Mining Report: Impairment in the Mining Industry
Research based report
As a new accounting graduate you have recently joined the accounting department of an ASX listed
company operating in the mining extraction industry. To complete this assignment you will need to
select a suitable company yourself that meets the following criteria:
The company must be a constituent of the S&P/ASX 300 index (www(dot)asx300list(dot)com);
The company must be in the ‘Materials' sector
you can identify all companies in this sector by sorting the list based on the third column of the table in the above website
The company must publish audited annual financial reports in English, fully complying
with IFRS or AASB standards;
The company must have a 30 June year end; and
The company cannot be Evolution Mining Limited. Your manager, the CFO, has sent you an email containing a Media Release (MR) from the Australian Securities &Investment Commission (ASIC) in relation to Evolution Mining Limited (Evolution Mining), a listed entity in the same industry as the company that you are employed by. MR is provided below:
http://asic(dot)gov(dot)au/about-asic/media-centre/find-a-media-release/2016-releases/16-294mr-evolution-mining-writes-down-pajingo-mine/
http://asic(dot)gov(dot)au/about
The Audit Committee is aware that as well as Evolution Mining, numerous other companies in the same industry have also recently been investigated by ASIC in relation to asset valuations. The Audit Committee is also aware that ASIC Commissioner,John Price,wasquoted as saying the following when announcing the focus areas for 30 June 2016 financial reports:“Directors and auditors should continue to focus on values of assets and accounting policy choices. We continue to see companies use unrealistic assumptions in testing the value of assets... To this end, the Audit Committee is keen to ensure that asset values are appropriately reflected in
the 30 June 2017 financial statements of your company.
You have been asked to undertake some research and prepare a report for presentation at the next meeting of the Audit Committe, to be held on 1 June 2017. Your report must address each of the following:
The role of ASIC as a Corporate Regulator, specifically in relation to their Financial Reporting
Surveillance Program. In your discussion provide a summary of ASIC's findings from their review of 31 December 2015 financial reports in relation to asset values and impairment testing. (5marks)
A critical analysis of some of the complexities and key issues involved in impairment testing for mining assets.
In your analysis, refer to one or more publications issued by the ‘Big 4'in relation to the mining industry.
Provide a detailed explanation of the impairment write-down made by Evolution Mining in the
year ended 30 June 2016. Your explanation should include a discussion of the asset/s that were
impaired, the amount of the impairment write-down, and relevant disclosures in the 30 June 2016 financial report in relation to impairment testing.(10 marks)
In relation to the company that you are employed by, identify five specific issues that the Audit
Committee should consider when reviewing the impairment calculations that will shortly be prepared by management. For each issue identified,explain how it is specifically relevant to your
company. Hint: You may wish to refer to table 3 of ASIC information sheet ‘INFO 203 Impairment of non-financial assets: Materials for directors'
for a list of matters that would be relevant to the Audit Committee. (10 marks)
Mining Report: Impairment in the Mining Industry
Name
Institution
Date
Table of contents
Executive summary
Fortescue Metals Group LTD is an iron ore producer and trader in Australia, and the company mostly exports steel to China. The financial reporting requirements agency contacts, the listed companies to review whether financial reporting requirements and disclosures that are adequate. The main impairment written down in the year ended June 30 2016 was the suspension of an ore joint venture. The audit committee needs to identify factors that affect the asset value to determine the impairment loss. Changes in demand for steel and low prices have affected the business operations at Fortescue Metals that the company needs to recognize impairment write offs and losses.
Introduction
Fortescue Metals Group LTD (Fortescue) is a mining and exploration company headquartered in East Perth, Australia, and one of the leading traders and producers of iron ore in the world (World Market Intelligence 2015, p. 14). The company owns mines in the Pilbara region of Western Australia, and also maintains a Vocational Training Employment Centre (VTEC) that supports training and employment opportunities. The company’s sports are divided into two main markets, China and others as China was the major market for the company’s iron ores
Body
ASIC as a Corporate Regulator and the Financial Reporting Surveillance Program
The ASIC plays a crucial role as a corporate regulator through ensuring that there is compliance and enforcement of the financial reporting requirements. The ASIC is also designed to carry out surveillance, investigation and enforcement procedures and this improves the quality of financial reporting (Patron, 2016). This is possible as the ASIC has adopted iinternatical financial reporting standards in the Australian context as covered by the financial reporting surveillance program. This highlights the important role that the body plays to ensure that disclosure obligations are enforced where the listed companies and significant entities by are alerted about reviews based on what is trending on disclosures. The ASIC requires that firms report on the impairment of the non-financial assets including goodwill, identifiable intangible assets as well as the property, plant and equipment. Companies are required to determine the recoverable amount of the assets to calculate amortization and recoverable amount. The firms have to consider assets that require testing and possible indicators of impairment, with the management tasked with determining the indicators of impairment.
Complexities and key issues involved in impairment testing for mining assets
Determining the impairment of financial assets in the mining industry is potentially problematic when there is goodwill, assets with indefinite lives and others already in use. The mining industry is affected the boom and bust in commodity prices more often as the extractive sector is largely dependent on global market forces. During boom times a realistic calculation of impairment is difficult when there are high profits. Commodity price pose a risk to the sector as variability has been associated with reduced profitability and impairment. Lower prices are indicators that there is a need for impairment, as the market capitalization of many companies have fallen below the net assets (Ernst & Young 2013, p.2).
Impairment testing is subjective and more so for the mining industry, the changes in commodity prices also affect the asset values in the mining industry and other financial variables this has been a challenge in a time when there has been a slowdown in the industry, and there is a need to determine the units generating profits and those that are loss making. This is further complicated by government legislations that have not clarified how to deal with the issue of impairment in some circumstances. This combined with concerns of government regulations has necessitated the market players to consider more robust impairment assessments.