On Oct. 19, 2011, the IFRS Interpretations Committee (IFRIC) issued IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, to address diverse practices around the world in the accounting for the cost of stripping operations incurred by mining companies after a surface mine begins production. Some companies recognize these costs as expenses, while other companies capitalize them as assets, using a variety of allocation methods.
Stripping costs are costs incurred when removing waste material in a surface mine, which allows companies to access the more valuable minerals below the surface. Stripping costs are incurred not only in the development phase of a surface mine (before production begins), but also during the production phase and throughout the life of the mine. Currently, companies account for stripping costs incurred during the development phase as assets that are typically capitalized as part of building, developing and constructing the mine. Some companies continue to capitalize these costs once production begins, but other companies believe that at this point stripping costs no longer meet the criteria for recognizing an asset and should instead be expensed as normal production costs. IFRIC 20 is narrowly focused on surface mines, not underground mines, and on extracting mineral ore such as coal, not oil and gas.
In a surface mine, stripping activities can result in two benefits for a mining company. The first benefit is actual useable ore. As the stripping activity removes the overlying waste material (referred to as overburden), it can unearth some of the valuable minerals that the mine is designed to produce, which would be sold in the ordinary course of doing business. The second benefit is access to other areas of the mine that may contain more of the valuable minerals, which is the main reason for undertaking the stripping activities in the first place.
Recognizing assets and parts of assets
Paragraph 4.44 of The Conceptual Framework for Financial Reporting calls for the recognition of an asset if two criteria are met: "[I]t is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably." Assuming that the costs can be reliably measured, the two benefits – useable ore and access – would seem to meet the criteria for recognition as assets.
The first benefit, the actual ore, is an asset in its own right. It is essentially in saleable...