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fuel used, rig costs, delay rentals, and payments made to contractors. If potentially commercial quantities of hydrocarbons are not found, the exploration
expenditure is written off as a dry hole. If hydrocarbons are found and, subject to further appraisal activity, are likely to be capable of commercial development,
the costs continue to be carried as an asset. Costs directly associated with appraisal activity, undertaken to determine the size, characteristics and commercial
potential of a reservoir following the initial discovery of hydrocarbons, including the costs of appraisal wells where hydrocarbons were not found, are initially
capitalized as an intangible asset. All such carried costs are subject to technical, commercial, and management review at least once a year to confirm the
continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs are written off. When proved reserves of
oil and natural gas are determined and development is approved by management, the relevant expenditure is transferred to property, plant, and equipment.
Development expenditure
Expenditure on the construction, installation, or completion of infrastructure facilities such as platforms, pipelines, and the drilling of development wells,
including service and unsuccessful development or delineation wells, is capitalized within property, plant, and equipment and is depreciated from the
commencement of production as described in the section that deals with the accounting policy for property, plant, and equipment.
Exploration for and evaluation of oil and natural gas resources
The following financial information represents the amounts included within the group totals relating to activity associated with the exploration for and
evaluation of oil and natural gas resources. All such activity is recorded within the Exploration and Production segment.
MULTIPLE-CHOICE QUESTIONS
1. IFRS 6 applies to expenditures incurred
a. When searching for an area that may warrant detailed exploration, even though the entity has not yet obtained the legal rights to explore a specific area.
b. When the legal rights to explore a specific area have been obtained, but the technical feasibility and commercial viability of extracting a mineral resource are
not yet demonstrable.
c. When a specific area is being developed and preparations for commercial extraction are being made.
d. In extracting mineral resources and processing the resource to make it marketable or transportable.
2. Does IFRS 6 require an entity to recognize exploration and evaluation expenditure as assets?
a. Yes, but only to the extent such expenditure is recoverable in future periods.
b. Yes, but only to the extent the technical feasibility and commercial viability of extracting the associated mineral resource have been demonstrated.
c. Yes, but only to the extent required by the entity’s accounting policy for recognizing exploration and evaluation assets.
d. No, such expenditure is always expensed in profit or loss as incurred.
3. What is an entity required to consider in developing accounting policies for exploration and evaluation activities?
a. The requirements and guidance in Standards and Interpretations dealing with similar and related issues.
b. The definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework.
c. Recent pronouncements of standard-setting bodies, accounting literature, and accepted industry practices.
d. Whether the accounting policy results in information that is relevant and reliable.
4. Is an entity ever required or permitted to change its accounting policy for exploration and evaluation expenditures?
a. Yes, entities are required to change their accounting policy for these expenditures if the change would result in more useful information for users of financial
statements.
b. Yes, entities are free to change accounting policy for these expenditures as long as the selected policy results in information that is relevant and reliable.
c. Yes, but only if the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable
and no less relevant to those needs.
d. No, entities would be permitted to change accounting policy only on adoption of a new or revised Standard that replaces the existing requirements in IFRS 6.
5. Which of the following expenditures would never qualify as an exploration and evaluation asset?
a. Expenditure for acquisition of rights to explore.
b. Expenditure for exploratory drilling.
c. Expenditures related to the development of mineral resources.
d. Expenditure for activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource.
6. Which measurement model applies to exploration and evaluation assets subsequent to initial recognition?
a. The cost model.
b. The revaluation model.