Minister of Energy and Mineral Resources Regulation No. 11 of 2019, effective since January 1, 2020, prohibits nickel mining companies in Indonesia from exporting nickel ore due to the excessive volume of nickel exports. The primary reason for implementing this policy is to ensure the limited reserve sustainability. The proven reserve for Indonesia’s national nickel commodity is 698 million tons. This amount can only guarantee the supply of nickel ore for refining facilities for approximately 7.3 years (if no new reserves are found). This policy encourages the process of down streaming, enabling processed nickel to generate higher added value and increase national revenue.
Nickel ore is divided into two types: sulfide and laterite. Sulfide nickel ore undergoes concentration processes to increase its nickel content before extraction, while laterite nickel ore is difficult to concentrate due to its complex composition. Laterite nickel ore is divided into two subtypes: limonite and saprolite. The processing methods for limonite and saprolite differ. Limonite is processed using High Pressure Acid Leaching (HPAL) technology, while saprolite is treated with Rotary Kiln Electric Furnace (RKEF) technology.
HPAL involves processing and refining limonite nickel through dissolution in a high-pressure vessel called an autoclave at elevated temperatures. The resulting concentrate solution is then subjected to extraction processes to obtain purer minerals, which are nickel and cobalt. RKEF is a process for treating saprolite nickel, involving drying, calcination, reduction, purification and other steps.
Table 1. Classification of Laterite Nickel Ore
| Nickel Content | Processing | Resulting Product | Largest Producer | |
| Limonite | <1,6% | High Pressure Acid Leaching (HPAL) | Class 1 Nickel Example:Nickel Powder/Sulfate | Maluku |
| Saprolite | >1,6% | Rotary Kiln Electric Furnace (RKEF) | Class 2 Nickel Example:Nickel Pig Iron dan Ferronickel | Sulawesi |
The impact of this regulation is to encourage the establishment of nickel smelters in Indonesia. As of April 2023, there have been 13 nickel smelters constructed, with plans for an additional 17 units. The government also provides tax holiday incentives for nickel smelters, as outlined in Regulation No. 130/PMK.010/2020 concerning the Granting of Corporate Income Tax Reduction Facilities. This tax reduction ranges from 50% to 100% of the payable tax amount and is applicable for a period of 5 to 20 years based on the provided investment.
The nickel industry is highly influenced by fluctuations in the global market prices. These prices are unpredictable due to factors such as global demand, government policies, and raw material costs for nickel production. The production of nickel requires a supply of coal, electricity and crude oil. Costs like coal and crude oil are also subject to global market prices, contributing to uncertainty in nickel pricing.
Realizing sales in the nickel industry typically depends on the prevailing global market prices at that time. Hence, sales contracts include provisions for price adjustments based on the world market prices at the time of the final invoice. The difference between the initial invoice and the market price, in cases like these, cannot be classified as regular trade receivables in accounting records.
Illustration of accounting treatment related to nickel down streaming:
15 December 20X3
Dr Trade Receivable USD 2.200.000
Cr Sales USD 2.200.000
(journal entry to record ferronickel sale)
31 December 20X3
Dr Trade Receivable USD 50.000
Cr Difference in fair valuation of trade receivable USD 50.000
(journal entry to record fair value of receivable as of reporting date)
2 February 20X4
Dr Bank USD 2.300.000
Cr Difference in fair valuation of trade receivable USD 50.000
Cr Trade Receivable USD 2.250.000
(journal entry for ferronickel payment)
The above accounting treatment complies with Indonesian Statement of Financial Accounting Standards (PSAK) 71, adopted from International Financial Reporting Standard (IFRS) 9, on Financial Instruments, describing Embedded Derivatives as a component of hybrid contracts that includes non-derivative host contracts, resulting in some cash flows that are similar to those of standalone derivatives.
Embedded Derivatives cause some or all of the cash flows required by the contract to be modified by a designated variable, including, but not limited to, interest rates, financial instrument prices, commodity prices, foreign exchange rates, index prices or interest rates, credit ratings or credit index, or other variables. For non-financial variables, these variables are not specific to parties to the contract. Derivatives attached to financial instruments but not separately transferable from the host contract or with different counterparties are not considered embedded derivatives but are separate financial instruments.
If the hybrid contract contains a host contract that qualifies as an asset within the scope of this statement, the entity applies the requirements for the entire hybrid contract, such as:
- requiring the entity to classify financial assets based on the entity’s business model to manage financial assets, except for financial assets measured at fair value through profit or loss. The entity assesses whether its financial assets meet the business model criteria as determined by the entity’s key management personnel.
- requiring an entity to classify financial assets based on the contractual cash flow characteristics as either solely payments of principal and interest (SPPI) or the contractual cash flow characteristics to achieve the objective of holding contractual cash flows or both the objective of holding contractual cash flows and selling financial assets. The entity is required to determine whether the contractual cash flows are solely payments of principal and interest.
Based on the above paragraph, receivables from nickel sales measured using the nickel price index are categorized as Embedded Derivatives.
Entity Business Model
Entities are required to classify financial assets based on the business model and contractual cash flow characteristics, whether solely payments of principal and interest (SPPI). Based on these two factors, financial assets are classified into: 1) Amortized Cost when meeting SPPI criteria and the business model aims to collect contractual cash flows, 2) Fair Value through Other Comprehensive Income (FVOCI) when meeting SPPI criteria and the business model aims to collect and sell contractual cash flows, and 3) Fair Value through Profit and Loss (FVTPL) when not fitting the previous categories.
Companies with receivables measured using the nickel price index fall into the third category, which is financial assets measured at fair value through profit or loss, as they do not fit into categories 1 and 2.
Impairment
According to PSAK 71, entities apply impairment requirements for recognition and measurement of loss allowances for financial assets measured at fair value through other comprehensive income. However, the loss allowances are recognized in other comprehensive income and do not reduce the carrying amount of financial assets in the financial statements. Receivables from nickel sales measured using the nickel price index are not impaired because they fall into the third category, which is financial assets measured at fair value through profit or loss.
This is due to the fact that the loans granted and the receivables are non-derivative financial assets with fixed or predetermined payments that do not have an active market quotation, other than being held for trading or initially designated as financial assets measured at fair value through profit or loss or available for sale.
Write-Off
According to PSAK 71, entities directly reduce the gross carrying amount of financial assets when the entity no longer has reasonable expectations of recovering the financial asset as a whole or partially. Write-off is the event of discontinuing the recognition of a financial asset. Because financial asset impairment is not applied, if there is a possibility that the financial asset cannot be recovered, management needs to perform a write-off or directly reduce the value of the financial asset.
