OT02030 - Oil Industry accounting: IFRS 6 - exploration for and evaluation of mineral resources

The accounting standard specific to expenditures incurred in the exploration for and evaluation of oil and gas is - for preparers using IFRS, FRS 101 or FRS 102 Section 34.11 (see OT02003) - IFRS 6 Exploration for and Evaluation of Mineral Resources. IFRS 6 was issued in 2004.

The International Accounting Standards Board (“IASB”) decided to develop an IFRS on exploration for and evaluation of mineral resources because:

  • there was no IFRS that specifically addressed the accounting for those activities and
  • they are excluded from the scope of IAS 38 Intangible Assets.

In addition, “mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources” are excluded from the scope of IAS 16 Property, Plant and Equipment.

IFRS 6 makes limited improvements to accounting practices for exploration and evaluation expenditures, without requiring major changes that might be reversed when a more comprehensive review of the accounting is completed. It also specifies when to test exploration and evaluation costs for impairment as well as outlining specific disclosure requirements.

It should be noted that FRS 102, per Section 34.11A, directs that when applying the requirements of IFRS 6, references made to other IFRSs within that standard shall be taken to be references to the relevant section or paragraph within this FRS (102). Accordingly, where applicable, such reference has been made in the guidance below.

Scope

An entity shall apply the IFRS to exploration and evaluation expenditures that it incurs (IFRS 6.3). However, in accordance with IFRS 6.5, the IFRS does not apply to expenditures incurred:

  • before the exploration for and evaluation of mineral resources, such as expenditures incurred before the entity has obtained the legal right to explore a specific area.
  • after the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

Recognition of exploration and evaluation assets

An entity is required to develop an accounting policy for its exploration and evaluation expenditure. IFRS 6 permits an entity to continue to apply its previous accounting policy by exempting it from the requirement of IAS 8.11 and 8.12 to refer to other IFRSs and the Framework for Preparation and Presentation of Financial Statements (The Framework). The accounting policy adopted must still meet the requirement of IAS 8.10 that it is both relevant and reliable. These policies are discussed further in section OT02085.

Measurement at recognition

Exploration and evaluation assets are measured at cost (IFRS 6.8).

Elements of cost of exploration and evaluation assets

The standard provides that an entity shall determine an accounting policy specifying which expenditures are recognised as exploration and evaluation assets and apply the policy consistently. In making this determination, an entity considers the degree to which the expenditure can be associated with finding specific mineral resources. A non-exhaustive list is provided of examples of expenditures that might be included in the initial measurement of exploration and evaluation assets (IAS 6.9) which comprise:

  • acquisition of rights to explore;
  • topographical , geological, geochemical and geophysical studies;
  • exploratory drilling;
  • trenching;
  • sampling and
  • activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource.

Expenditures related to the development of mineral resources shall not be recognised as exploration and evaluation assets. The Framework for Preparation and Presentation of Financial Statements and IAS 38 Intangible Assets provide guidance on the recognition of assets arising from development (IFRS 6.10) and for FRS 102 preparers, chapters 2 and 18.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets gives guidance on the recognition of any obligations for removal and restoration that are incurred during a particular period as a consequence of having undertaken the exploration for and evaluation of mineral resources (IFRS 6.11) and, for FRS 102 preparers the relevant guidance can be found in Section 21 Provisions and Contingencies (see OT02195).

Measurement after recognition

After recognition, an entity shall apply either the cost model or the revaluation model to the exploration and evaluation assets. If the revaluation model is applied (either the model in IAS 16 or the model in IAS 38) it shall be consistent with the classification of the assets (whether tangible or intangible) - IFRS 6.12. The relevant requirements for FRS 102 preparers are contained in Section 17 Property, Plant and Equipment and Section 18 Intangible Assets other than Goodwill. This is further discussed in OT02085.

Presentation

Exploration and evaluation assets are classified as tangible or intangible according to the nature of the assets acquired (IFRS 6.15).

Reclassification of exploration and evaluation assets

An exploration and evaluation asset shall no longer be classified as such when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Exploration and evaluation assets shall be assessed for impairment, and any impairment loss recognised, before reclassification (IFRS 6.17).

Impairment

Exploration and evaluation assets shall be assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount (IFRS 6.18). In this situation, an entity shall measure, present and disclose any resulting impairment loss in accordance with IAS 36 Impairment of Assets and for FRS 102 reporters, Section 27 Impairment of Assets.

The facts or circumstances which might suggest testing for impairment are given (IFRS 6.20) as including (but not limited to):

  • 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.
  • Substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned.
  • Exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area.
  • Sufficient data exists to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.