Companies in many countries around the world - including the EU, Australia and South Africa - now have to prepare their accounts in accordance with International Financial Reporting Standards (IFRS). And the list of countries in which IFRS is mandatory is set to increase. This presents challenges for companies across all industries - but gives rise to some particular difficulties for those in the mining sector.
First, there is a broad range of mining-specific issues for which IFRS contains little or no guidance. The IASB has set up an “extractive activities” group to work on filling this gap in the literature, but no pronouncements are likely to be operational until 2008 at the earliest. In the meantime, mining companies implementing IFRS still have to make decisions about the accounting policies they will apply to post-production stripping costs, low grade stockpiles and provisional pricing arrangements, for example. Moreover, there is no guidance within IFRS on how mining companies should determine their reserves for accounting purposes, or when it is appropriate to take account of resources.
Second, there are a number of standards – dealing with topics such as inventory and revenue recognition – for which mineral products have specifically been scoped out. In some cases, the reasons for these exclusions are unclear and in practice it is uncertain whether mining companies will be able to use them.
Third, there is a long list of topics for which the guidance within IFRS is difficult to apply to the mining industry. Examples include:
- the determination of functional currency;
- the treatment of commissioning costs when new mines are entering production;
- the application of impairment rules, particularly in periods of unusually high or low commodity prices and exchange rates;
- the estimation of asset retirement obligations;
- the valuation of mineral properties in business combinations and the identification of goodwill;
- the treatment of joint ventures, such as tolling arrangements;
- the treatment of commodity price hedging programmes, including the determination of whether they qualify as a hedge; and
- the identification of embedded derivatives.
For mining companies with a US listing, life is even more complicated. The SEC has taken a close interest in how US GAAP is applied by mining companies in recent years, and it seems likely that it will also scrutinise carefully the IFRS policies they adopt. And there is also the requirement that any mining companies which are forced to correct their IFRS figures will be faced with disclosing a “material weakness” under Section 404 of the Sarbanes-Oxley Act.
PricewaterhouseCoopers' talent
PricewaterhouseCoopers teams around the world have worked with an impressive list of mining clients in implementing IFRS, and have considerable experience in helping mining companies to deal with the challenges described above.
To combine our collective experiences, and promote consistency across our clients, we have established a Mining IFRS Group comprising mining specialists from some of the key territories in which IFRS is currently being adopted or already applies – including the UK, Australia, South Africa and Indonesia. The Group has developed mining-specific solutions for a wide range of accounting issues and plays a key role in resolving new issues that emerge amongst our mining clients.
