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41 Depletion
41 Depletion
DEPLETION
QUESTION 41-1
Define the term exploration and evaluation of mineral resources under PFRS 6.
ANSWER 41-1
Mineral resources include minerals, oil, natural gas and similar nonregenerative resources.
The term exploration and evaluation of mineral resources is defined as the search for mineral
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
resources.
The expenditures incurred by an entity in connection with the exploration and eyaluation of
mineral resources before the technical feasibility and commercial viability of extracting a mineral
resource are known as exploration and evaluation expenditures.
QUESTION 41-2
What is the treatment of exploration and evaluation expenditures?
ANSWER 41-2
The exploration and evaluation expenditures may qualify as exploration and evaluation asset.
Under PFRS 6, an entity must develop an accounting policy for the recognition of such asset.
An entity is permitted to continue to apply a previous accounting policy provided that the
resulting information is relevant reliable
After initial recognition, an entity shall apply either the model or the revaluation model
Exploration and evaluation asset is classified either tangible asset or an intangible asset
QUESTION 41-3
Define wasting assets.
ANSWER 41-3
Wasting assets are material objects of economic value and utility to man produced by nature.
Natural resources usually include coal, oil, ore, precious metals like gold and silver, and timber
Wasting assets are so called because these are physically consumed and once consumed, the
wasting assets cannot be replaced anymore
If ever, the wasting assets can be replaced only by the process of nature. Natural resources cannot
be produced by man.
Wasting assets are physically consumed and irreplaceable
QUESTION 41-4
Explain the cost of a wasting asset.
ANSWER 41-4
The cost of wasting asset comprises acquisition cost, exploration cost, development cost and
estimated restoration cost.
Acquisition cost is the price paid to obtain the property containing the natural resource.
Unquestionably, this is the initial cost of the wasting asset.
If there is a residual land value after the extraction of the natural resource, the portion of the
acquisition cost applicable to the land should be deducted from the total cost to get the depletable
amount.
Exploration cost is the cost incurred in an attempt to locate the natural resource that can
economically be extracted or exploited.
Under the successful effort method, only the exploration cost directly related to the discovery of
commercially producible natural resource is capitalized as cost of the resource property.
Under the full cost method, all exploration costs, whether successful or unsuccessful, are
capitalized as cost of the successful resource discovery.
Development cost is the cost incurred to exploit or extract the natural resource that has been
located through successful exploration.
Development cost may be in the form of tangible equipment and intangible development cost.
Estimated restoration cost is the cost to be incurred in order to bring the property to the original
condition as required by law or contract.
QUESTION 41-5
What is the concept of depletion?
ANSWER 41-5
Depletion is the removal, extraction or exhaustion of a natural resource or wasting asset.
The depletion rate per unit is then multiplied by the units extracted during the year to arrive at the
depletion for the period.
Depletable amount equals cost of wasting asset minus residual land value.
QUESTION 41-6
What is the method used in computing depreciation of tangible equipment used in mining
operations?
ANSWER 41-6
Generally, the depreciation of tangible equipment used in mining operations is based on the life
of the mining equipment or the life of the wasting asset, whichever is shorter.
If the life of the mining equipment is shorter, the straight line method of depreciation is normally
used.
But if the life of the wasting asset is shorter, the output method of depreciation is frequently used.
However, if the mining equipment is movable and can be used in future extractive project, the
equipment is depreciated over its useful life using the straight line method.
2. Depletion expense
4. Which accurately describes the GAAP regarding the accounting for the costs of drilling dry
holes in the oil and gas industry?
a. When searching for an area that may warrant detailed exploration even though the entity has
not yet obtained the legal rights to explore a specific area.
b. When the legal rights to explore a specific area have been obtained but the technical feasibility
and commercial viability of extracting a mineral resource are not yet demonstrable.
c. When a specific area is being developed and preparations for commercial extraction are being
made.
d. In extracting mineral resource and processing the resource to make it marketable or
transportable.
3. Which of the following expenditures would never qualify as an exploration and evaluation
asset?
4. An entity is required to consider which of the following in developing accounting policy for
exploration and evaluation activities?
a. The requirements and guidance in Standards and Interpretations dealing with similar and
related issues
b. The definitions, recognition criteria and measurement concepts for assets, liabilities, income
and expenses
c. Recent pronouncements of standard-setting bodies
d. Whether the accounting policy results in information that is relevant and reliable
5. Which of the following is not a disclosure required in relation to exploration and evaluation
expenditures?