IAS 16 — Accounting for stripping costs in the production phase of a surface mine
The IFRIC considered a request to add to its agenda a project to clarify accounting treatment for stripping costs in the production phase.
An educational presentation was made by Niall Weatherstone, Chief Advisor for Evaluation at Rio Tinto. The presentation clarified the technical and geological aspects of mining as well as significance of the stripping costs, especially in open pit mining. The main aspect of the presentation was treatment of waste and overburden. During production, waste and ore are mined together, and some of the waste represents an additional 'development' activity needed to secure access to the next level of ore ('push-backs').
The IFRIC noted that capitalisation of pre-production stripping costs (cost to remove waste before the actual ore is mined) is not contentious. The real issue is capitalisation of stripping costs in the production phase of the mine.
The IFRIC also noted that stripping activity in the production phase occurs because development might continue through removal of overburden in portions of the mine, to reach ore that would be extracted in the current or in later periods. As such, stripping creates a future economic benefit. Many IFRIC members thought that conceptually such costs should be capitalised as well. Nonetheless, some IFRIC members expressed concerns about whether such costs could be distinguished from normal production cost and whether artificial arbitrary rules would not have to be introduced.
The IFRIC considered four alternatives on accounting for stripping costs during production:
- expense when incurred
- capitalise as a cost of inventory as variable production cost (the US approach)
- capitalise and attribute to reserves benefited in a systematic and rational manner (the Canadian approach)
- capitalise using a strip ratio
Most IFRIC members thought that Alternative 3 was the conceptually right answer, but Alternative 4 could be used as an expedient. Some IFRIC members were concerned with this view, as they believed that the main difference between Alternatives 3 and 4 was that Alternative 4 explicitly considers future costs which would be inconsistent with the Framework. For some IFRIC members the most pertinent issue was the unit of account issue – is the unit of account one mine? Some IFRIC members raised other issues with both alternatives 3 and 4 (for example, reflecting the profitability of each layer of ore and reflecting how the business of the pit is managed).
The IFRIC noted that treatment of production stripping cost was very diverse all over the world. In particular, given transition of Canada to IFRSs, several conflicting practices would be present in IFRS jurisdictions.
One IFRIC member asked about the relationship of stripping cost and the draft Extractive Industries Discussion Paper (DP). The staff clarified that the DP is not expected to treat the production stripping costs in detail. The DP will acknowledge that capitalisation might be appropriate. Moreover, the staff noted that the IASB is not expected to finalise an extractive industries Standard for three to five years.
After discussion, the IFRIC agreed to add this project to its agenda and directed the staff to explore scope of the project, capitalisation alternatives, and possible amortisation methods. The discussion is expected to resume at the next IFRIC meeting.