IFRS 9 Financial Instruments



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for Accounting Professionals

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IFRS 6 Exploration for and Evaluation of Mineral Resources

2013

IFRS WORKBOOKS

(1 million downloaded)

Welcome to the EU Tacis IFRS Workbooks sixth (2013) edition! This is the tenth anniversary of the first edition in 2003. The changes from the 2012 edition are minimal, with no new standard issued in the past year. Major changes are anticipated to IFRS 9, IFRS 4, IAS 17 and IAS 18. Exposure drafts (proposals) have been issued, but have not yet been incorporated into the standards. To the books, we have added an article: ‘IFRS- grabbing the tiger by the tail’ which has been published by bankir.ru in Russian. This article covers IFRS teaching issues for each standard and a number of opinions and discussion points.

The set of books provides a book for every standard, plus three books on consolidation. Financial instrument bookkeeping is covered in IAS 32/39 (book 3) and in IFRS 9. IFRS 7 is complemented by FINREP, which illustrates practical use and presentation formats. An introduction to IFRS and transformation models from Russian accounting to IFRS complete the set.

Each workbook is a combination of Information, Examples, Self-Test Questions and Answers.

Thanks are due to those who made these publications possible and to you, our readers, for your continued support. I would like to express my gratitude to: Igor Sykharev and Tatiana Trifonova of the Ministry of Finance who provided a link from the Ministry’s site. Gulnara Makhmutova and Adel Valeev provided the updated Russian texts and editing. Marina Korf and Yulia Ykhanova of bankir.ru provided help, advice and space on its website. Sergey Dorozhkov and Elina Buzina of Association of Russian Bankers’ Institute of Banking ran excellent IFRS courses on all standards which enabled us to test this material and learn new insights from them and the participants. Please join us there for the best consolidation course in Russia.

World Bank courses for the Bank of Tanzania (‘BOT’) provided new IFRS and banking insights: thanks to Albert Mkenda BOT and my colleague Benson Mahenya among many others. IFRS assistance to the Bank of Mongolia (‘BOM’) with PricewaterhouseCoopers (thanks to Ekaterina Nekrasova, Jelena Pesic and Vladislav Kononenko) provided exposure to Mongolian commercial bank reporting and blending IFRS with bank prudential ratios. Oyungerel Gonchig, Project Manager at World Bank, Mongolia, and our counterparts at BOM: Oyuntsatsral Banid, Bunchinsuren Dagva, Borkhuu Gotovsuren, Batmaa Ochirbat and Gantsetseg Myagmarjay contributed to a memorable project.

On the back page are notes covering copyright details and the history of the series.

Please tell your friends and colleagues where to find our books. We hope that you find them useful.

Robin Joyce

Professor of the Chair of International Banking and Finance,

Financial University under the Government of the Russian Federation

Professor, Russian Academy of National Economy and Public

Administration under the President of the Russian Federation

Visiting Professor of the Siberian Academy of Finance and Banking Moscow, Russia 2013

IFRS 6 -Exploration for and Evaluation of Mineral Resources

Definitions

i) Exploration and evaluation assets

Exploration and evaluation expenditures recognised as assets in accordance with the undertaking’s accounting policy.

ii) Exploration and evaluation expenditures

Expenditures incurred by an undertaking in connection with the exploration for and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

iii) Exploration for and evaluation of mineral resources

The search for mineral resources, including minerals, oil, natural gas and similar non-regenerative resources after the undertaking 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.

Reasons for issuing IFRS 6

Exploration and evaluation expenditures are significant to undertakings engaged in extractive activities. IAS 38 Intangible Assets does not cover this issue. IAS 38 insists on treating research as an expense with the possible capitalization of development.

In practice, the Exploration for and Evaluation of Mineral Resources varied from undertaking to undertaking. Many did not disclose their accounting policies.

Some would not meet the requirements of IAS 38 if it had been applied.

IFRS 6 is the first step towards a comprehensive standard on the issue. It allows the continued use of undertaking’s

existing accounting policies on the issue (whatever they are), but requires disclosure and tests for impairment on exploration and evaluation assets. Changes to existing accounting policies should only be made if they benefit the users of the financial statements.

Scope

An undertaking shall apply IFRS 6 to exploration and evaluation expenditures that it incurs. IFRS 6 does not address other aspects of accounting by undertakings engaged in the exploration for and evaluation of mineral resources.

An undertaking shall not apply IFRS 6 to expenditures incurred:

i) before the exploration for and evaluation of mineral resources, such as costs incurred before the undertaking has obtained the legal rights to explore a specific area.

ii) after the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

Costs before legal rights are obtained should be expensed.

Costs related to the development of mineral resources shall not be recognised as exploration and evaluation assets. The Conceptual Framework1 and IAS 38 Intangible Assets provide guidance on the recognition of assets arising from development.

Recognition of exploration and evaluation assets

When developing its accounting policies, an undertaking recording exploration and

evaluation assets shall apply paragraph 10 of IAS 8 Accounting Policies, Changes in

Accounting Estimates and Errors:

In the absence of an IFRS that specifically applies to a transaction, other event or

condition, management shall use its judgement in developing and applying an

accounting policy that results in information that is:

(1) relevant to the economic decision-making needs of users; and

(2) reliable, in that the financial statements:

(i) represent faithfully the financial position, financial performance and cash flows of the undertaking;

(ii) reflect the economic substance of transactions, other events and conditions, and not merely the legal form;

(iii) are neutral (free from bias);

(iv) are prudent; and

(v) are complete in all material respects.

Measurement of exploration and evaluation assets

Measurement at recognition

Exploration and evaluation assets shall be measured at cost.

Elements of cost of exploration and evaluation assets

An undertaking shall determine an accounting policy specifying which expenditures are

recognised as exploration and evaluation assets and apply the policy consistently.

An undertaking considers the degree to which the expenditure can be associated with finding specific mineral resources.

The following are examples of expenditures that might be included in the initial

measurement of exploration and evaluation assets (the list is not exhaustive):

(i) acquisition of rights to explore;

(ii) topographical, geological, geochemical and geophysical studies;

(iii) exploratory drilling;

(iv) trenching;

(v) sampling; and

(vi) activities in relation to evaluating the technical feasibility and commercial

viability of extracting a mineral resource.

Removal and Restoration

In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets an

undertaking recognises any obligations for removal and restoration that are incurred

during a particular period as a consequence of having undertaken the exploration

for and evaluation of mineral resources.

Example

Having signed a contract to mine for minerals in a particular place and the contract requiring the undertaking to make safe and restore the place at the end of the contract,

a provision is made immediately for the making safe and restoration. The amount will be discounted to reflect the time value of money between today and the end of the contract. (See IAS 37 workbook.)

Presentation

Classification of exploration and evaluation assets

An undertaking shall classify exploration and evaluation assets as tangible or intangible and apply the classification consistently.

Some exploration and evaluation assets are treated as intangible (such as drilling

rights), whereas others are tangible (such as vehicles and drilling rigs).

When a tangible asset is consumed in developing an intangible asset, the amount

reflecting that consumption is part of the cost of the intangible asset.

Measurement after recognition

After recognition, an undertaking shall apply either the cost model or the revaluation

model to the exploration and evaluation assets (see IAS 16 and IAS 38)

Changes in accounting policies

An undertaking may change its accounting policies for exploration and evaluation expenditures if the change makes the financial statements more relevant to users and no less reliable, or more reliable and no less relevant to those needs. An undertaking shall judge relevance and reliability using the criteria in IAS 8.

An undertaking shall demonstrate that the change brings its financial statements closer to meeting the criteria in IAS 8, but the change need not achieve full compliance with those criteria.

Reclassification of exploration and evaluation assets

An exploration and evaluation asset shall no longer be classified as such when the

technical feasibility and commercial viability of extracting a mineral resource are

demonstrable. Exploration and evaluation assets shall be assessed for impairment, and any impairment loss recorded, before reclassification.

Impairment

Recognition and measurement

IFRS 6 varies the recognition criteria of impairment from that in IAS 36 but measures the impairment in accordance with IAS 36 once the impairment is identified.

In short, exploration and evaluation assets can only be justified if there is a reasonable expectation that they will earn the same, or greater, amount of revenue than the asset value.

Revenue must be discounted when it will arise one year or more in the future. If the revenue is less (or nil), the asset is impaired to reflect the revenue shortfall.

Exploration and evaluation assets (and its cash-generating unit – see IAS 36) shall be assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount.

When the carrying amount exceeds the recoverable amount, an undertaking shall measure, present and disclose any resulting impairment loss in accordance with IAS 36.

For only the purposes of IFRS 6, one or more of the following facts and circumstances indicate that an undertaking should test exploration and evaluation assets for impairment (the list is not exhaustive):

(i) the period for which the undertaking 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.

(ii) substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted, nor planned.

(iii) 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 undertaking has decided to discontinue such activities in the

specific area.

(iv) 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.

In any such case, or similar cases, the undertaking shall perform an impairment test in

accordance with IAS 36. Any impairment loss is recognised as an expense in accordance with IAS 36.

Specifying the level at which exploration and evaluation assets are assessed for impairment

An undertaking shall determine an accounting policy for allocating exploration and

evaluation assets to cash-generating units (or groups of cash-generating units) – see IAS 36- for the purpose of assessing such assets for impairment.

Each cash-generating unit, or group of units, to which an exploration and evaluation asset is allocated shall not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments.

The level identified by the undertaking for the purposes of testing exploration and

evaluation assets for impairment may comprise one, or more, cash-generating units.

Disclosure

An undertaking shall disclose information that identifies and explains the amounts

recorded in its financial statements arising from the exploration for and evaluation of mineral resources.

An undertaking shall disclose:

(i) its accounting policies for exploration and evaluation expenditures including the recognition of exploration and evaluation assets.

(ii) the amounts of assets, liabilities, income and expense and operating and investing cash flows arising from the exploration for and evaluation of mineral resources.

An undertaking shall treat exploration and evaluation assets as a separate class of assets and make the disclosures required by either IAS 16 or IAS 38, consistent with how the assets are classified.

The future of IFRS 6

This short standard prescribes disclosure and impairment testing and gives guidance as to changing accounting policies.

IFRS 6 was issued in December 2004, with suggestions that it would be updated to a harmonization of methods (two alternative methods such as in IAS 2, IAS 16 and IAS 38) and / or a standard (only one method for all).

Its style was similar to IFRS 4 Insurance Contracts, which also allowed existing policies to continue, rather than limiting them.

There is no indication when any significant update to IFRS 6 will occur.

IFRS WORKBOOKS (History and Copyright)

(1 million downloaded)

This is the latest version of the legendary workbooks in Russian and English produced by 3 TACIS projects, sponsored by the European Union (2003-2009) and led by PricewaterhouseCoopers. They have also appeared on the website of the Ministry of Finance of the Russian Federation.

The workbooks cover all standards of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade their knowledge, understanding and skills.

Each workbook is a self-standing short course designed for approximately three hours of study. Although the workbooks are part of a series, each one is independent of the others. Each workbook is a combination of Information, Examples, Self-Test Questions and Answers. A basic knowledge of accounting is assumed, but if any additional knowledge is required this is mentioned at the beginning of the section.

Having written the first three editions, we continue to update them and provide them to you free to download. Please tell your friends and colleagues. Relating to the first three editions and updated texts, the copyright of the material contained in each workbook belongs to the European Union and according to its policy may be used free of charge for any non-commercial purpose. The copyright and responsibility of later books and the updates are ours. Our copyright policy is the same as that of the European Union.

We wish to especially thank Elizabeth Appraxine (European Union) who administered these TACIS projects, Richard J. Gregson (Partner, PricewaterhouseCoopers) who led the projects and all friends at bankir.ru for hosting the books.

TACIS project partners included Rosexpertiza (Russia), ACCA (UK), Agriconsulting (Italy), FBK (Russia), and European Savings Bank Group (Brussels).

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