Question 1

Describe the activities involved in the pre-production phase in the production of minerals,oil and gas and the accounting treatments that might be allowed for costs arising from this phase.

Accepted Answer

The pre-production phase encompasses four types of activities.They comprise exploration of areas that are leased for this purpose,the evaluation of exploration results,the development of the deposit for exploitation,and the possible construction of facilities for extraction,treatment and transportation from the deposit or ﬁeld.EXPLORATION This phase of operations includes the topographical,geological,geochemical and geophysical studies that are usually made over a wide area in order to obtain information that will lead to the acquisition of exploration rights in the most promising areas.EVALUATION After the property rights have been acquired,work is undertaken to determine the technical feasibility and commercial viability of the prospect.The aim of this investigation is to ﬁnd a commercial deposit.The costs of this phase include salaries and wages,supplies,transport,depreciation or rental of equipment,and other expenditure.DEVELOPMENT After the commercial viability of a prospect has been established,the development phase commences.'Development' refers to the activities involved in the establishment of access to the deposit or ﬁeld and other preparation for commercial production.These activities include drilling wells for the production of oil or natural gas,sinking shafts,driving tunnels,the removal of overburden,the development of access roads,and the supply of water and power.CONSTRUCTION A separate phase may be identiﬁed for construction,which includes the establishment of the facilities for extraction,treatment and transportation from the deposit or ﬁeld.

Question 2

According to the Statement of Accounting Concepts and the Framework,which of the following methods of accounting for exploration and evaluation costs in the extractive industries is most consistent?

Accepted Answer

A

Question 3

The units-of-production method is commonly used to calculate the amount of depreciation and amortisation expense to be written-off each year from the accumulated costs of exploration and development of a mining venture.Which of the following formulae best expresses the calculation of the amortisation rate under this method?

Accepted Answer

The units-of-production method calculates amortisation by dividing the net cost (accumulated cost plus estimated future costs minus estimated residual value) by the economically recoverable reserves, not by market value, present value of future net revenue, or future net revenue itself.

Question 4

Australian Accounting Standard AASB 6 Exploration for and Evaluation of Mineral Resources refers to which of the following categories of reserves of minerals,oil or gas?

Accepted Answer

The answer of Australian Accounting Standard AASB 6 Exploration for...

Question 5

Australian Accounting Standard AASB 6 Exploration for and Evaluation of Mineral Resources identifies all of the following EXCEPT which phases in the exploitation of mineral,oil or gas deposits?

Accepted Answer

Restoration is not a phase in the exploitation of mineral, oil or gas deposits.

Question 6

Zenith Mining Ltd paid $3 million for a mineral deposit and spent a further $225 000 in developing the property prior to commencing production on 1 July 20X0.It is estimated that the deposit will produce 25 million tonnes of ore and that the land will have an eventual residual value of $25 000.In addition to the development costs,Zenith spent another $500 000 on infrastructure construction at the mine site.Its mining operations during the year ended 30 June 20X1 resulted in:
$$\begin{array} { l l } 
\text { Tonnes of ore mined } & 1000000 \
\text { Tonnes of ore sold } & 900000
\end{array}$$
The amount to be charged as amortisation of pre-production costs for the year is:

Accepted Answer

The answer of Zenith Mining Ltd paid $3 million for...

Question 7

Under the Australian Accounting Standard AASB 6 'Exploration for and Evaluation of Mineral Resources',the area-of-interest method in accounting for pre-production costs of a mining operation is a special form of the:

Accepted Answer

The area-of-interest method is a special form of the successful-efforts method, which allows for capitalization of costs directly associated with finding specific mineral resources, while costs not resulting in a discovery are expensed.

Question 8

The successful-efforts method of accounting for exploration and evaluation costs in the extractive industries:

Accepted Answer

The successful-efforts method of accounting for exploration and evaluation costs in the extractive industries requires all such costs to be recognised as assets until an area is abandoned or a commercial mineral deposit is found. Therefore, option C is the correct answer. Options A and B are incorrect, as they do not reflect the requirements of the successful-efforts method. Option D is incorrect because one of the options must be correct.

Question 9

The expense (or costs written-off)method of accounting for exploration and evaluation costs in the extractive industries would seem to be the most conservative of the suggested methods of accounting for these costs.Conservatism has a long history in accounting and is often used to justify or support many accounting practices.Why then is the expense method not favoured by the Australian Accounting Standards Board? Consider both the benefits and the disadvantages arising from the use of this method.

Accepted Answer

The answer of The expense (or costs written-off)method of accounting...

Question 10

Describe the units-of-production method of amortizing pre-production costs that have been capitalized.

Accepted Answer

The answer of Describe the units-of-production method of amortizing pre-production...

Question 11

Reasons for the AASB 6 to allow exploration and evaluation costs to be capitalised under certain circumstances includes which of the following?

Accepted Answer

AASB 6 allows exploration and evaluation costs to be capitalized under certain circumstances, such as when the costs are expected to be recouped, when the rights to tenure of the area of interest are current, and when a reasonable assessment of the viability of the area of interest can be made. Therefore, all of the above choices are correct.

Question 12

Examples of expenditures that might be included in the initial measurement of exploration and evaluation assets provided in paragraph 9 are which of the following:

Accepted Answer

The answer of Examples of expenditures that might be included...

Question 13

Australian Accounting Standard AASB 6 Exploration for and Evaluation of Mineral Resources defines 'economically recoverable reserves' of minerals,oil or gas as those which can be expected to be profitably:

Accepted Answer

The correct answer is B) extracted, processed and sold under current and foreseeable economic conditions. This definition encompasses the entire process from extraction to sale, considering both current and future economic scenarios, which is essential for determining the economic viability of reserves.

Question 14

Australian Accounting Standard AASB 6 Exploration for and Evaluation of Mineral Resources states that exploration and evaluation costs of a mining operation:

Accepted Answer

AASB 6 states that exploration and evaluation costs of a mining operation can be recognised as expenses or carried forward as an asset depending on the circumstances of the particular operation. The decision on whether to expense or capitalise these costs is based on the likelihood of discovering economically recoverable mineral resources and the ability to extract them. AASB 116 is not applicable to exploration and evaluation costs. Option C and D are incorrect as they do not consider the circumstances of the particular operation as required by AASB 6.

Question 15

Which of the following statements is correct? The expense (costs written-off)method of accounting for exploration and evaluation costs in the extractive industries:

Accepted Answer

The expense (costs written-off) method of accounting for exploration and evaluation costs in the extractive industries is consistent with the framework of accounting, likely to be accepted for income tax purposes due to its simplicity and conservative nature, making all of the above statements correct.

Question 16

AASB 6 is an activity based standard; as such it does not fully cover other areas of extractive industries.Make a list and briefly explain the other relevant standards that a mining company has to consider in producing its financial statements under the new regime.

Accepted Answer

The answer of AASB 6 is an activity based standard;...

Question 17

Ferrous Minerals Ltd paid $2 million for a mine site and has spent a further $500 000 developing the property prior to commencing production.Ferrous estimates that the mine will produce 10 million tonnes of ore and that the land will have a final residual value of $75 000 for sale and use as a waste disposal site.It is also believed that to extract the last 2 million tonnes of ore will require further drilling and excavation work at a cost of an extra $200 000.What is the amortisation rate that should be used to write-off pre-production costs in the first year of production (when it is estimated that 1 million tonnes of ore will be mined):

Accepted Answer

To calculate the amortisation rate, we need to first calculate the total cost of the mine site and the development costs:

Total Cost = $2 million + $500,000 + $200,000 = $2.7 million

Next, we need to subtract the residual value of the land at the end of its useful life:

Depreciable Cost = Total Cost - Residual Value
Depreciable Cost = $2.7 million - $75,000 = $2.625 million

Finally, we divide the depreciable cost by the estimated amount of ore to be extracted:

Amortisation Rate = Depreciable Cost / Estimated Ore
Amortisation Rate = $2.625 million / 10 million tonnes = $0.2625 per tonne

Therefore, the answer is B, 26.25 cents per tonne.

Question 18

The full-cost method of accounting for exploration and evaluation costs in the extractive industries:

Accepted Answer

The full-cost method requires that all exploration and evaluation costs be capitalised as assets on the balance sheet. This includes both successful and unsuccessful exploration activities. The asset value will represent the costs incurred in exploring for minerals, which closely approximates the potential value of any mineral deposits discovered in the future. This method allows for more efficient cost recognition and reporting, as all exploration costs are deferred until the discovery of a commercially viable mineral deposit.

Question 19

Epson Mining Ltd has economically recoverable reserves of 3 million tonnes of ore.In discovering and developing its mine it has spent $400 000 to acquire the mining site,$600 000 in geological survey costs and $300 000 in excavating an open pit mine.It has also acquired a fleet of trucks to transport the ore,at a total cost of $160 000; the trucks have an estimated life of 5 years and zero residual value.Epson has extracted 300 000 tonnes of ore in its first year of production and expects to mine the same amount each year for the life of the mine.The mine will have no value when the ore has been extracted.In its first year of production,Epson's total expense for amortisation and depreciation should be shown as:

Accepted Answer

- Amortisation of mining site: $400 000 / 10 years = $40 000 per year
- Amortisation of geological survey costs: $600 000 / 10 years = $60 000 per year
- Depreciation of fleet of trucks: $160 000 / 5 years = $32 000 per year

Total amortisation and depreciation expense for the first year:
= $40 000 + $60 000 + $32 000
= $132 000

Since Epson has extracted 300,000 tonnes of ore in its first year, the depletion expense will be:
= (1/10) x (3,000,000 tonnes) x (300,000 tonnes) = $90,000

Therefore, the total expense for amortisation and depreciation is:
= $132,000 + $90,000
= $162,000

Hence, the correct choice is D.

Question 20

Extractive industries should value inventory held by businesses at:

Accepted Answer

Extractive industries should value inventory at the lower of cost and net realisable value, including amortisation of pre-production costs, to reflect the true value of the inventory considering both cost and potential market value.

Quiz 19: Accounting for Extractive Industry