NO HEADLINE (June 15, 1992)

The Canadian mining industry has one or two personalities who are always ready to make a statement. But there is one statement all miners have to make annually — the financial statement. It can be one of the more rigorous aspects of mining, and an admirable demonstration of creativity.

The words “financial statement” and “creativity” are served together about as often as sardines and ice cream. According to Regulation 44 of the Canada Business Corporations Act, financial statements must be prepared using standards established by the Canadian Institute of Chartered Accountants. These standards are “generally accepted accounting principles,” or GAAP. They are to be applied by financial statements preparers using their best judgment in order to arrive at fair and meaningful financial information. The marriage of complex issues and good judgment occasionally brings about incongruous accounting treatments. Treatments that, depending on the circumstances, are equally valid. There are no aspersions being cast, because there are many ways to make a fair financial statement. But let’s take a look at some interesting differences.

An established accounting rule states that when you spend more for an asset than that asset is going to return, you should write it down or write it off. Procedures for calculating the amount of any writedown are also part of GAAP. The uninitiated might expect the application of this rule to produce similar results, but the wild card of good judgment can intervene.

Consider Placer Dome (TSE) and International Corona (TSE). After evaluating its investment in Stikine Resources, Placer wrote it down by US$43.3 million. Corona, on the other hand, believes that, at this time, a writedown of its investment in Eskay Creek would be inappropriate. Clearly, beauty is in the eye of the beholder.

Another unsystematic area is gold loans.

Gold loans have evolved from a simple project financing vehicle to a combination financing and hedging device. Some companies have called their gold loans long-term debt and measured their obligation to pay back ounces at the current market price. Most other companies called their gold loans deferred revenue and recorded their obligations at the price of gold when the ounces were borrowed and sold.

The blending of mixed motives and good judgment produce some “apples-to-oranges” accounting. Whenever there is an apples-to-oranges accounting situation, the Emerging Issues Committee of the Canadian Institute of Chartered Accountants studies and resolves the problem as quickly as possible.

Last November, the EIC decided a gold loan was a loan and should be called one. It also decided that a borrower’s obligation varies with the price of gold; therefore, the obligation to repay gold should be measured at current gold prices and should be called debt. When borrowed ounces are remeasured at current prices there is a notional gain or loss which should be shown separately from the gold loans.

What could be simpler? A look at the financial statements of American Barrick Resources (TSE), Corona, Echo Bay (TSE), Lac Minerals (TSE), Placer Dome and Teck (TSE) reveals different presentations for gold loans, but each company is accounting for the decline in gold prices the same way — remeasurement gains are treated as future income.

Production and sale of metals are what mining is all about. In the long run, if a company sells its metals inventory for more than production cost, even its accountants will be happy. So recording inventory cost should be straightforward, right? Inco (TSE), Lac, Echo Bay and Placer Dome carry product inventories on their books at cost and new realizable value, whichever is lower. Noranda (TSE), American Barrick and Corona, on the other hand, value product inventories at net realizable value. Rio Algom (TSE) and Teck use net realizable value when there is a contract for the sale of materials; otherwise, inventories are recorded at the lower of cost or net realizable value. Although different, each presentation is fair. –This article has been prepared by the accounting firm Ernst & Young’s Mining Industry Group, directed by Randy Billing CA. Tony Hawkshaw CA is with Ernst & Young’s Mining Industry and National Accounting/Auditing Services groups.