Extractive Industries - Test Bank | 9e

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Chapter 20 Testbank

1. Proceeds from the sale of product obtained from activities in the exploration, evaluation or development phases of operations should be accounted for in the same manner as sales of product obtained during the production phase.

True   False

2. The estimated cost of producing the quantities concerned would frequently be deducted from the accumulated costs of such activities and be treated as the cost of the product sold according to AASB 15.

True   False

3. The development phase is described in AASB 1022 as including:

A. the determination of a technical feasibility and commercial viability of a deposit that is capable of extraction

B. the establishment and commissioning of facilities

C. the establishment of access to the deposit or field and other activities involved in establishing access for commercial production

D. the establishment of infrastructure to permit the day-to-day activities necessary to bring the natural substance to a state in which it becomes a saleable product

4. AASB 6 defines economically recoverable reserves to be:

A. the only source of revenue for firms in the extractive industries

B. the quantity of product that can be extracted before the firm makes a loss

C. the quantity of product that can be extracted, processed and sold at a profit based on past economic conditions

D. the estimated quantity of the product in the area of interest that can be expected to be profitably extracted, processed, and sold under current and foreseeable economic conditions

5. If expenditures in any of the five phases of the extractive industry are not considered likely to lead to an economically viable project:

A. it should be reduced from the carrying value of assets held in relation to projects of similar nature

B. the costs should be written off against a reserve created for revaluation of non-current assets held in relation to projects of similar nature

C. the costs should be deferred and amortised against the total revenue earned from all projects of similar nature

D. the costs should be expensed immediately

6. The full-cost method involves:

A. the writing off of the full cost of exploration and evaluation in each period as and when incurred

B. the capitalisation of the full cost of exploration and evaluation in order to amortise it against income from the total economically recoverable reserves

C. expensing the costs incurred during exploration and evaluation phase and capitalisation of all other costs

D. capitalisation of costs incurred during exploration and evaluation phase and writing off of all other costs as expense

7. When deciding, under the area-of-interest method, to what extent costs should be written off or carried forward, AASB 6 requires that:

A. various areas of interest be clubbed together to check whether the costs should be capitalised or expensed

B. each area of interest be considered separately

C. exploration and evaluation costs must be carried forward

D. each area of interest as defined by the firm to be considered separately, and exploration and evaluation costs must be carried forward

8. Where an area of interest contracts in size and subsequently becomes two distinct operations:

A. all costs to date must be apportioned equally between the two new operations

B. all future costs must be accounted for separately

C. all those operations are nevertheless treated as a single a single area of interest

D. pre-production cost should be accumulated and then apportioned between the two operations based on the size of the new areas of interest

9. Costs that have been carried forward for a specific area of interest are to be amortised against revenue earned during the production phase. How is the amortisation of the costs to be calculated?

A. Any generally accepted amortisation method may be used.

B. The costs should be amortised in proportion to the expected revenue stream, so that a higher proportion of costs are matched against higher revenue streams, especially where they occur as a result of greater quality product in the early years of production.

C. The costs should be amortised straight-line over a period of not greater than 20 years.

D. The costs should be allocated over the life of the economically recoverable reserve in terms of production output or in terms of time in circumstances such as where there is a fixed period of tenure or the limiting factor is the length of the mining right.

10. The costs of facilities that are depreciable assets associated with an area of interest are to be:

A. depreciated over the life of the area of interest

B. depreciated on the basis of production during the period out of the total estimated production

C. depreciated either on the basis of production or on the basis of expiration of time

D. None of the given answers are correct.

11. Factors to be considered in reassessing the estimate of recoverable reserves each year include/s:

A. the security of tenure of the area of interest

B. the possibility that technological developments or discoveries may make the product obsolete or uneconomical at some future time

C. any changes in technology, market or economic conditions affecting either sales prices or production costs, with a consequent impact on cut-off grades

D. All of the given answers are correct.

12. Mirza and Zimmer (1999) found that only a small number of companies were undertaking upward asset revaluations. The reasons for their reluctance to undertake this practice included:

A. a desire to remain 'small' in keeping with the political-cost hypothesis

B. any revaluations made are not permitted to be recognised as income by the relevant accounting standard

C. in an attempt not to overstate assets, management preferred not to revalue items that are subject to a great deal of uncertainty

D. All of the given answers are correct.

13. Which of the following statements is/are correct?

A. AASB 6 provides the disclosure requirements for exploration and evaluation expenditures

B. AASB 137 provides the disclosure requirements for restoration costs

C. An entity shall treat exploration and evaluation assets as a separate class of assets and make the disclosures required by either AASB 116 or AASB 138 consistent with how the assets are classified.

D. All of the given answers are correct.

14. According to AASB 6, once exploration and evaluation expenditure has been recognised initially at cost, an entity may subsequently choose to use either the 'cost model' or the ______ to account for exploration and evaluation assets.

A. revaluation model

B. selling price model

C. carrying value model

D. None of the given answers are correct.

15. AASB 138 Intangible Assets requires the existence of an/a __________for those intangible assets if they are to be revalued.

A. neutral market

B. active market

C. stable market

D. None of the given answers are correct.

16. Consistent with AASB 138, an 'active market' exists when the items traded in the market are ______________.

A. heterogeneous

B. homogeneous

C. substitutes

D. None of the given answers are correct.

17. 'Active markets' often do not exist for _____________assets, thereby restricting the ability of entities to revalue such assets.

A. tangible

B. intangible

C. physical

D. None of the given answers are correct.

18. In respect of provisions for restoration, Paragraphs 36, 45 and 47 of AASB 137 require that the amount recognised as a provision shall be the best estimate of the expenditure required to settle the _______at the end of the reporting period.

A. present obligation

B. past obligation

C. future obligation

D. None of the given answers are correct.

19. The cost of an item of property, plant and equipment includes the ___________ (inclusive of duties and taxes), other directly attributable costs to the acquisition and the initial estimates of costs necessary to 'make good' the site after the asset is retired (at present value).

A. purchase price

B. mortgage value

C. market value

D. None of the given answers are correct.

20. A common approach to estimating the expenditure required to restore a site is to obtain a reasonable estimate of the required expenditure in the present day and then to adjust this amount by using inflationary indicators such as the _______________(CPI) to obtain the expenditure required in a future reporting period.

A. Consumer Price Index

B. Compensatory Price Index

C. Complex Price Index

D. None of the given answers are correct.

21. ____________information on minerals or oil and gas properties in the statement of financial position is not perceived to generate useful information.

A. Historical cost

B. Present value

C. Market value

D. Financial notes

22. Although IFRS 6 Exploration for and Evaluation of Mineral Resources addresses the accounting for exploration and evaluation expenditures, it was developed as a(n) ______measure to allow (with some limitations) entities adopting IFRSs to continue to apply their existing accounting policies for these expenditures.

A. interim

B. permanent

C. five-year

D. None of the given answers are correct.

23. While historical cost might provide a faithful representation of the underlying 'cost' of an asset, that cost might not be terribly relevant for making various decisions if the value of the asset is significantly_________ cost.

A. different from

B. similar to

C. equal to

D. a fixed

24. Paragraph 4.79 of IASB (2010) states the decision to use historical cost or current value as the measurement basis has significant implications for __________________.

A. income recognition

B. resale value

C. depreciation rate

D. None of the given answers are correct.

25. In the United States an exposure draft was released in 1977 relating to the extractive industries. At the time the draft was released, firms could use their discretion in choosing between a number of alternatives to account for their exploration and evaluation expenditure (which, as we will see, is still currently the case in many countries other than Australia). The exposure draft recommended that firms should no longer be permitted to use the full-cost method. Rather, they were required to use the successful-efforts method, which is very similar to the ______________employed in Australia.

A. area-of-interest method

B. costs-written-off method

C. successful-efforts method

D. costs-written-off-and-reinstated method

26. Owing to the high degree of opposition to the standard (SFAS No. 19), which continued after its release, the Securities and Exchange Commission overrode the FASB and issued ______, which once more permitted the use of the full-cost method.

A. ASR 251

B. ASR 253

C. ASR 254

D. ASR 235

27. Walker argued that firms under scrutiny in relation to the magnitude of their profits might elect to reduce their reported profits by changing the method they choose to account for _____________costs.

A. pre-production

B. production

C. post-production

D. None of the given answers are correct.

28. Walker found that during the financial years of 1985 and 1986—the period of her study—_________were more likely to expense their pre-production costs than organisations in other extractive industries.

A. gold producers

B. silver producers

C. platinum producers

D. None of the given answers are correct.

29. Explain, using an example, how materials should be recognised as inventories in the production phase of extractive operations.

______________________________________________________________________________

30. Discuss briefly the provisions of AASB 102 Inventories as applied to measurement of inventory under extractive industry.

______________________________________________________________________________

31. If economically recoverable reserves are discovered and the organisation seeks to move from the exploration and evaluation phases to subsequent phases of operations, what could the amounts recorded as 'exploration and evaluation assets' for tangible and intangible assets be labelled as?

______________________________________________________________________________

32. According to AASB 102 Inventories, what should inventories be measured at?

______________________________________________________________________________

33. Give some examples of sustainability reports issued by Australian mining companies.

______________________________________________________________________________

34. Give some examples of the aspects of sustainability reports issued by Australian mining companies.

______________________________________________________________________________

35. Although reporting on social and environmental performance is voluntary, why do so many companies in the minerals and energy industries do so?

______________________________________________________________________________

36. Discuss briefly the disclosure requirements as per AASB 137 in respect of balances of provisions for restoration expenditure.

______________________________________________________________________________

37. What are the accounting standards that require disclosure requirements of extractive industries?

______________________________________________________________________________

38. Discuss briefly the AASB 6 standards with respect to whether the exploration and evaluation costs which are carried forward as an asset represent the actual value of reserves?

______________________________________________________________________________

39. Discuss how proceeds from the sale of product obtained from activities in the exploration, evaluation or development phases of operations should be accounted for.

______________________________________________________________________________

Chapter 20 Testbank