NOTE – 4 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accompanying condensed consolidated financial
statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying
condensed consolidated financial statements and notes.
| | Exploration stage company |
Despite the fact that the Company
commenced its production in 2009, it is still considered an exploration stage company under the criteria set forth by the
Securities and Exchange Commission (“SEC”) since it has not yet demonstrated the existence of proven or probable
reserves, defined by SEC Industry Guide 7 at Cunliji and Dayuan Gold Mines. As a result, and in accordance with
accounting principles generally accepted in the United States (“U.S. GAAP”) for exploration stage companies, all
expenditures for exploration and evaluation of the Company’s properties are expensed as incurred until mineralized
material is classified as proven or probable reserves. Accordingly, substantially all expenditures for mine development and
mill construction have been expensed as incurred. Certain expenditures, such as for rolling stock or other general-purpose
equipment, may be capitalized, subject to evaluation for possible impairment of the asset. As of June 30, 2013, none of the
mineralized material at Cunliji and Dayuan Gold Mines met the SEC’s definition of proven or probable reserves. The
Company expects to remain an exploration stage company for the foreseeable future, even though it has reached commercial
production. The Company will not exit the exploration stage unless and until it demonstrates the existence of proven or
probable reserves that meet SEC guidelines.
| | Proven or probable reserves |
The definition of proven or probable reserves
is set forth in SEC Industry Guide 7. Proven reserves are reserves for which (a) quantity is computed from dimensions revealed
in outcrops, trenches, workings or drill holes; (b) grade and/or quality are computed from the results of detailed sampling; and
(c) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that
size, shape, depth and mineral content of reserves are well-established. Probable reserves are reserves for which quantity and
grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling,
and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for
proven reserves, is high enough to assume continuity between points of observation. In addition, reserves cannot be considered
proven or probable until they are supported by a feasibility study, indicating that the reserves have had the requisite geologic,
technical and economic work performed and are economically and legally extractable at the time of the reserve determination. As
of June 30, 2013, none of the Company’s mineralized resources met the definition of proven or probable reserves.
In preparing these condensed consolidated financial
statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance
sheet and revenues and expenses during the periods reported. Actual results may differ from these estimates.
The condensed consolidated financial statements
include the financial statements of CHSO, its subsidiaries and VIEs. All inter-company balances and transactions between the Company
and its subsidiaries and VIEs have been eliminated upon consolidation.
The Company has adopted ASC Topic 810-10-5-8,
“Variable Interest Entities”, which requires a variable interest entity or VIE to be consolidated by a company
if that company is subject to a majority of the risk of loss for the VIEs or is entitled to receive a majority of the VIEs’
residual returns.
Variable interest entity
On May 15, 2010, the Company’s subsidiary,
SBCL entered into a series of agreements (“VIE agreements”) amongst SSIC, JinGuan, XinGuan and the individual owners
of SSIC, JinGuan and XinGuan and details of the VIE agreements are as follows :
| 1. | Exclusive Technical Service and Business Consulting Agreement, SBCL
has the exclusive right to provide to SSIC, JinGuan and XinGuan consulting services, including operational management, human resources
management, research and development of the technologies related to the operations of SSIC, JinGuan and XinGuan. SSIC, JinGuan
and XinGuan pays to SBCL quarterly consulting service fees in an amount equals to all of their revenue for such quarter. These
agreements run for 10 year terms and are subject to automatic renewal for an additional 10 year term provided that no objection
is made by both parties on the renewal. |
| 2. | Exclusive Option Agreement, SBCL has the option to purchase SSIC,
JinGuan and XinGuan all assets and ownership at any time. |
| 3. | Equity Pledge Agreement, SSIC JinGuan and XinGuan agree to pledge
their legal interest to SBCL as a security for the obligations under the Exclusive Technical Service and Business Consulting Agreement. |
| 4. | Proxy Agreement, SSIC, JinGuan and XinGuan irrevocably grant and
entrust SBCL the right to exercise its voting and other stockholder’s right. |
| 5. | Operating Agreement, SBCL agrees to participate in the operations
of SSIC, JinGuan and XinGuan in different aspects. |
With the above agreements, SBCL demonstrates
its ability to control SSIC, JinGuan and XinGuan as the primary beneficiaries and the operating results of the VIEs was included
in the condensed consolidated financial statements for the three months ended June 30, 2013 and 2012.
Cash and cash equivalents
Cash and cash equivalents are carried at cost
and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments
with an original maturity of three months or less as of the purchase date of such investments.
Accounts receivable
Accounts receivable are recorded at the invoiced
amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using
historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial
condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary.
Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for
recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. For the
three months ended June 30, 2013, no allowance for doubtful accounts was provided.
| | Mining rights, exploration and development costs |
Costs of mining rights are capitalized upon
acquisition.
Subsequent exploration and development costs
are expensed as incurred until such time as a feasibility study has been completed which establishes, in compliance with SEC
Industry Guide 7, that proven and probable reserves exist on the property. After proven and probable reserves have been established,
subsequent exploration and development costs are capitalized until such time as a property is placed in-service. Following a property's
in-service date, accumulated capitalized acquisition, exploration and development costs are reclassified as Mining Property assets
and are subject to amortization on a units-of-production basis when its production begins.
Prepaid mining rights represent certain amount
of lease prepayment made for the operation of the mining license of Dayuan Gold Mine and are being amortized using a straight-line
basis over its scheduled lease term.
The rent expense on prepaid mining rights
for the three months ended June 30, 2013 and 2012 was $542,806 and $521,254, respectively.
The rent expense on prepaid mining rights
for the six months ended June 30, 2013 and 2012 was $1,065,719 and $1,043,396, respectively.
As of June 30, 2013, the
estimated annual amortization of the prepaid mining rights for the next five years and thereafter is as follows:
| Years
ending June 30: |
|
|
|
|
|
|
| 2014 |
|
|
|
|
$ |
2,136,372 |
| 2015 |
|
|
|
|
|
1,961,038 |
| 2016 |
|
|
|
|
|
32,369 |
| 2017 |
|
|
|
|
|
32,369 |
| 2018 |
|
|
|
|
|
32,369 |
| Thereafter |
|
|
|
|
|
113,293 |
| |
|
|
|
|
|
|
| Total: |
|
|
|
|
$ |
4,307,810 |
| | Property, plant and equipment |
Property, plant and equipment are stated at
cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis
over the following expected useful lives from the date on which they become fully operational and after taking into account their
estimated residual values:
| |
Expected useful life |
|
Residual value |
| Plant and machinery |
5-10 years |
|
5% |
| Motor vehicles |
5 years |
|
5% |
| Office equipment |
3-5 years |
|
5% |
Expenditure for repairs and maintenance
is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts
and any resulting gain or loss is recognized in the results of operations.
Depreciation expense for the three months
ended June 30, 2013 and 2012 were $107,707 and $85,515, respectively.
Depreciation expense for the six months
ended June 30, 2013 and 2012 were $269,235 and $176,807, respectively.
Construction in progress is stated at cost,
which includes the costs of self-constructed assets, including mine development assets during the construction phase. Indirect
overhead costs are not included in the cost of self-constructed assets. Construction in progress is not depreciated until such
time as the assets are completed and put into operational use. No capitalized interest is incurred during the period of construction.
| | Impairment of long-lived assets |
In accordance with the provisions of ASC Topic
360-10-5, “Impairment or Disposal of Long-Lived Assets ”, all long-lived assets held and used by the Company
are annually 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 evaluated by a comparison of the carrying amount of an
asset to estimated future undiscounted cash flows expected to be generated by the asset. Future cash flows are based on estimated
quantities of gold and other recoverable metals, expected price of gold and other commodity (considering current and historical
prices, price trends and related factors), production levels and cash costs of production, capital and reclamation costs, all based
on detailed engineering life-of-mine plans. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amounts of the assets exceed the fair value of the assets.
Numerous factors including, but not limited
to, such things as unexpected grade changes, gold recovery problems, shortages of equipment and consumables, equipment failures,
and collapse of pit walls, could impact our ability to achieve forecasted production schedules from proven and probable reserves.
Additionally, commodity prices, capital expenditure requirements and reclamation costs could differ from the assumptions used in
the cash flow models used to assess impairment. The ability to achieve the estimated quantities of recoverable minerals from exploration
stage mineral interests involves further risks in addition to those factors applicable to mineral interests where proven and probable
reserves have been identified, due to the lower level of confidence that the identified mineralized material can ultimately be
mined economically. There has been no impairment charge for the periods presented.
In accordance with the ASC Topic 605, “Revenue
Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has
occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.
The Company derives revenues from the sales
of non-refined gold concentrate to smelters, whereas the smelter usually takes 6 days for the production from non-refined gold
concentrate to gold bullion. The Company generally recognizes its revenues, net of value-added taxes ("VAT") at the time
of gold bullion is produced by the smelter and its selling price is determined by the market value of gold bullion quoted by the
Shanghai Gold Exchange.
The Company is subject to VAT which is levied
on the standard gold products at the standard rate of 17% on the invoiced value of sales. The Company’s VIE, XinGuan is granted
with a preferential tax treatment under the Chinese tax law of the “Notice from Ministry of Finance and State Tax Bureau
in Relation to Exemption of Value Added Tax on Gold Production” and “Notice regarding issues on Tax Policy on
Gold Transaction”, whereas gold produced and sold by gold mining and smelting enterprises are exempted from VAT.
Service revenue is primarily derived from the
provision of mining consulting and technical services that are not an element of an arrangement for the sale of products. These
services are generally billed on a time-cost plus basis, for a period of service time from 2 to 6 months. Revenue is recognized
when service is rendered and accepted by the customers.
Interest income is recognized on a time apportionment
basis, taking into account the principal amounts outstanding and the interest rates applicable.
| | Resource compensation fees |
In accordance with the relevant
regulations under the Chinese Law, a company that is engaged in exploiting mineral resources is required to pay a resource
tax and resources compensation levy to the local government as the compensation for the depletion of mineral resources.
Pursuant to “Provisional Regulations on Resources Tax of the PRC” and “Administrative Rules on the
Levy of Mineral Resources Compensation”, the amounts of the resource tax and resources compensation levy are
computed on the basis of the sales revenue of mineral products. The Company was required to pay resource compensation fees of
$42,661 and $26,781 for the six months ended June 30, 2013 and 2012, respectively.
ASC Topic 220, “Comprehensive Income”,
establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive
income as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income,
as presented in the accompanying condensed consolidated statement of stockholders’ equity, consists of changes in unrealized
gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense
or benefit.
The Company adopts ASC Topic 740, “Income
Taxes” regarding accounting for uncertainty in income taxes which prescribes the recognition threshold and measurement
attributes for financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return.
In addition, the guidance requires the determination of whether the benefits of tax positions will be more likely than not sustained
upon audit based upon the technical merits of the tax position. For tax positions that are determined to be more likely than not
sustained upon audit, a company recognizes the largest amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement in the financial statements. For tax positions that are not determined to be more likely than not sustained
upon audit, a company does not recognize any portion of the benefit in the financial statements. The guidance provides for de-recognition,
classification, penalties and interest, accounting in interim periods and disclosure.
For the three months ended June 30, 2013
and 2012, the Company did not have any interest and penalties associated with tax positions. As of June 30, 2013, the
Company did not have any significant unrecognized uncertain tax positions.
The Company conducts major businesses in the
PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are
subject to examination by the foreign tax authority.
The Company calculates net loss per share in
accordance with ASC Topic 260, “Earnings per Share.” Basic loss per share is computed by dividing the net loss
by the weighted-average number of common shares outstanding during the period. Diluted loss per share is computed similar to basic
loss per share except that the denominator is increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.
| | Foreign currencies translation |
Transactions denominated in currencies other
than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction.
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional
currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the
statement of operations.
The reporting currency of the Company is the
United States Dollars ("US$"). The Company's subsidiary in the PRC maintain its books and records in its local currency,
Renminbi Yuan ("RMB"), which is functional currency as being the primary currency of the economic environment in which
the entity operates.
In general, for
consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not US$ are translated into US$,
in accordance with ASC Topic 830-30, “Translation of Financial Statement”,
using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the
period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate
component of accumulated other comprehensive income within the statement of stockholders’ equity.
Translation of amounts from RMB into US$1 has
been made at the following exchange rates for the respective period:
| |
|
|
June 30, 2013 |
|
June 30, 2012 |
| Period-end RMB:US$1 exchange rate |
|
|
6.1787 |
|
6.3197 |
| Period average RMB:US$1 exchange rate |
|
|
6.1930 |
|
6.3255 |
Parties, which can be a corporation or individual,
are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant
influence over the other party in making financial and operational decisions. Companies are also considered to be related if they
are subject to common control or common significant influence.
ASC Topic 280, “Segment Reporting”
establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal
organization structure as well as information about geographical areas, business segments and major customers in financial statements.
For the three and six months ended June 30, 2013, the Company operates in one reportable operating segments in the PRC.
| | Fair value of financial instruments |
The carrying value
of the Company’s financial instruments include cash, accounts receivable, amounts due from (to) related parties, deposits
and prepayments, accounts payable, amount due to a related party, income tax payable, accrued liabilities and other payable. Fair
values were assumed to approximate carrying values for these financial instruments because they are short term in nature and their
carrying amounts approximate fair values. The carrying value of the Company’s loans and note payable approximated
its fair value based on the current market prices or interest rates for similar debt instruments.
The Company also follows the guidance of ASC
Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10"), with respect to financial
assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes
the inputs used in measuring fair value as follows:
| - |
Level 1 : Observable inputs such as quoted prices in active markets; |
| - |
Level 2 : Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
| - |
Level 3 : Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions |
Fair value estimates are made at a specific
point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
| | Recent accounting pronouncements |
The Company has reviewed all recently issued,
but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected
to cause a material impact on its financial condition or the results of its operations.
In February 2013, the Financial Accounting
Standards Board (“FASB”) issued guidance requiring an entity to disclose additional information about reclassifications
out of accumulated other comprehensive income, including (1) changes in accumulated other comprehensive income balances by component
and (2) significant items reclassified out of accumulated other comprehensive income and the effect on the respective line items
in net income if the amounts are required to be reclassified in their entirety to net income. For other amounts that are not required
to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other
disclosures that provide additional detail about those amounts. The new guidance is effective prospectively for fiscal years beginning
after December 15, 2012. The adoption of these disclosure requirements did not have a material impact on the Company’s consolidated
financial statements.
In July 2013, the FASB issued ASU No. 2013-11,
Income Taxes (Topic 740)-Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax
Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 provides guidance on the financial statement
presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward
exists. This new standard requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward
that would apply in settlement of the uncertain tax positions. ASU 2013-11 will be effective for us beginning in the first quarter
of fiscal 2014. Early adoption is permitted. Since ASU 2013-11 only impacts financial statement disclosure requirements for unrecognized
tax benefits, The Company does not expect its adoption to have an impact on the Company’s financial position or results
of operations. |
