International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 656
determined to be a customer, then the contract will be in scope of IFRS 15.
If a royalty arrangement is considered to be a supplier-customer relationship (and,
hence, is in scope), mining companies and oil and gas companies may face a number of
challenges in applying IFRS 15 to these arrangements. These may include identifying the
performance obligations, determining the transaction price (e.g. if consideration is
variable and dependent upon actions by the customer, which would be the case for the
future extraction of minerals), applying the constraint on variable consideration, and
reallocating the transaction price when and if there is a change in the transaction price.
See Chapter 28 for more details on these requirements.
When considering the accounting for such royalties, IFRS 15 contains specific
requirements that apply to licences of intellectual property, which may appear similar
to some types of royalty arrangements in extractives industries. However, it is important
to note that the IFRS 15 requirements only apply to licences of intellectual property and
not all sales-based or usage-based royalties. So, the general requirements applicable to
variable consideration, including those relating to the constraint, will need to be
considered (see Chapter 28 at 6.2 for further discussion).
12.9.3
Royalty arrangements and the sale of non-financial items
If the royalty arrangement is not considered to relate to a contract with a customer nor
to a collaborative arrangement, but instead, relates to the sale of a non-financial asset
(e.g. an interest in a mining project or oil and gas project), IFRS 15 may still impact these
arrangements. This is because the requirements for the recognition and measurement
of a gain or loss on the transfer of some non-financial assets that are not the output of
an entity’s ordinary operations (e.g. property, plant and equipment in the scope of
IAS 16), refer to the requirements of IFRS 15 (see Chapter 28 at 12.3 for more detail).
Specifically, an entity needs to:
• Determine the date of disposal and, therefore, the date of derecognition (i.e. the
date control transfers to the acquirer) (see Chapter 28 at 8.3 for more detail).
• Measure the consideration to be included in the calculation of the gain or loss
arising from disposal including any variable consideration requirements
(see Chapter 28 at 6 for more detail).
• Recognise any subsequent changes to the estimated amount of consideration
(see Chapter 28 at 6.2.4, 6.9 and 7.5 for more detail).
Extractive
industries
3315
Mineral rights and mineral reserves (and, hence, the associated capitalised costs) are
outside the scope of both IAS 16 and IAS 38. However, in selecting an accounting policy
for the disposal of these assets, in practice, most entities look to the principles of these
two standards. Therefore, these requirements are likely to be applied by analogy to
arrangements in which an entity sells all (or part) of its mining properties or oil and gas
properties and some of the consideration comprises a royalty-based component.
There is also a lack of clarity as to how to apply the requirements of IFRS 15 to such
arrangements where, by virtue of the royalty rights, the vendor is considered to have
retained an interest in the mineral property. This may impact what is recognised or
derecognised from the balance sheet in terms of mineral assets and/or financial assets,
and also the gain/loss that is recognised in profit or loss.
There is more specific guidance when the royalty receivable represents contingent
consideration in the sale of a business (see Chapter 41 at 3.7.1.B).
12.10 Modifications to commodity-based contracts
Mining entities and oil and gas entities frequently enter into long-term arrangements for
the sale, transportation or processing of commodities. Over time, these contractual
arrangements may be amended to effect changes in tenure, volume, price, or delivery
point, for example. This may take the form of amendments, new tranches under existing
agreements, or, new contractual arrangements. IFRS 15 contains requirements on how
to account for changes to a contract depending on whether the change is considered to
be a contract modification, a new contract, or a combination of both. Further guidance
on contract modifications is set out in Chapter 28 at 4.4.
12.11 Principal versus agent considerations in commodity-based
contracts
When identifying performance obligations, there may be some arrangements for which an
entity needs to determine whether it is acting as principal or agent. This will be important
as it affects the amount of revenue the entity recognises. That is, when the entity is the
principal in the arrangement, the revenue recognised is the gross amount to which the
entity expects to be entitled. When the entity is the agent, the revenue recognised is the
net amount the entity is entitled to retain in return for its services as the agent. The entity’s
fee or commission may be the net amount of consideration that the entity retains after
paying the other party the consideration received in exchange for the goods or services to
be provided by that party. The critical factor to consider here is whether the entity has
control of the good or service before transferring on to its customer. See Chapter 28 at 5.4
for more information on the principal versus agent indicators.
12.11.1 Relationships with joint arrangement partners
It is not uncommon for valid vendor-customer relationships to exist alongside joint
arrangement/collaborator contracts such as joint operating agreements or production
sharing contracts. The manager of a joint arrangement may have a vendor-customer
contract to purchase volumes produced by the non-operating parties. The manager
would then on sell the product to third parties, and depending on the specific contract
terms, could be acting as the principal in the onward sale, or as agent that is selling on
behalf of the other joint arrangement partners.
3316 Chapter 39
Similarly, an entity with a gathering station or processing plant could purchase
commodities from other parties with tenements or fields in the same region at the point
of entry into the plant. Both the seller and purchaser would have to consider whether
the purchaser is a principal or an agent in the onward sale to the third-party customer
and account for the revenue accordingly.
12.11.2 Royalty
payments
As discussed at 5.7.5 above, mining companies and oil and gas companies frequently
enter into a range of different royalty arrangements with owners of mineral rights
(e.g. governments or private land owners) and at times, the treatment is diverse. It is
unclear whether, and how, such arrangements should be accounted for under IFRS 15.
In situations where the royalty holder retains or obtains a direct interest in the
underlying production, it may be that the relationship between the mining company or
oil and gas company and the royalty holder is more like a collaborative arrangement
(and, hence, is not within the scope of IFRS 15). See 12.5 above for further discussion.
If these royalty payments are in scope, the requirements relating to princip
al versus agent
in IFRS 15 will be helpful in assessing how these royalty payments should be presented.
Specifically, an entity will need to determine whether it obtains control of all of the
underlying minerals once extracted, sells the product to its customers and then remits the
proceeds to the royalty holder. If so, the mining company or oil and gas company will be
considered to be acting as the principal and, hence, would recognise the full amount as
revenue with any payments to the royalty holder being recognised as part of cost of goods
sold (or possibly as an income tax, depending on the nature of the royalty payment –
see 19 below for further discussion on determining when an arrangement is an income
tax). Where the entity does not obtain control over those volumes, it may be acting as the
royalty holder’s agent and extracting the minerals on its behalf.
The principal versus agent assessment under IFRS 15 is discussed in more detail in
Chapter 28 at 5.4 and the issue of how sales (and other similar) taxes should be
accounted for are discussed in Chapter 28 at 6.1.
12.12 Shipping
Given the location of the commodities produced in the mining sector and oil and gas
sector, they generally have to be shipped to the customer. Such transportation may
occur by road, rail or sea. The terms associated with shipping can vary depending on
the method of shipping and the contract.
When applying IFRS 15, there are a number of factors to consider in relation to shipping
terms linked to customer contracts which are set out below at 12.12.1 to 12.12.2.
12.12.1 Identification of performance obligations
Subsequent to the issuance of IFRS 15, there was some debate as to whether shipping
represented a separate performance obligation. The issue was raised with the joint
Transition Resources Group (TRG) and was also considered by the IASB and US FASB.
The US FASB amended their standard to allow US GAAP entities to elect to account for
shipping and handling activities performed after the control of a good has been transferred
to the customer as a fulfilment cost (i.e. an expense). Without such an accounting policy
choice, a US GAAP entity that has shipping arrangements after the customer has obtained
Extractive
industries
3317
control may determine that the act of shipping is a performance obligation under the
standard. The IASB did not permit a similar policy choice under IFRS 15.
Given this, when assessing customer contracts, mining companies and oil and gas
companies need to consider the requirements of IFRS 15 to determine whether shipping
is a separate performance obligation. It is likely that any shipping services provided to
a customer after the customer obtains control over a good will represent a separate
performance obligation. If this is the case, the transaction price for that contract will
need to be allocated to the various performance obligations including shipping. Revenue
will then be recognised when the goods are delivered and when the shipping services
have been provided, either at a point in time or over time.
12.12.2 Satisfaction of performance obligations – control assessment
Under IFRS 15, an entity recognises revenue only when it satisfies a performance obligation
by transferring control of a promised good or service to the customer and control may be
transferred over time or at a point in time. See Chapter 28 at 8 for more information.
When assessing contracts with customers, mining companies and oil and gas companies
need to carefully examine the terms of their contracts, including shipping terms, in light
of the indicators of control, to assess how shipping should be accounted for.
It is also worth noting that there may be some shipping arrangements where title to the
goods must pass to the carrier during transportation, but the related contract includes a
clause that requires the carrier to sell the goods back to the mining company or oil and
gas company at the same or another specified price. The impact of repurchase clauses
is discussed at 12.14 below.
12.13 Gold bullion sales (mining only)
Under IFRS 15, revenue is recognised only when the identified performance obligation
is satisfied by transferring the promised good or service to the customer. A good or
service is transferred when the customer obtains control of that good or service.
When mining companies sell gold bullion, there is generally a period of time (usually a
matter of days) between when the bullion leaves the mine site with the security shipper
and when the gold (fine metal) is credited to the metal account of the customer. In the
intervening period, the gold bullion is sent to the refinery where it is refined, ‘out turned’,
and, finally, the fine metal is transferred or credited to the customer’s metal account.
At the time when the gold bullion leaves the mine site, given the way these transactions
are commonly structured, the customer may not control the bullion and the IFRS 15
indicators that control has transferred may not be present. That is, the customer may
not have the ability to direct the use of, or receive the benefit from, the gold bullion.
Instead, these indicators may only be present when the gold bullion is actually credited
to the customer’s metal account.
12.14 Repurchase agreements
Some agreements in the extractive industries include repurchase provisions, either as
part of a sales contract or as a separate contract, that relate to the goods in the original
agreement or similar goods (e.g. tolling, processing or shipping agreements). The
application guidance to IFRS 15 clarifies the types of arrangements that qualify as
3318 Chapter 39
repurchase agreements. The repurchased asset may be the asset that was originally sold
to the customer, an asset that is substantially the same as that asset or another asset of
which the asset that was originally sold is a component. [IFRS 15.B64].
IFRS 15 specifically notes that repurchase agreements generally come in three forms:
• an entity’s obligation to repurchase the asset (a forward);
• an entity’s right to repurchase the asset (a call option); or
• an entity’s obligation to repurchase the asset at the customer’s request (a put
option). [IFRS 15.B65].
Where a repurchase agreement exists, this may change whether and when revenue is
recognised. See Chapter 28 at 8.4 for more details on repurchase agreements.
12.15 Multi-period commodity-based sales contracts
In the extractive industries, entities commonly enter into long-term (multi-period)
commodity-based sales contracts. There are a range of different issues to be considered
when applying IFRS 15.
12.15.1 Identify
the
contract
Judgement will need to be applied when identifying the contract for these long-term
arrangements. A contract is an agreement between two or more parties that creates
enforceable rights and obligations. [IFRS 15 Appendix A]. Entities will need to determine what
the enforceable part of the contract is. For example, whether there is a specified minimum
the customer must buy (e.g. in take-or-pay contracts – see 12.16 below), whether it is the
overall agreement, sometimes referred to as t
he master services agreement, or whether it
is each purchase order. See Chapter 28 at 4 and 4.1.1.A for more details.
12.15.2 Identify the performance obligations
The next step is to identify all the promised goods or services within the contract to
determine which will be treated as separate performance obligations. Chapter 28 at 5.2
explores in detail the requirements for determining whether a good or service is distinct,
whether the transfer of a good or service represents a separate performance obligation
and/or whether (and when) they need to be bundled.
During the development of IFRS 15, some respondents thought it was unclear whether
a three-year service or supply contract would be accounted for as a single performance
obligation or a number of performance obligations covering smaller time periods (e.g.
yearly, quarterly, monthly, daily) or individual units such as ounces, tonnes or barrels.
IFRS 15 clarifies that even if a good or service is determined to be distinct, if that good
or service is part of a series of goods and services that are substantially the same and
have the same pattern of transfer, that series of goods or services is treated as a single
performance obligation. However, before such a treatment can be applied, specific
criteria must be met. See Chapter 28 at 5.2.2 for further discussion and guidance.
Given the nature of these multi-period commodity-based sales arrangements, each unit
(e.g. each metric tonne (mt) of coal or each barrel of oil), would likely be a distinct good
and therefore, each unit would represent a separate performance obligation that is
satisfied at a point in time. Because such goods are satisfied at a point in time, they would
Extractive
industries
3319
not meet the criteria to be considered a series of distinct goods that would have to be
treated as a single performance obligation.
In addition, any option for additional goods or services will need to be evaluated to
determine if those goods or services should be considered a separate performance
obligation. See Chapter 28 at 5.6 for further discussion.
12.15.3 Determine the transaction price
The transaction price is the amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services to a customer,