Classification of exploration and evaluation assets

Exploration and evaluation assets may be either tangible or intangible in nature, depending on the type of expenditure in question.

IFRS 6 requires exploration and evaluation assets to be classified in an entity’s statement of financial position as either tangible or intangible according to the nature of the assets acquired. The classifications should be applied consistently.

IFRS 6 gives drilling rights as an example of an intangible asset and vehicles and drilling rigs as examples of tangible assets, but it does not provide further guidance on which exploration and evaluation expenditures should be considered as tangible and which as intangible assets. The definition of an intangible asset in IAS 38 should be considered in undertaking the assessment.

Sometimes, a tangible asset is consumed in the development of an intangible asset. To the extent that a tangible asset is consumed in the development of an intangible asset, the amount reflecting the consumption is part of the cost of the intangible asset. However, the mere fact that a tangible asset is consumed to create an intangible one does not change the nature of the former from tangible to intangible.

For example, part or all of the depreciation expense relating to some equipment (a tangible asset) may form part of the cost of an intangible exploration and evaluation asset, but this will not cause the equipment to be reclassified.

Consumption of a tangible asset to create an intangible asset – example Entity X extracts and produces oil and gas, and has identified a new prospective site. Entity X has already obtained the right to explore and exploit the land, but has not yet determined technical feasibility and commercial viability. As part of the exploration and evaluation phase of the project, Entity X intends to utilize its drilling rig to conduct drilling and sampling activities. Entity X maintains a policy of capitalizing costs incurred during the exploration and evaluation phase as intangible drilling rights in accordance with IFRS 6. The drilling rig that will be used during the exploration and evaluation phase of the project is capitalized as an item of property, plant and equipment in Entity X’s statement of financial position. In the circumstances described, during the exploration and evaluation phase of the project, the drilling rig should continue to be classified as a tangible asset. Entity X should, in accordance with its depreciation policy, calculate the amount of depreciation expense that is attributable to the drilling activities associated with the exploration and evaluation phase of the project and treat that amount as part of the cost of the intangible drilling rights asset.

Reclassification of exploration and evaluation assets

An exploration and evaluation asset should no longer be classified as such once the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Before reclassification, exploration and evaluation assets should be assessed for impairment, and any resulting impairment loss should be recognized.

Reclassification of exploration and evaluation assets Once the technical feasibility and commercial viability of extracting a mineral resource are demonstrable, the amount recognized as an exploration and evaluation asset will be reclassified to form part of a tangible or an intangible asset. As discussed, the Board has not defined the term ‘development’ in the Standard; nor has it provided guidance regarding the point in the life cycle of a mineral exploration project at which technical feasibility and commercial viability are demonstrable. Given the different nature of different extractive operations, it might not be possible for an entity to develop a single set of criteria that could be used in all circumstances. Generally, it will be appropriate for an entity to develop an accounting policy based on the nature of its own operations, specifying the criteria that must be met in order to demonstrate technical feasibility and commercial viability, and then apply that policy consistently; however, when an entity has projects that are not alike, it may be necessary to determine separate criteria for each. IAS 38 also contains guidance on research and development and intangible assets. This will often help to provide an appropriate starting point in considering when the ‘development’ cycle begins in mineral extraction projects. Generally, it will be appropriate to accumulate and aggregate exploration and evaluation expenditure on a project-by-project basis, to facilitate both the transfer of amounts out of exploration and evaluation assets once development commences, as discussed above, and also the impairment assessment.

Disclosure

Disclosure – general

IFRS 6 requires an entity to disclose information to identify and explain amounts recognized in its financial statements arising from the exploration for and evaluation of mineral resources.

Specifically, IFRS 6 requires an entity to disclose:

• its accounting policies for exploration and evaluation expenditures including the recognition of exploration and evaluation assets; and
• the amounts of assets, liabilities, income and expense and operating and investing cash flows arising from the exploration for and evaluation of mineral resources.

Exploration and evaluation assets should be presented as a separate class of assets. The disclosures required by IAS 16 and IAS 38 should also be provided, consistent with how the assets are classified.

Classification of expenditure as operating or investing cash flows

IAS 7: states that only expenditures resulting in a recognized asset in the statement of financial position are eligible for classification as investing activities.

Consequently, expenditure for exploration and evaluation activities should be classified as investing activities in the statement of cash flows only if the entity’s accounting policy is to capitalize such costs.