Impact of IFRS: Mining ENERGY & NATURAL RESOURCES KPMG International

ENERGY & NATURAL RESOURCES
Impact of IFRS:
Mining
kpmg.com/ifrs
KPMG International
Contents
Overview of the IFRS conversion process
2
Accounting and reporting issues
Exploration and evaluation (E&E) expenditure
Development assets Impairment of non-financial assets
Mine closure and environmental provisions Joint arrangements Stripping costs
Reserves and resources reporting
Financial instruments
First-time adoption of IFRS
3
5
8
10
12
14
16
18
20
22
Information technology and systems considerations
From accounting gaps to information sources
How to identify the impact on information systems
Mining accounting differences and
respective system issues
24
24
25
Parallel reporting: Timing the changeover
from local GAAP to IFRS reporting
Harmonisation of internal and external reporting 28
30
People: Knowledge transfer and change management
31
Business and reporting 32
Stakeholder analysis and communications
32
Audit Committee and Board of Directors
considerations32
Monitoring peer group
32
Other areas of IFRS risk to mitigate
32
Benefits of IFRS
33
KPMG: An experienced team, a global network
34
Contact us
35
26
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Impact of IFRS: Mining 1
Foreword
Accounting for mining activities
presents many difficulties. Significant
upfront investment, uncertainty over
prospects and long project lives have
led to a variety of approaches being
developed by companies, and a range
of country-specific guidance for
the industry.
Many countries have required IFRS
reporting for some companies since
2005 and companies around the world
continue to adopt IFRS. Japan has
already permitted the early adoption
of IFRS by listed companies and is
expected to announce a final decision
on whether to mandate adoption later in
2012. The US is yet to announce its plan
as to how IFRS might be incorporated
into the financial reporting requirements
for US domestic issuers. This means
that there are many companies for
whom IFRS conversion issues are, or
will become, relevant.
As countries adopt a single set of high
quality, global accounting and financial
reporting standards there should
be greater global consistency and
transparency. However, it is recognised
that extractive activities is an area in
which there is little IFRS guidance. There
is also variation in practice between
companies applying IFRS, which was
highlighted in KPMG’s survey The
Application of IFRS: Mining published in
September 2009.
Jimmy Daboo
Global Energy & Natural Resources
Auditing and Accounting Leader
KPMG
This publication looks at some of the
main accounting issues across mining
companies. It considers currently
effective standards and notes future
developments that could impact
accounting in the sector.
The long-term future of accounting for
extractive activities is as yet unclear. The
IASB issued Discussion Paper Extractive
Activities in April 2010, and the main
proposals of the project team and the
responses to this discussion paper are
discussed in this publication. A decision
on whether the Extractive Activities
project should be added to the IASB’s
active agenda is expected when the
IASB considers responses to its Agenda
Consultation 2011.
This publication also discusses the IFRS
conversion project as a whole, including
the importance of the conversion
management process, and considers
the impact of IFRS conversion across
an organisation.
Any conversion project will be
significantly more detailed than merely
addressing the issues discussed in this
publication. However, making a start in
identifying the accounting and business
related issues on conversion can avoid
accounting challenges in years to come.
While the main audience of this
publication is those contemplating
IFRS conversion, we hope that there
is something stimulating and thoughtprovoking for all those dealing with IFRS
in the mining sector.
Wayne Jansen
Global Head of Mining
KPMG
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
2 Impact of IFRS: Mining
Overview of the IFRS conversion process
Addressing challenges and
opportunities of conversion for
all aspects of your business
All IFRS conversions have consistent
themes and milestones to them.
The key is to tailor the conversion
specifically to your own issues, your
internal policies and procedures, the
structure of your group reporting,
the engagement of your stakeholders
and the requirements of your corporate
governance. There may be similarities
between the issues faced by mining
companies. However, there always will
be differences in the corporate DNA that
makes one conversion project different
from the next.
The IFRS Conversion Management
Overview diagram below presents
a holistic approach to planning and
implementing an IFRS conversion
by helping ensure that all linkages
and dependencies are established
between accounting and reporting,
systems and processes, people and
the business. The conversion should
address proactively the challenges and
opportunities of adopting IFRS to all
aspects of your business. This includes,
for example, consideration of the impact
of IFRS transition on the regulatory
aspect of your operations, which may
vary depending on state, federal,
international, product, reporting and
competitive requirements.
Identify GAAP differences
Quantify differences
Identify information ‘gaps’ for
conversion
Identify IFRS disclosure requirements
Assess impact on internal
controls/processes
Select and adopt accounting
policies and procedures
Assess impact on legal entity
reporting
Tailor financial reporting templates
Identify current system
functionality/suitability, related
new information technology (IT)
system needs and period-end close
contingency plans
Revise and/or design and implement
templates for data gathering
Tailor chart of accounts considering
IFRS accounting needs
Develop communication plans for all
stakeholders including:
Regulator(s)
Audit Committee
Senior Management
Investors
External Auditors
Assess internal reporting and key
performance indicators
Develop and execute training plans:
IFRS technical topics
New accounting policies and
reporting procedures
Changes in processess and controls
Revise performance evaluation targets
and measures
Assess impact on general business
issues such as contractual terms,
treasury practices, risk management
practices, etc.
Communication plans
Consider impact on incentive
compensation programs
Focus on key functions that will
undergo change (e.g. prospect
evaluation group)
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Impact of IFRS: Mining 3
Accounting and reporting issues
Early identification of
differences is critical to a
successful conversion project
The first and fundamental area to tackle
is accounting and reporting. Getting a
timely and accurate assessment of the
impact of IFRS and ensuring the ‘gap
analysis’ is correct are critical steps to a
successful transition.
Based on KPMG firms’ experience of
IFRS conversions, we outline below
the main sector-specific accounting
issues for mining companies to consider
when converting to IFRS, and provide a
glimpse of the issues to be considered.
This is not meant to be a comprehensive
list, but instead seeks to discuss some
of the key areas in which specific
mining-related issues arise. Other areas
1 Exploration and evaluation (E&E) expenditure
6 Stripping costs
2 Development assets
7 Reserves and resources reporting
3 Impairment of non-financial assets
8 Financial instruments
4 Mine closure and environmental provisions
9 First-time adoption of IFRS
5
Joint arrangements
For example, the impact of different
depreciation and amortisation policies
may lead to adjustments in the asset
sub-ledger.
In our experience, these issues are
significant to mining companies for the
following reasons.
●●
●●
that may be relevant, such as defined
benefit pension scheme accounting,
share-based payments, presentation
of financial statements and business
combinations are discussed in a crossindustry context in some of our other
publications (see the back cover).
Issues may be pervasive across the
sector and will require significant time
and cost to evaluate and implement;
for example, accounting for E&E
expenditure and assets.
Conversion may have a significant
impact on information systems,
accounting processes and systems.
●●
●●
Accounting requirements may require
careful consideration of contract
terms, for example those terms
outlined in joint arrangements.
Judgement may be required in
selecting significant accounting
policies that impact future results.
●●
Accounting and reporting
requirements may be subject to
future change for which companies
need to be prepared.
We recommend KPMG’s publication
The Application of IFRS: Mining for
greater detail on the issues raised in this
publication, and examples of disclosures
from existing IFRS mining companies.
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
4 Impact of IFRS: Mining
Discussion
Paper
Extractive
Activities
IFRS 6 Exploration for
and Evaluation of Mineral
Resources was only
intended to be a temporary
measure. The future of
accounting for E&E expenditure
is not yet clear.
The International Accounting
Standards Board (IASB) issued
a discussion paper Extractive
Activities in April 2010. The
discussion paper outlined a
revised framework for accounting
for extractive activities. A decision
on whether the Extractive Activities
project should be added to the IASB’s
active agenda is expected when the
IASB considers responses to its Agenda
Consultation 2011.
If the IASB adds a project on extractive
activities to its active agenda, then it will take
the discussion paper and the 141 comment
letters received as the basis for its initial
deliberations.
The discussion paper and responses are
discussed throughout this section of the
publication. It is clear that there is currently
variation in accounting and opinions between
companies in the extractive industries, and the
discussion paper generated significant interest in
the mining sector. The responses to the discussion
paper highlight the range of opinions on the future of
accounting for mining operations under IFRS.
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Impact of IFRS: Mining 5
1
Exploration and evaluation (E&E) expenditure
IFRS provide flexibility for mining companies when selecting accounting policies for E&E
expenditure
The costs involved in E&E and
development activities are considerable,
and often there are years between
the start of exploration and the
commencement of production. Even
with today’s advanced technology,
exploration is a risky and complex
activity. These factors create specific
challenges in accounting for E&E
expenditure.
There was no IFRS that specifically
addressed E&E activities until IFRS 6
became effective in 2006. The standard
was intended to be temporary while
the IASB undertook an in-depth project
on extractive activities. With that in
mind, IFRS 6 was written with a view
to allowing companies to carry over to
IFRS their previous GAAP practices to a
large extent.
Traditionally under national GAAPs,
mining companies have accounted for
E&E costs in a variety of ways, including
the area of interest method. This
method is not defined in IFRS 6, and the
approaches taken to accounting for E&E
costs vary.
Capitalisation of E&E
expenditure
IFRS 6 relaxes asset recognition
requirements for E&E expenditure
Without the benefit of IFRS 6,
expenditure would not be recognised as
an asset unless it is probable that it will
give rise to future economic benefits.
This would mean that expenditure on
an exploration activity would likely be
expensed until the earlier of the time
at which:
●●
●●
the estimated fair value less costs
to sell of the exploration prospect is
positive; or
it is determined that proved and
probable reserves are present.
Applying this test, it might be rare
for expenditure other than licence
or property acquisition costs to be
capitalised prior to the determination
of reserves.
IFRS 6 relaxes this approach for E&E
assets, allowing capitalisation of
E&E costs by expenditure class if the
company elects that accounting policy.
In KPMG’s 2009 survey The Application
of IFRS: Mining, just under half of the
companies surveyed capitalised at least
some E&E expenditure, the remainder
expensing all E&E costs as incurred.
Definition of E&E expenditure
The stage of a project is important
in determining the accounting
standards to be applied
IFRS 6 applies only to E&E expenditure.
Outside of the scope of IFRS 6 the
usual IFRS accounting requirements
apply, including in respect of
impairment testing.
The standard provides a non-exhaustive
list of E&E expenditure that may
be capitalised, including the cost of
geological and geophysical studies,
the acquisition of rights to explore
and sampling.
The stage of projects needs to be
monitored to ensure accounting
policies are applied appropriately. IFRS
6 excludes pre-licence expenditure
from the scope of E&E costs, implying
that E&E activities commence on
acquisition of the legal rights to explore
an area. Also, IFRS 6 does not apply to
expenditure incurred after the technical
feasibility and commercial viability of
extracting the mineral resource are
demonstrable. Determining the point
at which this test is met can involve
considerable judgement and requires
close communication between finance
and technical specialists.
Classification and
subsequent measurement
Classification of expenditure forms
the basis of presentation and
subsequent measurement of assets
E&E assets are a separate class of
asset that is measured initially at cost.
E&E assets are classified as tangible or
intangible assets depending upon their
nature. Tangible E&E assets may include
the items of plant and equipment used
for exploration activity, such as vehicles
and drilling rigs. Intangible E&E assets
may include costs of exploration permits
and licences.
The accounting policy adopted for E&E
assets affects classification of the
related cash flows in the statement
of cash flows. When E&E expenditure
is expensed as incurred, the related
cash flows are classified as operating
activities, whereas cash flows that
result in the recognition of an asset are
classified as investing activities.
Tangible or intangible E&E assets
with a finite life are depreciated or
amortised over their useful economic
life. This starts only when an asset is
available for use. Certain E&E assets,
for example vehicles, may be available
for use immediately and so may be
amortised during the E&E phase. Other
E&E assets may not be available for
use until a mine is ready to commence
operations.
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
6 Impact of IFRS: Mining
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Impact of IFRS: Mining 7
Discussion Paper Extractive Activities
The discussion paper supported
a separate accounting model for
E&E costs in extractive industries.
The views of respondents varied
significantly on the approach that the
IASB should take, and on the asset
recognition model.
The project team’s proposals related to
E&E assets included the following.
●●
●●
●●
A single accounting approach
for both minerals and oil and gas
extractive activities.
Recognition of an asset upon
the acquisition of legal rights and
capitalisation of all subsequent
expenditure as part of that asset.
This would include expenditure that
may be expensed currently.
Three possible measurement bases
for assets arising from extractive
activities: historical cost, current
value and a mixture of historical cost
and current value. The project team
recommended historical cost as the
preferred measurement basis.
Single and separate approach for
mining and oil and gas activities
The project team proposed to limit the
scope of a future IFRS to extractive
activities for minerals, oil and
natural gas. A single accounting and
disclosure model was proposed.
The responses highlighted the broad
range of views on this subject.
Of respondents to the discussion
paper who addressed this question,
62% agreed with the single model
approach. Respondents who
stated that they didn’t believe that
a separate accounting standard is
required included some major mining
companies. Some respondents
supported a disclosure standard
that applies a single approach to
oil and gas and mining companies,
some commented that separate
standards should be developed
for each of mining and oil and gas,
and some supported including
extractive activities in a broader
project to reconsider intangible assets
accounting.
The case for a broader project on
intangible assets relates to the
question of whether extractive
activities are sufficiently different from
other industries to justify a separate
accounting model. For example, the
uncertainty and long project lives
inherent in E&E activities are similar
to issues in the technology and
pharmaceutical industries.
Asset recognition proposals
problematic
Most respondents expressed at
least some concern with the asset
recognition model proposed by the
project team. While the majority
(63%) agreed with the proposal to
recognise an asset when the legal
right is acquired, a significant majority
of respondents (88%) disagreed
with the project team’s view that
the subsequent E&E activity would
always represent an enhancement of
the asset.
Many of those respondents suggested
that the project team’s analysis of
the treatment of E&E assets was
inconsistent with the asset recognition
criteria and the IFRS conceptual
framework. This was on the basis that
the information obtained may not have
any future economic benefit due to
uncertainty in the exploration process.
the scope of a future project should
extend beyond extractive activities.
●●
Use existing accounting methods,
such as ‘successful efforts’
accounting (19%).
The range of responses and the
concerns raised underline the
difficulties in accounting for E&E
assets and the divergence of practice.
Measurement at historical cost
preferred
Almost all respondents agreed with
the proposal to measure assets at
historical cost because it is a measure
that is verifiable, can be prepared in
a timely manner and can be used to
assess financial performance and
stewardship. These respondents
explained that they did not support
fair value because it would introduce
excessive subjectivity and short-term
volatility to the financial statements.
It was also thought that the use of
fair value would impose significant
preparation and audit costs that are
not justified because users are not
interested in that information.
The research conducted by the
project team indicated that analysts,
lenders and venture capitalists
would make only limited use of a
single-point estimate of fair value
due to the subjectivity and degree of
estimation involved.
Respondents urged the IASB to
consider asset recognition further.
Respondents who disagreed with the
asset recognition model made the
following suggestions of alternative
approaches.
●●
Recognise a mining/oil and gas
property asset on the same
basis as other assets (e.g. in
accordance with IAS 38 Intangible
Assets, IAS 16 Property, Plant and
Equipment and/or the framework)
(42%). Respondents who supported
this approach to asset recognition
typically also recommended that
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
8 Impact of IFRS: Mining
2
Development assets
Mining companies are faced with the challenging tasks of establishing policies for
development expenditure, detailed asset tracking and component accounting
Beyond the E&E stage, there is no
IFRS that addresses specifically
development activities by mining
companies. An accounting policy is
developed under the hierarchy for the
selection of accounting policies under
IFRS. The mine development phase
generally begins after the completion
of a feasibility study and ends when
production begins. Significant
accounting issues include consideration
of which costs should be capitalised and
the determination of when development
ends and production begins. In
practice this is further complicated,
as development often continues once
production has begun.
Classification and
identification
Determining when development
begins and ends is a significant
accounting issue for mining
companies
Companies should re-evaluate the
tangible/intangible classification
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Impact of IFRS: Mining 9
of E&E assets upon transfer to
the development asset category.
Identifiable tangible assets that
cease to be classified as E&E assets
generally will be classified as tangible
development assets, e.g. a vehicle
that will also be used in production.
Identifiable intangible E&E assets,
for example a licence or permit, may
continue to be classified as an intangible
asset, or may be reclassified as a
tangible asset if the intangible asset is
considered to be integral to the tangible
development asset and the tangible
element of the asset is more significant.
A company capitalises the construction
cost of developing the infrastructure
necessary to extract the minerals and
the costs of the plant and equipment
used in transporting and processing the
product. These costs are capitalised in
accordance with IAS 16 Property, Plant
and Equipment. Capitalised costs may
include directly attributable staff costs
associated with the construction of the
assets and other direct overheads.
Determining when development ends
and production begins is a significant
accounting issue for mining companies.
Generally, apart from certain stripping
costs (see section 6), during the
production phase costs are no longer
capitalised and depreciation of
development assets starts.
In practice, development often
continues during the production phase
and a company capitalises development
costs in accordance with IAS 16 if it is
probable that future economic benefits
will flow to the company.
Component accounting
Significant judgement may be
required in determining components,
and systems need to be capable of
tracking components separately
Companies need to allocate the cost
of an item of property, plant and
equipment into its significant parts,
or ‘components’, and depreciate each
part separately. For each component
the appropriate depreciation
method, rate and period needs to be
considered. This process may involve
significant judgement.
An item of property, plant and
equipment should be separated into
components when those parts are
significant in relation to the total cost
of the item. This does not mean that a
company should split its assets into an
infinite number of components if the
effect on the financial statements would
be immaterial. IAS 16 allows companies
to group and depreciate components
within the same asset class together,
provided they have the same useful life
and depreciation method.
Companies need to consider the impact,
including on accounting systems, of
depreciating assets on a much more
detailed level when compared to
previous GAAP.
Depreciation
Companies need to choose the
most appropriate depreciation
method. Determining when an asset
is available for use is an important
judgement
Depreciation or amortisation starts
when an asset is available for use. It
may be that development assets are
determined as being available for use
when commercial levels of production
are capable of being achieved.
Determining when commercial levels
of production have been achieved is a
significant judgement by management.
estimates should be calculated
or approximated. Consequently,
practice varies as to how reserves
are incorporated into the calculation
of depreciation.
Discussion
Paper Extractive
Activities
The scope of the discussion
paper did not specifically
include depreciation
The discussion paper did not
propose to change the basis for
calculating depreciation, although
it highlighted some issues relating
to the application of the unit-ofproduction method. One issue is
whether such a method should
be based on revenues or physical
units. Another issue is whether
the unit-of-production method
should be based on proved
reserves, proved and probable
reserves or another unit basis.
The project team proposed that
these issues be addressed in any
future standard.
IFRS does not specify one particular
method of depreciation as preferable.
Mining companies have the option
to use the straight-line method, the
reducing balance method or the unit-ofproduction method, as long as it reflects
the pattern in which the economic
benefits associated with the asset
are consumed. The unit-of-production
method is most commonly used to
depreciate/amortise mining assets,
using a ratio that reflects the annual
production in proportion to the estimate
of reserves within that mine or area of
mine.
IFRS provides no specific guidance
on the reserves, or reserves and
resources, measurement to be
used in the calculation of unit-ofproduction depreciation, or on how
the assumptions within the reserve
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
10 Impact of IFRS: Mining
3
Impairment of non-financial assets
Impairment testing requirements are relaxed for E&E assets
E&E assets
E&E assets are exempt from certain
impairment testing requirements
IFRS 6 requires E&E assets to be
assessed for impairment in two
circumstances.
●●
●●
When facts and circumstances
suggest that the carrying amount
of an E&E asset may exceed its
recoverable amount.
When E&E activities have been
completed, i.e. when the commercial
viability and technical feasibility of
that asset have been determined
and prior to reclassification to
development assets.
The standard provides the following
examples of ‘trigger events’ that
indicate that an E&E asset should be
tested for impairment:
●●
●●
●●
●●
expiration of the right to explore;
substantive expenditure on further
exploration for and evaluation of
mineral resources in the specific
area is neither budgeted nor
planned;
commercially viable reserves have
not been discovered and the company
plans to discontinue activities in the
specific area; and
data exists to show that while
development activity will proceed,
the carrying amount of the E&E
asset will not be recovered in full
through such activity or by sale
of the project to which the E&E
asset relates.
This provides relief from the general
requirements of IFRS, which require
annual impairment testing for intangible
assets that are not yet available for
use, and annual consideration of more
extensive impairment indications for
other assets.
Impairment testing calculations
are performed in line with general
impairment requirements.
●●
Development and production
assets
Reporting date consideration of
impairment indicators
For non-current assets (other than
goodwill and E&E assets) IAS 36
Impairment of Assets requires
companies to assess at the end of
each reporting period whether there
are any indicators that an asset is
impaired. If there is such an indication,
then the recoverable amount needs to
be assessed.
An impairment loss is recognised for
any excess of carrying amount over
recoverable amount. If the recoverable
amount cannot be determined for the
individual asset, because the asset
does not generate independent cash
inflows separate from those of other
assets, then the impairment loss is
recognised and measured based on
the cash-generating unit to which the
asset belongs.
Cash-generating units (CGUs)
A CGU is the smallest group of
assets that generates cash inflows
from continuing use that are largely
independent of the cash inflows from
other assets or groups of assets of the
mining company.
In our experience, many companies in
the mining sector base the identification
of CGUs on licence or permit areas. For
some companies that operate a number
of areas that have shared infrastructure,
the identification of CGUs can be
more complex.
Indicators of impairment
Some examples of indicators of
impairment are outlined below.
Market value has declined
significantly or the company has
operating or cash losses. For
example, a significant downward
movement in commodity prices may
result in operating cash losses and
represent a trigger for impairment.
●●
Technological obsolescence.
●●
Competition.
●●
●●
●●
●●
Market capitalisation. For example,
the carrying amount of the mining
company’s net assets exceeds its
market capitalisation. This may be
a particular risk for companies with
significant E&E assets.
Significant regulatory changes. For
example, renewed regulation of
environmental rehabilitation processes.
Physical damage to the asset. For
example, damage to a mine shaft
caused by collapse or flooding.
Significant adverse effect on the
company that will change the way
the asset is used/expected to be
used. For example, re-nationalisation
by some governments may lead
to some projects being diluted to
accommodate a government interest.
Goodwill
Impairment testing at least annually
Under IFRS, companies are required to
test goodwill (and intangible assets with
indefinite useful lives) for impairment
at least annually, irrespective of
whether indicators of impairment
exist. Additional testing at interim
reporting dates is required if impairment
indicators are present. Goodwill by
itself does not generate cash inflows
independently of other assets or groups
of assets and therefore is not tested
for impairment separately. Instead, it
should be allocated to the acquirer’s
CGUs that are expected to benefit
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Impact of IFRS: Mining 11
Discussion Paper Extractive Activities
Exemption from applying IAS 36 to E&E assets
The project team proposed that IAS 36 should not be applied to E&E
assets. The basis for this proposal was a view that it is not possible to
make a reliable judgement of whether the carrying amount is less than
the recoverable amount until sufficient information is available.
Under the proposed approach, E&E assets would be tested
for impairment when management determines that there is a
high likelihood that the carrying amount of the asset will not
be recovered.
Of respondents who commented on impairment, most (73%)
opposed the proposals. Some respondents suggested that
the IASB include a review of IAS 36 in any future project to
alleviate difficulties in applying IAS 36 to E&E assets. The
potential of the proposed approach to delay recognition
of any impairment loss and the reliance on management
judgement were noted by some respondents.
Some respondents remarked that if the IAS 36
impairment test approach is not considered to work for
E&E assets, then this may imply that the project team
has proposed the wrong asset recognition model.
from the synergies of the related
business combination.
Goodwill is allocated to a CGU that
represents the lowest level within
the company at which the goodwill is
monitored for internal management
purposes. The CGU cannot be larger
than an operating segment as defined
in IFRS 8 Operating Segments, before
aggregation. An impairment loss
is recognised and measured at the
amount by which the CGU’s carrying
amount, including goodwill, exceeds its
recoverable amount.
Impairment reversals
Reversal of impairment losses
restricted
Impairment losses related to goodwill
cannot be reversed. However, for other
assets companies assess whether
there is an indication that a previously
recognised impairment loss has
reversed. If there is such an indication,
then impairment losses are reversed,
subject to certain restrictions.
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12 Impact of IFRS: Mining
4
Mine closure and environmental provisions
IFRS may result in earlier recognition of provisions than previous GAAP
Mining companies often are exposed
to legal, contractual and constructive
obligations to meet the costs of
mine closure at the end of the mine’s
economic life and to restore the
site. These costs are likely to be a
significant item of expenditure for most
mining companies.
Timing of recognition
A present obligation that is more
likely than not
Mine closure and environmental
provisions are covered by IAS 37
Provisions, Contingent Liabilities and
Contingent Assets. Recognition of a
provision is required when there is
a present obligation and an outflow
of resources is probable. Probable is
defined as more likely than not.
A present obligation can be legal or
constructive in nature. For mining
companies often there are legal or
regulatory obligations to restore a
mine site and to provide ongoing
maintenance of closed mines. A
constructive obligation may arise from
published policies about clean-up or
from past practices.
The obligation to restore the
environment or dismantle an asset is
provided for in full at the time of the
environmental disturbance. This may
result in the recognition of additional
amounts or earlier recognition of such
amounts in IFRS financial statements
compared to previous GAAP.
When the provision arises on
initial recognition of an asset, the
corresponding debit is treated as part
of the cost of the related asset and is
not recognised immediately in profit
or loss. Changes in the estimate of the
provision generally are adjusted against
the carrying amount of the asset.
Measurement
Judgement is required to arrive at the
‘best estimate’
The provision is measured at the best
estimate of costs to be incurred. This
takes the time value of money into
account, if material. The best estimate
typically will be based on the single
most likely cost of mine closure and
takes uncertainties into account in
either the cash flows or the discount
rate used in measuring the provision.
The discount rate should reflect the risks
specific to the liability, and the process
of doing this often is complex and
involves a high degree of judgement.
There are many complexities
in calculating an estimate of
the expenditure to be incurred.
Technological advances may reduce
the ultimate cost of mine closure and
may also affect the timing by extending
the existing expected recoveries from
the ore body. The estimate needs to be
updated at each reporting date.
Future developments
The IASB is reviewing accounting for
provisions
In 2005 the IASB began reviewing
the accounting for provisions and an
exposure draft was issued, which
proposed changes to both the timing
of recognition and the measurement
of provisions. In 2010 the IASB issued
a limited re-exposure of the 2005
proposals, which included a focus
on the measurement of provisions
involving services. The project currently
is inactive, and the IASB will decide
whether or how to progress the
project when it considers responses
to its Agenda Consultation 2011. This
project, if finalised in its proposed
form, will be of particular relevance
to the calculation of mine closure and
rehabilitation provisions.
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Impact of IFRS: Mining 13
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14 Impact of IFRS: Mining
5
Joint arrangements
The term joint venture is a widely used operational term. However, not all of these
arrangements are joint ventures for accounting purposes. A new standard could
significantly impact the financial statements
Determining whether an
arrangement is a joint
arrangement
Companies need to review their
arrangements to determine whether
they should be accounted for as a
joint arrangement
Joint arrangements are a common way
for mining companies to share the risks
and costs of exploration and production
activities, and come in a variety of
forms. Within the sector, the term
joint venture is used widely as an allencompassing operational expression to
describe shared working arrangements.
However, under IFRS there are strict
criteria that must be met in order
for joint arrangement accounting to
be applied.
For an arrangement to be a joint
arrangement for accounting
purposes there must be a contractual
arrangement that gives joint control.
Joint control is not determined by
economic interest. Control is based
on the contractual arrangements
and exists when decisions about
the relevant activities require the
unanimous consent of more than one
party to the arrangement. Companies
need to review their arrangements to
determine whether joint control exists.
When the company does not have joint
control, the arrangement likely will
be accounted for as an investment,
subsidiary or associate if it is operated
through a company.
Accounting for joint ventures
prior to adoption of IFRS 11
Accounting for joint
arrangements from 2013
Accounting is based on whether
there is a separate legal entity. An
accounting policy choice is available
for jointly controlled entities
Accounting for joint arrangements
(currently referred to as joint ventures)
before the adoption of IFRS 11 Joint
Arrangements is governed by IAS 31
Interests in Joint Ventures. There are
three classifications of joint venture
under IAS 31: jointly controlled entity,
jointly controlled asset and jointly
controlled operation.
A new standard issued in 2011
significantly impacts the accounting
for joint arrangements
The IASB issued IFRS 11 in May 2011.
The standard is effective for periods
beginning on or after 1 January 2013,
with early adoption permitted subject to
some conditions.
Jointly controlled entities
A jointly controlled entity is a joint
arrangement that is carried out through
a separate legal entity. Currently there is
an accounting policy choice that applies
when accounting for jointly controlled
entities. A venturer accounts for its
interest using either proportionate
consolidation or the equity method. In
KPMG’s 2009 survey The Application
of IFRS: Mining, just over half of the
companies applied proportionate
consolidation, with the remainder using
the equity method.
Jointly controlled assets and jointly
controlled operations
Jointly controlled assets and jointly
controlled operations are joint ventures
that are not separate legal entities.
Venturers in jointly controlled assets and
jointly controlled operations recognise
the assets and liabilities, or share of
assets and liabilities, that they control,
as well as the costs incurred and income
received in relation to that arrangement.
There are two classifications of joint
arrangements under IFRS 11: joint
ventures and joint operations. The
definitions of these IFRS 11 categories
differ from the categories in IAS 31.
The classification of arrangements
under IFRS 11 is more judgemental
and the terms of arrangements and
the nature of any related agreements
need to be considered to determine the
classification of the arrangement for
accounting purposes.
Joint venture
A joint venture is a joint arrangement
in which the jointly controlling parties
have rights to the net assets of the
arrangement. Joint ventures include
only arrangements that are structured
through a separate vehicle (such as a
separate company). However, not all
joint arrangements that are companies
will necessarily be joint ventures.
The nature and terms of arrangements
need to be reviewed to determine
the appropriate classification of the
arrangement. The legal form of the
arrangement is only one factor to be
considered. When the contractual
arrangements and other facts and
circumstances indicate that the
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Impact of IFRS: Mining 15
joint venturers have rights to assets
and obligations for liabilities of the
arrangement, the arrangement will
be a joint operation rather than a
joint venture.
cannot undertake its own trade, and
can only trade with the parties to the
joint arrangement. Related agreements
and other facts and circumstances also
need to be considered.
A joint venturer will account for its
interest in the joint venture using the
equity method in accordance with
IAS 28 (2011) Investments in Associates
and Joint Ventures.
A joint operator recognises its own
assets, liabilities and transactions,
including its share of those
incurred jointly.
Joint operation
A joint operation is an arrangement
in which the jointly controlling parties
have rights to assets and obligations for
liabilities relating to the arrangement.
An arrangement that is not structured
through a separate vehicle will be a joint
operation; however, other arrangements
may also fall into this classification
depending on the rights and obligations
of the parties to the arrangement.
One circumstance that could indicate
that an arrangement structured through
a separate legal entity is a joint operation
is if the arrangement is designed so
that the jointly controlled company
Discussion Paper
Extractive Activities
Joint arrangements were not in the scope of
the discussion paper
In commenting on the proposed scope of any
future project by the IASB, some respondents
requested that the IASB consider other
issues that were not specifically covered in
the discussion paper.
These included risk-sharing agreements
such as farm-in/farm-outs and production
sharing agreements. Some respondents
indicated that they consider addressing
these, and other additional areas, to
be a high priority in the absence of
specific guidance in IFRS.
These comments underline the
importance, and accounting
complexities, of risk-sharing
arrangements in the extractive
industries.
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16 Impact of IFRS: Mining
6
Stripping costs
Some of the costs of waste and overburden removal are recognised as assets, if certain
criteria are met. Judgement is required to allocate costs appropriately and to determine the
basis for capitalisation
Overburden and waste removal
activities are an essential part of surface
mining operations. There was no IFRS
guidance that addressed specifically
these stripping activities until the issue
of IFRIC 20 Stripping Costs in the
Production Phase of a Surface Mine in
October 2011.
IFRIC 20 deals with production phase
stripping in surface mining operations.
For some mines a significant accounting
issue can be the determination of
whether costs are development or
production stripping costs. Determining
when production has commenced
is complex, and development may
continue once production has begun.
Pre-production stripping
costs
Generally capitalised
There is no specific IFRS guidance on
accounting for development phase
stripping costs. Therefore, a company
develops an accounting policy under the
hierarchy for the selection of accounting
policies under IFRS. The removal of
waste materials to access mineral
deposits is referred to as pre-production
stripping. During the development of
a mine (before production begins),
pre-production stripping costs generally
are capitalised and amortised over the
productive life of the mine using the
unit-of-production method. These costs
may be capitalised when it is probable
that future economic benefits will flow
to the company.
Production stripping costs
A new interpretation applicable from
2013
IFRIC 20 is applicable for annual periods
starting on or after 1 January 2013.
Early adoption is permitted, and as the
interpretation applies to costs incurred
on or after the earliest period presented,
we expect that companies in the
process of converting to IFRS will early
adopt this interpretation.
Capitalisation of production stripping
costs required if certain criteria are
met
There are two benefits of production
stripping activity:
●●
●●
inventory produced; and
improved access to ore for future
production.
To the extent that benefits are realised
in the form of inventory produced,
the related costs are accounted for in
accordance with IAS 2 Inventories.
stripping activity asset. The life of the
component determines the period of
depreciation; it will differ from the life
of the mine unless the stripping activity
improves access to the whole of the
remaining ore body. The identification
of the component is likely to require
significant judgement.
Allocation of costs between
inventory and the stripping activity
asset
When the costs of the stripping
activity asset vs inventory produced
are not separately identifiable, costs
are allocated between the two based
on a relevant production method. An
example may be actual vs expected
volume of waste extracted for a
given volume of ore.
Production stripping costs that improve
access to ore to be mined in the future
are recognised as a non-current asset (a
‘stripping activity asset’) if, and only if, all
of the following criteria are met:
●●
●●
●●
it is probable that the future economic
benefit will flow to the company;
the company can identify the
component of the ore body to which
access has been improved; and
the costs related to the stripping
activity associated with that
component can be measured reliably.
The stripping activity asset is accounted
for as part of an existing asset to which
it relates. Therefore, its classification
as property, plant and equipment or
as an intangible asset depends on the
classification of the existing asset.
Identification of the component of
the ore body is key to the accounting
As well as being a condition for
capitalisation, identification of a
component of the ore body also is
important for the calculation of the
depreciation/amortisation of the
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Impact of IFRS: Mining 17
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
18 Impact of IFRS: Mining
7
Reserves and resources reporting
There is no specific IFRS reporting requirement for reserves, although many mining
companies include a commentary in the accounting policies or critical estimates and
judgements notes, or elsewhere in the annual report
Mining reserve estimates are critical
information in the evaluation of mining
companies, and reserves disclosure
is an important component of annual
reports in the sector. The purpose of
reserves reporting is to make available
information about mining reserves and
resources controlled by companies
in the sector. This is vital in assessing
their current performance and future
prospects. Despite their importance
to both the company and the financial
statements, there are no explicit
requirements for the disclosure of
reserves information in IFRS.
meaningful comparison between
companies would be difficult without indepth analysis of the many assumptions
inherent in the core disclosures.
●●
Impact of reserves estimates
on financial statement
balances
While the reporting of reserves data
is important in its own right, reserves
measures are also used in deriving a
number of accounting estimates.
●●
Disclosures
In the absence of specific guidance,
mining companies tend to refer to other
requirements, such as securities laws
and listed company rules in the US,
Canada, Australia and the UK. The nature
of reserves estimates is such that, even
if all companies provided disclosure
based on a single classification,
the mine closure and environmental
rehabilitation provisions.
●●
In our experience, depreciation and
amortisation calculations usually
are based on the unit-of-production
method and the volume of reserves
(and sometimes resources) used in
the calculation affects the calculation
of the associated depreciation charge.
Reserves and resources estimates
are a key factor in determining the
economic life of a mine project and
therefore impact on the calculation of
●●
●●
Impairment calculations include
assumptions for reserves and
resources. Downward revisions in
reserves and resources estimates
often represent an indicator
of impairment.
Reserves and resources are a key input
to fair value calculations in accounting
for a business combination.
Assumptions about future profit
potential based on reserves and
resources estimates may be a key
basis for the recognition of deferred
tax assets arising from unused
tax losses.
Because of the impact of reserves and
resources information in the financial
statements, mining companies typically
include some information about
reserves and resources in the annual
report.
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Impact of IFRS: Mining 19
Discussion Paper Extractive Activities
Significant disclosure requirements
proposed
The project team’s proposals relating
to reserves reporting included the
following.
●●
Use of mineral and resource
definitions established by the
Committee for Mineral Reserves
International Reporting Standards
(the CRIRSCO Template).
The discussion paper noted that
the CRIRSCO Template forms the
basis of market regulator disclosure
requirements in most jurisdictions
that have formalised reserve
disclosure requirements, excluding
in the US.
●●
Significant disclosure requirements
relating to reserves and resources,
including:
– quantities of proved reserves and
proved plus probable reserves,
with reserve quantities presented
separately by commodity and by
material geographical area;
– the main assumptions used in
estimating reserve quantities,
and a sensitivity analysis; and
– a current value measurement of
reserves by major geographical
region if historical cost is used to
measure E&E assets.
Reserves definition – respondents’
views
Most respondents agreed with
recommendations that industry-based
definitions of reserves and resources
be used in any future IFRS to set
disclosures and complement the
accounting requirements. Half (51% of
those who responded to this question)
also agreed with the use of the
CRIRSCO Template. Concerns raised
related to the approach for incorporating
the definition into any future IFRS.
Of those who disagreed with the
use of the CRIRSCO Template,
38% proposed the development of
principles-based definitions. Other
respondents proposed alternative
definitions such as those applied
by the US Securities and Exchange
Commission.
Concern also was raised over the
project team’s proposal that reserves
estimates should be prepared using
a market participant’s assumption of
commodity price. Respondents who
commented expressed a preference
for a historical price assumption to
remove subjectivity.
Disclosure proposals – respondents’
views
While a majority (63%) of respondents
generally agreed with the disclosure
objectives, almost all respondents
expressed significant concern
about the level of granularity of the
disclosures proposed. Concern
also was raised over whether the
disclosure of reserves quantities
should be subject to audit.
Some of the proposed disclosures differ
from those currently required by some
market regulators. Also, additional
information may be required in the
future if such disclosures are mandated.
Therefore, this area is likely to require
significant management focus as
practice and requirements develop.
The importance of reserves
reporting and the lack of current
guidance led some respondents to
support development of disclosure
requirements separately, and more
urgently, than accounting requirements.
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
20 Impact of IFRS: Mining
8
Financial instruments
The conversion process needs to include a review of the existence, classification and
measurement of financial instruments. Future changes in the accounting for these
instruments are expected
Accounting for financial instruments
under IFRS can be complex, and the
accounting and disclosure requirements
may be significantly different from
previous GAAP. Therefore, a thorough
review of the existence, classification
and measurement of financial
instruments is an important part of any
IFRS conversion process.
This publication does not deal with
the details of financial instruments
accounting, which are extensive. This
section focuses on accounting for
derivative instruments, and contracts to
buy and sell non-financial items, which
are of particular relevance to many
companies in the mining sector.
Current and future
accounting requirements
Currently the recognition and
measurement requirements for financial
instruments are covered by IAS 39
Financial Instruments: Recognition
and Measurement. The IASB has an
ongoing project to improve accounting
for financial instruments and has issued
the first chapters of IFRS 9 Financial
Instruments, which will supersede the
requirements of IAS 39 and is effective
from 1 January 2015. IFRS 9 includes
different measurement categories for
financial assets. The IASB continues
to work on elements of the financial
instruments project, most notably
hedging and impairment.
Derivatives
Mining companies face significant
commodity price risk, as well as foreign
exchange and interest rate exposures.
Derivatives are used frequently in the
mining sector to manage these risks
and provide more certainty over the
future cash flows.
Derivatives generally are measured at
fair value, with changes in those values
recognised in profit or loss. This can lead
to volatility in the financial statements
as the fair value of derivatives changes
in response to changes in commodity
prices or interest rates, for example.
proposing significant changes to the
current hedge accounting requirements.
For example, the proposals would
change the process for assessing hedge
effectiveness and expand the range of
instruments that can be designated as
hedging instruments.
Embedded derivatives
Own use exemption
Certain types of mining contracts
also commonly contain embedded
derivatives that may need to be
accounted for separately. For example,
sales agreements commonly provide for
provisional pricing of sales at the time
of shipment, with the final price being
linked to an underlying price index, such
as the price of the commodity on the
London Metal Exchange. The pricing
element of the sales contract may meet
the criteria for an embedded derivative
in some circumstances.
Contracts to buy or sell non-financial
items, for example sales of gold,
may be within the scope of IAS 39.
However, contracts for physical receipt
or delivery of a non-financial item
in accordance with the company’s
expected purchase, sale or usage
requirements generally are excluded
from the scope of the financial
instruments standards. Contracts that
qualify for this ‘own use exemption’ are
accounted for as executory contracts.
The requirements and applicability
of the own use exemption should be
considered carefully.
Hedge accounting
While the term ‘hedging’ is a generic
term to describe the management
of risks, ‘hedge accounting’ refers
to hedge relationships that meet the
criteria for, and are accounted for as,
hedges in accordance with IAS 39.
Not all hedge transactions will be
accounted for as accounting hedges.
Hedge accounting is voluntary and the
decision to apply hedge accounting is
made on a transaction-by-transaction
basis. Hedge accounting for derivatives
mitigates income statement volatility
by either adjustment to the hedged
item or recognition of gains or losses
on derivatives directly in equity,
but is permitted only when strict
documentation and effectiveness
requirements are met.
This exemption is particularly useful
for mining companies as contracts
for future sales of minerals may
otherwise require recognition in
the financial statements.
9
As part of its project to replace IAS 39,
the IASB issued Exposure Draft
Hedge Accounting in December 2010
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Impact of IFRS: Mining 21
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22 Impact of IFRS: Mining
9
First-time adoption of IFRS
A number of exemptions from retrospective application of IFRS are available
Without any specific reliefs, a company
converting to IFRS would have to
recreate its accounting history as if
currently-effective IFRS had always
been applied. That process would clearly
be difficult, time consuming and in
some cases impracticable.
The requirements for the first-time
adoption of IFRS are covered by IFRS 1
First-time Adoption of International
Financial Reporting Standards. That
standard aims to ensure that the first
set of IFRS financial statements provide
a suitable starting point for subsequent
accounting under IFRS, without the
costs of transition exceeding the
benefits. IFRS 1 includes a number
of exemptions, some mandatory and
some optional, which will need to be
considered in planning conversion.
Some of the main areas for
consideration for mining companies on
conversion are discussed in this section.
For a more detailed discussion of the
requirements on first-time adoption, we
recommend that you refer to KPMG’s
publication IFRS Handbook: First-time
adoption of IFRS.
Deemed cost exemption
for property, plant and
equipment
To determine the carrying amount of
assets in the opening IFRS balance
sheet, the cost of each item needs to
be recalculated at the date of initial
recognition and rolled forward to the
date of transition. When the relevant
information has not been collected
previously, the process of collation and
estimation of this information could be
costly. There is an optional exemption in
IFRS 1 that allows companies to avoid
full retrospective restatement of the
cost of property, plant and equipment.
This ‘deemed cost exemption’ allows
a first-time adopter to measure an
item of property, plant and equipment
at the date of transition based on a
measurement of fair value or revalued
amount. A previous GAAP revaluation
can be used as deemed cost if it is
broadly comparable to either fair
value or IFRS. The option to measure
at fair value is available as long as it
can be measured reliably at the date
of transition.
For mine properties and E&E assets
classified as property, plant and
equipment, the measurement of fair
value may be complex and may require
technical input to relate the fair value
calculation to the relevant reserves and
resources. However, this is a very useful
exemption to consider for all assets, as
this option can be taken for individual
items of property, plant and equipment,
and need not be applied to all items in
a class. Revaluing items of property,
plant and equipment at deemed cost
on transition is likely to increase the
carrying amount of these assets
and increase depreciation charges in
future years.
A similar exemption for intangible
assets exists, but is only available when
there is an active market for the asset.
Borrowing costs
Borrowing costs that are directly
attributable to the acquisition or
construction of a ‘qualifying asset’
form part of the cost of that asset
under IAS 23 Borrowing Costs. A
qualifying asset is one that necessarily
takes a substantial period of time to
be made ready for its intended use.
Mine property assets are likely to meet
this definition.
IFRS 1 gives first-time adopters
the option of applying IAS 23 only
to qualifying assets for which the
commencement date of capitalisation is
on or after:
●●
the later of 1 January 2009 and the
date of transition; or
●●
an earlier date chosen by the
company.
Mine closure and
environmental provisions
An optional exemption gives relief from
the fully retrospective calculation of
provisions to restore the environment
and dismantle assets (see section 4).
Without the benefit of this exemption,
a first-time adopter would be required
to recalculate retrospectively the effect
of each change to the provision that
occurred prior to the date of transition,
along with the related impact on
depreciation.
If the exemption is taken, then the
amount of the provision capitalised in
property, plant and equipment in the
opening balance sheet is calculated by
applying the following steps.
●●
●●
●●
Calculate the provision at the date of
transition, discounted using a current
market-based discount rate.
Discount that provision back to the
date that the obligation first arose
using an estimate of the historic riskadjusted discount rate.
Depreciate the resulting present
value from the date that the obligation
first arose to the date of transition.
Stripping costs
A first-time adopter can elect to
account for production stripping costs
in a surface mine (see section 6) under
IFRIC 20 prospectively from the start
of the earliest period presented. In
this case, any existing assets related
to production stripping activity will be
written off to retained earnings if there
is no related remaining identifiable
component of the ore body. Any
other existing stripping assets will be
reclassified as part of an existing asset
to which the stripping relates, and will
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Impact of IFRS: Mining 23
be depreciated over the remaining life of
the identified component.
Financial instruments
There are a number of specific provisions
and optional exemptions relating to
financial instruments. The provisions of
IFRS 1 should be considered in detail
as part of the process of assessing
the impact of financial instruments
accounting under IFRS on the financial
statements. In particular, in order to
apply hedge accounting from the date
of transition, the requirements of IFRS
will require careful consideration and
planning well in advance of the date of
transition. IFRS 1 prohibits retrospective
designation of derivatives and other
instruments as hedges. Hedging
relationships will need to be assessed
and documented in accordance with
IFRS requirements before the date
of transition in order to apply hedge
accounting from that date.
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24 Impact of IFRS: Mining
Information technology and systems considerations
A major effect of converting to IFRS will
be the increased burden throughout
the mining organisation of capturing,
analysing and reporting new data to
comply with IFRS requirements. Making
strategic and tactical decisions relating
to information systems and supporting
processes early in the project helps limit
unnecessary costs and risks arising
from possible duplication of effort or
changes in approach at a later stage.
Much depends on factors such as:
●●
●●
the type of enterprise system and
whether the vendor offers IFRS
specific solutions;
whether the system has been kept
current, as older versions first may
need updating; and
●●
the level of customisation, as the
more customised the system,
the more effort and planning the
conversion process will likely take.
From accounting gaps to
information sources
The foundation of the project, as
described earlier, is to understand
the local GAAP to IFRS accounting
differences and the effects of those
differences. That initial analysis needs
to be followed by determining the effect
of those accounting gaps on internal
information systems and internal
controls. What mining companies need
to determine is which systems will need
to change and translate accounting
differences into technical system
specifications.
One of the difficulties that mining
companies may face in creating
technical specifications is to understand
the detailed end-to-end flow of
information from the source systems,
such as mine operational sub-ledgers,
to the general ledger and further
to the consolidation and reporting
systems. The simplified diagram below
outlines a process that organisations
can adopt to identify the impact on
information systems.
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Impact of IFRS: Mining 25
How to identify the impact on information systems
There are many ways in which information systems may be affected, from the initiation of transactions through to the
generation of financial reports. The following table shows some areas in which information systems change might be required
under IFRS depending upon facts and circumstances.
Change
Action
New data requirements
New accounting disclosure and recognition requirements
may result in more detailed information, new types of data
and new fields; and information may need to be calculated
on a different basis.
Modify:
• general ledger and other reporting systems to capture
new or changed data
• work procedure documents.
Changes to the chart of accounts
There will almost always be a change to the chart of
accounts due to reclassifications and additional reporting
criteria.
Reconfiguration of existing systems
Existing systems may have built-in capabilities for specific
IFRS changes, particularly the larger enterprise resource
planning (ERP) systems and high-end general ledger
packages.
Modifications to existing systems
New reports and calculations are required to
accommodate IFRS.
Spreadsheets and models used by management as an
integral part of the financial reporting process should
be included when considering the required systems
modifications.
New systems interface and mapping changes
When previous financial reporting standards did not
require the use of a system or when the existing system
is inadequate for IFRS reporting, it may be necessary to
implement new software.
When introducing new source systems and
decommissioning old systems, interfaces may need to
be changed or developed and there may be changes to
existing mapping tables to the financial system. When
separate reporting tools are used to generate the financial
statements, mapping these tools will require updating to
reflect changes in the chart of accounts.
Create new accounts and delete accounts that are no longer
required.
Reconfigure existing software to enable accounting under
IFRS (and parallel local GAAP, if required).
Make amendments such as:
• new or changed calculations
• new or changed reports
• new models.
Implement software in the form of a new software
development project or select a package solution.
Interfaces may be affected by:
• modifications made to existing systems
• the need to collect new data
• the timing and frequency of data transfer requirements.
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
26 Impact of IFRS: Mining
Change
Action
Consolidation of entities
Under IFRS, there is the potential for changes to the
number and type of entities that need to be included in
the group consolidated financial statements. For example,
the application of the concept of ‘control’ may be different
under IFRS (based on IFRS 10 Consolidated Financial
Statements from periods beginning on/after 1 January
2013) and previous GAAP.
Reporting packages
Reporting packages may need to be modified to:
• gather additional disclosures in the information from sites
or subsidiaries operating on a standard general ledger
package; or
• collect information from subsidiaries that use different
financial accounting packages.
Financial reporting tools
Reporting tools can be used to:
• perform the consolidation and prepare the financial
statements based on data transferred from the general
ledger; or
• prepare only the financial statements based on the
receipt of consolidated information from the general
ledger.
Update consolidation systems and models to account for
changes in consolidated entities.
Modify reporting packages and the accounting systems
used by subsidiaries and branches to provide financial
information. Also communicate new requirements to
operators of joint arrangements.
Modify:
• reporting tools used by subsidiaries and sites to provide
financial information
• mappings and interfaces from the general ledger
• consolidation systems based on additional requirements
such as segment reporting.
Mining accounting differences and respective system issues
The following table outlines some of the accounting differences that we have noted earlier, together with potential system
impacts.
Accounting differences
Potential systems and process impact
E&E and development
costs
• Interaction between technical E&E processes and accounting systems to clearly identify
milestones such as licence acquisition and determination of commercial reserves.
• Impact on master data settings to reflect changes in E&E capitalisation policies.
• Impact on general capitalisation process and system settings based on differences in
eligible costs for capitalisation (e.g. unsuccessful exploration, seismic, pre-feasibility costs).
• Impact on master data settings and structure based on the component approach to
depreciation.
• Allocation of assets to cash-generating units and depreciation units of account.
Mine closure and
environmental
provisions
• Impact on the interface with E&E and development assets to reflect work progress and
changes in estimates as extraction occurs.
• Accounting systems need to identify discount rates specific to each liability and this may
lead to changes in the sub-ledger as well as the general ledger.
Joint arrangements
• Clear identification of accounting differences between information provided by joint
arrangement operators and IFRS principles will be required and could lead to changes in
reporting packages and sub-ledgers used.
• Additional system interfaces may be required to adjust for accounting policy differences for
the compilation of consolidated financial statements.
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Impact of IFRS: Mining 27
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
28 Impact of IFRS: Mining
Stripping costs
• Impact on posting specifications of the fixed assets sub-system to include production
stripping activity assets as part of an existing asset.
• Impact on master data settings and structure based on differences in the components
approach to deferred stripping.
• Impact on processes for calculating asset additions.
• Interaction with mine management systems to track the component of the ore body.
• Allocation of stripping activity assets to cash-generating units and establishment of
depreciation policies.
Parallel reporting: Timing the changeover from local GAAP to IFRS reporting
Conversion from local GAAP to IFRS will require parallel accounting for a certain period of time. At a minimum, this will happen
for one year as local GAAP continues to be reported, but IFRS comparatives are prepared prior to the go-live date of IFRS.
Parallel reporting may be created either in real-time collection of information through the accounting source systems to the
general ledger or through ‘top-side’ adjustments posted as an overlay to the local GAAP reporting system.
The manner and timing of processing information for the comparative periods in real time or through top-side adjustments will
be based on a number of considerations.
Parallel accounting option in
comparative year
Effect
Considerations
Parallel accounting through top-side
adjustments
• No real-time adjustments to
systems and processes will be
required for comparative period.
• Local GAAP reporting will flow
through sub-systems to the general
ledger, i.e. business as usual.
• Comparative periods will need to be
recast in accordance with IFRS, but
can be achieved off-line.
• Migration of local GAAP to IFRS
happens on first day of the year in
which IFRS reporting commences.
• Less risky for ongoing local
GAAP reporting requirements in
comparative year.
• Available for all, but more typical
when there is a lower volume of
transactions to consider.
• More applicable to small/less
complex organisations or when few
changes are required.
Real-time parallel accounting
• Consideration needed for ’leading
ledger’ in comparative year being
local GAAP or IFRS, i.e. which GAAP
will management use to run the
business.
• If leading ledger is IFRS in
comparative year, then conversion
back to local standards will be
necessary for the usual reporting
timetable and requirements.
• Changes to systems and
information may continue to be
needed in the comparative year if
the IFRS accounting options have
not been fully established.
• Migration to IFRS ledgers needed
prior to first day of the year in which
IFRS reporting commences.
• Real-time reporting of two GAAPs in
the comparative year has benefits,
but puts more stress on the
finance team.
• Typically used when tracking two
sets of numbers for large volume
of transactions and will make
systemisation of comparative
year essential.
• More applicable for large/complex
organisations with many changes.
• Strict control on system changes
will need to be maintained over this
phased changeover process.
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Impact of IFRS: Mining 29
Most major ERP systems (e.g. SAP®, Oracle®, Peoplesoft®) are able to handle parallel accounting in their accounting systems.
The two common solutions implemented are the Account solution or the Ledger solution.
Depending on the release of the respective ERP systems, one or both options are available for the general ledger solution.
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
30 Impact of IFRS: Mining
Harmonisation of internal and external
reporting
Mining companies should consider the impact of IFRS
changes on data warehouses and relevant aspects of internal
reporting. In many companies, internal reporting is performed
on a basis similar to external reporting, using the same
data and systems, which therefore will need to change to
align with IFRS. One key difference that may remain after
transitioning to IFRS is the reporting in line with joint venture
agreements.
The following diagram represents the possible internal
reporting areas that may be affected by changing systems to
accommodate the new IFRS reporting requirements.
The process of aligning internal and external reporting
typically will involve the following.
●●
●●
●●
When mappings have changed from the source systems to
the general ledger, mappings to the management reporting
systems and the data warehouses also should be changed.
When data has been extracted from the source systems
and manipulated by models to create IFRS adjustments
that are processed manually through the general ledger, the
impact of these adjustments on internal reporting should be
considered carefully.
Alterations to calculations and the addition of new data
in source systems as well as new timing of data feeds
could have an effect on key ratios and percentages in
internal reports, which may need to be redeveloped to
accommodate them.
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Impact of IFRS: Mining 31
People: Knowledge transfer and change management
When your company reports for the first time under IFRS, the preparation of those financial statements
will require IFRS knowledge to have been successfully transferred to the financial reporting team.
Timely and effective knowledge transfer is an essential part of a successful and efficient IFRS
conversion project.
The impact on a company’s people
during and after an IFRS conversion
ranges from an accounts payable clerk
coding invoices differently under IFRS to
Audit Committee approval of disclosures
for IFRS reporting. There is a broad
spectrum of people-related issues, all
of which require an estimation of the
changes that are needed under the IFRS
reporting regime.
The success of the conversion project
will depend on the people involved.
There needs to be an emphasis on
communications, engagement, training,
support, and senior sponsorship, all of
which are part of change management.
Training should not be underestimated
and companies often do not fully
appreciate levels of investment and
resource involved in training. Although
most conversions are driven by a central
team, you ultimately need to ensure
the conversion project is not dependent
on key individuals and is sustainable
into the long term across the whole
organisation. Distinguishing between
different audiences and the nature of
the content is key to successful training.
The following are some useful matters
to consider.
●●
●●
●●
Training tends to be more successful
when tailored to the specific needs of
the company. Few companies claim
significant benefit from external nontailored training courses.
Geographically disparate companies
are considering web-based training as
a cost- and time-efficient method of
disseminating knowledge.
More complex areas such as
accounting for exploration
expenditure or mine closure
provisions tend to be best conveyed
through ‘workshop’ training
approaches in which company
specific issues can be tackled.
●●
●●
Many companies manage their
training through a series of site visits;
typically partnerships of one member
of the core central team along with
a second technical expert, often an
external advisor.
Some companies use training as
an opportunity to share their data
collection process for group reporting
at the same time.
Even with the best planning and
training possible, it is critical that an
appropriate support structure is in place
so that the business units implement
the desired conversion plans properly.
IFRS knowledge only really becomes
embedded in the business when the
stakeholders have the opportunity to
actually prepare and work with real
data on an IFRS basis. We recommend
building dry runs into the conversion
process at key milestones to test
the level of understanding among
finance staff.
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
32 Impact of IFRS: Mining
Business and reporting
One of the challenges of IFRS convergence stems from the number of stakeholders that have a
vested interest in the financial performance of the company. Your project will have to deal with a
large number of internal and external stakeholders so as to manage one fundamental issue – the
operational performance stays the same but the ’scoreboard‘ of the financial statements gives a
different result under IFRS.
The measurement of operational
performance cuts across all parts
of an organisation and affects the
internal business drivers and external
perceptions of the company. The
assessment of who those affected
groups are, and when the appropriate
time for communications will be,
is a key component of an IFRS
conversion project.
Stakeholder analysis and
communications
A thorough review of the internal and
external stakeholders is an essential
first step. Certain less obvious internal
stakeholder groups may be engaged
only in the conversion process at a late
stage, but the awareness of when to
engage those groups is necessary.
For example, most mining companies
have union representatives who will
need to be involved for changes to
compensation schemes if, for example,
bonuses are based on earnings per
share measures that will alter under
IFRS. However, there is little point
engaging in detailed accounting
discussions with the unions or human
resource (HR) groups early on in the
conversion process.
In a similar context, other external
stakeholders should be properly
identified and communicated with
throughout the IFRS conversion.
Examples include groups such as
tax authorities, regulators, industry
analysts and the financial media. Every
identified group needs to be factored
into the timing of when and how to
present changes in operational reporting
because of IFRS. Furthermore, for
internal stakeholders, project related
deliverables need to be incorporated
into the IFRS project’s objectives to help
ensure their successful achievement.
A common failure of conversion projects
is the lack of a communications strategy
through which companies ensure all key
stakeholder groups are fully informed
of the project’s progress. At a minimum
this includes the quarterly and annual
disclosures in the financial reports,
but may need a much broader ranging
communications strategy.
Audit Committee and Board
of Directors considerations
The Audit Committee and Board of
Directors should be actively informed
and included in the process so that
they are appropriately engaged in the
conversion process and do not become
a bottleneck for certain key decisions.
All IFRS conversions should ensure that
Board and Audit Committee meetings
are acknowledged on the project
plan as these meetings can drive key
deliverables and provide incentive for
timely delivery.
Other senior management groups
also need to have tailored and periodic
training to suit their knowledge
requirements so as to not overwhelm
them with accounting theory on IFRS.
Clearly there is a balance to be struck
between the accounting understanding
required and the responsibilities of the
group undergoing the training.
Monitoring peer group
The mining community often uses
industry benchmarks and peer group
comparisons. As such, most mining
companies in a given geography will
want to know what their peers are doing
as it relates to IFRS and what choices
and options are being taken by others.
Investors and analysts may also want to
be able to look across mining companies
and be aware of the differences, so as
to factor those differences into their
various buy/sell/hold recommendations.
Management will need to assess its
mining peer group, but the manner
in which this is achieved may vary
depending on the working relationship
with its peers. Past practice has
seen mining sector groups form that
informally share updates on accounting
interpretations, practical issues and
choices being made throughout the
IFRS conversion project, as well as more
formal discussions occurring through
the facilitation of mining industry
bodies. Additionally, as many mining
companies have been reporting under
IFRS for a number of years, publications
that analyse the results of those
companies may also be of use.
Other areas of IFRS risk to
mitigate
A quality IFRS conversion enables an
accounting process involving change
management and complexity to be as
risk-free as possible. It is essential that
the company does not miss deadlines,
or issue reports that include errors.
As such, the stakes are high when
it comes to IFRS conversions and
mining companies are no different
in this regard. There are a number
of areas to consider, but two main
ones relate to the use of the external
auditor and the internal control
certification requirements.
The close co-operation and use of
the company’s auditors should be an
integral part of the IFRS governance
process of the project. There needs
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Impact of IFRS: Mining 33
to be explicit acknowledgement on the
part of the company for frequent auditor
involvement. Clear expectations should
be set around all key deliverables,
including timely IFRS technical partner
involvement. The Audit Committee
also needs to ensure the external
audit teams have reviewed changes
to accounting policies alongside the
approval by Audit Committee.
Proper planning for new and enhanced
internal controls and certification
process as part of your IFRS conversion
should be considered. Assessment of
internal control design for accounting
policy management as well as financial
close processes are integral and
companies need to be aware of the
impact of any manual work-arounds
used. Documentation of new policies,
procedures and the underlying internal
controls will all need to be reflected as
part of the IFRS process.
Benefits of IFRS
While the majority of this publication
has focused on the micro-based risks
and issues associated with IFRS and
IFRS conversions, senior management
should not lose sight of the macrobased benefits to IFRS conversion. IFRS
may offer more global transparency and
ease access to foreign capital markets
and investments, and that may help
facilitate cross-border acquisitions,
ventures and spin-offs. For example,
and as a final thought, by converting to
IFRS, mining companies should be able
to present their financial reports to a
wider capital community. If this lowers
the lending rate to that company by,
say, a quarter of a percentage point for
the annuity of the instrument, then the
benefits are clearly measurable despite
the short-term pain of the finance group
through the IFRS conversion process.
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
34 Impact of IFRS: Mining
KPMG: An experienced team, a global network
KPMG’s Energy & Natural
Resources practice
KPMG’s Global Energy and Natural
Resources (ENR) practice offers
customised, industry-tailored Audit, Tax
and Advisory services that can lead to
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for your most pressing business
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KPMG’s Global ENR practice is
dedicated to supporting all organisations
operating in the Mining, Oil & Gas, and
Power & Utilities industries globally
in understanding industry trends and
business issues. Our professionals,
working in member firms around the
world, offer skills, insights and knowledge
based on substantial experience working
with ENR organisations to understand
the issues and help deliver the services
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KPMG’s Global ENR practice, through
its global network of highly qualified
professionals in the Americas, Europe,
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For more information, visit kpmg.com
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KPMG member firms’ mining clients
operate in many countries and have
a diverse range of needs. In each of
these countries, we have local practices
that understand the mining industry’s
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It is this local knowledge, supported and
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Your conversion to IFRS
As a global network of member firms
with experience in more than 1,500
IFRS convergence projects around
the world, we can help ensure that
the issues are identified early, and can
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many pitfalls of such projects. KPMG
firms have extensive experience and
the capabilities needed to support
you through your IFRS assessment
and conversion process. Our global
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© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Impact of IFRS: Mining 35
Contact us
Global contacts
Country contacts
Global Chairman, Energy and
Natural Resources (ENR)
Australia
China
Helen Cook
T: +61 8 9263 7342
E: [email protected]
Melvin Guen
T: +86 1085087019
E: [email protected]
Brazil
India
Andre Castello Branco
T: +55 (21) 3515 9468
E: [email protected]
Hiranyava Bhadra
T: +91 22 3983 6000
E: [email protected]
Canada
South Africa
Lee Hodgkinson
T: +1 416 777 3414
E: [email protected]
Ian Kramer
T: +27 11 647 6646
E: [email protected]
CIS
United Kingdom
Lydia Petrashova
T: +74959372975 x 12640
E: [email protected]
Richard Sharman
T: +44 20 73118228
E: [email protected]
Chile
United States
Benedicto Vasquez
T: +56 2 798 1206
E: [email protected]
Roy Hinkamper
T: +1 314 244 4061
E: [email protected]
Michiel Soeting
T: +44 20 7694 3052
E: [email protected]
Global Head of Audit, ENR
Jimmy Daboo
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E: [email protected]
Global Head of Audit, Mining
Lee Hodgkinson
T: +1 416 777 3414
E: [email protected]
Global Head of Mining
Wayne Jansen
T: +27 11 647 7201
E: [email protected]
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Other KPMG publications
We have a range of IFRS publications that can assist you further, including:
●●
The Application of IFRS: Mining
●●
First Impressions: Production stripping costs
●●
New on the Horizon: Extractive Activities
●●
Insights into IFRS
●●
IFRS compared to US GAAP
●●
IFRS Handbook: First-time adoption of IFRS
●●
New on the Horizon publications that discuss consultation papers
●●
First Impressions publications that discuss new pronouncements
●●
Illustrative financial statements for annual and interim periods
●●
Disclosure checklist.
Acknowledgements
We would like to acknowledge the authors and reviewers of this publication, including:
Pamela Taylor
KPMG International Standards Group (part of KPMG IFRG Limited)
Daniel Camilleri
KPMG in Italy
Riaan Davel
KPMG in South Africa
Lee Hodgkinson
KPMG in Canada
Anthony Jones
KPMG in Australia
Lise Meyer
KPMG in South Africa
Nicole Perry
KPMG in Australia
Chris Sargent
KPMG in Australia
kpmg.com/ifrs
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Printed in the UK
Publication name: Impact of IFRS: Mining
Publication number: 314693
Publication date: January 2012