Factors Affecting the Value-Relevance of Capitalized Exploration and Evaluation Expenditures Under IFRS 6

Abstract

This study examines factors affecting the value-relevance of financial and non-financial disclosure in the context of the long contentious International Financial Reporting Standards (IFRS 6). Relative to the capitalization of R&D expenditures, IFRS 6 follows a far less restrictive approach, delaying the requirement for probable future economic benefits in settings of high uncertainty. We compare the value-relevance of this asset with that of non-financial information commonly reported by mining firms, namely mineral resource estimates. We report evidence that investors utilize non-financial information to assess the value-relevance of financial information, initially focusing on whichever information is timelier. We do not find evidence that investors prefer conservative reporting practices in a setting with high uncertainty; rather we provide evidence that investors interpret the capitalization decision as a signal of project viability. This finding is of particular relevance to the ongoing Intangible Assets project being conducted by the International Accounting Standards Board (IASB).

Keywords: IFRS 6, intangible assets, value relevance, extractive activities

JEL Classification: G12, G14