Natural resources and intangible assets

Learning goals

• Calculate depletion per unit and allocate extracted resource cost.
• Distinguish finite-life and indefinite-life intangible assets.
• Record acquisition and amortization of a finite-life intangible.
• Explain why internally generated brands and goodwill are not simply recorded at an estimated value.

Prerequisite check

Depreciation applies to tangible PPE; depletion allocates the cost of natural resources; amortization allocates finite-life intangible cost. All three are cost allocation processes rather than automatic market revaluations.

Vocabulary

• Depletion: allocation of a natural resource's depreciable amount to units extracted.
• Intangible asset: identifiable non-monetary asset without physical substance.
• Finite life: limited useful period over which amortization is recorded.
• Indefinite life: no foreseeable limit to benefit; review and impairment replace routine amortization.
• Patent: legal right protecting an invention for a limited period.
• Goodwill: acquisition residual arising when a business is purchased; not a self-created plug.

Core idea

Resource cost follows extraction into inventory and then expense when units are sold. An identifiable purchased intangible is recorded at cost and amortized if its useful life is finite. Recognition depends on control, identifiable future benefits, and reliable measurement—not on the strength of a marketing story.

Why this treatment makes sense

Extracted but unsold material remains inventory, so expensing all depletion at extraction would mismatch cost with sales. Intangible benefits can be real even without physical form, but internally generated brand estimates are too subjective to record freely and could invite manufactured assets and profit.

A repeatable method

Natural resource:

1. Determine capitalized cost, residual value, and estimated recoverable units.
2. Calculate (cost − residual) ÷ estimated units.
3. Multiply by units extracted and debit Inventory.
4. Transfer cost of units sold from Inventory to Cost of Goods Sold.

Intangible:

1. Identify the legal/contractual right and acquisition cost.
2. Assess finite versus indefinite useful life and applicable framework.
3. For finite life, allocate cost over the shorter supportable benefit/legal period.
4. Review indicators and estimates; never create internally generated goodwill as a plug.

Worked example

Temagami Stone Ltd. capitalizes quarry rights and site preparation of $1,200,000, expects $100,000 residual value, and estimates 500,000 recoverable tonnes. Depletion rate = ($1,200,000 − $100,000) ÷ 500,000 = $2.20 per tonne.

It extracts 60,000 tonnes and sells 45,000.

Table: Quarry depletion assigned to extraction and sales

Unsold extracted inventory is 15,000 × $2.20 = $33,000.

The company separately buys a patent for $60,000 and pays $4,000 directly related legal registration fees. Expected useful life is eight years. Capitalized patent cost is $64,000 and annual straight-line amortization is $8,000: debit Amortization Expense—Patent $8,000; credit Accumulated Amortization—Patent $8,000.

Journal, ledger, and statement connection

The resource asset is reduced directly or through accumulated depletion depending on the accounting system. Extracted unsold cost appears in current inventory; sold cost appears in COGS. Patent cost less accumulated amortization appears among non-current assets, and amortization lowers profit and retained earnings.

Common mistakes

• Expensing all depletion when resources are extracted even if units remain unsold.
• Dividing by units extracted this year instead of estimated recoverable units.
• Using legal life automatically when economic useful life is shorter.
• Recording internally developed reputation as goodwill.
• Treating research, development, brands, software, or websites identically without checking recognition criteria and framework.

Guided practice

A timber right costs $480,000, residual value $30,000, and estimated harvest is 150,000 cubic metres. Rate is $3 per cubic metre. Harvesting 20,000 creates $60,000 resource cost; if 14,000 are sold, $42,000 reaches COGS and $18,000 remains inventory.

Independent practice

1. A mineral property costs $900,000, residual $60,000, and contains an estimated 280,000 tonnes. Calculate rate and depletion for 35,000 tonnes extracted.
2. A purchased licence costs $45,000 and supports five years of use. Record one year's amortization.
3. Explain why an indefinite-life asset is not the same as an immortal asset.
4. What evidence would you request before capitalizing an internally developed technology cost?

Self-check and solutions

1. Rate = $840,000 ÷ 280,000 = $3; depletion assigned to extraction = $105,000.
2. Debit Amortization Expense $9,000; credit Accumulated Amortization—Licence $9,000.
3. “Indefinite” means no foreseeable limit now, not permanent value. It still requires review for impairment and reassessment of useful life.
4. Technical feasibility, intention and resources to complete, probable benefits, ability to use/sell, and reliable cost tracking, assessed under the applicable framework.

Retrieval practice

1. Where does depletion on unsold output appear?
2. Are finite-life intangibles amortized?
3. Can a company record internally generated goodwill whenever management estimates it?

Answers: inventory; yes; no.

Exam-style application

A mine doubles its estimate of recoverable tonnes after new geological evidence. Should prior depletion be called fraud and reversed?

Model response: Not if the original estimate was reasonable and honestly based on information then available. Recalculate the per-unit rate prospectively using the remaining carrying amount, revised residual value, and revised remaining units; document the evidence. Investigate only if the original estimate was knowingly biased or unsupported.

Lesson summary

Natural-resource cost follows units from extraction to inventory to sale. Intangible accounting depends on identifiable rights, reliable cost, and useful life; physical form is not required, but evidence is.