Question 1

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 are current and these expenditures are expected to be recouped through successful development or sale.

Accepted Answer

AASB 6 allows for the capitalisation of exploration and evaluation costs when the rights to tenure are current, but it does not require that these expenditures be expected to be recouped through successful development or sale.

Question 2

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 indeed required to report their performance against specifically nominated environmental performance indicators, including greenhouse gas emissions.

Question 3

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 4

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 5

AASB 6 stipulates that exploration and evaluation assets shall be measured at cost at recognition.

Accepted Answer

AASB 6 requires that exploration and evaluation assets be measured at cost upon recognition, in accordance with the concept of prudence. However, there are specific circumstances where subsequent measurement at fair value is allowed, such as when the asset is available for sale or the entity has a firm commitment to sell the asset.

Question 6

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 7

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 8

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

Allowing a choice regarding the treatment of pre-production costs can lead to different accounting treatments and can ultimately reduce the level of comparability that could be achieved through the standard.

Question 9

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 an accounting method permitted in the US for companies in the oil and gas industry, where all costs associated with exploration and development of oil and gas reserves are capitalized and then depleted over time as the oil and gas is extracted. This method includes the matching of past costs with future revenue and current period costs against revenue from previously discovered reserves, even if they are in an entirely different area.

Question 10

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 does require 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 11

Costs carried forward for an abandoned area of interest should be expensed in the period the decision to abandon was made.

Accepted Answer

Costs associated with an abandoned area of interest should be expensed in the period when the decision to abandon was made. This is in accordance with the matching principle of accounting, which requires expenses to be recognized in the same period as the related revenues or benefits. By expensing these costs, the financial statements reflect the accurate financial position of the company and avoid overstating assets or understating liabilities.

Question 12

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

The answer of Costs in the exploration phase are incurred...

Question 13

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 14

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. These methods include successful efforts method, full cost method, production stripping method, asset retirement obligation method, and units of production method.

Question 15

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 16

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 17

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

The statement is true. The costs-written-off-and-reinstated method is an acceptable accounting policy under the AASB Framework, which allows the reversal of exploration and evaluation expenses to recognize an asset. This method is used when exploration activities lead to the discovery of an economically viable mineral resource, and it aligns with the principle of asset recognition where an asset should be recognized when it is probable that future economic benefits associated with the asset will flow to the entity, and the asset has a cost or value that can be reliably measured.

Question 18

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 entities to apply either the cost model or the revaluation model to their exploration and evaluation assets, as long as they follow certain guidelines and disclose the accounting policies used.

Question 19

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 suggests that large companies may choose not to capitalise exploration and evaluation expenditures in order to reduce political costs, as this may face opposition from stakeholders who believe it misrepresents the company's financial position. By not capitalising these expenditures, the company can report lower initial costs and avoid potential criticism.

Question 20

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

The answer of The costs incurred in the development and...

Quiz 20: Accounting for the Extractive Industries