International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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Example 39.10:
Unitisation ........................................................................................... 3345
Example 39.11:
Reserves contributed in an unitisation ........................................... 3347
Example 39.12:
Redetermination (1) ........................................................................... 3349
Example 39.13:
Redetermination (2) ........................................................................... 3351
Example 39.14:
Allocating costs between inventory and the stripping
activity asset ........................................................................................ 3355
Example 39.15:
Exclusion of capitalised costs relating to undeveloped
reserves ................................................................................................. 3367
Example 39.16:
Physical units of production method ............................................. 3372
Example 39.17:
Identifying lease payments – inclement weather ....................... 3384
Example 39.18:
Identifying lease payments – major maintenance ...................... 3384
Example 39.19:
Petroleum revenue tax ..................................................................... 3389
Example 39.20:
Grossing up of notional quantities withheld ................................ 3390
Example 39.21:
Acquisition of an entity that owns mineral reserves .................. 3392
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Chapter 39
Extractive industries
1
INTRODUCTION AND BACKGROUND
1.1
Defining extractive industries
‘Extractive industries’ were defined in the IASC’s Issues Paper – Extractive Industries
(IASC issues paper) published in November 2000 as ‘those industries involved in finding
and removing wasting natural resources located in or near the earth’s crust’.1 However,
this chapter adopts a slightly narrower focus and concentrates on the accounting issues
that affect mining companies and oil and gas companies. The IASC issues paper was
prepared by the IASC as part of its original project on ‘extractive industries’ which was
led by an IASC Steering Committee on Extractive Industries. This paper considered a
broad range of issues including reserves and resources estimation, historical and
valuation based concepts of measurement of resources related assets, treatment of
removal and restoration costs, impairment, revenue, inventories and arrangements to
share risks and costs. While it was non-authoritative this paper is referred to throughout
this chapter where relevant as it provided a broad range of information on the common
practices observed in the extractive industries and the common terms used.
IFRSs currently use the term ‘minerals’ and ‘mineral assets’ when referring to the
extractive industries as a whole. This is used as a collective term to include both mining
and oil and gas reserves and resources. In contrast, a distinction between the two
industries was introduced in the Extractive Activities DP (discussed below at 1.3), where
the term ‘minerals’ has been used to refer to the mining sector and the term ‘oil and gas’
has been used to refer to the oil and gas sector.
For the purposes of this chapter, consistency with the current wording in IFRSs will be
maintained and therefore, unless stated otherwise, ‘minerals’ and ‘mineral assets’ will
encompass both mining and oil and gas.
Historically the IASB and its predecessor, the IASC, have avoided dealing with
specific accounting issues in the extractive industries by excluding minerals and
mineral products/reserves from the scope of their accounting standards. Currently,
minerals and mineral products/reserves are excluded at least in part from the scope
of the following standards:
• IAS 2 – Inventories; [IAS 2.3(a), 4]
• IAS 16 – Property, Plant and Equipment; [IAS 16.3(d)]
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• IAS 17 – Leases, [IAS 17.2(a)]
• IFRS 16 – Leases, [IFRS 16.3(a)]
• IAS 38 – Intangible Assets, [IAS 38.2(c)]
• IAS 40 – Investment Property, [IAS 40.4(b)] and
• IFRIC 4 – Determining whether an Arrangement contains a Lease. [IFRIC 4.4].
While these standards exclude ‘minerals’ from their scope, the exact wording of the
scope exclusions differs between standards – see 3.1.1 below for more information. In
addition, although minerals and mineral products/reserves themselves are excluded
from the scope of many standards, assets used for the exploration, development and
extraction of minerals are covered by existing IFRSs.
Many of the financial reporting issues that affect entities that operate in the extractive
industries are a result of the environment in which they operate. Specific accounting
issues arise because of the uncertainties involved in mineral exploration and extraction,
the wide range of risk sharing arrangements, and government involvement in the form
of mandatory participations and special tax regimes. At the same time, however, some
of the business arrangements that are aimed at mitigating certain risks give rise to
financial reporting complications. The financial reports of these entities need to reflect
the risks and rewards to which they are exposed. In many cases, there are legitimate
differences of opinion about how an entity should account for these matters.
The IASC’s Issues Paper identified the following characteristics of activities in the
extractive industries, which are closely related to the financial reporting issues that are
discussed in this chapter:
• High risks – In the extractive industries there is a high risk that the amounts spent in
finding new mineral resources will not result in additional commercially recoverable
reserves. In financial reporting terms this means that it can remain uncertain for a long
period whether or not certain expenditures give rise to an asset. Further risks exist in
relation to production (i.e. quantities actually produced may differ considerably from
those previously estimated) and price (i.e. commodity prices are often volatile).
• Little relationship between risks and rewards – In the extractive industries a small
expenditure may result in finding mineral deposits with a value of many times the
amount of the expenditure. Conversely, large expenditures can frequently result
in little or no future production. This has given rise to different approaches in
financial reporting that can be broadly categorised as follows: (1) expense all
expenditures as the future benefits are too uncertain, (2) capitalise some or all
expenditures as the cumulative expenditures may be matched to the cumulative
benefits, or (3) recognise the minerals asset found at fair value.
• Long lag between expenditure and production – Exploration and/or development
may take years to complete. During this period it is often far from certain that
economic benefits will be derived from the costs incurred.
• High costs of individual projects – The costs of individual projects can be very high
(e.g. offshore oil and gas proje
cts and deep mining projects). Exploration
expenditures that are carried forward pending the outcome of mineral acquisition
and development projects may be highly significant in relation to the equity and
the total assets of an entity.
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• Unique cost-sharing arrangements – High costs and high risks, as discussed above,
often lead entities in the extractive industries to enter into risk-sharing
arrangements (e.g. joint arrangements, farm-out arrangements, carried interest
arrangements, oilfield services arrangements and contract mining). These types of
arrangements, which are much more common in the extractive industries than
elsewhere, often give rise to their own financial reporting issues.
• Intense government oversight and regulation – The regulation of the extractive
industries ranges from ‘outright governmental ownership of some (especially
petroleum) or all minerals to unusual tax benefits or penalties, price controls,
restrictions on imports and exports, restrictions on production and distribution,
environmental and health and safety regulations, and others’. Governments may
also seek to charge an economic rent for resources extracted. These types of
government involvement give rise to financial reporting issues, particularly when
the precise nature of the government involvement is not obvious.
• Scarce non-replaceable assets – Mineral reserves are unique and scarce resources
that an entity may not be able to replace in any location or in any form.
• Economic, technological and political factors – While these factors are not unique
to the extractive industries, the IASC’s Issues Paper argues that they tend to have
a greater impact on the extractive industries because:
‘(a) fluctuating market prices for minerals (together with floating exchange rates)
have a direct impact on the economic viability of reserves and mineral
properties. A relatively small percentage change in long-term prices can change
decisions on whether or when to explore for, develop, or produce minerals;
(b) there is a sharp impact from cost changes and technological developments.
Changes in costs and, probably more significantly, changes in technology can
significantly change the economic viability of particular mineral projects; and
(c) in almost every country, mineral rights are owned by the state. In those
countries where some mineral rights are privately owned, public reliance on
adequate sources of minerals for economic and defence purposes often leads
to governmental regulations and control. At other times, governmental
policies may be changed to levy special taxes or impose governmental
controls on the extractive industries.’
While it may be the case that the above factors affect the extractive industries more
than others, to the extent that they also arise in the pharmaceutical, bio-technology,
agricultural and software industries some of these risks give rise to further financial
reporting issues. However, those industries are not affected by the combination of these
circumstances to the same extent as is the case with the extractive industries. It is a
combination of these factors, a lack of specific guidance in IFRSs and a long history of
industry practice and guidance from previous GAAPs that have given rise to a range of
accounting practices in the extractive industries.
There is as yet no IFRS that addresses all of the specific issues of the extractive
industries although attempts to devise such a standard commenced quite some time ago.
Furthermore, these draft proposals to date would not have addressed many of these
specific issues that affect the extractive industries.
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1.1.1
Definition of key terms
The most important terms and abbreviations used are defined in this chapter when
discussed or in the glossary at 21 below. However, alternative or more detailed
definitions of financial reporting terms, and of mining and oil and gas technical terms
and abbreviations, can be found in the following publications:
• Issues Paper Extractive Industries, IASC, November 2000;
• Petroleum Resources Management System, Society of Petroleum Engineers, 2007;
• The Australasian Code for Reporting of Exploration Results, Mineral Resources
and Ore Reserves (the JORC Code), Australasian Joint Ore Reserves Committee
(the JORC Committee); and
• The former UK Oil Industry Accounting Committee Statement of Recommended
Practice (OIAC SORP) (see 1.4 below).
1.2
The development of IFRS 6 – Exploration for and Evaluation of
Mineral Resources
In December 2004, the IASB issued IFRS 6 – Exploration for and Evaluation of Mineral
Resources – which addresses the accounting for one particular aspect of the extractive
industries – being exploration and evaluation (‘E&E’) activities. IFRS 6 was issued as a
form of interim guidance to clarify the application of IFRSs and the IASB’s Conceptual
Framework to E&E activities and to provide temporary relief from existing IFRSs in
some areas. The IASB decided to develop IFRS 6 because mineral rights and mineral
resources are outside the scope of IAS 16 and IAS 38, E&E expenditures are significant
to entities engaged in extractive activities, and there were different views on how these
expenditures should be accounted for under IFRSs. Other standard-setting bodies have
had diverse accounting practices for E&E assets which often differed from practices in
other sectors with analogous expenditures. [IFRS 6.IN1].
One of the IASB’s goals in developing IFRS 6 was to avoid unnecessary disruption for
both users and preparers. The Board therefore proposed to limit the need for entities
to change their existing accounting policies for E&E assets. As a result, IFRS 6 defines
what E&E expenditures are, makes limited improvements to existing accounting
practices for E&E expenditures, such as specifying when entities need to assess E&E
assets for impairment in accordance with IAS 36 – Impairment of Assets, and requires
certain disclosures.
E&E expenditures are ‘expenditures incurred by an entity in connection with the
exploration for and evaluation of mineral resources before the technical feasibility and
commercial viability of extracting a mineral resource are demonstrable’. E&E assets are
‘exploration and evaluation expenditures recognised as assets in accordance with the
entity’s accounting policy’. [IFRS 6 Appendix A].
The IFRS Interpretations Committee (‘the Interpretations Committee’) has noted that
the effect of the limited scope of IFRS 6 is to grant relief only to policies in respect of
E&E activities, and that this relief did not extend to activities before or after the E&E
phase. The Interpretations Committee confirmed that the scope of IFRS 6 limited the
relief from the hierarchy to policies applied to E&E activities only and that there is no
basis for interpreting IFRS 6 as granting any additional relief in areas outside its scope.
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The detailed requirements of IFRS 6 are discussed at 3 below.
1.3
April
2010 Discussion Paper: Extractive Activities
In April 2010, as part of the long running project of trying to progress the issue of
extractive industries accounting, the IASB published the staff Discussion Paper –
Extractive Activities (the DP). The DP was developed by a research team comprising
members of the Australian, Canadian, Norwegian and South African accounting
standard-setters.2 Although the IASB has discussed the project team’s findings, the DP
only reflects the views of the project team. The Board did not express any preliminary
views or make any tentative decisions on the DP and, due to other standard-setting
priorities, has put the project on hold (see 1.3.6 below for a status update).
The DP addressed some of the financial reporting issues associated with exploring for and
finding minerals, oil and natural gas deposits, developing those deposits and extracting the
minerals, oil and natural gas. These were collectively referred to as ‘extractive activities’
or, alternatively, as ‘upstream activities’.3 The aim of the project was to create a single
accounting and disclosure model that would only apply to upstream extractive activities
in both the minerals and oil and gas industries. This represented a change from IFRS 6,
which currently includes exploration and evaluation activities relating to minerals, oil,
natural gas and similar non-regenerative resources within its scope. The project team
decided against a broader scope in the DP as this would result in the need to develop
additional definitions, accounting models and disclosures.4
The DP concluded that there were similarities in the main business activities, and the
geological and other risks and uncertainties of both the minerals and oil and gas
industries.5 There were also similarities in the definitions of reserves and resources used
by the Committee for Mineral Reserves International Reporting Standards (CRIRSCO)
and the Society of Petroleum Engineers Oil and Gas Reserves Committee (SPE OGRC).6
The DP therefore proposed that there should be a single accounting and disclosure
model that applies to all extractive activities (as defined, see 1.1 above).
While it has been generally acknowledged that the issues addressed in the DP are
important, a significant number of respondents to the DP commented that the scope of