IFRS 6: Exploration for and evaluation of mineral resources
Which exploration costs can be capitalised, measuring and classifying exploration and evaluation assets, and when to test them for impairment.
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What it is: A standard for mining, oil and gas companies, covering the costs of searching for minerals and evaluating whether they can be extracted profitably.
The key idea: costs between getting the legal right to explore and showing that extraction is technically feasible and commercially viable can be capitalised as exploration and evaluation (E&E) assets. Costs before the licence are not covered; costs after feasibility are development.
Example. After winning a licence, a company spends £3m on test drilling. That can be an E&E asset. The £0.5m it spent on surveys before getting the licence cannot.
Key words
- Exploration and evaluation
- The search for mineral resources after obtaining legal rights to explore, and determining the technical feasibility and commercial viability of extracting them.Example: Test drilling, sampling, feasibility studies.
- E&E assets
- Exploration and evaluation expenditure recognised as assets under the entity’s accounting policy.Example: Capitalised drilling costs of £3m.
- Technical feasibility and commercial viability
- The point where extraction is shown to be possible and profitable. E&E accounting stops here; the asset is tested for impairment and reclassified.Example: A positive bankable feasibility study.
- Pre-exploration costs
- Costs before the entity has the legal right to explore. Outside IFRS 6.Example: Desk research before applying for a licence.
Learn
Scope: one phase only
| Phase | Standard |
|---|---|
| Before obtaining legal rights to explore | Not IFRS 6 (usually expensed) |
| After legal rights, before feasibility and viability are shown | IFRS 6 |
| Development and extraction | IAS 16, IAS 38 and others |
IFRS 6 gives a temporary relief from part of IAS 8: a company can keep its existing accounting policies for E&E, even if they don’t fully meet the Conceptual Framework, and may change them only if the change makes the statements more relevant and no less reliable.
Measurement and classification
- Initially at cost. Examples: acquiring exploration rights, topographical and geological studies, exploratory drilling, trenching, sampling, and evaluating technical feasibility and commercial viability.
- Afterwards: the cost model or the revaluation model (as in IAS 16 or IAS 38).
- Classify as tangible (for example vehicles, drilling rigs) or intangible (for example drilling rights) according to their nature.
Impairment
Test when facts and circumstances suggest the carrying amount may exceed recoverable amount, for example:
- the exploration right has expired or will soon, and is not expected to be renewed
- no further substantive spending is budgeted or planned
- no commercially viable quantities have been found and activities will stop
- data shows the carrying amount is unlikely to be recovered in full from development or sale
Measure the loss under IAS 36. E&E assets can be grouped into cash-generating units no larger than an operating segment. Also test for impairment before reclassifying when feasibility and viability are shown.
Worked example
A mining company has the following costs this year:
| Cost | £000 | Treatment |
|---|---|---|
| Desk survey before applying for the licence | 500 | Expense: before legal rights |
| Buying the exploration licence | 1,200 | E&E asset (intangible) |
| Exploratory drilling | 3,000 | E&E asset |
| A drilling rig bought for exploration | 800 | E&E asset (tangible) |
| Feasibility study | 400 | E&E asset |
E&E assets total £5.4m. At the year end the licence is about to expire and the company decides not to renew it, because the drilling found no commercially viable reserves. That is an impairment indicator: it tests the assets under IAS 36 and writes them down to recoverable amount (for example, the rig’s resale value).
Practice questions
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