The IASB has just published a discussion paper written by the National Standard setters of Australia, Canada, Norway and South Africa which introduces the results and proposals of a research project on the accounting and disclosure requirements for extractive activities.

Extractive activities are the activities undertaken by mining and oil and gas entities when searching for, and ultimately extracting, minerals or oil and gas.  Typically this involves four stages:  exploration, evaluation, development and production.

The current international standard is IFRS 6 Exploration for and Evaluation of Mineral Resources which was published in 2004.  However, when this standard was being developed it was recognised that it would only be an interim standard and would be replaced once the IASB had more time.

IFRS 6 permits a continuation of previous accounting policies for exploration and evaluation which has led to a diversity of financial reporting practice.  The project team proposes that a common basis for defining ‘reserves and resources' should be used and that the initial focus for accounting should be the legal rights to the property which will be recognised in the books of account when these legal rights are acquired.

The project team proposes that the minerals or oil and gas properties should be measured at historical cost, supplemented with detailed disclosure about these properties.  Historical cost is the dominant measurement basis within current practice in extractive activities.  However, there are various historical-cost based accounting models that are used to recognise and measure minerals or oil and gas properties.  The discussion paper proposes a single measurement basis.

The project team proposes to introduce disclosure requirements that would enable users to evaluate:

- The value of the entity's minerals or oil and gas properties;

- The contribution that the minerals or oil and gas properties make to the entity's performance; and

- The nature and extent of the risks and uncertainties associated with the entity's minerals or oil and gas properties.

The extent and nature of disclosures in current practice varies significantly.  These disclosures are often driven by regulatory requirements many of which have evolved separately for minerals and for oil and gas activities.  Diversity in the definition of reserves can lead to a lack of comparability when similar information is disclosed.

During the course of the research the project team met representatives of the ‘Publish What You Pay' (PWYP) coalition which seeks to improve accountability of governments of resource-rich developing countries for the management of revenues from the minerals or oil and gas industries.  The PWYP coalition proposes that entities undertaking extractive activities should disclose on a country by country basis:

- The payments made to governments whether in cash or kind; and

- Other information including reserve quantities, production quantities, production revenues and costs incurred in development and production.

The discussion paper does not reach a conclusion as to whether these additional disclosures should be required.

The IASB is seeking comments on the discussion paper by 30 July 2010.  Based on these comments and a consideration of the discussion paper's analysis and proposals the IASB will then decide whether to add a project on Extractive Activities to its agenda beyond June 2011.

If you have anything to say on the content of the discussion paper then please leave a comment below.