Concerns and debates remain about the levels of accounting comparability between companies.
Despite the continuous adoption of IFRS, or convergence of national accounting standards with IFRS across the world, there remain concerns and debates about the levels of accounting comparability between companies. Significant aspects of these concerns relate to the level of assets recognised in financial statements, and the accompanying disclosures as mandated by the standards. Arguably, this is in part because of the principles-based nature of some IFRS, the application of which allows for managerial discretion.
Exploration & Evaluation expenditure is one of them. Exploration & Evaluation (E&E) expenses include: the acquisition of rights to explore; topographical, geological, geochemical and geophysical studies; exploratory drilling; trenching; sampling; and activities that relate to evaluating the technical feasibility and commercial viability of extracting a mineral resource. In essence, the accounting for E&E costs can be viewed as an extension of the debate on the recognition of intangible assets versus the level of accounting conservatism.
While IFRS 6 makes no specific requirement, there are four prevalent accounting methods that are generally applied to E&E costs. These have been broadly defined and grouped in practice as follows, from most aggressive to conservative: Full Cost; Area of Interest; Successful Efforts; and Expense All. Though The International Accounting Standards Committee tentatively proposed not allowing the full capitalisation of E&E expenditure, with non-viable expenditure being amortised against revenue from successful areas (Full Cost), and requiring companies to capitalise all expenditure and writing off expenditure related to unsuccessful projects either as incurred or once that assessment was made (Successful Efforts).
Most recently, in late 2020 a comprehensive review of the accounting practices relating to E&E expenditure was carried out by the IASB . The analysis was carried out using 1,531 entities across 177 jurisdictions. The results show that firms apply a range of accounting policies while many fail to disclose explicitly the accounting policy applied. However, according to the IASB analysis, that Successful Efforts is the most commonly used accounting method.
The IASB was asked to decide whether to commence a project to replace or amend IFRS 6. A Discussion Paper with findings has recently been published, and the IASB noted that the Discussion Paper is the first step towards a possible IFRS for extractive activities that would address many concerns on the current treatment in light of the significant changes in extractive activities, especially in view of oil and gas markets’ volatility and would potentially replace or amend IFRS 6.
The discussion paper suggests a wider project with the following scope:
- improving the existing recognition, measurement and disclosure requirements of IFRS Standards to improve consistency and comparability in financial reporting, or
- withdrawing IFRS 6 and including extractive activities in a broader project on intangible assets, or
- doing nothing and maintaining IFRS 6.
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