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General Steel To Restate Certain Items In Accounting Treatment Related To Collaboration With Shaanxi Iron And Steel Group, Co. Ltd.

In summary, the effects on the financial statements of these restatements, subject to audit, will be as follows:

  1. Reimbursements for the net book value of dismantled assets of RMB 70.1 million and inefficiency costs of RMB 183 million, which were recorded as reductions to costs of goods sold in the fourth quarter of 2010, will instead be deferred and amortized to income over the remaining term of the 40-year sub-lease.
  2. Rent under the sub-lease for the period from inception of the land sub-lease to the fourth quarter of 2010, which was all recognized as rental income in the fourth quarter of 2010, will be recognized in the appropriate periods to which the rent relates, starting from June 2009.
  3. Reimbursements for trial production costs of RMB 89 million and RMB 89 million, which were recognized as reductions to costs of goods sold in the fourth quarter of 2010 and the first quarter of 2011, respectively, will instead be deferred and amortized to income over the remaining term of the 40-year sub-lease. At various stages during this trial production phase, although Longmen JV was still testing the newly constructed assets, certain of the assets, mainly the sintering machine, converters and blast furnaces, came online and became available to produce saleable or usable output. Therefore, these assets would be considered ready for use when they started producing output. As Longmen JV was using these completed assets free of charge as they came online, this is considered an arrangement containing a lease and as such, lease expense based upon an estimate of fair value will be recognized for this free-use period prior to the Cooperation Agreement being signed in the second quarter of 2011. Deferred lease income will be credited and amortized over the period of the land sub-lease, consistent with the reimbursements for the inefficiencies.
  4. For the above costs, receivables for the reimbursements were not recognized until the fourth quarter of 2010. Receivables for these costs and the site preparation cost of RMB 31.7 million, which were originally recorded as a reduction to costs of goods sold in the fourth quarter of 2010, will be restated such that they are recognized as the costs were incurred.

While the restatement of these reimbursements has the effect of deferring recognition as income of amounts previously recognized in 2010 and the first quarter of 2011, and reflecting the added benefit of continuous recognition of sub-lease income from the reimbursement received from Shaanxi Steel in the future, the Company does not expect these changes to impact its reported sales revenue or cash balances. Furthermore, the restatement has no impact on the results of the Company's manufacturing production, nor has the Company encountered any issues relating to the accounting treatment of historical revenue recognition. The Company's management is currently evaluating and assessing the implications of this matter on the effectiveness of internal control over financial reporting.

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