DEPLETION

Question 1

What is depletion?

Answer 1

Depletion is the removal/extraction/exhaustion of a natural resource.

It is the systematic allocation of the depletable amount of a wasting asset over the period the natural resource is extracted or produced.

Question 2

What standard governs depletion?

Answer 2

PFRS 6

Question 3

What are exploration and evaluation expenditures?

Answer 3

These are expenditures incurred in connection with exploration and evaluation of mineral resources BEFORE THE TECHNICAL FEASIBILITY AND COMMERCIAL VIABILITY of extracting a resource is established. It includes the following:

a. acquisition of rights to explore
b. topographical geological studies
c. exploratory drilling
d. trenching
e. sampling
f. activities in relation to evaluating technical feasibility and commercial viability of extracting mineral resources
g. general and administrative costs DIRECTLY ATTRIBUTABLE to exploration and evaluation activities

Question 4

Explain exploration and evaluation assets.

Answer 4

Exploration and evaluation assets are capitalized exploration and evaluation expenditures, since the standard does not provide a clear cut definition on these assets.

Question 5

How should exploration and evaluation assets be measured?

Answer 5

Initially AT COST.
Subsequently, either at:
1. COST MODEL
2. REVALUATION MODEL

Question 6

What are wasting assets?

Answer 6

Wasting assets are material objects of economic value and utility to man produced by nature. They are PHYSICALL CONSUMED AND ARE IRREPLACEABLE.

Question 7

What are the costs of wasting assets?

Answer 7

1. Acquisition costs
2. Exploration costs
3. Development costs
4. Restoration costs

Question 8

What is acquisition cost in relation to wasting assets?

Answer 8

It is the price paid to obtain the property containing the natural resource.

If there is residual value on the land after extraction, such amount is separated to get the land’s “depletable amount”.

Question 9

What are exploration costs?

Answer 9

These are costs incurred BEFORE TECHNICAL FEASIBILITY AND COMMERCIAL VIABILITY of extracting a resource are demonstrated. It incudes costs incurred to LOCATE the natural resource. There are 2 methods in recording exploration costs:

1. Successful effort method
2. Full cost method

Question 10

What is the successful effort method?

Answer 10

Only the exploration costs directly attributable to the discovery of commercially producible resources are capitalized.

Costs of UNSUCCESSFUL DISCOVERIES ARE EXPENSED.

Question 11

What is the Full cost method?

Answer 11

All exploration costs are CAPITALIZED, whether successful or not.

Question 12

What are development costs?

Answer 12

These are costs incurred to EXPLOIT OR EXTRACT the natural resource that has been located through successful exploration.

Only INTANGIBLE DEVELOPMENT COSTS are CAPITALIZED.

Tangible development costs such as equipment, tunnels, and bunkers are depreciated in a separate account.

Question 13

What are restoration costs?

Answer 13

Restoration costs are costs TO BE INCURRED IN ORDER TO BRING THE PROPERTY BACK TO ITS ORIGINAL CONDITION.

It must be added to the cost of property and is CAPITALIZED ONLY WHEN THE ENTITY INCURS AN OBLIGATION TO RESTORE SAID PROPERTY.

The amount to be capitalized is DISCOUNTED.

Question 14

How is depletion computed?

Answer 14

Depletion is computed using the OUTPUT OR PRODUCTION METHOD.

Question 15

How are tangible mining equipment depreciated?

Answer 15

Generally, mining equipment used in operations are DEPRECIATED BASED ON WHICHEVER IS SHORTER BETWEEN:

1. Useful life of the equipment
2. Useful life of the wasting asset based on output method

HOWEVER, if the equipment is MOVABLE AND CAN BE USED IN OTHER PRJOECTS, USE THE USEFUL LIFE.

Question 16

What happens to depreciation of mining equipment if a shutdown of operations occur?

Answer 16

The depreciation on the year of shutdown shall be based on the remaining life of the equipment following the straight line method.

AFTER the shutdown, depreciation can once again be computed using the output method.

Question 17

What is the trust fund doctrine?

Answer 17

The trust fund doctrine states that the share capital of a corporation is conceived as a trust fund for the protection of creditors. Such capital cannot be returned to the shareholders during the lifetime of the creditors.

Question 18

What is the wasting asset doctrine?

Answer 18

A wasting asset corporation engaged in the extraction of a natural resource can LEGALLY return capital to the shareholders during its lifetime.

It can pay NOT ONLY TO THE EXTENT OF RETAINED EARNINGS, BUT ALSO TO THE EXTENT OF ACCUMULATED DEPRECIATION.

The amount paid in excess ARE LIQUIDATING DIVIDENDS.

Question 19

What journal account is debited alongside retained earnings when recording liquidating dividends?

Answer 19

The portion reflecting liquidating dividends is debited to the “CAPITAL LIQUIDATED” account

Retained earnings 200
Capital liquidated 100
Dividends Payable 300

The capital liquidated account IS A DEDUCTION FROM THE TOTAL SHAREHOLDER’S EQUITY.

Question 20

What is the formula for computing the maximum dividend that can be declared to shareholders?

Answer 20

(Retained earnings + Accumulated Depreciation) - (Capital Liquidated in prior years + Unrealized depletion in ending inventory) = MAX DIVIDENDS