London School of Mines

6 June 2019

Developments in accounting and financial reporting

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LSoM 2019 06/06/19

1. Regulators

2. IFRS 16 – Leases for miners

3. IFRS 9 and 15 implementation and interaction

4. IASB activity

5. Other front and back half issues

Agenda

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1) Regulators

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LSoM 2019 06/06/19

Regulators

Thematic reviews and points of focus

18/19 focus (and ongoing)

• Implementation – IFRS 9 & 15

• Impact – IFRS 16

• Effect of Brexit on principalrisks/uncertainties

19/20

• Thematic review of impairment of non-financial assets

• Other information in the annual report, including viability statements and wider corporate governance code

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2) IFRS 16 – leases for miners

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LSoM 2019 06/06/19

IFRS 16: Leases

Overview

What’s changed

Old treatment for lessees:

Finance leaseson balance sheet

Operating leasesoff balance sheet

Service contractsoff balance sheet

Almost all leases> 12 months on balance sheet

Service contracts off balance sheet

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LSoM 2019 06/06/19

Year

Impact on net profit

$

Operating lease

Depreciation

Interest expense

Net profit impact

* Excluding low value / short term / variable

Operating leases IAS 17

Applicable leases * IFRS 16

Revenue X X

Operating Singleexpenses expense

EBITDA

Depreciation

and Depreciationamortisation

Operating profit

Finance cost Interest

PBT

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LSoM 2019 06/06/19

How is IFRS 16 affecting miners?

Challenges we forecast

Watch out for “embedded lease” in mining service,transportation and storage contracts.

Long-term power supply contracts may contain leases of power plants.

Sale and leaseback transactions no longer provide off-balance sheet financing structure anymore.

Don’t forget potential impact on covenants – have you renegotiated?

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LSoM 2019 06/06/19

Incentives/

rent free periods

Interim and short term

lease disclosures

Lease term Discount rate

Non-lease components

Interaction with

impairment

IFRIC

How is IFRS 16 affecting miners?

Other challenges we are seeing

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LSoM 2019 06/06/19

How could IFRS 16 affect miners going forward? The IFRIC impact

IFRIC tentative agenda decisions in March 2019:

• Sub-surface contracts and easements

• Liabilities in relation to a joint operator’s interest in a joint operation

4) Other current and recent IASBactivity

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LSoM 2019 06/06/19

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Other current and recent IASB activity

Particularly relevant to miners and other energy companies

• Definition of a business – more asset acquisitions?

• Proposed amendment to IAS 16 for proceeds during development stage

• Goodwill/impairment – DP H2 2019

• Rate regulated activity – DP or ED H2 2019

Relevant to everyone

• Agenda decisions that drive policy changes e.g. load following swaps, failed own use – time to implement

• IBOR reform• IFRIC 23

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LSoM 2019 06/06/19

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Definition of a business

• Narrowed definition- need an input and a substantive process- a mineral interest can be an input

• Asset acquisition if substantially all value in one asset or similar assets- tangible and intangible are not similar- proven v probable reserves may not be similar

• Potential impact on goodwill, transactions costs expense and deferred tax recognition

• Effective 1/1/2020 – can be early adopted but not yet EU endorsed

Video – What impact do the latest changes to IFRS 3 have on the Oil and Gas and Mining industry? watch PwC's Scott Bandura in this IFRS 3 -definition of a business video as he tells us what we need to know https://pwc.to/2QvDlLJ

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Proceeds during development stage

IASB published exposure draft in 2017 to amend IAS 16:

• To prohibit deducting from the cost of PPE any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

• Instead, an entity would recognise the proceeds from selling such items, and the cost of producing those items,in profit or loss.

• IASB received 71 comment letters, strong disagreement with proposals. Discussed at IFRIC June 2018 then at IASB Nov 2018

• No date but IASB plans to proceed with the ED with some modifications:• improve disclosure and presentation• clarify how to identify the costs of such sales

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LSoM 2019 06/06/19

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Goodwill and impairment

IASB suggestions:

• Simplify VIU e.g. use post-tax numbers, cashflows related to future enhancements

• Retain VIU and FV model with ‘higher of’ test• How to deplete goodwill more quickly e.g. amortise over

useful life or annually consider total headroom or no requirement to carry out annual impairment review

• Improve business combination disclosures

PwC IFRS Talks episode 51: The IASB has kicked off a research project to look at the impairment model in IAS 36. Could we be saying goodbye to pre-tax measures? PwC's Iain Selfridge joins Ruth Preedy in this episode and gives us the latest on proposed changes to the impairment model in just 20 minutes. Tune in now: https://pwc.to/2HHtJLe

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IBOR Reform

Forecast

transactions

Prospective

assessments

Risk

components

• Reform creates uncertainty about timing /

amount of future cash flows based on IBOR

• How to consider uncertainty when assessing

whether future IBOR cash flows are highly

probable?

• Hedge accounting requires a notion of offsetting

between hedged item and hedging instrument

• How to consider possible changes from reform?

• If the hedged item is a risk component, then it

must be separately identifiable

• Reform might impact market structure and

therefore ability to identify a risk component

Until

uncertainty

is resolved,

assume

interest

benchmark

does not

change

Demonstrate

separately

identifiable only

at inception

Other

implications?

• Is it a derecognition or modification event – P&L

impact?

• Impact on other balance sheet items e.g.

impairment, lease discount rates?

IASB are aware

of issues –

second stage

proposed

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Uncertain tax positionsIFRIC 23: Effective 2019

When to recognise

How to measure

Unit of accountDetection risk

Changes in circumstances

3) IFRS 15 and IFRS 9 – miners’ implementation issues plus when do you need to consider both?

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IFRS 15 onlyFOB/CIF arrangements – identification of separate performanceobligations for freight services.

Provisional pricing – watch out for embedded derivatives and variableconsideration.

Failed own use transactions - Reassess take-or-pay arrangements, optimisation, economic hedging and

repos- IFRIC conclusion cannot record revenue on failed own use contracts at rate

in contract unless formally hedge accounting (IFRIC agenda notice)- IFRS 15 clarifies accounting for repos as leases or financing transactions- Consider breakage of take-or-pay contracts if customers never take all of

the commitment.

Exchange of ‘similar’ items and ‘similar’ line of business – IAS 18 v IFRS 15

Accounting for the sale of output by a joint operator – overlift and underlift (IFRIC agenda notice)

IFRS 15 only

IFRS 15 only

IFRS 9 only

Expected credit losses on intercompany loans – and long term loans to equity accounted entities (IAS 28 amendment)Calculating gains and losses on modifications of liabilities

IFRS 9 and 15 (and 16)

IFRS 9 and 15

Front and back half impacts – mining focus

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LSoM 2019 06/06/19

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Climate-related financial disclosures

Task Force on Climate-related Financial Disclosure (TCFD)was established in 2015, by the G20 Financial StabilityBoard, to develop recommendations for more and effectiveclimate-related financial disclosures. Recommendations gobeyond current climate disclosures, like CDP, in twosignificant ways:

• Disclosures should be quantified in financial terms and in mainstream financial filings, shifting responsibility for climate risk analysis to the CFO and audit committee;

• Companies should use scenario analysis to assess thefinancial implications of climate risks. This is a concern for many companies who haven’t used scenario analysisin the past or applied it in this context to their P&L;

• Front half disclosures required plus consider implications for E&E activity and cashflow forecasts/impairment.

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Tailing dams

The terrible accidents in recent months have focussed everyone’s attention on safety and the cost to human life:

• Front half disclosures should bring out all the relevant risk areas – human capital, reputational risk, operational, financial;

• Back half i.e. financial statements need to consider cost implications – viability of CGUs, cashflow projections for impairment calculations and contingent/committed liabilities

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23

Presenters

Iain Selfridge

Accounting consulting

services partner

Advises firm and its clients on

IFRS and UK GAAP. Focuses

particularly on energy and

mining companies. Specialist

in issues arising from

business combinations and

potential impairments.

Claire Howells

Accounting consulting

services senior manager

Advises firm and its clients on

IFRS and UK GAAP. Focuses

particularly on energy, utilities

and mining companies.

Specialist in financial

instruments, treasury and

leasing issues.

Q & A

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