INTRODUCTION
BC1 This Basis for Conclusions summarises the International
Accounting Standards Board's considerations in reaching the conclusions in ED 6
Exploration for and Evaluation of Mineral Resources. Individual Board
members gave greater weight to some factors than to others.
B An International Financial Reporting Standard (IFRS)
addressing exploration for and evaluation of mineral resources is needed
because:
(a) there is at present no IFRS that specifically addresses
the accounting for expenditures for the exploration for and evaluation of
mineral resources, and such activities are excluded from the scope of [draft]
IAS 38 Intangible Assets.* In addition, mineral rights and
mineral resources such as oil, natural gas and similar non-regenerative
resources are excluded from the scope of IAS 16 Property, Plant and
Equipment. Consequently, an entity is required to determine its accounting
policy for such exploration and evaluation expenditure in accordance with
paragraphs 10-12 of IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors.
(b) there are different views on how exploration and
evaluation expenditures should be accounted for under IFRSs.
(c) accounting practices for exploration and evaluation
assets under the generally accepted accounting practices of other
standard-setting bodies are diverse and often differ from practices in other
sectors for costs that may be considered analogous (eg accounting practices for
research and development costs under [draft] IAS 38).
(d) exploration and evaluation expenditures represent a
significant cost to entities engaged in extractive activities.
* in Exposure Draft of Proposed Amendments to IAS 36,
Impairment of Assets, and IAS 38, Intangible Assets (December
2002)
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(e) relatively few entities incurring exploration and
evaluation expenditures present their financial statements in accordance with
IFRSs, although many more are expected to do so from 2005.
BC3 The IASB's predecessor organisation, the International
Accounting Standards Committee (IASC), established a Steering Committee in 1998
to carry out initial work on accounting and financial reporting by entities
engaged in extractive activities. In November 2000 the
Steering
Committee published an Issues Paper. In response, 52
comment letters were received.
BC4 In July 2001 the Board announced that it would restart the
project only when agenda time permitted. In September 2002 the Board decided it
was not feasible to complete a comprehensive project in time for the many
entities that will adopt IFRSs in 2005. Accordingly, the Board is focusing on
what it views as the main issues for entities, including first-time adopters,
engaged in the exploration for and evaluation of mineral resources. Although
the Board recognises the importance of the treatment of exploration and
evaluation expenditures, it noted that it was not feasible to complete the
detailed analysis required for this issue, obtain appropriate input from
constituents and undertake the Board's normal due process in time to implement
changes before 2005.
BC5 In April and September 2003 the Board reached the
following decisions in respect of the main issues for entities engaged in the
exploration for and evaluation of mineral resources:
(a) IFRSs should apply to entities engaged in the exploration
for and evaluation of mineral resources, except to the extent that an IFRS
excludes such activities from its scope.
(b) Entities, including first-time adopters of IFRSs, may
continue to account for exploration and evaluation expenditures using existing
accounting policies. However, if an entity that recognised an exploration and
evaluation asset wished to change its accounting for that asset, it should be
subject to the requirements for a voluntary change in accounting policy
contained in IAS 8.
(c) In respect of exploration and evaluation assets, an
entity should assess such assets for impairment annually. However, an entity
may elect to adopt an alternative definition of a cash-generating unit for the
purpose of applying the impairment test in [draft] IAS 36 Impairment of
Assets.*
* in Exposure Draft of Proposed Amendments to IAS 36,
Impairment of Assets, and IAS 38, Intangible Assets (December
2002)
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ED 6 EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES
APPLICATION OF IFRSs TO ENTITIES ENGAGED IN THE
EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES
BC6 In the Board's view, all IFRSs (including International
Accounting Standards and Interpretations) are applicable to entities engaged in
the exploration for and evaluation of mineral resources that make an unreserved
statement of compliance with IFRSs in accordance with IAS 1 Presentation of
Financial Statements. Consequently, each IFRS must be applied by all such
entities, except to the extent that an IFRS provides an exclusion from its
scope.
BC7 Some entities recognising exploration and evaluation
assets take the view that, in the absence of a comprehensive IFRS on extractive
industries, it would be permissible for an entity adopting IFRSs to continue to
apply the related pronouncements of other standard-setting bodies without
further consideration of IFRSs in general and the IASB Framework in
particular. Paragraphs 10-12 of IAS 8 permit an entity developing an accounting
policy in the absence of a specific IFRS requirement to consider a
pronouncement of another standard-setting body only in limited circumstances.
The entity must determine that the accounting policy meets the requirements in
paragraph 10 of [draft] IAS 8. In doing so the entity must consider existing
IFRSs dealing with similar and related issues
and the Framework. In addition, pronouncements of
other
standard-setting bodies may be used only when they are developed in
the context of a similar conceptual framework and are consistent with the
Framework and IFRSs.
TEMPORARY CONTINUATION OF SOME EXISTING ACCOUNTING
PRACTICES
BC8 The draft IFRS proposes to exempt entities from some
requirements of other IFRSs and the Framework. Paragraphs 11 and 12 of
[draft] IAS 8 specify the various sources of authoritative requirements and
guidance, including the Framework, an entity would consider in
developing an accounting policy for an item if no IFRS specifically applies.
Instead of requiring entities engaged in the exploration for and evaluation of
mineral resources to consider the various sources of authoritative requirements
and guidance in developing an accounting policy for such activities, the Board
proposes specifically to permit those entities the alternative of continuing
their existing accounting treatment in certain circumstances.
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In particular, the Board proposes to permit an entity
recognising exploration and evaluation assets to continue to account for such
assets in accordance with the accounting policies applied in its most recent
annual financial statements.
BC9 Without the IFRS now proposed uncertainty might exist
about whether an accounting policy for exploration and evaluation assets is
consistent with IFRSs. Resolving this uncertainty might involve considerable
cost and some entities might make major systems changes only to be required to
make further significant changes in the event that when the Board is able to
address the issues as part of a comprehensive project. To avoid unnecessary
disruption in areas in which it intends to undertake a comprehensive analysis
of accounting issues, the Board proposes to limit the need for entities to
change their existing accounting practices for exploration and evaluation
assets. The proposals in the draft IFRS would exempt an entity from considering
the authoritative sources in paragraphs 11 and 12 of IAS 8 when assessing its
existing accounting policies for exploration and evaluation assets.
BC10 Some suggest that the Board should expand the scope of
IAS 16 and [draft] IAS 38 to include exploration and evaluation assets. They
view exploration and evaluation expenditure as similar to research expenditure.
[Draft] IAS 38 requires all research expenditure to be recognised in profit or
loss in the period incurred and permits the recognition of a development asset
in limited circumstances. Although the Board is concerned that existing
accounting practices might result in the inappropriate recognition of
exploration and evaluation assets, it is also concerned that accounting for
exploration and evaluation expenditure in accordance with [draft] IAS 38 might
result in an overstatement of expenses. There is no international consensus on
the appropriate accounting treatment of such expenditure and further
consideration and analysis is needed before the Board can make an informed
judgement.
BC11 Therefore the Board agreed to permit entities to continue
their existing accounting practices for the recognition of exploration and
evaluation assets. However, the Board proposes to require any exploration and
evaluation assets recognised to be tested for impairment using [draft] IAS 36
(see paragraphs BC15-B7).
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ED 6 EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES
RECOGNITION OF EXPLORATION AND EVALUATION
ASSETS
BC12 The draft IFRS proposes that an entity may continue to
use the accounting policies applied in its most recent annual financial
statements for exploration and evaluation assets. This includes the
continuation of practices in respect of recognition and measurement when
incorporated within such accounting policies. An entity may change its
accounting policy for exploration and evaluation assets in accordance with the
requirements for voluntary changes in accounting policy in IAS 8.
BC13 The definition of exploration and evaluation assets
determines which expenditures the draft IFRS addresses and which expenditures
should be accounted for in accordance with other IFRSs. Although the Board is
willing to accept, as an interim measure, the continuation of existing
accounting treatments for exploration and evaluation assets, it is unwilling to
base the definition used for accounting purposes on local definitions that may
vary from country to country.
BC14 Some express concerns that the adoption of a particular
definition by the Board could lead to inappropriate changes in definitions used
for other purposes, such as company law or tax. The Board emphasises that any
definition used in IFRSs is solely for accounting purposes and is not intended
to change or pre-empt definitions used for other purposes.
Measurement after Recognition
BC15 The draft IFRS permits an entity recognising an
exploration and evaluation asset to measure such an asset after recognition
using either the cost model or the revaluation models in IAS 16 and [draft] IAS
38. Those revaluation models permit the revaluation of assets when specified
requirements are met (see paragraphs 31-42 of IAS 16 and paragraphs 70-84 of
[draft] IAS 38). The revaluation model in [draft] IAS 38 can be used only if
the asset's fair value can be determined by reference to an active market; the
revaluation model in IAS 16 does not and refers only to `market-based
evidence.' Some Board members are troubled by this inconsistency and are
concerned that entities might choose accounting policies to achieve a more
advantageous measurement of exploration and evaluation assets. However, the
Board concluded that, although the revaluation of an exploration asset in
accordance with IAS 16 and [draft] IAS 38 may not be widespread, it is
appropriate not to require use of only the cost model in either Standard for
exploration and evaluation assets.
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IMPAIRMENT OF EXPLORATION AND EVALUATION
ASSETS
The level at which impairment is assessed
BC16 [Draft] IAS 36 requires an impairment loss to be
recognised when the carrying amount of an asset exceeds its recoverable amount.
When it is not possible to estimate the recoverable amount of an individual
asset, an entity must determine the recoverable amount of the cash-generating
unit to which that asset belongs. The Board is of the view that it is important
that draft IAS 36 applies to all assets, including exploration and evaluation
assets, because otherwise assets might be carried at an amount exceeding
recoverable amount.
BC17 However, the Board is also concerned that requiring
entities to use the definition of a cash-generating unit in paragraph 5 of
[draft] IAS 36 when assessing exploration and evaluation assets for impairment
would negate the effects of the other proposals in this draft IFRS and might
result in the inappropriate recognition of impairment losses in some
circumstances.
BC18 The Board understands that the definition of a
cash-generating unit in [draft] IAS 36 might create uncertainty about whether
existing accounting policies are consistent with IFRSs. This is because
exploration and evaluation assets would often not be expected:
(a) to be the subject of future cash inflow and outflow
projections relating to the development of the project, on a reasonable and
consistent basis, without being heavily discounted because of uncertainty and
lead-times;
(b) to have a determinable net selling price; or
(c) to be readily identifiable with other assets that
generate cash inflows as a specific cash-generating unit.
The implications of (a)-(c) are that an exploration and
evaluation asset would often be deemed to be impaired if the existing
definition of a cash-generating unit was applied.
BC19 To avoid the outcome identified in paragraph BC17, the
draft IFRS proposes a definition of a cash-generating unit for exploration and
evaluation assets. When an entity recognising an exploration and evaluation
asset first applies the draft IFRS, it would elect to apply to such assets the
definition of a cash-generating unit in paragraph 5 of [draft] IAS 36 or the
definition of a cash-generating unit for exploration and
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evaluation assets. As defined by the Board, the
cash-generating unit for exploration and evaluation assets is the
cash-generating unit that represents the smallest identifiable group of assets
that, together with exploration and evaluation assets, generates cash inflows
from continuing use to which impairment tests were applied by the entity under
the accounting policies applied for its most recent annual financial
statements. However, the impairment test to be applied is the one required by
[draft] IAS 36.
B0 The Board acknowledges that creating the notion of a
special cash-generating unit is unusual. The Board concluded that such a
decision was necessary to give effect to its interim approach to the
recognition and measurement of exploration and evaluation assets. However, it
also sought to impose some discipline on the definition of a cash-generating
unit for exploration and evaluation assets, without which the relevance and
reliability of the entity's financial statements would be adversely affected to
an unacceptable degree. Consequently, the Board proposes that a cash-generating
unit for exploration and evaluation assets shall be no larger than a segment,
as defined in IAS 14 Segment Reporting. The Board could not identify
any valid reasons why it should permit an entity to assess exploration and
evaluation assets for impairment at a level higher than a segment.
B1 IAS 14 requires entities whose equity or debt instruments
are publicly traded to disclose segment information for all reportable
segments. A reportable segment is a business segment or a geographical segment
identified on the basis of the definitions in IAS 14. IAS 14 provides that an
entity's business and geographical segments for external reporting purposes
should be those organisational units for which information is reported to the
board of directors and to the chief executive officer for the purpose of
evaluating the unit's past performance and for making decisions about future
allocations of resources. The Board notes that IAS 14 also provides that two or
more internally reported business segments or geographical segments may be
combined as a single business segment or geographical segment when they are
substantially similar, ie:
(a) they exhibit similar long-term financial performance and
(b) they are similar in all of the factors in the appropriate
definition in IAS 14.
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B2 The Board is aware that some entities recognising
exploration and evaluation assets assess impairment on the basis of an `area of
interest'. However, the Board is of the view that such a level of assessment is
appropriate only if the area of interest is no larger than a segment as defined
in IAS 14.
B3 Under the accounting policies applied for its most recent
annual financial statements, an entity might have applied a test that was
equivalent to an impairment test, whereby specified criteria had to be met to
continue to recognise an exploration and evaluation asset. In the Board's view,
if an entity did not assess such assets for impairment under the accounting
policies applied for its most recent annual financial statements using inputs
similar to those in [draft] IAS 36, the test would not meet the requirements of
that draft Standard. Consequently, it is not proposing that entities should
continue existing practices with respect to the impairment test itself. Rather,
the [draft] IAS 36 impairment test is applied at a different level from that
which might otherwise be required by that Standard.
B4 The Board noted that all assets other than exploration and
evaluation assets included within the cash-generating unit for exploration and
evaluation assets are subject to separate impairment testing under [draft] IAS
36. Such tests must be performed, and any related impairment losses recognised,
before testing the exploration and evaluation assets for impairment.
Identifying an asset that may be impaired
B5 The Board has proposed additional indicators of impairment
to be included among the external and internal sources of information an entity
considers when identifying whether exploration and evaluation assets might be
impaired.
B6 The Board considered the application of the external
indicators of impairment in paragraph 9(b) of [draft] IAS 36 and, in
particular, significant adverse market or economic changes that «...have
taken place during the period, or will take place in the near future...».
The Board decided that in relation to these indicators, any significant adverse
changes in an entity's long-term view about prices or foreign exchange rates
would be implicitly factored into the indicators of impairment for exploration
and evaluation assets in paragraph 13 of the draft IFRS.
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B7 Although an entity is required to consider the indicators
of impairment in paragraphs 9-13 of [draft] IAS 36, the Board concluded it was
important to clarify the application of these paragraphs to exploration and
evaluation assets. Paragraph 13 of the draft IFRS is of particular importance
because the proposal that an entity may continue to use the accounting policies
applied for its most recent annual financial statements may result in
recognition of significant exploration and evaluation assets.
Reversal of impairment losses
B8 The reversal of impairment losses when specified
requirements (set out in paragraphs 109-122 of [draft] IAS 36) are met is
required of all entities under IFRSs for all assets (excluding goodwill and
equity investments classified as available for sale). Thus, the Board concluded
it is appropriate not to propose an exemption from the requirement to reverse
impairment losses for exploration and evaluation assets.
CHANGES IN ACCOUNTING POLICIES
B9 The Board encourages entities to use IFRSs to improve their
financial reporting. In particular, it encourages those entities electing to
continue to apply existing accounting policies for exploration and evaluation
assets to improve their accounting policies. However, the Board notes the
requirement of IAS 8 paragraph 14(b), which states that an entity may change
its accounting policies only if the change results in more relevant and
reliable information in the financial statements.
CLASSIFICATION OF EXPLORATION AND EVALUATION
ASSETS
BC30 The Board acknowledges that some exploration and
evaluation assets are intangible, eg drilling or mining rights. However, for
convenience, entities often combine such assets with other assets that are
tangible. The Board notes that under existing practices of other
standard-setting bodies, entities engaged in exploration for and evaluation of
mineral resources typically classify exploration and evaluation assets as
development assets or as a sub-category within mineral rights and development
properties, both of which are typically treated as categories of property,
plant and
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equipment. The Board also noted that exploration and
evaluation assets, when classified separately, are typically transferred to the
development costs asset class within property, plant and equipment once the
decision to develop the mineral resource has been made.
BC31 The Board has not yet considered whether exploration and
evaluation assets are tangible. Accordingly, entities may continue to classify
such assets in accordance with the accounting policies applied in their most
recent annual financial statements.
BC32 As noted in paragraph BC7, an entity that elects not to
continue to apply the accounting policies applied for its most recent annual
financial statements for the exploration for and evaluation of mineral
resources is required to apply the criteria in paragraphs 10-12 of IAS 8 in
developing an accounting policy for the exploration for and evaluation of
mineral resources. The Board notes that such an entity should not apply
paragraphs 4-10 of the draft IFRS by analogy in developing its accounting
policy for exploration for and evaluation of mineral resources because the
proposals in the draft IFRS are predicated on the suspension of the criteria in
paragraphs 11 and 12 of IAS 8.
DISCLOSURE
BC33 To enhance comparability among entities engaged in
extractive activities, particularly because the continuation of the accounting
policies applied by an entity for its most recent annual financial statements
will result in diverse treatment of the exploration for and evaluation of
mineral resources under IFRSs, the Board proposes to require an entity to
disclose:
(a) its accounting policies for exploration and evaluation
expenditure including the recognition of exploration and evaluation assets.
(b) material amounts of assets, liabilities, income and
expense (and, if it presents its cash flow statement using the direct method,
cash flows) arising from the exploration for and evaluation of mineral
resources.
(c) the level at which the entity assesses any exploration
and evaluation assets recognised for impairment.
BC34 The Board is of the view that appropriate disclosure of
accounting policies in accordance with IAS 8 is important, given the variety of
accounting treatments for exploration and evaluation expenditures and the
recognition of exploration and evaluation assets that would continue under the
proposed IFRS.
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ED 6 EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES
BC35 The Board notes that disclosure of exploration and
evaluation expenditure incurred and recognised as an expense in the period is
required by all entities engaged in the exploration for and evaluation of
mineral resources under IAS 1. The Board also notes that appropriate
disclosures of impairment losses and any reversals of impairment losses
relating to exploration and evaluation assets is required under [draft] IAS
36.
EFFECTIVE DATE
BC36 This draft IFRS is proposed to be applied for annual
periods beginning on or after 1 January 2005. Earlier
application is encouraged.
BC37 The Board has stated its intention not to mandate changes
to IFRSs between early 2004 and the end of 2005. This is to assist the many
entities that wish or are required to adopt IFRSs on or before 1 January 2005
to do so without the additional concerns of new accounting standards becoming
effective. Notwithstanding this, the Board is of the view that the proposals in
the draft IFRS should facilitate an orderly transition to IFRSs and should not
result in changes to existing accounting policies.
BC38 Without the IFRS now proposed, entities that have
exploration and evaluation assets and wish or are required to adopt IFRSs on or
before 1 January 2005 would be in a difficult position. In the absence of
specific guidance, and given the scope exclusions contained in IAS 16 and
[draft] IAS 38, an entity would be required to apply the hierarchy in IAS 8
paragraphs 11 and 12 when determining the appropriate treatment for exploration
and evaluation assets under IFRSs. As explained in paragraphs BC8-BC11, the
Board is concerned that this could lead to entities making major systems
changes only to be required to make further changes when the Board addresses
the issues as part of a comprehensive project. Therefore, the Board concluded
that the most appropriate effective date is 1 January 2005.
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APPENDIX
Alternative views on ED 6 Exploration for and
Evaluation of Mineral Resources
AV1 Four Board members voted against the publication of ED 6
Exploration for and Evaluation of Mineral Resources. Their alternative
views are set out below.
AV2 The Board members would not permit entities the
alternative of continuing their existing accounting treatment for exploration
and evaluation assets. In particular, they believe that all entities should be
required to apply paragraphs 11 and 12 of IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors when developing an accounting
policy for exploration and evaluation assets. The Board members believe that
the requirements in IAS 8 have particular relevance and applicability when an
IFRS lacks specificities, as is the case for entities recognising exploration
and evaluation assets. This is especially true because the draft IFRS allows
the continuation of a variety of measurement bases for these items and, because
of the failure to consider the IASB Framework, may result in the
inappropriate recognition of assets. In the Board members' view, if an entity
cannot meet those requirements, it should not be allowed to describe its
financial statements as being in accordance with International Financial
Reporting Standards.
AV3 The Board members also disagree with the decision to
include the concept of a «cash-generating unit for exploration and
evaluation assets» for the purpose of assessing exploration and evaluation
assets for impairment. The Board members believe that the cash-generating unit
defined in [draft] IAS 36 as applicable to other non-financial assets should be
applied to exploration and evaluation assets. Failure to do so could result in
exploration and evaluation assets continuing to be carried forward when such
assets are not recoverable. This could result in the exclusion of relevant
information from the financial statements because of the failure to recognise
impairment losses on a timely basis and the inclusion of unreliable information
because of the inclusion of assets that do not faithfully represent the
transactions and other events that they purport to represent.
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AV4 The Board members' concerns are heightened by the absence
from the Board's work programme of a project on accounting for exploration for
and evaluation of mineral resources generally. Although a research project is
expected to begin in 2004, it is unlikely that the Board will be able to
develop financial reporting standards in the near- to mid-term. Accordingly, it
is likely that the proposed concessions will remain in place for some time.
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