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FAQ 4.3.2.2 - Can an entity capitalise research costs incurred to investigate ‘green’ solutions to climate change by applying IFRS 6?
Publication date: 03 Mar 2023
uk In depth INT2023-02
Question
IFRS 6 states that an entity should determine an accounting policy specifying which expenditures are recognised as exploration and evaluation assets. In practice many entities in the extractive industries, for example, mining, oil and gas, have developed a policy of capitalising certain exploration and evaluation assets.
Entity A is an oil and gas entity and has incurred significant costs on researching certain carbon capture projects and investigating the feasibility of using existing technology and facilities/infrastructure owned or developed by themselves and other extractive entities in these projects.
Since the entity is itself engaged in extractive activities would it be able to develop a policy for such carbon capture under IFRS 6?
Answer
Extractive activities include:
- exploration and evaluation - acquisition of legal rights, exploratory drilling and feasibility studies;
- development - development drilling, development of mine sites and construction of facilities;
- production - extraction and on-site processing;
- processing and transport - processing, treatment, storage and transportation; and
- closure - rehabilitating the mine or production site, plugging of wells and removal of infrastructure.
In many cases, green projects may involve ‘storage’ of carbon or hydrogen in existing oil and gas facilities or rehabilitation of existing mines or production sites for such other purposes.
However, the definitions in IFRS 6 confirm that exploration and evaluation expenditures are those incurred in the search for mineral resources (including minerals, oil, natural gas and similar non-regenerative resources), and in the determination of the technical feasibility and commercial viability of extracting the mineral resource, after the entity has obtained the legal rights to explore a specific area.
Although Entity A’s carbon capture project will utilise certain extractives technology or assets, the project does not generally involve the search for or evaluation of mineral resources. This is because it involves the sequestration of a gas. Therefore, the expenditure is outside the scope of IFRS 6 and should be evaluated under IAS 38 ‘Intangible assets’, which has specific guidance on the accounting for research and development costs.
However, in some cases plans may include the use of the stored CO2 for enhanced recovery techniques (refer to the International Energy Agency website for information) of resources. To the extent an entity is incurring such costs as part of the exploration of an oil field, there may be limited instances where it can be argued that these costs relate to the exploration and evaluation of oil and qualify as exploration and evaluation expenditures.
IAS 38 requires activities conducted under the research phase outside the scope of IFRS 6 to be expensed as incurred. Research is defined as “original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding” [IAS 38 para 8].
Other than in the limited cases where such expenditures can be argued to be within the scope of IFRS 6, they would likely meet the definition of research and should therefore be expensed. Entity A could consider whether it is possible to capitalise any costs as development costs as the project progresses by evaluating the costs incurred each period using the criteria for development costs in IAS 38 discussed in EX 4.3.2.1.
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