How will IFRS 15 Revenue from Contracts with Customers impact the mining industry?

The International Accounting Standards Board (IASB) published IFRS 15[1] Revenue from Contracts with Customers in May 2014 effective for reporting periods commencing on or after 1 January 2018. Since IFRS 15 replaces all of the existing guidance on revenue recognition, and applies to all entities and industries, there has been considerable confusion (and debate) as to what the likely impacts are going to be, across different industries, when adopted.

This article highlights what the key implications of adopting IFRS 15 are expected to be on the mining industry. For the majority of revenue contracts and companies in this industry IFRS 15 is not expected to have a material impact on the numbers reported. Despite this, it is important to consider specific contracts and how the areas highlighted below may impact your company.

Likely areas impacted upon include:

  1. Royalty income
  2. Take-or-pay arrangements

1. Royalty income
In the mining industry it is not uncommon for entities to sell part, or all, of their interests in a mine for a future royalty stream. IAS 18/AASB 118 Revenue (along with various other accounting standards) scopes out revenue arising from the extraction of mineral ores. As a result, there is divergence in how entities account for revenue, including royalty streams, in the mining industry.

IFRS 15 is not the silver bullet to eliminate this divergence. IFRS 15 doesn’t exclude revenue arising from the extraction of mineral ores but will only apply where a contract with a customer exists. IFRS 15.6 highlights:

A counterparty to the contract would not be a customer if, for example, the counterparty has contracted with the entity to participate in an activity or process in which the parties to the contract share in the risks and benefits that result from the activity or process (such as developing an asset in a collaboration arrangement) rather than to obtain the output of the entity’s ordinary activities.

In many cases a customer relationship will not exist.

Whilst there are scope exclusions in relation to mineral rights and mineral reserves in both IAS 16/AASB 116 Property, Plant and Equipment and IAS 38/AASB 138 Intangible assets it is likely that most entities will use the principles in these standards to account for many types of royalty arrangements that involve the sale of a mineral interest. These standards now refer to many of the principles in IFRS 15 including the restraints on variable consideration. Since the amount of future royalty streams will be uncertain (i.e. variable) then these provisions now provide important guidance on accounting for royalty income.

IFRS 15 requires one of the following methods to be used to estimate variable revenue (depending on which method better predicts the outcome):

  • a probability weighted estimate; or
  • the most likely amount.

Importantly though, IFRS 15 restricts how much of this type of revenue is actually recognised. Variable revenue can only be recognised (IFRS15.56):

‘to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved’.

This is likely to delay the recognition of the impacts of royalty income regardless of the accounting policy chosen by entities.
 
2. Take-or-pay arrangements
There are a variety of forms a take-or-pay arrangement may take. When considering the impact of IFRS 15 on them we recommend entities consider the following issues:

  • Is there a material right contained in the contract?
  • How to account for any variability in the pricing mechanism (variable consideration constraints discussed above).
  • Does the contract contain a financing component?

A material right is normally a separate performance obligation in the contract as it provides the customer with a benefit that other similar customers can’t obtain. For instance, some contracts include a right to purchase future goods at a discount that similar volume customers don’t also receive. Where a contract contains a material right then a portion of the revenue received must be deferred and only recognised when the additional sale is made or the option lapses.

Where an entity receives payments for goods, and period between the receipt of the cash and delivery of the goods is greater than one year (payment may be in advance or arrears), then IFRS 15 requires that the entity assess whether there is a financing component embedded within that contract. If there is, then this component must be accounted for separately to the revenue recognised under the contract.

The information contained in this article is for general guidance only and does not represent, nor intend to be, advice. We recommend that prior to taking any action or making any decision, that you consult with an advisor to ensure that individual circumstances are taken into account.


[1] AASB 15 Revenue from Contracts with Customers in Australia.