Mining and the Environment Accounting for future environmental

Among the factors that influence the levels of risk and profitability for mining are the twin costs of environmental protection and site rehabilitation. Obtaining permits can delay development for months, if not years. Complying with toxic discharge limits increases capital investment and operating expense. Shutdown and site rehabilitation costs are daunting and subject to continuous upward pressure. Investors and lenders are aware of spiraling costs for environmental regulation and expect to see them built into operating plans and feasibility studies. Many financial institutions are requesting environmental audits of operations before approving loans. Securities commissions are pressing for more detailed disclosure for environmental risks.

The Canadian Institute of Chartered Accountants recently issued new capital asset accounting recommendations which codify the removal/restoration cost accrual requirement.

Generally accepted accounting principles have always required a provision for future removal and restoration costs where they were likely to be incurred and when they were expected to exceed salvage value. But because of uncertainties related to mine life and estimating costs, they have been expensed in or around the periods they were incurred.

One may argue that the new CICA recommendations represent an accounting change that might be retroactively applied. This would allow some costs to be charged to operations in prior periods, thereby unburdening current and future operating results.

The merit of this approach is suspect in view of long-established accounting principles for contingent liabilities, which say that accruals for removal and rehabilitation costs should have been made beforehand if reasonably determinable. If such costs can now be reasonably estimated, then these costs should be charged to the income of the current and future periods and not to past operations.

Full disclosure of costs and uncertainties, both in the financial statements and management’s annual reports on operations, will help investors and lenders determine which companies are effectively managing their exposure to environmental risks.

In addition, clearly defined environmental policies may strengthen employee morale and retain or attract qualified personnel. Above all, the adoption of such policies will promote environmental responsibility both during and after a mine’s operating life. This series of articles has been complied by Ernst & Young’s mining industry group directed by Randy Billing. This article was contributed by Ross Pearman and Tony Hawkshaw. A previous article on mine closures in Ontario (T.N.M., Nov. 26/90), incorrectly attributed to David Hunter, was contributed by Michael Bourassa and Nancy Kleer of Aird & Berlis.