Depletion Base

Definition

The financial accounting term depletion base refers to the total cost associated with assets that are a natural resource too.  The depletion base typically includes three costs:  acquisition, exploration and development.  This base is the value used when determining the company's depletion expense.

Calculation

Depletion Base = Cost to Acquire + Cost to Explore + Cost to Develop

Explanation

The term depletion is associated with assets that are considered natural resources.  Typically, these are assets that are consumed and only replaced by nature.  Examples of natural resources include timber, mineral ores, oil and natural gas deposits.

While assets such as property, plant and equipment are depreciated over their serviceable lives, natural resources are subject to depletion.  In order for companies to calculate this expense, they must first determine the depletion base.  The costs associated with assets that are natural resources fall into three categories:

  • Acquisition:  the price paid for known resources or the rights to search and discover a natural resource.
  • Exploration: the costs associated with discovering a natural resource.  Some companies will capitalize the costs of unsuccessful efforts in addition to successful exploration efforts.  This is referred to as the full-cost approach.  Companies that follow this method believe the unsuccessful efforts are the true cost of discovering a resource.  Companies may also follow the successful efforts approach and only capitalize the fruitful efforts, while expensing ineffective ones.
  • Development:  the costs associated with extracting a resource fall into two categories:  intangible and tangible development costs.  Tangible costs include the physical assets needed to extract the resource.  Examples include oil rigs, drills, and other heavy equipment.  Tangible costs are NOT included in the depletion base, but are depreciated in the same way as other property, plant, and equipment.  Intangible assets include those costs associated with drilling, tunneling or otherwise gaining access to the natural resource.  Intangible assets are included as part of the depletion base.

Related Terms

assets, property, plant, equipment, service life, depreciation expense, amortization, depletion expense, discovery value accounting, recoverable reserves