Towards a Solution to the International Variety in the Accounting Practices of Extractive Firms Under IFRS

Accounting for extractive costs is the last major issue to remain largely unregulated by IFRS. This is despite the fact that extractive firms are an important part of several big stock markets. Under a temporary permissive standard (IFRS 6), which has been in place since 2004, firms use a wide range of accounting policies for extractive costs, thus undermining comparability. We review the IFRS annual reports of a large number of firms, looking for different policies. We identify many distinguishable methods of accounting. Along with this, we discover that disclosures are often confusing, partly because of the lack of definitions in IFRS 6. To aid insight into this complexity, we prepare a classification of these methods and give real examples of each. We then assess the methods in the context of IFRS 6 and other relevant parts of IFRS. We find that nearly all the methods comply with IFRS. This leads us to a proposal for narrowing the variety of practice by withdrawing IFRS 6, and putting extractive costs within the scope of IAS 38 (Intangible Assets). As part of this, IAS 38 would be further revised to extend the scope of capitalization of other development costs, thereby addressing one of the criticisms of current reporting practice and bringing IAS 38 more into line with the latest version of the Conceptual Framework