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IAS 16 – Cost of asset testing (finalised)

Date recorded:

In May, 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 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 Committee in May noted that the guidance in IAS 16 is sufficient to identify the date at which an item of property, plant and equipment is "ready for intended use" and therefore, to distinguish proceeds that offset the costs of testing the asset from revenue from commercial production. In addition, the Committee 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 not to take this project forward.

Subsequently, the Committee received two comment letters which supported the decision not to take the issue to the Committee's agenda but one of the letters provided additional comments for the Committee to consider: a) it is inappropriate for the Committee to comment on the likely accounting treatment for a submitted fact pattern "likely to apply separately to each individual plant"; and b) the term "ready for intended use" should be removed because this term is not used in IAS 16.

The Committee reaffirmed its decision not to take the issue to its agenda and to proceed with the agenda decision to incorporate proposed amendments to improve the wording to the agenda and a) remove reference to the submitted fact pattern "likely to apply separately to each individual plant" mentioned above; and b) revise the wording to be consistent with the terminology used in IAS 16.

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