4.2.1 Depreciation of mining assets The accumulated capitalised costs from E&E and development phases are amortised over the expected total production using a units of production (“UoP”) basis. UoP is the most appropriate amortisation method because it reflects the pattern of consumption of the reserves’ economic benefits. However, straight-line amortisation may be appropriate for assets that are consumed more by the passage of time. Also, there may be circumstances when straight line depreciation does not produce a materially different result and can be used as a proxy for UoP.
4.2.2 UoP basis
IFRSs do not prescribe what basis should be used for the UoP calculation. There are several methods commonly used:
• total quantity of material extracted from the mine (including waste): this is appropriate for depreciating equipment such as shovels and draglines where the level of wear and tear is based on the volume extracted from the mine, irrespective of whether it represents ore or waste;
• total quantity of ore extracted from the mine:
this is appropriate for depreciating the cost of the mineral property itself. It might also be suitable for depreciating equipment that is used in the early stages of processing, such as crushers and conveyors where wear and tear is linked to the ore throughput;
• total output: this is appropriate for depreciating plant and equipment that is involved in the latter stages of processing (such as smelters and refineries) where the volume of throughput (and hence wear and tear) is closely linked to the quantity of valuable output.
For assets with an economic life that is shorter than the mine life, these calculations need to be performed using the estimated productive capacity of the individual asset (or component), not the estimated capacity of the mine as a whole.
4.2.3 Determining the reserve/
resource base
The life of the mine for depreciation purposes is based on an estimate of mineable mineral reserves and resources. The reserve/resource base selected needs to be considered in conjunction with the actual mine plan and any necessary costs to be incurred in order to extract part of those reserves/resources in determining the amortisation charge for the period.
The following reserve and resource bases are commonly used by a mining entity:
• Proved and probable reserves; or
• Reserves and a portion of resources expected to be converted into reserves.
Entities should only include those reserves or resources which they plan to mine.
4.2.3.1 Proved and probable reserves
The use of proved and probable reserves for the calculation of depreciation is common as it is often the best estimate of the life of the mine. All inferred
resources are excluded, together with any indicated and measured resources that have not yet been deemed economically recoverable.
This approach may be appropriate in situations where proved and probable reserves provide the best indication of the useful life of the assets and the related costs that have been capitalised. However, in other situations, proved and probable reserves alone may not provide a realistic indication of the useful life of the mine and related assets. Management may be confident that further resources will be converted into reserves and are approaching economic decisions affecting the mine on this basis, but has chosen to delay the work required to designate them formally as reserves.
4.2.3.2 Reserves and a portion of resources expected to be converted into reserves
Some mining entities adopt a different policy. The reserve/resource base is assessed for each mine and will depend on the type of mineral and the characteristics of the deposit. It is difficult to justify including inferred mineral resources in the depreciation base if the tonnage, grade and mineral content can only be estimated with a low level of confidence. For some deposits, however, it may be considered reasonable to take account of indicated and measured mineral resources that have not yet been classified as reserves.
This might help to ensure the depreciation charges reflect management’s best estimate of the useful life of the assets.
This can be particularly important where a mineral property has been acquired as part of a business combination and a significant amount has been attributed to the fair value of resources not yet designated as reserves. Use of only proved and probable reserves in those circumstances would probably result in a significant acceleration of depreciation expense.
4.2.3.3 Basis of UoP calculation
The basis of the UoP calculation is a choice, and should be applied consistently for similar fact patterns. As noted in section 2.3.2, the type of site which is being operated may be a factor which the entity considers when evaluating the likely activity on a mine and could be a factor in deciding which basis to use for the UoP calculation. A brownfield site may provide more confidence in selecting reserves and a portion of resources which they expect to convert to reserves.
If an entity includes more than just proved and probable reserves in its UoP calculation, an adjustment is generally made to the calculation of the amortisation charge to include the estimated future development costs to access the portion of resources expected to be converted into reserves. There are different approaches to the inclusion of future development costs and these are discussed in 4.2.3.4 below.
The estimated production used for depreciation of assets that are subject to a lease or licence should be restricted to the total production expected to be produced during the licence/lease term. Renewals of the licence/ lease are only assumed if there is evidence to support probable renewal at the choice of the entity without significant cost.
Unit of production calculation—classes of reserves What class of reserves should be used for the UoP calculation?
Background
Entity D is preparing its first IFRS financial statements. D’s management has identified that it should amortise the carrying amount of its producing mines on a unit of production basis over the reserves present for each mine.
However, D’s management is debating whether to use proved and probable reserves or reserves and a portion of resources expected to be converted into reserves for the unit of production calculation.
Solution
Entity D’s management may choose to use either proved and probable reserves or reserves and a portion of resources expected to be converted into reserves for the unit of production amortisation calculation.
The IASB Framework identifies assets on the basis of probable future economic benefits. An appropriate basis for assessing these would be the reserves used by management when assessing their business performance and the use of probable reserves may be consistent with this approach. In some limited circumstances it may be appropriate to include resources which form an integral part of management’s mine plan.
Whichever reserves definition D’s management chooses it should disclose and apply this consistently to all similar types of production properties.
Unit of production calculation—future mine plans
Can resources not yet designated as reserves be used as a basis for the UoP calculation?
Background
Entity C has been operating a producing mine for the last 30 years. The mine area contains narrow deep veins of precious metals.
At the year end there are proved reserves remaining equivalent to two years of production remaining. However, the entity expects to convert further resources not yet designated as reserves and believes that these will be sufficient for activity to continue for an additional 20 years.
Solution
Where the entity has a track record of proving up additional reserves every year, has evidence to indicate that there are additional resources which may be proved up in future and has demonstrated an intention to continue activity at the site, it may be appropriate to include resources expected to be converted into reserves.
4.2.3.4 Future development costs
Substantial costs are incurred up-front when a new mine is established but before production commences.
However, it may be apparent that further future development costs will be necessary to extract all of the reserve/resource base from the mine. For example, it may be necessary to expand the tailings facilities or remove more overburden or, in the case of an underground mine, it may be necessary to construct new levels and cross-cuts.
Where substantial future development costs are required to extract the entire reserve/resource base, one approach is to split the costs attributed to the mineral property between those that can:
• be attributed to the entire ore body (such as the property acquisition costs and transfers from exploration and evaluation), which should be depreciated over the full reserve/resource base; and
• only be attributed to part of the ore body (such as the overburden removal costs or the cost of constructing the first tailings facility), which should be depreciated over the relevant portion of the reserve/resource base.
This might result in the use of several different reserve/
resource bases for different components of the mine development costs. These costs are then depreciated as and when additional development costs are incurred over the part of the ore body to which they relate.
Any amounts capitalised in respect of the future dismantlement, removal and restoration of the mine site are depreciated on a basis consistent with the mine development activity to which they relate. This approach is consistent with the requirement that each part of an asset with a cost that is significant to the total cost of the item should be depreciated separately.
Where costs are attributed to the entire ore body and depreciation is calculated over reserves and resources, future development costs may need to be taken into account when determining the pattern of depreciation charges on the existing asset.
4.2.4 Change in the basis of reserves An entity should use the reserve base which is in line with their mine plan and the level of reserves they expect to extract. As expectations can change the entity may subsequently determine that an alternative base may be more appropriate. A change in the basis of reserves from proved and probable reserves to reserves and a portion of resources expected to be converted into reserves is considered acceptable under IFRS.
A change in the basis of reserves constitutes a change in accounting estimate under IAS 8. The entity’s policy of depreciating their assets on a UoP basis is unchanged;
they have only changed their estimation technique. The effect of the change is recognised prospectively from the period in which the change has been made. Entities which change their UoP basis should ensure that any related changes (such as future capital expenditure to complete any assets or access resources) are also incorporated into their depreciation calculation.
Appropriate disclosure of the change should be made.
4.2.5 Depreciation of other assets
Non-mining assets are depreciated using a method that reflects the pattern in which the asset’s future economic benefits are expected to be consumed. The depreciation is allocated on a systematic basis over an asset’s useful life. The residual value and the useful lives of the assets are reviewed at least at each financial year-end and, if expectations differ from previous estimates the changes are accounted for as a change in an accounting estimate in accordance with IAS 8. Depreciation on a straight line basis over the expected useful lives of the assets is a common approach.
4.2.6 Components
IFRS has a specific requirement for ‘component’
depreciation, as described in IAS 16. Each significant part of an item of property, plant and equipment is depreciated separately [IAS 16 para 43-44].
Significant parts of an asset that have similar useful lives and patterns of consumption can be grouped together.
This requirement can create complications for mining entities, as there may be assets that include components with a shorter useful life than the asset as a whole.
Productive assets are often large and complex installations. Assets are expensive to construct, tend to be exposed to harsh environmental or operating conditions and require periodic replacement or repair.
The significant components of these types of assets must be separately identified. Consideration should also be given to those components that are prone to technological obsolescence, corrosion or wear and tear more severe than that of the other portions of the larger asset.
The components that have a shorter useful life than the remainder of the asset, such as mill liners, are depreciated to their recoverable amount over that shorter useful life. The remaining carrying amount of the component is derecognised on replacement and the cost of the replacement part is capitalised [IAS 16 para 13-14].