Accounting Update 7

Accountants & business advisers

IFRIC 20 - Stripping costs in the production phase of a surface mine

In October 2011, the International Financial Reporting Standards Interpretations Committee (IFRIC) published IFRIC 20: Stripping Costs in the Production Phase of a Surface Mine (IFRIC 20). IFRIC 20 is applicable for financial years commencing on or after 1 January 2013 with early adoption permitted. It is important to note that this interpretation deals only with stripping during the production phase of a mine and not the development phase.

There are two key benefits to an entity from stripping which are: Usable ore that can lead to inventory; and Improved access to material that will be mined in future periods. IFRIC 20 clarifies when production stripping costs should lead to the recognition of an asset and how that asset should be initially and subsequently measured. The consensus reached by the interpretation is too the extent that: the benefit from the stripping activity is realised in the form of inventory, the entity shall account for the costs of that stripping activity in accordance with the principles of International Accounting Standard 2: Inventories (IAS 2); and the benefit has improved access to ore, the entity shall recognise the costs of that stripping activity as a non-current asset (stripping activity asset), if the criteria below are met.

HIGHLIGHTS OF IFRIC 20
There has been some divergence in practice on how to treat stripping costs in the production phase of a mine. Stripping involves the process of removing mine waste materials (overburden) to gain access to mineral ore deposits. The divergence arises due to the complexity of deciding when stripping is performed purely to reach ore at lower levels or when the stripping produces material with sufficiently high grades of ore that it should be treated as inventory. The ratio of ore to waste can range from uneconomic low grade to profitable high grade.

An entity shall recognise a stripping activity asset if, and only if, all of the following are met. a)  If it is probable that the future economic benefit (improved access to the ore body) associated with the stripping activity will flow to the entity. b)  If the entity can identify the component of the ore body for which access has been improved. c) I f the costs relating to the stripping activity associated with that component can be measured reliably. The stripping activity asset is accounted for as an addition to the existing asset and therefore takes on the tangible/intangible asset classification of that existing asset. The stripping activity asset is measured at cost plus an allocation of directly attributable overhead costs. Subsequent to initial recognition, the stripping activity asset will normally be carried at cost or its cost less depreciation or amortisation and less impairment losses. The stripping activity asset must be depreciated or amortised on a systematic basis, over the expected useful life of the identified component of the ore body that becomes more accessible as a result of the stripping activity.

TRANSITION
On transition an entity shall: Not reinstate previously expensed stripping costs incurred prior to the beginning of the earliest period presented (i.e. start of comparative period); Reclassify any previous stripping asset in the balance sheet as a part of an existing asset to which the stripping activity related (i.e. following accounting rules in the interpretation for any preexisting stripping assets); and De-recognise any previously recognised stripping assets where there is no component of the ore body to which the asset relates (de-recognised in opening retained earnings at the beginning of the earliest period presented).

ACCOUNTING PUBLICATION
These accounting updates have been prepared by PKF International Ltd (PKFI) as a resource to help PKF member firms understand key accounting developments and how they may affect their clients. The Accounting Update is a periodic publication which incorporates key accounting developments which have arisen within that period.

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This specific Accounting Update has been contributed by PKF Australia. Should you have any questions regarding the content of this Accounting Update please contact:

Abdul Islam - Senior Technical Manager Email: abdul.islam@pkf.com Tel: +44 (0) 207 065 0418

IMPORTANT DISCLAIMER: This publication has been distributed on the express terms and understanding that the authors are not responsible for the results of any actions which are undertaken on the basis of the information which is contained within this publication, nor for any error in, or omission from, this publication. The publishers and the authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication. Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances. PKF International is a network of legally independent member firms administered by PKF International Limited (PKFI). Neither PKFI nor the member firms of the network generally accept any responsibility or liability for the actions or inactions on the part of any individual member firm or firms.

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12-1769i May 2012