Accounting Theory and Current Issues

1. This assignment is to be submitted in accordance with assessment policy stated in the Subject
Outline and Student Handbook.
2. It is the responsibility of all students who have their name on the submitted work, to ensure
that the work is in fact done by the group. NB: Incorporating another’s work or ideas into
one’s own work without giving appropriate acknowledgement is academic malfeasance.
Students should review all assignments for plagiarism checking (self-check) on Blackboard
before final submission of hardcopy in the subject. For further details, please refer to the
Subject Outline and Student Handbook.
3. Maximum marks available: 20 marks (e.g. 200/10 = 20).
4. Due date of submission: Friday Week 10, T1 2016
5. Assignment should be of an appropriate length (2,000-4,000 words). Please use “word-count”
and include in report.
KARRICK Gold & Copper Ltd. (KGC Ltd), an Australian mining firm listed on the
Australian Stock Exchange (ASX), has been operating a large Open Cast (Pit) gold and
copper mine in the Star Mountain Range in Papua New Guinea (PNG) for 30 years. The
Star Mountain Range in PNG is very isolated (no roads) and has a wide range of exotic
plants and animals found nowhere else in the world.
Other Information—KGC Ltd. has:
1) Revenues of $30 billion Australian dollars (AUD) a year and, in the absence of new ore
finds, has only seven years of ore reserves.
2) The Net Book Value (NBV) of the PP&E is $16.5 billion AUD and another $5.0 billion
AUD is needed over the next seven years.
3) There is no active prospecting for additional reserves of ore—because the firm’s current
license from the PNG government to mine in that region will expire in eight years.
4) While there have been several rich “shows” of silver and lead ore,1 nothing so far is of
commercial quantity and quality. However, the mine manager expects that over the next
eight years large deposits of commercially-viable silver-and-lead ore will be found within the
mine property or adjacent.
5) The KGC Ltd. employs 3,400 full-time employees in its PNG mine, offices, and processing
plant—3,000 are PNG citizens and reside in the Star Mountain Range. The labourparticipation rate in that region of PNG is 32 percent and the unemployment rate (among
those 32 percent) is 45 percent.
NB: If KGC Ltd. shuts down its mining operations in the Star Mountain Range in PNG, the
unemployment rate among the 32 percent participating in the labour market will rise to 95
percent and there are few if any alternative sources of employment.
6) The KGC Ltd. PNG operations pay $4 billion in royalties to the traditional owners of the
land where they mine and process ore and $6 billion in taxes to the PNG government. Also,
they built and operate the only water-processing plants, grade schools, hospitals, and health
centres in the Star Mountain Range in PNG.
1 A “show” of a mineral is a small finding of noncommercial amounts. A show of a mineral is a strong indicator
that there may be commercial amounts of the ore but is not definitive.
Assessment Value: 20%
7) In the last few decades, the Christian-animist residents of the Indonesian half of the Island of
New Guinea (the Indonesians call their half of the island “Irian Jaya” or “Papua”) have been
agitating for independence from Indonesia (it is estimated that 100,000 of them have died in
the conflict and some of the tribes have resumed headhunting with the Indonesian soldiers
and settlers being targeted. The PNG tribes near the border with Papua are closely related to
the tribes across the border and there is fear the conflict and the police actions by the
Indonesian army will spill into the PNG portion of the Star Mountain Range.
8) A recent collapse of a “tailings” pond dumped 5 million litres of ore-waste sludge into a river
from which two local villages draw their drinking water, fish, hunt, harvest lotus root and
water their taro root, yam and cassava crops.2 While most of the sludge flushed through to
the ocean in a few days, many environmental groups in Australia are screaming that KGC
Ltd. is environmentally irresponsible. The complaints got especially loud and strident after
the General Manager of the PNG mine stated at a public meeting: “First) The sludge will
quickly flush out to sea; Second) “At sea the sludge will be vastly diluted; Third) The
solution to pollution is dilution; Fourth) The peoples of the Star Mountain Range in PNG
depend on the KGC Ltd. operations for most of their jobs, clean potable water, health care,
and education”
9) The cost of remediating the sludge spill (i.e. clean-up costs, fines, offsetting work elsewhere,
and compensating cash payments) is expected to range from $6 billion to $60 billion,
depending on the outcome of a court case in PNG that has been initiated by an ecological
group from Australia. Please note: KGC Ltd. is claiming that the annual benefits of the KGC
Ltd. operations in the Star Mountain Range in PNG offset the harm of the mining and
processing (including the rare sludge spill) by manyfold and that should the mine be
shutdown, the loss to that region and PNG in general would be devastating.
While this case study is adapted from real events and circumstances, names have been
changed to protect the innocent and to avoid lawsuits. Please answer the following
questions using the above information and supplementing it (as needed) with information
from the course, the internet, and other literature. Marks will be awarded for clarity of
thought and succinctness of presentation.
Required (HI6025 ) Marks
a) Should KGC Ltd. revalue its major PPE assets from historic cost to fair-market value?
(Discuss the principles, potential issues, and risks). 30
b) The PP&E is estimated to have a replacement value of $20.5 billion AUD and a value
in use of $12.0 billion AUD under current expected operations (i.e. seven years) but
rises to $30 billion AUD if the contract is renewed for 10 years in addition to the
current seven years and new viable ore bodies are found. What is the “True and Fair”
value of the PP&E? (Explain).
c) Discuss the merits and risks of KGC Ltd. including a “Triple Bottom Line” aspect to
its reporting approach 30
d) Discuss the nature of “Legitimacy” and the importance of KGC Ltd. maintaining
legitimacy in the eyes of the traditional land-owners, the government of PNG, and the
people of Australia.
e) Is the “Legitimacy” of KGC Ltd. at risk and what consequences may KGC Ltd. suffer
if it loses “Legitimacy”. 30
f) Discuss how KGC Ltd. can restore its legitimacy (include a section on the two types
of stakeholder theory in this discussion). 20
g) List the various ways that KGC Ltd. could record the cost of the harm associated with
the sludge spill in its GPFS, discuss the pros-and-cons of each method, choose a
method and defend your choice.3 30
2 The sludge in the tailings ponds of mines are typically acidic and have toxic levels of mercury, arsenic, and other
nasty metals. While the toxicity is relatively low, long-term exposure can create serious chronic health issue.
3 Pros-and-cons = the arguments in favour of and against a method, argument, policy, etc.