doe gon for and Evaluation of Mi espa fo of Mineral Resources 515 pFRS 6 Exploration for and Evaluation of Mineral Resources fearning Objective |, Explain the accounting for exploration and evaluation expenditures. introduction PERS 6 addresses the accounting for expenditures on exploration for and evaluation of mineral resources. » Exploration for and evaluation of mineral resources is “the search for mineral resources, induding minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights to explore ina specific area, as well as the determination of the technical feasibility and commercial viability of extracting the mineral resource.” (PFRS 6.Appendix A) n expenditures - are “expenditures connection with the exploration for and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.” (PRRS 6.Appendix A) PERS 6 applies to expenditures incurred after the entity has obtained legal rights to explore in a specific area (it is illegal to explore for mineral resources without obtaining first an | authorization from the government) but before the existence of lished and the technical feasibility Mineral reserves is in fact esta and commercial viability of extracting mineral renourtes care demonstrable. Expenditures incurred after technical feasibility and commercial viability at® demonstrable are called lcreapir sis, Development costs ar accounted for under other applica le Standards, v Exploration and evaluatio' incurred by an entity in ¢PERS 6 a Tegal rights are obtained : oo mer pee feasibility after techrical feasibly i secial viability are and commercial visbiliy t and commer ze ee coe ° demonstrable demonstrable [ explore are ob a \¢ ae Exemption from Hierarchy of reporting standards under PAs 8 & Hierarchy of reporting standards (PAS 8) 1. PFRSs 2. Judgment When making the judgment: > management shal/ consider the following: a, Requirements in other PFRSs dealing with similar transactions b. Conceptual Framework > management may consider the following: a. Pronouncements issued by other standard-setting bodies b. Other accounting literature and industry practices PFRS 6 temporarily exempts an entity from applying the hierarchy above. PFRS 6 permits entities to develop their own accounting policy for exploration and evaluation assets that results in relevant and reliable information based entirely on management's judgment and without the need to consider the hierarchy of standards in PAS 8, Accordingly, an entity may recognize exploration and evaluation expenditures as expenses or assets depending on its chosen accounting policy (which is developed based entirely on management's judgment). In making the judgment, an entity considers the degree to which the expenditure can be associated with finding specific mineral resources,oo B we for and Evaluation of Mineral Resources 517 itial measurement peploration and evaluation assets are initially measured at cost. > Exploration and evaluation assets — are “exploration and evaluation expenditires recognized as assets in accordance with the entity’s accounting policy.” (PFRS 6.Appendix A) gxamples of expenditures that might be included in the initial measurement of exploration and evaluation assets: a. Acquisition of rights to explore p. Topographical, geological, geochemical and geophysical studies Exploratory drilling Trenching Sampling Activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource. (PERS 6.9) mean The initial measurement also includes the present value of ration costs for which the entity any decommissioning and resto: quence of having undertaken has incurred an obligation as a conse: the exploration and evaluation activities. Expenditures related to the development of mineral resources are not recognized as exploration and evaluation assets. Subsequent measurement 2 Exploration and evaluation assets are subsequently measured using cither the cost model or the revaluation ‘model. Changes in accounting policies : : An entity may change its accounting policy for exploration and evaluation expenditures if the change results in more relevant and no less reliable, or more reliable and no less relevant, information. The entity judges relevance and reliability using the criteria in PAS,Classification of exploration and evaluation assets Exploration and evaluation assets are treated asa separate class of assets and classified as tangible (e.g. vehicles and drilling rigs) o, intangible (e.g. drilling rights) depending on the nature of the assets. Reclassification of exploration and evaluation assets When the technical feasibility and commercial viability of extracting a mineral resource are demonstrable, the exploration and evaluation assets are reclassified in accordance with other relevant Standards. The exploration and evaluation assets are assessed first for impairment before the reclassification. Impairment Loss Exploration and evaluation assets are assessed for impairment when indication exists that their carrying amount exceeds their recoverable amount. The entity applies PAS 36 when making the assessment, except for the allocation of impairment loss on assets within cash-generating units wherein the entity is allowed to determine its own accounting policy for the allocation. Examples of indications that exploration and evaluation assets need to be assessed for impaitment: 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 exists that, although a specific area will be developed, the carrying amount of the exploration and evaluation asset is unlikely to be fully recovered.— jon jor and Evaluatic sxplration jor and Evaluation of Mineral Resources eT pROBLEMS pROBLEM 1: MULTIPLE CHOICE | 4, Exploration for and evaluation of mineral resources is a. the search for mineral resources before the entity has \ obtained legal rights to explore in a specific area. b. the search for mineral 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. c. the search for mineral resources before the entity has | obtained legal rights to explore in a.specific area up to the date when mineral resources are actually confirmed to exist in the area. d. the search for mineral resources after the entity has ' obtained legal rights to explore in a specific area up to the date when commercial operations begin. | | 2. According to PFRS 6 Exploration for and Evaluation of Mineral ! Resources, an entity may change its accounting policies for tion expenditures if the financial statements more relevant exploration and evalua! a. the change makes and more reliable. b. the PFRSs do not prohibit the change. c. the change makes the financial statements more relevant and no less reliable, or more reliable and no less relevant. d. aorbae 520 PERS 6 Se PROBLEM 2: FOR CLASSROOM DISCUSSION Exemption from Hierarchy of reporting standards under PAs g 1. According to PFRS 6, expenditures on exploration for and evaluation of mineral resources are recognized as a. assets. b. expenses. ¢. aorb depending on the entity’s accounting policy. d. not accounted for Measurement 2. According to PFRS 6, how are exploration and evaluation assets measured? Initial Subsequent a. cost cost model b. cost fair value model cost cost model or revaluation model d. fair value fair value through profit or loss