Measurement at initial recognition

Exploration and evaluation assets to be measured on initial recognition at cost

IFRS 6 requires exploration and evaluation assets to be measured on initial recognition at cost.

An entity should develop an accounting policy which specifies the types of expenditures that it recognizes as exploration and evaluation assets. The policy should be applied consistently. The determination as to what qualifies as eligible expenditure should be based on an assessment of how closely associated the expenditure is with finding specific mineral resources. IFRS 6 provides the following non-exhaustive list of examples of expenditures that an entity might consider to be included in the initial measurement of exploration and evaluation assets:

• 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.

Entities are permitted but not required to capitalize exploration and evaluation expenditures Note that IFRS 6 does not require entities to capitalize exploration and evaluation expenditures. Rather, when specified conditions are met, IFRS 6 permits entities to continue to apply the accounting policies followed with respect to exploration and evaluation expenditure before adopting the Standard. For example, an entity’s policy may be to recognize expenditures relating to feasibility studies and sampling as an asset or as an expense, or a mixture of the two depending on the nature of the expenditure. IFRS 6 only requires that the accounting policy developed be applied consistently and that, if the costs are to be recognized as an asset, the entity should consider the degree to which the expenditure can be associated with finding specific mineral resources.

Expenditures related to the development of mineral resources should not be recognized as exploration and evaluation assets; instead, entities are required to apply the Conceptual Framework and IAS 38 to determine an appropriate accounting policy for such amounts.

Meaning of ‘expenditure on the development of mineral resources’ IFRS 6 does not define what constitutes ‘development’ on the basis that such activities are beyond its scope. However, IFRS 6 is clear that the development phase begins after the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

An entity should recognize any obligations for removal and restoration that are incurred as a result of the exploration for and evaluation of mineral resources. The obligation should be recognized in accordance with IAS 37.

Capitalization of general administrative and overhead costs

Capitalization of general administrative and overhead costs General administrative and overhead costs are not included in the list of examples of expenditures that an entity might consider to be included in the initial measurement of exploration and evaluation assets. However, IFRS 6 does not preclude the inclusion of such costs in the carrying amount of an exploration and evaluation asset. When debating whether such costs should be considered to be part of exploration and evaluation assets, the Board noted that inconsistency exists with respect to the treatment of such costs under different IFRS Standards and that IFRS 6 was not the appropriate place to try to resolve the issue. Accordingly, the Board decided that the treatment of such expenditures is a matter of accounting policy choice. However, the accounting policy choice should be considered in light of the requirement of IFRS 6  for an entity to consider the degree to which expenditure can be associated with finding specific mineral resources.

Borrowing costs associated with exploration and evaluation expenditures

Borrowing costs associated with exploration and evaluation expenditures Notwithstanding the authority under IFRS 6  to determine which expenditures should be included in the measurement of exploration and evaluation assets, the question arises as to whether, if an entity is engaged in exploration and evaluation activities and it incurs borrowing costs, it is required to apply IAS 23 and, therefore, capitalize borrowing costs incurred in relation to qualifying assets. The requirements of IAS 23 do not take precedence over the choice available under IFRS 6. Therefore, an entity may choose whether to capitalize borrowing costs as part of the cost of exploration and evaluation assets. An entity should develop an accounting policy for the treatment of exploration and evaluation expenditures, including borrowing costs, and apply it consistently. Judgement should be exercised to ensure that the treatment of borrowing costs under IFRS 6 is logical given the entity’s policy with respect to other exploration and evaluation expenditures. The guidance in IFRS 6:9  requiring an entity to consider the degree to which expenditures can be associated with finding specific mineral resources must also be carefully considered when determining the amount of borrowing costs that may be capitalized.

Measurement after recognition

An entity should apply either the cost model or the revaluation model after initial recognition. If the revaluation model is adopted, the basis for revaluing the asset at the end of each reporting period (i.e., either the model in IAS 16 or the model in IAS 38), should be consistent with the classification of the asset.

The revaluation model in IAS 38 may only be used when there is an ‘active market’ for the asset in question. Given the nature of exploration and evaluation assets, it is not likely that application of the revaluation model will be possible when exploration and evaluation assets have been classified as intangible.

The Basis of Conclusions on IFRS 6 states explicitly that any exploration and evaluation assets acquired in a business combination should be accounted for at fair value in accordance with IFRS 3.

Changes in accounting policies

An entity is permitted to change its accounting policies for exploration and evaluation expenditures if the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant. The assessment of relevance and reliability should be made with reference to the criteria in IAS 8.

In order to change its accounting policies for exploration and evaluation expenditures, an entity should demonstrate that the change will bring its financial statements closer to meeting the criteria in IAS 8, but it is not necessary to achieve full compliance with those criteria.

IAS 8 provides specific guidance in relation to relevance and reliability. Although an entity must demonstrate compliance with specific aspects of IAS 8 before changing an accounting policy, this requirement does not override the exemptions discussed.

The Basis for Conclusions on IFRS 6 clarifies that a change in what is deemed to be expenditure qualifying for recognition as an exploration and evaluation asset should be treated as a change in accounting policy.

Change in accounting policy – example Entity X drills for and extracts oil from deep sea beds. It adopted IFRS Standards for the first time on 1 January 20X5. Prior to adopting IFRS Standards, as permitted by its previous GAAP, Entity X capitalized all expenditures related to exploration and evaluation activities. This accounting policy was carried forward on transition to IFRS Standards in accordance with the requirements of IFRS 6. Subsequently, Entity X discovers that most of its direct competitors, on transition to IFRS Standards, have adopted a policy of capitalizing costs only when a drilling effort has been successful and an oil reserve has been found. Entity X believes that its financial statements will be more relevant for users if it also adopts this policy. Under IFRS 6:13, Entity X may change its accounting policy as long as it can establish that the change provides more relevant, and no less reliable (or more reliable and no less relevant), information to users; relevance and reliability should be assessed with reference to the criteria in IAS 8. Entity X is not required to apply the requirements of IAS 8 before making the accounting policy change; for example, Entity X does not need to consider the requirements and guidance in other IFRS Standards dealing with similar issues or recent pronouncements of other standard-setting bodies.