Essential guide: Mining and resources accounting explained

Key highlights

• Costs can be capitalised only when the entity holds a valid right to explore and meets certain criteria.
• Audit focus includes impairment indicators, documentation of cost classifications, and compliance with the entity’s accounting policy.
• Common pitfalls include misclassifying expenditures, inadequate impairment assessments, and failure to reassess capitalised costs regularly.

Introduction

For CFOs and finance leaders in the mining and resources sector, the capitalisation of exploration and evaluation (E&E) costs under AASB 6 Exploration for and Evaluation of Mineral Resources (AASB 6) remains a critical aspect of financial reporting. With increased regulatory scrutiny and the need for financial transparency, ensuring compliance is not just about accounting—it directly impacts investor confidence.

AASB 6 permits, but does not mandate, the capitalisation of E&E expenditure, but the challenge lies in ensuring costs meet the required criteria while maintaining a commercially pragmatic approach. Auditors will closely examine whether capitalised costs are properly documented, justifiable, and aligned with regulatory expectations.

So, how can CFOs best prepare for their next audit?

Background & context

Exploration and evaluation activities in the mining and resources sector involve significant upfront investment before commercial viability is established. AASB 6 provides an accounting policy choice between capitalising and expensing such costs, but, once that policy is chosen, requires consistent application and rigorous assessment of impairment indicators. Understanding the standard’s requirements is essential for accurate financial reporting and audit readiness.

The scope of AASB 6 applies to entities engaged in the exploration and evaluation of mineral resources before the development phase. Once technical feasibility and commercial viability are established, capitalisation is governed by AASB 116 Property, Plant and Equipment or AASB 138 Intangible Assets.

Key accounting requirements

AASB 6 provides the framework for recognising, measuring, and presenting exploration and evaluation assets in financial statements. Ensuring consistency in reporting, the standard enhances the reliability of financial information for investors and stakeholders.

Exploration and evaluation expenditures

E&E expenditures can arise from internal activities or through external contractors and consultants. These costs may include:

• Acquisition of exploration rights;
• Topographical, geological, geochemical, and geophysical studies;
• Exploratory drilling;
• Trenching and sampling; and
• Activities assessing the technical feasibility and commercial viability of extracting a mineral resource.

Entities must establish an accounting policy for these expenditures—either expensing them as incurred or capitalising them.  Capitalisation can only commence once the entity has obtained the legal right to explore a specific area.

Capitalisation criteria

Capitalisation in exploration projects involves recognising certain E&E costs as assets on the balance sheet rather than expensing them immediately. This approach reflects the expectation that these expenditures may generate future economic benefits if the project advances. However, capitalisation is subject to strict criteria under AASB 6.

To qualify for capitalisation, E&E expenditures must meet the following conditions:

• Legal Rights: The entity holds the legal rights to explore the specific area of interest.
• Technical and Economic Feasibility: The activities undertaken must be technically sound and have reasonable prospects of economic viability.
• Project Viability: Either ongoing exploration is expected to continue in the area of interest, or the costs are anticipated to be recouped through successful development or sale of the mineral resource.

Applying these principles ensures compliance with AASB 6, enhances financial statement credibility, mitigates reporting risks, and supports informed decision-making.

When to expense costs

Certain expenditures cannot be capitalised under AASB 6 and must be expensed as incurred, including:

• General administration and overheads, unless directly attributable to E&E activities;
• Costs incurred before obtaining the legal right to explore;
• Expenditure on areas where exploration has ceased with no further plans for development; and
• Costs incurred after the technical feasibility and commercial viability of extraction have been demonstrated (which must then be assessed under other relevant accounting standards).

By applying these capitalisation and expensing principles consistently, entities can maintain transparency, improve financial reporting accuracy, and reduce audit risks related to E&E assets.

Practical application

The following table provides a high level summary of the above:

Audit expectations & regulatory considerations

Ensuring compliance with AASB 6 requires a robust approach to financial reporting, particularly around the capitalisation of E&E costs. Auditors and regulators will closely scrutinise these costs to verify their appropriateness, consistency, and alignment with financial reporting requirements.

Audit expectations

Auditors will evaluate whether E&E costs have been appropriately capitalised by requesting:

• Evidence of Exploration Rights – Documentation confirming ownership or legal access to explore a specific area, such as exploration permits, government approvals, or contractual agreements.
• Technical Justification – Geological reports, drilling results, feasibility studies, and other supporting documentation that demonstrate the potential for resource discovery and continued exploration efforts.
• Management’s Intentions – Board or management papers outlining future exploration plans, budgets, and financial commitments, ensuring there is a reasonable expectation that exploration will continue.
• Consistency with Past Practices – Capitalisation policies must be applied consistently across reporting periods unless there is a justified and disclosed change in accounting policy.
• Segregation of Costs – A clear distinction must be made between capitalised E&E costs and expenses that should be recognised immediately (e.g., administrative overheads, general corporate costs, and costs incurred before exploration rights are secured).
• Impairment Assessment – Even if no impairment is recognised, auditors will expect a documented assessment of impairment indicators under AASB 6 to ensure compliance with accounting requirements.

Given the inherent uncertainty in exploration activities, auditors will also assess whether management has exercised appropriate judgment in determining the viability of capitalised costs and whether any bias exists in impairment assessments.

Regulatory considerations

ASIC has identified E&E accounting as a key area of focus, particularly around:

• Appropriate Disclosure of Accounting Policies and Judgments – Financial statements must clearly outline the entity’s accounting policy for E&E expenditures, including the criteria for capitalisation and impairment assessments.
• Management’s Annual Review of Impairment Indicators – Even if no impairment is recognised, entities must demonstrate that they have considered all relevant indicators, such as unsuccessful exploration results, expiry of exploration rights, or a lack of planned substantive expenditure.
• Comparability and Transparency – Investors and other stakeholders rely on financial reports to assess an entity’s financial health. Inconsistent application of AASB 6 or insufficient disclosures can lead to regulatory scrutiny and potential financial statement restatements.

ASIC continues to encourage companies to ensure their disclosures provide sufficient clarity around the nature of E&E expenditures, the rationale for capitalisation, and the potential risks associated with exploration activities. Failure to comply with these requirements can result in regulatory action, increased audit scrutiny, and reputational damage.

By proactively addressing these audit and regulatory expectations, companies can enhance the credibility of their financial statements, mitigate compliance risks, and foster investor confidence.

Common pitfalls

While the rules for capitalisation seem clear, mining companies often make mistakes in their financial reports. Misunderstanding the rules and having personal biases can lead to big problems.

A common mistake is not seeing indicators of impairment in time. Changes in the market, losing resources, or bad exploration results can hurt an asset's value a lot. Ignoring these signs goes against AASB guidelines. This could put the company at risk for financial issues and damage its reputation. It may also cause problems with tax compliance.

Misinterpretation of AASB 6 guidelines

A common pitfall arises from misinterpreting the nuances of AASB 6, particularly regarding the capitalisation criteria. Companies may misclassify expenses, incorrectly aggregate costs, or overlook the conditions for recognising impairment.

One recurring issue is the misclassification of costs - particularly when companies attempt to capitalise general overheads or salaries that aren’t directly attributable to exploration activities. A classic example: capitalising a Managing Director’s salary on the basis that “they’re a geologist,” even though their day-to-day responsibilities are largely strategic or administrative. Unless the MD is genuinely spending the majority of their time on hands-on exploration and evaluation (E&E) activities, this cost should not be capitalised.

These misinterpretations highlight the importance of a thorough understanding and diligent application of AASB 6.

CFO audit readiness: Balancing commercial strategy with compliance

With investors increasingly focused on balance sheet transparency, companies should take a commercially pragmatic approach to AASB 6 compliance. This includes:

• Clear & Consistent Policies – Align capitalisation policies with both accounting standards and commercial strategy.
• Regular Portfolio Reviews – Identify impairment risks early and communicate them effectively.
• Robust Documentation – Maintain comprehensive records to support capitalisation and impairment decisions.
• Proactive Engagement – Be prepared to justify positions with auditors and regulators, ensuring alignment with ASIC guidance.

Conclusion

Correctly applying AASB 6 is critical for transparent financial reporting and compliance. By understanding the criteria for capitalisation, conducting economic feasibility assessments, and ensuring alignment with regulatory expectations, CFOs can mitigate financial reporting risks while maintaining investor confidence. Mining companies should proactively review their capitalisation policies, maintain proper documentation, and engage with auditors to support their financial reporting approach.

For further guidance on the application of AASB 6 and best practices in capitalising exploration and evaluation assets, reach out to your audit and financial advisory team.

Reach out to Aimee Whittingham or Jess Hishon to explore how RSM can help.