How to Account for Mining Rights in Namibia: A Practical Guide
A mining right grants companies the permission to explore and extract minerals from the earth, unlocking potential profits hidden beneath the surface. These rights are not just crucial for mining operations but also significant assets on a company’s balance sheet.
But how do you account for such a prized asset? This is where IAS 38 covers the accounting treatment of intangible assets, including mining rights, ensuring they are properly recorded and reported in financial statements. In this article, we look at how to apply IAS 38 to record mining rights in a company's books.
Are Mining Rights Intangible Assets?
Nature of Mining Rights
Mining rights provide the right to explore, develop, and produce minerals from a specific area. These rights are valuable because they grant exclusive access to mineral resources, which can generate significant economic benefits. Although mining rights are non-physical, they can be identified separately from the company’s other assets and be measured reliably. This makes them fit the definition of intangible assets under IAS 38 because they:
Grant specific legal rights to the holder.
Can be bought, sold, or transferred separately from other assets.
Provide future economic benefits by allowing the extraction and sale of minerals.
Recognition and Measurement
Recognition
A mining right should be recognised as an intangible asset if it is probable that future economic benefits attributable to the right will flow to the entity and the cost of the right can be measured reliably.
Initial Measurement
Mining rights are initially measured at cost. This includes the purchase price and any directly attributable costs necessary to bring the asset to its intended use.
Subsequent Measurement
After initial recognition, an entity can choose either the cost model or the revaluation model for subsequent measurement:
Cost Model: The asset is carried at cost less accumulated amortisation and impairment losses.
Revaluation Model: The asset is carried at a revalued amount, being its fair value at the date of revaluation less any subsequent amortisation and impairment losses.
Amortisation and Impairment
Amortisation
Finite Useful Life: If the mining right has a finite useful life, it should be amortized over that period. For example, if the useful life is 10 years, the annual amortisation expense is the cost of the asset divided by 10.
Indefinite Useful Life: If the mining right has an indefinite useful life, it is not amortized. Instead, it is tested for impairment at least annually and whenever there is an indication that the asset might be impaired.
A Case Study: Accounting for the Sale of a Mining Right in Namibia
Background
ABC Mining Ltd. is a mining company based in Namibia. On January 1, 2018, ABC Mining Ltd. acquired a mining right for $500,000. The mining right allows the company to explore and extract minerals from a designated area for a period of 10 years, making it a finite-life intangible asset. The company amortises the mining right on a straight-line basis over its useful life.
After 5 years, on December 31, 2022, ABC Mining Ltd. decided to sell the mining right to another mining company for $400,000. By this time, the accumulated amortisation on the mining right amounts to $250,000.
Objective
The objective of this case study is to demonstrate the application of IAS 38 to the accounting for a mining right, including initial recognition, amortisation, impairment testing, and the recording of the sale of the mining right. The case study will illustrate the necessary journal entries to reflect these transactions accurately in ABC Mining Ltd.'s financial statements.
Key Details
Initial Cost of Mining Right: $500,000
Useful Life of Mining Right: 10 years
Annual Amortisation Expense: $50,000 ($500,000 / 10 years)
Accumulated Amortisation after 5 Years: $250,000
Proceeds from Sale: $400,000
Carrying Amount at Time of Sale: $250,000 ($500,000 - $250,000)
Gain on Sale: $150,000 ($400,000 - $250,000)
Corporate Tax Rate in Namibia: 32%
Journal Entries
Initial Recognition on January 1, 2018:
Debit: Intangible Asset - Mining Right $500,000
Credit: Cash/Bank $500,000
Annual Amortisation (for each of the 5 years):
Debit: Amortisation Expense $50,000
Credit: Accumulated Amortisation - Mining Right $50,000
Accumulated Amortisation after 5 Years:
Accumulated Amortisation = $50,000 * 5 = $250,000
Sale of Mining Right on December 31, 2022:
Debit: Accumulated Amortisation - Mining Right $250,000
Debit: Cash $400,000
Credit: Intangible Asset - Mining Right $500,000
Credit: Gain on Sale of Intangible Asset $150,000
Tax Implications of the Gain on Sale:
Tax Liability Calculation:
Tax Liability = Gain on Sale * Corporate Tax Rate
Tax Liability = $150,000 * 32% = $48,000
Journal Entry for Tax Liability:
Debit: Income Tax Expense $48,000
Credit: Income Tax Payable $48,000
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