IASB

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IASBs Extractive Activities Research Project

• IFRS Conference 25 June 2008

Glenn Brady IASB Extractive Activities Project
Team
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Research project objective

• Why take a fresh look at how to account for oil
  gas and mineral reserves/resources
• IFRS 6 Exploration for and Evaluation of Mineral
  Resources is only an interim solution
• existing IFRSs do not adequately address unique
  features of oil gas and mining extractive
  activities
• some question the relevance of existing practices
  in accounting for extractive activities

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Research project team

• An international project team of accounting
  standard setters is undertaking the research
• Australia, Canada, Norway South Africa
• Advisory panel is assisting the project team
• large and small oil gas and mining companies
• analysts and other users of financial reports
• auditors
• securities regulators (including SEC)
• Advisory panel is geographically diverse
• Africa, Asia-Pacific, Europe North America

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Key research questions

• When should an asset be recognised on the balance
  sheet?
• How should reserves/resources recognised on the
  balance sheet be measured?
• What reserves/resources information should be
  disclosed in the financial report?
• How should reserves/resources be defined?

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Asset recognition

• In the continuum from prospecting to production,
  when can an asset be initially recognised?
• when does entity have control over future
  benefits?
• application of recognition criteria
• relationship with reserve and resource
  classifications
• What unit of account should apply?

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Asset recognition

• What is the asset?
• Possibly 2 types of asset
• properties with (controlled) reserves and
  resources
• a tangible asset
• other properties rights and knowledge
• an intangible asset

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Asset measurement alternatives

• Historical cost?
• Verifiable, but
• Cost has limited relevance to users
• no correlation between finding development
  costs incurred and the future cash flows that
  will be generated from the minerals or oil gas
  property

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Asset measurement alternatives

• Fair value?
• Seems relevant (in principle), but
• Requires many subjective assumptions and
  estimates
• is it meaningful?
• Time and effort
• is it feasible? cost/benefit?
• Income statement implications
• Is current value an alternative?
• a simplified fair value

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User survey

• 34 users interviewed sell-side, buy-side, debt
  rating agencies, lenders, venture capital
• Results
• limited usefulness in historical cost measurement
  of reserves/resources
• limited interest in valuing reserves/resources on
  balance sheet, or as part of note disclosures
  (either fair value or current value)
• want information to input into own models
• disclosures are key

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Disclosure

• Current disclosure practice is diverse
• What reserve/resource information should be in
  financial reporting disclosures?
• users want information to input into own models
• most users want more than proved reserves
• Should reserve estimates be presented as
• through the eyes of management?
• reflecting standardised conditions (e.g. price)?
• What level of disaggregated presentation is both
  useful to users and feasible to present?

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Definitions

• No single agreed definition of reserves or
  resources for the extractive industries
• IASB requested SPE (oil gas) and CRIRSCO
  (mining) to identify opportunities for converging
  elements of their definitions
• Positive outcome
• new PRMS improves comparability
• a mapping document explains the similarities
  (and differences) between the systems and
  indicates broad equivalence
• reserve and resource classifications can
  therefore provide the building blocks of the
  accounting model

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What about other systems?

• Monitoring SEC developments
• SEC Concept Release issued in December 2007
• Many responses encouraged SEC to
• Adopt PRMS definitions
• Coordinate with IASB
• Monitoring progress on United Nations Framework
  Classification for Fossil Energy and Mineral
  Resources (UNFC)

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Project timing

• Discussion paper expected in late 2008
• will identify possible accounting and disclosure
  approaches and request comments
• Discussion paper and comments will be key input
  for IASB in developing an IFRS for extractive
  activity accounting
• Timing of final standard dependent on several
  factors