Once the functional currency is determined, the standard allows it to be changed only
if there is a change in those underlying transactions, events and conditions. For example,
a change in the currency that mainly influences the sales prices of goods and services
may lead to a change in an entity’s functional currency. [IAS 21.36].
3280 Chapter 39
The extract below, from Angel Mining plc’s financial statements, provides an example
of a change in conditions that resulted in a change in functional currency. Accounting
for a change in functional currency is discussed in Chapter 15 at 5.5.
Extract 39.17: Angel Mining plc (2010)
Notes to the financial statements
Year ended 28 February 2010 [extract]
1a. Basis of preparation – Change in functional currency
Previously, the directors considered the functional currency of the Company to be Sterling. In light of developments
within the Company’s operations and the nature of its funding, the directors have reassessed the functional currency
of the Company and concluded that the currency of the primary economic environment in which Angel Mining
operates is now the US dollar. The date of change from Sterling to US dollars has been taken as 1 March 2009. The
key factors influencing this decision include the following:
(i)
During the year, the Company acquired the Nalunaq license and mining assets. This will be the first producing
mine for the Company. The consideration for these assets was paid in US dollars;
(ii)
During the year, the Company sourced plant, machinery and employees with technical skills on a global
basis. A significant proportion of these costs were based in US dollars. In prior years, the Company’s costs
had been incurred primarily in Sterling;
(iii)
The Company’s primary form of finance during the period was the long term and short term debt facilities
provided by FBC. These facilities are all based in US dollars. During prior periods, the Company had been
more heavily dependent upon equity finance which was denominated in Sterling;
(iv)
The vast majority of the forms of finance which the Company has been pursuing and is likely to pursue going
forward are US dollar based;
(v)
Commencing during the year, one of the largest consumables used by the Company in its operations in
Greenland was diesel fuel. Although the Company pays for its diesel in Danish Kroner, the price of diesel is
determined globally and priced in US dollars; and
(vi)
The resources that the Company is working to exploit are global commodities which are always priced in US
dollars. When the Company begins producing, all its revenues will be dollar based.
The change in the Company’s functional currency has been accounted for prospectively from 1 March 2009 in
accordance with IAS 21. This change constituted a prospective change in accounting policy. The financial statements
for 2009 have been prepared using Sterling as the functional currency and US dollars as the presentational currency.
The change in the presentational currency from Sterling to US dollar is and therefore is applied retrospectively in
accordance with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ and therefore require
comparative information to be restated and consequently, a third balance sheet is required to be presented in the
financial statements.
The impact of this change in presentational currency for 2009, is as follows:
(i)
The assets and liabilities for both the Group and the Company at 28 February 2009 have been translated using
the closing rate for the same date of $1.426/£;
(ii)
The consolidated income statement for 2009 has been translated using the average rate for the year ended
28 February 2009 of $1.771/£ on the basis that this average rate approximates the exchange rates on the dates
of transactions; and
The resulting gain on retranslation from average to closing rate has been recognised in the consolidated statement of
comprehensive income.
Extractive
industries
3281
10 DECOMMISSIONING
AND
RESTORATION/REHABILITATION
The operations of entities engaged in extractive industries can have a significant impact
on the environment. Decommissioning or restoration activities at the end of a mining or
oil and gas operation may be required by law, the terms of mineral licences or an entity’s
stated policy and past practice. The associated costs of decommissioning, remediation
or restoration can be significant. The accounting treatment for such costs is therefore
critical. Different terms may be used, often interchangeably, to essentially refer to the
same activity, e.g. restoration, remediation and rehabilitation. In this section we shall
use the words decommissioning and restoration.
Accounting for decommissioning and restoration costs is governed by the requirements
of IAS 37 and IFRIC 1. The discussion below should be read in conjunction with
Chapter 18 (Property, Plant and Equipment) at 4.3, Chapter 27 (Provisions, Contingent
Liabilities and Contingent Assets) and Chapter 29 (Income Taxes) at 7.2.7.A. Some of
the specific issues to consider with respect to such provisions are listed below:
• initial recognition – see 10.1.1 below;
• initial measurement – see 10.1.2 below;
• discount rates – see Chapter 27 at 4.3;
• decommissioning or restoration costs incurred in the production phase –
see 10.1.3 below;
• changes in decommissioning and restoration/rehabilitation costs – see Chapter 27
at 6.3.1 and 6.3.2;
• treatment of foreign exchange differences – see 10.2 below;
• accounting for deferred taxes – see Chapter 29 at 7.2.7.A;
• indefinite life assets – see 10.3 below; and
• funds established or put aside to meet a decommissioning or restoration obligation
– see Chapter 27 at 6.3.3.
10.1 Recognition and measurement issues
10.1.1 Initial
recognition
Initial recognition of a decommissioning or restoration provision only on commencement
of commercial production is generally not appropriate under IFRS, because the obligation
to remove facilities and to restore the environment typically arises during the
development/construction of the facilities, with some further obligations arising during
the production phase. Therefore, a decommissioning or restoration provision should be
recognised during the development or construction phase (see 1.6.1 above) of the project,
i.e. before any production takes place, and should form part of the cost of the assets
acquired or constructed. It may also be necessary to recognise a further decommissioning
or restoration provision during the production phase (see 10.1.3 below).
While the damage caused in the exploration phase may generally be immaterial, an
entity should recognise a decommissioning or restoration provision where the
damage is material and the entity will be required to carry out remediation. The
accounting for such a provision will depend on how the related E&E costs have been
accounted for. If the E&E costs are capitalised, the associated decommissioning costs
3282 Chapte
r 39
should also be capitalised. However, if the E&E costs are expensed, any associated
decommissioning or restoration costs should also be expensed.
Finally, even if decommissioning and restoration were not planned to take place in the
foreseeable future (for example because the related assets are continually renewed and
replaced), IAS 37 would still require a decommissioning or restoration provision to be
recognised. However, in these cases the discounted value of the obligation may be
comparatively insignificant.
10.1.2
Measurement of the liability
Measurement of a decommissioning or restoration provision requires a significant
amount of judgement because:
• the amount of remedial work required will depend on the scale of the operations.
In the extractives industries the environmental damage may vary considerably
depending on the type and development of the project;
• the amount of remedial work further depends on environmental standards
imposed by local regulators, which may vary over time;
• detailed decommissioning and remedial work plans will often not be developed
until fairly shortly before closure of the operations;
• it may not always be clear which costs are directly attributable to decommissioning
or restoration (e.g. security costs, maintenance cost, ongoing environmental
monitoring and employee termination costs);
• the timing of the decommissioning or restoration depends on when the fields or
mines cease to produce at economically viable rates, which depends upon future
commodity prices and reserves; and
• the actual decommissioning or restoration work will often be carried out by
specialised contractors, the cost of which will depend on future market prices for
the necessary remedial work.
Many of the uncertainties above can only be finally resolved towards the end of the
production phase, shortly before decommissioning and restoration are to take place. A
significant increase in the decommissioning or restoration provision resulting from revised
estimates would result in recognition of an additional asset. However, as IFRIC 1 specifically
states that any addition to an asset as a result of an increase in a decommissioning or
restoration provision is considered to be a trigger for impairment testing, a significant
increase in a decommissioning or restoration provision close to the end of the production
phase may lead to an immediate impairment of that additional asset. Conversely, a decrease
in the decommissioning or restoration provision could exceed the carrying amount of the
related asset, in which case the excess should be recognised as a gain in profit or loss.
10.1.3
Decommissioning or restoration costs incurred in the production phase
IAS 16 considers the initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located to be part of the cost of an item of property, plant
and equipment. [IAS 16.16(c)]. However, an entity should apply IAS 2 to the costs of
obligations for dismantling, removing and restoring the site on which an item is located that
are incurred during a particular period as a consequence of having used the item to produce
inventories during that period. [IAS 16.18]. That means that such additional decommissioning
Extractive
industries
3283
or restoration costs resulting from production activities should be included in the cost of
inventories, [IAS 2.10], while decommissioning costs resulting from the construction of assets
during the production phase should be accounted for as discussed above.
An entity that incurs abnormal amounts of costs (e.g. costs of remediation of soil
contamination from oil spills or overflowing of a tailings pond) should not treat these as
part of the cost of inventories under IAS 2, but expense them immediately. [IAS 2.16].
10.2 Treatment of foreign exchange differences
In most cases it will be appropriate for the exchange differences arising on provisions
to be taken to profit or loss in the period they arise. However, it may be that an entity
has recognised a decommissioning provision under IAS 37 and capitalised it as part of
the initial cost of an asset under IAS 16. One practical difficulty with decommissioning
provisions recognised under IAS 37 is that due to the long period over which the actual
cash outflows will arise, an entity may not know the currency in which the transaction
will actually be settled. Nevertheless, if it is determined that it is expected to be settled
in a foreign currency it will be a monetary item. The main issue then is what should
happen to any exchange differences.
As discussed in Chapter 27 at 6.3, IFRIC 1 applies to any decommissioning or similar
liability that has been both included as part of an asset and measured as a liability in
accordance with IAS 37. IFRIC 1 requires, inter alia, that any adjustment to such a provision
resulting from changes in the estimated outflow of resources embodying economic benefits
(e.g. cash flows) required to settle the obligation should not be taken to profit or loss as it
occurs, but should be added to or deducted from the cost of the asset to which it relates.
Therefore, the requirement of IAS 21 to take the exchange differences arising on the
provision to profit or loss in the period in which they arise conflicts with this requirement
in IFRIC 1. It is our view that IFRIC 1 is the more relevant pronouncement for
decommissioning purposes, therefore we consider that this type of exchange difference
should not to be taken to profit or loss, but dealt with in accordance with IFRIC 1.
10.3 Indefinite life assets
While the economic lives of oil fields and mines are finite, certain infrastructure assets
(e.g. pipelines and refineries) are continually being repaired, replaced and upgraded.
While individual parts of such assets may not have an indefinite economic life, these
assets may occupy a particular site for an indefinite period.
Regardless of whether or not the related asset has an indefinite life, the decommissioning
provision will normally meet the criteria relating to the recognition of a provision as set
out in IAS 37.14(a) and (b), in that an entity will have a present obligation and it will be
probable that an outflow of resources will be required to settle the obligation. With
respect to the final criterion in paragraph (c), while it might seem that a reliable estimate
of the decommissioning provision cannot be made if the underlying asset has an indefinite
life, ‘indefinite’ does not mean that the asset has an infinite life but that the life is long and
has not yet been determined. IAS 37 presumes that:
‘Except in extremely rare cases, an entity will be able to determine a range of
possible outcomes and can therefore make an estimate of the obligation that is
sufficiently reliable to use in recognising a provision.’ [IAS 37.25].
3284 Chapter 39
Therefore, it should be extremely rare for an entity to conclude that it cannot make a
reliable estimate of the amount of the obligation. Even if an entity did conclude in an
extremely rare case that no reliable estimate could be made, there would still be a
contingent liability and the foll
owing disclosures would be required:
• a brief description of the nature of the contingent liability; and
• where practicable:
• an estimate of its financial effect, measured under paragraphs 36-52 of IAS 37;
• an indication of the uncertainties relating to the amount or timing of any
outflow; and
• the possibility of any reimbursement. [IAS 37.26, 86].
Finally, it should be noted that the discounted value of decommissioning costs that will
only be incurred far into the future may be relatively insignificant.
11
IMPAIRMENT OF ASSETS
The following issues require additional attention when a mining company or oil and gas
company applies the impairment testing requirements under IFRS:
• impairment indicators (see 11.1 below);
• identifying cash-generating units (see 11.2 below);
• projections of cash flows (see 11.4.2 and 11.5.1 below);
• cash flows from mineral reserves and resources and the appropriate discount rate
(see 11.4.2.A below);
• commodity price assumptions (see 11.4.3 and 11.5.2 below).
• future capital expenditure (see 11.4.4 and 11.5.3 below);
• foreign currency cash flows (see 11.4.5 and 11.5.4 below); and
• consistency in cash flows and carrying amount of CGU (see 11.4.1 below).
The general requirements of IAS 36 are covered in Chapter 20.
11.1 Impairment
indicators
Impairment indicators applicable to assets of mining companies and oil and gas
companies are found in two places, IFRS 6 and IAS 36. IFRS 6 describes a number of
situations in which an entity should test E&E assets for impairment, discussed at 3.5.1
above, while an entity should apply the impairment indicators in IAS 36 to assets other
than E&E assets. The lists of impairment indicators in IFRS 6 and IAS 36 are not
exhaustive. Entities operating in the extractive industries may also consider carrying out
an impairment test in the following situations:107
• declines in prices of products or increases in production costs;
• governmental actions, such as new environmental regulations, imposition of price
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 649