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REVIEW HANDOUTS AND MATERIALS

SEMESTER FIRST SEMESTER SCHOOL YEAR 2020-2021
SUBJECT
FINANCIAL ACCOUNTING AND REPORTING
HANDOUT # MIXED 016
TOPIC IFRS 16
IFRS 6 Exploration for and Evaluation of Mineral Resources

Objective

1 The objective of this IFRS is to specify the financial reporting for the exploration for and evaluation of mineral
resources.

2 In particular, the IFRS requires:

(a) limited improvements to existing accounting practices for exploration and evaluation expenditures.

(b) entities that recognise exploration and evaluation assets to assess such assets for impairment in accordance with this IFRS and measure
any impairment in accordance with IAS 36 Impairment of Assets.

(c) disclosures that identify and explain the amounts in the entity’s financial statements arising from the exploration for and evaluation of
mineral resources and help users of those financial statements understand the amount, timing and certainty of future cash flows from any
exploration and evaluation assets recognised.

Scope

3 An entity shall apply the IFRS to exploration and evaluation expenditures that it incurs.

4 The IFRS does not address other aspects of accounting by entities engaged in the exploration for and evaluation of
mineral resources.

5 An entity shall not apply the IFRS to expenditures incurred:

(a) 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.

(b) after the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

Recognition of exploration and evaluation assets

Temporary exemption from IAS 8 paragraphs 11 and 12

6 When developing its accounting policies, an entity recognising exploration and evaluation assets shall apply paragraph 10
of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

7 Paragraphs 11 and 12 of IAS 8 specify sources of authoritative requirements and guidance that management is required to
consider in developing an accounting policy for an item if no IFRS applies specifically to that item. Subject to paragraphs 9 and 10 below,
this IFRS exempts an entity from applying those paragraphs to its accounting policies for the recognition and measurement of exploration
and evaluation assets.

Measurement of exploration and evaluation assets

8 Exploration and evaluation assets shall be measured at cost.

9 An entity shall determine an accounting policy specifying which expenditures are recognised as exploration and
evaluation assets and apply the policy consistently. In making this determination, an entity

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considers the degree to which the expenditure can be associated with finding specific mineral resources. The following are examples of
expenditures that might be included in the initial measurement of exploration and evaluation assets (the list is not exhaustive):

(a) acquisition of rights to explore;

(b) topographical, geological, geochemical and geophysical studies; (c)exploratory

drilling;

(d)trenching;

(e)sampling; and

(f)activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource.

10 Expenditures related to the development of mineral resources shall not be recognised as exploration and evaluation assets. The
Framework and IAS 38 Intangible Assets provide guidance on the recognition of assets arising from development.

11 In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets an entity recognises any obligations for
removal and restoration that are incurred during a particular period as a consequence of having undertaken the exploration for and
evaluation of mineral resources.

Measurement after recognition

12 After recognition, an entity shall apply either the cost model or the revaluation model to the exploration and evaluation assets. If
the revaluation model is applied (either the model in IAS 16 Property, Plant and Equipment or the model in IAS 38) it shall be consistent
with the classification of the assets (see paragraph 15).

Changes in accounting policies

13 An entity may change its accounting policies for exploration and evaluation expenditures if the change makes the financial
statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to
those needs. An entity shall judge relevance and reliability using the criteria in IAS 8.

14 To justify changing its accounting policies for exploration and evaluation expenditures, an entity shall demonstrate that the
change brings its financial statements closer to meeting the criteria in IAS 8, but the change need not achieve full compliance with those
criteria.

Presentation

Classification of exploration and evaluation assets

15 An entity shall classify exploration and evaluation assets as tangible or intangible according to the nature of the assets
acquired and apply the classification consistently.

16 Some exploration and evaluation assets are treated as intangible (eg drilling rights), whereas others are tangible (eg vehicles
and drilling rigs). To the extent that a tangible asset is consumed in developing an intangible asset, the amount reflecting that
consumption is part of the cost of the intangible asset. However, using a tangible asset to develop an intangible asset does not change a
tangible asset into an intangible asset.

Reclassification of exploration and evaluation assets

17 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 recognised, before reclassification.

Impairment

Recognition and measurement

18 Exploration and evaluation assets shall be assessed for impairment when facts and circumstances suggest that the carrying
amount of an exploration and evaluation asset may exceed its recoverable amount. When facts and circumstances suggest that the carrying
amount exceeds the recoverable amount, an entity shall measure, present and disclose any resulting impairment loss in accordance with
IAS 36, except as provided by paragraph 21 below.

19 For the purposes of exploration and evaluation assets only, paragraph 20 of this IFRS shall be applied rather than paragraphs 8–
17 of IAS 36 when identifying an exploration and evaluation asset that may be impaired. Paragraph 20 uses the term ‘assets’ but applies
equally to separate exploration and evaluation assets or a cash-
generating unit.

20 One or more of the following facts and circumstances indicate that an entity should test exploration and evaluation assets for
impairment (the list is not exhaustive):

(a) the period for which the entity has the right to explore in the specific area has expired during the period or will expire in the near
future, and is not expected to be renewed.

(b) substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor
planned.

(c) exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities
of mineral resources and the entity has decided to discontinue such activities in the specific area.

(d) sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of
the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.

In any such case, or similar cases, the entity shall perform an impairment test in accordance with IAS 36. Any impairment loss is recognised
as an expense in accordance with IAS 36.

Specifying the level at which exploration and evaluation assets are assessed for impairment

21 An entity shall determine an accounting policy for allocating exploration and evaluation assets to cash- generating units or
groups of cash-generating units for the purpose of assessing such assets for impairment. Each cash-generating unit or group of units to
which an exploration and evaluation asset is allocated shall not be larger than an operating segment determined in accordance with IFRS
8 operating Segments.

22 The level identified by the entity for the purposes of testing exploration and evaluation assets for impairment may
comprise one or more cash-generating units.

Disclosure

23 An entity shall disclose information that identifies and explains the amounts recognised in its financial statements arising
from the exploration for and evaluation of mineral resources.

24 To comply with paragraph 23, an entity shall disclose:

(a) its accounting policies for exploration and evaluation expenditures including the recognition of exploration and evaluation assets.

(b) the amounts of assets, liabilities, income and expense and operating and investing cash flows arising from the exploration for and
evaluation of mineral resources.

25 An entity shall treat exploration and evaluation assets as a separate class of assets and make the disclosures required
by either IAS 16 or IAS 38 consistent with how the assets are classified.

Additional Notes:

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
Theory

1. Information needed to compute a depletion charge per unit includes the

a. estimated total amount of resources available for removal.
b. amount of resources removed during the period.
c. cumulative amount of resources removed.
d. amount of resources sold during the period.

2. Which of the following depreciation methods most closely approximates the method used to deplete the cost of natural resources?
a. Straight-line method
b. Double-declining-balance method
c. Sum-of-the-years'-digits method
d. Units-of-production method

3. Which of the following depreciation methods is computed in the same way as depletion?
a. Straight-line
b. Sum-of-the-years'-digits
c. Double-declining-balance
d. Productive-output

4. Exploration and evaluation assets are initially measured at

a. cost.
b. revalued amount.
c. fair value.
d. a or b

5. Exploration and evaluation assets are exploration and evaluation expenditures recognized as
a. assets in accordance with the entity’s accounting policy.
b. expenses in accordance with applicable PFRSs.
c. assets in accordance with (a) above, subject to the limitations provided under PAS 8 Accounting Policies, Changes
in Accounting Estimates and Errors.
d. any of these

Problems

1. Joseph Company acquired a tract of land containing an extractable natural resource. Joseph is required by the purchase contract to
restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that
the recoverable reserves will be 2,500,000 tons and that the land will have a value of $1,000,000 after restoration. Relevant cost
information follows:

Land ................................................. $9,000,000

Estimated restoration costs .......................... 1,500,000

What should be the depletion charge per ton of extracted material?

a. $4.00
b. $3.80
c. $3.60
d. $3.20

2. In January 2005, Vance Mining Corporation purchased a mineral mine for $7,200,000 with removable ore estimated by geological
surveys at 4,320,000 tons. The property has an estimated value of $720,000 after the ore has been extracted. Vance incurred
$2,160,000 of development costs preparing the property for the extraction of ore. During 2005, 540,000 tons were removed and
480,000 tons were sold. For the year ended December 31, 2005, Vance should include what amount of depletion in its cost of goods
sold?
a. $720,000
b. $810,000
c. $960,000
d. $1,080,000

3. In 2004, Newman Company paid $1,000,000 to purchase land containing a total estimated 160,000 tons of extractable mineral
deposits. The estimated value of the property after the mineral has been removed is
$200,000. Extraction activities began in 2005, and by the end of the year, 20,000 tons had been recovered and sold. In 2006,
geological studies indicated that the total amount of mineral deposits had been underestimated by 25,000 tons. During 2006, 30,000
tons were extracted, and 28,000 tons were sold. What is the depletion rate per ton (rounded to the nearest cent) in 2006?
a. $4.24
b. $4.32
c. $4.85
d. $5.19
4. In 2004, Silverspur Mining Inc. purchased land for $5,600,000 that had a natural resource supply estimated at 4,000,000 tons. When
the natural resources are removed, the land has an estimated value of $640,000. The required restoration cost for the property is
estimated to be $800,000.

Development and road construction costs on the land were $560,000, and a building was constructed at a cost of
$88,000 with an estimated $8,000 salvage value when all the natural resources have been extracted.

During 2005, additional development costs of $272,000 were incurred, but additional resources were not discovered. Production for
2004 and 2005 was 700,000 tons and 900,000 tons, respectively.

Compute the depletion charge for 2004 and 2005. (Include depreciation on the building, if any, as a depletion charge.) Round
depletion charge to the nearest cent.

ANS:

Acquisition costs .................................... $5,600,000

Restoration costs .................................... 800,000
Residual value--land ................................. (640,000)
Development costs .................................... 560,000
Building ............................................. 88,000
Salvage value--building .............................. (8,000)
$6,400,000
$6,400,000/4,000,000 tons = $1.60 per ton

2004: 700,000 tons $1.60 = ...................... $1,120,000

2005: Original cost ............................... $6,400,000
Additional costs--2005 ...................... 272,000
6,672,000
Estimated depletion--2004 ................... (1,120,000)
Balance subject to depletion ................ $5,552,000

$5,552,000/3,300,000 tons = $1.68 per ton (rounded)

900,000 tons $1.68 = .............................. $1,512,000

5. In 2005, Hukay Mining Company purchased property with natural resources P6,200,000. The property was relatively close to a large
city and had an expected residual value of P900,000.

a. In 2005, Hukay spent P400,000 in development costs and P300,000 in buildings on the property, Hukay does not anticipate
that the buildings will have utility after the natural resources are depleted.
b. In 2006 and 2008, P300,000 and P800,000,
c. respectively, were spent for additional developments on the mine.
d. The tonnage mined and estimated remaining tons for years 2005-2009 are as follows:

Year Tons Extracted Estimated Tons Remaining

2005 0 5,000,000
2006 1,500,000 3,500,000
2007 1,800,000 2,000,000
2008 1,700,000 900,000
2009 900,000 0

REQUIRED:
Compute the depletion and depreciation expense for the years 2005 – 2009.

SUGGESTED SOLUTION GUIDE:

Depletion
Year Output Rate Depletion
2005 - -
2006 1,500,000 1.20 1,800,000
2007 1,800,000 1.11 1,998,000
2008 1,700,000 1.15 1,955,000
2009 900,000 1,047,000
Computation of depletion rate - 2006
Cost of land P6,200,000
Development cost – 2005 400,000
Development cost – 2006 300,000
Total cost 6,900,000
Residual value ( 900,000)
Depletable amount 6,000,000
/Estimated reserves 5,000,000
Depletion rate 1.20

Computation of depletion rate - 2007

Original DA P6,000,000
Depletion – 2006 (1,800,000)
Remaining DA, 1/1/07 4,200,000
/Est. reserves, 1/1/07 3,800,000
Depletion rate 1.11

Computation of depletion rate - 2008

Remaining DA, 1/1/07 P4,200,000
Depletion – 2007 (1,998,000)
Remaining DA, 1/1/08 2,202,000
Development cost – 2008 800,000
Depletable amount-2008 3,002,000
/Est. reserves, 1/1/08 2,600,000
Depletion rate 1.15

Depreciation
Year Output Rate Depreciation
2005 - -
2006 1,500,000 0.06 90,000
2007 1,800,000 0.06 108,000
2008 1,700,000 0.04 68,000
2009 900,000 34,000

Computation of depreciation rate - 2006 Cost/DA

of building P 300,000
/Estimated reserves 5,000,000
Depreciation rate 0.06

Computation of depreciation rate - 2007

Cost/DA of building P 300,000
Depreciation – 2006 (90,000)
Remaining DA, 1/1/07 210,000
/Est. reserves, 1/1/07 3,800,000
Depreciation rate 0.06

Computation of depreciation rate - 2008

Remaining DA, 1/1/07 P 210,000
Depreciation – 2007 (108,000)
Remaining DA, 1/1/08 102,000
/Est. reserves, 1/1/08 2,600,000
0.04

6. Lemery Company acquired property in 2005 which contains mineral deposit. The acquisition cost of the property was P20,000,000.
Geological estimates indicate that 5,000,000 tons of mineral may be extracted. It is further estimated that the property can be sold for
P5,000,000 following mineral extraction. For P2,000,000, Lemery is legally required to restore the land to a condition appropriate for
resale. After acquisition, the following costs were incurred:

Exploration cost 13,000,000

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

The company extracted 600,000 tons of the mineral in 2005 and sold 450,000 tons. In the 2005 income statement, what amount
of depletion is included in cost of sales?
a. 4,800,000
b. 3,600,000
c. 5,400,000
d. 4,050,000
7. Calaca Company quaries limestone, crushes it and sells it to be used in road building. Calaca paid P20,000,000 for a certain quarry on
January 1, 2004. The property can be sold for P4,000,000 after production ceases. The original total estimated reserves totaled
5,000,000 tons. Calaca quarried 500,000 tons in 2004 and 1,500,000 tons in 2005. An engineering study performed in 2005 indicated
that as of December 31, 2005, 4,500,000 tons were available. Calaca Company should record 2005 depletion at
a. 3,600,000
b. 4,800,000
c. 6,000,000
d. 4,500,000

8. On July 1, 2005 Balayan Company purchased rights to a mine. The total purchase price was P50,000,000 of which P5,000,000 was
allocated to the land. Estimated reserves were 6,000,000. Balayan expects to extract and sell 100,000 tons per month. Balayan
Company purchased new equipment on July 1, 2005 for P21,000,000 with estimated life of 8 years. However, after all the resource is
removed, the equipment will be of no use and will be sold for P3,000,000. What is the depreciation of the equipment for 2005?
a. 1,800,000
b. 2,100,000
c. 1,125,000
d. 3,600,000

9. Calatagan Company provides the following balances at the end of 2005:

Wasting asset, at cost 100,000,000

Accumulated depletion 30,000,000
Capital liquidated 10,000,000
Retained earnings 15,000,000
Depletion based on 250,000 units extracted at P50 per unit 12,500,000
Inventory of resource deposit (50,000 units) 6,000,000

Calatagan can declare maximum dividend on December 31, 2005 of a. 32,500,000

b. 45,000,000
c. 29,000,000
d. 15,000,000