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IAS 16 – Cost of testing (new)

Date recorded:

The Committee considered a request to clarify the accounting for sales proceeds received from testing an asset before it is ready for its intended use. The request relates to a petrochemical complex with several plants, some of which are ready for use by management and producing chemicals that are sold on the market, while others are still in the commissioning phase and not yet ready for production.

The question arising from this request is whether, with respect to paragraph 17(e) of IAS 16 Property, Plant and Equipment, revenue from products produced from completed plants and sold on the market could be used to offset the costs of testing the other plants that are still in the commissioning phase. That is, could such revenues be accounted for as a reduction in the cost of plants being constructed, rather than recognised as revenue in profit or loss?

The staff read paragraph 17(e) of IAS 16 as applying separately to each individual plant. Chemicals sold on the market are produced once the asset is operating in the manner intended by management. In the staff's opinion, revenue from those products should not give rise to 'net proceeds' to be offset against the costs of testing other plants that are part of the complex; the revenue should instead be recognised in profit or loss for the period, because it reflects the operations of the entity for the period.

The Committee agreed with the staff's position and noted there is no significant diversity in practice nor does it expect significant diversity in practice to emerge in the future. As such, the Committee decided to not take this project forward. A draft agenda decision would be issued explaining the rationale.