level of confidence than a Proved Mineral Reserve but is of sufficient quality to
serve as the basis for a decision on the development of the deposit.’66
• ‘A Proved Mineral Reserve is the economically mineable part of a Measured
Mineral Resource. A Proved Mineral Reserve implies a high degree of confidence
in the Modifying Factors. A Proved Mineral Reserve represents the highest
confidence category of reserve estimate.’67
The CRIRSCO Template contains more detailed guidance on how a competent person
should decide on mineral resource and mineral reserve classification and contains a
checklist and guideline for the preparation of public reports.
2.4 Disclosure
of
mineral
reserves and resources
Mineral reserves and resources, or subcategories thereof, are a significant element in
communications by mining companies and oil and gas companies to their stakeholders.
IFRS requires an entity to provide ‘additional disclosures when compliance with the
specific requirements in IFRSs is insufficient to enable users to understand the impact
of particular transactions, other events and conditions on the entity’s financial position
and financial performance’. [IAS 1.17(c)]. Therefore, although IFRS does not specifically
require it, disclosures regarding mineral resources and reserves will generally be
necessary under IFRS to provide users with the information they need to understand
the entity’s financial position and performance.
As noted in 2 above, entities have to use reserves data and sometimes resources data for
a number of accounting purposes and the methodology should be consistent with the
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definitions in the IFRS Conceptual Framework for asset recognition. We believe that
users of the financial statements need to be able to identify the methodology used to
estimate reserves and resources in order to understand an entity’s financial statements. If
management uses proved reserves for investment appraisal and uses these same reserves
for depreciation and impairment calculations, this should be clearly identified in the
reserves disclosure. Conversely, if management uses different reserves and/or resources
definitions for different purposes, that should be made clear in the financial statements.
In the absence of guidance under IFRS, entities not subject to the requirements of a
national regulator may wish to use the disclosure requirements of other standard-setters
as a starting point in developing their own policies. The sections below discuss the
disclosure requirements of several standard-setters for mineral reserve and resource
quantities for oil and gas companies and mining companies (see 2.4.1 and 2.4.2
respectively below) and reserve values (see 2.4.3 below).
However, while disclosure of information about mineral reserves and resources is
clearly very useful, users of financial statements should be aware that there are many
variances between the requirements of different jurisdictions or even within those
jurisdictions. Therefore, comparisons between entities may be difficult or even
impossible. In particular, the following aspects are important:
• Proven and probable reserves – The definition of reserves can vary greatly, e.g.
the former OIAC SORP permitted disclosure of either ‘proven and probable’ or
‘proved developed and undeveloped’ reserves, whereas Accounting Standards
Codification (ASC) Topic 932-235-50 – Extractive Activities – Oil and Gas –
Notes to Financial Statements – Disclosure – requires disclosure of ‘proved
reserves, proved developed reserves and proved undeveloped reserves’;68
• Commodity price – The quantity of economically recoverable reserves may
depend to a large extent on the price assumptions that an entity uses. Differences
often arise because the entity:
• uses its own long-term price assumption which, for example, was permitted
under the former OIAC SORP;
• is required to use 12-month average prices, which is required by the SEC
Release No. 33-8995 in the oil and gas sector; or
• is required to use a three year trailing average, which is required to comply
with the SEC’s Industry Guide 7 in the mining sector;
• Royalties – Royalties payable in-kind to the government or legal owner of the
mineral rights may or may not be included in reserves;
• Non-controlling interests – Generally ‘reserves’ include all reserves held by the
parent and its consolidated subsidiaries. While in many jurisdictions mining
companies and oil and gas companies are required to disclose the reserves
attributable to significant non-controlling interests, this is not always required;
• Associates, joint arrangements and other investments – An entity may have
economic ownership of reserves through investments in associates and joint
arrangements, equity interests (see 7 below) or royalty yielding contracts (see 5.7
below). Such reserves are generally not included in consolidated reserves, but may
need to be disclosed separately; and
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industries
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• Production sharing contracts and risk service contracts (see 5.3 and 5.5.1
respectively below) – Frequently the mining company or oil and gas company does
not legally own the mineral reserves and resources in the ground, i.e. the
government retains legal ownership. A significant amount of judgement concerning
the nature of the rights and economic interests of the entity may be required to
determine whether the entity is the economic owner of any reserves or resources.
Depending on the reserve reporting framework that the entity is subject to, such
‘economic’ reserves may or may not be included in reserves or resources.
In addition to those matters set out above, there may be other variances in the reserves
definition and disclosure requirements in different jurisdictions of which users of IFRS
financial statements should be aware. Such differences may affect IFRS financial
reporting directly.
2.4.1
Oil and gas sector
Many oil and gas companies are required to disclose information about reserve
quantities in accordance with the rules and requirements of the stock exchange on
which they are listed. However, those oil and gas companies that are not subject to the
specific disclosure requirements of a stock exchange or other local regulator should
consider the need to disclose reserves and resources information to provide users with
the information they need to understand the entity’s financial position and performance.
Companies may continue to consider disclosing the information previously required
under the former OIAC SORP or the US ASC 932-235-50, or could look to the example
disclosures contained in the 2010 DP at 1.3.4 above.
2.4.2 Mining
sector
Many mining companies are required to disclose information about reserve quantities
in accordance with the rules and requirements of the stock exchange on which they are
listed. However, those mining companies that are not subject to the specific disclosure
requirements of a stock exchange or other local regulator may wish to consider
disclosing the information required under the US Securities and Exchange
Commission’s Industry Guide 7 – Description of Property by Issuers Engaged or to Be
Engaged in Significant Mining Operations (SEC Industry Guide 7).
Mining companies that are subject to the SEC rules and regulations need to understand
not only the content of Industry Guide 7, but also the current interpretation of this
content by the SEC’s staff. While many of the definitions may seem familiar, the SEC
staff’s interpretations may differ considerably from those of regulators in other
countries.69 Refer to SEC Industry Guide 7 sections I-III for details.
2.4.3
Disclosure of the value of reserves
As part of its work on the Extractive Activities DP (see 1.3.4 above) the IASB staff
considered whether a disclosure-focused approach might be appropriate in an extractive
industries financial reporting standard. It is in this context that the DP noted that, given
the near unanimity of the feedback from users on the lack of relevance of either historical
cost or current value accounting for reserves and resources, a disclosure-focused
approach needed to be considered as one alternative in the discussion paper.70
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One of the key issues to consider before developing a disclosure-focused approach is
whether or not disclosure of the value of mineral reserves should be a requirement. A
secondary issue is whether the mineral reserves should be disclosed at their fair value
or at a standardised measure of value, similar to the requirement under ASC 932-235-50
which is based on discounted cash net cash flows.
This disclosure requirement is not uncontroversial, as the ‘standardized measure of oil and
gas’ (often abbreviated to SMOG) does not represent the market value of an entity’s proved
reserves. However, the standardised measure of the value of oil and gas reserves greatly
reduces the impact of management’s opinion about future development on the value
calculated, e.g. the method prescribes the discount rate and commodity price to be used.
While this may not take into account relevant insights that management may have, the
advantage is that comparability of the disclosures between entities is increased. As illustrated
in Extract 39.1, some companies caution against over-reliance on these disclosures.
Extract 39.1: BP p.l.c. (2017)
Supplementary information on oil and natural gas (unaudited) [extract]
Standardized measure of discounted future net cash flows and changes therein relating to proved oil and gas reserves
[extract]
The following tables set out the standardized measure of discounted future net cash flows, and changes therein,
relating to crude oil and natural gas production from the group’s estimated proved reserves. This information is
prepared in compliance with FASB Oil and Gas Disclosures requirements.
Future net cash flows have been prepared on the basis of certain assumptions which may or may not be realized. These
include the timing of future production, the estimation of crude oil and natural gas reserves and the application of average crude oil and natural gas prices and exchange rates from the previous 12 months. Furthermore, both proved reserves estimates and production forecasts are subject to revision as further technical information becomes available and economic conditions change. BP cautions against relying on the information presented because of the highly arbitrary nature of the assumptions on which it is based and its lack of comparability with the historical cost information presented in the financial statements.
It is clear that reaching agreement as to what constitutes useful and relevant disclosures
about the value of mineral reserves is not straightforward and will be controversial. Still, in
September 2008, the Board indicated support for the Extractive Activities DP to propose
the disclosure of ‘a current value measurement, such as a standardised measure of
discounted cash flows, and the key assumptions necessary for a user to make use of that
measurement’. This would not be disclosed if the minerals or oil and gas assets are measured
on the balance sheet at fair value or some other current value measurement. In that case, an
entity would provide disclosures similar to those required in the US (by ASC 820-10-50-1,
2, 3 – Fair Value Measurements and Disclosures).71 Accordingly, the DP concluded that:
• if the assets are measured at historical cost then detailed information should be
disclosed about their current value (either fair value or standardised measure) 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.
2.4.3.A
ASC 932-235-50 – disclosure of standardised measure of oil and gas
All entities engaged in significant oil and gas producing activities that report under
US GAAP are required by ASC 932-235-50 to disclose a standardised measure of
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discounted future net cash flows relating to proved oil and gas reserve quantities. There
may also be non-US GAAP oil and gas companies who, while they are not subject to these
specific disclosure requirements, still elect to refer to these when determining the reserves
and resources information to provide to their users. ASC 932-235-50 is highly prescriptive
and should be reviewed directly in full to ensure compliance with its requirements.
3
IFRS 6 – EXPLORATION FOR AND EVALUATION OF
MINERAL RESOURCES
3.1
Objective and scope
The IASB’s objective in developing IFRS 6, as noted at 1.2 above, was restricted to
making limited improvements to existing accounting practices for exploration and
evaluation (E&E) expenditures. E&E expenditures are ‘expenditures incurred by an
entity in connection with the exploration for and evaluation of mineral resources before
the technical feasibility and commercial viability of extracting a mineral resource are
demonstrable’, while E&E assets are ‘exploration and evaluation expenditures
recognised as assets in accordance with the entity’s accounting policy’. [IFRS 6 Appendix A].
IFRS 6 is limited to specifying the financial reporting for the exploration for and evaluation
of mineral resources, which the standard defines as ‘the search for mineral resources,
including minerals, oil, natural gas and similar non-regenerative resources after the entity
has obtained legal rights to explore in a specific area, as well as the determination of the
technical feasibility and commercial viability of extracting the mineral resource’.
[IFRS 6.1, Appendix A]. The standard also specifies when entities need to assess E&E assets for
impairment in accordance with IAS 36 and requires certain disclosures.
An entity may not apply IFRS 6 to expenditures incurred before the exploration for and
evaluation of mineral resources (e.g. expenditures incurred before the entity has
obtained the legal rights to explore a specific area such as prospecting and acquisition
of mineral rights) or after the technical feasibility and commercial viability of extracting
a mineral resource are demonstrable (e.g. development, construction, production and
closure). [IFRS 6.5]. Furthermore, it deals only with E&E expenditures and does not
>
provide guidance on other sector-specific issues that may arise during the E&E phase.
Equipment used in the E&E phase, e.g. property, plant and equipment and any other
intangibles, such as software, are not in the scope of IFRS 6, instead, they are in the
scope of IAS 16 or IAS 38.
3.1.1
Scope exclusions in other standards relating to the extractive industries
In the Basis for Conclusions on IFRS 6 the IASB confirmed that ‘even though no IFRS
has addressed extractive activities directly, all IFRSs (including International
Accounting Standards and Interpretations) are applicable to entities engaged in the
exploration for and evaluation of mineral resources that make an unreserved statement
of compliance with IFRSs in accordance with IAS 1’. [IFRS 6.BC6]. However, certain
aspects of activities that occur in the extractive industries that fall outside the scope of
IFRS 6 are excluded from the scope of other standards.
Various standards exclude ‘minerals’ from their scope, but the exact wording of the
scope exclusions differs from standard to standard. Therefore, it would be incorrect to
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conclude that the same aspects of the extractive industries’ activities are excluded from
the scope of these standards:
• IAS 2 – does not apply to the measurement of minerals and mineral products, ‘to
the extent that they are measured at net realisable value in accordance with well-
established practices in those industries’. [IAS 2.3(a), 4]. The practice of measuring
minerals and mineral products inventories at net realisable value is, in reality,
relatively rare in many areas of the extractive industries.
• IAS 16 – does not apply to ‘mineral rights and mineral reserves such as oil, natural
gas and similar non-regenerative resources’. [IAS 16.3(d)]. In addition, the standard does
not apply to ‘the recognition and measurement of exploration and evaluation assets’.
[IAS 16.3(c)]. Equipment used in extracting reserves is within the scope of IAS 16.
• IAS 17 – does not apply to ‘leases to explore for or use minerals, oil, natural gas and
similar non-regenerative resources’. [IAS 17.2(a)]. However, leases of assets used for
exploration or evaluation activities are in the scope of IAS 17.
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