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2. PAT and Ethics Question High Hopes Mining Company Ltd begins exploring for oil in outback Australia on 1 July 2012. It spends $80,000,000 on
2. PAT and Ethics Question High Hopes Mining Company Ltd begins exploring for oil in outback Australia on 1 July 2012. It spends $80,000,000 on exploration and evaluation (E&E) in the year ended 30 June 2013 in one area of interest. At June 30, 2013 no economically recoverable oil deposits have been found but the area of interest is still current and exploration work is ongoing so a decision has not yet been made about the ultimate economic viability of the area of interest. However, the company's geologists and engineers inform the company that the outlook for success in this area of interest is not good, and that it is not probable that the company will find economically recoverable oil reserves. High Hopes must decide how it will account for the $80,000,000 E&E expenditure. The facts in the next paragraph are about the company's financial situation before it decides how to account for this $80,000,000 E&E expenditure. The company has other successful oil wells that have produced a net profit of $50,000,000 for the year ended 30 June 2013. On this day, the company has total assets of $920,000,000 (before deciding how to account for the $80m in exploration and evaluation) and total liabilities of $590,000,000. The company has a debt contract in place with lenders that prohibits the company's total liabilities/total assets ratio from exceeding 60%; otherwise the company will be in default. The company's accounting choices for the $80,000,000 E&E expenditure are (a) immediate write-off to P&L or (b) capitalisation of $80m and carry forward as an asset. What should the company do? (i) According to AASB 6 (ii) According to the Conceptual Framework (111) From a PAT perspective, (iv) From the ethical perspective of an Aristotelian
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