Financial Reporting in the Mining Industry - PwC

\mining

Financial reporting

in the mining industry

International Financial

Reporting Standards

6th edition

Foreword

International Financial Reporting Standards

(IFRS) provide the basis for financial

reporting to the capital markets in an

increasing number of countries around the

world. Over 100 countries either use or are

adopting IFRS. Those companies already on

IFRS have their own challenges as the pace

of standard-setting from the International

Accounting Standards Board (IASB) has been

intense in recent years with a constant flow

of changes.

One of the major challenges of any reporting

framework is how best to implement it in the

context of a specific company or industry.

IFRS is a principles based framework and

short on industry guidance. PwC looks at

how IFRS is applied in practice by mining

companies. This publication identifies the

issues that are unique to the mining industry

and includes a number of real life examples to

demonstrate how companies are responding

to the various accounting challenges along

the value chain.

Of course, it is not just IFRSs that are

constantly evolving but also the operational

issues faced by mining companies with the

heavy demand for capital and risks faced

Tim Goldsmith

Global Mining Leader

November 2012

by the industry driving more cooperative

working relationships. We look at some

of main developments in this context

with a selection of reporting topics that

are of most practical relevance to mining

companies¡¯ activities. The new standards on

joint arrangements, consolidated financial

statements and disclosure of interests in

other entities will be of particular interest to

companies in the mining sector. The debate

about specific guidance for exploration,

evaluation, development and production of

mineral resources continues.

This publication does not describe all IFRSs

applicable to mining entities but focuses

on those areas that are of most interest to

companies in the sector. The ever-changing

landscape means that management should

conduct further research and seek specific

advice before acting on any of the more

complex matters raised. PwC has a deep level

of insight into the industry and commitment

to helping companies in the sector report

effectively. For more information or

assistance, please do not hesitate to contact

your local office or one of our specialist

mining partners.

Contents

Introduction ................................................................................................................................11

1

Mining value chain.................................................................................................... 12

2

Exploration and evaluation activities ....................................................................... 15

2.1

Overview ........................................................................................................................16

2.2

Reserves and resources ...................................................................................................16

2.2.1

Defining a mineral resource.............................................................................................16

2.2.2

Resources vs reserves.......................................................................................................17

2.2.3

Assumptions and estimates..............................................................................................18

2.2.4

Extractive activities project..............................................................................................18

2.3

Exploration and evaluation .............................................................................................18

2.3.1

Accounting for E&E under IFRS 6 ....................................................................................19

2.3.2

Initial recognition .......................................................................................................... 20

2.3.3

Evaluation...................................................................................................................... 22

2.3.4

Subsequent measurement of E&E assets ......................................................................... 23

2.3.5

Borrowing costs during the E&E phase............................................................................ 24

2.3.6

Reclassification out of E&E under IFRS 6......................................................................... 24

2.3.7

Impairment of E&E assets............................................................................................... 24

2.3.8

Post balance sheet events ............................................................................................... 25

2.3.9

Exploration and evaluation disclosures........................................................................... 26

2.4

Disclosure of reserves and resources ............................................................................... 26

3

Development activities.............................................................................................. 28

3.1

Development expenditures ............................................................................................. 29

3.2

Borrowing costs in the development phase...................................................................... 29

3.3

Foreign exchange gains and losses.................................................................................. 29

3.4

Hedging costs..................................................................................................................31

3.5

Pre-production sales ........................................................................................................31

3.6

Development disclosures.................................................................................................31

4

Production activities.................................................................................................. 32

4.1

Revenue recognition....................................................................................................... 33

4.1.1

Cost and Freight vs Free On Board .................................................................................. 33

4.1.2

Transfer of effective control over goods sold.................................................................... 34

4.1.3

Product exchanges.......................................................................................................... 35

4.1.4

Forward-selling contracts to finance development .......................................................... 36

4.1.5

Provisional pricing arrangements ................................................................................... 36

4.1.6

Agency arrangements......................................................................................................37

4.1.7

Tolling arrangements...................................................................................................... 38

4.1.8

Long-term contracts........................................................................................................ 38

4.1.9

Lump sum contributions................................................................................................. 39

4.1.10 Presentation of revenue .................................................................................................. 39

4

Financial reporting in the mining industry

Contents

4.2

Depreciation & Amortisation .......................................................................................... 39

4.2.1

Depreciation of mining assets.......................................................................................... 39

4.2.2

UoP basis........................................................................................................................ 40

4.2.3

Determining the reserve/resource base........................................................................... 40

4.2.4

Change in the basis of reserves........................................................................................ 42

4.2.5

Depreciation of other assets ........................................................................................... 42

4.2.6

Components ................................................................................................................... 42

4.3

Deferred stripping costs.................................................................................................. 43

4.3.1

Approaches prior to adoption of IFRIC 20....................................................................... 43

4.3.2

Approach following adoption of IFRIC 20........................................................................ 43

4.4

Inventory valuation .........................................................................................................51

4.4.1

Recognition and measurement.........................................................................................51

4.4.2

Cost and net realisable value........................................................................................... 52

4.4.3

Joint products and by-products....................................................................................... 55

4.4.4

Insurance and capital spares........................................................................................... 56

4.4.5

Consumable stores and other spare parts.........................................................................57

4.5

Renewal and reconditioning costs....................................................................................57

4.6

Care and maintenance.................................................................................................... 58

4.7

Carbon taxes and trading schemes ................................................................................. 58

4.7.1

Accounting for ETS......................................................................................................... 58

4.8

Production disclosures.................................................................................................... 59

5

Consolidation............................................................................................................ 61

5.1

Overview........................................................................................................................ 62

5.2

Control........................................................................................................................... 62

6

Business combinations.............................................................................................. 63

6.1

Overview ....................................................................................................................... 64

6.2

Definition of a business .................................................................................................. 64

6.3

Identification of a business combination ..........................................................................67

6.4

Acquisition method .........................................................................................................67

6.4.1

Identifying the acquirer and determining the acquisition date..........................................67

6.4.2

Consideration transferred............................................................................................... 68

6.4.3

Contingent consideration................................................................................................ 68

6.4.4

Allocation of the cost of the combination to assets and liabilities acquired....................... 69

6.4.5

Undeveloped properties.................................................................................................. 69

6.4.6

Tax amortisation benefit................................................................................................. 69

6.4.7

Key questions.................................................................................................................. 69

Financial reporting in the mining industry

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