Greenland is not for sale

Greenland, the world`s largest island, has become the centre of international attention after the US president Trump repeatedly expressed the ambition “to buy” or “annex” the autonomous territory of Denmark to the US.

The country with 57 ths. inhabitants, lies in the strategic area of the globe between Canada, US (Alaska), Russia and Scandinavia, housing the US Missile Defence Station.

The land deposits large natural resources of precious metals (gold, ruby), iron, specialty (uranium) and raw metals and energy commodities (oil).

The climate change can make the extraction easier and ignite “gold rush” of exploration activities and offer an alternative to China, leading mining of minreals.

At present, the lack of infrastructure and hostile weather conditions, make extracting challenging at best. Many exploration projects get cancelled as a result.

The accounting is governed by the IFRS 6 Exploration for and Evaluation of Mineral Resources.

IFRS 6 - originally issued as an interim standard - addresses the topic of recognition of eligible exploration & evaluation (E&E) expenses as assets.

The following types of expenditures can be incurred:

• exploration and evaluation of potential mineral and petroleum resources,

• legal rights &licences,

• researching,

• analysing of historical exploration data,

• exploratory drilling, trenching, sampling

• pre-feasibility & commercial viability studies.

These expenses can be recognized as assets according to IFRS 6:

• after respective exploration legal rights were obtained and,

• before technical feasibility and commercial viability of extracting a mineral resource is demonstrable.

Compare to IAS 38 where tech. feasibility (among other criteria, IAS 38.57) for internally generated intangible assets must be completed before the capitalization starts).

Classification of E&E assets:

• tangible (drilling rigs, equipment) or,
• intangible (rights) depending on nature.

Measurement: at cost.

Want to try some real life exercise?

An exploration license acquired by Amroq Minerals Ltd, a Canadian Company conducting exploration activities in Greenland:

• covers area 1,042km2,
• acquired from another entity,
• zero upfront consideration but in exchange for a 0.5% contractual, gross revenue royalty (GRR),
• the royalty is based on potential future sales of minerals exploited,
• the GRR is paid annually and capped at US$10 mil.,
• the Cap is subject to an annual inflation adjustment,
• the seller has a right of first refusal on any sales or transfer of licenses,
• the license term: Nov, 2022 - Dec 2026, possible 5-year extension.

How would you account for the right and which standards are applicable?

My solution:

• At acquisition:

The right is part of E&E expenses (IFRS 6), at the cost of zero. Disclosure in the notes in acc. with IFRS 6.23-25.

The Company recognizes E&E as assets “when the expense is expected to be recouped from future exploitation or sale” and “it is planned to continue with active and significant operations in relation to the area” (which is the case here).

Intangibles (rights, licenses) are considered “insignificant & indistinguishable parts” of overall tangible assets at Amaraoq and are classified as parts of “property, plant & equipment”.

Afterwards (presuming the exploration expense leads to extraction of minerals and sales):

The royalty fee would be paid out on an annual basis as 0.5% applied to the gross revenue figure.

The fee will be expensed, on a straight line basis (monthly). Depending on the timing of the payment, the fee is booked as an expense monthly and credited against a liability which is released after the payment took place. Alternatively, a prepayment is booked as a prepaid expense and released into expenses monthly.

An estimate of annual sales & annual inflation rate is necessary, with a true-up taking place at the end of the reporting period.