Stripping costs

Stripping costs are those costs incurred when removing overburden or waste materials in order to obtain access to a commercially-producible ore body. If so, and the activity provides better access to the deposit, then under GAAP the cost should be capitalized along with other development costs. If not, then the stripping cost should be charged to expense as incurred. When stripping costs are incurred during the production phase, the firm should treat these costs as variable production costs. As such, they should be included in the costs of produced inventory during the period in which the stripping costs are incurred.

Under International Financial Reporting Standards, there are several options for the accounting for stripping costs incurred during the development phase of a mine, which are:

  • Treat as inventory. If there is usable ore in the overburden, record the stripping cost as inventory.

  • Treat as fixed asset. If there is no usable ore in the overburden, capitalize the stripping cost into the cost of the mine, along with an allocation of directly attributable overhead costs, and then depreciate it. The usual form of depreciation is the units of production method, though another method can be used if it is more appropriate. This option is only available if the stripping cost will probably result in improved access to the underlying ore, the business can identify the ore to which access will be improved, and costs associated with accessing that particular ore body can be measured reliably.

  • Charge to expense. If the preceding two options are not applicable, charge the stripping cost to expense as incurred.

Related Courses

Accounting for Mining
IFRS Guidebook