IFRS 6

IFRS 6, titled Exploration for and Evaluation of Mineral Resources, is an International Financial Reporting Standard issued by the International Accounting Standards Board (IASB). It specifies the financial reporting for the exploration for and evaluation of mineral resources, including minerals, oil, natural gas, and similar non-regenerative resources. ^[1]

Scope

IFRS 6 applies only to expenditures incurred in the exploration and evaluation (E&E) phase. This phase begins after an entity has obtained legal rights to explore a specific area and ends when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. ^[2]

It does not apply to:

• Expenditures incurred before the exploration of mineral resources (e.g., pre-acquisition costs).
• Expenditures incurred after the commercial viability is demonstrable (governed by IAS 16 and IAS 38).

Recognition of E&E assets

An entity is permitted to develop its own accounting policy for recognizing exploration and evaluation assets. This allows companies to choose whether to capitalize E&E costs or expense them as they are incurred. ^[3]

Commonly capitalized costs include:

• Acquisition of rights to explore.
• Topographical, geological, geochemical, and geophysical studies.
• Exploratory drilling and trenching.

Subsequent measurement

After initial recognition, an entity shall apply either the cost model or the revaluation model to its E&E assets, consistent with IAS 16 (for tangible assets) or IAS 38 (for intangible assets). ^[4]

Carrying Amount = Initial Capitalized E&E Costs − (Accumulated Depreciation or Amortization) − Accumulated Impairment Losses

Impairment

One of the most critical aspects of IFRS 6 is the specific "trigger-based" impairment test. An entity must assess E&E assets for impairment when facts and circumstances suggest that the carrying amount of an E&E asset may exceed its recoverable amount. ^[5]

Impairment Calculation

If an indicator exists, the entity performs an impairment test under IAS 36. The loss is calculated as:

Impairment Loss = Carrying Amount of E&E Asset − Recoverable Amount (where Recoverable Amount = higher of Fair Value or Value in Use)

Specific IFRS 6 triggers for this test include: ^[6]

1. The period for which the entity has the right to explore has expired or will expire soon.
2. Substantive expenditure on further exploration is neither budgeted nor planned.
3. Exploration has not led to the discovery of commercially viable quantities.
4. Sufficient data exists to indicate that the carrying amount is unlikely to be recovered in full from successful development or by sale.

Presentation and disclosure

An entity must classify E&E assets as tangible or intangible according to the nature of the assets acquired and apply the classification consistently. ^[7] For example, drilling rights are typically intangible, while drilling rigs are tangible.

References

1. IFRS 6.1; IFRS 6.BC1.
2. IFRS 6.5; IFRS 6.BC2.
3. IFRS 6.7; IFRS 6.BC5.
4. IFRS 6.12.
5. IFRS 6.18; IFRS 6.BC17.
6. IFRS 6.20.
7. IFRS 3.15.