Advanced Financial Accounting: Evaluation and Exploration of AASB 6

This report provides a detailed explanation of AASB 6, the accounting standard for the exploration and evaluation of mineral resources. It covers the definition and recognition criteria for assets, emphasizing the consistency between the framework and the accounting rules. The report discusses the treatment of expenditures associated with mineral resource exploration, including asset classification, measurement at recognition, and impairment testing. It analyzes the compatibility of AASB 6 with the conceptual reporting framework, particularly regarding asset definition and recognition. The report also highlights disclosure requirements and the standard's application, offering insights into how entities develop accounting policies and assess assets for impairment. The conclusion summarizes the key aspects of AASB 6 and its implications for financial reporting, including the timing, amount, and certainty of future cash flows from exploration activities.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced financial accounting
Name of the University
Name of the student
Authors note

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Table of Contents
Introduction:....................................................................................................................................2
Discussion:.......................................................................................................................................2
Evaluation of asset and recognition of exploration:........................................................................4
Measurement of assets at recognition:.............................................................................................4
Specification of the level at which assets evaluation and exploration are assessed for impairment:
.........................................................................................................................................................5
Evaluation of the compatibility between the asset definition and recognition criteria as per genera
reporting framework and AASB 6 rules for exploration and evaluation of mineral resources:......6
Conclusion:......................................................................................................................................8
References list:.................................................................................................................................9
Introduction:
The purpose of the study is to provide detail explanation of the AASB 6 with respect to
the evaluation and exploration of expenditures. Explanation concerning this particular

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accounting standard is elaborated in terms of definition and recognition criteria for the assets that
have been specified in the AASB framework. The consistency between the definition and
recognition criteria that have been specified in the framework and the accounting rules has been
explained. Study further elucidates on the existence of any inconsistencies between such criteria
and the AASB 6 rules. The objective of this particular standard is to make the specification of
financial reporting for evaluation and explanation of mineral resources (Abdo 2016). As per this
standard, limited improvement is required in the existing accounting practices for evaluation and
exploration of expenditures. This particular standard is applicable by entities for evaluation and
exploration of expenditures incurred by it. Any other aspects of accounting by entities engaged
in exploration and evaluation of mineral resources is not addressed by AASB 6.
Discussion:
The accounting standard AASB 6 deals with the treatment of expenditures that is
associated with evaluation of and exploration for mineral resources. This particular standard
requires allows reporting entity to develop their own accounting policies for treating such
expenditures without complying with the paragraph 12 and 11 of AASB 108 accounting policies.
The accounting policies are required to be consistent with the approach of area of interest as per
AASB 6. It is required by the standard to conduct the impairment testing of evaluation
expenditures and capitalized exploration. The circumstances and facts that are specified by this
particular standard are consistent with the factors that are used for determination whether an
entity is capable of continuing to make recognition of evaluation of expenditures and capitalized
exploration under AASB 1022. Furthermore, as per paragraph 5 a) of AASB 6 and the definition
on the evaluation and exploration of mineral resources, a distinction between the pre exploration
and exploration activities are drawn (Zhang and Andrew 2014). In addition to the disclosure of

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assets, income and expenses amounts, it is required by AASB 6 to make disclosure of the
operating, liabilities amount and investing cash flow amount.
As per the framework of AASB for the presentation and preparation of financial
statements, assets are defined as the entity possession that helps in future economic benefits that
is controlled as the consequence of past events or past transactions. When the assets are
controlled by entity is indicative of the fact that entity’s capacity for benefitting from assets in
pursuit of objective of entity and such benefits would not be accessed by others. As per the
accounting standard AASB 6, evaluation and exploration of assets are done by entities for
assessing such assets for impairment and the measurement of impairment of such assets are done
in accordance with the ASSB 136 for dealing with impairment of assets. The amount of assets
that arises from the evaluation and exploration of mineral resources is required to be disclosed as
per the standard. This would assist financial statements users in understanding the timing,
amount and certainty of future cash flows from such exploration along with recognition of
evaluated assets. The framework of AASB dealing with recognition criteria of assets depict that
the available incidence forms the basis of assessment of certainty degree that is attached to future
economic benefits in any specific situation (Iddon et al. 2015).
An organization cannot use this particular standard for treating the expenditures if such
expenditures are incurred after the commercial viability and technical feasibility for extracting
mineral resources. Standard is also not applicable before the mineral resources are evaluated and
explored such as the expenditures that have been incurred before the legal right for exploring any
area is obtained by reporting entity.

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Evaluation of asset and recognition of exploration:
The classification of exploration and evaluation of assets as tangible and intangible assets
are required to be done by entity in accordance with the nature of assets that have been acquired
and such classification have been applied consistently. Organization treats some exploration and
evaluation assets as intangible while treat some other as tangible. The classification of asset
evaluation and exploration will no longer be required when commercial viability and technical
feasibility of mineral resources are demonstrable (Barker et al. 2014).
An entity is required to make the application of paragraph 10 of AASB 108 accounting
policies when developing the accounting policies while evaluation the assets and recognizing the
exploration. The sources of authoritative guidance and requirements are specified in the
paragraph 11 and 12 of the AASB 108. It is required by organization to fulfill the following
requirements when developing the accounting policies of treatment of evaluation of expenditures
and exploration of assets (Barth et al. 2014).
The expenditures incurred in the evaluation and exploration of mineral resources should
be incurred as an expenses or it will be recognized, fully or partially capitalized as an evaluation
and exploration of assets if the paragraph Aus 7.2 requirement are satisfied.
Measurement of assets at recognition:
The evaluation and exploration of assets of mineral resources should be done at costs.
Accounting policy is determined by entity and the same is applied consistently by specifying the
nature of expenditures and they are recognized by way of such assets evaluation and exploration.
An entity is required to consider the degree to which the expenditure is associated with
ascertaining specific mineral resources when making such determination. The initial evaluation

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of assets and measurement of exploration would comprise of the expenditures such as
exploratory drilling, acquisition rights to explore, activities concerning evaluation of commercial
viability and technical feasibility for extraction of mineral resources and geological, geophysical
and topographical studies. According to paragraph 9 of the AASB 6, the indirect and direct cost
related to evaluation and exploration of mineral resources is allocated in that particular area of
interest. It is not required to draw any distinction between the service costs that is performed by
consultants and outside contractors and the costs that is incurred within the entity when making
such allocation. Furthermore, any amount of expenditure relating to mineral resources
development should not be recognized as evaluation and exploration assets. For the assets
recognition that arises from development, the guidance is provided by AASB 138 intangible
assets and the framework for the presentation and preparation of financial statements
(Smieliauskas et al. 2017).
The general and administrative costs are allocated in the evaluation of assets and
exploration costs and only to the extent of cost that can be related to operational activities in the
interest area. As per AASB 6, the evaluation of expenditures and capitalized exploration is
required to be tested for impairment when it is suggested by circumstances and facts that the
evaluation of assets and carrying amount of exploration might exceed its recoverable amount.
Specification of the level at which assets evaluation and exploration are assessed for
impairment:
An accounting policy is determined by entity for evaluation of assets and allocation of
exploration to the cash generating unit or cash generating unit group. Such allocations are done
for the purpose of conducting the assessment of impairment testing. According to AASB 8 of the
operating segments, the allocation of each cash generating unit or group of cash generating units

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are done concerning the evaluation and exploration of assets should not be more than the
operating segments. An entity identifying such level for the purpose of evaluation of assets and
testing exploration for impairment might comprise of one or more cash generating unit. Such
level identified by reporting entity will not be area of interest any longer. This particular standard
is applicable by the reporting entity for the annual period beginning on or after January 2016. All
such discussed facts should be disclosed by reporting entities if the standard is applied for the
period beginning before January, 2016 (Lamb et al. 2015).
The evaluation of assets and its exploration by reporting entities are done as a separate
class of assets and the disclosure is made according to the requirement of IAS 138 intangible
assets and IAS 13 property, plant and equipment that is consistent with the classification of the
assets that have been identified. The disclosure of information relating to the evaluation and
exploration of expenditures arising from the evaluation and exploration of mineral resources are
recognized in the financial statements (Ong 2016).
Evaluation of the compatibility between the asset definition and recognition criteria as per
genera reporting framework and AASB 6 rules for exploration and evaluation of mineral
resources:
As per the conceptual reporting framework, the probability criterion is considered
unnecessary for the recognition of assets that are created from rights or obligations. On other
hand, the probability criterion is considered necessary when the recognition of assets or group of
assets is done when it arises from some other events other than rights or obligations. Now, when
looking at the accounting standard AASB 6, the recognition of the exploration and evaluation of
the assets pertaining to mineral resources are done by development of the accounting policies. At
recognition, exploration and evaluation of assets are done at cost. The conceptual framework

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also poses criterion of cost constraints to the recognition of assets and such costing level is
decided by the standard (Zhou et al. 2015).
Furthermore, the recognition of assets as per the conceptual reporting framework is done
in the balance sheet when there is a probability that then future economic benefits associated
with the assets will flow into the organization. Moreover, the assets have some costs associated
with it that can be measured reliably. On other hand, the recognition of assets are not done in the
balance sheet in the event of incurring of expenditures for which the economic benefits that will
flow to organization is improbable. The accounting standard AASB 6 on other hand is not
applicable to the standard for evaluation and exploration of expenditures if it is incurred after the
commercial viability and technical feasibility of the mineral resources extraction. The standard is
also not applicable when the expenditure is incurred before the evaluation and exploration of
mineral resources such as incurring of expenditure prior to obtaining of legal rights for exploring
any particular area (Russell 2017).
When it comes to the impairment testing of assets regarding the mineral resources, the
accounting standard AASB 6, requires the entities to evaluate and explore the assets for
impairment testing in accordance with the standard AASB 136 Impairment of assets. In this
regard, it can be seen that there is considerable degree of consistency between the conceptual
reporting framework criteria for assets impairment and impairment criteria as specified by the
AASB 6. Furthermore, reporting entity is also required to make the disclosures by explaining and
identifying the amounts arising from mineral resources exploration and extractions. As a result,
users of financial report will be able to gain an understanding of the timing, amount and certainty
of future cash flows by the recognition of exploration and evaluation of assets (Allee et al. 2015).

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Conclusion:
The report is prepared to explain the accounting standard with respect to the evaluation
and exploration of mineral resources. This particular standard AASB 6 enables reporting entities
to develop the accounting policies for treating the mineral resources assets and the way it is
reported in the financial statements. From the above analysis, it can be inferred that there exist
few degree of consistencies between the recognition criteria of assets based on the conceptual
reporting framework and recognition criteria of mineral resources as per the accounting standard
AASB 6. However, there also exist some inconsistencies in other aspects of the definition of
assets and recognition criteria.

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References list:
Abdo, H., 2016. Accounting for Extractive Industries: Has IFRS 6 Harmonised Accounting
Practices by Extractive Industries?. Australian Accounting Review, 26(4), pp.346-359.
Allee, K., Campbell, J., Curtis, A., Hales, J., Jorgensen, B., Krische, S., Rees, L., Sunder, J. and
Wang, C., 2015. Response to the IASB Invitation to Comment: Conceptual Framework for
Financial Reporting (ED/2015/3).
Azam, M.R., 2017. Challenges to the Users of Financial Reports Constructed Using Multiple
Measurement Bases: A Review of the IASB’s Conceptual Framework for Financial
Reporting. International Journal of Accounting and Financial Reporting, 7(2), pp.172-177.
Barker, R., Lennard, A., Nobes, C., Trombetta, M. and Walton, P., 2014. Response of the EAA
financial reporting standards committee to the IASB discussion paper A review of the conceptual
framework for financial reporting. Accounting in Europe, 11(2), pp.149-184.
Barth, M.E., Nobes, C. and Tarca, A., 2015. Conceptual framework for financial reporting: an
introduction to the special issue by the guest editors.
Chen, X., 2014. Analysts' earnings forecasts in Australia and their implications in the extractive
industry.
Iddon, C., Hettihewa, S. and Wright, C.S., 2015. Value Relevance of Accounting and Other
Variables in the Junior-Mining Sector. Australasian Accounting Business & Finance
Journal, 9(1), p.25.

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Lamb, D., Erskine, P.D. and Fletcher, A., 2015. Widening gap between expectations and practice
in Australian minesite rehabilitation. Ecological management & restoration, 16(3), pp.186-195.
Ong, S.H., 2016. Measuring the quality and identifying influencing factors of sustainability
reporting: Evidence from the resources industry in Australia.
Russell, M., 2014. Capitalization of intangible assets and firm performance.
Russell, M., 2017. Management incentives to recognise intangible assets. Accounting &
Finance, 57(S1), pp.211-234.
Smieliauskas, W., Craig, R. and Amernic, J., 2017. GAAP as Ineffective Legal Defense of
Financial Reporting: Implications for Truthfulness, Auditability, and the IASB's Proposed 2015
Conceptual Framework.
Walton, P., 2018. Discussion of Barker and Teixeira ([2018]. Gaps in the IFRS Conceptual
Framework. Accounting in Europe, 15) and Van Mourik and Katsuo ([2018]. Profit or loss in the
IASB Conceptual Framework. Accounting in Europe, 15). Accounting in Europe, pp.1-7.
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical
perspectives on accounting, 25(1), pp.17-26.
Zhou, T., Birt, J. and Rankin, M., 2015. The value relevance of exploration and evaluation
expenditures. Accounting Research Journal, 28(3), pp.228-250.