COMPLEMENTARY NOTES TO THE FINANCIAL INFORMATION
SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL POLICIES:
FOLLOWING IS A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FOLLOWED BY THE COMPANY IN THE PREPARATION OF THE
PARTIALLY - CONSOLIDATED FINANCIAL STATEMENTS.
1.1 CONSOLIDATION BASIS:
THE PARTIALLY - CONSOLIDATED FINANCIAL STATEMENTS INCLUDE
THE FINANCIAL STATEMENTS OF CORPORACION DURANGO, S.A. DE
C.V. AND THE FOLLOWING SUBSIDIARIES:
COMPANIA PAPELERA DE ATENQUIQUE, S.A. DE C.V.
EMPAQUES DE CARTON TITAN, S.A. DE C.V.
ADMINISTRACION CORPORATIVA DE DURANGO, S.A. DE C.V.
PONDEROSA INDUSTRIAL DE MEXICO, S.A. DE C.V.
ALL SIGNIFICANT INTERCOMPANY BALANCES AND TRANSACTIONS
HAVE BEEN ELIMINATED FOR CONSOLIDATION PURPOSES. THE
PARTIALLY - CONSOLIDATED FINANCIAL STATEMENTS INCLUDE
THE ASSETS, LIABILITIES AND INCOME OR LOSS OF THE
PARENT COMPANY AND THE SUBSIDIARIES WITH MORE THAN 50%
OF OWNERSHIP.
AS OF JUNE 1, 2004, THE MEXICAN BOARD FOR RESEARCH AND
DEVELOPMENT OF FINANCIAL REPORTING STANDARDS, OR CINIF,
ASSUMED THE RESPONSIBILITY OF ESTABLISHING MEXICAN
ACCOUNTING AND REPORTING STANDARDS. AS PART OF ITS
RESPONSIBILITY, AND AFTER DUE EXPOSURE IN 2004 AND
2005, THE CINIF ISSUED SEVERAL FINANCIAL REPORTING
STANDARDS (NORMAS DE INFORMACION FINANCIERA, OR NIFS)
THAT BECAME EFFECTIVE ON JANUARY 1, 2006.
THE PRINCIPAL OBJECTIVE OF THE CINIF IN ISSUING THE
NIFS IS TO ACHIEVE GREATER CONCURRENCE BETWEEN
MEXICAN GAAP AND INTERNATIONAL FINANCIAL REPORTING
STANDARDS (IFRSS).
THE STRUCTURE OF THE NIFS IS AS FOLLOWS:
- NEW BULLETINS AND INTERPRETATIONS TO THE BULLETINS
ISSUED BY CINIF.
- EXISTING BULLETINS ISSUED BY THE ACCOUNTING
PRINCIPLES BOARD OF THE MEXICAN INSTITUTE OF PUBLIC
ACCOUNTANTS THAT HAVE NOT BEEN AMENDED, REPLACED OR
REPEALED BY THE NEW NIFS.
- IFRSS THAT ARE SUPPLEMENTARY GUIDANCE TO BE USED WHEN
MEXICAN GAAP DOES NOT PROVIDE PRIMARY GUIDANCE.
THE CIRCULARS ISSUED BY THE ACCOUNTING PRINCIPLES BOARD
WILL CONTINUE TO HAVE THE STATUS OF RECOMMENDATIONS AND
WILL BE PART OF THE NIFS UNTIL SUCH TIME AS THEY ARE
REPLACED OR REPEALED BY NIFS.
THE NIFS ISSUED TO DATE ARE NOT EXPECTED TO HAVE A
SIGNIFICANT EFFECT ON FINANCIAL INFORMATION REPORTING.
THEY ARE THE FOLLOWING:
NIF A-1 "FINANCIAL INFORMATION STANDARDS STRUCTURE".
NIF A-2 "BASIC PRINCIPLES".
NIF A-3 "USERS REQUIREMENTS AND FINANCIAL STATEMENTS
OBJECTIVES".
NIF A-4 "FINANCIAL STATEMENTS QUALITATIVE
CHARACTERISTICS".
NIF A-5 "FINANCIAL STATEMENTS BASIC ELEMENTS".
NIF A-6 "RECOGNITION AND VALUATION".
NIF A-7 "PRESENTATION AND DISCLOSURE".
NIF A-8 "SUPPLEMENTARY STANDARDS TO MEXICAN GAAP".
NIF B-1 "ACCOUNTING CHANGES AND ERROR CORRECTIONS".
1.2 BASIS FOR COMPARISSON EFFECTS IN THE FINANCIAL
STATEMENTS:
A) THE PARTIALLY CONSOLIDATED FINANCIAL STATEMENTS
HAVE BEEN PREPARED IN ACCORDANCE WITH MEXICAN GAAP
AND REFLECT THE PURCHASING POWER OF THE MEXICAN
PESO AS OF THE MOST RECENT REPORTIND DATE. FOR
COMPARISON PURPOSES, PARTIALLY CONSOLIDATED
FINANCIAL STATEMENTS OR PRIOR YEAR HAVE ALSO BEEN
RESTATED TO REFLECT IDENTICAL PURCHASING POWER,
USING FACTORS DERIVED FROM CHANGES IN THE NATIONAL
CONSUMER PRODUCTS INDEX (NCPI) ISSUED BY BANCO DE
MEXICO.
B) CONVERSION FIGURES OF FOREIGN SUBSIDIARIES IS
DONE IN ACCORDANCE WITH BULLETIN B-15 "FOREIGN
CURRENCY TRANSACTIONS AND TRANSLATION OF FINANCIAL
STATEMENTS OF FOREIGN OPERATIONS" ACCORDINGLY ,
THE TRANSLATION IS DONE UNDER THE "FOREIGN
ENTITIES"
1.3 VALUATION OF TEMPORARY INVESTMENTS:
THESE INVESTMENTS ARE REALIZABLE WITHIN THREE MONTHS
AND ARE VALUED AT MARKET PRICE. THE INCOME OR LOSS
GENERATED IS INCLUDED IN THE STATEMENTS OF
OPERATIONS.
1.4 RIGHTS AND LIABILITIES VALUATION IN FOREIGN
CURRENCY:
ASSETS AND LIABILITIES IN FOREIGN CURRENCY, MAINLY
IN AMERICAN DOLLARS, ARE EXPRESSED IN MEXICAN PESOS
AT THE CLOSING OF THE YEAR`S EXCHANGE RATE.
THE EXCHANGE RATE ON SEPTEMBER 30st, 2006 WAS
$10.9935.
1.5 INVENTORY VALUATION:
INVENTORIES ARE STATED AT AVERAGE COST, AND DO NOT
EXCEED MARKET VALUE. THE AVERAGE COST APROXIMATES
THE LAST PURCHASE OR PRODUCTION COST.
PROPERTY, PLANT AND EQUIPMENT:
PROPERTY, PLANT AND EQUIPMENT OF MEXICAN ORIGIN ARE
RECORDED AT ACQUISITION COST AND ARE RESTATED TO
REFLECT MEXICAN PESOS OF CONSTANT PURCHASING POWER
USING FACTORS DERIVED FROM CHANGES IN THE NATIONAL
CONSUMER PRICE INDEX (NCPI).
PLANT AND EQUIPMENT OF NON-MEXICAN ORIGIN ARE
RECORDED AT ACQUISITION COST AND THE ACQUISITION
COST IS RESTATED TO CONSTANT CURRENCY USING THE
INFLATION OF THE COUNTRY OF ORIGIN, THEN CONVERTED
INTO MEXICAN PESOS AT THE EXCHANGE RATE IN EFFECT
AT THE BALANCE SHEET DATE.
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT, IS
CALCULATED BASED ON UNITS PRODUCED IN THE PERIOD
IN RELATION TO THE TOTAL ESTIMATED PRODUCTION OF
THE ASSETS OVER THEIR SERVICE LIVES. ASSETS ARE
DEPRECIATED AS FOLLOWS:
YEARS
BUILDINGS 25-50
MACHINERY & EQUIPMENT 23-40
OFFICE EQUIPMENTS 5-10
TRANSPORTATION VEHICLES 1-5
COMPUTER EQUIPMENT 1-3
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THESE ASSETS ARE EVALUATED ANNUALLY FOR POTENTIAL
IMPAIRMENT.
RECURRING MAINTENANCE AND REPAIR EXPENDITURES ARE
CHERGED TO OPERATING EXPENSES AS INCURRED. MAJOR
OVERHAULS TO FIXED ASSETS ARE CAPITALIZED AND
AMORTIZED OVER THE PERIOD IN WHICH BENEFITS ARE
EXPECTED TO BE RECEIVED.
NET COMPREHENSIVE FINANCING COST INCURRED DURING
THE PERIOD OF CONSTRUCTION AND INSTALLATION OF
PROPERTY, PLANT AND EQUIPMENT IS CAPITALIZED AND
RESTATED APPLIYING FACTORS DERIVED FROM CHANGES
IN THE NCPI.
CONTINGENCY LIABILITIES:
LABOR OBLIGATIONS:
THE COMPANY ADOPTED THE NORMATIVE DISPOSITIONS
RELATED TO BULLETIN D-3 "LABOR OBLIGATIONS"
ISSUED BY THE MEXICAN INSTITUTE OF PUBLIC
ACCOUNTANTS, THIS NORMATIVITY MODIFIES THE BASIS
FOR CUANTIFICATION, RECOGNITION AND DISCLOSURE
OF EXPENSES AND LIABILITIES RELATED TO
RETIREMENT AND SENIORITY PREMIUMS, INCLUDING
FORMAL AND INFORMAL, REQUIRING ITS VALUATION
USING THE ACTUARIAL METHOD OF "PROJECTED UNITARY
CREDIT" WICH STATES THE OBLIGATION TO RECOGNIZE
A LIABILITY (ASSET) OF TRANSITION AT THE MOMENT
OF THE APPLICATION OF THIS BULLETIN, WHICH IS
AMORTIZED IN DIRECT LINE OVER THE REMAINIG
AVERAGE LABOR LIFE OF THE EMPLOYEES EXPECTED TO
RECEIVE SUCH BENEFITS FROM THE RETIREMENT PLANS,
REQUIRES AN ADDITIONAL LIABILITY IN CASE THE
ACTUAL LIABILITY IS LARGER THAN THE PROJECTED
NET LIABILITY (ASSET).
THE COST OF THE EMPLOYEE RETIREMENT PLANS
(PENSIONS AND SENIORITY PREMIUMS), ARE
RECOGNIZED AS COST IN THE YEARS IN WHICH THE
SERVICES ARE PAID IN ACCORDANCE WITH
CALCULATION PERFORMED BY INDEPENDENT ACTUARIES.
IN THE COMPANIES ESTABLISHED IN THE UNITED
STATES OF AMERICA, THERE IS A BENEFIT AND
RETIREMENT PLAN (THE PLAN), WHICH COVERS ALL
THE EMPLOYEES THAT MEET CERTAIN ELEGIBILITY
REQUIREMENTS. THE BENEFITS OF THE PLAN ARE
MAINLY BASED IN THE YEARS OF SERVICE AND THE
COMPENSATION OF SUCH EMPLOYEES. CORPORACION
DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(THREE SUBSIDIARY COMPANIES) RECOGNIZES
"MODIFICATIONS TO THE BULLETIN D-3 ON 2004"
A NEW 2004 PLAN "ADDITIONAL BENEFITS AT
RETIREMENT" IN ACCORDANCE TO MODIFICATIONS
TO BULLETIN D-3.
STOCKHOLDERS' EQUITY:
CAPITAL STOCK, STOCK SALE PREMIUM, STATUTORY
LEGAL RESERVE AND RETAINED EARNINGS, INCLUDE
THE RESTATED EFFECT, ACCORDING WITH THE
NATIONAL CONSUMER PRICE INDEX (NCPI) FROM THE
DATE THE CAPITAL WAS CONTRIBUTED AND FROM THE
YEAR THE RESULTS AND PREMIUMS WERE DETERMINED
RESPECTIVELY. THE RESTATED AMOUNT REPRESENTS
THE REQUIRED AMOUNT TO MAINTAIN THE
CONTRIBUTIONS AND ACCUMULATED RESULTS IN
CONSTANT PESOS AS OF SEPTEMBER 30st, 2006.
FIXED AND VARIABLE EQUITY COMPONENTS
AMOUNT NUMBER OF SHARES
FIXED PORTION 982,074 65,419,089
VARIABLE PORTION 678,873 45,222,022
---------- ------------
1,660,947 110,641,111
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DEFERRED TAXES:
AS OF JANUARY 1st.,2000, WITH THE ISSUANCE OF
BULLETIN D-4 ("DEFERRED TAXES" THE COMPANY
RECOGNIZED TO THAT DATE (JANUARY 1st.,2000)
THE INITIAL EFFECT OF DEFERRED TAXES DERIVED
FROM TEMPORARY DIFFERENCES AS A GAIN OR A
LOSS,IN SUBSECUENT PERIODS THE COMPANY IS IN
COMPLIANCE WITH THE BULLETIN.
IN ORDER TO RECOGNIZE THE DEFERRED INCOME TAX,
THE HOLDING COMPANY AND ITS SUBSIDIARIES USE
THE INTEGRAL ASSETS AND LIABILITIES METHOD,
WHICH CALCULATES SUCH TAX, USING THE
APPLICABLE STATUTORY TAX RATE TO THE TEMPORARY
DIFFERENCES BETWEEN BOOK AND TAX VALUES OF
THE ASSETS AND LIABILITIES AS OF THE END OF
THE PERIOD.
DISCONTINUED OPERATIONS:
THE COMPANY REPORTS ON DISCONTINUED OPERATIONS
THE RESULT OF THE PARTICLEBOARD PLANT FROM
PONDEROSA INDUSTRIAL DE MEXICO, S.A. DE C.V.,
FOR 2005.
BUSINESS SEGMENTS INFORMATION:
SEGMENT REPORTING INFORMATION IS PREPARED IN
ACCORDANCE WITH BULLETIN B-5 "FINANCIAL INFORMATION
BY SEGMENT". THE SEGMENTS REPORT BASED ON THE
INTERNAL REPORT METHOD USED BY THE COMPANY.
THE COMPANY PRESENTS THE FOLLOWING BUSINESS SEGMENTS:
1. PACKAGING. THIS SEGMENT INCLUDES THE PRODUCTION
AND SALES OF CORRUGATED CONTAINER, MULTI-WALL SACKS
AND PAPER TUBES.
2. PAPER. THIS SEGMENT INCLUDES THE PRODUCTION AND
SALES OF KRAFT AND SEMI-KRAFT PAPER PRODUCED FROM
VIRGIN FIBERS OR RECYCLED FIBERS.
3. OTHERS. THIS SEGMENT INCLUDES THE PRODUCTION
AND SALE OF PLYWOOD.
AS OF SEPTEMBER 30st., 2006 AND 2005, THE SEGMENT
INFORMATION IS PRESENTED AS FOLLOWS:
PROPERTY
PLANT AND
TOTAL EQUIPMENT SEGMENT
2006 INCOME ACQUISITION, NET ASSETS
------ --------- ---------------- --------------
PACKAGING 3,539,704 65,827 30,785,134
PAPER 2,430,146 51,826 9,072,790
OTHERS 91,562 60,558 669,960
ELIMINATONS (2,088,273) (26,271,635)
---------- ------------ --------------
TOTAL 3,973,139 178,211 14,256,249
========== ============ ==============
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PROPERTY
PLANT AND
TOTAL EQUIPMENT SEGMENT
2005 INCOME ACQUISITION, NET ASSETS
------ --------- ---------------- --------------
PACKAGING 3,428,872 10,578 27,957,674
PAPER 2,174,986 41,448 8,616,926
OTHERS 69,210 (47,001) 1,129,277
ELIMINATIONS (2,177,679) (22,977,200)
---------- ------------ --------------
TOTAL 3,495,389 5,025 14,726,677
========== ============ ==============
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THE FINANCIAL INFORMATION PRESENTED ABOVE IS
USED IN THE DECISITION MAKING PROCESS BY THE
COMPANY.
INTERNAL CONTROL:
THE COMPANY HAS STARTED IMPLEMENTATION ON THE
SARBANES OXLEY ACT WITH THE ADVISE OF EXPERT
ADVISORS.
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