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The naked truth about stripping costs for resources companies


Deloitte’s Energy and Resources Group today called upon resources companies to monitor carefully the impacts of a new project of the International Financial Reporting Standards Committee (IFRIC). The project, dealing with so-called ‘stripping costs’, i.e. the removal of ‘overburden’ and waste material in open pit mining operations, could potentially change commonly adopted accounting practices for Australian mining and oil and gas companies, leading to increased volatility in reported profitability.

Reuben Saayman, Deloitte Assurance & Advisory mining and resources partner, noted that accounting for overburden and waste costs has seen varied practices develop in Australia and elsewhere in the world.

“A common practice in the Australian context is the use of a ‘stripping ratio’ which has the effect of spreading the costs of overburden and waste over all the ore mined,” said Mr Saayman.

“Some of the approaches being explored by IFRIC would have the effect of bringing forward costs that might now be deferred by companies, impacting profitability and the balance sheet – in some mining operations the costs spread over the life of the mine can be substantial.”

However, many Australian mining companies generally argue spreading the costs of waste over the ore produced is the best reflection of the commercial realities.

Mr Saayman continued, “The decision to take a mining project to development and production will generally be based on the whole of the mine’s life and companies look to reflect this in their accounting for such costs as overburden and waste removal.”

“These costs as treated as period costs in the United States and can result in extreme volatility in the cost of production as different areas of a project are developed and mined. Many question this approach in an environment where analysts focus on costs and margins.”

The sting in the tail for the wider resources sector is that overburden and waste costs are not exclusive to open pit mining operations. Underground mining operations and oil and gas operations also incur costs that vary from time to time in the overall plan for the mine or field – and accounting for these costs might be affected by any new Interpretation from IFRIC.

“One of the principles of IFRS is that entities should look to other pronouncements when accounting for similar items – so the IFRIC interpretation may set a precedent for many costs in the resources sector,” said Mr Saayman.

“For instance, in the nascent coal seam liquefied natural gas industry in Australia, a significant cost is ‘dewatering’ prior and during the extraction of gas and it may be hard to depart from any accounting methodology IFRIC might develop.”

Whilst IFRIC’s project is in its early stages, a new, binding accounting pronouncement may be developed quickly.

Mr Saayman noted that, “IFRIC’s role is to act quickly and issue guidance as soon as possible, so if IFRIC can find common ground on this issue, any new requirements might be rapidly introduced

However, not everyone is convinced IFRIC should deal with this issue right now.

“The International Accounting Standards Board (IASB) is considering a new project on accounting for resources activities more widely and a draft Discussion Paper has already been issued in this area. Accordingly, any guidance IFRIC develops might be superseded by the IASB’s own project, potentially leading to multiple changes in accounting in this area in a relatively short time,” concluded Mr Saayman.

Deloitte’s Energy and Resources Group has issued a new edition of its resources-focussed publication, Extracting Value, exploring in more depth the issues resources companies and IFRIC should consider.

Last Updated: 


Reuben Saayman
Deloitte Australia
Job Title:
Partner, National Mining Leader (East Coast)
Tel: +61 7 9323308 7147
Johnny Sollitt-Davis
Deloitte Australia
Job Title:
Corporate Affairs & Communications
Tel: +61 3 9671 6177, Mobile: 0431 134 850




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