BC FORM 51-901F

[exhibit991002.gif]

Tanzanian Royalty Exploration Corporation

Consolidated Financial Statements

For the years ended

August 31, 2014 and 2013

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

The accompanying consolidated financial statements of Tanzanian Royalty Exploration Corporation were prepared by management in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board. Management acknowledges responsibility for the preparation and presentation of the consolidated financial statements, including responsibility for significant accounting judgments and estimates and the choice of accounting principles and methods that are appropriate to the Company’s circumstances. The significant accounting policies of the Company are summarized in Note 3 to the consolidated financial statements.

Management has established processes, which are in place to provide them with sufficient knowledge to support management representations that they have exercised reasonable diligence that (i) the consolidated financial statements do not contain any untrue statement of material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it is made, as of the date of and for the year presented by the consolidated financial statements and (ii) the consolidated financial statements fairly present in all material respects the financial condition and results of operations of the Company, as of the date of and for the year presented by the consolidated financial statements.

The Board of Directors is responsible for ensuring that management fulfills its financial reporting responsibilities and for reviewing and approving the consolidated financial statements together with other financial information. An Audit Committee assists the Board of Directors in fulfilling this responsibility. The Audit Committee meets with management to review the internal controls over the financial reporting process. The Audit Committee meets with management as well as with the independent auditors to review the consolidated financial statements and the auditors' report. The Audit Committee also reviews the Annual Report to ensure that the financial information reported therein is consistent with the information presented in the consolidated financial statements. The Audit Committee reports its findings to the Board of Directors for its consideration in approving the consolidated financial statements together with other financial information of the Company for issuance to the shareholders.

Management recognizes its responsibility for conducting the Company’s affairs in compliance with established financial standards, and applicable laws and regulations, and for maintaining proper standards of conduct for its activities.


“James E. Sinclair”		“Steven Van Tongeren”
James E. Sinclair		Steven Van Tongeren
Chief Executive Officer		Chief Financial Officer

INDEPENDENT AUDITORS’ REPORT

OF REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

Tanzanian Royalty Exploration Corporation

We have audited the accompanying consolidated financial statements of Tanzanian

Royalty Exploration Corporation, which comprise the consolidated statements of

financial position as at August 31, 2014 and 2013, and the consolidated statements of

comprehensive loss, changes in equity and cash flows for the years then ended, and a

summary of significant accounting policies and other explanatory information.

Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these

consolidated financial statements in accordance with International Financial

Reporting Standards as issued by the International Accounting Standards Board, and

for such internal control as management determines is necessary to enable the

preparation of consolidated financial statements that are free from material

misstatement, whether due to fraud or error.

Auditors’ responsibility

Our responsibility is to express an opinion on these consolidated financial statements

based on our audits. We conducted our audits in accordance with Canadian generally

accepted auditing standards and the standards of the Public Company Accounting

Oversight Board (United States). Those standards require that we comply with ethical

requirements and plan and perform the audit to obtain reasonable assurance about

whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts

and disclosures in the consolidated financial statements. The procedures selected

depend on the auditors’ judgment, including the assessment of the risks of material

misstatement of the consolidated financial statements, whether due to fraud or error.

In making those risk assessments, the auditors consider internal control relevant to

the entity’s preparation and fair presentation of the consolidated financial statements

in order to design audit procedures that are appropriate in the circumstances. An audit

also includes examining, on a test basis, evidence supporting the amounts and

disclosures in the consolidated financial statements, evaluating the appropriateness of

accounting policies used and the reasonableness of accounting estimates made by

management, as well as evaluating the overall presentation of the consolidated

financial statements.

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We believe that the audit evidence we have obtained in our audits is sufficient and

appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material

respects, the financial position of Tanzanian Royalty Exploration Corporation as

at August 31, 2014 and 2013, and its financial performance and its cash flows for the

years then ended in accordance with International Financial Reporting Standards as

issued by the International Accounting Standards Board.

Emphasis of Matter

Without qualifying our opinion, we draw attention to note 1 in the consolidated

financial statements which indicates that the Company has working capital of

$1,325,667 and accumulated losses of $69,095,649 at August 31, 2014. These

conditions, along with other matters as set forth in note 1, indicate the existence of a

material uncertainty that raises substantial doubt about the Company’s ability to

continue as a going concern.

Other matter

We have also audited, in accordance with the standards of the Public Company

Accounting Oversight Board (United States), Tanzanian Royalty Exploration

Corporation’s internal control over financial reporting as at August 31, 2014, based

on the criteria established in Internal Control — Integrated Framework issued by the

Committee of Sponsoring Organizations of the Treadway Commission and our report

dated October 30, 2014 expressed an unqualified opinion on Tanzanian Royalty

Exploration Corporation’s internal control over financial reporting.

Vancouver, Canada, Ernst & Young LLP

October 30, 2014.

Chartered Accountants

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of August 31, 2014. In making this assessment, the Company’s management used the criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO 1992”). The Company’s management has completed their review and testing of the Company’s internal control over financial reporting and concluded that they are appropriately designed and operating effectively as of August 31, 2014.

INDEPENDENT AUDITORS’ REPORT

OF REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Tanzanian Royalty Exploration Corporation

We have audited Tanzanian Royalty Exploration Corporation’s internal control

over financial reporting as at August 31, 2014, based on criteria established in

Internal Control — Integrated Framework issued by the Committee of Sponsoring

Organizations of the Treadway Commission (1992 framework) (the "COSO

criteria"). Tanzanian Royalty Exploration Corporation’s management is

responsible for maintaining effective internal control over financial reporting, and for

its assessment of the effectiveness of internal control over financial reporting

included in the accompanying “Management’s Report on Internal Control Over

Financial Reporting”. Our responsibility is to express an opinion on the company’s

internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company

Accounting Oversight Board (United States) ("PCAOB"). Those standards require

that we plan and perform the audit to obtain reasonable assurance about whether

effective internal control over financial reporting was maintained in all material

respects. Our audit included obtaining an understanding of internal control over

financial reporting, assessing the risk that a material weakness exists, testing and

evaluating the design and operating effectiveness of internal control based on the

assessed risk, and performing such other procedures as we consider necessary in the

circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide

reasonable assurance regarding the reliability of financial reporting and the

preparation of financial statements for external purposes in accordance with generally

accepted accounting principles. A company’s internal control over financial reporting

includes those policies and procedures that (1) pertain to the maintenance of records

that, in reasonable detail, accurately and fairly reflect the transactions and

dispositions of the assets of the company; (2) provide reasonable assurance that

transactions are recorded as necessary to permit preparation of financial statements in

accordance with generally accepted accounting principles, and that receipts and

expenditures of the company are being made only in accordance with authorizations

of management and directors of the company; and (3) provide reasonable assurance

regarding prevention or timely detection of unauthorized acquisition, use, or

disposition of the company’s assets that could have a material effect on the financial

statements.

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Because of its inherent limitations, internal control over financial reporting may not

prevent or detect misstatements. Also, projections of any evaluation of effectiveness

to future periods are subject to the risk that controls may become inadequate because

of changes in conditions, or that the degree of compliance with the policies or

procedures may deteriorate.

In our opinion, Tanzanian Royalty Exploration Corporation has maintained, in all

material respects, effective internal control over financial reporting as at August 31,

2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the PCAOB, the

consolidated statements of financial position of Tanzanian Royalty Exploration

Corporation as at August 31, 2014 and 2013, and the related consolidated statements

of comprehensive loss, changes in equity, and cash flows for the years then ended.

Our report dated October 30, 2014 expressed an unqualified opinion thereon that

included an explanatory paragraph regarding Tanzanian Royalty Exploration

Corporation’s ability to continue as a going concern.

Vancouver, Canada, Ernst & Young LLP

October 30, 2014.

Chartered Accountants

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Nature of Operations and Going Concern

The Company is in the process of exploring and evaluating its mineral properties. The business of exploring and mining for minerals involves a high degree of risk. The underlying value of the mineral properties is dependent upon the existence and economic recovery of mineral reserves, the ability to raise long-term financing to complete the development of the properties, government policies and regulations, and upon future profitable production or, alternatively, upon the Company’s ability to dispose of its interest on an advantageous basis; all of which are uncertain.

The amounts shown as mineral properties and deferred expenditures represent costs incurred to date, less amounts amortized and/or written off, and do not necessarily represent present or future values. The underlying value of the mineral properties is entirely dependent on the existence of economically recoverable reserves, securing and maintaining title and beneficial interest, the ability of the Company to obtain the necessary financing to complete development, and future profitable production.

At August 31, 2014 the Company had working capital of $1,325,667 (August 31, 2013 – $5,416,104), including warrant liability or a working capital of $1, 325,667 (August 31, 2013 – $8,940,104) excluding warrant liability, had not yet achieved profitable operations, has accumulated losses of $69,095,649 (August 31, 2013 – $67,117,263) and expects to incur further losses in the development of its business. The Company will require additional financing in order to conduct its planned work programs on mineral properties, meet its ongoing levels of corporate overhead and discharge its future liabilities as they come due.

Based on the Company’s current funding sources and taking into account the working capital position and capital requirements at August 31, 2014, these factors indicate the existence of a material uncertainty that raises substantial doubt about the Company’s ability to continue as a going concern and is dependent on the Company raising additional debt or equity financing. The Company must obtain additional funding in 2015 in order to continue development and construction of the Buckreef Project. Furthermore, the Company is currently negotiating project financing terms with a number of lending institutions, which the Company believes will result in the Company obtaining the project financing required to fund the construction of the Buckreef Project. However there is no assurance that such additional funding and/or project financing will be obtained or obtained on commercially favourable terms. These consolidated financial statements do not give effect to any adjustment which would be necessary should the Company be unable to continue as a going concern and, therefore, be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the consolidated financial statements.

Basis of Preparation

2.1 Statement of compliance

The Company was originally incorporated under the corporate name “424547 Alberta Ltd.” in the Province of Alberta on July 5, 1990, under the Business Corporations Act (Alberta). The name was changed to “Tan Range Exploration Corporation” on August 13, 1991. The name of the Company was again changed to “Tanzanian Royalty Exploration Corporation” (“TREC” or the “Company”) on February 28, 2006. The address of the Company’s registered office is 40 King Street West, Suite 4400, Toronto, Ontario M5H 3Y4 Canada. The Company’s principal business activity is in the exploration and development of mineral property interests. The Company’s mineral properties are located in United Republic of Tanzania. The consolidated financial statements of the Company as at and for the years ended August 31, 2014 and 2013 comprise of the Company and its subsidiaries (together referred to as the “Company” or “Group”).

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Basis of Preparation (continued)

2.1 Statement of compliance (continued)

The Company’s consolidated financial statements, including comparatives, have been prepared in accordance with and using accounting policies in full compliance with the International Financial Reporting Standards (“IFRS”) and International Accounting Standards (“IAS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”), effective for the Company’s reporting for the year ended August 31, 2014.

These consolidated financial statements were approved and authorized by the Board of Directors of the Company on October 30, 2014.

2.2 Basis of presentation

The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair value, as explained in the accounting policies set out in note 3.

2.3

Adoption of new and revised standards and interpretations

New standards and interpretations adopted

The Company applies, for the first time, certain standards and amendments to the financial statements. These include IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 13 Fair Value Measurement and amendments to IAS 1 Presentation of Financial Statements. The nature and effect of these changes are disclosed below.

The nature and impact of each new standard/amendment is described below:

IAS 1 Presentation of Items of Other Comprehensive Income – Amendments to IAS. The amendments to IAS 1 introduce a grouping of items present in other comprehensive income (OCI). Items that could be reclassified (or recycled) to profit and loss at a future point in time (e.g., net gain on hedge of net investment, exchange differences on translation of foreign operations, net movement on cash flow hedges and net loss or gain on available-for-sale financial assets) now have to be presented separately from items that will never be reclassified (eg. actuarial gains and losses on defined benefit plans and revaluation of land and buildings). The amendment affected presentation only and had no impact on the Company’s financial position of performance.

IAS 1 Clarification of the requirement for comparative information (Amendment). The amendment to IAS 1 clarifies the difference between voluntary additional comparative information and the minimum required comparative information. An entity must include the comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional voluntarily comparative information does not need to be presented in a complete set of financial statements.

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Basis of Preparation (continued)

2.3

Adoption of new and revised standards and interpretations (continued)

New standards and interpretations adopted (continued)

IFRS 10 Consolidated Financial Statements and IAS 27 Separate Financial Statements
IFRS 10 establishes a single control model that applies to all entities including special purpose entities. IFRS 10 replace the parts of previously existing IAS 27 Consolidated and Separate Financial Statements that dealt with consolidated financial statements and SIC-12 Consolidation – Special Purpose Entities. IFRS 10 changes the definition of control such that an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. To meet the definition of control in IFRS 10, all three criteria must be met, including: (a) an investor has power over the investee; (b) the investor has exposure, or rights, to variable returns from its involvement with the investee; and (c) the investor has the ability to use its power over the investee to affect the amount of the investors returns. IFRS 10 had no impact to the Company.

IFRS 11 Joint Arrangements and IAS 28 Investments in Associates and Joint Ventures. IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities-Non-monetary Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using the proportionate consolidation. Instead, JCEs that meet the definition of a joint venture under IFRS 11 must be accounted for using the equity method. The application of IFRS 11 has no impact to the Company.

IFRS 12 Disclosure of Interests in Other Entities. IFRS 12 sets out the requirement for disclosures relating to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. None of these disclosure requirements are applicable for the consolidated financial statements, unless significant events and transactions in the period requires that they are provided. The amendment affected presentation only and had no impact on the Company’s financial position of performance.

IFRS 13 Fair Value Measurement. IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The application of IFRS 13 has not impacted the fair value measurements carried out by the Company.

New standards and interpretations to be adopted in future

At the date of authorization of these Financial Statements, the IASB and IFRIC has issued the following new and revised Standards and Interpretations which are not yet effective for the relevant reporting periods and which the Company has not early adopted these standards, amendments and interpretations. However, the Company is currently assessing what impact the application of these standards or amendments will have on the consolidated financial statements of the Company.

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IFRS 9 Financial Instruments. IFRS 9 covers the classification and measurement, impairment and hedge accounting of financial assets and financial liabilities and the effective date is for annual periods on or after January 1, 2018, with earlier application permitted. The Company is still assessing the impact of adopting IFRS 9. Amendments to IFRS 9 also provide relief from the requirement to restate comparative financial statements for the effect of applying IFRS 9. Instead, additional transition disclosures will be required to help investors understand the effect that the initial application of IFRS 9 has on the classification and measurement of financial instruments.

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Basis of Preparation (continued)

2.4

Adoption of new and revised standards and interpretations (continued)

New standards and interpretations to be adopted in future (continued)

•

IFRS 15 Revenue from Contracts with Customers. In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers. IFRS 15 specifies how and when to recognize revenue as well as requires entities to provide users of financial statements with more informative, relevant disclosures. The standard supersedes IAS 18, Revenue, IAS 11, Construction Contracts, and a number of revenue-related interpretations. Application of the standard is mandatory for all IFRS reporters and it applies to nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts. IFRS 15 must be applied in an entity’s first annual IFRS financial statements for periods beginning on or after January 1, 2017. Application of the standard is mandatory and early adoption is permitted. The Company has not yet determined the impact of the amendments on the Company’s financial statements.

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IAS 32 ‘Financial instruments, Presentation’ – In December 2011, effective for annual periods beginning on or after January 1, 2014, IAS 32 was amended to clarify the requirements for offsetting financial assets and liabilities. The amendments clarify that the right of offset must be available on the current date and cannot be contingent on a future date. The Company has not yet determined the impact of the amendments on the Company’s financial statements.

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Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets. The IASB has published Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36). These narrow-scope amendments to IAS 36, Impairment of Assets, address the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. When developing IFRS 13, Fair Value Measurement, the IASB decided to amend IAS 36 to require disclosures about the recoverable amount of impaired assets. The amendments clarify the IASB’s original intention that the scope of those disclosures is limited to the recoverable amount of impaired assets that is based on fair value less costs of disposal. The amendments to IAS 36 are effective for annual periods beginning on or after January 1, 2014. The Company is still assessing the impact of adopting these amendments to IAS 36.

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IFRIC 21 Levies - In May 2013, the IASB issued IFRIC 21 – Levies (“IFRIC 21”), an interpretation of IAS 37 – Provision, Contingent Liabilities and Contingent Assets (“IAS 37”), on the accounting for levies imposed by governments. IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event (“obligation event”). IFRIC 21 clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. IFRIC 21 is effective for annual periods commencing on or after January 1, 2014. The Company has not yet determined the impact of the amendments on the Company’s financial statements.

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Summary of Significant Accounting Policies

3.1 Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its wholly controlled subsidiaries: Tanzania American International Development Corporation 2000 Limited (“Tanzam”), Tancan Mining Co. Limited (“Tancan”), Buckreef Gold Company Ltd. (“Buckreef”), and Northwestern Base Metals Company Limited (“NWBM”). Control is achieved when the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Subsidiaries are consolidated from the date of acquisition, being the date on which the Company obtains control, and continued to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.

The consolidated financial statements of the Company set out the assets, liabilities, expenses, and cash flows of the Corporation and its subsidiaries, namely:


		Ownership interest as at August 31,
	Country of incorporation	2014	2013
Tanzam	Tanzania	100%	100%
Tancan	Tanzania	100%	100%
Buckreef	Tanzania	55%	55%
NWBM	Tanzania	75%	75%

All intra‐company transactions, balances, income and expenses are eliminated in full on consolidation.

Non‐controlling interests in the net assets of consolidated subsidiaries are identified separately from the Company’s equity therein. Total comprehensive income within a subsidiary is attributed to the non-controlling interest even if it results in a negative balance.

3.2 Mineral properties

All direct costs related to the acquisition and exploration and development of specific properties are capitalized as incurred. If a property is brought into production, these costs will be amortized against the income generated from the property. If a property is abandoned, sold or impaired, an appropriate charge will be made to the statement of comprehensive loss at the date of such impairment. Discretionary option payments arising on the acquisition of mining properties are only recognized when paid. Amounts received from other parties to earn an interest in the Company's mining properties are applied as a reduction of the mining property and deferred exploration and development costs until all capitalized costs are recovered at which time additional reimbursements are recorded in the statement of comprehensive loss, except for administrative reimbursements which are credited to operations.

Consequential revenue from the sale of metals, extracted during the Company's test mining activities, is recognized on the date the mineral concentrate level is agreed upon by the Company and customer, as this coincides with the transfer of title, the risk of ownership, the determination of the amount due under the terms of settlement contracts the Company has with its customer, and collection is reasonably assured. Revenues from properties earned prior to the commercial production stage are deducted from capitalized costs.

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Summary of Significant Accounting Policies (continued)

3.2 Mineral properties (continued)

The amounts shown for mining claims and related deferred costs represent costs incurred to date, less amounts expensed or written off, reimbursements and revenue, and do not necessarily reflect present or future values of the particular properties. The recoverability of these costs is dependent upon discovery of economically recoverable reserves and future production or proceeds from the disposition thereof.

The Company reviews the carrying value of a mineral exploration property when events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying value of the property exceeds its fair value, the property will be written down to fair value with the provision charged against operations in the year of impairment. An impairment is also recorded when management determines that it will discontinue exploration or development on a property or when exploration rights or permits expire.

Ownership in mineral properties involves certain risks due to the difficulties in determining the validity of certain claims as well as the potential for problems arising from the frequently ambiguous conveyance history characteristic of many mineral interests. The Company has investigated the ownership of its mineral properties and, to the best of its knowledge, ownership of its interests are in good standing.

Capitalized mineral property exploration costs are those directly attributable costs related to the search for, and evaluation of mineral resources that are incurred after the Company has obtained legal rights to explore a mineral property and before the technical feasibility and commercial viability of a mineral reserve are demonstrable. Any cost incurred prior to obtaining the legal right to explore a mineral property are expensed as incurred. Field overhead costs directly related to exploration are capitalized and allocated to mineral properties explored. All other overhead and administration costs are expensed as incurred.

Once an economically viable reserve has been determined for a property and a decision has been made to proceed with development has been approved, acquisition, exploration and development costs previously capitalized to the mineral property are first tested for impairment and then classified as property, plant and equipment under construction.

2.3

Property, plant and equipment

Property, plant and equipment (“PPE”) are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of PPE consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Depreciation is provided at rates calculated to write off the cost of PPE, less their estimated residual value, using the declining balance method over the following expected useful lives:


Assets	Rate

Machinery and equipment	20% to 30%
Automotive	30%
Computer equipment	30%
Drilling equipment and automotive equipment	6.67%
Leasehold improvements	20%

An item of PPE is derecognized upon disposal, when held for sale or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset, determined as the difference between the net disposal proceeds and the carrying amount of the asset, is recognized in the consolidated statement of comprehensive loss.

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Summary of Significant Accounting Policies (continued)

3.3 Property, plant and equipment (continued)

Assets under construction are capitalized as construction-in-progress. The cost of construction-in-
progress comprises of its purchase price and any costs directly attributable to bringing it into working
condition for its intended use. Construction-in-progress assets are not depreciated until it is completed
and available for use.

The Company conducts an annual assessment of the residual balances, useful lives and depreciation methods being used for PPE and any changes arising from the assessment are applied by the Company prospectively.

Where an item of plant and equipment comprises major components with different useful lives, the components are accounted for as separate items of plant and equipment. Expenditures incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditures are capitalized.

3.4 Decommissioning, restoration and similar liabilities (“Asset retirement obligation” or “ARO”)

The Company recognizes liabilities for statutory, contractual, constructive or legal obligations, including those associated with the reclamation of mineral properties and PPE, when those obligations result from the acquisition, construction, development or normal operation of the Company’s assets. Initially, a liability for an asset retirement obligation is recognized at its fair value in the period in which it is incurred. Upon initial recognition of the liability, the corresponding asset retirement obligation is added to the carrying amount of the related asset and the cost is amortized as an expense over the economic life of the asset using the declining balance method. Following the initial recognition of the asset retirement obligation, the carrying amount of the liability is increased for the passage of time and adjusted for changes to the current market‐based discount rate, and adjusted for changes to the amount or timing of the underlying cash flows needed to settle the obligation. As of August 31, 2014, and 2013 no liability for asset retirement obligations exists.

3.5 Share based payments

Share based payment transactions

Employees (including directors and senior executives) of the Company receive a portion of their remuneration in the form of share based payment transactions, whereby employees render services as consideration for equity instruments (“equity‐settled transactions”).

In situations where equity instruments are issued and some or all of the goods or services received by the entity as consideration cannot be specifically identified, they are measured at fair value of the share‐based payment.

Equity settled transactions

The costs of equity settled transactions with employees are measured by reference to the fair value at the date on which they are granted.

The costs of equity‐settled transactions are recognized, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (“the vesting date”). The cumulative expense is recognized for equity‐settled transactions at each reporting date until the vesting date reflects the Company’s best estimate of the number of equity instruments that will ultimately vest. The profit or loss charge or credit for a period represents the movement in cumulative expense recognized as at the beginning and end of that period and the corresponding amount is represented in share based payment reserve.

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Summary of Significant Accounting Policies (continued)

3.5 Share based payments (continued)

No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied provided that all other performance and/or service conditions are satisfied.

Where the terms of an equity‐settled award are modified, the minimum expense recognized is the expense as if the terms had not been modified. An additional expense is recognized for any modification which increases the total fair value of the share‐based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.

The effect of outstanding options is considered in the computation of earnings per share, if dilutive.

3.6 Taxation

Income tax expense represents the sum of tax currently payable and deferred tax.

Current income tax

Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the date of the statement of financial position.

Deferred income tax

Deferred income tax is provided using the liability method on temporary differences at the date of the statement of financial position between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences, except:

• where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilized except:

• where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred income tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Summary of Significant Accounting Policies (continued)

3.6 Taxation (continued)

The carrying amount of deferred income tax assets is reviewed at each date of the statement of financial position and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each date of the statement of financial position and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the date of the statement of financial position.

Deferred income tax relating to items recognized directly in equity is recognized in equity and not in the statement of comprehensive loss.

Deferred income tax assets and deferred income tax liabilities are offset if, and only if, a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend to either settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.

Sales tax

Expenses and assets are recognized net of the amount of sales tax, except:

•

When the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item, as applicable

•

When receivables and payables are stated with the amount of sales tax included

The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position.

3.7 Loss per share

The basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. The diluted loss per share reflects the potential dilution of common share equivalents, such as outstanding restricted stock units and share purchase warrants, in the weighted average number of common shares outstanding during the year, if dilutive.

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Summary of Significant Accounting Policies (continued)

3.8 Financial assets

All financial assets are initially recorded at fair value and designated upon inception into one of the following four categories: held‐to‐maturity, available‐for‐sale, loans‐and-receivables or at fair value through profit or loss (“FVTPL”). The Company initially recognizes loans and receivables on the date they are originated. All other financial assets are recognized on the trade date at which the Company becomes party to the contractual provisions of the instruments.

Subsequent to initial recognition, financial assets classified as FVTPL are measured at fair value with unrealized gains and losses recognized through earnings. The Company’s other financial assets are classified as FVTPL.

Financial assets classified as loans‐and‐receivables and held‐to‐maturity are measured at amortized cost. The Company’s cash and cash equivalents and trade and other receivables are classified as loans‐and-receivables.

Subsequent to initial recognition, financial assets classified as available‐for‐sale are measured at fair value with unrealized gains and losses recognized in other comprehensive income (loss) except for losses in value that are considered other than temporary. During the periods presented, the Company has not classified any financial assets as available‐for‐sale.

Transactions costs associated with FVTPL financial assets are expensed as incurred, while transaction costs associated with all other financial assets are included in the initial carrying amount of the asset.

The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the rights and rewards of ownership of the financial asset are transferred.

3.9 Financial liabilities

All financial liabilities are initially recorded at fair value and designated upon inception as FVTPL or other‐financial‐liabilities on the trade date at which the Company becomes party to the contractual provisions of the instrument.

Financial liabilities classified as other‐financial‐liabilities are initially recognized at fair value less directly attributable transaction costs. After initial recognition, other‐financial-liabilities are subsequently measured at amortized cost using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. The Company’s trade and other payables and convertible debt are classified as other‐financial‐liabilities.

Financial liabilities classified as FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as FVTPL. Derivatives, including separated embedded derivatives are also classified as FVTPL unless they are designated as effective hedging instruments. Fair value changes on financial liabilities classified as FVTPL are recognized through the statement of comprehensive loss. At August 31, 2014 and 2013 the Company’s warrant liability has been classified as FVTPL.

The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled, as they expire.

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Summary of Significant Accounting Policies (continued)

3.10 Impairment of financial assets

The Company assesses at each date of the statement of financial position whether a financial asset is impaired.

Assets carried at amortized cost

If there is objective evidence that an impairment loss on assets carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is then reduced by the amount of the impairment. The amount of the loss is recognized in profit or loss.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed to the extent that the carrying value of the asset does not exceed what the amortized cost would have been had the impairment not been recognized. Any subsequent reversal of an impairment loss is recognized in profit or loss.

In relation to trade receivables, a provision for impairment is made and an impairment loss is recognized in profit and loss when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Company will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced through use of an allowance account. Impaired debts are written off against the allowance account when they are assessed as uncollectible.

Available-for-sale

If an available‐for‐sale asset is impaired, an amount comprising the difference between its cost and its current fair value, less any impairment loss previously recognized in profit or loss, is transferred from equity to profit or loss. Reversals in respect of equity instruments classified as available‐for‐sale are not recognized in profit or loss.

3.11 Impairment of non-financial assets

At each date of the statement of financial position, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash‐generating unit to which the assets belong.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre‐tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

If the recoverable amount of an asset (or cash‐generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash‐generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in the statement of comprehensive loss, unless the relevant asset is carried at a re-valued amount, in which case the impairment loss is treated as a revaluation decrease.

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Summary of Significant Accounting Policies (continued)

3.11 Impairment of non-financial assets (continued)

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash‐generating unit) in prior years.

3.12 Cash and cash equivalents

Cash and cash equivalents in the statement of financial position comprise cash at banks and on hand, and short term deposits with an original maturity of three months or less, which are readily convertible into a known amount of cash.

3.13 Related party transactions

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. Related party transactions that are in the normal course of business and have commercial substance are measured at the exchange amount, being the amount agreed by the parties to the transaction.

3.14 Foreign currency transactions

Functional and presentation currency

Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The functional currency of the Company and each of its subsidiaries is the Canadian Dollar (“CDN”). The consolidated financial statements are presented in Canadian Dollars which is the Company’s presentation currency.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of comprehensive loss.

3.15 Significant accounting judgments and estimates

The preparation of these consolidated financial statements requires management to make judgements and estimates and form assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its judgements and estimates in relation to assets, liabilities, revenue and expenses. Management uses historical experience and various other factors it believes to be reasonable under the given circumstances as the basis for its judgements and estimates. Actual outcomes may differ from these estimates under different assumptions and conditions. The most significant estimates relate to the appropriate depreciation rate for property, plant and equipment, the valuation of warrant liability, the recoverability of accounts receivable, the valuation of deferred income tax amounts, impairment testing of mineral properties and deferred exploration and property, plant and equipment and the calculation of share‐based payments. The most significant judgements relate to the recognition of deferred tax assets and liabilities and asset retirement obligations, the determination of the economic viability of a project or mineral property and the determination of functional currencies.

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Summary of Significant Accounting Policies (continued)

3.16 Inventory

Inventory consists of supplies for the Company’s drilling rig to be consumed during the course of exploration development and operations. Cost represents the delivered price of the item.

Mineral Properties

The Company explores or acquires gold or other precious metal concessions through its own efforts or through the efforts of its subsidiaries. All of the Company’s concessions are located in Tanzania.

The Company’s mineral interests in Tanzania are initially held under prospecting licenses granted pursuant to the Mining Act, 2010 (Tanzania) for a period of up to four years, and are renewable two times for a period of up to two years each. Annual rental fees for prospecting licenses are based on the total area of the license measured in square kilometres, multiplied by USD$100/sq.km for the initial period, USD$150/sq.km for the first renewal and USD$200/sq.km for the second renewal. With each renewal at least 50% of the licensed area, if greater than 20 square kilometres, must be relinquished and if the Company wishes to keep the relinquished one-half portion, it must file a new application for the relinquished portion. There is also an initial one-time “preparation fee” of USD$500 per license. Upon renewal, there is a renewal fee of USD$300 per license.

Certain of the Company’s prospecting licenses are currently being renewed.

The Company assessed the carrying value of mineral properties and deferred exploration costs as at August 31, 2014 and recorded a write-down of $1,209,640 during the year ended August 31, 2014 (2013 - $2,194,907)

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Convertible Debt

As of August 31, 2014, the company has no outstanding Convertible Debt Obligations.

(i)

August 31, 2014:


	August 2010	September 2010	October 2010	Total

Gross proceeds at inception	$ 1,000,000	$ 1,000,000	$1,060,000	$ 3,060,000
Fair value of liability portion	965,375	965,375	1,023,297	2,954,047
Fair value of equity portion	34,625	34,625	36,703	105,953

Liability portion of convertible debt:
Initial fair value of debt component	$ 965,375	$ 965,375	$ 1,023,297	$ 2,954,047
Issuance costs	(111,160)	(3,359)	(22,383)	(136,902)
Accretion expense	101,523	87,606	152,716	341,845
Interest paid	(36,164)	(63,288)	(93,630)	(193,082)
Conversion into common shares	(919,574)	(986,334)	-	(1,905,908)
Cash repayment on principal	-	-	(1,060,000)	(1,060,000)

Closing balance of liability portion (current)	$ -	$ -	$ -	$ -

Equity portion of convertible debt:
Opening balance	$ -	$ -	$ -	$ -
Initial fair value of equity component	34,625	34,625	36,703	105,953
Issuance costs	(3,987)	(120)	(804)	(4,911)
Conversion into common shares	(30,638)	(34,505)	-	(65,143)

Closing balance of equity portion	$ -	$ -	$ 35,899	$ 35,899

(ii)

August 31, 2013:


	August 2010	September 2010	October 2010	Total

Gross proceeds at inception	$ 1,000,000	$ 1,000,000	$1,060,000	$ 3,060,000
Fair value of liability portion	965,375	965,375	1,023,297	2,954,047
Fair value of equity portion	34,625	34,625	36,703	105,953

Liability portion of convertible debt:
Initial fair value of debt component	$ 965,375	$ 965,375	$ 1,023,297	$ 2,954,047
Issuance costs	(111,160)	(3,359)	(22,383)	(136,902)
Accretion expense	101,523	87,606	147,937	337,066
Interest paid	(36,164)	(63,288)	(63,630)	(163,082)
Conversion into common shares	(919,574)	(986,334)	-	(1,905,908)

Closing balance of liability portion (current)	$ -	$ -	$1,085,221	$1,085,221

Equity portion of convertible debt:
Opening balance	$ -	$ -	$ -	$ -
Initial fair value of equity component	34,625	34,625	36,703	105,953
Issuance costs	(3,987)	(120)	(804)	(4,911)
Conversion into common shares	(30,638)	(34,505)	-	(65,143)

Closing balance of equity portion	$ -	$ -	$ 35,899	$ 35,899

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Convertible Debt (continued)

On August 17, 2010, the Company issued a three-year convertible promissory note to an arm’s length third party, in the principal amount of $1,000,000 bearing interest at 3% and convertible into 255,484 common shares at a price of $4.286 per share. The agreement charged finance and commitment fees of $95,000 which was paid by issuing 22,166 common shares. In September 2011, the loan was converted into 233,318 shares.

On September 23, 2010, the Company completed a private placement with an arm’s length third party consisting of a three-year convertible promissory note in the principal amount of $1,000,000 bearing interest at 3% and convertible into 221,337 common shares at the price of $4.518 per share. The Company received notice to convert the Promissory Note in the principal amount of $1,000,000 and 221,337 shares were issued on October 17, 2012.

On October 4, 2010, the Company completed a private placement with arm’s length third parties consisting of three-year convertible promissory notes in the aggregate principal amount of $1,060,000 bearing interest at 3% and convertible into 204,772 common shares at the price of $5.1765 per share. On September 14, 2013 the promissory notes matured and the Holders elected repayment of the promissory notes in cash. Accordingly $1,060,000 plus interest in the amount of $30,000 was paid on September 16, 2013.

Each of the convertible debentures includes a conversion feature. The Company determined a fair value of the financial liability by obtaining independent bank rates of 4.25% for the August, September and October 2010 debt, assuming a three-year expected life and assigned the residual value of all debts to the equity conversion feature in the amount of $105,953. Total transaction costs for all debt agreements were $141,813 of which $4,911 was allocated to the equity component, which aggregated to $35,899 at August 31, 2014 (August 31, 2013 - $35,899) and is included in share based payment reserve in shareholders’ equity.

Other financial assets

Other financial assets are comprised of shares of publicly traded companies. As at August 31, 2014, these investments have been sold resulting in a balance of $nil. As of August 31, 2013, these investments were measured at their fair value of $5,250. The impact to the consolidated financial statements of the revaluation to market value for the year ended August 31, 2014 resulted in a realized gain of $417 (2013 – $12,600 unrealized loss) as the investments were sold. In the prior period market values of these securities decreased resulting in an unrealized loss.

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Capital Stock

Share Capital

The Company’s Restated Articles of Incorporation authorize the Company to issue an unlimited number of common shares. On November 23, 2011, the Board resolved that the Company authorize for issuance up to a maximum of 115,000,000 common shares, subject to further resolutions of the Company’s board of directors.


	Number	Amount ($) ($)
Balance on September 1, 2012	100,459,937	$ 113,476,858
Issued on conversion of convertible debt	221,337	986,334
Issued pursuant to Restricted Share Unit Plan	241,308	1,151,010
Balance at August 31, 2013	100,922,582	$ 115,614,202
Issued pursuant to Restricted Share Unit Plan	320,893	1,354,238
Issued for settlement of lawsuit	82,405	185,000
Balance at August 31, 2014	101,325,880	$ 117,153,440

Activity during the year ended August 31, 2014:

During the year ended August 31, 2014, 320,893 shares were issued pursuant to the Company’s Restricted Share Unit Plan at an average price of $4.22 for total issued value of $1,354,238.

On June 27, 2014, the Company issued 82,405 common shares common shares at a price of $2.245 per share to an arm’s length third party in settlement of legal proceedings initiated by the consultant for consulting services provided to the Company.

Activity during the year ended August 31, 2013:

On October 17, 2012, pursuant to the private placement completed on September 23, 2010, the Company received notice from an arm’s length third party to convert its Promissory Note in the principal amount of $1,000,000 bearing interest at 3% and convertible into 221,337 common shares at a price of $4.518 per share, and 221,337 shares were issued on October 17, 2012.

During the year ended August 31, 2013, 241,308 shares were issued pursuant to the Company’s Restricted Share Unit Plan at an average price of $4.77 for total issued value of $1,151,010.

Warrant issuances:

There were no warrant issuances during the year ended August 31, 2014 or the year ended August 31, 2013.

Warrants and Compensation Options outstanding:

At August 31, 2014, there were no warrants or compensation options outstanding.

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Capital Stock (continued)

Warrant liability:

As part of the Company’s prospectus financing on August 12, 2011, and April 18, 2012, 5,263,158 warrants were issued exercisable at USD$6.25.

Effective December 7, 2011, the exercise price of the 5,263,158 common share purchase warrants was reduced from USD$6.25 to USD$4.00 and the term of the warrants was extended one year to expire August 12, 2014. Effective February 6, 2014, the exercise price of 2,381,578 common share purchase warrants was further reduced from USD$4.00 to USD$2.50.

Foreign currency denominated warrants (not including compensation warrants), are considered a derivative as they are not indexed solely to the entity’s own stock. The Company’s functional currency is the Canadian dollar as such the warrants whose exercise price is denominated in US dollars have been recorded under liabilities and carried at fair value as determined by the Black-Scholes option pricing model, with changes in fair values recorded as gains or losses in the statements of comprehensive loss.

The table below shows the activity for warrant liability for the years ended August 31, 2014 and 2013:


*Year ended*	August 31, 2014	August 31, 2013
Balance at beginning of year	$ 3,524,000	$ 8,114,000
Decrease in value of warrant liability	(3,524,000)	(4,590,000)
Balance at end of year	$ -	$ 3,524,000

During the year ended August 31, 2014, the value of the warrants decreased to $nil from the balance at August 31, 2013 of $3,524,000, as a result of the warrants expiring unexercised on August 12, 2014. The assumptions in valuing the warrants at August 31, 2013 included an expected volatility of 64-83%, a US risk free interest rate of 0.03% to 0.13% and an expected life of 2 to 12 months. The decrease in value of $3,524,000 (2013 – $4,590,000 decrease) has been recorded as a gain (2013 – gain) in the statement of comprehensive loss.

Employee stock ownership plan:

On May 1, 2003, the Company established a non-leveraged employee stock ownership plan (ESOP) for all eligible employees, consultants, and directors. The Company matches 100 percent of participants’ contributions up to 5 percent of the participants’ salaries and 50 percent of participants’ contributions between 6 percent and 30 percent of the participants’ salaries. All contributions vest immediately. ESOP compensation expense for the year ended August 31, 2014 was $71,251 (2013 - $58,864) and is included in salaries and benefits expense.

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Capital Stock (continued)

Restricted share units:

The Restricted Stock Unit Plan (RSU Plan) is intended to enhance the Company’s and its affiliates’ abilities to attract and retain highly qualified officers, directors, key employees and other persons, and to motivate such officers, directors, key employees and other persons to serve the Company and its affiliates and to expend maximum effort to improve the business results and earnings of the Company, by providing to such persons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company. To this end, the RSU Plan provides for the grant of restricted stock units (RSUs). Each RSU represents an entitlement to one common share of the Company, upon vesting. As of November 9, 2012, the Board resolved to suspend 1,500,000 of the 2,500,000 common shares previously authorized for issuance under the RSU Plan, such that a maximum of 1,000,000 shares shall be authorized for issuance under the RSU Plan, until such suspension may be lifted or further amended. As of January 9, 2014, the Board further resolved to amend the suspension to 1,200,000 of the 2,500,000 common shares previously authorized for issuance under the RSU Plan, such that a maximum of 1,300,000 shares shall be authorized for issuance under the RSU Plan, until such suspension may be lifted or further amended. RSU awards may, but need not, be subject to performance incentives to reward attainment of annual or long-term performance goals in accordance with the terms of the RSU Plan. Any such performance goals are specified in the award agreement.

The Board of Directors implemented the RSU Plan under which officers, directors, employees and others are compensated for their services to the Company. Annual compensation for outside directors is $68,750 per year, plus $6,875 per year for serving on Committees, plus $3,437 per year for serving as Chair of a Committee. On April 11, 2012, the board approved that at the election of each individual director, up to one half of the annual compensation may be received in cash, paid quarterly. The remainder of the director’s annual compensation (at least one half, and up to 100%) will be awarded as RSUs in accordance with the terms of the RSU Plan and shall vest within a minimum of one (1) year and a maximum of three (3) years, at the election of the director, subject to the conditions of the RSU Plan with respect to earlier vesting. In 2012 outside directors had the option to elect to receive 100% of their compensation in RSUs. If 100% compensation in RSUs is elected, the compensation on which the number of RSUs granted in excess of the required one half shall be increased by 20%.

The Company uses the fair value method to recognize the obligation and compensation expense associated with the RSU’s. The fair value of RSU’s issued is determined on the grant date based on the market price of the common shares on the grant date multiplied by the number of RSUs granted. The fair value is expensed over the vesting term. Upon redemption of the RSU the carrying amount is recorded as an increase in common share capital and a reduction in the share based payment reserve.

The Company has a RSU Plan which allows the Company to issue RSU’s which are redeemable for the issue of common shares at prevailing market prices on the date of the RSU grant. The aggregate number of RSU’s outstanding is limited to a maximum of ten percent of the outstanding common shares. The Company has granted RSU’s to officers and key employees.

Of the 1,300,000 shares authorized for issuance under the Plan, 1,194,254 shares have been issued as at August 31, 2014.

Total share-based compensation expense related to the issue of RSUs was $1,416,868 for the year ended August 31, 2014 (2013 - $1,353,967). The amount capitalized to mineral properties for the year ended August 31, 2014 was $114,363 (2013 - $91,886).

Tanzanian Royalty Exploration Corporation

Notes to the Consolidated Financial Statements

For the Years Ended August 31, 2014 and 2013

Capital Stock (continued)

The following table summarizes changes in the number of RSU’s outstanding:


Tanzanian Royalty Exploration Corporation Consolidated Statements of Financial Position (Expressed in Canadian Dollars)
*As at*	August 31, 2014	August 31, 2013

Assets
Current Assets
Cash and cash equivalents (Note 18)	$ 1,829,661	$ 10,679,516
Other financial assets (Note 7)	-	5,250
Other receivables (Note 15)	691,799	512,369
Inventory (Note 17)	24,230	11,849
Prepaid expenses (Note 14)	68,882	80,761
	2,614,572	11,289,745
Property, plant and equipment (Note 5)	3,125,861	971,388
Mineral properties and deferred exploration (Note 4)	47,052,468	45,932,207
	$ 52,792,901	$ 58,193,340

Liabilities
Current Liabilities
Trade, other payables and accrued liabilities (Note 16)	$ 1,288,905	$ 1,264,420
Convertible debt (Note 6)	-	1,085,221
Warrant liability (Note 8)	-	3,524,000
	1,288,905	5,873,641
Shareholders’ equity
Share capital (Note 8)	117,153,440	115,614,202
Share based payment reserve (Note 10)	935,060	873,736
Warrants reserve (Note 9)	870,037	870,037
Accumulated deficit	(69,095,649)	(67,117,263)
Equity attributable to owners of the Company	49,862,888	50,240,712
Non-controlling interests (Note 21, 4(a), 4(f))	1,641,108	2,078,987
Total shareholders’ equity	51,503,996	52,319,699
	$ 52,792,901	$ 58,193,340


Tanzanian Royalty Exploration Corporation Consolidated Statements of Comprehensive Loss (Expressed in Canadian Dollars)
*Year ended August 31,*	2014	2013

Administrative expenses
Depreciation (Note 5)	$ 258,068	$ 288,519
Consulting	225,914	317,257
Directors’ fees (Note 11)	376,434	375,342
Office and general	380,631	388,675
Shareholder information	265,421	343,291
Professional fees	523,359	732,328
Salaries and benefits	1,304,895	1,388,160
Share based payments (Note 8)	1,106,517	1,053,509
Travel and accommodation	223,886	126,362
	(4,665,125)	(5,013,443)
Other income (expenses)
Foreign exchange	(18,957)	(5,215)
Interest, net	65,362	133,116
Interest accretion	(4,779)	(55,549)
Unrealized gain (loss) on other financial assets (Note 7)	417	(12,600)
Exploration costs	(347,699)	(497,263)
Write off of mineral properties and deferred exploration costs (Note 4)	(1,209,640)	(2,194,907)
Write off of inventory	-	(246,548)
Recovery of VAT, net	262,116	-
Change in value of warrant liability (Note 8)	3,524,000	4,590,000
Withholding tax recoveries (costs)	(21,960)	76,411
Net loss and comprehensive loss	$ (2,416,265)	$ (3,225,998)

Loss and comprehensive loss for the year attributable to:
Owners of the Company	(1,978,386)	(3,018,990)
Non-controlling interests	(437,879)	(207,008)
	$ (2,416,265)	$ (3,225,998)

Loss per share
– basic and diluted	$ (0.02)	$ (0.03)
Weighted average # of shares outstanding
– basic and diluted	101,051,691	100,735,972


Tanzanian Royalty Exploration Corporation Consolidated Statements of Cash Flow (Expressed in Canadian Dollars)
*Year ended August 31,*	2014		2013

*Operations*
Net loss	$ (2,416,265)		$ (3,225,998)
Adjustments to reconcile net loss to cash flow from operating activities:
Depreciation	258,068		288,519
Change in value of warrant liability	(3,524,000)		(4,590,000)
Share based payments	1,106,517		1,053,509
Unrealized loss on other financial assets	-		12,600
Share issued on settlement of lawsuit	185,000		-
Realized gain on other financial assets	(417)		-
Cash interest paid	(11,033)		(74,486)
Cash interest received	62,455		124,432
Interest accretion	4,779		55,549
Non cash directors’ fees	194,682		208,572
Write-off of mineral properties	1,209,640		2,194,907
Write-off of inventory	-		246,548
Net change in non-cash operating working capital items:
Other receivables	(179,430)		(441,144)
Inventory	(12,381)		(10,002)
Prepaid expenses	11,879		6,915
Trade, other payables and accrued liabilities	(375,084)		12,126
Cash used in operations	(3,485,590)		(4,137,953)
Investing
Mineral properties and exploration expenditures	(1,867,391)	(5,232,798)
Option payments received and recoveries	-	41,786
Proceeds from sale of other financial assets	5,667	-
Equipment and leasehold improvements, net	(2,412,541)	(50,197)
Cash used in investing activities	(4,274,265)	(5,241,209)
Financing
Repayment of convertible debt	(1,090,000)		-
Cash used in from financing activities	(1,090,000)		-
Net decrease in cash and cash equivalents	(8,849,855)		(9,379,162)
Cash and cash equivalents, beginning of year	10,679,516		20,058,678
Cash and cash equivalents, end of year	$ 1,829,661		$ 10,679,516


Supplementary information:	2014		2013
Non-cash transactions:
Share based payments capitalized to mineral properties	$ 114,363	$ 91,886
Shares issued on conversion of convertible debt	-	986,334
Shares issued pursuant to RSU plan	1,354,238	1,151,010


	Drilling equipment	Automotive	Computer Equipment	Machinery and equipment	Leasehold improvements	Construction-in-progress *	Total
Cost
As at September 1, 2012	$ 464,487	$ 302,640	$ 91,645	$ 1,527,153	$ 89,329	$ -	$ 2,475,254
Additions	-	-	26,122	13,076	10,999	-	50,197
As at August 31, 2013	$ 464,487	$ 302,640	$ 117,767	$ 1,540,229	$ 100,328	$ -	$ 2,525,451
Additions	-	-	5,919	323,982	-	2,082,640	2,412,541
Disposals	-	-	(11,374)	(20,101)	-	-	(31,475)
As at August 31, 2014	$ 464,487	$ 302,640	$ 112,312	$ 1,844,110	$ 100,328	$ 2,082,640	$ 4,906,517


Accumulated depreciation
As at September 1, 2012	$ 232,139	$ 174,501	$ 50,371	$ 790,667	$ 17,866	$ -	$ 1,265,544
Depreciation expense	15,490	35,160	22,695	199,415	15,759	-	288,519
As at August 31, 2013	$ 247,629	$ 209,661	$ 73,066	$ 990,082	$ 33,625	$ -	$ 1,554,063
Depreciation expense	14,456	24,612	21,903	183,756	13,341	-	258,068
Disposals	-	-	(11,374)	(20,101)	-	-	(31,475)
As at August 31, 2014	$ 262,085	$ 234,273	$ 83,595	$ 1,153,737	$ 46,966	$ -	$ 1,780,656
Net book value
As at September 1, 2012	$ 232,348	$ 128,139	$ 41,274	$ 736,486	$ 71,463	$ -	$ 1,209,710
As at August 31, 2013	$ 216,858	$ 92,979	$ 44,701	$ 550,147	$ 66,703	$ -	$ 971,388
As at August 31, 2014	$ 202,402	$ 68,367	$ 28,717	$ 690,373	$ 53,362	$ 2,082,640	$ 3,125,861


Number of RSU’s		Weighted average fair value at issue date
Balance, September 1, 2012	446,247	$ 5.09
Granted	416,639	$ 3.52
Redeemed for common shares	(241,308)	$ 4.77
Balance, August 31, 2013	621,578	$ 4.16
Granted	485,139	$ 2.70
Redeemed for common shares	(320,893)	$ 4.22
Forfeited	(2,793)	$ 3.58
Balance, August 31, 2014	783,031	$ 3.23


*Year ended*	August 31, 2014	August 31, 2013
Balance at beginning of year	$ 870,037	$ 870,037
Balance at end of year	$ 870,037	$ 870,037


*Year ended August 31,*	Notes	2014	2013
Legal services	(i)	$257,050	$269,880
Rent	(ii)	$21,347	$21,364
Technical Committee	(iii)	$nil	$55,709
Rent	(iv)	$33,924	$23,750
Consulting	(v)	$160,954	$82,173
Consulting	(vi)	$174,163	$nil


	August 31, 2014	August 31, 2013

Insurance	$ 41,475	$ 47,159
Listing fees	25,602	30,411
Other	1,805	3,191
Total prepaid expenses	$ 68,882	$ 80,761


	August 31, 2014	August 31, 2013

Receivable from related parties	$ 27,139	$ 811
HST and VAT Receivable	658,437	510,062
Other	6,223	1,496
Total Trade and Other Receivables	$ 691,799	$ 512,369


	August 31, 2014	August 31, 2013

Less than 1 month	$ 31,846	$ 499,537
1 to 3 months	12,840	12,832
Over 3 months	647,113	-
Total Other Receivables	$ 691,799	$ 512,369


	Year ended August 31, 2014	Year ended August 31, 2013
Consolidated net income (loss)
Canada	$ (135,311)	$ 1,223,920
Tanzania	(2,280,954)	(4,449,918)
	$ (2,416,265)	$ (3,225,998)
	As at August 31, 2014	As at August 31, 2013
Identifiable assets
Canada	$ 1,830,815	$ 10,748,028
Tanzania	50,962,086	47,445,312
	$ 52,792,901	$ 58,193,340
Non-current assets
Canada	$ 19,551	$ 21,486
Tanzania	50,158,778	46,882,109
	$ 50,178,329	$ 46,903,595


	August 31, 2014	August 31, 2013
Current assets	$ 40,395	$ 11,849
Long term assets	16,546,400	13,337,680
Current liabilities	(10,801)	(286,091)
Advances from parent	(17,576,972)	(13,762,479)

Net loss for the year	301,938	324,477


			2014		2013
Combined basic Canadian federal and provincial statutory income tax rates including surtaxes			26.25%		26.0%

Statutory income tax rates applied to accounting income		$	(637,000)	$	(837,000)

Increase (decrease) in provision for income taxes:
	Foreign tax rates different from statutory rate		(86,000)		(259,000)
	Permanent differences and other items		77,000		487,000
	Benefit of tax losses not recognized		646,000		609,000

Provision for income taxes		$	-	$	-


2015	$	997,000
2026		1,711,000
2027		1,388,000
2028		1,333,000
2029		1,587,000
2030		1,427,000
2031		2,378,000
2032		2,496,000
2033		2,352,000
2034		2,063,000
	$	17,732,000


Deferred Income Tax Liabilities	Mineral properties	Debt issuance cost	Total

At August 31, 2012	$ (10,348,000)	$ (18,000)	$ (10,366,000)
Charged to the consolidated statement of comprehensive loss	(369,000)	(8,000)	(377,000)
At August 31, 2013	$ (10,717,000)	$ (26,000)	$ (10,743,000)
Charged to the consolidated statement of comprehensive loss	(231,000)	(9,000)	(240,000)
At August 31, 2013	$ (10,948,000)	$ (35,000)	$ (10,983,000)


Deferred Income Tax Assets	Non-capital losses	Non-capital losses	Total

At August 31, 2012	$ 10,348,000	$ 18,000	$ 10,366,000
Charged to the consolidated statement of comprehensive loss	369,000	8,000	377,000
At August 31, 2013	$ 10,717,000	$ 26,000	$ 10,743,000
Charged to the consolidated statement of comprehensive loss	231,000	9,000	240,000
At August 31, 2013	$ 10,948,000	$ 35,000	$ 10,983,000

Net deferred tax assets (liabilities)	$ -	$ -	$ -


	August 31, 2014	August 31, 2013

Non capital losses	$ 32,286,000	$ 30,136,000
Property, plant and equipment	192,000	184,000
Capital losses	127,000	127,000
	$ 32,605,000	$ 30,447,000