FINANCIAL ACCOUNTING AND REPORTING

TOPIC 11: DEPLETION OF MINERAL RESOURCES

DEFINITION
EXPLORATION
AND SCOPE
EVALUATION
ASSETS MEASUREMENT

PRESENTATION AND DISCLOSURE

DEPLETION
OF MINERAL DEFINITION DEFINITION
RESOURCES
PFRS 6
COST OF WASTING ASSETS DEPLETION PERIOD
WASTING
DEPLETION
ASSETS DEPLETION METHOD

ACCOUNTING FOR SHUTDOWN

CHANGES IN
ESTIMATE
WASTING ASSET DOCTRINE
PRESENTATION AND
DISCLOSURE

EXPLORATION AND EVALUATION ASSETS

- Expenditure by an entity in connection with exploration and evaluation of mineral resources BEFORE technical
feasibility and commercial viability are demonstrable.
- Search for minieral resources AFTER the entity has obtained legal right to explore in a specific area as well as the
determination of the technical feasibility and commercial viability of extracting the mineral resources
- MR includes minerals, oil, natural gas, and similar nonregenerative resources.

LIFE CYCLE OF WASTING ASSETS

ACQUISITION EXPLORATION
DEVELOPMENT RESTORATION
Right to explore Includes evaluation

EXPLORATION AND
EVALUATION ASSET

TANGIBLE INTANGIBLE

SCOPE
DO NOT INCLUDE expenditures incurred:
- BEFORE an entity has obtained legal right to explore a specific are
- AFTER the technical feasibility and commercial of extracting a mineral resources are demonstrable

RECOGNITION: an entity must develop its own accounting policy for the recognition of asset (management’s judgment
and without the need to consider the hierarchy of standards of PAS 8)

MEASUREMENT
- Initially measured at COST
1. Acquisition of rights to explore SUBSEQUENTLY MEASURED AT:
- Cost Model
2. Topographical, geological, geochemical and geophysical studies
- Revaluation Model
3. Exploratory drilling
4. Trenching
5. Sampling
6. Activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource.
7. General and administrative costs directly attributable to exploration and evaluation activities.

IMPAIRMENT OF EXPLORATION AND EVALUATION ASSET (carrying amount > recoverable amount)
a. Period the entity has the right to explore in a specific area has expired and is not expected to be renewed.
b. Substantive expenditure for exploration and evaluation is neither budgeted nor planned.

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 c. Exploration and evaluation activities have not led to the discovery of commercially viable quantity of mineral resource
and the entity has decided to discontinue such activities.
d. Sufficient data indicate that the carrying amount of the exploration and evaluation asset is unlikely to be recovered
in full from successful development or by sale.

PRESENTATION AND DISCLOSURE

PRESENTATION DISCLOSURE
Separate NON-CURRENT ASSET within the balance sheet PAS 16 – tangible portion ; PAS 38 – intangible portion

WASTING ASSETS
- Natural resources (nonrenewable)
- Material objects of economic value and utility to man produced by nature
- PHYSICALLY CONSUMED, and once consumed, cannot be replaced anymore

COST OF WASTING ASSETS

1. ACQUISITION COST
- Price paid Residual value of WA = Value of Land
- Initial cost of the wasting asset

2. EXPLORATION COST
- Incurred AFTER obtaining legal right to explore a site but before technical feasibility
- Accounted for using SUCCESSFUL EFFORTS METHOD or FULL COST METHOD
What is to be CAPITALIZED?
Successful Efforts Method Only SUCCESSFUL
Full Cost Method BOTH successful and unsuccessful exploration

SUCCESSFUL EFFORT METHOD

- Used by large wasting assets corporation
Successful Exploration Capitalized as cost of wasting assets
RESULT
Unsuccessful Discovery of “Dry Holes” Expensed

FULL COST METHOD

- Used by small wasting assets corportation
- Based on theory of “wild goose chase”
Successful Exploration
RESULT CAPITALIZED
Unsuccessful Discovery of “Dry Holes”

3. DEVELOPMENT COST
- Incurred to exploit/extract the natural resource that has been located through successful exploration
Depreciation
Useful life to be used?
Method
Wasting Output
Intangible Depletion
Asset Method
Movable SL or other
Own useful life
Tangible stated methods
Shorter between Own UL < UL SL or other
Tangible PPE Depreciation
Immovable its own life and of WA stated methods
Tangible life of wasting Own UL > UL
Output Method
assets of WA

4. RESTORATION COST
- Estimated restoration cost is the COST
- Incured in order to bring the property to its original condition, capitalized ONLY when the entity incurs the
obligation
- Estimated restoration costs are measured AT PRESENT VALUE

DEPLETION
- Removal, extraction, or exhaustio of a natural resources
- Systematic allocation of the depletable amount of wasting asset of the depletable amoun of a wasting asset over
the periods the natural resources is extracted or produced

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DEPLETION PERIOD
- Commencement – extraction starts
- Cessation – full consumption / full exhaustion of mineral resources
Whichever is EARLIER
Cessation – derecognized before full consumption

DEPLETION METHOD – OUTPUT OR PRODUCTION METHOD

𝑫𝒆𝒑𝒍𝒆𝒕𝒂𝒃𝒍𝒆 𝑨𝒎𝒐𝒖𝒏𝒕
= 𝑫𝒆𝒑𝒍𝒆𝒕𝒊𝒐𝒏 𝑹𝒂𝒕𝒆 𝑷𝒆𝒓 𝑼𝒏𝒊𝒕
𝑼𝒏𝒊𝒕𝒔 𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝑻𝒐 𝑩𝒆 𝑬𝒙𝒕𝒓𝒂𝒄𝒕𝒆𝒅

𝑫𝒆𝒑𝒍𝒆𝒕𝒊𝒐𝒏 𝑹𝒂𝒕𝒆 𝑷𝒆𝒓 𝑼𝒏𝒊𝒕 𝒙 𝑼𝒏𝒊𝒕𝒔 𝑬𝒙𝒕𝒓𝒂𝒄𝒕𝒆𝒅 𝑫𝒖𝒓𝒊𝒏𝒈 𝒕𝒉𝒆 𝒀𝒆𝒂𝒓 = 𝑫𝒆𝒑𝒍𝒆𝒕𝒊𝒐𝒏

𝑫𝒆𝒑𝒍𝒆𝒕𝒂𝒃𝒍𝒆 𝑨𝒎𝒐𝒖𝒏𝒕
𝑫𝒆𝒑𝒍𝒆𝒕𝒊𝒐𝒏 = 𝒙 𝑨𝒄𝒕𝒖𝒂𝒍 𝑬𝒙𝒕𝒓𝒂𝒄𝒕𝒊𝒐𝒏
𝑻𝒐𝒕𝒂𝒍 𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑹𝒆𝒔𝒆𝒓𝒗𝒆𝒔

CHANGES IN ESTIMATE
- Accounted for prospectively under PAS 8
- Reviewed at each reporting date

STEP 1: Determine the amount of the wasting asset as at the beginning od the period of change (LATEST CARRYING
AMOUNT BEFORE THE CHANGE) basis of the new estimate “as if” cost

STEP 2: Apply the changes by depleting the carrying amount in Step 1 using revised estimated number of reserves and/or
residual value.
𝑹𝒆𝒎𝒂𝒊𝒏𝒊𝒏𝒈 𝑫𝒆𝒑𝒍𝒆𝒕𝒂𝒃𝒍𝒆 𝑪𝒐𝒔𝒕
𝑹𝒆𝒗𝒊𝒔𝒆𝒅 𝑫𝒆𝒑𝒍𝒆𝒕𝒊𝒐𝒏 𝑹𝒂𝒕𝒆 =
𝑹𝒆𝒗𝒊𝒔𝒆𝒅 𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆 𝒐𝒇 𝑷𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒆 𝑶𝒖𝒕𝒑𝒖𝒕

PRESENTATION OF DEPLETION
– Part of the the COST OF INVENTORY  presented in COGS (when related to inventory is sold)

ACCOUNTING FOR SHUTDOWN

During the period of shutdown or non-extraction
- No depletion is charged
- Depreciation continues since the asset
Tangible Development Cost Accounting Problem
Tangible Movable X STRAIGHT LINE Method over its
Tangible Immovable (OWN UL < UL OF WA) X REMAINING USEFUL LIFE
Tangible Immovable (OWN UL > UL OF WA)  Output Method

After period of shutdown / period with resumed extractions

- Depletion resumes
- Depreciation continues
Tangible Immovable DC with UL longer than the life of the WA should be depreciated using OUTPUT method over
the REMAINING ESTIMATED RESERVES

WASTING ASSET DOCTRINE

- Applies only to wasting asset corporation (WAC)
- WAC can ay dividend not only to the extent of retained earnings but also to the extent of accumulated depletion
- Exception to Trust Fund Doctrine (TFD)

TFD WAC
Return ON Capital (Dividends)  
Return OF Capital (Liquidating Dividends) X 

SOLUTION GUIDE FOR COMPUTATION OF MAXIMUM PERIOD

Retained Earnings – Unapporpriated XX
Realized Portion of Depletion XX
Accumulated Depletion XX
Unrealized Depletion in Ending Inventory (XX) XX
Capital Liquidated in prior years (XX)
Maximum Dividend XX