings Per Share”, requires presentation of basic earnings per share and diluted earnings per share. Basic earnings/(loss) per share is computed by dividing earnings/(loss) available to common shareholders by the weighted average number of common shares outstanding (including shares reserved for issuance) during the period. Diluted earnings/(loss) per share gives effect to all potential dilutive common shares outstanding during the period.

Going Concern

The Company’s financial statements are prepared using US GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As shown in these consolidated financial statements, the Company has a limited operating history and limited funds and has an accumulated deficit of $11,204,535 as of December 31, 2013.  These factors affect the Company’s ability to continue as a going concern.

In order to continue as a going concern and achieve a profitable level of operations, the Company will require additional financing from loans or the sale of debt or equity securities. In addition, the Company will seek to generate revenues from its business lines.  If the Company is unable to secure such additional financing or secure such additional financing on favorable terms, the lack of adequate financing could have a material adverse effect on its ability to conduct its business as intended.

The financial statements do not include any adjustments relating to the recoverability and classification of assets and/or liabilities that might be necessary should the Company be unable to continue as a going concern. The continuation as a going concern is dependent upon the ability of the Company to meet its obligations on a timely basis and ultimately to attain profitability.

Fair Value Measurements

Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure the fair value. Level inputs, as defined by ASC 820-10, are as follows:

· Level 1 – quoted prices in active markets for identical assets or liabilities.

· Level 2 – other significant observable inputs for the assets or liabilities through corroboration with market data at the measurement date.

· Level 3 – significant unobservable inputs that reflect management’s best estimate of what market participants would use to price the assets or liabilities at the measurement date.

The following table summarizes fair value measurements by level at December 31, 2013 for assets and liabilities measured at fair value on a recurring basis:

	Level 1		Level 2		Level 3		Total
Cash	$	615,469		–		–	$	615,469
Derivative liability		–		–		39,474		39,474

In determining the valuation approach to the derivative, it was determined to estimate the number of shares that would be required to settle the debt and apply the closing price. This was determined to result in the most accurate valuation and effect of settlement as of the balance sheet date. The following assumptions were used in this valuation:

Market trading lookback days used		11
Weighted average closing price	$	0.2787
Estimated rate of conversion		60%
Estimated conversion rate	$	0.1672

The following table summarizes fair value measurements by level at December 31, 2012 for assets and liabilities measured at fair value on a recurring basis:

	Level 1		Level 2		Level 3		Total
Cash	$	277,565		–		–	$	277,565

Recently Issued Accounting Pronouncements

In February 2013, the FASB issued authoritative guidance on the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount is reclassified to net income in its entirety in the same reporting period. The guidance is effective for fiscal years beginning after December 15, 2012, with early adoption permitted. The adoption of this guidance did not have a material effect on the Company’s financial condition, results of operations or cash flows.

In April 2014, the Financial Accounting Standards Board issued an accounting standard update that amends the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has, or will have, a major effect on an entity's operations and financial results. The amendment should be applied prospectively and is effective for fiscal years beginning on or after December 15, 2014. Early adoption is permitted for disposals that have not been reported in financial statements previously issued. The adoption of this guidance will not have a material effect on the Company's financial condition, results of operations or cash flows.

In May 2014, the FASB issued an accounting standard update on revenue recognition that will be applied to all contracts with customers. The update requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance will be required to be applied on a retrospective basis, using one of two methodologies, and will be effective for fiscal years beginning after December 15, 2016, with early application not being permitted. The Company is currently assessing the impact that the guidance will have on the Company's financial condition and results of operations.

In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements. ASU 2014-10 eliminates the distinction of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information on the statements of operations, cash flows and stockholders' equity. The amendments in ASU 2014-10 will be effective prospectively for annual reporting periods beginning after December 15, 2014, and interim periods within those annual periods, however early adoption is permitted. The Company adopted ASU 2014-10 during the quarter ended June 30, 2014, thereby no longer presenting or disclosing any information required by Topic 915.

The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.