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Depletion Notes: Disclaimer: Not Entirely
Depletion Notes: Disclaimer: Not Entirely
Introduction
Depletion is the removal or extraction of wasting assets. There is no IFRS standard that guides
the accounting for depletion. There is only IFRS 6 which guides ‘exploration and evaluation’ costs which
are costs that are included in accounting for depletion. Just like depreciation, depletion is not a matter of
valuation, but is rather a cost accumulation system for wasting assets. It is the depreciation counterpart of
wasting assets, just like how depreciation is to plant, property and equipment.
Due to the absence of an IFRS standard, entities are compelled to produce their own accounting
policy regarding depletion.
Exploration and evaluation costs are costs that form part of computing for an asset’s depletion.
These are costs that are incurred:
a. After acquiring the legal right to explore the land purchased in order to look for producible ‘holes’
or resources.
b. Before technical feasibility and commercial viability are demonstrable because the costs after the
two are demonstrable are called development costs.
Initially, at cost. After, you can either choose between the cost model or the revaluation model
which in the absence of fair value can be substituted with the depreciated replacement cost (also known
as sound value). Also, when measuring for an asset’s depletion, we use the PRODUCTION or OUTPUT
method since using the straight line basis to account for depletion would be harder since it’s relatively
hard to estimate the useful life of a natural resource.
a. Acquisition Cost
This is basically the initial cost of the asset. It is the amount paid in order to acquire the
right to use the asset. Also, when there is a land value attached to the property, we
deduct the residual land value, just like how we deduct the residual value from plant,
property and equipment, from the initial cost of the asset to arrive at the depletable
amount.
b. Exploration Cost
These are cost incurred to locate producible ‘holes’. These costs are part of the
aforementioned E&E list except for number six (6) since number six (6) relates to the
evaluation of the asset – costs which are not normally capitalized. Disclaimer: Not entirely
In accounting for exploration costs, there two methods which are often used:
c. Development Cost
These are costs incurred after E&E. These are now actually the costs incurred to per se
produce the product. The development cost may either be tangible or intangible.
The ERC is only capitalized when the entity incurs the obligation to comply with a legal
statute or by contract. This is netted against the residual land value and minimizing it
therefore increasing the costs of depletion.
Shutdown
When an entity experiences a shutdown, the depreciation of the tangible assets, or of plant,
property and equipment related to the property, shall CEASE to be in the output method, if in any case it
is. The entity will switch to a straight line basis until the shutdown ends, to by which the entity can go back
to the output method of depreciating assets. (IMPORTANT! Do not forget this.)
Declaration of Dividends
In a corporation, the issuance of dividend is only until the balance of its Retained Earnings
account. Under this doctrine, a corporation cannot return shares to its shareholders during the
lifetime of the corporation as this is seen as a trust fund by the entity. However, in the;
In the WAD, the declaration of dividends is to the extent of both the Retained Earnings account
and the Accumulated Depletion account. This is viewed by the entity as capital liquidated. In the
WAD, the guiding principle is that due to the nature of the wasting asset being irreplaceable and
consumable at once, it is unfair to the shareholders for the entity to be withholding such an
amount as this, the balance of the Accumulated Depletion, are costs that have already been
recovered. Shareholders are also aware of the decreasing capital requirements of an entity
engaged in the extraction of natural resources.