Reliable measurement FOREIGN EXCHANGE

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] Chapter 28 – Mineral Resources Page 385 6 Disclosure IFRS 6 has an overriding disclosure requirement to include information in the financial statements that identifies and explains the amounts that have been recognised as exploration and evaluation assets. Such information should include the entity’s accounting policy for the recognition and measurement of exploration and evaluation assets. An entity is also required to identify the amount of assets, liabilities, income and expense arising from the exploration and evaluation of mineral resources. In relation to the statement of cash flows the amount of operating and investing cash flows arising from the exploration and evaluation of mineral resources should be disclosed. [IFRS 6.23] The disclosure requirements in IAS 16 and IAS 38 are also applicable. 7 Chapter Review This chapter has been concerned with the key issues relating to the exploration for and evaluation of mineral resources. This chapter covered:  the objectives and scope of IFRS 6;  the recognition and measurement requirements for the exploration for and evaluation of mineral resources; and  the disclosure requirements of IFRS 6. Chapter 28 – Mineral Resources Page 386 8 Self Test Questions Chapter 28 1. Which TWO of the following models may be applied by entities for the measurement after recognition of exploration and evaluation assets, in accordance with IFRS6 Exploration for and evaluation of mineral resources? A Cost B Revaluation C Realisation D Present value 2. Does IFRS6 Exploration for and evaluation of mineral resources apply to the following types of expenditure? 1 The extraction and processing of mineral resources for transport to market. 2 The commercial review of possible areas for mineral extraction before bidding for the legal rights to explore a specific area. Expenditure 1 Expenditure 2 A IFRS6 does not apply IFRS6 does not apply B IFRS6 does not apply IFRS6 does apply C IFRS6 does apply IFRS6 does not apply D IFRS6 does apply IFRS6 does apply 3. The Strider Company is involved in the exploration for mineral resources. Its policy is to recognise exploration assets and measure them initially at cost. It is currently exploring a new gas field in Ruritania. The exploration licence for the new Ruritanian gas field is about to expire and Strider is now preparing to undertake an impairment review. Strider reports its financial performance as Mineral Production and Energy Trading in its financial statements in accordance with IFRS8 Operating segments. The Mineral Production segment comprises two cash-generating units – oil production and gas production. In accordance with IFRS6 Exploration for and evaluation of mineral resources, what is the highest level at which the impairment test can be undertaken? A A cash-generating unit based on the assets in the Ruritanian gas field B Gas production cash-generating unit C Oil production and gas production cash-generating units combined D A cash-generating unit at The Strider Company level