DEPLETION OF MINERAL RESOURCES
Exploration for and evaluation of mineral resources – is
the search for mineral resources, including minerals, oil,
natural gas and similar non-regenerative 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 resource
Exploration and evaluation procedures – are
expenditures incurred by an entity in connection with
the exploration for and evaluation of mineral resources
Development costs – expenditures incurred after
technical feasibility and commercial viability are
demonstrable
PFRS 6 exempts an entity from applying the Hierarchy
of reporting standards (PAS 8).
PFRS permits entities to develop their own accounting
policy for exploration and evaluation assets that results
in relevant and reliable information, based entirely on:
a. management’s judgment
b. without the need to consider the hierarchy of
standards in PAS 8
Recognition - Exploration and evaluation expenditures
- expenses or assets, depending on the chosen
accounting policy (developed based entirely on
management’s judgment)
INITIAL MEASUREMENT
Exploration and evaluation assets – are measured at
cost
Examples of expenditures that might be included:
1. acquisition of rights to explore
2. topographical, geological, geochemical, and
geophysical studies
3. exploratory drilling
4. trenching
5. sampling
Note: Expenditures related to the development of
mineral resources are not recognized as exploration and
evaluation assets.
SUBSEQUENT MEASUREMENT
Exploration and evaluation assets are subsequently
measured using either cost model or revaluation model.
CHANGES IN ACCOUNTING POLICY
An entity may change its accounting policy for
exploration and evaluation expenditures if it results to
more relevant and no less reliable, or more reliable and
no less relevant information.
CLASSIFICATION – Exploration and Evaluation Assets
These are initially classified as a separate class of assets
and considered as:
1. tangible (vehicles and drilling rigs) or
2. Intangible (drilling rights)
IMPAIRMENT LOSS
These are assessed for impairments when indication
exists that their carrying amount > their recoverable
amount.
Examples of indications
a. The right to explore has expired or will expire in
the near future and is not expected to be
renewed
b. Expenditures for further exploration and
evaluation activities are significantly higher than
expected
c. The exploration and evaluation activities in a
specific area have to be discounted because no
mineral resources have been discovered
d. Indication exists that, although a specific area
will be developed, the carrying amount of the
exploration and evaluation asset is unlikely to
be fully recovered
NATURAL RESOURCES or WASTING ASSETS
2 main features:
1. The complete removal (physical consumption)
of the asset
2. The replacement of the asset only by an act of
nature
Cost – Natural Resources
Cost of Natural Resource:
1. Purchase price (direct costs + restoration costs
(at its fair value))
2. Exploration costs – amounts paid to find the
natural resource after legal right to explore has
been obtained
3. Development costs – amounts paid to prepare
the resource site for mining. (drilling costs,
construction costs of tunnels, shafts, wells)
Acquisition Costs
- Is the price paid to obtain the property right to
search and find an undiscovered or discovered
natural resource
- Lease payments for property containing a
productive natural resource
- Included also are royalty payments to the
owner of the property
- These are recorded in the account titled
“Undeveloped Property”
If the exploration efforts are successful, the cost from
Undeveloped Property account are assigned to the
natural resource.
If the efforts are unsuccessful, the acquisition cost is
written-off as impairment loss
Restoration Costs – costs that entities incur to restore
property to its natural state after extraction has
occurred
- Capitalized as part of the cost of Natural
Resource to the extent the entity has a present
obligation to restore the property
Exploration Costs – as soon as the entity has obtained
the legal right to explore the property, it often incurs
this cost which is needed to find the resource
- The costs are accounted for in accordance with
the entity’s accounting policy developed based
on management’s judgment
Development Costs – costs to prepare the site prior to
extraction as soon as it is established that natural
resource actually exists in a property
2 parts of development costs
1. Tangible equipment costs – include all of the
transportation and heavy equipment needed to
extract the resource and get it ready for the
market
- These are capitalized as Equipment
2. Intangible development costs – are items as
drilling costs, tunnels, shafts, and wells.
- These are capitalized as part of the cost of
Natural Resource
DEPLETION – like depreciation, is the systematic
allocation of the depletion base of a natural resource
over the period the natural resource is extracted
Depletion base – is the capitalized cost of the natural
resource less its residual value
Useful life – is normally expressed as the quantity of
natural resource or number of production or similar
units expected to be obtained from the natural resource
Depletion is computed using the UNITS-OF-
PRODUCTION METHOD
1. Compute for depletion rate per unit:
𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝐵𝑎𝑠𝑒
𝑇𝑜𝑡𝑎𝑙 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑢𝑛𝑖𝑡𝑠 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑
2. Depletion rate per unit is then multiplied by the
actual units extracted in 20x1
Entry:
Resource deposit (cost)
Cash
Asset retirement obligation (restoration cost)
To record the cost of natural resource
Work-in-Process Inventory (depletion)
Accumulated depletion (depletion)
To record the depletion in 20x1
Accumulated depletion is treated as contra-asset
account to the wasting asset to derive its carrying
amount
Resource deposit – at cost
(Accumulated depletion)____
Carrying Amount__________
CHANGES IN ESTIMATES
Any revisions are accounted for as change in accounting
estimate and treated prospectively.
DEPRECIATION – MINING EQUIPMENT
Tangible equipment costs
1. Movable tangible equipment – those that can
be used from one extracting site to another
(heavy equipment, transportation equipment)
declared not only from retained earnings but also from
the balance of accumulated depletion
To compute the maximum amount of dividends that a
wasting asset corporation can declare:
Unrestricted retained earnings
Accumulated depletion_______
Total
(Depletion in ending inventory) (inventory x Depletion rate/unit)
(Capitalized liquidated)________
Maximum amount of dividend_

These are depreciated over its useful life using regular Entry
depreciation policy.
Retained Earnings (actual value)
2. Immovable tangible equipment – includes those Capital liquidated (squeeze)
that cannot be used in other extracting sites Dividends Payable (Max amount of dividend)
after the reserves in one site are fully depleted
(drilling rig foundation).
ACCOUNTING FOR DECOMMISSIONING AND
These has no further use after the natural resource is RESTORATION COSTS
fully depleted. Thus, these are depreciated over its
Initial measurement
useful life or the life of the resource, whichever is
shorter Decommissioning and restoration costs are initially
measured at fair value
If useful life is shorter, depreciation method used is
straight line method (or any other). Subsequent measurement
If the life of the resource is shorter, depreciation These are included in the related asset’s depreciable
method used is units-of-production method. amount or depletion base and allocated over the asset’s
useful life or depletion charge.
To compute for depreciation rate per unit:
𝐼𝑚𝑚𝑜𝑣𝑎𝑏𝑙𝑒 𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝐸𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 𝐶𝑜𝑠𝑡 Changes in estimates
𝑇𝑜𝑡𝑎𝑙 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑢𝑛𝑖𝑡𝑠 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 These are accounted for prospectively under PAS 8
However, if units of production method is used, and if
there is no extraction activities, the depreciation
method use is now straight line method. When
extraction activities resume, the equipment is now
again depreciated using units of production method.

LIQUIDATING DIVIDENDS
Retained earnings – where dividends are normally
declared out from
Trust fund doctrine – under this, a corporation’s legal
capital is considered a trust fund for the protection of
its creditors
Wasting asset doctrine – applied in wasting asset
corporations. Under this, due to the irreplaceable
nature of the corporation’s assets, dividends can be