DEPLETION Flashcards
What is depletion?
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.
What standard governs depletion?
PFRS 6
What are exploration and evaluation expenditures?
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
Explain exploration and evaluation assets.
Exploration and evaluation assets are capitalized exploration and evaluation expenditures, since the standard does not provide a clear cut definition on these assets.
How should exploration and evaluation assets be measured?
Initially AT COST.
Subsequently, either at:
1. COST MODEL
2. REVALUATION MODEL
What are wasting assets?
Wasting assets are material objects of economic value and utility to man produced by nature. They are PHYSICALL CONSUMED AND ARE IRREPLACEABLE.
What are the costs of wasting assets?
- Acquisition costs
- Exploration costs
- Development costs
- Restoration costs
What is acquisition cost in relation to wasting assets?
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”.
What are exploration costs?
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:
- Successful effort method
- Full cost method
What is the successful effort method?
Only the exploration costs directly attributable to the discovery of commercially producible resources are capitalized.
Costs of UNSUCCESSFUL DISCOVERIES ARE EXPENSED.
What is the Full cost method?
All exploration costs are CAPITALIZED, whether successful or not.
What are development costs?
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.
What are restoration costs?
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.
How is depletion computed?
Depletion is computed using the OUTPUT OR PRODUCTION METHOD.
How are tangible mining equipment depreciated?
Generally, mining equipment used in operations are DEPRECIATED BASED ON WHICHEVER IS SHORTER BETWEEN:
- Useful life of the equipment
- 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.
What happens to depreciation of mining equipment if a shutdown of operations occur?
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.
What is the trust fund doctrine?
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.
What is the wasting asset doctrine?
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.
What journal account is debited alongside retained earnings when recording liquidating dividends?
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.
What is the formula for computing the maximum dividend that can be declared to shareholders?
(Retained earnings + Accumulated Depreciation) - (Capital Liquidated in prior years + Unrealized depletion in ending inventory) = MAX DIVIDENDS
