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Introduction to IFRS 6 - Exploration for and Evaluation of Mineral Resources

Reasons for issuing the IFRS

1. The International Accounting Standards Board decided to develop an International Financial Reporting Standard (IFRS) on exploration for and evaluation of mineral resources because:

(a) until now there has been no IFRS that specifically addresses the accounting for those activities and they are excluded from the scope of 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 was required to determine its accounting policy for the exploration for and evaluation of mineral resources 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 in accordance with IFRSs.

(c) accounting practices for exploration and evaluation assets under the requirements of other standard-setting bodies are diverse and often differ from practices in other sectors for expenditures that may be considered analogous (eg accounting practices for research and development costs in accordance with IAS 38).

(d) exploration and evaluation expenditures are significant to entities engaged in extractive activities.

(e) an increasing number of entities incurring exploration and evaluation expenditures present their financial statements in accordance with IFRSs, and many more are expected to do so from 2005.

2. The Board’s predecessor organisation, the International Accounting Standards Committee, 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 Extractive Industries.

3. In July 2001 the Board announced that it would restart the project only when agenda time permitted. Although the Board recognised the importance of accounting for extractive activities generally, it decided in September 2002 that it was not feasible to complete the detailed analysis required for this project, obtain appropriate input from constituents and undertake the Board’s normal due process in time to implement changes before many entities adopted IFRSs in

4. The Board’s objectives for this phase of its extractive activities project are:

(a) to make limited improvements to accounting practices for exploration and evaluation expenditures, without requiring major changes that might be reversed when the Board undertakes a comprehensive review of accounting practices used by entities engaged in the exploration for and evaluation of mineral resources.

(b) to specify the circumstances in which entities that recognise exploration and evaluation assets should test such assets for impairment in accordance with IAS 36 Impairment of Assets.

(c) to require entities engaged in the exploration for and evaluation of mineral resources to disclose information about exploration and evaluation assets, the level at which such assets are assessed for impairment and any impairment losses recognised.

5. Main features of the IFRS

This IFRS 6:

(a) permits an entity to develop an accounting policy for exploration and evaluation assets without specifically considering the requirements of paragraphs 11 and 12 of IAS 8. Thus, an entity adopting IFRS 6 may continue to use the accounting policies applied immediately before adopting the IFRS. This includes continuing to use recognition and measurement practices that are part of those accounting policies.

(b) requires entities recognising exploration and evaluation assets to perform an impairment test on those assets when facts and circumstances suggest that the carrying amount of the assets may exceed their recoverable amount.

(c) varies the recognition of impairment from that in IAS 36 but measures the impairment in accordance with that Standard once the impairment is identified.

6. Effective date

An entity shall apply this IFRS for annual periods beginning on or after 1 January 2006. Earlier application is encouraged. If an entity applies the IFRS for a period beginning before 1 January 2006, it shall disclose that fact.

7. Transitional provisions

If it is impracticable to apply a particular requirement of paragraph 18 to comparative information that relates to annual periods beginning before 1 January 2006, an entity shall disclose that fact. IAS 8 explains the term ‘impracticable’.