cost of goods sold (even if the sales are not significant).
If an entity determines the sale of by-products or scrap materials is in the course of its
ordinary activities (even if they are not significant), the entity would recognise those
sales as revenue from contracts with customers under IFRS 15. If an entity determines
that such sales are not in its ordinary course of business, the entity would recognise
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those sales as either other income or other revenues (i.e. separate from revenue from
contracts with customers) because they represent sales to non-customers.
Although IAS 2 does not require extensive disclosures in respect of by-products, if
amounts are material, disclosure of the following information, which many extractives
companies provide on a voluntary basis, will greatly assist users:
• accounting policies applied to by-products;
• line items in the primary financial statements in which revenues and carried
amounts have been disclosed;
• quantities of by-products sold; and
• average prices of by-products sold.
14.2.2 Joint
products
Joint products are two or more products produced simultaneously from a common
raw material source, with each product having a significant relative sales value. One
joint product cannot be produced without the other and the products cannot be
identified separately until a certain production stage, often called the ‘split-off
point’, is reached. Joint products are very common in both the oil and gas sector
(e.g. crude oil when run through a refinery produces a variety of products) and the
mining sector.
Joint products, by definition, are all significant in value and require that an entity allocate
on a rational and consistent basis the costs of conversion that are not separately
identifiable for each product. The IASC Issues Paper outlined two approaches that have
found acceptance in practice:121
(a) allocation on the basis of physical characteristics – In the oil and gas sector,
entities often combine quantities of oil and gas based on their relative energy
content (i.e. 6,000 cubic feet of gas is roughly equal in energy to one barrel of
oil). This method, however, does not take account of the fact that, for example,
gas is cheaper per unit of energy than oil because the latter is more difficult to
transport; and
(b) allocation on the basis of relative values – This approach is more common in the
mining sector where often it is not possible to identify a relevant physical
characteristic that can be used to combine quantities of different products. The
drawback of this method is that it results in very similar profit margins for each
of the joint products, which may not be reflective of the underlying economic
reality (i.e. one of the joint products, if mined in isolation, might have a
completely different profit margin).
Although it should be kept in mind that neither method is perfect, both approaches are
currently permitted under IFRS. It is true also that whichever method is selected, it is
unlikely to have a material effect on reported profit overall. The extract below illustrates
the application of approach (b) by Anglo American.
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Extract 39.26: Anglo American plc (2017)
FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
NOTES TO THE FINANCIAL STATEMENTS [extract]
OTHER ITEMS
38. ACCOUNTING POLICIES [extract]
E. WORKING CAPITAL
Inventories
Inventory and work in progress are measured at the lower of cost and net realisable value, except for inventory held by
commodity broker-traders which is measured at fair value less costs to sell. The production cost of inventory includes an appropriate proportion of depreciation and production overheads. Cost is determined on the following basis:
• Raw materials and consumables are measured at cost on a first in, first out (FIFO) basis or a
weighted average cost basis.
• Work in progress and finished products are measured at raw material cost, labour cost and a
proportion of production overhead expenses.
• Metal and coal stocks are included within finished products and are measured at average cost.
At precious metals operations that produce ‘joint products’, cost is allocated amongst products according to the ratio
of contribution of these metals to gross sales revenues.
14.3 Core
inventories
In certain industries, for example the petrochemical sector, certain processes or storage
arrangements require a core of inventory to be present in the system at all times in order for
it to function properly. For example, in order for a crude oil refining process to take place,
the plant must contain a certain minimum quantity of oil. This oil can only be taken out once
the plant is abandoned and could then only be sold as sludge. Similarly, underground gas
storage caves are filled with gas; but a substantial part (in some instances 25%) of that gas can
never be sold as its function is to pressurise the cave, thereby allowing the remaining 75% to
be extracted. Even though the gas will be turned around on a continuing basis, at any one
time 25% of it will never be available to sell and cannot be recouped from the cave. Finally,
long distance pipelines contain a significant volume of gas that keeps them operational.
Similar examples of core inventories exist in the mining sector where certain processes
or processing facilities require a core or minimum amount of inventory to be present in
the system at all times. These may include:
• potlines in the aluminium industry;
• blast furnaces in the steel industry;
• electrowinning plants; or
• carbon in leach processing in the gold industry.
The key issue with such minimum amounts of inventory is whether they should be
accounted for as inventory in accordance with IAS 2 or as PP&E in accordance with IAS 16.
It is our view that if an item of inventory is not held for sale or consumed in a production
process, but is necessary to the operation of a facility during more than one operating cycle,
and its cost cannot be recouped through sale (or is significantly impaired), this item of
inventory should be accounted for as an item of property, plant and equipment under
IAS 16 rather than as inventory under IAS 2. This applies even if the part of inventory that
is deemed to be an item of PP&E cannot be separated physically from the rest of inventory.
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These matters will always involve the exercise of judgement, however, in the above
instances, we consider that:
• the deemed PP&E items do not meet the definition of inventories;
• although it is not possible to physically separate the chemicals involved into
inventory and PP&E categories, there is no accounting reason why one cannot
distinguish between identical assets with different uses and therefore account for
them differently. Indeed, IAS 2 does envisage such a possibility when discussing
different cost formulas; [IAS 2.25]
• the deemed PP&E items are necessary to bring another item of PP&E to the
condition necessary for it to be capable of operating in t
he manner intended by
management. This meets the definition of the costs of PP&E in IAS 16 upon initial
recognition; [IAS 16.16(b)] and
• recognising these items as inventories would lead to an immediate loss because
these items cannot be sold or consumed in a production process, or during the
process of rendering services. This does not properly reflect the fact that the items
are necessary to operate another asset over more than one operating cycle.
By contrast, core inventory that is not necessary to operate the asset and that is
recoverable (e.g. gas in a pipeline) is considered to be held for sale or to be consumed
in the production process or process of rendering services. Therefore such gas is
accounted for as inventory.
The issue of core inventories or ‘minimum fill’ was considered by the Interpretations
Committee in March and July 2014. The staff paper considered by the Interpretations
Committee proposed that base or cushion gas in storage facilities (required to maintain
adequate cavern pressure) and pipeline fill (i.e. the minimum volume of oil or gas to be
kept in a pipeline to ensure its operability) should be accounted for as property, plant
and equipment under IAS 16 where the carrying amount was not considered
recoverable through sale or consumption in the production process (which is consistent
with our views above). After consideration of this issue, the Interpretations Committee
noted that, although there was diversity in practice between industries, there was no, or
only limited, diversity in practice within the industries for which the issue is significant
(including extractive industries). Given there was not sufficient diversity within industry,
they decided not to continue with the development of an interpretation, and to remove
this item from its agenda.
The extract below from the financial statements of ENGIE SA shows how cushion gas
is accounted for as a tangible asset that is depreciated over its economic life.
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Extract 39.27: ENGIE SA (2017)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [extract]
NOTE 1 ACCOUNTING STANDARDS AND METHODS[extract]
1.4 Accounting methods [extract]
1.4.5 Property, plant and equipment [extract]
1.4.5.1 Initial recognition and subsequent measurement [extract]
Cushion gas [extract]
“Cushion” gas injected into underground storage facilities is essential for ensuring that reservoirs can be operated
effectively, and is therefore inseparable from these reservoirs. Unlike “working” gas which is included in inventories,
cushion gas is reported in property, plant and equipment (see § 1.4.10 “Inventories”).
1.4.10 Inventories [extract]
Gas inventories [extract]
Gas injected into underground storage facilities includes working gas which can be withdrawn without adversely
affecting the operation of the reservoir and cushion gas which is inseparable from the reservoirs and essential for their operation (see § 1.4.5.1).
Working gas is classified in inventory and measured at weighted average purchase cost upon entering the
transportation network regardless of its source, including any regasification costs.
Group inventory outflows are valued using the weighted average unit cost method.
An impairment loss is recognized when the net realizable value of inventories is lower than their weighted average
cost.
14.4 Carried at fair value
As noted earlier, inventories should be measured at the lower of cost and net realisable
value under IAS 2. However, IAS 2 does not apply to the measurement of minerals and
mineral products, to the extent that they are measured at net realisable value in
accordance with well-established practices in those industries. [IAS 2.3(a)]. There is also
an exception for commodity broker traders who measure their inventories at fair value
less costs to sell. When such inventories are measured at fair value less costs to sell,
these changes in fair value are recognised in profit or loss in the period of the change.
[IAS 2.3(b)].
An extractives company that wishes to use the exemption relating to minerals and
mineral products outlined above would need to demonstrate that valuation at net
realisable value was a well-established practice in its industry, which may be difficult to
do for base metals inventory.
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The commodity broker trader exemption above is commonly used by companies that
engage in commodity trading. The extract below from the financial statements of BP
illustrates a typical accounting policy for an oil and gas company that makes use of
this exemption.
An integrated oil company can include exploration, production, refinement and
distribution along with a trading operation. In such cases, inventory held by the trading
organisation may have originated from the entities own production. Where this has
occurred it will be necessary to ensure the inventory that came from the entity’s own
production is valued at cost or net realisable value rather than fair value.
Extract 39.28: BP p.l.c. (2017)
Notes on financial statements [extract]
1. Significant accounting policies, judgements, estimates and assumptions [extract]
Inventories [extract]
Inventories held for short-term trading purposes are stated at fair value less costs to sell and any changes in fair value are recognized in the income statement.
14.5 Stockpiles of low grade ore (mining)
Mining companies often stockpile low grade ore that cannot be economically processed at
current market prices or to give priority to the processing of higher grade ore. Low grade
ore stockpiles may not be processed for many years until market prices or technology have
improved or until no higher grade ore remains available. Extract 39.29 below from
AngloGold Ashanti illustrates that stockpiles of low grade ore may be held for many years.
Mineralised waste that is stockpiled in the hope, but without the expectation, that it may
become economical to process in the future should be accounted in the same way as
overburden and other waste materials (see 15.5 below). Low grade ore that is stockpiled
with the expectation that it will be processed in the future should be accounted for in
the same way as high grade ore. However, if the cost of the low grade ore exceeds its
net realisable value, an entity should recognise an impairment charge that it might need
to reverse at some point in the future if (and when) commodity prices were to increase.
If and when processing of low grade ore becomes economically viable and management
intends to process the stockpile in the future, the ore is often presented as non-current
inventory under IAS 2. Such stockpiles should be measured at the lower of cost and net
realisable value. [IAS 2.9, 30]. IAS 2 provides limited guidance in how to determine net
realisable value. Therefore, in allocating production costs to the low grade ore stockpile
and in subsequently assessing net realisable value, an entity should consider the following:
(1) timing of sale: what is a reasonable and supportable assumption about the time it
takes to sell;
(2) commodity prices: whether to use those at the reporting date or future commodity
prices. The commodity price at the reporting date may not be representative of
the price that can realistically be expected to prevail when the ore is expected to
be processed. The assumptions as to the long-term commodity prices used in the
estimate of the sales proceeds and the expected timing of realisation, should
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generally be consistent with those used in the Life of Mine Plan and other models
that would be used for valuation and impairment purposes;
(3) costs of processing: these may change in the future because of inflation,
technological changes and new environmental regulations;
(4) storage costs: specifically how these should be factored in; and
(5) time value of money: depending on how net realisable value is determined and
what inputs are used, the time value of money may impact the calculation of net
realisable value. IAS 2 is silent as to how to address the time value of money and
does not consider the degree to which the use of future commodity prices may
already reflect the time value of money.
Given the above, significant judgement will be involved and key estimates and
assumptions made should be disclosed where material.
The extract below shows how AngloGold Ashanti accounts for ore stockpiles.
Extract 39.29: AngloGold Ashanti Limited (2017)
GROUP – NOTES TO THE FINANCIAL STATEMENTS [extract]
For the year ended 31 December
1 ACCOUNTING POLICIES [extract]
1.2 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES
USE OF ESTIMATES [extract]
Stockpiles and metal in process
Costs that are incurred in or benefit the production process are accumulated in stockpiles and metals in process values.
Net realisable value tests are performed at least annually and represent the estimated future sales price of the product, based on prevailing and long-term metals prices, less estimated costs to complete production and bring the product
to sale.
Surface and underground stockpiles and metals in process are measured by estimating the number of tonnes added
and removed from the stockpile, the number of contained ounces based on assay data, and the estimated recovery
percentage based on the expected processing method. Stockpile ore tonnages are verified by periodic surveys.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 660
