KPMG’s mining survey

While mining companies’ financial reporting has improved in the last three years, the capital markets want more global consistency in how the reports are presented. A KPMG international report, Global Mining Reporting Survey, found the 2005 adoption of International Financial Reporting Standards (IFRS) helped to reduce the variety of national Generally Accepted Accounting Principles (GAAP) choices but had not removed the diversity of application.

Jimmy Daboo, a partner in KPMG’s mining practice in the UK, said, “The impetus for an international standard is driven by the capital markets needing the most reliable information possible. Much progress has been made to enable users to better understand the numbers, but more is needed if the mining industry is to continue to receive capital markets’ support.”

The report shows positive signs for the mining industry with more companies across the sector broadening the base of financial reporting to encompass other aspects of business performance in addition to profit, cash flows and financial position. The end result will be that users of financial reports can achieve a greater understanding of the performance of a business.

It is also noticeable that reporting on corporate social responsibility has become more prevalent, with the Global Reporting Initiative (GRI) providing the base framework for such reporting. However, the survey noted that investors are still seeking clarity in other areas, specifically the reporting of changes in mineral reserves and resources; qualitative and quantitative data; and financial instruments.

In the foreword to the report, International Accounting Standards Board (IASB) board member Robert Garnett conceded the need for greater convergence of many technical definitions including reserves and resources, predicting the release of an IASB research paper towards the end of 2007.

Daboo concluded, “The industry has made strides in developing its own reporting guidelines, prompted somewhat by the gradual convergence of IFRS and GAAP – and for that it should be applauded. However if external stakeholders are truly to get a better picture of how the industry is faring, then a greater degree of consistency across its financial reporting principles is required sooner rather than later.”

Key reporting improvements:

  • Companies recognizing mine closure and rehabilitation liabilities in full at reporting rose from 33% in 2003 to 93% in 2006
  • Rise in the disclosure of stripping costs and laybacks in open pit mines from 32% in 2003 to 59% in 2006
  • A total of 42 of the 44 companies surveyed used a consistent policy of revenue recognition at the time of shipment.

Key reporting challenges:

  • Disclosure of reserve and resource data in annual reports has risen from 78% in 2003 to 91% in 2006, but the information is still being presented in different ways depending on the reporting jurisdiction, which can cause headaches for capital investors
  • Differences also remain in the classification of reserves, resulting in additional disclosure for those companies that report in more than one jurisdiction
  • Where exploration was capitalized, 72% classified it as tangible assets on the balance sheet, at odds with IFRS which suggests the majority of exploration costs relevant to studies, drilling, sampling and evaluating are intangible by nature
  • There has been a move to more quantitative data and reporting of sensitivities in some areas but the survey found this had been inconsistent in breadth and depth
  • The move to provide quantitative information in support of key estimates, uncertainties and judgements in areas such as commodity prices, exchange rates and discount rates is only just beginning
  • Greater rigor in accounting for financial instruments should have lead to improved disclosures in the financial statements of management of commodity price, exchange rate and interest risk but, to date, many companies have chosen to only report part of these risks.