Accounting Lecture

DEPLETION

IFRS - 6 Exploration for and

Evaluation of Mineral Resources
 INTRODUCTION
IFRS 6, Exploration for and Evaluation of Mineral Resources, outlines
the accounting treatment for expenditures incurred during the
exploration and evaluation phase of mineral resource development.
The standard allows entities to choose accounting policies for these
expenditures, either recognizing them as assets or expensing them,
depending on their nature. It also provides temporary exemptions
from certain IAS 8 requirements, giving flexibility to companies in the
high-risk exploration phase. IFRS 6 ensures that financial statements
reflect relevant and reliable information while addressing the unique
challenges of the industry.
WASTING ASSET
A wasting asset is a natural resource asset
—such as a mineral deposit, oil or gas field, or timber tract that has a finite physical
quantity and is gradually consumed or depleted through extraction or usage. Its economic
value diminishes over time as the resource is removed, and the asset ultimately becomes
exhausted.

MAIN FEATURES OF WASTING ASSET

A. Wasting asset physically consumed over time through extraction, harvesting, or usage
B. Wasting assets are irreplaceable; as they are utilized, their physical quantity diminishes
irreversibly, ultimately leading to exhaustion.
WASTING ASSET
INITIAL MEASUREMENT

Based on Cost

Costs are comprises of

A. Acqusition cost
B. Exploration cost
C. Development cost
D. Estimated restoration cost
ACQUISTION COST
Purchase Price to obtained the property with natural
resources

Acquisition cost may include:

A. Price paid
B. all directly attributable cost
.
EXPLORATION COST
Exploration costs are the expenses incurred in the search for mineral resources before it is
known whether the resource is commercially viable and assess for technical feasibility.
These costs arise during the exploration phase of a resource project and may include
activities such as geological surveys, exploratory drilling, and sampling.

Two method for recognition of exploration cost

A. Successful Effort Method
all succesful exploration cost is capitalized
while those cost of dry holes is expensed
usually used by large companies
B. Full Cost Method
all cost is capitalized
usually used by small companies
.
DEVELOPMENT COST
Development costs are expenditures incurred that are necessary to prepare the site and
facilities for extraction or exploitation of mineral and other resources.
Examples include drilling of development wells, construction of tunnels or mine shafts,
installation of extraction equipment, site preparation, access roads, and stripping or
overburden removal in mining operations.

Types of development cost

A. Tangible development cost
Heavy equipments and other mining property
Not capitalized as part of Wasting Asset but recognized as part of PPE
B. Intangible development cost
Drilling cost and cost of construction
Ex. tunnels, wells, sinking shafts
Capitalized as part of Wasting Asset
.
RESTORATION COST
Refers to the estimated future costs required to restore a site to its original or legally required
condition after the extraction of natural resources is complete. These are obligations arising
from environmental laws or contractual agreements

Restoration cost is capitalized as part of the cost of the wasting asset, and is measured at
the present value of the expected future restoration expenditure, in accordance with IAS
16, PAS 37. This present value is determined by discounting the estimated future cost
using a suitable discount rate that reflects the time value of money and risks specific to
the obligation.
DEPLETION
is the systematic allocation of the cost of a wasting asset over the period in which the resource is extracted and used.
It is similar to depreciation, but specifically applies to natural resources that are physically consumed.
Depletion ensures that the portion of the asset consumed in a period is
Depletable Amount = Cost less Residual Value

Output Method or Production Method

Depletion rate per unit = Depletable Amount / Total Estimated Units

Depletion Expense = Depletion rate per unit * Actual unit extracted

REVISION OF DEPLETION RATE AND DEPRECIATION OF
MINING PROPERTY

When there is a change in the units estimated to be extracted or when the company incurs additional costs,
these are regarded as change in accounting estimate to be handled currently and prospectively. The
company needs to compute for the new depletion rate per unit using this formula:

New Depletion Rate/Unit = Remaining Depletion Cost / Remaining revised estimate of the productive
output

Depletion = Depletion rate per unit x units of extracted during the year
 DEPRECIATION OF MINING PROPERTY AND SHUTDOWN

Depreciation of mining equipment

Depreciation of mining equipment shall be systematically allocated over the asset's useful life.
The useful life of the asset depends on whether that asset is immovable or movable.
If the equipment is immovable, depreciation is based on the life of the equipment or life of the wasting asset
whichever is shorter
If the equipment is movable; the depreciation is based on the life of the equipment.

When a wasting asset undergoes a shutdown, the output method of depreciation becomes inappropriate due
to the cessation of production. In such cases, depreciation shall be calculated using the straight-line method,
allocating the asset’s remaining carrying amount over its remaining useful life or the expected idle period.
However, if the shutdown is permanent and the asset is fully impaired or classified as held for sale, depreciation
ceases accordingly.
 TRUST FUND DOCTRINE AND WASTING ASSET DOCTRINE

Under the trust fund doctrine, the capital stock of a corporation is conceived as a trust fund for the protection of
creditors. Consequently, such capital cannot be returned to stockholders during the lifetime of the corporation.
However, the corporation can pay dividends to stockholders but limited only to the balance of retained earnings.

Wasting asset doctrine - under this doctrine the wasting asset corporation or a company engaged in the
extraction of a natural resource, can legally return capital to stockholders during the lifetime of the corporation.
Accordingly, a wasting asset corporation can pay dividend not only to the extent of retained earnings but also to
the extent of accumulated depletion.
Formula:
Accumulated profits – unappropriated XX
Add: Accumulated depletion XX
Total XX
Less: Capital liquidated in prior years (XX)
Depletion in ending inventory (depletion per unit x units in the Ending Inventory) (XX)
Maximum dividend XX
ILLUSTRATIVE PROBLEMS
On January 1, 2025, an entity purchased a mineral mine for P26,400,000 with removable ore
estimated at 1,200,000 tons. After it has extracted all the ore, the entity will be required by law to
restore the land to the original condition at an estimated cost of P2,100,000. The present value of
the estimated restoration cost is P1,800,000. The property can be sold afterwards for P3,000,000.
During 2025, the entity incurred P2,000,000 exploration cost and P1,600,000 development cost
preparing the mine for production. The entity removed 100,000 tons of ore and sold 90,000 tons
of ore in the current year.
What amount of depletion should be included in cost of goods sold for the current year?
a. 2,400,000
b. 2,160,000
c. 2,182,500
d. 2,385,000
ILLUSTRATIVE PROBLEMS
On January 1, 2025, an entity purchased a mineral mine for
P26,400,000 with removable ore estimated at 1,200,000
tons. After it has extracted all the ore, the entity will be Acquistion Cost 26,400,000
required by law to restore the land to the original condition at
an estimated cost of P2,100,000. The present value of the
Exploration Cost 2,000,000
estimated restoration cost is P1,800,000. The property can Development Cost 1,600,000
be sold afterwards for P3,000,000. During 2025, the entity
incurred P2,000,000 exploration cost and P1,600,000 Restoration Cost 1,800,000
development cost preparing the mine for production. The Total cost of Wasting Asset 31,800,000
entity removed 100,000 tons of ore and sold 90,000 tons of
ore in the current year. ‘
What amount of depletion should be recognized for the
current year?
a. 2,400,000
b. 2,160,000
c. 2,182,500
d. 2,385,000 Depletion rate per unit = Depletable Amount / Total Estimated Units
Depletion Expense = Depletion rate per unit * Actual unit extracted

Depletable Amount = Cost - Residual value

= 31,800,000 - 3,000,000 = 28,800,000

Depletion rate per unit = 28,800,000 / 1,200,000. = 24

Depletion Expense = 24 * 100,000. = 240,000
ILLUSTRATIVE PROBLEMS
In 2023, an entity purchased property with mineral resources for P28,000,000. The property had a
residual value of P4,000,000. During 2023, an amount of P3,000,000 was spent for roads and
other improvements to aid in the extraction of the resources. The entity spent P1,000,000 in
development cost and P4,000,000 in exploration cost. Production began in 2024 and the tons
extracted totaled 3,000,000 in 2024 and 2,500,000 in 2025. The remaining tons totaled
7,000,000 on December 31, 2024 and 5,500,000 on December 31, 2025.

1. What amount of depletion should be recognized in 2024?

a. 12,000,000
b. 10,800,000
c. 9,600,000
d. 8,700,000
2. What amount of depletion should be reported for 2025?
a. 7,000,000
b. 6,350,000
c. 8,750,000
d. 7,875,000
ILLUSTRATIVE PROBLEMS
In 2023, an entity purchased property with mineral resources for
P28,000,000. The property had a residual value of P4,000,000. During 2023,
an amount of P3,000,000 was spent for roads and other improvements to Acquistion Cost 28,000,000
aid in the extraction of the resources. . The entity spent P1,000,000 in
development cost and P4,000,000 in exploration cost. Production began in Exploration Cost 4,000,000
Development Cost 4,000,000
2024 and the tons extracted totaled 3,000,000 in 2024 and 2,500,000 in
2025. The remaining tons totaled 7,000,000 on December 31, 2024 and
5,500,000 on December 31, 2025.

1. What amount of depletion should be recognized in 2024?

Total cost of Wasting Asset 36,000,000
a. 12,000,000
b. 10,800,000

2024
c. 9,600,000
d. 8,700,000
2. What amount of depletion should be reported for 2025?
a. 7,000,000
b. 6,350,000
Depletable Amount = Cost - Residual value
c. 8,750,000
d. 7,875,000 = 36,000,000 - 4,000,000 = 32,000,000

Depletion rate per unit = 32,000,000 / 10,000,000. = 3.2

Depletion Expense = 3.2 * 3,000,000. = 9,600,000

2025 (changes in expected total output )

Remaining Depletable Amount = 36,000,000 - 9,600,000

= 22,400,000

Depletion rate per unit = 22,400,000 / 8,000,000. = 2.8

Depletion Expense = 2.8 * 2,500,000. = 7,000,000
ILLUSTRATIVE PROBLEMS
On July 1, 2025, an entity purchased the rights to a mine for P20,000,000, of which P2,000,000
was allocable to the land. Estimated reserves were 1,500,000 tons. The entity expected to extract
and sell 20,000 tons per month. The entity purchased mining equipment on July 1, 2025 for
P8,000,000. The mining equipment had a useful life 8 years. However, after all the resource is
removed, the equipment will be of no use and will be sold for P500,000.
1. What amount should be reported as depletion for 2025?
a. 2,880,000
b. 1,440,000
c. 2,250,000
d. 1,125,000
2. What amount should be reported as depreciation for 2025?
a. 1,500,000
b. 1,200,000
c. 600,000
d. 468,750
ILLUSTRATIVE PROBLEMS
On July 1, 2025, an entity purchased the rights to a mine for Total cost of Wasting Asset 36,000,000
P20,000,000, of which P2,000,000 was allocable to the land.
Estimated reserves were 1,500,000 tons. The entity expected to
extract and sell 20,000 tons per month. The entity purchased mining
equipment on July 1, 2025 for P8,000,000. The mining equipment had
Depletion (Wasting Asset)
a useful life 8 years. However, after all the resource is removed, the
equipment will be of no use and will be sold for P500,000.
1. What amount should be reported as depletion for 2025?
a. 2,880,000
Depletable Amount = Cost - Residual value
b. 1,440,000 = 20,000,000 - 2,000,000 = 18,000,000
c. 2,250,000
d. 1,125,000
2. What amount should be reported as depreciation for 2025?
a. 1,500,000 Depletion rate per unit = 18,000,000 / 1,500,000. = 12
b. 1,200,000
c. 600,000
Depletion Expense = 12 * (20,000*6) = 1,440,000
d. 468,750

Depreciation ( MIning Property)

Remaining useful life of equipment = 8yrs
Useful Life of wasting asset = 6.25 yrs. (1.5M / 240k)

Output Method
Depreciable Amount= Cost - Residual Value
= 8,000,000 - 500,000 =7,500,000

Depreciation rate per unit = 7,500,000 / 1,500,000 = 5

Depreciation expense = 5 * (20,000*6) = 600,000
THANK YOU