ACCA Past question paper on IFRS 6 (Dec 2015 10 marks)
You are the financial controller of Omega, a listed company which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). Your managing director, who is not an accountant, has recently attended a seminar and has raised two questions for you concerning issues discussed at the seminar:
(a) One of the delegates at the seminar was a director of an entity which is involved in the exploration for, and evaluation of, mineral resources. This delegate told me that under IFRS rules it is possible for individual entities to develop their own policies for when to recognise the costs of exploration for and evaluation of mineral resources as assets. This seems very strange to me. Surely IFRS requires consistent treatment for all tangible and intangible assets so that financial statements are comparable. Please explain the position to me and outline the relevant requirements of IFRS regarding accounting for exploration and evaluation expenditures.
Provide the answer as raised by the managing director
Expenditure on the exploration for, and evaluation of, mineral resources is excluded from the scope of standards which might be expected to provide guidance in this area. Specifically such expenditure is not covered by IAS 16 – Property, Plant and Equipment – or IAS 38 – Intangible Assets.
This has meant that, in the absence of any alternative pronouncements, entities would determine their accounting policies for exploration and evaluation expenditures in accordance with the general requirements of IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors. This could lead to considerable divergence of practice given the diversity of relevant requirements of other standard setting bodies.
Given other pressures on its time and resources, the International Accounting Standards Board (IASB) decided in 2002 that it was not able to develop a comprehensive standard in the immediate future.
However, recognising the importance of accounting for extractive industries generally the IASB issued IFRS 6 – Exploration for and Evaluation of Mineral Resources – to achieve some level of standardisation of practice in this area.
IFRS 6 requires relevant entities to determine a policy specifying which expenditures are recognised as exploration and evaluation assets and apply the policy consistently.
When recognising exploration and evaluation assets, entities shall consistently classify them as tangible or intangible according to their nature.
Subsequent to initial recognition, entities should consistently apply the cost model or the revaluation model to exploration and evaluation assets.
If the revaluation model is used, it should be applied according to IAS 16 (for tangible assets) or IAS 38 (for intangible assets).
Where circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount, such assets should be reviewed for impairment. Any impairment loss should basically be measured, presented and disclosed in accordance with IAS 36 – Impairment of Assets.
Part (a) of this question was not well answered. A significant number of candidates seemed totally unaware of the provisions of IFRS 6 - Exploration for, and Evaluation of, Mineral Resources. Such candidates made general comments about the recognition of tangible and intangible assets and this could only receive limited credit. Whilst IFRS 6 is not a standard that will appear in every paper it is part of the examinable material for this paper and accordingly candidates should devote part of their study time to this subject.