LECTURE NOTES ON WASTING ASSETS

Costs of Wasting Assets

• Acquisition
• Exploration and evaluation
• Development
• Restoration

PFRS 6 – Exploration for and Evaluation of Mineral Resources

PFRS 6 permits an entity to develop an accounting policy for exploration and evaluation assets without specifically
considering the requirements of paragraphs 11 and 12 of PAS 8. Thus, an entity adopting PFRS 6 may continue to
use the accounting policies applied immediately before adopting the PFRS. This includes continuing to use recognition
and measurement practices that are part of those accounting policies.

Methods used before PFRS 6

Successful effort method
Cost of successful exploration – Capitalized
Cost of unsuccessful exploration – Expensed

Successful – The technical feasibility and commercial viability of extracting a mineral resource are demonstrable

Full cost method

All exploration and evaluation expenditures are capitalized

Key Definitions

Exploration for and evaluation of mineral resources

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.

Examples of Exploration and Evaluation Activities

• acquisition of rights to explore
• topographical, geological, geochemical and geophysical studies
• exploratory drilling
• trenching
• sampling
• activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral
resource

Exploration and evaluation expenditures

Expenditures incurred by an entity in connection with the exploration for and evaluation of mineral resources before
the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

Exploration and evaluation assets

Exploration and evaluation expenditures recognized as assets in accordance with the entity’s accounting policy.
Reclassification of Exploration and Evaluation Asset

An exploration and evaluation asset shall no longer be classified as such when the technical feasibility and commercial
viability of extracting a mineral resource are demonstrable. Exploration and evaluation assets shall be assessed for
impairment, and any impairment loss recognized, before reclassification.

Development Cost
Intangible
e.g. Cost of drilling and construction of wells

Include in the cost of wasting asset

Tangible
e.g. Building and machinery and equipment

Recognize as separate asset

Depreciation method:
Same method for other PPE

If the problem is silent

Useful life > Life of WA – Output
Useful life < Life of WA – Straight line

Estimated Restoration Cost

Included when recognized as provision. Therefore the restoration cost must

• Be a present obligation,
• Represent a probable outflow of economic resources, and
• Be measurable reliably
PROBLEMS
1. The Zomboni Company is involved in the exploration of mineral resources. Its policy is to recognize exploration
assets and measure them initially at cost.

During 2015 Zomboni incurs the following expenditure:

Million
Exploratory drilling for minerals on site and related P200
activities
Roads and infrastructure to access exploration site 350
Expenditures relating to the subsequent
development of the resources 340

In accordance with PFRS6 Exploration for and Evaluation of Mineral Resources, at what amount should exploration
assets be initially recognized in the financial statements of Zomboni?

2. The Macau Company is involved in the exploration for mineral resources. Its policy is to recognize exploration assets
and measure them initially at cost.

At the end of 2015 the following amounts were extracted from Macau's financial statements:
Million
Trenching and sampling expenditure P100
Drilling rigs used for exploration, carrying
amount 200
Drilling rigs used for exploration, depreciation
expense 30

In accordance with PFRS6 Exploration for and evaluation of mineral resources, at what amount should intangible
exploration assets be initially recognized at in the financial statements of Macau?

3. Zambales Company acquired property in 2015 which contains mineral deposit. The acquisition cost of the
property was P20,000,000. After acquisition, the following costs were incurred:

Exploration cost P13,000,000

Development cost related to drilling of
wells 10,000,000
Development cost related to production
equipment 15,000,000

For P2,000,000, Zambales is legally required to restore the land to a condition appropriate for resale. It is
estimated that the property can be sold for P5,000,000 following mineral extraction. Geological estimates
indicate that 5,000,000 tons of mineral may be extracted.

The company extracted 600,000 tons of the mineral in 2015 and sold 450,000 tons. In the 2015 income
statement, what amount of depletion is included in cost of sales?

4. During 2015, Sitar Oil Corporation incurred P4,000,000 in exploration costs for each of 15 oil wells drilled in
2015. Of the 15 wells drilled, 10 were dry holes. Sitar uses the successful efforts method of accounting.
Assuming that Sitar depletes 30% of the oil discovered in 2015, what amount of these exploration costs would
remain in its December 31, 2015 statement of financial position?

5. On January 1, 2015, Major Company purchased a uranium mine for P800,000. On that date, Major estimated
that the mine contained 1,000 tons of ore. At the end of the productive years of the mine, Major Company will
be required to spend P4,200,000 to clean up the mine site. The appropriate discount rate is 8%, and it is
estimated that it will take approximately 14 years to mine all of the ore. Major uses the productive-output
method of depreciation. During 2015, Major extracted 100 tons of ore from the mine. Compute the amount of
depletion for 2015.

6. Burns Company has purchased land that will serve as a temporary repository for nuclear waste. The site will
function for 30 years, at which time Burns will be required to completely decontaminate the land. The purchase
price for the land is P500,000. Burns knows that the land will have to be decontaminated but isn't sure which
of several possible approaches will be sufficient to reach the level of decontamination necessary by law. The
costs of each approach, and the estimated probability that the approach will be the one used, follow:

Approach 1 - 10% probability of total decontamination cost of P5,000 at the end of 30 years.
Approach 2 - 20% probability of total decontamination cost of P100,000 at the end of 30 years.
Approach 3 - 70% probability of total decontamination cost of P1,500,000 at the end of 30 years.

Assuming that the appropriate interest rate is 8%, the cost of the nuclear waste repository site is

7. Zomboss Corporation constructed a nuclear power plant at a cost of P110 million and started operating it on 1
January 2005. The plant has a useful life of 40 years. Zomboss is required to decommission the plant at the
end of its useful life at an estimated amount of P80 million. The risk-adjusted rate is 5 per cent. The entity’s
financial year ends on 31 December.

On 31 December 2014, the discount rate has not changed. However, Zomboss estimates that, as a result of
technological advances, the net present value of the decommissioning liability has decreased by P8 million.

The depreciation amount to be reported for the year ended December 31, 2015 is

8. In 2013, Lepanto Mining Company purchased property with natural resources for P28,000,000. The property
had a residual value of P5,000,000. However, the company is required to restore the property to its original
condition for P2,000,000.

In 2013, Lepanto spent P1,000,000 in development costs and P3,000,000 in buildings on the property. Lepanto
does not anticipate that the buildings will have utility after the natural resources are removed. In 2014, an
amount of P1,000,000 was spent for additional development on the mine. The tonnage mined and estimated
remaining tons for years 2013 to 2015 are as follows:
 Tons extracted Tons remaining
2013 0 10,000,000
2014 3,000,000 7,000,000
2015 3,500,000 2,000,000

The company should recognize depletion for 2015 at

9. Masinloc Company purchased a tract of resource land in 2014 for P39,600,000. The content of the tract was
estimated at 1,200,000 units. When the resource has been exhausted, it is estimated that the land will be worth
P1,200,000. Fixed installations were set up at a cost of P9,600,000. Mining equipment was purchased on
January 2, 2015 for P12,400,000. The life of the fixed installations is 8 years and the equipment, 4 years. In
2015, 120,000 units have been extracted. This was one half of the annual extraction which can be expected
following the first year of operations.

Masinloc Company should record total depreciation for 2015 at

10. Leyte Company constructed a building costing P15,000,000 on a mine property. The building has an estimated
life of 6 years with no salvage value. After all the resource is removed expectedly over 5 years, the building will
be of no use. The estimated recoverable output from the mine is 1,000,000 tons. During the first year, Leyte
produced 200,000 tons but there was shut down and no output in the second year. In the third year, Leyte
resumed operations and produced 300,000 tons. Leyte Company should record depreciation of the building in
the third year at

11. ABC Company provides the following balances at the end of 2015:

Wasting asset, at cost P80,000,000

Accumulated depletion 20,000,000
Retained earnings 10,000,000
Capital liquidated 15,000,000
Depletion based on 100,000 units
extracted at P50 per unit 5,000,000
Inventory of resource deposit
(20,000 units) 2,000,000

Compute for the maximum amount of dividend that ABC can declare on December 31, 2015.