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Summary of Significant Accounting Policies
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Mar. 31, 2011
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| Summary of Significant Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
2.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Reclassifications
Certain prior year balances have been reclassified to conform to
the current year presentation. The reclassifications do not
impact shareholders’ deficit.
Accounting
Principles
The consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States of America (“US GAAP”). The US dollar is used
as the reporting currency. All subsidiaries and qualifying
special purpose entities are consolidated and all significant
intercompany transactions and balances are eliminated.
Use of
Estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of
assets and liabilities and the disclosure 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
All assets and liabilities are translated into US dollars at
current exchange rates while revenues and expenses are
translated at average exchange rates in effect for the period.
The effects of foreign currency translation adjustments are
included directly in other comprehensive income in
shareholders’ equity. Gains and losses arising from foreign
currency transactions are recognised in income currently.
Restricted Cash
and Cash Equivalents
Restricted cash and cash equivalents relate to amounts subject
to letters of credit with insurance companies which restrict the
cash from use for general corporate purposes.
Inventories
Inventories are valued at the lower of cost or market. Cost is
generally determined under the
first-in,
first-out method, except that the cost of raw materials and
supplies is determined using actual or average costs. Cost
includes the costs of materials, labour and applied factory
overhead. On a regular basis, the Company evaluates its
inventory balances for excess quantities and obsolescence by
analysing demand, inventory on hand, sales levels and other
information. Based on these evaluations, inventory costs are
written down, if necessary.
Property, Plant
and Equipment
Property, plant and equipment are stated at cost. Property,
plant and equipment of businesses acquired are recorded at their
estimated fair value at the date of acquisition. Depreciation of
property, plant and equipment is computed using the
straight-line method over the following estimated useful lives:
Impairment of
Long-Lived Assets
Long-lived assets, such as property, plant and equipment, and
purchased intangibles subject to amortisation are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of the asset exceeds its estimated
future cash flows, an impairment charge is recognised by the
amount by which the carrying amount of the asset exceeds the
fair value of the assets.
Environmental
Remediation and Compliance Expenditures
Environmental remediation and Compliance expenditures that
relate to current operations are expensed or capitalised, as
appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to
current or future revenue generation, are expensed. Liabilities
are recorded when environmental assessments
and/or
remedial efforts are probable and the costs can be reasonably
estimated. Estimated liabilities are not discounted to present
value. Generally, the timing of these accruals coincides with
completion of a feasibility study or the Company’s
commitment to a formal plan of action.
Revenue
Recognition
The Company recognises revenue when the risks and obligations of
ownership have been transferred to the customer, which generally
occurs at the time of delivery to the customer. The Company
records estimated reductions in sales for customer rebates and
discounts including volume, promotional, cash and other
discounts. Rebates and discounts are recorded based on
management’s best estimate when products are sold. The
estimates are based on historical experience for similar
programs and
products. Management reviews these
rebates and discounts on an ongoing basis and the related
accruals are adjusted, if necessary, as additional information
becomes available.
Depreciation and
Amortisation
The Company records depreciation and amortisation under both
cost of goods sold and selling, general and administrative
expenses, depending on the asset’s business use. All
depreciation and amortisation related to plant building,
machinery and equipment is recorded in cost of goods sold.
Advertising
The Company expenses the production costs of advertising the
first time the advertising takes place. Advertising expense was
US$7.9 million, US$9.1 million and US$9.9 million
during the years ended 31 March 2011, 2010 and 2009,
respectively.
Accrued Product
Warranties
An accrual for estimated future warranty costs is recorded based
on an analysis by the Company, which includes the historical
relationship of warranty costs to installed product.
Income
Taxes
The Company accounts for income taxes under the asset and
liability method. Under this method, deferred income taxes are
recognised by applying enacted statutory rates applicable to
future years to differences between the tax bases and financial
reporting amounts of existing assets and liabilities. The effect
on deferred taxes of a change in tax rates is recognised in
income in the period that includes the enactment date. A
valuation allowance is provided when it is more likely than not
that all or some portion of deferred tax assets will not be
realised. Interest and penalties related to uncertain tax
positions are recognised in income tax expense.
Financial
Instruments
The Company calculates the fair value of financial instruments
and includes this additional information in the notes to the
consolidated financial statements when the fair value is
different from the carrying value of those financial
instruments. When the fair value reasonably approximates the
carrying value, no additional disclosure is made. The estimated
fair value amounts have been determined by the Company using
available market information and appropriate valuation
methodologies. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realise in a
current market exchange. The use of different market assumptions
and/or
estimation methodologies may have a material effect on the
estimated fair value amounts.
Periodically, interest rate swaps, commodity swaps and forward
exchange contracts are used to manage market risks and reduce
exposure resulting from fluctuations in interest rates,
commodity prices and foreign currency exchange rates. Where such
contracts are designated as, and are effective as, a hedge,
changes in the fair value of derivative instruments designated
as cash flow hedges are deferred and recorded in other
comprehensive income. These deferred gains or losses are
recognised in income when the transactions being hedged are
recognised. The ineffective portion of these hedges is
recognised in income currently. Changes in the fair value of
derivative instruments designated as fair value hedges are
recognised in income, as are changes in the fair value of the
hedged item. Changes in the fair value of derivative instruments
that are not designated as hedges for accounting purposes are
recognised in income. The Company does not use derivatives for
trading purposes.
Stock-based
Compensation
The Company recognised stock-based compensation expense
(included in selling, general and administrative expense) of
US$11.3 million, US$9.3 million and
US$7.2 million for the years ended 31 March 2011, 2010
and 2009, respectively. Included in stock-based compensation
expense for the years ended 31 March 2011, 2010 and 2009 is
an expense of US$2.2 million, US$1.6 million and nil,
respectively, related to liability-classified awards.
Earnings Per
Share
The Company discloses basic and diluted earnings per share
(“EPS”). Basic EPS is calculated using net income
divided by the weighted average number of common shares
outstanding during the period. Diluted EPS is similar to basic
EPS except that the weighted average number of common shares
outstanding is increased to include the number of additional
common shares calculated using the Treasury Method that would
have been outstanding if the dilutive potential common shares,
such as options, had been issued.
Accordingly, basic and dilutive common shares outstanding used
in determining net (loss) income per share are as follows:
Potential common shares of 13.8 million, 13.7 million
and 19.0 million for the years ended 31 March 2011,
2010 and 2009, respectively, have been excluded from the
calculation of diluted common shares outstanding because the
effect of their inclusion would be anti-dilutive.
Unless they are anti-dilutive, restricted stock units
(“RSUs”) which vest solely based on continued
employment are considered to be outstanding as of their issuance
date for purposes of computing diluted EPS and are included in
the calculation of diluted EPS using the Treasury Method. Once
these RSUs vest, they are included in the basic EPS calculation
on a weighted-average basis.
RSUs which vest based on performance or market conditions are
considered contingent shares. At each reporting date prior to
the end of the contingency period, the Company determines the
number of contingently issuable shares to include in the diluted
EPS, as the number of shares that would be issuable under the
terms of the RSU arrangement, if the end of the reporting period
were the end of the contingency period. Once these RSUs vest,
they are included in the basic EPS calculation on a
weighted-average basis.
Asbestos
At 31 March 2006, the Company recorded an asbestos
provision based on the estimated economic impact of the Original
Final Funding Agreement (“Original FFA”) entered into
on 1 December 2005. The amount of the net asbestos
provision of US$715.6 million was based on
the terms of the Original FFA,
which included an actuarial estimate prepared by KPMG Actuaries
as of 31 March 2006 of the projected future cash outflows,
undiscounted and uninflated, and the anticipated tax deduction
arising from Australian legislation which came into force on
6 April 2006. The amount represented the net economic
impact that the Company was prepared to assume as a result of
its voluntary funding of the asbestos liability which was under
negotiation with various parties.
In February 2007, the shareholders approved the AFFA entered
into on 21 November 2006 to provide long-term funding to
AICF, a special purpose fund that provides compensation for
Australian-related personal injuries for which certain former
subsidiary companies of James Hardie in Australia (being Amaca
Pty Ltd (“Amaca”), Amaba Pty Ltd (“Amaba”)
and ABN 60 Pty Limited (“ABN 60”) (collectively, the
“Former James Hardie Companies”)) are found liable.
Amaca and Amaba separated from the James Hardie Group in
February 2001. ABN 60 separated from the James Hardie Group in
March 2003. Upon shareholder approval of the AFFA in February
2007, shares in the Former James Hardie Companies were
transferred to the AICF. The AICF manages Australian
asbestos-related personal injury claims made against the Former
James Hardie Companies and makes compensation payments in
respect of those proven claims.
AICF
In February 2007, the shareholders approved a proposal pursuant
to which the Company provides long-term funding to the AICF. The
Company owns 100% of James Hardie 117 Pty Ltd (the
“Performing Subsidiary”) that funds the AICF subject
to the provisions of the AFFA. The Company appoints three of the
AICF directors and the NSW Government appoints two of the AICF
directors.
Under the terms of the AFFA, the Performing Subsidiary has an
obligation to make payments to the AICF on an annual basis,
depending on the Company’s net operating cash flow. The
amounts of these annual payments are dependent on several
factors, including the Company’s free cash flow (as defined
in the AFFA), actuarial estimations, actual claims paid,
operating expenses of the AICF and the annual cash flow cap. JHI
SE guarantees the Performing Subsidiary’s obligation. As a
result, the Company considers it to be the primary beneficiary
of the AICF.
The Company’s interest in the AICF is considered variable
because the potential impact on the Company will vary based upon
the annual actuarial assessments obtained by the AICF with
respect to asbestos-related personal injury claims against the
Former James Hardie Companies.
Although the Company has no legal ownership in the AICF, for
financial reporting purposes, the Company consolidates the AICF
due to its pecuniary and contractual interests in the AICF as a
result of the funding arrangements outlined in the AFFA. The
Company’s consolidation of the AICF resulted in a separate
recognition of the asbestos liability and certain other items
including the related Australian income tax benefit. Among other
items, the Company recorded a deferred tax asset for the
anticipated tax benefit related to asbestos liabilities and a
corresponding increase in the asbestos liability. As stated in
“Deferred Income Taxes” below, the Performing
Subsidiary is able to claim a tax deduction for contributions to
the asbestos fund. Since fiscal year 2007, the Company has
classified the expense related to the increase of the asbestos
liability as asbestos adjustments and the Company has classified
the benefit related to the recording of the related deferred tax
asset as an income tax benefit (expense) on its consolidated
statements of operations.
For the year ended 31 March 2011, the Company did not
provide financial or other support to the AICF that it was not
previously contractually required to provide. Future funding of
the AICF by the Company continues to be linked under the terms
of the AFFA to the Company’s long-term financial success,
specifically the Company’s ability to generate net
operating cash flow.
The AICF has operating costs that are claims related and
non-claims related. Claims related costs incurred by the AICF
are treated as reductions in the accrued asbestos liability
balances previously reflected in the consolidated balance
sheets. Non-claims related operating costs incurred by the AICF
are expensed as incurred in the line item Selling,
general and administrative expenses in the consolidated
statements of operations. The AICF earns interest on its cash
and cash equivalents and on its short-term investments; these
amounts are included in the line item Interest income
in the consolidated statements of operations.
See Asbestos-Related Assets and Liabilities below and
Note 11 for further details on the related assets and
liabilities recorded in the Company’s consolidated balance
sheet under the terms of the AFFA.
Asbestos-Related
Assets and Liabilities
The Company has recorded on its consolidated balance sheets
certain assets and liabilities under the terms of the AFFA.
These items are Australian dollar-denominated and are subject to
translation into US dollars at each reporting date. These assets
and liabilities are referred to by the Company as
Asbestos-Related Assets and Liabilities and include:
Asbestos
Liability
The amount of the asbestos liability reflects the terms of the
AFFA, which has been calculated by reference to (but is not
exclusively based upon) the most recent actuarial estimate of
projected future cash flows prepared by KPMG Actuarial. Based on
their assumptions, they arrived at a range of possible total
cash flows and proposed a central estimate which is intended to
reflect an expected outcome. The Company views the central
estimate as the basis for recording the asbestos liability in
the Company’s financial statements, which under US GAAP, it
considers the best estimate. The asbestos liability includes
these cash flows as undiscounted and uninflated on the basis
that it is inappropriate to discount or inflate future cash
flows when the timing and amounts of such cash flows are not
fixed or readily determinable.
Adjustments in the asbestos liability due to changes in the
actuarial estimate of projected future cash flows and changes in
the estimate of future operating costs of the AICF are reflected
in the consolidated statements of operations during the period
in which they occur. Claims paid by the AICF and claims-handling
costs incurred by the AICF are treated as reductions in the
accrued balances previously reflected in the consolidated
balance sheets.
Insurance
Receivable
There are various insurance policies and insurance companies
with exposure to the asbestos claims. The insurance receivable
determined by KPMG Actuarial reflects the recoveries expected
from all such policies based on the expected pattern of claims
against such policies less an allowance for credit risk based on
credit agency ratings. The insurance receivable generally
includes these cash flows as undiscounted and uninflated on the
basis that it is inappropriate to discount or inflate future
cash flows when the timing and amounts of such cash flows are
not fixed or readily determinable. The Company records insurance
receivables that are deemed probable of being realised.
Included in insurance receivable is US$10.8 million
recorded on a discounted basis because the timing of the
recoveries has been agreed with the insurer.
Adjustments in insurance receivable due to changes in the
actuarial estimate, or changes in the Company’s assessment
of recoverability are reflected in the consolidated statements
of operations during the period in which they occur. Insurance
recoveries are treated as a reduction in the insurance
receivable balance.
Workers’
Compensation
Workers’ compensation claims are claims made by former
employees of the Former James Hardie Companies. Such past,
current and future reported claims were insured with various
insurance companies and the various Australian State-based
workers’ compensation schemes (collectively
“workers’ compensation schemes or policies”). An
estimate of the liability related to workers’ compensation
claims is prepared by KPMG Actuarial as part of the annual
actuarial assessment. This estimate contains two components,
amounts that will be met by a workers’ compensation scheme
or policy, and amounts that will be met by the Former James
Hardie Companies.
The portion of the estimate that is expected to be met by the
Former James Hardie Companies is included as part of the
Asbestos Liability. Adjustments to this estimate are
reflected in the consolidated statements of operations during
the period in which they occur.
The portion of the estimate that is expected to be met by the
workers’ compensation schemes or policies of the Former
James Hardie Companies is recorded by the Company as a
workers’ compensation liability. Since these amounts are
expected to be paid by the workers’ compensation schemes or
policies, the Company records an equivalent workers’
compensation receivable.
Adjustments to the workers’ compensation liability result
in an equal adjustment in the workers’ compensation
receivable recorded by the Company and have no effect on the
consolidated statements of operations.
Asbestos-Related
Research and Education Contributions
The Company agreed to fund asbestos-related research and
education initiatives for a period of 10 years, beginning
in fiscal year 2007. The liabilities related to these agreements
are included in “Other Liabilities” on the
consolidated balance sheets.
Restricted Cash
and Cash Equivalents
Cash and cash equivalents of the AICF are reflected as
restricted assets, as the use of these assets is restricted to
the settlement of asbestos claims and payment of the operating
costs of the AICF. The Company classifies these amounts as a
current asset on the face of the consolidated balance sheet
since they are highly liquid.
Restricted
Short-Term Investments
Short-term investments consist of highly liquid investments held
in the custody of major financial institutions. All short-term
investments are classified as available for sale and are
recorded at market value using the specific identification
method. Unrealised gains and losses on the market value of these
investments are included as a separate component of accumulated
other comprehensive income. Realised gains and losses on
short-term investments are recognised in Other Income on
the consolidated statement of operations.
AICF –
Other Assets and Liabilities
Other assets and liabilities of the AICF, including fixed
assets, trade receivables and payables are included on the
consolidated balance sheets under the appropriate captions and
their use is restricted to the operations of the AICF.
Deferred Income
Taxes
The Performing Subsidiary is able to claim a tax deduction for
its contributions to the AICF over a five-year period from the
date of contribution. Consequently, a deferred tax asset has
been recognised equivalent to the anticipated tax benefit over
the life of the AFFA. The current portion of the deferred tax
asset represents Australian tax benefits that will be available
to the Company during the subsequent twelve months.
Adjustments are made to the deferred income tax asset as
adjustments to the asbestos-related assets and liabilities are
recorded.
Foreign Currency
Translation
The asbestos-related assets and liabilities are denominated in
Australian dollars and thus the reported values of these
asbestos-related assets and liabilities in the Company’s
consolidated balance sheets in US dollars are subject to
adjustment depending on the closing exchange rate between the
two currencies at the balance sheet date. The effect of foreign
exchange rate movements between these currencies is included in
Asbestos Adjustments in the consolidated statements of
operations.
Recent Accounting
Pronouncements
In January 2010, the FASB issued ASU
No. 2010-06,
which requires new fair value disclosures pertaining to
significant transfers in and out of Level 1 and
Level 2 fair value measurements and the reasons for the
transfers and activity. For Level 3 fair value
measurements, purchases, sales, issuances and settlements must
be reported on a gross basis. Further, additional disclosures
are required by class of assets or liabilities, as well as
inputs used to measure fair value and valuation techniques. ASU
No. 2010-06
is effective for interim and annual reporting periods beginning
after 15 December 2009, except for the disclosures about
purchases, sales, issuances and settlements on a gross basis,
which is effective for fiscal years beginning after
15 December 2010. The adoption of the effective portions of
this ASU did not result in a material impact on the
Company’s consolidated financial position, results of
operations or cash flows. The Company does not anticipate that
the adoption of the remaining portions of this ASU will result
in a material impact to its reported consolidated financial
position, results of operations or cash flows.
In April 2010, the FASB issued ASU
No. 2010-13,
which provides additional guidance concerning the classification
of an employee share-based payment award with an exercise price
denominated in the currency of a market in which the underlying
equity security trades. This update clarifies that an employee
share-based payment award with an exercise price denominated in
the currency of a market in which a substantial portion of the
entity’s equity securities trades should not be considered
to contain a condition that is not a market, performance or
service condition. Therefore, an entity would not classify such
an award as a liability if it otherwise qualifies as equity. The
amendments included in this update do not expand the recurring
disclosure requirements already in effect. The amendments in
this update are effective for fiscal years and interim periods
beginning on or after 15 December 2010. The adoption of
this ASU did not result in a material impact on the
Company’s reported consolidated financial position, results
of operations or cash flows.
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