IFRS 6 – Exploration for and Evaluation of Mineral Resources

§ 01 — Introduction

What Is IFRS 6?

IFRS 6, Exploration for and Evaluation of Mineral Resources, is the International Financial Reporting Standard that governs how entities account for costs incurred in the search for mineral resources including oil, gas, ores, and other minerals before the technical feasibility and commercial viability of extracting those resources has been established.

Issued by the International Accounting Standards Board (IASB) in December 2004 and effective for annual periods beginning on or after 1 January 2006, IFRS 6 represents a deliberate policy of limited standardisation. It was conceived as an interim measure to prevent entities from having to change their existing accounting policies while the IASB undertook a more comprehensive review of extractive industry accounting.

“The Standard permits an entity to develop an accounting policy for exploration and evaluation assets without specifically considering the requirements of IFRS Framework paragraphs 8–10.” — IASB, IFRS 6 Basis for Conclusions, BC7

The practical effect is that entities operating in mining, oil and gas, and related sectors retain considerable flexibility in how they capitalise or expense exploration costs; a feature that distinguishes IFRS 6 from most other IFRS standards that demand strict adherence to the Conceptual Framework.

§ 02 — Scope & Application

What IFRS 6 Covers – and What It Does Not

The scope of IFRS 6 is deliberately narrow. Understanding precisely which activities fall within its boundaries is essential for correct financial reporting in the extractive sector.

Activities Within Scope

IFRS 6 applies to expenditures incurred by an entity in connection with the exploration for and evaluation of mineral resources. Broadly, this encompasses the phase between the acquisition of legal rights to explore and the point at which technical feasibility and commercial viability are demonstrable.

Activities Outside Scope

IFRS 6 explicitly does not apply to expenditures incurred before the entity obtains the legal rights to explore in a specific area (pre-licence costs), nor to development expenditures after technical feasibility and commercial viability have been established. Those phases are governed by IAS 16, IAS 38, or IFRS 9 as appropriate.

§ 03 — Recognition

Recognition of Exploration & Evaluation Assets

One of the most significant features of IFRS 6 is the latitude it grants entities in developing their recognition policies. Rather than mandating a single approach, the standard permits entities to continue using accounting policies developed under previous national GAAPs, provided those policies result in information that is relevant and reliable.

The Area-of-Interest Method

The most widely adopted approach in practice is the area-of-interest method, under which all E&E expenditures relating to a defined geographical area are accumulated and capitalised as an asset, pending the outcome of exploration activities. If the area is abandoned, costs are written off; if it progresses to development, costs are reclassified to development assets.

The Full Cost Method

Under the full cost method, prevalent among many North American-listed entities reporting under IFRS; all E&E costs are pooled across a large cost centre (often a country or continent) and amortised against total proved reserves. This approach can result in significant capitalised balances even where individual projects have uncertain prospects.

Elements That May Be Capitalised

• Acquisition of rights to explore i.e. licence fees, option payments, and directly attributable legal costs.
• Topographical, geological, geochemical, and geophysical studies directly relating to the exploration area.
• Exploratory drilling, including sample collection, core analysis, and down-hole testing.
• Activities related to evaluating the technical feasibility and commercial viability of extracting a resource.
• Depreciation on plant and equipment used in the E&E phase, to the extent directly attributable.

§ 04 — Measurement & Classification

Measurement After Initial Recognition

IFRS 6 paragraph 12 requires that after recognition, E&E assets are measured using either the cost model or the revaluation model, applying the chosen model consistently to all E&E assets of the same type. The mechanics of each model are governed by IAS 16 (for tangible assets) and IAS 38 (for intangible assets) respectively.

Classification: Tangible or Intangible?

Entities must classify E&E assets as either tangible or intangible depending on the nature of the expenditure. In practice, many entities adopt a mixed approach i.e. classifying drilling rigs, vehicles, and infrastructure as tangible, and rights, licences, and geological data as intangible.

Reclassification to Development Assets

Once an entity determines that a mineral deposit is technically feasible and commercially viable to extract, E&E assets relating to that area must be reclassified out of E&E assets into the appropriate development asset category. This reclassification triggers full IFRS impairment testing under IAS 36 at the point of transition.

§ 05 — Impairment

IFRS 6 Impairment Testing: A Special Regime

IFRS 6 establishes a modified impairment testing framework that departs materially from the IAS 36 model. Rather than conducting detailed Recoverable Amount calculations at every reporting date, entities need only assess E&E assets for impairment when specific facts and circumstances indicate that the carrying amount may exceed the recoverable amount.

Impairment Indicators Under IFRS 6

IFRS 6 paragraph 20 lists non-exhaustive indicators that should prompt an impairment assessment:

• Licence expiry: The period for which the entity has the right to explore in a specific area has expired or will expire in the near future, and is not expected to be renewed.
• Absence of budget: Substantive expenditure on further exploration and evaluation in the specific area is neither budgeted nor planned.
• Insufficient discovery: Exploration and evaluation has not led to the discovery of commercially viable quantities of mineral resources, and the entity has decided to discontinue such activities.
• Data suggesting non-recovery: Sufficient data exists 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.

Cash-Generating Units for E&E Assets

IFRS 6 permits a unique aggregation approach: E&E assets may be grouped into CGUs (or groups of CGUs) that are no larger than an operating segment as defined by IFRS 8. This is significantly more permissive than the IAS 36 CGU definition and can allow losses in one area to be offset against surpluses in another within the same operating segment.

“The level at which E&E assets are assessed for impairment shall be no larger than an operating segment determined in accordance with IFRS 8.” — IFRS 6, paragraph 21

Once an impairment loss is identified, however, the measurement of that loss must follow IAS 36; meaning it equals the excess of carrying amount over recoverable amount (higher of fair value less costs of disposal and value in use).

§ 06 — Disclosure

Disclosure Requirements

Despite its permissive stance on recognition and measurement, IFRS 6 imposes meaningful disclosure requirements designed to enable users of financial statements to understand the amounts arising from E&E activities and the judgements made.

Entities in the extractive industries often supplement mandatory IFRS 6 disclosures with reserve quantities disclosures, production information, and lifting cost data particularly where they are cross-listed on exchanges such as the NYSE or LSE that have additional reserve reporting requirements.

§ 07 — Frequently Asked Questions

IFRS 6: Common Questions Answered