Exploration costs mean the cost incurred for the search of mineral resources including minerals, oils, natural gas, and other similar non-regenerative resources after the entity has obtained the rights to explore in specific areas by determining technical feasibility and commercial viability of extracting the mineral resource. (adapted from IFRS 6).
IFRS 6 allows the company to develop accounting policy for recognition of exploration and evaluation expenditures without adhering to much of the policy requirements of IAS 8 on Policies, changes in Accounting estimates, and errors. The evaluation phase is after the exploration but is dealt with likewise as one in IFRS.
Elements of cost of exploration and evaluation
After recognizing exploration cost as per IFRS 6, the following are the components that form part of the cost:
- Acquisition of rights to explore.
- Cost of exploratory drilling
- Trenching and sampling
- Cost of study towards topography and geology
- Cost of activities related to technical feasibility and commercial viability of extracting mineral
However, expenditure related to the development of mineral resources shall not be recognized as exploration and evaluation costs. These are dealt in as per IAS 38 on intangible assets as development costs.
Accounting for exploration and evaluation.
An entity may have a past practice of deferring all exploration and evaluation expenditure as an asset even if the outcome is highly uncertain. Other entities may have a past practice of expensing all exploration and evaluation expenditure until the technical feasibility and commercial viability of extracting a mineral resource have been established.
An entity can change its accounting policy for E&E only if the change results in an accounting policy that is closer to the principles of the Framework.
The entity should determine the unit to which exploration and evaluation cost will be allocated. The common method is to allocate between areas of interest.
This should involve determining areas to examine and track separately the costs incurred for each area. The area of interest contracts over time as work progresses.
Subsequent measurement of exploration and evaluation
There are two methods to determine the cost of exploration and evaluation. These methods are cost method and the revaluation method.
Whichever method is applied, it shall be consistent with the classification of the costs/assets. Depreciation and amortization of E&E assets usually do not commence until the assets are placed in service.
The revaluation method is applied to intangible assets only if there is an active market in relevant intangible assets.
However, such criteria are seldom met and cost method is used then. The ‘fair value as deemed cost’ exemption in IFRS only applies to tangible fixed assets and thus is not available for intangible assets.
Reclassification of Exploration and evaluation assets.
Exploration and evaluation assets are reclassified procedures that have been completed to recognize as such.
Those expenditures which are commercially viable have to reclassified to development cost viz. as development assets. The exploration and evaluation assets shall also be tested for impairment.
Impairment of Exploration and evaluation assets
There are various indicators to determine the impairment of exploration and evaluation assets as :
- The right to explore in the geographical area has expired or about to expire with no option to renew.
- Further exploration and evaluation are not planned.
- There is sufficient data to conclude that exploration and evaluation will be discontinued due to a lack of commercial reserves.
The disclosure requirements of exploration and evaluation assets generally include:
- The accounting policy used for allocating exploration and evaluation assets cash-generating units for impairment purposes
- The amount recognized in financial statement w.r.t. exploration and evaluation activities including the disclosure in operating cash flows and investing cash flows
- Last but not least the reconciliation statement of amounts carried forward as exploration and evaluation assets at the beginning and closing of the accounting period. The reconciliation statement includes transfers to development, amounts written off, and impairments.