ENHANCEMENT LECTURE
WASTING ASSETS
LECTURE NOTES
Costs of Wasting Assets
• Acquisition
• Exploration and evaluation
• Development
• Restoration
PFRS 6 – Exploration for and Evaluation of Mineral Resources
PFRS 6 permits an entity to develop an accounting policy for exploration and evaluation assets without specifically
considering the requirements of paragraphs 11 and 12 of PAS 8. Thus, an entity adopting PFRS 6 may continue to
use the accounting policies applied immediately before adopting the PFRS. This includes continuing to use
recognition and measurement practices that are part of those accounting policies.
Methods used before PFRS 6
Successful effort method
Cost of successful exploration – Capitalized
Cost of unsuccessful exploration – Expensed
Successful – The technical feasibility and commercial viability of extracting a mineral resource are demonstrable
Full cost method
All exploration and evaluation expenditures are capitalized
Key Definitions
Exploration for and evaluation of mineral resources
The search for mineral resources, including minerals, oil, natural gas and similar non-regenerative resources after the
entity has obtained legal rights to explore in a specific area, as well as the determination of the technical feasibility
and commercial viability of extracting the mineral resource.
Examples of Exploration and Evaluation Activities
• acquisition of rights to explore
• topographical, geological, geochemical and geophysical studies
• exploratory drilling
• trenching
• sampling
• activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral
resource
Exploration and evaluation expenditures
Expenditures incurred by an entity in connection with the exploration for and evaluation of mineral resources
before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.
Exploration and evaluation assets
Exploration and evaluation expenditures recognized as assets in accordance with the entity’s accounting policy
Reclassification of Exploration and Evaluation Asset
An exploration and evaluation asset shall no longer be classified as such when the technical feasibility and
commercial viability of extracting a mineral resource are demonstrable. Exploration and evaluation assets shall be
assessed for impairment, and any impairment loss recognized, before reclassification.
Development Cost
Intangible
e.g. Cost of drilling and construction of wells Include in the cost of wasting asset
Tangible
e.g. Building and machinery and equipment Recognize as separate asset
Depreciation method:
Same method for other PPE
If the problem is silent
Useful life > Life of WA – Output
Useful life < Life of WA – Straight line
Estimated Restoration Cost
Included when recognized as provision. Therefore, the restoration cost must
• Be a present obligation,
• Represent a probable outflow of economic resources, and
• Be measurable reliably
Theory
1.
Information needed to compute a depletion charge per unit includes the
a. estimated total amount of resources available for removal.
b. amount of resources removed during the period.
c. cumulative amount of resources removed.
d. amount of resources sold during the period.
2.
Which of the following depreciation methods most closely approximates the method used to deplete the cost
of natural resources?
a. Straight-line method
b. Double-declining-balance method
c. Sum-of-the-years'-digits method
d. Units-of-production method
3.
Which of the following depreciation methods is computed in the same way as depletion?
a. Straight-line
b. Sum-of-the-years'-digits
c. Double-declining-balance
d. Productive-output
Problems
1.
Joseph Company acquired a tract of land containing an extractable natural resource. Joseph is required by the
purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural
resource. Geological surveys estimate that the recoverable reserves will be 2,500,000 tons and that the land will
have a value of $1,000,000 after restoration. Relevant cost information follows:
Land .................................................
Estimated restoration costs ..........................
$9,000,000
1,500,000
What should be the depletion charge per ton of extracted material?
a. $4.00
b. $3.80
c. $3.60
d. $3.20
2.
In January 2005, Vance Mining Corporation purchased a mineral mine for $7,200,000 with removable ore
estimated by geological surveys at 4,320,000 tons. The property has an estimated value of $720,000 after the ore
has been extracted. Vance incurred $2,160,000 of development costs preparing the property for the extraction
of ore. During 2005, 540,000 tons were removed and 480,000 tons were sold. For the year ended December 31,
2005, Vance should include what amount of depletion in its cost of goods sold?
a. $720,000
b. $810,000
c. $960,000
d. $1,080,000
3.
In 2004, Newman Company paid $1,000,000 to purchase land containing a total estimated 160,000 tons of
extractable mineral deposits. The estimated value of the property after the mineral has been removed is
$200,000. Extraction activities began in 2005, and by the end of the year, 20,000 tons had been recovered and
sold. In 2006, geological studies indicated that the total amount of mineral deposits had been underestimated
by 25,000 tons. During 2006, 30,000 tons were extracted, and 28,000 tons were sold. What is the depletion rate
per ton (rounded to the nearest cent) in 2006?
a. $4.24
b. $4.32
c. $4.85
d. $5.19
4.
In 2004, Silverspur Mining Inc. purchased land for $5,600,000 that had a natural resource supply estimated at
4,000,000 tons. When the natural resources are removed, the land has an estimated value of $640,000. The
required restoration cost for the property is estimated to be $800,000.
Development and road construction costs on the land were $560,000, and a building was constructed at a cost of
$88,000 with an estimated $8,000 salvage value when all the natural resources have been extracted.
During 2005, additional development costs of $272,000 were incurred, but additional resources were not
discovered. Production for 2004 and 2005 was 700,000 tons and 900,000 tons, respectively.
Compute the depletion charge for 2004 and 2005. (Include depreciation on the building, if any, as a depletion
charge.) Round depletion charge to the nearest cent.
ANS:
Acquisition costs ....................................
Restoration costs ....................................
Residual value--land .................................
Development costs ....................................
Building .............................................
Salvage value--building ..............................
$5,600,000
800,000
(640,000)
560,000
88,000
(8,000)
$6,400,000
$6,400,000/4,000,000 tons = $1.60 per ton
2004:
2005:
700,000 tons $1.60 = ......................
Original cost ...............................
Additional costs--2005 ......................
Estimated depletion--2004 ...................
Balance subject to depletion ................
$5,552,000/3,300,000 tons = $1.68 per ton (rounded)
900,000 tons $1.68 = ..............................
5.
$1,120,000
$6,400,000
272,000
6,672,000
(1,120,000)
$5,552,000
$1,512,000
In 2005, Hukay Mining Company purchased property with natural resources P6,200,000. The property was
relatively close to a large city and had an expected residual value of P900,000.
a.
b.
c.
d.
Year
2005
2006
2007
2008
2009
In 2005, Hukay spent P400,000 in development costs and P300,000 in buildings on the property, Hukay
does not anticipate that the buildings will have utility after the natural resources are depleted.
In 2006 and 2008, P300,000 and P800,000,
respectively, were spent for additional developments on the mine.
The tonnage mined and estimated remaining tons for years 2005-2009 are as follows:
Tons Extracted
0
1,500,000
1,800,000
1,700,000
900,000 0
Estimated Tons Remaining
5,000,000
3,500,000
2,000,000
900,000
REQUIRED:
Compute the depletion and depreciation expense for the years 2005 – 2009.
SUGGESTED SOLUTION GUIDE:
Depletion
Year
Output
2005
2006
1,500,000
2007
1,800,000
2008
1,700,000
2009
900,000
Rate
1.20
1.11
1.15
Depletion
1,800,000
1,998,000
1,955,000
1,047,000
Computation of depletion rate - 2006
Cost of land
P6,200,000
Development cost – 2005
400,000
Development cost – 2006
300,000
Total cost
6,900,000
Residual value
( 900,000)
Depletable amount
6,000,000
/Estimated reserves
5,000,000
Depletion rate
1.20
Computation of depletion rate - 2007
Original DA
P6,000,000
Depletion – 2006
(1,800,000)
Remaining DA, 1/1/07
4,200,000
/Est. reserves, 1/1/07
3,800,000
Depletion rate
1.11
Computation of depletion rate - 2008
Remaining DA, 1/1/07
P4,200,000
Depletion – 2007
(1,998,000)
Remaining DA, 1/1/08
2,202,000
Development cost – 2008
800,000
Depletable amount-2008
3,002,000
/Est. reserves, 1/1/08
2,600,000
Depletion rate
1.15
Depreciation
Year
Output
2005
2006
1,500,000
2007
1,800,000
2008
1,700,000
2009
900,000
Rate
0.06
0.06
0.04
Depreciation
90,000
108,000
68,000
34,000
Computation of depreciation rate - 2006
Cost/DA of building
P 300,000
/Estimated reserves
5,000,000
Depreciation rate
0.06
Computation of depreciation rate - 2007
Cost/DA of building
P 300,000
Depreciation – 2006
(90,000)
Remaining DA, 1/1/07
210,000
/Est. reserves, 1/1/07
3,800,000
Depreciation rate
0.06
Computation of depreciation rate - 2008
Remaining DA, 1/1/07
P 210,000
Depreciation – 2007
(108,000)
Remaining DA, 1/1/08
102,000
/Est. reserves, 1/1/08
2,600,000
0.04