At its sixth education session on the extractive activities research project, the Board considered the research presented by the project team on the initial recognition of minerals and oil & gas reserves and resources.
The research applied the Framework�s asset definition and recognition criteria as well as the Board�s current thinking in the conceptual framework project. At present, it is common for entities to capitalise costs or recognise them as expense according to the different phases of upstream extractive activities, such as exploration and evaluation, development and production.
Asset definition and recognition
The project team considered that the economic resource, which relates to minerals or oil & gas, could be identified as three types of assets:
- legal rights, such as exploration rights or mineral rights;
- information (or knowledge); and
- the minerals or oil & gas deposit.
It was noted that these assets can be viewed as forming a continuum representing the maturing of upstream extractive activities from early stage prospecting and exploration activities through to the extraction of minerals or oil & gas from the ground. Which asset or assets should be recognised would depend on where the extractive activities operation is along the continuum.
Board members agreed that a legal rights asset should be recognised when the rights are acquired. The information obtained from exploration and evaluation activities generates a better understanding of the economic resource that underlies the legal rights asset and is therefore an enhancement of that asset, rather than a separate asset. Board members suggested that the asset associated with a minerals or oil & gas deposit is the right to extract the minerals or oil & gas contained in the deposit.
Unit of account
Board members concurred with the project team�s view on limiting the geographical size of the unit of account. For exploration activities, the unit of account would be defined according to the exploration rights held and, as more exploration and evaluation takes place, the size of the unit of account would contract to cover only the specific area(s) where detailed exploration and evaluation is taking place. During the development and extraction phases the unit of account would be no greater than a contiguous area, or areas, for which the legal rights are held and which is managed separately and would generate largely independent cash flows.
Board members also discussed infrastructure and equipment assets associated with a developed property and noted that the components approach in IAS 16 may be useful in considering which assets should be recognised separately from the legal rights.
Next steps and discussion paper
The project team was asked to bring an analysis of disclosure issues, together with an outline of the proposed discussion paper, to a future meeting. The discussion paper is intended to be ready for publication by the end of 2008.