Consolidated Financial Statements 2022 · Page 40

Public Investment Fund and its subsidiaries 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 
(All amounts in million SAR unless otherwise stated) 
Classification: External Confidential 
37 
 
4. 
SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (continued) 
 
4.11 Leases - Estimating the incremental borrowing rate  
 
The Group cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure 
lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the 
funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects 
what the Group ‘would have to pay’, which requires estimation when no observable rates are available (such as for subsidiaries that do not 
enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases 
are not in the subsidiary’s functional currency). The Group estimates the IBR using observable inputs (such as market interest rates) when 
available and is required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating). 
 
4.12 Useful lives of right-of-use assets 
 
The Group’s management determines the estimated useful lives of its right-of- use assets for calculating depreciation. The cost of right-of-
use assets are depreciated over the estimated useful lives of the assets, which is based on shorter of the lease term and the estimated useful 
lives of the assets. The Group reviews the estimated useful lives of right-of-use assets at the end of each annual reporting period.  Any change 
in the lease term or pattern of consumption of these assets are adjusted prospectively. 
 
4.13 Development, exploration and evaluation expenditure 
 
Expenditure on the construction, installation and completion of infrastructure facilities such as pipelines including services are capitalized 
within mine properties and is depreciated from the commencement of production. The capitalization policy requires management to make 
certain estimates and assumptions about future events and circumstances, in particular, whether an economically viable extraction 
operation can be established. Cost incurred on unsuccessful development or delineation are written-off.  
 
Significant estimates and assumptions are required to determine whether it is appropriate to continue to carry costs associated with 
exploration wells and exploratory type stratigraphic test wells on the balance sheet. This includes costs relating to exploration, seismic 
evaluation, geological and geophysical or other related costs. It is not unusual to have such costs being capitalized on the balance sheet while 
additional appraisal drilling and seismic work on the cluster is performed or while the optimum development plans and timing are 
established.  
 
4.14 Stripping costs 
 
Significant judgement is required to distinguish between development stripping and production stripping and to distinguish between the 
production stripping that relates to the extraction of inventory and that which relates to giving access to a component of the ore body to be 
mined in the future, which then give rise to the creation of a stripping activity asset. Once the Group has identified its production stripping 
for each surface