Chronology
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This page covers the Board's activities with respect to the project prior to issuance of IFRS 6 Exploration for and Evaluation of Mineral Resources. For backround on the project subsequent to issuance of IFRSs 6, please Click Here.
Important: The final IFRS 6 Exploration for and Evaluation of Mineral Assets was issued by the IASB in December 2004. The information on this page concerning ED 6 reflects the Board's discussions during the development of the final Standard, including tentative decisions that were changed along the way. Links to summaries of the final Standard can be found Here.
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Timetable
Approach Agreed at April 2003 IASB Meeting
A project team from the Australian Accounting Standards Board (AASB) is developing background material to assist the IASB in deciding whether to develop an IFRS for the extractive industries (mining and oil and gas). The AASB reviewed its work to date and asked the Board for instructions for the next steps of the project. The project team noted the wide range of accounting treatments currently used for pre- production costs, cost centres, allocations, impairment recognition, and disclosures. Even in those countries that have accounting standards for mining and oil and gas companies, none of those standards deals with the industry comprehensively.
The project team presented various approaches for addressing the issues. Among the questions is whether the existing scope exclusions in IAS 16 and IAS 38 should be retained, how other IAS/IFRS should be applied by companies in the extractive industries, and whether the IASB should develop implementation guidance.
After discussion, the Board agreed that the project team should develop an exposure draft along the following lines:
- There would not be a separate standard on accounting in the extractive industries.
- The industries will remain scoped out of IAS 16, IAS 36, and IAS 38.
- The definition of pre-production costs includes exploration and developments costs.
- Extractive industries should apply existing IAS/IFRS in accounting for pre-production costs and for identifying their cash generating units.
- Guidance will be provided on applying existing standards in the extractive industries.
The Board clarified that the foregoing decisions do not imply the Board agrees with the full cost method of accounting. Rather, the Board has not addressed this issue yet.
IASB Discussion in September 2003
Exploration and evaluation costs
The staff presented a pre-ballot draft and asked to the Board to vote on three specific issues:
- impairment test,
- continuation of previous GAAP, and
- nature of the amendments -- IAS 16, IAS 38, or both?
Impairment test and continuation of previous GAAP
The staff proposed an extractive industry cash generating unit for the purpose of applying the impairment test under IAS 36. The Board expressed some concerns that it would be unlikely that exploration-only entities will be able to capitalise exploration costs or that they would be impaired. One Board member reported that under the current practice in this industry, it appears that exploration costs are deferred until more information is available or expensed and reinstated as assets if the exploration is successful.
The Board agreed to allow current practice in the extractive industries to continue, and this should be applied to both current IFRS appliers and first-time adopters.
Nature of the amendments – IAS 16, IAS 38, or both
The Board agreed to include exploration costs in the scope of IAS 16 and to cross-reference them to IAS 38, but the current practice of deferral (as explained above) would still be permitted. This proposal was supported by 9 in favour and 5 against.
IASB Discussion at the December 2003 Board Meeting
The staff suggested that the guidance in the proposed exposure draft was incomplete in that it addressed only those expenditures that could be included in the exploration and evaluation asset and did not address those expenditures that could not be included. The staff proposed including guidance based on equivalent paragraphs in IAS 16 that addresses initial and subsequent measurement. The staff believed that having specified the initial measurement, guidance on subsequent measurement should also be included.
The staff noted a concern that the requirement to recognise an asset initially at cost might be a change in practice – for example, an entity might include some estimate of the value of reserves in the initial carrying amount of the exploration and evaluation asset recognised. In addition the requirement to apply either IAS 16 or IAS 38 might cause changes to existing practices.
The Board noted the concerns but agreed with the staff's proposal.
Exposure Draft ED 6 Issued in January 2004
On 15 January 2004, the IASB invited comment on its Exposure Draft ED 6, Exploration for and Evaluation of Mineral Resources. ED 6 proposes to exempt companies engaged in exploring for and evaluating mineral resources from certain requirements of IFRSs and the IASB Framework. Those companies would be permitted to continue using, under IFRS, the accounting policies for recognising and measuring assets arising from mineral exploration and evaluation activities that were used in their most recent annual financial statements. A company that elects to use its previous accounting policies should then change those policies if, and only if, the change makes the financial statements more relevant and reliable. In addition, ED 6 proposes indicators to be considered when identifying whether exploration and evaluation assets might be impaired. It also proposes a "cash generating unit for exploration and evaluation assets" under IAS 36, Impairment of Assets. The proposals would be effective for annual periods beginning on or after 1 January 2005. That is, they would be followed by European and other companies that adopt IFRS in 2005. ED 6 may be downloaded from the IASB's Website. Comment deadline is 16 April 2004.
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Summary of ED 6, Exploration for and Evaluation of Mineral Resources
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Accounting Policies
The proposed IFRS would permit an entity to continue using, under IFRS, the accounting policies applied in its most recent annual financial statements for exploration and evaluation expenditures, including the recognition and measurement of exploration and evaluation assets. In addition, it would permit an entity to use an alternative level of aggregation
for exploration and evaluation assets when testing such assets for impairment in accordance with the revision of IAS 36, Impairment of Assets, proposed in an Exposure Draft in December 2002.
The definition of exploration for and evaluation of mineral resources distinguishes exploration and evaluation expenditures from other expenditures that may be regarded as similar (for example, research expenditures). General and administrative expenses cannot be included in the initial measurement of exploration and evaluation assets.
The proposed IFRS would exempt entities from some requirements of other IFRSs and the IASB Framework. Instead of requiring entities engaged in the exploration for and evaluation of mineral resources to consider the various sources of authoritative
requirements and guidance in developing an accounting policy for such activities, the proposed IFRS would permit those entities the alternative of continuing their existing accounting treatment in specified circumstances. In particular, an entity could continue to account for exploration and evaluation assets in accordance with the accounting policies applied in its most recent annual financial statements.
Depreciation/Amortisation
The depreciable amount would be cost less residual value. IAS 16 would require a 'component asset' approach to recognising and depreciating property, plant, and equipment, and would not permit future costs to be included in the depreciable amount.
Impairment
The proposals would permit an entity that has recognised an exploration and evaluation asset to test that asset for impairment on the basis of a 'cash-generating unit for exploration and evaluation assets' rather than the cash-generating unit that might otherwise be required by IAS 36. Alternatively, the IAS 36 approach may be followed. In either case, however, entities are not necessarily permitted to continue existing practices with respect to the impairment test itself. Rather, the consequence of the amendment is that the IAS 36 impairment test proposed under ED 6 could be applied at a level different from that otherwise required by IAS 36.
The Exposure Draft sets out indicators of impairment for exploration and evaluation assets. These are to be considered in addition to the external and internal sources of information in paragraphs 9-13 of the proposed revision of IAS 36 to be used by entities when identifying whether such assets might be impaired.
Removal and Restoration Costs
IAS 37 requires the recognition of a provision, measured on a discounted present value basis, when a present obligation arises. This amount can be capitalised into the asset in some cases.
Disclosure
The proposed IFRS requires disclosure about:
- accounting policies for exploration and evaluation;
- the amounts in the entity's financial statements that arise from exploration and evaluation expenditures;
- the level at which the entity assesses exploration and evaluation assets for impairment.
Effective Date
The proposed effective date for the IFRS is 1 January 2005. Earlier application would be encouraged.
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The 4 March 2004 Deloitte Australian Accounting Alert, Accounting for Exploration and Evaluation under IFRS (PDF 126k), provides an overview of the requirements and practical implications of IASB ED 6.
Discussion at the June 2004 IASB Meeting
The Board commenced discussions considering comments received on the exposure draft.
Definitions. The Board considered whether any changes should be made to the definitions of exploration and evaluation assets, exploration and evaluation expenditures, and exploration of and evaluation for mineral resources, and in particular whether further guidance on the inclusion of general and administrative expenses in the initial measure of these assets should be provided.
Exemption from IAS 8 hierarchy. The Board agreed that no changes be made to the definitions but that further guidance be provided. In addition they agreed that no guidance be provided on general and administrative expenses or the inclusion of any other expenses.
The Board agreed to retain the exemption from the IAS 8 hierarchy for exploration and evaluation activities, as proposed in ED 6, but to provide further guidance for new entities consistent with the standard on insurance contracts.
Revaluation. The Board agreed to retain the ED 6 proposals permitting revaluation of assets.
Changes in accounting policies. The Board agreed to retain the ED 6 proposals regarding changes in accounting policies.
Classification of exploration and evaluation assets. The Board agreed that classification of exploration and evaluation assets could continue under either IAS 16 (tangible asset) or IAS 38 (intangible asset).
Impairment. The Board discussed the ED 6 proposals in respect of impairment of the assets and the cash generating unit. The Board noted that a number of commentators had expressed concern about those proposals. The Board concluded that certain relief should be provided to ensure that the proposals are workable. The staff were requested to develop proposals to require an impairment test in certain circumstances. The specific circumstances need to be developed.
Disclosure. The staff recommended that an explicit requirement be added to require the disclosures required by either IAS 16 or IAS 38 whichever is relevant. The Board agreed.
Timetable. Publication of a standard is anticipated in December 2004.
Discussion at the July 2004 IASB Meeting
Impairment and cash-generating units
In June 2004, the Board confirmed its intention that an entity recognising an exploration and evaluation asset should be required to assess that asset for impairment and that IAS 36 should be used to measure, present, and disclose that impairment in the financial statements. However, it was persuaded by comments received from constituents that requiring IAS 36 recognition to be applied to assets for which there was insufficient data to make a proper, informed assessment of recoverable amount could lead to inappropriate impairment losses being recognised and would defeat the purpose of permitting entities to recognise exploration assets in the first place. Therefore, the Board agreed that the approach to recognition should be changed such that the assessment of impairment would be triggered by changes in facts and circumstances. This would allow entities to continue using their current practices.
The staff proposed that paragraphs 12 to 18 be replaced by wording similar to the following:
Recognition and measurement
12. Exploration and evaluation assets shall be assessed for impairment when and only when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. When facts and circumstances suggest that the carrying amount of an exploration and evaluation asset exceeds its recoverable amount, an entity shall measure, present and disclose any resulting impairment loss in accordance with IAS 36.
13. This IFRS requires an entity recognising an exploration and evaluation asset to assess that asset for impairment. However, sometimes exploration and evaluation assets do not generate cash flows and there is insufficient information about a specific area's mineral resources for an entity to make reasonable estimates of an exploration and evaluation asset's recoverable amount. This is because the exploration for and evaluation of the mineral resources has not reached a stage at which sufficient information is available. Therefore, this IFRS requires an entity to assess an exploration and evaluation asset for impairment only when facts and circumstances suggest that the carrying amount of such an asset exceeds its recoverable amount. Once facts and circumstances indicate that an exploration and evaluation asset may be impaired, IAS 36 shall be applied with respect to measurement, presentation and disclosure.
14. One or more of the following facts and circumstances would suggest that an entity should test an exploration and evaluation asset 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. further exploration for and evaluation of mineral resources in the specific area are neither budgeted nor planned for in the near future
c. exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities mineral resources and the entity has decided to discontinue such activities in the specific area
d. sufficient data exists to indicate that, while 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 a successful development or by sale
In such cases, the entity performs an impairment test in accordance with IAS 36 Impairment of Assets. Any impairment loss is recognised as an expense in accordance IAS 36.
15. The list in paragraph 14 is not exhaustive. An entity may identify other indications that an exploration and evaluation asset may be impaired and these would also require the entity to determine the asset's recoverable amount.
16. Unless it is part of a cost centre under full cost accounting, when a specific area is surrendered, abandoned or otherwise deemed worthless, any exploration and evaluation asset related thereto shall be impaired and recognised as an expense in accordance with IAS 36.
17. When an entity has discovered commercially viable quantities of mineral reserves but is delaying a decision to develop the resource because the specific area requires major capital expenditure before production can begin, it shall assess the carrying amount of the related exploration and evaluation asset.
Reclassification of exploration and evaluation assets
18. An exploration and evaluation asset shall be reclassified as a development asset when the decision to develop the mineral resource is taken. Exploration and evaluation assets shall be assessed for impairment, and any impairment loss recognised, prior to reclassification.
The Board agreed with the above in principle but asked the staff to reword the paragraphs including removing paragraph 16 above.
Level at which impairment is tested
The Board proposed in ED 6 that entities should be able to test impairment at the level of the cost centre for extractive activities. The staff noted that many respondents disagreed with the proposal. A number of them stated they would prefer to apply the 'cash generating unit' (CGU) definition in IAS 36.
The Board noted that they believed applying the IAS 36 CGU definition would result in impairment being applied at a lower level (such as well by well in an oil field) and that commentators had misinterpreted the proposals in ED 6.
The Board agreed that they did not intend to push impairment in these circumstances down to a well-by-well or similar level but were concerned about the comments received. They requested the staff to discuss the issue with a number of the commentators particularly those using the full cost method.
Effective Date and transition
The staff recommended that the proposed standard be effective for 1 January 2006 and that early adoption be allowed. Staff said this proposal was in response to comments about the 'stable platform' despite the standard being necessary for those jurisdictions applying IFRS for the first time in 2005. The Board agreed.
Transition would follow the normal retrospective approach under IAS 8 except if information is not available, in which case this would need to be disclosed. This could apply, for example, for impairment tests required at 1 January 2004.
The Board agreed that, subject to the above items requiring further investigation, it intends to finalise the standard at the September meeting.
Discussion at the September 2004 IASB Meeting
Board members noted at a previous meeting that IAS 36 paragraph 22 requires impairment to be assessed at the individual asset level "unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets". In addition, IAS 36 paragraph 70 requires that "if an active market exists for the output produced by an asset or group of assets, that asset or group of assets shall be identified as a cash-generating unit". In some cases in which exploration and evaluation assets are recognised, for example in the petroleum sector, each well is capable of producing future cash inflows that are observable and capable of reliable measurement because there is an active market for crude oil. The Board was concerned that respondents might not have appreciated this application requirement fully (because of a lack of familiarity with IAS 36). The Board directed the staff to investigate this further.
The staff highlighted this concern in the July 2004 issue of IASB Update, in the Website project summary, and in the Effect of Redeliberations document (also on the Website). These materials were sent to the IASB's research project team and the UK's Oil Industry Accounting Committee (OIAC) with a request that their constituents be encouraged to respond to the issues raised. The staff received 16 comment letters.
Staff advised the Board that there was broad support for the revised approach to the assessment of impairment – the facts and circumstances approach. The Board's revised approach was seen as a sensible and pragmatic solution and one that would assist on-going comparability with existing practice in many countries.
In view of the above, staff proposed an approach that requires management to allocate exploration and evaluation assets to an appropriate unit of account and test impairment at this level. The staff considered that the approach taken by the Board to the impairment of goodwill in its 2004 revisions to IAS 36 paragraphs 80-82 offered the best model available within IFRSs to accomplish this objective. Using the analogy provided above, this might be an oil field or a contiguous ore body. The unit of account might be the same as an area of interest but might not be. Since the proposal would permit CGUs to be aggregated, the staff has mirrored the goodwill requirements in IAS 36 and proposed that the unit of account can be no larger than a segment, based on either the entity's primary or secondary segment reporting format under IAS 14 Segment Reporting. This requirement is no less rigorous than ED 6's requirement that the special CGU "be no larger than a segment".
The Board agreed with this proposal.
Other issues arising from the pre-ballot draft standard resulted in the following staff proposals:
- IFRS 6 paragraph 8 ["Exploration and evaluation assets shall be measured at cost"] be raised to a bold letter principle. This would also be consistent with the paragraphs on initial recognition in IAS 16 (paragraph 15) and IAS 38 (paragraph 24).
- The Board's proposals not be re-exposed and that the Board proceed directly to finalise the IFRS. The reasons for this being that:
- 1. No fundamental changes of principle have been made; and
- 2. Where changes have been made to ED 6, they have been made to matters addressed in the invitation to comment on which constituents' comments were invited. The Board has considered the comments received and the basis for alternatives suggested by constituents and as a result of its own redeliberations. It is doubtful that re-exposure would yield any new information that has not already been shared with the Board.
The Board agreed with the staff on both issues.
A ballot Draft will be submitted to the Board in October. Four Board members indicated their intention to dissent on the basis that the IFRS contradicts the hierarchy requirements in IAS 8. The IFRS would be published in November 2004.
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