On 31 March 2004 the International Accounting Standards Board (IASB) finalised the "stable platform" of reporting standards to be applied by the 2005 first-time adopters (which includes Australian entities) of IFRS.

    Uncertainty for miners

    Susan Oldmeadow-Hall* advises on reporting difficulties facing the mining industry under the International Financial Reporting Standards

    On 31 March 2004 the International Accounting Standards Board (IASB) finalised the "stable platform" of reporting standards to be applied by the 2005 first-time adopters (which includes Australian entities) of IFRS.

    Unfortunately the stable platform does not include a standard that specifically deals with accounting for exploration and evaluation expenditure incurred by miners. The IASB is expected to issue a standard at the end of this year, dealing with exploration and evaluation of mineral resources that will apply to financial years commencing on or after 1 January 2006 - one year too late for

    Australian miners adopting IFRS for 2005. However, Australian entities will have the choice to early adopt this standard.

    What options do Australian

    miners have?

    The Australian Accounting Standards Board (AASB) intends to make a standard available in late 2004. While early adoption of the standard will be permitted, the AASB will allow companies not to early adopt and therefore be subject to the existing policies under the IASB's stable platform.

    Early adoption

    If an entity were to early adopt the future standard, it is likely that it would be able to continue to recognise exploration and evaluation assets in accordance with its current Australian accounting treatment. This effectively grandfathers the recognition requirements specific to the entity in the current AASB 1022 "Accounting for the Extractive Industries".

    However, early adoption does not relieve companies from the new impairment rules introduced under IFRS. These new rules require entities to consider whether there have been any indicators of impairment. Where an impairment indicator exists, a detailed impairment test is performed.

    Under the impairment test, the carrying value of the asset is compared to its market value or its discounted cash flow value (termed value in use). Where an individual asset does not generate cash flows, it is grouped with other assets that form a cash-generating unit and tested for impairment on this basis.

    Demonstration of value in use and the ability to generate cash from exploration assets will be a significant challenge for exploration entities.

    For entities that have primarily engaged in exploration, significant write-downs were anticipated on initial adoption of IFRS. To address this implementation issue the IASB has proposed at its June and July meetings to allow exploration entities to continue to recognise exploration and evaluation assets until they have enough information to make a reasonable assessment about the commercial viability of the asset. Specific details of the amended impairment test will be finalised at the September IASB meeting.

    Early adopters will be able to continue to defer exploration and evaluation costs but may be subject to transitional impairment charges to opening retained earnings and ongoing impairment charges to the profit and loss (usually larger in times of cyclical downturn).

    What if entities choose

    not to early adopt?

    AASB 1022 is to be withdrawn on transition to IFRS. If the early adoption option is not taken, there will be no industry-specific accounting requirements and hence an entity will be required to develop a new accounting policy that conforms to the IFRS hierarchy of guidance.

    We anticipate that this will mean that exploration and evaluation costs will need to be expensed as incurred with no ability to defer as an asset. This interpretation is likely to be confirmed by the AASB. This is a significant departure from current practices adopted in Australia.

    Those entities not early adopting will be able to derecognise all deferred exploration and evaluation costs on transition, but will need to expense all exploration and evaluation costs as incurred going forward (usually incurred on a cyclical basis).

    Impacts for newly-formed entities (post IFRS implementation)

    For entities that form after adoption of IFRS there will be no accounting policy for exploration and evaluation costs that could be grandfathered. Exploration and evaluation costs would have to be written off as incurred.

    This could be an issue, particularly for exploration entities seeking to obtain admittance to the Australian Stock exchange. ASX Listing Rules require that less than half of an entity's total tangible assets (after raising the funds) must be in cash or a form readily convertible to cash or the entity has commitments to spend at least half of its cash.

    The IASB has acknowledged that this is a potential issue that will be addressed at the September IASB


    Other impacts from the

    removal of AASB 1022

    The removal of the tailored extractive industry standard AASB 1022 may introduce vagaries to the industry,

    such as:

    • Specific inventory recognition guidance
    • Specific revenue recognition criteria
    • Post exploration and evaluation stage deferral of cost
    • Rehabilitation and restoration obligations.

    While the IASB intends for other IFRS standards to

    fill this void, their direction (in the absence of specific

    implementation guidance) is more generic than what

    the industry has been accustomed to under AASB 1022.

    * Susan Oldmeadow-Hall is a partner, NAAS, with

    Ernst & Young


    The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.

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