Chapter 20 - Wasting Assets CHAPTER 20 WASTING ASSETS TOPIC OVERVIEW: This chapter discusses wasting asset, its characteristics and components, initial and subsequent measurement, the different depletion methods and the financial statement presentation of wasting asset. LEARNING OBJECTIVES: After studying this chapter, you should be able to: 1. Describe the mining value chain. 2. Identify cost of wasting asset 3. Describe the initial recognition, ini measurement, subsequent measurement, derecognition and financial statement presentation of exploration and evaluation asset. 4. Compute the amount of depletion and depreciation relating to tangible development. NATURAL RESOURCES Natural resources are assets that used up when they are consumed. Gas isa good example of a natural resource since it is consumable. In contrast with a car that can be used and reused. Natural resources like gas, oil, lumber, and coal are often called wasting assets because they must be consumed in order to be used. Recognition of Exploration and Evaluation Assets: At recognition, exploration and evaluation assets are measured at cost. Expenditure related to the following activities is potentially includable in the initial measurement of cost. 1) Acquisition of exploration rights; ‘Topographical, geological, geochemical and geophysical studies; 3) Exploratory drilling; 4) Trenching; 5) Sampling; and ; 6) Activities to evaluating the technical feasibility and commercial viability of extracting a mineral resource. 832 Scanned with CamScannerchapter 20.~ Wasting Assets RATION aaa an ently explo! ing and evaluating the extraction of er jurtake activities including determination of heel deposits. will rring and economic feasibility studies, construction of sir ys 1 and administrative matters: directly assoc ants and sts Chat may be incurred include: ciated with these yuust und engine all technical functions. C satellite imagery; «airborne and seismic surve «depreciation of geophysical instrumentation to prepare surveys; © map preparation; «license fees and legal ¢ «geologist inspections; «chemical analysis; and «payments to employees and contractors. classified as intangible assets. The consumption of All of these costs would be the instrumentation should be regarded as an intangible asset. However, the geophysical instrumentation would remain as a tangible asset. ion of Mineral Resources PERS 6: Exploration for and Evaluat! ‘Applicability of PFRS 6 An entity applies PFRS 6 to exp! incurs, Inapplicability of PFRS 6 An entity does not apply PFRS 6 to expenditures ind 1, Before the exploration for and evaluation of mine expenditures incurred before the entity has obtains explore a specific area. abil extracting 3 2 After the vechnlcal feasibility and commercial viability of extracting mineral resource are demonstrable. oration and evaluation expenditures that it urred: neral resources, such cd the legal rights to as 833 Scanned with CamScanner |ves | MINING VALUE CHAIN U Exploration and Evaluation - PERS No.6 (Asset or Expense) Expense Pre-exploratory activities Exploration | i. | Expenditure related to the Ing activities are potentially includable in the initial measurement of cost. before the obtained the rights to explore a specificarea | ‘exploration rights; logical, geochemical and technical feasibility ‘of extracting a mineral ‘production are demonstrated, {Exploration and Evaluation assets are reclassified as |development costs Applied Auditing by Asuncion, Ngina and assy BuaseM — 02 401deUO Scanned with CamScannerChapter 20 - Wasting Assets SUB: EQUENT MEASUREMENT Alter recognition, an entity applies either the 1. Cost model ot 2. Revaluation model to the exploration and evaluation assets, The journal entry assuming there is increase in value of wasting asset is Wasting asset XX Revaluation surplus XX Refer to PAS 16 ~ Property, Plant and Equipment and PAS 38 - Intangible for guidance, The classification should be consistent with the ation of the assets as tangible or intangible depending on their Asset cla nature. DEPLETION It refers to the systematic and rational allocation of the depletion base of a natural resource over its useful life. Depletion Method Units of Output Method (UOP) is often used in computing the depletion of a natural resource. The formula is: Total cost of the wasting asset - Depletion = estimated residual value x Units estimated to be extracted Units extracted during the year Where: Total cost of the _ Acquisition cost + Exploration cost + Intangible wasting asset - Development cost + Estimated restoration cost ILLUSTRATION: During 2021, Charisse Mae Company acquired property with mineral deposit for 15,000,000. The property had a residual value of P500,000. However, Charisse Mae is legally required to restore the property to its original condition at a discounted amount of P2,000,000. Geologists estimate that 2,000,000 tons are to be extracted. Tons extracted totaled 250,000 in 2021. Require 1) Whats the depletion to be recogni 72021? 2) Prepare all the necessary entries in 2021. SOLUTION: . Acquisition cost P 15,000,000 Add: Estimated restoration cost - 2,000,000 Total P17,000,000 Less: Residual value 500,000 Depletable cost P16,500,000 Scanned with CamScannerpaptet 20= wasting Assets c tion charge: pepletion' 16,500,000 pepletion = ~~ 2,000,000 = 2,062,500 x 250,000 tons pepletion = Journal entries are: Mineral deposit +5000,00 Cash To record the acquisition of wasting asset 15,000,000 Mineral deposit Sania Estimated restoration cost (Asset retirement obligation) 2,000,000 To record the liability from estimated restoration cost Depletion eo Accumulated depletion —_ To record the depletion charge in 2021. Change in the units estimated to be extracted and additional development costs When there is a change in the units estimated to be extracted or when the company incurs additional costs, these are regarded as change in accounting estimate to be handled currently and prospectively. The company needs to compute for the new depletion rate per unit using this formula: Remaining depletable cost New depletion rate/unit Remaining revised estimate of the productive output Depletion= _ Depletion rate/unit X Units of extracted during the year ILLUSTRATION: During 2020, Noble Company purchased property with ore deposit for P10,000,000. ‘The property had a residual value of P 1,000,000. However, Noble is legally required to restore the property to its original condition at a discounted amount of 500,000. In 2020, Noble spent 800,000 in development cost. In 2021, an amount of P900,000 was spent for additional development on the mines ‘The tonnage mined and e: years 2020 - 2021 are as follows Year TonsExtracted Esti Tons Remaining 2020 500,000 1,500,000 2021 800,000 1,700,000 Required: ay for 2020 and 2021? Compute for the depletion to be recognize Scanned with CamScannerChapter 20 - Wasting Assets SOLUTION: Acquisition cost P 10,000,000 ‘Add: Estimated restoration costs and geological surveys 500,000 Development cost - 2020 800,000 Total P11,300,000 Less: Residual value 001 Depletable cost - 2020 Depletion in 2020 Depletable cost 2020 P 10,300,000 Divide by units estimated to be extracted (500,000+1.5M) —__2,000,000 _ Depletion per unit P 5.15 Multiply: Tons extracted 500,000 Depletion - 2020 P 2,575,000 Total Depletable cost in 2020 P10,300,000 Less: Accumulated depletion 2,575,000 Total P 7,725,000 Add: Development cost - 2021 900,000 Depletable cost - 2021 P 8,625,000 Divide by: Units estimated to be extracted Depletion per unit P Multiply: Tons extracted - 2021 Depletion - 2021 P Change in asset retirement obligation (e.g,, restoration cost) When there is a change in the estimated restoration cost, the change is accounted as change in accounting estimate. Therefore, it is accounted currently and prospectively. ‘The difference in the present value of the estimated restoration cost is adjusted in the cost of the wasting asset and the related liability, Illustration: Change in estimated restoration cost On January 2, 2020, Restorer Company purchased property with ore deposit for P20,000,000. The property had a residi }0,000, However, Restorer is required to restore the condition at an estimated cost of P2,500,000 on appropriate discount rate is 10%. The tonnage mined and estimated remaining tons for years 2020 - 2021 are as follows: Year Tons Extracted Estimated Tons Remaining 2020 500,000 1,500,000 2021 800,000 1,700,000 838 Scanned with CamScanner- wasting Assets _ ; compute for the following and r ined are hee (round off depletion rate into two decimal places rated journal . rrp nto four decimal places) ind present value fact st of the wasting asset ; ppepletion expense in 2020 interest expense im 2020 4 Case No. Te Assuming at the end of 2020, the restoration cost to b fhearred! on December 31, 2020 is now estimated to be P2 300.000, Compute for the: 300,000. 3. Interest expense in 2021 bh. Depletion expense in 2021 5, Case No. 2: Assuming at the end of 2020, the restoration cost to be incurred on December 31, 2023 is now estimated to be P2,600,000 Compute for the: a 3, Interest expense in 2021 b. Depletion expense in 2021 SOLUTION: Requirement No. 1 P20,000,000 ‘Acquisition cost ‘Add: Estimated restoration costs (P-2,500,000 x .683) 1,707,500 P21,707,500 Total Cost Journal entry: Wasting asset P21,707,500 Cash 20,000,000 1,707,500 ‘Asset retirement obligation - restoration cost To record the acquisition of wasting asset Requirement No. 2 Total Cost 21,707,500 Less: Residual value 1,000,000 Depletable cost - 2020 Son Divide by: Units estimated to (500,000 +1.5M) nS Depletion rate , Sal Multiply by: Tons extracted r re175.000- Depletion - 2020 ee Journal entry: ry: Depletion P 5,175,000 5,175,000 Accumulated depletion uo To record the depletion in 2020. 839 Scanned with CamScannerChapter 20 ~ Wasting Assets Requirement No. Present value of timated restoration cost 01/02/2020 1,707,509 Multiply by: Discount rate 10%, Interest expense ~ 2020 PA7750 | Journal entry: Interest expense P 170,750 Asset retirement obligation ~ restoration cost » 170,759 To record the interest expense in 2020. Requirement No, 4a Present value of initial estimated restoration e« 12/31/2020 (P1,707,500 + P170,750) P 1,878,250 Less: Present value of revised estimate (P2,300,000 %.7513) __ 1,727,990 Decrease in estimated restoration cost P 150,260 Journal entry: Asset retirement obligation - restoration cost. P 150,260 Wasting asset P 150,260 To record the decrease in estimated restoration cost. Total depletable cost in 2020 20,707,500 Less: Accumulated depletion 5,175,000 Total 15,532,500 Less: Decrease in estimated restoration cost 150,260 Depletable cost - 2021 P 15,382,240 Divide by: Units estimated to be extracted (800,000 + 1.7M) __ 2.500.000 Depletion per unit P Multiply: Tons extracted - 2021 Depletion - 2021 P-4,920,000 Journal entry: Depletion P 4,920,000 Accumulated depletion P 4,920,000 To record the depletion in 2021. Requirement No. 4b Revised present value of estimated restoratio ; 12/31/2020 =a P 1,727,990 Multiply by: Discount rate " 10% Interest expense - 2020 P_172,799- 27 Journal entry: Interest expense i P 172,799 Asset retirement obligation - restoration cost Pp 172,799 To record the interest expense in 2021, Scanned with CamScannerter 20.- wasting Assets chapter <— oO — quirement No. 5a e yale of initial estimated restoration cost - 9920 (P 1,707,500 + P170,750) P 1,878,250 present value of revised estimate (P2,600,000 x.7513) __1 80 present 12/31/ Increase in estimated restoration cost P journal eny Wasting asset P 75,130 eset retirement obligation ~ restoration cost P 75,130 To record the increase in estimated restoration cost. otal depletable cost in 2020 P20,707,500 Loss: Accumulated depletion 5,175,000 Total 5 ‘Add: Increase in estimated restoration cost Depletable cost — 2021 P15,607,630 Divide by: Units estimated to be extracted (800,000 + 1.7M) 00,000 Depletion per unit P 6.24 Multiply: Tons extracted - 2021 800,000 Depletion - 2021 P 4,992,000 Journal entry: Depletion P 4,992,000 Accumulated depletion P 4,920,000 To record the depletion in 2021. Requirement No.5 b Revised present value of estimated restoration cost — 12/31/2020 P 1,953,380 Multiply by: Discount rate 10% Interest expense - 2020 P 195,338 Journal entry: Interest expense P 195,338 Asset retirement obligation - restoration cost P 195,338 To record the interest expense in 2021. Depreciation of Mining Equipm Depreciation of Mining Equipment shall be systematically allocated over the asset's useful life. The useful life of the asset depends on whether that asset is immovable or movable. If the equipment is immovable, depreciation is based on the life of the equipment or life of the wasting asset whichever is shorter but if the equipment is movable; the depreciation is based on the life ofthe equipment. 841 Scanned with CamScannerChapter 20 - Wasting AS A. Immovable Equipment / 1. I the life of the equipment is shorter and assuming the use gf straight line method i - Depreciable cost | Depreciation ~ Usetul life of the equipment 2. I the life of the wasting asset is shorter, the units of output method is often used Depreciation = Depreciation rate per unit x units extracted Wher | Depre ‘per ion rate B. Movable Equipment uming the use of ht line method | : Depreciable cost | Depreciation = Useful life of the equipment ILLUSTRATION 1: Depreciation of Mining Equipment On January 1, 2021, Rhislyn Co. acquired land containing ore for a total cost of P40,000,000. Other capitalizable costs incurred for the wasting assets amounted to P20,000,000. On the same date, mining equipment were also purchased by the company at a total cost of P15,000,000. Geologists estimate that the total units estimated to be extracted is 4,000,000 tons of ore. It is estimated that 400,000 tons will be racted each year during the useful life of the wasting assets. Actual units extracted during 2021 are 450,000 tons, Required: Case No. 1: Assuming the equipment are movable and its usetul life is 15 years, how much is the depreciation expense in 2021? Case No. 2: Assuming the equipment are mo) useful life is 5 years, how much is the depreciation expense in 20! Case No. i is 15 ssuming the equipment are immovable and its useful life is 18 years, how much is the depreciation expense in 2021? 55 Case No. 4: Assuming the equipment are immovable and its usel! life IS ° years, how much is the depreciation expense in 2021? 842 Scanned with CamScanneroLuTION = “yee NO» LE Movable Equipment with useful life longer than the life of asting asset ment at cost vscomom (a the Wi ning equip! " esidual value le ee pepreciable cost : Fis D000 pide by useful life of the equipment is Depreciation expense in 2021 P 1,000,000 case No. 2: Movable Equipment with useful life shorter than the life of the wasting asset Mining equipment at cost Less: Residual value Depreciable cost Divide by useful life of the equipment Depreciation expense in 2021 15,000,000 15,000,000 ———e P 3,000,000 case No. 3: Immovable Equipment with useful life longer than the life of the wasting asset Mining equipment at cost P15,000,000 Less: Residual value —- Depreciable cost P15,000,000 Divide by units estimated to be extracted 4,000,000 Depreciation per unit P 3.75 Multiply by units extracted during 2021 ___ 450,000 _ Depreciation expense P 1,687,500 Life of the Wasting Asset 4,000,000 Estimated units to be extracted Divide by average units to be extracted per year —— 400,000 10 years Life of the wasting asset Depreciation is based on the life of the equipment or life of the wasting asset whichever is shorter. Case No. 4: Immovable Equipment life shorter than the life of the wasting asset ening equipment at cost PAsn00.00” bess Residual value “pi5,000,000° Depreciable cost _ vide by useful life of the equipment =e 000, Depreciation expense in 2021 843 Scanned with CamScannerChapter 20 - Wasting Assets a Depreciation is based on the life of the equipment or life of the Wasting asset whichever is shorter, ILLUSTRATION 2: Depre ion of Mining Equipment During 2020, Antonette Company acquired and developed property with mineral deposit for P30,000,000, ‘The property had a residual value of P4,000,000. In 2020, Antonette spent P5,000,000 in building on the property. Antonette does not anticipate that the building will have utility after the mineral deposits are removed. The tonnage mined and estimated remaining tons for years 2020 to 2021 are as follows: Year TonsExtracted Estimated Tons Remaining 2020 500,000 1,500,000 2021 800,000 1,700,000 Required: 1) Compute for the depreciation to be recognized for 2020? 2) Compute for the depreciation to be recognized for 2021? SOLUTION: Requirement No. 1 Depreciation 2020: Building at cost P5,000,000 Less: Residual value - Depreciable cost 5,000,000 Divide by units estimated to be extracted (500,000+1.5M) 2,000,000 Depreciation per unit P 2.50 Multiply by: Tons extracted - 2020 ___500,000_ Depreciation - 2020 P1,250,000 Requirement No. 2 Building at cost 5,000,000 Less: Accumulated Depreciation 1,250,000 Book value Jan 1, 2021 ‘ 3,750,000 Less: Residual value : z Depreciable cost 3,750,000 Units estimated to be extracted (800,000+1.7M) _-_2,500,000_ Depreciation per unit i p 1.50 Multiply by: Tons extracted - 2021 0,000 Depreciation - 2021 71,200,000, | 844 Scanned with CamScannerchapt snuTDOWwN FH ehere is a shutdown, depreciation is computed as follows (assuming HuTPUT method was used before the shutdown} ° When operations are resumed, the depreciation is computed following the output method: Depreciation _ Remaining book value after the shutdow Per Unit Remaining revised estimate of the productive output Depreciation _= Depreciation per unit x units extracted during the year Illustration: Shutdown The Salcedo Mining Company constructed a building costing P280,000 on the mine property. Its estimated residual value will not benefit the company and will be ignored for purposes of computing depreciation. The building has an estimated physical life of ten years. The total estimated recoverable units from the mine is 500,000 tons. The company’s production in the first four years of operations was: Firstyear 100,000 tons Third year Shutdown, no output Second year 100,000 tons Fourth year 100,000 tons Required: PHILCPA Adapted Compute for the depreciation expense for the building. SOLUTION: First and Second Years: Depreciation = 2289.00 100,000 tons 500,000 tons Depreciation = __P56,000 Third Year: P280,000-P56,000-P56,000 Depreciation = Depreciation = Note: The depreciation was computed following the straight-line method. Fourth Year ¥ =! 56,000-P21,000 Depreciation= __—__—_—-P49,000__- Scanned with CamScannerChapter 20 - Wasting Assets Liquidating Dividends Unser the trust fund doctrine, the capital stock of a corpora conceived as a trust fan for the protection of creditors, Consequen 2 capital cannot be returned to stockholders during the lifetime ae corporation. Hovsever, the corporation ean pay dividends to stockhotg™ tut limited only to the balance of retained earnings, ers Exception to the trust fund doctrine: Wasting asset doctrine - under this doctrine the wasting asset corporation or a company engaged in the extraction of a natural resource, can | return capital to stockholders during the lifetime of the corporstay Accondingly, a wasting asset corporation can pay dividend not only to the extent of retained earnings but also to the extent of accumulated depletion, Formula: Accumulated profits - unappropriated x Add: Accumulated depletion x Total x Less: CAPITAL liquidated in prior years XX DEPLETION in ending inventory (depletion per unit x units in the Ending Inventory) xX OK Maximum dividend xX ILLUSTRATION: Phoebe Company provides the following balances at the end of 2021: Wasting asset, at cost 8,000,000 Accumulated depletion 7,000,000 Capital liquidated 1,000,000 Accumulated profits - unappropriated 5,000,000 Accumulated profits appropriated for plant expansion 800,000 Depletion based on 100,000 units extracted at P15 per unit 1,500,000 Inventory of resource deposit (20,000 units) 1,000,000 Required: Compute for maximum dividend that December 31, 2021, SOLUTION: declared by Phoebe o” Accumulated profits -unappropriated 5,000.09 Accumulated depletion 7,000 Total 12,000 Less: Capital Liquidated soon 00 Depletion in the ending inventory (! = 00, Maximum Dividend a Scanned with CamScannerchapter 20 = Wasting Assets Changes in Accounting Policy An entity may change its accounting policies for expenditur' s ifthe chang e makes the financial statements mor Hi s more relevant to the economic decision-making needs of users and no | able and no less relevant to those neat » less reliable, or more xploration and evaluation re Impairment: One or more of the following facts and cir 1) The period for which the entity his the right oie eee cxpired during the period or will expire inthe near fut specie pected to be renewed. near future, and exploration for an evaluation of mineral resources in the specific area are neither budgeted for nor planned in the near futur 3) Exploration for and evaluation of mineral resour in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the sp 4) The entity has made the de the specific area. 5). The entity plans to dispose of the 6) Significant changes have occurred with an adverse effect on the main tumptions, including prices and foreign exchange rates, or plans for further exploration for and in the specific are: on not to develop the mineral resource in set at an unfavorable price. accounting ass underlying approved budgets, evaluation of mineral resoure! s recognizing exploration and evaluation assets 10 assets when facts and circumstances 5 may exceed their recov rable accordance with PAS 36 PERS 6 requires entitic: perform an impairment test on thos suggest that the carrying amount of the ass‘ Amount, Entities shall measure the impairment in Impairment of Assets FINANCIAL STAT! ‘An entity cla: Juation 7 intangible accot ‘the nature of the assets acquired classification consistently. a, Tangible equipment - b. Intangible development © resources (e.g. exploration an gil and apply the lant and equipment. , pli is part of property. as cost of natural ‘ost - is capitalized d evaluation assets): 5 the amounts explain: n for and he exploratior DISCLOSURES: An entity discloses information that I tatements 2! identifies and rising from ¢ Tecognized in its financial s' paler os: evaliiation of mineral resources. An ent discloses: esha aes 847 ones Eat Scanned with CamScanner— Chapter 20 - Wasting Assets + Its accounting policies for exploration and evaluation expenditure and n assets. The amounts of assets, liabilities, income and expense and operat Ing and investing cash flows arising from the exploration for and evaluatio nm of mineral resources. The level at which the entity assesses exploration and evaluation assets for impairment. Scanned with CamScanner