Defined as the search for mineral 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 resources
Exploration and Evaluation of Mineral Resources
The expenditures incurred by an entity in connection with the exploration and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource are known as
Exploration and Evaluation Expenditures
Give examples of exploration and evaluation expenditures
1: Acquisition of rights to explore
2: Topographical , geological, geochemical and geophysical studies
3: exploratory drilling
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
*Building roads and tunnels are examples of exploration and evaluation expenditures
False. Such expenses are related to development of mineral resources. Another example is the preparation for commercial production
*PFRS 6 mandates the recognition of exploration and evaluation asset
FALSE. PFRS 6 does not provide clear cut guidance for such recognition. Accordingly, an entity must develop its own accounting policy for the recognition of such asset.
PFRS 6 allows an entity to continue to apply its previous accounting policy provided that the resulting information is relevant and reliable. If that accounting policy results in the recognition of an E&EA, such asset shall be measured at
Subsequent to initial recognition, how shall an entity measure an exploration and evaluation asset?
either cost model or revaluation model
* Exploration and Evaluation Asset is a tangible asset
FALSE. It may be intangible or tangible. For example, vehicles and drilling rigs would be classified as tangible assets while drilling rights would be classified as intangible.
What are the indications that an Exploration and Evaluation Asset may be impaired? (4)
1: The period for which the entity has the right to explore in a specific area has expired and is not expected to be renewed
2: Substantive expenses for the exploration and evaluation is neither budgeted nor planned
3:The EE activities have not led to the discovery of commercially viable quantity of mineral resources and the entity has decided to discontinue such activities
4: Sufficient data indicate that the carrying amount of the EE asset is unlikely to be recovered in full from successful development or by sale
Are material objects of economic value and utility to man produced by nature
Wasting Assets. These are actually natural resources which include coal, oil, ore precious metals like gold and silver and timber. Once consumed, they cannot be replaced anymore.
Two main characteristics of wasting assets
A: physically consumed B: Irreplaceable
*Measurement of wasting assets is under PFRS 6
FALSE. At present IFRS does not address wasting assets. There is no comprehensive standard applicable to extractive or mining industry.
In general, the cost of wasting asset or natural resource can be divided into 4 categories namely
4:Estimated Restoration Cost
The price to obtain the property containing the natural resource
Acquisition Cost: Unquestionably this is the initial cost of the wasting asset
If there is residual land value after the extraction of the natural resource, what is the treatment of the portion applicable to the land?
1: Include in the natural resource account or
2: set up in a separate account and the remaining cost should be charged to the natural resource account
How is land value treated in the computation of depletion?
deducted from total cost to arrive at depletable amount. It is considered as residual value.
Under PFRS 6, this is the cost incurred in an attempt to locate the natural resource that can economically be extracted or exploited.
What are the two methods of accounting for exploration cost?
1:Successful Effort Method and
2: Full Cost Method
Under the Successful Effort method of accounting for exploration cost, what is capitalized as the cost of resource property?
Only exploration cost related to the discovery of commercially producible natural resource.
Explain the meaning of "dry holes" in relation to Exploration and Evaluation Assets
These are unsuccessful discoveries. Under the successful effort method, these are expensed.
Under the Full Cost Method of accounting for Exploration Cost, what costs are capitalized as the cost f the resource property?
All exploration costs whether successful or unsuccessful. This is on the theory that any exploration cost is a "Wild Goose Chase" and therefore necessary before any commercially producible and profitable resource can be found.
*The cost of drilling dry holes is excluded under the Full Cost Method of accounting for Exploration Cost
FALSE: It is included
Which among the Successful Effort and Full Cost Method is commonly used in practice?
Both. Large entities use the successful effort while small oil entities use the full cost.
The cost incurred to exploit or extract the natural resource that has been located through successful exploration
Development Cost. It may be in the form of tangible equipment or intangible development cost
These development costs include transportation equipment, heavy machinery tunnels, bunkers and mine shaft
*Cost of tangible equipments are capitalized as cost of wasting asset under PFRS 6
FALSE. Not capitalized but set up in a separate account and depreciated in accordance with normal depreciation policies.
What is the treatment of intangible development costs with regard to Exploration and Evaluation Assets?
Capitalized as cost of wasting asset. It includes drilling cost, sinking mine shaft and construction of wells.
Sinking Mine shaft is what type of development cost?
intangible development cost
Construction of wells is what type of development cost?
intangible development cost
Drilling cost is what type of development cost?
intangible development cost
Mine shaft is what type of development cost?
Tunnel is what type of development cost?
Bunker is what type of development cost?
The cost to be incurred in order to bring the property to its original condition
Estimated restoration cost
What are the two alternative treatments for estimated restoration cost?
Added to cost of resource property or "netted" against the expected residual value of the resource property
Under PAS 16, the estimated restoration cost in bringing back the property to its original condition is capitalized only when
the entity incurs the obligation when the asset is acquired. There must be an existing present obligation required by law or contract.
*Estimated restoration cost must be discounted
The removal, extraction or exhaustion of a natural resource or wasting asset
*In essence, 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 the total cost of the materials available for production.
What method is used in computing for depletion?
Output or Production Method
The residual value of a wasting asset is composed of
the value of the land after extraction underneath the resource is found
How is depreciation of tangible equipment used in mining operations computed?
Life of the mining equipment or life of wasting asset whichever is shorter, if life of the equipment is shorter, straight line is used. If life of the wasting asset is shorter, output method is used.
If the mining equipment used in mining operations is movable and can be used in future extractive project, the equipment is depreciated using
its useful life using straight line method
Entities can pay dividends up to the extent of? (Give answer under Wasting Asset and Trust Fund Doctrines)
WA: up to retained earnings and accumulated depletion TFD: up to retained earnings only
What is the formula in determining the maximum amount of dividend that can be declared by a wasting asset corporation?