As the 2014 financial year comes to a close, commodity price volatility and reduced exploration activity require close examination, and the question of whether an exploration asset has become impaired remains critical.
However, asset impairment is not just an issue for the major resource companies – it is also a potential issue for junior resource companies where exploration may be continuing.
In this Alert, Partner Michael Hansel and Associate Richard Hanel recommend that a company should ensure that policies and processes are in place to help identify impaired exploration assets.
When is an exploration asset impaired?
An asset becomes impaired when the carrying amount of the asset exceeds the recoverable amount through the use or sale of that asset, and that impairment must be recognised in the company financial statements.
Accounting Standard AASB 136 - Impairment of Assets (AASB 136) sets out the procedures a company must apply to ensure its assets are carried at no more than their recoverable amount. However, for exploration and evaluation assets, Accounting Standard AASB 6 – Exploration for and Evaluation of Mineral Resources (AASB 6) must also be applied for the purposes of identifying when an asset may be impaired.
AASB 6 specifies that exploration and evaluation assets should be assessed for impairment when facts and circumstances suggest that the carry amount of the asset may exceed its recoverable amount because:
- the period for which the entity has the right to explore has expired or will expire in the future and will not be renewed;
- substantive expenditure on further exploration for and evaluation of mineral resources is not budgeted for or planned;
- exploration and evaluation of resources in the specific area has not led to the discovery of commercially viable quantities of a mineral resource and there are plans to discontinue those activities; or
- data indicates that although a development in the specific area is likely to proceed, the carry amount of the asset is unlikely to be recovered from successful development or by sale.
If these or similar circumstances exist, the company should conduct an impairment test as set out in AASB 136. However, this is not an exhaustive list and the company should also consider other facts and circumstances that may suggest impairment.
Having identified that impairment exists, the measurement, presentation and disclosure of the impairment must continue to be carried out in accordance with AASB 136. As circumstances change in the future (e.g.an increase in exploration or the relevant commodity price) the impairment can be reversed.
An exploration company should look to implement an asset impairment policy which draws upon the requirements of both AASB 6 and AASB 136. Then the board and audit committee, with the assistance of relevant managers, are in a position to ensure that these requirements are adequately addressed and that the company’s financial reports are accurate and complete.