Nickel Strike Mines is a nickel mining company with mines in northern Ontario, Colombia, and Australia. It is a publicly traded company and follows IFRS, and has historically followed industry practice and used units of production as its depreciation policy for all its mines. During 2014, the price of nickel declined significantly, even below the costs of production for the Ontario mines. Consequently, the company has had the Ontario mines closed since early January 2014. It has continued to produce in its Colombian and Australian mines. It is now December 2014 and the controller is trying to decide what accounting issues there are related to the Ontario mines. Since it was a very bad year for the company, and investors are expecting the worst, the controller is considering switching to the declining-balance method of depreciation for the Ontario mine only. This would create a significant depreciation charge for 2014, but in the future, the depreciation costs related to the mine would decrease, resulting in higher net income. In addition, since there were no units produced in the Ontario mine for the year, no depreciation is taken. The controller believes that this is wrong, and that some amount of depreciation should be recorded.
Additionally, the controller is also considering taking as large an impairment loss as possible on all the mines. The controller will do this by assuming a very low nickel price, which will cause the recoverable amounts to be below carrying values for all mines. This impairment loss should likely reverse in the following years, since nickel prices are expected to climb dramatically over the next year, as supplies diminish and as demand from Asian countries increases. With tile reversal of the impairment in 2015, this would show a significant improvement in the company's net income.
Instructions
You are a Nickel Strike Mines board member and have just heard the controller's comments on these issues. Comment on the controller's suggestions. Include in your discussion how the impairment test would be completed and the assumptions required. Also discuss the note disclosure that would be required related to all of these issues.