Depletion Method of Depreciation

 In extraction and mining industry, entities have fixed assets to extract natural
resources.
 Unlike property, plant and equipment that are used get consumed as a result of
extraction.
 For such assets,depreciation is calculated using depletion method.

Depletion is the allocation of cost of natural resource to the period based on

consumption rate, requiring information on cost, depletion rate, expected total reserve,
and quantity extracted in the period.

Cost of natural resource is determined like other fixed assets of the entity.
General principle is that all costs that are specifically incurred to bring the assets into
its use are included as cost of the asset. In case of natural resource cost includes:
1. Purchase cost of the asset
The price paid to acquire the property where extraction will be done.
2. Exploration and drilling costs
The cost on efforts applied to locate the position of natural resource and analyzing
potential point of extraction. These costs are incurred well before actual extraction
starts.
3. Extraction and development costs
All such efforts, assets both tangible or intangible that were necessary to extract the
resource and includes machinery and legal fees.
4. Restoration and rehabilitation costs
The state is duty bound to restore the natural resource after extraction work, ensuring
the area remains in its natural state.This cost is also added as cost of natural resource
or in other words depletion base.

Once the cost of natural resource is established, depreciable(depletable) value is

determined by deducting any residual value from depletion base.