PFRS 6

Depletion
 • Wasting Assets – material
objects of economic value and
utility to man produced by
nature.

• Acquisition cost – price paid to

Definition of obtain the property containing
the natural resource.
Terms
• Exploration cost – expenditure
incurred before the technical
feasibility and commercial
viability of extracting a mineral
resource are demonstrated
 • Development cost – cost incurred
to exploit or extract the natural
resource that has been located
through successful exploration

• Restoration cost – cost to be

Definition of incurred in order to bring the
Terms property to its original condition

• Depletion – the removal,

extraction, or exhaustion of a
natural resource
Development
Exploration
Acquisition
Restoration
= Cost of Wasting Asset
Example
A wasting asset entity has acquired the right to use a
property to explore a natural resource. The acquisition cost is
P6,000,000, the related exploration costs amount to
P4,000,000, and development costs incurred in erecting wells
and drilling the resource deposit are P10,000,000. It is
estimated that the resource deposit is approximately
2,000,000 units.
If 500,000 units are extracted in the first year of
operations, then the depletion for the year is?
 Assume that, in the preceding example, additional
development costs of P7,500,000 are incurred in the second
year, and recoverable deposits are estimated to be 2,500,000
units at the beginning of the second year. 700,000 units were
extracted during the year.

What is the depletion for the second year?

Do-it-yourself
Resource Company was engaged in the rock and gravel business. The following
transactions relate to the acquisition and development of an extensive gravel pit.
2016
Cost of acquisition and development 960,000
Estimated output 2,400,000 tons
Production 1,000,000 tons
2017
Additional development cost 490,000
Production 600,000 tons
2018
Additional development cost 500,000
New estimate of remaining output 2,500,000 tons
Production 700,000 tons
Do-it-yourself
Resource Company was engaged in the rock and gravel business. The following
transactions relate to the acquisition and development of an extensive gravel pit.
2016
Cost of acquisition and development 960,000
Estimated output 2,400,000 tons
Production 1,000,000 tons
2017
Additional development cost 490,000
Production 600,000 tons
2018
Additional development cost 500,000
New estimate of the total output 3,000,000 tons
Production 700,000 tons
Depreciation of other property
• Tangible equipment such as:
Transportation equipment
Heavy machinery
Mine shaft
Sheds/Houses
Other equipment
Depreciation of other property
• Depreciation is based on the useful life of the equipment or
the useful life of the wasting asset, whichever is shorter.

• If useful life of the equipment: use Straight-Line Method

• If useful life of the wasting asset: use Output Method

NOTE: However, if the equipment is movable and can be used

in future projects, it is depreciated over its useful life using
SLM.
Example
A natural resource deposit is estimated to contain 225,000
units. Heavy equipment necessary to extract the deposit is
acquired at a cost of P4,500,000. The useful life of the
equipment is 10 years.
It is estimated that 30,000 units will be extracted each year.
How much is the depreciation of the equipment for the year?

What if: It is estimated that 15,000 units will be extracted

each year. How much is the depreciation of the equipment for
the year?
Do-it-yourself
Reliable Company purchased a tract of resource land in 2018 for
P3,960,000. The content of the tract was estimated at 120,000 units.
When the resource has been exhausted, it is estimated that the land
will be worth P120,000.

Building was set up at a cost of P960,000 and heavy equipment was

purchased in early January 2018 for P1,240,000. The useful life of the
building is 8 years and the useful life of the equipment is 4 years.

In 2018, 12,000 units have been extracted. This was one half of the
annual extraction which can be expected following the first year of
operations. In 2019, 25,000 units were extracted.
Comprehension Check:

In relation to mining activities, “exploration” means

a. the search for resources suitable for commercial exploitation
b. determining the technical feasibility and commercial viability of a
mineral resource
c. Establishing access to and commissioning facilities to extract, treat
and transport production from the mineral reserve, and other
preparations for commercial production
d. The day-to-day activities of obtaining a saleable product from the
mineral reserve on a commercial scale
Comprehension Check:

In relation to mining activities, “exploration” means

a. the search for resources suitable for commercial exploitation
b. determining the technical feasibility and commercial viability of a
mineral resource
c. Establishing access to and commissioning facilities to extract, treat
and transport production from the mineral reserve, and other
preparations for commercial production
d. The day-to-day activities of obtaining a saleable product from the
mineral reserve on a commercial scale
Does PFRS 6 require an entity to recognize exploration and evaluation
expenditures as assets?
a. Yes, but only to the extent such expenditure is recoverable in future
periods
b. Yes, but only to the extent the technical feasibility and commercial
viability of extracting the associated mineral resource have been
demonstrated
c. Yes, but only to the extent required by the entity’s accounting policy
for recognizing exploration and evaluation assets
d. No, such expenditure is always expensed in profit or loss as
incurred.
Does PFRS 6 require an entity to recognize exploration and evaluation
expenditures as assets?
a. Yes, but only to the extent such expenditure is recoverable in future
periods
b. Yes, but only to the extent the technical feasibility and commercial
viability of extracting the associated mineral resource have been
demonstrated
c. Yes, but only to the extent required by the entity’s accounting policy
for recognizing exploration and evaluation assets
d. No, such expenditure is always expensed in profit or loss as
incurred.
In January 2018, PARK MINE CO. purchased a mineral mine
for P2,640,000 with removable ore estimated at 1,200,000
tons. After it has extracted all the ore, PARK will be required
by law to restore the land to its original condition at an
estimated cost of P220,000. The present value of the
estimated restoration costs is P180,000. PARK believes it will
be able to sell the property afterwards for P300,000. During
2018, PARK incurred P360,000 of development costs
preparing the mine for production and removed and sold
60,000 tons of ore.
In its 2018 statement of comprehensive income, what
amount should PARK MINE report as depletion?
Shutdown
• Shutdown period refers to the year when there is no
exploitation or extraction that occurred.

• Acctg issue is for depreciation – the equipment is still

depreciated even if idle (not used)

• SLM = no issue
• Output Method = the depreciation in the year of shutdown is
based on straight-line method
Example
A natural resource property was purchased by Global
Company for P5,000,000. The output was estimated to be
1,000,000 tons. Mining equipment was acquired at the cost of
P8,000,000. The equipment has a useful life of 10 years but is
capable of exhausting the resource in six to eight years.
Production is as follows:

First year 200,000 tons

Second year 250,000 tons
Third year None
Fourth year 100,000 tons
Do-it-yourself
A natural resource property was purchased by Universe
Company for P7,500,000. The output was estimated to be
3,750,000 tons. Mining equipment was acquired at the cost of
P10,000,000. The equipment has a useful life of 9 years but is
capable of exhausting the resource in six to eight years.
Production is as follows:

First year 600,000 tons

Second year None
Third year 250,000 tons
Maximum Dividends
Trust fund Doctrine
• The share capital of a
corporation is conceived as a
trust fund for the protection of
creditors. It cannot be returned
to shareholders.
• the corporation can pay
dividends to shareholders
limited to the balance of
retained earnings
Wasting asset doctrine
• Can legally return capital to
shareholders
• the corporation can pay dividend
not only to the extent of
retained earnings but also to the
extent of accumulated depletion
Example

A wasting asset corporation showed the following accounts:

Wasting asset, at cost 2,000,000
Accumulated depletion 200,000
Retained earnings 400,000

The maximum dividend is?

What is the entry to record the declaration?
Complete formula:

Retained earnings xxx

Add: Accumulated Depletion xxx
Total xxx
Less: Capital liquidated in prior years xxx
Unrealized depletion in ending invty xxx xxx
Maximum Dividend xxx
Example
The following data are available on December 31 of the current year:
Wasting asset, at cost 10,000,000
Accumulated depletion 5,000,000
Share capital 4,000,000
Capital liquidated 600,000
Retained earnings 3,000,000
Depletion for the current year based on 60,000
units extracted at P50 per unit 3,000,000
Inventory of resource deposit 10,000 units
Do-it-yourself
Icon Company provided the following balances at the end of the
current year:
Wasting asset, at cost 20,000,000
Accumulated depletion 2,500,000
Share capital 50,000,000
Capital liquidated 1,800,000
Retained earnings 1,500,000
Depletion based on 50,000
units at P20 per unit 1,000,000
Inventory of resource deposit (5,000 units) 400,000