Draft Handbook on Measuring Intellectual Property Products: Estimating Mineral Exploration

1. Draft Handbook on Measuring Intellectual Property Products:Estimating Mineral Exploration Presentation to OECD Working Party on National Accounts, Paris, October 2007

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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