Office of the Chief Accountant:
Letter from SEC Chief Accountant Requesting AcSEC Take on Project on Mining Industry
May 10, 2001
Mr. Mark V. Sever
Chairman - Accounting Standards Executive Committee
c/o Ernst & Young LLP
111 North Canal Street
Chicago Il 60606-6301
Dear Mr. Sever
The mining industry includes thousands of companies engaged in mining an array of products including precious metals, base metals, coal, uranium, and other industrial minerals. Our recent filing reviews of major mining companies and early-to-advanced stage exploration entities have identified several areas of variations in accounting practices. Some of these practices, such as capitalizing exploration costs, do not appear supportable under the FASB's conceptual framework. Given the current diversity in financial reporting, the SEC staff recommends that the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants (AICPA) add a project to its agenda to develop a statement of position addressing accounting and disclosure issues related to the mining industry.
We also note that the International Accounting Standards Committee (IASC) has a project on its agenda regarding accounting in the extractive industries, including mining and petroleum. The first stage of that project has led an IASC Steering Committee to release for comment an issues paper covering mining and oil and gas accounting. The comment period on this paper expires on June 30, 2001. We believe that concurrent development of accounting standards for the mining industry could help in developing a set of high quality U.S. standards for this specific industry with those of the IASC.
Following is a summary of the accounting and reporting issues that the staff believes should be considered within the scope of a possible project to develop U.S. standards for the mining industry.
Accounting for and Disclosure of Mineral Reserves
- How should the costs of acquiring mineral rights or properties be accounted for given these acquisitions may take the form of taking title to properties, obtaining mineral and mining rights, leases, patents, etc.
- How should generally accepted principles for determination of the impairment of such costs capitalized be determined?
- What financial information should be disclosed to investors that will provide relevant, comparable and transparent disclosures of mineral reserves?
For mineral companies, the amount of reported "proven and probable" mineral reserves has a significant impact on the value of the company and on many financial statement measures (e.g., depletion or impairment estimates). In this regard, for public companies SEC Industry Guide 7 establishes definitions of "proven" and "probable" mineral reserves.
Accounting for costs associated with exploration and development activities
- Clarify that costs incurred in exploring for minerals may not be capitalized.
- Provide definitions of exploration activities (related costs are expensed) versus mine development activities (related costs are capitalized).
The exploration for mineral deposit or the acquisition of mineral reserves commonly occurs several years prior to commencement of mining. Significant amounts of capital may be invested into the process of identifying mineral reserves; however, many exploration projects never result in the identification of an economically recoverable mineral reserve. We believe that costs incurred in exploring for minerals may not be capitalized as such costs do not qualify for capitalization pursuant to FASB Statement 2 and do not meet the definition of an asset as defined in FASB Concepts Statement 5. The SEC staff is concerned with capitalizing exploration costs since it is unclear that there is a probable future economic benefit prior to a reserve being proven to exist. Further, since a reserve has not yet been identified, there are no cash flows to support the recoverability of any exploration costs deferred.
The SEC Staff understands the IASC Steering Committee has identified the accounting for exploration costs as a major item for consideration and has reached a tentative view that all such costs should be expensed.
Accounting for development activities performed contemporaneous to production
- Specify that costs incurred at an operating mine, excluding costs included in inventory, should not be deferred.
- Provide guidance as to when a mine is under construction versus in production.
- Due to the nature of the business, specify which, if any mine development costs incurred prior or subsequent to commercial production commencing, should be capitalized.
A mining enterprise should not capitalize operating losses incurred after commercial production begins.
Accounting for operating activities
- Define when it would be appropriate for inventories of precious and base metals appropriately to be recorded at other than cost.
- Provide guidance about common revenue recognition matters unique to the industry.
Our recent experience suggests that there is inconsistent application of ARB No. 43, Restatement and Revision of Accounting Research Bulletins, related to the carrying amount of precious metals inventories. In the discussion portion ARB 43, statement 9 of chapter 4, it states that "[i]nventories of gold and silver, when there is an effective government-controlled market at a fixed monetary value, are ordinarily reflected at selling prices." As there is no longer a government-controlled market at a fixed monetary value, the provision is no longer relevant, adding uncertainty as to how the statement should be applied. The IASC Steering Committee has reached a tentative view that all mineral inventories should be measured at historical cost.
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I would appreciate it if you would discuss this proposal with the members of AcSEC's Planning Subcommittee. If you have any comments or questions regarding this letter, please contact either John Morrissey or Scott Blackley at (202) 942-4400.
Lynn E. Turner