Question 1

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: $$\begin{array} { | l | r | r | } 
\hline & \text { Cost } & \text { Useful life } \
\hline \text { Mine site building } & \$ 1500000 & 20 \text { years } \
\hline \text { Mining equipment } & 2400000 & 15 \text { years } \
\hline \text { Machineries and equipment (portable) } & 750000 & 8 \text { years } \
\hline
\end{array}$$ 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?

Accepted Answer

A)  $465 000 
B)  $483 750 
C)  $540 000 
D)  $930 000

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

The full-cost method involves:

Accepted Answer

A)  the writing off of the full cost of exploration and evaluation in each period. 
B)  the capitalisation of the full cost of exploration and evaluation in order to amortise it against total production revenue. 
C)  including overhead costs in the amount of exploration and evaluation costs written off or capitalised in each period. 
D)  tracing the full cost of pre-production costs to the product by using a process costing system to track and report the costs as they are incurred.

Question 6

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:

Accepted Answer

A)  a separate environmental report that details the company's environmental management system where it is extracting minerals under licence from an international mineral rights holder. 
B)  details of compliance with government environmental regulations relevant to the company in line with best practice corporate governance. 
C)  details of the entity's performance in relation to environmental regulation in the company's Directors' Report if it is subject to any particular and significant environmental regulation under a law of the Commonwealth or of a state or territory. 
D)  disclosure of corporate environmental and social performance in a separate report where the shares of the company are less than 50% Australian owned.

Question 7

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

Accepted Answer

A)  Inventories may be brought to account at the earliest stage at which their value and quantity may be reliably measured or estimated. 
B)  Inventories should be brought to account at the earliest stage at which materials representing, or expected to be converted by further processing to, saleable product can be measured with reliability and the quantities of such materials can be determined by physical measurement or reliable estimate. 
C)  Inventories should be brought to account at the point that their recovery from the ground is considered to be virtually certain and the extent of the reserves can be measured reliably. 
D)  Inventories should be brought to account only at the latest stage at which materials representing saleable product can be measured with reliability in terms of their recoverable value and cost.

Question 8

An area of interest is defined in AASB 6 as:

Accepted Answer

A)  a specific type of exploration activity as defined by either the production process, type of mineral or gas extracted, or expected future pattern of cash inflows. 
B)  a cost centre as defined for the purposes of tracking expenses and revenues and which is also used as a basis for completing taxation returns. 
C)  a specific geological area as defined by the initial geological surveys or as grouped according to the nature of the natural substance to be extracted. 
D)  an individual geological area which is considered to constitute a favourable environment where there may be a mineral deposit or natural gas field, or which has been proved to contain such a deposit or field.

Question 9

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

Accepted Answer

A)  permit the carrying forward of any exploration and evaluation costs. 
B)  match the total costs of exploration and evaluation against the revenue arising from the few successful projects. 
C)  prohibit the creation of reserves to smooth income by delaying the recognition of expenses and matching them against unrelated revenues. 
D)  involve the immediate write-off of any exploration and evaluation costs.

Question 10

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

Accepted Answer

The answer of Explain why firms do not restate its...

Question 11

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

Accepted Answer

A)  determining the size of the deposits of natural substances in the area of interest. 
B)  determining whether an asset has been acquired through the expenditures associated with exploration, evaluation and development. 
C)  allocating revenues to the periods in which they are earned. 
D)  determining the cost of capital in such a high-risk industry.

Question 12

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?

Accepted Answer

A)  costs of acquiring leases or other rights of tenure in the area of interest that are included in the cost of the exploration and evaluation asset if they are acquired as part of the exploration for and evaluation of mineral resources 
B)  charges for depreciation of equipment used in exploration and evaluation activities 
C)  general and administrative costs directly attributed to the operational activities in the area of interest to which the exploration and evaluation asset relates 
D)  salaries and other expenses of general management allocated by head office to the area of interest

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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.

Accepted Answer

The answer of While AASB 6 prefers the area-of-interest method...

Question 15

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

Accepted Answer

A)  depreciated over the life of the area of interest for which they were acquired unless they can be transported to another site or can otherwise be of further use not necessarily connected with any particular area of interest, in which case they should be depreciated over their own specific useful lives. 
B)  depreciated over the expected life of the associated mining rights. 
C)  depreciated using a method that matches the recovery of future benefits and the pattern of revenue streams generated by the area of interest. 
D)  depreciated straight-line over the expected useful life of the particular asset except where the expected life of the area of interest is less than that of the non-current asset. In that case the asset should be depreciated for a period matching the expected life of the area of interest.

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

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)?

Accepted Answer

A)  $1 142 857 
B)  $800 000 
C)  $1 920 000 
D)  $685 714

Question 18

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

Accepted Answer

The answer of Discuss the disclosure requirements of AASB 6...

Question 19

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.

Accepted Answer

The answer of AASB 6 differs from its predecessor (AASB...

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 20: Accounting for the Extractive Industries

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.

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.