IAS 16 — Accounting for production phase stripping costs in the mining industry
The IFRIC continued its deliberations on the accounting treatment for stripping costs during the production stage of a mine.
In response to a question from the staff, the IFRIC tentatively agreed that by incurring costs to remove the waste, a mining entity has created a benefit in the form of improved access to the mineral ore body and therefore meets the definition of an asset. The IFRIC then discussed whether the asset should be classified as a tangible or intangible asset. One IFRIC member noted that before the IFRIC can conclude on the classification of the asset, it first need to consider whether the asset is an asset in its own right or an addition to an existing asset. After a fairly long discussion, the majority of members supported the view that the benefit created by the stripping costs is an addition to an existing asset.
The IFRIC then discussed whether the stripping costs should be capitalised to the intangible asset (mineral right) in accordance with IAS 38 or to the tangible mining assets (plant and equipment) in accordance with IAS 16. The IFRIC tentatively agreed that the capitalisation of stripping costs should follow the treatment applied by an entity when capitalising other mining costs or assets, and an Interpretation should not to specify whether it is an intangible or tangible asset. As a result the IFRIC agreed not to amend to the scope of the Standard with regards to mineral rights and reserves.
The IFRIC also deliberated how to allocate stripping costs between the current and future periods. It considered two approaches:
- strip ratio approach, which makes use of a strip ratio using the long-term mine plan data; and
- specific identification approach, whereby the costs of a stripping campaign are allocated to the section of the mineral ore that become accessible as a result of the campaign.
One IFRIC member questioned the staff on the practicality and application of the specific identification approach in practice. Staff responded that their research showed that the majority of mining entities are capable of applying this approach as the information is already available as part of the mine plan.
Another IFRIC member did not consider the specific identification approach to be conservative and was opposed to it. However, the majority of the IFRIC members supported the specific identification approach as, in their opinion, the strip ratio approach can lead to a entity's recognising a gain when the stripping costs have been spread over the entire ore body and it is subsequently decided not to mine the entire ore body. When put to a vote, only one member objected to the specific identification approach, with all other members voting in favour of it.
The IFRIC then considered what the appropriate unit of account should be. Without much discussion, the IFRIC tentatively agreed that the unit of account should be the stripping campaign.
Lastly, the IFRIC was asked to consider the subsequent attribution (or amortisation) of the asset. The IFRIC tentatively agreed that regardless of whether an entity capitalises those costs as part of a tangible or intangible asset, the asset should be attributed over ore reserves in a systematic and rational manner. IFRIC further agreed that in drafting the interpretation, the concepts of componentisation included in IAS 16 should be incorporated into the interpretation.