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BASIS FOR CONCLUSIONS ON IFRS 6 DISCLOSURES

BASIS FOR CONCLUSIONS ON IFRS 6 DISCLOSURES

BASIS FOR CONCLUSIONS ON IFRS 6 DISCLOSURES: Entities are required to disclose information that identifies and explains the amounts recognised in their financial statements arising from the exploration for and evaluation of mineral resources. To comply with this requirement, the following should be disclosed:

• the entity’s accounting policies for exploration and evaluation expenditures, including the recognition of exploration and evaluation assets.

• the amounts of assets, liabilities, income and expense and operating and investing cash flows arising from the exploration for and evaluation of mineral resources. Exploration and evaluation assets will be treated as a separate class of assets for disclosure purposes.

The disclosures required by either IAS 16 or IAS 38 should be made, consistent with how the assets are classified.

BASIS FOR CONCLUSIONS ON IFRS 6 DISCLOSURES

Changes made to an entity’s accounting policy for exploration and extraction assets can only be made if the result is closer to the principles of the IASB Framework. The change must result in a policy that is more relevant and no less reliable, or more reliable and no less relevant, than the previous policy.

The costs capitalised under the IFRS might not meet the IASB Framework definition of an asset because, for example, the capitalisation criteria followed might not require the demonstration of probable future economic benefits. IFRS 6 therefore deems these costs to be assets. Exploration and evaluation expenditure might therefore be capitalised earlier than would otherwise be the case under the IASB Framework.

BASIS FOR CONCLUSIONS ON IFRS 6 DISCLOSURES

Recognised exploration and evaluation assets should be classified as either tangible or intangible assets under IFRS 6. Assets recognised in respect of licences and surveys should therefore be classified as intangible assets. Subsequent costs incurred during the exploration and evaluation phase should be capitalised in accordance with this same policy. Basically, the entity can retain the accumulated cost as an exploration asset until there is sufficient information to determine whether there will be commercial cash flows or not.

When first recognised in the statement of financial position, exploration and evaluation assets are measured using the cost model. Subsequently, cost or the revaluation model, as described in IAS 16 and IAS 38. Depreciation and amortisation is not calculated for the assets because the economic benefits that the assets represent are not consumed until the production phase.

BASIS FOR CONCLUSIONS ON IFRS 6 DISCLOSURES

Assets should be tested for impairment if the book value of the asset may not be recoverable. The facts and circumstances indicating impairment include the following:

  • The entity’s right to explore in an area has expired, or will expire in the near future, without renewal.
  • No further exploration or evaluation is planned or budgeted for.
  • A decision has been made to discontinue exploration and evaluation in an area because of the absence of commercial reserves.
  • Sufficient data exists to indicate that the book value will not be fully recovered from future development and production.

As this type of asset does not generate cash inflows, it is tested for impairment as part of a larger group of assets. An entity should develop a policy for allocating these assets to groups of cash generating units (CGUs) and apply that policy consistently. The assets are tested for impairment in accordance with IAS 36, subject to certain special requirements. The limitation specified in the IFRS is that the CGU to which the assets are allocated should not be larger than a segment of the entity. IAS 36 specifies that a CGU is the smallest unit for which independent cash flows can be identified. Without this exemption, it could mean that each individual extraction unit (such as an oil rig) would be treated as a CGU. IFRS 6 therefore also gives some flexibility when defining a CGU.

BASIS FOR CONCLUSIONS ON IFRS 6 DISCLOSURES

Once the technical and commercial feasibility of extracting a mineral resource has been demonstrated, the assets fall outside IFRS 6 and are reclassified according to other IFRSs. Before reclassification, the assets should be tested for impairment.

Exploration and development costs that are capitalised are classified as non-current assets in the statement of financial position, and should be separately disclosed on the face of the statement of financial position and distinguished from production assets, where material. The classification as ‘tangible’ or ‘intangible’, established during the exploration phase, should be continued through to the development and production phases. Details of the amounts capitalised, and the amounts recognised as an expense from exploration, development, and production activities, should be disclosed.

BASIS FOR CONCLUSIONS ON IFRS 6 DISCLOSURES

IFRS 6 allows entities using quite different accounting policies to all claim adherence to the standard, effectively exempting them from applying the IASB Framework. This is similar to IFRS 4, Insurance Contracts. It was argued that it was too harsh to force those entities that use capitalisation in their accounts to switch to expensing, even though IAS 38 requires this. It was also argued that some entities are created just to carry out exploration, and once this is complete, they sell the rights to the minerals found. If the IASB Framework or IAS 36 was applied to these entities, then no assets would ever be recognised. The IASB accepted these arguments and therefore issued IFRS 6.

BASIS FOR CONCLUSIONS ON IFRS 6 DISCLOSURES

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BASIS FOR CONCLUSIONS ON IFRS 6 DISCLOSURES

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