Exploration For and Evaluation of Mineral Resources: Ifrs 6

Exploration for and Evaluation of
Mineral Resources
IFRS 6
Definition
• Exploration and evaluation of mineral resources is defined as the
search for mineral resources after the entity has obtained legal right
to explore in a specific area as well as the determination of the
technical feasibility and commercial viability of extracting the mineral
resources.
• The expenditures incurred by an entity in connection with the

exploration and evaluation of mineral resources before the technical
feasibility and commercial viability of extracting a mineral resource
are known as exploration and evaluation expenditures.
Exploration and Evaluation Expenditures
• Exploration and evaluation expenditures do not include expenditures
incurred:
• Before an entity has obtained the legal right to explore a specific area.
• After the technical feasibility and commercial viability of extracting a
mineral resource are demonstrable.
This pertains to development expenditure. Expenditures related to
development of mineral resources such as preparation of commercial
production: building roads an tunnels cannot be recognized as exploration and
evaluation expenditures.
Exploration and Evaluation Expenditures
• Acquisition of rights to explore
• 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.
• General and administrative costs directly attributable to exploration
and evaluation activities.
Exploration and Evaluation Asset
• The exploration and evaluation expenditures may qualify as exploration
and evaluation asset.
• However, the standard does not provide a clearcut guidance for the
recognition of exploration and evaluation asset.
• Accordingly, an entity must develop its own accounting policy for the
recognition of such asset.
• As a matter of fact, IFRS 6 permits an entity to continue to apply its

previous accounting policy provided that the resulting information is
relevant and reliable.
Measurement and classification
• Exploration and evaluation asset shall be measured initially at COST.
• After initial recognition, an entity shall apply either the cost model or
the revaluation model.
• Exploration and evaluation asset is classified either as tangible asset

or an intangible asset.
Wasting assets
• Wasting assets are material objects of economic value and utility to
man produced by nature (natural resources such as coal, oil, ore,
precious metals like gold and silver, and timber).
• Wasting assets are so called because these are physically consumed

and once consumed, the assets cannot be replaced anymore. Natural
resources cannot be produced by man.
Wasting assets
• Two main features:
• Wasting assets are physically consumed
• Wasting assets are irreplaceable
Cost of wasting asset
• In general, the cost of wasting asset can be divided into four
categories, namely:
• Acquisition cost
• Exploration cost
• Development cost
• Estimated restoration cost
Acquisition cost
• Acquisition cost is the price paid to obtain the property containing the
natural resource.
• If there is a residual land value after the extraction of the natural

resource, the portion of the acquisition cost applicable to the land
may be included in the natural resource account.
• The land value is the residual value of a wasting asset for purposes of
computing depletion. This should be deducted from the total
acquisition cost to het the depletable amount.
Exploration cost
• Exploration cost is the expenditure incurred before the technical
feasibility and commercial viability of extracting a mineral resource
are demonstrated.
• Exploration cost is the cost incurred in an attempt to locate the

natural resource that can be economically be extracted or exploited.
• Exploration cost includes acquisition of right to explore, geological

study, exploratory drilling, trenching and sampling.
Two methods of accounting for exploration
cost
• Successful effort method
• Full cost method
Development cost
• Development cost is the cost incurred to exploit or extract the natural resource that has
been located through successful exploration.
• Development cost may be in the form of tangible equipment and intangible development
cost.
• Tangible equipment includes transportation equipment, heavy machinery, tunnels,

bunker and mine shaft.
• The cost of tangible equipment is not capitalized as cost of natural resource but set up in
a separate account and depreciated in accordance with normal depreciation policies.
• Intangible development cost is capitalized as cost of the natural resource. Such cost
includes drilling, sinking mine shaft and construction of wells.
Restoration cost
• Estimated restoration cost is the cost to be incurred in order to bring
the property to its original condition.
• Restoration cost may be added to the cost of resource property or

“netted” against the expected residual value of the resource property.
• PAS 16, paragraph 16, provides that the estimated cost of restoring
the property to its original condition is capitalized only when the
entity incurs the obligation when the asset is acquired.
Depletion
• The removal, extraction or exhaustion or a natural resource is called
depletion.
• Depletion is the systematic allocation of the depletable amount of a

wasting asset over the period the natural resource is extracted or
produced.
Depletion Method
• Depletion is computed using the output or production method.
• The depletable amount of the wasting asset is divided by the units

estimated to be extracted to obtain a depletion rate per unit. The
depletion rate per unit is then, multiplied by the units extracted during
the year to arrive at the depletion for the period.
Illustration
• A wasting asset entity has acquired the right to use a property to
explore a natural resource. The acquisition cost is P3,000,000, the
related exploration costs amount to P2,000,000, and development
costs incurred in erecting wells and drilling the deposit are
P5,000,000.
• It is estimated that the resource deposit is approximately 1,000,000

units; 250,000 units are extracted in the first year of operations.
Revision of depletion rate
• Changes in estimate are to be handled currently and prospectively, if
necessary.
• The procedure is to revise the depletion rate on a prospective basis,

that is, by dividing the remaining depletable cost of the wasting asset
by the revised estimate of the productive output.
Illustration
• Assume that, in the preceding example, additional development costs
of P3,750,000 are incurred in the second year, and recoverable
deposits are estimated to be 1,250,000 units at the beginning of the
second year.
• 300,000 units are extracted in the second year.

Depreciation of mining property
• Tangible equipment such as transportation equipment, heavy machinery, mine shaft and
other equipment used in mining operations shall be reported in separate accounts and
depreciated following normal depreciation policies.
• The depreciation of equipment used in mining operations is based on the useful life of
the equipment or the useful life of the wasting asset, whichever is shorter.
• If the useful life of the equipment is shorter, the straight line method of depreciation us
normally used.
• If the useful life of the wasting asset is shorter, the output method of depreciation is
frequently used.
• However, if the mining equipment is movable and can be used in future extractive
project, the equipment is depreciated over its useful life using the straight line method.
Illustration
• A natural resource deposit is estimated to contain 450,000 units.
• Heavy equipment necessary to extract the deposit is acquired at a

cost of P9,000,000.
• The useful life of the equipment is 10 years.
• It is estimated that 30,000 units will be extracted each year.

Shutdown
• When the output method is used in depreciating mining property, in the
event of shutdown such method cannot be used.
• In this case, the depreciation in the year of shutdown is based on the

remaining life of the equipment following the straight line method.
• The remaining carrying amount of the equipment is divided by the

remaining life of the equipment to arrive at the depreciation in the year of
shutdown.
• When operations are resumed, the depreciation is again computed

following the output method with a new depreciation rate per unit.
Trust fund doctrine
• Under this doctrine, the share capital of a corporation is conceived s a
trust fund for the protection of creditors. Consequently, such capital
account cannot be returned to shareholders during the lifetime of the
corporation.
• However, the corporation can pay dividends to shareholders but

limited only to the balance of retained earnings.
Wasting Asset Doctrine
• Under this doctrine, a wasting asset corporation or an entity engaged
in the extraction of a natural resource, can legally return capital to
shareholders during the lifetime of the corporation.
• A wasting asset corporation can pay dividend not only to the extent of
retained earnings but also to the extent of accumulated depletion.
• The amount paid in excess of retained earnings is accounted for as a

liquidating dividend or return of capital.
Formula of Maximum Dividend
Retained Earnings XX
Add: Accumulated Depletion XX
Total XX
Less: Capital liquidated in prior year XX
Unrealized depletion in ending inventory XX XX
Maximum dividend XX
Illustration
• The following date are available at the current year end:
Wasting asset, at cost 8,000,000
Accumulated depletion 3,000,000
Share capital 5,000,000
Capital liquidated 500,000
Depletion for the current year based on 50,000 units
extracted at P20 per unit 1,000,000
Inventory of resource deposit (5,000 units) 300,000

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Exploration for and Evaluation of

• The expenditures incurred by an entity in connection with the

• As a matter of fact, IFRS 6 permits an entity to continue to apply its

• Exploration and evaluation asset is classified either as tangible asset

• Wasting assets are so called because these are physically consumed

• If there is a residual land value after the extraction of the natural

• Exploration cost is the cost incurred in an attempt to locate the

• Exploration cost includes acquisition of right to explore, geological

• Tangible equipment includes transportation equipment, heavy machinery, tunnels,

• Restoration cost may be added to the cost of resource property or

• Depletion is the systematic allocation of the depletable amount of a

• The depletable amount of the wasting asset is divided by the units

• It is estimated that the resource deposit is approximately 1,000,000

• The procedure is to revise the depletion rate on a prospective basis,

• 300,000 units are extracted in the second year.

• Heavy equipment necessary to extract the deposit is acquired at a

• The useful life of the equipment is 10 years.

• It is estimated that 30,000 units will be extracted each year.

• In this case, the depreciation in the year of shutdown is based on the

• The remaining carrying amount of the equipment is divided by the

• When operations are resumed, the depreciation is again computed

• However, the corporation can pay dividends to shareholders but

• The amount paid in excess of retained earnings is accounted for as a

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