extracting that ore in future periods. In accordance with IAS 2, such costs should be
included in the cost of that subsequent ore. This effectively means that the depreciation
or amortisation of the stripping activity asset should be recapitalised as part of the cost
of the inventory produced in those subsequent periods. Once the inventory is sold,
those costs will be recognised in profit or loss as part of cost of goods sold.
15.5.5 Disclosures
IFRIC 20 has no specific disclosure requirements. However, the general disclosure
requirements of IAS 1 are relevant, e.g. the requirements to disclose significant
accounting policies, [IAS 1.117], and significant judgements, estimates and assumptions.
[IAS 1.125]. For many entities, it is likely that the accounting policy for stripping costs
would be considered a significant accounting policy which would therefore warrant
disclosure, as would the judgements, estimates and assumptions they make when
applying this policy.
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The extract below from Rio Tinto illustrates an IFRIC 20 accounting policy disclosure.
Extract 39.35: Rio Tinto plc (2017)
Notes to the 2017 financial statements [extract]
1 Principal accounting policies [extract]
(h) Deferred stripping (note 14)
In open pit mining operations, overburden and other waste materials must be removed to access ore from which minerals
can be extracted economically. The process of removing overburden and waste materials is referred to as stripping.
During the development of a mine (or, in some instances, pit; see below), before production commences, stripping costs
related to a component of an orebody are capitalised as part of the cost of construction of the mine (or pit) and are
subsequently amortised over the life of the mine (or pit) on a units of production basis.[...]
The Group’s judgment as to whether multiple pit mines are considered separate or integrated operations depends on each
mine’s specific circumstances.
The following factors would point towards the initial stripping costs for the individual pits being accounted for separately:
• If mining of the second and subsequent pits is conducted consecutively following that of the
first pit, rather than concurrently.
• If separate investment decisions are made to develop each pit, rather than a single investment
decision being made at the outset.
• If the pits are operated as separate units in terms of mine planning and the sequencing of
overburden removal and ore mining, rather than as an integrated unit.
• If expenditures for additional infrastructure to support the second and subsequent pits are
relatively large.
• If the pits extract ore from separate and distinct orebodies, rather than from a single orebody.
If the designs of the second and subsequent pits are significantly influenced by opportunities to optimise output from
several pits combined, including the co-treatment or blending of the output from the pits, then this would point to
treatment as an integrated operation for the purposes of accounting for initial stripping costs.
The relative importance of each of the above factors is considered in each case.
In order for production phase stripping costs to qualify for capitalisation as a stripping activity asset, three criteria must be met:
• It must be probable that there will be an economic benefit in a future accounting period because
the stripping activity has improved access to the orebody;
• It must be possible to identify the “component” of the orebody for which access has been
improved; and
• It must be possible to reliably measure the costs that relate to the stripping activity.
A “component” is a specific section of the orebody that is made more accessible by the stripping activity. It will
typically be a subset of the larger orebody that is distinguished by a separate useful economic life (for example, a
pushback).
Production phase stripping can give rise to two benefits: the extraction of ore in the current period and improved
access to ore which will be extracted in future periods. When the cost of stripping which has a future benefit is not
distinguishable from the cost of producing current inventories, the stripping cost is allocated to each of these activities based on a relevant production measure using a life-of-component strip ratio. The ratio divides the tonnage of waste
mined for the component for the period either by the quantity of ore mined for the component or by the quantity of
minerals contained in the ore mined for the component. In some operations, the quantity of ore is a more appropriate
basis for allocating costs, particularly where there are significant by-products. Stripping costs for the component are
deferred to the extent that the current period ratio exceeds the life of component ratio. The stripping activity asset is depreciated on a “units of production” basis based on expected production of either ore or minerals contained in the
ore over the life of the component unless another method is more appropriate.
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The life-of-component ratios are based on the ore reserves of the mine (and for some mines, other mineral resources) and
the annual mine plan; they are a function of the mine design and, therefore, changes to that design will generally result in changes to the ratios. Changes in other technical or economic parameters that impact the ore reserves (and for some
mines, other mineral resources) may also have an impact on the life-of-component ratios even if they do not affect the
mine design. Changes to the ratios are accounted for prospectively.
It may be the case that subsequent phases of stripping will access additional ore and that these subsequent phases are only possible after the first phase has taken place. Where applicable, the Group considers this on a mine-by-mine basis.
Generally, the only ore attributed to the stripping activity asset for the purposes of calculating a life-of-component ratio, and for the purposes of amortisation, is the ore to be extracted from the originally identified component.
Deferred stripping costs are included in “Mining properties and leases” within “Property, plant and equipment” or
within “Investments in equity accounted units”, as appropriate. Amortisation of deferred stripping costs is included
in “Depreciation of property, plant and equipment” within “Net operating costs” or in “Share of profit after tax of
equity accounted units”, as appropriate.
Critical accounting policies and estimates [extract]
(v) Deferral of stripping costs (note 14)
Stripping of waste materials takes place throughout the production phase of a surface mine or pit. The identification
of components within a mine and of the life of component strip ratios requires judgment and is dependent on an
individual mine’s design and the estimates inherent within that. Changes to that design may introduce new
components and/or change the life of component strip ratios. Changes in other technical or economic parameters that
impact ore reserves may also have an impact on the life of component strip ratios, even if they do not affect the mine’s
design. Changes to the life of component strip ratios, are accounted for prospectively.
The Group’s judgment as to whether multiple pit mines are considered separate or integrated operations determines
whether initial stripping of a pit is deemed to be pre-production or production phase stripping and, the
refore, the
amortisation base for those costs. The analysis depends on each mine’s specific circumstances and requires judgment:
another mining company could make a different judgment even when the fact pattern appears to be similar.
14 Property, plant and equipment [extract]
(a) At 31 December 2017, the net book value of capitalised production phase stripping costs totalled
US$1,815 million, with US$1,374 million within Property, plant and equipment and a further US$441 million
within Investments in equity accounted units (2016 total of US$1,967 million with US$1,511 million in
Property, plant and equipment and a further US$456 million within Investments in equity accounted units).
During the year capitalisation of US$327 million was partly offset by depreciation of US$299 million
(including amounts recorded within equity accounted units). Depreciation of deferred stripping costs in respect
of subsidiaries of US$194 million (2016: US$203 million; 2015: US$173 million) is included within
“Depreciation for the year”.
16 DEPRECIATION,
DEPLETION AND AMORTISATION
(DD&A)
16.1 Requirements under IAS 16 and IAS 38
The main types of depreciable assets of mining companies and oil and gas companies
are property, plant and equipment, intangible assets and mineral reserves, although the
exact titles given to these types of assets may vary.
While ‘mineral rights and expenditure on the exploration for, or development and
extraction of, minerals, oil, natural gas and similar non-regenerative resources’ are
outside the scope of IAS 16 and IAS 38, any items of property, plant and equipment
(PP&E) and other intangible assets that are used in the extraction of mineral reserves
should be accounted for under IAS 16 and IAS 38. [IAS 16.2, 3, IAS 38.2].
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For items of PP&E, various descriptions are used for such assets which can include
producing mines, mine assets, oil and gas assets, producing properties. Whatever the
description given, IAS 16 requires depreciation of an item of PP&E over its useful life.
Depreciation is required to be calculated separately for each part (often referred to as a
‘component’), of an item of PP&E with a cost that is significant in relation to the total
cost of the item, unless the item can be grouped with other items of PP&E that have the
same useful life and depreciation method. [IAS 16.43, 45].
The guidance in IAS 16 relating to parts of an asset does not apply directly to intangible
assets as IAS 38 does not apply a ‘parts’ approach, or to mineral rights, but we believe
that entities should use the general principles for determining an appropriate unit of
account that are outlined at 4 above. IAS 16’s general requirements are described in
Chapter 18 and IAS 38 is addressed in Chapter 17.
16.1.1 Mineral
reserves
In the absence of a standard or an interpretation specifically applicable to mineral
reserves and their related expenditures, which are technically outside the scope of
IAS 16 and IAS 38, management needs to develop an accounting policy for the
depreciation or amortisation of mineral reserves in accordance with the hierarchy in
IAS 8, taking into account the requirements and guidance in Standards and
Interpretations dealing with similar and related issues and the definitions, recognition
criteria and measurement concepts for assets, liabilities, income and expenses in the
Conceptual Framework. [IAS 8.11]. In practice, an entity will generally develop an
accounting policy that is based on the depreciation and amortisation principles in IAS 16
and IAS 38, which deal with similar and related issues.
16.1.2
Assets depreciated using the straight-line method
The straight-line method of depreciation is generally preferred in accounting for the
depreciation of property, plant and equipment. The main practical advantages of the
straight-line method are considered to be its simplicity and the fact that its results are often
not materially different from the units of production method if annual production is
relatively constant.129 In general, the straight-line method is considered to be preferable for:
• assets whose loss in value is more closely linked to the passage of time than to the
quantities of minerals produced (e.g. front-end loaders that are used in stripping
overburden and production of minerals);
• assets that are unrelated to production and that are separable from the field or mine
(e.g. office buildings);
• assets with a useful life that is either much longer (e.g. offshore platforms) or much
shorter (e.g. drill jumbos) than that of the field or mine in which they are used;
• assets used in fields or mines whose annual production is relatively constant.
However, if assets are used in fields or mines that are expected to suffer extended
outages, due to weather conditions or periodic repairs and maintenance, then the
straight-line method may be less appropriate; and
• assets that are used in more than one field or mine (e.g. service trucks).
If the production of a field or mine drops significantly towards the end of its productive
life, then the straight-line method may result in a relatively high depreciation charge per
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unit of production in these latter years. In those cases, an entity may need to perform
an impairment test on the assets involved.
The extract below indicates the assets to which BHP applies the straight-line method.
Extract 39.36: BHP Billiton plc (2017)
Notes to the Financial Statements [extract]
10 Property, plant and equipment [extract]
Where assets are dedicated to a mine or petroleum lease, the below useful lives are subject to the lesser of the asset
category’s useful life and the life of the mine or petroleum lease, unless those assets are readily transferable to another productive mine or lease.
Depreciation
The estimation of useful lives, residual values and depreciation methods require significant management judgement
and are reviewed annually. Any changes to useful lives may affect prospective depreciation rates and asset carrying
values.
Depreciation of assets, other than land, assets under construction and capitalised exploration and evaluation that are
not depreciated, is calculated using either the straight-line (SL) method or units of production (UoP) method, net of
residual values, over the estimated useful lives of specific assets. The depreciation method and rates applied to specific assets reflect the pattern in which the asset’s benefits are expected to be used by the Group. The Group’s reported
reserves are used to determine UoP depreciation unless doing so results in depreciation charges that do not reflect the
asset’s useful life. Where this occurs, alternative approaches to determining reserves are applied, such as using
management’s expectations of future oil and gas prices rather than yearly average prices, to provide a phasing of
periodic depreciation charges that better reflects the asset’s expected useful life.
The table below summarises the principal depreciation methods and rates applied to major asset categories by the
Group.
Capitalised
exploration,
Mineral rights
eva
luation and
Plant and
and petroleum
development
Category Buildings equipment
interests
expenditure
Typical
depreciation
methodology
SL SL UoP
UoP
Based on the rate of
Based on the rate of
depletion of
depletion of
Depreciation rate
25-50 years
3-30 years
reserves
reserves
16.1.3
Assets depreciated using the units of production method
When it comes to assets relating to mineral reserves, the units of production method is
the most common method applied. ‘The underlying principle of the units of production
method is that capitalised costs associated with a cost centre are incurred to find and
develop the commercially producible reserves in that cost centre, so that each unit
produced from the centre is assigned an equal amount of cost.’130 The units of production
method thereby effectively allocates an equal amount of depreciation to each unit
produced, rather than an equal amount to each year as under the straight-line method.
When the level of production varies considerably over the life of a project (e.g. the
production of oil fields is much higher in the periods just after the start of production
than in the final periods of production), depreciation based on a units of production
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method will produce a more equal cost per unit from year to year than straight-line
methods. Under the straight-line method the depreciation charge per unit in the early
years of production could be much less than the depreciation per unit in later years.
‘That factor, coupled with the fact that typically production costs per unit increase in
later years, means that the profitability of operations would be distorted if the straight-
line method is used, showing larger profits in early years and lower profits in later years
of the mineral resource’s life. The higher cost per unit in later years is, in part, due to
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 665
