Proposed amendments to financial and disclosure requirements in the extractive industries sector will see a significant overhaul of existing standards and greater obligations on entities to declare information on a number of activities that currently may go unreported. Initial research completed into International Financial Reporting Standards (IFRS) will oblige companies in this sector to disclose information in an arena where, broadly, there has been minimum IFRS requirements for disclosure thus far.
Released for comment recently, the Extractive Activities Discussion Paper proposes far-reaching disclosure compliance principles in the interests of shareholders and investors and other sectoral stakeholders. The proposals are also intended to provide a standardised platform for companies with extractive activities to produce and compare financial results.
While the South African extractive industries sector has historically been quite forthcoming with thought-leading disclosures, it might be necessary for the sector to prepare for what are likely to become new requirements around disclosure.
Some of the disclosure areas that may be impacted upon include:
- main assumptions in reporting reserve quantities, a sensitivity analysis and period-on-period reconciliations – by commodity and by country or project
- current value measurement and changes period-on-period– based on geographical region
- production revenues – by commodity
- cash flows for exploration, development and production – as a time series over a defined period.
While the intention is to encourage faithful disclosure of information in the areas above, it is also useful to note a few gaps that could be addressed to enhance reporting and assurance activities in the sector. One of the more significant of these is the estimation of resources. Reporting of resources is fairly common in the mining sector in South Africa and is encouraged to continue. The disclosure requirements in the Extractive Activities Discussion Paper are meant to provide a minimum starting point, also in comparison with the oil and gas industry.
There has been recognition that financial volatility and commercial sensitivity differ across extractive industry sectors, and the need to disclose assumptions in estimating value based on reserves and resources would enhance more than just reporting standards. While there has been much debate about fair value and a standardised measure of proved and probable reserves in relation to reporting standards and the recognition in the statement of financial position, it is useful to disclose the basis for the preparation of reports and the assumptions that inform any reconciliation of changes in value. The collation of information as part of the disclosure process would therefore require the disclosure of sensitivity to main assumptions in response to prevailing market conditions and will be useful to a wide range of users.
Information on reserves and resources is the starting point for presenting useful data in reporting in the extractives industry and will continue to play an important role in harmonising standards.
Through the Discussion Paper, a platform has been created for the International Accounting Standards Board (IASB) to move forward on issuing a standard for extractive activities. As little specific guidance is currently available in IFRS and regulations that govern disclosure in the mining industry often differ, consistency can only be achieved through a specific IFRS standard. A standard will make it possible for useful information to be presented on a common and integrated basis.
The deadline for public comment on the proposals is 30 July 2010 and can be directed to the South African Institute of Chartered Accountants or the IASB directly via e-mail.
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