Although the quantities of recoverable metal are reconciled by comparing the grades of ore to the quantities of metals
actually recovered (metallurgical balancing), the nature of the process inherently limits the ability to precisely monitor recoverability levels. As a result, the metallurgical balancing process is constantly monitored and engineering
estimates are refined based on actual results over time.
Variations between actual and estimated quantities resulting from changes in assumptions and estimates that do not
result in write-downs to net realisable value are accounted for on a prospective basis.
The carrying value of inventories (excluding finished goods and mine operating supplies) for the group at
31 December 2017 was $424m (2016: $397m; 2015: $393m).
ANNEXURE A
Summary of significant accounting policies [extract]
INVENTORIES [extract]
Inventories are valued at the lower of cost and net realisable value after appropriate allowances for redundant and
obsolete items. Cost is determined on the following bases:
[...]
• ore stockpiles are valued at the average moving cost of mining and stockpiling the ore. Stockpiles
are classified as a non-current asset where the stockpile exceeds current processing capacity; [...]
3340 Chapter 39
The extract below illustrates the disclosure of an impairment of stockpiled ore (in 2008)
and then disclosures relating to the reversal of impairment of stockpiled ore.
Extract 39.30: Kazakhmys PLC (2008 and 2010)
Notes to the consolidated financial statements [extract]
7. IMPAIRMENT LOSSES – 2008 [extract]
(d) Kazakhmys Copper and MKM inventories
Impairment of inventories includes an amount of $73 million and $15 million in respect of Kazakhmys Copper and MKM,
respectively. For Kazakhmys Copper, the impairment primarily relates to the impairment of stockpiled ore which is not going to be processed in the foreseeable future as its processing is uneconomic at current commodity price levels. Within MKM, a provision has been recognised to record inventory at the lower of cost and net realisable value. This primarily relates to finished goods held in stock at the end of the year which have been written down reflecting the fall in copper price in December.
8. IMPAIRMENT LOSSES – 2010 [extract]
(b) Kazakhmys Copper inventories
Included within the provisions against inventories is an impairment loss of $15 million relating to general slow moving
inventory, and a reversal of a previous impairment against certain stockpiled ore of $18 million. In 2008, it was envisaged that the stockpiled ore would not be processed in the future as this would have been uneconomic at the prevailing
commodity prices. However, during 2010 certain of these stockpiles were processed and the previous impairment reversed.
14.6 Heap leaching (mining)
Heap leaching is a process which may be used for the recovery of metals from low grade
ore. The crushed ore is laid on a slightly sloping, impermeable pad and leached by
uniformly trickling a chemical solution through the heaps to be collected in ponds. The
metals are subsequently extracted from the pregnant solution. Although heap leaching
is one of the lowest cost methods of processing, recovery rates are relatively low.
Despite the estimation and measurement challenges associated with heap leaching, ore
loaded on heap leach pads is usually recognised as inventory. An entity that develops
an accounting policy for heap leaching needs to consider the following:
• the metal recovery factor is relatively low and will vary depending on the
metallurgical characteristics of the material on the heap leach pad. The final
(actual) recovery is therefore unknown until leaching is complete. Therefore, an
entity will need to estimate the quantity of recoverable metal on each of its heap
leach pads, based on laboratory test work or historical ore performance;
• the assayed head grade of ore added to the heap;
• the ore stockpiles on heap leach pads are accounted for as inventories that are
measured at cost under IAS 2. As the valuable metal content is leached from these
ore stockpiles, the cost basis is depleted based upon expected grades and recovery
rates. The depletion charge should be accounted as the cost of production of work
in progress or finished goods;
• the level at which the heap leach pads are measured – that is, whether they are
measured separately, in groups or in total. The preferred approach is to consider
each pad separately (where possible) because this reduces the expected volatility
in ore type to more manageable levels; and
• ore stockpiles on heap leach pads from which metals are expected to be recovered
in a period longer than 12 months are generally classified as non-current assets.
Extractive
industries
3341
The extracts below from the financial statements of AngloGold Ashanti and Goldcorp
illustrate the issues that an entity will need to consider in developing an accounting
policy for heap leaching.
Extract 39.31: AngloGold Ashanti Limited (2017)
GROUP – NOTES TO THE FINANCIAL STATEMENTS [extract]
For the year ended 31 December
ANNEXURE A
Summary of significant accounting policies [extract]
INVENTORIES [extract]
Inventories are valued at the lower of cost and net realisable value after appropriate allowances for redundant and
obsolete items. Cost is determined on the following bases:
[...]
• heap leach pad materials are measured on an average total production cost basis.
Extract 39.32: Goldcorp (2017)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 [extract]
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [extract]
(l) Inventories and stockpiled ore [extract]
Finished goods, work-in-process, heap leach ore and stockpiled ore are measured at the lower of weighted average
cost and net realizable value. Net realizable value is calculated as the estimated price at the time of sale based on
prevailing and long-term metal prices less estimated future costs to convert the inventories into saleable form and
estimated costs to sell. [...]
Ore extracted from the mines is generally stockpiled and subsequently processed into finished goods (gold and by-
products in doré or concentrate form). Costs are included in work-in-process inventory based on current costs incurred
up to the point prior to the refining process, including applicable depreciation and depletion of mining interests, and
removed at the weighted average cost per recoverable ounce of gold. The average costs of finished goods represent
the average costs of work-in-process inventories incurred prior to the refining process, plus applicable refining costs.
The recovery of gold and by-products from certain oxide ore is achieved through a heap leaching process at
Peñasquito. Under this method, ore is stacked on leach pads and treated with a cyanide solution that dissolves the
gold contained within the ore. The resulting pregnant solution is further processed in a plant where the gold is
recovered. Costs are included in heap leach ore inventory based on current mining and leaching costs, including
applicable depreciation and depletion of mining interests, and removed from heap leach ore inventory as ounces of
gold are recovered at the weighted average cost
per recoverable ounce of gold on the leach pads. Estimates of
recoverable gold on the leach pads are calculated based on the quantities of ore placed on the leach pads (measured
tonnes added to the leach pads), the grade of ore placed on the leach pads (based on assay data), and a recovery
percentage (based on ore type).
Supplies are measured at weighted average cost. In the event that the net realizable value of the finished product, the
production of which the supplies are held for use in, is lower than the expected cost of the finished product, the
supplies are written down to net realizable value.
The costs of inventories sold during the period are presented as mine operating costs in the Consolidated Statements
of Earnings.
3342 Chapter 39
15
PROPERTY, PLANT AND EQUIPMENT
15.1 Major maintenance and turnarounds/renewals and
reconditioning costs
Some assets (e.g. refineries, smelters and gas processing plants) require major
maintenance at regular intervals, which is often described as an overhaul or turnaround
in the oil and gas sector and renewal or reconditioning in the mining sector. When an
entity incurs further costs in relation to an item of PP&E, IAS 16 requires it to determine
the nature of the costs. Where such costs provide access to future economic benefits
they should be capitalised. Costs of day-to-day servicing (e.g. costs of labour and
consumables, and possibly the cost of small parts) should be expensed as incurred.
[IAS 16.12]. If the costs relate to the replacement of a part of the entire asset then the entity
derecognises the carrying amount of the part that is replaced and recognises the cost of
the replacement part. [IAS 16.13]. However, the part need not represent a physical part of
the asset.
When a major inspection, renewal or reconditioning project is performed, its cost
should be recognised in the carrying amount of the item of property, plant and
equipment and any remaining carrying amount of the cost of the previous
inspection/renewal (which will be distinct from physical parts) is derecognised. This is
not affected by whether the entity identified the cost of the previous inspection when
the item was acquired or constructed. [IAS 16.14]. See Chapter 18 at 3.3.2.
Subsequent costs that meet the recognition criteria should therefore be capitalised even
if the costs incurred merely restore the assets to their original standard of performance,
and the remaining carrying amount of any cost previously capitalised should be
expensed. However, under IAS 37 an entity cannot provide for the costs of planned
future maintenance (e.g. turnarounds, renewals/reconditions) as is illustrated by
Example 39.9, based on Example 11A in IAS 37. [IAS 37 Appendix C].
Example 39.9: Refurbishment costs – no legislative requirement
A furnace has a lining that needs to be replaced every five years for technical reasons. At the end of the
reporting period, the lining has been in use for three years.
Under IAS 37 no provision should be recognised as there is no present obligation. The cost of replacing the
lining is not recognised because, at the end of the reporting period, no obligation to replace the lining exists
independently of the company’s future actions – even the intention to incur the expenditure depends on the
company deciding to continue operating the furnace or to replace the lining. Instead of a provision being
recognised, the depreciation of the lining takes account of its consumption, i.e. it is depreciated over five
years. The re-lining costs then incurred are capitalised with the consumption of each new lining shown by
depreciation over the subsequent five years.
Even a legal requirement to refurbish does not make the costs of a turnaround/renewal
a liability under IAS 37, because no obligation exists independently of the entity’s future
actions – the entity could avoid the future overhaul expenditure by its future actions,
for example by selling the refinery or the asset that is being renewed/reconditioned.
[IAS 37 IE Example 11B].
The extract below from BP illustrates a typical accounting policy for repairs,
maintenance and inspection costs under IFRS.
Extractive
industries
3343
Extract 39.33: BP p.l.c. (2017)
Notes on financial statements [extract]
1. Significant accounting policies, judgements, estimates and assumptions [extract]
Property, plant and equipment [extract]
Expenditure on major maintenance refits or repairs comprises the cost of replacement assets or parts of assets,
inspection costs and overhaul costs. Where an asset or part of an asset that was separately depreciated is
replaced and it is probable that future economic benefits associated with the item will flow to the group, the
expenditure is capitalized and the carrying amount of the replaced asset is derecognized. Inspection costs
associated with major maintenance programmes are capitalized and amortized over the period to the next
inspection. Overhaul costs for major maintenance programmes, and all other maintenance costs are expensed
as incurred.
Turnarounds/renewals can have a considerable impact on financial performance
because of additional costs incurred and lower revenues. Therefore, fairly detailed
information is generally disclosed about turnaround costs incurred in the past and
turnarounds planned in the future.
Extract 39.34: BP p.l.c. (2012)
Business review: Group overview [extract]
Our performance [extract]
Safety [extract]
We continued our programme of major upstream turnarounds, with 30 turnarounds completed in 2012. We expect to
carry out up to 22 further turnarounds in 2013.
Downstream [extract]
Refinery operations were strong this year, with Solomon refining availability of 94.8%. (See refining availability on
page 74.) Utilization rates were at 88% despite a relatively high level of turnaround activity in 2012.
Business review: BP in more depth [extract]
Profit or loss for the year [extract]
Compared with 2010, in 2011 there were higher realizations, higher earnings from equity-accounted entities, a higher
refining margin environment and a stronger supply and trading contribution, partly offset by lower production
volumes, rig standby costs in the Gulf of Mexico, higher costs related to turnarounds, higher exploration write-offs,
and negative impacts of increased relative sweet crude prices in Europe and Australia, primarily caused by the loss
of Libya production and the weather-related power outages in the US.
Risk factors [extract]
Strategic and commercial risks [extract]
Major project delivery – our group plan depends upon successful delivery of major projects, and failure to deliver
major projects successfully could adversely affect our financial performance.
Successful execution of our group plan depends critically on implementing the activities to deliver the major
projects over the plan period. Poor delivery of any major project that underpins production or production growth
and/or any other major programme designed to enhance shareholder value, including maintenance turnaround
programmes, could adversely affect our financial performance. Successful project delivery requires, among other
things, adequate engineer
ing and other capabilities and therefore successful recruitment and development of staff
is central to our plans.
3344 Chapter 39
15.2 Well workovers and recompletions (oil and gas)
Well workovers or recompletions are often required when the producing oil sands
become clogged and production declines or other physical or mechanical problems
arise.122 Workover costs that relate to the day-to-day servicing of the wells (i.e.
primarily the costs of labour and consumables, and possibly the cost of small parts)
should be expensed as incurred. However, as discussed at 15.1 above, costs incurred
to restore a well to its former level of production should be capitalised under IFRS,
but an entity should derecognise any relevant previously capitalised well completion
costs. However, to the extent that an entity can forecast future well workovers, it
will need to depreciate the original well completion costs over a shorter economic
life. Conversely, if an entity unexpectedly incurs well workover costs, it may need
to consider whether those additional costs result in the need to perform an
impairment test.
15.3 Care
and
maintenance
At certain times, a mining operation, gas plant or other substantial component of
operations may be suspended because of a change in circumstances, which may
include a weakening of global demand for the commodity, lower prices, higher costs,
changes in demand for processing, changes in exchange rates, changes in government
policy or other events of nature such as seismic events or cyclones. Such changes
mean that continuing with production or further development becomes
uneconomical. Instead of permanently shutting down and abandoning the mine or
plant, the operations and development are curtailed and the mine, plant or operation
is placed on ‘care and maintenance’. This can happen either in the development phase
or the production phase.
A decision to put an asset such as a mine or gas plant on care and maintenance would
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 661
