Recognition and measurement

Impairment must be considered for exploration and evaluation assets, in keeping with the requirements for all other assets recognized under IFRS Standards. However, due to the special nature of exploration and evaluation assets, IFRS 6 sets out specific requirements which limit the need to test for impairment to circumstances when there are indicators of impairment. This is true in all circumstances except when exploration and evaluation assets are reclassified, as discussed.

In many cases, an entity engaged in the exploration and evaluation phase of a project will not be generating cash inflows from the project. Frequently, the exploration and evaluation activities have not even reached a stage where there is enough information to estimate the future cash flows that might be eventually generated by the project.

Accordingly, IFRS 6 provides special relief by not requiring exploration and evaluation assets to be assessed for impairment annually; instead, an impairment assessment is required only when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. When such facts and circumstances exist, an entity is required to measure, present and disclose any impairment loss in accordance with IAS 36, except that IFRS 6 sets out specific requirements regarding the level at which exploration and evaluation assets are assessed for impairment.

IFRS 6 sets out specific impairment indicators to be considered for exploration and evaluation assets (instead of the indicators listed in IAS 36). Exploration and evaluation assets should be tested for impairment if one or more of the following facts and circumstances is present.

• 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 exist 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.

The Standard notes that the above list is not exhaustive. In any of the circumstances listed, or in similar circumstances, IFRS 6 requires an entity to perform an impairment test in accordance with IAS 36 and to recognize any resultant impairment loss as an expense.

Issue How do the modifications in IFRS 6 affect the assessment of E&E assets for impairment? Viewpoints Indications of Impairment IFRS 6 requires E&E assets to be assessed for impairment when facts and circumstances suggest that the carrying amount of an E&E asset may exceed its recoverable amount. According to IFRS 6, one or more of the following facts and circumstances indicate that an entity should test E&E assets for impairment: a. 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. b. substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned. c. 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. d. sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the E&E asset is unlikely to be recovered in full from successful development or by sale. IFRS 6 clearly states that this list is not exhaustive. For example, the following additional facts and circumstances may also indicate that an entity should test E&E assets for impairment: • a significant drop in mineral prices; • a significant deterioration in the availability of equity financing; • a delay in E&E activity; or • a substantial decline in the share price of the mining entity. For the purpose of assessing E&E assets for impairment, an entity applies guidance in IFRS 6 rather than IAS 36. Unlike IAS 36, IFRS 6 does not explicitly require impairment testing of E&E assets when the carrying amount of the net assets of an entity is more than its market capitalization. However, market capitalization should not be ignored. When market capitalization is less than the carrying amount of an entity’s net assets, an entity should carefully consider the reasons for this occurrence. This fact could be viewed as an indication that E&E assets might be impaired because of other reasons. Market capitalization metrics alone would not be indicative of impairment. An entity should then carefully consider the other, more relevant facts and circumstances (i.e., those listed in paragraph 20 of IFRS 6) to determine if an impairment test is required. Level at Which Impairment Is Tested An entity is required by IFRS 6 to determine an accounting policy for allocating E&E assets to cash-generating units (CGUs) or groups of CGUs for the purpose of assessing such assets for impairment. Therefore, entities may test E&E assets for impairment at the level of reporting that reflects the way they manage their operations. IAS 36 defines an asset’s CGU as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. A mining entity may, for example, identify the following as a CGU: • a contiguous ore body or a property in the E&E phase; or • a mine in the development or production phase. E&E assets do not currently generate cash inflows; however, they may form a separate CGU when there is sufficient information about the mineral resources to estimate future cash inflows. In accordance with IFRS 6, the level identified by the entity for the purposes of testing E&E assets for impairment may comprise one or more CGUs. In many cases, there is insufficient information about the mineral resources to estimate future cash inflows; therefore, E&E assets are often allocated to CGUs or groups of CGUs for the purpose of assessing such assets for impairment. This allocation may be based on the way in which the entity manages its operations, for example by mineral within a specific geographic area. It is important to note that IFRS 6 stipulates that each CGU or group of CGUs to which an E&E asset is allocated must not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments.

Level at which exploration and evaluation assets are assessed for impairment

An entity should 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 such assets for impairment. Each cash-generating unit or group of units to which an exploration and evaluation asset is allocated should not be larger than an operating segment determined in accordance with IFRS 8. The level identified by the entity for the purposes of testing exploration and evaluation assets for impairment may comprise one or more cash-generating units.

Application of requirements regarding the level at which exploration and evaluation assets are assessed for impairment The impairment testing requirements within IFRS 6 provide some flexibility compared to the requirements of IAS 36. Under IFRS 6, the level at which impairment testing is performed is a matter of accounting policy choice and may comprise one or more cash-generating units – it need not be the smallest identifiable group of assets that generates largely independent cash inflows. Management should consider carefully what the appropriate level of monitoring and reporting is for the entity in order to ensure that the financial statements provide reliable and relevant information that properly reflects the true economic nature of the entity. Once the entity establishes its policy for determining cash-generating units, the allocation of exploration and evaluation assets should be carried out. The amounts allocated should include not only the assets but also, in the calculation of fair value less cost of disposal, liabilities such as provisions for decommissioning costs and remediation, to the extent they would be transferred with the assets. An entity might choose to aggregate exploration and evaluation sites into a portfolio based on attributes that are determined as an accounting policy choice. For example, an entity might choose to aggregate sites by type of resource, geographical location, size etc. It is possible, although unlikely, that all sites might be aggregated into one group of cash-generating units (as long as it is not larger than an operating segment); at the other end of the spectrum, an entity might choose to identify each site that meets the test of being a cash-generating unit on a stand-alone basis. When the specific requirements of IAS 36 are met, entities are required to reverse previously recognized impairment losses.