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Exploration and production assets
An entity accounts for its exploration and evaluation
("E&E") expenditures either in accordance
with the IFRS Framework or in accordance with the
exemption permitted by IFRS 6 [IFRS6.7]. IFRS 6
allows an entity to apply an accounting policy for
E&E assets which is relevant and reliable however
the policy need not be in full compliance with the
IFRS Framework [IFRS6.6-7].
The criteria to be used to determine if a policy
is relevant and reliable are those set out in paragraph
10 of IAS 8. That is, it must be:
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Relevant to decision making needs of users; |
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Provide a faithful representation; |
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Reflect the economic substance; |
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Neutral (free from bias); |
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Prudent; and |
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Complete |
Changes made to an entity's accounting policy for
E&E assets can only be made if they result in
an accounting policy that is closer to the principles
of the Framework [IFRS6.13]. The change must result
in a new policy that is more relevant and no less
reliable or more reliable and no less relevant than
the previous policy. This restriction on changes
to the accounting policy includes changes implemented
on adoption of IFRS 6 .
Initial
recognition of exploration and evaluation expenditures
in accordance with the IFRS 6 exemption
The exemption in IFRS 6 allows an entity to continue
to apply the same accounting policy to exploration
and evaluation expenditures as it did prior to application
of IFRS 6. The costs capitalised under this policy
might not meet the IFRS Framework definition of an
asset because, for example, the capitalisation criteria
followed might not require the demonstration of probable
future economic benefits. IFRS 6 therefore deems these
costs to be assets. Exploration and evaluation expenditures
might therefore be capitalised earlier than would
otherwise be the case under the Framework.
Exploration and evaluation assets recognised should
be classified as either tangible or intangible according
to their nature [IFRS6.15]. Assets recognised in
respect of licences and surveys should therefore
be classified as intangible E&E assets. The
construction of a test well however, would be classified
as a tangible asset. The classification of E&E
assets as tangible or intangible is relevant if
the revaluation model is used for subsequent measurement
or if the fair value as deemed cost exemption in
IFRS 1 is used on first-time adoption of IFRS. This
is because use of fair values for intangible assets
requires the existence of an active market as defined
in IAS 38 [IAS38R.8].
Subsequent costs incurred during the exploration
and evaluation phase should be capitalised in accordance
with this same policy.
Initial recognition
of exploration and evaluation expenditures in accordance
with the Framework
Expenditures incurred in exploration activities
should be expensed unless they meet the definition
of an asset. An entity recognises an asset when
it is probable that economic benefits will flow
to the entity as a result of the expenditure [F.89].
Expenditures on an exploration property are therefore
expensed until the capitalisation point, which is
the earlier of:
| i) the fair value less costs to sell of the
property can be reliably determined as higher
than the total of the expenses incurred and
costs already capitalised (such as licence acquisition
costs) ; and |
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| ii) an assessment of the property demonstrates
that commercially viable reserves are present
and hence there are probable future economic
benefits from the continued development and
production of the resource. |
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Costs incurred after probability of economic benefits
is established are capitalised only if the costs
are necessary to being the resource to commercial
production. Subsequent expenditures should not be
capitalised after commercial production commences,
unless they meet the asset recognition criteria.
Subsequent measurement of exploration and evaluation assets
Exploration and evaluation assets are measured using
either the cost model or the revaluation model as
described in IAS 16 and IAS 38 after initial recognition
[IFRS6.12]. Depreciation
and amortisation is not calculated for E&E assets
because the economic benefits that the assets represent
are not consumed until the production phase.
E&E assets should be tested for impairment
when there are facts and circumstances that suggest
that the book value of the asset may not be recoverable.
The facts and circumstances include [IFRS6.20]:
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The entity's right to explore in an area has
expired or will expire in the near future without
renewal; |
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No further exploration or evaluation is planned
or budgeted; |
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The decision to discontinue exploration and
evaluation in an area because of the absence
of commercial reserves; and |
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Sufficient data exists to indicate that the
book value will not be fully recovered from
future development and production. |
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If facts and circumstances such as those above
are identified, the affected E&E assets should
be tested for impairment in accordance with IAS
36R.
E&E assets do not themselves generate cash
inflows. They are therefore tested for impairment
as part of a larger group of assets including producing
cash generating units (CGUs). An entity should develop
a policy for allocating E&E assets to groups
of CGUs and apply that policy consistently [IFRS6.21].
The level at which E&E assets are grouped with
producing CGUs must not be larger than the entity's
segments under IAS 14 .
Reclassification
at the end of the exploration and evaluation phase
E&E assets for which commercially-viable reserves
have been identified are reclassified out of the Exploration
and Evaluation category to Development Assets and
accounted for as described below. The E&E asset
should be tested for impairment under IFRS 6 immediately
prior to this reclassification [IFRS6.17]. Once an
E&E asset has been reclassified out of the E&E
classification, it is subject to the normal IFRS requirements
of impairment testing at the CGU level and depreciation
on a component basis as the relief provided by IFRS
6 in this area is available only up to the point of
evaluation (IFRIC Update November 2005).
The post-evaluation accounting for an E&E asset
for which no commercially-viable reserves have been
identified is subject to interpretation as to whether
it should be written down to its fair value less
costs to sell or whether there is a basis for continuing
to classify it within E&E subject to the segment-wide
impairment test under IFRS 6.
Measurement
of expenditures beyond the exploration and evaluation
phase
Expenditures may be incurred after evaluation of a
property, for example to commence commercial development.
An entity should develop an accounting policy for
the development expenditures based on the guidance
in the Framework and, as appropriate, guidance in
standards dealing with similar issues, such as IAS
38 [IFRS6.10].
Expenditures should generally be capitalised to
the extent that they are necessary to bring the
property to commercial production. Expenditures
incurred after the point at which commercial production
has commenced should only be capitalised if the
expenditures meet the asset recognition criteria.
This will be where the additional expenditure enhances
the productive capacity of the producing property.
Subsequent measurement of production assets
Producing assets should be amortised over their expected
total production using a unit of production basis.
The unit of production basis is the most appropriate
amortisation method because it reflects the pattern
of consumption of the economic benefits of the reserves.
The total production used for amortisation of reserves
that are subject to a lease or licence should be
restricted to the total production expected to be
produced during the licence/lease term. The reserves
used for the unit of production calculation could
be proved and probable reserves or proved developed,
but the policy choice taken should be applied consistently
. Renewals of the licence/lease
are only assumed if there is evidence to support
probable renewal without significant cost. However,
the reserves used for impairment testing should
always be proved and probable even if proved developed
are used for amortisation purposes.
Disclosure of exploration,
evaluation and production expenditures
Exploration
and development costs that are capitalised should
be classified as non-current assets in the balance
sheet. They should be separately disclosed on the
face of the balance sheet and distinguished from producing
assets where material. The classification as tangible
or intangible established during the exploration phase
should be continued through to development and production
phases. Details of the amounts capitalised and the
amounts recognised as an expense from exploration,
development and production activities should be disclosed
[IFRS6.23].
Other information relating to significant licence
terms and commitments should be disclosed in the
financial statements. Reserve information should
be disclosed in the financial statements or elsewhere
in the annual report where this is necessary or
useful for an understanding of the financial statements
[IAS1R.13]. Regulatory requirements and/or listing
rules will often require disclosures of this kind,
but where none exist, details of reserves held,
by class and by major field/area of interest would
be appropriate.
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