IFRS 6 - Exploration for and Evaluation of Mineral Resources (detailed review)

Objective

This standard prescribes the guide lines to be used by the entities which are engage in exploration and evaluation activities, to deal with the accounting treatment of exploration for and evaluation of mineral resources. This standard specifically deals with the following aspects:

• Development in the existing accounting policies of the entity in respect of expenditures relating to exploration and evaluation, to limited extent

• Impairment requirements for the exploration and evaluation assets, which are recognized by the entity in accordance with this standard and accounting for such impairment as per IAS 36

• Disclosures requirements for the exploration and evaluation activities, to intimate the users of financial statements the information about the amounts, timing and certainty of future cash flows in respect of the exploration and evaluation assets recognized by the entity

Scope

The requirements of this standard are applicable for the accounting treatment of exploration and evaluation expenditure. However, this standard does not deal the any other aspects of exploration and evaluation activities and the expenditure which:

• Incurs before the entity has acquired the legal permission to explore a certain area. for the purpose of the exploration for and evaluation of mineral resources and

• After the entity has demonstrated the commercial viability and technical feasibility for the extraction of mineral resources

Recognition of Exploration and Evaluation Assets

The entity engage in exploration and evaluation activities is not required to apply the requirements of IAS 8 for the determination of accounting policy relating to the exploration and evaluation expenditure.

• The entity will determine the accounting policy for the exploration and evaluation expenditure using its own judgment or past practices before the adoption of this standard i.e. entity will determine the extent to which expenditure will be recognized as exploration and evaluation asset and in what circumstance it will be reported to statement of profit or loss as an expense

• However, the accounting policy determined by the entity, for the exploration and evaluation expenditure should be applied consistently

Initial Measurement of Exploration and Evaluation Assets

The exploration and evaluation expenditure which is recognized by the entity as an exploration and evaluation asset, will be initial measured at cost

The elements of exploration and evaluation expenditure which can be capitalized as part of exploration and evaluation asset may include the following:

• Purchase costs of exploration and evaluation rights
• Cost associated with exploratory drilling
• Sampling
• Labor Cost
• Cost incurred in relation to geographical and geological factors studies
• Cost incurred in determination of the commercial viability and technical feasibility for the extraction of mineral resource.

The expenditures incurred by the entity for the development of mineral resources after the commercial viability and technical feasibility for the extraction of mineral resource has been demonstrated, cannot be recognized as exploration and evaluation assets under this standard, instead that will be accounted for in accordance with IAS 38 Intangible Assets

The entity is required to recognize a provision in accordance with IAS 37 for any restoration or dismantling cost relating to the exploration for and evaluation of mineral resources

Subsequent Measurement

The entity can measure the exploration and evaluation asset at reporting date either:

i) Under Cost Model or

 ii) Under Revaluation Model

 

• However, whichever model is selected it should be applied consistently from one period to the next period

• The measurement model selected by the entity for exploration and evaluation assets at reporting date should be according to the classification of the assets i.e. for tangible assets the measurement model will be as par IAS 16 and intangible assets it will be in accordance with IAS 38

• The entity will classify the exploration and evaluation asset as per the nature of the expenditure such as vehicles, property and oil rig are tangible while legal rights are intangible

• The entity is allowed to change the its accounting policy in respect of exploration and evaluation expenditure only if entity believes that it will result in financial statements being reflecting more relevant and reliable information to the users of financial statements

Reclassification of Exploration and Evaluation assets

The exploration and evaluation asset will be reclassified to the other relevant standards, when the commercial viability and technical feasibility for the extraction of mineral resources has been demonstrated, such as capitalized exploration and evaluation expenditure to IAS 38 for subsequent accounting, while the property, plant, equipments and vehicles to IAS 16.

However, exploration and evaluation asset will be tested for impairment before  reclassification, if required

Impairment Testing for Exploration and Evaluation Assets

The entity is required to apply impairment test to the exploration and evaluation assets, if there is an indication reflected by the circumstances. The entity will recognized resulting impairment loss as per the requirements of IAS 36. The circumstances which may indicate the existence of impairment loss may include the following:

• Expiration of legal rights for exploration and evaluation and is not renewable

• Substantial exploration and evaluation expenditure exceeding the budgeted expenditure

• When entity expects that it will not be able to recover its whole amount of expenditure incurred for exploration and evaluation even the project has commercial viability

• When expenditure incurred for exploration and evaluation do not result in commercial viability of the project

Disclosures

The entity is required to disclose the following related to the exploration and evaluation expenditure:

• The accounting policy f the entity for the exploration and evaluation expenditure
• The amount of expenditure recognized as exploration and evaluation asset in the accounting period
• The amount of exploration and evaluation expenditure recognized in the statement of profit or loss