IFRS in mining Iain Selfridge, Tim McAllister & Jason Burkitt
IFRS in mining Agenda Standard setting update Applying IFRS 15 Revenue recognition for miners Accounting for alternative financing arrangements Proceeds of test production IFRIC update IFRS 11 Joint arrangements IFRIC update Impairment considerations for 2015 reporting Liquidity focus Non-GAAP performance measures London Common School of Mines UK GAAP issues for miners Slide 2
Standard setting update June 2014 Slide 3
Standard setting update - IASB work plan Major project Q2 2014 Q3 2014 IFRS 9 Classification and measurement IFRS 9 Impairment IFRS IFRS IFRS 9 General hedging Macro hedging IFRS DP Insurance contracts Leases Redeliberations Redeliberations Revenue IFRS Conceptual framework Rate regulated activities Implementation activities: narrow scope amendments, IFRS 3 PIR, etc Redeliberations Ongoing DP Slide 32
Standard setting update Selected topics IFRS 15 Revenue from contracts with customers Leasing standard IFRS 9 hedging Extractive Industries Transparency Initiative (EITI) (2013) Slide 5
Leasing update Lessee accounting Today IAS 17 2013 ED Reliberations Operating lease Finance lease BS: All except ST, small ticket leases PL: Split - Type A: front loaded if more than insignificant portion consumed - Type B: straight line IASB: favors all Type A leases except for ST and small ticket leases. FASB: favors split based on old US GAAP Redeliberations continue Lessor accounting Operating lease Finance lease Type A: Receivable and residual Type B: Operating leases Back to IAS 17 - based on transfer of risk and rewards. Lease term Include if reasonably certain of being exercised Include if significant economic incentive to exercise. Include if reasonably certain will exercise option considering economic factors. Variable lease payments Contingent rents expensed as incurred Remeasurement not required Usage or performance-based not included Index and in-substance fixed included Reassessment required. No change noted in redeliberations to date. Slide 36
IFRS 9 Hedging Hedge accounting more closely aligned with risk management Effectiveness testing 80-125% threshold removed, replaced by: Economic relation Other key changes Effect of credit risk does not dominate the value changes Hedging ratio based on risk management but shall not be imbalanced to create ineffectiveness Elective fair value option for hedges of credit exposures Similar items test removed for groups of hedged items Forward points, time value of options and cross-currency basis treated as cost-ofhedging Slide 7
Choice between IFRS 9 and IAS 39 Hedging One-time choice to use either standard on all hedges until the upcoming macro hedging standard is effective (if ever ) IFRS 9 may be preferable if Hedges exposures to non-financial items Swaps foreign funding to local currency Wants to be able to hedge aggregate positions Finds 80-125 % threshold challenging Wants to use options for hedging IAS 39 may be preferable if Uses macro hedging Practises proxy designations Has a working hedge accounting model Slide 8
Standard setting update Extractive Industries Transparency Initiative (EITI) effective 1/1/2016 - Objective: increase transparency on payments made to governments - Covers listed entities and large undertakings in the extractive industries - Types of payments to disclose: production entitlements; taxes on income, production or profits; royalties; dividends; signature, discovery and production bonuses. More on this in a separate session! Slide 9
Revenue Recognition for miners June 2015 Slide 10
Revenue Recogntion IFRS 15 Revenue from contracts with customers - Standard issued 28 May 2014 - EU endorsement? - Effective from 1 January 2018 with early adoption permitted Slide 11
IFRS 15 Revenue recognition model IAS 18 /11 Separate models for: Construction contracts Goods Services Focus on risk and rewards IFRS 15 Single model for performance obligations: Satisfied over time Satisfied at a point in time Focus on control Limited guidance on: Multiple element arrangements Variable consideration Licences More guidance: Separating elements, allocating the transaction price, variable consideration, licences, options, repurchase arrangements, etc. June 2014 Slide 12
Revenue Recognition Expected impact on mining Product exchanges Agency relationships Recognition of CIF arrangements Provisional pricing arrangements - Non monetary exchanges scoped out - Similar but provided in new context - Evaluate whether there are separate performance obligations for goods and freight services - Judgement as to whether there is an embedded derivative or variable consideration Take or pay and similar LT agreements - Judgement required in identification of performance obligations Disclosure of quantitative and qualitative information on customer relationships, key judgements and assets recognised from the costs to obtain or fulfil contracts required. June 2015 Slide 13
Proceeds of test production June 2014 Slide 14
Proceeds of test production During 2104 IFRIC considered how to account for the proceeds from sale of product produced during a testing phase when an asset is under construction. 17. Examples of directly attributable costs are: e) costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); The initial conclusion was that no guidance was required as the answer was obviously to take such proceeds to the P&L. In practice many organisations, in particular in mining, credit such costs to the asset under construction. IFRIC responded by agreeing to undertake further research. June 2014 Slide 15
Proceeds of test production IFRIC concluded last month that it will develop an interpretation. We expect the interpretation will focus on the meaning of "functioning properly", and would be based on technical/physical performance rather than financial. Earlier focus had been on whether proceeds were de minimis, whether there were different customers and pricing during testing phase. Discussions indicated preference was to take all proceeds to income as soon as functioning properly. Noted application of componentisation was critical, cited mining example. Likely to be a disclosure requirement for proceeds deducted from PPE. June 2014 Slide 16
IFRS 11 Joint Arrangements Implementation issues considered by IFRIC June 2014 Slide 17
IFRS 11 generated a record number of issues for IFRIC The IC finalised their decisions on a number of issues in their March 2015 meeting. Key matters included: The assessment of other facts and circumstances should focus on whether those facts and circumstances create enforceable rights to the assets and obligations for the liabilities. Judgement will be needed to determine the appropriate accounting where the share of output purchased by a joint operator differs from its share of ownership interest in the joint operation. Joint operators should only recognise revenue only when the joint operation sells its output to third parties. Publication of the final decisions completes the IC discussions on IFRS 11. It is understood that a Post Implementation Review of IFRS 11 will commence in 2016 June 2015 Slide 18
Alternative Financing for the extractive industries June 2014 Slide 19
Alternative financing for the extractive industries The challenges Funding structures comes in all shapes and sizes Often a hybrid of financing and acquisition of a working interest Does not fit into an accounting standard Economics often a driver of accounting Investors keen but want clarity on accounting implications Slide 20
Alternative Financing for extractive industries Our in depth covers the common arrangements and walks through how to: Understand the facts and identify the parties to the arrangement Clarify the rights and obligations under the contract Evaluate the substance and economics Bring all the pieces together to conclude June 2014 Slide 21
Impairment of assets What to consider for 2015 reporting June 2014 Slide 22
Impairment of mining assets 2015 reporting Impairment still a issue for the industry at this point in the cycle and remains focus of regulators While much focus on commodity prices, which remain volatile, other factors to consider in current environment: - Appropriateness of long term pricing assumptions for shorter lived assets - Foreign exchange rate assumptions - Impact of oil prices on recoverable amounts Emerging issue of stranded assets likely to raise questions by stakeholders, regulators Disclosure approach, including risk to be considered Carbon regulation not agreed, but impacts already being felt Slide 23
Impairment of assets IAS 36 Identified financial reporting deficiencies 1) Insufficient disclosure of key assumptions Management s approach in determining assumptions (price, discount rate, reserves, FX, costs, mine plan) Description of assumptions and judgments made Disaggregation of assumptions by CGU/CGUs 2) Lack of disclosure of sensitivities Impact of changes on significant estimates Disclosure of CGU/CGUs at risk 3) Reasonableness of assumptions not supportable Consistency compared to historical experience and actual results Critically assessed by management Consistency compared to other information disclosed in financial statements (i.e. business review, segments) Slide 24
Impairment of assets IAS 36 Identified financial reporting deficiencies 4) Identification of assets and CGUs at too high a level and lack of description of CGUs to determine level of impairment testing 5) Lack of disclosure of events and circumstances (i.e. indicators) that led to impairment 6) Mismatch of cash flows in present value calculations and assets (or CGUs) tested 7) Lack of disclosure of CGUs with significant goodwill 8) Disclosures were seen as boilerplate and not entity specific 9) Disclosure of impairment testing was incomplete and often omitted 10) Measurement provisions of IAS 36 were not applied correctly resulting in overstatement of assets Slide 25
Liquidity considerations June 2015 Slide 26
Liquidity disclosures IFRS requirements Management is responsible for assessing an entity s ability to continue as a going concern (IAS 1 p.25) Going concern assumption appropriate but a material uncertainty exists: Adequately describe principal events and conditions that give rise to significant doubt Describe management s plans to deal with these events and conditions State clearly that there is a material uncertainty that may cast significant doubt Common observation from recent reviews Indicators of material uncertainty are present (negative assets, net losses, covenant breachs) No disclosures about material uncertainties and why going concern assumption is appropriate 27
Non-GAAP performance measures June 2014 Slide 28
Non-GAAP performance measures There remains a strong desire among the investment community for non gaap performance measures and such measures are allowable under most reporting regimes. Whether regulators or investors, there is a strong desire for non-gaap measures to adhere to basic ground rules - Be clear and consistent in definitions of measures - Be balanced in the adjustments made - Reconcile back to GAAP in a bridge chart or table - Give equal prominence to GAAP and non-gaap measures in all communications - Be clear about which measures are non-gaap and not audited In the UK, the FRC is very focussed on Non GAAP measures following the release of their concerns on adjusted earnings measures Slide 29
Non-GAAP performance measures Observations While the FRC action has not necessarily changed what companies have reported during 2014, many companies have considered their approach to adjusted earnings type measures. Cost savings being widely reported but practice is divergent and disclosures often ambiguous All-in sustaining costs and all-in costs metrics have gained traction and now widely adopted within gold sector Capital Expenditure reporting remains an area where analysts would like to see more disclosure Slide 30
UK GAAP conversion Common issues June 2015 Slide 31
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