## Learning Outcomes

After reading this article, you will be able to explain the purpose and scope of IFRS 6 _Prospecting for and Evaluation of Mineral Resources_, describe the key recognition and measurement rules for prospecting and evaluation assets, understand the requirements for impairment testing, and address specific presentation and disclosure issues relevant to this standard. You will also be able to apply these concepts to exam-style scenarios.

## ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are required to understand the requirements and implications of industry-specific standards such as IFRS 6. This article will help you revise:

- The scope and objective of IFRS 6 _Prospecting for and Evaluation of Mineral Resources_
- The recognition and measurement of prospecting and evaluation expenditures
- The circumstances and method for impairment testing of prospecting and evaluation assets
- The presentation and disclosure requirements under IFRS 6
- Application of professional judgement to areas where IFRS 6 allows policy choice or flexibility

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. Which of the following expenses can be capitalised as a prospecting and evaluation asset under IFRS 6?
   a) Expenditure on extracting minerals for commercial sale
   b) Geological survey costs incurred after securing legal rights
   c) Land acquisition for refinery construction
   d) Marketing costs incurred before mine development

2. When must a prospecting and evaluation asset be tested for impairment under IFRS 6?
   a) Only when there is an indication of impairment
   b) At every reporting date, regardless of indicators
   c) When reclassified as a development asset
   d) Only after technical feasibility is established

3. True or false? An entity using IFRS 6 must always measure prospecting and evaluation assets at cost.

4. State one key disclosure required by IFRS 6 for prospecting and evaluation assets.

## Introduction

The extractive industries, such as oil, gas, and mining, require significant investment in discovering and evaluating new resources. IFRS 6 _Prospecting for and Evaluation of Mineral Resources_ provides guidance on how entities should account for their expenditure incurred in these early stages. This standard grants some flexibility and seeks to balance strict capitalisation criteria with the unique uncertainties inherent in resource prospecting. Understanding the principles of IFRS 6, and how it interacts with other IFRS, is essential for ACCA SBR candidates.

> **Key Term: prospecting and evaluation assets**
> Expenditures incurred by an entity in connection with the prospecting for and evaluation of mineral resources before technical feasibility and commercial viability are demonstrable.

### Scope and Purpose of IFRS 6

IFRS 6 applies to entities engaged in the prospecting for and evaluation of mineral resources, including minerals, oil, natural gas, and similar non-regenerative resources. The standard governs the treatment of expenditures incurred before it is clear that extracting the resource is technically feasible and commercially viable. Once these stages are reached, other IFRS (such as IAS 16 or IAS 38) become relevant.

> **Key Term: prospecting and evaluation expenditures**
> Costs arising from the search for mineral resources and the assessment of their commercial potential, typically incurred after legal rights to explore have been obtained.

### Asset Recognition and Measurement

Entities must determine whether and to what extent prospecting and evaluation costs can be recognised as an asset. IFRS 6 allows an entity to develop an accounting policy for capitalising such expenditures, provided it is consistent and meets the requirements of IAS 8 _Accounting Policies, Changes in Accounting Estimates and Errors_.

Costs eligible for capitalisation usually include:

- Acquisition of rights to explore
- Topographical, geological, geochemical, and geophysical studies
- Exploratory drilling, trenching, and sampling
- Evaluating technical feasibility and commercial viability

Costs not directly attributable to prospecting or evaluation, or incurred before legal rights are obtained, must be expensed.

> **Key Term: recognition criteria**
> The minimum conditions costs must meet to be recorded as an asset rather than an expense under the entity's accounting policy.

### Changes in Accounting Policy

IFRS 6 permits entities to develop or modify their accounting policy for prospecting and evaluation expenditures without requiring full retrospective application, as provided by IAS 8. This temporary exemption acknowledges the diversity and judgement required in the sector.

> **Key Term: accounting policy choice**
> Selecting among acceptable IFRS-compliant approaches when more than one option exists for recognising or measuring an item.

### Measurement After Recognition

After initial recognition, prospecting and evaluation assets can be measured using the cost model or, if fair value can be reliably determined, the revaluation model (although this is rare due to the uniqueness of the assets and the lack of active markets). Subsequent costs related to prospecting and evaluation are added to the asset if they improve potential resource identification.

### Impairment of Prospecting and Evaluation Assets

Prospecting and evaluation assets are subject to impairment testing under a modified version of IAS 36 _Impairment of Assets_. While the general IAS 36 requirements apply, IFRS 6 identifies specific impairment indicators for these assets, such as:

![Prospecting and evaluation asset impairment under IFRS 6, from indicator assessment to IAS 36 recoverable amount estimation, loss recognition, or continued carrying amount.](https://static.pastpaperhero.com/images/acca-sbr-industry-specific-and-emerging-topics-exploration-and-evaluation-ifrs-6-overview_00.png)

_IFRS 6 impairment indicators determine whether a prospecting and evaluation asset proceeds to IAS 36 measurement and possible impairment recognition._

- Rights to explore in the area have expired or will not be renewed
- No further substantive prospecting or evaluation is planned or budgeted
- Prospecting and evaluation have not led to commercially viable quantities, and no plans exist to continue exploring
- Sufficient data exists to indicate the asset is unlikely to be developed profitably

> **Key Term: impairment indicators**
> Events or changes suggesting that an asset's carrying amount may not be recoverable and should be tested for impairment.

When impairment is indicated, the asset's recoverable amount must be estimated. If it is lower than carrying amount, an impairment loss is recorded.

### Worked Example 1.1

Scenario:
Yakima Mining has legal rights to explore in Area O. It spends \$800,000 on geological studies and exploratory drilling, uncovering some evidence of mineralisation. However, a governmental decision means Yakima's rights to continue prospecting will not be renewed in the next period.

Question:
Should Yakima Mining recognise an impairment loss in respect of the \$800,000 prospecting and evaluation asset as at year end?

> **Answer:**
> Yes. The expiry of legal rights is a specific impairment indicator under IFRS 6. Yakima Mining must test the asset for impairment. If the recoverable amount is nil (for example, if no alternative use exists), the full \$800,000 should be written off.
>
> **Exam Warning:**
> In the exam, always identify and apply the specific IFRS 6 impairment indicators. Do not rely solely on general IAS 36 guidance. Failure to apply the sector-specific indicators may lose you marks.

### Reclassification and Derecognition

Once technical feasibility and commercial viability of extracting the resource are demonstrable, the asset is reclassified in accordance with relevant IFRS standards (such as IAS 16 for property, plant and equipment). Any remaining carrying amount not expected to be recovered through development or sale should be derecognised as an impairment loss.

### Worked Example 1.2

Scenario:
Proxima Oil has spent \$4 million over several years evaluating a new oil field. The company now completes a feasibility study confirming commercial extraction. \$200,000 of the balance relates to costs for testing a non-productive seam, which management determine will not proceed to development.

Question:
How should Proxima Oil treat the \$4 million capitalised balance at year end?

> **Answer:**
> The \$3.8 million relating to successful evaluation can be reclassified to development assets under IAS 16. The \$200,000 relating to the non-productive seam does not meet the recognition criteria for further development and should be expensed as an impairment.

### Presentation and Disclosure

IFRS 6 requires separate presentation of prospecting and evaluation assets in the statement of financial position and dedicated disclosure in the notes, including:

- The amounts of assets, liabilities, income, and expenses related to prospecting and evaluation
- The accounting policies adopted for recognising and measuring these items
- Details of impairment losses (amount and circumstances)
- Significant judgements made

These disclosures provide transparency around policy choices and risks specific to the sector.

> **Revision Tip:**
> In SBR questions, clearly state the entity's accounting policy for capitalising or expensing costs, and back it up by referencing IFRS 6 requirements during your discussion.

## Summary

IFRS 6 provides a sector-specific approach for the treatment of prospecting and evaluation expenditures in mineral resource extraction industries. The standard offers flexibility in accounting policy choice, detailed rules for impairment, and explicit disclosure requirements. Proper application of IFRS 6 ensures more relevant and useful information for investors given the unique uncertainties of prospecting activities.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Explain the purpose and scope of IFRS 6 for prospecting and evaluation activities
- Identify which prospecting and evaluation costs may be capitalised
- Describe measurement and impairment testing requirements for prospecting and evaluation assets under IFRS 6
- Apply the indicators for impairment specific to extractive industries
- Outline disclosure and presentation rules for these assets

## Key Terms and Concepts

- prospecting and evaluation assets
- prospecting and evaluation expenditures
- recognition criteria
- accounting policy choice
- impairment indicators


Industry-specific and emerging topics - Exploration and evaluation (IFRS 6) overview