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Extractive activities

Date recorded:

Project scope and objectives: an overview (Agenda Paper 19A)

In this session, the staff provided an overview of the staff’s analysis and recommendation about the scope and objectives of the Extractive Activities research project.


The Board issued IFRS 6 in 2004. IFRS 6 allows entities engaged in extractive activities to continue to apply some aspects of their existing accounting policies for E&E expenditure until the Board is able to complete a comprehensive review of the accounting for extractive activities. The Board achieved this by providing entities with a temporary exemption from applying particular parts of IAS 8 when developing their accounting policies. This has led to diversity in the accounting for E&E expenditure.

The Extractive Activities research project was activated in 2018 with the aim of gathering evidence to help decide whether to start a project to develop proposals that would amend or replace IFRS 6. The project has occurred in multiple stages since its commencement in 2018 as follows:

Stage 1—Review of 2010 Extractive Activities Discussion Paper (the 2010 DP)

Stage 2—Outreach and research activities

Stage 3—Targeted investor outreach

Summary of feedback

Consistent with feedback on the 2010 DP, the staff observed mixed views about the scope of this project. For example, stakeholders suggested:

  • Developing a disclosure-only standard for all extractive activities
  • Improving the recognition, measurement and disclosure requirements of IFRS 6 to improve consistency and comparability of financial statements
  • Withdrawing IFRS 6 and including extractive activities in a project that considers the accounting for intangible assets more generally
  • Developing guidance on how an entity with extractive activities can apply IFRS Standards
  • Developing an industry-specific standard which would scope in the accounting for all extractive activities, not only E&E activities
  • Maintaining IFRS 6 and doing nothing further, that is, there are no significant application problems related to IFRS 6 which need fixing

Staff analysis

The staff think each of the project scopes would have different objectives (that is, these project scopes would seek to address different matters). The staff think a project scope could include one or more objectives and need not align with the project scopes suggested by stakeholders. In particular, the staff think the project scope would depend on the Board’s objective (or objectives) of the project.

The staff therefore identified matters for further analysis based on the evidence gathered. Based on the nature of the matters the staff grouped the matters into three papers:

  • Matters relating to E&E expenditure and activities—that is, matters in the scope of IFRS 6 (Agenda Paper 19C)
  • Matters primarily relating to development and production activities—that is, matters outside the scope of IFRS 6 (Agenda Paper 19D)
  • Reserve and resource (R&R) information (Agenda Paper 19E)

Staff recommendation

Based on the analysis and staff recommendations in Agenda Papers 19C-19E, the staff recommended that:

  • The scope of the Extractive Activities project be to explore:
    • Developing requirements or guidance to improve the disclosure objectives and requirements in IFRS 6 about an entity’s exploration and evaluation (E&E) expenditure and activities
    • Amending the Basis for Conclusions on IFRS 6 to remove its temporary status.
  • The objectives of such a project be to:
    • Provide more useful information about an entity’s E&E expenditure and activities to primary users of financial statements (users)
    • Remove the temporary status of IFRS 6

Board discussion

NB: This paper was discussed after papers 19C, 19D and 19E – some of the comments were made with reference to what had been discussed on those papers (see below).

The discussion focused on whether the temporary status of IFRS 6 should be removed. One Board member said that removing the temporary status might imply that the Board has validated all the requirements in IFRS 6 and no further work is required. It was important to her to make sure that stakeholders understand that the accounting requirements lead to diversity in practice, which is not useful and needs improvement, however, addressing this would require costs that outweigh the benefits of the information and therefore the Board decided against this. Other Board members echoed this, but some of them thought that this could be solved by communication and the temporary status was no longer necessary. The staff reminded the Board that including the temporary status in the Basis for Conclusions of IFRS 6 was decided because there was a comprehensive project that examined the accounting treatment of all extractive activities. This comprehensive project has now been closed with today’s decision.

Board decision

All Board members agreed with the staff recommendation to develop requirements or guidance to improve the disclosure objectives and requirements in IFRS 6 about an entity’s E&E expenditure and activities and that the objective of this would be to provide more useful information about an entity’s E&E expenditure and activities to primary users of financial statements.

8 of the 12 Board members agreed with the staff recommendation to remove the temporary status of IFRS 6.

Assessment factors (Agenda Paper 19B)

For the purpose of identifying the scope of the Board’s project on extractive activities, the staff assessed each matter identified through outreach and research against five factors:

  • Relevance—that is, whether the matter affects all entities or only those with extractive activities
  • Scope of IFRS 6—that is, whether the matter relates to exploration and evaluation (E&E) activities or to activities outside the scope of IFRS 6 Exploration for and Evaluation of Mineral Resources
  • Diversity—that is, whether the matter gives rise to diversity in the accounting for similar transactions
  • Improvements—that is, whether the matter is one for which the Board can significantly improve accounting (including disclosure)
  • Effects on users—that is, whether the matter has a material effect on primary users of financial statements (users)

Board discussion

Agenda Paper 19B was not discussed.

Matters in the scope of IFRS 6 (Agenda Paper 19C)

Through outreach and research, the staff identified the following matters:

  • Diversity in accounting for E&E expenditure. In particular:
    • The unit of account applied
    • The elements of cost of an E&E asset—that is: which E&E expenditure to capitalise and when to start and stop capitalising E&E expenditure
  • Differences in accounting for intangible E&E expenditure (applying IFRS 6) and the accounting for research and development (R&D) expenditure (applying IAS 38)
  • The impairment of E&E assets
  • Disclosures about E&E expenditure and activities

Staff recommendations

Based on the analysis in this paper, the staff recommended that the Board:

  • Explore developing requirements or guidance to improve disclosures about an entity’s E&E expenditure and activities as part of a project on extractive activities
  • Not address other matters identified in this paper as part of that project. The staff think there is insufficient evidence at this stage to support making significant amendments to the recognition and measurement of E&E expenditure and assets

Board discussion

Board members acknowledged that the staff recommendations may not be what users had hoped for, given the staff is recommending developing only disclosures instead of recognition and measurement requirements for E&E expenditure and activities. Nonetheless, Board members were generally supportive of the staff recommendations. While this means that there will be continued diversity in practice regarding the accounting for E&E expenditure and activities, this would be acceptable from a cost-benefit perspective. Practice has developed for longer than the IASB exists and it would be disruptive to force some preparers to change their locally accepted accounting policies. This could potentially lead to a misalignment between internal and external reporting, given regulators often prescribe a specific accounting treatment. Furthermore, investors stated that the existing diversity does not affect their decision-making process. While it is odd to state that the Board accepts diversity in practice, the papers for this meeting explain very well why this is the best course of action for this project.

However, some Board members were not content with stopping the work on the recognition and measurement requirements. One Board member said that the Board would first have to decide the objective of the project. If the objective is comparability, diversity between preparers will have to be addressed. If the objective is transparency, disclosures are sufficient to achieve the objective. He suggested to focus on the user needs when determining the objective. Another Board member said that the Board should not shut the door on recognition and measurement requirements once and for all. In his view, it is acceptable to focus on disclosures now, but when developing disclosures, the staff will gain a good overview of the recognition and measurement issues. These should then be reconsidered by the Board. The Basis for Conclusions of IFRS 6 should be cognisant of the diversity in practice and acknowledge that there is no ad hoc solution, but that addressing the diversity will be considered in the long term.

On the staff’s recommendation not to standardise the accounting for intangible E&E expenditure and R&D expenditure as part of a project on extractive activities, Board members generally agreed with this. While there are similarities, the two are sufficiently different not to have a standardised accounting treatment for both. It was suggested to look at this as part of a project on intangibles, if that should be set up based on the feedback to the agenda consultation.

With regard to impairment, one Board member said that the selection of the unit of account has a great effect on whether there will be impairment or not and that it is worth including guidance on this. The Chairman acknowledged this but said that E&E expenditure is not sufficiently different from other assets to warrant impairment requirements separate from those of IAS 36. The Board member agreed but expressed concern that disclosure might be required to explain this. The staff confirmed that if the Board supported the staff recommendation on impairment, it would not preclude adding disclosure requirements to IFRS 6.

On improving disclosures on E&E expenditures and activities, one Board member cautioned that the communication should be clear that disclosures are not generally a substitute for recognition and measurement requirements, but in this case they are. Another Board member said that some of the information the staff envisages should already be provided under the existing disclosure requirements in IFRS 6, however there seems to be a compliance issue. She recommended that the staff examine which disclosure requirements in IFRS 6 are often not met and how they can be enhanced so that it is clear they are required. One Board member cautioned that users have not called for improved disclosure requirements and therefore, the Board should carefully consider, taking its resources into account, whether developing disclosure requirements for E&E expenditure and activities is a top priority. It was noted that the project could be connected to the project on ‘Targeted Standards-level Review of Disclosures’, as that project is going through a similar process, i.e. updating disclosure requirements of existing Standards to be objectives-based. The Chairman stressed that the staff recommendation was about whether it should be explored to add disclosure requirements. He clarified that this is not a decision of whether the Board will develop disclosure requirements.

Board decision

All Board members agreed with the staff’s recommendations.

Matters outside the scope of IFRS 6 (Agenda Paper 19D)

Feedback identified the following matters outside the scope of IFRS 6:

  • Matters relating to the application of IFRS 11, IAS 2, IAS 16 and IAS 37
  • Matters not specifically addressed by IFRS Standards—collaborative arrangements
  • Disclosures not specifically required by IFRS Standards

Staff recommendation

Based on the analysis in the paper, the staff recommended that the matters above are not included in the scope of a project on extractive activities. The staff have not identified compelling evidence to suggest that the Board should address these matters as part of a project on extractive activities. The staff note the matters discussed in this paper would also be relevant to entities in other industries and therefore developing requirements or guidance to address these matters could have wider implications or unintended consequences for entities in other industries.

Board discussion

There has been no significant discussion on this paper.

Board decision

All Board members agreed with the staff recommendation.

Reserve and resource information (Agenda Paper 19E)

R&R classification systems establish standards for public reporting of R&R information—similar to IFRS Standards, these classification systems provide a comprehensive framework for the preparation and disclosure of R&R information. The DP and more recent outreach with stakeholders indicated that primary users of financial statements find R&R information important.

Staff recommendation

The staff think any potential improvements the Board could make regarding the use and disclosure of R&R information in financial statements would be limited. They acknowledge many stakeholders support disclosure of R&R information in financial statements. However:

  • Most jurisdictions with significant extractive industries have requirements governing the preparation and disclosure of R&R information
  • Although users said R&R information is important and enhances their understanding of financial statements and many stakeholders expressed concern about the diversity in practice, many stakeholders also said R&R information is non-financial and beyond the remit of the Board and the financial statements

The staff therefore recommended not developing requirements for the disclosure and use of R&R information in the financial statements as part of a project on extractive activities.

Board discussion

Board members noted that R&R information is very important to users for making investment decisions. However, they acknowledged that the cost for bringing this information into the financial statements would likely outweigh the benefits. One Board member suggested to keep an ‘inventory’ of issues identified that can be passed on to other projects (where appropriate) or be saved for future projects.

It was noted that requiring disclosures on R&R information would widen the scope of IFRS 6, which currently only addresses E&E expenditures and activities. One Board member responded that R&R would be part of E&E considerations, for example the cash-generating unit for impairment testing of capitalised E&E expenditure could include R&R. Hence, the scope would not necessarily be increased.

The Vice-Chair noted that R&R information would be an example of what should be included in management commentary applying the proposed revised Practice Statement, which is currently out for comment. This way, the information would be available to users without having to require it to be within the financial statements.

Board decision

All Board members supported the staff recommendation.

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