17.10.08

ACCOUNTING FOR THE MINING INDUSTRY at indonesia



STATEMENT OF SFAS No. 
FINANCIAL ACCOUNTING STANDARD 
33 
INDONESIAN INSTITUTE OF ACCOUNTANTS 
ACCOUNTING FOR THE MINING INDUSTRY 
Source: http://www.rsm.aajassociates.com

INTRODUCTION 
Characteristics of Accounting for the General Mining Industry 
01 There are four main activities in the general mining industry covering: 
(a) exploration; 
(b) development and construction; 
(c) production; and 
(d) processing. 
Enterprises in the general mining industry can be formed as integrated entities undertaking exploration, development and construction, production, and processing, or as independently segregated entities. 
02 The nature and characteristics of the general mining industry are different from other industries. The differences are as follows: 
(a) the exploration of mineral resources is an activity carrying a high degree of uncertainty. In spite of careful preparations, coupled with high costs, there is no assurance that the activity will result in the discovery of mineral reserves that are commercially feasible to be mined; 
(b) mineral resources are by nature non-renewable. To conduct a mining activity, from exploration phase until processing phase, requires relatively high investment costs, intensive capital over a long period, significant risks and advanced technology, up to the point where professional management is necessary; 
(c) in general, mining operations are located in isolated areas and their activities cause damage to and/or pollute the environment. Hence, mining companies are responsible for fulfilling the statutory environmental regulations besides having a clear post-mining concept; and 
(d) the Indonesian Government does not issue mining concessions because according to statutes, all mineral resources in Indonesia belong to the Indonesian people and are to be used to increase the prosperity of the Indonesian people. In order to operate in the mining industry, the Indonesian Government sets a regulation which authorizes entities to do so. 
03 In the mining industry, there are possibilities for joint efforts based on Contract of Work and Contract of Cooperation, either in terms of capital or joint operations. 
04 As a result of the nature and characteristics of the mining industry, some specialized accounting practices for the mining industry differ from the accounting practices for other industries, especially in accounting for exploration costs, development and construction costs, production costs, and environmental management costs. 
SCOPE 
05 This Statement was prepared based on the nature and characteristics of the mining industry in Indonesia and to be guided by the basic financial accounting concepts covered by the Financial Accounting Standards and statutory regulations. 
06 Similar to other Financial Accounting Standards, this Statement should be applied in the presentation of financial statements for external users by all companies in the mining industry, including contractors under Contract of Work or Contract of Cooperation in the field of mining. With this Statement, both the preparer as well as the user of financial statements is required to follow the same accounting standard. If the accounting treatment is general in nature, then it should be in accordance with this Statement. 
07 For purposes of this Statement, general mining operations are segregated into four phases of activity: 
(a) exploration (including evaluation); 
(b) development and construction; 
(c) production; and 
(d) environmental management. 
EXPLORATION 
Definitions 
08 The terms used in this Statement are defined as follows: 
Exploration is the effort expended in the search for, discovery and evaluation of proven reserves in a specific mining area during a specific time period in accordance with statutory regulations. 
Proven reserves represent estimates of mineral reserves in an Area of Interest which technically, as well as economically, can justify the possibility of production in the future based on the price of the mineral resource at the date of estimation and its mining costs. Area of Interest represents a geological area which is expected to have the potential to yield mineral reserves or has been proven to yield mineral reserves. 
09 A mining company may have more than one Area of Interest, and a certain Area of Interest may have more than one phase of operation at the same time. 
10 Each Area of Interest should be treated separately for purposes of determining whether the costs incurred during exploration and development can be capitalized or expensed in the current period. 
Description of Activities 
11 General Survey 
A general survey is a general geological or geophysical survey conducted on land, on sea and/or from the air for the purpose of drawing general geological maps or verifying the existence of mineral resources. 
12 Permission and Administrative 
Permission and administrative represents activities performed in managing the permission to conduct exploration activities in a specific area, including the managing of the Mining Authority Right (Hak Kuasa Pertambangan), Contract of Cooperation, Contract of Work, Land authority and administrative of exploration activities. 
13 Geology and Geophysical 
Geological activities consist of analyzing aerial photographs and the geological mapping of land surfaces with the purpose of mapping the spread of minerals. Geophysics is one form of exploration technology utilizing the physical characteristics of rock surveyed for purposes of extracting data from below the earth’s surface. 
14 Explorational Drilling 
Drilling is used to obtain detailed data on the deposits below the earth’s surface. Based on laboratory examination of the drilling samples, the type and content of the deposit can be determined. The results from several drilling samples can be correlated for the same type of rock and the amount of mineral reserves can also calculated. 
15 Evaluation 
Evaluation is the process of determining the technical feasibility and commercial viability of a particular mineral resource. Activities during this phase consist of determining the volume and grade of the deposit, analyzing the impact on the environment, permission requirements, mining methods, production process, transportation surveys, infrastructure requirements, budgetary requirements, as well as the market value of the reserve and production plans. 
Types of Costs 

16 The primary exploration costs, either directly or indirectly related to the exploration activities are as follows: 
(a) General Survey 
Costs incurred during the general survey include: 
(i) literature study costs; 
(ii) costs to obtain satellite data and aerial photographs; 
(iii) geological mapping costs; 
(iv) sampling costs; and 
(v) costs for analyzing surface samples. 
(b) Permission and Administrative 
Costs incurred during permission and administrative include: 
(i) costs for acquiring Mining Authority; 
(ii) costs for acquiring Contract of Cooperation; 
(iii) costs for acquiring Contract of Work; 
(iv) costs for excavation of land; and 
(v) exploration administrative costs. 
(c) Geology and Geophysical 
Costs incurred during geology and geophysical include: 
(i) Side Looking Air Radar (SLAR) costs; 
(ii) field geological costs; 
(iii) chemistry geological costs, including analysis of laboratory tests; 
(iv) gravitational examination costs; 
(v) magnetic examination costs; and 
(vi) seismic examination costs. 
(d) Exploratory Drilling 
Costs incurred during exploratory drilling include: 
 (i) area preparation costs, including cost of constructing the entrance road to the 
drilling location; 
(ii) drilling costs, including drilling equipment; 
(iii) mobilization and demobilization costs; 
(iv) testing and finishing costs; and 
(v) logistic costs during drilling activities. 
(e) Evaluation 
Costs incurred during evaluation activities. 
Accounting Treatment 
17 Costs incurred in connection with exploration and evaluation activities in an Area of Interest should be expensed in the current period, except when one of the following conditions is met, then the costs can be deferred: 
(a) permission to conduct exploration in the Area of Interest is still valid and exploration activities have not been completed at the balance sheet date, as well as significant exploration activities in the Area of Interest are still in progress, which up to this point no determination can be made as to whether the exploration will result in the discovery of proven reserves; or 
(b) permission to conduct mining activities in the Area of Interest is still valid and it can be proven that the exploration costs incurred will be recovered through the production of Proven Reserves or through transferring the mining rights to another party. 
18 Depreciation costs on fixed assets that support exploration activities are allocated as a part of exploration costs. 
19 If a general survey is not related specifically to a particular exploration program, the costs incurred for that general survey should be expensed in the current period. 
20 Interest costs incurred as a result of financing exploration activities are deferred (as long as the exploration costs can also be deferred) in accordance with Statement of Financial Accounting Standard No. 26, Accounting for Interest During Construction Period. 
21 General and administrative costs directly related to exploration activities are also deferred as a part of Deferred Exploration Costs. 
22 Other income obtained from exploration activities is deducted from Deferred Exploration Costs. 
23 For Amortization for Deferred Exploration Costs see paragraph 31(e). 
24 The Present Value of Deferred Exploration Costs should be estimated and reported as stated in paragraph 50. 
Presentation of Financial Statements 
25 The total amount of exploration costs expensed in the current period (excluding the amortization on the Deferred Exploration Costs) is presented separately in the income statement as Exploration Expenses. 
26 The deferred costs related to exploration activities are presented as Deferred Exploration Costs. 
Disclosure 
27 The following items should be disclosed in the notes to the financial statements: 
(a) accounting policy in connection with the basis for: 
(i) Deferred Exploration Costs for the exploration activities still in progress with an explanation on the duration of the contract for the related Area of Interest; 
(ii) Deferred Exploration Costs for an exploration activity which has discovered Proven Reserves with an explanation that amortization will be recorded when production commences. 
(b) The Deferred Exploration Costs for exploration activities still in progress and the Deferred Exploration Costs for exploration activities that have discovered Proven Reserves should be presented separately; 
(c) If there is more than one Area of Interest, Deferred Exploration Costs for each Area of Interest should be disclosed; and 
(d) The total amount of exploration costs expensed in the current period and the reason for expensing. 
 
DEVELOPMENT AND CONSTRUCTION 
Definitions 
28 The terms used in this Statement are defined as follows: 
Development includes all activities conducted in the preparation of Proven Reserves until commercial production. 
Construction is building facilities and infrastructure to conduct and support production activities. 
Description of Activities 
29 The development and construction phase consists of administrative and technical activities. Administrative activities represent activities performed in managing the permission to mine and to support the implementation of development and construction activities. Technical activities include planning activities and stripping activities to gain access to the mineral reserves as part of the preparation for production activities. 
Types of Costs 
30 The primary types of development and construction costs, either directly or indirectly related to development and construction activities are as follows: 
(a) Development Costs 
Costs incurred during development activities include: 
(i) administrative costs: 
- costs of managing permission and the Mining Authority 
- land excavation costs; 
(ii) land clearing costs; and 
(iii) cost of opening the mine, including stripping the land surface before production. 
(b) Construction Costs 
Costs incurred during construction activities include: 
(i) infrastructure establishment costs; 
(ii) building establishment costs; and 
(iii) machinery and equipment establishment costs. 

Accounting Treatment 
31 Development costs consist of: 
(a) costs incurred in connection with development activities in a certain Area of Interest, either directly or indirectly, are deferred as Deferred Development Costs; 
(b) depreciation costs on fixed assets used in conducting development activities are deferred as a part of Deferred Development Costs; 
(c) general and administrative costs which are directly related to development activities are deferred as a part of Deferred Development Costs. General and administrative costs which are not directly related to development activities should be treated as expenses in the current period; 
(d) when production in an Area of Interest commences, Accumulated Deferred Development Costs and Accumulated Deferred Exploration Costs for the same Area of Interest are totaled, and the total amount of these costs is amortized. The amortized cost is expensed as part of production cost; 
(e) amortization is calculated based on the unit-of-production method. Under certain circumstances, the amortization is calculated based on the estimated useful economic life of the Area of Interest if it is considered to result in more accurate financial information. The basis for calculating of amortization should be applied consistently. If the unit-of-production method is used, the amortization rate each year should be based on the reasonable reserves which could be produced until the end of the exploitation period of that Area of Interest. If the amortization is based on the passage of time, then the estimated economic useful life should not be longer than the exploitation period. The exploitation period is based on the permission to mine. 
(f) If the production in an Area of Interest is delayed after development activities are completed, then at the end of each accounting period during the delay, the Accumulated Deferred Development Costs and Deferred Exploration Costs should be evaluated as to whether these costs can be recovered from the estimated production value. If it is evident that the estimated production value is lower than the deferred costs, the difference should be expensed in the current period. The methods and factors used in performing the evaluation are stated in paragraph 50. 
32 Construction Costs 
All costs incurred in connection with construction and infrastructure work are capitalized as fixed assets and depreciated based on the economic useful life of the assets. The point in time when depreciation commences and is charged to expense can be determined as follows: 
 (a) For fixed assets used directly in production process, depreciation is calculated when commercial production commences and the depreciation cost is expensed as a part of production cost. 
(b) For fixed assets not used directly in the production process, depreciation commences when construction of the fixed assets is completed and the depreciation cost is expensed as a part of operating expense in the current period. 
33 Interest Costs incurred in connection with financing development and construction activities are deferred or capitalized in accordance with Statement of Financial Accounting Standard No. 26, Accounting for Interest During Construction Period. 
Presentation of Financial Statements 
34 Deferred Development Costs are presented in the balance sheet along with Deferred Exploration Costs (for exploration activities which have discovered proven reserves) as Deferred Exploration and Development Costs. 
35 For the accounting period where commercial production has commenced, Deferred Exploration and Development Costs are presented in a net amount, after deduction for amortization. 
36 The amount of the write down resulting from evaluating the Deferred Exploration and Development Costs as described in paragraph 31 (f) is presented separately in the income statement as a write down of Deferred Exploration and Development Costs. 
37 Costs relating to construction and infrastructure activities which are still in progress are presented as Construction in Progress. 
Disclosure 
38 The following information should be disclosed in the notes to the financial statements: 
(a) accounting policy relating to : 
(i) the basis for determining the deferral of development costs and capitalization of construction and infrastructure costs; and 
(ii) the amortization and depreciation methods applied with an explanation on the duration of the mining rights and estimated economic useful life of the mine. 
(b) Deferred Development Costs for development activities that are still in progress. 
(c) Deferred Exploration and Development Costs where there is a delay in production, including explanations: 

 (i) reason for the delay; 
(ii) amortization has not been calculated because the production value has not been estimated; and 
(iii) the amount of the write down, if any, resulting from the evaluation of the deferred costs, and the method and basic assumptions used in calculating the write down. 
(d) When there is more than one Area of Interest, the Deferred Exploration and Development Costs for each Area of Interest should be disclosed. 
PRODUCTION 
Definitions 
39. The terms used in production activities are defined as follows: 
Production includes all the activities ranging from extracting Proven Reserves up to when they are ready to be sold, used or processed further. 
Description of Activities 
40 Mining production activities include: stripping, extracting, washing and cleaning, and transporting the mineral resource to the collection station. 
(a) Stripping during the production period includes excavating and transporting the soil from the excavation location to the filling location or other location. 
(b) Extracting the mineral resources using methods in accordance to the nature and characteristics of the related minerals like: excavation, spraying with water, using bulldozers and shovels, dredging and blasting. 
(c) Washing of minerals, including activities conducted to clean and separate the minerals from other minerals or by-products like soil, ash, sand, clay, mud, sulfur, mud, and other impurities. Washing is performed by means of water, chemicals, machinery such as jigs or filters. Washing includes the process of breaking large chunks of minerals into the desired size for eventual sale or to be processed further. 
(d) Transporting minerals from the mining site to the collection station is performed by means of conveyor belt, lorry, dump truck, barge, or ship. 
Some mining companies can conduct more extensive processing in addition to the processes outlined above. 

Types of Costs 
41 The primary mining costs, either directly or indirectly related to the production activity, are as follows: 
(a) Stripping During the Production Period 
Costs incurred during stripping include: 
(i) stripping costs; 
(ii) cost of acquiring fill site; and 
(iii) cost of filling after the stripping process. 
(b) Extracting 
Costs incurred during extracting include: 
(i) excavation costs; 
(ii) spraying costs; 
(iii) dredging or blasting costs; and 
(iv) filling costs. 
(c) Washing of Minerals 
Costs incurred during the washing of minerals include: 
(i) cost of washing and separating minerals from the by-products; and 
(ii) costs of shaping the minerals into standard measurement/size which has been determined by the industry. 
(d) Transporting of Minerals 
Represents the costs incurred in transporting the minerals from mining location to the collection station. 
(e) Environmental Management 
Represents the costs incurred in connection with maintaining the environment. 

Accounting Treatment 
42 All costs incurred in connection with production are recorded as Work in Process. 
43 Production costs are calculated based on beginning and ending balances of Work in Process. 
44 Cost per unit of inventory is calculated based on the average method or the first-in, first-out method. 
45 Inventories consist of Work in Process, finished goods, and ancillary materials. 
46 There are two kinds of stripping costs: the initial stripping which is conducted before production commences, and the ongoing stripping which is conducted during the production period. The initial stripping costs are a part of Deferred Development Costs, and the ongoing stripping costs are expensed as production costs. Before the commencement of production, the Average Stripping Ratio is calculated. The Average Stripping Ratio is the ratio of the estimated rock/land cover layer to the estimated amount of mineral content stated in unit quantity. 
47 The ongoing stripping costs are normally expensed as production costs based on the Average Stripping Ratio. In situations where the Actual Stripping Ratio (which is the ratio between the quantity of land/rock which has been stripped for a certain period and the quantity of reserves produced for the same period) is not significantly different from the average ratio, the stripping costs incurred during the period can be expensed as production costs. 
When the actual ratio is significantly different from the average ratio, as in the case when the actual ratio is higher than the average ratio, the excess stripping costs is deferred and recorded as Deferred Stripping Costs. In addition, these deferred costs are expensed as production costs in periods where the actual ratio is significantly lower than the average ratio. 
48 If there is a change in the Average Stripping Ratio, this change is a change in estimate. 
49 During the production period, frequent evaluations should be made regarding the estimate of the Proven Reserves which could be produced, and the additional estimated development costs which would be required to produce these reserves in the future. These estimates form the basis for amortization of Deferred Exploration and Development Costs. 
50 The realization of the Deferred Exploration and Development Cost balance should be evaluated at the end of the accounting period by comparing it with the present value of estimated reserve production during the remaining useful life of the mine (the remaining useful life should not be longer than the exploitation period permitted by government regulations). If it is evident that the estimated production value is lower than that deferred cost balance, the difference should be expensed in the current period. 
Presentation of Financial Statements 
51 Inventory is presented in the balance sheet using the lower of acquisition cost or market value. The market value is the estimated selling price at the balance sheet date reduced by the estimated expense incurred in connection with selling the product. 
52 The total amount of the write down from Deferred Exploration and Development Costs is presented in accordance with paragraph 36. 
Disclosure 
53 The following information should be disclosed in the notes to the financial statements: 
(a) accounting policy relating to: 
(i) method of determining cost of inventory and the basis for valuation; 
(ii) method of expensing; and 
(iii) method of calculating average Stripping Ratio. 
(b) the total amount of Deferred Stripping Costs with an explanation of the differences between the Actual Stripping Ratio and the average ratio; 
(c) the change in the Average Stripping Ratio (if any); and 
(d) disclosures as stated in paragraph 38(c). 
ENVIRONMENTAL MANAGEMENT 
Definitions 
54 Environment means a continuum with all objects, energy, conditions and living organisms, including human beings and their behavioral characteristics, which influence the existence and prosperity of human beings and other living organisms. 
55 With the existence of mining activities in a certain location, the effects on the environment around the mining includes, but is not limited to, the following: 
(a) Environmental pollution means the addition of living organisms, substances, energy and other components into the environment and/or the change in the ecosystem by man’s activities or natural processes up to the point where the quality of the environment has been diminished or cannot function to perform its intended purpose. 
(b) Environmental damage means actions that result directly or indirectly in changes to the characteristics and/or biological make-up of area so that it ceases to support the continuing development. 
As part of the effort to lessen and control the negative effects of mining on the environment, environmental management should be conducted which includes a concerted effort in the preservation, arrangement, maintenance, control and development of the environment. 
Description of Activities 
56 Activities conducted in environmental management include but are not limited to: 
(a) preparing Analysis of Environmental Impact (AMDAL) documents; 
(b) efforts to prevent the pollution of rivers by leakage from mines by building sediment pools around the excavation location, dumping area and stockpile; 
(c) landscaping is conformed to topographical and hydrological conditions. These activities include: 
(i) shaping slope gradient to lessen runoff, erosion, landslides and sedimentation; 
(ii) shaping drainage so water does not flow to certain areas to limit erosion; 
(d) topsoil management are activities conducted in removing and preserving topsoil from the mining location and piling it so that it can be reused in the reclamation of the former mining site when mining is completed; 
(e) revegetation is the replanting of the former mining site where the original vegetation has been destroyed or tampered with; 
(f) erosion control encompasses planting grass, building terraces and spreading rocks; 
(g) preventing dust pollution includes spraying water on roads leading to the production area, the loading station and stockpile, and spraying other potentially dusty locations; 
(h) preventing landslides by reducing the gradients of slopes and building dikes; 
(i) researching the soil and plants to determine appropriate planting techniques; 
 (j) monitoring water quality from sediment pools, drainpipes and rivers near the mine; 
(k) monitoring air quality at the mining location, employees’ quarters and the surroundings; 
(l) monitoring the land quality in the dumping area; 
(m) monitoring locations that have lost their vegetation as well as revegetation areas; 
(n) monitoring the results of environmental control and management efforts; and 
(o) monitoring the rate of erosion. 
Types of Costs 
57 Environmental management costs include, but are not limited to, the activities described above. The basic costs include building environmental management infrastructure, reducing and controlling the negative impact of mining activities, and other routine costs. 
Accounting Treatment 
58 The costs of building environmental management infrastructure are capitalized as Fixed Assets and depreciated systematically based on the economic useful life. 
59 Estimated environmental management liabilities should be accrued if the following conditions are met: 
(a) there is clear indication that an obligation has been incurred at the balance sheet date resulting from activities which have already been performed; 
(b) there is a reasonable basis to calculate the amount of the obligation incurred. 
60 The estimated cost for environmental management which have been incurred in connection with exploration and development activities, is accrued by debiting the Deferred Environmental Management Costs and crediting the Liability (provision) for Environmental Management. The deferred costs are amortized as the commercial production commences; the amortization expense is recorded as Production Cost. 
61 The estimated cost for environmental management which is incurred in connection with production activities is expensed as production cost by crediting the Liability (provision) for Environmental Management. 
62 Payment of environmental management liabilities in the current period is recorded as a reduction of the liability for environmental management. 
63 At the balance sheet date, the amount of estimated liability for environmental management should be reevaluated to determine whether the amount of accrual is adequate. 
64 If the actual expenditures for environmental management relating to prior periods are greater than the accrual amount, the difference should be expensed as production cost in the period when the difference arises. 
Presentation of Financial Statements 
65 Estimated Liability for Environmental Management should be presented in the balance sheet at the accrued amount less actual expenditures. 

Disclosure 
66 The following information should be disclosed in the notes to the financial statements: 
(a) accounting policy relating to: 
(i) accounting treatment on expensing environmental management costs; 
(ii) amortization method for the Deferred Environmental Management Costs; and 
(iii) depreciation method of environmental management infrastructure; 
(b) the activity in the estimated liability for environmental management in the current year showing: 
(i) the beginning balance; 
(ii) the provision made; 
(iii) the actual expenditures; and 
(iv) the ending balance; 
(c) environmental management activities which have been conducted and are in progress. 
(d) contingent liabilities in connection with environmental management and other contingent liabilities as described in the financial accounting standards. 
TRANSITION 
67 The change arising from the application of this Statement does not constitute a Cumulative Effect of A Change in Accounting Policy. Therefore, in preparing financial statements adopting this new method, the previous period’s ending balance will be the beginning balance for the current period. 
68 The estimated remaining liability for environmental management relating to prior activities (the difference between estimated total liabilities and the actual expenditures) is expensed prospectively from the effective date of this Statement through a systematic amortization over the remaining useful life of the mine and is presented after Operating Profit items. The amortization method and duration should be disclosed in the notes to the financial statements. 

EFFECTIVE DATE 
69 This Statement becomes effective for financial statements covering periods beginning on or after January 1, 1995. 





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