Minutes of the Ssc Working Group Meeting

Minutes of the WORKING GROUP

28 May 2010

MINUTES OF THE SSC WORKING GROUP MEETING

HELD ON 28 MAY 2010

AT THE OFFICES OF THE SAIMM, HOLLARD STREET, MARSHALLTOWN

Present:

R Dixon (Chairman)

A Clay

G Njowa

Kelly Redman

Cuthbert Musingwini

Kevin Davies

In attendance:

J Dixon (Manager SAIMM)

J van Loggerenberg (recordist)

Purpose of the meeting:

To formulate formal responses to the questions raised in the draft IASB Extractive Industry Paper.

Question 1: Scope of Extractive activities

The project team proposes that the scope of an extractive activities IFRS should include only upstream activities for minerals, oil and natural gas.

Do you agree?

Are there other similar activities that should also fall within the scope of an IFRS for the extractive activities? If so, please explain what other activities should be included within the scope and why.

Response: (Discussion Paper Reference - Paragraph 1.6)

The meeting agreed with the scope of activities – see “Mining Industry Working Group Draft Response – IASB Extractive Activities Research Project” Page 6, para 3:

Although there is not a universally accepted classification of upstream activities in the extractive industries there are eight activities (phases) which are commonly identified/referenced by companies in providing information on their operations to investors, regulators and others:

prospecting
acquisition of mineral rights
exploration
appraisal or evaluation
development

construction
production
closure and decommissioning

These activities provide the necessary framework to develop the accounting standards for extractive industry upstream activities The accounting for the expenditures related to these activities will depend on the nature of the activity for which the costs are incurred.

Further comments from the meeting:

It was considered that it is important to take into account anything that falls under government departments that needs a right or license to extract and the conditions that they placed on their use.

Once a decision has been made with respect to boundaries defining upstream activities, it should be clearly stated.

The entity reporting should disclose its policy as to what decision has been made with regard to defining “upstream”.

Question 2: Approach

The project team proposes that there should be a single accounting and disclosure model that applies to extractive activities in both the minerals and oil and gas industries.

Do you agree? If not, what requirements should be different for each industry and what is your justification for differentiating between the two industries?

Response:(Discussion Paper Reference - Paragraphs 1.10 and 1.11)

The meeting was generally in agreement with the Mining Industry Working Group Draft Response. See “Mining Industry Working Group Draft Response – IASB Extractive Activities Research Project” page 7 paragraph 2 under “Approach”.

“The Working Group agrees with the scope of the DP in that it should apply to extractive activities in both the minerals and oil & gas industries. Despite differences between minerals and oil & gas extractive activities, there are sufficient similarities for a single principles-based accounting standard to apply. This is firmly supported by the project team’s analysis of reserve and resource definitions by the Committee for Mineral Reserves International Reporting Standards (CRIRSCO) and the Society of Petroleum Engineers Oil and Gas Reserves Committee (SPE OGRC)) which showed substantive equivalence between the two sets of industry definitions. This mapping concept demonstrates the importance of convergence between oil and gas and mining reporting requirements. Additionally, the main business activities (i.e., exploration, evaluation, development and production) and geological and other risks and uncertainties are very similar. We believe a single standard and disclosure model will benefit a financial statement user’s economic decisions involving investing and lending to entities in the extractive industries.

While a single model is appropriate for the issues included in scope of the Discussion Paper, we believe there are industry specific issues in the oil and gas and minerals industries that will need to be considered separately in the proposed accounting and disclosure model. For example, the Mapping of the PRMS and the CRIRSCO Template in Figure 2.1 of paragraph 2.28 of the Discussion Paper depicts contingent resources in the oil and gas industry as being somewhat analogous to mineral resources in the mining industry. Paragraph 2.40 of the Discussion Paper concluded “that mineral resources are essentially the same as marginal contingent resources in the PRMS in that they are contingent on future events or actions before they can be converted into reserves” However, the probability of the conversion of contingent resources to reserves in the oil and gas industry should be contrasted with the probability of the conversion of mineral resources to mineral reserves in the mining industry. Specifically, contingent resources in the oil and gas industry are defined in Appendix B21 as “those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies.” In contrast, the initial conversion of a mineral resource to a mineral reserve in the mining industry requires the completion of a feasibility study wherein modifying factors such as mining methods, metallurgical, economic, legal, environmental, social and governmental factors are considered”.

Question 3: Definitions of minerals and oil and gas reserves and resources

The project team proposes the use of mineral reserve and resource definitions established by the Committee for Mineral Reserves International Reporting Standards and the oil and gas reserve and resource definitions established by the Society of Petroleum Engineers (in conjunction with other industry bodies) in an IFRS for the extractive activities.

Do you agree?If not, now should minerals or oil and gas reserves and resources be defined for an IFRS?

Response: (Discussion Paper Reference – Paragraphs 2.9, 2.15, 2.16, 2.17, 2.18, 2.19, 2.20, 2.21, 2.22, 2.61 and 2.66)

The meeting was in general agreement with the Mining Industry Working Group response See “Mining Industry Working Group Draft Response – IASB Extractive Activities Research Project” pages 8, 9 and 10.

“The Working Group concurs with the project team’s recommendation that existing definitions should be applied when determining reserves and resources for minerals. New definitions should not be developed. The Working Group is of the view that existing definitions should be applied to mineral reserves and resources for the purposes of financial accounting and agrees with the IASB position that developing a new set of definitions specifically for accounting purposes would be confusing to industry practitioners and inconsistent with the widespread application and understanding of existing definitions. Given the international application of accounting standards, it is essential that definitions adopted in any guidance issued by the IASB for the extractive industries are already in widespread use internationally. The use of CRIRSCO definitions should be applied to mineral reserves and resources, and assessed for comparability with the PRMS. The Working Group believe that the definitions contained in the CRIRSCO Template meet the requirements of wide-spread international use (CRIRSCO comprises representatives from Australia, South Africa, Europe, Canada, USA and Chile). The CRIRSCO definitions are intended for public reporting of mineral reserves and resources and are therefore implicitly targeted at investors and are compliant with a use for market related purposes. Given the similarity of purpose between CRIRSCO type reporting and the concepts used in developing accounting practices, very little modification would be required to the existing CRIRSCO system to accommodate specific accounting requirements. CRIRSCO and SPE have already carried out a mapping exercise to compare the definitions contained in the Template and PRMS on behalf of IASB which demonstrated that while the systems are not identical, their widespread acceptance, comprehensive scope and application principles are consistent with the requirements of the IASB for IFRS purposes. Maintaining this alignment between the Template and PRMS would be a future task for CRIRSCO and SPE in support of IFRS.

The Working Group is of the opinion that the current SEC definitions do not meet the needs of the IASB. The definitions and associated guidelines contained in Industry Guide 7 are inconsistent with international practice, and the rules applied by the SEC to determine reserves (resources are not defined) are inconsistent with many business practices. Accordingly, this would not create an acceptable alternative for the IASB to consider.

The Working Group believes that the current United Nations Framework Classification[1] does not meet the needs of the IASB. While the classification encompasses both minerals and oil and gas, it is intended to serve the needs of energy and mineral supply studies, government resources management and policy formulation, business process management and for financial reporting. As such, its remit is too broad for IASB purposes. Further, as noted in the Discussion Paper, the UNFC is not applied generally, particularly in those areas of most relevance to the IASB, namely business process management and financial reporting. It is noted that the UNFC has adopted the CRIRSCO Template as it relates to reserves and resources as used by mining industry.

The use of entity-specific forecast assumptions (Level 3 inputs) is suitable in circumstances where observable and directly relevant market data are not available, provided that the entity’s own assumptions are reasonably expected to fall within the range of market participant views. In the Working Group’s view, it is logical that reserves and resources will be estimated and approved by a Competent Person based on an entity’s view of future economic inputs, as this is how its operations are run. It would be expected that historical performance would influence the selection of such inputs, but not exclusively. For example, with respect to certain properties, long term contracts may be more relevant. Comprehensive and relevant long-term market data are generally not available to resource and reserve estimators. Sometimes published prices may be limited to the spot price that may not be a guide to future prices for all commodities. The consequence of their use could introduce volatility into reserve estimates and therefore future cash flow assumptions for impairment testing. Many other parameters are also relevant in the determination of ore reserves including: geological data about the extent and grade of mineralization; methods of processing; transport to market; environmental and political issues; exchange rates; costs of production (including external treatment and refining charges) and capital. As such, directly applicable market data are unlikely to be available covering the entire life of the reserve and resource.

The use of management’s intentions in the CRIRSCO definition of reserves is appropriate for disclosure purposes. Management’s intention to develop or otherwise monetize mineral reserves is considered implicit in a public disclosure of such reserves and, as such, the Working Group endorses the project team’s recommendation.

The project team’s view is that reserves based on management’s intentions should be disclosed separately from other quantities of minerals that are not currently planned to be developed and produced. The Working Group does not agree with the project team’s recommendation. As noted above, management’s intent to develop or monetize the mineral reserve is the relevant basis for disclosure. However, if the IFRS 5 criteria have been met that require such mineral asset to be categorized as “Held for Sale”, the related reserves would be separately disclosed.

Further Comments from the meeting:

Difficulty with UNFC is that there are over 70 categories and sub categories compared with the sixinthe CRIRSCO Template.

Concern was expressed with the use of the terms “compatible” and “mapped” in relation to the CRIRSCO Template. Would a mapping exercise as recently undertaken by the Russians be considered compatible?

The issue of monetization is not relevant in this section.

Question 4: Minerals or oil and gas asset – recognition

The project team proposes that legal rights, such as exploration rights or extraction rights should form the basis of the minerals or oil and gas asset. The asset is recognised when the legal rights are acquired. Information obtained from subsequent exploration and evaluation activities and development works undertaken to access the minerals or oil and gas deposit would both be treated as enhancements of the legal rights asset.

Do you agree with this analysis for the recognition of a minerals or oil and gas asset?If not, what assets should be recognised and when should they be initially recognised?

Response: (Discussion Paper Reference – Paragraphs 3.7, 3.13, 3.14, 3.15, 3.33, 3.34, and 3.35, 4.61)

The Working Group agrees with the project team’s view that (a) the legal rights, such as exploration rights or extraction rights, should form the basis of the minerals or oil and gas asset and (b) the asset should be initially recognised when the legal rights are acquired. We agree with paragraph 3.15 of the Discussion Paper which references paragraph 21.a of IAS 38 regarding the probability recognition criterion being satisfied with respect to the legal rights acquired. Any additional rights and approvals as the DP suggests should be viewed as improvements or enhancements of any initial extraction or exploration rights originally capitalized because these additional rights are tied directly to the underlying initial extraction or exploration rights. Additionally, we agree with the project’s team view to utilize the fundamental asset definition and recognition criteria within existing international guidance to determine when there is an asset that can be recognised in the financial statements.

We differ from the project team’s view regarding information obtained from subsequent exploration and evaluation activities and development works undertaken to identify or access the mineral or oil and gas deposit as de facto enhancements of the legal rights asset. This is because the costs of acquiring such information do not necessarily reflect probability expectations of the future economic benefits of the legal right asset. Alternatively, we believe that the costs of such activities would be evaluated separately for asset recognition from the asset represented by the legal rights. We believe that this view is consistent with IAS 16 requirements for componentization and, further, we are aware of examples where the enhancement costs are recovered without the sale of the underlying legal rights asset. Using the Framework’s definition of an asset (as explained by IFRS statements, such as IAS 16, that clarify the definition of an asset) should be the sole basis for determining whether an asset exists and whether an asset should be recognized. This approach would help alleviate any practical application of when to recognize assets when dealing with exploration rights, or legal rights, as an example, which take a variety of forms in countries throughout the world. The underlying asset definition should address the following key questions in whatever unique scenario a company finds itself: (a) does the entity have enforceable rights that enable an entity to access or deny (or limit) the access of others to the economic resource (in other words, the economic resource can be controlled); (b) does the entity expect to realize positive economic value (in other words, future economic benefits are expected); (c) does the potential asset in question currently exist and does the potential asset have a cost or value that can be measured reliably? For illustrative purposes, the Working Group recommends that the following indicators be considered as examples, inter alia, of evidence for asset recognition – declaration of the existence of Inferred Resources with a reasonable level of confidence as to tonnage, grade and mineral content by a Competent Person whose opinion based on preliminary economic assessments is that future economic benefits could be expected (i.e. more likely than not), and/or an indicative offer by a third party to acquire or enter into a farm-in arrangement.

Finally, the Working Group suggests that an opportunity exists for the IASB to provide clarity with regard to classification of legal rights as tangible or intangible assets in its final standard on accounting for extractive industries. A reference is made in the Discussion Paper to IAS 38 "Intangible Assets" which is relevant to legal rights being recognised as an intangible asset. Accounting guidance in other jurisdictions has provided clarification that certain use rights may have characteristics of assets other than intangible assets. The Working Group recommends that the IASB consider a similar type clarification in its extractive industries standard.