Comprehensive Notes – PFRS 6, PAS 8, PAS 16, PAS 20 & PAS 23

PFRS 6 – Exploration for and Evaluation of Mineral Resources

  • Scope Timeline

    • Before legal rights to explore are obtained → PFRS 6 not applicable\text{PFRS 6 not applicable}
    • After legal rights are obtained but before technical feasibility & commercial viability are demonstrable → PFRS 6 applicable\text{PFRS 6 applicable}
    • After feasibility & viability are demonstrable → accounted for as development costs under other PFRSs.

  • Key Definitions (Appendix A)

    • Exploration & evaluation (E&E) = search for mineral resources after legal rights obtained + assessment of technical/commercial viability.
    • Exploration & evaluation expenditures = costs incurred before feasibility & viability are demonstrable.
    • Exploration & evaluation asset = E&E expenditures capitalised under the entity’s policy.

  • Temporary PAS 8 Hierarchy Exemption

    • Entity may develop its own accounting policy for E&E without applying PAS 8 hierarchy provided information is relevant & reliable.
    • Policy choice → expense immediately or capitalise. Judgement based on association with finding specific resources.

  • Initial Measurement

    • Recorded at cost (cash paid + PV of de-commissioning/restoration obligations).
    • Typical cost components: acquisition of rights, geo-studies, exploratory drilling, trenching, sampling, feasibility & viability studies.
    • Development costs excluded (handled by other Standards).

  • Subsequent Measurement

    • Choice of cost model or revaluation model.

  • Changes in Policy

    • Allowed if new policy yields more relevant & no less reliable OR more reliable & no less relevant info (PAS 8 criteria).

  • Classification

    • Separate class; further split into tangible (e.g., drilling rigs) & intangible (e.g., drilling rights).

  • Reclassification

    • When feasibility & viability become demonstrable → test for impairment then reclassify per relevant Standard.

  • Impairment (PAS 36 basis with modified CGU allocation)

    • Indicators include expiry of rights, unexpectedly high future costs, cessation of activity due to no discovery, and doubt over recoverability.

  • Summary Mnemonic

    • “LR → E&E → F/V → DEV” (Legal Rights → Exploration & Evaluation → Feasibility/Viability → Development).

PAS 8 – Accounting Policies, Changes in Accounting Estimates & Errors

  • Hierarchy for Selecting Policies

    1. PFRSs (Standards & Interpretations).
    2. Judgement considering:
    • Other PFRSs dealing with similar issues.
    • Conceptual Framework.
    • (Optionally) other standard-setter pronouncements, literature, industry practice.

  • Accounting Policy Changes

    • Permitted only if (a) required by a PFRS, or (b) results in more reliable & relevant info.
    • Usual driver: change in measurement basis.
    • Accounting order of priority:
    1. Transitional provisions in new PFRS.
    2. Retrospective application (adjust equity & comparatives as if new policy always applied).
    3. Prospective application if retrospective impracticable.
    • Early adoption of new PFRS = not voluntary policy change.

  • Accounting Estimates

    • Monetary amounts subject to measurement uncertainty (e.g., depreciation, impairment, provisions, NRV of inventories, FV measurements).
    • Revision = prospective: P/L of period of change or that plus future periods affected.
    • If distinction between policy vs estimate unclear → treat as estimate.

  • Errors

    • Mis-applications, math mistakes, fraud, omissions.
    • Current-period errors → correct by journal entry in current period.
    • Prior-period errors → retrospective restatement (adjust comparatives or opening balances of earliest period presented).
    • Restatement possible only as far back as practicable; otherwise correct prospectively.

  • Quick Comparison Table

    • Change in Policy → usually measurement basis → retrospective (or per transition/ impracticable).
    • Change in Estimate → expected inflow/outflow pattern → prospective.
    • Error → mis-application/fraud → retrospective restatement (or prospectively if impracticable).

PAS 16 – Property, Plant & Equipment (PPE)

  • Scope Exclusions

    • Assets held for sale (PFRS 5), biological assets except bearer plants (PAS 41), exploration & evaluation assets (PFRS 6), mineral rights/reserves.

  • Definition & Characteristics

    • Tangible, used in business, expected to be used > 1 period.

  • Recognition Criteria

    • Probable future economic benefits and reliable cost measurement.
    • Spare parts & standby equipment: PPE if > 1 period; otherwise inventory.

  • Initial Measurement – Cost Components

    1. Purchase price minus trade discounts + non-refundable taxes.
    2. Directly attributable costs to bring asset to location & condition (employee benefits, site prep, freight, installation, testing gross of sample proceeds, professional fees).
    3. PV of dismantlement/removal/site restoration obligation.
    • Exclusions (expensed): opening a new facility, advertising, staff training, admin/overheads.
    • Incidental operations income/expense prior to ready-for-use → recognise in P/L.
    • Self-constructed assets follow same cost principles; exclude internal profit & abnormal waste.
    • Bearer plants treated like self-constructed PPE until mature.
    • Deferred payment: recognise at cash-price equivalent; difference = interest.
    • Exchange of assets cost hierarchy: FV asset given → FV asset received → carrying amount; lack of commercial substance → carry-over value.

  • Subsequent Expenditures

    • Capitalise only if recognition criteria met; routine repairs & maintenance expensed.
    • Replacement parts & major inspections → capitalise cost of new component/inspection, derecognise carrying amount of old.

  • Subsequent Measurement Models

    1. Cost model: Carrying amount=Cost−Accum. Depreciation−Accum. Impairment\text{Carrying amount}=\text{Cost}-\text{Accum. Depreciation}-\text{Accum. Impairment}
    2. Revaluation model: Fair value−Subsequent Accum. Dep’n/Impairment\text{Fair value}-\text{Subsequent Accum. Dep’n/Impairment} applied by class; revalue regularly.

  • Depreciation Fundamentals

    • Depreciable amount = Cost or FV−Residual value\text{Cost or FV} - \text{Residual value}
    • Methods must reflect consumption pattern (straight-line, diminishing balance, units of production). Revenue-based methods prohibited.
    • Review useful life, residual value, method annually (changes = estimate).
    • Begin when available for use; cease on derecognition, classification as held-for-sale, or when CA = RV. Does not cease when idle.
    • Each significant component depreciated separately.

  • Revaluation Accounting

    • Increase → OCI → “Revaluation surplus” (equity); however, to extent it reverses prior impairment → P/L.
    • Decrease → first offset against any surplus for that asset (OCI); excess → P/L.
    • Post-revaluation depreciation based on revalued amount; transfer incremental depreciation from surplus to retained earnings (directly, not via P/L).

  • Derecognition

    • On disposal or when no future benefits expected.
    • Gain/Loss = Net disposal proceeds−Carrying amount\text{Net disposal proceeds} - \text{Carrying amount}, recognise in P/L.
    • Transfer any remaining revaluation surplus for that asset to retained earnings.

  • Key Formulas Recap

    • Straight-line Dep’n: Cost  –  ResidualUseful life\dfrac{\text{Cost}\;–\;\text{Residual}}{\text{Useful life}}
    • Revaluation surplus: FV−Carrying amount (before reval.)\text{FV} - \text{Carrying amount (before reval.)}

PAS 20 – Government Grants & Assistance

  • Out-of-Scope: hyperinflation grants, income-tax benefits, gov’t ownership stakes, PAS 41 agriculture grants.

  • Definitions

    • Government grant = resource transfer in return for compliance with conditions.
    • Distinguish from other assistance lacking measurable value (e.g., advice, guarantees) → disclose only if significant.

  • Recognition Criteria

    1. Reasonable assurance that attached conditions will be met.
    2. Reasonable assurance that grant will be received.
    • Mere receipt ≠ satisfaction of conditions.

  • Classification by Condition

    • Grants related to assets → require acquisition/construct of LT assets.
    • Grants related to income → all other grants.

  • Measurement

    • Monetary grant: cash received/fair value receivable.
    • Non-monetary grant (e.g., land): fair value; alternatively nominal amount.
    • Loans:
    • Forgivable loan: recognise at carrying amount when forgiveness virtually certain.
    • Below-market loan: benefit = Initial carrying amount per PFRS 9−Proceeds\text{Initial carrying amount per PFRS 9} - \text{Proceeds}.

  • Accounting Approach = Income Approach (Matching)

    • Recognise grant income systematically over periods matching related expenses.
    • Depreciable asset → over depreciation periods.
    • Non-depreciable asset with construction condition → over depreciation of related constructed asset.
    • Compensation for past costs/losses → recognise immediately when receivable.
    • Cash-basis recognition prohibited unless no other rational basis.

  • Presentation Options

    • Grants related to assets
    • Gross: show grant as deferred income (liability); amortise to P/L.
    • Net: deduct grant from asset’s carrying amount; depreciation based on net amount.
    • Grants related to income
    • Gross: present as “Other income”.
    • Net: deduct from related expense line.
    • Statement of Cash Flows: show cash inflow & related asset purchase as separate, even if net presentation in SFP.

  • Repayment

    • Treat as change in estimate (prospective).
    • Related to income → offset against deferred income; excess → P/L.
    • Related to asset → increase CA or reduce deferred income; recognise catch-up depreciation immediately; test for impairment.

  • Disclosures

    • Accounting policy & presentation method.
    • Nature, extent, unfulfilled conditions/contingencies of grants & assistance.

PAS 23 – Borrowing Costs

  • Core Principle

    • Borrowing costs directly attributable to acquisition/ construction/ production of a qualifying asset are capitalised. All others expensed.

  • Definitions

    • Borrowing costs: interest computed via EIR, certain FX differences on foreign borrowings regarded as interest.
    • Qualifying asset = asset that necessarily takes substantial period to get ready for intended use/sale (e.g., long-term construction PPE, self-manufactured inventories aged long, internally developed intangibles). Excludes financial assets, ready-for-use acquisitions, routinely produced inventories, FV-measured assets.

  • Capitalisation Period

    1. Expenditures for asset incurred.
    2. Borrowing costs incurred.
    3. Activities necessary to prepare asset are in progress.
    • Suspend during extended breaks with no active development (except unavoidable delays).
    • Cease when asset substantially ready; if built in parts, cease per completed part.

  • Specific Borrowings

    • Capitalisable BC = Actual interest−Investment income on unused funds\text{Actual interest} - \text{Investment income on unused funds}.

  • General Borrowings

    1. Compute capitalisation rate = Total interest on general borrowingsTotal general borrowings\dfrac{\text{Total interest on general borrowings}}{\text{Total general borrowings}}.
    2. Determine average expenditure on qualifying asset (amount weighted by time outstanding).
    3. Eligible BC = Average expenditure×Capitalisation rate\text{Average expenditure} \times \text{Capitalisation rate}.
    4. Capitalise lower of eligible BC and actual interest incurred.

  • Disclosures

    • Amount of BC capitalised during period.
    • Capitalisation rate used.

Cross-Standard Connections & Practical Insights

  • PAS 8’s change in estimate guidance crucial for:
    • Revising depreciation parameters under PAS 16.
    • Re-setting capitalisation periods or rates under PAS 23.
  • PFRS 6’s temporary PAS 8 hierarchy exemption shows rare instance where entity may bypass normal policy selection steps.
  • Grants (PAS 20) linked to PPE (PAS 16): presentation choice (defer income vs offset asset) affects depreciation pattern and, hence, expense recognition – highlight matching principle interplay.
  • Borrowing cost capitalisation (PAS 23) interacts with PPE self-construction cost (PAS 16) and with grants: a grant that subsidises interest might reduce capitalisable BC.
  • Ethical angle: Discretion over policy choice (capitalise vs expense, cost vs revaluation, grant presentation) demands transparent disclosure to avoid earnings management.
  • Real-world relevance: Mining firms, infrastructure developers, and tech start-ups routinely apply the cluster of standards above—timely recognition and measurement affect investment appraisals, tax positions, dividend capacity, and stakeholder perception.

Quick Formula Sheet

  • Straight-line depreciation: (Cost−Residual)/Useful life(\text{Cost} - \text{Residual}) / \text{Useful life}
  • Revaluation surplus: FV−Carrying amount (pre-reval.)\text{FV} - \text{Carrying amount (pre-reval.)}
  • Gain/Loss on disposal: Net proceeds−Carrying amount\text{Net proceeds} - \text{Carrying amount}
  • Capitalisable interest – specific: Interest−Investment income\text{Interest} - \text{Investment income}
  • Capitalisable interest – general: min⁡(Avg. exp.×Cap. rate),Actual interest\min{(\text{Avg. exp.} \times \text{Cap. rate}), \text{Actual interest}}