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AASB 6 Exploration for and Evaluation of Mineral Resources
The Australian Accounting Standards Board 6 (AASB 6)
Exploration for and Evaluation of Mineral Resources was published in December 2004 and is applicable with effect from 1st January 2005. The standards have been derived from both the International Accounting Standards Board (IASB) which comprises of the International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) and the International Financial Reporting Interpretations Committee (IFRIC). AASB 6 replaces previous standards AASB 1022 / AAS 7
Accounting for the Extractive Industries.
This paper looks at some of the interpretations of this standard and identifies the issues involved in achieving compliance. Due to the complexities of quarries, mines and mineral related properties there are many different interpretations involved within this document. It is hoped that this paper can be used as a discussion document for clarification of the many issues that it involves.
Who needs to comply with these standards ?
Compliance involves all companies involved within the exploration for and evaluation of mineral reserves, such as quarrying companies, mining companies, but also Local Government Authorities and not for profit organisations. All of the entities must be registered companies under the Companies Acts but are only relevant to companies satisfying certain size criteria. Individual owners and registered companies that involve smaller operations are often exempt.
Sequence of Events
As these standards are effectively new then their assessment is very different from the previous standards AASB 1022 and AAS 7. If we assume that an entity has a 30th June year end, then the first year that they may adopt these standards would be in the accounting period to 30th June 2006. A 31st December year end would not need to be reported until 31st December 2006 and so on. The first reporting period only involves an accumulation of the costs incurred up to the date of reporting, and could be adequately dealt with
in house by the entity. The standard states:
Exploration and evaluation assets shall be measured at cost at recognition.
However the first year following the first reporting period, for example year end 30th June 2007 or 31st December 2007 and so on, then the entity had the option to either continue the cost model OR opt for a revaluation model where the assets would be classified into either Tangible, and dealt with under AASB 116 Property Plant and Equipment, or Intangible, and dealt with under AASB 138 Intangible Assets. The revaluation model is then assessed for any Impairment of Assets under AASB 136 from the previous year or the cost at recognition year. The AASB 6 standard states:
An entity shall classify exploration and evaluation assets as tangible or intangible according to the nature of the assets acquired and apply the classification consistently.
Some exploration and evaluation assets are treated as intangible (e.g. drilling rights), whereas others are tangible (e.g. vehicles and drilling rigs).
To the extent that a tangible asset is consumed in developing an intangible asset, the amount reflecting that consumption is part of the cost of the intangible asset.
However, using a tangible asset to develop an intangible asset does not change a tangible asset into an intangible asset.
Set out below is a chart indicating some of the asset classifications for quarry, mine and mineral related properties:
State owned Minerals
AASB 138 & 117
Surface Rights (Removed surface lands)
Coal Seam Methane
Coal Seam Methane rights
Void Space Rights (Landfill)
Development Approvals / Consents
Mining & EPA Licensing
Quarry / Mine Infrastructure
Areas of Interest
Before consideration can be given to either the cost or revaluation models we firstly have to identify the assets involved. For this purpose the AASB 6 identifies
an area of interest and we set out the explanation for this as follows:
Aus 7.2 An exploration and evaluation asset shall only be recognised in relation to
an area of interest if the following conditions are satisfied:
the rights to tenure of the area of interest are current; and
at least one of the following conditions is also met:
the exploration and evaluation expenditures are expected to be recouped through successful development and exploitation of the area of interest, or alternatively, by its sale; and
(ii) exploration and evaluation activities in the area of interest have not at the reporting date reached a stage which permits a reasonable assessment of the existence or otherwise of
economically recoverable reserves, and active and significant operations in, or in relation to, the area of interest are continuing.
Where the rights to tenure or ownership changes, then so too can the nature of the assets, into either tangible or intangible. This is illustrated in the chart above. Following the rights to tenure the assets are then classified into either
active as in 7.2 (b) (i) or
inactive as in 7.2 (b) (ii).
For definition purposes
an area of interest is classified as follows:
An area of interest refers to an individual geological area whereby the presence of a mineral deposit or an oil or natural gas field is considered favourable or has been proved to exist.
It is common for an area of interest to contract in size progressively, as exploration and evaluation lead towards the identification of a mineral deposit or an oil or natural gas field, which may prove to contain economically recoverable reserves.
When this happens during the exploration for and evaluation of mineral resources, exploration and evaluation expenditures are still included in the cost of the exploration and evaluation asset notwithstanding that the size of the area of interest may contract as the exploration and evaluation operations progress.
In most cases, an area of interest will comprise a single mine or deposit or a separate oil or gas field.
Therefore for definition purposes an
Area of Interest runs with the geology and can be inferred to include not only the mineral extraction area but the buffer and operational lands as well, as they often include the future geological deposit. If the revaluation model is adopted then the valuer has to firstly identify the area of interest, and on the basis that this predominantly involves the geology of the site, then the valuer needs to link the geology to the surface lands. It is therefore essential that any valuer undertaking such a task is familiar with geological deposits as otherwise they may not correctly identify the underlying resources. The presence of fault lines can dramatically alter the geology within a given area, and the valuer needs to take on the responsibility of identifying any geological anomalies and consequently requires experience within geology.
We summarise the process in the flowchart below:
Tangible Assets - AASB 116 Property, Plant and Equipment
In relation to the evaluation of mineral resources, then the tangible assets would usually include the physical mineral deposit itself, as well as the surface lands including buffer lands and perhaps other non operational land included as part of the area of interest, and then classified into either active or inactive. However great care needs to be given to the particular ownership structure of the minerals which often involves both the surface and mineral rights, which again can be either active or inactive. For instance if the minerals are State owned, then the entity only enjoys the surface lands, which would be tangible assets until they are removed, whereby, they then convert to surface rights which are classified as intangibles. In other circumstances there may be changes in geology which involve both entity owned minerals and State owned minerals and the area of interest may have to be apportioned accordingly.
All the tangible assets would be dealt with under AASB 116 Property Plant and Equipment and the basis for this would be fair value. Difficulties arise because the physical mineral deposit would rarely be traded by itself, and its value would require expert advice to determine the value of, in effect, the fair value of a partial interest, often equated as a royalty and then applied to the output and capitalised.
Intangible assets could include both the surface and mineral rights depending on whether the surface has been breached or not but also considered as either active or inactive. Where the mineral and / or surface rights are not directly owned and subject to a lease then these working rights are all that can be valued and it is possible that these could also be included under AASB 117 Leases. Other intangible assets could include the development approval, licensing, future void space rights and for highly specialised minerals there could be patents involved where unique products are concerned. Similar to tangible assets the various rights to the minerals are seldom traded in the market, and again expertise would be required to determine the appropriate fair values for these, again equated as a royalty and applied to the output and capitalised.
Impairment of Assets
Impairment of Assets effectively considers the losses in fair values from one year to the next to determine changes to depreciation and obsolescence values. The carrying amount must not exceed the fair value and any excess would be recognised as an impairment loss. Where the revaluation model is adopted then it could be assumed that the fair value for the first year following the measurement at cost would exceed the cost figure and therefore impairment losses may not arise. Consequently the first year where losses may be incurred under impairment testing for most entities would involve a 30th June 2008 or 31st December 2008 year end and so on. On the basis that a mineral operation changes every day due to extraction, then its value changes every day. Subsequently it would be very rare for a fair value to be the same from year to year. In addition as workings progress then additional geology is revealed and this too is changing all the time. The annual output also changes and this has the impact of changing the life of mine, which is one of the main reasons for impairing the assets. Therefore impairment valuations should be carried out annually for mineral producing assets, as the changes can be quite dramatic, and would be one of the key factors involved within corporate disclosures.
Other Exceptions to AASB 6
an area of interest has been developed then the costs associated with this are not to be included within AASB 6 but within AASB 138. This is as identified below:
Expenditures related to the development of mineral resources shall not be recognised as exploration and evaluation assets.
Framework for the Preparation and Presentation of Financial Statements and AASB 138
Intangible Assets provide guidance on the recognition of assets arising from development.
It needs to be recognised that development costs, such as the planning approval and licensing are intangible, but development costs such as infrastructure and other physical assets would likely come under AASB 116 Property Plant and Equipment.
AASB 137 Provisions, Contingent Liabilities and Contingent Assets
As with all mineral extraction, there should always be a restoration proposal following exhaustion of the quarry. The restoration proposal is often linked to the development approval, and is for most quarries, a liability. There are many exceptions to this, where an old quarry is located within or close to an urban area, then the after use can involve a re zoning to industrial or residential or other zone involving value added opportunities. In fact there are many quarries where their highest and best use is not quarrying but involves a re zoned after use and this includes landfill. Caution needs to be taken when assessing this element, as it is important that the values are not double counted, within AASB 116. The standard states:
In accordance with AASB 137
Provisions, Contingent Liabilities and Contingent Assets an entity recognises any obligations for removal and restoration that are incurred during a particular period as a consequence of having undertaken the exploration for and evaluation of mineral resources.
AASB 6 Exploration for and Evaluation of Mineral Resources
On the basis that the revaluation model is adopted and taking into account the above allocations then the only item remaining within AASB 6 would be the exploration costs. The evaluation of mineral resources would be broken down into tangible and intangible and dealt with under separate accounting policies as indicated earlier.
How the assets are reported for quarries, mines and mineral related properties are complex issues and require a great deal of judgement not only in relation to identification of the assets, but where the revaluation model is adopted, the value of the particular assets equated as a royalty, then applied to the output and capitalised. The difficulty involves valuing partial interests where in terms of market evidence then quarries are generally sold on a going concern basis, and include all of the constituent parts. Market lease evidence for quarries can identify a number of issues in relation to values, but can be commercially sensitive and not always available and especially not around the valuation date. Ultimately it is the Directors of the entity that have the corporate responsibility and not the valuer and the Directors need to understand the issues and ensure compliance. The standard states:
An entity shall disclose information that identifies and explains the amounts recognised in its financial report arising from the exploration for and evaluation of mineral resources.
To comply with paragraph 23, an entity shall disclose:
its accounting policies for exploration and evaluation expenditures including the recognition of exploration and evaluation assets; and
the amounts of assets, liabilities, income and expense and operating and investing
cash flows arising from the exploration for and evaluation of mineral resources.
In addition to the disclosure required by paragraph 24(b), an entity that recognises exploration and evaluation assets for any of its areas of interest shall, in disclosing the amounts of those assets, provide an explanation that recoverability of the carrying amount of the exploration and evaluation assets is dependent on successful development and commercial exploitation, or alternatively, sale of the respective areas of interest.
An entity shall treat exploration and evaluation assets as a separate class of assets and make the disclosures required by either AASB 116 or AASB 138 consistent with how the assets are classified.
AASB 6 forms the basic framework for identifying the treatment of the different assets involved at quarries, mines and other mineral related properties. The framework is complex in that a mineral asset can be tangible, intangible, active, inactive and based on either cost or value. Consequently the services of an appropriately qualified and experienced mineral valuer are required to undertake the identification and valuation of these assets. Peer reviews may overcome many of these issues, but where unsupported inconsistencies do occur then Auditors are likely to require additional valuations. Where compliance is not met then the Directors would have the ultimate corporate responsibility.
The opinions expressed in the above paper are the personal views of the author gained from experience and research within the extractive industries. No responsibilities can be held for any person or company who relies on information within this paper or who attempts to take any extracts from this paper. This paper is not to be used or quoted in part or as a whole for commercial use without the express written consent of the author.