Comments to Groups

Group 1 – Extractive Industries

What is G & G costs

What are dry hole costs

It is important to note the scope of IFRS 6 Exploration for and Evaluation of Mineral Resources is limited
to the recognition, measurement and disclosure of expenditure incurred in the phase covering
specifically the exploration and evaluation (E & E) of minerals, oil, natural gas and other similar non-
regenerative resources which applies across the extractive industry (BDO IFR Advisory Limited, 2019).
Identification and determination of expenditures falling under the scope of applicable IFRSs is very
challenging for companies. The standard, however, contains specific exemption from the requirements
of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. This results to certain
expenditures to qualify for capitalization even if the definition of an asset in the Conceptual Framework
is not met. After this, an entity has the option to either capitalize or expense each of the expenditure
during the E & E phase. This will be based on formed accounting policies to be consistently applied. The
standard enumerated expenditures to be considered for capitalization such as acquisition of rights to
explore, topographical, geological, geochemical and geophysical studies, exploratory drilling, trenching,
sampling, activities in relation to evaluating the technical feasibility and commercial viability of
extracting a mineral resource (BDO IFR Advisory Limited, 2019).

Historically, entities would use the following methods in capitalizing E & E: successful efforts, area-of-
interest, full cost, and partial capitalization. The successful efforts method capitalize only the costs that
directly lead to the discovery, acquisition or development of mineral reserves. In area-of-interest
method, costs are grouped based on an area that establish a promising environment for the existence of
a mineral deposit, an oil or a natural gas field and are capitalized (BDO IFR Advisory Limited, 2019). The
full cost method capitalizes all costs incurred. There are aspects of this method that are inconsistent
with the requirements of IFRS 6 like capitalizing pre license acquisition costs, the need to classify E & E
as tangible or intangible, the need to test E & E for impairment at the point of cessation of activity.
Lastly, partial capitalization. In this approach, only some costs are eligible for capitalization. There is little
global consistency in accounting for E & E expenditures, especially with accounting policies based on
GAAP or historical practices. Whichever method entities follow, IFRS 6 would require entities to modify
their accounting policies and practices to be more consistent across the world.

References
BDO IFR Advisory Limited. (2019). IFRS in Practice 2019 An Overview of IFRS 6 Exploration for and
Evaluation of Mineral Resources.
Group 2 – Service Concession Agreements

I agree with group 2’s assessment of Meralco to be within the scope of IFRIC 12 Service Concession
Arrangements. The grantor, in this case the Philippine Economic Zone Authority (PEZA), controls or
regulates the service the operator, in this case Meralco, must provide with the infrastructure, to whom
it must provide them, and at what price (IFRIC 12 Service Concession Arrangements, 2006). PEZA
controls through ownership, beneficial entitlement or otherwise, any significant residual interest in the
infrastructure at the end of the term of the arrangement of 25 years which began May 26, 2014. IFRIC
12 also applies to both the infrastructure Meralco constructs or acquires from a third party for the
purpose of the service arrangement and existing infrastructure to which the PEZA gives the Meralco
access for the purpose of the service arrangement (IFRIC 12 Service Concession Arrangements, 2006).

Issues tackled in the interpretation include treatment for Meralco’s rights over the infrastructure.
Meralco shall not recognize its infrastructure as its PPE. This is seen in Meralco’s 2018 audited financial
statements that no PPE is recorded as its assets.

References
IFRIC 12 Service Concession Arrangements. (2006, November). IFRS Foundation. International
Accounting Standards Board. Retrieved August 2019
Group 3 – Business Combination

It is important to note that in a business combination, the acquisition method is applied. First step of
which is to identify the acquirer. In this case, it is clearly Microsoft. The next step is to determine the
acquisition date or the date the acquirer obtains control or the closing date. But it is not always
necessarily the closing date, it depends on the contractual agreement between the parties (Mahutova,
2014). With the case presented, the acquisition of Nokia by Microsoft was completed in April 25, 2014
(Microsoft officially welcomes the Nokia Devices and Services business, 2014). The next step is to
recognize and measure the identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquire separate from goodwill. Non-controlling interest (NCI) is the equity in a subsidiary
not attributable, directly or indirectly to a parent (Mahutova, 2014). There is no NCI for Microsoft
acquired substantially all of Nokia’s Devices and Services business (NDS) as disclosed in their financial
statements and notes (Richter, 2015). The final step in the acquisition method is to recognize and
measure goodwill or a gain from a bargain purchase. Goodwill is an intangible asset that represents the
future economic benefits arising from other assets acquired in a business combination that are not
individually identifies and separately recognized. If the goodwill is negative, it is a gain on bargain
purchase. Microsoft recorded a goodwill in its acquisition of Nokia equivalent to a proportion of 37% in
the value of the total acquired assets (Violeta & Camelia, 2016). In the Microsoft-Nokia case, a financial
reporting problem risk arises in the fair value valuation of assets acquired and liabilities assumed
(Business combinations: Consider financial reporting issues before closing, 2017). Internally developed
intangible assets of Nokia like customer lists, copyrights and patents and contingent liabilities like
Internal Revenue Service inquiries and unemployment claims might be mislaid (Business combinations:
Consider financial reporting issues before closing, 2017).

References
Business combinations: Consider financial reporting issues before closing. (2017, October 17). Bakertilly.
Retrieved August 2019, from https://www.bakertilly.com/insights/business-combinations-
consider-financial-reporting-issues-before-closing

Mahutova, S. (2014, September). IFRS 3 Business Combinations. IFRSbox. Retrieved August 2019, from
https://www.ifrsbox.com/ifrs-3-business-combinations/

Microsoft officially welcomes the Nokia Devices and Services business. (2014, April 25). Microsoft News
Center. Retrieved August 2019, from https://news.microsoft.com/2014/04/25/microsoft-
officially-welcomes-the-nokia-devices-and-services-business/

Richter, F. (2015, July 9). Microsoft Spent $9.4 Billion on a Sinking Ship. Statista. Retrieved August 2019,
from https://www.statista.com/chart/3626/nokias-smartphone-market-share/

Violeta, S., & Camelia, S. M. (2016). Purchased Goodwill In International Acquisitions. Microsoft-Nokia
Case. Annals of the University of Oradea, Economic Science Series, 25(1), 727-736. EBSCO.
Retrieved August 2019