Exploration and Evaluation of Mineral Resources (PFRS 6)

– the search for mineral 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

Exploration and Evaluation Expenditures – the expenditures incurred by an entity in connection with the
exploration and evaluation of mineral resources before the technical feasibility and commercial viability of
extracting a mineral resource.

Examples:
1: Acquisition of rights to explore
2: Topographical, geological, geochemical and geophysical studies
3: Exploratory drilling
4: Trenching
5: Sampling
6: Activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral
resource
7: General and administrative costs directly attributable to exploration and evaluation activities

* PFRS 6 does not provide clear cut guidance for the Recognition of Exploration and Evaluation of Assets.
Accordingly, an entity must develop its own accounting policy for the recognition of such asset.

Exploration and Evaluation of Assets – It may be intangible or tangible. For example, vehicles and drilling
rigs would be classified as tangible assets while drilling rights would be classified as intangible.

Initial measurement: at COST.

*The expenditures incurred by the entity for the development of mineral resources after the commercial viability
and technical feasibility for the extraction of mineral resource has been demonstrated, cannot be recognized as
exploration and evaluation assets under this standard, instead that will be accounted for in accordance with
IAS 38 Intangible Assets
*The entity is required to recognize a provision in accordance with IAS 37 for any restoration or dismantling
cost relating to the exploration for and evaluation of mineral resources

Subsequent measurement: either COST or REVALUATION MODEL.

Indications that an Exploration and Evaluation Asset may be impaired:

1: The period for which the entity has the right to explore in a specific area has expired and is not expected to
be renewed
2: Substantive expenses for the exploration and evaluation is neither budgeted nor planned
3: The EE activities have not led to the discovery of commercially viable quantity of mineral resources and the
entity has decided to discontinue such activities.
4: Sufficient data indicate that the carrying amount of the EE asset is unlikely to be recovered in full from
successful development or by sale.

WASTING ASSETS - These are actually natural resources which include coal, oil, ore precious metals like gold
and silver and timber. Once consumed, they cannot be replaced anymore.

Measurement: at present IFRS does not address wasting assets. There is no comprehensive standard
applicable to extractive or mining industry.
4 categories of Cost of Wasting Assets:
1: ACQUISITION COST – unquestionably this is the initial cost of the wasting asset.
2: EXPLORATION COSTS – this is the cost incurred in an attempt to locate the natural resource that can
economically be extracted or exploited.

Two methods of accounting Exploration cost:

a: Successful Effort Method - Only exploration cost related to the discovery of commercially producible
natural resource.
b: Full Cost Method – All exploration costs whether successful or unsuccessful (dry holes). 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.

3: DEVELOPMENT COSTS – The cost incurred to exploit or extract the natural resource that has been located
through successful exploration.
This may be:
a: Tangibles – not capitalized as cost of wasting assets. includes transportation equipment, heavy machinery
tunnels, bunkers and mine shaft.
b: Intangibles – capitalized as cost of wasting assets. includes drilling cost, sinking mine shaft and
construction of wells.

4: ESTIMATED RESTORATION COST – the cost incurred in order to bring the property to its original
condition. *This must be discounted.
Two treatments:
a: added to cost of resource property.
b: “netted” against expected residual value.
When is this capitalized? – the entity incurs the obligation when the asset is acquired. There must be an
existing present obligation required by law or contract.

DEPLETION – The removal, extraction or exhaustion of a natural resource or wasting asset.

Method used in computing depletion: Output or Production method.

Residual value of wasting asset: the value of the land after extraction underneath the resource is found

*Depletion is a cost of production and therefore maybe directly debited to Inventory under Perpetual system.

Depreciation of tangible equipment used:

Life of the mining equipment or life of wasting asset whichever is shorter, if life of the equipment is shorter,
straight line is used. If life of the wasting asset is shorter, output method is used.
*Exception: If the mining equipment used in mining operations is movable and can be used in future extractive
project, the equipment is depreciated using straight line method.

Entities can pay dividends up to the extent of:

Trust fund doctrine – retained earnings only.
Wasting asset doctrine – retained earnings and accumulated depletion.

Formula in determining the maximum amount of dividend that can be declared by a wasting asset corporation:
Retained Earnings
PLUS Accumulated Depletion
MINUS Capital liquidated in prior years
MINUS Unrealized depletion in ending inventory

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IMPAIRMENTS OF ASSETS (PAS 36)

RULES:
1. Recoverable amount > Carrying Value = Impaired
2. Recoverable amount = Value in use or Discounted net cash inflows or FV less Cost to sell whichever is
higher
3. IL in a CGU is allocated as foolows: (1) Goodwill, then (2) to all other noncash assets of the unit prorate
based on their carrying amount.
4. Carrying amount shall not be reduced below the highest of FV-CTS, VIU and ZERO. Reallocate if
necessary.
5. Allocate only to those assets that are considered impaired.
6. Carrying amount of CGU only include carrying amount of those assets that can be directly attributable or on
a reasonable and consistent basis to the CGU.
7. Fair value cannot exceed carrying amount assuming there was no impairment.
8. Goodwill impairment is determined at the level of the individual reporting unit and not at the entity level.