Q Discuss Using Australian accounting standard If a decision is made to abandon an area of interest Home, - What costs should be included in the cost of inventory Question: Discuss (Using Australian accounting standard)If a decision is made to abandon an area of interest, how should any pre-production costs in respect of that area be treated? Explain, what costs should be included in the cost of inventory of an entity involved in the extractive industries. ANSWER: As per AASB 6- Exploration for and Evaluation of Mineral Resources, an area of interest is classified as a geographical region that has oil or gas or mineral fields and it is considered to be profitable to exist. Since these mineral fields experience exploration of oil or minerals, so it is common for them to decrease in their size(AASB6, 2021) Not only that, but they also contain scarce and economically valuable natural resources that can be rarely found in any place. When exploration for and evaluation of minerals take place, costs attributable to such expenditures on exploration and evaluation are included in the costof the exploration and evaluation asset(AASB6, 2021). It is irrelevant as to whether the size of the area of interest has shrunk due to intensive exploration; the costs are still included. Entities engaged in the extraction industries often have a choice at their disposal. One of them is to consider the exploration and evaluation costs as expenditures of the period in which they are incurred which means that they will not form part of the cost of the inventory(AASB6, 2021). The other option is to wholly or partially capitalize those expenditures into the cost of the inventory, only if some pre-conditions are fulfilled. In that case, such expenditures may form part of the inventory cost. Subsequently, when the exploration And evaluation operations get completed, then the costs will be transferred to another asset before the earlier asset gets amortized. Hence, the amortization cost of the earlier asset will also form part of the cost of the inventory(AASB6, 2021). Related: Cost of acquisition of the entity Typical expenses recognized by a lease What costs should be included in the cost of inventory Calculate the Earnings Per Share for Pearson Ltd Discuss Acquisition of qualifying assets
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