Exam 20: Accounting for the Extractive Industries

On 1 April 2013 Ulladulla Mining Ltd assessed that its Mollymook area of interest contained economically recoverable reserves of 50 000 ounces of gold.On the same day the entity installed the following assets: Cost Useful life Mine site building \ 1500000 20 years Mining equipment 2400000 15 years Machineries and equipment (portable) 750000 8 years The above assets were ready for use on 1 July 2013.Ulladulla Mining Ltd expects to extract the entire reserves in 5 years.For the year ending 30 June 2014 the entity had extracted 5000 ounces of gold. What is the total depreciation/amortisation expense for the capitalised development costs for the year ending 30 June 2013?

AASB 6 Exploration for and Evaluation of Mineral Resources requires exploration and evaluation assets be measured at fair value at recognition.

The costs incurred in the development and construction phases require more judgment in determining whether or not they constitute an asset for the entity than other stages in the operation.

AASB 6 effectively permits entities to choose between the full-cost method and the area-of-interest method.

The full-cost method involves:

Since the late 1980s,an increasing number of minerals and energy companies are making environmental and social disclosures.The majority of these are voluntary; however,there is a requirement to disclose:

At what point of the production phase of an extractive operation should inventories be recognised?

An area of interest is defined in AASB 6 as:

The successful-effort method of accounting for pre-production costs does not:

Explain why firms do not restate its recoverable reserves to fair value? In your response consider the findings of Mirza and Zimmer (1999).

Key issues in accounting for entities in the extractive industries include:

Which of the following costs is not an element of cost of exploration for and evaluation of mineral assets in AASB 6 Exploration for and Evaluation of Mineral Resources?

Firms engaged in the extractive industries are solely engaged in the search for natural substances of commercial value.

While AASB 6 prefers the area-of-interest method among other alternatives to account for pre-production costs,is there scope for managers to manipulate their accounting policy to adopt an alternative method? Discuss.

Consistent with AASB 116 the costs of facilities that are depreciable assets associated with an area of interest should be:

Costs in the exploration phase are incurred to discover economically recoverable reserves,while costs in the evaluation phase are incurred to prepare the areas of interest for effective exploitation of the reserves.

Extractor Ltd has carried forward costs of $16 million relating to a gold mine in Western Australia.It owns the site and has completed the first year of production.The revenues from the year's sales are 12% of the total expected revenues based on expected future sales and prices.Five thousand tonnes of gold-bearing deposits were mined during the period out of a total estimate of 70 000 tonnes of reserves.It is expected that it will take 20 years to fully deplete the existing reserves.How much of the carried-forward costs should be allocated to production this period (round to the nearest dollar)?

Discuss the disclosure requirements of AASB 6 for entities engaged in exploration for and evaluation of mineral resources.

AASB 6 differs from its predecessor (AASB 1022)in that the former restricts its coverage to the first two phases of an extractive operation.Explain the accounting treatment for the other phases of an extractive operation now that these are no longer covered in AASB 6.

AASB 6 requires deferred evaluation and exploration costs to be assessed for impairment when there is reason to suspect that the carrying amount may exceed its recoverable amount.