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BASIS FOR CONCLUSIONS ON IFRS 6 REASONS FOR ISSUING THE IFRS

BASIS FOR CONCLUSIONS ON IFRS 6 REASONS FOR ISSUING THE IFRS

BASIS FOR CONCLUSIONS ON IFRS 6 REASONS FOR ISSUING THE IFRS:

The Reason are as follow: The impact of International Financial Reporting Standards (IFRSs) has been felt extensively in the exploration industry – particularly the oil and gas industry where key dilemmas and judgements made are greatest at the exploration and production stage. At one end, IFRS 6, Exploration for and evaluation of mineral resources has introduced certain issues for the industry, and, at the other, IFRS is shifting the boundaries of cash-generating units down to the level of the petrol station or smallest group of retailing assets under IAS 36, Impairment of assets.

IFRS 6 is an interim standard, and is a short-term solution to the problem of accounting for the exploration and evaluation of mineral resource assets. There was a lack of guidance prior to this IFRS, and where national standards did exist, the accounting practices were diverse, and a number were used throughout the world to account for the costs involved in exploration and extraction. These included capitalising the costs, or writing them off in the same way as research expenses.

BASIS FOR CONCLUSIONS ON IFRS 6 REASONS FOR ISSUING THE IFRS

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 REASONS FOR ISSUING THE IFRS

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 REASONS FOR ISSUING THE IFRS

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 REASONS FOR ISSUING THE IFRS

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BASIS FOR CONCLUSIONS ON IFRS 6 REASONS FOR ISSUING THE IFRS

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