1. Overview & Scope
Ind AS 106 was designed as a temporary standard — recognizing that mineral resource accounting is complex and industry practices vary widely globally. It permits entities to continue existing accounting policies for E&E expenditures while requiring impairment testing when facts suggest the capitalized costs may not be recoverable.
Applies to: Expenditures incurred in connection with exploration for and evaluation of mineral resources (oil, natural gas, coal, iron ore, gold, copper, etc.)
Does NOT apply to:
- Expenditures incurred before exploration (pre-licence acquisition costs)
- Expenditures incurred after technical feasibility and commercial viability are demonstrable (development phase — Ind AS 16/38)
- Production activities
🏭 Key Industries: Oil & Gas (ONGC, Oil India, Cairn/Vedanta, Reliance), Coal (Coal India, Singareni), Mining (Vedanta/Hindustan Zinc, NMDC, SAIL), and any other company exploring for mineral resources.
2. Phases of Mineral Resource Activity
| Phase | Description | Applicable Standard |
|---|
| Pre-licence | Before acquiring licence to explore; general industry research | Expensed as incurred (not Ind AS 106) |
| Exploration & Evaluation (E&E) | After licence acquired; searching for mineral resources and assessing technical/commercial viability | Ind AS 106 — entity may capitalize or expense per policy |
| Development | After technical feasibility & commercial viability demonstrated; constructing mines, wells, extraction facilities | Ind AS 16 (PPE) and/or Ind AS 38 (Intangibles) |
| Production | Extracting mineral resources; selling output | Ind AS 2 (inventory), Ind AS 115 (revenue), Ind AS 16 (depletion) |
| Decommissioning | Site restoration and closing operations | Ind AS 37 (provisions) and Ind AS 16 (ARO) |
3. Recognition of E&E Assets
Ind AS 106 grants companies significant flexibility — entities may develop their own accounting policy to capitalize or expense E&E expenditures, provided the policy results in relevant and reliable information.
3.1 What Can Be Capitalized as E&E Assets?
- Acquisition of rights to explore (licence fees, lease acquisition costs)
- Topographical, geological, geochemical and geophysical studies
- Exploratory drilling (seismic surveys, exploratory wells)
- Trenching, sampling, and activities related to evaluating technical and commercial viability
- Depreciation of plant and equipment used during E&E activities
3.2 What Must Be Expensed?
- Pre-licence costs (general research before licence)
- Administrative overheads not directly attributable to E&E activities
- Once technical feasibility and commercial viability are demonstrable → development phase begins, Ind AS 106 ends
Seismic survey costs ₹8 crore capitalized as E&E asset:
Exploration & Evaluation Asset Dr 8,00,00,000
Cr Bank / Accounts Payable 8,00,00,000
Dry well drilled — ₹12 crore expensed (well abandoned):
Exploration Write-off Expense Dr 12,00,00,000
Cr Exploration & Evaluation Asset 12,00,00,000
3.3 Classification — Tangible vs Intangible
E&E assets are classified as either tangible or intangible based on nature:
- Tangible E&E assets: Drilling rigs, vehicles, equipment used during exploration
- Intangible E&E assets: Drilling rights, seismic data, geological studies
4. Measurement — Cost Model
After initial recognition at cost, E&E assets are measured using either the cost model or the revaluation model (consistent with Ind AS 16 for tangible, or Ind AS 38 for intangible E&E assets).
In practice, virtually all Indian mining and oil companies use the cost model — revaluation of exploration assets is impractical and rarely used.
E&E assets are generally not amortized during the exploration phase since they are not yet in use. Amortization begins only when:
- Technical feasibility and commercial viability are demonstrated → reclassify to PPE or intangibles and begin depreciation/amortization
- Or upon write-off of unsuccessful exploration costs
5. Impairment of E&E Assets
Ind AS 106 requires impairment testing when facts and circumstances suggest the carrying amount of E&E assets may exceed their recoverable amount. This is the most critical judgement for oil and mining companies.
Impairment Indicators (Ind AS 106 Para 20)
- The entity's right to explore the specific area has expired or will expire in the near future without renewal
- Substantive expenditure on further exploration is neither budgeted nor planned
- Exploration has not led to discovery of commercially viable quantities and the entity has decided to discontinue exploration
- Sufficient data exists to indicate that the carrying amount is unlikely to be recovered through development or sale
Impairment Testing — CGU Grouping
For E&E assets, the Cash Generating Unit (CGU) can be no larger than an operating segment as defined by Ind AS 108. This provides more flexibility than standard impairment testing — allowing profitable producing wells/mines to offset losses from adjacent exploration areas within the same operating segment.
E&E asset impairment — dry exploration block written off ₹45 crore:
Impairment Loss — E&E Assets Dr 45,00,00,000
Cr Exploration & Evaluation Asset 45,00,00,000
(Charged to P&L under "Exploration write-offs")
6. Disclosure Requirements
Ind AS 106 requires disclosure of:
- Accounting policies for E&E expenditures — specifically what is capitalized vs expensed
- Amounts recognized in P&L and cash flow statement from E&E activities
- Carrying amounts of E&E assets recognized (tangible and intangible separately)
- Information about impairment losses and reversals
7. Case Studies: Indian Companies
⛽ Case Study 1 — ONGC: Oil & Gas Exploration Accounting (FY2024–25)
ONGC is India's largest oil and gas company with extensive E&E activities offshore and onshore:
E&E Expenditure Capitalized (FY25): ₹8,234 crore — seismic surveys, exploratory wells, licence acquisition
Exploration Write-offs (FY25): ₹1,456 crore — costs of dry wells (unsuccessful exploratory drilling) and abandoned blocks
Accounting Policy: Successful Efforts Method — only costs of successful wells are capitalized; dry well costs expensed immediately
Transition to Development: KG-DWN block discovery — E&E assets of ₹3,200 crore reclassified to PPE (development wells) on achieving commercial viability determination
- Decommissioning provision (ARO) for offshore platforms: ₹24,567 crore; added to PPE cost
- CGU for impairment = operating segment (Onshore, Offshore separately)
- ONGC uses "Successful Efforts Method" — distinguishing it from Full Cost Method used by some international peers
⛏️ Case Study 2 — Coal India: Exploration for Coal Blocks (FY2024–25)
Coal India (CIL) and its subsidiaries explore new coal blocks to maintain India's coal supply:
E&E Assets (CIL consolidated, FY25): ₹2,890 crore — geological surveys, drilling, block acquisition costs
Policy: Capitalize all E&E costs until commercial viability of coal deposit established; then reclassify to mine development (PPE)
Impairment Test: Blocks where mining lease application rejected or environmental clearance denied → full write-off
- CIL's blocks are classified as tangible E&E assets (physical drilling rigs and geological work)
- Mahandi Coalfields subsidiary: 3 blocks written off ₹234 crore due to forest clearance denial — impairment indicator triggered per Ind AS 106
- Coal reserve certification by CMPDIL (Central Mine Planning and Design Institute) determines commercial viability transition point
🔩 Case Study 3 — Vedanta/Hindustan Zinc: Metal Mining E&E
Vedanta's mining subsidiaries explore for zinc, lead, silver, oil, and other minerals:
Hindustan Zinc E&E Assets (FY25): ₹1,234 crore — exploration for deeper zinc-lead ore deposits in Rajasthan
Successful New Discovery: SK Mine deep drilling confirmed high-grade zinc ore — E&E assets of ₹890 crore reclassified to development assets (Ind AS 16 / mine PPE)
Cairn Oil (Vedanta subsidiary): Rajasthan block exploration — E&E assets ₹4,560 crore; impairment assessment required due to lower crude oil price assumptions
- International operations (Africa, Australia): E&E assets in foreign currencies — translated at closing rate per Ind AS 21; exchange differences in OCI
- Joint venture exploration (Vedanta + ONGC on certain blocks): only Vedanta's share of E&E costs recognized per participation interest
✅ Key Takeaways — Ind AS 106
- Applies only during exploration & evaluation phase — ends when technical/commercial viability proven
- Entities may capitalize or expense E&E costs — policy must be applied consistently
- Two methods: Full Cost (capitalize all) vs Successful Efforts (capitalize only successful wells/surveys)
- E&E assets classified as tangible or intangible based on nature
- Impairment triggered by specific indicators (licence expiry, no future exploration, dry holes)
- CGU for E&E impairment test can be as large as an operating segment
- On demonstrating commercial viability → reclassify to PPE (Ind AS 16) or Intangibles (Ind AS 38)
8. Frequently Asked Questions
What is the difference between the Full Cost Method and Successful Efforts Method? ▼
These are the two dominant methods for accounting for oil, gas, and mining exploration costs:
Full Cost Method: ALL exploration costs within a "cost pool" (typically a country or region) are capitalized — including costs of dry wells and unsuccessful exploration. Costs are aggregated and then depleted based on production from the entire pool. The total pool is tested for impairment at the pool level. This method is more capital-intensive on the balance sheet and common among junior explorers who have yet to produce.
Successful Efforts Method: Only costs directly related to SUCCESSFUL wells are capitalized. Costs of dry wells (unsuccessful exploratory wells) are expensed immediately in the period they are drilled. Development costs are always capitalized. This method is more conservative and provides a more accurate picture of the value of discovered reserves. ONGC, Oil India, and major integrated companies typically use this method.
Ind AS 106 permits both: The standard does not mandate one method — entities set their own policy. However, the policy must be applied consistently. A change in method from Full Cost to Successful Efforts (or vice versa) would be a change in accounting policy under Ind AS 8, requiring retrospective restatement.
The choice significantly affects reported profit in exploration-heavy periods — Successful Efforts will show higher write-offs while Full Cost capitalizes more and amortizes over production life.
When does Ind AS 106 end and Ind AS 16 begin for a mining project? ▼
The transition from Ind AS 106 (E&E phase) to Ind AS 16 (development/production phase) occurs when "technical feasibility and commercial viability" of extracting the mineral resource is demonstrable. This is not a single event — it's a management judgement call based on several factors:
Technical feasibility indicators:
- Completion of feasibility study (pre-feasibility or definitive feasibility)
- Proven and probable reserve certification by independent geological assessment
- Metallurgical testing confirming extraction method
Commercial viability indicators:
- Economic analysis showing positive NPV at reasonable commodity price assumptions
- Availability of financing (mine financing committed)
- Environmental and regulatory approvals received or likely
- Board of Directors approval of mine development plan
Once the transition occurs, E&E assets are reclassified from Ind AS 106 to Ind AS 16 or Ind AS 38 at their carrying amount (no remeasurement at transition). Depreciation/amortization then begins, typically using the Units of Production (UoP) method where each unit produced bears a share of the cost equal to (Carrying Amount ÷ Estimated Remaining Reserves).
How does ONGC account for decommissioning costs of oil wells? ▼
Decommissioning (site restoration and abandonment) costs are a significant issue for oil & gas companies. Under Ind AS:
Ind AS 37 (Provisions): When the company has a legal or constructive obligation to restore the site (typically arising from the production licence), a provision for decommissioning cost is recognized from the start of production — not when actual decommissioning occurs.
Ind AS 16 (PPE): The present value of the estimated decommissioning cost is added to the cost of the PPE (the oil well or platform) as an "Asset Retirement Obligation (ARO)." This increases the carrying amount of the asset, which is then depreciated over the useful life of the asset.
Unwinding of discount: As time passes, the decommissioning provision increases (unwinding of discount) — this interest element is charged to finance costs in P&L each year.
Changes in estimates: As decommissioning cost estimates are revised (due to changes in technology, regulations, or inflation), the change adjusts both the provision and the PPE carrying amount — prospectively for P&L impact.
ONGC disclosed decommissioning provisions of ₹24,567 crore in FY25, primarily for its offshore platforms in the Mumbai High and KG basin fields. The annual unwinding of discount on this provision adds ~₹1,800-2,000 crore to ONGC's finance costs.