Wasting assets

PFRS 6: Exploration for and Evaluation of Mineral

Resources
 Natural resources are assets
that are extracted or depleted
when they are consumed.

Natural resources
Gas, oil, lumber, and coal are
often called “wasting assets”
because they must be
consumed in order to be
used.
Recognition of Exploration and Evaluation
Assets
At recognition, exploration and evaluation assets are measured at cost. Expenditure
related to the following activities is potentially includable in the initial measurement:
1. Acquisition of exploration rights;
2. Topographical, geological, geochemical, and geophysical studies;
3. Exploratory drilling;
4. Trenching;
5. Sampling;
6. Activities to evaluating the technical feasibility and commercial viability of
extracting a mineral resource.
PFRS 6: Applicability & Inapplicability
+ An entity applies PFRS 6 to exploration and evaluation expenditures
that it incurs.
+ An entity does not apply PFRS 6 to expenditures incurred
+ Before the exploration for and evaluation of mineral resources,
such as expenditures incurred before the entity has obtained the
legal rights to explore a specific area.
+ After the technical feasibility and commercial viability of
extracting a mineral resource are demonstrable.
Pre-exploratory activities: Expense
+ Costs that are expensed include costs incurred before the entity has
obtained the legal rights to explore a specific area.
Exploration and Evaluation: Asset or Expense
+ PFRS 6
+ Expenditure related to the following activities are potentially includable in the
initial measurement:
1. Acquisition of exploration rights;
2. Topographical, geological, geochemical, and geophysical studies;
3. Exploratory drilling;
4. Trenching;
5. Sampling;
6. Activities to evaluating the technical feasibility and commercial viability of
extracting a mineral resource.
Development: Asset
+ Once technical feasibility and commercial viability of production are
demonstrated, exploration and evaluation assets are reclassified as
development costs.
Production: Asset
Closure: Asset
Initial Measurement: Cost
+ Cost of natural resources:
+ Acquisition cost
+ Exploration and evaluation cost
+ Development cost
+ Estimated restoration cost
Acquisition cost
+ Acquisition cost is the price paid to get hold of the property containing
the natural resource.
Exploration and evaluation cost
+ Exploration for and evaluation of mineral resources mean the search for
mineral resources including minerals, oil, natural gas and similar non-
regenerative resources after the entity has obtained legal rights to explore in a
specific area as well as the determination of the technical feasibility and
commercial viability of extracting the mineral resource.
+ Exploration and evaluation expenditures are expenditures incurred in
connection with the exploration and evaluation of mineral resources before
the technical feasibility and commercial viability of extracting a mineral
resource are demonstrable.
+ Companies have a choice of either writing these off as they are incurred or
capitalizing these pending evaluation.
Development cost
+ Development cost is the cost incurred to exploit or extract the natural
resource that has been located through successful exploration. Once technical
feasibility and commercial viability of production are demonstrated,
exploration and evaluation assets are reclassified as development costs.
+ Two forms of development costs:
+ Tangible equipment - includes transportation, heavy machinery, tunnels, bunker and
mine shaft. The cost of tangible equipment is not capitalized as cost of natural
resource but set up in a separate account (i.e., PPE) and depreciated in accordance
with normal depreciation policies.
+ Intangible development cost - is capitalized as cost of the natural resource. Such
cost includes drilling, sinking mine shaft and construction of wells.
Estimated restoration cost
+ Estimated restoration cost is a cost that may be necessary to bring the
property to its original state. The estimated restoration cost is
capitalized only to the extent that it is recognized as a provision.
Subsequent Measurement
+ After recognition, an entity applies (to the exploration and evaluation
assets) either the
+ Cost model; or
+ Revaluation model.
+ The journal entry assuming there is increase in value of wasting assets
is
+ Dr. Wasting asset xx
+ Cr. Revaluation surplus xx
Depletion
+ It refers to the systematic and rational allocation of the depletion base
of a natural resource over its useful life.

+ Depletion Method: Units of Output Method (UOP) is often used in

computing the depletion of a natural resource.
Illustration:
+ During 2023, Charisse Mae Company acquired property with mineral
deposit for P15,000,000. The property had a residual value of
P500,000. However, Charisse Mae is legally required to restore the
property to its original condition at a discounted amount of
P2,000,000. Geologists estimate that 2,000,000 tons are to be
extracted. Tons extracted totaled 250,000 in 2023.
+ Required:
1. What is the depletion to be recognized for 2023?
2. Prepare all the necessary entries in 2023.
Illustration:
Acquisition cost 15,000,000
Add: Estimated restoration cost 2,000,000
Total 17,000,000
Less: Residual value 500,000
Depletable cost 16,500,000

1. What is the depletion to be recognized for 2023?

2,062,500
Illustration:
Dr. Mineral deposit 15,000,000
Cr. Cash 15,000,000
Dr. Mineral deposit 2,000,000
Cr. Asset retirement obligation 2,000,000
Dr. Depletion 2,062,500
Cr. Accumulated depletion 2,062,500
Change in the units estimated to be extracted
and additional development costs
+ Regarded as change in accounting estimate to be handles currently and
prospectively.
+ The company needs to compute for the new depletion rate per unit
using this formula:

+ Additionally, the amount of depletion is computed using this formula:

Illustration:
+ During 2023, Noble Company purchased property with ore deposit for
P10,000,000. The property had a residual value of P1,000,000.
However, Noble is legally required to restore the property to its
original condition at a discounted amount of P500,000. In 2023, Noble
spent P800,000 in development cost. In 2024, an amount of P900,000
was spent for additional development on the mine.
Illustration:
+ The tonnage mined and estimated remaining tons for years 2023 –
2024 are as follows:
Year Tons Extracted Estimated Tons Remaining
2023 500,000 1,500,000
2024 800,000 1,700,000

+ Required:
Compute for the depletion to be recognized for 2023 & 2024.
Illustration:
Compute for the depletion to be recognized for 2023.
2,575,000
Compute for the depletion to be recognized for 2024.
2,760,000
Change in asset retirement obligation
+ Regarded as change in accounting estimate to be accounted currently
and prospectively.
+ The difference in the present value of the estimated restoration cost is
adjusted in the cost of the wasting asset and the related liability.
Illustration:
+ On January 2, 2023, Restorer Company purchased property with ore
deposit for P20,000,000. The property had a residual value of
P1,000,000. However, Restorer is required to restore the property to its
original condition at an estimated cost of P2,500,000 on December 31,
2026. The appropriate discount rate is 10%.
+ The tonnage mined and estimated remaining tons for years 2023 –
2024 are as follows:

Year Tons Extracted Estimated Tons Remaining

2023 500,000 1,500,000
2024 800,000 1,700,000
Illustration:
+ Required:
Compute for the following are prepare the related journal entries (Round
off depletion rate into two decimal places and present value factor into
four decimal places.)
1. Cost of the wasting asset.
2. Depletion expense in 2023.
3. Interest expense in 2023.
Illustration:
+ Required:
Compute for the following are prepare the related journal entries (Round
off depletion rate into two decimal places and present value factor into
four decimal places.)
4. Case #1: Assuming at the end of 2023, the restoration cost to be
incurred on December 31, 2026 is now estimated to be P2,300,000.
• Interest expense in 2024.
• Depletion expense in 2024.
Illustration:
+ Required:
Compute for the following are prepare the related journal entries (Round
off depletion rate into two decimal places and present value factor into
four decimal places.)
5. Case #2: Assuming at the end of 2023, the restoration cost to be
incurred on December 31, 2026 is now estimated to be P2,600,000.
• Interest expense in 2024.
• Depletion expense in 2024.
Illustration:
+ Answers:
1. Cost of the wasting asset. 21,707,500
Dr. Wasting asset 21,707,500
Cr. Cash 20,000,000
Cr. Asset retirement obligation 1,707,500
2. Depletion expense in 2023. 5,175,000
Dr. Depletion 5,175,000
Cr. Accumulated depletion 5,175,000
3. Interest expense in 2023. 170,750
Dr. Interest expense 170,750
Illustration:
+ Answers:
4. Decrease in estimated restoration cost. 150,260
Dr. Asset retirement obligation 150,260
Cr. Wasting asset 150,260
Depletion expense in 2024. 4,920,000
Dr. Depletion 4,920,000
Cr. Accumulated depletion 4,920,000
Interest expense in 2024. 172,799
Dr. Interest expense 172,799
Cr. Asset retirement obligation 172,799
Illustration:
+ Answers:
5. Increase in estimated restoration cost. 75,130
Dr. Wasting asset 75,130
Cr. Asset retirement obligation 75,130
Depletion expense in 2024. 4,992,000
Dr. Depletion 4,992,000
Cr. Accumulated depletion 4,992,000
Interest expense in 2024. 195,338
Dr. Interest expense 195,338
Cr. Asset retirement obligation 195,338
Depreciation of Mining Equipment
+ The depreciable cost of mining equipment shall be systematically
allocated over the asset’s useful life. The useful life of the asset
depends on whether that asset is immovable or movable.
Illustration:
+ On January 1, 2023, Rhislyn Co. acquired land containing ore for a
total cost of P40,000,000. Other capitalizable costs incurred for the
wasting assets amounted to P20,000,000. On the same date, mining
equipment were also purchased by the company at a total cost of
P15,000,000. Geologists estimate that the total units estimated to be
extracted is 4,000,000 tons of ore. It is estimated that 400,000 tons
will be extracted each year during the useful life of the wasting assets.
Actual units extracted during 2023 are 450,000 tons.
Illustration:
+ Requirements:
1. Assuming the equipment are movable and useful life is 15 years, how
much is the depreciation expense in 2023?
2. Assuming the equipment are movable and useful life is 5 years, how
much is the depreciation expense in 2023?
3. Assuming the equipment are immovable and useful life is 15 years, how
much is the depreciation expense in 2023?
4. Assuming the equipment are immovable and useful life is 5 years, how
much is the depreciation expense in 2023?
Illustration:
+ Answers:
1. Assuming the equipment are movable and useful life is 15 years, how
much is the depreciation expense in 2023? 1,000,000
2. Assuming the equipment are movable and useful life is 5 years, how
much is the depreciation expense in 2023? 3,000,000
3. Assuming the equipment are immovable and useful life is 15 years,
how much is the depreciation expense in 2023? 1,687,500
4. Assuming the equipment are immovable and useful life is 5 years, how
much is the depreciation expense in 2023? 3,000,000