12. How should companies address special items or adjustments needed to normalise earnings in AISC and AIC?
The WGC Guidance Note excludes certain costs from AISC and AIC, including items that a company adjusts for to normalise earnings. These adjustments include items such as impairment charges on non-current assets and one-time material severance charges. The WGC Guidance Note does not provide a specific list of items or adjustments that are considered appropriate or reasonable as it is not practical to define such a list given the potential range of events faced by individual companies. Companies should adequately disclose the reason for adjustments to AISC and AIC for special or non-recurring items. As discussed above, a numerical reconciliation should be provided between the US GAAP or IFRS financial statement line items and the costs included in the reported AISC and AIC metrics that clearly identifies any special items or unusual adjustments excluded from AISC and AIC.
13. How should companies treat “by-product” and “co-product” sales from secondary metals in AISC and AIC?
The WGC Guidance Note specifies that by-product and co-product credits are included in the calculation of AISC and AIC as a credit to operating costs. Companies generally treat both by- product (i.e. secondary metal sales treated as a reduction of cost of sales in the financial statements) and co-product (i.e. secondary metal sales reported as sales in the financial statements) credits as a reduction of AISC and AIC. This approach is consistent with the WGC Guidance Note. Regulatory requirements regarding how co-product revenues can be treated in non-GAAP metrics such as AISC and AIC can result in inconsistencies when comparing metrics between companies. Companies should clearly disclose how they treat both by-product and co- product credits in the calculation of their AISC and AIC metrics in order to make the user of the information aware of the potential differences between companies.
If a company reports separate AISC and AIC metrics for gold and co-product metals, the company should provide a numerical reconciliation between the US GAAP or IFRS financial statement line items and the total costs included in the gold and co-product AISC and AIC metrics. A company that reports separate gold and co-product AISC and AIC metrics should also disclose the methodology used to allocate costs between gold and the co-product metal.
14. How should companies treat net realizable value (“NRV”) write-downs of stockpile, leach pad or in-process inventories when reporting AISC and AIC?
The WGC Guidance Note excludes changes in working capital from AISC and AIC, except for adjustments to inventory on a sales basis. Adjustments to stockpile, leach pad, and in-process inventories can include NRV write-downs. NRV write-downs represent the difference between the estimated total cost of an ounce of gold in inventory (i.e. current inventory carrying costs plus future costs to complete processing) and the estimated future selling price of an ounce of gold. In some cases, companies exclude NRV inventory write-downs from their AISC and AIC metrics. It is expected that the impact of write-downs of current inventory (i.e. inventory expected to be realised in the next twelve months) would be included in AISC or AIC. However, the impact of write-down of non-current inventory may be excluded where the write-down is driven by exceptional circumstances, such as a significant reduction in the gold price. NRV inventory write- downs represent mining costs incurred that had been deferred in inventory. If a company excludes NRV write-downs from AISC and AIC metrics, they should clearly disclose the amount of such NRV write-downs excluded and the rationale (i.e. price driven NRV write-downs) for excluding them. Any reversals should be treated in the same manner as the original impairment.
It is important to note the due to the differences between US GAAP and IFRS, under which IFRS permits the capitalisation of deferred stripping costs for an open pit mine in production and US GAAP does not, US GAAP reporting companies can typically experience a higher level of NRV write-downs for mines during stripping campaigns because all stripping costs flow through inventory costs.
15. Should corporate general and administrative costs be included in AISC and AIC?
Costs incurred in supporting a company’s corporate structure and fulfilling its obligations to operate as a public company (not related to any specific operation) should be included in AISC and AIC. Such costs are generally non-discretionary and should be treated as a necessary cost to sustain current operations.
16. How should research and development (“R&D”) costs be incorporated in AISC and AIC?
While R&D costs are more likely to be discretionary in nature, management judgement is required to assess the nature of R&D costs to determine if they are sustaining or non-sustaining. To the extent R&D costs support the optimization of existing operations, they should be considered sustaining costs. To the extent R&D costs deliver longer-term benefits to existing or future operations, they may be considered non-sustaining. The determination for inclusion as sustaining or non-sustaining should be made on a project-by-project basis.
17. How should costs associated with mergers and acquisitions, divestments, business integration costs (e.g. conversion to uniform technology platforms, severance costs, relocation costs, branding updates, etc.) or business development activities not related to existing operations be treated in AISC and AIC?
Per the WGC Guidance Note, costs related to business combinations, acquisitions and disposals are excluded from AISC and AIC. Companies should consider whether costs for business integration or business development activities are discretionary and/or incremental to the ongoing costs associated with running the business. For example, if a company has a full-time corporate development team, those costs should be considered sustaining costs, whereas specific fees paid to banks or consultants unrelated to existing operations should be considered non-sustaining and excluded from AISC. Companies should clearly disclose those merger and acquisition, divestment, business integration and business development costs excluded from AISC and AIC metrics.
18. When should restructuring or impairment charges be included in AISC or AIC?
The WGC Guidance Note excludes certain costs from AISC and AIC, including items that a company adjusts for to normalise earnings. These adjustments include items such as impairment charges on non-current assets and one-time material severance charges. Companies are encouraged to clearly disclose the adjustments made to exclude these costs from AISC and AIC and provide a detailed reconciliation back to the nearest US GAAP or IFRS financial statement line items.
19. How should lease costs be incorporated in AISC and AIC?
The original WGC Guidance Note (released in June 2013) explicitly excluded certain financing activities from AISC and AIC. The logic behind this approach was that interest expense largely reflects a company’s capital structure, while capital expenditures reflect the cost of operations. This approach effectively scoped finance leases out of the framework, while operating leases were included by virtue of being charged directly to costs.
The new lease accounting standards (ASC 842 and IFRS 16, effective 1st January 2019) will require lessees, under certain qualifying conditions, to bring additional leases onto the balance sheet and result in the recognition of new lease assets and liabilities. These lease payments were previously reported as part of cost and treated as an operating activity. Because of this accounting standard change, the WGC Guidance Note has been updated to address how the costs associated with finance leases (US GAAP and IFRS) and operating leases (US GAAP only) should be treated when computing AISC and AIC metrics. The approach adopted is based on including the principal portion of the cash payment as well as the financing component per the cash flow statement in the AISC and AIC metrics, on the basis that this reflects the current periodic cash costs under the lease.
20. How should share-based remuneration be included in AISC and AIC if it is not disclosed within a company’s financial statements as a separate line item?
Companies should include share-based remuneration in their AISC and AIC metrics and disclose where it is included the metrics (i.e. included as cost of sales for site based compensation, included in corporate general and administrative costs, etc.)