Question

“Mining, explorations and other similar extractive businesses are naturally and fundamentally possessing risk, in addition to uncertain outcome” consequently all expenditures of such activities should be accounted for as expenses as and when incurred.

Required:

Assess, evaluate and briefly discuss this statement.

Answer 1

Answer-The given statement is partially correct because there are different phases in the operations of mining and extractive industries like exploration, evaluation, development, construction and production. As per the relevant accounting standard, 'Area of interest' method is used to determine whether costs pertaining to exploration, evaluation, development and construction should be written off as and when incurred or carried forward. In majority cases, the area of interest would consist of a single mine, oil or gas field and all the direct as well as indirect costs incurred during exploration, evaluation, development and construction phases and particularly relatable to the area of interest, are allocated to such area of interest & for any one area of interest, exploration and evaluation costs can be carried forward as long as there is a probability of success in that area, otherwise such costs need to be written off as and when incurred. However, such costs which have been carried forward shall be amortised over the life of the area of interest to which they relate.