Executive Summary

IFRS 6, “Exploration for and Evaluation of Mineral Resources,” provides specific financial reporting guidance for expenditures incurred during the exploration and evaluation (E&E) phase of mineral resources. It aims to offer “limited improvements to existing accounting practices” for these expenditures, particularly concerning asset recognition, impairment testing, and required disclosures. The standard applies to E&E expenditures after an entity obtains legal rights to explore a specific area and before the technical feasibility and commercial viability of extraction are demonstrable.

A key feature of IFRS 6 is its temporary exemption from certain requirements of IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors,” which grants entities flexibility in developing their accounting policies for E&E assets. This allows for a wider range of expenditures to be capitalized than might otherwise be permitted under a strict application of other IFRSs. Entities have an accounting policy choice to either expense all E&E expenditure as incurred or capitalize some or all of it.

IFRS 6 also includes specific, less stringent impairment requirements compared to IAS 36 “Impairment of Assets,” outlining particular facts and circumstances that trigger an impairment test for E&E assets. This is largely due to the inherent uncertainty and lack of immediate cash flows associated with E&E activities.

1. Scope and Applicability of IFRS 6

IFRS 6 specifically applies to “exploration and evaluation expenditures that it incurs.” The term “mineral resources” is broadly defined to include “minerals, oil, natural gas and similar non-regenerative resources,” thus covering the entire extractives industry.

However, the scope of IFRS 6 is strictly limited to the E&E phase, meaning it does not apply to:

• Pre-exploration expenditures: “expenditures incurred before the entity has obtained the legal rights to explore a specific area.” These costs, such as “pre licence costs,” are typically outside the scope of IFRS 6 and usually fall under IAS 38 “Intangible Assets” or are expensed as incurred if not attributable to a specific mineral property.
• Post-E&E expenditures: “expenditures incurred…after the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.” This includes phases like “development, production, closure and rehabilitation.” For these later stages, other IFRSs apply in full.

Key point: While IFRS 6 applies to E&E, other IFRSs still apply to equipment used in the extractives industry (e.g., IAS 16 for tangible assets) and leases of assets (IFRS 16), though specific exclusions exist for “leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources.”

2. Recognition and Measurement of E&E Assets

2.1 Temporary Exemption from IAS 8

A significant aspect of IFRS 6 is its temporary exemption from paragraphs 11 and 12 of IAS 8. These paragraphs typically guide management in developing accounting policies when no specific IFRS applies. The exemption was granted to “limit the need for entities to change their existing accounting policies for exploration and evaluation assets” and “minimise disruption” given the diverse accounting practices prevalent in the extractive industry.

This exemption effectively “permits a greater range of expenditure to qualify to be capitalised as an asset in comparison with the approach that would normally be followed under all of the requirements of IFRS.” It allows entities to capitalize E&E expenditures that might otherwise be expensed as research under IAS 38, or result in delayed impairment recognition.

Important Note: Despite this exemption, entities are still required to apply paragraph 10 of IAS 8 when developing their accounting policies for E&E assets. This means policies must still lead to financial statements that are relevant and reliable.

2.2 Measurement at Initial Recognition

“Exploration and evaluation assets shall be measured at cost.” An entity must define an accounting policy that specifies “which expenditures are recognised as exploration and evaluation assets and apply the policy consistently.” This determination should consider “the degree to which the expenditure can be associated with finding specific mineral resources.”

Examples of expenditures that might be included in the initial measurement of E&E assets (this list is not exhaustive):

• “acquisition of rights to explore.”
• “topographical, geological, geochemical, and geophysical studies.”
• “exploratory drilling.”
• “Trenching.”
• “Sampling.”
• “activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource.”

Expenditures related to the “development of mineral resources shall not be recognized as E&E assets.” Entities must also “recognize any obligations for removal and restoration that are incurred during a particular period as a consequence of having undertaken the exploration for and evaluation of mineral resources” in accordance with IAS 37. If the E&E expenditure that gives rise to the obligation is capitalized, then the debit entry for the provision should also be capitalized.

Accounting Policy Choice: Entities have a choice to either “capitalise or expense each of these types of expenditure during the E&E phase.” This is a consistent accounting policy choice, meaning an entity can choose to capitalize “no E&E expenditure, only some E&E expenditure, or almost all E&E expenditure.”

Different methods historically used include:

• Successful Efforts: “only those costs that lead directly to the discovery, acquisition, or development of specific, discrete mineral reserves are capitalised.” Costs of unsuccessful activities are typically expensed.
• Area-of-Interest: “all E&E expenditure relating to an area of interest are grouped and capitalised,” provided costs are expected to be recouped through development or sale. An “area of interest” is a geological area favorable for mineral presence. Even costs of “dry wells” can be capitalized under this approach if the area is regarded as a single asset.
• Full Cost: generally “capitalising all costs incurred in prospecting, acquiring mineral interests, exploration, appraisal, development and construction.” However, certain aspects of full cost accounting are inconsistent with IFRS, such as capitalizing pre-license costs.
• Partial Capitalization: only some eligible costs are capitalized (e.g., initial acquisition costs, with subsequent costs expensed).

2.3 Measurement After Recognition

After initial recognition, an entity must apply either the cost model or the revaluation model to its E&E assets. If the revaluation model is chosen (from IAS 16 or IAS 38), “it shall be consistent with the classification of the assets.” In practice, most entities use the cost model due to the difficulty in determining fair value for specialized E&E assets and the unlikelihood of an active market for intangible E&E assets.

3. Classification and Reclassification of E&E Assets

3.1 Classification

Entities “shall classify E&E assets as tangible or intangible according to the nature of the assets acquired and apply the classification consistently.” Examples include:

• Intangible: “drilling rights”
• Tangible: “vehicles and drilling rigs”

If a tangible asset is “consumed in developing an intangible asset,” the “amount reflecting that consumption is part of the cost of the intangible asset.” However, “using a tangible asset to develop an intangible asset does not change a tangible asset into an intangible asset.”

3.2 Reclassification

An E&E asset “shall no longer be classified as such when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.” Before reclassification, these assets “shall be assessed for impairment, and any impairment loss recognized.”

4. Impairment of E&E Assets

IFRS 6’s impairment requirements are “considerably less strict” than those in IAS 36. E&E assets “shall be assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount.”

4.1 Impairment Triggers

IFRS 6.20 provides a non-exhaustive list of facts and circumstances that indicate an entity should test E&E assets for impairment:

• “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.”
• “substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned.”
• “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.”

If any of these, or similar, conditions exist, an entity “shall perform an impairment test in accordance with IAS 36.” Any resulting impairment loss is recognized as an expense. The less stringent triggers in IFRS 6 were adopted because E&E assets often do not generate immediate cash flows, making a full application of IAS 36 impractical for impairment assessment until sufficient information is available.

4.2 Level of Impairment Assessment

An entity “shall determine an accounting policy for allocating E&E assets to cash-generating units or groups of cash-generating units for the purpose of assessing such assets for impairment.” Critically, “each cash-generating unit or group of units to which an E&E asset is allocated shall not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments.”

4.3 Reversal of Impairment Losses

Impairment losses recognized on E&E assets (other than goodwill) “is reversed…if there is a subsequent increase in the recoverable amount calculated in accordance with IAS 36.” This reversal is contingent on the asset not having been derecognized. If E&E activities are abandoned and assets derecognized, any subsequent developments will not result in a reversal of the prior impairment charge.

5. Changes in Accounting Policies

An entity “may change its accounting policies for E&E expenditures if the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs.” The entity “shall judge relevance and reliability using the criteria in IAS 8.” The justification for such a change does not require “full compliance” with IAS 8 criteria but must bring the financial statements “closer to meeting the criteria in IAS 8.”

6. Disclosure Requirements

IFRS 6 mandates disclosure of information that “identifies and explains the amounts recognized in its financial statements arising from the exploration for and evaluation of mineral resources.”

Specifically, an entity must disclose:

• “its accounting policies for E&E expenditures including the recognition of E&E 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.”

E&E assets must be treated as a “separate class of assets,” and disclosures required by IAS 16 or IAS 38 must be made “consistent with how assets are classified.” Additional disclosures under IAS 1 (e.g., significant judgments and sources of estimation uncertainty) are also likely required for E&E activities.

7. Farm-in Arrangements

Farm-in arrangements are common in the extractive industry, where one entity (the farmor) transfers a proportion of a property to another (the farmee) in exchange for funding commitments. While IFRS 6.4 states it “does not address other aspects of accounting by entities engaged in the Exploration for and Evaluation of Mineral Resources,” these arrangements are considered to fall within its scope because they result in the recognition of E&E activities by the farmee and potential disposal by the farmor.

In practice, the accounting approach is often based on previous national GAAPs:

• The farmor “will not record any expenditure…that is settled by the farmee.”
• The farmor “does not recognise a gain or loss on the basis of the partial disposal of any E&E asset that has already been capitalised.” Instead, proceeds are “credited against the carrying amount of any existing E&E asset.”
• If proceeds exceed the capitalized E&E asset’s carrying amount, “this excess is recognised as a gain in profit or loss.”

8. Current Status of IFRS 6

IFRS 6 was initially published in 2004 as a “temporary standard.” In September 2021, the IASB decided to “explore developing requirements or guidance to improve the disclosure objectives and requirements in IFRS 6…relating to a company’s exploration and evaluation expenditure and activities; and removing the temporary status of IFRS 6.” As of March 2022, a research project began on these items. However, the IASB decided against developing requirements for reserve and resource information or significantly altering the diverse recognition and measurement requirements, indicating that IFRS 6’s current approach is “likely to remain effective for the long-term, with the potential for new disclosure requirements to be added.