Contract revenue FOREIGN EXCHANGE

Chapter 28 – Mineral Resources Page 383  licence fees and legal costs;  geologist inspections;  chemical analysis; and  payments to employees and contractors. All of these costs would be classified as intangible assets. The consumption of the instrumentation should be regarded as an intangible asset. However, the geophysical instrumentation would remain as a tangible asset. Expenditure incurred on infrastructure, such as access roads, that is necessary for the exploration work to proceed should be recognised as property, plant and equipment in accordance with IAS 16. [IAS16.3] Following initial recognition of an exploration and evaluation asset at cost, an entity may choose to continue to apply a cost model or move to a revaluation model. IFRS 6 provides no guidance in the area of revaluation and instead an entity should follow guidance in IAS 16 or IAS 38 according to the classification of the asset, as discussed below. An exploration and evaluation asset should be classified as a tangible or intangible asset according to the nature of that asset. An intangible asset is defined as an identifiable non- monetary asset that does not have physical substance, for example the acquisition of drilling rights and the costs incurred in drilling. A tangible asset is not defined in international standards but will typically be an item of property, plant or equipment, such as the drilling rig. Exploration and evaluation assets should be treated as a separate class of assets. Once exploration and evaluation expenditure has been classified as a tangible or intangible asset, IAS 16 or IAS 38 should be applied in relation to that asset. For example, an asset recognised as tangible will be depreciated on a systematic basis over its useful life. If the asset were classified as intangible, it should be amortised over its useful life since it would be unlikely that such an asset would have an indefinite life. [IAS 16.50, IAS 38.74] An exploration and evaluation asset should no longer be classified as such when the technical feasibility and commercial viability of the asset can be demonstrated. Prior to the asset being reclassified, it should be assessed for impairment. The recognition of expenditure incurred on the development and extraction of mineral resources is outside of the scope of IAS 16 and IAS 38 as well as IFRS 6, and therefore an entity should develop its own accounting policy that is appropriate to its circumstances. 5 Impairment An entity is required to follow guidance in IFRS 6 rather than IAS 36 Impairment of assets when assessing whether an exploration and evaluation asset has become impaired. The impairment testing requirements in IFRS 6 are less onerous than those that would otherwise be applicable under IAS 36. If an impairment is identified under IFRS 6, then the measurement, presentation and disclosure requirements of IAS 36 become applicable. [IFRS 6.18] IFRS 6 allows an entity to allocate exploration and evaluation assets to specific cash- generating units CGUs for the purpose of impairment testing. An entity should then assess at what level its exploration and evaluation assets should be tested for impairment, as this may be the amalgamation of more than one CGU. However, if a number of CGUs have been amalgamated to assess whether exploration and evaluation assets have become impaired, they should not be larger than an operating segment determined in accordance with IFRS 8 Operating segments. [IFRS 6.21] IFRS 6 sets out that an asset should be tested for impairment where there are “facts and circumstances” to suggest that the asset’s carrying amount is more than its recoverable amount i.e. the asset has lost value since it was initially recognised. The recoverable Chapter 28 – Mineral Resources Page 384 amount of an asset is the amount which can be recovered through continuing use of the asset or by selling it. The standard sets out some “facts and circumstances” which should lead to an impairment, as follows:  the acquired right to explore in a specific area is about to expire and the entity is not able to renew that right;  further expenditure to explore or evaluate a mineral right is not budgeted for;  exploration has ceased due to its unlikely commercial nature; and  where there is an indication that a site is suitable for development but it is unclear whether the cost of the exploration and evaluation will be recovered through its development or sale. Illustration 2 An entity undertakes oil exploration and production activities both on land and at sea. The entity currently has two producing fields, one on land and one at sea. Both fields share a common oil refinery. The onshore and offshore oil producing fields are reported within the same operating segment for the purposes of IFRS 8. The entity is exploring a new offshore oil field. If the exploration is successful, then the new offshore oil field is expected to share the oil refinery facilities with the two existing oil fields. The two offshore fields are expected to be operationally dependent if the new field is successfully developed and commercially viable. However, a recent satellite survey has raised concerns about the reserves and recovery rate of oil from this potential new offshore oil field. In accordance with IFRS 6.18 an impairment review should be undertaken. The exploration and production assets need to be grouped for the purposes of the impairment test. The two offshore fields could be grouped together as a cash generating unit, as they are economically dependent. The impairment test could be performed at this level. Alternatively, management could group all three oil fields together on the basis that they are within the same IFRS 8 operating segment. IFRS 6 has been criticised for the flexibility it allows management in determining the level at which the impairment test is undertaken. However, the policy must be applied consistently from period to period. The existence of circumstances that led to an impairment review being carried out may not lead to an actual impairment of exploration and evaluation assets where for example a number of CGUs have been amalgamated. In such circumstances, assets may be recognised in the statement of financial position at an amount that would otherwise have been impaired had the asset not been grouped with other assets. An entity may therefore consider a policy of writing off exploration and evaluation assets to be more appropriate where a specific area that was being considered for development has been abandoned. The requirements in IAS 36 on the reversal of impairment losses applies to exploration and evaluation assets. In summary, the reversal of an impairment loss should be recognised immediately as part of profit or loss for the period unless the relevant asset was measured at a revalued amount. An impairment loss that has been reversed should not take the asset above its carrying amount had it not be impaired in the first instance i.e. the carrying amount of the asset would be net of depreciation or amortisation of the original carrying amount. [IAS 36.117, 36.119]