Energy & Mining International - Fall 2015 - 15


COLUMNS | EXPLORATION COSTS

Fall 2015

1. REDUCING THE IMPACT OF
MINERAL ASSET IMPAIRMENT
CHARGES
By expensing E&E costs, companies
can report their expenses in the
historical periods when originally
incurred, rather than as one major
impairment charge to earnings during
the period when an impairment may
be identified. This helps improve the
potential distortion of a company's
earnings, resulting in more favourable
shareholder perception on a continuous basis and providing a clearer,
more accurate picture for financial
statement users.

2. JUNIORS NEED TO CONSERVE
CASH NOW MORE THAN EVER
By expensing E&E costs, the consideration of impairment indicators
required under IFRS - such as inactivity on mineral properties or lack of
funding to support exploration budgets
- and impairment tests can be eliminated, decreasing internal administrative costs and external audit fees,
including expensive and onerous asset
valuation analyses.

3. BECOMING MORE
CONSISTENT WITH MANY
JUNIORS' CURRENT CAPITAL
MANAGEMENT STRATEGIES
For many companies whose current capital management plans have
smaller and more focused mineral
project budgets than in the past, a
policy of expensing E&E costs may
better reflect that current plan. If the
plan is to hold tight, reconsider current
projects and keep an eye out for better
opportunities, presenting a significant
mineral asset may appear to contradict
management's strategy, resulting in
shareholder confusion. Further to this,
if only minimal costs are being put into

the project under such a strategy, a
stagnant mineral asset on the statement of financial position will highlight this fact, potentially concerning
some shareholders.

time when a property moves from
E&E stage to development stage, can
result in an IFRS-mandated impairment test and may give pause to
potential investors.

4. FAMILIARIZING THE
STATEMENT OF FINANCIAL
POSITION FOR U.S. INVESTORS

6. REDUCING THE COST OF
PRODUCTION FOR ACCOUNTING
PURPOSES

The United States' movement away
from U.S. GAAP toward IFRS has
slowed to a near halt, creating differences in reporting that may perplex
U.S. investors exploring opportunities
among Canadian companies. More
specifically, U.S. GAAP dictates that
until the economic viability of a project
is established, only costs associated

If historical E&E costs have not been
capitalized after assets have been taken
into production, the company will enjoy a lower apparent cost of production
and thus a higher relative net income
and IRR on the project. With many
companies now reporting their "all-in"
cost of production, which includes
historical E&E costs, this aspect may
not be an advantage for all companies.
However, it is something to consider
when selecting an E&E capitalization
accounting policy.

A policy of capitalizing costs
may exaggerate the perceived
value of the asset, since costs
incurred are simply a reflection
of management's efforts to
collect data on the property,
not all of which is fruitful.
with acquiring the right to explore a
mineral property (acquisition costs)
are capitalized while all other costs are
expensed as incurred.
To help bridge the gap, companies
may opt only to capitalize acquisition
costs to more effectively mirror what
U.S. investors are used to seeing, which
may prove advantageous in their fundraising activities.

5. PROVIDING GREATER
TRANSPARENCY FOR INVESTORS
A policy of capitalizing costs may
exaggerate the perceived value of the
asset, since costs incurred are simply
a reflection of management's efforts to
collect data on the property, not all of
which is fruitful. Holding a large E&E
asset on the balance sheet, during the

+

7. REDUCING POTENTIAL
COMPLEXITIES AROUND
DEFERRED INCOME TAXES
Where a company has capitalized
E&E costs, there's a potential for tax
timing differences. However, when
E&E costs are expensed, the potential for deferred income tax liabilities
in connection with E&E assets is
reduced.
Expensing E&E costs may have
its downsides, of course. Seasoned
investors are used to seeing E&E costs
on the statement of financial position
and may interpret their absence as an
indication of weakness. Transparency
and proactive communication can help
stakeholders better understand the
new approach. EMI
__
BRYNDON KYDD, CPA, CA, is the leader of
BDO Canada's Mining Sector Group. For
more information, he can be reached at
bkydd@bdo.ca.

emi-magazine.com 15


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Table of Contents for the Digital Edition of Energy & Mining International - Fall 2015

Contents
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