Revaluing Major Property, Plant And Equipment Assets For KGC Ltd In An Essay.

The Fair Value Measurement Approach

Question:

Discuss about the Accounting Theory and Contemporary Issues for Australian Mining Industry.

KARRICK Gold & Copper Ltd is operating in the Australian mining industry. This stock listed company has been working a broad Open Cast gold and copper mine in the Star Mountain Range in Papua New Guinea (PNG) for thirty years. There are an impressive track record of the industry for delivering continuous improvements in safety and risk governance standards. However, several business risks are often identified related to resource nationalism. Furthermore, market imbalances, falling commodity prices, impairment call capital allocation are many problems increase the level of concerns in this industry. In this report, all KGC Ltd’s information is going to be analyzed to understand the risk related to their business.

Accounting principles in order to revaluation of PPE Assets

Currently, KGC Ltd has a “net book value” of the PP&E amounted of 16.5 billion AUD. Additionally, the company is also required $5 billion AUD over the next seven years. The value of an item if property, plant and equipment shall be determined on the basis of the basis of “fair value measurement” as mentioned by AASB 13 applying the revaluation value. According to AASB 13, KGC Limited should revalue its major PPE at the price which would be received in order to pay to transfer a liability or sell an asset in a systematic transaction between market participants at the measurement data. Under the model of revaluation the PPE whose value will be measured at fair value will be carried at a revalued amount by calculating “fair value” at the date of revaluation less any subsequent accumulated depreciation along with “accumulated losses of impairment” (Yao, Percy and Hu 2015). Here KGC Ltd should not value their PPE at historical costs because this is not considering the different trends in the market price of the assets (Diana 2015). To exploration for and evaluation of mineral resources, the elements of costs of exploration and evaluation assets such as exploratory drilling, trenching, sampling all shall be assessed by the standard of AASB 6.

The potential issues regarding the revaluation of its PPE assets are as follows:

Ore reserves are only sustained for next seven years and there is no active prospecting for additional reserve of ore in the company’s planning process. Therefore, scarcity of resources can be a concern for the mining production in the future period. Secondly, the mining industry is highly flexible in terms of manufacturing costs because high inflation of costs. Thirdly, issues regarding the mining capacity constraint are another potential cause of concern because The Star Mountain Range in PNG is isolated area where local accessibility is very low. Therefore, there are two major issues the company needs to address well: environmental issues and Ore reserve resource issues.

To revalue KGC Ltd’s major PPE assets, the company can identify the several potential risks (DeFond 2015). High mineral prices concealed the impact of rampant inflation of cost, falling productivity, appreciation of currency and poor capital discipline. All this are probable risks the company could face externally. Apart from that the mining risks associated with licensing and permitting because the company’s present license from the government of PNG to mine in that region will expire in 8 years. Furthermore, the company is having a huge burden of the costs of remediating the sludge spill which is predictable to series from $6 billion top $60 billion. However the intensity of the costs burdens are completely depends on the result of a pending case in PNG.

Potential Issues and Risks

According to the AASB 13, fair value of PPE should be measured at the price that would be received to sell an asset or paid to transfer a liability between participants of the market at the date of ascertainment. Here the value will be estimated after considering the following factors:

• Closest alternative item’s value (Laing and Perrin 2014)
• Value of the acquisition, substitution costs of the item (Pawsey 2016)
• The capacity of the production within a specified period
• The demand supply curve of the market
• Factors of risks
• ROC and cost of capital

Here the company will evaluate the fair value of PPE by considering the “value in use” of $12 billion AUD if the renewal of contract for ten years which is addition to the present 7 years. The “value is use” cost is ideal for the company because the company is generating the natural resources which is better to ascertain the fair value considering the future earnings of the company (Diana 2015). Furthermore, the company has not been reserved ore after seven years. To mitigate this risks the company will take $12 billion as the true and fair value of the PPE.

Generally sustainable development addresses the corporate behavior and how environmental management strategies are applied as a tool for growing the image of the company and cumulative effect of the company (Glac 2015). The “Triple Bottom Line” aspects argue that business success should be measured based on three perspectives: planet, people and profit (Milne and Gray 2013). By the inclusion of this aspects into the reporting approach, the company can evaluate their mining performances in a wide prospective to create greater value of businesses. According to Glac (2015) the TBL has the potential to demonstrate all environmental and social responsibilities in positive terms that are relevant factors in their statement of financials and thus its inclusion can be beneficial for the company.

If KGC Ltd incorporates “Triple Bottom Line” aspects to its reporting approach, many positive aspects (merits) of the performances of the company could be evaluated:

People’s perspective:

KGC Limited is the major employer of the “Star Mountain Range in Papua New Guinea (PNG)”. The company provides employment to 3400 people as permanent employees in its PNG mine, processing plant and offices. The company helps to provide the sustainable labor participation rate which is almost 32 percent. Therefore, it can be said that a huge work dependency has successfully maintained by the company. Furthermore, the people of the “Star Mountain Range in PNG” depend on the operational efficiencies of the company for majority of their professions, health care services, clean potable water and education.

However, the PNG tribes located near in the border of Papua are nearly related to the tribes across the border. Hence, the local people of PNG portion may get affected by such tribal conflicts and the corresponding police actions.

Planet’s perspective:

The company is successfully operated at the “Star Mountain Range in PNG” which is isolated, but the area is blessed with a “wide range of exotic plants and animals which are rarely found in other part of the world. To involve in mining operation, the company maintains the ecological balance.

However, the company has been criticized due to the current collapse of a “tailings” pond deserted “five million litres of ore-waste sludge into a river”. This results loss of local villages, water, fish, and hunt and so on and thus, considered as a irresponsible environmental performance. SO the mining pollution concern is huge for KGC Ltd.

Incorporating Triple Bottom Line into Reporting Strategy

Profits’ perspective:

The company pays high amount of taxes in order to operate in the mining industry. Secondly, the company has been operated sustainable by paying the four billion dollar in royalties to the conventional owners of the land and paid taxes as well.

However, the company is largely affected due to this collapse and expected to expense huge cost for settlement of the same.

Legitimacy is the generalized perception that the actions of an entity are proper, desirable or appropriate where organizations or other entities operated under the social constructed system of norms, beliefs, and definitions (Hough, Jackson, and Bradford 2013). Here KGC Ltd maintains legitimate business operation in different perspectives:

Legitimacy towards the traditional land owners:

Paying four billion dollar in royalties to the conventional owners for the effective use of their land in which the company produces mine and ore processing are being takes place. It indicates that the businesses are maintaining legitimacy.

Legitimacy towards the government of PNG:

The company effectively released the burden of taxes of the amount of $6 to the PNG government. Apart from the release of tax liability, the company is running its operation legitimately by steadily providing employment opportunities and thus, the company maintains business sustainability towards providing the infrastructural development on behalf of the government of PNG.

Legitimacy practices towards the people:

The company has successfully contributed towards the health and education for the local people of PNG along with the job offering. However, the ore-waste sludge into the river incidents collapsed the local area and considered less responsive behavior from the authority of KGC limited.

In this way, the company is maintaining the business legitimacy in the eyes of different stakeholders.

The company is at risk in terms of providing legitimacy towards the people of PNG. Despite the company is providing large job opportunity and maintains the popularity in the isolated area, the company is still at risk because the company is involved in court case which results are awaiting. The authority is currently expected a huge expense ranging from $6 billion to $60 billion, due to make settlement in the coming times. If the company is not being able to entitle their lawsuits, there could be a huge financial loss incurred and this may results operational inefficiency during the mining and ore productions (van Urk,  Grant and Bonell 2015). In this way, the company may fail to maintain legitimacy.

The mining service provider, KGC limited needs to incorporate some actions for restoring its legitimacy towards the people. According to stakeholder theory explained by the Friedman and Miles, the company should establish the implications of continuous relationships between organizations and its stakeholders. To resolve the legitimacy issue regarding the people, the company should make a plan for contingency reserves in terms of new ore option (Sarkis and Dhavale 2015). This extra production will generate more returns that will help to maintain a sustainable relationship with their stakeholders (Bridoux and Stoelhorst 2014). To emphasize more on employment, the company needs to provide more job opportunities. In this way, the company can maintain a strong relationship with the people.

As per the stakeholder theory of Donaldson and Preston, the company should give more emphasize to expand the business expansion maintaining the ethical and moral viability during the processing of ore. Here the mining company can more involve in byproducts operations to generate more revenue in the long run. This effort could minimize the risk of a huge expanse of lawsuits.

For maintaining the financial reporting efficiency, KGC Limited should record all associated “costs of the harm associated with the sludge spill” in its GPFS. The “general purpose financial statement” consists with the statement of financial performance, statement of income, cash flow statement and statement of change in equity (Nobles,  Mattison and Matsumura 2013). Here KGC limited should make contingent liability to recover the damage costs. Right now, the company is anticipating a huge financial loss due to pending case which is actually not happened. This means the company has not faced any loss due to collapsed phase but it should incorporate the cost of harm as a contingent liability in the liability side of the statement of financial performances (Picker 2016).  According to the AASB 137, the company needs to make a disclosure regarding such contingencies. With this presence, the potential loss will be increased and the company can present less income at the end of the financial year (Hough, Jackson and Bradford 2013).

Additionally, the company should make more provision during the financial year to record “costs of the harm” related to the sludge spill in the statement of profit of loss. This will reduce the actual profit; however the company can be able to offset such costs.

References:

Bridoux, F. and Stoelhorst, J.W., 2014. Microfoundations for stakeholder theory: Managing stakeholders with heterogeneous motives. Strategic Management Journal, 35(1), pp.107-125.

DeFond, M.L., 2015. Annual Report and Editorial Commentary for The Accounting Review. The Accounting Review, 90(6), pp.2603-2638

Diana, C.I., 2015. Fair Value Measurement Under Ifrs 13. Annals-Economy Series, 3, pp.55-59

Glac, K., 2015. Triple Bottom Line. Wiley Encyclopedia of Management.

Hough, M., Jackson, J. and Bradford, B., 2013. Legitimacy, trust and compliance: An empirical test of procedural justice theory using the European Social Survey

Laing, G.K. and Perrin, R.W., 2014. Deconstructing an accounting paradigm shift: AASB 116 non-current asset measurement models. International Journal of Critical Accounting, 6(5-6), pp.509-519.

Milne, M.J. and Gray, R., 2013. W (h) ither ecology? The triple bottom line, the global reporting initiative, and corporate sustainability reporting. Journal of business ethics, 118(1), pp.13-29

Nobles, T.L., Mattison, B.L. and Matsumura, E.M., 2013. Horngren's Financial & Managerial Accounting: Pearson New International Edition. Pearson Higher Ed

Pawsey, N., 2016. Project: Review of IFRS adoption in Australia.

Picker, R., 2016. Applying international financial reporting standards. John Wiley & Sons

Sarkis, J. and Dhavale, D.G., 2015. Supplier selection for sustainable operations: A triple-bottom-line approach using a Bayesian framework.International Journal of Production Economics, 166, pp.177-191

van Urk, F., Grant, S. and Bonell, C., 2015. Involving stakeholders in programme theory specification: discussion of a systematic, consensus-based approach. Evidence & Policy: A Journal of Research, Debate and Practice.

Yao, D.F.T., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets and audit fees: Evidence from Australian companies. Journal of Contemporary Accounting & Economics, 11(1), pp.31-45.