Wasting Asset

IA 1 | J. Tamayao
 EXPLORATION FOR AND EVALUATION ASSETS
Exploration for and evaluation of mineral resources means the
search for mineral resources, including minerals, oil, natural gas
and similar non-regenerative resources after the entity has
obtained legal rights to explore in a specific area, as well as the
determination of the technical feasibility and commercial viability
of extracting the mineral resource.
 WASTING ASSET

Definition

Are natural resources property in the form of land containing

mineral deposits, precious stones and metals or trees to be
harvested as logs and lumber with a limited life and will be
subject to depletion using the production method.
COST OF WASTING ASSET

Acquisition Cost

Exploration Cost

Development Cost

Restoration Cost
 DEPLETION
Depletion is “depreciation” of natural resources. The depletion
base is the total cost of the property providing the natural
resources. This includes all development costs such as
exploring, drilling, excavating, and other preparatory costs.
 DEPLETION

DEPRECIABLE BASE Cost less Residual Value

USEFUL LIFE Quantity of Resource

DEPLETION METHOD Units-of-Production Method

Start: Natural Resource is extracted

DEPLETION METHOD Ends: Consumed / Derecognized
 ACCOUNTING FOR DEPLETION
Depletion on resources extracted during an accounting period is
allocated between inventory and cost of goods sold.

WIP xx
Accum. Depletion xx

COGS xx
WIP xx
 EXAMPLE: DEPLETION
On January 1, 2019, CDH Co. acquired property containing mineral
resources for P150,000,000. Total costs of exploration and intangible
development costs was P8,000,000. CDHis mandated by the Mining
Act to restore the site after 4 years. Based on most reliable
measurement, the amount of restoration cost is P12,000,000 and
current market-based discount rate is 10%. Geologists estimate that
the total units estimated to be extracted is 12,000,000. It is estimated
that 1,500,000 units will be extracted each year during the useful life
of the wasting assets. Actual units extracted in 2019 and 2020 were
1,600,000 and 1,700,000, respectively.
 CHANGE IN ESTIMATES
The unit depletion rate is frequently revised due to the
uncertainties surrounding the recovery of natural resources. The
adjustment is being made prospectively.
 EXAMPLE: CHANGE IN ESTIMATE
On January 1, 2019, CDH Co. acquired property containing mineral
resources for P150,000,000. Total costs of exploration and intangible
development costs was P8,000,000. CDH is mandated by the Mining Act to
restore the site after 4 years. Based on most reliable measurement, the
amount of restoration cost is P12,000,000 and current market-based
discount rate is 10%. CDH estimates that the total units estimated to be
extracted is 12,000,000. It is estimated that 1,500,000 units will be
extracted each year during the useful life of the wasting assets. Actual units
extracted in 2019 and 2020 were 1,600,000 and 1,700,000, respectively.
By the end of 2020, CDH estimated the remaining recoverable reserves at
15,000,000. Actual units extracted on 2021 is 1,500,000.
 DEPRECIATION OF PPE USED IN E&E

MOVABLE IMMOVABLE

No Future Use
Has Future Use
Life of the Asset is
Depreciate over the longer, unit of production
life of the asset method

Life of the Asset is

shorter, life of the asset
 DEPRECIATION OF PPE
On January 1, 2015, CDH Co. acquired property containing mineral
resources. On the same date, CDH acquired movable and
immovable tangible equipment. The movable tangible equipment
amounted P6,000,000 while the immovable tangible equipment
amounted to P9,000,000. CDH estimates that the total units
estimated to be extracted is 12,000,000. It is estimated that
1,500,000 units will be extracted each year during the useful life
of the wasting assets. The movable equipment has a useful life of
20 years while the immovable equipment has an estimated useful
life of 10 years.
 DEPRECIATION DURING SHUTDOWN
Depreciation shall not cease. Depreciated using
straight line.

remaining book value before the shutdown

remaining life of the equipment
 LIQUIDATING DIVIDENDS
Wasting Asset Doctrine

Under this doctrine the wasting asset corporation or a

company engaged in the extraction of a natural resource,
can legally return capital to stockholders during the lifetime
of the corporation.
Accordingly, a wasting asset corporation can pay dividend
not only to the extent of retained earnings but also to the
extent of accumulated depletion.
 LIQUIDATING DIVIDENDS
Retained earnings-unappropriated XX
Add: Accumulated depletion XX
Less: Capital liquidated in prior years XX
Depletion in ending inventory XX
Maximum dividend XX
 EXAMPLE: LIQUIDATING DIVIDENDS
CDH has the following balances as of December 31, 2019:
Capital Stock 10,000,000
Retained Earnings 4,700,000
Wasting Asset 12,000,000
Accumulated Depletion 3,000,000
Capital Liquidated 2,200,000
Inventory 900,000 units
Depletion Rate 2.50 per unit
END