FINANCIAL ACCOUNTING AND REPORTING

WASTING ASSETS

IFRS 6, Exploration for and Evaluation of Mineral Resources

2 ways to account for E&E expenditures
1. Successful efforts method – capitalize expenditures related to wells/mines with resources (other
expenditures are expensed immediately)
2. Full cost method – capitalize expenditures regardless if successful or not successful

Cost of Wasting Asset

1. Costs of Purchase (Purchase price + Transaction costs)
2. Costs of Development
3. Costs of E&E (successful or full cost)
4. PV of ARO (asset retirement obligation)

Cost of wasting asset is subjected to depletion based on units of production.

PPE related to wasting asset

1. PPE has alternative use/movable – depreciate as is
2. PPE has no alternative use/immovable
a. Estimated life of the PPE <= Estimated life of the wasting asset – depreciate as is
b. Estimated life of the PPE > Estimated life of the wasting asset – depreciate same rate of
depletion

PROBLEM A:
ABC Co. started business at the beginning of the current year. During the year, ABC had oil and gas
exploration costs of P5,000,000. Of these costs, P1,000,000 was associated with successful wells. All of
the costs were incurred during the year.

REQUIRED:
1. What is the oil and gas exploration expense reported for the year assuming the successful effort
method was used? 4,000,000
2. What is the oil and gas exploration expense reported for the year assuming the full cost method
was used? zero

PROBLEM B:
On January 1, 2022, ABC Co. purchased a mineral mine for P10,560,000 (purchase price) with removable
ore estimated at 1,200,000 (useful life) tons. ABC is required by law to restore the land to its original cost
at the end of the mining operations at an estimated cost of P880,000 (future value of ARO). The present
value of the estimated restoration cost is P720,000 (present value of ARO). The property can be sold for
P1,200,000 at the end of the life (residual value). During 2022, ABC incurred P1,440,000 of exploration
and development costs preparing the mine for operation. 80,000 tons of ore were extracted during the year
and 75% were sold to outsiders.

REQUIRED:
1. How much is the accumulated depletion as of December 31, 2022? 768,000
2. How much is the depletion to be included in the 2022 cost of sales? 576,000

Purchase price 10,560,000

E&E and development costs 1,440,000
PV of ARO 720,000
Cost of wasting asset 12,720,000
Residual value (1,200,000)
Depletable cost 11,520,000
Depletion (80,000 extracted out of 1,200,000) x80,000/1,200,000
Accumulated depletion 768,000

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 Purchase price 10,560,000
E&E and development costs 1,440,000
PV of ARO 720,000
Cost of wasting asset 12,720,000
Residual value (1,200,000)
Depletable cost 11,520,000
Divide: Useful life (tons) 1,200,000
Depletion rate per ton 9.60
# of tons extracted during the year x80,000
Depletion for the year 768,000

Journal entries:
Wasting Asset 12,720,000
Cash 12,000,000
Asset Retirement Obligation 720,000

Inventory 768,000
Accumulated Depletion 768,000

COGS 576,000
Inventory 576,000
(768,000 x 75%)

For example: the useful life (tons) was revised from 1,200,000 to 1,000,000. 50,000 tons were extracted
during 2023. How much is depletion for 2023?
Cost 12,720,000
Depletion – year 1 (768,000)
Carrying value, 12/31/2022 11,952,000
Residual value (1,200,000)
Remaining depletable costs 10,752,000
Divide: Remaining life (tons)
Revised total tons 1,000,000
Already extracted (80,000) 920,000
Revised depletion rate per ton 11.69
# of tons extracted during the year x50,000
Depletion for the year 584,500

Cost 12,720,000
Accumulated depletion, 12/31/2023
1/1/2023 768,000
2023 depletion 584,500 (1,352,500)
Carrying value, 12/31/2023 11,367,500

PROBLEM C:
On July 1, 2022, ABC Co. purchased a mine with an estimated 1,800,000 tons of ore for P8,200,000, of
which P1,000,000 was allocable to the land (P7,200,000 allocated to depletable asset). Furthermore, ABC
purchased a new equipment for P3,750,000 with a useful life of 8 years. ABC expects to extract and sell
25,000 tons per month (25,000 tons x 12 months = 300,000 tons per year). After extraction (no alternative
use), the equipment will be sold for P150,000.

REQUIRED:
1. Assuming that ABC extracted 25,000 per month during the remainder of the year, how much
should be recorded as depletion for 2022? 600,000
2. Assuming that ABC extracted 25,000 per month during the remainder of the year, how much
should be recorded as depreciation for 2022? 300,000

Total estimated tons 1,800,000

Divide: extraction rate per year 300,000
Estimated life of the wasting asset 6 years

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Estimated life of wasting asset 6 years
Estimated life of equipment with no alternative use 8 years
Since life of equipment > life of wasting asset = depreciate same way as depletion

Cost of wasting asset subject to depletion 7,200,000

Residual value (0)
Depletable cost 7,200,000
Divide: estimated life (tons) 1,800,000
Depletion rate per ton 4
Actual extraction (25,000 x 6 months) 150,000
Depletion for the year 600,000

Cost of equipment 3,750,000

Residual value (150,000)
Depreciable cost 3,600,000
Multiply: 150,000 over 1,800,000
Depreciation for the year 300,000

PROBLEM D:
ABC Co. provided the following balances at the end of the current year:
Wasting asset, cost P16,000,000
Accumulated depletion (P12 depletion per unit) 6,000,000
Capital liquidated (already declared as liquidating dividends) 2,000,000
Retained earnings, unappropriated 4,000,000

Assuming that ABC has an ending inventory of 20,000 units, how much is the maximum dividend
(wasting asset doctrine and trust fund doctrine) that can be declared at year-end? 7,760,000

Wasting asset doctrine – amount of depletion related to units sold can be declared as liquidating dividends

Accumulated depletion (for units extracted, regardless if sold or not) 6,000,000

Depletion of unsold (20,000 units x P12 depletion per unit) (240,000)
Depletion of units sold 5,760,000
Capital liquidated (2,000,000)
Remaining capital to be liquidated under the trust fund doctrine 3,760,000

Maximum liquidating dividend (wasting asset doctrine) 3,760,000

Max normal dividends/Retained earnings, unappropriated (trust fund doctrine) 4,000,000
Total maximum dividend that can be declared 7,760,000

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