Discuss and explain If an entity is considering revaluing its exploration and evaluation assets

Home, - Restoration of a oil extraction project

Question: Discuss and explain If an entity is considering revaluing its exploration and evaluation assets, would the revaluation increase the ‘relevance' of the information from the perspective of the readers of the financial statements? Further, provide explanation for capitalising the expenses at evaluation and exploration stage also restoration of a oil extraction project.

The entity is required to consider the revaluation of exploration and evaluation of the assets. The reporting entity is required for periodic assessment of the expected future costs and the disturbance costs with respect to laws and the technological changes. In terms of AASB 137, the outflow of resources with the economic benefits are embedded in settlement purposes with respect to 90% of the eventual costs. The resources are required to be found based on the cost of assets and the understated value of the reserves. The revaluation will increase the ‘relevance' of information with respect to the financial statements. The upward revaluation is found to be reported on the revaluation reserve rather than on the company's profit account. On revaluation, the cost of sales mostly increases with respect to the results as found from the reduced profit (Dymock et al., 2021). The recognition of the respected assets in their fair values is due to the uncertainty as well as the revaluation credit that is not accounted for in the company income generation. The increase in relevance is provided in terms of the asset values that are provided under the full-cost method. The share price of the firms with respect to the cash flows being affected in the revaluation of the assets bring much pre-production costs to be taken into account under the ‘relevance' of information.

The capitalization of expenses in accordance with AASB 136, states that the evaluation and the exploration of the assets are often unlikely to be recovered on the full form even in the successful development of the projects (Amin et al., 2018). The mineral resources in the oil extraction project as used by Australian firms imply that the capitalisation of expenses often go under budgeted or without any planning. Amortization against the revenue is considered for the revenue as earned in the production phase of the project. However, there is no form of any revenue when it comes to the capitalization of costs on amortization. As per AASB 116, Property, Plant and Equipment the direct as well as the indirect expenses for the oil project, the exploration and evaluation of assets are not much undertaken under the area covered within AASB 16. Except the abandonment of the area of the project will lead to the capitalisation of expenses.

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