SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The Company\'s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The preparation of the Company\'s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include inventories; asset impairments; environmental and reclamation obligations; acquisition accounting; other employee benefit obligations; useful lives for depreciation, depletion, and amortization; current and deferred income taxes; and fair value of financial instruments. Estimates are based on facts and circumstances believed to be reasonable at the time; however, actual results could differ from those estimates.
Principles of consolidation
These consolidated financial statements included the accounts of the Company and its wholly-owned subsidiaries as follows:
Dragon International, a Hong Kong corporation incorporated on October 5, 2010.
Fujinan Huilong, a People’s Republic of China corporation incorporated on August 4, 2005.
All significant intercompany accounts and transactions have been eliminated upon consolidation.
Foreign currency translation
The Company’s functional currency and presentation currency is Canadian dollars (“CAD”) and U.S. dollars, respectively. The Company’s subsidiaries’ functional currencies are Hong Kong dollars (“HKD”) and Chinese RMB (“RMB”).
Transactions in a currency other than the functional currency (“foreign currency”) are measured in the respective functional currencies of the Company and its subsidiaries and are recorded on initial recognition in the functional currencies at exchange rates approximating those ruling at the transaction dates. Exchange gains and losses are recorded in the statements of income and comprehensive income.
Assets and liabilities of the Company and its subsidiaries are translated into the U.S. dollars at exchange rates at the balance sheet date, equity accounts are translated at historical exchange rate and revenues and expenses are translated by using the average exchange rates. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income in the statements of stockholders’ equity.
Cash and cash equivalents
Cash and cash equivalents include those short-term money market instruments which are highly-liquid investments and readily convertible into cash with a term to maturity of 90 days or less when acquired. As of December 31, 2011 and 2010, cash and cash equivalents consisted of cash only.
Coal inventories are stated at the lower of average cost or market. The cost of coal inventories is determined based on average cost of production, which includes all costs incurred to extract, transport and process the coal. Market represents the estimated replacement cost, subject to a floor and ceiling, which considers the future sales price of the product as well as remaining estimated preparation and selling costs. Coal is reported as inventory at the point in time the coal is extracted from the mine and weighed at a loading facility.
As at December 31, 2011 and 2010, the Company carried no inventories.
Property, equipment and mine development costs
Property, plant and equipment, are stated at cost less depreciation and amortization and accumulated impairment loss. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Depreciation of property, plant and equipment is calculated to written off the cost, less their estimated residual value, if any, using the straight-line method over their estimated useful lives. The estimated useful lives are as follows:
Machinery / Mobile mining equipment
Costs for mineral properties and mine development incurred to expand capacity of operating mines or to develop new mines are capitalized and charged to operations (i) on a straight-line basis with the estimated useful lives of 10 to 20 years for fiscal year 2010; (ii) on the units-of-production method over the estimated proven and probable reserve tons directly benefiting from the capital expenditures but up to the Company’s allowable quotas set by the local government effectively January 1, 2011. The change of depreciation and depletion method is the result of the change of estimate and prospective application has been adopted. Mine development costs include costs incurred for site preparation and development of the mines during the development stage.
Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefitted. Maintenance and repairs are expensed as incurred. When equipment is retired or disposed, the related cost and accumulated depreciation are removed from the respective accounts and any profit or loss on disposal is recognized in cost of coal sales.
Intangible asset represents the coal mining right and is recorded at cost less accumulated amortization. For fiscal year 2010, amortization is provided over the term of the right agreements on a straight-line basis with the estimated useful lives of 10 years. Effective January 1, 2011, the Company changed its method of amortization on the units-of-production method over the estimated proven and probable reserve tons directly benefiting from the capital expenditures but up to the Company’s allowable quotas set by the local government. The change of amortization method is the result of the change of estimate and prospective application has been adopted.
Construction in progress
Construction-in-progress (“CIP”) represents mine shaft under construction, and is stated at cost less accumulated impairment losses, if any. Costs include construction and acquisition costs. No provision for depreciation is made on construction-in-progress until such time as the assets are completed and ready for use. When the asset being constructed becomes available for use, the CIP is transferred to the appropriate category of property, equipment and mine development costs.
Asset impairment and disposal of long-lived assets
Long-lived assets, such as property, equipment and mine development costs, owned and leased mineral rights and purchased intangibles subject to amortization, 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 an asset exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed would separately be presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the consolidated balance sheets.
Asset Retirement Obligation
Minimum standards for mine reclamation have been established by various regulatory agencies and dictate the reclamation requirements at the Company\'s operations. The Company\'s asset retirement obligations consist principally of costs to reclaim acreage disturbed at surface operations and estimated costs to reclaim support acreage and perform other related functions at underground mines. The Company records these reclamation obligations at fair value in the period in which the legal obligation associated with the retirement of the long-lived asset is incurred. When the liability is initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. To settle the liability, the obligation is paid, and to the extent there is a difference between the liability and the amount of cash paid, a gain or loss upon settlement is recorded. The Company annually reviews its estimated future cash flows for its asset retirement obligations.
Stock based compensation
The Company adopted ASC Topic 718-10,
Compensation - Stock Compensation - Overall
, to account for its stock options and similar equity instruments issued. Accordingly, compensation costs attributable to stock options or similar equity instruments granted are measured at the fair value at the grant date, and expensed over the expected vesting period. ASC Topic 718-10 requires excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid.
Borrowing costs are capitalized as part of the cost of a qualifying asset if they are directly attributable to the acquisition, construction or production of that asset. Capitalization of borrowing costs commences when the activities to prepare the asset for its intended use or sale are in progress and the expenditures and borrowing costs are incurred. Borrowing cost are capitalized until the assets are substantially completed for their intended use or sale. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.
The Company accounts for income taxes under the provisions of ASC Topic 740-10,
, which requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The effect on deferred income tax assets and liabilities of a change in income tax rates is included in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized.
Other comprehensive income
The Company accounts for comprehensive income under the provisions of ASC Topic 220-10,
Comprehensive Income - Overall
, which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. The Company is disclosing this information on its Statements of Income and Comprehensive Income. The Company’s comprehensive income consists of net earnings for the period and currency translation adjustments.
Earnings per share
Basic earnings per share is calculated using the weighted average number of shares outstanding during the year. The Company has adopted ASC Topic 260-10,
Earnings per Share - Overall
, and uses the treasury stock method to compute the dilutive effect of options, warrants and similar instruments. Under this method, the dilutive effect on earnings per share is recognized on the use of the proceeds that could be obtained upon exercise of options, warrants and similar instruments. It assumes that the proceeds would be used to purchase common shares at the average market price during the period. As at December 31, 2011 and 2010, the basic earnings per share is equal to diluted earnings per share as there were no dilutive instruments outstanding as at December 31, 2011 and 2010.
The Company’s revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104 (codified in FASB ASC Topic 480). Coal sales revenues represent sales to individual customers who sold the coal to coal processing companies, power stations and steel factories. Sales revenue is recognized when a formal arrangement exists, which is generally represented by a contract between the Company and the buyer; the price is fixed or determinable; title has passed to the buyer, which generally is at the time of delivery; no other significant obligations of the Company exist and collectability is reasonably assured.
Cost of revenue
Cost of revenue consists primarily of labour cost, governmental charges of coal excavation and related expenses and overhead which are directly attributable to coal excavation.
Fair value of financial instruments
The estimated fair values for financial instruments under ASC Topic 825-10,
, are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair value of the Company’s financial instruments includes cash and cash equivalents, receivables, accounts payable and accrued liabilities, asset retirement obligation, due from a related party and term loan. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying values, unless otherwise noted.
The Company adopted ASC Topic 820-10,
Fair Value Measurements and Disclosures
, which defines fair value, establishes a framework for measuring fair value in US GAAP, and expands disclosures about fair value measurements.
ASC Topic 820-10 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
Level one – Quoted market prices in active markets for identical assets or liabilities;
Level two – Inputs other than level one inputs that are either directly or indirectly observable; and
Level three – Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
For the years ended December 31, 2011 and 2010, the fair value of cash and cash equivalents was measured using Level one inputs.
The book values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and amounts due to a related party approximate their respective fair values due to the short-term nature of these instruments. The book value of asset retirement obligation and term loan as at December 31, 2011 and 2010 approximates the fair value. Items identified are measured at fair value on a recurring basis.
There were no assets or liabilities measured at fair value on a non-recurring basis during the years ended December 31, 2011 and 2010.
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker whose members are responsible for allocating resources and assessing performance of the operating segments.
Pursuant to the applicable laws in PRC, PRC entities are required to make appropriations to three non-distributable reserve funds, the statutory surplus reserve, statutory public welfare fund, and discretionary surplus reserve, based on after-tax net earnings as determined in accordance with the PRC GAAP, after offsetting any prior years’ losses. Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net earnings until the reserve is equal to 50% of the entity\'s registered capital.
The Company allocated $358,044 and $nil from after-tax net earnings to statutory surplus reserve for the years ended December 31, 2011 and 2010, respectively.
New accounting pronouncements adopted
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R), which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The guidance clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity\'s purpose and design and a company\'s ability to direct the activities of the entity that most significantly impact the entity\'s economic performance. The guidance requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. It also requires additional disclosures about a company\'s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. The guidance is applicable for annual periods beginning after November 15, 2009. The adoption of the guidance did not have a material impact on the Company\'s financial position, results of operations and cash flows.
In June 2009, the FASB issued ASC 860, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140 ("ASC 860"), which amends the criteria for a transfer of a financial asset to be accounted for as a sale, redefines a participating interest for transfers of portions of financial assets, eliminates the qualifying special-purpose entity concept and provides for new disclosures. ASC 860 is effective for fiscal years beginning after November 15, 2009. The adoption of the guidance did not have a material effect on the Company\'s financial position, results of operations or cash flows.
In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updated ("ASU") 2010-6, Improving Disclosures About Fair Value Measurements ("ASU 2010-6"),which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair- value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. ASU 2010-6 relates solely to disclosures in the notes to the financial statements. The adoption of the applicable provisions in 2010 did not have an effect on the Company\'s financial position, results of operations or cash flows. The adoption of the applicable provisions did not have an effect on the Company\'s financial position, results of operations or cash flows.
Recent accounting pronouncements
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. The Company is currently evaluating the impact of the adoption.
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which is effective for annual reporting periods beginning after December 15, 2011. ASU 2011-05 will become effective for the Company on January 1, 2012. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, items of other comprehensive income that are reclassified to profit or loss are required to be presented separately on the face of the financial statements. This guidance is intended to increase the prominence of other comprehensive income in financial statements by requiring that such amounts be presented either in a single continuous statement of income and comprehensive income or separately in consecutive statements of income and comprehensive income. The adoption of ASU 2011-05 is not expected to have a material impact on the Company’s financial position or results of operations.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.