Question

The Outback Mining Company Ltd has incurred various costs to explore an area of interest and wants to capitalise its Exploration and Evaluation (E&E) expenditures on an area of interest basis. The following costs have been incurred.

Required:

Explain how each of these costs should be treated under AASB 6?

1. the acquisition of speculative seismic data in relation to the area of interest to help determine whether to apply for an exploration licence, costing $2,800
2. labour costs of engineers analysing the seismic data, costing $3,400
3. the exploration licence fee costing $850

PART B

State how each of the following items should be valued and explain why:

1. olives on olive trees
2. chickens kept on a farm
3. cooked turkeys at a supermarket
4. trees in a forest

Answer 1

Australian Accounting Standards board - 6 (AASB), Exploration for and evaluation of mineral resources lays down principles for accounting of expenses related to mineral resources. These can be capital expenditure like purchase ofmines, license, etc. also any other expenditures or interest incurred for acquisition for it.

The standard states that - " For each area of interest, expenditures incurred in the exploration for and evaluation of mineral resources shall be: -

a) expensed as incurred; or

b) partially or fully capitalised, and recognised as an exploration and evaluation asset if it satisfies any of the following-

I) The rights to tenure of the area of interest are current; and

II) at least one of the following conditions is also met:

(i) the exploration and evaluation expenditures are expected to be recouped through successful development and exploitation of the area of interest, or alternatively, by its sale; and (ii) exploration and evaluation activities in the area of interest have not at the end of the reporting period reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in, or in relation to, the area of interest are continuing.

In our case, following is the treatment for different expense -

1. the acquisition of speculative seismic data in relation to the area of interest to help determine whether to apply for an exploration licence, costing $2,800 - This is a contingent expense. It means the expense would be fruitful or not will depend on whether we apply for license which will have rights to tenure of the license. Since the conditions are not getting fullfilled the same would be expensed out.
2. labour costs of engineers analysing the seismic data, costing $3,400 - Similar to above, this expense will also be expensed out.
3. the exploration licence fee costing $850 - This license fees will last for a time period, which determines the tenure of interest. Also, this license will enable for exploration of minerals which will help in recovering of these fees. hence this expense can be fully capitalised.

Part B

As per AASB 141, Biological asset is a living animal or a tree. The exclusions covered by this standard does not apply in our case.

1. olives on olive trees - It shall be measured on initial recognition and at the end of each reporting period at its fair value less costs to sell,
2. chickens kept on a farm - shall be measured on initial recognition and at the end of each reporting period at its fair value less costs to sell, if the market value is not easily available at initial recognition, it shall be measured at its cost less any accumulated depreciation and any accumulated impairment losses. Once the fair value of such a biological asset becomes reliably measurable, an entity shall measure it at its fair value less costs to sell.
3. cooked turkeys at a supermarket - It shall be measured on initial recognition and at the end of each reporting period at its fair value less costs to sell
4. trees in a forest - Measure at its fair value less cost to sell