Understanding Ind AS 6: Exploration and Evaluation of Mineral Resources
Ind AS 6 applies to entities engaged in the exploration for and evaluation of mineral resources. As a CA student, you will encounter this standard when studying Advanced Accounting or when dealing with companies in the extractive industries—mining, oil and gas, or mineral exploration ventures.
The key challenge: determining when a cost should be capitalised as an asset and when it should be expensed immediately. This article walks you through the framework.
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What Is an Exploration and Evaluation Asset?
An exploration and evaluation (E&E) asset is a tangible or intangible asset representing the right to explore and evaluate mineral resources in a defined geographical area. Think of it as the capitalised cost of the right to search for and assess whether commercial extraction is feasible.
Typical costs include:
- Drilling and boring
- Geological and geochemical surveys
- Environmental impact assessments
- Feasibility studies for a specific area
- Acquisition of exploration rights and licences
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Core Recognition Criteria: Two Conditions
Ind AS 6 states that E&E assets are recognised only if both of the following conditions are met:
1. Legal Right to Explore
Your entity must have:
- The legal right (licence, permit, or concession) to explore in a specific area, and
- The intention to exercise that right
Without a valid legal right, exploration costs cannot be capitalised as E&E assets—they must be expensed.
2. Economic Viability Indicators
There must be evidence suggesting that exploration may lead to economically viable extraction. This is where judgment plays a role:
- Have any mineral deposits of commercial quality been identified?
- Does the entity have experience in the region or similar geological conditions?
- Is there a reasonable expectation of future cash inflows from extraction?
- Have preliminary test results been encouraging?
If exploration is purely speculative with no geological or technical evidence of economic viability, costs are expensed.
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What Costs Are Capitalised?
Once both conditions above are satisfied, the following costs may be capitalised:
- Direct exploration costs (drilling, sampling, surveying)
- Acquisition cost of the exploration licence or right
- Allocation of administrative and overhead costs directly attributable to the E&E asset
- Costs of assessing feasibility for a specific asset
Critical point: Only costs directly attributable to the specific exploration area are capitalised. General corporate overhead, training costs, and costs related to unsuccessful exploration projects in other areas are typically expensed.
Costs Always Expensed
- General exploration activities before any specific area is identified
- Costs of areas relinquished or where rights have lapsed
- Repairs and maintenance (unless they increase the asset's economic benefit)
- Cost of land restoration (unless required to prepare the area for sale)
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Reclassification and Movement Through Stages
Once the evaluation phase concludes and commercial viability is demonstrated, E&E assets may be:
- Reclassified to property, plant and equipment (if development will proceed), or
- Reclassified to inventory (mineral reserves ready for extraction), or
- Written off entirely (if the project is abandoned)
The timing of this reclassification depends on when development is deemed commercially viable—not when extraction actually begins.
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Impairment Testing: A Critical Requirement
Ind AS 6 requires regular impairment testing. E&E assets are tested whenever indicators of impairment arise:
Triggers for Impairment Testing
- Exploration rights have expired or will not be renewed
- No further budgeted expenditure is planned
- Test results show insufficient mineral concentrations
- Management decides to cease activities in the area
- Market prices for the resource have fallen significantly
- Environmental or regulatory changes make extraction unviable
How Impairment Is Assessed
Unlike other assets, E&E assets are not tested using value-in-use calculations during the exploration phase. Instead, impairment is recognised when:
- The entity no longer has the legal right to explore, or
- The entity can no longer demonstrate economic viability, or
- Facts and circumstances indicate the carrying amount is unlikely to be recovered
Once reclassified out of E&E (e.g., to PPE), normal Ind AS 36 impairment testing applies.
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Worked Example: Capitalise or Expense?
Scenario
Minerals Ltd acquires a drilling licence for ₹50 lakhs in a new region. Over two years, it spends:
- ₹20 lakhs on exploratory drilling
- ₹8 lakhs on geological surveys
- ₹3 lakhs on head office administration (allocated)
- ₹5 lakhs on training of technical staff
- ₹2 lakhs on environmental restoration of test holes
Analysis
Legal right: ✓ Yes—licence obtained Economic viability: ✓ Early test results show promising mineral concentrations
Capitalised:
- Drilling licence: ₹50 lakhs
- Exploratory drilling: ₹20 lakhs
- Geological surveys: ₹8 lakhs
- Allocated admin: ₹3 lakhs (directly attributable)
- Total E&E Asset: ₹81 lakhs
Expensed:
- Staff training: ₹5 lakhs (not directly attributable to this asset)
- Environmental restoration: ₹2 lakhs (not required to prepare for extraction; likely maintenance)
If test results had shown no viable mineral deposits, all costs would have been expensed immediately.
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Presentation and Disclosure
In the balance sheet, E&E assets are typically shown as a separate line item under non-current assets (or in the notes if combined with PPE).
Key disclosures in notes:
- Gross carrying amount and accumulated impairment
- Movements during the period (additions, impairments, reclassifications)
- Key assumptions about economic viability
- Details of areas where exploration rights have lapsed
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Common Pitfalls CA Students Make
- Capitalising without legal right: Always verify the licence is valid before capitalising any cost.
- Treating all overhead as directly attributable: Corporate costs, HR, and general admin are typically expensed.
- Forgetting impairment triggers: Watch for regulatory changes, disappointing test results, or changes in management plans.
- Confusing E&E with development assets: Once commercial viability is proven and development begins, reclassify and apply Ind AS 16.
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FAQs
Q: If we have a valid licence but no evidence of commercial viability, can we capitalise exploration costs?
A: No. Both conditions must be present. Without economic viability indicators, all costs are expensed, even if the legal right exists.
Q: What happens if we relinquish an exploration right mid-way through the project?
A: The entire carrying amount of the E&E asset is written off as an impairment loss. It cannot be recovered; the asset is no longer economic.
Q: Are development costs (after proving viability) still covered by Ind AS 6?
A: No. Once development commences, assets are reclassified to property, plant and equipment (Ind AS 16) or inventory. Ind AS 6 applies only during exploration and initial evaluation phases.
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Ind AS 6 requires careful judgment on the line between capitalisation and expense. The key is to ask two questions: Do we have the legal right? and Is there evidence of economic viability? Master these, and you'll navigate mineral resource accounting confidently.
For day-by-day study plans and scenario-based practice, visit our free study planner and explore our case scenario practice sets on extractive industry accounting.