The major global mining companies surveyed by KPMG’s Mining Financial Reporting Survey 2014 reported an impairment loss of $70 billion in the 2013/2014 financial year — signaling the impact of the low commodity price cycle currently being experienced. This may also indicate that companies overpaid for mining investments in the past.
This was revealed by KPMG partner; Daniel Hooijer at the recent launch of the biennial KPMG Mining Financial Reporting survey in Johannesburg. The 2014 Survey focuses on the impact and key issues currently facing mining companies in an increasingly challenging regulatory and operating environment.
Hooijer said the fact that 80% of the 25 companies surveyed recorded an impairment of goodwill and/or mining assets compared to only 45% of companies surveyed in the 2012 Mining Financial Reporting Survey, indicates that the 2013 financial year was a challenging one for mining companies.
“The increase in impairment is not owing to new or changed reporting requirements. “What has changed is the focus on cash generation and the economics around mining,” he commented.
Mining groups were more explicit about the reasons for the impairment of goodwill or mining assets: twelve companies cited low commodity prices and three attributed their impairments to market capitalisation versus carrying value of asset shortfalls.
Most companies reported the underlying reasons for impairment were owing to factors specific to assets such as changes to mine plan, abandonment, suspension or delay in projects and increasing operating and capital costs. According to the survey, these underlying causes have led the investment community to demand more comprehensive disclosure of the cost of production.
In determining whether there is an impairment indicator, an entity considers both internal factors such as adverse changes in performance and external factors such as adverse changes in the business or regulatory environment.
Jacques Erasmus, KPMG partner: head of mining in Southern Africa, highlighted that only six of the companies which participated in the survey provided a sensitivity analysis in cases where the carrying amount of goodwill allocated to a cash generating unit was significant in comparison to the entity’s total carrying amount.
Entities are required to disclose a sensitivity analysis when a reasonable possible change in a key assumption would result in the cash generating unit’s carrying amount to exceed its recoverable amount.
In 2013, companies reporting under the International Financial Reporting Standards (IFRS) applied a new standard for accounting for stripping costs. KPMG’s Pieter Fourie, senior manager: energy and natural resources, said IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine added value to financial statements as it enabled mining companies to capitalise the costs of production stripping in surface mining.
Fourie commented this was important as it accounted for costs while stripping work was ongoing. The standard recognises that production stripping in surface mining activity could produce two benefits: usable ore that can produce inventory and improved access to materials that will be mined in future.
All the companies surveyed that own surface mining operations disclosed how they accounted for stripping cost during production. However, limited disclosures were made about the methods companies used in allocating costs between inventory and the stripping assets with only 5 of the companies disclosing their allocation method. The methods disclosed was mainly based on some form of stripping ratio methodology.
One of the key concepts underlying the IFRIC 20 standard is the identification of the component of the ore body to which access was improved or gained through stripping activities. Most companies disclosed that stripping assets were amortised over the expected life of the component to which access was improved through stripping activities IFRIC 20, however, does not provide a specific definition of the component of the ore body, which could lead to different interpretations. Fourie also mentioned that limited disclosures were made by companies on factors they consider in determining the component of the ore body to which access has been improved through stripping activities.
An important non-GAAP measure the survey group used in their financial statements was all-in sustaining costs — an extension of existing cash cost metrics incorporating costs related to sustaining production. All ten gold producers that were surveyed disclosed ‘all-in sustaining costs’, leading Hooijer to ask whether the sector will omit cash costs and disclose all-in sustaining costs in future.
As standard setters continue to update standards KPMG foresees greater disclosure of non-financial measures.
The Mining Financial Reporting Survey 2014 published key messages from its survey group on the impairment of financial assets, investments (IFRS 10 and IFRS 11), deferred stripping, estimates and judgments and Non-GAAP measures.
Download the survey at: Mining Financial Reporting Survey 2014
How to ensure that mine fatalities stay at the low levels of 2014
8 strategies for reclaiming efficiency and lowering costs in mining
Chinese firm Heaven-Sent bids $56M for South African Village Main Reef