Question 1

Positive accounting theory predicts that large sized entities will choose not to capitalise their exploration and evaluation expenditures to reduce political costs.

Accepted Answer

Positive accounting theory proposes that entities will select accounting policies based on their effect on the interests of key members such as management and shareholders. Large entities may choose to expense exploration and evaluation expenditures rather than capitalizing them in order to reduce political costs associated with opposition from interest groups or regulatory bodies.

Question 2

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

Accepted Answer

False

Question 3

AASB 1022, a predecessor to AASB 6, divides extractive industry operations into five phases. These are:

Accepted Answer

AASB 1022 divides extractive industry operations into five phases as Exploration, evaluation, development, construction and production.

Question 4

The full-cost method is permitted in the US despite the fact that it may involve the matching of past costs with future revenue and current period costs against revenue from previously discovered reserves in an entirely different area.

Accepted Answer

The statement is true. The full-cost method is a generally accepted accounting principle in the US, which allows companies to match past costs with future revenue and allocate current period costs against revenue from previously discovered reserves, even if they are located in different areas.

Question 5

AASB 6 "Exploration for and Evaluation of Mineral Resources" allows an entity to apply either the cost model or the revaluation model to the exploration and evaluation assets.

Accepted Answer

AASB 6 allows an entity to apply either the cost model or the revaluation model to the exploration and evaluation assets.

Question 6

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

Accepted Answer

Firms engaged in the extractive industries are involved not only in the search for but also in the extraction of natural substances of commercial value, such as minerals, oil, and gas.

Question 7

The costs-written-off-and-reinstated method permits the reversal of exploration and evaluation expenses recorded in an earlier period in order to record an asset, and it is consistent with the AASB Framework:

Accepted Answer

This method is consistent with the AASB Framework as it allows for the recognition of an asset when certain criteria are met, which is in line with the Framework's principle of recognition.

Question 8

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

AASB 6 paragraph 17 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.

Question 9

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:
FALSE

Accepted Answer

Costs in the exploration phase are incurred to discover potential reserves, while costs in the evaluation phase are incurred to determine the technical and economic feasibility of extracting the reserves. The actual preparation for exploitation occurs in the development phase.

Question 10

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

Accepted Answer

The answer of Key issues in accounting for entities in...

Question 11

Australian companies who voluntarily adopt the Australian Minerals Code for Environmental Management are required to report their performance against specifically nominated environmental performance indicators, such as greenhouse gas emissions.

Accepted Answer

Companies who adopt the Australian Minerals Code for Environmental Management are required to report their performance against specific environmental performance indicators. Greenhouse gas emissions is one of the nominated indicators.

Question 12

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

Accepted Answer

AASB 6 allows exploration and evaluation assets to be measured at cost, not at fair value, at the time of recognition.

Question 13

Exploration and evaluation assets are depreciated when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount.

Accepted Answer

Exploration and evaluation assets are not depreciated but are assessed for impairment. Depreciation starts when the assets are ready for their intended use, typically after the exploration and evaluation phase.

Question 14

By allowing a choice about the treatment of pre-production costs relating to an area of interest, AASB 6 reduces the level of comparability that could otherwise have been achieved through the Standard.

Accepted Answer

This is because different entities may choose to treat pre-production costs differently and therefore comparability of financial statements is reduced.

Question 15

AASB 6 provides guidance to cover costs incurred in the five phases listed in AASB 1022 namely: exploration, evaluation, development, construction and production:

Accepted Answer

AASB 6 specifically addresses the exploration and evaluation expenditures within the context of extractive industries, not the development, construction, and production phases.

Question 16

Positive accounting theory predicts that large sized entities will choose not to capitalise their exploration and evaluation expenditures to reduce likelihood of violating debt covenants.

Accepted Answer

Positive accounting theory actually predicts that firms, especially those close to violating debt covenants, might choose to capitalize costs rather than expense them to improve their reported financial position, not specifically related to the size of the entity or the nature of the expenditures as exploration and evaluation.

Question 17

AASB 6 only allows a choice between capitalisation or expensing of exploration and evaluation costs when the rights to tenure of the area of interest is current and these expenditures are expected to be recouped through successful development or sale.

Accepted Answer

The answer of AASB 6 only allows a choice between...

Question 18

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

Accepted Answer

AASB 6 does not permit entities to choose between the full-cost method and the area-of-interest method; it requires exploration and evaluation expenditures to be treated in accordance with the entity's accounting policy, without explicitly allowing a choice between these two methods.

Question 19

AASB 6 deals with the financial recording and performance of an entity and must be applied by all companies:

Accepted Answer

AASB 6 is specifically related to the exploration and evaluation of mineral resources and is only applicable to companies in the mining and extractive industries. It does not apply to all companies.

Question 20

There are potentially five alternative methods to account for pre-production costs for extractive industries:

Accepted Answer

There are indeed potentially five alternative methods to account for pre-production costs for extractive industries, as outlined in the International Financial Reporting Standards (IFRS) 6. These methods include: full cost method, successful efforts method, production method, development cost deferral method, and exploration cost deferral method.

Quiz 21: Accounting for the Extractive Industries