A simple and clear guide for accounting and finance students CA X ACCA.
IFRS 6 is a specialised accounting standard that applies to companies involved in mining, oil, gas, and other mineral resource activities. These industries spend a large amount of money before they even know whether minerals exist or not. Because of this uncertainty, normal accounting rules do not always fit well. IFRS 6 was introduced to address this issue and provide guidance during the early stages of exploration and evaluation.
This article explains IFRS 6 in very simple language. It is designed for CA X ACCA, ICAEW, and finance students who want a clear understanding without complex technical wording. The focus is on clarity, logic, and exam relevance.
What IFRS 6 Covers
IFRS 6 applies to exploration and evaluation activities related to mineral resources. These activities take place after a company has obtained legal rights to explore a specific area and before it can prove that extraction is commercially viable.
Mineral resources include:
- Oil
- Natural gas
- Coal
- Metals
- Other non renewable natural resources
IFRS 6 does not apply to extraction or production phases. It also does not apply before legal rights are obtained.
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Purpose of IFRS 6
The main purpose of IFRS 6 is to allow flexibility in accounting for exploration and evaluation costs while ensuring minimum reliability and transparency. Exploration activities are risky and uncertain, so the standard allows companies to continue using their existing accounting policies with some restrictions.
Another important purpose is to ensure that exploration assets are not overstated. IFRS 6 introduces impairment testing to protect users of financial statements from misleading information.
Scope of IFRS 6
IFRS 6 applies only when:
- The entity has legal rights to explore
- Costs relate directly to exploration and evaluation
The standard does not apply to:
- Costs incurred before legal permission
- Development and production costs
- Environmental restoration after production
This distinction is very important and often tested in exams.
Exploration and Evaluation Expenditure
Exploration and evaluation expenditure includes costs incurred to discover mineral resources and assess whether extraction is feasible.
Examples include:
- Geological studies
- Geophysical surveys
- Exploratory drilling
- Sampling
- Trenching
- Activities related to feasibility studies
These costs can be capitalised or expensed depending on the company’s accounting policy.
Accounting Treatment of Exploration Costs
IFRS 6 allows companies to choose an accounting policy for exploration and evaluation costs. The policy must be applied consistently.
There are two common approaches:
Capitalisation Approach
The company capitalises exploration costs as an asset. This is common in large mining and oil companies.
Expense Approach
The company expenses exploration costs as they are incurred. This approach is more conservative.
Once the policy is selected, it cannot be changed easily.
Measurement of Exploration and Evaluation Assets
Exploration and evaluation assets are initially measured at cost. After recognition, the company may choose either:
- Cost model
- Revaluation model
If the revaluation model is used, the asset must be measured reliably at fair value.
Impairment of Exploration and Evaluation Assets
IFRS 6 introduces special impairment rules. An exploration and evaluation asset must be tested for impairment when facts and circumstances suggest that the carrying amount may not be recoverable.
Indicators of impairment include:
- Legal rights to explore have expired
- No budget for further exploration
- Exploration has not found commercial quantities
- Data shows extraction is unlikely to be profitable
If impairment exists, the asset is tested under IAS 36.
Cash Generating Units under IFRS 6
Exploration assets are grouped into cash generating units for impairment testing. These units must not be larger than operating segments defined under IFRS 8. This prevents companies from hiding losses by combining unrelated areas.
Presentation in Financial Statements
Exploration and evaluation assets must be classified as:
- Tangible assets if they relate to physical items
- Intangible assets if they relate to rights and studies
The classification must be clearly disclosed in the statement of financial position.
Disclosure Requirements of IFRS 6
IFRS 6 requires companies to disclose information that helps users understand:
- Accounting policies used
- Amount of exploration and evaluation assets
- Impairment losses recognised
- Risks associated with exploration
These disclosures improve transparency and comparability.
Common Mistakes Students Make in IFRS 6
Mistake 1: Capitalising Costs Before Legal Rights
Students often capitalise costs incurred before legal rights are obtained. IFRS 6 does not allow this.
Mistake 2: Mixing Exploration with Production
Exploration costs are different from development and production costs. Many students mix them.
Mistake 3: Ignoring Impairment Indicators
Some students forget to test for impairment when indicators exist.
Mistake 4: Changing Accounting Policy Easily
IFRS 6 restricts frequent changes in accounting policy.
Solutions and Pro Tips for Students
| Common Issue | Simple Solution |
|---|---|
| Unsure when IFRS 6 applies | Check if legal rights exist and activity relates to exploration |
| Confused about capitalisation | Follow company policy consistently |
| Forgetting impairment | Look for impairment indicators in questions |
| Mixing standards | Use IFRS 6 for exploration, IAS 16 or IAS 38 for production |
Why IFRS 6 Is Important for Students
IFRS 6 may appear niche, but it tests important concepts like judgement, impairment, and policy consistency. It also helps students understand how accounting adapts to high risk industries.
Understanding IFRS 6 also makes it easier to study IFRS 17 and IAS 36 later.
How IFRS 6 Is Tested in Exams and Real Practice ?
IFRS 6 is not a very long standard, but examiners test it in a smart way. Most questions are not direct theory questions. Instead, they are scenario based. Students are given information about exploration activities and then asked to decide whether costs should be capitalised or expensed. Understanding how IFRS 6 works in real situations helps students score better marks.
In exams, IFRS 6 is usually tested through:
- Identification of exploration and evaluation phase
- Recognition of costs after legal rights are obtained
- Impairment indicators and impairment testing
- Classification of exploration assets
- Disclosure related questions
For example, a question may describe drilling activities before and after legal permission. Only costs incurred after legal rights are obtained can fall under IFRS 6. Another common exam area is impairment. If exploration results are negative or funding is stopped, impairment must be considered immediately.
In real business practice, IFRS 6 is important for mining and oil companies because it allows flexibility but still protects users of financial statements. Investors want to know whether exploration assets are realistic or overstated. IFRS 6 ensures that weak projects are written down at the right time.
For students, this heading is important because it connects theory with practical thinking. Once you understand how examiners and companies apply IFRS 6, the standard becomes much easier and less confusing.
IFRS 6 Frequently Asked Questions (FAQs)
What is the main objective of IFRS 6
The main objective of IFRS 6 is to provide guidance for accounting of exploration and evaluation activities while allowing flexibility and ensuring that assets are not overstated.
When does IFRS 6 start to apply
IFRS 6 applies only after the entity has obtained legal rights to explore a specific area. Costs incurred before that are not covered by IFRS 6.
Can exploration costs be capitalised under IFRS 6
Yes. IFRS 6 allows exploration and evaluation costs to be capitalised if the entity follows a consistent accounting policy.
Is it compulsory to capitalise exploration costs
No. IFRS 6 allows entities to either capitalise or expense exploration costs based on their accounting policy.
Does IFRS 6 apply to production and extraction costs
No. IFRS 6 applies only to exploration and evaluation activities. Production and development costs follow other standards such as IAS 16 or IAS 38.
When is impairment testing required under IFRS 6
Impairment testing is required when facts and circumstances indicate that the carrying amount of exploration assets may not be recoverable.
What are common indicators of impairment
Common indicators include expiry of legal rights, lack of budget for further exploration, unsuccessful exploration results, or data showing extraction is not commercially viable.
How are exploration assets classified in the financial statements
Exploration assets are classified as tangible or intangible depending on their nature and must be presented separately.
Can accounting policies under IFRS 6 be changed easily
No. Changes in accounting policy are allowed only when they make financial statements more relevant and reliable.
Why is IFRS 6 considered a flexible standard
IFRS 6 allows entities to continue existing accounting practices due to the high uncertainty in exploration activities, while still applying impairment and disclosure rules.
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