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BASIS FOR CONCLUSIONS ON IFRS 6 TRANSITION: IFRS 6 is effective for annual periods beginning on or after 1 January 2006. Earlier application is encouraged. If an entity applies IFRS 6 for a period beginning before 1 January 2006, that fact should be disclosed. For entities that chose to wait until 1 January 2006 to adopt the Standard, IAS 8 requires the entity to disclose that fact and, if estimable, the expected impact in the period of initial application.

The IASB has delayed the implementation date for IFRS 6 to 1 January 2006 in order not to disturb the ‘stable platform’ for 2005 and to allow more time to make the transition to the IFRS. However, given that the principal objective of IFRS 6 is to provide relief from applying the more rigorous requirements of IAS 8, it is likely that the vast majority of affected entities applying IFRSs in 2005 will select the alternative of early adoption.

The adoption of IFRS 6 will not generally result in changes in accounting policies for the recognition and measurement of exploration and evaluation assets. Where an entity voluntarily changes its accounting policies to improve the relevance or reliability of the financial information provided in respect of such assets, then the general principles of IAS 8 apply.

Therefore, such changes in accounting policies should be applied retrospectively, unless it is impracticable to do so. As regards impairment testing, the general requirement on the adoption of IFRS 6 is that entities recognising exploration and evaluation assets should determine whether there were any facts and circumstances indicating impairment in prior periods. Any identified impairment should generally be recognised retrospectively. However, the Board has permitted an exemption where it is impracticable to apply the impairment rules to comparative information that relates to an annual period beginning before 1 January 2006. The rules need not be applied retrospectively in such circumstances, provided that the entity discloses that fact


IFRS 6 permits entities to continue to use their existing accounting policies, provided they comply with paragraph 10 of IAS 8, Accounting policies, changes in accounting estimates and errors – that is they result in information which is relevant and reliable. An entity accounts for its exploration and evaluation expenditure either in accordance with the IASB Framework or with the exemption permitted by IFRS 6. This allows an entity to apply an accounting policy for exploration and evaluation assets which is relevant and reliable, even though the policy may not be in full compliance with the IASB Framework. The criteria to be used to determine if a policy is relevant and reliable are set out in paragraph 10 of IAS 8. A policy must:

  • be relevant to the decision-making needs of users
  • provide a faithful representation
  • reflect the economic substance
  • be neutral (free from bias), prudent, and complete.


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.


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.


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.


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.


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.


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