Aimee:

Afternoon everyone and welcome to the latest episode of the RSM Audit Unlocked series. We're really excited to have you here in the Brisbane office. I'm Aimee, a partner from the Melbourne office 

Jess:

And I'm Jess from the RSM Brisbane office.

Aimee:

We'll be your hosts as we explore the world of audit and assurance. Everything from technical updates to career journeys, hot topics, and even some behind the scenes moments that make audit so interesting.

Whether you are working for an ASX-listed company, fast-paced startup or not-for-profit, we know that financial reporting comes with its complexities and we're here to make it a little bit easier. 

Each episode will unpack what auditors are really looking for when it comes to complex accounting areas alongside practical solutions around those common areas.

So whether you're a CFO, a financial controller, or part of an audit committee, this is a series for you. Let's help you level up your next audit and make financial reporting feel a little bit less daunting and maybe even a little bit more fun. 

We want to say firstly, thanks so much for listening to the other episodes and really love your questions, particularly around the CFO checklist as well as the really interesting topic, going concern episode.

Aimee:

Today this is for the mining and exploration leaders and we'll be talking all things capitalisation of exploration assets. 

Jess:

Yes, so first things first. It's really important that you don't wait until the audit time to have conversations around exploration assets, capitalisations. If you're in management or part of the board, start engaging early with your audit team to walk through things such as your capitalisation policy, especially if you're considering changing that year to year, the exploration strategy and budget, any potential concerns around possibly some impairment of certain assets. And if there's been any new tenements or changes to your rights. Really important to start that chat early so we can see what's the flow on impact into your numbers.

Aimee:

So why are these things important Jess?

Jess:

 I'm glad you asked Aimee because we hate surprises. Not starting this conversation early results in surprises and ASIC is really only increasing the scrutiny in this area. 

Aimee:

This is a good segway into looking at five essential ways that companies can be prepared and have the proper documentation around this area.

The first one, which we see as being fairly important, is around legal rights documentation. So before you capitalise anything, do you have specific tenements in place to be able to drill into those specific areas?

Jess:

 I do have control over those. So, you're looking at things such as exploration permits, joint venture agreements, government approvals to make sure that you have the rights and the control process in place.

So if there's any uncertainty around whether it's clear or not, whether you have those things, it's something to be cautious of and maybe consider before you're capitalising the costs. It's probably really important to make sure you've got a register you're running to track these because most companies will have in excess of what? 30, 50 different tenements at any one point in time. And they all have different start dates, expiry dates, minimum expenditure requirements over certain periods of time. So yeah, just really making sure you have a schedule in place to track this is really important. And it impacts so many areas of the financial statements as well. 

Aimee:

Absolutely. And not having those in place could be one of the main triggers for impairment in that area of interest. Which leads us on to the second one around good documentation, technical and economic feasibility evidence. So auditors want to see substance behind the numbers. What does that look like, Jess? 

Jess: 

Aimee, we're talking geographical or geophysiology reports, drilling results, and of course, feasibility studies. 

Aimee:

So I think, and for me personally, when working with a lot of my mining companies who are part of the ASX or listed on another exchange, looking at the announcements can give you a lot of evidence and understanding of the current evidence and results today. 

Jess:

But I think it's also really important to make sure that management and the board are comfortable with the position that the area of interest is defined, which we'll come back to in a minute. But that information is all collated in a simple memo with the supporting schedule sitting behind it. Because a lot of this information can be spread out from different people around the organisation and can be hard to track and maintain.

Aimee: 

Do you also include external valuers? Does that come into this as well? 

Jess:

Yeah, less so valuers and I think more so relying on experts who assess the results under the JORC standards. You know, that's proving and providing support as to the quantity of resources that a mining company or exploration company might have access to. 

Aimee:

So you mentioned area of interest, which leads into the third area, which is really important. Can you tell us what an area of interest is? 

Jess:

Yeah. So this is actually very specific to the Australian standard, AASB 6.

IFRS doesn't have this terminology in it, it's just under the Australian standards. Under the Australian standards, you define an area of interest, which would be grouping related tenement areas together. So you might have one area of interest, which might be made up of, you know, six or seven different individual tenements. And that's sort of what you're doing all your assessment on at the end of the day. 

Aimee:

So because tenements don't necessarily define the area of interest?

Jess:

That's it. You know, different tenements might have different minerals linked to it. They might be in different geological locations. So we might have some in Queensland, you might have some in the Bass Strait. And really, you're getting an overall understanding as to the feasibility of the area and not just one little pocket. 

Aimee:

And I think that's when I've reviewed an audit file sometimes where we've done one impairment assessment of the area of interest but not actually defined the area of interest. I think that's so important from an evidence point of view and defining what that is. 

Jess:

Yeah, that's so right. And that leads us into impairment indicators as well. So this is a big area of ASIC's focus looking at impairment considerations, making sure that everything is documented well. And that there's support behind those judgments out there. So, AASB 6 again is a little bit different when we've, I suppose in general looking at exploration and evaluation assets is a little different, but the impairment considerations fall under AASB 6. 

Aimee:

Because that's a different standard than 136, isn't it? That’s where you'd usually look at impairment indicators of other assets. 

Jess:

That's correct. Yeah. So it's a little bit more specific and targeted at the mining industry in general. So really important for managers to ensure that they've got a well-documented memo that sets out the areas of interest, the results that are happening on each of those areas, that you're looking for impairment indicators, which are listed out in the standard as well.

Aimee:

 Any other criteria that you would be looking at what's slightly different? 

Jess:

Yeah, maybe planned future spend, just because you're X way through a project, you might have capitalised to that point, but you might have done a bit of a feasibility assessment and gone, actually, financially, it doesn't make sense to pursue this area or the results aren't as good as you were anticipating. So yeah, that's a really important one to step back and just consider. 

Aimee:

Yeah. And I've seen in quite a lot of cases where exploration companies, because there might be pre-revenue generating, cash is tight. So they might not have spent anything or have any future planned spend on an area of interest because they're using the cash on another project, but that doesn't mean that its necessarily impairment indicated, does it? 

Jess:

No, it doesn't. I think it is important just to remember, though, a lot of the tenements do have a minimum spend requirement associated with them to keep them active. So just something to be really careful of. 

Aimee:

So that leads on to the last point, which is really important when we're looking at capitalisation of exploration assets. So that's around consistent application of policy. 

Jess:

Yes. So the same with any sort of policy to be fair under the Australian standards and international standards, there has to be consistency year to year in how you're applying the accounting treatment. Otherwise, you have financial statements that aren't really comparable year to year. So if you have any policy change, which does happen from time to time as a company grows, the policy may need to grow with it. It's really important to ensure that you've got clear documentation around the rationale for that change and what's the flow and impact into the financials. There will be needed to be some disclosures around that.

Aimee:

Policies and procedures also need to be then approved really ideally by the board, by the audit committee or by the board of directors. 

Jess:

Yeah, that's right. And I think ensuring consistency across all your areas of interest, not one tenement has one thing, and a different tenement or area of interest has another. So yeah, just ensuring that consistency. 

Jess:

Aimee, what top tips can we give to our audit committees for consideration around this matter?

Aimee:

Well, there's probably a few top questions that audit committees should be asking themselves around this documentation. And the first one is, can management walk us through documentation that supports capitalised exploration costs this year? So is it appropriately documented and is it in line with the policy that they have approved and is that what they've got locked in around that? What's the process for identifying and reviewing impairment indicators? Is there a memo that management prepare and does that actually get approved by the board? 

Jess:

Yeah and one final point I would say, being aware of where spending has stopped and understanding the nature of why that spend has stopped because is that an impairment indicator or a reason to actually be expensing now? And by asking these questions it means your committee is taking their responsibility as governance managers.

Aimee:

And it shows really good oversight. And even though it makes our job a little bit harder in audit committees, but we like directors to ask questions. So we know that there's some really good oversight around what their roles are. 

Jess:

Yeah, that's right. So I think that wraps up a little bit of a high level of capitalisation and impairment indicators in this area. 

Jess:

If you've got any questions off the back of today's episode, please feel free to reach out to Aimee or myself. We'd love to hear from you. 

If you found this episode helpful, which we hope you have, we'd really appreciate if you could share it with someone who you think might benefit from it. Our next episode is a good one, where we'll be unlocking business combinations. It's set to drop next month, so keep an eye out. Thanks for tuning in. See you next time.