Draft Handbook on Measuring Intellectual Property Products:

Estimating Mineral Exploration

Presentation to OECD Working Party on National Accounts,

Paris, October 2007

Outline• Developments in International standards• Proposals for SNA93 Rev 1• Coverage of mineral exploration and evaluation• Aspects of measurement

– Valuation

– Price and volume measures

– Depreciation and capital services

– Ownership and balance sheets

• ABS sources and methods• Measurement issues

International standards

• SNA68– Mineral exploration treated as intermediate consumption

• SNA93– Expenditure on mineral exploration capitalised

– Addition to stock of knowledge and costs realise their benefits over an extended period of time

• SEEA 2003– Consistent with SNA93 with additional discussion on accounting

treatment

International standards (cont)

• International accounting standards– IASB interim guideline – IFRS 6 – released in 2004– Case by case assessment allowing capitalisation and

expensing– A cost model is used when first recognised– Revaluation possible but guideline does not cover

treatment of the asset once feasibility of extraction is demonstrated

– IASB working group formed to examine issues further– Discussion paper scheduled for release in 2008

Proposals for SNA93 Rev 1

• Five proposed clarifications / refinements– Use of term “mineral exploration and evaluation”– Continue separation between mineral exploration as

produced asset and sub-soil assets as non-produced– Clarify that when specialised firms provide services the

actual output of these firms is used in valuing GFCF– The resource rent used to value sub-soil assets should be

adjusted for the capital services provided by mineral exploration

– Payment by extractor to owner treated as rent

Coverage

• Recommend use of IASB criteria– Consider the extent to which the expenditure is

associated with finding specific mineral resources– Possible expenditures include

• Acquisition of rights to explore (incl. leases & licences)

• Topographical, geological studies, etc

• Drilling, trenching, sampling

• Evaluation of technical and commercial viability

Valuation

• Much mineral exploration is done on an own account basis and so should be valued at the sum of costs

• SNA93 Rev 1 has details. Relevant costs include:– Intermediate consumption– Compensation of employees– COFC– Return to fixed capital– Taxes less subsidies on production

Price and volume measures

• Preference for output price index– Technically feasible but resource intensive to develop

and maintain

• Likely use of an input price index based on deflating the various costs of production– Will miss productivity gains that are likely to have been

significant– Some adjustment for productivity might be sensible

Depreciation & capital services

• Use a conventional approach through assumptions regarding age-price and age efficiency functions

• Asset life linked to life of the sub-soil asset discovered

• Need to consider appropriate choices of age-price and age efficiency functions

Ownership & Balance sheets

• Ownership of mineral exploration rests with the unit undertaking the exploration

• However, in many countries ownership of the sub-soil assets rests with the government– Results of mineral exploration may become freely

available

• Balance sheets should record the mineral exploration and sub-soil assets separately

Ownership & Balance sheets

• “Double counting”– Is the value of mineral exploration included in the value of the

stock of sub-soil assets?– Provided costs of mineral exploration deducted in estimating

resource rent there is no problem

• Allocating ownership– If governments own sub-soil assets then the accounts for the

extractor will include the mineral exploration asset but exclude the sub-soil asset

– Analysis less obvious if conducted with respect to mining activity– Ongoing area for investigation and research

ABS source & methods

• Quarterly surveys of firms in mineral and petroleum exploration– Exploration expenditure allocated between current and capital in

line with Australian and international accounting standard

• Deflation using input price index– Largest component wage rates (77%)

• Derive depreciation and related capital estimates through PIM

• In balance sheets currently include mineral exploration with sub-soil assets

Measurement issues

• Volatility of series impacting on editing data and weighting series

• Finding suitable deflators– Appreciate any general advice that the manual can give

in this area

• Defining units appropriately especially given own account nature of the work

Conceptual issues

• Rationale for inclusion of unsuccessful exploration– See draft HMIP paragraphs 19-20

• Rationale for treatment of “freely available” mineral exploration knowledge– Suggest that since only one extractor can use the

information at one time then there is no public benefit even if knowledge is freely available

– Thus the boundary considerations that apply to R&D expenditures do not apply for mineral exploration