Extractive Activities Research Project

Date recorded:

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.

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