www.pwc.

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2012 Americas School of

Mines

Basics of US Mining Accounting

Christie Greve
- Senior Associate
Alex Mayberry
- Senior Associate
Molly Hepburn
- Manager
Benita Pulins
- Managing Director
Introduction

Basics of US Mining Accounting

PwC 2
 Introduction

• Objectives and goals

- Identify and distinguish between the different phases of
mining operations
- Identify the key accounting principles for a typical
mining company

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Agenda

Stages of Mine Operations

(15 min break)
Key Accounting Principles (part 1)
(15 min break)
Key Accounting Principles (part 2)
Q&A

Basics of US Mining Accounting

PwC 4
Introduction

Have you ever been to a mine site?

a) Yes

b) No

Basics of US Mining Accounting

PwC 5
Stages of Mine Operations

Basics of US Mining Accounting

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Stages of Operations: Overview

Stages of Mine Operations:

Stage 1: Exploration
Stage 2: Evaluation
Stage 3: Development
Stage 4: Construction
Stage 5: Production
Stage 6: Closure and Rehabilitation
Note: The basic accounting treatment of these six phases will be
discussed throughout the course.

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 Stages 1 & 2: Exploration and Evaluation

Stage 1 & 2: Stage 4: Stage 6:

Exploration and Construction Closure
Evaluation

Stage 3: Stage 5:
Development Production

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Stage 1: Exploration

Exploration is the search for resources suitable for commercial

exploitation. It includes:

• Researching and analyzing historic exploration data.

• Conducting topographical, geological, geochemical and geophysical

studies.

• Exploratory drilling, trenching, and sampling.

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Stage 2: Evaluation

Evaluation means determining the technical

feasibility and commercial viability of a mineral
resource:

• Determining volume and grade of deposits.

• Examining and testing extraction methods
and metallurgical or treatment processes.
• Surveying transportation and infrastructure
requirements.
• Conducting market and finance studies.

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Stages 1 & 2: Exploration and Evaluation (cont)

Exploration vs. Evaluation

Exploration = Discovery Costs

Evaluation = Proving Costs

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Stage 1: Exploration and Evaluation –
Accounting Treatment

Once exploration and evaluation costs have been recorded

in the Profit and Loss statement, they cannot subsequently
be reinstated as assets.

a) True
b) False

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 Stage 3: Development

Stage 1 & 2: Stage 4: Stage 6:

Exploration and Construction Closure
Evaluation

Stage 3: Stage 5:
Development Production

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Stage 3: Development

Development means establishing access to the mineral reserve and

other preparations for commercial production.

Costs may include:

• Sinking shafts and underground drifts
• Permanent excavations
• Infrastructure development (road and tunnel building)
• Advance removal of overburden and waste rock (stripping)

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Stage 3: Development

• Commencement - Phase commences when it is determined that

commercially recoverable reserves exist (usually through completion
of a bankable feasibility study) and a decision is taken by the
directors to develop the mine.

• Conclusion - Phase concludes upon the commencement of

sustainable production from the resource.

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Stage 3: Development:
US GAAP Accounting treatment: Capitalize Costs

• Development costs are usually carried forward until the mine is

commissioned (production begins) because the expenditure is for
future benefit from the mineral extraction.
• Capitalized development costs are then amortized using the units-of-
production (UOP) method as the resources are mined.

Note: Stripping costs incurred in the development stage should be capitalized if

the stripping activity can be shown to represent a betterment to the mineral
property. A ‘betterment’ occurs when the stripping activity provides access to
sources of reserves that will be produced in future periods that would not have
otherwise been accessible in the absence of this activity.

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Stage 3: Development (cont)

Start-up cost treatment:

• ASC 720-15-15, “Start-up Costs” provides guidance on the financial

reporting of the start-up costs. It applies to both developmental stage
entities and established operating stage entities.

• Start-up activities are defined as, “those one-time activities relating

to opening a new facility, introducing a new product or service,
conducting business in a new territory, conducting business with a
new class of customer, initiating a new process in an existing facility,
or commencing a new operation.” These costs include organization
costs (activities associated with organizing a new entity).

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Stage 3: Development (cont)

Start-up cost treatment (cont):

• Start-up costs include pre-operating costs such as:

› Training costs, travel, recruiting costs.
› Wages and benefits during non-production periods.
› Nonrecurring operating losses.

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Stage 3: Development (cont)

Start-up cost treatment (cont):

• Start of commercial production is the most important cut-off point.

- Critical in determining if expenses should be capitalized or
expensed, and when amortization should commence.
- Production is defined for surface mining operations in ASC 930-
330-20, “Accounting for Stripping Costs Incurred during
Production in the Mining Industry”

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Stages 3: Development (cont)

Development costs are capitalized and carried forward on

the balance sheet because the expenditures are for the
future benefit from the mineral extraction.

a) True
b) False

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Stage 3: Development (cont)

• Mineral resources and reserves are the source of the value generated
by mining entities needed to deliver future production
• Most important economic asset for a mining entity
• Source of future cash inflows from sales of minerals
• Provide the basis for acquiring funds through borrowings and
additional equity financing

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Stage 3: Development (cont)

• Mineral Resource is a concentration or occurrence of diamonds,

natural solid inorganic material, or natural solid fossilized organic
material including base and precious metals, coal and industrial
minerals in or on the Earth’s crust in such form and quantity and of
such grade or quality that it has reasonable prospects for economic
extraction.

• Mineral Reserve is the economically mineable part of a mineral

resource that, based upon appropriate assessments, and adequate
information demonstrates that economic extraction could reasonably
be justified.

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Stage 3: Development (cont)

Mineral Reserves are usually categorized based upon the degree of

certainty with which quantities can be estimated and the extent to
which properties containing reserves have been developed:

1. Proven

2. Probable

3. Possible (Inferred)

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 Reserves are like

Proven Developed: The fish is in the boat. You have weighed it. You can
smell it. You are going to eat it.
Proven Undeveloped: The fish is on your hook, in the water close to the
boat and you are ready to net him. You can tell how big he looks (they
always look bigger in the water).
Probable: There are fish in the lake. You may even be able to see them,
but you have not caught any today.
Possible (Inferred): There is a lake full of fresh water. Someone may
have told you there are fish in the lake. Your boat is on the trailer, but you
might go play golf instead.
24
PwC
Stage 3: Development (cont)

Reserve Disclosure:
• ASC 255-10-50, Financial Reporting and Changing Prices,
encourages companies to disclose the following information on
mineral reserves:
- Estimated quantities of proven and probable reserves
- Quantity of each mineral product believed to be commercially
recoverable
- Quantity of each mineral produced in the year
- Quantity of reserves sold or purchased in the year
- Average market prices of each mineral product

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Stage 3: Development (cont)

Reserve Disclosure (cont):

• Audit Requirements: AU 558.05 provides that procedures should be
performed for required supplementary information.
• Inquiry of management to determine the following:
- Whether reserves were measured within prescribed guidelines
- Whether method of measurement has changed
- Significant assumptions underlying the measurement

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Stage 3: Development (cont)

Reserve Disclosure (cont):

• SEC Industry Guide 7, “Description of Property by Issuers Engaged
or to be Engaged in Significant Mining Operations”, states that
estimates other than proved or probable reserves shall not be
disclosed in any document filed with the SEC unless:
- Required by foreign or state law, or
- Where such estimates have been provided to a person offering to
acquire, merge or consolidate with the registrant

PwC 27
Stage 3: Development (cont)
What is the best indication that a mineral
resource is present?

a) Outcrops show signs of mineralization.

b) Drill holes spaced closely together confirm
a continuous high grade body of the
mineral.
c) There’s a ghost town nearby that the
locals say was heavily populated
by mineral speculators 100 years ago.
d) There are old waste dumps in the area.

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 Stage 4: Construction

Stage 1 & 2: Stage 4: Stage 6:

Exploration and Construction Closure
Evaluation

Stage 3: Stage 5:
Development Production

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Stage 4: Construction (cont)

• Construction means establishing and commissioning facilities to

extract, treat and transport production from the mineral reserve.

• Construction facilities include:

- Infrastructure
- Buildings
- Machinery
- Plant and Equipment

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Stage 4: Construction (cont)
Development Phase vs. Construction Phase

Development Assets Construction Assets

• Involves access costs and • Involves tangible assets

expenses (underground drifts). (buildings, machinery).

• Expenditures are capitalized • Tangible assets have a

until the mine is commissioned. measurable life and start to
depreciate as soon as they are
used.
• Costs are generally depreciated
over the life of the mine. • May have a longer or shorter life
than that of the mine.

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Stage 4: Construction (cont)
Construction Phase vs. Production Phase

Cut-off is the point between the development/construction phase and

production phase occurs when the mine has achieved commercial levels
of production.
Development/Construction Phase: Costs are capitalized.
Production Phase: Costs are charged as operating expenses.
Underground Development Exception: Possible for costs to still
be capitalized during the production phase

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 Stage 5: Production

Stage 1 & 2: Stage 4: Stage 6:

Exploration and Construction Closure
Evaluation

Stage 3: Stage 5:
Development Production

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Stage 5: Production
Production Phase

Production means the day to day activities of obtaining a saleable

product from the mineral reserve on a commercial scale.

When are commercial levels of production achieved?

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Stage 5: Production (cont)

Commercial levels of production may be based on a range of criteria

such as:

• A nominated percentage of design capacity.

• Mineral recoveries at or near expected levels.

• The achievement of continuous production.

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Stage 5: Production (cont)
Accounting for Production Expenditures

Production expenditures include all extraction & treatment costs:

• Depreciation Costs
• Amortization Costs
• Conversion Costs
• Transport Costs

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Stage 5: Production
Inventory

All of the following are types of inventory usually carried on

the balance sheet of a mining entity with the exception of:

a) Finished Goods
b) Mineral
c) Heap Leach
d) Stockpile

PwC 37
Stage 5: Production
Inventory

Components of inventory:

• Work in Progress
• Long term and short term stockpiles
• Heap Leaching
• Finished Goods

• How should inventory be measured and valued?

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Stage 5: Production
Inventory Measurement

Work in Progress Inventory Measurement:

• Measure when two conditions are present:

- A reliable assessment of mineral content is possible.
- Cost of production can reliably be determined.

• GAAP is diverse as the assessment of mineral content and the reliable

determination of production costs can vary from mine to mine.

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Stage 5: Production
Inventory Measurement (cont)

Stockpile Inventory Measurement:

• Quantities are usually based on physical measurements.

• Grade is generally determined through assay testing.
• Common industry practice is to use two measurement methods.

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Stage 5: Production
Inventory Measurement (cont)

What is Heap Leaching?

• A process by which a mineral can be economically recovered from

low grade ore. A solution passes through the ore, which has been
stacked on an impermeable liner and dissolves the mineral.

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Stage 5: Production
Inventory Measurement (cont)

Heap Leach Inventory Measurement:

• Same difficulties of stockpile measurement with the added

complexity of the metal recovery factor.
• Recognizing ore loaded on heap leach pads as inventory is normal
mining industry practice (matching principle).
• Consider each pad separately to reduce variability.

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Stage 5: Production
Inventory Valuation

Determination of inventory costs:

• All costs of purchase

• Costs of conversion
• Other costs incurred in bringing inventories to their present location
and condition.

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Stage 5: Production
Inventory Valuation (cont)

Costs of conversion include production overheads:

• Indirect Labor
• Indirect Materials (supplies and other small items not usually
accounted for individually).
• Depreciation of processing plant and other equipment used in mining
and processing ore.
• Light and power, heat and all other indirect costs of running the
mine.

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Stage 5: Production
Inventory Valuation (cont)

Other costs associated with mining included in the cost of

inventory:

• Depreciation and amortization.

• Ongoing, or short-term development costs that are expensed as
production costs.
• Royalties (if based on production).
• Freight costs incurred in transporting inventory to its present
location.

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Stage 5: Production
Inventory Valuation (cont)

Costs EXCLUDED from inventory:

• Administrative overheads that are not associated with the mine or

the processing plant.
• Storage costs (unless they are necessary in the production process
before a further production stage).
• Selling costs.
• Abnormal amounts of wasted materials, labor or other production
costs.

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Stage 5: Production
Inventory Valuation (cont)

GAAP requires that inventory be valued at the lower of cost or market.

• In the event that the inventory costs plus costs to complete will not be
recovered by sales proceeds, inventories should be written down to
net realizable value.

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Stage 5: Production
Inventory Valuation (cont)

All of the following should be included in the valuation of

inventory with the exception of:

a) Depreciation and Amortization

b) Indirect Labor
c) Selling Costs
d) Freight Costs

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 Stage 6: Closure and Rehabilitation

Stage 1 & 2: Stage 4: Stage 6:

Exploration and Construction Closure
Evaluation

Stage 3: Stage 5:
Development Production

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Stage 6: Closure and Rehabilitation

Closure occurs after mining operations have ceased and includes

restoration of the site.

Closure costs include:

- Employee Severance Costs
- Restoration
- Rehabilitation and Environmental Expenditure

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Key Accounting Principles

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Key Accounting Principles: Agenda

•Use of Estimates
•Joint Ventures
•Development Stage Enterprises
•Depreciation and Amortization
•Deferred Stripping
•Revenue Recognition
•Impairment and Disposals
•Environmental Obligations
•Asset Retirement Obligation

PwC 52
Key Accounting Principles:
Use of Estimates
The preparation of mining company financial statements requires us to
make estimates and assumptions. The most significant ones are:

• Quantities of proven and probable mineral reserves

• Classification of mineralization as either reserves or non-reserves
• Fair values of acquired assets and liabilities assumed in business
combinations
• Future commodity prices
• Future cost of asset retirement obligations
• Amounts and likelihood of contingencies

PwC 53
Key Accounting Principles:
Use of Estimates (cont)

Using these and other estimates and assumptions, we make various

decisions in preparing financial statements including:

• The treatment of expenditures at mineral properties prior to when

production begins as either an asset or an expense
• Whether tangible and intangible long-lived assets are impaired, and
if so, estimates of fair value of those assets and any corresponding
impairment charge
• The useful lives of tangible and intangible long-lived assets and the
measurement of amortization
• The fair value of asset retirement obligations

PwC 54
Key Accounting Principles: Use of
Estimates
Why is understanding the company’s use of
estimates so important?

a) Estimates prepared by mining companies

involve complex areas such as reserves,
useful lives and asset retirement
obligations
b) Individuals preparing these estimates
must use significant judgment
c) All of the above
d) None of the above

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Key Accounting Principles: Agenda
•Use of Estimates
•Joint Ventures
•Development Stage Enterprises
•Depreciation and Amortization
•Deferred Stripping
•Revenue Recognition
•Impairment and Disposals
•Environmental Obligations
•Asset Retirement Obligation

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 (ASC 323-10-20)
Key Accounting Principles:
Joint Ventures

Joint Ventures Defined:

• A corporate joint venture is defined as a corporation owned and

operated by a small group of businesses as a separate and specific
business or project for the mutual benefit of the members of the
group.
- Incorporated Joint Ventures
- Unincorporated Joint Ventures

• Under US GAAP, a joint venture refers to jointly controlled entities,

where the arrangement is carried on through a separate corporate
entity.

PwC 57
Key Accounting Principles:
Joint Ventures (cont)

Joint Ventures in mining:

Joint Ventures are common in the mining industry due to the following:

• Significant capital requirements associated with new projects.

• Increasing number of projects in high-risk developing countries.
• Companies looking for a strategic investment.

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Key Accounting Principles:
Joint Ventures (cont)

Joint Ventures in mining:

Generally, equity accounting must be used for incorporated joint

ventures where ownership is between 20% to 50%. Proportional
consolidation is permitted for unincorporated joint ventures where it is
established industry practice to do so.

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Key Accounting Principles:
Joint Ventures (cont)

Mine Development (cont)

Joint Control Entities (cont)
GAAP guidance on joint ventures can be found in ASC 930:

• ASC 930-810-45 provides guidance for investors in unincorporated

entities such as partnerships and unincorporated joint ventures:
- Proportionate gross financial statement presentation is not
appropriate for an unincorporated legal entity accounted for by the
equity method unless the entity is in the extractive industry where
there is a longstanding practice of its use.
- The investor’s pro-rata share of assets, liabilities, revenues and
expenses are included in their financial statements.

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Key Accounting Principles:
Joint Ventures (cont)

General Considerations:

• Joint venture agreement usually requires an audit of the entity.

• Accounting policies used to prepare joint venture financial
statements should comply with the policies adopted by the investor.
• Joint venture financial statements should be adjusted to eliminate
any material unrealized profits and losses existing between joint
venture and investor.

PwC 61
Key Accounting Principles: Joint
Ventures
Why would a mining company be interested in
pursuing a joint venture with another
company?

a) Spread risk

b) Share costs

c) Gain access to a new country or territory

d) All of the above

PwC 62
Key Accounting Principles: Agenda
•Use of Estimates
•Joint Ventures
•Development Stage Enterprises
•Depreciation and Amortization
•Deferred Stripping
•Revenue Recognition
•Impairment and Disposals
•Environmental Obligations
•Asset Retirement Obligation

PwC 63
Key Accounting Principle:
Development Stage Enterprises

• ASC 915, “Development Stage Entities”, is applicable to the separate

financial statements of development stage enterprises in all
industries.
• An entity is considered to be in the development stage if it is devoting
substantially all of its efforts to establishing a new business and
either of the following conditions exists:
a) Planned principal operations have not commenced.
b) Planned principal operations have commenced, but there has
been no significant revenue therefrom.

PwC 64
Key Accounting Principle:
Development Stage Enterprises (cont)

• Financial statements should include:

- Financial position.
- Results of operations (current year and cumulative to date).
- Cash flows (current year and cumulative to date).
- A description of the nature of the development stage activities in
which the entity is engaged.

• ASC 915 provides for alternative presentation and disclosure only -

US GAAP is still equally applicable for development state entities as it
is for operating entities.

PwC 65
Key Accounting Principles: Agenda
•Use of Estimates
•Joint Ventures
•Development Stage Enterprises
•Depreciation and Amortization
•Deferred Stripping
•Revenue Recognition
•Impairment and Disposals
•Environmental Obligations
•Asset Retirement Obligation

PwC 66
Key Accounting Principles:
Depreciation and Amortization (cont)

Most common methods of depreciation in the mining

industry are as follows:

Depreciation Useful life Expense

method
Units-of- The number of units of production Variable, based on level of
production expected to be obtained from or production attributable to the
processed by the asset asset

Straight-line The time period over which the asset is Fixed

method expected to be used

PwC 67
Key Accounting Principles:
Depreciation and Amortization

Examples of depreciable assets typically subject to units-of-

production method of depreciation:

• Deferred Mine Development

• Certain Property, Plant and Equipment

PwC 68
Key Accounting Principles:
Depreciation and Amortization

Applying the units of production method of depreciation on

a utility vehicle would be appropriate.

a) True

b) False

PwC 69
Key Accounting Principles: Agenda
•Use of Estimates
•Joint Ventures
•Development Stage Enterprises
•Depreciation and Amortization
•Deferred Stripping
•Revenue Recognition
•Impairment and Disposals
•Environmental Obligations
•Asset Retirement Obligation

PwC 70
 (ASC 930-330-25)
Key Accounting Principles:
Deferred Stripping

• Stripping is the removal of overburden or waste to access mineralized

material.
• Once production has commenced from a mine, production related
stripping costs are accounted for as a cost of current production and,
therefore, as a component of the cost of any inventory extracted from
the mine and held at period end.
- Applies to all types of inventory including stockpiles and in-
process materials.
- Standard applies only to stripping costs (waste or overburden)
incurred in surface mining during the production phase of a mine.

PwC 71
 (ASC 930-330-20)
Key Accounting Principles:
Deferred Stripping (cont)

• Production phase of a mine begins when saleable minerals are

extracted (produced), regardless of the level of production. However,
the production phase does not commence with the removal of de
minimis saleable mineral material that occurs in conjunction with
the removal of overburden.

PwC 72
Key Accounting Principles:
Deferred Stripping (cont)

Facts and circumstances must be considered when determining if a

mine can capitalize stripping costs incurred at an existing operation.
These include the following to be considered:
• Workings of separate geological structures/mineral deposits.
• Separate and distinct areas of mining operations contemplated by the
mine development plans.
• Enlargement of existing operations vs. separate and distinct new
operations.
• Expenditures for tangible property and infrastructure development

PwC 73
 (ASC 930-330-25)
Key Accounting Principles:
Deferred Stripping (cont)

Capitalized or expensed:

• Generally, stripping costs should be accounted for as variable

production costs that should be included in the costs of the inventory
produced (that is, extracted) during the period that the stripping
costs are incurred.
• Stripping costs should be capitalized if the stripping activity can be
shown to represent a betterment to the mineral property. A
betterment occurs when the stripping activity provides access to
sources of reserves that will be produced in future periods that would
not have otherwise been accessible in the absence of this activity.

PwC 74
Key Accounting Principles:
Deferred Stripping
Where can one find the best
authoritative definition of
“production”?

a) SEC Industry Guide 7

b) ASC 930-330-20 “Accounting for
Stripping Costs Incurred during
production in the Mining Industry”
c) Google
d) The glossary section of a mining
company’s 10-K
PwC 75
Key Accounting Principles: Agenda
•Use of Estimates
•Joint Ventures
•Development Stage Enterprises
•Depreciation and Amortization
•Deferred Stripping
•Revenue Recognition
•Impairment and Disposals
•Environmental Obligations
•Asset Retirement Obligation

PwC 76
 (ASC 605-10-25)
Key Accounting Principles:
Revenue Recognition

Revenue recognition guidance is extensive under US GAAP and

includes a significant volume of literature issued by various US
standard setters.

Revenue recognition is considered to involve either:

- a) being realized or realizable – typically when products (goods or
services), merchandise, or other assets are exchanged for cash or
claims to cash.
- b) being earned – typically when the entity has substantially
accomplished what it must do to be entitled to the benefits
represented by the revenues

PwC 77
Key Accounting Principles:
Revenue Recognition (cont)

Revenue generally is (1) realized or realizable and (2) earned when all of
the four criteria noted below are satisfied:

1. Persuasive evidence of an arrangement exists.

2. Delivery has occurred.
3. Seller's price to buyer is fixed or determinable.
4. Collectability is reasonably assured.

PwC 78
Key Accounting Principles:
Revenue Recognition (cont)

Gold Bullion Sales

1. Persuasive evidence of an arrangement exists.

2. Delivery has occurred.
3. Seller's price to buyer is fixed or determinable.
4. Collectability is reasonably assured.

PwC 79
Key Accounting Principles:
Revenue Recognition (cont)

Provisional Pricing

• Usually occurs with the production of concentrate

• Risks pass upon shipment/delivery at a preliminary price
• Provisional payments received on delivery, final payment on
settlement
• Provisional payment can be as high as 90%

PwC 80
Key Accounting Principles:
Revenue Recognition (cont)

Concentrate Sales

1. Persuasive evidence of an arrangement exists.

2. Delivery has occurred.
3. Seller's price to buyer is fixed or determinable.
4. Collectability is reasonably assured.

PwC 81
Key Accounting Principles:
Revenue Recognition (cont)

Tolling arrangements

• Value added service such as smelting, washing, refining or

transporting product on behalf of another company.
• Smelter is entitled to a treatment charge usually fixed by contract

PwC 82
Key Accounting Principles:
Revenue Recognition (cont)

Tolling arrangements, continued

Revenue recognition in tolling arrangements might be at point of either

when:

• The metal is shipped to the smelter

• The metal arrives at the smelter

PwC 83
Key Accounting Principles:
Revenue Recognition

In all circumstances, revenue is

recognized upon shipment of goods.

a) True

b) False

PwC 84
 (ASC 605-10-S99)
Key Accounting Principles:
Revenue Recognition (cont)

Other Issues:

FOB Destination:

• If title has not transferred, revenue recognition is not appropriate.

• In some contracts, title does not transfer until payment.

PwC 85
 (ASC 605-10-S99)
Key Accounting Principles:
Revenue Recognition (cont)

Bill and Hold

PwC 86
Key Accounting Principles: Agenda
•Use of Estimates
•Joint Ventures
•Development Stage Enterprises
•Depreciation and Amortization
•Deferred Stripping
•Revenue Recognition
•Impairment and Disposals
•Environmental Obligations
•Asset Retirement Obligation

PwC 87
 (ASC 360-10-35)
Key Accounting Principles:
Impairment and Disposals

Impairment: The condition that exists when the carrying amount of a

long-lived asset or asset group exceeds its fair value.

PwC 88
 (ASC 360-10-35-21)
Key Accounting Principles:
Impairment and Disposals (cont)

Impairment Indicators:
• Significant decrease in the market price of a long-lived asset.
• Significant change in which a long-lived asset is used.
• Significant change in the asset’s physical condition.
• Significant change in legal factor, regulations or business climate.
• Substantial overruns of project costs.
• Current period or trend of operating or cash flow losses supported by
a forecast that demonstrates continued losses.
• An expectation that the asset will be sold or disposed of before the
end of its previously estimated useful life.

PwC 89
Key Accounting Principles:
Impairment and Disposals

Which of the following would be considered an

impairment indicator?

a) A favorable outcome in a lawsuit

b) A discovery of new proven and probable reserves
c) A three month decline in commodity prices
d) A trend of operating cash flow gains

PwC 90
 (ASC 360-10-35)
Key Accounting Principles:
Impairment and Disposals (cont)

Long-Lived Assets Classified as Held and Used

Recognition of Impairment Losses:

• Carrying amount of the long-lived asset is:

- 1 - Not recoverable
- 2 - Exceeds its fair value

PwC 91
 (ASC 360-10-35)
Key Accounting Principles:
Impairment and Disposals (cont)
Long-Lived Assets Classified as Held and Used
Recoverability Test:
• Carrying Amount > Sum of Undiscounted Cash Flows:
• Carrying amount of the asset at the date the test is conducted.
• Undiscounted cash flows from the use and eventual disposal of the
asset:
- Include only the future cash flows (cash inflows less associated cash
outflows) that are directly associated with and that are expected to arise as
a direct result of the use and eventual disposition of the asset.
- Estimates of future cash flows used to test the recoverability of a long-
lived asset (asset group) shall incorporate the entity’s own assumptions
about its use of the asset (asset group) and shall consider all available
evidence.
- Estimates of future cash flows used to test the recoverability of a long-
lived asset (asset group) shall be made for the remaining useful life of the
PwC asset (asset group) to the entity. 92
 (ASC 360-10-35-17)
Key Accounting Principles:
Impairment and Disposals (cont)

Long-Lived Assets Classified as Held and Used

Measurement of Impairment Loss:

• Impairment Loss = Carrying Amount – Fair Value*:

- *Fair value is the price that would be received to sell an asset in an
orderly transaction between market participants at the
measurement date.
- Adjusted carrying amount becomes new cost basis.
- Restoration of previously recognized impairment loss is
PROHIBITED.

PwC 93
 (ASC 360-10-50-2)
Key Accounting Principles:
Impairment and Disposals (cont)

Long-Lived Assets Classified as Held and Used

Impairment Disclosures:
• Description of the impaired long-lived asset.
• Facts and circumstances surrounding the impairment.
• Amount of the impairment loss.
• Caption in the income statement that includes the loss.
• Method used to determine fair value.
• The segment in which the impaired long-lived asset is reported under
(if applicable).

PwC 94
 (ASC 360-10-45-9)
Key Accounting Principles:
Impairment and Disposals (cont)

Long-Lived Assets Classified as Held For Sale

When can an asset be classified as held for sale?

1. Management commits to a plan to sell the asset.

2. The asset is available for immediate sale in its present condition.
3. An active program to locate a buyer has been initiated.
4. The sale of the asset within one year is probable.
5. The asset is being actively marketed for sale at a price that is
reasonable to its current fair value.
6. It is unlikely the plan to sell the asset will be withdrawn.

All conditions must be met!

PwC 95
 (ASC 360-10-35-43)
Key Accounting Principles:
Impairment and Disposals (cont)

Long-Lived Assets Classified as Held For Sale

Accounting While Held for Sale:

Asset is measured at the LOWER of its carrying amount or fair value

less cost to sell.

Costs to sell include:

- Broker Commissions
- Legal and Title Transfer Fees
- Closing Costs

PwC 96
 (ASC 360-10-35-43)
Key Accounting Principles:
Impairment and Disposals (cont)

Long-Lived Assets Classified as Held For Sale

Accounting While Held for Sale (continued):

• Recognize a loss for any initial or subsequent write-down to fair value

less cost to sell.
• Recognize a gain for any subsequent increase in fair value less cost to
sell, but not in excess of the cumulative loss previously recognized.
• Discontinue Depreciation

PwC 97
 (ASC 360-10-45-14)
Key Accounting Principles:
Impairment and Disposals (cont)

Long-Lived Assets Classified as Held For Sale

Presentation and Disclosure:

• A long-lived asset classified as held for sale should be presented

separately in the statement of financial position.

PwC 98
Key Accounting Principles:
Impairment and Disposals

Assets that may be impaired should always be

assessed individually.

a) True

b) False

PwC 99
Key Accounting Principles: Agenda
•Use of Estimates
•Joint Ventures
•Development Stage Enterprises
•Depreciation and Amortization
•Deferred Stripping
•Revenue Recognition
•Impairment and Disposals
•Environmental Obligations
•Asset Retirement Obligation

PwC 100
Key Accounting Principles:
Environmental Obligations

Summary: Entities are required to recognize a liability for obligations

associated with environmental remediation liabilities that relate to
pollution arising from some past act.

Laws and Regulations:

- Federal Law
- State Law
- Non U.S Law
- Foreign Law

Guidance: ASC 410-30 (Environmental Obligations)

PwC 101
 (ASC 410-30-05)
Key Accounting Principles:
Environmental Obligations (cont)

Environmental Rehabilitation Liability Laws

• Superfund
- Comprehensive Environmental Response, Compensation, and
Liability Act of 1980
- Superfund Amendments and Reauthorization Act of 1986

• Resource Conservation and Recovery Act

PwC 102
 (ASC 410-30-05)
Key Accounting Principles:
Environmental Obligations (cont)

Laws intended to Control or Prevent Pollution

• Resource Conservation and Recovery Act of 1976
- solid and hazardous wastes
• Clean Water Act
- discharge of pollutants into the waters of the United States and to
publicly owned treatment works
• Cross-State Air Pollution Rule
- replaces Clean Air Interstate Rule
- emission of pollutants into the atmosphere
• Emergency Planning and Community Right-to-Know Act
• Pollution Prevention Act of 1990

PwC 103
 (ASC 410-30-05)
Key Accounting Principles:
Environmental Obligations (cont)

Potentially Responsible Parties

Superfund places liability on the following four distinct classes of

responsible parties:
1. Current owners or operators of sites at which hazardous substances
have been disposed of or abandoned
2. Previous owners or operators of sites at the time of disposal of
hazardous substances
3. Parties that "arranged for disposal" of hazardous substances found
at the sites
4. Parties that transported hazardous substances to a site, having
selected the site for treatment or disposal

PwC 104
Key Accounting Principles:
Environmental Obligations

Potentially Responsible Parties

A mining company that disposes of its waste

at approved facilities, in accordance with all
current requirements and has exercised "due
care“ will not be liable for future
environmental claims?

a) True
b) False

PwC 105
Key Accounting Principles:
Environmental Obligations (cont)

U.S. GAAP Requires the accrual of a liability if both of the following

conditions are met:

• Information available before the financial statements are issued

indicates that it is probable that a liability has been incurred at the
date of the financial statements.

• The amount of the loss can be reasonably estimated.

PwC 106
 (ASC 450-20-25)
Key Accounting Principles:
Environmental Obligations (cont)

Probability that a Liability Has Been Incurred:

Litigation has commenced or a claim has been asserted.

• It is probable that the outcome is unfavorable.

PwC 107
 (ASC 410-30-25)
Key Accounting Principles:
Environmental Obligations (cont)

Ability to Estimate the Liability – Environmental Factors:

• Extent and type of hazardous substances.

• Choice of technology.
• Changing laws and regulations.
• Number of other potentially responsible parties.
• Financial condition of other parties.

PwC 108
 (ASC 410-30-30)
Key Accounting Principles:
Environmental Obligations (cont)

Environmental Liability Considerations – Allocation:

• Identification of potentially responsible parties.

• Likelihood that other potentially responsible parties will pay their full
share liability.
• The percentage of the liability that will be allocated to the entity

PwC 109
 (ASC 410-30-30)
Key Accounting Principles:
Environmental Obligations (cont)

Environmental Liability Considerations – Cost Examples:

• Costs of compensation and benefits employees expected to devote a

significant amount to the remediation effort.
• Costs to complete feasibility studies.
• Fees to outside engineers and consultants.
• Costs of contractors.
• Governmental oversight costs.
• Cost of machinery dedicated to the remedial action.
• to the entity

PwC 110
 (ASC 410-30-50)
Key Accounting Principles:
Environmental Obligations (cont)

Environmental Liability Considerations – Required

Disclosures:

• Nature of the accrual.

• Amount of the accrual (if necessary).
• Whether the accrual for environmental remediation liabilities is
measured on a discounted basis.
• If any portion of the accrued obligation is discounted, the
undiscounted amount of the obligation, and the discount rate used in
the present-value determinations.

PwC 111
Key Accounting Principles: Agenda
•Use of Estimates
•Joint Ventures
•Development Stage Enterprises
•Depreciation and Amortization
•Deferred Stripping
•Revenue Recognition
•Impairment and Disposals
•Environmental Obligations
•Asset Retirement Obligation

PwC 112
Key Accounting Principles:
Asset Retirement Obligations

Environmental Obligations vs. Asset Retirement Obligations

Environmental Obligations Asset Retirement Obligations
• ASC 410-30 • ASC 410-20
• Environmental remediation • Environmental remediation
liabilities that result from the liability associated with the
improper operation of a long- retirement of a tangible long-
lived asset lived asset that result from the
• Environmental remediation acquisition, construction, or
liabilities that relate to pollution development and (or) the
arising from some past act normal operation of a long-lived
generally as a result of the asset.
provisions of environmental
laws.
PwC 113
Key Accounting Principles:
Asset Retirement Obligations

Which of the following events would typically

give rise to an Asset Retirement Obligation?

a) A mercury spill at an operating mine site

b) The acquisition of a developed mining
operation
c) An operating mine is found by authorities
to be emitting an unacceptable level of
pollution

PwC 114
 (ASC 410-20-25)
Key Accounting Principles:
Asset Retirement Obligations (cont)

Recognition Criteria

An entity must recognize an ARO in the period in which it is incurred

when:

• The entity has an existing legal obligation associated with the

retirement of a tangible asset
• The amount of the liability can be reasonably estimated

PwC 115
 (ASC 410-20-30)
Key Accounting Principles:
Asset Retirement Obligations (cont)

Initial Measurement Criteria

Liability can be estimated if any of the following conditions exist:

1. It is evident that the fair value of the obligation is embodied in the

acquisition price of the asset
2. An active market exists for the transfer of the obligation
3. Sufficient information exists to apply an expected present value
technique

PwC 116
 (ASC 410-20-30)
Key Accounting Principles:
Asset Retirement Obligations (cont)

Initial Measurement Criteria

Present Value Technique:

Estimated expected cash flows due to legal obligations
ADD: Third party profit margins and costs
ADD: Inflation and Mark Risk Factors
Basis for ARO Calculation (Before Discounting)
Discount using a credit-adjusted risk-free rate

PwC 117
 (ASC 410-20-30)
Key Accounting Principles:
Asset Retirement Obligations (cont)

Initial Recognition and Measurement - Capitalize

Debit: ARO LT Asset $XXX

Credit: ARO Liability $XXX

PwC 118
 (ASC 410-20-35)
Key Accounting Principles:
Asset Retirement Obligations (cont)

Subsequent Measurement:

Recognize Period-to-Period Changes Resulting From:

1. The passage of time

2. Change in estimate
◦ Revisions to timing
◦ Revisions in the original estimate of undiscounted cash flows

PwC 119
 (ASC 410-20-35)
Key Accounting Principles:
Asset Retirement Obligations (cont)

Subsequent Measurement - Passage of Time

Debit: ARO Depreciation Expense XXX

Credit: ARO Accumulated Depreciation XXX

- Amortize over the life of the asset

- Balance at end of mine life: $0

PwC 120
 (ASC 410-20-35)
Key Accounting Principles:
Asset Retirement Obligations (cont)

Subsequent Measurement - Passage of Time

Debit: Accretion Expense XXX

Credit: ARO Liability XXX

- Accrete over the asset life

- Accretion expense dependent on CARF Rate
- Accretion expense will not equal depreciation expense
- Balance at end of mine life: Original FV (Basis) for ARO
Calculation

PwC 121
 (ASC 410-20-35)
Key Accounting Principles:
Asset Retirement Obligations (cont)

Subsequent Measurement - Changes in Estimate

Increase or Decrease the ARO Liability and Asset:

• Upward Revisions in undiscounted cash flows – current credit-
adjusted risk-free rate
• Downward Revisions in undiscounted cash flows– historical credit-
adjusted risk-free rate
*Refer to Section 4580 of the ARM for more information and illustrations

PwC 122
 (ASC 410-20-50)
Key Accounting Principles:
Asset Retirement Obligations (cont)

Disclosure

• General description of the ARO and the associated long-lived assets

• Fair value of assets that are legally restricted for purposes of settling
ARO

PwC 123
 (ASC 410-20-50)
Key Accounting Principles:
Asset Retirement Obligations (cont)

Disclosure, continued

• Reconciliation of the beginning and ending aggregate carrying

amount of ARO, showing separately the changes attributed to the
following:
- Liabilities incurred in the current period
- Liabilities settled in the current period
- Accretion expense
- Revisions in estimated cash flows

PwC 124
 (ASC 410-20-50)
Key Accounting Principles:
Asset Retirement Obligations (cont)

Disclosure, continued

• If the fair value of an ARO cannot be reasonably estimated, that fact

and the reasons therefore should be disclosed.
• Must determine an ARO even when uncertainty exists as to the
timing of the obligation or method of settlement.

PwC 125
Key Accounting Principles:
Asset Retirement Obligations

What do you use to discount upward revisions

in ARO estimates?

a) Historical Interest Rate

b) Current Interest Rate
c) Historical Credit-Adjusted Risk-Free Rate
d) Current Credit-Adjusted Risk-Free Rate

PwC 126
Reclamation: Before/After

Yates Pile

PwC 127
Reclamation: Before/After

Mill Site

PwC 128
Reclamation: Before/After

Slurry/Sand Dams

PwC 129
Reclamation: Before/After

Slurry/Sand Dams

PwC 130
Summary

More interest? Dig for more information at the PwC Publication

website (http://www.pwc.com/us/en/publications)

Type mining in the ‘Search’ box to advance to the mining information.

PwC 131
Contacts

Christie Greve Molly Hepburn

Denver, Colorado Denver, Colorado
+1 720 931 7679 +1 720 931 7250
[email protected] [email protected]

Alex Mayberry Benita Pulins

Perth, Western Australia Salt Lake City, Utah
+61 8 9238 3039 +1 801 537 5227
[email protected] [email protected]

PwC 132
Thank You

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member firm, and may sometimes refer to the PwC network. Each member firm is a separate
legal entity. Please see www.pwc. com/structure for further details.