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
Why expense?
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 the public.
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.
Why capitalize?
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 properties.
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.
