Ind AS 106 does not mandate a specific accounting policy for exploration and evaluation (E&E) expenditure — it allows an entity to continue its existing policy, expensing or capitalising as it sees fit — but it does require that policy to be applied consistently, and the audit's first task is confirming what the actual documented policy is and testing whether expenditure has, in fact, been classified against it consistently across projects and periods, since a policy applied selectively to flatter results in a weak period is the standard's most exploitable weakness.
What to test once the policy is established
- 01Trace capitalised costs to the entity's own policy definition of E&E expenditureAcquisition of exploration rights, topographical/geological studies, exploratory drilling, and evaluating technical feasibility typically qualify; costs incurred after commercial viability is demonstrated do not, and should move to Ind AS 16 or Ind AS 38 recognition instead.
- 02Confirm the trigger point for ceasing capitalisation under E&E and reclassifyingOnce technical feasibility and commercial viability of extracting the resource are demonstrable, the asset should be reclassified out of the E&E category and tested for impairment immediately before reclassification.
- 03Test the specific impairment indicators Ind AS 106 identifies for E&E assetsThe right to explore has expired or will expire without renewal, no further exploration is budgeted or planned, exploration has not led to discovery of commercially viable quantities and the entity has decided to discontinue, or sufficient data exists to indicate the carrying amount is unlikely to be fully recovered — each is a specific, standard-defined trigger distinct from the general Ind AS 36 indicators.
- 04Check the impairment, when triggered, was tested at the level the entity determinesInd AS 106 allows a CGU or group of CGUs for E&E assets to be determined by the entity (which may combine more than one cash-generating unit) — confirm this level is no larger than an operating segment and is applied consistently.
Common practice, not a requirement
A change from expensing to capitalising E&E costs (or vice versa) between periods, without a restated accounting policy note and prior period adjustment, should be treated as a significant risk area — Ind AS 8's change-in-policy requirements apply in full.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Fixed assets & capexInd AS 16: property, plant and equipment — recognition, componentization and derecognitionA single asset with parts that wear out on different schedules isn't one depreciation calculation — Ind AS 16 requires splitting it, and a lot of fixed asset registers still don't.
- Fixed assets & capexImpairment testing for fixed assets: a practical approachThe impairment indicators that actually matter for a mid-market client, when a formal test is genuinely warranted, and how to test management's recoverable amount workings.
- Fixed assets & capexFixed asset register audit: completeness and accuracy checksWhat a fixed asset register must contain, how to tie it to the general ledger, and the gaps that quietly survive year after year if nobody checks for them.
- Fixed assets & capexCapex vs revenue expenditure: the audit testThe capitalisation criteria, the repairs-versus-improvement judgement calls that actually come up, and how to sample repairs and maintenance for misclassified capex.
Free tools, no signup
Each one reads a file entirely in your browser — or, for two of them, just answers a few questions — and nothing is ever uploaded.
- Purchase register checkDuplicate payments, round-sum amounts, weekend-dated invoices, incomplete records.
- GSTR-2B reconcilerMatches your purchase register against GSTR-2B — missing invoices either side, amount mismatches.
- Bank reconciliation checkerMatches your cash book against a bank statement — what's outstanding on each side.
- Payroll red-flag scannerBank accounts shared across employees, and records missing an ID, PAN or salary.
- CARO applicability checkerAnswer a few questions about the company and see which CARO 2020 clauses likely apply.
- MSME payment delay checkerMSME-flagged invoices paid — or still unpaid — beyond the 45-day Section 22 limit.
- Related-party transaction screenerTransactions above a threshold you set with no approval reference, grouped by counterparty.
- Depreciation useful life checkerCompares a useful life in use against the Schedule II, Part C indicative figure.
- Materiality calculatorOverall and performance materiality against PBT, revenue, assets or equity, with reasoning shown.
- Sample size calculatorStatistical sample size for a test of controls or a substantive test of detail.