ACCT2110 Intermediate Financial Accounting - Lecture 6: Accounting for Extractive Industries

Flashcards covering key concepts from the Accounting for Extractive Industries lecture, including industry characteristics, production phases, relevant accounting standards, and cost treatment.

What are extractive industries?

Industries engaging in the search for and extraction from the ground of natural substances having a commercial value such as minerals (including coal), oil, and natural gas.

Why are extractive industries considered high risk?

Exploration may be unsuccessful, there are long lead times between exploration and production, and changes in demand, price, and government policies may arise.

List the phases of production in extractive industries.

Exploration, Evaluation, Development, Construction, and Production.

What activities are included in the Exploration and Evaluation phases?

Searching for mineral deposits, geological studies, exploratory drilling, acquisition of rights to explore, determining technical feasibility and commercial viability, and assessing quantity and quality.

What activities are included in the Development phase?

Activities involved to access the deposit and to construct infrastructure, including tunnels, mine shafts, and roads.

What activities are included in the Construction phase?

Establishment of facilities for extraction, treatment, and transportation of product.

What activities are included in the Production phase?

Day-to-day activities, extraction and processing costs, as well as any relevant processing before the sale of the output.

What accounting standard specifically addresses exploration and evaluation of mineral resources?

AASB 6

What does AASB 6 allow regarding accounting methods for exploration and evaluation costs?

A choice of accounting methods: costs can be expensed immediately or capitalized as an asset if certain conditions are met.

What is the 'area of interest' method as per AASB 6?

Each individual geological area which is considered to constitute a favourable environment for the presence of a mineral deposit or oil or natural gas field, or has proved to contain such a deposit or field. It usually comprises a single mine or deposit or a separate oil or gas field and it's used as a cost center.

Briefly describe 'rights to tenure'.

It means the legal right to explore for and extract resources.

What are 'economically recoverable reserves'?

The estimated quantity of product in an area of interest that can be expected to be profitably extracted, processed, and sold under current and foreseeable economic conditions.

How are exploration and evaluation (E&E) assets initially measured?

At cost.

What are stripping costs?

The costs incurred in the process of removing waste (rocks, soil and other materials) from a surface mining in order to gain access to mineral ore deposits.

What are restoration costs?

Obligations for removal and restoration that are incurred during a particular period as a consequence of having undertaken the exploration for and evaluation for mineral resources.

How are restoration costs treated?

Initial estimate of removal/demolition/restoration costs added to asset cost and recognised as provisions in accordance with AASB 137.

What are the two methods of depreciation?

Production output basis (a.k.a. units-of-production method) and time basis