borrowing costs in respect of it.
3.4
Presentation and classification
E&E assets should be classified consistently as either tangible or intangible assets in
accordance with the nature of the assets acquired. [IFRS 6.15]. For example, drilling rights
may be presented as intangible assets, whereas vehicles and drilling rigs are tangible
assets. A tangible asset that is used in developing an intangible asset should still be
presented as a tangible asset. However, to the ‘extent that a tangible asset is consumed
in developing an intangible asset, the amount reflecting that consumption is part of the
cost of the intangible asset’. For example, the depreciation of a drilling rig would be
capitalised as part of the intangible E&E asset that represents the costs incurred on
active exploration projects. [IFRS 6.16, BC33]. This assessment requires judgement and we
observe different classification practices across the mining industry and the oil and gas
industry.
3.4.1
Reclassification of E&E assets
E&E assets should no longer be classified as such when ‘technical feasibility and
commercial viability of extracting a mineral resource are demonstrable’.
3224 Chapter 39
Determining when technical feasibility and commercial viability have been
demonstrated may involve significant judgement, particularly in relation to complex
assets or projects where feasibility assessment may be ongoing over an extended period
of time: for example Liquefied Natural Gas (LNG) projects, unconventional assets, large
scale, technically challenging projects, or where significant upfront investment in long
lead items is required.
A final investment decision being approved is often a common signal that technical
feasibility and commercial viability have been determined. However, absent this,
other factors may also need to be considered, such as the booking of significant
quantities of commercial reserves, approval of budgeted expenditure to commence
commercial development activities or the actual commencement of expenditure on
development activities. It should be noted that both technical feasibility and
commercial viability must be demonstrated before an asset can be transferred out
of E&E. Activities that occur prior to this point which are aimed at assessing the
viability of a resource, may still be regarded as E&E in nature and must be accounted
for accordingly.
Before reclassification, E&E assets should be assessed for impairment individually or as
part of a cash-generating unit and any impairment loss should be recognised. [IFRS 6.17].
3.5 Impairment
In some cases, and particularly in exploration-only entities, E&E assets do not
generate cash inflows and there is insufficient information about the mineral
resources in a specific area for an entity to make reasonable estimates of an E&E
asset’s recoverable amount. This is because the exploration for and evaluation of the
mineral resources has not reached a stage at which information sufficient to estimate
future cash flows is available to the entity. Without such information, it is not possible
to estimate either fair value less costs of disposal (‘FVLCD’) or value in use (‘VIU’), the
two measures of recoverable amount in IAS 36. Therefore, without some sort of
alternate impairment assessment approach, this would have led to immediate write-
off of exploration expenditure.
Therefore, modifications were made to the impairment testing approach. Under IFRS 6,
the assessment of impairment should be triggered by changes in facts and
circumstances. However once an entity had determined that there is an impairment
trigger for an E&E asset, IAS 36 should be used to measure, present and disclose that
impairment in the financial statements. This is subject to the special requirements with
respect to the level at which impairment is assessed. [IFRS 6.BC37].
IFRS 6 makes two important modifications to IAS 36:
• it defines separate impairment testing ‘triggers’ for E&E assets; and
• it allows groups of cash-generating units to be used in impairment testing.
[IFRS 6.18-20].
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3.5.1
Impairment testing ‘triggers’
E&E assets should be assessed for impairment when facts and circumstances suggest
that the carrying amount of an E&E asset may exceed its recoverable amount. [IFRS 6.18].
Under IFRS 6 one or more of the following facts and circumstances could indicate that
an impairment test is required. The list is not intended to be exhaustive:
(a) the period for which the entity has the right to explore in the specific area has
expired during the period or will expire in the near future, and is not expected to
be renewed;
(b) substantive expenditure on further exploration for and evaluation of mineral
resources in the specific area is neither budgeted nor planned;
(c) exploration for and evaluation of mineral resources in the specific area have not
led to the discovery of commercially viable quantities of mineral resources and the
entity has decided to discontinue such activities in the specific area; and
(d) sufficient data exist to indicate that, although a development in the specific area is
likely to proceed, the carrying amount of the E&E asset is unlikely to be recovered
in full from successful development or by sale. [IFRS 6.20].
Finding that an exploratory or development well does not contain oil or gas in
commercial quantities (i.e. finding a ‘dry hole’) is not listed in IFRS 6 as an impairment
indicator. If finding a dry hole marks the end of budgeted or planned exploration
activity, indicator (b) above would require impairment testing under IAS 36.
Similarly, if the dry hole led to a decision that activities in the area would be
discontinued, indicator (c) would require that an impairment test be performed, and
indicator (d) requires an entity to do an impairment test if it is unlikely that it will
recover the E&E costs from successful development or sale. However, absent one of
these indicators being met, in isolation, drilling a dry hole would not necessarily
trigger an impairment test. For example, if the first well in a three well campaign is a
dry hole, but the entity still intends to drill the remaining two wells, an impairment
trigger may not exist.
3.5.2
Specifying the level at which E&E assets are assessed for impairment
When deciding the level at which E&E assets should be assessed, rather than introduce
a special CGU for E&E assets, IFRS 6 allows CGUs to be aggregated in a way consistent
with the approach applied to goodwill in IAS 36. [IFRS 6.BC40-BC47]. Therefore, an entity
should determine an accounting policy for allocating E&E assets to CGUs or to CGU
groups for the purpose of assessing them for impairment. [IFRS 6.21]. Each CGU or group
of CGUs to which an E&E asset is allocated should not be larger than an operating
segment (which is smaller than a reportable segment) determined in accordance with
IFRS 8 – Operating Segments. [IFRS 6.21]. See also Chapter 20 at 8.1.4.
Hence, the level identified by an entity for the purposes of testing E&E assets for
/> impairment may be comprised of one or more CGUs. [IFRS 6.22].
3226 Chapter 39
3.5.3
Cash-generating units comprising successful and unsuccessful E&E
projects
IFRS 6 does not specifically address whether successful and unsuccessful E&E projects can
be combined in a single CGU (which will occur under full cost accounting and may occur
under area of interest accounting). There are some issues to consider before doing this:
• Regardless of whether there is an impairment trigger (see 3.5.1 above), IFRS 6
requires E&E assets to be tested for impairment before reclassification when the
technical feasibility and commercial viability of extracting a mineral resource are
demonstrable. [IFRS 6.17]. That means that the successful conclusion of a small
E&E project and its reclassification out of E&E would result in an impairment
test of a much larger CGU and possible recognition of an impairment loss on that
larger CGU.
• Successful E&E projects should be reclassified as tangible or intangible assets
under IAS 16 and IAS 38, respectively. [IFRS 6.15]. Therefore, a CGU comprising
both successful and unsuccessful E&E projects would be subject to the impairment
triggers in both IFRS 6 and IAS 36. This would significantly increase the frequency
of impairment testing. [IFRS 6.20, IAS 36.8-17].
• An entity should carefully consider the consequences of including several E&E
projects in a CGU, because the unsuccessful conclusion of one project would
usually trigger an impairment test of the entire CGU. [IFRS 6.20].
3.5.4
Order of impairment testing
CGUs often contain other assets as well as E&E assets. When developing IFRS 6, ED 6
specifically stated that such other assets should be tested for impairment first, in
accordance with IAS 36, before testing the CGU inclusive of the E&E assets.82 However,
IFRS 6 does not specifically address this topic. Despite this, we believe that as the
impairment test is completed in accordance with IAS 36, and a similar approach is
adopted as that applied to goodwill, the order of the impairment testing as set out in
IAS 36 would apply. That is, an entity would test the underlying assets/CGU without the
E&E assets first, recognise any write down (if applicable) and then test the CGU/CGU
group with the E&E assets allocated.
3.5.5
Additional considerations if E&E assets are impaired
In some circumstances an entity that recognises an impairment of an E&E asset must
also decide whether or not to derecognise the asset because no future economic
benefits are expected, as illustrated in Example 39.1 below.
Example 39.1: Impairment losses on E&E assets
Entity A’s exploration activity in a specific area does not discover oil and/or gas resources. Therefore, A
recognises an impairment of the cash-generating unit and derecognises the related E&E assets.
Entity B’s exploration activity in a specific area leads to the discovery of a significant quantity of resources,
but these are located in a complex reservoir. Therefore, at present the costs of extraction of the discovered
resources do not justify the construction of the required infrastructure. Nevertheless, B’s management
believes that the surrounding area has strong potential to yield other discoveries on other geological structures
and it is considered possible that the required infrastructure will be constructed in the future, although at this
stage management has no plans to undertake further exploration activity. Entity B recognises an impairment
of the E&E assets, but since it expects future economic benefits the related E&E assets are not derecognised.
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If an entity concludes that production is not technically feasible or commercially viable,
that provides evidence that the related E&E asset needs to be tested for impairment. It
is also possible that such evidence may indicate that no future economic benefits are
expected from such assets and therefore any remaining assets should be derecognised.
When considering the two examples above, in Entity A’s situation, no oil and/or gas
resources were discovered and based on current plans, no future economic benefits
were expected from the related E&E assets so they were derecognised. Whereas in
Entity B’s situation, while oil and/or gas resources were discovered, extraction was not
commercially viable at this stage. So while an impairment was recognised, the remaining
assets were not derecognised as management did expect future economic benefits to
flow from such assets.
Although IFRS 6 does not specifically deal with derecognition of E&E assets, the entity
should derecognise the E&E asset because the asset is no longer in the exploration and
evaluation phase and hence outside the scope of IFRS 6 and other asset standards such as
IAS 16 and IAS 38 would require derecognition under those circumstances. Once
derecognised, the costs of an E&E asset that have been written off cannot be re-
recognised as part of a new E&E asset, so unlike an impairment, the write off is permanent.
3.5.6
Income statement treatment of E&E write downs – impairment or
exploration expense
In some circumstances, it may be unclear whether an E&E asset is impaired, or whether
a write off of unsuccessful exploration is required. In an unconventional project, or in
circumstances where costs have been carried forward for some time pending
determination of technical feasibility and commercial viability, judgement will be
required in concluding on the most appropriate income statement presentation. Key
considerations may include whether the objectives of drilling or other expenditure
programs have been met, whether the indicative impairment triggers in IFRS 6 have
been met, and management’s future intentions for the asset.
3.5.7
Reversal of impairment losses
Any impairment loss on an E&E asset recognised in accordance with IFRS 6 needs to
be reversed if there is evidence that the loss no longer exists or has decreased. The
entity must apply the requirements specified in IAS 36 for reversing an impairment loss
(see Chapter 20 at 11). [IFRS 6.BC48, IAS 36.109-123].
3.6 Disclosure
To identify and explain ‘the amounts recognised in its financial statements arising
from the exploration for and evaluation of mineral resources’, [IFRS 6.23], an entity
should disclose:
(a) its accounting policies for exploration and evaluation expenditures including the
recognition of exploration and evaluation assets; and
(b) the amounts of assets, liabilities, income and expense and operating and investing
cash flows arising from the exploration for and evaluation of mineral resources.
[IFRS 6.24].
The extract below from Tullow Oil’s 2017 financial statements illustrates the disclosures
required by IFRS 6.
3228 Chapter 39
Extract 39.6: Tullow Oil plc (2017)
GROUP INCOME STATEMENT [extract]
YEAR ENDED 31 DECEMBER 2017
2017 2016
Notes
$m
$m
Continuing activities
Sales revenue
2
1,722.5
1,269.9
Other operating income – lost production insurance proceeds
6
162.1
90.1
Cost of sales
4
(1,069.3)
(813.1)
Gross Profit
815.3
546.9
Administrative expenses
4
(95.3)
(116.4)
Restructuring cost
4
(14.5)
(12.3)
Loss on disposal
9
(1.6)
(3.4)
Goodwill impairment
–
(164.0)
Exploration costs written off
10
(143.4)
(723.0)
Impairment of property, plant and equipment, net
11
(539.1)
(167.6)
Provision for onerous service contracts, net
22
1.0
(114.9)
Operating profit/(loss)
22.4
(754.7)
(Loss)/gain on hedging instruments
20
(11.8)
18.2
Finance revenue
5
42.0
26.4
Finance costs
5
(351.7)
(198.2)
Loss from continuing activities before tax
(299.1)
(908.3)
Income tax credit
7
110.6
311.0
Loss for the year from continuing activities
(188.5)
(597.3)
Attributable to:
Owners of the Company
(189.5)
(599.9)
Non-controlling interest
25
1.0
2.6
(188.5)
(597.3)
Loss per ordinary share from continuing activities
8
¢
¢
Basic
(14.7)
(55.8)
Diluted
(14.7)
(55.8)
GROUP BALANCE SHEET [extract]
AS AT 31 DECEMBER 2017
2017
2016
Notes
$m
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 638