Factors Affecting the Value-Relevance of Capitalized Exploration and Evaluation Expenditures Under IFRS 6

Abstract

This study examines factors affecting the value-relevance of financial and nonfinancial disclosure in the context of the long contentious International Financial Reporting Standard 6 (IFRS 6). Relative to the capitalization of R&D expenditures, IFRS 6 follows a far less restrictive approach, delaying the requirement for probable future economic benefits in settings of high uncertainty. We compare the value-relevance of this asset with that of nonfinancial information commonly reported by mining firms, namely mineral resource estimates. We report evidence that investors utilize nonfinancial information to assess the value-relevance of financial information, initially focusing on whichever information is timelier. We do not find evidence that investors prefer conservative reporting practices in a setting with high uncertainty; rather we provide evidence that investors interpret the capitalization decision as a signal of project viability. This finding is of particular relevance to the ongoing Intangible Assets project being conducted by the International Accounting Standards Board (IASB). JEL classifications: G12, G14

CEO compensation in early‐stage firms: Rewards for prospectivity and survival

“…Under the Australian Accounting Standard 6 (AASB 6), MEEs are allowed to defer or capitalize their E&E expenditure to match with the revenue to be generated in future periods provided certain criteria are met (Ferguson, Kean, & Pundrich, 2020). 7 The E&E asset account balance is typically increased by ongoing exploration (capitalized E&E additions) and by project acquisitions (capitalized E&E acquisitions).…”

“…The key criterion required by AASB 6 for MEEs to capitalize E&E expenditures is that future developments and sales are anticipated to recoup the expenditures or ongoing exploration effort is demonstrated (Ferguson et al, 2020).…”