IFRS 6 EXPLORATION FOR & EVALUATION OF MINERAL RESOURCES

Definition

Exploration for and evaluation of mineral resources means the search for mineral resources, including minerals, oil,
natural gas and similar non-regenerative resources after the entity has obtained legal rights to explore in a specific
are, as well as the determination of the technical fusibility and commercial viability of extracting the mineral
resource. [IFRS 6. Appendix A]

Exploration and evaluation expenditures are expenditures incurred in connection with the exploration and
evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral
resource is demonstrable. [IFRS 6. Appendix A]

Accounting policies for exploration and evaluation

IFRS 6 permits an entity to develop an accounting policy for recognition of exploration and evaluation expenditures
as assets without specifically considering the requirements of paragraphs 11 and 12 of IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors. [IFRS 6.9] 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.

Impairment

IFRS 6 effectively modifies the application of IAS 36 Impairment of Assets to exploration and evaluation assets
recognized by an entity under its accounting policy. Specifically:
 Entities recognizing exploration and evaluation assets are required to perform an impairment test on those
assets when specific facts and circumstances outlined in the standard indicate an impairment test is required.
The facts and circumstances outlined in IFRS 6 are non-exhaustive, and are applied instead of the indicators
of impairment in IAS 36. [IFRS 6.19-20]
 Entities are permitted to determine an accounting policy for allocating exploration and evaluation assets to
cash-generating units or groups of CGUs. [IFRS 6.21] This accounting policy may result in a different
allocation than might otherwise arise on applying the requirements of IAS 36.
 If an impairment test is required, any impairment loss is measured, presented and disclosed in accordance
with IAS 36. [IFRS 6.18]

Presentation and disclosure

An entity treats exploration and evaluation assets as a separate class of assets and make the disclosures required by
either IAS 16 Property, Plant, and Equipment or IAS 38 Intangible Assets consistent with how the assets are classified.
[IFRS 6.25]
IFRS 6 requires disclosure of information that identifies and explains the amounts recognized in its financial
statements arising from the exploration for and evaluation of mineral resources, including: [IFRS 6.23-24]
1. Its accounting policies for exploration and evaluation expenditures including the recognition of exploration
and evaluation of assets
2. The amounts of assets, liabilities, income, and expense and operating and investing cash flows from the
exploration for and evaluation of mineral resources
Summary of IFRIC 20 – Stripping Costs in the Production Phase of a Surface Mine

In surface mining operations, entities may find it necessary to remove mine waste materials (‘overburden’) to gain
access to mineral ore deposits. This waste removal activity is known as ‘stripping’. There can be two benefits
accruing to the entity from the stripping activity: usable ore that can be used to produce inventory and improved
access to further quantities of material that will be mined in future periods.

IFRIC 20 considers when and how to account separately for these two benefits arising from the stripping activity, as
well as how to measure these benefits both initially and subsequently.

IFRIC 20 only deals with waste removal costs that are incurred in surface mining activity during the production
phase of the mine (‘production stripping costs’).

Overview of requirements

IFRIC 20 requires:
 The costs of stripping activity to be accounted for in accordance with the principles of IAS 2 Inventories to
the extent that the benefit from thee stripping activity is realized in the form of inventory produced.
 The cost of stripping activity which provides a benefit in the form of improved access to ore is recognized
as a non-current ‘stripping activity asset’ where the following criteria are met:
o It is probable that the future economic benefit (improved access to the ore body) associated with the
stripping activity will flow to the entity
o The entity can identify the component of the ore body for which access has been improved
o The costs relating to the stripping activity associated with that component can be measured reliably
 When the costs of the stripping activity asset and the inventory produced are not specifically identifiable,
production stripping costs are allocated between the inventory produced and the stripping activity asset by
using an allocation basis that is based on a relevant production measure
 A stripping activity is accounted for as an addition to, or enhancement of, an existing asset and classified as
tangible or intangible asset according to the nature of the existing asset of which it forms part.
 A stripping activity asset is initially measured at cost and subsequently carried at cost or its revalued amount
less depreciation or amortization and impairment losses.
 A stripping activity asset is depreciated or amortized on a systematic basis, over the expected useful life of
the identified component of the ore body that becomes more accessible as a result of the stripping activity.
The units of production method is used unless another method is more appropriate.

Application and transition

IFRIC 20 applies to annual periods beginning on or after 1 January 2013. Earlier application is permitted.

The Interpretation applies to production stripping costs incurred on or after the beginning of the earliest period
presented. Any ‘predecessor stripping asset’ at that date is required to be reclassified as part of the existing asset to
which the stripping activity is related (to the extent there remains an identifiable component of the ore body to
which it can be associated), or otherwise recognized in opening retained earnings at the beginning of the earliest
period presented.
ADDITIONAL NOTES:

The Concept of Depreciation

Depreciation is the systematic allocation of the depreciable amount of the property, plant, and equipment over the
useful life. Depreciation is not so much a matter of valuation as it is a matter of cost allocation in recognition of the
exhaustion of the life of an item of PPE used in business operations.

The objective of depreciation is to have each period benefiting from the use of the asset bear an equitable share of
the asset cost.

Definitions
Carrying amount The amount at which an asset is recognized after deducting any accumulated
depreciation and accumulated impairment losses.
Cost The amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition or construction
or, where applicable, the amount attributed to that asset when initially recognized in
accordance with specific requirements of other IFRS.
Depreciable amount The cost of an asset, or the other amount substituted for cost, less its residual value.
Depreciation The systematic allocation of the depreciable amount of an asset over its useful life.
Residual value The estimated amount that an entity would currently obtain from disposal of the
asset, after deducting the estimated costs of disposal, if the asset were already of the
age and in the condition expected at the end of its useful life.
Useful life (a) The period over which an asset is expected to be available for use by an entity; or
(b) The number of production or similar units expected to be obtained from the
asset by an entity

Depreciation
 Each part of an item of property, plant, and equipment with a cost that is significant in relation to the total
cost of the item shall be depreciated separately.
 The depreciation charge for each period shall be recognized in profit or loss unless it is included in the
carrying amount of another asset for example depreciation on factory equipment which shall be included as
overhead and cost of inventories.

Depreciable Amount and Depreciation Period

 The depreciable amount of an asset shall be allocated on a systematic basis over its useful life.
 The residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if
expectations differ from previous estimates, the change(s) shall be accounted for as a change in accounting
estimate.
 Depreciation is recognized even if the fair value of the asset exceeds its carrying amount; as long as the
asset’s residual value does not exceed its carrying amount. Repair and maintenance of an asset do not
negate the need to depreciate it.
 The residual value of an asset may increase to an amount equal to or greater than the asset’s carrying
amount. If it does, the asset’s depreciation charge is zero unless and until its residual value subsequently
decreases to an amount below the asset’s carrying amount.
  Depreciation of an asset begins when it is available for use. Depreciation of an asset ceases at the earlier of
the date that the asset is classified as held for sale and the date that the asset is derecognized. Therefore,
depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully
depreciated. However, under usage method of depreciation, the depreciation charge can be zero while there
is no production.
 Factors are considered in determining useful life of an asset:
o Expected usage of asset. Usage is assessed by reference to the asset’s expected capacity or physical
output.
o Expected wear and tear, which depends on operational factors such as the number of shifts for which
the asset is to be used and the repair and maintenance programme, and the care and maintenance of the
asset while idle.
o Technical or commercial obsolescence arising from changes or improvements in production, or from a
change in the market demand for the product or service output of the asset.
o Legal or similar limits on the use of the asset, such as the expiry dates of related leases.

Depreciation Method
 The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are
expected to be consumed by the entity.
 The depreciation method applied to an asset shall be reviewed at least at each financial year-end and, if there
has been a significant change in the expected pattern of consumption of the future economic benefits
embodied in the asset, the method shall be charged to reflect the changed pattern. Such change shall be
accounted for as a change in accounting estimate.
 A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a
systematic basis over its useful life. These methods include the straight line method, the diminishing
balance method and the units of production method.

Clarifying depreciation and amortization methods

In May 2014, the International Accounting Standards Board (IASB) amended IAS 16 and IAS 38 to clarify when a depreciation or
amortization may be based on revenue.
For PPE, thee amendment clarified that a revenue-based depreciation method is no longer appropriate because there are factors that
affect revenue other than the consummation of economic benefits embodied in an asset. These may include inputs and processes,
selling activities, changes in sales volumes and prices which have no direct correlation to the use of the asset.
For intangible assets, the amendment established a rebuttable presumption that a revenue-based depreciation is not appropriate
except:
 Where the intangible asset is expressed as a measure of revenue (e.g. an entity whose rights to operate a toll road is based on a fixed
amount of revenue to be generated from toll charges); or
 Where it can be demonstrated that revenue and consumption of economic benefits are highly correlated (e.g. an entity with a
concession to explore and extract gold from gold mine and the expiration of contract is based on a fixed amount of total revenue to
be generated from extraction)
Furthermore, the amendment to IAS 38 introduced guidance in determining the appropriate amortization method of intangible asset by
determining the “predominant limiting factor”. While “predominant limiting factor” is not defined in the standard, it is illustrated as the
starting point for identifying the appropriate amortization method which may be stated as a provision in a contract where an entity’s
rights over the use of an intangible asset can be expressed in terms of years, units of output or even revenue. Where revenue is
identified as the “predominant limiting factor”, a revenue-based amortization method may be appropriate.
On the other hand, entities that have intangible assets under International Financial Reporting Interpretation Committee 12, Service
Concessions, may significantly impacted by the amendment to IAS 38 where a revenue-based amoritization method is used.
Depreciation Methods
1. Uniform/ Fixed Charge Method
Straight line = depreciable amount/ useful life
= Depreciable amount x Rate*
*Rate = 100% ÷ useful life

Composite (heterogeneous) & Group (homogenous)

*Composite life = Σ depreciable amount ÷ Σ annual depreciation
*Composite rate = Σ annual depreciation ÷ Σ cost
** Retirement of asset = difference between cash and cost of asset is charged to accumulated
depreciation. If no cash/ proceeds, all are charged to accumulated depreciation.
***Depreciation expense = depreciation rate x total group (composite) cost

2. Variable Charge Methods

Working hours = depreciable amount ÷ life in terms of working hours * actual hours used
Output method = depreciable amount ÷ life in terms of total output * actual output

3. Diminishing balance methods

SYD = depreciable cost * SYD rate
SYD rate = Life x (Life +1) ÷ 2
*if half year: useful life x 2, 2 fractions are used per year
**depreciation expense/ year = depreciable amount * (remaining years ÷ SYD)

Declining balance = cost * DB rate (consider salvage value only on the last year)
Rate = 1 −   ÷ cost

Double declining balance (same with declining balance)

%
Rate = 2


4. Others (useful for depreciating small tools and similar items)

Inventory method = Beg. Tools + purchases – end. Tools – proceeds from disposal of tools
Replacement method = tools disposed * cost of latest purchase – proceeds from disposal
Retirement method = tools disposed * cost of earlier purchase – proceeds from disposal
*no accumulated depreciation is recognized; therefore, directly credited to asset account

Part of an item – “Component Accounting”

 On initial recognition, allocate cost to significant parts of an asset (including non-physical parts)
 Depreciate separately each “component” of an asset
 Must capitalize subsequent expenditures when:
o Probable that future economic benefits will flow to the entity, and
o Cost can be measured reliably
Notes:
 The depreciation method should be reviewed at least annually and if the pattern of consumption of benefits has
changed, the depreciation method should be changed prospectively as a change in estimate under PAS 8.
 Depreciation begins when the asset is available for use and continues until the asset is derecognized, even if it is
idle.
 Derecognition (retirement and disposals), an asset should be removed from the balance sheet on disposal or
when it is withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss
on disposal is the difference between the proceeds and the carrying amount and should be recognized in the
income statement.

WASTING ASSETS are natural resources property in the form of land containing mineral deposits, precious
stones and metals or trees to be harvested as logs and lumber with a limited life and will be subject to depletion
using the production method.

Cost of Wasting Assets

Acquisition cost Purchase price of the property
Exploration & Evaluation Cost Cost incurred to locate the minerals and other resources beneath the surface of
the property
Development cost Cost incurred for the actual production or extraction of the minerals and other
resources. Development cost is naturally incurred multiple number of times
during the period of production and will usually cause the recomputation of
the rate. Development cost related to other tangible assets should not be
capitalized as part of the wasting asset rather as other items of PPE and
depreciated separately, like equipment, machinery, and processing facilities.
Restoration cost Future cost to be paid to restore the property back to its original condition but
recorded as a provision (liability that is estimated) at its present value.

PFRS 6 – Exploration for and Evaluation of Mineral Resources

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

Methods used before PFRS 6

1) Successful effort method
 Cost of successful exploration – capitalized
 Cost of unsuccessful exploration (dry wells) – expensed
2) Full cost method
 All exploration and evaluation expenditures are capitalized.

Key definitions
 Exploration for and evaluation of mineral resources – the search for mineral resources, including minerals,
oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights to explore in
a specific area as well as the determination of the technical feasibility and commercial viability of extracting
the mineral resources.
 o Examples: (1) acquisition of rights to explore (2) topographical, geological, geochemical, and
geophysical studies (3) exploratory drilling (4) trenching (5) sampling (6) activities in relation to
evaluating the technical feasibility of extracting the mineral resource

 Exploration and evaluation expenditures – expenditures incurred by an entity in connection with the
exploration for and evaluation of mineral resources before the technical feasibility and commercial viability
of extracting a mineral resource are demonstrated.
 Exploration and evaluation assets – exploration and evaluation expenditures recognized as assets in
accordance with the entity’s accounting policy

1. Cost subject to depletion

a. Acquisition cost – price paid to obtain the property right to search and find an undiscovered resource
b. Exploration cost – costs needed to find the resources (successful vs full cost method)
c. Development cost – cost to construct buildings, drill wells or mine shafts, buy equipment
i. Intangible (e.g. cost of drilling, sinking mine shaft, and construction of wells) – include in the
cost of the wasting asset
ii. Tangible (e.g. building, machinery, equipment, tunnels, bunker and mine shaft) – recognize as a
separate asset
If the problem is silent in computing depreciation expense:
Useful life > life of wasting asset; use output method
Useful life < life of wasting asset; use straight line method
 If the mining equipment is movable and can be used in future extractive project, the equipment is
depreciated over its useful life using the straight line method.
d. Estimated restoration cost – cost to bring the property back to its natural state after extraction has
occurred. The estimated restoration cost shall be discounted. The restoration cost must be an existing
present obligation either legal or constructive. Included when recognized as provision. Therefore, the
restoration cost must, be a present obligation, represent a probable outflow of economic resources, and
be measurable reliably.

2. Residual value
3. Method of allocation – units of output (production) method
a. Calculating depletion
∗ % − &'
   ! " =
(! )  " *! "+ 
*C = acquisition cost + exploration cost + PV restoration cost + development cost
b. Revision of depletion
& ) ,-' + ! *!, 0 1 − &'
&     ! " =
& )  + ! *! "  )  
c. Treatment of depletion – inventoriable or product cost
i. Sold units = depletion is included in CGS
ii. Unsold units = depletion is in inventory account
Shutdown
 When the output method is used is depreciation mining property, in the event of shutdown, such method
cannot be used. In this case, the depreciation in the year of shutdown is based on the remaining life of the
equipment following the straight line method.
 When operations are resumed, the depreciation is again computed following the output method. In this
case, a new depreciation rate per unit is computed by dividing the remaining book value of the equipment
by the remaining or revised estimate of the deposit.

Trust fund doctrine

 Under this doctrine, the share capital of a corporation is conceived as a trust fund for the protection of
creditors. Consequently, such capital cannot be returned to shareholders during the lifetime of the
corporations.
 The corporation can pay only dividends limited to the balance of retained earnings.
 The corporation cannot pay dividends if it has a deficit balance, because this would be a tantamount to a
return of capital to shareholders.

Wasting Asset Doctrine

 Wasting asset corporation or any entity engaged in extraction of a natural resource, can legally return capital
to shareholders during the lifetime of the corporation.
 Wasting asset corporation can pay dividend not only to the extent of retained earnings but also to the extent
of accumulated depletion.
 The amount paid in excess of retained earnings is accounted for as liquidating dividends or return of capital.
 Therefore, wasting asset corporation is exception to Trust Fund Doctrine.
 Formula:

Retained Earnings XXX

Accumulated Depletion XXX
Less: Capital Liquidateed XXX
Unrealized depletion in ending inventory XXX XXX
Maximum Dividend XXX

Pro-forma Journal Entry

Retained Earnings XXX
Capital Liquidated XXX
Dividends Payable XXX