BAO55225 Corporate and Financial Accounting
Individual Case Study – Rio Tinto (15%)
Rio Tinto (RTIO) is a mining and metals company operating in around 36 countries around the world. Our purpose is to produce the materials essential to global growth. Metals produced by Rio Tinto include Aluminium, Copper & Diamonds, Energy & Minerals and Iron Ore.
Rio Tinto’s Operations Centre in Perth uses next-generation technologies, including artificial intelligence, automation and robotics, to run operations in real-time and respond quickly to changes. Our AutoHaul™ train system is the first fully autonomous, long-distance, heavy-haul rail network – the world’s largest robot.
Each of these elements works together to deliver high-quality iron ore, including our flagship Pilbara Blend™, to our customers reliably and safely.
Our three operations at Dampier Salt, in Western Australia, are also part of RTIO.
• 16 integrated mines in Western Australia
• 5 iron ore products
• 4 port terminals
The following extracts taken from Rio Tinto’s annual report 2020 .
(e) Goodwill and intangible assets (excluding exploration and
evaluation expenditure) (notes 12 and 13)
Goodwill is not amortised; it is tested annually for impairment or more frequently if events or changes in circumstances indicate a potential impairment. Investments in EAUs, including any goodwill, are tested for impairment as a single asset when a trigger for impairment has been identified. The Group’s impairment policy is explained in note 1(i). Purchased intangible assets are initially recorded at cost. Finite-life intangible assets are amortised over their useful economic lives on a straight line or units of production basis, as appropriate. Intangible assets that are deemed to have indefinite lives and intangible assets that are not yet ready for use are not amortised; they are reviewed annually for impairment or more frequently if events or changes in circumstances indicate a potential impairment in accordance with accounting policy note 1(i).
The Group considers that intangible assets have indefinite lives when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate cash flows for the Group. The factors considered in making this judgment include the existence of contractual rights for unlimited terms or evidence that
renewal of the contractual rights without significant incremental cost can be expected for indefinite future periods in view of the Group’s investment intentions. The life cycles of the products and processes that depend on the asset are also considered.
(f) Exploration and evaluation (note 13)
Exploration and evaluation expenditure comprises costs that are directly attributable to:
– Researching and analysing existing exploration data;
– Conducting geological studies, exploratory drilling and sampling;
– Examining and testing extraction and treatment methods; and/or
– Compiling various studies (order of magnitude, pre-feasibility
Exploration expenditure relates to the initial search for deposits with economic potential. Expenditure on exploration activity undertaken by the Group is not capitalised.
Evaluation expenditure relates to a detailed assessment of deposits or other projects (including smelter and refinery projects) that have been identified as having economic potential. Capitalisation of evaluation expenditure commences when there is a high degree of confidence that the Group will determine that a project is commercially viable, that is the project will provide a satisfactory return relative to its perceived risks, and therefore it is considered probable that future economic benefits will flow to the Group. The Group’s view is that a high degree of confidence is greater than “more likely than not” (that is, greater than 50% certainty) and less than “virtually certain” (that is, less than 90% certainty). Assessing whether there is a high degree of confidence that the Group will ultimately determine that an evaluation project is commercially viable requires judgment and consideration of all relevant factors such as the nature and objective of the project; the project’s current stage; project
timeline; current estimates of the project’s net present value, including sensitivity analyses for the key assumptions; and the main risks of the project. Development expenditure incurred prior to the decision to proceed is subject to the same criteria for capitalisation, being a high degree of confidence that the Group will ultimately determine that a project is commercially viable.
In some cases, undeveloped projects are regarded as successors to orebodies, smelters or refineries currently in production. Where this is the case, it is intended that these will be developed and go into production when the current source of ore is exhausted or when existing smelters or refineries are closed. Ore reserves may be declared for an undeveloped mining project before its commercial viability has been fully determined. Evaluation costs may continue to be capitalised during the period between declaration of ore reserves and approval to mine as further work is undertaken in order to refine the development case to maximise the project’s returns.
Impairment charges/reversals of non-current assets Impairment charges and reversals are assessed at the level of cash generating units which, in accordance with IAS 36 “Impairment of Assets”, are identified as the smallest identifiable asset or group of assets that generate cash inflows which are largely independent of the cash inflows from other assets. Separate cash-generating units are identified where an active market exists for intermediate products, even if the majority of those products are further processed internally. Impairment of financial assets is evaluated in accordance with IFRS 9.
In some cases, individual business units consist of several operations with independent cash-generating streams which constitute separate cash generating units.
Goodwill acquired through business combinations is allocated to the cash generating unit or groups of cash-generating units that are expected to benefit from the related business combination, and tested for impairment at the lowest level within the Group at which goodwill is monitored for internal management purposes. All goodwill, intangible assets that have an indefinite life and intangible assets that are not ready for use are tested annually for impairment as at 30 September, regardless of whether there has been an impairment trigger, or more frequently if events or changes in circumstances indicate a potential impairment.
Please read Rio Tinto’s annual report 2020 about the disclosure of Intangible Assets and impairment testing.
Use the case analysis document to analyse the case covering the following aspects.
a) Assess the measurement and recognition consistency of AASB138 “ Intangible Assets” with the AASB Framework.
b) Use the measurement and recognition criteria of AASB138 “ Intangible Assets” and AASB 136 “Impairment of Assets” to critically discuss the accounting policies of Rio Tinto.
c) Use the disclosure requirements of AASB 138 and AASB 136 to recommend the changes required in the disclosure of the company.