Wasting Asset Study Documents

WASTING ASSET WASTING ASSET Are natural or mineral resources that is exhaustible or must be physically consumed to be used, such as gas and oil. Once wasting asset is consumed, it cannot be replaced. INITIAL MEASUREMENT: COST Land Acquisition or Purchase Price Legal rights Airborne and seismic surveys Geologist inspections Exploration Cost Exploratory drilling PFRS 6 Expenditures incurred in Exploration and Evaluation of Mineral resources NOTE! Successful Effort method This method is used by large companies where only successful explorations are capitalized while cost of dry holes are expensed. Full Cost method This method is used by small companies where costs incurred, whether successful or not, are capitalized. TANGIBLE Part of Property, Plant, and Equipment e.g. Mining equipment, tunnel, bunker INTANGIBLE Part of Cost of Wasting Asset e.g. Cost of drilling to extract, Construction of wells Development Cost Restoration cost is only capitalized when the entity incurs the obligation to restore the asset. Restoration Cost Cost incurred in order to bring the property to its original condition. It is measures at Present Value. PFRS 6: Expenses incurred in Exploration and Evaluation of Mineral Resources EXCLUDES Expenses incurred before exploration and evaluation (e.g. Expenditures before obtaining legal rights to explore) After technical feasibility and commercial viability of extracting mineral resource are demonstrable. (e.g. Development of mineral resources after it is extracted). MINERAL RESOURCES Costs incurred before obtaining legal right to explore are Expensed. DEVELOPMENT PRODUCTION Once technical feasibility and commercial viability are proved and evidenced, exploration and evaluation of asset are reclassified as Development cost. Obtained legal rights for Exploration and Evaluation of Mineral Resources. Technical Feasibility the process of figuring out how you’re going to produce the product to determine whether it’s possible for the company. Commercial Viability the ability of business product, or service to compete effectively and to make profit. Closure NOTE! Development costs that are intangible are capitalizable as cost of Wasting Asset. SUBSEQUENT MEASUREMENT: COST MODEL COST MODEL or REVALUATION MODEL REVALUATION MODEL Had it been there is increase in value of wasting asset: DEPLETION Refers to proper systematic and rational allocation of depletable amount of wasting asset over its useful life. Depletion is part of Cost of Inventory. If the asset is sold, part of “Cost of Goods Sold”. If the asset is unsold, part of “Ending Inventory”. Output Method Change in units estimated to be extracted. When company incurs additional costs. Computation of New depletion rate per unit is a Change in Accounting Estimate which is accounted prospectively. Temporary shutdown of operation On January 01, 2024, ABC company constructed a building amounting to Php 3,000,000. There is no Residual Value, but the estimated useful life is 8 years. The expected units to be extracted is 400,000 tons. Actual extraction per year: Assuming Output method is being used before the “Shutdown”, change the method of depreciation to Straight-line method during the shutdown period of operation. The purpose why there is a change in method of depreciation is because, during the shutdown under Output Method, actual units extracted is zero, thus Depreciation Expense is also zero. However, PAS 16 says: “Depreciation does not stop / cease when the asset is idle”. Therefore, to continue incurring depreciation, Output Method is changed to Straight-line Depreciation on the period of shutdown. Once operation commenced back, return to Output Method of depreciating the equipment. 1st year: 100,000 tons 2nd year: 100,000 tons 3rd year: Shutdown 4th year: 100,000 tons 3,000,000 – 750,000 – 750,000 8 years – 2 years 3,000,000 less: 750,000 less: 750,000 less: 250,000 400,000 – 200,000 tons