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.