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IAS 16 — Accounting for production phase stripping costs in the mining industry

Date recorded:

Definition of scope

Following on its November 2009 decision to add the matter to its agenda, the IFRIC discussed how to define the scope of its project on accounting for stripping costs in the production phase of a mine. The two main issues discussed were:

  • whether the scope should include all extractive activities or only the extraction of minerals; and
  • whether the scope should have an industry of activity focus.

One IFRIC member enquired whether staff has had consultations with constituents in industries other than mining, as the principles proposed in the accounting for stripping costs can equally be applied to other industries with similar activities. Another member also enquired why the proposed scope of the Interpretation has been limited to the mining industry. This member expressed a preference for defining the activities to be covered by the Interpretation as opposed to the industry. Several IFRIC members shared this view.

One IFRIC member agreed in principal with the view, but noted that practically and realistically it may not be possible for the IFRIC to develop an Interpretation with such broad scope in the foreseeable future as the IFRIC would require further education sessions on the other industries prior to concluding whether the principles would be appropriate. On that basis the member felt that the scope should be limited to the mining industry as the original request submitted to the IFRIC was from that industry. Another member remarked that if the IFRIC or the staff have already potentially identified areas where the proposed Interpretation can be applied, those areas should not be ignored at the moment.

During IFRIC deliberations, one member said that if the principles can be applied to other industries or activities, the Basis for Conclusions to the Interpretation can contain a paragraph similar that included in IFRIC 15, stating that the Interpretation can be analogised to other similar activities. The Chairman noted that in order for the IFRIC to conclude that the proposed Interpretation should allow analogy, it is first necessary to define its scope and formulate the appropriate accounting treatment. Analogy to other activities can only be decided on once the project has been completed.

Another IFRIC member stated that the proposed wording of the scope paragraph is overly complex and could be simplified by using 'wasted' material instead. Staff responded that although the wording has been proposed by the constituents, they agree with the suggestion.

The Chairman then reminded the IFRIC that it has a responsibility to hone in on where divergence in practice has originated and address that divergence. In this case, it was the mining industry, and the scope of the proposed Interpretation should be limited to that.

The IFRIC agreed that the scope of the interpretation should refer to the activity of overburden removal and should not be more specific.

The IFRIC then discussed whether the scope of the proposed Interpretation should be limited to the production phase or include the other mining activities as well. One IFRIC member noted that it is important to understand why the proposed scope is limited to the production phase. Another IFRIC member noted that limiting the scope to the production phase only will open the door for accounting arbitrage. For that reason, although both the development and production phases should be addressed in the proposed Interpretation, the production phase has to be clearly defined.

The Chairman explained that mines do not have difficulty in distinguishing between the development phase and the production phase as it is quite easy to determine when production has started. He also explained that the divergence in practice in accounting for stripping costs does not occur in the development phase, but rather once production has started, hence the request for an IFRIC Interpretation.

One IFRIC member remarked that the distinction is difficult in practice, as it is possible to have started production at one pit on the mine, but still be in the development phase for another pit. It is therefore important to understand what the unit of account is. Another member noted that the proposed definition of the production phase must remain consistent with the existing guidance included in IAS 16.

One member questioned whether the distinction between the development and production phase is really important. It was suggested that the proposed Interpretation should focus on when the definition of an asset has been met, in other words, when future economic benefits become available to the entity.

When asked whether any of the IFRIC members disagreed with the staff's proposal to confine the scope to the production phase, no IFRIC members disagreed.

The IFRIC was then asked whether there is agreement with confining further confining the scope to surface mining – a type of mining where soil and rock overlying the mineral deposit are removed. One IFRIC member noted that if the activities to which the proposed Interpretation applies are set out, it should not be necessary to limit it to surface mining. Another member remarked that practically, if the scope is not limited, inadvertent consequences will be created. This member was supportive of limiting the activities to which the proposed Interpretation can be applied, as long as those activities are clearly defined. The Chairman reminded the IFRIC that the activity the IFRIC was asked to provide guidance on was the removal of overburden in surface mining activities. None of the members seemed to disagree with the proposal.

The discussion then turned to whether the scope of the proposed Interpretation should be restricted only to circumstances where overburden removal activity results in a future economic benefit being created. Without much discussion, the IFRIC agreed with the proposal not to limit the scope to circumstances where a future benefit is created.

The IFRIC then returned to the first question on whether the scope should be limited to mining activities only. One IFRIC member was comfortable with the scope as articulated in the agenda papers and remarked that the IFRIC should perform the duties that it has been given. When asked for assistance by constituents, the IFRIC should be helpful and provide the guidance without turning requests away; otherwise constituents will stop asking for assistance. The Chairman concluded that the scope of the Interpretation will be kept short and precise.

The IFRIC agreed that the scope should be limited to accounting for the costs of removal of waste material in a surface mining activity during the production phase.

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