Gold loan accounting rules aim to end inconsistencies

Canadian gold producers were recently issued a new set of accounting guidelines that requires them to change the way they account for gold loans in their financial statements.

Effective, Nov. 20, the new rules are designed to address inconsistencies in the way producers treat gold loans when preparing annual and quarterly reports.

Having reached a consensus that gold loans are primarily a way of obtaining financing, the Canadian Institute of Chartered Accountants is asking companies to refer to such loans in their balance sheets as long-term debt rather than as deferred revenue. The changes apply to 1991 income statements. In addition, borrowers who have traditionally carried their gold loans at the spot price on the initial drawdown date must now re-measure the loan to reflect the market price on the date financial statements are issued. Although some mining companies have expressed concerns about such changes, they are primarily cosmetic, according to Robert Brouwer, a partner at Toronto chartered accounting firm Peat Marwick Thorne. “They relate more to disclosure issues rather than income measurement,” he said.

Under the old system, companies would report any gold loan liabilities on their balance sheet at spot price for gold on the drawdown date. But while companies must now re-measure their liability at each balance sheet date, any gains or loss would still be deferred and recognized as revenue when the originally hedged production is sold.

As a result, if the spot price fell by US$50 per oz. between the date of initial drawdown and the statement issue date, a borrower is only being asked to record the difference in revenue on its balance sheets, not on their income statement.

However, as the new rules also alter the accounting practices for gold loans that aren’t considered a hedge against future price volatility, they will change the earnings of a small minority of companies.

Gregory Wilkins, chief financial officer at American Barrick Resources (TSE), says he has reservations about the new rules because they refer only to liabilities and not to the changing value of reserves in the ground. “More disclosure will now be required to assist shareholders in understanding what the changes really mean,” he told The Northern Miner. However, he says he doesn’t foresee any changes in the company’s business practices.