On 16 July 2008, the conditions to the Master Purchase and Farm-in agreement were finalised, which included regulatory
and statutory approvals by the PNG Government. Stage 1 completion took place on 31 July 2008, and a total
consideration of R1 792 million (US$229.8 million) was received on 7 August 2008, of which R390 million
(US$50 million) was placed in a jointly controlled escrow account. This amount was subsequently released to Harmony
following confirmation of approval of an exploration licence during September 2008 by the PNG mining authorities.
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Harmony recognised a profit of R416 million (US$58 million) on the completion of stage 1, which represented a sale
of a 30.01% undivided interest of Harmony’s PNG gold and copper assets and liabilities comprising the joint venture.
During the farm-in period, Harmony agreed to transfer a further 19.99% interest to Newcrest in consideration for an
agreement by Newcrest to meet certain expenditure which would otherwise have to be undertaken by Harmony. The
interest to be transferred were conditional on the level of capital expenditures funded by Newcrest at certain
milestones, and by the end of February 2009, Newcrest acquired another 10% through the farm-in arrangement. The
final 9.99% was acquired by 30 June 2009.
At the date of completion of each party’s obligations under the farm-in arrangement, Harmony derecognised the
proportion of the mining assets and liabilities in the joint venture that it had sold to Newcrest, and recognised its
interest in the capital expenditure at fair value. The difference between the net disposal proceeds and the carrying
amounts of the asset disposed of during the farm-in arrangement amounted to a gain of R515 million (US$54 million),
which has been included in the consolidated income statements for 2009.
6.3 Asset
swaps
Asset exchanges are transactions that have challenged standard-setters for a number of
years. For example, an entity might swap certain intangible assets that it does not require
or is no longer allowed to use for those of a counterparty that has other surplus assets.
It is not uncommon for entities to exchange assets as part of their portfolio and risk
management activities or simply to meet demands of competition authorities.
The key accounting issues that need to be addressed are:
• whether such an exchange should give rise to a profit when the fair value of the
asset received is greater than the carrying value of the asset given up; and
• whether the exchange of similar assets should be recognised.
In the extractive industries an exchange of assets could involve property, plant and
equipment (PP&E), intangible assets, investment property or E&E assets, which are in
the scope of IAS 16, IAS 38, IAS 40 and IFRS 6, respectively. Hence there are three
possible types of exchanges (which will be discussed below), those involving:
(a) only
E&E
assets;
(b) only PP&E, intangible assets and/or investment property; and
(c) a combination of E&E assets, PP&E, intangible assets and/or investment property.
6.3.1 E&E
assets
Accounting for E&E assets, and therefore also accounting for swaps involving only E&E
assets, falls within the scope of IFRS 6. [IFRS 6.3]. As that standard does not directly
address accounting for asset swaps, it is necessary to consider its hierarchy of guidance
in the selection of an accounting policy. IFRS 6 does not require an entity to look at
other standards and interpretations that deal with similar issues, or the guidance in the
IASB’s Conceptual Framework. [IFRS 6.7]. Instead, it allows entities to develop their own
accounting policies, or use the guidance issued by other standard-setters, thereby
effectively allowing entities to continue using accounting policies that they applied
under their previous national GAAP. Therefore, many entities, especially those which
consider that they can never determine the fair value of E&E assets reliably, have
selected an accounting policy under which they account for E&E assets obtained in a
swap transaction at the carrying amount of the asset given up. An alternative approach,
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which is also permitted under IFRS 6, would be to apply an accounting policy that is
based on the guidance in other standards as discussed below.
6.3.2
PP&E, intangible assets and investment property
Three separate international accounting standards contain virtually identical guidance
on accounting for exchanges of assets: IAS 16, IAS 38 and IAS 40. These standards
require the acquisition of PP&E, intangible assets or investment property, as the case
may be, in exchange for non-monetary assets (or a combination of monetary and non-
monetary assets) to be measured at fair value. The cost of the acquired asset is measured
at fair value unless:
(a) the exchange transaction lacks ‘commercial substance’; or
(b) the fair value of neither the asset received nor the asset given up is reliably
measurable. [IAS 16.24, IAS 38.45, IAS 40.27].
For more information, see Chapter 18 at 4.4 (PP&E), Chapter 17 at 4.7 (intangible assets)
and Chapter 19 at 4.6 (investment properties).
6.3.3
Exchanges of E&E assets for other types of assets
An entity that exchanges E&E assets for PP&E, intangible assets or investment property
needs to apply an accounting treatment that meets the requirements of IFRS 6 and those
of IAS 16, IAS 38 or IAS 40. As discussed above, exchanges involving PP&E, intangible
assets and investment property that have commercial substance should be accounted
for at fair value. Since this treatment is also allowed under IFRS 6, an entity that
exchanges E&E assets for assets within the scope of IAS 16, IAS 38 or IAS 40 should
apply an accounting policy that complies with the guidance in those standards.
7
INVESTMENTS IN THE EXTRACTIVE INDUSTRIES
Extractive industries are characterised by the high risks associated with the exploration
for and development of mineral reserves and resources. To mitigate those risks, industry
participants use a variety of ownership structures that are aimed at sharing risks, such
as joint investments through subsidiaries, joint arrangements, associates or equity
interests. IFRS defines each of these as follows:
• subsidiaries – entities controlled by the reporting entity. Sometimes entities in the
extractive industries do not own 100% of these subsidiaries, and there can often be
significant non-controlling shareholders that share in some of the risk and rewards.
Accounting for non-controlling interests is discussed in detail in Chapter 7 at 5.
Furthermore, the existence of put and/or call options over non-controlling
interests may transfer some of the risks between the parent entity and the non-
controlling shareholders. This issue is discussed in detail in Chapter 7 at 6;
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• joint arrangements – contractual arrangements of which two or more parties have
joint control (see 7.1 below);
• undivided interests – participations in projects which entitle the reporting entity
only to a share of the production or use of an asset,
and do not of themselves give
the entity any form of control, joint control or significant influence (see 7.2 below);
• associates – entities that, while not controlled or jointly controlled by the reporting
entity, are subject to significant influence by it (see Chapter 11 at 4); and
• equity interests – entities over which the reporting entity cannot exercise any
control, joint control or significant influence (see Chapters 44 and 45).
7.1 Joint
arrangements
Joint arrangements have always been, and continue to be, a common structure in the
extractive industries. Such arrangements are used to bring in partners to source new
projects, combine adjacent mineral licences, improve utilisation of expensive infrastructure,
attract investors and help manage technical or political risk or comply with local regulations.
The majority of entities operating in the extractive industries are party to at least one joint
arrangement. However, not all arrangements that are casually described as ‘joint
arrangements’ or ‘joint ventures’ meet the definition of a joint arrangement under IFRS.
Accounting for joint arrangements is governed by IFRS 11. Given the prevalence of joint
arrangements in the extractive industries, careful analysis of IFRS 11, in conjunction
with the requirements of IFRS 10 – Consolidated Financial Statements (see Chapter 6)
and IFRS 12 – Disclosure of Interests in Other Entities (see Chapter 13) is required.
Chapter 12 contains a full discussion on IFRS 11 and its requirements and therefore
while some specific areas for extractives companies to consider are set out below, this
section should be read in conjunction with that chapter.
We also discuss some issues relating to the acquisition of interests in joint operations
(see 8.3 below).
A joint arrangement in the scope of IFRS 11 is an arrangement over which two or more
parties have joint control. [IFRS 11.4]. (See 7.1.1 below for further discussion on the
definition of joint control). Under IFRS 11, there are two types of joint arrangements –
‘joint operations’ and ‘joint ventures’.
Joint operation: a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the assets, and obligations for the liabilities, relating to the
arrangement. [IFRS 11 Appendix A].
Joint venture: a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement. [IFRS 11 Appendix A].
Classification between these two types of arrangements is based on the rights and
obligations that arise from the contractual arrangement. An entity will need to have a
detailed understanding of the specific rights and obligations of each of its arrangements
to be able to determine the impact of this new standard.
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Subsequent to the issuance of IFRS 11, the Interpretations Committee discussed various
implementation issues particularly when it came to classifying a joint arrangement that
is structured through a separate vehicle. In March 2015, the Interpretations Committee
issued an agenda decision dealing with a range of issues, including:
• how and why particular facts and circumstances create rights and obligations;
• implication of ‘economic substance’; and
• application of ‘other facts and circumstances’ to specific fact patterns:
• output sold at a market price;
• financing from a third party;
• nature of output (i.e. fungible or bespoke output); and
• determining the basis for ‘substantially all of the output’.
This agenda decision includes a number of fact patterns which may be relevant for
extractive industries, including (for example) the impact on agreements to purchase a
joint arrangement’s output. See Chapter 12 at 5.4.3 for further discussion.
7.1.1
Assessing joint control
Joint control is defined as ‘the contractually agreed sharing of control of an arrangement
which exists only when the decisions about the relevant activities require the
unanimous consent of the parties sharing control’. [IFRS 11.7, Appendix A]. IFRS 11 describes
the key aspects of joint control as follows:
• Contractually agreed – contractual arrangements are usually, but not always,
written, and set out the terms of the arrangements. [IFRS 11.5(a), B2].
• Control and relevant activities – IFRS 10 describes how to assess whether a party
has control, and how to identify the relevant activities, which are described in
more detail in Chapter 6 at 3 and 4.1. Some of the aspects of ‘relevant activities’
and ‘control’ that are most relevant to extractives arrangements are discussed
at 7.1.1.A and 7.1.2 below, respectively. [IFRS 11.8, B5].
• Unanimous consent – means that any party (with joint control) can prevent any of
the other parties, or a group of the parties, from making unilateral decisions about
the relevant activities without its consent. [IFRS 11.B9]. Joint control requires sharing
of control or collective control by two or more parties. Some of the aspects of
‘unanimous consent’ for extractives arrangements are discussed at 7.1.1.B below.
For more information on assessing joint control see Chapter 12 at 4.
7.1.1.A Relevant
activities
Relevant activities are those activities of the arrangement which significantly affect the
returns of the arrangement. Determining what these are for each arrangement may
require significant judgement.
Examples of decisions about relevant activities include, but are not limited to:
• establishing operating and capital decisions of the arrangement including budgets –
for an arrangement in the extractive industries, this may include approving the
operating and/or capital expenditure programme for the next year; and
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• appointing and remunerating a joint arrangement’s key management personnel or
service providers and terminating their services or employment – for example,
appointing a contract miner or oil field services provider to undertake operations.
For more information on identifying relevant activities, see Chapter 12 at 4.1.
7.1.1.B
Meaning of unanimous consent
Unanimous consent means that any party with joint control can prevent any of the other
parties, or a group of parties, from making unilateral decisions about relevant activities.
For further discussion on unanimous consent, see Chapter 12 at 4.3.
In some extractive industries operations, decision-making may vary over the life of the
project, e.g. during the exploration and evaluation phase, the development phase or the
production phase. For example, it may be agreed at the time of initially entering the
contractual arrangement that during the exploration and evaluation phase, one party to
the arrangement may be able to make all of the decisions, whereas once the project
enters the development phase, decisions may then require unanimous consent. To
determine whether the arrangement is jointly controlled, it will be necessary to decide
(at the point of initially entering the contractual arrangement, and subsequently, should
facts and circumstan
ces change) which of these activities, e.g. exploration and
evaluation and/or development, most significantly affect the returns of the arrangement.
This is because the arrangement will only be considered to be a joint arrangement if
those activities which require unanimous consent are the ones that most significantly
affect the returns. This will be a highly judgemental assessment.
For further information on the impact of different decision-making arrangements over
various activities, see Chapter 12 at 4.1.
7.1.2
Determination of whether a manager of a joint arrangement has control
It is common in the extractive industries for one of the parties to be appointed as the
operator or manager of the joint arrangement. The manager is frequently referred to as
the operator, but as IFRS 11 uses the terms ‘joint operation’ and ‘joint operator’ with
specific meanings, to avoid confusion we refer to such a party as the manager. The other
parties to the arrangement may delegate some of the decision-making rights to this
manager. In many instances, it is considered that the manager does not control the joint
arrangement, but simply carries out the decisions of the parties under the joint venture
(or operating) agreement (JOA), i.e. the manager acts as an agent. This view is based on
the way in which these roles are generally established and referred to, or perceived, in
the industries. Under IFRS 11, consideration is given to whether the manager actually
controls the arrangement. This is because when decision-making rights have been
delegated, IFRS 10 describes how to assess whether the decision-maker is acting as a
principal or an agent, and therefore, which party (if any) has control.
Careful consideration of the following will be required:
• scope of the manager’s decision-making authority;
• rights held by others (e.g. protective rights and removal rights);
• exposure to variability in returns through the remuneration of the manager; and
• variable returns held through other interests (e.g. direct investments by the
manager in the joint arrangement).
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Of these factors, rights held by others and variable returns held through other interests
will be particularly relevant for mining companies and oil and gas companies. Each of
the above is discussed in Chapter 6 at 6 in more detail.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 644
