Module 2

2.1 Overview

This module discusses wasting asset, its characteristics and components initial and subsequent measurement, the different
depletion methods and the financial statement presentation of wasting asset

2.2 Natural Resources

NATURAL RESOURCES
Natural resources are assets that used up when they are consumed. Gas is a good example of a natural resource since it is
consumable. In contrast with a car that can be used and reused. Natural resources like gas, oil, lumber, and coal are often
called wasting assets because they must be consumed in order to be used.
Recognition of Exploration and Evaluation Assets:
At recognition, exploration and evaluation assets are measured at cost. Expenditure related to the following activities is
potentially includable the initial measurement of cost.

 Acquisition of exploration rights;

 Topographical, geological, geochemical and geophysical studies;
 Exploratory drilling;
 Trenching;
 Sampling and
 Activities to evaluating the technical feasibility and commercial viability of extracting a mineral resource.

Illustration
An entity exploring and evaluating the extraction of coal deposits will undertake activities including determination of
recoverable reserves, engineering and economic feasibility studies, construction of pilot plants and all technical and
administrative matters directly associated with the functions. Costs that may be incurred include.

 satellite imagery;
 airborne and seismic surveys;
 depreciation of geophysical instrumentation to prepare surveys;
 map preparation;
 license fees and legal costs;
 geologist inspections;
 chemical analysis; and
 payments to employees and

All of these costs would be classified as intangible assets. The consumption of the instrumentation should be regarded as
an intangible asset. However, the geophysical instrumentation would remain as a tangible asset.

2.3 PFRS 6 Exploration and Evaluation of Mineral Resources

Objective
This standard prescribes the guide lines to be used by the entities which are engage in exploration and evaluation activities,
to deal with the accounting treatment of exploration for and evaluation of mineral resources. This standard specifically deals
with the following aspects:
 Development in the existing accounting policies of the entity in respect of expenditures relating to exploration and
evaluation, to limited extent

 Impairment requirements for the exploration and evaluation assets, which are recognized by the entity in accordance
with this standard and accounting for such impairment as per PAS 36

 Disclosures requirements for the exploration and evaluation activities, to intimate the users of financial statements the
information about the amounts, timing and certainty of future cash flows in respect of the exploration and evaluation
assets recognized by the entity

Scope
The requirements of this standard are applicable for the accounting treatment of exploration and evaluation expenditure.
However, this standard does not deal the any other aspects of exploration and evaluation activities and the expenditure
which:

 Incurs before the entity has acquired the legal permission to explore a certain area. for the purpose of the exploration
for and evaluation of mineral resources and

 After the entity has demonstrated the commercial viability and technical feasibility for the extraction of mineral
resources

2.3.1 Recognition of Exploration and Evaluation Assets

The entity engage in exploration and evaluation activities is not required to apply the requirements of IAS 8 for the
determination of accounting policy relating to the exploration and evaluation expenditure.

 The entity will determine the accounting policy for the exploration and evaluation expenditure using its own judgment or
past practices before the adoption of this standard i.e. entity will determine the extent to which expenditure will be
recognized as exploration and evaluation asset and in what circumstance it will be reported to statement of profit or loss
as an expense

 However, the accounting policy determined by the entity, for the exploration and evaluation expenditure should be
applied consistently

2.3.1.1 Initial Measurement of Exploration and Evaluation Assets

The exploration and evaluation expenditure which is recognized by the entity as an exploration and evaluation asset, will be
initial measured at cost
The elements of exploration and evaluation expenditure which can be capitalized as part of exploration and evaluation asset
may include the following:

 Purchase costs of exploration and evaluation rights

 Cost associated with exploratory drilling
 Sampling
 Labor Cost
 Cost incurred in relation to geographical and geological factors studies
 Cost incurred in determination of the commercial viability and technical feasibility for the extraction of mineral resource.

The expenditures incurred by the entity for the development of mineral resources after the commercial viability and technical
feasibility for the extraction of mineral resource has been demonstrated, cannot be recognized as exploration and
evaluation assets under this standard, instead that will be accounted for in accordance with PAS 38 Intangible Assets
The entity is required to recognize a provision in accordance with PAS 37 for any restoration or dismantling cost relating to
the exploration for and evaluation of mineral resources

2.3.1.2 Subsequent Measurement

The entity can measure the exploration and evaluation asset at reporting date either:
i) Under Cost Model or
 ii) Under Revaluation Model

 However, whichever model is selected it should be applied consistently from one period to the next period

 The measurement model selected by the entity for exploration and evaluation assets at reporting date should be
according to the classification of the assets i.e. for tangible assets the measurement model will be as par PAS 16 and
intangible assets it will be in accordance with PAS 38

 The entity will classify the exploration and evaluation asset as per the nature of the expenditure such as vehicles,
property and oil rig are tangible while legal rights are intangible

 The entity is allowed to change the its accounting policy in respect of exploration and evaluation expenditure only if
entity believes that it will result in financial statements being reflecting more relevant and reliable information to the
users of financial statements

2.4 Reclassification of Exploration and Evaluation assets

Reclassification of Exploration and Evaluation assets

The exploration and evaluation asset will be reclassified to the other relevant standards, when the commercial viability and
technical feasibility for the extraction of mineral resources has been demonstrated, such as capitalized exploration and
evaluation expenditure to IAS 38 for subsequent accounting, while the property, plant, equipment's and vehicles to PAS 16.
However, exploration and evaluation asset will be tested for impairment before reclassification, if required
Impairment Testing for Exploration and Evaluation Assets
The entity is required to apply impairment test to the exploration and evaluation assets, if there is an indication reflected by
the circumstances. The entity will recognized resulting impairment loss as per the requirements of PAS 36. The
circumstances which may indicate the existence of impairment loss may include the following:

 Expiration of legal rights for exploration and evaluation and is not renewable

 Substantial exploration and evaluation expenditure exceeding the budgeted expenditure

 When entity expects that it will not be able to recover its whole amount of expenditure incurred for exploration and
evaluation even the project has commercial viability

 When expenditure incurred for exploration and evaluation do not result in commercial viability of the project

2.5 Disclosures

Disclosures
The entity is required to disclose the following related to the exploration and evaluation expenditure:
 The accounting policy of the entity for the exploration and evaluation expenditure
 The amount of expenditure recognized as exploration and evaluation asset in the accounting period
 The amount of exploration and evaluation expenditure recognized in the statement of profit or loss