Evaluation of IFRS 6 Standard: Exploration for and Evaluation of Mineral Resources

IFRS 6 Standard, “Exploration for and Evaluation of Mineral Resources,” addresses a specialized topic concerning the accounting for activities related to the search for and evaluation of mineral resources, such as oil, natural gas, and minerals. IFRS 6 Standard provides guidance to mining and exploration companies on how to recognize, measure, and disclose exploration and evaluation expenditures in the financial statements. In this article, we will provide an assessment of IFRS 6 Standard, discuss its objectives, scope, and key requirements, and explain how to recognize, measure, and test for impairment of exploration and evaluation assets, highlighting the importance of this standard and its impact on the financial statements of mining companies.

What is IFRS 6 Standard Exploration for and Evaluation of Mineral Resources?

IFRS 6 Standard is an International Financial Reporting Standard (IFRS) that addresses the accounting for exploration and evaluation expenditures for mineral resources. This standard applies to companies that are engaged in the exploration for and extraction of natural resources, such as oil, gas, and mining companies.

• Exploration and Evaluation of Mineral Resources: Refers to the activities undertaken by an entity to search for mineral resources and assess their technical feasibility and commercial viability.

Objectives of IFRS 6 Standard Exploration for and Evaluation of Mineral Resources:

• Provide an Accounting Framework for Exploration and Evaluation Expenditures: IFRS 6 Standard aims to provide guidance on how to account for expenditures incurred in the exploration and evaluation phase, which is a phase prior to the start of commercial production.
• Improve the Quality of Disclosures: IFRS 6 Standard imposes specific disclosure requirements aimed at improving the transparency and reliability of information related to exploration and evaluation activities in the financial statements.
• Enhance Comparability: IFRS 6 Standard contributes to improving the comparability of the financial statements of companies operating in the mining and exploration industry by standardizing the treatment of exploration and evaluation expenditures.
• Specify Recognition and Measurement Requirements: IFRS 6 provides guidance on how to recognize and measure exploration and evaluation assets.

Scope of IFRS 6 Standard Exploration for and Evaluation of Mineral Resources:

IFRS 6 Standard applies to exploration and evaluation expenditures for mineral resources, which include:

• Costs of Acquiring Exploration Rights: These include costs paid to governments or landowners to obtain the rights to explore and evaluate mineral resources in a specific area.
• Costs of Geological, Geophysical, and Geochemical Studies: These include the costs of studies and surveys aimed at identifying the locations and characteristics of mineral resources.
• Costs of Exploratory Drilling: These include the costs of drilling test wells to determine the quantity and quality of mineral resources.
• Costs of Sampling and Analysis: These include the costs of collecting samples of discovered mineral resources and analyzing them in laboratories to determine their characteristics.
• Costs of Technical and Commercial Feasibility Studies: These include the costs of preparing feasibility studies to assess the possibility of extracting mineral resources in a commercially profitable manner.
• Costs of activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource, such as determining the volume and grade of deposits, examining and testing alternative mining methods, and studying engineering, technological, and economic factors.  

IFRS 6 Standard excludes from its scope:

• Expenditures Incurred Before Obtaining the Legal Rights to Explore for Mineral Resources: These costs are treated as an expense in the Income Statement.
• Expenditures Incurred After the Technical Feasibility and Commercial Viability of Extracting a Mineral Resource Are Demonstrable (Development Phase): These costs are addressed according to other accounting standards, such as IAS 16 “Property, Plant and Equipment” or IAS 38 “Intangible Assets.”  

Recognition of Exploration and Evaluation Assets:

IFRS 6 allows companies to capitalize exploration and evaluation expenditures as an asset on the Statement of Financial Position (Balance Sheet) if these expenditures can be linked to the discovery of a specific resource and are likely to result in future economic benefits.

Conditions for Recognizing Exploration and Evaluation Assets:

• The expenditures can be identified and measured reliably: The company must be able to identify and measure the exploration and evaluation expenditures accurately.
• The expenditures are directly related to the discovery of a specific resource: The expenditures must have been incurred with the aim of finding and evaluating a specific mineral resource.
• It is probable that the expenditures will result in future economic benefits: There must be a high probability that the exploration and evaluation activities will lead to the discovery of a mineral resource that can be extracted commercially and profitably.
• Exploration and Evaluation assets may be classified as tangible or intangible assets.
  • Tangible Assets: Such as costs of drilling exploratory wells and machinery and equipment used in exploration and evaluation activities.
  • Intangible Assets: Such as exploration rights and costs of geological and geophysical studies.

Measurement of Exploration and Evaluation Assets:

• Initial Measurement: Exploration and evaluation assets are initially measured at cost. Cost includes all direct and indirect expenses related to exploration and evaluation activities, such as material, labor, and consulting services costs.
• Subsequent Measurement:IFRS 6 allows companies to choose between the cost model and the revaluation model for measuring exploration and evaluation assets after initial recognition.
  • Cost Model: The asset is measured at its historical cost less any impairment losses. This model is the most common in practice.
  • Revaluation Model: The asset is measured at its fair value at the revaluation date, with any subsequent changes in fair value recognized in other comprehensive income. This model requires the existence of an active market for exploration and evaluation assets, which is often not the case.

Impairment Test of Exploration and Evaluation Assets:

Companies must test exploration and evaluation assets for impairment periodically and when there are indications of impairment. IFRS 6 requires performing an impairment test in the following cases at least:

• At the end of each reporting period.
• When facts and circumstances suggest that the carrying amount of exploration and evaluation assets may exceed their recoverable amount.  

Indicators of Impairment:

• The period for which the entity has the right to explore in the specific area has expired or will expire in the near future, and is not expected to be renewed.  
• Substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned.  
• Exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area.  
• Sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.  
• Other evidence exists that the asset’s carrying amount exceeds its recoverable amount.

Recognition of Impairment Losses:

If the recoverable amount of an exploration and evaluation asset (which is the higher of fair value less costs to sell and value in use) is less than its carrying amount, an impairment loss must be recognized in the Income Statement.

How to Calculate the Recoverable Amount:

• Fair Value Less Costs to Sell: This amount represents the price at which the asset can be sold in the market after deducting the costs of sale.
• Value in Use: Represents the present value of the future cash flows expected from using the asset.

Disclosures Required by IFRS 6 Standard:

IFRS 6 Standard imposes specific disclosure requirements aimed at improving the transparency of information related to exploration and evaluation activities in the financial statements. These disclosures include:

• Accounting Policies Used for Exploration and Evaluation Expenditures: The company must disclose the accounting policies it applies to exploration and evaluation expenditures, including the basis used to recognize these expenditures as an asset and the measurement method used (cost or revaluation).
• Amounts Recognized as Exploration and Evaluation Assets: The carrying amount of exploration and evaluation assets at the beginning and end of the reporting period must be disclosed, with clarification of any changes that occurred during the period.
• Information about the Nature and Extent of Exploration and Evaluation Risks: The company must disclose information about the key risks associated with exploration and evaluation activities, such as the risk of not finding mineral resources in commercial quantities.
• Information about Impairment Tests: The company must disclose information about the impairment tests performed, including the key assumptions used in calculating the recoverable amount and the impairment losses recognized during the period.
• Information about Any Commitments Related to Site Restoration: The company must disclose any commitments related to restoring sites where exploration and evaluation activities have been carried out.
• Disclosure of the amounts of exploration and evaluation assets classified as tangible or intangible, based on the nature of these assets.
• Disclosure of the amounts of exploration and evaluation assets reclassified to development.

Importance of IFRS 6 Standard for Mining and Exploration Companies:

IFRS 6 Standard is an important standard for companies operating in the mining and exploration industry, as it provides a clear accounting framework for exploration and evaluation expenditures. Applying this standard helps companies:

• Comply with IFRS: IFRS 6 Standard ensures that companies treat exploration and evaluation expenditures consistently with IFRS.
• Improve the Quality of Financial Reporting: Applying IFRS 6 Standard leads to improved quality and transparency of financial information related to exploration and evaluation activities, which enhances the credibility of the financial statements.
• Enhance Investor Confidence: IFRS 6 Standard helps build investor confidence by providing more accurate and reliable information about exploration and evaluation assets and better risk assessment.
• Make Better Decisions: IFRS 6 Standard provides useful financial information that helps management make decisions related to exploration and evaluation activities and determine the feasibility of future projects.

Challenges in Applying IFRS 6 Standard:

• Determining Whether Expenditures Are Related to the Discovery of a Specific Resource: In some cases, it may be difficult to determine whether exploration and evaluation expenditures are directly related to the discovery of a specific resource, especially in the early stages of the exploration process.
• Estimating the Probability of Success: Recognizing exploration and evaluation assets requires estimating the probability of success of exploration and evaluation activities in achieving future economic benefits, which involves a high degree of uncertainty.
• Choosing the Appropriate Measurement Model: Companies must choose the measurement model (cost or revaluation) that suits their specific circumstances, taking into account the requirements of IFRS and the availability of reliable information about fair value.
• Impairment Testing: Impairment testing requires making complex estimates about future cash flows and appropriate discount rates, which may lead to differences in estimates among companies.

Impact of IFRS 6 Standard on the Financial Statements of Mining Companies:

• Statement of Financial Position (Balance Sheet): IFRS 6 Standard affects the recognition and measurement of exploration and evaluation assets, which may constitute a significant portion of the assets of mining companies. These assets are presented separately from other assets in the Statement of Financial Position (Balance Sheet).
• Income Statement: Applying IFRS 6 Standard may lead to the recognition of impairment losses in the Income Statement, which affects net profit. Also, expenditures that are not capitalized are recognized as an expense in the Income Statement.
• Statement of Cash Flows: IFRS 6 Standard affects the Statement of Cash Flows by classifying cash flows related to exploration and evaluation activities as investing activities.
• Disclosures: IFRS 6 Standard imposes specific disclosure requirements aimed at improving the transparency of information related to exploration and evaluation activities, helping users of the financial statements understand the nature of these activities and their impact on the company’s financial position.

Role of Technology in Applying IFRS 6 Standard:

Accounting software and Enterprise Resource Planning (ERP) systems help in applying IFRS 6 Standard more efficiently and accurately by:

• Automating the Process of Tracking Exploration and Evaluation Expenditures: These systems facilitate the process of tracking and classifying exploration and evaluation expenditures according to the project or exploration area.
• Facilitating the Impairment Testing Process: They provide tools to perform impairment tests automatically, reducing the time and effort involved in this process.
• Generating Reports Necessary to Comply with Disclosure Requirements: They help prepare the disclosures required by IFRS 6 Standard easily and accurately.
• Improving the Accuracy of Financial Data Related to Exploration and Evaluation Activities: They reduce the risk of human errors and improve the accuracy and reliability of financial data.
• Providing Advanced Data and Analytics: Some specialized systems offer advanced analytical tools that help companies evaluate the performance of exploration and evaluation activities and make better investment decisions.

Future of Accounting for Exploration and Evaluation of Mineral Resources:

It is expected that the focus will continue to be on improving the quality and transparency of financial information related to exploration and evaluation activities. Technological developments, such as artificial intelligence and big data analytics, may lead to fundamental changes in how mining companies account for these activities in the future.

Potential Future Trends:

• Increased Reliance on Fair Value: We may see a greater shift toward using fair value in measuring exploration and evaluation assets, especially with the development of valuation methods and the increased availability of market data.
• Integration of Sustainability Data: Sustainability data (environmental and social) may be integrated into the evaluation of exploration and evaluation assets, leading to a more comprehensive accounting of the impacts of mining activities.
• Use of New Technologies: Technologies such as blockchain may improve the transparency and reliability of data related to the mineral supply chain, which may affect how exploration and evaluation assets are evaluated.

Examples of Applying IFRS 6 in Mining Companies:

• Saudi Aramco: Saudi Aramco applies IFRS 6 Standard when accounting for exploration and evaluation costs for oil and gas fields, and discloses detailed information about these activities in its financial statements.
• BHP: BHP uses IFRS, including IFRS 6 Standard, in preparing its financial statements and discloses detailed information about its exploration and evaluation activities, including the accounting policies used, the amounts recognized as assets, and the impairment tests performed.
• Rio Tinto: Rio Tinto applies IFRS 6 Standard and provides comprehensive disclosures about its exploration and evaluation assets around the world, including information about the risks and challenges related to these activities.

Professional Ethics in the Context of IFRS 6 Standard:

Accountants must adhere to the highest standards of ethical conduct when applying IFRS 6 Standard. Financial reports must be prepared with integrity, transparency, and objectivity, and must faithfully represent the economic reality of the entity. Accountants must avoid any manipulation of financial data or inappropriate use of accounting policies to influence the figures in the financial statements.

Relationship Between IFRS 6 and Other IFRS Standards:

IFRS 6 Standard is related to several other IFRS standards, such as:

• IAS 1 “Presentation of Financial Statements”: Specifies how to present exploration and evaluation assets in the Statement of Financial Position (Balance Sheet).
• IAS 16 “Property, Plant and Equipment”: This standard applies to exploration and evaluation assets classified as tangible assets after the technical feasibility and commercial viability of extracting mineral resources are demonstrable.
• IAS 36 “Impairment of Assets”: Specifies how to test for impairment of assets, including exploration and evaluation assets.
• IAS 38 “Intangible Assets”: This standard applies to exploration and evaluation assets classified as intangible assets after the technical feasibility and commercial viability of extracting mineral resources are demonstrable.
• IFRS 8 “Operating Segments”: May require additional disclosures about exploration and evaluation assets according to IFRS 8 if they represent a separate operating segment.
• IFRS 9 “Financial Instruments”: Applies to financial instruments held by the mining companies, and can have an effect on the valuation of exploration and evaluation assets.

Case Study of a Mining Company Applying IFRS 6 Standard:

“Shiny Gold” Company is a mining company engaged in the exploration and evaluation of gold. The company has exploration rights in Area “A” and Area “B.”

In Area “A”:

• The company spent 5 million Riyals on geological studies and exploratory drilling.
• Preliminary results showed strong indications of the presence of gold in commercial quantities.
• The company decided to continue evaluation activities in this area.

In Area “B”:

• The company spent 3 million Riyals on geological studies and exploratory drilling.
• The results did not show any indications of the presence of gold in commercial quantities.
• The company decided to discontinue exploration activities in this area.

Accounting Treatment According to IFRS 6 Standard:

• Area “A”: “Shiny Gold” Company can capitalize the exploration and evaluation expenditures of 5 million Riyals as an intangible asset on the Statement of Financial Position (Balance Sheet), as there are strong indications of the presence of gold in commercial quantities.
• Area “B”: “Shiny Gold” Company must recognize 3 million Riyals as an expense in the Income Statement, as there is no high probability of future economic benefits from these expenditures.

Impairment Test:

At the end of the reporting period, “Shiny Gold” Company must perform an impairment test for the exploration and evaluation asset in Area “A.”

If the recoverable amount of the asset (fair value less costs to sell or value in use, whichever is higher) is less than its carrying amount (5 million Riyals), an impairment loss must be recognized in the Income Statement.

Disclosures:

• “Shiny Gold” Company must disclose the accounting policies used to account for exploration and evaluation expenditures.
• The value of exploration and evaluation assets in Area “A” must be disclosed on the Statement of Financial Position (Balance Sheet).
• The exploration and evaluation expense in Area “B” must be disclosed in the Income Statement.
• Any other significant information about exploration and evaluation activities, such as risks and challenges related to these activities, must be disclosed.

Conclusion:

IFRS 6 Standard provides an important accounting framework for mining and exploration companies, as it helps improve the quality and transparency of financial information related to exploration and evaluation activities for mineral resources. Understanding IFRS 6 and its requirements is essential for accountants, auditors, investors, and anyone seeking to understand the financial statements of mining companies.

As the mining industry continues to evolve and new technologies emerge, it is expected that IFRS, including IFRS 6 Standard, will continue to be updated to ensure that these developments are addressed and that financial information remains relevant and reliable for users of the financial statements. Applying IFRS 6 Standard correctly and adhering to professional ethics ensures the preparation of high-quality financial reports that enhance trust between compa