An issue in interpreting IFRS 6 raises broader policy questions
Here’s an issue recently discussed by CPA Canada’s IFRS Discussion Group:
- Under IFRS 6 Exploration for and Evaluation of Mineral Resources, demonstrating technical feasibility and commercial viability is important because the standard does not apply to expenditures incurred “after the technical feasibility and commercial viability of extracting a mineral resource are demonstrable” (paragraph 5(b) of IFRS 6).
- IFRS 6 does not define the term “technical feasibility” or the term “commercial viability”. Also, IFRS 6 does not prescribe criteria for demonstrating the technical feasibility and commercial viability of extracting a mineral resource. Management must make judgments in applying an entity’s accounting policies and identifying appropriate criteria for demonstrating technical feasibility and commercial viability.
- In addition, IFRS 6 refers to “mineral resource” and does not differentiate between mineral resources and mineral reserves. The Committee for Mineral Reserves International Reporting Standards (CRIRSCO) makes the distinction between a mineral reserve and a mineral resource based on the economic viability of extraction…
- In Canada, National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101) sets out disclosure requirements for entities with mineral projects. NI 43-101 incorporates terms and definitions specified by the Canadian Institute of Mining, Metallurgy and Petroleum (CIM). Consistent with CRIRSCO, CIM defines the term “mineral reserve” as “the economically mineable part of a measured or indicated mineral resource” and notes that the public disclosure of a mineral reserve must be demonstrated by a pre-feasibility study or feasibility study. The CIM Best Practice Guideline explicitly states: “mineral resources which are not mineral reserves do not have demonstrated economic viability.” A scoping study or preliminary economic assessment is not sufficient to establish mineral reserves…
The group discussed, against this background, whether it’s necessary for an entity to establish mineral reserves in order to demonstrate the technical feasibility and commercial viability of extracting a mineral resource under IFRS 6 (and, if a property is developed, whether establishing mineral reserves is necessary to support capitalizing expenditures related to that development). In favour of this argument, you might argue that “the term ‘economic viability’ that is included in the CIM Best Practice Guideline (which makes reference to the requirements in NI 43-101) and ‘commercial viability’ in IFRS 6 are considered to have a common meaning” and that “reporting entities with mineral projects should provide their investors and other stakeholders with financial and technical information that is based on consistent concepts and terminology.” A counter-argument would be that “in the absence of specific guidance under IFRS 6, management must use its judgment to determine how the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Management may conclude that other factors demonstrate technical feasibility and commercial viability (for example, proximity of the area to a successfully developed and producing mine, results from a preliminary feasibility study or internal management analysis).”
Most of the group supported the second view: “the establishment of mineral reserves is not required to demonstrate technical feasibility and commercial viability for various reasons, including that IFRS 6 does not refer to mineral reserves. Group members observed that this is a complex area and IFRS 6 does not prescribe the specific nature of evidence required to establish technical feasibility and commercial viability.” In practice, the two things would usually go together, but “there could be some industries, such as uranium, in which these differences are more common. Other circumstances, particularly for junior mining entities, may arise when the issuer may choose not to obtain a pre-feasibility or feasibility study because doing so would be cost prohibitive. In such situations, other persuasive evidence would be needed to support management’s judgment in demonstrating technical feasibility and commercial viability.” The CSA representatives though took the opposing view, and the meeting report says they’ll be considering possible next steps.
Although it’s an interesting enough issue in itself, it’s perhaps most notable in evoking a broader philosophical debate, similar to how judges at the highest level of adjudication might wrestle with how much weight to place on a statute’s “original intent,” versus the practical context in which it currently exists. If IFRS is intended as a living discipline that intersects with the real world, then, you might ask, why shouldn’t those points of intersection colour how we interpret the standards? On the other hand, if one went down that road, what if regulators also wanted to set expectations for (say) the benchmarks to be applied in measuring fair value, or in various elements of disclosure, or other aspects of practice where one might detect benefit in imposing more “common concepts and terminology”? Does it matter if a few litmus tests get added here and there, as long as it’s for the greater good? But would such efforts add or subtract from the perception of IFRS as a common accounting language? Even if they subtracted from it, would it matter, within limits? Could we be confident that regulators would always know better? How far would disclosure of the underlying judgments help? Do we have any framework (beyond just instinct) for how we could even start to address such questions…?
The opinions expressed are solely those of the author