IAS 16 – Accounting for production phase stripping costs in the mining industry
The Committee continued its discussion on accounting for production phase stripping costs in the mining industry. Based on the Committee's comments made during the March 2011 meeting, the staff revised the draft interpretation removing the 'stripping campaign' concept and instead describing the recognition of a long term asset as a 'stripping cost asset'. Additionally, the staff replaced the term 'section' from the recognition principle with the term 'component'.
The revised recognition principle drafted by the staff reads as follows:
8. An entity shall recognise production stripping costs as part of an asset if, and only if:
- a. It is probable that the future economic benefit associated with the costs will flow to the entity; and
- b. The costs can be measured with reliability.
9. To the extent that the benefit is realised in the current period in the form of inventory produced, the entity shall account for the costs in accordance with the principles of IAS 2 Inventories.
10. To the extent that the benefit is the improved access to ore that is to be realised (mined) in a future period, the entity shall recognise these costs as a long-term asset. This [draft] interpretation refers to this long-term asset as the stripping cost asset'.
- a. Identify the component of the ore body for which access has been improved, and
- b. Measure the costs relating to the improved access to that component with reliability.
12. If the entity cannot identify the component of the ore body for which access has been improved, or cannot measure the costs relating to the improved access to that component with reliability, then the entity shall recognise these costs in profit or loss.
A few of the Committee members expressed various concerns over the staff's proposed use of the term component'. One Committee member noted in particular that small mining operations may have difficulty in identifying a component and could interpret that otherwise eligible stripping costs would not be eligible for capitalisation. Another suggested providing a more structured definition of a component so that the guidance would not be applied incorrectly. Other Committee members had concern that providing a more specific definition may establish a brightline on what constitutes a component.
Some Committee members also felt that the guidance in paragraphs 8 and 11 above were repetitive and could be streamlined into a single paragraph.
The Committee generally supported the principle drafted by the staff. However, the staff will consider the comments the Committee had with how the principle could be better clarified.
The staff also asked the Committee whether they believed that any recognition trigger' should be included in the final Interpretation. The Committee agreed that a recognition trigger was not necessary.
Method of allocating costs between current and future periods
The Committee continued their discussions from the March 2011 meeting on the method for allocating stripping costs between current and future benefits. Specifically, two approaches were discussed the residual cost approach and the relative benefit approach. The residual cost approach would calculate the standard cost of removing ore in a section of the mine while the relative benefit approach involves allocating the production stripping costs for a section of the mine on a relative benefit basis according to the sales value of the extracted ore. The staff provided a numerical example of the application of each of these two approaches which provided significantly different results.
The staff recommended the draft Interpretation require use of the residual cost approach. However, several of the Committee members had concerns with requiring the use of a specific approach. Some of the Committee members also noted that the relative benefit approach could be applied using inputs other than future sales prices, such as based on quantities extracted (the use of highly subjective information such as future market prices was an area of concern for certain Committee members in using this approach). Another Committee member suggested that the relative benefit approach could also be applied by using current market values rather than estimating future market conditions. Because no consensus could be reached, the Committee asked the staff to revise the allocation guidance based on the feedback received from the Committee.
The staff brought back to the Committee revised guidance on allocating cost between current and future benefits. The revised staff proposal included the following:
Where the costs of the stripping cost asset and the inventory produced are not separately identifiable, the entity shall allocate the production stripping costs between the inventory produced and the stripping cost asset on a rational and consistent basis.
The entity shall use an allocation basis that is based on a relevant production metric, calculated for an identified component of the mine, that can be used as a benchmark to identify the extent to which additional activity of creating a future benefit has taken place. Examples of such metrics may include:
- a. cost of inventory produced compared with expected cost;
- b. volume of waste extracted compared with expected volume, for a given volume of ore production; and
- c. mineral content of the ore extracted compared with expected mineral content to be extracted.
The Committee generally supported the direction the staff was headed with the revised guidance, although a few members still had some concerns with certain aspects of the drafting. Only one Committee member had reservations with the concepts in the guidance feeling it was still too prescriptive and preferred that only the first paragraph be included. The staff clarified for the Committee that the guidance was drafted in such a way that the use of sales based metrics were intentionally omitted and that this would be noted in the basis for conclusions.
Some of the comment letter respondents to the draft Interpretation suggested the Committee provide guidance of how a component is to be impaired. However, the staff recommended that the consensus not specifically address impairment. Instead, the basis for conclusions would note that impairment would be considered under IAS 36 Impairment of Assets. The Committee agreed with the staff recommendation.
The draft Interpretation proposed that the provisions would be effective for production stripping costs incurred on or after the beginning of the earliest period presented. Comment letter respondents broadly agreed with the proposed transition requirements. The Committee reaffirmed their previous decision that the provisions in the Interpretation would be effective for production stripping costs incurred on or after the beginning of the earliest period presented.
Existing stripping cost assets
Some entities may have recognised stripping cost assets that cannot be directly associated with an identifiable section of the ore body and therefore not eligible for capitalisation under the Interpretation. The staff recommended that those stripping cost assets no longer eligible for capitalisation would be written off through opening retained earnings upon initial application of the Interpretation. The Committee agreed with the staff recommendation.
Comment letter respondents did not support including the illustrative example in the draft Interpretation in the final Interpretation. Therefore the staff recommended not including the illustrative example in the final Interpretation and the Committee agreed with the staff recommendation.
The Committee discussed whether the decisions during the re-deliberations of the draft Interpretation would require re-exposure. A few of the Committee members mentioned they would like to see an analysis of the changes made between the draft Interpretation and the final Interpretation to better assess whether re-exposure would be required. The staff mentioned they would draft the language for the final Interpretation and prepare the analysis and distribute to the Committee toward the end of May. The Committee may then schedule an interim teleconference meeting in early June to determine whether re-exposure is required. If they determine that re-exposure is not required, the Committee would then finalise the vote to approve the Interpretation. Only one Committee member expressed reservation that she may dissent to the final Interpretation.