Stripping costs – my take on the issue (maybe not IFRIC’s)

Well, here’s one I’ve been saving for the holiday season…

Someone suggested I write an article on IFRIC’s interpretation from a few years ago on accounting for stripping costs, and although I never bothered to read it, I’m so confident of its contents that I feel able to write a synopsis regardless. I mean, I was way ahead of them on thinking this issue through, and I know you all were too. The costs of stripping fall of course into two categories: the costs to the stripper and the costs to the, so to speak, strippee. Let’s go through them separately here.

The primary direct costs to the stripper are by definition skimpy, although of course they may be subject to the core principle of fashion – the less substantial something looks, the more it cost. These items should be capitalized because they’re not consumed immediately to generate revenue, although the depreciation rate can be exceptionally hard to track (first you see them, then you don’t see them, later on you see them again, and so on). The risk of impairment is exceptionally high; if faced with a rowdy clientele, it may be necessary to test for impairment every twenty minutes or so. Other direct costs are mostly expensed as incurred, although the costs of developing and maintaining the required disdainful stare may be capitalized as an intangible asset.

The costs to the consumer, regardless of their monetary amount, always meet a materiality threshold in that the key user of the reports (the consumer’s spouse) would always find those costs relevant to decision-making. However, they also fall into the rare category of costs where disclosure not only could, but almost certainly would be seriously prejudicial to the consumer’s interests. Consequently, IFRS puts its primary emphasis on hiding the facts, whatever it takes. If the expenditures are detected and therefore require explanation, IFRS emphasizes the creativity of the accompanying disclosure, not its accuracy. For example, a colourful account of having one’s pocket picked would normally constitute reasonable disclosure. A heartwarming account of donating the money to charity would be even better disclosure, but likely more susceptible to being immediately assessed as a ridiculous lie (especially in the absence of a receipt).

Normally, of course, the anticipated costs of future stripping consumption would be recognized in those future periods as incurred. However, in some situations, they may constitute constructive obligations, in that the consumer has indicated an intention to incur those costs and has no practical discretion to avoid them. This is why you should never let yourself fall under the spell of a stripper (or so this newly homeless person told me).

You may observe I wrote the preceding paragraphs in a scientifically gender-neutral manner, but of course in practice, strippers tend to fall into one gender or the other (funny how that works). This raises a collection of more detailed issues, which I imagine the IFRIC would have been too embarrassed to address, and I for one won’t criticize them for that. And Bambi and Moonlight wouldn’t criticize them for it either, based on my conversations with them last night. They did criticize me though, for suggesting they might both be regarded as comprising a host contract and a set of embedded derivatives. We talked about that a lot, not that you need to know.

Anyway, some theorists argue that the traditional accounting framework, still based primarily on historical costs, fails to capture the true costs of stripping, much as it fails to capture, say, the cost of environmental pollution (some argue that stripping is, indeed, a subcategory of environmental pollution). This is a serious objection, with many parallels. For example, it’s been demonstrated that if corporations were to recognize the liability resulting from the benign idiocy inherent within their structures (measured by such criteria as the workforce’s degree of fidelity to the Toronto Maple Leafs, its enthusiasm for Adam Sandler movies, or its belief that Elvis still walks among us), the value of their equity would in many instances be wiped out. Of course, one encounters idiots far more often than strippers (at least, as far as you can tell superficially), but the same basic point holds. Forward-minded accountants should commend the IFRIC on the work done to date in this area, while urging the IASB to grab the remaining stripping issues with both hands, study carefully the contours of the subject, and ensure it peels away all obscuring layers. Full transparency demands no less.

PS Just before pressing the button on this, I decided after all to take a quick glance at the IFRIC interpretation. Well, my face certainly is red, I had it completely wrong – it’s actually some dull-ass mining issue! Oops! But anyway, I can’t let all my deep thinking go to waste, so I’ll have to post it anyway. Happy new year!

(The opinions expressed are solely those of the author, although not necessarily those of the author in his right mind…)

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