Question

OG Limited is in the oil and gas business. It spends quite a bit of money each year exploring for new wel

When excavating one site, OG came across a significant amount of gold. OG is now mining and selling the gold. Currently, it is trying to decide how to account for the gold inventory and is considering valuing the gold at market price once it has been refined, even though it is not yet sold.

How is gold Valued Under IFRS and ASPE?

Answer 1

Financial Reporting in the Mining Industry

Inventories of mine product include:

• run-of-mine ore;

• work in progress (crushed ore, ore in-circuit); and

• finished goods (concentrate, metal).

Inventory is usually measured at cost, where cost does not exceed net realisable value as determined under IAS 2. Various cost methods are available and can be used under IFRS; specific identification, weighted average or first-in first-out (FIFO).

Inventory is recognised when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value than can be measured reliably. Ore is recognised as inventory as soon as it is extracted, the reliable assessment of mineral content is possible and the cost of production can be reliably determined.

Determination of costs

The absorption method is used to determine the cost of inventories. This means that the cost of inventory consists of:

• all costs of purchase;

• costs of conversion; and

• other costs incurred in bringing the inventories to their present location and condition.

IAS 2 requires inventories to be measured at the lower of cost or net realisable value.

Net realisable value

Inventory is carried at the lower of cost and net realisable value. Net realisable value is estimated by calculating the net selling price less all costs still to be incurred in converting the relevant inventory to saleable product, and delivering it to the customer. The selling price of mine products is generally determined by reference to mineral content; management must determine the grade of the material as well as the physical quantities.Net realisable value is determined on the basis of conditions that existed at balance sheet date; subsequent price movements are also considered to determine whether they provide more information about the conditions that were present at balance sheet date. The net realisable value should be determined using the most reliable estimate of the amounts the inventories are expected to realise. Both the year-end spot price and the market forward commodity price may provide unbiased and reliable estimates of the amount the inventories are expected to realise.