The main accounting standard that applies specifically to exploration and evaluation activities is AASB 6 – Exploration for and Evaluation of Mineral Resources. This standard deals with the treatment of the capitalisation of exploration and evaluation expenses incurred until the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.
Expenses incurred for these activities can only be capitalised and measured at cost if:
- rights to tenure the tenement are current; and
- exploration and evaluation expenditures are expected to be recouped through successful development and exploitation of the tenement or if you cannot determine the existence or quantity of the economically recoverable reserves of minerals at the year end.
If the carrying amount of an exploration and evaluation asset exceeds its recoverable amount the asset should be reviewed for impairment in accordance with AASB 136 – Impairment of Assets and adjusted for accordingly if required. An impairment review must be completed by management annually.
The following may indicate if impairment exists:
- licence for the right to explore the tenement has or will expire in the near future, and will not be renewed;
- further exploration and evaluation expenditure of the tenement has not been budgeted or planned for;
- exploration activities have not led to the discovery of commercially viable quantities and the entity has decided to discontinue such activities in the tenement;
- it is unlikely that the carrying amount of the asset will be recovered in full from the successful development or by sale.
Expenditure that has been incurred during the period for these activities will be examined during the audit to ensure it has been accounted for correctly.
To complete this efficiently the following documentation should be made available at commencement of the audit:
- licence for each tenement;
- minutes of meetings and progress reports to show the status of projects;
- invoices for costs capitalised;
- authorisation and assumptions used in capitalising wages;
Many Mining Exploration companies are involved in R&D activities and may be entitled to reclaim these costs incurred through the R&D tax incentive. This tax incentive was set up by the government to encourage certain companies (R&D entities) to conduct R&D activities that benefit Australia.
Companies that are eligible can claim any costs relating to R&D. The ATO has indicated that costs that are the subject of the R&D claim should be disclosed separately as R&D in the accounting records.
If you believe you may be entitled to make a claim and would like further information in relation to this please contact us.