Exploration and Evaluation of Mineral Resources (PFRS 6; PAS8)

-search for mineral resources

 After -entity has obtained legal rights to explore
 Before –extracting technical feasibility and commercial viability

*recognized when; required by the entity’s accounting policy (based on management’s judgement)

Cost of Mineral Resources ( Wasting asset )

 Purchase Price; acquisition cost, lease cost
 Exploration cost
 Development cost; intangible
 Restoration cost; estimated

Measurement
*initially – at cost
*subsequent – cost model
- revaluation model

Wasting Asset
-material objects of economic value and utility to man produced by nature.
- includes; coal, oil, ore, metals, gold, silver and timber. Characterized by two main features;
 Physically consumed
 Irreplaceable

Depletion
-systematic allocation of depletable amount of wasting asset over the period the natural resources
extracted or produced.
-recognized as the cost of the material used in production and thus becomes finished product.

Proforma :

Cost of Wasting Asset Cost of wasting asset Actual units extracted Cost of Wasting Asset
Less: Residual Value Estimated units to be during the year Less: Accum. Depletion
(expected to sell) extracted X rate =Carrying Amount
=Cost of Wasting Asset =Rate =Depletion

*Depletion normally computed as units of production.

In the income statement, depletion is classified as part of the cost of production or cost of sale.

Depletion Charge
 Computed per unit, estimated total amount of resources available for removal.

GAAP (cost of drilling)

 Both successful effort and full cost method may be used.
 Tangible Equipment
-includes; transpo. equipment, heavy machinery, tunnels, bunker and mine shaft.
-cost of tangible is not capitalized but set up in separate account and depreciate over its useful life.

 Movable – SYD
Straight line
Double declining
*depreciate over its useful life
Cost of equipment (drilling)
Useful life
=Movable Depreciation

 Immovable – straight line (useful life)

Units of production (resources/mine)
*depreciate over useful life of mine or straight line whichever is shorter
*Total estimated recoverable reserves
Units extracted each year
=units of production life

Wasting Asset Doctrine

-W.A corporation can pay dividend not only to extent of retained earnings but alo to the extent of
accum. depletion.

Retained earnings Dr. Ratined earnings

Less: Accum Depletion Realized unliquidated
Less: Capital liquidated Cr. Dividends Payable
Less: W.A-inventory (units x per units)
=Maximum Dividends

Government Grant (PAS 20)

-“assistance by government in the form of transfer of resources to an entity in return for part or future
compliance with certain conditions relating to the operating activities of the entity”
 Subsidy
 Subvention
 Premium