Gold Fields Annual Financial Report including Governance Report 2016: Independent Auditor's Report

Independent Auditor's Report

To the Shareholders of Gold Fields Limited

REPORT ON THE AUDIT OF THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

Opinion

We have audited the consolidated and separate financial statements of Gold Fields Limited (the Group and Company) set out on pages 99 to 179, which comprise the consolidated and separate statements of financial position at 31 December 2016, and the consolidated and separate income statements, statements of comprehensive income, changes in equity and cash flows for the year then ended, the accounting policies and the notes to the consolidated and separate financial statements, and the non-executive directors’ fees and executive directors’ and prescribed officers’ remuneration and directors’ and prescribed officers’ equity-settled instruments sections of the remuneration report, as set out on pages 97 to 98.

In our opinion, the consolidated and separate financial statements present fairly, in all material respects, the consolidated and separate financial position of Gold Fields Limited at 31 December 2016, and its consolidated and separate financial performance and consolidated and separate cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) and the requirements of the Companies Act of South Africa.

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated and Separate Financial Statements section of our report. We are independent of the Group and Company in accordance with the Independent Regulatory Board for Auditors Code of Professional Conduct for Registered Auditors (IRBA Code), and other independence requirements applicable to performing audits of financial statements in South Africa. We have fulfilled our other ethical responsibilities in accordance with the IRBA Code and in accordance with other ethical requirements applicable to performing audits in South Africa. The IRBA Code is consistent with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (Part A and B). We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated and separate financial statements of the current period. These matters were addressed in the context of our audit of the consolidated and separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

We have identified the following key audit matters pertaining to the consolidated financial statements:

1. IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL

Property, plant and equipment – US$4,547.8 million; Goodwill – US$317.8 million; Impairment of investments and assets – US$76.5 million.

Refer to the accounting policies (significant accounting judgements and estimates – carrying value of property, plant and equipment and goodwill, pages 102 to 103) and notes 6, 13 and 14 to the consolidated financial statements..

	Key audit matter			How the matter was addressed in our audit
	Impairment indicators have been identified at certain of the Group’s cash-generating units (CGUs), including the Cerro Corona and South Deep CGUs amongst others, which gave rise to a risk that the Group’s property, plant and equipment and goodwill relating to those CGUs may be impaired. Goodwill is also required to be tested annually for impairment. A CGU impairment relating to property, plant and equipment was recognised in respect of Cerro Corona amounting to US$66.4 million during 2016. No impairment was recognised for the other CGUs where impairment indicators were identified. Further, no goodwill impairment relating to the South Deep CGU, to which all the goodwill is allocated, was identified at 31 December 2016. Impairment of long-lived assets and goodwill is a significant area of judgement due to the inherent uncertainty in forecasting and discounting future cash flows, which form the basis of the Group’s fair value less cost of disposal (FVLCOD) calculations used in the impairment analysis. Key judgements, assumptions and estimates used by the Group to calculate FVLCOD of its assets are inherently uncertain and could materially change over time. These include reserves and resource estimates, production estimates, economic factors such as commodity prices (gold and copper), discount rates, foreign currency exchange rates, resource valuations, estimates of production costs, future capital expenditure and taxation. Due to the above mentioned factors, impairment of long-lived assets and goodwill is considered a key audit matter.			Our audit procedures included testing internal controls designed and applied by management to ensure that its impairment analysis was appropriately performed and reviewed. Our team included senior audit team members including finance and valuation specialists who understand the Group’s business, industry and the economic environment in which it operates. For the CGUs where impairment indicators were identified, we tested the integrity of the cash flow projections and discount rates, as well as challenged the appropriateness of the assumptions used in the preparation thereof. We evaluated this with reference to our knowledge of the industry and assessed the potential risk of management bias. Specifically, for externally derived inputs, we: assessed the reasonableness of the key assumptions with reference to external forecasts by principally comparing projected commodity prices against external analyst reports, both regionally and globally; and assessed the reasonableness of the Group’s resource price per ounce used to determine the value of the CGUs beyond proved and probable reserves, against a range of acceptable prices for comparable transactions in emerging markets. For internally derived inputs, we: compared the mineable reserves assumptions used in the cash flow models to the reserves assessed by the various experts employed by the Group to produce the estimates of proven and probable reserves at 31 December 2016; assessed the objectivity, competence and capabilities of those various experts, obtained an understanding of the work performed by them, and evaluated the appropriateness of their work; compared operating expense forecasts to the historical operating expenses and assessed the accuracy of production and sales forecasts in relation to historical data and mine plans; compared the capital expenditure projections to existing planned works and the capital development work necessary to extract the mineable reserves as assessed by the Group’s mining experts; and critically assessed the appropriateness of the discount rate used to calculate the net present value of CGUs, by reference to a range of acceptable discount rates we derived from market data. We performed sensitivity analyses to consider the impact of changes in assumptions and estimates. We considered the adequacy of the Group’s disclosures in respect of property, plant and equipment and goodwill carrying values and impairment testing, including those disclosures related to significant accounting judgements and estimates used to determine the FVLCOD amounts.

Key audit matter

How the matter was addressed in our audit

Impairment indicators have been identified at certain of the Group’s cash-generating units (CGUs), including the Cerro Corona and South Deep CGUs amongst others, which gave rise to a risk that the Group’s property, plant and equipment and goodwill relating to those CGUs may be impaired. Goodwill is also required to be tested annually for impairment.

A CGU impairment relating to property, plant and equipment was recognised in respect of Cerro Corona amounting to US$66.4 million during 2016. No impairment was recognised for the other CGUs where impairment indicators were identified. Further, no goodwill impairment relating to the South Deep CGU, to which all the goodwill is allocated, was identified at 31 December 2016.

Impairment of long-lived assets and goodwill is a significant area of judgement due to the inherent uncertainty in forecasting and discounting future cash flows, which form the basis of the Group’s fair value less cost of disposal (FVLCOD) calculations used in the impairment analysis.

Key judgements, assumptions and estimates used by the Group to calculate FVLCOD of its assets are inherently uncertain and could materially change over time. These include reserves and resource estimates, production estimates, economic factors such as commodity prices (gold and copper), discount rates, foreign currency exchange rates, resource valuations, estimates of production costs, future capital expenditure and taxation.

Due to the above mentioned factors, impairment of long-lived assets and goodwill is considered a key audit matter.

Our audit procedures included testing internal controls designed and applied by management to ensure that its impairment analysis was appropriately performed and reviewed.

Our team included senior audit team members including finance and valuation specialists who understand the Group’s business, industry and the economic environment in which it operates. For the CGUs where impairment indicators were identified, we tested the integrity of the cash flow projections and discount rates, as well as challenged the appropriateness of the assumptions used in the preparation thereof. We evaluated this with reference to our knowledge of the industry and assessed the potential risk of management bias.

Specifically, for externally derived inputs, we:

assessed the reasonableness of the key assumptions with reference to external forecasts by principally comparing projected commodity prices against external analyst reports, both regionally and globally; and
assessed the reasonableness of the Group’s resource price per ounce used to determine the value of the CGUs beyond proved and probable reserves, against a range of acceptable prices for comparable transactions in emerging markets.

For internally derived inputs, we:

compared the mineable reserves assumptions used in the cash flow models to the reserves assessed by the various experts employed by the Group to produce the estimates of proven and probable reserves at 31 December 2016;
assessed the objectivity, competence and capabilities of those various experts, obtained an understanding of the work performed by them, and evaluated the appropriateness of their work;
compared operating expense forecasts to the historical operating expenses and assessed the accuracy of production and sales forecasts in relation to historical data and mine plans;
compared the capital expenditure projections to existing planned works and the capital development work necessary to extract the mineable reserves as assessed by the Group’s mining experts; and
critically assessed the appropriateness of the discount rate used to calculate the net present value of CGUs, by reference to a range of acceptable discount rates we derived from market data.

We performed sensitivity analyses to consider the impact of changes in assumptions and estimates.

We considered the adequacy of the Group’s disclosures in respect of property, plant and equipment and goodwill carrying values and impairment testing, including those disclosures related to significant accounting judgements and estimates used to determine the FVLCOD amounts.

2. RECOVERABILITY OF DEFERRED TAX ASSETS

Deferred taxation asset – US$48.7 million; Deferred taxation liability – US$465.5 million; Mining and income taxation – US$192.1 million.

Refer to the accounting policies (significant accounting judgements and estimates – income taxes, page 104) and notes 9, 23 and 35 to the consolidated financial statements.

	Key audit matter			How the matter was addressed in our audit
	The net deferred tax asset recognised includes an amount of US$49.0 million which is disputed by the South African Revenue Service (SARS). The tax position taken by management to recognise the related deferred tax asset is based on management’s judgement of the most probable outcome of the dispute. Deferred tax assets amounting to US$34.9 million were not recognised at Cerro Corona and Damang during 2016. The Group recognises the net future tax benefit related to deferred tax assets to the extent that it is probable that the deductible temporary differences will reverse in the foreseeable future. Assessing the recoverability of deferred tax assets requires the Group to make significant estimates related to the quantum and timing of future taxable income. Estimates of future taxable income are based on the forecast of cash flows from operations, the reversal of temporary differences and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Group to realise the net deferred tax assets recorded at the reporting date could be impacted. Due to the above mentioned factors, recoverability of deferred tax assets is considered a key audit matter.			Our audit procedures included testing internal controls designed and applied by management to ensure that its deferred tax analysis was appropriately performed and reviewed. Our team included senior audit team members and tax specialists with knowledge of both the international and local operations. Our audit procedures included seeking to understand the tax position taken by the Group relating to the SARS dispute, by reviewing correspondence between the Group and SARS and between the Group and its lawyers as well as enquiries with management to enable us to challenge management’s judgement of the most probable outcome of the dispute. We assessed the basis of accounting for recognised deferred tax assets based on our knowledge of the tax environment in which the Group operates and work performed on the cash flow projections used in forecasting future taxable income and the reversal of temporary differences.

3. ACQUISITION OF GRUYERE GOLD PROJECT

Property, plant and equipment – US$4,547.8 million (Gruyere Gold Project asset acquisition – US$275.9 million)

Refer to the accounting policies (significant accounting judgements and estimates – business combinations, page 105) and notes 13 and 15.2 to the consolidated financial statements.

	Key audit matter			How the matter was addressed in our audit
	On 31 December 2016, the Group purchased 50% of the Gruyere Gold Project and entered into a 50:50 unincorporated joint venture with Gold Road Reserves Limited for the development and operation of the Gruyere Gold Project in Western Australia. A critical step in determining the appropriate accounting approach to be followed for an acquisition in the mining industry is to determine whether the acquisition is that of a business (and therefore within the scope of IFRS 3 Business Combinations), or is an acquisition of an asset or group of assets that do not constitute a business and is therefore outside the scope of IFRS 3. The difference in the accounting for the acquisition as a business or an asset is material and could significantly impact the recognition and measurement of amounts reported in the consolidated financial statements and the related disclosures. The Group accounted for this acquisition as an asset acquisition. Due to the judgement applied in determining whether the acquisition was a business or an asset, the acquisition of Gruyere Gold Project is considered a key audit matter.			Our audit procedures included testing internal controls designed and applied by management to ensure that the controls over financial reporting with regards to the Gruyere Gold Project acquisition were appropriately performed and reviewed. We involved senior audit team members including accounting specialists who understand the Group’s business, industry and the economic environment in which it operates to assist with the assessment of the accounting for the transaction including judgements applied around whether the acquisition meets the definition of a business under IFRS 3. We researched and corroborated the conclusions reached by management using various interpretations, industry practice and accounting literature. We reviewed the significant contracts applicable to the transaction. We considered the adequacy of the Group’s disclosures in respect of this transaction including those disclosures related to significant accounting judgements included in the accounting policies and interest in joint operation.

We have identified the following key audit matter pertaining to the separate financial statements:

1. FINANCIAL GUARANTEE RECOGNITION AND MEASUREMENT

Financial guarantee liability – R363.1 million

Refer to accounting policies (4.1.1 Financial guarantees) and note 5 to the separate financial statements.

	Key audit matter			How the matter was addressed in our audit
	Gold Fields Limited acts as guarantor of certain of the Group’s borrowings, including the US$1 billion notes issue (the notes), and the US$1,290 million term loan facility and revolving credit facilities. During 2016, the Group repurchased US$148 million of the US$1,000 million notes outstanding and refinanced its US$1,510 million term loan and revolving credit facilities. As a result, management was required to derecognise a portion of its existing financial guarantee liabilities associated with the notes repurchased and credit facilities refinanced. In addition, management had to recognise new financial guarantee liabilities relating to the guarantee of the new US$1,290 million term loan and credit facilities and apply assumptions in order to measure the guarantees associated with such facilities. Due to the above mentioned factors, the recognition and derecognition of the financial guarantees is considered a key audit matter..			Our audit procedures included testing internal controls designed and applied by management to ensure that the controls over financial reporting with regards to the Gruyere Gold Project acquisition were appropriately performed and reviewed. Our team included valuation specialists that assisted us with challenging the appropriateness of management’s assumptions used in the valuation of the new financial guarantee liabilities relating to its refinanced loan and revolving credit facilities. We checked the accuracy of the accounting entries processed and we considered the adequacy of the disclosures in the separate financial statements.

OTHER INFORMATION

The directors are responsible for the other information. The other information comprises the Company Secretary’s report, Audit Committee report and the Directors’ Report as required by the Companies Act of South Africa as well as the Integrated Annual Report, which we obtained prior to the date of this report. Other information does not include the consolidated and separate financial statements and our auditor’s report thereon.

Our opinion on the consolidated and separate financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.

In connection with our audit of the consolidated and separate financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated and separate financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

RESPONSIBILITIES OF THE DIRECTORS FOR THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

The directors are responsible for the preparation and fair presentation of the consolidated and separate financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated and separate financial statements, the directors are responsible for assessing the Group’s and Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group and/or Company or to cease operations, or have no realistic alternative but to do so.

AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

Our objectives are to obtain reasonable assurance about whether the consolidated and separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated and separate financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the consolidated and separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s and Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s and Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated and separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group and/or Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated and separate financial statements, including the disclosures, and whether the consolidated and separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the consolidated and separate financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS

In terms of the IRBA Rule published in Government Gazette Number 39475 dated 4 December 2015, we report that KPMG Inc. has been the auditor of Gold Fields Limited for seven years.

KPMG Inc.

Registered Auditor

Per CH Basson

Chartered Accountant (SA)
Registered Auditor
Director
20 March 2017

85 Empire Road
Parktown 2193
Gauteng, South AfricaGold