depletion of mineral resources

• Exploration and evaluation expenditures

  Expenditures incurred before establishing technical feasibility and commercial viability of extracting mineral resources
• Technical feasibility


  Ability to demonstrate that extraction of mineral resources will result in commercial activities
• Commercial viability


  Ability to demonstrate that extraction of mineral resources will result in commercial activities
• Exploration and evaluation of mineral resources

  Search for mineral resources including minerals, oil, natural gas and similar non-regenerative resources
• Exploration and evaluation activities are done after obtaining legal rights to explore in a specific area
• Accounting policies for exploration and evaluation assets

  Entities are allowed to develop their own accounting policies that result in relevant and reliable information, based on management's judgment and without need to consider hierarchy of standards
• Entities may recognize exploration and evaluation expenditures as expense or asset


  Depending on the entity's own accounting policy
• Natural assets/resources (wasting assets)

  Non-renewable, non-regenerative, non-replenishable assets such as petroleum, minerals, timber
• Costs of natural resources

  • Purchase/acquisition cost
  • Directly attributable costs (legal fees, permits, restoration costs)
• Restoration costs


  Costs to return the area used in mining operations to its original condition, capitalized at present value
• Development costs


  Amounts paid to prepare the resource site for mining, including drilling, construction of tunnels, shafts and wells
• Depletion


  Systematic and rational allocation of the depletion base of a natural resource over the period it is extracted
• Depletion base


  Capitalized cost of the natural resource less its residual/salvage value
• Depletion method


  Units of production method (also known as activity method or variable charge method)
• Movable tangible mining equipment


  Can be used from one extracting site to another, depreciated over useful life
• Immovable tangible mining equipment

  Cannot be used in other extracting sites after reserves in one site are depleted, depreciated over shorter of useful life or life of resource
• If useful life of immovable equipment is shorter than economic life of resource, use straight-line depreciation method
• If useful life of immovable equipment is longer than economic life of resource, use units of production depreciation method
• Depletion


  A systematic and rational allocation process, similar to depreciation for property, plant and equipment
• Depletion base


  The depreciable amount, based on the values for the natural resource or mineral resource (wasting assets)
• Depletion calculation


  1. Depletion base (cost less residual value) / Estimated total units to be extracted = Depletion rate per unit

  2. Depletion rate per unit x Actual units extracted = Depletion charge
• Depletion charge is first recorded as part of the cost of an asset (work-in-process inventory), then expensed when the inventory is sold
• If there is no extraction, no depletion is recognised
• Units of production method

  The method used to calculate depletion, also known as the activity method or variable charge method
• Depletion base = Acquisition cost + Total costs (exploration, development, etc.) - Residual value
• Depletion begins when natural resource extraction starts, and ceases when the resource is physically consumed or disposed
• Changes in accounting estimates for depletion (e.g. remaining reserves, residual value) are applied prospectively under IAS 8
• Carrying amount of the natural resource = Cost - Accumulated depletion
• Depletion charge for units sold is included in cost of goods sold, while depletion for unsold units is included in inventory
• Revised depletion rate per unit is calculated at the beginning of the year when there are changes in accounting estimates
• Depletion


  The reduction in the carrying amount of a wasting asset due to the consumption of the asset through extraction, harvesting, or use
• Depletion calculation


  1. Determine the revised residual value

  2. Determine the remaining recoverable reserves

  3. Compute the revised depletion rate per unit

  4. Multiply the depletion rate by the actual units extracted
• Change in accounting estimate

  A change in the estimated residual value or the estimated remaining recoverable reserves of a wasting asset
• Depletion calculation (alternative method)

  1. Determine the original depletion rate per unit

  2. Multiply the depletion rate by the actual units extracted in 20x5
• Development costs


  Costs to develop the acquired property for mining operations
• Types of development costs

  • Tangible development costs (equipment with physical substance)
  • Intangible development costs (no physical substance)
• Tangible development costs


  • Can be moved from one location to another
  • Can be sold separately from other assets
  • Have alternative usage and residual values
• Depreciation of tangible development costs

  1. Movable equipment: Depreciate over useful life using regular depreciation policies

  2. Immovable equipment: Depreciate over the shorter of the equipment's useful life and the mine's useful life
• The estimated recoverable reserves from the mine is 2 million 100 thousand units
• The estimated annual extraction is 300 thousand units