IAS 16 – Accounting for production phase stripping costs in the mining industry
The Committee continued its re-deliberations. In particular, it discussed the staff's revised principle for capitalising production stripping costs, including proposed guidance on the apportionment of those costs between current (inventory/expense) and future benefit (defer/capitalise). In addition, the Committee discussed a revised approach to depreciation and amortisation of the capitalised component.
Principle for capitalisation
The Committee discussed the following proposed principle and related application of the principle:
An entity shall capitalise stripping costs in the production phase of a mine to the extent that the benefit created by the stripping activity is expected to be realised in a future period.
In order to apply this principle, we think that the entity must be able to:
Committee members agreed with the principle (it was hard not to, as many observed), but the application proved more controversial. Most agreed that identifying components was critical in this case. However, many were unhappy about the use of 'section' (hence it appearing in [square brackets] above. The sense of the meeting was that they were too open to misinterpretation and introduced a concept that was unhelpful in the context of IAS 16. Retaining the idea of a component (already a feature of IAS 16) was thought more helpful.
A few Committee members were concerned that the principle and application were an open invitation to capitalise 'every scoop of dirt; every bit of rock' and that the revised principle seemed to have lost the feel of an aggressive stripping activity. Hence, these Committee members would want feel more comfortable with a stripping campaign approach. However, there seemed to be consensus that the member's fear cited above was over-stated and that all Committee members thought that the stripping activity within the scope of the Interpretation would always be 'non-routine'.
Basis for measurement
The staff introduced two methodologies for allocating the production stripping costs between the inventory component and the long-term asset component: (i) the 'relative benefit approach', which would be based on the following formula:
|Sales value (or mineral content) of the ore extracted|
|Sales value (or mineral content) of the remaining ore to be extracted|
or (ii) the 'residual cost approach', which would be based on standard cost theory.
Opinions were mixed. Some saw the relative benefit approach as the 'better measure' because it was a value-based measure and gave a better allocation; while the residual cost basis was easier to apply in a long-life mine and could be seen as more consistent with IAS 16, the standard being interpreted.
After a long and tortuous debate, the Committee agreed that there should be a cost allocation approach. As to which method should be used, the staff and the Committee were split, and the staff will conduct further outreach with constituents.
The Committee agreed with the proposed depreciation principle:
The 'stripping cost asset' shall be depreciated or amortised in a rational and systematic manner over the expected useful life of the ore body (or component of the ore body) in the section of the mine that becomes more accessible as a result of the stripping activity. The units of production method is applied unless another method is more appropriate.
The staff will conduct further outreach on both the capitalisation principle and the cost allocation methods before preparing a revised Interpretation to be discussed in May 2011. At that meeting the Committee will also discuss
The Committee then had a debate about whether an Interpretation was necessary at all, given the likely direction and content. Several Committee members (and the Chairman, rather forcefully) thought that an Interpretation was necessary because there was diversity in practice that would only get worse as more 'mining-heavy' jurisdictions came into the IFRS family and (in particular) because of the scope exception in IAS 16 for the extractive activities. In the end, it was agreed to continue work on the project and reassess at a later stage.