What does it mean by Exploration for and evaluation of mineral resources, Oil and Gas?

It is basically 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.

 

 

 

Relevant IFRS applicable for Exploration and evaluation of Mineral resources, Oil and Gas Industry

  • IFRS 6: Exploration for and Evaluation of Mineral Resources
  • IAS 16 – Component accounting for assets
  • IAS 36 – Impairments
  • IAS 37 – Asset retirement obligations
  • IAS 38 – Intangible assets
  • IFRS 1 – opening balance sheet

What are the Exploration for and Evaluation Cost?

  • Lease acquisition rights
  • Technical studies and services
  • Seismic costs
  • Geologic and geophysical costs
  • Exploratory drilling and testing
  • Tangible and intangible costs

Transition issues (IFRS1)

Requires retrospective restatement of beginning balances which is subject to very high cost and limited benefits to users

Cash Generating Unit

IFRS 6 defines Cash Generating Unit (CGU) as smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets

Impairment of assets is done at the CGU level.  Application of CGU requires judgment. It will involve how management monitor operations, product line, regional areas, decision regarding continuing or disposing operations.

We have already discussed Component accounting in our previous articles.

IFRS 6

Objective - To specify the financial reporting for the exploration for and evaluation of mineral resources

Scope: It applies only to expenditure incurred before exploration and evaluation of mineral resources. It does not apply to companies who are engaged in exploration and evaluation of mineral resources.

Measurement: Exploration for and evaluation assets shall be measured at cost

 It allows Full Cost Method for exploration and evaluation after this the companies are required to follow Successful effort method.

Successful Effort method (SE) v/s Full Cost Method (FC)

Oil and gas sector is only industry where companies are allowed to chose between two extreme different accounting methods.

Exploratory dry holes cost are capitalized in FC method where as in SE it is expensed.

Geologic and geophysical costs are capitalized in FC method where as in SE it is expensed.

Steps to proceed with IFRS 6

  • The entity must determine accounting policies specifying which exploration and evaluation expenditures are recognized as assets, and how such assets are to be measured.
  • On recognition, exploration and evaluation assets are measured at cost. Subsequently they are measured using either the cost model or the revaluation model. 
  • Exploration and evaluation assets are classified as tangible or intangible assets according to their nature.

 

An exploration and evaluation asset is assessed for impairment when circumstances suggest the carrying amount exceeds the recoverable amount.

Author: Shalini Tibe, IFRS Consultant