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Development expenses of mines

20 July 2016

We own a mines which is virgin and non productive. It is in process of development. Please suggest me accounting treatment of expenses incurred on development till mines become productive and after become productive then what will accounting treatment of these expenses.Also presentation of these development expenses as per Schedule III.

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6 Replies

Praveen Tawania (Owner) (369 Points)
Replied 21 July 2016

Dear Member

AS-26 criteria to be check...

Ravindra Nagda (CA) (37 Points)
Replied 21 July 2016

Sir,

AS 26 does not cover expenses on exploration for, or delvelopment and extraction, of minerals, oil, natural gas. Hence AS 26 will not apply on these expenses according to me. Now please suggest then what will be accounting treatment of these expenses. Whether these will show as Capital WIP or Intangible under Development in B/S as per Schedule III. Please guide.

Praveen Tawania (Owner) (369 Points)
Replied 22 July 2016

Depends upon you assumption and nature of business and apply AS-10 or AS-26

CA Kishore D (Management Consultant | Trainer) (324 Points)
Replied 23 July 2016

Hi Ravindra,

Good question.

In the mining industry, the surface junk that is removed is called 'Overburden' or OB. The costs incurred for removal of overburden is called 'Stripping Costs'.

The nature of the overburden will vary, and will determine the type of waste removal activity – softer materials may not require breakage; more resistant rock will require blasting to break it up. Materials-handling equipment will then be chosen to satisfy the operating conditions: auger drills will be used for weak rock, compared to percussion drills for hard rock. Power shovels, front-end loaders and trucks and bulldozers will be employed for excavation and haulage activities. The displaced soil and other waste material will be usually used to re-fill the site once the mining operation has concluded

In the Accounting Standards, there seems to be a general lack of clarity on how to treat these cost and account them. Therefore, we need to refer to IFRS, which points to IFRIC 20, which was issued in Jan 2013.

According to this, there are two types of treatment of stripping costs:

1. The costs of removal of OB is usually accounted as inventory, and recognized at lower of cost and NRV.

2. Once the OB is removed and the mining ore is accessed, costs incurred for better access of the mine can be capitalized as 'Mine Development Costs' (provided they meet the recognition criteria) and expensed off over the life of the mine.

Practically it very hard for an accountant to differentiate when Step 1 ends, and when Step 2 begins. It is here that we need to use the Geologist's opinion on when the OB removal activity stops, and when the real ore is ready for access. For this the Geologist usually has estimates of OB, and when OB removal activity is complete. He needs to issue a certificate in this regard as documentation. Since you are in a mining company, I am sure you can understand what I have written, and how to get the Geologist's certificate.

Hope this helps!

Ravindra Nagda (CA) (37 Points)
Replied 24 July 2016

Sir,

Many thanks for your answer.

But still a query about presentation of these expenses in Balance Sheet as per Schedule III. Whether it will show as Capital WIP or Intangible under Development ? Please guide.