Question: The cost of land is not depreciated because it does not have a finite life. However, land is often acquired
solely for the natural resources that it might contain such as oil, timber, gold or the like. As the oil is pumped, the
timber harvested or the gold extracted, a portion of the value is physically separated from the land. How is the
reported cost of land affected when its natural resources are removed?
Answer: Oil, timber, gold and the like are “wasting assets.” They are taken from land over time, a process
known as depletion. Value is literally removed from the asset rather than being consumed through use as with the
depreciation of property and equipment. The same mechanical calculation demonstrated above for the units-of-
production (UOP) method is applied. The 2008 financial statements for Massey Energy state that “depletion of
mining properties owned in fee and leased mineral rights is computed using the units-of-production method over
the estimated proven and probable reserve tons.”
Because the value is separated rather than used up, depletion initially leads to the recording of inventory (such as
oil or gold, for example). An expense is recognized only at the eventual point of sale.
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