AC 210 Lecture Notes - Lecture 47: Financial Statement
5 Jun 2018
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Natural Resources
Timber, fossil, mineral deposits, and other natural resources are different from
depreciable assets because they are physically extracted during company operations
and they are replaceable only through natural processes.
Cost of natural resources. The cost of natural resources includes all costs necessary
to acquire the resource and prepare it for extraction. If the property must be restored
after the natural resources are removed, the restoration costs are also considered to be
part of the cost.
Companies that search for new natural resources determine cost using one of two
approaches: the successful‐efforts approach or the full‐cost approach. Under
the successful‐efforts approach, exploration costs are considered part of the cost of
natural resources only when a productive natural resource is found. Unsuccessful
exploration costs are treated as expenses in the period during which they occur. Under
the full‐cost approach, all exploration costs are included in the cost of natural
resources. The approach that a company selects should be disclosed in the notes that
accompany the financial statements.
Depletion. Depletion is the process of allocating the depletable cost of natural
resources to expense as individual units of the resource are extracted. Depletable
cost equals the total cost of natural resources less any salvage value remaining after
the company finishes extracting them. Depletion expense is generally calculated using
the units‐of‐activity method. Under this method, a per‐unit cost of depletion is found by
dividing the depletable cost by the estimated number of units the resource contains. The
per‐unit cost times the actual number of units extracted and sold in one year equals the
amount of depletion expense recorded for the asset during that year.
Calculating Units‐of‐Activity Depletion
Suppose a company pays $50,000,000 for an existing gold mine estimated to contain
1,000,000 ounces of gold. The mine has no salvage value, so the depletable cost of
$50,000,000 is divided by 1,000,000 ounces to calculate a per‐unit depletion cost of $50
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Document Summary
Timber, fossil, mineral deposits, and other natural resources are different from depreciable assets because they are physically extracted during company operations and they are replaceable only through natural processes. The cost of natural resources includes all costs necessary to acquire the resource and prepare it for extraction. If the property must be restored after the natural resources are removed, the restoration costs are also considered to be part of the cost. Companies that search for new natural resources determine cost using one of two approaches: the successful efforts approach or the full cost approach. Under the successful efforts approach, exploration costs are considered part of the cost of the full cost approach, all exploration costs are included in the cost of natural natural resources only when a productive natural resource is found. Unsuccessful exploration costs are treated as expenses in the period during which they occur.
