In August 2011, the IASB published IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine. This IFRIC addresses the following three questions:
1. How and what production stripping costs to recognise as an asset;
2. How to initially measure the stripping activity asset; and 3. How to subsequently measure the stripping activity asset.
In summary, the IFRIC concludes that:
When benefits from the stripping activity are realised in the form of inventory produced, the principles of IAS 2, Inventories, shall be applied.
However, to the extent that the benefit is the improved access to ore, the entity shall recognise these costs as a non‐current asset. This non‐ current asset will be known as the “stripping activity asset.”
The stripping activity asset will be accounted for as part of an existing asset (an enhancement of an existing asset) and will be classified as either tangible or intangible according to the nature of the existing asset of which it forms a part.
The stripping activity asset will be initially measured at cost.
The stripping activity asset will be subsequently measured at cost or revalued amount less depreciation or amortisation and less impairment losses, in the same way as the existing asset of which it is a part.
The stripping activity asset will be depreciated or amortised on a systematic basis, over the expected useful life of the identified component of the ore body that becomes more accessible as a result of the stripping activity.
This IFRIC becomes effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted. The Interpretation applies to production stripping costs incurred on or after the beginning of the earliest period presented. Any “predecessor stripping asset” at that date is required to be reclassified as a part of the existing asset to which the stripping activity is related (to the extent there remains an identifiable component of the ore body to which it can be associated), or otherwise recognised in opening retained earnings at the beginning of the earliest period presented.
The following is a practical example of an accounting policy and illustrates how deferred stripping is applied in practice.
EXAMPLE OF FINANCIAL STATEMENT DISCLOSURES
Anglo American 2017 Annual Report
Accounting judgements: deferred stripping
In certain mining operations, rock or soil overlying a mineral deposit, known as overburden, and other waste materials must be removed to access the orebody. The process of removing overburden and other mine waste materials is referred to as stripping. The group defers stripping costs onto the balance sheet where they are considered to improve access to ore in future periods. Where the amount to be capitalised cannot be specifically identified it is determined based on the volume of waste extracted compared with expected volume for the identified component of the orebody. This determination is dependent on an individual mine's design and life of mine plan and therefore changes to the design or life of mine plan will result in changes to these estimates. Identification of the components of a mine's orebody is made by reference to the life of mine plan. The assessment depends on a range of factors, including each mine's specific operational features and materiality.
Accounting policy: deferred stripping
The removal of rock or soil overlying a mineral deposit, overburden and other waste minerals is often necessary during the initial development of an open pit mine site to access the orebody. The process of removing overburden and other mine waste materials is referred to as stripping. The directly attributable cost of this activity is capitalised in full within “Mining properties and leases,” until the point at which the mine is considered to be capable of operating in the manner intended by management. This is classified as expansionary capital expenditure, within investing cash flows.
The removal of waste material after the point at which depreciation commences is referred to as production stripping. When the waste removal activity improves access to ore extracted in the current period, the costs of production stripping are charged to the income statement as operating costs in accordance with the principles of IAS 2, Inventories.
Where production stripping activity both produces inventory and improves access to ore in future periods the associated costs of waste removal are allocated between the two elements. The portion that benefits future ore extraction is capitalised within “Mining properties and leases.” This is classified as stripping and development capital expenditure, within investing cash flows. If the amount to be capitalised cannot be specifically identified it is determined based on the volume of the waste extracted compared with expected volume for the identified component of the orebody. The determination is dependent on an individual mine's design and life of mine plan and therefore changes to the design or life of mine plan will result in changes to these estimates. Identification of the components of a mine's orebody is made by reference to the life of mine plan.
The assessment depends on a range of factors, including each mine's specific operational features and materiality.
In certain instances, significant levels of waste removal may occur during the production phase with little or no associated production. This may occur at both open pit and underground mines, for example longwall development.
The cost of this waste removal is capitalised in full to “Mining properties and leases.”
All amounts capitalised in respect of waste removal are depreciated using the unit of production method for the component of the orebody to which they relate, consistent with depreciation of property, plant and equipment.
The effects of changes to the life of mine plan on the expected cost of waste removal or remaining ore reserves for a component are accounted for prospectively as a change in estimate.
The IASB has decided to open a research project on extractive industries again to assess whether accounting requirements for exploration, evaluation, development and production of minerals, and oil and gas, should be introduced. No documents are published yet.
FUTURE DEVELOPMENTS
The IASB is in the process of gathering evidence to decide whether a project on extractive industries should be included in their work plan.
US GAAP COMPARISON
US GAAP separately addresses extractive industries (ASC 930), specifically for mining and oil‐ and gas‐producing companies (ASC 932), accounting for the acquisition of property, exploration, development, production and support equipment and facilities. Specific guidance regarding the presentation of costs and revenues, capitalisation, depreciation, derecognition and disclosure of costs related to oil and gas extraction is also provided. However, extracted resources are valued at cost with very few exceptions.
Disclosures for oil and gas activities are substantial and require specialised engineering estimates. Some of these disclosures are:
Proved oil and gas reserve quantities;
Capitalised costs relating to oil‐ and gas‐producing activities;
Continued capitalisation of exploratory well costs;
Costs incurred for property acquisition, exploration and development;
Results of operations of oil‐ and gas‐producing activities;
A standardised measure of discounted future net cash flows related to proven oil and gas reserve quantities.
There are additional disclosures for public companies. Disclosures also include net quantities for equity‐accounted entities. The unit of account for impairments is specifically at the field level. Additionally, if a field is proved non‐productive after the balance sheet date, but before the financial statements are available for issue, it should be considered for an adjusting subsequent event, not merely a disclosure as is required for other impairments related to conditions occurring after the reporting date.
Under US GAAP all costs related to oil‐ and gas‐producing activities are accounted for under either the successful efforts method or the full cost method, and the type of exploration and evaluation costs capitalised under each method differ. For other extractive industries, exploration and evaluation costs are generally expensed as they are incurred unless an identifiable asset is created by the activity.
Additionally, oil‐ and gas‐producing entities do not segregate capitalised exploration and evaluation costs into tangible and intangible
components; instead all capitalised costs are classified as tangible assets. Furthermore, the test for recoverability is usually conducted at the oil and gas field level under the successful efforts method, or by geographic region under the full cost method.