Drilling down on exploration and evaluation expenditure

By Neil Hirani
Audit Manager
5 August 2022

Australia’s resource and energy export earnings are forecast to hit a record of $425 billion in 2021–22. While new waves of COVID-19 cases and the Russian invasion of Ukraine are likely to have checked the global economic recovery (and hence commodity demand), Australian resource and energy export earnings are likely to be lifted by surging energy prices. - Australian Government, Resources and Energy Release, March 2022

Hence, AASB 6 (Exploration for and Evaluation of Mineral Resources) continues to be a significant and important standard in financial reporting in Australia.

Difference between AASB 6 and IFRS 6

Although there is IFRS 6 of the same name, AASB 6 includes specific ‘Aus” paragraphs covering Australian-specific requirements and has a stricter set of rules related to the capitalisation of exploration and evaluation (E&E) expenditure.

One such Australian concept is an “area of interest”, which paragraph Aus 7.2 defines as:

“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”.

The main instance of this is a single mine or deposit or a separate oil or gas field, which is applied to the expenditures incurred and testing for impairment. Hence, AASB 6 results in earlier impairment and/or derecognition of the E&E asset than under
IFRS 6.

Example one: Rights of tenure are not current

Paragraph Aus 7.2 also states:

“Exploration and evaluation assets shall only be recognised…. if the rights to tenure of the area are current”.

This means that application costs for tenements/permits prior to granting cannot be capitalised.

Example two: Capitalising general overheads

Paragraph Aus 9.4 states:

“General and administrative costs are allocated to, and included in, the cost of an exploration and evaluation asset, but only to the extent that those costs can be related directly to operational activities in the area of interest to which the exploration and evaluation asset relates.”

Otherwise, these costs are expensed as incurred. Examples of such costs are directors’ fees, salaries and general management expenses. An example of a capitalised cost is if the relevant person is also performing the role of exploration manager and competent person.

Also, at least one of the following two conditions needs to be met for a cost to be capitalised:

  1. the exploration and evaluation expenditures are expected to be recouped through successful development and exploitation, or by sale; or
  2. exploration and evaluation activities in the area of interest have not at the reporting date reached a stage of reasonable assessment to determine the recoverable reserves, but active operations are continuing.

Impairment testing shall be undertaken when facts and circumstances suggest that the carrying amount of the E&E asset may exceed its recoverable amount.

Finally, even though costs can be fully capitalised per AASB 6 if the above conditions are considered, these can also be expensed as incurred or partially capitalised.

PKF Audit & Assurance has a number of experts in the mining and resources sector nationally. For any further guidance, please contact your local PKF Audit representative.

To read more articles in the Winter 2022 edition of Clarity, click here