323583886-Wasting-Assets PDF

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Summary

Wasting assetsLECTURE NOTESCosts of Wasting Assets Acquisition Exploration and evaluation Development Restoration PFRS 6 – Exploration for and Evaluation of Mineral ResourcesPFRS 6 permits an entity to develop an accounting policy for exploration and evaluation assets without specifically considerin...

Description

Wasting assets LECTURE NOTES Exploration and evaluation expenditures

Costs of Wasting Assets •

Acquisition

•

Exploration and evaluation

•

Development

•

Restoration

Expenditures incurred by an entity in connection with the exploration for and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Exploration and evaluation assets Exploration and evaluation expenditures recognized as assets in accordance with the entity’s accounting policy.

PFRS 6 – Exploration for and Evaluation of Mineral Resources PFRS 6 permits an entity to develop an accounting policy for exploration and evaluation assets without specifically considering the requirements of paragraphs 11 and 12 of PAS 8. Thus, an entity adopting PFRS 6 may continue to use the accounting policies applied immediately before adopting the PFRS. This includes continuing to use recognition and measurement practices that are part of those accounting policies.

Reclassification of Exploration and Evaluation Asset An exploration and evaluation asset shall no longer be classified as such when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Exploration and evaluation assets shall be assessed for impairment, and any impairment loss recognized, before reclassification.

Development Cost Methods used before PFRS 6

Intangible e.g. Cost of drilling and construction of wells

Successful effort method Include in the cost of wasting asset Cost of successful exploration – Capitalized Cost of unsuccessful exploration – Expensed

Tangible e.g. Building and machinery and equipment

Successful – The technical feasibility and commercial viability of extracting a mineral resource are demonstrable

Recognize as separate asset Depreciation method: Same method for other PPE

Full cost method All exploration and evaluation expenditures are capitalized

If the problem is silent Useful life > Life of WA – Output Useful life < Life of WA – Straight line

Key Definitions Exploration for and evaluation of mineral resources

Estimated Restoration Cost

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.

Included when recognized as provision. Therefore the restoration cost must • Be a present obligation, • Represent a probable outflow of economic resources, and • Be measurable reliably

Examples of Exploration and Evaluation Activities • • • • • •

acquisition of rights to explore topographical, geological, geochemical and geophysical studies exploratory drilling trenching sampling activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource

STRAIGHT PROBLEM In 2005, Hukay Mining Company purchased property with natural resources P6,200,000. The property was relatively close to a large city and had an expected residual value of P900,000.

The following information relates to the use of the property.

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PROFESSIONAL REVIEW and TRAINING CENTER, INC. a) In 2005, Hukay spent P400,000 in development costs and P300,000 in buildings on the property, Hukay does not anticipate that the buildings will have utility after the natural resources are depleted. b) In 2006 and 2008, P300,000 and P800,000, respectively, were spent for additional developments on the mine. c) The tonnage mined and estimated remaining tons for years 2005-2009 are as follows: Tons Extracted 0 1,500,000 1,800,000 1,700,000 900,000

Year 2005 2006 2007 2008 2009

Estimated Tons Remaining 5,000,000 3,500,000 2,000,000 900,000 0

REQUIRED: Compute the depletion and depreciation expense for the years 2005 – 2009.

Depreciation Year 2005 2006 2007 2008 2009

Output 1,500,000 1,800,000 1,700,000 900,000

Rate

Depreciation 90,000 108,000 68,000 34,000

0.06 0.06 0.04

Computation of depreciation rate - 2006 Cost/DA of building /Estimated reserves Depreciation rate

P

300,000 5,000,000 0.06

Computation of depreciation rate - 2007 Cost/DA of building Depreciation – 2006 Remaining DA, 1/1/07 /Est. reserves, 1/1/07 Depreciation rate

P (

300,000 90,000) 210,000 3,800,000 0.06

SUGGESTED SOLUTION GUIDE: Computation of depreciation rate - 2008 Depletion Year 2005 2006 2007 2008 2009

Output 1,500,000 1,800,000 1,700,000 900,000

Rate 1.20 1.11 1.15

Depletion 1,800,000 1,998,000 1,955,000 1,047,000

Computation of depletion rate - 2006 Cost of land Development cost – 2005 Development cost – 2006 Total cost Residual value Depletable amount /Estimated reserves Depletion rate

P6,200,000 400,000 300,000 6,900,000 ( 900,000) 6,000,000 5,000,000 1.20

Computation of depletion rate - 2007 Original DA Depletion – 2006 Remaining DA, 1/1/07 /Est. reserves, 1/1/07 Depletion rate

P6,000,000 (1,800,000) 4,200,000 3,800,000 1.11

Computation of depletion rate - 2008 Remaining DA, 1/1/07 Depletion – 2007 Remaining DA, 1/1/08 Development cost – 2008 Depletable amount-2008 /Est. reserves, 1/1/08 Depletion rate

P4,200,000 (1,998,000) 2,202,000 800,000 3,002,000 2,600,000 1.15

Remaining DA, 1/1/07 Depreciation – 2007 Remaining DA, 1/1/08 /Est. reserves, 1/1/08 Depreciation rate

P (

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210,000 108,000) 102,000 2,600,000 0.04

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