Mining and Natural Resources Accounting (IFRS 6): Exploration and Evaluation Costs
Mining and Natural Resources Accounting (IFRS 6): Exploration and Evaluation
Mining accounting is one of the most complex sectors because it involves spending millions on exploration and evaluation before knowing if the site will even be profitable. Standard IFRS 6 provides the framework for handling these initial costs, while concepts like Depletion help distribute the resource cost over its productive life. In this guide, we explore the lifecycle of a mining project and the key accounting treatments required.
- Understand the scope and application of IFRS 6 in mining.
- Differentiate between Exploration, Development, and Production phases.
- Master the Units of Production (UOP) method for calculating Depletion.
- Handle Environmental Restoration provisions and site reclamation costs.
- Practical knowledge of Impairment testing for mining assets.
1) What is Mining and Natural Resources Accounting?
Unlike traditional manufacturing, mining accounting deals with “Wasting Assets”—resources that are consumed and cannot be replaced. The main goal is to capture all costs of finding, extracting, and eventually closing the site, and matching them with the revenue from sold minerals.
Mining assets are a specialized form of property, plant, and equipment (PPE) but with a focus on depletion.
2) IFRS 6: Exploration and Evaluation of Mineral Resources
IFRS 6 is unique because it allows companies to keep their existing accounting policies for exploration and evaluation (E&E) costs.
- Capitalization: Companies can choose whether to expense or capitalize costs like topographical studies, exploratory drilling, and sampling.
- Materiality: The standard requires consistency; once a policy is chosen, it must be applied uniformly to all similar projects.
- Technical Feasibility: Once technical feasibility and commercial viability are proven, the project moves out of IFRS 6 and into general PPE or Intangible standards.
3) The 5 Phases of a Mining Project
Each phase has a different accounting treatment.
Practical IFRS Applications - PDF File
4) Depletion: The Depreciation of Natural Resources
Depletion is how we allocate the cost of the natural resource as it is extracted. The most common method is the Units of Production (UOP) method.
Depletion per Unit = (Total Cost of Resource − Salvage Value) ÷ Estimated Total Recoverable Units.
| Item | Value | Calculation Note |
|---|---|---|
| Total Capitalized Cost | 10,000,000 | Acquisition + Development. |
| Estimated Reserves | 500,000 oz | Based on geological survey. |
| Cost per Ounce | 20 / oz | 10M ÷ 500k. |
| Production this Year | 50,000 oz | Actual ounces extracted. |
| Annual Depletion Expense | 1,000,000 | 50k × 20. |
5) Environmental and Restoration Liabilities
Mining companies are legally or constructively obligated to restore the site after operations end. According to IAS 37, this liability must be recognized as soon as it is incurred (usually at the start of production).
- Provision: Recognize the present value of estimated future restoration costs.
- Asset Link: The debit goes to the related mining asset (PPE), increasing its cost.
- Unwinding: The interest expense on the provision is recognized annually (Unwinding of discount).
6) Impairment of Mining Assets
In mining accounting, we must test for impairment if facts suggest the carrying amount of an E&E asset exceeds its recoverable amount. Indicators include:
- Expiry of the right to explore.
- Decision to stop further exploration in a specific area.
- Proof that the resource is not commercially viable.
7) Brief Chart of Accounts (COA) for Mining
| Account Group | Typical Accounts | Key Analytical Dimension |
|---|---|---|
| Non-Current Assets | Exploration & Evaluation Assets, Mineral Reserves, Mine Infrastructure. | Project / Site ID |
| Inventory | Extracted Ore, Concentrates, Consumables. | Material Type |
| Liabilities | Provision for Site Restoration, Royalties Payable. | Jurisdiction |
| Expenses | Depletion Expense, Exploration Write-offs, Production Salaries. | Cost Center |
8) Required Disclosures under IFRS 6
Because of the significant estimation involved, IFRS 6 requires:
- Accounting policies for exploration and evaluation expenditures.
- The amounts of assets, liabilities, income, and expense arising from E&E.
- Specific details on impairment testing and the cash-generating units (CGUs) used.
9) Frequently Asked Questions
What is the difference between Depletion and Depreciation?
Depreciation is for man-made assets (buildings, machinery), while Depletion is for natural resources (coal, oil, timber) that are physically consumed.
Can exploration costs be expensed immediately?
Yes, IFRS 6 allows an entity to choose its policy: capitalization or expensing. Once chosen, it must be applied consistently.
How often should reserves be re-estimated?
Reserves should be reviewed annually. Changes in estimates are handled prospectively, affecting future depletion rates.
10) Conclusion
Successful mining accounting depends on clear stage-gating. By mastering IFRS 6 for exploration, applying Depletion via the UOP method, and accurately providing for Environmental Restoration, a mining company can provide a transparent view of its long-term viability and risk profile. Always remember: the mine is a finite resource; accounting must reflect its journey from discovery to restoration.