Accounting for Acquisitions - Gold Mining Companies

Transcription

1 Urgent Issues Group Abstract 10 (November 1996) Accounting for Acquisitions - Gold Mining Companies Issued by the Australian Accounting Research Foundation on behalf of the Australian Society of Certified Practising Accountants and The Institute of Chartered Accountants in Australia

2 The Australian Accounting Research Foundation was established by the Australian Society of Certified Practising Accountants and The Institute of Chartered Accountants in Australia and undertakes a range of technical and research activities on behalf of the accounting profession as a whole. A major responsibility of the Foundation is the development of Statements of Accounting Concepts, Australian Accounting Standards and Urgent Issues Group Abstracts. Copies of this Abstract are available for purchase from the offices of the Australian Accounting Research Foundation, 211 Hawthorn Road, Caulfield, Victoria 3162, Australia. COPYRIGHT 1996 Australian Accounting Research Foundation. The copying of this Abstract is only permitted in certain circumstances. Enquiries should be directed to the offices of the Australian Accounting Research Foundation. ISSN

3 URGENT ISSUES GROUP ABSTRACT 10 ACCOUNTING FOR ACQUISITIONS GOLD MINING COMPANIES ISSUE 1 Accounting Standards define the cost of acquisition to include the purchase consideration, determined on a fair value basis, plus any costs incidental to the acquisition. The Standards also specify that it is necessary to identify and recognise all of the assets and liabilities acquired. Some have expressed concern that in the acquisition of gold mining companies inappropriate and, in some cases, inconsistent practices have been adopted in respect of: (a) (b) (c) the identifica tion and description of the assets acquired; and the allocation of the cost of acquisition to the respective identifiable assets and liabilities acquired; and the treatment of the excess of the cost of acquisition over the identifiable net assets acquired that is, whether any such excess should be described, and accounted for, as goodwill. 2 The matters dealt with in this Abstract may also apply to acquisitions of gold mining assets directly and in other branches of the extractive industries. However, the Urgent Issues Group addressed the issues in the context of acquisitions of gold mining companies. This Abstract does not deal with the basis upon which the cost of acquisition or the fair values of the identifiable net assets acquired should be determined. 3 The issues are: (a) (b) What identifiable assets should be recognised on the acquisition of a gold mining company? Following allocation of the cost of acquisition to the identifiable net assets acquired, how should any difference be described and accounted for? - 3 -

4 (c) How should the identifiable exploration assets acquired be accounted for subsequent to acquisition? CONSENSUS 4 In the acquisition of a gold mining company, assets acquired may include mineral reserves, mineral resources and exploration areas resulting from exploration and evaluation activities of the acquired entity, and unexplored and unevaluated acreage. When an entity acquires a gold mining company it must recognise all identifiable assets and liabilities acquired, including identifiable exploration assets, at their cost of acquisition determined in accordance with the requirements of Accounting Standards AASB 1015 "Accounting for the Acquisition of Assets" and AAS 21 "Accounting for the Acquisition of Assets (including Business Entities)". 5 Where, in the acquisition of a gold mining company, a difference arises between the cost of acquisition and the amount of the identifiable net assets acquired, that difference must be accounted for in accordance with Accounting Standards AASB 1013 and AAS 18 "Accounting for Goodwill". 6 Exploration assets recognised at acquisition must be carried forward provided rights to tenure of the area of interest are current and at least one of the following conditions is met: (a) (b) the carrying amount is expected to be recouped through successful development and exploitation of the area of interest, or alternatively, by its sale; and exploration and evaluation activities in the area of interest have not at balance date reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in, or in relation to, the area of interest are continuing. 7 Exploration assets recognised at acquisition and carried forward in respect of an area of interest subsequently abandoned, must be written off in the reporting period in which the decision to abandon is made. 8 Exploration and evaluation expenditures incurred subsequent to acquisition in respect of an exploration asset acquired, must be accounted for in accordance with the requirements of - 4 -

5 Accounting Standards AASB 1022 or AAS 7 "Accounting for the Extractive Industries", paragraphs.11 and 10 respectively

6 Application and Operative Date 9 This Consensus applies to all reporting entities for all acquisitions of gold mining companies occurring on or after 15 October DISCUSSION 10 Accounting Standards AASB 1013 and AAS 18 require that identifiable assets and liabilities acquired be recognised at their cost of acquisition. In the case of the acquisition of an entity this is achieved by allocating the cost of acquisition to the identifiable assets and liabilities acquired by reference to their respective fair values. An essential part of the process of allocating the cost of the acquisition is the identification of all the identifiable assets acquired, some of which may not have previously been recognised by the acquired entity, and the determination of their fair values. 11 In the acquisition of a gold mining company, assets acquired may include receivables, property, plant and equipment, operating mines, development projects and associated infrastructure, rights to identified mineral resources and ore reserves. They may also include broadly defined "exploration assets" such as advanced exploration areas, redevelopment projects, and exploration areas including unevaluated and unexplored acreage. Exploration assets will only be recognised at acquisition if they are identifiable. There is often greater uncertainty about realisation of the expected future economic benefits of some exploration assets than there is for other assets. In determining the fair value of the identifiable exploration assets acquired, and in allocating the cost of acquisition to them, regard will be had for all risks relating to such assets. 12 Consistent with the requirements of AASB 1015 and AAS 21 this Consensus requires that identifiable exploration assets must be recognised as assets in the consolidated statement of financial position at their cost of acquisition, which is determined by reference to their fair values. This Consensus requires such assets to be recognised notwithstanding that the accounting policy of the acquirer and/or the acquired company is to recognise all exploration and evaluation expenditures incurred on an ongoing basis as expenses. 13 In some acquisitions, the cost of acquisition is different from the fair value of the net identifiable assets acquired. Where goodwill or discount on acquisition does arise it must be accounted for in accordance with the requirements of Accounting Standards AASB 1013 and AAS 18. As provided in AASB 1013 and AAS 18, the - 6 -

7 excess of the cost of acquisition over the amount of the identifiable net assets acquired is goodwill if it represents probable future economic benefits to be generated by unidentifiable assets. If the excess does not represent probable future economic benefits it is charged to profit and loss immediately. AASB 1013 and AAS 18 also require that, subsequent to acquisition, the unamortised balance of goodwill must be reviewed at each reporting date and written down to the extent that future benefits are no longer probable. Consistent with the requirements of AASB 1013 and AAS 18, discount on acquisition is recognised when the fair value of the identifiable net assets acquired exceeds the cost of acquisition. 14 Some argue that goodwill cannot arise in the acquisition of a gold mining company. The UIG is of the view that it is unlikely that in the acquisition of a gold mining company the amount of goodwill will be substantial. However, goodwill may arise where the acquired entity possesses special attributes such as access to the allocation of exploration areas, particular exploration skills or specialised knowledge. Goodwill may also arise because of the synergistic benefits of an acquisition. 15 When the acquired company has previously incurred exploration and evaluation expenditure on exploration areas, permits or leases, the purchaser acquires the results of that activity, including rights to tenure. The exploration assets represented by that activity include the probable future economic benefits from enhanced technical knowledge and data, including that related to identified mineral resources and ore reserves. They will be recognised as assets when they satisfy the requirements of AASB 1015 or AAS 21. This Consensus requires that these assets must not be written down below acquisition cost until such time as the acquisition cost is not expected to be recovered. This might become apparent as the outcome of exploration or evaluation activities becomes known. It might also arise as circumstances change or adverse events occur subsequent to acquisition that indicate that the economic benefits have been consumed or have expired. In the course of its discussions, the UIG noted that the requirements of paragraph 5.1 of AASB 1010 and AAS 10 "Accounting for the Revaluation of Non-Current Assets" may be relevant in calculating the amount of any write-downs of assets. 16 Subsequent to acquisition, expenditure may be incurred on exploration assets, including unexplored and unevaluated acreage. This Consensus confirms that such expenditure must be accounted for in accordance with the requirements of AASB 1022 paragraph.11 or AAS 7 paragraph 10. These expenditures are distinguished - 7 -

8 from the assets which have been acquired and recognised at their cost of acquisition. 17 This Consensus applies to all acquisitions of gold mining companies occurring on or after 15 October Paragraphs 4 and 5 of this Consensus reflect the requirements of existing Accounting Standards AASB 1015, AAS 21, AASB 1013 and AAS 18 which already apply in respect of the acquisition of gold mining companies. Paragraph 8 reflects the requirements of AASB 1022 and AAS 7 in respect of exploration and evaluation expenditures incurred subsequent to acquisition. 18 While this Consensus deals only with the acquisition of gold mining companies the principles established in this Consensus may also be applicable in analogous circumstances in the extractive industries. REFERENCES Australia Accounting Standards AASB 1022 and AAS 7 "Accounting for the Extractive Industries" Accounting Standards AASB 1015 "Accounting for the Acquisition of Assets" and AAS 21 "Accounting for the Acquisition of Assets (including Business Entities)" Accounting Standards AASB 1013 and AAS 18 "Accounting for Goodwill" Accounting Standards AASB 1010 and AAS 10 "Accounting for the Revaluation of Non-Current Assets" Statement of Accounting Concepts SAC 4 "Definition and Recognition of the Elements of Financial Statements" APS 1 "Conformity with Accounting Standards and UIG Consensus Views" The Supreme Court of New South Wales Equity Division Company List 1608/96 - Solomon Pacific Resources NL v Acacia Resources Ltd (1996) Australasian Code for Reporting of Identified Mineral Resources and Ore Reserves (The JORC Code) - 8 -

9 Code and Guidelines for Assessment and Valuation of Mineral Assets and Mineral Securities for Independent Experts Reports (The Valmin Code) South Africa Accounting Practices Committee "Accounting and Reporting Practices in the Mining Industry" United States of America Statement of Financial Accounting Standards FAS 19 "Financial Accounting and Reporting by Oil and Gas Producing Companies" FASB Interpretation No. 4 "Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method" Canada Emerging Issues Committee EIC 55 "Identifiable Assets Acquired in a Business Combination" Emerging Issues Committee EIC 62 "Measurement of Cost of a Business Acquisition Effected by Issuing Shares" Accounting Guidance AcG5 "Full Cost Accounting in the Oil and Gas Industry" International Accounting Standards Committee International Accounting Standard IAS 22 "Business Combinations" - 9 -