t10 - Tutorial 11 Suggested Solutions HPH, CHAPTER 22...

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1 Tutorial 11 Suggested Solutions HPH, CHAPTER 22 –QUESTIONS 8 The statement seems to envisage changes in the area of interest. AASB 6 , however, requires that all costs associated with an area of interest should be capitalised for as long as the whole area is not abandoned. If particular costs incurred in an area are unproductive, they are capitalised because they apply to the area. AASB 6 requires the identification of areas of interest at the outset of exploration. Areas may be redefined at irregular intervals, but AASB 6 does not indicate that they should be progressively narrowed or concentrated on the successful parts of the area with costs incurred on unsuccessful parts recognised as expenses. There are several ways in which pre-production costs could be accounted for. The four most frequently suggested ways are that they should be: recognised as expenses in the period in which they are incurred (the expense method); capitalised until there is revenue against which they are amortised (the full-cost method); capitalised only to the extent that the costs are expected to provide future economic benefits (the successful-efforts and area-of-interest methods); and recognised as expenses and reinstated if the costs subsequently give rise to future economic benefits. In the pre-production period, the expense method probably understates profits and the full-cost method probably overstates profits. The intermediate methods produce results that lie between these extremes. If AASB 6 is amended to be consistent with the Framework, the expense and reinstate method would probably be selected. 11 Northern Mining Ltd (NML) (a) NML should recognise the estimated costs of restoration in its balance sheet as at 30 June 2007. 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, then the liability could be measured at either: (i) face value of expected future outlays = $1 million or (ii) present value of expected future outlays = () 543 385 $ 1 . 1 000 000 1 $ 10 = Students may prefer to measure restoration costs in accordance with existing practice (option i) or to recognise that restoration is deferred for a considerable time (option ii). (b) The need for restoration has arisen as a result of development activities. Because AASB 6 only deals with exploration and evaluation, the accounting standard does not specify requirements in relation to this issue. However, consistent with the treatment in AASB 6, the $1 million should be included in development costs and amortised over the life of the deposit once production commences.
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This note was uploaded on 07/07/2009 for the course ACCT 3102 taught by Professor Drk.herbohn during the Three '09 term at Queensland.

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t10 - Tutorial 11 Suggested Solutions HPH, CHAPTER 22...

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