University of Southern Philippines Foundation
College of Accountancy
Intermediate Accounting 1
Module.09_Financial Reporting for Depletion of Mineral Resources
Introduction
Resources supplied by nature, such as ore deposits, mineral deposits, oil reserves, gas deposits, and timber stands, are natural
resources or wasting assets. Natural resources represent inventories of raw materials that can be consumed (exhausted) through
extraction or removal from their natural setting (e.g. removing oil from the ground). Depletion is the exhaustion that results from the
physical removal of a part of a natural resource. In each accounting period, the depletion recognized is an estimate of the cost of the
natural resource that was removed from its natural setting during the period.
This module focuses on the accounting and reporting for depletion of Mineral Resources in accordance with PAS 16, PAS 37, IFRIC
1, PFRS 6, and IFRIC 20. This module presents the recognition principle, measurement, presentation and disclosure requirements for
depletion of mineral resources. It introduces the learner to the proper accounting treatment of wasting assets through the online
lecture, develops the learner’s understanding of the requirements through the use of examples and indicates significant judgements
that are required in accounting for wasting assets. Furthermore, the module includes questions designed to test the learner’s
knowledge of the requirements and to develop the learner’s ability to account for wasting assets in accordance with applicable
standards.
Learning Outcomes
At the end of this module you MUST be able to:
1. Account for the cost of wasting asset
2. Compute for the depletion of wasting asset.
Learning Activities:
1. Submission of assignment through Canvas.
2. Read lecture notes.
3. Answer pre-assessment activities through Canvas.
4. Download the pre-recorded lecture.
Lecture Notes
Costs of Wasting Assets
• Acquisition
• Exploration and evaluation
• Development
• Restoration
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.
Methods used before PFRS 6
Successful effort method
Cost of successful exploration – Capitalized
Cost of unsuccessful exploration – Expensed
Successful – The technical feasibility and commercial viability of extracting a mineral resource are demonstrable
Full cost method
All exploration and evaluation expenditures are capitalized
Key Definitions
Exploration for and evaluation of mineral resources
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.
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
Exploration and evaluation expenditures
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.
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
Intangible - e.g. Cost of drilling and construction of wells
o Include in the cost of wasting asset
Tangible - e.g. Building and machinery and equipment
o Recognize as separate asset
o Depreciation method: Same method for other PPE
If the problem is silent
Useful life > Life of WA – Output method
Useful life < Life of WA – Straight line method
Estimated Restoration Cost
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
Depletion
The removal, extraction or exhaustion of a natural resource
The systematic allocation of the depletable amount of a wasting asset over the period the natural resource is extracted or
produced.
Depletion method
Output or production method
Depletion rate per unit
Depletable amount divided by units estimated to be extracted
Depletion for the period
Depletion rate per unit multiplied by number of units extracted for the period
Revision of depletion rate
Changes in estimate are to be handled currently and prospectively
Depreciation of mining property
Based on the useful life of the equipment or the useful life of the wasting asset, whichever is shorter
Wasting asset doctrine
Entity can pay dividend not only to the extent of RE but also to the extent of accumulated depletion
Amount paid in excess of RE is accounted for as liquidating dividend
Retained Earnings xx
Add: Accumulated depletion xx
Total xx
Less: Capital liquidated in prior years xx
Unrealized depletion in Ending Inventory xx (xx)
Maximum Dividend xx
-- end of lecture notes --
Pre-Assessment Activity on Intangible Assets
1. The Zozobini Company is involved in the exploration of mineral resources. Its policy is to recognize exploration assets and measure them initially
at cost.
During the year Zozobini incurs the following expenditure:
Millio
n
Exploratory drilling for minerals on site and related activities P200
Roads and infrastructure to access exploration site 350
Expenditures relating to the subsequent development of the resources 340
In accordance with PFRS6 Exploration for and Evaluation of Mineral Resources, at what amount should exploration assets be initially recognized in
the financial statements of Zozobini?
2. The Cream Company is involved in the exploration for mineral resources. Its policy is to recognize exploration assets and measure them initially at
cost.
At the end of the current year the following amounts were extracted from Cream's financial statements:
Million
Trenching and sampling expenditure P100
Drilling rigs used for exploration, carrying amount 200
Drilling rigs used for exploration, depreciation expense 30
In accordance with PFRS6 Exploration for and evaluation of mineral resources, at what amount should intangible exploration assets be initially
recognized at in the financial statements of Cream?
Million
Trenching and sampling expenditure P100
Drilling rigs used for exploration, depreciation expense 30
Total Intangible exploration assets 130
3. Silk Company acquired property during the year which contains mineral deposit. The acquisition cost of the property was
P18,000,000. After acquisition, the following costs were incurred:
Exploration cost P15,000,000
Development cost related to drilling of wells 12,000,000
Development cost related to production equipment 18,000,000
For P2,500,000, Silk is legally required to restore the land to a condition appropriate for resale. It is estimated that the property
can be sold for P5,200,000 following mineral extraction. Geological estimates indicate that 5,000,000 tons of mineral may be
extracted.
The company extracted 750,000 tons of the mineral in during the year and sold 550,000 tons. In its year-end income statement,
what amount of depletion is included in cost of sales and ending inventory?
Acquisition 18,000,000
Exploration 15,000,000
Development 12,000,000
Restoration 2,500,000
Total cost 47,500,000
RV (5,200,000)
Dep. Amount 42,300,000
Est. Reserves 5,000,000
Dep. Rate 8.46
output 750,000
Depletion 6,345,000
Sold 550,000
rate 8.46
Cost of Sales 4,653,000
Unsold 200,000
rate 8.46
Ending Inventory 1,692,000
4. During the year, Sitar Oil Corporation incurred P4,000,000 in exploration costs for 15 oil wells drilled in all throughout the year. Of the 15
wells drilled, 10 were dry holes. Sitar uses the successful efforts method of accounting. Assuming that Sitar depletes 30% of the oil discovered
during the year, what amount of these exploration costs would remain in its year end statement of financial position?
Exploration cost 4,000,000
Successful Drilling 5/15
Capitalizable Cost 1,333,333.33
Depletion 400,000
Exploration Cost at the End 933,333
5. On January 1, 2019 Ethyl Company purchased a uranium mine for P800,000. On that date, Ethyl estimated that the mine contained 1,000 tons
of ore. At the end of the productive years of the mine, Ethyl Company will be required to spend P4,200,000 to clean up the mine site. The
appropriate discount rate is 8%, and it is estimated that it will take approximately 14 years to mine all of the ore. Ethyl uses the productive-
output method of depreciation. During 2019, Ethyl extracted 100 tons of ore from the mine. Compute the amount of depletion expense for
2019.
Acquisition 800,000
Restoration cost (4.2M * 0.3405) 1,430,100
Total cost 2,230,100
Est. reserves 1,000
Dep rate 2,230
Output 100
Depletion 223,010
6. In 2017, Green Mining Company purchased property with natural resources for P28,000,000. The property had a residual value
of P5,000,000. However, the company is required to restore the property to its original condition for P2,000,000.
In 2017, Green spent P1,000,000 in development costs and P3,000,000 in buildings on the property. Green does not anticipate that
the buildings will have utility after the natural resources are removed. In 2018, an amount of P1,000,000 was spent for additional
development on the mine. The tonnage mined and estimated remaining tons for years 2017 to 2019 are as follows:
Tons extracted Tons remaining
2017 0 10,000,000
2018 3,000,000 7,000,000
2019 3,500,000 2,000,000
The company should recognize depletion for 2019 at..
Acquisition 28,000,000
Restoration 2,000,000
Dev't cost 1,000,000
Addt'l dev't cost 1,000,000
Total cost 32,000,000
RV (5,000,000)
Depletable amount 27,000,000
Depletion - 2018 (8,100,000)
Rem depletable amount - 2019 18,900,000
Est. reserves 5,500,000
Dep rate 3.44
Output 3,500,000
Depletion - 2019 12,040,000
7. Masinloc Company purchased a tract of resource land in 2018 for P39,600,000. The content of the tract was estimated at 1,200,000 units.
When the resource has been exhausted, it is estimated that the land will be worth P1,200,000. Fixed installations were set up at a cost of
P9,600,000. Mining equipment was purchased on January 2, 2019 for P12,400,000. The life of the fixed installations is 8 years and the
equipment, 4 years. In 2019, 120,000 units have been extracted. This was one half of the annual extraction which can be expected following
the first year of operations.
Masinloc Company should record total depreciation for 2019 at.
Estimated reserves 1,200,000
annual extraction 240,000
life of WA 5
Life of WA UL
fixed installation 5 8 output
mining equipment 5 4 straight line
Fixed installation 9,600,000
Est. reserves 1,200,000
Dep. Rate 8.00
Output 120,000
Depreciation 960,000
Mining equipment 12,400,000
UL 4
Depreciation 3,100,000
8. ABC Company provides the following balances at the end of 2019:
Wasting asset, at cost P80,000,000
Accumulated depletion 20,000,000
Retained earnings 10,000,000
Capital liquidated 15,000,000
Depletion based on 100,000 units extracted at
P50 per unit 5,000,000
Inventory of resource deposit
(20,000 units) 2,000,000
Compute for the maximum amount of dividend that ABC can declare on December 31, 2019.
Retained earnings 10,000,000
Undistributed realized depletion
Acc. Depletion 20,000,000
Cap. Liquidated - PY (15,000,000)
Dep. - EI (unrealized) (20T*50) (1,000,000) 4,000,000
Maximum 14,000,000
RE 10M
Capital liquidated 4M
Div. Payable 14M
-- end of Pre-Assessment Activity --
Assessment
1. Online quiz through Canvas.
Optional Activities/Resources
1. Intermediate Accounting 1B 2019 Edition by Zeus Vernon B. Millan
2. https://www.iasplus.com/en/standards/ias/ias2
SMC 😊
