Extractive activities – thinking of removing the temporary. At least for now!

The IASB recently issued Extractive Activities – a Project Update, written by IASB member Tadeu Cendon

As we’ve noted before, IFRS 6 allows issuers some concessions in how an entity develops its accounting policies for recognizing and measuring exploration and evaluation assets – it labels this as a “temporary exemption” from aspects of IAS 8. The temporary exemption is now in its eighteenth year or so, and one could be forgiven for hoping that it’s never actually lifted (in the way, say, that one gets so accustomed to patches of scaffolding in one’s neighbourhood that the streets feel obscenely naked once they’re taken away). But we may have to prepare to say goodbye. Here’s the summary from the project update:

  • In its September 2021 meeting, the International Accounting Standards Board (IASB) made tentative decisions about the scope and objectives of its Extractive Activities project. The IASB decided to explore:
    • developing requirements or guidance to improve the disclosure objectives and requirements in IFRS 6 Exploration for and Evaluation of Mineral Resources relating to a company’s exploration and evaluation expenditure and activities; and
    • removing the temporary status of IFRS 6.
  • The IASB decided it lacked sufficient evidence to suggest that the benefits of reduced diversity in the accounting policies applied to exploration and evaluation expenditure would outweigh the costs of implementing any changes. The IASB also considered, but decided not to explore developing requirements or guidance for reserve and resource information in financial statements.

For background, an April 2010 Extractive Industries discussion paper had proposed capitalizing all exploration and evaluation costs. It said: “The information gained from these activities generates a better understanding of whether a minerals or oil and gas deposit exists and, if so, the characteristics of that deposit and the prospects for economically extracting minerals or oil and gas from the deposit. Over time, exploration and evaluation will provide more information, thereby reducing geological and economic uncertainty. Information that is generated during development and production will reduce this uncertainty further. Thus, the information attribute of the legal rights asset will continue to be modified.”

However, the staff summary of responses to the discussion paper noted: “a significant majority disagreed with the project team’s view that the subsequent exploration and evaluation activities undertaken would always represent an enhancement of the property (at least at the time that information is obtained).” Many of the respondents “suggested that the project team’s analysis of the treatment of those exploration and evaluation activities was inconsistent with the asset recognition criteria in the Framework because the information obtained may not have any probable future economic benefit.” There was a widespread view that the discussion paper “does not adequately make the case for changing existing accounting policies that are being consistently applied and that are well understood by user of financial statements.”

Much time later, it seems that the opposition won the day. The update presents this as something of a symbol of a newly focused IASB, for example quoting one member as follows: “… our conclusion is not that the accounting is good and useful and doesn’t need improvement … our conclusion is there is diversity in practice in this area of exploration and evaluation costs. Would addressing this diversity improve the usefulness of financial statements? Yes. But our conclusion is that the cost of addressing those areas would not be exceeded by the benefit.”

Another idea floated in 2010 was to disclose information on proved reserves and on proved and probable reserves within the notes to the financial statements. Unsurprisingly, many users and consultants argued (quoting again from the staff summary) that “auditing reserve disclosures would impose a significant cost, be time intensive and would divert geological and engineering expertise away from business functions and towards compliance functions. Furthermore, most users consulted by the project team agreed that the costs of auditing reserves disclosure would outweigh the benefits they would obtain from that assurance process.” The new project update confirms that the idea is being dropped, concluding among other things: “Reserve and resource information is similar in nature to other information that is important to investors of companies in other industries that is generally not required to be disclosed in financial statements—for example, details of the research pipeline of drugs for a pharmaceutical company (and is therefore) beyond the remit of the IASB and of financial statements.”

Back in 2014, I suggested things would probably go that way, and wondered whether the “temporary exemption” would ever actually be lifted. Or maybe, as I suggested above, I was partly expressing a wish that it not be. Anyway, the stated next steps are to consider what research would be needed to identify the information investors need about exploration and evaluation expenditure and why they don’t currently get that information, and the costs of providing that information. The IASB also needs to consider the appropriate timing of that research. Hey, maybe in eighteen years’ time?

The opinions expressed are solely those of the author

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