Depreciation of mines and mining machinery and equipment;

              34 HASKINS & SELLS May
Depreciation of Mines and Mining Machinery and Equipment
By JOHN R. FINCHER (In-charge Accountant, New York Thirty-ninth Street Office)
THE various methods of depreciation in
common use, or advocated by writers
on the subject, are based generally on the
principle that the cost, less residual value,
of the facility being depreciated should be
amortized in some manner during the
period of its usefulness. This principle un­doubtedly
is correct in theory for all ordi­nary
enterprises in which the production,
or return, bears some uniform relation to
the use of the facility; but its application
in the case of mining is questioned because
of the inherent differences in economic con­ditions
of operation.
The fundamental difference between the
accounting for a mine and for another
ordinary enterprise is first observed after
the project has been fully equipped and
operations have begun. After the mineral
lands have been acquired, either through
purchase or lease, the initial expenditures
necessary to equip a mine for operation will
consist of the cost of mine development
work, such as shafts, slopes, tunnels, gang­ways,
airways, drainage, etc., and the
machinery and equipment necessary to
handle the mineral output and waste mate­rial.
After operations are begun there will
be continually recurring expenditures for
extensions of the mine workings and for
additional machinery and equipment made
necessary by such extensions, all of which
will be required merely to maintain, with­out
at all increasing, the average quantity
output of mineral.
It is generally agreed that the initial
cost of equipping a mine to begin operation
must be capitalized. The subsequent ex­penditures
for development and extensions,
however, constitute a problem upon which
there is much difference of opinion. If the
practice is conformed to the accounting
theory that the cost of all facilities expected
to have a useful life of more than one year
should be capitalized and depreciated over
the period of usefulness, the property ac­counts
would continue to increase until the
very end of operation, causing progressive
increases in the charges for depreciation.
This would prove unsound because the in­creasing
charges for depreciation would
tend to increase the per-ton cost of mineral
production progressively for each succeed­ing
operating period.
In the early stages of operation of a
mining project the per-ton cost of mineral
production is comparatively low, because
the recoverable mineral deposits are easily
accessible. As mining progresses the de­posits
become daily less accessible and the
maintenance of a stable output requires
extensions of the workings and entails
ever-increasing costs for transportation,
while the greater depth of the workings en­tails
greater costs for lifting and drainage,
and added cost for the disposition of waste.
If to the ever-increasing direct costs of
mining we should add depreciation charges
which mount higher each year, the per-ton
cost of production during the later stages of
operation would increase to a figure out of
all proportion to the cost at the beginning.
When we reflect that, aside from market
fluctuations, the last ton of mineral pro­duced
is worth not one cent more than the
first, the error in applying the principle to
mine accounting becomes doubly impres­sive.
In theory, profits or losses arising from a
business project can be accurately deter­mined
only when the undertaking is fully
completed and the business is liquidated.
Business expediency, however, has brought
about the general custom of stating ac­counts
annually, at which time the profits
or losses of a going concern are approxi­mated
by estimating such factors as cannot
be definitely determined. Little difficulty
is experienced in applying this method in
the case of ordinary enterprises which en­counter
fairly uniform conditions from
year to year; but a mining enterprise has