1. Objective of IFRS 6
IFRS 6 provides guidance on:
-
Accounting for exploration and evaluation (E&E) expenditures
-
Recognizing and measuring E&E assets
-
Impairment rules specific to E&E assets
It allows flexibility while maintaining transparency.
2. Scope of IFRS 6
IFRS 6 applies to expenditures incurred after an entity obtains legal rights to explore and evaluate mineral resources.
Applicable to industries such as:
-
Mining
-
Oil and gas
-
Natural gas
-
Geothermal energy
Does not apply to:
-
Development or production costs
-
Employee benefits
-
Environmental restoration obligations
-
Inventories
3. Recognition of Exploration & Evaluation Expenditure
When to Recognize an E&E Asset
Expenditures may be recognized as E&E assets when they relate to:
-
Geological and geophysical studies
-
Exploratory drilling
-
Sampling and trenching
-
Assessing technical feasibility
-
Assessing commercial viability
Entity may choose to capitalise or expense, but must apply policy consistently.
Costs Allowed to be Capitalised
Examples:
-
Geological/topographical surveys
-
Exploratory drilling
-
Sample analysis and testing
-
Costs to obtain exploration rights
-
Feasibility evaluations
Costs Not Allowed to be Capitalised
Examples:
-
General administrative overheads
-
Costs incurred before exploration rights
-
Production costs
-
Environmental restoration liabilities
These follow IAS 38, IAS 37, or other standards.
4. Measurement of E&E Assets
Initial Measurement
Measure E&E assets at cost, such as:
-
License acquisition cost
-
Drilling and survey costs
-
Directly attributable expenditures
Subsequent Measurement
Entities may use:
-
Cost model
-
Revaluation model (rare due to lack of active market values)
5. Impairment of E&E Assets
Special Impairment Indicators
Test for impairment when facts indicate:
-
Rights to explore have expired or will soon expire
-
No further exploration budget or plans
-
No commercially viable deposits found
-
Exploration discontinued
-
Data suggests the carrying amount is unrecoverable
Allocation to Cash-Generating Units
E&E assets are often allocated to groups of CGUs, because exploration covers large geographical areas.
6. Presentation and Disclosure
Entities must disclose:
-
Accounting policies for exploration and evaluation
-
Carrying amounts of E&E assets
-
Impairment losses recognized or reversed
-
Recoverability assumptions
-
Whether E&E assets are classified as tangible or intangible
7. Practical Examples
Example 1: Capitalising Exploration Costs
Company obtains exploration rights and incurs:
-
Survey: $50,000
-
Drilling: $200,000
-
Lab testing: $20,000
-
Admin: $15,000
Capitalised: $270,000
Expensed: $15,000 (admin)
Example 2: Impairment Trigger
E&E asset = $500,000
Licence expires and no renewal is planned.
No viable minerals found.
→ Entire $500,000 must be impaired.
Example 3: Exploration Continues
E&E cost = $800,000
-
Licence active
-
Promising new drilling
-
Future budget approved
→ No impairment required.
Example 4: Pre-Exploration Costs Expensed
Before obtaining exploration rights:
-
Market study: $40,000
-
Preliminary mapping: $25,000
→ Must be expensed.
Example 5: Transition to Development Phase
Once commercial viability is proven:
-
Costs move from IFRS 6 to IAS 16 / IAS 38
-
Example: building a mine, drilling production wells