Tutorial V: Accounting for Extractive Industries

1. Define what is ‘area of interest’

2. Would the full-cost method or the area of-interest method of accounting for extractive
industries provide a greater volatility of earnings?
3. When should a company in the extractive industries start accounting for restoration costs?
4. Generally speaking, what costs should be included in cost of inventory of an entity involved
in extractive industries? Explain your answer.
5. When would you use time as the basis of amortising pre-production costs incurred in a
mining venture?
6. Extracto Limited commences operations on 1 January 2017. During 2017 Extracto Ltd
explores three areas and incurs the following costs:
______________________________________________________
Exploration and evaluation expenditure
($m)
_____________________________________________________
Good 23
Bad 16
Indifferent 25
_____________________________________________________
In 2018 oil is discovered at Good Site. Bad Site is abandoned. Indifferent Site has not
reached a stage that permits a reasonable assessment of or otherwise of economically
recoverable reserves, and active and significant operations in the area of interest are
continuing. In relation to the exploration and evaluation expenditures incurred at Good Site
and Indifferent Site, 80 per cent of the expenditures related to property, plant and
equipment, and the balance relates to the intangible assets.

In 2018 development cost of $27 million are incurred at Good Site (to be written off on
production basis) $20 million of this expenditure relates to property, plant and equipment
and the balance relates to intangible assets. Good Site is estimated to have 15 000 000
barrels. The current sale price is $30 per barrel. Three million barrels are extracted at a
production cost of $4 million and 1.9 million barrels are sold.

Required
Provide the necessary journal entries using:
a. the area-of-interest method
b. the full cost method