10 / 11 December 2009

Working draft of the IASB Discussion PaperProposals and implications for companies and disclosures

Michael D Lynch-BellPartner, Transaction Advisory ServicesErnst & Young LLP+44 20 7951 9335mlynchbell@uk.ey.com

mlynchbell@uk.ey.com

15 December 2009 Working Draft of IASB Discussion PaperPage 2

Agenda and introduction

► Status of the working draft► Reasons for undertaking the project► Scope and approach► Definitions of reserves and resources► Asset recognition► Asset measurement► Disclosure including Publish What You Pay proposals

► Implications for companies and disclosures?

15 December 2009 Working Draft of IASB Discussion PaperPage 3

Status of the working draft

► Publication of the Extractive Activities discussion paper deferred until early 2010► Working draft made available for interested observers, but no

comments are requested► Working draft presents the project team’s findings and

recommendations

► IASB has not developed preliminary views on the recommendations

► Discussion Paper and Request for Views to be published in 1Q’10

15 December 2009 Working Draft of IASB Discussion PaperPage 4

Reasons for undertaking the project

► Minerals and oil & gas industries are an important part of the international capital markets

► IFRS 6 made limited improvements to accounting practices (e.g. around impairment testing and disclosure)

► Significant divergence in financial reporting for extractive activities under IFRS, including:► the extent to which the costs of finding, acquiring and developing reserves

and resources should be capitalised► the methods of depreciating or amortising capitalised costs► the degree to which quantities and values of reserves and resources,

rather than costs, should affect accounting► the definition and measurement of reserves and resources

15 December 2009 Working Draft of IASB Discussion PaperPage 5

Scope

► Proposalthe scope of an extractive activities IFRS should include only upstream activities for minerals, oil, and natural gas

► Scope is narrower than that of IFRS 6► The project team decided against a broader scope:

► To keep the project manageable► To avoid complications in the accounting and disclosure model

15 December 2009 Working Draft of IASB Discussion PaperPage 6

Approach

► Proposalthere should be a single accounting and disclosure model that applies to extractive activities in both the minerals and oil & gas industries

► Considerable similarities in the reserve and resource definitions used in the minerals and oil & gas industries

► Common set of financial reporting issues:► definitions of reserves and resources for use in accounting► initial recognition and measurement of extractive assets► subsequent accounting for those assets (e.g. remeasurement, impairment

and depreciation)► disclosure of information (including reserves and resources information)

Scope and approach- implications?

► Scope limited to minerals, oil and natural gas► Exclusion of ‘similar non-regenerative resources’ (IFRS6)

► Scope includes all upstream activities, regardless of phase of project► Amendment of scope of IAS 16 and IAS 38 needed

► Significant areas not currently addressed in detail ► Range of industry issues impacting E&E generally included in scope of IFRS6

► Eg Carried interests, farm-ins/outs, production sharing contracts► Now fall under other standards despite involving E&E?

► Risk sharing arrangements, stripping costs, depreciation, taxation etc► Limited availability of grand-fathering of past practice

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15 December 2009 Working Draft of IASB Discussion PaperPage 8

Definitions of reserves and resources

► Proposal…use of mineral reserve and resource definitions established by the Committee for Mineral Reserves International Reporting Standards and the oil & gas reserve and resource definitions established by the Society of Petroleum Engineers (in conjunction with other industry bodies) in an IFRS for the extractive activities

► CRIRSCO Template and the PRMS are widely accepted and comprehensive

► Option of using the United Nations Framework Classification for Fossil Energy and Mineral Resources (UNFC) to be reconsidered

Reserves and Resources- implications?

► Reliance on CRIRSCO Template and PRMS► Limits changes to definitions for companies already complying with these

standards

► Inconsistencies with SEC (and other) requirements► Dual compliance?

► Endorsement of CRIRSCO/ PRMS?

► Audited?

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15 December 2009 Working Draft of IASB Discussion PaperPage 10

Asset recognition: Definition

► Proposal…legal rights, such as exploration rights or extraction rights, should form the basis of the minerals or oil & gas asset. The asset is recognised when the legal rights are acquired. Information obtained from subsequent exploration and evaluation activities and development works undertaken to access the minerals or oil & gas deposit would both be treated as enhancements of the legal rights asset

► Asset is right to explore, develop, extract minerals or oil & gas► Over time this asset is enhanced by

► information from exploration & evaluation activities► development to access the mineral or oil & gas► additional rights and approvals (including extraction rights)

Asset recognition- implications?

► Current range in asset recognition practice► Exploration expenditure and sub-elements (eg G&G)

► Potential increase in costs capitalised including those relating to ‘unsuccessful efforts’

► Accounting model not based on phases:► Difficult to provide specific guidance on recognition, measurement and

disclosure for specific phases in a project► Disclosure of information about particular phases of project (e.g.

exploration/ development costs)► Impairment triggers for different phases of a project.

15 December 2009 Working Draft of IASB Discussion PaperPage 11

15 December 2009 Working Draft of IASB Discussion PaperPage 12

Asset recognition: Unit of account

► Proposal…the geographical boundary of the unit of account would initially be defined according to the exploration rights held. As exploration, evaluation and development activities take place, the unit of account will progressively contract until it becomes no greater than a single area, or group of contiguous areas, for which the legal rights are held and which is managed separately and would be expected to generate largely independent cash flows.

► Entities may decide to account for their assets using a smaller unit of account

Unit of Account- implications?

► A key consideration in the accounting for extractive industries► Range of current practice- full cost- area of influence- legal rights- smaller

► Practical considerations:► How to allocate the unit of account to smaller units in practice?► Trigger points for de-recognition of a unit of account?► Units of account for joint infrastructure?► Treatment of purchased ‘potential’?

► Significant impact for companies currently using larger units ofaccount

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15 December 2009 Working Draft of IASB Discussion PaperPage 14

Asset measurement: Historical cost

► Proposal[The working draft] identifies current value (such as fair value) and historical cost as potential measurement bases for minerals and oil & gas assets. The research found that, in general, users believe that measuring these assets at either historical cost or current value would provide only limited relevant information. The project team’s view is that these assets should be measured at historical cost and that, in addition, detailed disclosure about the entity’s minerals or oil & gas assets should be provided to enhance the relevance of the financial statements

► Measurement at historical costs because it does the ‘least harm’► Disclosures to enhance the relevance of the financial statements► Practical application issues regarding depreciation to be considered

Asset measurement- implications?

► Historic cost as doing ‘least harm’► Limits impact but useful for decision making?► Alternatives would likely have a profound impact on cost of compliance and

output of financial reporting

► Depreciation► Range of current practice

► Reserve base?► Future capex?

► Need for symmetry between reserve base used and the cost pool being depreciated

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15 December 2009 Working Draft of IASB Discussion PaperPage 16

Asset measurement: Impairment

► Proposal…exploration assets should not be tested for impairment in accordance with IAS 36 Impairment of Assets. Instead, these assets should be tested for impairment whenever evidence is available to suggest that full recovery of the carrying amount of an exploration asset is unlikely. Under this view, the asset would not need to be tested for impairment if, at the reporting date, the evidence needed to make that assessment is not yet available or is inconclusive. The project team also proposes that an entity should disclose why it considers that the carrying amounts of its exploration assets are not impaired

► Using full IAS 36 not considered feasible► Impairment only when evidence is available that full recovery of the

carrying amount of an exploration asset is unlikely► Otherwise apply IAS 36 requirements

Impairment- implications?

► Impairment testing where there is evidence available that full recovery of an exploration asset is unlikely► Continued relief from IAS 36 (as there is under IFRS6) ► Phases are not defined so potential for assets currently tested under IAS 36

to benefit from scope out?► Impairment test currently required at end of E&E phase under IFRS 6► Judgment in assessing ‘evidence available’► No further grouping of cash generating units permitted under IFRS6

► Possible that higher costs carried may increase frequency of impairment testing being triggered

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15 December 2009 Working Draft of IASB Discussion PaperPage 18

Disclosure: Purpose

► Proposal…the disclosure objectives for extractive activities are to enable users of financial reports to evaluate:(a) the value attributable to an entity’s minerals or oil & gas assets(b) the contribution of those assets to current period financial performance(c) the nature and extent of risks and uncertainties associated with those

assets

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Disclosure: Detailed proposals

► Proposal…the types of information to be disclosed in the notes to the financial statements should include:(a) quantities of proved reserves and proved plus probable reserves, with the

disclosure of reserve quantities presented separately by commodity and by material geographical areas

(b) the main assumptions used in estimating reserves quantities, and a sensitivity analysis

(c) a reconciliation of changes in the estimate of reserves quantities from year to year

(d) a current value measurement that corresponds to reserves quantities disclosed with a reconciliation of changes in the current value measurement from year to year

(e) separate identification of the exploration, development and operating cash flows for the current period and as a time series over a defined period (such as five years)

(f) separate identification of production revenues by commodity

Working Draft of IASB Discussion PaperPage 20

Disclosure requirements (O&G)

SEC/ US GAAP

Canada UK SORP IFRS (Discussion

Paper)

Reserves volumes disclosure

Proved, voluntary disclosure of probable, possible

By product and geographical area

Proved, probable, (possible)

Proved or proven and probable

Proved and Proved plus probable with voluntary additional disclosures

By product by country or project

Pricing assumptions

12 month average. Option for sensitivity analysis

Constant & forecast price

Management view Forecast prices

Sensitivities

NPV disclosure? 10% disc. rate, pricing consistent with reserves

Reconciliation

10% disc. rate, constant price

5%,10%,15%,20%, forecast price

No Standardised measure of proved and probable

Reconciliation by geographical area

Additional information?

Including:

► PUD disclosures

► Capitalised costs

► Costs incurred

► Results of ops

► Suspended wells

Including:

► Disclosure re new reserves

► Costs incurred

► Properties & wells

► Properties with no attributed costs

Including:

► Capitalised costs

► Pre-production costs incurred

► Results of operations

Including:

► Production revenues

► Exploration, development, production costs

► PWYP

Working Draft of IASB Discussion PaperPage 21

Disclosure requirements (Mining)

SEC(IG -7)

CanadaNI 43-101

IFRS (Discussion Paper)

Reserves volumes disclosure

Proved (Measured), probable (Indicated)

Proved and probable Proved and Proved plus probable with voluntary additional disclosures

By product by country or project

Pricing assumptions

Historical prices – 3 year average.

Key assumptions, parameters, and methods to be disclosed

Forecast prices

Sensitivities

NPV disclosure? No No guidance Standardised measure of proved and probable

Reconciliation by geographical area

Additional information?

Including:

► Details and location of property

►Titles and licences

►Grade and tonnage calculations

►Resources not included

Including:

► Disclosure re resources

► details of exploration properties

►Each category of reserve and resource reported separately

Including:

► Production revenues

► Exploration, development, production costs

► PWYP

Disclosures (including PWYP)- implications?

► Potentially voluminous and costly to prepare► Challenge in explaining complex geological and engineering issues in

a way suitable for inclusion in a set of financial statements► Significant ‘new’ disclosures

► Sensitivity analyses for reserves► Value based disclosures for mining companies

► Commercial sensitivity around level of required disclosure?► Audited disclosures?

► Disclosure of information in an Appendix that is not part of the audited financial statements?

► Identification of exploration, development and production costs without defined phases?

► Potential costs of Publish What You Pay Disclosure proposals

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Practical implications

► Interpretation of a new standard by industry and practice► Revised company accounting policies

► Costs of adoption and compliance► In house versus specialist involvement► Systems implications

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Concluding remarks

► First step towards a new standard for an industry that has not had comprehensive guidance under IFRS► Significant due process ahead of a new standard► Implications will continue to be assessed

► Potential for significant changes in accounting versus current practice► Potentially limited scope to ‘grand-father’ past practice

► Depending on final scope, may continue to be significant interpretation due to nature and complexity of industry

► Potential addition to compliance costs

► Importance of early comment as the project develops

15 December 2009 Working Draft of IASB Discussion PaperPage 24

Thank you

Disclaimer: The views expressed in this presentation are those of the presenter. Information in this presentation is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material.