Wasting Assets

IAS 6 – Exploration for and Evaluation of Mineral Resources

Learning Objectives:
At the end of this chapter, students are expected to understand the following:
1. The activities of extracting natural resources.
2. The accounting for expenditures for each stage of extracting activities.
3. The determination of amount subject to depletion and the amount of depletion during each
period.
4. The determination of depreciation for PPE items used in extractive activities.
5. The accounting for changes in the estimate of depletion and depreciation.
6. The wasting asset doctrine and the maximum amount of dividends that a wasting asset entity
can declare.

WASTING ASSETS
One of the specialized industries involves the extraction of natural resources. Entities may
extract oil (petroleum), natural gas and coal to become source of energy. On the other hand,
entities may also extract metal ores, precious stones or rocks for use in industrial purposes or
for ornamental purposes (e.g. jewelry).

The main characteristic of this industry is that as the resources are extracted, the economic
benefits are consumed. The extracted resources are not renewable, hence the name “wasting
asset”. There are also material amounts of asset retirement obligations in this industry. This
industry is also under strict govt. regulations because of the possible damage to the
environment that the extraction process brings.

In a few years, as the financial reporting requirements are being finalized, disclosures about the
sustainability of wasting asset operations may drastically change especially with the
establishment of the International Sustainability Standards Board (ISSB).

Wasting assets- are a type of asset whose value decreases over time due to limited useful life.
Ex. Natural resources (the extracted resources are not renewable)

PHASES AND ACTIVITIES IN EXTRACTIVE INDUSTRIES

1. Prospecting – an entity does not have land rights yet to a possible source of wasting assets
(general search of resources).
2. Exploration – after obtaining legal rights, an entity makes a “specific search” for resources
that are suitable for commercial exploitation. Activities may include: exploratory drilling,
sampling, and trenching; conducting technical studies (geophysical); analyzing and researching
past exploration data.
3. Evaluation – an entity determines the commercial viability and technical feasibility of the
resource. Estimating volume and quality deposits; testing possible extraction methods or
treatment; assessing logistical and structural requirements; conducting financial analysis
(market analysis).
4. Development – an entity establishes access and constructs facilities for the extraction of
resources. Major and permanent excavations; construction of tunnels, roads and other
structures; advanced removal of overburden; sinking underground drifts and shafts.
5. Production – an entity will now start the day-to-day activities of extracting a marketable
product from the resource reserve on a commercial scale. It also includes any processing
activities before sale, such as refining and grinding.
6. Decommission and Rehabilitation-this happens after the extractive operations have ceased,
and the entity is now required to restore and rehabilitate the area.

Accounting concepts and procedures will depend on what stage a cost has been incurred. The
main accounting issues that will be tackled for the rest of the chapter are:
a. Capitalization of costs incurred during each phase
b. Amount that should be the basis of depletion
c. Depletion calculations
d. Asset retirement obligations

Depletion - used to allocate the cost of extracting natural resources such as timber, minerals,
and oil from the earth.
Calculation of Costs in each phase:
1. PROSPECTING PHASE- costs of research on possible sites and amounts paid to
consultants. Costs incurred in this phase are expensed outright and the amounts are
relatively lower than costs incurred in subsequent phases.
2. EXPLORATION AND EVALUATION PHASE- costs includes acquisition of rights to
explore(includes costs to acquire the property itself and costs incurred in obtaining the
regulatory licenses); topographical, geological, geochemical and geophysical studies;
exploratory drilling; sampling; activities related to evaluating the technical feasibility and
commercial viability of extracting a mineral resource.
In addition, depreciation of other PPEs used in the exploration and evaluation activities can also
be included in exploration and evaluation assets.
3 Accounting policies:
1. Successful efforts method-only those exploration and evaluation costs incurred related to
resource property which resulted to technically feasible and commercially viable quantities are
capitalized. Otherwise, exploration evaluation costs are expensed outright.
2. Full-cost method-all exploration and evaluation costs incurred are capitalized in large cost
pools. In other words, costs are capitalized even if these costs are directly related to resource
property which does not contain technically feasible and commercially viable quantities.
3. Area-of-interest method- every exploration and evaluation costs are attributed to a particular
geographical area (i.e. unit of account). The costs are capitalized related to geographical area
if these costs are expected to be recovered from successful development of the property or
through the sale of the property. Under this method, the exploration and evaluation costs are
totaled in a per location basis. The total per location is classified as either capitalizable or
expensed outright based on the technical feasibility and commercial viability per location. Unlike
in the successful-efforts method, the costs pertaining to Davao de Oro Mine #2 are capitalized
since the basis is the total cost per location.

Illustration 1: BAUXITE Company mines gold and other industrial metals across the country.
For the year 2023, the following amounts of exploration and evaluation expenditures were
incurred per mine, per location:
Surigao Del Sur Davao de Oro Cebu
Mine #1 P1,200,000 P885,000 P455,000
Mine #2 950,000 1,100,000 676,000
Mine #3 975,000 815,000 N/A
Mine #4 800,000 750,000 N/A__
Totals P 3,925,000 P3,550,000 P1,131,000

Exploration and evaluation costs related to all the mines in Surigao del Sur are deemed to be
recoverable from the estimated reserve quantity. Exploration and evaluation costs related to all
the mines, except for Mine #2, in Davao de Oro are deemed to be recoverable from the
estimated reserve quantity.

All the costs incurred in Cebu mines are not recoverable as the Company deemed that it is not
technically feasible and commercially viable to continue the exploration and evaluation activities.
Required: Under each of the following independent scenarios, determine the amount of
capitalizable exploration and evaluation asset and the amounts to be recognized as expense:
1. Successful efforts method 2. Full-cost method 3. Area-of- interest method
assuming that the area of interest is per location

DEVELOPMENT PHASE – starts after the technical feasibility and commercial viability of
extracting a mineral resource are demonstrable. Accounting standards other than PFRS 6 shall
be applied during this phase (e.g.PAS 16, PAS 38)
Development costs can be segregated into two main classifications:
a. Tangible Development Costs – include cost of tangible assets used during this phase. Ex.
acquisition price of equipment, transportation equipment and heavy machineries and
constructive costs of buildings, bunkers, mine shafts, and land improvements.
b. Intangible Development costs-costs incurred which do not result to physical assets.
Examples include excavation costs, costs of drilling, costs of tunneling, costs of constructing
well and costs of stripping the land. These costs are included in the depletable amount.
In addition, since the entity already started the development, it may also already incur Asset
Retirement Obligation (ARO) related to its legal or contractual obligation to restore and
rehabilitate the area after the mining operations cease. The initial measurement of the ARO
(i.e. present value) shall be included in the depletable amount. Subsequent changes due to
accretion of interest shall be expensed outright.
Development phase ends when the extractable reserves become ready for commercial
production.

PRODUCTION PHASE –at the start of production phase, depletable amount shall be comprised
of the following costs:
a. Capitalized exploration and evaluation asset;
b. Intangible development costs;
c. Capitalized ARO;
d. Residual value of the resource after the extraction activities (as a deduction)
The total of items a, b and c above is usually presented as a separate category of PPE in the
FS as “Natural Resources Asset”

Depletion as the resources are being extracted, the benefits are being consumed. Because of
this, it is important to present this in financial terms as a reduction of the depletable amount in
the form of depletion. The calculation is similar to output-based method of depreciation. As the
quantity of extracted resources in a period increases, the amount of depletion also increases.

Depletion rate = Depletable amount/total estimated remaining reserves

Journal entry: Depletion xxx

Accumulated depletion xxx

Illustration 2: On December 31, 2022, at the end of the development phase and the start of
production phase, XENOLITH Company accumulated the following costs related to one of its
mines:
Capitalized exploration and evaluation costs P5,400,000
Costs of drilling 1,200,000
Costs of excavation 600,000
Costs of constructing wells 900,000
Purchase price of transportation equipment with useful life of 10 yrs.
and can be used in other mines 800,000
Purchase price of specialized equipment that can only be used in this
mine, though it has a supposed useful life of 10 yrs 1,200,000
Construction costs of temporary structures with useful life of 3 yrs
and can be used only in this mine 450,000
Total estimated rehabilitation costs to be incurred after 8 yrs, relevant
discount rate is 5% 3,000,000
Selling price of the property after rehabilitation 1,450,000

Total reserves are estimated to be 1,000,000 kilograms (kgs.). Based on the current capacity of
the Company, it is estimated that the reserves in the mine can be fully extracted after 8 yrs.
Actual quantities extracted for the years 2023, 2024 and 2025 numbered 140,000 kgs., 110,000
kgs., and 130,000 kgs.
Required: Calculate the ff. :
1. Total depletable costs 2. Present value of the asset retirement 3. Prepare the journal
entries
4. Depletion rate 5. Depletion amount 6. Carrying amount of the natural
resource

DEPRECIATION OF TANGIBLE DEVELOPMENT COSTS

The depreciation will depend on both of the following factors:

a. Whether the tangible development assets can be used in other mines or just in a specific
mine.
b. The length of useful life of the tangible development costs relative to the useful life of the
mine.

The following specific rules are relevant:

CAN be used in other mines CANNOT be used in other mines
(i.e. movable or for general use) (i.e. immovable or especially tailored)
Depreciated over its useful life. If useful life > life of the mine:
Usually, SLM is used. Depreciated using the unit-of-
production
method, similar to related depletion
If useful life< life of the mine:
Depreciated over its useful life. Usually
SLM is used.

Illustration 3: Using the same information in XENOLITH Company. Calculate the

depreciation.
Purchase price of transportation equipment with useful life of 10 yrs.
and can be used in other mines 800,000
Purchase price of specialized equipment that can only be used in this
mine, though it has a supposed useful life of 10 yrs 1,200,000
Construction costs of temporary structures with useful life of 3 yrs
and can be used only in this mine 450,000
 Reserves in kilograms 1,000,000
Expected useful life of the mine in years, before the reserves are fully
extracted 8 years
The following is the summary on how to depreciate these tangible development costs:
Asset Can be used in Shorter useful life How to depreciate
other mines
a. Transportation Yes N/A Straight-line method
equipment for 10 years
b. Specialized No Useful life of the mine Unit-of-production
equipment (8 yrs.) using 1,000,000 kgs.
c. Temporary No Useful life of the Straight-line method
structures asset (3 yrs.) for 3 years

Calculate the annual depreciation and the total depreciation for the tangible assets.

TOTAL PRODUCTION COSTS

The extracted ores or minerals are considered as inventory because they meet the accounting
definition of “inventory” since the extracted resources are sold in the wasting asset entity’s
normal operations.

In connection with this, the amounts of depletion and depreciation of assets used in the
extraction are capitalized as cost of inventory together with the costs of refining and further
processing of the extracted resources.

Illustration 4: In addition to the computed depletion and depreciation amounts in XENOLITH

Company (from Illustrations 2 and 3) the following additional information was also provided:

2023 2024 2025

Further processing costs P350,000 P 275,000 P325,000
Output from further processing* 126,000 kgs. 99,000 kgs. 117,000
kgs.
Sold output 126,000 kgs. 99,000 kgs. 100,000
kgs.
*The refinement process yielded 90% of the extracted quantities due to removal of impurities
and normal shrinking of the ores.
Required: Calculate the total capitalizable costs per year.

2023 2024 2025

Further processing costs P350,000 P275,000 P325,000
Add: Depletion 1,215,200 954,800 1,128,000
Total depreciation 398,000 362,000 386,000
Total capitalizable inventory costs P1,963,200 P1,591,800 P1,839,400
Divide: Output from further processing 126,000 99,000 117,000
Cost per kilogram of inventory (rounded) P15.58 P16.08 P15.72

The amount of cost of goods sold for each year shall be determined as follows:
Beginning inventory - - -
Add: Capitalizable inventory costs P1,963,200 P1,591,800 P1,839,400
Cost of goods available for sale P1,963,200 P1,591,800 P1,839,400
Less: Cost of goods sold *( 1,963,200) (1,591,800) **( 1,572,000)
Ending inventory - - P 267,400
*Cost of goods sold is equal to cost of goods available for sale since all of the produced inventory were sold during
the same year.
**P1,572,000 = P15.72 x 100,000 kgs. of output sold during the year.

CHANGES IN THE COMPUTATION OF DEPLETION

Some of the inputs in the computation are all based on reliable estimates. Due to the nature of
estimates, the previous assumptions used in the computations may not be relevant after some
time due to changes in circumstances. Changes in the computation of depletion may arise from
one or combination of any of the following:
1. Changes in the estimate of remaining reserves. (Note: changes in this estimate will also
affect the depreciation of tangible development costs being depreciated based on the unit-of-
production method).
2. Additional development costs incurred in further excavating the resources.
3. Changes in the estimate of asset retirement obligation.
These changes shall be accounted for prospectively (i.e., amounts previously reported shall not
be revised) similar to accounting for the changes in depreciation.
CHANGES IN THE ESTIMATE OF REMAINING RESERVES
An updated amount of depletion rate shall be used in determining the amount of depletion
moving forward:
Updated depletion rate= Remaining depletable amount/Revised estimated remaining reserves

Illustration: TITANIUM Company reported capitalized exploration and evaluation costs of

P2,700,000 and intangible development costs of P3,100,000. The mined property can be sold
for P800,000 after extraction of all the 400,000 tons of total estimated copper reserves, which is
expected to last for 10 years.

In addition, the Company also constructed a building costing P1,200,000 in the site which has a
physical useful life of 20 years. Extracted quantities of copper numbered 30,000 and 42,000
during the years 2023 and 2024.

During 2025, the Company has extracted 36,000 tons of copper. However, during the same
year, there were changes in the estimated reserves. Required: Under each of the following
independent scenarios, determine the amount of depletion and depreciation for the year 2025:
1. Estimated remaining reserves at the beginning of 2025 is 300,000 tons.
2. Estimated remaining reserves at the end of 2025 is 324,000 tons.

Scenario 1: Total depletable amount at the start of extraction operations amounted to

P5,000,000 (P2,700,000 + P3,100,000 – P800,000). From this amount, the original depletion
rate to be used from 2023-2024 shall be determined as:
Depletion rate= P5,000,000/400,000 = P12.50/ton

As of December 31, 2024, the remaining depletable amount shall be determined as follows:
Original depletable amount P5,000,000
Less: Depletion, 2023 (30,000 x P12.50) (375,000)
Depletion, 2024 (42,000 x 12.50) (525,000)
Remaining depletable amount, 12/31/24 P4,100,000

The revised depletion rate for 2025 is computed as follows:

Revised Depletion Rate = P4,100,000/300,000 tons=P13.67/ton (rounded)

Depletion for 2025 shall be computed as P492,000 (P13.66667 x 36,000 tons)

On the other hand, the building shall be depreciated using unit-of-production method since its
own useful life is longer than the life of the mine. Original depreciation rate per ton shall be
P3.00/ton (P1,200,000/400,000).
As of December 31, 2024, the building’s carrying amount shall be determined as follows:
Original carrying amount P1,200,000
Less: Depreciation, 2023 (30,000 x P3.00) ( 90,000)
Depreciation, 2024 (42,000 x P3.00) (126,000)
Carrying amount, 12/31/24 P 984,000

The revised depreciation rate for 2025 is as follows:

Revised depletion rate = P984,000/300,000 tons = P3.28/ton

Depreciation for 2025 shall be computed as P118,080 (P3.28 x 36,000 tons).

Scenario 2
Using the same remaining depletable amount as in Scenario 1 as of December 31, 2024, the
revised depletion rate for 2025 shall be determined as follows:

Revised depletion rate = P4,100,000/P324,000 + 36,000 = P11.39/ton (rounded)

The 36,000 tons extracted during the 2025 were added in the denominator to arrive at the
estimated reserves at the beginning of 2025 since 324,000 tons are stated as of the end of
2025. Consequently, the depletion for 2025 is computed as P410,000 (P11.3888889 x 36,000).

Using the same building’s carrying amount as in Scenario 1 as of December 31, 2024, the
revised depreciation rate for 2025 is computed as follows:

Revised depreciation rate = P984,000/324,000 + 36,000 = P2.73/ton (rounded)

Depreciation for 2025 shall be computed as P98,400 (P2.7333333 x 36,000 tons)

ADDITIONAL DEVELOPMENT COSTS INCURRED

Further development costs, such as drilling costs, may be incurred during the production phase
when accessing the remaining reserves deep in the mountains or in the Earth’s crust. These
additional development costs shall affect the computation of depletion prospectively.

Illustration 6. On January 1, 2023, KIMBERLITE Company started the production phase of its
mining operations with depletable amount of P6,000,000. The residual value of the property is
nil. Total estimated reserves at the start of the production phase numbered 500,000 tons. For
the years 2023 to 2025, the following information were relevant:

Year Development costs incurred Extracted (in tons)

2023 P- 150,000
2024 350,000 100,000
2025 200,000 120,000

All development costs were incurred at the beginning of each year. In addition, at the beginning
of 2025, remaining reserves were estimated to be 300,000 tons.
Required: Calculate the depletable amount as of 12/31/25.

Depletable amount, 1/1/23 P6,000,000

Less: Depletion, 2023 (P150K x P12*) ( 1,800,000)
Depletable amount, 12/31/23 P4,200,000
Add: Development costs, 1/1/24 350,000
Depletable amount 1/1/24 P4,550,000
Less: Depletion, 2024 (100K x P13**) (1,300,000)
Depletable amount, 12/31/24 P3,250,000
Add: Development costs, 1/1/25 200,000
Depletable amount, 1/1/25 P3,450,000
Less: Depletion, 2025 (120K x P11.50***) (1,380,000)
Depletable Cost, 12/31/25 P2,070,000

*P12 = P6M/500K
**P13 = P4.55M/(500K -150K extracted reserves during 2023)
***P11.50 = P3.45M /300K revised estimated remaining reserves

CHANGES IN THE ESTIMATE OF ASSET RETIREMENT OBLIGATION

According to IFRIC 1, Changes in Existing Decommissioning, Restoration and Similar Liabilities,
changes in ARO shall be accounted prospectively as follows (when the entity is using cost
model):

Change in ARO Effect in depletable amount

Increase in ARO Increase in depletable amount
Decrease in ARO Decrease in depletable amount

However, increases in the ARO solely due to the accretion of interest, as previously
mentioned, shall not affect the determination of depletable amount. In addition, any excess
of the decrease in the amount of ARO over the carrying amount of natural resource asset shall
be immediately recognized in profit and loss.

Illustration 7: On January 1, 2023, at the start of its production phase, POTASH Company
reported the following information related to one of its oil wells:
Exploration and evaluation asset P3,750,000
Intangible development costs 5,000,000
Tangible development costs 4,000,000
Restoration costs to be incurred after 10 yrs.;
relevant discount rate is 6% 2,000,000
Total estimated reserves in barrels 170,000

The Company extracted 20,000 and 30,000 barrels during 2023 and 2024, respectively. On
December 31, 2023, the Company reassessed the amount of its ARO due to changes in its
estimates.
Required: Determine the amount of depletion for 2024 under each of the following
independent scenarios related to ARO.
1. Restoration costs increased related to P3,000,000.
2. Restoration costs will be incurred in five years’ time.
3. Discount rate changed to 8%.

Scenario 1
First, determine the initial depletable amount as of January 1,2023:
Exploration and evaluation asset P3,750,000
Intangible development costs 5,000,000
Asset retirement obligation 1,116,790
Total depletable amount P9,866,790

The amount of ARO included in the amount above is computed as follows:

PV Factor of PV Factor Cash Flow PV

Single payment for 10 periods at 6% 0.558395 P2,000,000 P1,116,790

From the total depletable amount, the depletion rate per barrel shall be determined at a rounded
amount of P58.04/barrel (P9,866,790/170,000). From this depletion rate, the remaining
depletable amount as of December 31, 2023 (before reflecting the changes in ARO) shall be
determined as P8,705,990 [P9,866,790 – (20,000 x P58.04)].

On the other hand, the unadjusted carrying amount of the ARO as of December 31, 2023 is
computed as follows:
Date Interest Expense Amortization Carrying Amount
Jan. 1, 2023 1,116,790
Dec. 31, 2023 67,007* 67,007 1,183,797
*P1,116,790 x .06 = P67,007

The revised carrying amount of the ARO as of December 31, 2023 shall be determined as
follows:

PV Factor of PV Factor Cash Flow PV

Single payment for 9 periods at 6% 0.591898 P3,000,000 P1,775,694
Less: Unadjusted carrying amount of ARO (1,183,797)
Increase in ARO P 591,897
The increase in ARO shall be recorded as follows:
Natural resources asset 591,897
Asset retirement obligation 591,897

Since the increase in ARO affected the carrying amount of the natural resources asset, the
revised depletion rate starting in 2024 shall be determined as:

Revised depletion rate = (P8,705,990 + P591,897) = P61.99/barrel (rounded)

(170,000 – 20,000)

Using the revised rate, the depletion for 2024 is P1,859,700 (30,000 x P61.99).

Scenario 2
The revised carrying amount of the ARO as of December 31, 2023 shall be determined as
follows:

PV Factor of PV Factor Cash Flow PV

Single payment for 5 periods at 6% 0.747258 P2,000,000 P1,494,516
Less: Unadjusted carrying amount of ARO (same in scenario 1) 1,183,797
Increase in ARO P 310,719
The increase in ARO shall be recorded as follows:
Natural resources asset 310,719
Asset retirement obligation 310,719

Since the increase in ARO affected the carrying amount of the natural resources asset, the
revised depletion rate starting in 2024 shall be determined as:

Revised depletion rate=(P8,705,990 + P310,719) = P60.11/barrel (rounded)

(170,000 – 20,000)

Using this revised rate, the depletion for 2024 is P1,803,300 (30,000 x P60.11).

Scenario 3
The revised carrying amount of the ARO as of December 31, 2023 shall be determined as
follows:

PV Factor of PV Factor Cash Flow PV

Single payment for 9 periods at 8% 0.500249 P2,000,000 P1,000,498
Less: Unadjusted carrying amount of ARO (same in Scenario 1) 1,183,797
Decrease in ARO P 183,299

The decrease in ARO shall be recorded as follows:

Asset retirement obligation 183,299
Natural resources asset 183,299

Since the decrease in ARO affected the carrying amount of the natural resources asset, the
revised depletion rate starting in 2024 shall be determined as:

Revised depletion rate = (P8,705,990 – P183,299) = P56.82/barrel (rounded)

(170,000 – 20,000)

Using this revised rate, the depletion for 2024 is P1,704,600 (30,000 x P56.82).

TEMPORARY SHUTDOWN OF EXTRACTIVE OPERATIONS

Extractive operations may be temporarily shut down due to a variety of reasons, such as
logistics, weather, safety, or regulatory. The shutdown will have the following effects in the
accounting procedures:
Amounts Accounting procedures during period of shutdown
Depletion No depletion shall be recorded during the period of shutdown
Depreciation For assets depreciated over their useful lives:
Depreciation shall continue to be recognized using SLM even during the
period of shutdown.
For assets depreciated using the unit-of-production method:
The remaining depreciable amount shall be temporarily depreciated over
their own remaining useful lives during the period of shutdown.
Upon continuation of operations, the remaining depreciable amount shall
continue to be depreciated using unit-of-production method.

In addition, the natural resources asset and the capitalized tangible development costs may be
subjected to impairment assessment. All of these are considered as changes in accounting
estimate (i.e. accounted for prospectively).

Illustration 8: On January 1, 2023, at the start of its production phase, PLATINUM Company
had 5,000,000 depletable costs and tangible development costs as follows:
a. Building with cost of P1,500,000 and useful life of 13 years.
b. Extracting equipment with cost of P700,000 and useful life of 7 years. This can be used in
other mines.
Total estimated reserves numbered 500,000 tons and that these are estimated to be fully
extracted after 10 years. Extracted reserves numbered as follows:
2023 2024 2025
20,000 tons None – shutdown 24,000 tons

There were no changes in the estimated remaining reserves from 2023 to 2025.

Required: From the information given, determine the amounts of depletion and depreciation of
each asset during each year from 2023-2025.

Depletion
The amount of depletion for each year shall be determined using the depletion rate of P10/ton
(P5,000,000/500,000 tons).
2023 2024 2025
Extracted quantities 20,000 - 24,000
Multiply: Depletion rate P10 P10 P10__
Depletion P200,000 P- P240,000

No depletion shall be recorded during 2024, the period of shutdown.

Depreciation – Extracting Equipment

The equipment shall be depreciated over its seven-year useful life using straight-line method
since it can be used to other mines. Consequently, depreciation of P100,000 (P700,000/7
years) shall be recorded each year from 2023 to 2025, despite the shutdown during 2024.

Depreciation – Building
The building shall be depreciated using the unit-of-production method, except during the 2024
temporary shutdown of operations as follows:

Depreciable amount, 1/1/23 P1,500,000

Less: Depreciation, 2023 (20K x P3*) (60,000)
Depreciable amount, 12/31/23 P1,440,000
Less: Depreciation during shutdown, 2024 **(120,000)
Depreciable amount, 12/31/24 P 1,320,000
Less: Depreciation, 2025 (24K x P2.75***) (66,000)
Depreciable amount, 12/31/25 P1,254,000
*P3/ton = P1.5M/500K tons
**P120,000 = P1.44M/(13 years less elapsed 1 year during 2023).
***P2.75/ton= P1.32 M/(500K tons less 20K tons previously extracted in 2023

PERMANENT SHUTDOWN OF EXTRACTIVE OPERATIONS

In these cases, the remaining carrying amounts of natural resource asset and tangible
development costs shall be recognized as an outright impairment loss during the period the
decision to permanently shut down the operations were made.

WASTING ASSET DOCTRINE

Generally, corporate entities are not allowed to distribute amounts to its owners in excess of its
net earnings since its equity serves as a buffer for the benefit of its creditos. However,
exception can be made for wasting assets entity since the bulk of their assets (i.e. the
capitalized resource assets) are consumed in the regular course of their business.

Consequently, for wasting asset entities, the maximum amount of dividends that it can declare
shall be determined as follows:
Retained earnings Pxxx
Add: Accumulated depletion xx
Less: Balance in capital liquidated account (xx)
Unrealized depletion in ending inventory (xx)
Maximum dividends that can be declared P xx

The terminologies above are described as follows:

a. Capital liquidated account represents the liquidating dividends that were previously
declared during the prior periods. Liquidating dividends are declared dividends in excess of the
amount of retained earnings.
b. Unrealized depletion means the portion of depletion that is not yet realized through the sale
of the related inventory of extracted resources.

Illustration 9: A wasting asset entity reported the following information as of December 31,
2023:
Retained earnings P6,500,000
Accumulated depletion 4,500,000
Capital liquidated 3,000,000
Ending inventory, 10,000 units 5,000,000

Depletion rate was estimated to be P125/unit of inventory. From this information, the maximum
amount of dividends that can be declared shall be determined as follows:
Retained earnings P6,500,000
Add: Accumulated depletion 4,500,000
Less: Balance in capital liquidated account (3,000,000)
Unrealized depletion in ending in ending
inventory (10k x P125) (1,250,000)
Maximum dividends that can be declared P6,750,000