DipIFR Syllabus B. Elements of financial statements - Exploration for and evaluation of mineral resources - Notes ^{2 / 2}

Exploration for and evaluation of mineral resources is the search for mineral resources after the entity has obtained legal rights to explore in a specific area.

Mineral resources can be:

1. Oil

2. Natural gas

3. Similar non-regenerative resources

Exploration and evaluation expenditures

are expenditures incurred in connection with the exploration and evaluation of mineral resources

Remember!

• These expenditures are incurred BEFORE the technical feasibility and commercial viability of extracting a mineral resource IS DEMONSTRABLE.

Terms

• Technical feasibility

  is the ​ability of a ​business to ​complete the product under current technical conditions.

• Commercial viability

  is the ​ability of a ​business or ​product to ​compete ​effectively and to make a ​profit

Accounting policies

The IFRS permits an entity to develop an accounting policy for exploration and evaluation assets.

1. Entities determine their own accounting policies

   Entities should determine their accounting policies for exploration and evaluation expenditures in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors.

2. Keep the Acc. policies consistent

   IFRS 6 requires relevant entities to determine a policy specifying which expenditures are recognised as exploration and evaluation assets and apply the policy consistently.

3. Clasify the assets as TA or IA

   Entities shall consistently classify them as tangible or intangible according to their nature.

Assets to be measured at cost at recognition

When they are first recognised in the balance sheet, exploration and evaluation assets are required to be measured at cost. 

The following as examples of expenditures that might be included in the initial measurement of exploration and evaluation assets:

• 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.

Future Obligations

Where an entity incurs obligations for removal and restoration as a consequence of having undertaken the exploration for and evaluation of mineral resources, those obligations are recognised in accordance with the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

• This is:
  Dr PPE
  Cr Liability
  All at present value

  This will need discounting and the discount unwound:

  Dr interest (with unwinding of discount) 
  Cr liability

Subsequent measurement

After recognition, entities can apply either the cost model or the revaluation model.

Reclassify the assets...

When the technical feasibility and commercial viability of extracting a mineral resource become demonstrable, at which point the asset falls outside the scope of IFRS 6

Impairment

Check whether there are any indications that an asset may be impaired

• If an impairment test is required, any impairment loss is measured in accordance with IAS 36.

Impairments Indicators

• The right to explore has expired

  if 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 no planned
  substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned;

• Discontinue exploration
  the entity has decided to discontinue exploration of mineral resources in the specific area

A detailed impairment test is required in two circumstances:

1. when the technical feasibility and commercial viability of extracting a mineral resource become demonstrable, at which point the asset falls outside the scope of IFRS 6 and is reclassified in the financial statements; and

2. when facts and circumstances suggest that the asset's carrying amount may exceed its recoverable amount.