Chapter 9 - Mineral Resource Assets

• What do you call to the asset that are related to entities that are in extractive activities?


  Mineral Resource Asset or wasting assets
• Extractive industries are those industries who take raw materials such as coal, gold, and other mineral resources from the earth
• Extractive industries are generally divided into two sectors which are;

  1. Mining; and
  2. Oil and gas
• PFRS 6 is limited in scope. Thus, it does not apply to the following expenditures;

  1. expenditures incurred before the exploration for and evaluation of mineral resources
  2. expenditure incurred after the technical feasibility and commercial viability of extracting a mineral resource are demonstrable
• What are the examples of expenditure incurred before the exploration for and evaluation of mineral resources?

  Expenditure incurred before the entity has obtained the legal rights to explore the specific area
• entities refer to PAS 8 as a guidance for the selection and application of accounting policies of activities that are not within the scope of PFRS 6
• in accordance with paragraph 10 of PAS 8 which stated that in an absence of a PFRS that specifically applies to a transaction, management shall use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable, in that the FS:

  1. represents faithfully
  2. reflect the economic substance and not merely the legal form
  3. neutral
  4. prudent; and
  5. complete in all material respects
• Paragraph 11 and 12 provided the following hierarchy of accounting policy;

  1. requirement in PFRS dealing with similar and related issues (also known as analogy)
  2. definitions, recognition criteria and measurement concepts for ALE in the conceptual framework
  3. most recent pronouncements of other standard setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these not conflict with the sources in (a) and (b)
• Extractive activities include the ff;

  1. Pre - Exploration
  2. Exploration and evaluation
  3. Development
  4. Production
  5. Closure and Rehabilitation
• It refers to the search for mineral resources when a company has been granted the legal rights to explore in a particular area, as well as the assessment of the technical feasibility and commercial viability of extracting the mineral resources

  Exploration and Evaluation of Mineral Resources
• an appropriate accounting policy for expenditure incurred in pre exploration activities could be developed from an application of the general principles of asset recognition in PAS 16 and PAS 38. An entity also considers Conceptual Framework definition of assets and expenses
• Examples of pre-exploration activities and their corresponding accounting treatment

  1. Expenditure directly attributable to the acquisition of exploration license - part of intangible asset
  2. Expenditure on infrastructure - PPE
  3. Expenditures that cannot be associated with any specific mineral property - expense as incurred
• The following are excluded from exploration and evaluation expenditures:

  1. expenditures incurred before an entity obtained legal rights to explore.
  2. after the technical feasibility and commercial viability of extracting mineral resources are demonstrable.
  3. any developmental expenditure such as commercial production preparation and road and tunnel building.
• This are activities intended to discover mineral resources


  Exploration Activities
• Examples of exploration activities

  1. Researching and analysing an area's historic exploration data
  2. Conducting topographical, geological, geochemical, and geophysical studies
  3. Exploratory drilling, trenching and sampling
• These are activities that are done to prove the technical feasibility and commercial viability of mineral resources found

  Evaluation activities
• PFRS 6 requires an entity to determine an accounting policy specifying which expenditures on exploration and evaluation will be recorded as an asset considering the degree to which the expenditure can be associated with finding specific mineral resources
• Oil and gas industries commonly used the "successful efforts" or "full cost method"
• Expenditure under;

  1. Successful effort - recognized as an asset
  2. Unsuccessful - recognized as an expense
  3. Full cost method - all expenditures incurred in exploration and evaluation are recognized as asset
• Initial measurement:

  1. Exploration and evaluation assets are initially measured at cost.

  Subsequent measurement:

  1. Exploration and evaluation assets are subsequently measured using either the:

  Cost model, or

  Revaluation model
• Classification of exploration and evaluation assets;

  1. Tangible assets - i.e. machines, equipment, and vehicles utilised in exploration and evaluation activities
  2. Intangible assets - rights that allow a business to execute such operations as drilling
• Wasting assets

  1. also referred as to the natural resources
  2. these assets held by an entity that have economic value and are produced by nature, such as oil, gas reserves and mineral deposits
• Components of cost of wasting assets

  1. Acquisition cost of the property (including direct attributable costs)
  2. Capitalizable exploration costs
  3. Intangible development costs
  4. Restoration cost (at present value)
• It is the cost of acquiring the land on which the natural resources is located

  Acquisition cost of the property
• Exploration cost;

  1. the amount expended to locate natural resources before the extraction of mineral resources
  2. expenditures incurred prior to demonstrating the technical feasibility and commercial viability of extracting a mineral deposit
  3. it is compromises of purchase of exploration rights, geological studies, exploratory drilling, trenching, and sampling
• It is the cost incurred to extract natural resources that have been discovered.


  Development cost
• This activity starts once the technical and commercial viability of extracting the mineral resource had been determined but before the commercial production

  Development activities
• Examples of development activities;

  1. sinking shafts
  2. permanent excavations
  3. building transport infrastructure
  4. initial removal of burden (stripping)
• Development cost are categorised into two;

  1. Tangible Development Cost
  2. Intangible Development Cost - capitalized as part of the cost of natural resources examples are drilling, sinking mine shafts, and well construction
• It involves the day-to-day activities of obtaining a saleable product from the mineral reserve on a commercial scale. It includes extraction and any processing before sale

  Production
• PAS 2 provides guidance that should be followed in accounting for expenditure incurred in production stage
• What do you call to the removal of waste materials or overburden to gain access to mineral ore deposits?


  Stripping activity
• It is the cost incurred in doing stripping activity by an entity engaged in surface mining

  Stripping cost
• according to IFRIC 20 stripping costs are accounted as follows;

  1. PAS 2 - to the extent that the benefit is realised in the form of inventory
  2. Non - current asset - if the benefit is improved access to ore; IF ALL criteria are met
  3. probable economic benefit
  4. can identify the component of the ore body for which access has been improved
  5. cost can be measured reliably
  6. Expense - if the cost incurred did not qualify as an asset
• stripping cost are usually capitalized as part of the depreciation cost of building, developing, and constructing the mine under development phase
• Stripping activity asset shall be accounted for as an addition to, or as an enhancement of an existing asset
• stripping activity asset is initially measured at cost which includes;

  1. cost directly incurred to perform the stripping activity to improved the access to the identified component of ore; and
  2. allocation of directly attributable overhead costs
• It is the cost to be incurred to restore the property to its original condition.

  Restoration cost
• The cost of restoration may be:

  1. Added to the cost of the resource property; or
  2. Deducted from the resource property’s projected residual value
• The expected cost of restoring the property to its original condition is capitalized only when the entity incurs the liability when the asset is acquired according to PAS 16, par 16. Furthermore, aside from the fact that the estimated restoration cost must be discounted, it should also represent a pre-existing legal or contractual obligation.