• Project carried over from IASC
• November 2000, IASC Issues Paper Published - click for Details
• Discussed at April 2005 IASB Meeting – Educational Session
• Discussed at July 2005 IASB Meeting – Educational Session
• Discussed at October 2006 IASB Meeting – Educational Session
• Discussed at June 2007 IASB Meeting
• Discussed at March 2008 IASB Meeting
• Discussed at June 2008 IASB Meeting

Timetable

• Click for IASB Project Timetable

Discussion at the April 2005 IASB Meeting – Educational Session

The Board had an introductory education session on mineral and oil and gas reserves and resources, focussing on the factors influencing the estimation of reserves and resources and the major reserve reporting codes and classification systems used in the extractive industries.

The first presentation on Resource / Reserve Reporting Standards for Minerals was done via video link from Melbourne by Pat Stephenson, Member and past Chairman of Joint Ore Reserves Committee (JORC).

The other presentation on Resource and Reserve Classification and Reporting Standards for Oil and Gas was done by Duncan Frost, Member of The Society of Petroleum Engineers (SPE) Oil and Gas Reserves Committee.

No decisions were made.

Discussion at the July 2005 IASB Meeting [Educational Session]

This education session involved a question and answer session with minerals and oil and gas industry experts focussing on reserve definitions. No decisions were made during this session.

The purpose of the July 2005 public education session for the extractive activities research project was to:

• expand Board members' understanding of:
  • the key elements of the existing reserve and resource definitions for minerals and oil and gas;
  • the similarities and differences between those definitions - and the two industries more generally; and
• provide Board members with a further opportunity to ask mineral and oil and gas technical experts questions about reserves and resources; and
• seek the Board's initial reaction to the possible directions for defining reserves and resources for financial reporting purposes.

Much of the discussion was centred on the different definitions of reserves and resources including that of the SEC. The Board indicated its intention to reach one generic definition for financial reporting purposes and to then take into account some of the differences in the current definitions, probability assessments etc into the measurement and disclosure provisions of the Standard.

Discussion at the October 2006 IASB Meeting

The Board held an education session on their extractive activities research project. Representatives from the research team presented the outcomes of the research on whether fair value is a suitable measurement and/or disclosure objective for extractive activities.

The representatives focused on agenda paper 4D (available from the IASB Website). The paper considered whether fair value as either the measurement or the disclosure objective for extractive activities would satisfy the qualitative characteristics to provide useful financial information. The research team reported that users had indicated more support for disclosure of inputs necessary for them to prepare their own valuations rather than the reporting of fair values. Based on a lack of support from users for fair value as the measurement objective, combined with difficulties in obtaining verifiable estimates of fair value and significant compliance costs incurred to estimate this value, the research team expressed concern with requiring fair value as a measurement objective.

The Board debated which difficulties the extractive industries may incur when measuring fair values of mineral reserves and resources, and how this would be different from other industries. The alternative to fair value would be to continue to measure mineral reserves and resources at historical cost. Board members generally said that they did not like the alternative, and they seemed confused about why users would be more interested in knowing how much is paid for a resource or reserve compared to what it is worth. The Board noted that it did not see the benefit of going forward with this project if it were to be based on historical cost as a measurement objective.

The Board asked the research team to go back and further explore which difficulties arise on fair value measurement of resources and reserves and bring this back in the future.

Discussion at the June 2007 IASB Meeting

The Board held two educational sessions on the extractive activities project. The first was a report from the project team; the second was an interactive session at which analysts who follow the extractive industries participated.

Project team report: convergence of definitions

The Project team provided a report Board on the progress of a review that is considering the potential for increased alignment between the minerals sector's definitions of reserves and resources and the petroleum sector's definitions of 'reserves' and 'resources'. The review is being undertaken by the SPE/CRIRSCO convergence team – which is an industry working group comprising members of the Society of Petroleum Engineers Oil and Gas Reserves Committee (SPE OGRC) and the Committee for Mineral Reserves International Reporting Standards (CRIRSCO). In an oral presentation, a representative of the SPE OGRC noted that what the two groups were trying to achieve was convergence of the assessment methodologies. How those methodologies were described might not be converged (for a variety of historical and operational reasons), but the definitions and descriptions used would be mapped to each other, so that confusion was minimised.

A Board member noted that this effort was critical to the IASB's research project. The reconciliation of the definitions of reserves and resources was a necessary step that was helpful to the Board as they explore whether it wants to use the resulting data as the basis for financial reporting.

Board members questioned and discussed various aspects of the definitions, especially those aspects of the definitions that might trigger accounting events. Several expressed appreciation for the efforts of the two sectors to reconcile the definitions and thought that they might be useful as the project team continues its work.

The Chairman thanked the CRIRSCO and SPE teams for their efforts and commended the progress that had already been made. They were very helpful to the IASB as they educated themselves in this area and it was evident from the interest expressed in other areas, such as the United Nations Framework Classification project, that the work effort had relevance beyond the work of the IASB.

User survey discussion

At the second educational session, the project team presented and discussed the findings of a user survey that they had conducted to develop a better understanding of the information needs of users involved in analysing minerals and petroleum entities. They were joined by four UK-based analysts from Cazenove, Fidelity Investments, and UBS.

The project team had conducted interviews with 34 analysts, including buy-side, sell-side, venture capital, lenders, and debt rating agencies. These analysts were based in a variety of jurisdictions. The core findings from the user survey were:

• the financial statements and note disclosures provide some information that is necessary for users to make an informed investment decision in relation to a minerals or oil & gas company – primarily information related to cash flow and current period expenditures – but the information provided in financial statements and note disclosures alone is not sufficient to meet the needs of analysts and much information is sourced elsewhere;
• there is very limited interest in placing a valuation of reserves and resources (at current value or fair value) on the balance sheet;
• there is limited interest in disclosing a valuation of reserves and resources (at current value or fair value);
• measuring reserve and resource assets on the balance sheet according to a historical cost measurement model (for example, successful efforts, full cost, area of interest) does not generate much useful information;
• analysts generally would prefer more, and/or improved, disclosure of key valuation inputs so that those inputs could be incorporated into their own valuation models; and
• directors' sign off was generally identified as the preferred assurance or responsibility process that could be applied to the reporting of reserve information.

Board members and the analyst guests discussed various aspects of the survey results. Much of the discussion focussed on the petroleum sector. It was noted some of the disclosures required under FAS 69 and related SEC requirements did provide useful information. These disclosures had seen marked improvements in recent years.

In addition, companies provide additional materials; however those materials although similar are not prepared on a consistent basis.

The analysts present expressed mixed views about the benefits of assigning a value to reserve and resources on the balance sheet. Concerns about subjectivity and assigning 'too much credibility' to a number fraught with estimation error underlay these views. A disaggregation of inputs would assist analysts to make comparisons across companies in the sector. Board members noted that such concerns could also be made about other items for which a number is currently reported on the balance sheet. Issues similar to those in the extractive industry arose in other areas of speculative development, for example pharmaceuticals.

Board members asked, if current measures were not thought useful, what could be done to make historical cost-based financial information more useful. Were there opportunities for the Board to require more useful information; information that would be helpful in assessing costs and future cash flows. In particular, would it be helpful to concentrate on the information currently provided in some jurisdictions for 'upstream' and 'junior' activities-such as those in the US for development stage entities-where information about certain costs that are expensed are still captured in some way.

Analysts and Board members noted the potential cross-over between information in the financial statements and footnotes and information discussed in the management commentary. Much of the more subjective information reviewed by the Chief Operating Decision Maker was as important as that captured in the financial statements.

Without getting to industry-specific matters, there was still an opportunity to require discussion of the types of data related to income generation, operational performance, etc.

The project team asked the Board for their views on possible approaches to financial reporting for inclusion in the Discussion Paper. The staff proposed a current value model and a historical cost model with enhanced decision-useful disclosures.

A Board member noted that there were cross-cutting issues, especially the 'unit of account' issue, before any decision can be taken on what the financial reporting should be. After further discussion, the Board agreed that the Project team should continue to develop the two proposed models.

Discussion at the March 2008 IASB Meeting

Definitions of reserves and resources

The IASB were joined by members of the IASB's Extractive Activities Research Team and by staff from the Office of the Chief Accountant, US Securities and Exchange Commission (SEC).

The session was an opportunity for the Board to hear about developments occurring in the United States of America in relation to oil and gas reserve definitions and disclosure requirements. In particular, the SEC staff outlined the content of the recent Concept Release on Possible Revisions to the Disclosure Requirements Relating to Oil and Gas Reserves (PDF 380k). The Concept Release was issued to gauge the interest in a revision of the current requirements for oil and gas reserve disclosures, which date from between 1978 and 1982. In particular, the SEC was aware of concern that their rules had not adapted to current practices and might not provide investors with the most useful picture of oil and gas reserves. This issue is relevant to the IASB's research project on extractive activities, because a central issue in the IASB's project is the definition of reserves and resources. The session shared information, and no decisions were made.

Subject to the usual SEC disclaimers, the staff noted that their preliminary analysis of the comments they have received fell broadly into three groups:

• those who thought that the current requirements gave a degree of standardisation that was desirable and need not be changed dramatically;
• those who favoured more radical change, perhaps adopting the approach to reserve evaluation developed by the Society of Petroleum Engineers, in particular the SPE's Petroleum Resource Management System (PRMS); and
• those who wanted something somewhere in between.

Contentious areas included the classification and disclosure of reserves; whether disclosure of reserves other than 'proved reserves' should be permitted; pricing; and issues related to 'unconventional' reserves (for example. tar sands and oil shale).

The SEC staff noted that the comment letter analysis was still under way and that the Commission had not yet determined whether any rulemaking is necessary.

A Board member asked the SEC staff what was meant by the Concept Release's Question 1, which asked whether the SEC should develop a 'principles-based rule'? The staff responded that the Commission were trying to find a way to ask registrants 'to do the right thing in good faith'. The Board member was relieved that the SEC "had no more idea of what 'principles-based' meant" than he did.

Another Board member asked whether the SEC had given thought to whether any rules it might issue, especially with respect to unconventional mineral resources and means of extraction, would become the standard for mining companies also, or whether mining entities would continue to have more latitude with respect to reserve disclosure. The SEC staff acknowledged the issue but had no ready answer (nor, the Board member noted, does the IASB).

With respect to pricing reserves, the same Board member noted that the current SEC rules require a trailing twelve-month average, whereas oil is priced on a forward basis. He was concerned that the SEC might continue to insist on historical information, while most market participants were interested in forward-looking information. Again, the SEC staff acknowledged the trade-off between the consistency that historical information would give and the decision-usefulness for forecasting future cash flows that forward-looking pricing would provide. This would be an issue for the Commission to decide.

The coordinator of the Research Team noted that of the 80 letters received by the SEC, 12 had been submitted by entities represented on the IASB's advisory panel and a further two had participated in the development of letters submitted by professional organisations.

Reserve and Resources Definitions and Asset Recognition

The Board was joined by members of the IASB's Extractive Activities Project Team, representatives of the Society of Petroleum Engineers' Oil and Gas Reserves Committee (SPE) and (by video link) the Committee for Mineral Resources International Reporting Standards (CRIRSCO).

The meeting discussed progress made by the SPE and CRIRSCO towards convergence of their respective definitions of reserves and resources and whether those definitions might be suitable for use in a future IFRS addressing 'upstream' mineral and hydrocarbon/ petroleum extractive activities. This review was undertaken at the IASB's invitation.

The SPE and CRIRSCO convergence team determined that there was 'a high degree of compatibility in the classification logic that petroleum and minerals evaluators apply in determining quantities of their respective materials that reside in a field or deposit and can be extracted and marketed'. However, 'full convergence' was not justified.

The alignment was illustrated by the following diagram:

Petroleum and minerals both use 'proved and probable' reserves and resources to mean reserves that are 'more likely than not' (to use the IASB term). The petroleum sector uses 'possible' resources to describe what the minerals sector call 'inferred' resources, although for practical reasons the mineral sector does not assign a high degree of confidence to such resources.

The Board discussed issues surrounding the definitions proposed by the SPE/CRIRSCO and posed questions to the representatives present. It was noted that, although the definitions were relatively fixed, the guidance to apply the definitions was more easily changed. In particular, the ongoing work of the US Securities and Exchange Commission with respect to disclosures by oil and gas entities (see IASPlus.com for 12 March 2008) might have an effect on the model as it is today. In particular, the CRIRSCO representative noted that mineral exploration entities commenting to the SEC's Concept Release urged that minerals and oil and gas should have a common disclosure regime.

It was noted that the mineral and petroleum sectors view proved and probable reserves slightly differently for financial reporting purposes (primarily because of the SEC rules), but operationally they are a continuum that is constantly reassessed under their respective business models.

This part of the session was informational and no decisions were made. However, the IASB Chairman thanked the SPE and CRIRSCO for rising to the challenge posed to them by the IASB and for the significant contribution their report had made to the IASB's research project.

The Board approved a staff recommendation that the forthcoming IASB research discussion paper be drafted on the basis that the best prospects for defining minerals and oil and gas reserves and resources, at this stage, appears to be with using the CRIRSCO and SPE definition systems. This would enable the IASB to propose, where appropriate, comparable accounting and disclosure requirements across the minerals and oil and gas industries. In addition, the progress of the SEC and UN Framework Classification for Fossil Energy and Mineral Resources (UNFC) processes be monitored to confirm whether those systems might offer viable alternatives for defining reserves and resources in an IFRS.

Applying the Asset Definition and Recognition Criteroa

The Board discussed alternatives identified as to what might constitute control of a mineral resource by the research project team.

View A

View A is that control is the absolute right to extract the mineral or oil and gas from the ground. This view implies that all the rights (including permits, licences and approvals) necessary for development and production must be in place, including governmental and environmental approvals, agreements with landowners and others with rights.

View B

View B places more emphasis on the unconditional ability to apply for any additional rights, denying other entities access to the future economic benefits. Under View B, control over minerals or oil and gas reserves and resources exists where the entity holds some present legal rights (for example, the unconditional right to explore according to the terms of an exploration permit) and the right to apply for the outstanding rights that are a prerequisite to having the absolute right to extract the mineral or oil and gas (for example, the conditional rights to develop and produce the minerals or oil and gas located on the property). By definition the entity controls the unconditional rights. Development may be conditional on several factors, including determination that there is a resource that is suitable for development (size, structure, mineralisation etc) and the obtaining of the necessary permits etc.

The Project Team favour View B, which they see as more aligned with how such projects are managed in practice. Some Board members were sympathetic but disagreed with the conclusion, particularly because they saw problems with the unit of account (the right to exploit the mineral vs the right to apply to exploit the mineral). Board members wanted to know the unit of account before agreeing to the Project Team's recommendation. The Project Team will return later with a revised recommendation.

Discussion at the June 2008 IASB Meeting

The Extractive Activities project team discussed progress made towards producing a Discussion Paper on key features of an accounting model for certain aspects of minerals and oil and gas reserves and resources. This discussion focused on asset definition, recognition and unit of account issues.

Asset definition

The project team noted that their proposed approach was to focus on the definition of an asset in the current IASB Framework (and, to a lesser extent, current activities on the revised asset definition as a result of the Framework project), rather than on the traditional approach to asset recognition in this sector, phases of an extractive project.

The project ream had identified two types of asset and items that might be within those broad categories:

Intangible assets: including legal instruments/approvals necessary for undertaking 'upstream' extractive activities (for example, mineral rights, development permits, etc); and information (such as geological data confirming or not the presence of mineral resources in a particular area).

Tangible assets: including mineral, oil and gas deposits and property, plant and equipment used to access and extract those resources.

The Board expressed broad agreement with the approach. However, there was a great deal of detailed discussion about 'information' intangibles and the proposed 'flip' from intangible (the right to exploit) to tangible (the resources themselves).

Board members noted that information by itself was unlikely to be an asset-it could only enhance the value of an asset.

Others disagreed, noting that information (e.g. the results of geological surveys) could be sold. In response, Board members noted that information may be an asset, but without the right to exploit it, it was probably not worth very much. There appeared to be agreement that in this context legal rights were precedential.

The project team presented two views of when reserves and resources would meet the definition of an asset. One view would require all the rights (including permits, licences, and approvals) necessary for development and production be in place before a mineral resource could be recognised on the balance sheet. The project team noted that this took a narrow view of control of the asset. The alternative view would require the entity to have the legal rights to the minerals sufficient to allow then to extract those resources and to deny access to them by others; to have received approvals that give the entity a reasonable expectation that it will be able to exercise those rights; and has an unrestricted right to apply for any outstanding rights or approvals that are ancillary in nature and expected to be received in a timely manner. This second view is seen as consistent with 'rational economic behaviour of entities and financial statement users' and presumably reflects significant elements of current practice.

The Board seemed to accept that both views were possible at this stage, although some did seem concerned about the cliff effects of the proposed recognition.

The discussion moved on to when an asset should be recognised. Again, two views were presented: one a narrow view based on an assessment of whether the exploration and evaluation activities have been 'successful'. The alternative position views economic benefits more broadly to include the potential benefit to the entity if it were to sell the property. However, one Board member suggested that recognising and measuring the reserves and resources as a separate (tangible) asset was not necessary. In his view, the one thing that remains constant is the right to exploit. Once minerals have been discovered, the right becomes more valuable. The communication to users might be clearer if it were the mineral rights that were re-measured rather than the resources. This interesting point was not explored further, but may be developed by the staff. The Board then discussed unit of account issues. The Board seemed to have general agreement with the project team's conclusions:

• (a) infrastructure assets that generate largely independent cashflows are excluded from the unit of account - in other words, the unit of account can be no greater than a cash-generating unit, as determined in accordance with IAS 36;
• (b) infrastructure assets that are physically and commercially separable are excluded from the unit of account - in other words, this applies to assets which could realistically be moved to other operations and the movement of these assets could be economically justified. In contrast, assets that are commercially inseparable include assets that, although being physically separable, may be more economic to abandon or decommission than to physically move them to a new location. Examples might include assets that are dedicated to the property because either:
  • (i) they are not readily movable (e.g. offices, concentrator, dedicated rail facilities etc); and/or
  • (ii) are specialised so there is no other economic use for the assets; and
• (c) infrastructure assets that have different useful lives from the reserves are excluded from the unit of account.

August 2008: IFRS and the mining industry

Publicly accountable entities in Canada are required to switch to IFRSs starting in 2011 (with an option to adopt IFRSs earlier, even in 2008, with approval of the Provincial securities regulator). The transition from Canadian GAAP will be different for every company. However, particular industries will experience common themes and issues. Deloitte (Canada) has published IFRS and the Mining Industry: Top Ten Accounting Issues for Canadian Issuers (PDF 264k). This publication provides Deloitte's viewpoints on the following IFRS changeover issues in the mining industry: