Accounting update: upcoming changes, with a focus on production phase stripping costs

Transcription

1 Accounting update: upcoming changes, with a focus on production phase stripping costs 11 Anthony Hodge Technical Advisor

2 Agenda Relevant new standards/interpretations for 2013 (PSAK) ISAK 29 - Stripping costs in the production phase of a surface mine Other new standards to be aware of (not mining focused) Slide 2

3 Lessons learned from adoption in other territories Prior practices must be revisited The impact could be significant if you currently use a general capitalisation ratio to defer costs or if all stripping activity is expensed Asset lives will generally be shorter Record keeping No one size fits all response Each ore body is unique, and different mining approaches are followed for different commodity types Involvement of non-finance personnel is critical Transition Old balances must be assessed Not a fully retrospective approach or opportunity to reinstate old costs Slide 3

4 Scope Includes Production phase stripping costs Surface mining activity Excludes Pre-production stripping costs Underground mining activity Oil sands Whether oil sands extraction is surface mining - not addressed Entities in oil sands extraction using processes similar to surface mining to assess carefully whether included in scope Development phase vs. production phase No guidance on differentiating development from production phase Can be complex requiring significant judgement especially where portions of large mines are accessed in stages Slide 4

5 Recognition of stripping costs as an asset Benefit from stripping activity Accounting 1. Current production of ore inventory In accordance with PSAK 14 Inventories 2. Improved future access to ore As a stripping activity asset if: Probable future economic benefits Can be identified to a specific component for which access improved Costs can be measured reliably Stripping activity asset is part of an existing asset. Classification as tangible or intangible depends on classification of the existing asset. Identifying components is a complex process involving significant management judgement consider discrete phases in the mine plan, annual production plans, push back campaigns, etc Slide 5

6 Component identification example open pit Component of the ore body refers to a specific volume of the ore body made more accessible as a result of the stripping activity. Slide 6

7 Component identification example open pit Key questions this pit design should raise: how should I treat A and B within cut back 1? are zones A, C and E part of development or production stripping? how should I treat zones D and F? what is my identifiable component? what if I have multiple pits at my mine? Do I need to consider each cut back? how would this differ if we were to consider shallower strip mining? Slide 7

8 Initial measurement Stripping activity asset is measured at cost - includes directly incurred costs and allocation of directly attributable overheads (but not borrowing costs) Principles of PSAK 16 / 19 followed while determining the costs that can be capitalised Can costs be separately identified for inventory and stripping activity asset? Yes No Record both assets at respective costs Allocate costs based on a relevant production measure Allocation of costs cannot be based on a sales measure Some relevant production measures are: Cost of inventory produced vs. expected cost; Volume of waste extracted vs. expected volume; and Mineral content of the ore extracted vs. expected mineral content Slide 8

9 Worked example Allocation of costs Entity X had the following cost and extraction information for an identified component of its gold mine: Direct costs incurred for the stripping activity USD 10,550,000 Directly attributable overhead costs USD 3,450,000 Total USD 14,000,000 Ore extracted in the current year Waste extracted in the current year Total Expected ore to be extracted from component Expected waste to be extracted from component Total How should X allocate the costs incurred between the inventory produced and the stripping activity asset? 765 tonnes 5,980 tonnes 6,745 tonnes 4,590 tonnes 28,750 tonnes 33,340 tonnes Slide 9

10 Worked example Allocation of costs Step 1: Can X identify the costs separately for each of the benefits? Let us say X has determined that it cannot separately determine the costs because inventory and stripping activity asset are produced simultaneously. Step 2: Determine a production measure that can be used to allocate costs X has determined that they will allocate costs based on the volume of waste extracted compared with expected volume, for a given volume of ore production. A different production-measure based allocation of costs can be used. If the mineral content fluctuates significantly or cost of production is a more reliable measure, those basis can be chosen to allocate costs if it gives the most relevant and reliable information Slide 10

11 Worked example Allocation of costs Step 3: Determine the additional waste extracted compared to expected volume of waste for the actual volume of ore extracted Expected waste per unit of ore produced Expected vol. of waste for actual vol. of ore produced =765*6.26 = 4,792 Actual volume of waste extracted = 5,980 Expected vol. of ore to be extracted Expected vol. of waste to be extracted = 28,750/4,590 = 6.26 Additional waste extracted = 5,980 4,792 = 1,188 Slide 11

12 Worked example Allocation of costs Step 4: Work out the ratio for allocating costs to the stripping activity asset Ratio = Additional volume of waste extracted = 1,188 (Actual volume of waste + ore extracted) (5, ) = 17.62% The ratios at Step 3 and 4 above have to be computed for a specific component of the ore body and not the mine as a whole. Step 5: Compute the amount to be allocated to inventory and the stripping activity asset Allocation to stripping activity asset = 14,000,000*17.62% = 2,466,800 Allocation to inventory = 14,000,000 2,466,800 = 11,533,200 Slide 12

13 Subsequent measurement of stripping activity asset Measured consistently with existing asset of which it is a part At cost or revaluation less depreciation/amortisation and impairment Depreciated/amortised over expected useful life of identified component of ore body generally UOP basis Expected useful life of a component is shorter than that of mine itself Consider updates to mine plans and reserves Impairment determined as per PSAK 16/19. Tested for impairment as part of the relevant CGU and not on standalone basis, but consider inpit events Slide 13

14 Transition and effective date Effective date: Annual periods beginning on or after January 1, 2014, but early adoption is allowed Apply to stripping costs incurred on or after beginning of earliest period presented. If early adopted, this means January 1, 2012 Opening balances to be linked to components of ore for which access was improved If no such ore remains / can be identified, write off against opening retained earnings Consider deferred tax implications from adjustment to opening balances as well Slide 14

15 Practical challenges Determining the component of the ore body Bulk commodities vs. base metals Multiple pits = multiple components? Multiple cut-backs in one pit = multiple components? Not just an accounting discussion Discuss with mining staff and finance staff to understand approach and how the company assesses its components Better understanding of LOM plans needed to navigate this standard Slide 15

16 Practical challenges Recently acquired mines and legacy balances Details and documentation of legacy stripping assets acquired Differing views on component identification may result with new management Slide 16

17 ISAK 29 Stripping costs 1 systems Impact on processes and Thinking ahead Review processes used to gather underlying data Implementation may be expensive given increased involvement of management and data gathering exercise Slide 17

18 ISAK 29 Stripping costs Thinking ahead 2 Impact on financial statements and key financial ratios Potential change in accounting policy and timing of expense recognition Existing asset balances that cannot be attributed to an identifiable component of the ore body will need to be written off to retained earnings Slide 18

19 Other new standards High level summary PSAKs (applicable 2013) Revision of PSAK 38 Business combinations for entities under common control. Narrows scope to stop standard being used for broader related party transactions and provides guidance on how to deal with differences between transfer price and carrying value of assets. Revision to PSAK 60 Financial instrument disclosures. Primarily reduction in disclosure on certain aspects of financial assets. Withdrawal of PSAK 51, Bapepam-LK regulations Accounting for quasi-reorganisation. Accounting standard withdrawn due to inconsistency with other standards, and regulator has put in place thresholds for which listed companies can apply the regulation. Slide 19

20 Other new standards High level summary ISAKs (applicable 2014, but early adoption allowed) ISAK 27 Transfer of assets from customers. How to account for assets transferred from a customer in return for connection to a network or ongoing access to goods or services. (Not mining focused). ISAK 28 Extinguishing financial liabilities with equity instruments. How to treat debt to equity swaps with unrelated third party creditors. May result if clients are having difficulty negotiating finance. Slide 20

21 Thank you. DISCLAIMER: This presentation is for general information purposes only, and must not be used as a substitute for consultation with professional advisors. Indonesia is comprised of KAP Tanudiredja, Wibisana & Rekan, PT PricewaterhouseCoopers Indonesia Advisory, and PT Prima Wahana Caraka, each of which is a separate legal entity and all of which together constitute the Indonesian member firm of the PricewaterhouseCoopers global network, which is collectively referred to as PricewaterhouseCoopers Indonesia KAP Tanudiredja, Wibisana & Rekan. All rights reserved. refers to the Indonesia member firm, and may sometimes refer to the network. Each member firm is a separate legal entity. Please see for further details.