Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources Depletion of Assets
Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources
Accounting Textbooks Boundless Accounting
Accounting Textbooks
Accounting
Concept Version 11
Created by Boundless

Recoverable Reserves

Recoverable reserves are the amount of a natural resource present and their value is used to compute the resource's depletion expense.

Learning Objective

  • Explain how to calculate a natural resources recoverable reserve

Key Points

    • On the balance sheet, natural resources are part of non-current assets and classified as separate groups, such as oil reserves.
    • The natural reserves recovered involve several costs related to acquisition, exploration, development, and restoration of the natural resources.
    • Natural reserve costs are reported on the balance sheet and assigned to the asset in question, such as "timber stands" or "oil reserves. " They are reported at their total cost, less accumulated depletion.
    • Depletion expense allows a business to account for the reduction in value of natural reserves. Similar to depreciation, depletion reflects the use and reduction of value of an asset over the course of time.

Terms

  • non-current assets

    Also known as fixed assets, a non-current asset is a term used in accounting for assets and property which cannot easily be converted into cash.

  • depreciation

    The measurement of the decline in value of assets. Not to be confused with impairment, which is the measurement of the unplanned, extraordinary decline in value of assets.

Example

    • Big Texas Oil Co. discovers a large reserve of oil and pays USD 500,000 to acquire the land. The company spends USD 100,000 to explore and develop the land and will spend USD 200,000 to restore the land after it no longer produces oil and is estimated to be valued at USD 20,000. The cost of the recoverable oil reserves are USD 780,000 (500,000 - 20,000 value of land +100,000 + 200,000). This cost is subject to depletion --the company has estimated the oil well will produce 200,000 barrels of oil. After they extract 10,000 barrels the first year, the depletion deduction is USD 39,000 (USD 780,000 X 10,000/200,000). The recoverable oil reserves account is valued at 741,000 (780,000 - 39,000) after one year of extraction activity.

Full Text

Accounting for Natural Reserves

Natural reserves supplied by nature, such as ore deposits, mineral deposits, oil reserves, gas deposits, and timber stands, are natural resources or wasting assets. Natural resources represent inventories of raw materials that are consumed (exhausted) through extraction or removal from their natural setting (e.g. removing oil from the ground). On the balance sheet, natural resources are part of non-current assets and classified as separate groups, such as oil reserves .

Recoverable copper reserves include the amount of the current copper deposits present.

The amount of recoverable reserves are used to compute an asset's depletion.

The Recovery of Natural Reserves

Businesses that are involved in the recovery of natural resources, such as mining, growing timber, and extracting petroleum will incur costs related to the resource recovery. The natural reserves recovered involve several costs related to acquisition, exploration, development, and restoration of the natural resources. These costs are reported on the balance sheet and assigned to the asset in question, such as "timber stands" or "oil reserves. " They are reported at their total cost, less accumulated depletion.

The Effect of Depletion

As these natural resources are used throughout the course of business, their value will be reduced by periodic depletion. Depletion expense allows a business to account for the reduction in value of natural reserves. Similar to depreciation, depletion reflects the use and reduction of value of an asset over the course of time. Two methods are available to calculate depletion: the cost and percentage method. Cost depletion is the most commonly used by oil and gas companies. The depletion amount can also vary when calculating it for financial reporting and tax purposes, so it can have a different effect on the accounting period's income and income tax expense.

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