IFRIC 20, “Stripping Costs in the Production Phase of a Surface Mine,” provides guidance on accounting for stripping costs incurred during the production phase of a surface mine. In this article, we will provide definitions, explanations, examples, and case studies to help entities understand the application of IFRIC 20.
Definitions:
Stripping Costs: Costs incurred to remove waste material (overburden) that is not considered an inventory of the mine and expose mineral reserves for extraction.
Surface Mine: A mine where minerals are extracted from the surface of the earth, typically using open-pit mining methods.
Explanations:
During the production phase of a surface mine, it is common for entities to incur costs to remove overburden and expose mineral reserves for extraction. IFRIC 20 provides guidance on how to account for such stripping costs in the entity’s financial statements. The key principle is that stripping costs should be capitalized as part of the cost of inventory if they meet certain criteria, and only if the entity expects to benefit from the improved access to the mineral reserves in the future.
Examples:
ABC Mining Inc. operates a surface mine and incurs costs of $1 million to remove overburden and expose mineral reserves for extraction. The entity expects to benefit from the improved access to the mineral reserves over the next three years. As per IFRIC 20, ABC Mining Inc. would capitalize the stripping costs of $1 million as part of the cost of inventory and allocate it to the units of production over the next three years.
DEF Resources Ltd. incurs stripping costs of $500,000 during the production phase of its surface mine. However, the entity does not expect to benefit from the improved access to the mineral reserves in the future as it plans to close the mine within the next year. As per IFRIC 20, DEF Resources Ltd. would not capitalize the stripping costs and would expense them in the current period.
Case Studies:
Let’s look at two case studies to further illustrate the application of IFRIC 20:
Case Study 1:
Capitalization of Stripping Costs
ABC Mining Inc. operates a surface mine and incurs stripping costs of $2 million during the production phase. The entity expects to benefit from the improved access to the mineral reserves over the next five years. The total estimated tons of mineral reserves to be extracted over the next five years are 500,000 tons.
In this case, ABC Mining Inc. would capitalize the stripping costs of $2 million as part of the cost of inventory and allocate it to the units of production (tons of mineral reserves) over the next five years. The cost per ton of inventory would be $4 ($2 million divided by 500,000 tons).
Case Study 2:
Expense of Stripping Costs
DEF Resources Ltd. operates a surface mine and incurs stripping costs of $1.5 million during the production phase. The entity does not expect to benefit from the improved access to the mineral reserves in the future as it plans to close the mine within the next year.
In this case, DEF Resources Ltd. would not capitalize the stripping costs and would expense them in the current period, as the entity does not expect to benefit from the improved access to the mineral reserves in the future.
Conclusion:
IFRIC 20 provides guidance on how to account for stripping costs incurred during the production phase of a surface mine. Entities should carefully assess whether the stripping costs meet the criteria for capitalization, and only capitalize them if the entity expects to benefit from the improved access to the mineral reserves in the future. Examples and case studies can help entities understand the application of IFRIC 20 in practice and ensure appropriate accounting treatment for stripping costs in their financial statements.
In summary, IFR IC 20 provides clear guidance on the accounting treatment for stripping costs in the production phase of a surface mine. It is important for entities to carefully evaluate and apply the requirements of IFRIC 20 to ensure accurate and consistent financial reporting. Seeking professional advice and staying updated with the latest developments in accounting standards can further assist entities in complying with IFRIC 20 and other relevant accounting standards.
In conclusion, IFRIC 20 addresses the accounting treatment for stripping costs in the production phase of a surface mine. It provides definitions, explanations, examples, and case studies to assist entities in understanding the application of the standard. Entities should carefully assess and apply the guidance of IFRIC 20 in their financial statements to ensure appropriate accounting treatment for stripping costs. Compliance with IFRIC 20 and other relevant accounting standards is essential for accurate and transparent financial reporting.