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Extractive activities

Date recorded:

Cover paper (Agenda Paper 19)

The papers assessed the necessity of amending or replacing IFRS 6 with a new standard and present the findings from the research activities:

  • (a) feedback about the extractives industry from other jurisdictions and stakeholder groups (see June 2020 Agenda Paper 19A);
  • (b) accounting for exploration and evaluation expenditure applying IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets (see Agenda Paper 19A);
  • (c) a literature review on accounting for exploration and evaluation expenditure and reserve and resource disclosures (see Agenda Paper 19B);
  • (d) diversity of accounting policies applied to exploration and evaluation expenditure;
  • (e) reserve and resource reporting requirements of jurisdictions which have significant extractive activities; and
  • (f) an explanation of extractive activities in the minerals and oil and gas industries, together with the common accounting issues for those extractive activities.

The Board was not asked to make any decisions at this meeting.

There was no discussion on the cover paper.

Applying IAS 16 and IAS 38 to exploration and evaluation expenditures (Agenda Paper 19A)

The staff summarised their assessment on how activities within the scope of IFRS 6 Exploration for and Evaluation of Mineral Resources would be accounted for in the absence of that Standard, applying the requirements in IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets.

The staff assume a common sequence of activities undertaken by entities engaged in extractive activities:

  • (i) Legal rights — These activities usually start with the acquisition of legal rights to explore a defined area.
  • (ii) Exploration and evaluation – These activities produce information about the geology and the presence and extent of any mineral or oil and gas deposits. Over time, the exploration will increase the understanding of the mineral or oil and gas deposits to the point at which an assessment can be made of whether there is a mineral or oil and gas deposit that can be economically developed. This provides information about the existence of minerals or oil and gas, the extent and characteristics of the deposit, and the economics of the extraction.

The paper focuses on an entity undertaking a common sequence of activities as described above. It does not address the circumstance of subsequent exploration and evaluation expenditure on an acquired in-process exploration and evaluation project. The paper does not conclude on whether an exploration and evaluation asset should be classified as a ‘tangible’ or ‘intangible’.

For the purpose of this paper, the staff have assumed that the exploration and evaluation expenditure could give rise to an asset applying the Conceptual Framework with the following characteristics:

  • (a) tangible—for example, a legal right, and the information associated with that legal right, provides access and relates to a mineral or oil and gas deposit that is tangible (physical) in nature and the subsequent expenditure could also result in a physical asset, for example, an exploration well;
  • (b) held for use in the production of minerals or oil and gas—for example, the legal right could include a right for the entity to extract minerals or oil and gas and the information can be used to determine the method of extraction (ie production of goods);
  • (c) expected to be used during more than one period—for example, the legal right can extend over several reporting periods and provide access to the mineral deposit for that extended period.

Applying IAS 16

The staff concluded that applying IAS 16 to exploration and evaluation expenditure, the costs capitalised under exploration phases would not meet the requirements of IAS 16 paragraph 7. Whilst it would be possible measure costs reliably, there is a low probability of future economic benefits associated to the exploration and evaluation phase of extractive activities.

Therefore, the staff thinks that at the point at which future economic benefits are probable, the entity is no longer undertaking exploration and evaluation activities. Consequently, the staff thinks that it is likely that exploration and evaluation expenditure would be recognised as an expense as incurred if IAS 16 were applied.

Applying IAS 38

The staff concluded that applying IAS 38 to exploration and evaluation expenditure, the costs capitalised under exploration phases would not meet the requirements of IAS 38 paragraph 21(a). Although it is possible to reliably measure the cost of such expenditure, the staff thinks the criteria in paragraph 21(a) of IAS 38 would not be met during the exploration and evaluation phase of extractive activities. This is because, although exploration and evaluation expenditure is incurred to generate future economic benefits, the probability of those expected future economic benefits is low.

Separate acquisition

The staff assessed that often, the price an entity pays to acquire separately an intangible asset will reflect expectations about the probability that the expected future economic benefits embodied in the asset will flow to the entity. Therefore, the probability recognition criterion in paragraph 21(a) is always considered to be satisfied for separately acquired intangible assets. Exploration and evaluation expenditure incurred acquiring the legal rights from a third party could therefore meet the definition of an intangible asset and the recognition criteria, because the probability recognition criteria would be considered to be met in accordance with paragraph 25 of IAS 38.

In addition, the cost of a separately acquired intangible asset can usually be measured reliably. This is particularly so when the purchase consideration is in the form of cash or other monetary assets.

However, applying IAS 36 Impairment of Assets without the specific requirements in paragraphs 18-22 of IFRS 6 would generally lead to an immediate writeoff of exploration and evaluation assets.

This is because the exploration for and evaluation of the mineral resources has not reached a stage at which information sufficient to estimate future cash flows is available to the entity. Without such information, it is not possible to estimate either fair value less costs of disposal or value in use, the two measures of recoverable amount in IAS 36.  The staff have not considered whether an active market might exist for legal rights or whether an expected cash flow approach to measure value in use (see Appendix A of IAS 36) might result in a recoverable amount that is higher than the cost of the legal right.

Research versus development phases

Some stakeholders thought that exploration and evaluation activities are broadly similar to activities undertaken in other industries, such as research and development activities in the pharmaceutical and high-technology industries. These stakeholders questioned whether exploration and evaluation expenditure incurred subsequent to the acquisition of legal rights should be treated similarly to research and development expenditure applying IAS 38.

Staff thinks exploration and evaluation expenditure incurred subsequent to acquiring the legal right would be most similar to expenditure incurred during the ‘research phase’ as described in IAS 38.

This is because:

(a)   an entity would be unable to meet the recognition criteria listed in paragraph 57 of IAS 38 during the exploration and evaluation phase—for example, once an entity is able to demonstrate technical feasibility of a project, expenditure incurred is no longer within the scope of exploration and evaluation activities (see paragraph 4); and

(b)   applying paragraph 55 of IAS 38 and the staff analysis in paragraphs 14-16 and 23, an entity would be unable to demonstrate that an intangible asset exists that will generate probable future economic benefits during the exploration and evaluation phase.

Therefore, applying the guidance in paragraphs 54 and 55 of IAS 38, exploration and evaluation expenditure incurred subsequent to the acquisition of the legal right would be recognised as an expense as it is incurred.

Board discussion

Board members provided comments on some accounting topics and the disclosure practice of extractive companies. The comments can be summarised as following:

  • Agenda Paper 19A assesses how exploration and evaluation costs would be accounted for in the absence of IFRS 6. Some Board members commented that a clear distinction between expenditures related to exploration and evaluation and development phases must be made when reading the paper. Those Board members who raised the comment argued that development costs are currently accounted for applying the requirements of IAS 16 and would therefore not be part of the assessment.
  • A Board member commented on accounting for development phases of extractive assets. Some Board members cautioned that some interpretations might affect the accounting for research and development costs in industries that are not subject of the case study.
  • Some Board members highlighted that more diligence would be necessary with regard to the utilisation of the terms ‘low probability’ and ‘probable’ in the agenda paper. A Board member highlighted that assets in the extractive phase have a low probability of future inflow. This was also noted by another Board member.
  • Board members discussed company practices of disclosure and accounting policies mentioned in the literature review in Agenda Paper 19B (not summarised). Board members had different understandings of the information conveyed in the academic papers.

No decisions have been made.

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