CHAPTER 28: DEPLETION  Activities in relation to evaluating the

technical feasibility and commercial

PFRS/IFRS 6 : FINANCIAL REPORTING FOR THE viability of extracting a mineral resource
EXPLORATION AND EVALUATION OF MINERAL  General and administrative costs directly
RESOURCES attributable to exploration and
 Mineral Resources – include minerals, oil, evaluation activities (e.g. depreciation of
natural gas, and similar nonregenerative mining equipment)
resources
MEASUREMENT AND CLASSIFICATION (E&E)
Exploration and Evaluation (E&E) of Mineral - E & E expenditures may qualify as E & E
Resources asset
- the search for mineral resources after - shall be measured initially at cost
the entity has obtained legal right to - subsequent recognition: cost model or
explore in a specific area revaluation model
- Determination of the technical - classified either as tangible asset
feasibility and commercial viability of (vehicles and drilling rigs) or intangible
extracting the mineral resource asset (ex. drilling rights)

Exploration and Evaluation Expenditures WASTING ASSETS

– the expenditures incurred by an entity - material objects of economic value and
in connection with the exploration for utility to man produced by nature
and evaluation of mineral resources - are natural resources (includes: coal,
before the technical feasibility and ore, precious materials)
commercial viability of extracting a
mineral resource Two characteristics:
 physically consumed
Does not include expenditure incurred:  irreplaceable
 Before an entity has obtained the
legal right to explore a specific area COST OF WASTING ASSETS [AEDR]
 After the technical feasibility and  Acquisition cost
commercial viability of extracting a  Exploration cost
mineral resource are demonstrable a. Successful efforts method
(pertains to development  Successful cost = capitalized
expenditure)  Unsuccessful cost =
expensed
EXPLORATION AND EVALUATION EXPENDITURES b. Full cost method
[ATET SAG]  All exploration costs
 Acquisition of rights to explore (whether successful or not)
 Topographical, geological, geochemical, are capitalized
and geophysical studies
 Exploratory drilling  Development Cost
 Trenching a. Tangible equipment (PPE)
 Sampling b. Intangible development cost
(Wasting Assets)
  Estimated Restoration Cost REVISION OF DEPLETION RATE
Two Approaches of Accounting: Original cost xx
1. Added to the cost of resource Less: Accumulated depletion xx
property or “netted” against Carrying amount xx
the expected residual value of Less: Residual value xx
the resource property Remaining Depletable Amount xx
2. The estimated cost of ÷ Revised remaining est. (beg. year) xx
restoring the property to its New depletion rate xx
original condition is capitalized x Units extracted during the year xx
only when the entity incurs Depletion xx
the obligation when the asset
is acquired DEPRECIATION OF MINING PROPERTY
 General rule: useful life of the equipment
DEPLETION or useful life of the wasting asset,
- The removal, extraction, or exhaustion whichever is shorter
of a natural resource  UL of Equip. < UL of WA : Straight Line
- The systematic allocation of the  UL of Equip. > UL of WA: Output Met.
depletable amount of a wasting asset
over the period the natural resource is  If the mining equipment is movable and
extracted or produced can be used in future extractive projects :
- Computed using the output or Straight Line
production method  In the event of shutdown : Straight Line
- classified as part of the cost of
production or cost of sales. TRUST FUND DOCTRINE
- the corporation can pay dividends to
Computation: shareholders but limited only to the
Acquisition cost xx balance of retained earnings
Exploration cost xx
Development cost* xx WASTING ASSET DOCTRINE
PV of Restoration cost (PV of 1) xx - exception to the trust fund doctrine
Total cost xx - wasting asset corporation can legally
Less: Residual value xx return capital to shareholders during
Depletable amount xx the lifetime of the corporation
Divided by: Units est. to be extracted xx - can pay dividend not only to the extent
Depletion rate per unit xx of retained earnings but also to the
Multiplied by: Units extracted xx extent of accumulated depletion
Depletion xx
*should be intangible  Philosophy: to limit dividend declaration to
the retained earnings balance would have
the effect of retaining in the business funds
which are not needed because the wasting
assets are irreplaceable
  Restoration cost should be discounted
COMPUTATION FOR MAXIMUM DIVIDEND at PV of 1. Also, credit estimated
Retained Earnings xx Liability for Restoration Cost (not cash)
Add: Accumulated Depletion xx  If monthly extraction is given, multiply
Total xx by the number of months in a given
Less: Capital liquidated in prior years xx year and account for annual depletion
*Unrealized Depletion (Inv.,end) xx xx  If estimated residual value will not
Maximum dividend xx benefit the entity, it is ignored and not
*Depletion rate x inventory (in units) deducted
 If asked “depletion expense” – (units
Journal Entry: produced or extracted x depletion rate)
*Retained Earnings xx  If asked “depletion expense in COGS” –
Capital Liquidated xx (units sold x depletion rate)
Dividend Payable xx  Whether asked “depletion
*should be closed first expense/depletion expense in COGS”,
computation of CA will always be
Cost – Depletion rate
ADDITIONAL: COST & CLASSIFICATIONS  Revision of Depletion Rate is a Change
Cost Classification in Accounting Estimate; hence to be
Geological survey Exploration cost handled currently and prospectively
Cost of erecting walls  In the event of shutdown, use straight
Development cost
and drilling deposit
line method; when operations are
Road construction Development cost
resumed, the depreciation is again
Tunnels, bunk
Mine improvements computed following the output method
houses, and other
fixed installations
(PPE)  In computation for maximum dividend,
the accumulated depletion balance is
---------------------------------------------------------------- used only for the purposes of
Notes: determining how much capital can be
 If silent as to depreciation of mining legally returned to shareholders
equipment, assume output method  The “capital liquidated” account is a
 Depletion method is always output deduction from the Shareholders’
method, unless specified otherwise equity
  Wasting Assets doctrine: The funds
Total estimate would only be given to the shareholders
Useful life of wastingasset = be extracted ¿ when the corporation is finally dissolved
Expected units ¿
and liquidated
 Revision of depletion rate is made:
a. When additional cost is incurred
b. When original estimate is
changed
 Shut down only affects depreciation.
Depletion for the year of shutdown is
zero