IFRS update Mining and metals

Transcription

1 IFRS update Mining and metals Tracey Waring Americas Mining & Metals Forum September 2013

2 Our panellists Colette Rustad VP Finance, Goldcorp Brent Papek Senior Manager EY Phoenix Ellie Mikes Freeport-McMoRan Copper & Gold Inc. Richard Bembridge Senior Manager EY Vancouver Page 2

3 Financial accounting and reporting impacts CURRENT C F FUTURE O OTHER/ ONGOING Page 3

4 Agenda Timing Topic Current IFRIC 20 IFRS 11 Future: near term Future: longer term Accounting for acquisitions in joint operations Contribution of a business to a joint venture Contingent consideration in the acquisition of property, plant and equipment (PP&E) Revenue recognition Leases Hedging Ongoing/ Other Impairment Business vs. asset Cash cost reporting Publish what you pay Page 4

5 Current impacts Page 5

6 IFRIC 20: stripping costs Page 6

7 IFRIC 20: stripping costs Recap Applies to production phase stripping waste for surface mines Two benefits from waste removal Access to inventory in the current period (IAS 2) Improved access to ore to be extracted in the future (Stripping activity asset (SAA)) (IFRIC 20) Lower level of accounting life of mine vs. component Where costs cannot be directly allocated, use relevant production measures (calculated at the component level) Depreciate on UOP basis over reserves that benefit from removal Transition rules no retrospective adjustment Page 7

8 IFRIC 20: stripping costs Key judgement areas Production phase Companies rechallenged this point of determination Some applied at component level rather than mine level Identification of components Calculation of production measure Most using volume-based measures, e.g. tonnes, or contained minerals Depreciation/Amortisation approach Transition Page 8

9 IFRIC 20: stripping costs Identification of components Lower than entire ore body >1 year, could be multiple years (depends on the mine s life) Each component doesn t have to be of the same size Component unlikely to be higher than a pit Common terms: Phase, push back, section, block, cutback Need to identify components in practical manner, consistent with how engineers/geologists analyse the ore body (stages or phases) Process to identify components involves detailed examination and understanding of mine plans Phases/Stages, comparison to ore body, sequencing Page 9

10 IFRIC 20: stripping costs Depreciation/Amortisation Depreciate/Amortise SAA as mined on units of production (UOP) basis Identification of appropriate UOP denominator Should reflect aggregate ore to be mined in future from section of ore body that becomes more accessible Can include ore from multiple stages/phases Policy decision: direct or indirect association Depreciation/Amortisation of SAA to be included in inventory extracted in future periods in accordance with IAS 2 Page 10

11 IFRIC 20: stripping costs Transition Retroactive application not required Attribution of opening balance To identifiable component(s) of the ore body still to be mined To consider whether any portion relates to ore that has already been extracted vs. ore still to be extracted Although retrospective application is not required, some similar considerations may be relevant Various allocation approaches used in practice Impacts of different transition dates jointly owned mines PRACTICE: seeing combination of both Full carry-forward of entire balance Partial write-off and partial carry-forward (probably most common) Page 11

12 IFRIC 20: stripping costs Practical challenges Most mines will likely have more than one component Significant amount of data may need to be analysed (depending on type and complexity of mine) Involvement of mining/reserves engineers critical Changes needed for processes and information systems to gather and report the required information Companies have developed practical approaches, e.g., strip ratio remains relatively constant and no material SAAs are being created, effectively expensing as incurred Impact on: Balance sheet and future profit or loss Performance measurement and communication of changes to the market Page 12

13 IFRS 11: joint arrangements Page 13

14 IFRS 11: joint arrangements Recap IFRS 11 IAS 31 Joint arrangements Joint ventures Jointly controlled operations (JCO) [Share of assets, liabilities, income, expenses] Jointly controlled assets (JCA) [Share of assets, liabilities, income, expenses] Jointly controlled entities (JCE) [Proportionate consolidation or equity accounting] Joint operations (JO) Rights to assets and obligations for liabilities [Share of assets, liabilities, income, expenses] Joint ventures (JV) Rights to net assets [Equity accounting] Page 14

15 IFRS 11: joint arrangements Practical insights and challenges Time-consuming for some Difficulty in locating and assessing contracts Rights and obligations are CRITICAL Discussions with joint arrangement participants critical Assessment of whether joint control exists need to consider: Relevant activities Decision-making Other facts and circumstances requiring greatest degree of judgement, regarding interpretation and application Assessments leading to numerous conclusions Page 15

16 IFRS 11: joint arrangements The ongoing challenge Interpretations continue to evolve European companies given 1-year extension (to 1 January 2014) IASB activities Educational guidance on hold Additional outreach activities PRACTICE: wide variety of implications from: No change JCEs that were proportionately consolidated now JVs, which are equity accounted (and vice versa) JCAs = Joint operations For some joint ventures under IAS 31 no joint control under IFRS 11 so not in scope Page 16

17 As interpretations continue to evolve, entities will need to ensure they remain abreast of the developments and the impact on current and future arrangements Page 17

18 Future impacts Near term Page 18

19 IFRS 11: joint arrangements (amendment) Overview Diversity in accounting IFRIC-concerned diversity would continue under IFRS 11 Proposals to clarify the following: If you have an acquisition of an interest in a joint operation (JO) And That joint operation is a business it is to be accounted for using the relevant business combination principles of IFRS 3 Business Combinations and other standards Transition Prospectively on or after the effective date Page 19

20 IFRS 11: joint arrangements (amendment) Issues and status update Issues Business vs. asset Which transactions are in scope? Impact of having to apply business combination accounting Still some areas where accounting is unclear and clarity required Update Impact on farm-in arrangements 70 comment letters majority supported proposals Issues raised, e.g., business vs. asset, more guidance Decided to finalise amendment and make IASB aware of additional guidance required to go to future board meeting Page 20

21 IFRS 10/IAS 28 Amendment Overview and status update Issue: contribution of a business to a joint venture Proposals to remove inconsistencies and diverse treatments when assets contributed to an equityaccounted investment (including joint venture and associate) No longer relevant whether lose control of a subsidiary KEY FACTOR: whether the asset contributed is a business Nature of the contribution Business Accounting treatment Full gain recognition: remeasure retained interest to fair value Not a business Partial gain recognition: eliminate profit relating to the retained interest (so do not remeasure retained interest) Page 21

22 Contingent consideration in acquiring PP&E Overview and status update Initial accounting No consensus on variable payments that are dependent on the purchaser s future activity Debate about IAS 32/IAS 39 vs. IAS 37 Variable consideration not dependent on purchaser s future activities to be included in initial measurement at the date of purchase of asset Subsequent measurement Adjustments to the carrying amount of a liability relating to contingent consideration to be adjusted against cost of related asset, other than those adjustments for finance costs that are not eligible for capitalisation Proposed to amend IAS 16, IAS 38 and IAS 39 Page 22

23 Contingent consideration in acquiring PP&E Overview Update July 2013 IASB meeting Initial accounting impacts subsequent accounting so need to address both Variable payments being considered as part of leases and conceptual framework projects Given this, IASB will reconsider this issue after proposals in leases ED are re-deliberated Page 23

24 All of these amendments increase the focus on the distinction between business vs. asset Page 24

25 Future impacts Longer term Page 25

26 Revenue recognition Page 26

27 Revenue recognition Update Targeting final standard 3Q2013 (but likely to slip into 4Q2013) effective date Will be different from the re-exposed ED issued in 2012 Potential areas of impact for extractive industries Scope: what is a customer? Production sharing contracts Recognition and measurement Provisionally priced sales contracts Take or pay arrangements assessing impact is not straight forward Need to assess all contractual arrangements that generate income/revenue to determine if any impact Page 27

28 Leases Page 28

29 Leases High level overview A lease is a contract that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration Lessor Right-of-use Lessee Leases (max. possible lease term >12 month) on balance sheet (for lessee) Right-of-use asset and lease liability (for lessee) Two types of leases introduced Type A and Type B Changes (from original ED) to the amounts that are to be included as part of lease payments to determine initial measurement of right-of-use asset and lease liability Page 29

30 Leases Lease definition Requires use of an identified asset (similar to current accounting) Explicitly or implicitly identified (substantive right to substitute) Can include a physically distinct portion of larger asset Conveys the right to control the use of an identified asset for a period of time (criteria to determine this has changed from current accounting) AND Direct the use of the identified asset Receive the benefits from the use of the identified asset This may mean fewer embedded leases are likely However, extractives entities will still need to consider all contracts, especially services contracts Page 30

31 Leases Flowchart Page 31

32 Leases Issues for mining and metals companies Minerals lease exclusion how far does this extend? Surface rights and rights of way? Rights outside E&E phase? Other assets used in connection with E&E activities? Identified assets Non-physically distinct portions, e.g., 50% of tolling facility/power plant vs. substantially all Substantive rights of substitution Right to control the use of the asset Direct the use of the asset Ability to make decisions about the use of asset that most significantly affect economic benefits to be derived from the use of the asset Can be established during contract negotiation phase Derive benefits from the use of the asset Page 32

33 Leases ED Undivided interests and joint arrangements Undivided interests in assets (with or without joint control) Rights generally do not represent a right to use Instead use applicable standard, e.g., IAS 16 and IAS 38 Arrangements entered into by joint arrangement operators All parties to arrangement enter contract Assess at contract/joint arrangement level Each party recognises its share of arrangement Entered into in operator s name Acting as agent? Acting as principal? If so, operator recognises 100% of right-of-use asset and associated lease liability But how do the non-operator parties account for their use of the asset? Sublease? Non-physically distinct portion of an asset so cannot be a lease? Executory contract, operator recoups costs? Impact of lease classification Page 33

34 Leases Possible arrangements to consider Arrangements to consider i.e., any arrangement that may involve the use of an asset(s) Assets used in joint operations either lease arrangements or other arrangements that may contain a lease Mining services arrangements including drill contracts Freight, shipping and other transportation agreements Surface rights Rights of way Storage arrangements Tolling arrangements Utility arrangements, e.g., electricity, water, gas, telecommunications Outsourcing arrangements, e.g., IT Page 34

35 Leases Lease payments lessee Lease payments exclude: Variable payments not dependent on index or rate, e.g., based on performance or usage (provided not in-substance fixed payments) Per tonne, per shipment, per metre, per drill hole If all (or substantially all) of the payments are variable payments of a type which are excluded from the calculation of a lease liability, then even if a mining and metals entity determines that it has a lease (or an embedded lease), there will either be nothing (or a significantly lower value) to recognise on day 1 for the right-of-use asset and lease liability** ** There may still be some disclosure requirements, e.g., it is a requirement to disclose costs that are recognised in the period relating to variable lease payments that were not included in the lease liability. No maturity analysis is required, as this only applies where the entity recognises a lease liability. Page 35

36 Leases Lease classification IAS 17 Operating lease Finance lease** ED Type B Property (land and/or buildings) unless: Type A Non property assets (equipment, vehicles) unless: Or Lease term is the major part of the remaining economic life of the underlying asset Present value of lease payments accounts for substantially all of the fair value of the underlying asset at commencement date Or Lease term is for an insignificant part of the total economic life of the underlying asset Present value of lease payments is insignificant relative to the fair value of the underlying asset at commencement date ** There may be some (limited) situations where a finance lease under IAS 17 may be a Type B lease under the ED. Page 36

37 Leases Lessee accounting Income statement Cash flow statement Type A Most equipment/ vehicle leases Amortisation and interest Principal paid (financing) interest paid (depends on policy) Type B Most property leases Single lease expense Total cash paid (operating) Balance sheet (Type A and B) Right-of-use asset and lease liability for obligation Page 37

38 Leases Broader business implications Data collection and ongoing management of data Financial statements and metrics Stakeholders communications Compensation and debt arrangements Lease procurement and strategy IT systems, processes and controls Tax implications Education and training Page 38

39 While the leases standard is still a long way from being finalised; if you are currently negotiating long-term contracts, then consider the potential implications of the current proposals Page 39

40 Hedging Page 40

41 Hedging Update Financial reporting will reflect more accurately how an entity manages its risks and how hedge accounting mitigates those risks No bright line effectiveness test No retrospective effectiveness assessment decreases the impact of hedge failure Option time value and FX basis spreads to be considered a cost of hedging through OCI Early adoption will be available to benefit from the new model Expect final standard by 3Q 2013 Page 41

42 Other/Ongoing Page 42

43 Other/Ongoing Impairment and reversals Has been (and may continue to be) key issue Current issue impairment reversals (fairly new for many) Not a choice if indicators exist and test reveals recoverable amount > carrying value must reverse (does not apply to goodwill) But restrictions apply When impairment losses should be reversed How much can be reversed Sensitive issue Most don t want it back What percentage increases in commodity price forecasts would warrant reversal Need robust evidence to support reversal Page 43

44 Other/Ongoing Other Business vs. asset Continues to be an area of contention Recent amendments increase importance of this distinction Cash cost reporting World Gold Council guidance discussed in more detail later Changes to IFRS financial statement presentation to make reconciliation process easier Publish what you pay Not within scope of IFRS Europe and Canada come out with similar (but not the same) proposals as Dodd-Frank Australia considering options for similar type of reporting Page 44

45 The challenge keeping up to date Page 45

46 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Global Mining & Metals Center With a strong but volatile outlook for the sector, the global mining and metals sector is focused on future growth through expanded production, without losing sight of operational efficiency and cost optimization. The sector is also faced with the increased challenges of changing expectations in the maintenance of its social license to operate, skills shortages, effectively executing capital projects and meeting government revenue expectations. EY s Global Mining & Metals Center brings together a worldwide team of professionals to help you succeed a team with deep technical experience in providing assurance, tax, transactions and advisory services to the mining and metals sector. The Center is where people and ideas come together to help mining and metals companies meet the issues of today and anticipate those of tomorrow. Ultimately it enables us to help you meet your goals and compete more effectively EYGM Limited. All Rights Reserved. EYG no. ER0098 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.