Q

Explain the situation that a company expenses all exploration and evaluation expenditure as incurred

Home, - Company expenses all exploration and evaluation expenditure

Question: Explain the situation that a company (in the extractive industry) expenses all exploration and evaluation expenditure as incurred. Would the related financial reports provide ‘relevant' information?

ANSWER:
As per AASB 6, Exploration and evaluation expenses are those that are incurred in connection with exploring and evaluating mineral resources prior to analysing and demonstrating the technical feasibility and commercial viability of such extraction. Such exploration and evaluation expenses include several components like the acquisition of rights for exploration, cost of drilling, cost of trenching and sampling, cost of analysis of the geology and topology of the region and cost of activities associated with the technical feasibility and commercial viability of such extraction.

While accounting for such costs, an entity may defer such expenses as assets despite the outcome being extremely uncertain. Entities also have an option of expensing all such expenses in its books of accounts until the technical feasibility and commercial viability is established.

The company can use the full cost method or the successful efforts method for expensing such exploration and evaluation expenses. While in the full cost method all such expenses are capitalised, in the successful efforts method only those expenses related to successful wells are capitalised. Those expenses incurred for unsuccessful wells are expenses during the period. Such activity is considered as an operating activity and deducted from earnings before income tax.

In the full cost method, initially, all such cost is allocated between the areas of interest and costs are separately tracked for each area. Any subsequent measurement can be done using any of the two methods, cost method and revaluation method. This is done in the case where such expenses are deferred and recognised as assets. Later on, when the assets are placed in service, the depreciation and amortisation of these assets are expensed over the period of service. Therefore, it can be seen that in most cases the exploration and evaluation expenses are classified as deferred assets and our amortised and appreciated once their period of service begins. Such assets are regularly tested for impairment and any impairment gain or loss is accordingly recognised in the Profit and loss statement.

Leave a comment


Captcha

Related :-