Exploration And Evaluation Of Mineral Resources PDF

lOMoARcPSD|44168759 EXPLORATION AND EVALUATION OF MINERAL RESOURCES 1. Define the term "exploration and evaluation of mineral resources" under PFRS 6.  Exploration and evaluation of mineral resources is defined as the search for mineral resources, including minerals, oil,...

lOMoARcPSD|44168759 EXPLORATION AND EVALUATION OF MINERAL RESOURCES 1. Define the term "exploration and evaluation of mineral resources" under PFRS 6.  Exploration and evaluation of mineral resources is defined as 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 resources. 2. Give examples of exploration and evaluation expenditures  Acquisition of rights to explore  Sampling  Topographical, geological, geochemical, and  Activities in relation to evaluating technical geophysical studies feasibility and commercial viability of extracting a mineral resource.  Exploratory Drilling  General and administrative costs directly  Trenching attributable to exploration and evaluation activities. 3. What is the treatment of exploration and evaluation expenditures?  The exploration and evaluation expenditures may qualify as exploration and evaluation asset. However, the standard does not provide clear cut guidance for the recognition of exploration and evaluation asset.  Accordingly, an entity must develop its own accounting policy for the recognition of such asset.  As a matter of fact, IFRS 6 permits an entity to continue to apply its previous accounting policy provided that the resulting information is relevant and reliable. 4. Define wasting asset.  Wasting asset are material objects of economic value and utility to man produced by nature. Actually, wasting assets are natural resources. Natural resources usually include coal, oil, ore, precious metals such as gold and silver.  Wasting asset are so called because these are physically consumed and once consumed, the assets cannot be replaced anymore. If ever, the wasting assets can be replaced only by the process of nature. Natural resources cannot be replaced by man.  Thus, wasting assets are characterized by two main features: o The wasting assets are physically consumed. o The wasting assets are irreplaceable. 5. What is the cost of wasting asset?  The cost of wasting asset can be divided into four categories, namely: o Acquisition Cost o Development Cost o Exploration Cost o Estimated Restoration Cost 6. Explain the acquisition cost of wasting asset.  Acquisition Cost is the price paid to obtain the property containing the natural resources. It is also known as the “initial cost” of the wasting asset.  Generally, this type of cost is charged to any descriptive natural resource account.  lOMoARcPSD|44168759  If there is a residual land value after the extraction of the natural resource, the portion of the acquisition cost applicable to the land may be included in the natural resource account. The land may be set up in a separate account and the remaining cost should be charged to the natural resource account.  Actually, the land value is the residual value of wasting asset for purpose of computing depletion. Thus, this should be deducted from the total acquisition cost to get the depletable amount. 7. Explain exploration cost of a wasting asset.  Exploration Cost is the expenditure incurred before the technical feasibility and commercial viability of extracting mineral resource are demonstrated.  In short, the exploration cost is the cost incurred in an attempt to locate natural resource that can economically be extracted or exploited. It includes acquisition of right to explore geological study, exploratory drilling, trenching and sampling. 8. Explain the successful effort and full cost method of accounting for exploration cost.  Successful Effort – exploration cost directly related to the discovery of commercially producible natural resources is capitalized as cost of the resource property.  The exploration cost related to “dry holes” or unsuccessful discovery is expensed in the period incurred.  Full Cost Method – All exploration costs, whether successful or unsuccessful are capitalized as cost of the successful resource discovery. This is on the theory that any exploration cost is a “wild goose chase” and therefore necessary before any commercially producible and profitable resource can be found.  The cost of drilling dry holes is part of the cost of locating productive holes. 9. Explain the development cost of a wasting asset.  Development Cost is the cost incurred to exploit or extract the natural resource that has been located through successful exploration. It may be in the form of tangible equipment and intangible development cost. 10. Explain briefly tangible equipment and intangible development cost.  Tangible Equipment – this is not capitalized as cost of natural resource but set up in a separate account and depreciated in accordance with normal depreciation policies. It includes transportation equipment, heavy machinery, tunnels, bunker, and mine shaft.  Intangible Development Cost – this is capitalized as cost of natural resource. Such cost includes drilling, sinking mine shaft and construction wells. 11. Explain estimated restoration cost.  Estimated Restoration Cost – is the cost to be incurred in order to bring the property to its original condition. Such restoration cost may be added to the cost of resource property or “netted” against the expected residual value of the resource property.  PAS 16, paragraph 16, provides that the estimated cost of restoring the property to its original condition is capitalized only when the entity incurs obligation when the asset is acquired. In other words, the estimated restoration cost must be an existing present obligation required by law or contract. The estimated restoration cost must be “discounted”.  lOMoARcPSD|44168759 12. What is the concept of depletion?  Depletion is the removal, extraction or exhaustion of natural resource. It is the systematic allocation of depletable amount of wasting asset over the period the natural resource is extracted or produced.  Depletion is recognized as the cost of the material used in production and thus becomes the finished product of the extractive entity since the wasting asset is conceived as the total cost of the materials available for production. 13. What is the common method of computing depletion?  The common method of computing depletion is output or production method.  The depletable amount of wasting asset is divided by the units estimated to be extracted to obtain a depletion rate per unit.  The depletion rate per unit is then multiplied by the units extracted during the year to arrive at the depletion for the period. 14. What is the method used in computing depreciation of tangible equipment?  Generally, the depreciation of equipment used in mining operations is based on the useful life of the equipment or the useful life of the wasting asset, whichever is shorter.  If the useful life of the equipment is shorter, the straight line method of depreciation is normally used. But if the useful life of the wasting asset is shorter, the output method of depreciation is frequently used.  However, if the mining equipment is movable and can be used in future extractive project, the equipment is depreciated over its useful life using straight line method. 15. Explain the Trust Fund Doctrine.  The share capital of a corporation is conceived as a trust fund for the protection of creditors. Consequently, such capital cannot be returned to shareholders during the lifetime of the corporation.  However, the corporation can pay dividends to shareholders but limited only to the balance of retained earnings.  Accordingly, the corporation cannot pay dividends if it has a deficit because this would be similar to a return of capital to shareholders. 16. Explain the Waste Asset Doctrine.  A wasting asset corporation or an entity engaged in the extraction of a natural resource can legally return capital to shareholders during 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 depreciation.  The amount paid in excess of retained earnings is accounted for as a liquidating dividend or return of capital.