Comments from ACCA to the International Accounting Standards Board, 30 November 2010.
ACCA is pleased to have this opportunity to comment on the draft interpretation (DI) on the above subject, which was considered by ACCA's Financial Reporting Committee.
We acknowledge that there is diversity in practice in relation to the treatment of stripping costs in the production phase of surface mines. However, and similar to the concerns we raised with the earlier exposure draft on extractive activities, we believe that the justification for why existing IFRS cannot be used for such activities has not been made adequately. We therefore do not support the proposals in the DI, and see no reason why such stripping costs could not be appropriately accounted for by applying the model in IAS16.
Specific questions raised in the ED
Question 1 - Definition of a stripping campaign
The proposed Interpretation defines a stripping campaign as a systematic process undertaken to gain access to a specific section of the ore body, which is a more aggressive process than routine waste clearing activities. The stripping campaign is planned in advance and forms part of the mine plan. It will have a defined start date and it will end when the entity has completed the waste removal activity necessary to access the ore to which the campaign is associated.
Do you agree that the proposed definition satisfactorily distinguishes between a stripping campaign and routine waste clearing activities? If not, why?
We would support any additional guidance which brings greater consistency and comparability to the accounting for production phase costs. However we have concerns about the lack of clarity in the definition which in turn may hinder any consistency in treatment.
In particular, we are concerned that the DI does not appear to provide a clear distinction between pre-production (stripping campaign) and production (routine waste) costs. While the illustrative example with a single pit, is quite clear-cut, it may be more difficult to distinguish if there are multi-pit mines, where the costs could represent a stripping campaign for any single pit, but not for the mine as a whole. Similarly there could be issues where there is a large single pit, and the initial pre-production activity provides access only to part of the ore, which will be accessed over a number of phases/periods.
It may therefore be more appropriate for the distinction to be made between those stripping costs that provide access to part of the ore which will be extracted (routine stripping) and those that relate to future extraction.
Question 2 - Allocation to the specific section of the ore body
The proposed Interpretation specifies that the accumulated costs recognised as a stripping campaign component shall be depreciated or amortised in a rational and systematic manner, over the specific section of the ore body that becomes directly accessible as a result of the stripping campaign. The units of production method is applied unless another method is more appropriate.
(a) Do you agree with the proposal to require the stripping campaign component to be depreciated or amortised over the specific section of the ore body that becomes accessible as a result of the stripping campaign? If not, why?
(b) Do you agree with the proposal to require the units of production method for depreciation or amortisation unless another method is more appropriate? If not, why not?
In our response to the IASB's exposure draft on Extractive Activities, dated 30 July 2010 we noted that the case had not been adequately made for a specific, revised model for such activities. Similarly, we are not aware of any reasons why the principles within IAS16 (where mineral rights are scoped out) could not be applied for stripping costs in the production phase of surface mines. Sound guidance on its application would ensure that any existing divergence in practice would be effectively diminished.
As noted in our response to Question 1, we have concerns that the DI has to some extent over-simplified the reality of surface mining, especially in relation to defining related costs for a stripping campaign. Therefore, while we support a unit of production method for depreciating the stripping campaign, we do not believe it is appropriate to amortise these costs only over the useful life of the specific part of the ore. Again, not only would this lead to confusion for multi-pit mines, but we believe that in principle the future economic benefits accrued would likely be from the entire ore body. We would therefore prefer a more principles based approach, allowing entities to apply a level of judgement in terms of what is a ‘systematic manner' for depreciation, taking into account both current and future exploration, as is practically the case.
We also note that Paragraph 19 of the DI, appears to suggest a component-level impairment test as opposed to doing so at the cash generating unit level, under IAS36. The DI does not provide a rationale justification for this apparent inconsistency.
Question 3 - Disclosures
The proposed Interpretation will require the stripping campaign component to be accounted for as an addition to, or an enhancement of, an existing asset. The stripping campaign component will therefore be required to comply with the disclosure requirements of that existing asset.
Is the requirement to provide disclosures required for the existing asset sufficient? If not, why not, and what additional specific disclosures do you propose and why?
As we believe that the measurement and recognition requirements of IAS16 are applicable for such costs, we see no reason why the disclosure requirements in that standard should not also apply. We would prefer the stripping campaign to be included as part of the overall existing asset, but agree that were such costs to be material, enhanced disclosure would provide decision-useful information.
Question 4 - Transition
Entities would be required to apply the proposed Interpretation to production stripping costs incurred on or after the beginning of the earliest comparative period.
(a) Do you agree that this requirement is appropriate? If not, what do you propose and why?
The proposed Interpretation requires any existing stripping campaign component to be recognised in profit or loss, unless the component can be directly associated with an identifiable section of the ore body. The proposed Interpretation also requires any stripping cost liability balances to be recognised in profit or loss on transition.
(b) Do you agree with the proposed treatment of existing stripping cost balances? If not, what do you propose and why?
We agree that it would be most practicable were the requirements in the DI to be applied to production stripping costs incurred on or after the beginning of the earliest comparative period.