Welcome to our series of articles which breakdowns AASB 6 Exploration for and Evaluation of Mineral Resources.
Despite being a relatively short and industry-specific accounting standard, we often discover exploration and evaluation (E&E) expenditure is missed. This article addresses the subtle differences between IFRS 6 and AASB 6 as well as capitalisation under AASB 6.
Consistency with IFRS 6
It is commonly misconceived that AASB 6 is identical to IFRS 6. While AASB 6 contains all of the text and guidance within IFRS, it also includes specific ‘Aus” paragraphs covering Australian-specific requirements. The effect of these paragraphs is a stricter set of rules related to the accounting or more specifically, the capitalisation of exploration and evaluation expenditure.
One of the key Australian concepts is that of an “area of interest”.
Per paragraph Aus 7.2, an area of interest refers to an individual geological area whereby the presence of a mineral deposit or an oil or natural gas field is considered favourable or has been proved to exist. In most cases, an area of interest will comprise a single mine or deposit or a separate oil or gas field. This unit of account is applied to the expenditures incurred as well as the testing for impairment. As a result, AASB 6 will often result in earlier impairment and/or derecognition of the E&E asset than under IFRS 6 due to the reduced unit of account.
Capitalisation under AASB 6
One of the more common myths is that every cost can be capitalised… let’s explore…
Capitalisation where the rights to tenure are not current
Paragraph Aus 7.2 states that exploration and evaluation assets shall only be recognised in relation to an area of interest if the rights to tenure of the area are current. To this end, the costs for applying for the tenements/permits prior to granting is not allowed to be capitalised. The same applies to the suite of other costs incurred while working on the tenements, prior to the granting of tenements/permits.
In some instances, transactions are affected to acquire application in progress. Similar to application costs, these costs are required to be expensed.
Capitalising general overheads
Paragraph Aus 9.4 states that general and administrative costs are allocated to, and included in, the cost of an exploration and evaluation asset, but only to the extent that those costs can be related directly to operational activities in the area of interest to which the exploration and evaluation asset relates. In all other cases, these costs are expensed as incurred.
For example, general and administrative costs such as directors’ fees, secretarial and share registry expenses, and salaries and other expenses of general management are generally expensed, unless it can be demonstrated that they have a direct nexus to E&E activities (i.e. the managing director is also performing the role of exploration manager and competent person).
It would be foolish not to cover the topic of impairment, after we have briefly covered the issue of capitalisation. In short, AASB 6 provides for special rules as to when impairment testing is to be performed.
Paragraph 19 of AASB 6 requires for the purposes of exploration and evaluation assets only, that paragraph 20 of AASB 6 is applied rather than paragraphs 8-17 of AASB 136 when identifying an exploration and evaluation asset that may be impaired.
Paragraph 20 provides a non-exhaustive list of circumstances which indicate that an entity should test EE assets for impairment. They are:
- the period for which the entity 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;
- substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned;
- 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 entity has decided to discontinue such activities in the specific area;
- 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.
Importantly, the ‘area of interest’ unit of account is to be applied to the level at which E&E assets are assessed for impairment. We will cover the finer details associated with impairment in part 2 of the series.
This article was written by Alison Stewart, Assistant Manager, Audit & Assurance at HLB Mann Judd Melbourne.