Industry-Specific Reporting

IFRS 6 is a TEMPORARY measure addressing the accounting for expenditures on the exploration and evaluation of mineral resources. It provides a framework while the IASB develops a more comprehensive standard for extractive industries.

Scope of IFRS 6:

• Applies to E&E EXPENDITURES INCURRED by an entity
• "Exploration and evaluation" = search for mineral resources after entity has obtained legal rights to explore in a specific area, but BEFORE technical feasibility and commercial viability are demonstrable
• Includes minerals, oil, natural gas, etc.

NOT covered by IFRS 6:

• Pre-licence costs (BEFORE legal rights obtained): generally expensed under IAS 38 (research)
• POST-evaluation development costs: under IAS 38 (development) or IAS 16 (PPE)
• Production phase: IAS 2 (inventory), IAS 16 (PPE)

Recognition and measurement:

• Entity ELECTS its accounting policy for E&E expenditure (capitalise or expense), provided result is RELEVANT and RELIABLE
• Common: capitalise costs that have a high probability of generating future benefits; expense others
• Once policy chosen: apply consistently

Examples of E&E expenditure:

• Acquisition of rights to explore (licence costs)
• Topographical, geological, geochemical, and geophysical studies
• Exploratory drilling
• Trenching, sampling
• Activities related to evaluating technical feasibility and commercial viability

Initial measurement:

• At COST
• Includes directly attributable costs

Subsequent measurement:

• Cost model: cost less accumulated impairment (typical)
• Revaluation model permitted but rarely used (no active market for E&E assets)

Classification of E&E assets:

• Tangible (e.g., vehicles, drilling rigs used) — separate class
• Intangible (e.g., licences, drilling rights) — separate class

Impairment of E&E assets:

Test for impairment when FACTS AND CIRCUMSTANCES suggest carrying amount may not be recoverable. Indicators (rebuttable):

• Period of right to explore has expired or will expire soon (no plans to renew)
• Substantive expenditure neither budgeted nor planned
• E&E activities have not led to discovery of commercially viable resources, AND entity has decided to discontinue
• Carrying amount unlikely to be recovered from successful development or sale

If impairment indicators present: apply IAS 36 to test recoverability

• Recoverable amount = higher of FV less costs to sell, and value in use
• If carrying amount > recoverable amount: impair to recoverable amount
• Impairment loss to P&L
• Reversals possible if recoverable amount increases (within IAS 36 rules)

RECLASSIFICATION on demonstration of technical/commercial feasibility:

• When technical feasibility AND commercial viability are demonstrable: NO LONGER E&E
• Reclassify to:
  • Property, Plant and Equipment (IAS 16) for tangible assets, OR
  • Intangible Assets (IAS 38) for intangible assets
• BEFORE reclassification: test for impairment under IAS 36 (mandatory, even without other indicators)
• After reclassification: standard IAS 16 / IAS 38 treatment (depreciation, amortisation)

Disclosure requirements:

• Entity's accounting policies for E&E expenditure
• Amounts of assets, liabilities, income, expense, operating and investing cash flows from E&E
• Information on impairment

IAS 41 applies to agricultural activity — management of biological transformation of biological assets to produce agricultural produce or generate additional biological assets.

Key definitions:

• Biological asset: a LIVING animal or plant (e.g., cows, sheep, fruit trees, crops in the field, fish in fish farms)
• Agricultural produce: the harvested product of biological assets (e.g., milk from cows, apples from trees, cotton from cotton plants)
• Bearer plant: a living plant that produces or bears agricultural produce, is expected to bear produce for more than one period, and has a remote likelihood of being sold as agricultural produce (excluding incidental scrap sales). Examples: apple trees, vine plants, oil palms, rubber trees.
• Biological transformation: processes of growth, degeneration, production, and procreation that cause changes in biological assets

BEARER PLANTS — important exception (IAS 16):

• BEARER PLANTS are accounted for under IAS 16 (PPE) — NOT IAS 41
• Effective from 2016 amendment
• Reasoning: bearer plants are like PPE — used to produce, not consumed/sold themselves
• BUT: produce growing on bearer plants is a BIOLOGICAL ASSET under IAS 41
• Example: oil palm tree = IAS 16 PPE; oil palm fruits growing on the tree = IAS 41 biological asset

IAS 41 measurement:

Biological assets (other than bearer plants):

• Initial AND subsequent measurement at FAIR VALUE LESS COSTS TO SELL
• Costs to sell: incremental costs directly attributable to disposal (excludes finance, income tax)
• Gains and losses on initial recognition AND from subsequent FV changes: in P&L
• Exception: where FV cannot be measured reliably on initial recognition → use COST MODEL until FV becomes reliably measurable

Agricultural produce (at point of harvest):

• Initial recognition at FAIR VALUE LESS COSTS TO SELL at point of harvest
• This becomes the deemed cost when transferred to inventory (IAS 2)
• Subsequent: under IAS 2 (lower of cost and NRV)

Worked example — biological asset:

Dairy farm has 100 cows. At 1 January 2025: FV less costs to sell £150,000 (£1,500/cow). At 31 December 2025: FV less costs to sell £180,000 (£1,800/cow) — herd grew. During year: 50,000 litres of milk produced, FV less costs to sell at point of milking £40,000.

Accounting:

• Biological asset (cows):
  • Year-end SoFP: £180,000
  • P&L gain: £180,000 − £150,000 = £30,000 (FV change to P&L)
• Agricultural produce (milk):
  • Recognised at point of harvest (milking): £40,000
  • P&L gain: £40,000 (revenue from agricultural produce at FV)
  • Once milk transferred to inventory: at £40,000 deemed cost
  • If sold: revenue = sale price; cost of sales = £40,000
  • If unsold at year-end: at lower of cost (£40,000) and NRV under IAS 2

Why fair value? IASB rationale:

• Biological assets undergo transformation — historical cost less informative
• FV reflects the value created by biological growth
• Better reflects performance for stakeholders
• Applied broadly in agriculture industry

Practical considerations:

• FV measurement may be challenging for some assets (e.g., growing crops mid-cycle)
• Quoted market prices for similar assets useful where available
• For long-cycle biological assets (forest plantations): DCF often used
• Volatility in P&L from FV changes

Government grants:

• Unconditional grants on biological assets at FV less costs to sell: recognise in P&L when receivable
• Conditional grants: recognise in P&L when conditions met
• For other biological assets at cost less impairment (no reliable FV): apply IAS 20

IAS 20 deals with the accounting for and disclosure of government grants and government assistance.

Definitions:

• Government grant: assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to operating activities
• Government assistance: action by government designed to provide an economic benefit specific to a qualifying entity (e.g., free advice, free guarantees not measured at FV, public procurement preferences)

RECOGNITION CRITERIA (both must be met):

1. The entity will COMPLY with the conditions attached to the grant
2. The grant WILL BE RECEIVED

Two approaches to grant accounting:

Worked example — grant related to assets:

Entity buys machine for £100,000 on 1 January 2024. Useful life 10 years; straight-line depreciation. Government grant of £20,000 received as subsidy for green technology.

Method (a) — Deduct from asset cost:

• Asset carrying amount: £100,000 − £20,000 = £80,000
• Annual depreciation: £80,000 / 10 = £8,000
• P&L impact: £8,000 depreciation each year

Method (b) — Deferred income:

• Asset at full cost: £100,000
• Deferred income (liability): £20,000
• Annual depreciation: £100,000 / 10 = £10,000
• Annual grant amortised: £20,000 / 10 = £2,000 (release to P&L as income)
• Net P&L impact each year: £10,000 − £2,000 = £8,000

Both methods produce same NET P&L effect — different presentation.

IAS 20 in complex scenarios:

1. Grants in form of NON-MONETARY ASSETS:

• E.g., government provides land or equipment for a nominal sum or free
• Recognise asset and grant at FAIR VALUE
• Apply normal grant accounting going forward

2. FORGIVABLE LOANS:

• Loan that lender undertakes to waive repayment under specific conditions
• Treat as government grant when reasonable assurance that conditions will be met
• Until that point: ordinary loan
• When forgiven: recognise grant income

3. Below-market rate loans:

• Loan from government at interest rate BELOW market
• Initial measurement: PV at MARKET interest rate
• Difference between proceeds received and PV = government grant
• Apply IAS 20 to the grant element
• Loan accounted for under IFRS 9 going forward (using market rate as effective rate)

Worked example — below-market rate loan:

Entity receives £100,000 loan from government at 2% interest. Term: 5 years. Market rate for similar loans: 6%.

• PV of loan at 6% (annual interest £2,000, principal £100,000 at end of year 5): approximately £83,150
• Grant element: £100,000 − £83,150 = £16,850 (recognised as deferred income or matched to related expenses)
• Loan recorded at £83,150; subsequently amortised to £100,000 at maturity using EIR 6%
• Each period: interest expense at 6% effective rate (more than 2% paid)

4. Repayable grants:

• Grant that becomes repayable: treat as change in accounting estimate
• Apply prospectively
• Repayment of grant related to income: charged against any unamortised deferred income; excess to P&L
• Repayment of grant related to assets: increase asset carrying amount (or reduce deferred income); cumulative additional depreciation that would have been recognised → charged immediately to P&L

5. Disclosure of government assistance:

• Even if not "grant" (e.g., free guarantees, advice): disclose nature, extent, duration of assistance
• Helps users assess scope of government support

Comparison with IFRS standards:

• IFRS for SMEs: similar approach to IAS 20
• FRS 102: simpler — performance model (recognise grant when performance conditions met) or accruals model

IFRIC 12 addresses the operator's accounting for SERVICE CONCESSION ARRANGEMENTS — public-private partnerships (PPPs) where a private operator provides public services using infrastructure controlled by the public-sector grantor.

Common examples:

• Toll roads (operator builds/maintains; charges users)
• Hospitals (operator builds; provides facilities; charges public sector)
• Schools, prisons, water systems
• Airports (in some structures)

Conditions for IFRIC 12 to apply:

1. Grantor CONTROLS or REGULATES what services the operator must provide and to whom
2. Grantor controls — through ownership, beneficial entitlement, or otherwise — any SIGNIFICANT RESIDUAL INTEREST in the infrastructure at the end of the arrangement

If both met: IFRIC 12 applies. The infrastructure is NOT recognised as the operator's PPE.

Two accounting models for the operator:

Model 1: FINANCIAL ASSET MODEL

• Apply when operator has UNCONDITIONAL CONTRACTUAL RIGHT to receive cash from grantor (or another party at grantor's direction) for the services
• Operator recognises a FINANCIAL ASSET (typically a receivable)
• Asset measured at FV initially; subsequently at amortised cost (IFRS 9)
• Receipts split between: principal repayment, interest income, services revenue

Example:

Operator builds hospital and operates for 25 years. Government pays operator £X per quarter regardless of usage. Operator has unconditional right to receive cash → FINANCIAL ASSET MODEL.

Model 2: INTANGIBLE ASSET MODEL

• Apply when operator has the RIGHT (LICENCE) to charge USERS of the public service
• No unconditional right to cash from grantor — depends on usage
• Operator recognises an INTANGIBLE ASSET (right to charge users)
• Initial measurement: FV (typically construction cost + margin under IFRS 15)
• Subsequent: amortise over useful life (typically concession period)
• User payments: revenue at point of receipt

Example:

Operator builds toll road and operates for 30 years. Right to collect tolls from users. Revenue depends on traffic levels → INTANGIBLE ASSET MODEL.

Mixed (bifurcated) model:

• Some arrangements have BOTH features:
  • Guaranteed minimum payment from grantor (financial asset element)
  • Plus right to charge users above the guaranteed level (intangible asset element)
• Split the consideration accordingly
• Apply both models pro rata

Construction phase revenue:

• Operator typically constructs the infrastructure during initial period
• Revenue and profit from CONSTRUCTION recognised under IFRS 15
• Performance obligation = construction service to grantor
• Cost of construction: recognised as cost of revenue
• Margin = construction profit

Operations phase:

• Revenue from providing services (operations and maintenance)
• Under FA model: services revenue + interest income from FA
• Under intangible asset model: revenue from users; amortisation of intangible

Worked example — service concession:

Operator builds toll road for £500m construction cost. Concession period 25 years. Right to charge tolls + grantor guarantees minimum annual payment £30m.

Hybrid arrangement:

• Estimated PV of guaranteed minimum payments: £400m → FA model
• Estimated PV of toll revenue above guaranteed minimum: £150m → Intangible asset model
• Total: £550m (construction value + margin)

Construction phase:

• Construction cost £500m
• Revenue from construction: £550m (over time during construction; allocated to FA £400m and intangible £150m)
• Construction profit: £50m

Operations phase (year 1+):

• FA: amortise £400m using effective interest method against guaranteed payments
• Intangible asset £150m: amortise over 25 years (£6m/year)
• Toll revenue: as received above guaranteed minimum portion

Disclosures:

• Significant terms of arrangement
• Nature and extent of operator's rights and obligations
• Changes in arrangement
• Classification (FA model vs intangible model vs both)

IFRS 2 Share-Based Payment covers transactions where the entity receives goods or services in exchange for:

• Its own EQUITY INSTRUMENTS (equity-settled SBP), OR
• Cash whose AMOUNT IS BASED ON the entity's share price (cash-settled SBP), OR
• Either of these (with choice for entity or supplier)

Common SBP transactions:

• Share options to employees (most common)
• Free shares / restricted stock
• Share appreciation rights (SARs)
• Employee share purchase plans
• SBP for goods/services from non-employees

EQUITY-SETTLED SBP:

Recognition principle:

• Recognise EXPENSE over the VESTING PERIOD (the period during which conditions must be satisfied)
• Credit to EQUITY (typically a separate "other equity" reserve)
• Total expense fixed at GRANT-DATE FAIR VALUE — never remeasured

Measurement:

• Use FV at GRANT DATE
• For employee transactions: based on FV of equity instruments granted (more reliably measurable than services received)
• For non-employee transactions: FV of goods/services received (if reliable); otherwise FV of equity granted

Estimating FV of share options:

• Use OPTION PRICING MODEL (Black-Scholes, binomial, Monte Carlo)
• Inputs: share price, exercise price, expected volatility, expected life, risk-free rate, expected dividends
• Excludes vesting conditions other than market conditions (handled separately)

Vesting conditions:

Key insight on market conditions:

• Market conditions (e.g., "vest if share price reaches £10 by 2027") are reflected in grant-date FV via option pricing model
• If condition not met: NO REVERSAL of expense already recognised (because FV at grant already discounted for the probability)
• Result: expense recognised regardless of whether market condition actually achieved

Worked example — equity-settled options:

1 January 2024: Company grants 1,000 options to each of 10 senior executives. Vesting conditions: remain in service 3 years AND EPS reach £2 by year 3. Grant-date FV per option: £4. EPS target is a non-market performance condition.

Calculation each year:

Journal entries each year:

• Dr Employee benefits expense (P&L)
• Cr Equity (SBP reserve)

If EPS target NOT met by year 3:

• No options vest (failed performance condition)
• REVERSE all previously recognised expense
• Equity (SBP reserve) stays — no transfer to other equity

If MARKET condition (share price target) not met:

• NO reversal — expense stays
• Reflects that the FV already considered probability at grant

Exercise of options:

• On exercise: cash received from exercise price
• Increase share capital (par) and share premium
• SBP reserve: transfer to share premium / retained earnings (no P&L impact)

Lapses (unexercised options expiring):

• SBP reserve transferred within equity (e.g., to retained earnings)
• NO P&L IMPACT

CASH-SETTLED SBP:

• Entity owes a CASH AMOUNT based on share price (e.g., Share Appreciation Rights — SARs)
• Recognise expense over vesting period (similar to equity-settled)
• BUT: a LIABILITY is recognised (not equity)
• Liability REMEASURED at FV at each reporting date and on settlement
• Changes in FV → P&L

Worked example — cash-settled SARs:

1 January 2024: Grant of 1,000 SARs to 10 employees. Vest after 3 years' service. Each SAR pays cash equal to (share price at exercise − £5). At grant: FV per SAR £4. At year-end 2024: FV £6. At year-end 2025: FV £8. At vesting end 2026: FV £10. All employees stayed.

Key differences from equity-settled:

• Liability remeasured to FV (volatility through P&L)
• Final expense = exercise-date intrinsic value (rather than grant-date FV)
• Use of CURRENT FV at each reporting date (not grant-date)

Settlement:

• Cash paid; liability extinguished
• Any difference between final liability and cash paid: P&L

SBP with CASH ALTERNATIVE (employee chooses):

• Compound instrument: split between equity and liability components at grant
• Equity component: residual (FV of SBP minus liability component FV)
• Liability component: FV of cash alternative
• Account for each component separately

SBP with CASH ALTERNATIVE (entity chooses):

• If entity has obligation (constructive or legal) to settle in cash: treat as CASH-SETTLED
• Otherwise: treat as EQUITY-SETTLED

MODIFICATIONS:

Modification = change in terms of original SBP (e.g., reducing exercise price, extending term, changing performance condition).

Key principle: minimum expense = original grant-date FV.

• If modification is BENEFICIAL to employees (FV INCREASES): recognise INCREMENTAL FV over remaining vesting period (in addition to original FV)
• If modification is DETRIMENTAL: ignore — continue to recognise original FV (don't reduce expense already recognised)
• Effect: cannot reduce SBP expense below original grant-date FV

Worked example — modification (repricing options):

Original grant: 1,000 options at £10 exercise price; FV £4 each. Year 2: share price has fallen; original options now FV £1 each. Company REPRICES to £6 exercise price; new FV £3 each. Vesting period 3 years from original grant.

• Original grant FV: £4,000 — recognised over 3 years
• Modification at end Year 2: incremental FV = £3 (post) − £1 (immediately before) = £2 per option = £2,000
• Recognise incremental FV £2,000 over remaining vesting (1 year)
• Total expense = £4,000 (original spread over 3 years) + £2,000 (incremental in Year 3)

CANCELLATIONS:

Cancellation = entity (or counterparty) terminates the SBP arrangement.

• If cancelled (other than failure to meet vesting condition): treat as ACCELERATION OF VESTING
• Recognise IMMEDIATELY the amount that would have been recognised over the remaining vesting period
• Any payment made on cancellation: deducted from equity (up to FV at cancellation)
• Any excess payment: as expense

Failure to meet vesting condition:

• Service condition fails: reverse expense recognised for that employee
• Non-market performance fails: reverse all expense
• Market condition fails: NO REVERSAL (already in grant-date FV)

Replacement of SBP arrangement:

• Cancellation of original + grant of new: typically treated as MODIFICATION (incremental FV approach)
• Provided new grant identified as replacement at the cancellation date

Disclosures:

• Description of each type of SBP arrangement
• Number and weighted average exercise prices for options outstanding/granted/exercised/lapsed
• FV calculation methodology
• Total SBP expense for the period
• Carrying amount of liabilities for cash-settled SBP