CHAPTER 8

WASTING ASSETS

TOPIC OVERVIEW:
This chapter explains wasting asset, its characteristics and components, initial and subsequent
measurement, the different depletion methods and its financial statement presentation.

LEARNING OBJECTIVES:
After studying this chapter, the students should be able to:
1. Determine the cost of wasting assets.
2. Compute the amount of depletion and depreciation relating to tangible development.
3. Explain the initial recognition, initial measurement, subsequent measurement, derecognition and
financial statement presentation of exploration and evaluation asset.

Wasting Assets
Wasting assets are material objects of economic value and utility to man produced by nature.
Actually, wasting assets are natural resources. 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 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. Thus, wasting assets are characterized by two main features:
a) The wasting assets are physically consumed.
b) The wasting assets are irreplaceable.

Cost of Wasting Assets

Entities follow a wide variety of practices in accounting for an extractive industry. At present,
IFRS does not address wasting assets. There is no comprehensive standard that is applicable to the
extractive or mining industry. The only standard related to the mining industry is IFRS 6 on the
reporting of exploration and evaluation expenditures.
In general, the cost of wasting asset can be divided into four categories, namely:
a. Acquisition cost
b. Exploration cost
c. Development cost
d. Estimated restoration cost

Acquisition 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. Generally, the acquisition cost is
charged to any descriptive natural resource account. If there is a residual land value after the
extraction of the natural resource, the portion of the acquisition cost applicable to the land may be
included in the natural resource account. The land may be set up in a separate account and the
remaining cost should be charged to the natural resource account. Actually, the land value is the
residual value of a wasting asset for purposes of computing depletion. Thus, this should be
deducted from the total acquisition cost to get the depletable amount.

Exploration cost
Exploration cost is the expenditure incurred before the technical feasibility and commercial
viability of extracting a mineral resource are demonstrated. Simply stated, the exploration cost is
the cost incurred in an attempt to locate the natural resource that can economically be extracted or
exploited. Exploration cost, includes acquisition of right to explore geological study, exploratory
drilling, trenching and sampling. The exploration may result in either success or failure.
Development cost
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.
 Tangible equipment includes transportation equipment, heavy machinery, tunnels, bunker
and mine shaft. The cost of tangible equipment is not capitalized as cost natural resource
but set up in a separate account and depreciated in accordance with normal depreciation
policies.
 Intangible development cost is capitalized as cost of the natural resource. Such cost
includes drilling, sinking mine shaft and construction of wells.

Restoration cost
Estimated restoration cost is the cost to be incurred in order to bring the property to its original
condition. Such restoration cost may be added to the cost of resource property or "netted" against
the expected residual value of the resource property. PAS 16, paragraph 16, provides that the
estimated cost of restoring the property to its original condition is capitalized only when the entity
incurs the obligation when the asset is acquired. In other words, the estimated restoration cost must
be an existing present obligation required by law or contract. The estimated restoration cost must
be "discounted".

DEPLETION
Depletion is the systematic allocation of the depletable amount of a wasting asset over the period
the natural resource is extracted or produced. In essence, however, depletion is recognized as the
cost of the material used in production and thus becomes the finished product of the extractive
entity since the wasting asset is conceived as the total cost of the materials available for production.

Depletion Method
Normally, depletion is computed using the output or production method.

Total cost of the wasting asset – estimated

x Units extracted during
Depletion = residual value
the year
Units estimated to be extracted

Where:
Acquisition cost + Exploration cost + Intangible development
Total cost of wasting asset =
cost + Estimated Restoration cost

ILLUSTRATION:
During 2018, ALMA Company acquired property with mineral deposit for ₱15,000,000. The
property had a residual value of ₱500,000. However, ALMA is legally required to restore the
property to its original condition at a discounted amount of ₱2,000,000. Geologists estimate that
2,000,000 tons are to be extracted. Tons extracted totaled 250,000 in 2018.

Required:
1. What is the depletion to be recognized for 2018?
2. Prepare all the necessary entries in 2018.

Solution:
Acquisition cost ₱15,000,000
Add: Estimated restoration cost 2,000,000
Total 17,000,000
Less: Residual value (500,000)
Depletable cost ₱16,500,000
 16,500,000
Depletion = x 250,000
2,000,000

Depletion = ₱2,062,500

Journal entries
Mineral deposit 15,000,000
Cash 15,000,000
To record the acquisition of wasting asset

Mineral deposit 2,000,000

Estimated restoration cost 2,000,000
To record the liability from restoration cost

Depletion 2,062,500
Accumulated depletion 2,062,500
To record the acquisition of wasting asset

Revision of depletion rate

Not frequently, the original estimate of the resource deposit has to be changed either because new
information is available or because production processes have become more sophisticated. The
revision of the original estimate of recoverable resource deposit gives rise to the same problem
faced in accounting for change in estimate concerning the useful life of property, plant and
equipment. Changes in estimate are to be handled currently and prospectively, if necessary.
Accordingly, the procedure is to revise the depletion rate on a prospective basis, that is, by dividing
the remaining depletable cost of the wasting asset by the revised estimate of the productive output.

ILLUSTRATION:
During 2019, ALMA Company purchased property with ore deposit for ₱10,000,000. The property
had a residual value of ₱1,000,000. However, ALMA is legally required to restore the property to
its original condition at a discounted amount of ₱500,000. In 2019, ALMA spent ₱800,000 in
development cost. In 2020, an amount of ₱900,000 was spent for additional development on the
mine.

The tonnage mined and estimated remaining tons for years 2017-2018 are as follows:
Year Tons Extracted Estimated Tons Remaining
2019 500,000 1,500,000
2020 800,000 1,700,000

Required: Compute for the depletion to be recognized for 2019 and 2020.

Solution:
Acquisition cost ₱10,000,000
Add: Estimated restoration cost 500,000
Development cost 800,000
Total 11,300,000
Less: Residual value (1,000,000)
Depletable cost ₱10,300,000
10,300,000
Depletion = x 500,000
2,000,000

Depletion (2019) = ₱2,575,000

 Depletable Cost, 2019 ₱10,300,000
Add: Additional development cost 900,000
Total 11,200,000
Less: Accumulated depletion (2,575,000)
Depletable cost ₱8,625,000
8,625,000
Depletion = x 800,000
2,500,000

Depletion (2020) = ₱2,760,000

Depreciation of mining property

Tangible equipment such as transportation equipment, heavy machinery, mine shaft and other
equipment used in mining operations shall be reported in separate accounts and depreciated
following normal depreciation policies. Generally, the depreciation of equipment used in mining
operations is based on the useful life of the equipment or the useful life of the wasting asset,
whichever is shorter. If the useful life of the equipment is shorter, the straight line method of
depreciation is normally used. But if the useful 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.

ILLUSTRATION:
On January 1, 2018, ALMA Company acquired land containing ore for a total cost of ₱40,000,000.
Other capitalizable costs incurred for the wasting assets amounted to ₱20,000,000. On the same
date, mining equipment were also purchased by the company at a total cost of ₱15,000,000.
Geologists estimate that the total units to be extracted are 4,000,000 tons of ore. It is estimated that
400,000 tons will be extracted each year during the useful life of the wasting assets. Actual units
extracted during 2018 are 450,000 tons.

Required:
Case 1: Assuming the equipment is movable and its useful life is 15 years, how much is the
depreciation expense in 2018?
Case 2: Assuming the equipment is movable and its useful life is 5 years, how much is the
depreciation expense in 2018?
Case 3: Assuming the equipment is immovable and its useful life is 15 years, how much is the
depreciation expense in 2018?
Case 4: Assuming the equipment is immovable and its useful life is 5 years, how much is the
depreciation expense in 2018?

SOLUTION:
Case 1
Mining equipment at cost ₱15,000,000
Less: Residual value -
Depreciable cost 15,000,000
Divided by useful life 15
Depreciation expense, 2018 ₱1,000,000
Case 2
Mining equipment at cost ₱15,000,000
Less: Residual value -
Depreciable cost 15,000,000
Divided by useful life 5
Depreciation expense, 2018 ₱3,000,000

Case 3
Mining equipment at cost ₱15,000,000
Less: Residual value -
Depreciable cost 15,000,000
Divided by units to be extracted 4,000,000
Depreciation per unit 3.75
Multiplied by units extracted during 2018 450,000
Depreciation expense, 2018 ₱1,687,500

Case 4
Mining equipment at cost ₱15,000,000
Less: Residual value -
Depreciable cost 15,000,000
Divided by useful life 5
Depreciation expense, 2018 ₱3,000,000

FINANCIAL STATEMENT PRESENTATION

An entity classifies exploration and evaluation assets as tangible or intangible according to the
nature of the assets acquired and apply the classification consistently.
 Tangible equipment – part of property, plant, and equipment
 Intangible development cost – capitalized as cost of natural resources

References:
Valix, et. al. (2020) Intermediate Accounting Volume. 1, 2020 Revised Edition, GIC Enterprises
Co., Inc. Manila
Asuncion, et. al. (2018). Applied Auditing Book 1 of 2, Baguio City: Real Excellence Publishing
Assessment:
ALMA Company paid ₱5,400,000 for property containing natural resource of 2,000,000 tons of
ore. The present value of the estimated cost of restoring the land after the resource is extracted is
₱450,000. The land will have a value of ₱650,000 after it is restored for suitable use. Tunnels,
bunk houses and other fixed installations are constructed at a cost of ₱8,000,000 and such
expenditures are charged to mine improvements. Operations began on January 1, 2018 and
resources removed totaled 600,000 tons. During 2019, a discovery was made indicating that
available resource after 2019 will total 1,875,000 tons. At the beginning of 2019, additional bunk
houses were constructed in the amount of ₱770,000. In 2019, only 400,000 tons were mined
because of a strike.

Required: Compute for the following:

a. Depletion, 2018
b. Depletion, 2019
c. Depreciation, 2018
d. Depreciation, 2019