Cost Depletion
What Is Cost Depletion?
Cost depletion is one of two accounting methods used to dispense the costs of extricating natural resources, like timber, minerals, and oil, and to record those costs as operating expenses to reduce pretax income. It's a method for distributing extraction costs, charged as a expense. The yearly depletion cost depends on the units removed or utilized for a given time frame period.
The Formula for Cost Depletion Is:
To work out the adjusted value of the property, note that:
What Does Cost Depletion Tell You?
Cost depletion is typically part of the "DD&A" (depletion, depreciation, and amortization) line of a natural resource company's income statement. Depletion is like depreciation, which is utilized to allot the cost of tangible assets like processing plants and equipment over their helpful lives. Depletion is utilized for natural resources, which can incorporate minerals, metal, oil, gas, and timber. In particular, a company that separates resources will utilize depletion to account for the utilization of these assets.
Illustration of How to Use Cost Depletion
The investment cost of a natural resource asset is $2 billion and development costs during a period were $40 million. The salvage value is $200 million. Assuming the estimated number of resource units on this property is 600 million and the company concentrates and sells 10 million units, depletion expense under the cost depletion accounting method would be:
Organizations participated in mining or separating distinguish their depletion expense methods and comment on period expenses in the management discussion and analysis (MD&A) areas of their quarterly and annual filings.
Trailblazer Natural Resources Company states that it utilizes the cost depletion method and gave the accompanying clarification to a 19% decline in depletion expense for its fiscal year 2017: "The lessening is basically due to (I) options to proved reserves owing to the Company's fruitful Spraberry/Wolfcamp horizontal drilling program and (ii) commodity price increments and cost reduction drives, the two of which added proved reserves by stretching the economic existences of the Company's delivering wells."
The Difference Between Cost Depletion and Percentage Depletion
The other method of depletion is percentage depletion, which is calculated by duplicating the gross income received in the tax year from removing a resource by an IRS-decided percentage laid out for every resource. For instance, assuming the percentage were 22%, depletion expense would be gross income times 22%. Notwithstanding, now and again, cost depletion must be utilized over percentage depletion, like the case with standing timber.
Limitations of Using Cost Depletion
Depletion must be utilized for natural resources, while depreciation is considered all substantial assets. Not at all like depreciation, cost depletion depends on use and must be calculated each period.
For related data, read about how to account for depletion and other non-cash charges.
Features
- Cost depletion is one of the two accounting methods used to allot the costs of removing natural resources.
- Depletion must be utilized for natural resources, while depreciation is took into account every substantial asset.
- It is typically part of the DD&A, a line of a natural resource company's income statement.
