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Chapter
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Exploration for and Evaluation ofMineral Resources (IFRS 6)
4. RECOGNITION
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4.1 Development of Accounting Policies
4.1.1
IFRS 6 does not contain recognition requirements for exploration and evaluation assets, so
an entity needs to develop its own accounting policies for recognition of such assets .
Practical Insight
Entities follow a wide variety of accounting practices for exploration and evaluation expendi–
tures. At one end of the spectrum , some entities defer nearly all exploration and evaluation
expenditure as assets on the balance sheet. At the other end of the spectrum, some entities rec–
ognize all such expenditure in profit or loss as incurred . An entity is permitted to continue to
apply its previous accounting policies upon adoption of IFRS 6 provided that the resulting in–
formation is relevant and reliable.
4.1.2
lAS 8 specifies a hierarchy of criteria that an entity ordinarily should use to develop an ac–
counting policy if no IFRS applies specifically to an item. When developing accounting policies for
exploration and evaluation assets, however, IFRS 6 exempts an entity from part of the hierarchy in
lAS 8. In the absence of such an exemption, the hierarchy in lAS 8 would have required an entity
to refer to, and consider the applicability of, these sources of authoritative requirements and guid–
ance in developing and applying an accounting policy for exploration and evaluation assets:
(a) The requirements and guidance in Standards and Interpretations dealing with similar and
related issues;
and
(b) The definitions, recognition criteria, and measurement concepts for assets , liabilities, in-
come and expenses in the
Framework.
4.1.3
The reason for the exemption is that the IASB wanted to minimize disruption on first-time
adoption of IFRS both for users (e.g., due to lack of continuity of trend data) and for preparers
(e.g., due to the need to do costly system changes) until the IASB has made a comprehensive re–
view of accounting for extractive industries.
4.1.4
The requirement in lAS 8 for management to use its judgment in developing and applying
an accounting policy that results in information that is relevant and reliable applies to exploration
and evaluation assets . This means, for instance , that information that results from the entity's ac–
counting policy needs to be complete in all material respects , reflect economic substance (not
merely legal form), and be neutral.
Practical Insight
Two common accounting methods in the oil and gas industry are the "full-cost" method and
the "successful efforts" method .
Under the full-cost method, all costs incurred in acquiring, exploring, and developing within a
broadly defined cost center (e.g., a country or group of countries) are capitalized and amor–
tized. Under this method, costs are capital ized even if a specific project in the cost center was
a failure.
Under the successful efforts method, many costs are capitalized and amortized. Unlike the
full-cost method , however, costs of unsuccessful acquisition and exploration activities are
charged to expense. Costs whose outcome is unknown are either expensed or capitalized.
4.2 Changes in Accounting Policies
Once an entity has established accounting policies for exploration and evaluation expenditures, it is
permitted to change those policies only if the change makes the financial statements more relevant
to the economic decision-making needs of users and no less reliable, or more reliable and no less
relevant to those needs. The concepts of relevance and reliability are found in lAS 8.