This issue is a hot topic for exploration stage
companies. Many want to wait to and see what their counterparts are
doing so they are not alone in their decision . Which way should
your company turn ?
After speaking to CFOs, other accountants and our clients, it
would appear, based on information gathered to date, there is no
consensus in the industry. Some companies have chosen or will be
choosing to expense their exploration expenditures, while others
will continue to capitalize their expenditures as allowed under
IFRS 6. Each company needs to consider their own facts and
circumstances and do what makes sense for them. Based on our large
audit practice of junior mining companies, there appears to be no
momentum to expense at this point. Below are some pros and cons of
both expensing and capitalizing to better understand the impact
that each decision could have on your company.
To expense or not to expense, that is the question
The benefit of expensing that is most often brought up is the
impact it will have on the transition to IFRS. Adopting a policy of
expensing will make the transition process much easier to manage.
Expensing eliminates the need to analyze whether the expenditures
capitalized under Canadian GAAP met the criteria for capitalization
under IFRS. In addition, expensing eliminates the need to consider
impairment or trying to support the valuation of the properties to
auditors and regulators. Although expensing may make the transition
to IFRS easier, the easy answer is not always the right answer for
every company. Some companies want to show explorations and
evaluation assets on their books and believe that this would help
their investors to better understand their financial statements and
the activities of the company.
Others are less concerned about what is reflected on their
statement of financial position as they feel. that exploration
companies' market value is supported by the properties they own
and by the prospects and potential for development, which is
supported by geological information that is also made available to
Expensing could be perceived as negative due to past practice of
only expensing properties that are abandoned or impaired. Another
disadvantage of expensing is the loss of information related to the
total costs spent to explore a particular property in the financial
statements. Therefore more information on the costs would need to
be provided in the MD&A to keep investors updated on what is
happening on the properties.
The advantage of continuing to capitalize is that it is clear
and easy for investors to understand, as it is what they are
familiar with. Costs are accumulated and therefore easier for
investors to understand the work and costs incurred to date on the
If capitalizing, it will be very clear in the financial
statements if a particular property has been abandoned as a
write-down will be required. If expensing additional disclosure and
discussions in the MD&A and financial statements would be need
to ensure investors were aware of the abandonment.
With the transition to IFRS, there is a great deal of
uncertainty as to best approach to be taken. At BDO, we recommend
closely examining your properties and talking to your board and
other key stakeholders and consider all the pros and cons to
determine the best policy choice for your company.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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International Financial Reporting Standards (IFRS) are often said to be "principle-based," meaning that they are based on clear-cut principles that can be applied without the need for detailed interpretive guidance.