CHAPTER 34: PFRS 6 - EXPLORATION AND EVALUATION OF MINERAL REASOURCES

EXPLORATION AND EVALUATION

Mineral resources include minerals, oil, natural gas and similar nonregenerative resources.

The term exploration and evaluation of mineral resources is defined as the search for mineral resources after the entity
has obtained legal right to explore in a specific area as well as the determination of the technical feasibility and
commercial viability of extracting the mineral resources.

Exploration and evaluation expenditures are expenditures incurred by an entity in connection with the exploration and
evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource.

Simply stated, exploration cost is the cost incurred in an attempt to locate the natural resource that can economically be
extracted.

Accordingly, exploration and evaluation expenditures do not include expenditures incurred:

a. Before an entity has obtained the legal right to explore a specific area.
b. After the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

This pertains to development expenditure.

Expenditures related to development of mineral resources, for example, preparation for commercial production, such as
building roads and tunnels, cannot be recognized as exploration and evaluation expenditures.

Development cost is the cost incurred to extract the natural resource that has been located through successful
exploration.

Exploration and evaluation expenditures

a. Acquisition of rights to explore

b. Topographical, geological, geochemical and geophysical studies
c. Exploratory drilling
d. Trenching
e. Sampling
f. Activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral
resource.
g. General and administrative costs directly attributable to exploration and evaluation activities.

Exploration and evaluation asset

The exploration and evaluation expenditures may qualify as exploration and evaluation asset.

However, the standard does not provide a clearcut guidance for the recognition of exploration and evaluation asset.

Accordingly, an entity must develop its own accounting policy for the recognition of such asset.

As a matter of fact, IFRS 6 permits an entity to continue to apply its previous accounting policy provided that the
resulting information is relevant and reliable.

Measurement and classification

Exploration and evaluation asset shall be measured initially at cost.

After initial recognition, an entity shall apply either the cost model or the revaluation model.

Exploration and evaluation asset is classified either as tangible asset or an intangible asset.
CHAPTER 34: PFRS 6 - EXPLORATION AND EVALUATION OF MINERAL REASOURCES

For example, vehicles and drilling rigs would be classified as tangible assets and drilling rights would be classified as
intangible assets.

Two methods of accounting for exploration cost

a. Successful effort method

The exploration cost directly related to the discovery of commercially producible natural resource is capitalized
as cost of the resource property.

The exploration cost related to "dry holes" or unsuccessful discovery is expensed in the period incurred.
b. Full cost method

All exploration costs, whether successful or unsuccessful, are capitalized as cost of the successful resource
discovery.

This is on the theory that any exploration cost is a “wild goose chase” and therefore necessary before any
commercially producible and profitable resource can be found.

The cost of drilling dry holes is part of the cost of locating productive holes.

Both methods are used in practice.

Most large and successful oil entities follow the successful effort method.

The full cost method is popular-among small oil entities.