Auditing Concepts and Applications: Wasting Assets and

AUDITING CONCEPTS AND APPLICATIONS1 Module 7.2_Wasting Assets (Investment in Mineral Resources LECTURE NOTES Costs of Wasting Assets•Acquisition •Exploration and evaluation •Development •Restoration PFRS 6-Exploration for and Evaluation of Mineral Resources PFRS 6 permits an entity to develop an accounting policy for exploration and evaluation assets without specifically considering the requirements of paragraphs 11 and 12 of PAS 8.Thus, an entity adopting PFRS 6 may continue to use the accounting policies applied immediately before adopting the PFRS.This includes continuing to use recognition and measurement practices that are part of those accounting policies. Methods used before PFRS 6 Successful effort method Cost of successful exploration-Capitalized Cost of unsuccessful exploration-Expensed Successful-The technical feasibility and commercial viability of extracting a mineral resource are demonstrable Full cost method All exploration and evaluation expenditures are capitalized Key Definitions Exploration for and evaluation of mineral resources The search for mineral resources, including minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights to explore in a specific area, as well as the determination of the technical feasibility and commercial viability of extracting the mineral resource. Examples of Exploration and Evaluation Activities •acquisition of rights to explore •topographical, geological, geochemical and geophysical studies •exploratory drilling •trenching •sampling •activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource Exploration and evaluation expenditures Expenditures incurred by an entity in connection with the exploration for and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Exploration and evaluation assets Exploration and evaluation expenditures recognized as assets in accordance with the entity's accounting policy. Reclassification of Exploration and Evaluation Asset 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 recognized, before reclassification. Development Cost Intangible e.g. Cost of drilling and construction of wells Include in the cost of wasting asset Tangible e.g. Building and machinery and equipment Recognize as separate asset 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