International Financial Reporting Standard (IFRS) 6 outlines the accounting treatment for exploration and evaluation activities related to mineral resources. The standard requires entities to recognize and measure exploration and evaluation assets, determine the recoverable amount of these assets, and assess the impairment of these assets.
Exploration and Evaluation Assets
Exploration and evaluation assets are the rights to explore for and evaluate mineral resources, including those acquired in exchange for cash or other assets. The assets can be held directly by the entity or through a subsidiary or joint venture. Entities are required to measure exploration and evaluation assets at cost less accumulated impairment.
The recoverable amount of an exploration and evaluation asset is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell is the amount the entity could receive for the asset in an arm’s length transaction less the costs of disposal. Value in use is the present value of the estimated future cash flows expected to be generated by the asset.
Exploration and evaluation assets are required to be assessed for impairment at each reporting date. If the carrying amount of the asset exceeds its recoverable amount, the asset is impaired and an impairment loss is recognized in the income statement. The impairment loss cannot be reversed in subsequent periods, except in limited circumstances.
IFRS 6 also includes disclosure requirements, which require entities to disclose the nature and extent of their exploration and evaluation activities, as well as the basis for determining the recoverable amount of exploration and evaluation assets.
A mining company is exploring for gold in a remote area. They have incurred exploration costs of $5 million to date and have estimated that they will need to spend an additional $10 million to fully evaluate the mineral resource. The company believes that the recoverable amount of the exploration and evaluation asset is $15 million. However, the market for gold has recently experienced a downturn and the company is concerned that the fair value less costs to sell may be lower than the recoverable amount. The company performs an impairment test and determines that the carrying amount of the asset is $14 million, which exceeds its recoverable amount. As a result, the company recognizes an impairment loss of $1 million in its income statement.
In 2022, the mineral exploration company ABC Corporation conducted exploration and evaluation activities on a newly acquired mine in Australia. The total cost incurred during the exploration period was $20 million. The company estimates that the recoverable amount of the mine is $50 million, which is determined based on the estimated net present value of the future cash flows from the mine.
In 2023, the market value of minerals experienced a significant decline, and the company is concerned that the fair value less cost to sell may be lower than the recoverable amount. The company performs an impairment test and determines that the carrying amount of the mine is $40 million, which exceeds its recoverable amount. As a result, the company recognizes an impairment loss of $10 million in its income statement.
In September 2021, the International Accounting Standards Board (IASB) published an exposure draft proposing amendments to IFRS 6. The proposed amendments aim to align the accounting requirements for exploration and evaluation activities with the requirements for other extractive activities in IFRS 16 Leases and IFRS 6 Exploration for and Evaluation of Mineral Resources. The amendments also clarify the accounting treatment of costs associated with production activities that occur before commercial production begins.