Library / Technical Accounting Manual: IFRS, IAS and Ind AS Equivalents

IFRS 6 - Exploration for and Evaluation of Mineral Resources

Indian equivalent: Ind AS 106 - Exploration for and Evaluation of Mineral Resources

Objective and scope

IFRS 6 provides specialised, temporary relief for the extractive industries (mining, oil and gas) on how to account for the costs of searching for and evaluating mineral, oil and gas resources - before it is known whether extraction is even commercially viable.

Core principle

Exploring for minerals is enormously expensive and uncertain - you might drill and find nothing. Rather than force normal asset rules onto this unique risk, IFRS 6 lets companies keep their existing policy for exploration and evaluation (E&E) costs and choose whether to capitalise or expense them, with a modified impairment test.

Defined terms and technical terminology

Term	Technical meaning
Exploration and evaluation (E&E) expenditure	Costs incurred searching for and assessing the feasibility of extracting mineral resources, after obtaining legal rights to explore an area.
Exploration and evaluation assets	E&E expenditure that the entity's policy capitalises as an asset.
Extractive industries	Mining, oil and gas sectors that explore for and extract natural resources.

Application and worked illustrations

Why a special standard exists

Exploration is a peculiar activity: huge, risky spending with no certain asset at the end. When IFRS was being adopted, there was no time to write a full standard for it, so IFRS 6 gives interim relief: an entity may continue its existing accounting policy for E&E costs (many capitalise them, some expense them) and is exempt from some normal requirements while still in the exploration phase.

The scope window

IFRS 6 applies only to the E&E phase - after the entity obtains legal rights to explore, but before the technical feasibility and commercial viability of extraction are demonstrable. Costs before acquiring exploration rights (e.g., general prospecting) and costs after viability is proven (development, extraction) fall outside IFRS 6 and follow normal standards (IAS 16, IAS 38, IAS 2).

Worked example

OreCorp obtains a licence to explore a region and spends ₹15 crore on drilling, sampling and feasibility studies. Under its chosen policy it capitalises this ₹15 crore as an exploration and evaluation asset. If drilling later shows the deposit is uneconomic, IFRS 6 requires an impairment test and the asset is written off to profit. If viability is proven, the E&E asset is reclassified and future costs follow the normal development/extraction rules.

Modified impairment test

E&E assets are tested for impairment when facts suggest the carrying amount may not be recoverable - e.g., the exploration right is expiring, no further exploration is budgeted, or exploration has not found commercially viable quantities.

Common mistake: applying IFRS 6 to development or production costs. IFRS 6 covers only the exploration-and-evaluation window.

IND AS LINK

Ind AS 106 aligns with IFRS 6, providing the same interim relief to Indian mining and oil-and-gas companies.

Further worked illustrations

Extra numeric example - writing off a dry well

An oil explorer capitalises ₹12 crore of exploration costs on a prospect. Drilling confirms there is no commercially viable oil. The exploration-and-evaluation asset fails its recoverability test, so the full ₹12 crore is impaired and written off to profit. Exploration is high-risk: capitalised costs can evaporate the moment a prospect proves barren.

INDIAN REGULATORY CONTEXT

Large Indian extractive companies apply Ind AS 106 to their exploration phase, often using the successful efforts or full cost policy (IFRS 6 lets them keep their existing policy). The reclassification of E&E assets into development assets once viability is proven is a key judgement in their accounts.

TECHNICAL EDGE CASE

A company spends ₹50 lakh on general geological surveys of a region before obtaining any legal right to explore it. These costs are outside IFRS 6 - they're incurred before the E&E phase begins - and are therefore expensed immediately under normal principles. IFRS 6 relief only starts after the legal exploration right is obtained.