Accountants' Handbook Special Industries and Special Topics 10th Edition_2

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Accountants’ Handbook Special Industries and Special Topics 10th Edition_2 27.7 ACCOUNTING FOR MINING COSTS 27 15 •t ion activities. As this publication goes to print, a steering committee of the International Ac-counting Standards Steering Board has produced an issues paper as the first stage in the de-velopment of international accounting standards in the mining industry. Absent accountingstandards specific to the mining industry, mining companies rely on the guidance providedby authoritative pronouncements, the specific GAAP guidance in SFAS No. 19 for naturalresource companies engaged in exploration, development, and production of oil and gas, andthe accounting policies followed by mining companies as the basis for GAAP in the miningindustry.27.7 ACCOUNTING FOR MINING COSTS(a) EXPLORATION AND DEVELOPMENT COSTS. Exploration and development costs aremajor expenditures of mining companies. The characterization of expenditures as exploration, de-velopment, or production usually determines whether such costs are capitalized or expensed. For ac-counting purposes, it is useful to identify five basic phases of exploration and development:prospecting, property acquisition, geophysical analysis, development before production, and devel-opment during production. Prospecting usually begins with obtaining (or preparing) and studying topographical and geologi-cal maps. Prospecting costs, which are generally expensed as incurred, include (1) options to lease orbuy property; (2) rights of access to lands for geophysical work; and (3) salaries, equipment, and sup-plies for scouts, geologists, and geophysical crews. Property acquisition includes both the purchase of property and the purchase or lease of min-eral rights. Costs incurred to purchase land (including mineral rights and surface rights) or to leasemineral rights are capitalized. Acquisition costs may include lease bonus and lease extensioncosts, lease brokers commissions, abstract and recording fees, filing and patent fees, and other re-lated expenses. Geophysical analysis is conducted to identify mineralization. The related costs are generallyexpensed as exploration costs when incurred. Examples of exploration costs include exploratorydrilling, geological mapping, and salaries and supplies for geologists and support personnel. A body of ore reaches the development stage when the existence of an economically andlegally recoverable mineral reserve has been established through the completion of a feasibilitystudy. Costs incurred in the development stage before production begins are capitalized. Develop-ment costs include expenditures associated with drilling, removing overburden (waste rock), sink-ing shafts, driving tunnels, building roads and dikes, purchasing processing equipment andequipment used in developing the mine, and constructing supporting facilities to house and carefor the workforce. In many respects, the expenditures in the development stage are similar to thoseincurred during exploration. As a result, it is sometimes difficult to distinguish the point at whichexploration ends and development begins. For example, the sinking of shafts and driving of tun-nels may begin in the exploration stage and continue into the development stage. In most in-stances, the transition from the exploration to the development stage is the same for bothaccounting and tax purposes. Development also takes place during the production stage. The accounting treatment of devel-opment costs incurred during the ongoing operation of a mine depends on the nature and purpose ofthe expenditures. Costs associated with expansion of capacity are generally capitalized; costs in-curred to maintain production are normally included in production costs in the period in which theyare incurred. In certain instances, the benefits of development activity will be realized in future pe-riods, such as when the “block caving” and open-pit mining methods are used. In the block cavingmethod, entire sections of a body of ore are intentionally collapsed to permit the mass removal ofminerals; extraction may take place two to three years after access to the ore is gained and the blockprepared. In an open-pit mine, there is typically an expected ratio of overburden to mineral-bearingore over the life of the mine. The cost of stripping the overburden to gain access to the ore is ex-27 16 OIL, GAS, AND OTHER NATURAL RESOURCES •pensed in those periods in which the actual ratio of overburden to ore approximates the expectedratio. In certain instances, however, extensive stripping is performed to remove the overburden inadvance of the period in which the ore will be extracted. When the benefits of either developmentactivity are to ...