Paragraph 13 of IFRS 6 allows an entity to change its accounting policies related to E&E costs. In this regard, the entities need to consider some matters if they want to change their accounting policies applicable to E&E costs.
An entity to change its accounting policies related to E&E costs on the condition that 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’. In assessing the relevance and reliability of the change, entities are directed to the criteria in IAS 8, although they are not expected to fully comply with those criteria.
An example of an acceptable change in accounting policy following this guidance would be a change from the full cost method to the successful efforts method.
How the successful efforts method of accounting for E&E expenditure compares to the full cost method:
Under the successful efforts method of accounting E & E costs are not capitalized unless they are expected to lead to finding, acquiring and developing mineral reserves. If the expectation is not borne out, the costs are written off whereas under the full cost method, E & E costs are capitalized using a larger cost center than an area of interest such as a country or even a group of countries.
Possible challenges in applying the revaluation models under IAS 16 or IAS 38 to E&E assets.
The revaluation model in IAS 16 requires that the fair value be reliably measurable. It is normally extremely difficult to determine the fair value of E&E assets due to the early stage of such projects and the significant degree of estimation involved in determining the fair value of an asset that only has future value to the extent a commercial quantity of resources exists and can be efficiently extracted.
The revaluation model in IAS 38 requires the existence of an active market, which does not exist for E&E assets as they are not homogeneous assets.
