related to the carried party’s interest.
The carried party accounts for the transaction as follows:
$
$
Cash received from the carrying party
50
Capital calls to be paid by the carrying party (60% × $350 million =) †
210
Property, plant and equipment (40% × $250 million =)
100
Gain on sale (40% × ($650 million – $250 million) =)
160
† The
carried
party has obtained the commitment from the carrying party to make certain payments on its behalf.
If the carried party had recognised a loss on the interest sold, it would need to perform an impairment test on
the interest retained.
The carrying party accounts for the transaction as follows:
$
$
Assets acquired ($50 million + $210 million =) †
260
Cash paid to the carried party
50
Capital calls payable on behalf of the carried party (60% × $350 million =) ‡
210
†
As discussed above, the cost of property, plant and equipment is defined as the fair value of the consideration. In an
arm’s length transaction the fair value of property, plant and equipment acquired is normally equal to the fair value of
the consideration paid. The fair value of the portion of the oil field and the portion of the related property, plant and equipment acquired is (40% × $650 million =) $260 million.
‡
The carrying party has assumed a liability to make these payments on behalf of the carried party. The carrying party
will also be required to pay (40% × $350 million =) $140 million for its own share of the future investments, but that
amount is only recognised as a liability upon recognition of the related property, plant and equipment.
The receivable recognised by the carried party and the corresponding liability
recognised by the carrying party are reduced over the course of the construction of the
assets to which they relate. The carrying party reduces the liability as it funds the carried
party’s share of the investment and the carried party recognises its share of the assets
being constructed while reducing the balance of the receivable.
6.2
Farm-ins and farm-outs
A farm-out (from the viewpoint of the transferor) or a farm-in (from the viewpoint of
the transferee) was defined in the former OIAC SORP as ‘the transfer of part of an oil
3250 Chapter 39
and gas interest in consideration for an agreement by the transferee (farmee) to meet,
absolutely, certain expenditure which would otherwise have to be undertaken by the
owner (farmor)’.101 Farm-in transactions generally occur in the exploration or
development phase and are characterised by the transferor (i.e. farmor) giving up future
economic benefits, in the form of reserves, in exchange for a (generally) permanent
reduction in future funding obligations.
Under a carried interest arrangement, the carried party transfers a portion of the risks
and rewards of a property, in exchange for a funding commitment from the carrying
party. Under a farm-in arrangement the farmor transfers all the risks and rewards of a
proportion (i.e. a straight percentage) of a property, in exchange for a commitment from
the farmee to fund certain expenditures. Therefore, a farm-out represents the complete
disposal of a proportion of a property and is similar to purchase/sale-type carried
interest arrangements as discussed at 6.1.4 above.
The following types of farm-in arrangements are separately discussed below:
• farm-in arrangements in the E&E phase (see 6.2.1 below); and
• farm-in arrangements outside the E&E phase (see 6.2.2 below).
6.2.1
Farm-in arrangements in the E&E phase
IFRS 6 deals only with accounting for E&E expenditures and does not address other
aspects of accounting by entities engaged in the exploration for and evaluation of
mineral resources. [IFRS 6.4]. That leaves open the question of whether farm-in
arrangements can ever fall within the scope of IFRS 6. However, as a farm-in
arrangement leads to the acquisition of an E&E asset by the farmee and a disposal by
the farmor, we believe that a farm-in arrangement would fall within the scope of IFRS 6.
Hence an entity has two options: either to develop an accounting policy under IAS 8 as
discussed at 6.2.2 below; or to develop an accounting policy under IFRS 6. In practice
many entities use the second option and apply an accounting policy to farm-in
arrangements that is based on a previous national GAAP.
Accounting policies for farm-in arrangements in the E&E phase that are based on an
entity’s previous national GAAP will often require that:
• the farmee recognises its expenditure under the arrangement in respect of its own
interest and that retained by the farmor, as and when the costs are incurred. The
farmee accounts for its expenditures under a farm-in arrangement in the same way
as directly incurred E&E expenditure; and
• the farmor accounts for the farm-out arrangement as follows:
• the farmor does not record any expenditure made by the farmee on its behalf;
• the farmor does not recognise a gain or loss on the farm-out arrangement, but
rather redesignates any costs previously capitalised in relation to the whole
interest as relating to the partial interest retained; and
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• any cash consideration received is credited against costs previously
capitalised in relation to the whole interest with any excess accounted for by
the farmor as a gain on disposal.
If an entity applies its previous GAAP accounting policy in respect of farm-in
arrangements, we would expect the entity also to make the farm-in disclosures required
by its previous GAAP.
6.2.2
Farm-in arrangements outside the E&E phase: accounting by the
farmee
A farm-in represents the complete acquisition of a proportion of a property. The
accounting for such an arrangement will depend on whether the entity is farming into an
asset or into an arrangement that is considered a business (and which is a joint operation),
or whether the farm-in results in the arrangement becoming a joint operation.
6.2.2.A
Farming into an asset
Where a farmee farms into an asset, regardless of whether it is a joint operation or results
in the formation of a joint operation, it should recognise an asset that represents the
underlying (partially) undeveloped interest acquired at cost in accordance with IAS 16
or IAS 38, [IAS 16.15, IAS 38.21], and recognise a liability that reflects obligations to fund the
farmor’s share of the future investment from which the farmee itself will not derive any
future economic benefits.
Farm-in arrangements can be structured in numerous ways, some requiring payment of
a fixed monetary amount while others are more flexible and state, for example, that
capital expenditures over the next five years will be paid for by the farmee regardless
of what those amounts may be. Accounting for these arrangements is uncertain.
In some cases, the liability may meet the definition of a financial liability under IAS 32
– Financial Instruments: Presentation – and should be accounted for in accordance
with IFRS 9. In other scenarios, such as the latter example above (i.e. where the farmee
pays all capital expenditure incurred over a five year period, regardless of the amount),
the liability may meet the definition of a provision under IAS 37 as the timing and
amount of the liability are uncertain. [IAS 37.10]. If an entity concludes that IAS 37 applies,
then there can be some debate as to when a provision should be recognised as that
standard is not clear.
The issue of contingent consideration in the context of the acquisition of assets has been
discussed by the Interpretations Committee but they were unable to reach consensus
on whether IAS 37 or IFRS 9 applies. Hence, different treatments will continue to be
encountered in practice. See 8.4 below for further discussion on this issue and an update
on current status.
3252 Chapter 39
An arrangement involving a farm-in into an asset is illustrated below in the extract from
Newcrest’s 2009 financial statements.
Extract 39.11: Newcrest Mining Limited (2009)
29. Interests in Unincorporated Joint Venture Assets [extract]
(b) Acquisition of Interest in the Morobe Mining Joint Venture [extract]
During the year Newcrest acquired a 50% interest in the Papua New Guinea (PNG) gold assets of Harmony Gold
Mining Ltd (Harmony) via unincorporated joint venture structures. The joint venture assets comprise:
–
The Hidden Valley mining operation, a gold and silver project, expected to produce over 250,000 ounces of gold
and 4 million ounces of silver per annum over a 14-year mine life;
–
The highly-prospective Wafi-Golpu gold-copper deposit and its surrounding exploration tenements; and
–
Extensive exploration tenements in the Morobe province of PNG.
The acquisition of the interest in the joint ventures comprised two stages:
–
In the first stage, which was completed on 7 August 2008, Newcrest acquired an initial 30.01% interest for cash
consideration of US$228.0 million (A$249.4 million) consisting of an initial payment of US$180.0 million
together with a reimbursement to Harmony of US$48.0 million in project expenditure incurred between
1 January 2008 and 7 August 2008.
–
The second stage represented a farm-in commitment for the remaining 19.99% interest. In this stage, Newcrest
solely funded all project expenditure up to 30 June 2009 which totalled US$297.7 million (A$420.8 million).
6.2.2.B
Farming into a business which is a joint operation or results in the
formation of a joint operation
Where a farmee farms into a project that is considered to be a business (as defined in
IFRS 3) which is either a joint operation or results in the formation of a joint operation,
historically there has been some diversity in how this was to be accounted for. Some
have applied the business combination principles in IFRS 3 and other standards and
some have applied the asset acquisition accounting principles (as discussed above
at 6.2.2.A).
This issue was resolved by the IASB issuing an amendment to IFRS 11 which was
effective for annual reporting periods commencing on or after 1 January 2016. This
amendment requires that where an entity acquires an interest in a joint operation which
constitutes a business, the business combination accounting principles of IFRS 3 and
other standards must be applied.
See Chapter 12 at 8.3.1 for further discussion on this issue. These requirements will
include such interests acquired through a farm-in.
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It is important to note that for the IFRS 11 amendment to mandatorily apply, the
definition of a joint operation in accordance with IFRS 11 must be met, i.e. there must
be joint control. Where there is joint control, the amendment applies to all entities
to the joint operation whether or not the entity is a party that has joint control.
IFRS 11 specifies that ‘a party that participates in, but does not have joint control of,
a joint operation shall also account for its interest in the arrangement in accordance
with paragraphs 20-22 if that party has rights to the assets, and obligations for the
liabilities, relating to the joint operation. If a party that participates in, but does not
have joint control of, a joint operation does not have rights to the assets, and
obligations for the liabilities, relating to that joint operation, it shall account for its
interest in the joint operation in accordance with the IFRSs applicable to that
interest’. [IFRS 11.23].
When it comes to accounting for the acquisition of an interest in an arrangement which
does not meet the definition of a joint operation under IFRS 11, i.e. there is no joint
control, there is no specific guidance as to how this should be accounted for. That is, it
is not clear whether an entity can, or should, apply similar provisions to those applicable
to acquiring an interest in a joint operation (discussed above). Given this, diversity may
continue in practice.
6.2.3
Farm-in arrangements outside the E&E phase: accounting by the
farmor
In accounting for a farm-in arrangement the farmor should:
• derecognise the proportion of the asset that it has sold to the farmee, consistent
with the principles of IAS 16 or IAS 38; [IAS 16.67, IAS 38.112]
• recognise the consideration received or receivable from the farmee, which
represents the farmee’s obligation to fund the capital expenditure in relation to the
interest retained by the farmor;
• recognise a gain or loss on the transaction for the difference between the net
disposal proceeds and the carrying amount of the asset disposed of.
[IAS 16.71, IAS 38.113]. Recognition of a gain would be appropriate only when the value
of the consideration can be determined reliably. If not, then the carried party
should account for the consideration received as a reduction in the carrying
amount of the underlying assets; and
• test the retained interest for impairment if the terms of the arrangement indicate
that the retained interest may be impaired.
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Under IAS 16, IAS 38 and IFRS 15, the amount of consideration to be included in the
gain/loss arising from the derecognition of an item of property, plant and equipment or
an intangible asset, and hence the receivable that is recognised, is determined in
accordance with the requirements for determining the transaction price under IFRS 15.
Subsequent changes to the estimated amount of the consideration included in the gain
or loss calculation shall be accounted for in accordance with the requirements for
changes in the transaction price in IFRS 15. [IAS 16.72, IAS 38.116]. See Chapter 28 at 6, 6.2
and 12.3 for more information.
Any part of the consideration that is receivable in the form of cash will meet the
definition of a financial asset under IAS 32, [IAS 32.11], and should be accounted for in
accordance with IFRS 9, either at amortised cost or fair value depending on the nature
of the receivable or how the farmor designates the receivable. See Chapter 44 at 2 for
m
ore information on classifying a financial asset under IFRS 9.
The extract below describes the farm-in transactions of Harmony Gold.
Extract 39.12: Harmony Gold Mining Company Limited (2009)
Directors’ report [extract]
Disposals [extract]
Sale of interest in PNG to Newcrest
During the year, the group sold 50% of its interest in its PNG assets in Morobe Province to Newcrest. This took place
in three stages, with the disposal of 30.01% for US$229 million (stage one) being completed on 31 July 2008. Stages
two and three were completed by the end of quarters three and four of the financial year respectively with Newcrest
having earned in a further 10% and 9.99% respectively in each of these stages.
Notes to the group financial statements [extract]
6 Profit of sale of property, plant and equipment [extract]
Included in the total for 2009 is R931 million (US$111.9 million) profit on sale of 50% of Harmony’s gold and copper
assets in Morobe Province, Papua New Guinea, to Newcrest Mining Limited (Newcrest) in terms of the Master
Purchase and Farm-in agreement. The sale was concluded in three stages. On 31 July 2008, stage 1, being the sale of
an initial 30.1% participating interest in the assets, was concluded at a profit of R416 million (US$57.9 million). The
remaining 19.99% interest was sold in two further stages, resulting in a profit of R439 million (US$44.6 million) for
the 10% interest of stage 2 and a profit of R76 million (US$9.9 million) for the 9.99% interest of stage 3. These stages
were completed on 27 February 2009 and 30 June 2009 respectively. Refer to note 23.
23 Investment in joint venture [extract]
a) Papua New Guinea (PNG) Partnership agreement (50%)
On 22 April 2008, Morobe Consolidated Goldfields Limited and Wa fi Mining Limited, subsidiaries of Harmony
Australia, entered into a Master Purchase and Farm-in Agreement with Newcrest. This agreement provided for Newcrest
to purchase a 30.01% participating interest (stage 1) and a further farm-in of an additional 19.99% participating interest in Harmony’s PNG gold and copper assets, giving them a 50% interest. The total value of the transaction was estimated
at US$530 million.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 643
