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MODULE 31 Exploration For An Evaluation of Mineral Resources
MODULE 31 Exploration For An Evaluation of Mineral Resources
LEARNING OBJECTIVE:
Explain the accounting for exploration and evaluation expenditures
OVERVIEW
PFRS 6 Exploration for and Evaluation of Mineral Resources has the effect of allowing entities
adopting the standard for the first time to use accounting policies for exploration and evaluation
assets that were applied before adopting PFRSs. It also modifies impairment testing of explo-
ration and evaluation assets by introducing different impairment indicators and allowing the
carrying amount to be tested at an aggregate level (not greater than a segment).
Definitions
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 area, as well as the determination of the
technical feasibility and commercial viability of extracting the mineral resource. [PFRS 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. [PFRS 6.Appendix A]
Thus, an entity adopting PFRS 6 may continue to use the accounting policies applied immedi-
ately before adopting the PFRS. This includes continuing to use recognition and measurement
practices that are part of those accounting policies.
PFRS 6 applies to expenditures incurred after the entity has obtained legal rights to
explore in a specific area, but before the existence of mineral reserves is in fact established
and the technical feasibility and commercial viability of extracting mineral resources are
demonstrable.
Development cost – are expenditures incurred after technical feasibility and commercial
viability are demonstrable.
Initial measurement
Exploration and evaluation assets are initially measured at cost.
Exploration and evaluation assets – are “exploration and evaluation expenditures recognized
as assets in accordance with the entity’s accounting policy.” (PFRS 6. Appendix A)
Examples of expenses that might be included in the initial measurement of exploration and
evaluation assets:
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. (PFRS 6.9)
The initial measurement also includes the present value of any decommissioning and
restoration cost for which the entity has incurred and obligation as a consequence of having
undertaken the exploration and evaluation activities.
Subsequent measurement
Exploration and evaluation assets are subsequently measured using either cost or the
revaluation model.
Impairment loss
Exploration and evaluation assets are assessed for impairment when indication exist that their
carrying amount exceeds recoverable amount. The entity is allowed to determine its own
accounting policy for the allocation of impairment.
Example of indications for impairment:
a. The right to explore has expired or will expire in the near future and is not expected to be
renewed.
b. Expenditures for further exploration and evaluation activities are significantly higher than
expected.
c. The exploration and evaluation activities in a specific area have to be discontinued
because no mineral resources have been discovered.
d. Indication exist that, although a specific area will be developed, the carrying amount of
the exploration and evaluation assets is unlikely to be fully recovered.