Venmyn send us regular newsletters. Here is their look at the differences between the way the South African Department of Minerals and Energy (DME) and the accountants of mining companies view environmental provisioning, i.e, account for mine closure costs.

The DME requires certainty that the environmental liability will be funded over the life of the mine and in this the DME is supported by the legislation of the MPRDA, 2002 which provides an option to establish an environmental trust fund. To understand how a mining company accounts for such an environmental trust fund it is necessary to consider the requirements of the International Financial Reporting Interpretations Committee (IFRIC 5) - “Accounting for an interest in a fund”.

The IFRIC 5 states that:

The contributor shall recognise its obligation to pay decommissioning costs as a liability and recognise its interest in the fund separately unless the contributor is not liable to pay decommissioning costs even if the fund fails to pay.

The contributor shall determine whether it has control, joint control or significant influence over the fund by reference to the International Accounting Standards (IAS 27, IAS 28, IAS 31) and the Standard Industrial Classification-12. If it does, the contributor shall account for its interest in the fund in accordance with those Standards.

If a contributor does not have control, joint control or significant influence over the fund, the contributor shall recognise the right to receive reimbursement from the fund as a reimbursement in accordance with IAS 37. This reimbursement shall be measured at the lower of:-

(a) the amount of the decommissioning obligation recognised; and

(b) the contributor’s share of the fair value of the net assets of the fund attributable to contributors.

There are some important differences between the way the DME looks at the rehabilitation liability and the way accountants calculate and treat the liability in terms of the international accounting standards. These differences are summarised in the table below.

Comparison of the DME's Estimate and the Accounting Estimate

DME ESTIMATE

ACCOUNTING ESTIMATE

Governed by legislation – extensive guidance provided by the MPRDA, 2002, its regulations and associated guidelines.

Governed by IAS 37 – limited guidance

Primary purpose is to determine how much cash ‘provision’ should be made within an environmental trust fund.

Primary purpose is to ensure that financial statements are fairly presented at each balance sheet date.

Discount Rate: Application is uncertain.

Discount Rate: Risk free rate for similar period, if such flows have been adjusted for risk.

Must be done by a ‘Competent Person’.

Accounting rules expect that complex areas are dealt with by an expert.

Concerned about the closure costs and current liability.

Concerned about the liability at a point in time (i.e.: balance sheet date).

Further to this, the Table below provides some examples of quotes from the reports of independent environmental consultants, highlighting the differences in the approach adopted by such consultants when compared to the accountants who are applying the relevant accounting rules.

DME

Accountants

Life-of-mine closure obligations:

Example 1: “The backfilling of the currently exposed areas of the pits will be carried out in conjunction with future mining operations and will be incorporated into the costs of mining those areas.”

Accounting standards require that the total amount needed at that point in time is recorded as a liability regardless of the fact that it is going to be financed as part of the cost of operations in the coming years.

Example 2: “The obligation for backfilling, soil replacement and vegetation of the pit will be accrued as mining of specific areas of the pit is completed and will be matched with the generation of revenue from the mining operations.”

The fact that an obligation will be matched with the generation of revenue from future mining income from that area is irrelevant.

Example 3: “It has been established that a net profit will be made from the dismantling and sale for refurbishment and scrap of the process plant and associated infrastructure. The closure of the plant is not reflected as a current obligation as the majority of the ore-body has yet to be mined and will require processing.”

Accounting requires that the entire liability at a particular point in time is raised as a liability regardless of expected future income from that mine or area.

Mining related infrastructure:

“The assumption underlying the calculation of the mine’s obligations with regard to infrastructure related to the mining operations is that the infrastructure would either have a commercial value and would be removed for re-sale or that it would be of use in the post closure land use. Provisions required for the removal and disposal of such infrastructure have therefore been kept to a minimum.”

Accounting rules do not allow such assumptions and the liability for removal of the infrastructure must be raised. The fact that it will (undoubtedly) have some commercial value is also irrelevant when estimating the quantum of the liability.

Accounting provisions are transactions in which mining companies make non-cash provisions for future mine closure costs. This practice does not however necessarily result in any actual cash flow for the purposes of accumulating funds for the eventual closure of a mine.

If mining companies do not make tangible (cash) provisions during its life-cycle, when the mine does close, the environmental liabilities could exceed the assets of the company. In such cases, the burden of environmental liability would revert to the State.