Background

In December 2004, the IASB issued IFRS 6, Exploration for and Evaluation of Mineral Resources, which proposed an interim solution designed to facilitate compliance with IFRS by entities reporting exploration and evaluation assets, without making substantial changes to existing accounting practices. The reasons cited by the IASB for the development of an interim standard addressing exploration for and evaluation of mineral resources were as follows:

1. There were no extant IFRS that specifically addressed the exploration for and evaluation of mineral resources, which had been excluded from the scope of IAS 38. Furthermore, mineral rights and mineral resources such as oil, natural gas and similar non-regenerative resources were excluded from the scope of IAS 16. Accordingly, a reporting entity having such assets and activities is required to determine accounting policies for such expenditures in accordance with IAS 8.
2. There were alternative views on how the exploration for and evaluation of mineral resources and, particularly, the recognition of exploration and evaluation assets, were required to be accounted for under IFRS.
3. Accounting practices for exploration and evaluation expenditures under various national GAAP standards were quite diverse, and often differed from practices in other sectors for items that could have been considered similar (e.g., the accounting practices for research costs under IAS 38).
4. Exploration and evaluation expenditures represented a significant cost to entities engaged in extractive activities.

IFRS 6 in Greater Detail

IFRS 6 sets forth a set of generalised principles for reporting entities that have activities involving the exploration for and evaluation of mineral resources. These principles are as follows:

1. IFRS fully applies to these entities, except when they are specifically excluded from the scope of a given standard.
2. Reporting entities may continue employing their existing accounting policies to account for exploration and evaluation assets, but any change in accounting will have to qualify under the criteria set forth by IAS 8.
3. A reporting entity that recognises exploration and evaluation assets must assess those assets for impairment when the facts and circumstances surrounding the assets suggest that the carrying amount of the assets may exceed their recoverable amounts. However, the entity may conduct the assessment at the level of “a cash-generating unit for exploration and evaluation assets,” rather than at the level otherwise required by IAS 36. As set out in IFRS 6, this is a higher level of aggregation than would have been the case under a strict application of the criteria in IAS 36. A cash-generating unit for exploration and evaluation assets can be no larger than an operating segment as determined by IFRS 8, Operating Segments.

Thus, according to IFRS 6, entities that have assets used for exploration and evaluation of mineral resources are to report under IFRS, but certain assets may be subject to alternative measurement requirements.

Cash-Generating Units for Exploration and Evaluation Assets

The most significant aspect of IFRS 6 concerns its establishment of a unique definition of cash-generating units for impairment testing. It created a different level of aggregation for mineral exploration and evaluation assets, when compared to all other assets subject to impairment considerations under IAS 36. The reason for this distinction is that the IASB was concerned that requiring entities to use the standard definition of a cash-generating unit, as set out in IAS 36, when assessing exploration and evaluation assets for impairment might have negated the effects of the other aspects of the proposal, thereby resulting in the inappropriate recognition of impairment losses under certain circumstances. Specifically, the IASB was of the opinion that the standard definition of a cash-generating unit could cause there to be uncertainty about whether the reporting entity's existing accounting policies were consistent with IFRS, because exploration and evaluation assets would often not be expected to:

1. Be the subject of future cash inflow and outflow projections relating to the development of the project, on a reasonable and consistent basis, without being heavily discounted because of uncertainty and lead times;
2. Have a determinable net selling price; or
3. Be readily identifiable with other assets that generate cash inflows as a specific cash-generating unit.

In the IASB's view, the implications were that an exploration and evaluation asset would often be deemed to be impaired, inappropriately, if the IAS 36 definition of a cash-generating unit was applied without at least the potential for modification.

IFRS 6 provides that the reporting entity is to determine an accounting policy for allocating exploration and evaluation assets to cash-generating units or groups of cash-generating units for the purpose of assessing those assets for impairment as that need arises. Accordingly, each cash-generating unit or group of units to which an exploration and evaluation asset is allocated is not to be larger than an operating segment, determined in accordance with IFRS 8 (See discussion in Chapter 28). The level identified by the entity for the purposes of testing exploration and evaluation assets for impairment can comprise one or more cash-generating units.

IFRS 6 provides that exploration and evaluation assets are to be assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset might exceed the recoverable amount, as with other impairment testing prescribed by IAS 36. When facts and circumstances indicate that the carrying amount might exceed the respective recoverable amount, the reporting entity is required to measure, present and disclose any resulting impairment loss in accordance with IAS 36, with the exception that the extent of aggregation may be greater than for other assets.

In addition to the criteria set out in IAS 36, IFRS 6 identifies certain indications that impairment may have occurred regarding the exploration and evaluation assets. It states that one or more of the following facts and circumstances indicate that the reporting entity should test exploration and evaluation assets for impairment:

1. The period for which the entity has the right to explore in the specific area has expired during the period or will expire in the near future and is not expected to be renewed.
2. Substantive expenditure by the entity on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned.
3. Exploration for and evaluation of mineral resources in the specific area have not resulted in the discovery of commercially viable quantities of mineral resources, and accordingly the reporting entity decided to discontinue such activities in the specific area.
4. Sufficient data exist to suggest that, although a development in the specific area is likely to proceed, the carrying amount from the exploration and evaluation asset is unlikely to be fully recovered.

If testing identifies impairment, the consequent adjustment of carrying amounts to the lower, impaired value results in a charge to current operating results, just as described by IAS 36 (discussed in Chapter 13).

Categorisation

IFRS 6 provides a listing of assets that would fall within the definition of exploration and evaluation expenditures. These assets are those that are related to the following activities:

1. Acquisition of rights to explore;
2. Topographical, geological, geochemical and geophysical studies;
3. Exploratory drilling;
4. Trenching;
5. Sampling; and
6. Activities in relation to evaluating technical feasibility and commercial viability of extracting a mineral resource.

The qualifying expenditures notably exclude those that are incurred in connection with the development of a mineral resource once technical feasibility and commercial viability of extracting a mineral resource have been established. Additionally, any administration and other general overhead costs are explicitly excluded from the definition of qualifying expenditures.

Availability of Cost or Revaluation Models

Consistent with IAS 16, IFRS 6 requires initial recognition of exploration and evaluation assets based on actual cost, but subsequent recognition can be done using either the historical cost model or the revaluation model. The standard does not offer guidance regarding these accounting treatments and the requirements of IAS 16 or IAS 38 should be applied. (See discussion in Chapters 9 and 11.)

Financial Statement Classification

IFRS 6 provides that the reporting entity is to classify exploration and evaluation assets as tangible or intangible according to the nature of the assets acquired and apply the classification consistently. It notes that certain exploration and evaluation assets, such as drilling rights, have traditionally been considered intangible assets, while other assets have historically been identified as tangible (such as vehicles and drilling rigs). The standard states that, to the extent that a tangible asset is consumed in developing an intangible asset, the amount reflecting that consumption (which would otherwise be reported as depreciation) becomes part of the cost of the intangible asset. Using a tangible asset to develop an intangible asset, however, does not warrant classifying the tangible asset as an intangible asset.

In the statement of financial position, exploration and evaluation assets are to be presented as a separate class of assets. Disclosures required by IAS 16 or IAS 38 must be made depending on how the exploration and evaluation assets are classified.

IFRS 6 only addresses exploration and evaluation. It holds that once the technical feasibility and commercial viability of extracting a mineral resource have been demonstrated, exploration and evaluation assets are no longer to be classified as such. At that point, the exploration and evaluation assets are to be assessed for impairment, and any impairment loss recognised, before reclassification.

Disclosure Requirements under IFRS 6

A reporting entity is required to disclose information that identifies and explains the amounts recognised in its financial statements that pertain to the exploration for and evaluation of mineral resources. This could be accomplished by disclosing:

1. Its accounting policies for exploration and evaluation expenditures, including the recognition of exploration and evaluation assets;
2. The amounts of assets, liabilities, income and expense and operating and investment cash flows arising from the exploration for and evaluation of mineral resources.

The Exposure Draft preceding IFRS 6 had proposed that the mandatory disclosures identify the level at which the entity assesses exploration and evaluation assets for impairment. While this is not set forth in IFRS 6, it is obviously good practice, and is therefore strongly recommended by the authors.

Accounting policy: exploration and evaluation expenditure

Exploration and evaluation expenditure is expensed in the year in which it is incurred. Exploration expenditure is the cost of exploring for mineral resources other than that occurring at existing operations and projects and comprises geological and geophysical studies, exploratory drilling and sampling and mineral resource development. Evaluation expenditure includes the cost of conceptual and pre-feasibility studies and evaluation of mineral resources at existing operations. When a decision is taken that a mining project is technically feasible and commercially viable, usually after a pre-feasibility study has been completed, subsequent directly attributable expenditure, including feasibility study costs, are considered development expenditure and are capitalised within property, plant and equipment. Exploration properties acquired are recognised on the balance sheet when management considers that their value is recoverable. These properties are measured at cost less any accumulated impairment losses.

Accounting judgements: deferred stripping

In certain mining operations, rock or soil overlying a mineral deposit, known as overburden, and other waste materials must be removed to access the orebody. The process of removing overburden and other mine waste materials is referred to as stripping. The group defers stripping costs onto the balance sheet where they are considered to improve access to ore in future periods. Where the amount to be capitalised cannot be specifically identified it is determined based on the volume of waste extracted compared with expected volume for the identified component of the orebody. This determination is dependent on an individual mine's design and life of mine plan and therefore changes to the design or life of mine plan will result in changes to these estimates. Identification of the components of a mine's orebody is made by reference to the life of mine plan. The assessment depends on a range of factors, including each mine's specific operational features and materiality.

Accounting policy: deferred stripping

The removal of rock or soil overlying a mineral deposit, overburden and other waste minerals is often necessary during the initial development of an open pit mine site to access the orebody. The process of removing overburden and other mine waste materials is referred to as stripping. The directly attributable cost of this activity is capitalised in full within “Mining properties and leases,” until the point at which the mine is considered to be capable of operating in the manner intended by management. This is classified as expansionary capital expenditure, within investing cash flows.

The removal of waste material after the point at which depreciation commences is referred to as production stripping. When the waste removal activity improves access to ore extracted in the current period, the costs of production stripping are charged to the income statement as operating costs in accordance with the principles of IAS 2, Inventories.

Where production stripping activity both produces inventory and improves access to ore in future periods the associated costs of waste removal are allocated between the two elements. The portion that benefits future ore extraction is capitalised within “Mining properties and leases.” This is classified as stripping and development capital expenditure, within investing cash flows. If the amount to be capitalised cannot be specifically identified it is determined based on the volume of the waste extracted compared with expected volume for the identified component of the orebody. The determination is dependent on an individual mine's design and life of mine plan and therefore changes to the design or life of mine plan will result in changes to these estimates. Identification of the components of a mine's orebody is made by reference to the life of mine plan. The assessment depends on a range of factors, including each mine's specific operational features and materiality.

In certain instances, significant levels of waste removal may occur during the production phase with little or no associated production. This may occur at both open pit and underground mines, for example longwall development.

The cost of this waste removal is capitalised in full to “Mining properties and leases.”

All amounts capitalised in respect of waste removal are depreciated using the unit of production method for the component of the orebody to which they relate, consistent with depreciation of property, plant and equipment.

The effects of changes to the life of mine plan on the expected cost of waste removal or remaining ore reserves for a component are accounted for prospectively as a change in estimate.

The IASB has decided to open a research project on extractive industries again to assess whether accounting requirements for exploration, evaluation, development and production of minerals, and oil and gas, should be introduced. No documents are published yet.