Overview of IFRS 6

IFRS 6 Exploration for and Evaluation of Mineral Resources specifies the financial reporting for the exploration for and evaluation of mineral resources. IFRS 6 has the effect of allowing entities adopting the Standard for the first time to use accounting policies for exploration and evaluation assets that were applied before adopting IFRS Standards. It also modifies impairment testing of exploration and evaluation assets by introducing different impairment indicators and allowing the carrying amount to be tested at an aggregate level (not greater than a segment).

IAS 36 Impairment of Assets applies to the accounting for the impairment of all assets, including exploration and evaluation (E&E) assets.1 – IAS 36 prescribes the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount, which is the higher of the amount to be recovered through use of the asset and the amount to be recovered through sale of the asset.

If an asset is carried at more than its recoverable amount, the asset is impaired and IAS 36 requires an entity to recognize an impairment loss. IAS 36 also specifies when an entity should reverse an impairment loss.

IFRS 6 was introduced in 2004 as a ‘temporary’ measure. IFRS 6 does not deal with many of the most challenging accounting issues faced by entities in the extractive industries, not least of which is the measurement of reserves (e.g., oil reserves) and changes in reserve balances. The Standard focuses only on the activities undertaken during the exploration and evaluation phase.

The Board’s research ‘pipeline’ includes a planned project to assess whether the Board should introduce accounting requirements for exploration, evaluation, development and production of minerals, and oil and gas. This project is not currently active, but the Board expects to start work on it before the next Agenda Consultation, which is expected to begin around 2021.

Recent amendments to IFRS 6

There have been no amendments to IFRS 6 since March 2018.

It is important to note that although IAS 36 applies to the accounting for the impairment of E&E assets, IFRS 6 Exploration for and Evaluation of Mineral Resources modifies the requirements in IAS 36 with respect to: • the indications of impairment; and • the level at which impairment is tested.

Scope

Scope – general

IFRS 6 applies to exploration and evaluation expenditures incurred by an entity that engages in the exploration for and the evaluation of mineral resources. It does not apply to any other expenditures, or any other aspects of accounting by such an entity.

Appendix A of IFRS 6 provides the following definitions.

• Exploration and evaluation expenditures are “expenditures incurred by an entity in connection with the exploration for and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable”.
• Exploration for and evaluation of mineral resources is “the search for mineral resources, including minerals, oil, natural gas and similar non-regenerative resources, after the entity has obtained legal rights to explore in a specific area, as well as the determination of the technical feasibility and commercial viability of extracting the mineral resource”.
• Exploration and evaluation assets are “exploration and evaluation expenditures recognized as assets in accordance with the entity’s accounting policy”.

Scope – exclusions

Specifically, IFRS 6 does not apply to:

• expenditures incurred before the exploration for and evaluation of mineral resources (e.g., expenditures incurred before the entity has obtained the legal rights to explore a specific area); or
• expenditures incurred after the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

Application of IFRS 6 for other activities within extractive industries Often, the process of extracting geological assets from a productive mine or oil well begins with prospecting activities when an entity looks for suitable property to exploit. Prospecting activities are generally carried out without ownership or legal rights to any specific piece of property and are very similar to the pure research stage for other entities engaged in research and development. The expenditures associated with prospecting activities are not within the scope of IFRS 6 because the activities are undertaken before legal rights to explore a specific area have been obtained. Once a prospect is identified, rights to explore and/or exploit the area are often obtained and the entity undertakes a range of activities (which might include obtaining scoping studies, drilling, sampling etc.) to determine whether the site is worthy of exploitation. These are the ‘exploration and evaluation’ activities contemplated by IFRS 6. Once the site is judged to be worthy of exploitation, the expenditures incurred thereafter in connection with the project are no longer within the scope of IFRS 6. Expenditures incurred during stages other than the exploration and evaluation stage are not addressed in IFRS 6. However, the Board has noted that, notwithstanding the lack of a specific IFRS to address these areas, it expects entities to be able to develop appropriate accounting policies by applying existing IFRS Standards, the definitions of assets and expenses from the Conceptual Framework and the general principles for asset recognition in IAS 16 and IAS 38. Further, the Basis for Conclusions notes that pre-acquisition expenditures that are directly attributable to the acquisition of an intangible asset (e.g., those that are directly attributable to the acquisition of an operating license) may need to be recognized as part of the intangible asset in accordance with IAS 38. When developing accounting policies for activities prior to and after exploration and evaluation (i.e., for activities prior to obtaining exploration rights and for development and exploitation activities), entities are required to apply the hierarchy of IAS 8 in full. Therefore, when adopting IFRS Standards for the first time, an entity is only permitted to continue its previous GAAP practices for development and exploitation activities if those practices comply with the requirements of the appropriate IFRS Standards. This principle was confirmed by the IFRIC (now the IFRS Interpretations Committee) in the January 2006 IFRIC Update.

Exploration and evaluation activities for geothermal energy

Application of IFRS 6 to exploration and evaluation activities for geothermal energy The exploration for and evaluation of possible sources of geothermal energy involves searching for viable active geothermal regions with the goal of building a geothermal power plant. In this regard, exploration and evaluation activities for geothermal energy share the majority, if not all, of the characteristics of activities in the extractives industries. Although geothermal energy is sometimes referred to as a ‘regenerative’ resource, the geothermal resource in a specific location may be non-regenerative. This is the case when, for example, the amount of steam in a reservoir that can be extracted using existing technology is limited. Such geothermal resources would be viewed as ‘similar non-regenerative resources’ as contemplated in Appendix A of IFRS 6 and, therefore, exploration and evaluation expenditures in respect of such resources should be accounted for in accordance with IFRS 6. In contrast, if a geothermal resource is viewed as regenerative on the basis of specific facts and circumstances, any related exploration and evaluation expenditures do not fall within the scope of IFRS 6. It would also be inappropriate to apply IFRS 6 by analogy using the hierarchy in IAS 8 because IFRS 6 provides exemptions from applying other IFRS Standards as a matter of exception (resulting in certain items of expenditure being eligible for capitalization even though they do not meet the definition of an asset), and its application should be strictly limited to the activities that are within the scope of IFRS 6.

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

IFRIC 20 addresses the appropriate accounting for costs of removing waste material to gain access to mineral ore deposits incurred during the production phase of a surface mine.