Chapter 31

Depletion

1. Define the term ‘’exploration and evaluation of mineral resources”

 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.
 Mineral resources include minerals, oil, natural gas and similar nonregenerative resources.
 The expenditures incurred by an entity in connection with the exploration and evaluation of mineral
resources before the technical feasibility and commercial viability of extracting a mineral resource
are known as exploration and evaluation expenditures.
 Expenditures related to development of mineral resources, for example, preparation for
commercial production, such as building roads and tunnels, cannot be recognized as exploration and
evaluation expenditures.

2. What is the treatment of exploration and evaluation expenditures?

 The exploration and evaluation expenditures may qualify as exploration and evaluation asset.
 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 and reliable.
 An exploration and evaluation asset shall be measured initially at cost.
 After initial recognition, an entity shall apply either the cost model or the revaluation model.
 Exploration and evaluation asset is classified either as tangible asset or an intangible asset.

3. Define wasting assets.

 These are material objects of economic value and utility to man produced by nature.
 Wasting assets are actually natural resources, which usually include coal, oil, ore, precious metals
like gold and silver, and timber.
 Wasting assets are so called because these are physically 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.

4. Explain the cost of a wasting asset.

 In general, it 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.
Only intangible development cost is capitalized as cost of wasting asset.
The cost of tangible equipment is included in property, plant and equipment.
 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.
The estimated restoration cost must be discounted.
5. What is concept of depletion?
 It is the removal, extraction or exhaustion of a natural resource or wasting asset.
 As an accounting procedure, depletion is the systematic allocation of the depletable amount of a
wasting asset over the periods the natural resource is extracted or produced.
Normally, depletion is computed using the output or production method.
 The depletable amount of the wasting asset is divided by the units estimated to be extracted to
obtain depletion rate per unit.
 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.

6. What is the method used in computing depreciation of tangible equipment used in mining operations?
 Generally, it is based on the life of the mining equipment or the life of the wasting asset, whichever is
shorter.
 In the life of the mining equipment is shorter, the straight line method of depreciation is normally
used.
 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.