Quarry Accounting – What Are The Main Differences?
Did you know, quarries have a special set of considerations to be applied in order to determine appropriate accounting for the industry?
Phases of the Industry
One of the special considerations relates to the stage of the operations:
1) Exploration – search for resources suitable for commercial exploitation (discovery costs)
2) Evaluation – determining the technical feasibility and commercial viability of the resource (proving costs)
3) Development – establishing access to the reserves and preparations for commercial production
4) Construction – establishing and commissioning facilities to extract, treat and transport production from the reserve
5) Production – day to day activities of obtaining a saleable product from the reserve on a commercial scale
6) Closure and rehabilitation – ceasing operations and restoration of the site
The accounting for each of these phases is nuanced and should be discussed with your accounting advisors in detail. In particular, during the development phase, costs are generally capitalized until the point in which production begins. Capitalized development costs are amortized using the units-of-production method as the resources are mined. Reserves during the development phase should be estimated to determine the proven and probable amount of reserves available.
The cutoff of the development and construction phases, in which costs are generally capitalized, and the point of production are critical points that should be established by the entity. During the production phase, costs are charged as operating expenses, rather than capitalized.
Inventory Accounting – Production Phase
During the production phase, inventory should be measured and valued at all costs of the purchase, costs of conversion and other costs to bring inventory to present location and condition. Generally Accepted Accounting Principles require inventory be held at the lower of cost or net realizable value. Costs of conversion include indirect labor, indirect materials, depreciation of the processing plant and equipment used, and all other costs of running the site including electricity, power, utilities and any other costs to run production. Other costs associated with inventory could include depreciation and amortization, ongoing or short-term development costs, royalties (if based on production) and freight costs.
Administrative overheads not associated with the site, storage costs (unless necessary in production process), selling costs and abnormal amounts of wasted materials, labor and production should be excluded from inventory costs.
Stripping is the removal of overburden or waste to access mineralized materials. Once production has commenced, stripping costs incurred in surface mining are accounted for as a cost of current production. Therefore, these are a component of the cost of inventory extracted from the site and held at period end.
Work in progress inventory should be measured when a reliable assessment of mineral content is possible and cost of production can be reliably determined. Stockpile inventory is based on physical measurements with grade determined through testing.
Entities are required to recognize a liability for obligations associated with environmental remediation liabilities related to pollution arising from some past acts under ASC 410-30. An accrual is required if information is available before the financial statements are issued that indicates it is probable that a liability has been incurred as of the financial statement date and the amount of the loss can be reasonably estimated.
The estimate should consider the extent and type of hazardous substances, choice of technology, changing laws and regulations, number of potential responsible parties, and the financial conditions of the other parties. Additionally, companies should consider the cost of compensation and benefits for employees handling remediation, cost of feasibility studies, fees to engineers, consultants and contractors, governmental oversight costs, and costs of machinery.
This differs slightly from asset retirement obligations, which should be recognized in the period incurred when the entity has an existing legal obligation associated with the retirement of a tangible asset and the amount can be reasonably estimated. The present value of the obligation should be calculated and accrued as a liability then released with the passage of time and changes in estimates.
When in doubt about any accounting topics in a specialized industry, consult your advisors!