FINANCIAL REPORTING: What mining execs need to know

The following tips on changing to the International Financial Reporting Standards were made available by the Canadian Institute of Chartered Accountants.

Mining companies adopting International Financial Reporting Standards (IFRS) may experience more volatility in reported earnings and asset values. The changeover will not alter the economics of the business but may affect the way the financial performance is reported and the metrics used to discuss business performance with investors.

"The extent of the changes will depend on the nature of the company's activities," explained Glenn Ives, Deloitte's North American mining leader. "Most will be able to retain their current treatment of costs during exploration and evaluation."

"Currently under IFRS, specific accounting guidance for extractive industries is limited to the exploration and evaluation phase," said Gordon Heard, principal advisor of The Finance Group. "With certain restrictions, IFRS allow companies the choice of consistently expensing or capitalizing their exploration and evaluation expenditures."

Ives indicates the differences in the way asset impairments are measured may have a more significant impact. "It is expected impairment charges will be required more frequently under IFRS," he said.

"When there are indicators that a property may be impaired, IFRS require an immediate comparison to discounted future cash flows to determine whether an impairment charge should be recorded," explained Heard. "Currently companies compare to undiscounted cash flows to make that determination. The new impairment methods must be applied when IFRS are first adopted. Due to special impairment provisions for exploration properties, the impact of these differences may be more significant for properties in the development or production phases."

"We expect to see more volatility in financial statements from the industry, especially when you consider that IFRS require a reversal of previous impairment charges when economic circumstances change," added Ives.

In addition, acquisitions of businesses are treated differently and changes to IFRS expected by the end of 2010 may significantly change how some joint ventures are reflected in the financial statements.

More changes to IFRS are expected, with the potential for specific guidance on the treatment of stripping costs in the near term. In the longer term, a project is underway to determine whether more comprehensive standards for extractive activities should be developed.

The changeover to IFRS is mandatory in 2011 for public companies with a December year-end and in the 2012 fiscal year for non-calendar year-ends. The investment community will expect executives to be able to speak to the changes with confidence.

More information about communicating with investors and other aspects of the changeover to the new accounting standards are available through a special website www.CICA.ca/IFRS.

*Gordon Beal, CA, is a principal of the CICA and a leader in facilitating the changeover to IFRS.