International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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Application of this allocation methodology effectively involves a comparison of the
expected level of activity for that component with the actual level of activity for the
same component, to identify when additional activity may have occurred and may be
creating a future benefit. See 15.5.3.B below for further discussion about how to
determine a component.
Where the actual level of activity exceeds the expected level of activity, the waste
removal activity incurred at the expected level and its associated costs would then form
part of the cost of inventory produced in that period. Any excess of actual activity over
the expected level (and the associated costs of such excess activity) needs to be
considered to determine whether it represents a stripping activity asset.
It is important to note that where actual stripping levels exceed those expected for the
identified component, this will not automatically result in the recognition of a stripping
activity asset. An entity will need to assess whether the removal of such additional waste
has actually resulted in a future economic benefit, i.e. improved access to future ore. If
not, such costs should not be capitalised as an asset, but instead should be recognised in
profit or loss in the period incurred. For example, the mining of an unexpected fault or
dyke should not be capitalised but instead expensed as incurred.
Where actual waste removal activity is less than the expected level of activity, only the
actual waste removed and its associated costs, not the expected costs, will form part of
the cost of inventory produced in that period. This is because continuing to recognise
waste costs at the expected level would require an entity to recognise a deferred
stripping liability. This is not permitted under IFRIC 20 or generally under IFRS
because, in the absence of a legal or constructive obligation to continue to mine the
deposit, such costs would not satisfy the criteria to be recognised as a liability.
It is worth noting that while some of the allocation approaches set out in the
Interpretation are similar to the life-of-mine average strip ratio approach used by many
entities prior to the introduction of IFRIC 20, there are differences.
The key difference is that the level at which the expected level of activity is to be
determined when calculating the relevant production measure is likely to be lower than
that was previously used for the life-of-mine average strip ratio approach. The life-of-
mine average strip ratio approach used the entire ore body, whereas IFRIC 20 requires
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this to be determined for each component of the ore body, which is expected to be a
subset of the ore body. See 15.5.3.B below for further discussion about how to determine
a component.
The other difference relates to the way in which any stripping activity asset is
recognised in profit or loss. Under the life-of-mine average stripping ratio approach, a
portion of the deferred stripping asset was recognised in profit or loss when the actual
stripping ratio fell below the expected average life-of-mine strip ratio. Under IFRIC 20
however, the stripping activity asset is to be depreciated or amortised over the useful
life of the identified component of the ore body that becomes more accessible. The
units of production (UOP) method is to be used unless another method is more
appropriate. [IFRIC 20.15].
It is important to note that the calculation of the expected production measure for each
component will need to be reviewed and updated if there are material changes to the
mine plan for that component (for example due to differences in actual versus budgeted
performance or changes in future mining plans resulting from other factors, e.g. changes
in commodity prices or increases in costs). Should these changes impact the expected
production measure for the remaining life of the component, then the IFRIC 20
calculations will need to be updated and applied on a prospective basis. The calculation
of the expected production measures will also be required if and when new components
commence production.
Example 39.14: Allocating costs between inventory and the stripping activity
asset
Scenario A – actual performance measure exceeds the expected performance measure
The following example illustrates how an entity would allocate costs between inventory and the stripping
activity asset where the actual performance measure exceeds the expected performance measure for a
component in a particular period.
Assume Entity A has a mine which comprises two separate pits which are accessing the one ore body. For
the purposes of IFRIC 20, each pit is identified as a component. Pit 1 has a total life of three years and at
reporting period end, has been in production for one year. Pit 2 has a total life of five years but production
has not yet commenced.
At the commencement of production from pit 1, the company has forecast the following mining and stripping
activity:
Expected ore to be extracted over the 3 years
1,000 tonnes
Expected volume of waste to be extracted over the 3 years
3,000 tonnes
During the current period, the following had occurred in relation to the production from pit 1:
Cost incurred for mining activity
$13,000,000 (a)
Actual tonnes of ore removed
100 tonnes (b)
Actual tonnes of waste removed
1,200
tonnes
(c)
Average cost per tonne in year 1 = (a) / [(b)+(c)]
$10,000
The company determined that it is not practically possible to identify separately what portion of the waste
removal costs leads to the extraction of inventory and what portion to improved access to future ore. This is
because these two activities were occurring simultaneously as there were multiple shovels in operation in
multiple parts of the component and a single haulage fleet was used.
Given this, the company has decided that it will allocate costs by comparing the actual volume of waste and
ore extracted (the actual strip ratio) in the period with the expected volume of waste and ore (expected strip
ratio) for the life of the component i.e. for pit 1.
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The allocation of the actual waste removal costs incurred will involve the following steps:
Step 1: Calculate the expected strip ratio for pit 1
Expected volume of waste to be extracted / expected volume of ore to be extracted
= 3,000 tonnes / 1,000 tonnes
= 3.00 (expected strip ratio)
This means that for every 1 tonne of ore extracted over the life of pit 1, the company expects (on average)
to remove 3 tonnes of waste.
Step 2: Calculate the additional waste extracted compared to the expected waste extracted for the actual
volume of ore extracted
Actual volume of ore extracted × expected strip ratio
= 100 tonnes × 3 tonnes
= 300 tonnes
Actual volume of waste extracted in year 1 = 1,200 tonnes
Additional waste extracted in year 1 = actual waste extracted less expected waste to be extracted
= 1,200 tonnes – 300 tonnes
= 900 tonnes of additional waste was extracted
Step 3: Alloca
te mining costs between inventory and the stripping activity asset
Stripping activity asset
Additional waste tonnes removed × cost per tonne
= 900 tonnes × $10,000
=
$9,000,000
Inventory
Total mining costs incurred less costs allocated to the stripping activity asset
= $13,000,000 – $9,000,000
=
$4,000,000
This
comprises:
(1) The cost of extracting the inventory tonnes
= 100 × $10,000
=
$1,000,000
Plus:
(2) The cost of waste removal allocated directly to inventory (which was allocated at the expected level
of 3:1)
= 300 tonnes × $10,000
=
$3,000,000
Scenario B – actual strip ratio is less than the expected strip ratio
Assume the same basic fact pattern as per Scenario A above, but with different actual mining results for pit 1
in the current period:
Cost incurred for mining activity
$13,000,000 (a)
Actual tonnes of ore removed
1,200 tonnes (b)
Actual tonnes of waste removed
100
tonnes
(c)
Average cost per tonne in year 1 = (a) / [(b) + (c)]
$10,000
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The allocation of the actual waste removal costs incurred will involve the following steps:
Step 1: Calculate the expected strip ratio for pit 1
Expected volume of waste to be extracted / expected volume of ore to be extracted
= 3,000 tonnes / 1,000 tonnes
= 3.00 (expected strip ratio)
This means that for every 1 tonne of ore extracted over the life of pit 1, the company expects (on average)
to remove 3 tonnes of waste.
Step 2: Calculate the additional waste extracted compared to the expected waste extracted for the actual
volume of ore extracted
Actual volume of ore extracted × expected strip ratio
= 1,200 tonnes × 3 tonnes
= 3,600 tonnes
Actual volume of waste extracted in year 1 = 100 tonnes
During the current period the actual strip ratio was only 0.0833. As this is less than the expected strip
ratio, as explained above, there is no additional waste removed during the period.
Step 3: Allocate mining costs between inventory and the stripping activity asset
Stripping activity asset
As the actual strip ratio was below the expected strip ratio, no additional waste was removed during the
period; therefore there is no amount to be added to the stripping activity asset.
Inventory
As the actual amount of waste removed during the current period is less than the expected level of waste
for the life of the component, and there is no amount to be allocated to the stripping activity asset, then
the total mining costs for the period will be allocated to inventory.
=
$13,000,000
This
comprises:
(1) The cost of extracting the inventory tonnes
= 1,200 × $10,000
=
$12,000,000
Plus:
(2) The cost of waste removal allocated directly to inventory (which is allocated based on the actual
waste tonnes removed during the period)
= 100 tonnes × $10,000
=
$1,000,000
15.5.3.B
Identifying the component of the ore body
Identifying the various components of the ore body is one of the critical steps in
applying IFRIC 20. This is necessary for several reasons:
(a) production stripping costs can only be capitalised as an asset if the component of
the ore body for which access has been improved, can be identified;
(b) to allocate stripping activity costs between inventory and the stripping activity
asset, an entity needs to determine the expected level of activity for each
component of the mine; and
(c) the stripping activity asset is required to be depreciated or amortised on a
systematic basis, over the expected useful life of the identified component of the
ore body that becomes more accessible as a result of the stripping activity.
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The Interpretation provides limited guidance on how to identify components, although
it does appear a component is expected to be a subset of the whole ore body. This view
is supported in several parts of IFRIC 20.
• A ‘component’ refers to the specific volume of the ore body that is made more
accessible by the stripping activity; the identified component of the ore body
would typically be a subset of the total ore body of the mine; and a mine may have
several components, which are identified during the mine planning stage.
[IFRIC 20.BC8].
• The depreciation or amortisation requirements state that the expected useful life
of the identified component of the ore body that is used to depreciate or amortise
the stripping activity asset will differ from the expected useful life that is used to
depreciate or amortise the mine itself and the related life-of-mine assets, unless
the stripping activity provides improved access to the whole of the ore body.
[IFRIC 20.BC17].
In practice, the identification of components of an ore body is a complex process which
requires a significant amount of management judgement. While it is considered that an
entity’s mine plan will provide the information required allowing these judgements to
be made with reasonable consistency, this may not be a straightforward exercise, and it
will be particularly challenging for the more complex mines. This is because ore bodies
vary significantly in shape and size and are more haphazard than often illustrated in
simple examples. Management may identify components in a number of different ways.
These could include identifying discrete components in the mine plan, such as phases,
sections, push backs, cutbacks, lay backs, blocks, etc.; examining annual production
plans; or examining push back campaigns. Whatever approach is adopted, it is essential
that the components are recognisable to those who are responsible for mine planning
as they will be the ones who will need to track progress as ore is removed and will need
to update the assessment of components should the mine plan change. Given this,
practice has revealed that when identifying the components of an ore body, it is
essential that input is obtained from those who best understand the mine plan, i.e. the
mining engineers and operational personnel.
The identification of components will need to be reassessed and updated (if necessary)
whenever there are material changes to the mine plan. Given this, an entity will need to
establish systems, processes, procedures and controls to ensure it is able to identify
when material changes to the mine plan have occurred that would require the IFRIC 20
calculations to be updated. Identification of components will also be required when an
entity commences production on a new component of the ore body or in relation to a
new ore body.
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15.5.4 Subsequent
measurement
After initial recognition, the stripp
ing activity asset must be carried at its cost or revalued
amount less depreciation or amortisation and less impairment losses, in the same way
as the existing asset of which it is a part. [IFRIC 20.14]. The stripping activity asset is to be
depreciated or amortised on a systematic basis, over the expected useful life of the
identified component of the ore body that becomes more accessible as a result of the
stripping activity. [IFRIC 20.15].
The units of production method is effectively required to be applied unless another
method is more appropriate. [IFRIC 20.15]. The expected useful life of the identified
component that is used to depreciate or amortise the stripping activity asset will differ
from the expected useful life that is used to depreciate or amortise the mine itself and
the related life-of-mine assets, unless the stripping activity provides improved access to
the whole of the ore body (this is expected to be rare). [IFRIC 20.16].
Consistent with the units of production method used for other mining assets, the
calculation of the units of production rate will be completed when a stripping activity
asset is first recognised. It will then need to be reviewed (and if necessary, updated) at
the end of each reporting period, or when the mine plan changes. The new units of
production rate will be applied prospectively.
Given the depreciation or amortisation of the stripping activity asset represents the
consumption of the benefits associated with the stripping activity asset, and those
benefits are realised by the extraction of the ore to which the stripping activity asset
relates (i.e. the ore for which access was improved by the removal of this waste in prior
periods), this depreciation or amortisation effectively represents part of the cost of