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.
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.
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 to 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.
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) If 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.
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 pre-existing 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).
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