International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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1,080
1,080
Exploration and development asset at 31/12/2017
before redetermination
280
2,520
2,800
A
B
Total
Total investment based on ‘initial determination’:
A: 10% of $4,000 = $400 and B: 90% of $4,000 = $3,600
400
3,600
4,000
Total investment based on redetermination:
A: 8% of $4,000 = $320 and B: 92% of $4,000 = $3,680
320
3,680
4,000
Reimbursement of exploration and development costs
80
–80
–
Decommissioning asset at 1/1/2015
100
900
1,000
Units of production depreciation:
$100 ÷ 100 mboe × 30 mboe =
30
30
$900 ÷ 900 mboe × 270 mboe =
270
270
Decommissioning asset at 31/12/2017
before redetermination
70
630
700
Decommissioning provision at 1/1/2015
100
900
1,000
Accreted interest from 1/1/2015 to 31/12/2017
20
180
200
Decommissioning provision at 31/12/2017
before redetermination
120
1,080
1,200
Reduction in decommissioning provision
–24
24
–
Decommissioning provision at 1/1/2018:
A: 8% of $1,200 = $96 and B: 92% of $1,200 = $1,104
96
1,104
1,200
There are different ways in which an entity might interpret the effect of a redetermination on the exploration
and development asset:
(a) Reimbursement of capital expenditure; or
(b) Sale/purchase of a partial interest.
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Reimbursement of capital expenditure
Under this approach, the redetermination is treated as a reimbursement of capital expenditure and the ‘make-
up’ oil is accounted for prospectively. This would lead entity A to make the following journal entries:
$
$
Dr Cash
80
Cr Exploration and development asset
80
The reimbursement of exploration and development costs is accounted for as a reduction in
the exploration and development asset.
The overall impact on the statement of financial position of both Entities A and B is summarised in the table
below:
A
B
Total
$
$
$
Exploration and development asset at 31/12/2017
before redetermination
280
2,520
2,800
Reimbursement of exploration and development costs
–80
80
–
Exploration and development asset at 1/1/2018
after redetermination
200
2,600
2,800
Before the redetermination both A and B would record depreciation of the exploration and development asset
of $4/barrel (i.e. A: $400 ÷ 100 mboe = $4/barrel and B: $3,600 ÷ 900 mboe = $4/barrel). After the
redetermination the depreciation of the exploration and development asset is still $4/barrel for both A and B
(i.e. A: $200 ÷ 50 mboe = $4/barrel and B: $2,600 ÷ 650 mboe = $4/barrel).
Sale/purchase of a partial interest
The second approach, which is sometimes advocated, is to treat the redetermination as the equivalent of a
sale or purchase of part of an interest.
$
$
Dr Cash
80
Cr Exploration and development asset:
56
(8% – 10%) ÷ 10% × $280 =
Cr Gain on disposal of exploration and development asset
24
The reimbursement of exploration and development costs is accounted for as a partial
disposal of the exploration and development asset.
However, Entity B will treat its entire payment of $80 to Entity A as the cost of the additional 2% interest
that it ‘acquired’ in the redetermination. The overall impact on the statement of financial position of both
Entities A and B is summarised in the table below:
A
B
Total
$
$
$
Exploration and development asset at 31/12/2017
before redetermination
280
2,520
2,800
Reimbursement of exploration and development costs
–56
80
–
Exploration and development asset at 1/1/2018
after redetermination
224
2,600
2,824
After the redetermination the depreciation of exploration and development asset for Entity A is ($224 ÷ 50
mboe =) $4.48/barrel and for Entity B is ($2,600 ÷ 650 mboe =) $4/barrel.
15.4.2.B ‘Make-up’
oil
As indicated in Example 39.12 above, Entity B would be entitled to 6 mboe of ‘make-up’
oil out of Entity A’s share of the production. This raises the question whether Entity A
Extractive
industries
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should recognise a liability for the ‘make-up’ oil and whether Entity B should recognise
an asset for the ‘make-up’ oil that it is entitled to.
‘Make-up’ oil is in many ways comparable to an overlift or underlift of oil, because after
the redetermination it appears that Entity A is effectively in an overlift position (i.e. it has
sold more product than its proportionate share of production) while Entity B is in an
underlift position (i.e. it has sold less product than its proportionate share of production).
IFRS does not directly address accounting for underlifts and overlifts (as discussed
at
12.4 above) or accounting for ‘make-up’ oil following a redetermination.
Consequently, an entity that is entitled to receive or is obliged to pay ‘make-up’ oil will
need to apply the hierarchy in IAS 8 to develop an accounting policy that is compliant
with current IFRS. In doing so, the entity may look to the accounting standards of
another standard-setter with a similar conceptual framework, such as US GAAP or
UK GAAP, in which case the entity would not recognise an asset or liability and account
for the ‘make-up’ oil prospectively.
Under many unitisation agreements, entities are required to give up oil only to the
extent that there is production from the underlying field. Under these circumstances,
Entity A would have no obligation to deliver oil or make another form of payment to
the other parties under the unitisation agreement. In those cases, the ‘make-up’ oil
obligation would not meet the definition of financial liability under IAS 32 or that of a
provision under IAS 37. It may also be considered that Entity B cannot recognise an
asset, because its right to ‘make-up’ oil only arises because of a future event (i.e. the
future production of oil).
15.4.2.C Decommissioning
provisions
Another
effect of a redetermination is that it may increase or decrease an entity’s share of
the decommissioning liability in relation to the project, as illustrated in the example below.
Example 39.13: Redetermination (2)
Assuming the same facts as in Example 39.12 above, how should Entities A and B account for the change in
the decommissioning provision?
Under IFRIC 1 the change in a decommissioning provision should be added to, or deducted from, the cost of
the related asset in the current period. However, if a decrease in the liability exceeds the carrying amount of
the asset, the excess should be recognised immediately in profit or loss. [IFRIC 1.5].
This would lead Entities A and B to make the following journal entries:
$
$
Entity A
Dr Decommissioning
provision
24
Cr Decommissioning
asset 24
Entity B
Dr Decommissioning
asset 24
Cr Decommissioning
provision
24
The decommission asset is adjusted in accordance with IFRIC 1 for the change in the
decommissioning provision.
If Entity A had recognised a gain of $24 upon the reduction of the decommissioning liability, this would have
resulted in an increase in the depreciation of the decommissioning asset from ($100 ÷ 100 mboe =) $1/barrel to
($70 ÷ 50 mboe =) $1.40/barrel. The IFRIC 1 approach avoids this although it increases the depreciation of the
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decommissioning asset slightly to ($56 ÷ 50mboe =) $1.12/barrel, as the decommissioning provision is also
affected by the accretion of interest. Nevertheless, the approach required by IFRIC 1 is largely consistent with
the treatment of a redetermination as a reimbursement of capital expenditure in Example 39.12 above.
15.5 Stripping costs in the production phase of a surface mine
(mining)
In surface mining operations it is necessary to remove overburden and other waste
materials to gain access to ore from which minerals can be extracted – this is also
referred to as stripping. IFRIC 20 – Stripping Costs in the Production Phase of a Surface
Mine – specifies how stripping costs incurred during the production phase of a surface
mine are to be accounted for. IFRIC 20 considers the different types of stripping costs
encountered in a surface mining operation. These costs are separated into those
incurred in the development phase of the mine (i.e. pre-production) and those that are
incurred in the production phase. [IFRIC 20.2, 3]. For these purposes, the mine is
considered to be an asset that is separate from the mineral rights and mineral reserves,
which are outside the scope of IAS 16. [IAS 16.3(d)].
15.5.1
Scope of IFRIC 20
Generally, those costs incurred in the development phase of a mine would be capitalised
as part of the depreciable cost of building, developing and constructing the mine, under
the principles of IAS 16. Ultimately, these capitalised costs are depreciated or amortised
on a systematic basis, usually by using the units of production method, once production
commences. The stripping costs incurred in the development phase of a mine are not
considered by IFRIC 20.
Instead, the interpretation applies to all waste removal (stripping) costs incurred during
the production phase of a surface mine (production stripping costs). [IFRIC 20.2]. It does
not apply to oil and natural gas extraction and underground mining activities. Also, it
does not address the question of whether oil sands extraction is considered to be a
surface mining activity and therefore whether it is in scope or not. [IFRIC 20.BC4].
Despite the importance of the term ‘production phase’, this is not defined in the
Interpretation, or elsewhere in IFRS. The determination of the commencement of the
production phase not only affects stripping costs, but also affects many other accounting
issues in the extractive industries, described in more detail below. These include the
cessation of the capitalisation of other costs, including borrowing costs, the
commencement of depreciation or amortisation (see 16 below), and the treatment of
certain pre-production revenues (see 12.1 above).
Stripping activity undertaken during the production phase may create two benefits (1)
the extraction of ore (inventory) in the current period and (2) improved access to the
ore body to be mined in a future period. Where the benefits are realised in the form of
inventory produced, the production stripping costs are to be accounted for in
accordance with IAS 2. Where the benefits are improved access to ore to be mined in
the future, these costs are to be recognised as a non-current asset, if the required criteria
are met (see 15.5.2 below). The Interpretation refers to this non-current asset as the
‘stripping activity asset’. [IFRIC 20.8].
Extractive
industries
3353
15.5.2
Recognition criteria – stripping activity asset
IFRIC 20 states that an entity must recognise a stripping activity asset if, and only if, all
of the following criteria are satisfied:
(a) it is probable that the future economic benefit (improved access to the ore body)
associated with the stripping activity will flow to the entity;
(b) the entity can identify the component of the ore body for which access has been
improved; and
(c) the costs relating to the stripping activity associated with that component can be
measured reliably. [IFRIC 20.9].
Instead of being a separate asset, the stripping activity asset is to be accounted for as an
addition to, or as an enhancement of, an existing asset. This means that the stripping
activity asset will be accounted for as part of an existing asset. [IFRIC 20.10]. IFRIC 20 does
not specify whether the stripping activity asset is a tangible or intangible asset. Instead,
it simply states that it should be classified as tangible or intangible according to the
nature of the existing asset of which it is part – so it will depend upon whether an entity
classifies its mine assets as tangible or intangible.
The Interpretation considers that the stripping activity asset might add to or improve a
variety of existing assets, such as, the mine property (land), the mineral deposit itself, an
intangible right to extract the ore or an asset that originated in the mine development
phase. [IFRIC 20.BC10]. In most instances, entities classify their producing mine assets as
tangible assets; therefore, it is likely that the stripping activity assets will also be
classified as tangible assets.
15.5.3 Initial
recognition
The stripping activity asset is to be initially measured at cost. This will be the
accumulation of costs directly incurred to perform the stripping activity that benefits
the identified component of ore, plus an allocation of directly attributable overhead
costs. [IFRIC 20.12]. Examples of the types of costs expected to be included as directly
attributable overhead costs are items such as salary costs of the mine supervisor
overseeing that component of the mine, and an allocation of rental costs of any
equipment hired specifically to perform the stripping activity. [IFRIC 20.BC12].
>
Some incidental operations may take place at the same time as the production stripping
activity that are not necessary for the production stripping activity to continue as
planned. The costs associated with these incidental operations are not to be included in
the cost of the stripping activity asset. [IFRIC 20.12]. An example provided in the
Interpretation is the building of an access ramp in the area in which the production
stripping activity is taking place. These ancillary costs must be recognised as assets or
expensed in accordance with other IFRSs.
15.5.3.A
Allocating costs between inventory and the stripping activity asset
If the costs of waste removal can be directly allocated between inventory and the
stripping activity asset, then the entity should allocate those costs accordingly.
However, it may be difficult in practice to identify these costs separately, particularly if
inventory is produced at the same time as access to the ore body is improved. This is
likely to be very common in practice. Where this is the case, the Interpretation permits
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an entity to use an allocation approach that is based on a relevant production measure
as this is considered to be a good indicator of the nature of benefits that are generated
for the activity taking place in the mine. [IFRIC 20.13].
The Interpretation provides a (non-exhaustive) list of some of the possible metrics that
could be used to determine the appropriate allocation basis. These include:
• cost of inventory produced compared with expected cost;
• volume of waste extracted compared with expected volume, for a given volume of
ore production; and
• mineral content of the ore extracted compared with expected mineral content to
be extracted, for a given quantity of ore produced. [IFRIC 20.13].
An allocation basis which uses sales value or relative sales value is not acceptable.
[IFRIC 20.BC15].
The production measure is calculated for each identified component of the ore body.