IFRS 6: Exploration and evaluation of mineral resources

IFRS 6 is dedicated to assets arising out of exploration and exploitation of mineral resources. Note that IAS 16 on property, plant and equipment is not applicable to mineral rights and mineral resources. The Standard primarily pertains to treatment of exploration and evaluation expenditure pertaining to mineral extraction.

The term exploration and evaluation of mineral resources is defined as “The search for mineral resources, including minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights to explore in a specific area, as well as the determination of the technical feasibility and commercial viability of extracting the mineral resource.” The expenditure incurred for exploration and evaluation of mineral resources includes the expenditure incurred before demonstrating the technical and commercial viability of the extraction. The combined reading of the two definitions suggests that the exploration/evaluation expenditure covered by the Standard is that incurred after obtaining legal rights for such exploration/evaluation, and before establishing the commercial/technical feasibility of the extraction.

The crux of the Standard is the capitalization of exploration/evaluation expenditure. Exploration/evaluation expenditure may be treated, based on accounting policy of the entity, as exploration/evaluation asset. The consideration for the same is “degree to which expenditure can be associated with finding specific mineral resources”. That is to say, an accounting policy on capitalization of an expenditure proceeds on the assumption that the expenditure will lead to cash flows over time. The expenditure that may be capitalized includes:

(a)    acquisition of rights to explore;

(b)   topographical, geological, geochemical and geophysical studies;

(c)    exploratory drilling;

(d)   trenching;

(e)   sampling; and

(f)     activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource.

Developmental expenses are not treated as per this Standard – IAS 38 on intangible assets takes care of the same.

Subsequent measurement of exploration/evaluation assets may be done following the cost model/revaluation model as in case of fixed assets [IAS 16].

Once the technical/commercial feasibility of exploration/evaluation is demonstrable, the exploration/evaluation assets will cease to be classified as such, and will be classed as regular tangible/intangible assets.

Exploration/evaluation assets are subject to impairment. Impairment testing shall be done based on whether the carrying value of the asset exceeds the recoverable amount.  The indicative tests for impairment are as follows:

  1. the period for which the entity has the right to explore in the specific area has expired during the period or will expire in the near future, and is not expected to be renewed.
  2. substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned.
  3. exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area.

Sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.