the DP did not address many of the more complex accounting issues where practice is
diverse and greater consistency is required.
These issues included:
• the lack of guidance on complex areas such as farm-out and farm-in transactions
(see 6.2 below); and
• accounting for production sharing and royalty agreements (see 5.3 and 5.7 below).
The main proposals in the DP have been summarised briefly below.
1.3.1
Definitions of reserves and resources
The DP explored a number of alternatives for defining reserves and resources. The
definition used is ‘reserves and resources are either the most significant assets or amongst
the most significant assets for most entities engaged in extractive activities. Assessing the
financial position and performance of an entity engaged in extractive activities in order to
make economic decisions therefore requires an understanding of the entity’s minerals or
oil and gas reserves and resources, which are the source of future cash flows’.7
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This chapter considers the definitions of reserves and resources that should be used in
financial reporting. See 2 below for further discussion.
1.3.2 Asset
recognition
The DP proposed that legal rights (i.e. exploration rights and extraction rights) should
form the basis of a mineral asset or oil and gas asset. An asset should be recognised when
the legal rights are acquired. Associated with these legal rights is information about the
(possible) existence of minerals or oil and gas, the extent and characteristics of the
deposit, and the economics of their extraction. The project team believed that rights
and information associated with minerals or oil and gas properties satisfy the asset
recognition criteria. While such information does not represent a separate asset, the
project team proposed that information obtained from subsequent exploration and
evaluation activities and development works would be treated as enhancements of the
asset represented by the legal rights.
When considering the appropriate unit of account (see 4 below), the DP proposed that the
geographical boundary of the unit of account would be defined initially on the basis of the
exploration rights held. As exploration, evaluation and development activities took place,
the unit of account would contract progressively until it became no greater than a single
area, or group of contiguous areas, for which the legal rights were held and which are
managed separately and would be expected to generate largely independent cash flows.
1.3.3 Asset
measurement
The DP considered both current value (e.g. fair value) and historical cost as potential
measurement bases for minerals and oil and gas assets. Based on their findings, and
taking the views of users and preparers into account, the project team concluded that
minerals and oil and gas assets should be measured at historical cost and that detailed
disclosures should be provided to enhance the relevance of the financial statements.
The project team acknowledged that its choice of historical cost as the measurement
basis was based to a large extent on doing the ‘least harm’.
In relation to impairment, it was considered that the IAS 36 impairment testing model was
not feasible for exploration properties given the early stage of such properties. Therefore,
the DP concluded that exploration properties should only be tested for impairment
whenever, in management’s judgement, there is evidence that suggests that there is a high
likelihood that the carrying amount of an exploration asset will not be recovered in full. This
would require management to apply a separate set of indicators to such properties in order
to assess whether their continued recognition as assets would be justified. In addition,
further disclosures would be required in respect of the impairment of exploration properties
due to the fact that management may take different views on the exploration properties.
These would include separate presentation of exploration properties, the factors that led to
an impairment being recognised, and management’s view as to why the remaining value of
the asset or the other exploration assets is not impaired. This impairment assessment would
need to be conducted separately for each exploration property.
1.3.4 Disclosure
The DP proposed extensive disclosures aimed at ensuring users of financial reports
could evaluate:
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• the value attributable to an entity’s minerals or oil and gas assets;
• the contribution of those assets to current period financial performance; and
• the nature and extent of risks and uncertainties associated with those assets.
The DP proposed detailed disclosures about the quantities of reserves and resources,
and production revenues and costs. If the assets are measured at historical cost then
detailed information should be disclosed about their current value and how it was
determined. If, instead, the assets are measured at fair value then detailed information
should be disclosed about that fair value and how it was determined.
It is noted that a number of the proposed disclosures differ from US GAAP. These
include disclosures of:
• key reserve estimate assumptions and sensitivity analysis (not required by
US GAAP); and
• proved and probable reserves (US GAAP only requires proved reserves, with an
option to disclose probable reserves).
1.3.5
Publish What You Pay proposals
A coalition of non-governmental organisations has promoted, and continues to
promote, a campaign called Publish What You Pay (PWYP), proposing that entities
undertaking extractive activities should be required to disclose, in their financial
reports, the payments they make to each host government. Furthermore, PWYP
recommended that its disclosure proposals should be incorporated into an eventual
IFRS for extractive activities. Given this, a section in the DP was dedicated to the PWYP
proposals. The DP acknowledged that the disclosure of payments made to governments
provides information that would be of use to capital providers in making their
investment and lending decisions, but noted that providing this information might be
difficult and costly for some entities.
These proposals were partially in response to a perception that in certain countries
some mining companies and oil and gas companies are not paying their ‘fair share’ in
exchange for extracting scarce natural resources. In addition, there has been and
continues to be increasing political pressure to expand the disclosure of payments to
governments by entities within extractive industries as a means of reducing corruption
by shining a light on these payments. As well as the proposals made in the DP, there are
also increasing calls for transparency in the reporting of taxes and other payments to
governments. This has led to a variety of transparency or publish what you pay types of
initiatives being introduced in different jurisdictions around the world (e.g. US, Europe,
UK, Canada, Australia, to name just a few), however these are outside the scope of IFRS
a
nd are governed by specific legislation.
1.3.6
Status of Extractive Activities project
After the 2011 Agenda Consultation, the Board adopted a more evidence-based
approach to setting IFRS Standards, in that the Board would not start a standard-setting
project before carrying out research to gather sufficient evidence that an accounting
problem exists, that the problem is sufficiently important that standard-setting is
required and that a feasible solution can be found.
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Before the IASB’s 2015 agenda consultation process, the IASB’s research programme
included a project on intangible assets, research and development and extractive
activities. It was acknowledged that extractive activities are important globally and are
particularly significant in some jurisdictions. IFRS 6 was originally intended to be a
temporary Standard and provides a number of exemptions from other IFRS Standards
that would otherwise apply. It was noted that a permanent solution would be required
for reporting these activities.
After considering the feedback from the 2015 agenda consultation process, the Board
created a pipeline of future research projects which included Extractive Activities. With
respect to the latter, the IASB decided to narrow the scope to remove any reference to
intangibles and research and development. The reason for this was primarily based on
the amount of resources a combined project would require and a view that the Board
could work more effectively and more efficiently on extractive activities if it did not try
to address intangible assets and research and development at the same time.
The Board decided in February 2018 to start work on Extractive Activities by asking
those national standard-setters whose staff contributed to the 2010 Discussion Paper
Extractive Activities to make the Board aware of any developments since then.
However, at the date of writing this chapter, no substantive work has started.
Given this, it is unlikely that there will be any significant developments on this project
in the near term.
1.4
Status of the Statement of Recommended Practice, UK Oil
Industry Accounting Committee, June 2001 (OIAC SORP)
The Oil Industry Accounting Committee (OIAC), based in the United Kingdom, had
previously developed a Statement of Recommended Practice (SORP) titled Accounting
for Oil and Gas Exploration, Development, Production and Decommissioning Activities,
which was updated and adopted by the UK Accounting Standards Board (ASB) in 2001.
The main function of the OIAC SORP had been to set out best practice in relation to
activities in the oil and gas industry that were not covered directly by the main body of
UK accounting standards. However, as much of the OIAC SORP has now been
superseded by subsequent changes to accounting standards, the OIAC has concluded
that the SORP is no longer applicable in directing best practice guidance. From
1 January 2015, non-listed UK entities moved to new accounting standards – FRS 100 –
Application of Financial Reporting Requirements, FRS 101 – Reduced Disclosure
Framework – and FRS 102 – The Financial Reporting Standard applicable in the UK
and Republic of Ireland – and therefore were required by FRS 101 and FRS 102 to apply
IFRS 6. As such, there is no intention to further update the SORP for future industry
developments or changes in accounting standards. The ASB has indicated it will
continue to provide the OIAC SORP as a reference document, but it will primarily be
for educational purposes, will not carry the authoritative accounting weight it did
previously, and will not be reviewed or endorsed by the UK Financial Reporting Council
(UK FRC). In future OIAC may, when considered necessary, issue guidance notes
addressing industry specific accounting matters under IFRS and UK GAAP but these will
not be endorsed by the UK FRC.
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Given the long history of companies in certain jurisdictions looking to the OIAC SORP
for guidance for oil and gas accounting and reporting, and the lack of definitive guidance
elsewhere, the SORP is likely to continue to be a valuable source of industry guidance
e.g. reserves reporting (see 2.4.1 below). However, we highlight the importance of
having to overlay IFRS pronouncements and guidance as and when they are available.
Throughout this chapter the OIAC SORP will be referred to as the ‘former OIAC SORP’
because it has been decommissioned.
1.5
Guidance under national accounting standards
Entities complying with IFRSs do not have a free hand in selecting accounting policies
– indeed the very purpose of a body of accounting literature is to restrict such choices.
IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors – makes it
clear that when a standard or an interpretation specifically applies to a transaction, other
event or condition, the accounting policy or policies applied to that item should be
determined by applying the standard or interpretation and considering any relevant
implementation guidance issued by the IASB. [IAS 8.7].
However, in the extractive industries there are many circumstances where a particular
event, transaction or other condition is not specifically addressed by IFRS. When this is
the case, IAS 8 sets out a hierarchy of guidance to be considered in the selection of an
accounting policy (see Chapter 3 at 4.3).
The primary requirement of the standard is that management should use its judgement
in developing and applying an accounting policy that results in information that is both
relevant and reliable. [IAS 8.10].
In making the judgement, management should refer to, and consider the applicability
of, the following sources in descending order:
(a) the requirements in standards and interpretations dealing with similar and related
issues; and
(b) the definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses in the Conceptual Framework. [IAS 8.11].
Management may also take into account the most recent pronouncements of other
standard-setting bodies that use a similar conceptual framework to develop accounting
standards, other accounting literature and accepted industry practices, to the extent that
these do not conflict with the sources in (a) and (b) above. [IAS 8.12].
The stock exchanges in Australia, Canada, South Africa, the United Kingdom and the
United States have historically been home to the majority of the listed mining
companies and oil and gas companies. Consequently, it is organisations from those
countries that have been the most active in developing both reserves and resources
measurement standards and accounting standards specifically for companies engaged in
extractive activities. In developing an accounting policy for an issue that is not
specifically dealt with in IFRSs, an entity operating in an extractive industry may find it
useful to consider accounting standards developed in these countries. It should be
noted, however, that the requirements in such guidance were developed under national
accounting standards and may contradict specific requirements and guidance in
IFRSs
that deals with similar and related issues.
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1.6
Upstream versus downstream activities
Upstream activities in the extractive industries are defined as ‘exploring for, finding,
acquiring, and developing mineral resources up to the point that the reserves are first
capable of being sold or used, even if the enterprise intends to process them further’.8
Downstream activities are ‘the refining, processing, marketing, and distributing of
petroleum, natural gas, or mined mineral (other than refining or processing that is
necessary to make the minerals that have been mined or extracted capable of being sold)’.9
Thus, activities that are required to make the product saleable or usable are generally
considered to be upstream activities. For example, the removal of water to produce dry
gas would be an upstream activity, because otherwise the gas cannot be sold at all.
However, refining crude oil is considered to be a downstream activity, because crude
oil can be sold.
This chapter focuses on upstream activities in the extractive industries as they are
primarily affected by the issues discussed above. However, downstream activities are
discussed to the extent that they give rise to issues that are unique to the extractive
industries (e.g. provisional pricing clauses) or are subject to the same issues as upstream
activities (e.g. production sharing contracts).
1.6.1
Phases in upstream activities
Although there is not a universally accepted classification of upstream activities in the
extractive industries, the IASC Issues Paper identified the following eight phases which
other authors also commonly identify:10
(a) Prospecting – Prospecting involves activities undertaken to search for an area of
interest, a geologic anomaly or structure that may warrant detailed exploration.11
Prospecting is undertaken typically before mineral rights in the area have been
acquired, and if the prospecting results are negative the area of prospecting
generally will be abandoned and no mineral rights acquired.12 However, sometimes
it will be necessary to acquire a prospecting permit as the prospecting activities
require access to the land to carry out geological and geophysical tests.13
(b) Acquisition of mineral rights – The acquisition phase involves the activities related
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