Week 9 Tutorial Solutions.docx - ACC/ACF3100 Week 9 Tutorial Solutions Extractive Industries Henderson et al Chapter 19 Questions 2(a What is the main

Week 9 Tutorial Solutions.docx - ACC/ACF3100 Week 9...

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ACC/ACF3100 Week 9 Tutorial Solutions Extractive Industries Henderson et al. Chapter 19 Questions 2(a) What is the main accounting issue for entities involved in the extractive industries? The main issue is how to account for the significant costs incurred during both the pre- production and production phases. Should the costs be recognised as expenses or as an asset? What criteria should be used in answering this question? Conceptually, the Framework should be applied to see if the expenditures give rise to assets. Differences in opinion relate mainly to the treatment of pre-production costs and in particular exploration and evaluation costs. By the time development commences, the deposit is obviously considered by management to be worth exploiting. Variations in opinions on how to account for these costs are likely due primarily to differing interpretations of the degree of risk inherent in the extractive industries. (b) Briefly outline the four broad approaches to accounting for pre-production costs, identifying the approach advocated in AASB6. Broadly speaking, there are four approaches to accounting for pre-production costs: 1. The expense (or costs written-off) method, which recognises the costs as expenses in the period in which they are incurred; 2 . The expense-and-reinstate method, which recognises the costs as expenses in the period in which they are incurred, but reinstates them as assets if subsequently those costs give rise to economically recoverable reserves; 3 The full-cost method, which recognises the costs as an asset irrespective of the likely success of the exploration program; and 4 . The successful-efforts method, which limits asset recognition to those costs that are likely to result in the discovery of economically recoverable reserves (the other costs are recognised as expenses). The current approach advocated in AASB 6 , the area of interest method, is a special case of the successful-efforts method. 7. Northern Mining Ltd (NML) (a) NML should recognise the estimated costs of restoration in its statement of financial position as at 30 June 2017. The restoration will require an outflow of economic benefits to those undertaking the restoration. NML has a constructive obligation to restore the company’s mine sites based on community expectation and company policy, and the need for restoration has arisen because of site development work. Assuming that the $1 million of future work is necessitated by development at the mine site that has already occurred, the need for restoration is probable and the costs can be measured reliably . The obligation would be measured at either: (i) face value of expected future outlays = $1 million or 1
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