ACYFARP: Accounting for Wasting Assets

Tangible Equipment

Includes transportation equipment, heavy machinery, tunnels, and bunkers. These costs are not capitalized as part of the cost of natural resources; instead, they are recorded in a separate account and depreciated accordingly.

Exploration and Evaluation of Mineral Resources

Refers to the search for mineral resources when a company has been granted the legal right to explore in a particular area, as well as the assessment of the technical feasibility and commercial viability of extracting the mineral resources.

Exploration and Evaluation Expenditures

Are the costs incurred by an entity in conjunction with the exploration and evaluation of mineral resources prior to demonstrating the technical feasibility and commercial viability of extracting a mineral resource.

Excluded from Exploration and Evaluation Expenditure

Expenditures incurred before an entity obtained legal rights to explore.

Excluded from Exploration and Evaluation Expenditure

After the technical feasibility and commercial viability of extracting mineral resources are demonstrable.

Excluded from Exploration and Evaluation Expenditure

Any development expenditure such as commercial production preparation and road and tunnel building.

Common Example of Exploration and Evaluation Expenditures

Acquisition of rights to explore

Common Example of Exploration and Evaluation Expenditures

Topographical, geological, geochemical and geophysical studies

Common Example of Exploration and Evaluation Expenditures

Exploratory drilling, trenching, and sampling

Common Example of Exploration and Evaluation Expenditures

Cost of examining the technical feasibility and economical viability of extracting mineral resources.

True

(True or False) Exploration and evaluation costs could be considered an exploration and evaluation asset. The standard, however, does not give clear guidance for identifying exploration and evaluation assets. As a result, for the recognition of such an asset, each company must adopt its own accounting policy. In truth, IFRS 6 allows a company to continue to use its previous accounting policy as long as the information produced is relevant and reliable.

Cost

The initial measurement of exploration and evaluation assets.

Cost Model or Revaluation Model

The subsequent measurement of exploration and evaluation assets.

Exploration and Evaluation Assets

Are classified as either tangible or intangible assets.

Tangible Assets - Exploration and Evaluation Assets

Include machines, equipment, and vehicles utilized in exploration and evaluation activities.

Intangible Assets - Exploration and Evaluation Assets

Are the rights that allow a business to execute such operations such as drilling.

wasting Assets

Referred to as natural resources.

Wasting Assets

These are assets held by an entity that have economic value and are produced by nature, such as oil, gas reserves, and mineral deposits.

Wasting Assets

Refer to its nature, that once physically consumed. These kind of assets cannot be replaced anymore.

Acquisition Cost of the Property (Including Directly Attributable Costs + Capitalizable Exploration and Development Costs + Restoration Cost - Present Value)

The total cost of wasting assets.

Acquisition Cost of the Property

The cost of acquiring the land on which the natural resource is located.

True

(True or False) The portion of the purchase price applicable to land may be included in the natural resource account if there remains a residual value after the extraction of the natural resources. The land may be set up in a separate account and the remaining cost should be charged to the natural resource account.

True

(True or False) For purposes of calculating depletion, the land value is actually the residual value of the wasting asset. Thus, this should be deducted from the total cost of the wasting asset to get the depletable amount.

Exploration Costs

Amount expended to locate a natural resource before the extraction of mineral resources.

Exploration Costs

Expenditures incurred prior to demonstrating the technical feasibility and commercial viability of extracting a mineral deposit.

Exploration Costs

Comprises the purchase of exploration rights, geological studies, exploratory drilling, trenching, and sampling; these efforts result in either success or failure.

Successful Effort Method

The cost of the resource property is capitalized as the exploration cost directly related to the finding of a commercially producible natural resource. The cost of investigation for dry holes, if unsuccessful, is expensed in the period incurred.

Full Cost Method

All exploration costs, whether successful or not, are capitalized as cost of successful resource discovery. This is based on the belief that any exploration effort cost is a wild goose chase that must be undertaken before any economically producible and valuable resource can be discovered. For instance, drilling cost for dry holes must be included in the overall cost of identifying productive holes.

Full Cost Method

A method of accounting exploration costs that is commonly used by small oil companies.

Successful Cost Method

A method of accounting exploration costs that is commonly used by big entities.

Development Cost

Costs incurred to extract natural resources that have been discovered.

Development Cost

Can be categorized under tangible equipment or intangible development cost.

Intangible Development Costs

Are capitalized as part of the natural resources. Includes drilling, sinking mine shafts, and well constructions.

Restoration Cost

Costs to be incurred to restore the property to its original condition.

Restoration Cost

May be:

A. Added to the cost of the resource property.

B. Deducted from the resource property's projected residual value.

True

(True or False) The expected cost of restoring the property to its original condition is capitalized only when the entity incurs the liability when the asset is acquired. Such estimated cost shall be discounted. It must also represent a pre-existing legal or contractual obligation.

Depletion

Refers to the systematic allocation of depletable amount of a wasting asset over the period the natural resource is extracted or produced.

Depletion

Pertains to natural resources' removal, extraction, or exhaustion.

Depletion

Actual Units Extracted x Depletion Rate

Depletion Rate

Depletable Amount of the Wasting Asset / Estimated Units to be Extracted

Amount Subject for Depletion

Total cost of the mining property less residual value.

Depletion as Inventoriable Cost

If the related product is sold, depletion will form part of the cost of goods sold for the current period.

Depletion as Ending Inventory

If the related product is not yet sold, depletion will form part of the ending inventory which will be reported as part of current assets of the entity.

Depreciation of Mining Property

All tangible equipment used in mining operations shall be reported in separate accounts and depreciated following the normal company depreciation policies.

Movable Mining Properties

Those that can be used from one extracting site to another. They have alternative use even after the natural resource is fully depleted.

Immovable Mining Properties

Are those that cannot be used in other extracting sites after the reserves in one site are fully depleted. They have no further use after the natural resource is fully depleted.

Movable Mining Properties

Is depreciated using the straight-line method.

Immovable Mining Properties

Is depreciated either the straight-line method (If the useful life of such property is shorter than the mining period) or output method (If the useful life of such property is longer than the mining period).

Shutdown of Mining Operations

When the output method is used to depreciate mining property, it cannot be employed in the event of a shutdown. In this situation, the depreciation in the year of shutdown is calculated using the straight-line method based on the equipment's remaining useful life.

Depreciation in the Year of Shutdown of Mining Operations

Remaining Carrying Amount of Immovable Mining Property / Remaining Useful Life of Immovable Mining Property

Shutdown of Mining Operations

When operations are resumed, the depreciation is calculated again using the output method, if this method was used before the operation was shut down. In this situation, a new depreciation rate unit is calculated.

New Depreciation Rate Due to Resumption of Mining Operations

Immovable Mining Property's Carrying Amount / Deposit's Remaining or Revised Estimated Output

True

(True or False) There will be no depletion to be reported in the period of shutdown.

Liquidating Dividends

Are amounts declared in excess of unrestricted retained earnings.

Trust Fund Theory

Prevents entities from declaring dividends from their legal capital. It states that a corporation's share capital is kept in trust for the benefit of its creditors. As a result, unless the corporation is dissolved or liquidated, no part of the capital will be distributed to the owners.

Wasting Asset Doctrine

The doctrine that applies to wasting asset entities. Due to the irreplaceable character of the entity's assets, dividends can be distributed not only to the extent of unrestricted retained earnings, but also to the extent of accumulated depletion that has been realized but not yet liquidated.

Maximum Amount of Dividend that Can be Declared

Unrestricted Retained Earnings + Accumulated Depletion - Capital Liquidated - Depletion in Ending Inventory

Expenditures Incurred Before an Entity has Obtained the Legal Right to Explore a Specific Area and Expenditures After the Technical Feasibility and Commercial Viability of Extracting a Mineral Resource are Demonstrable

These pertain to development expenditures

Exploration and Evaluation Expenditure

Acquisition of rights to explore

Exploration and Evaluation Expenditure

Topographical, geological, geochemical and geophysical studies

Exploration and Evaluation Expenditure

Exploratory Drilling

Exploration and Evaluation Expenditure

Trenching

Exploration and Evaluation Expenditure

Sampling

Exploration and Evaluation Expenditure

Activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource .

Exploration and Evaluation Expenditure

General and administrative costs directly attributable to exploration and evaluation activities

Physical Consumption and Irreplaceability

The two main features of a wasting asset.

Acquisition Cost, Exploration Cost, Development Cost, and Estimated Restoration Cost

The following four categories of the cost of a wasting asset.

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

Is the expenditure incurred before the technical feasibility and commercial viability of extracting a mineral resource are demonstrated.

Exploration Cost

Is the cost incurred in an attempt to locate the natural resource than can economically be extracted or exploited.

Exploration Cost

Includes acquisition of right to explore, geological study, exploratory drilling, trenching and sampling.

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.

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.

Output or Production Method

The depletion method to be used, according to IFRS 6

Shutdown

The event in which the output method of depletion used in depreciating mining property cannot be used. The depreciation in the year of such occurrence shall be based on the remaining life of the equipment following the straight line method.

Shutdown

The depreciation method in this particular event shall be based on the remaining carrying amount of the equipment divided by the remaining life of the equipment. When operations are resumed, the depreciation is again computed following the output method. But in such a case, a new depreciation rate per unit is computed by dividing the remaining carrying amount of the equipment by the remaining or revised estimate of the deposit.