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IAS 16 – Accounting for net proceeds and costs of testing on PPE

Date recorded:

The technical manager reminded the Committee that in July 2014, they had discussed a request to clarify accounting for the net proceeds from selling any items produced whilst bringing an item of property, plant and equipment (PPE) to the location and condition necessary for it to be capable of operating in the manner intended by management. The submitter had asked whether the amount by which the net proceeds received exceeded the costs of testing should be recognised in profit or loss, or as a deduction from the cost of the PPE.  The IFRS IC had issued a tentative agenda decision that excess proceeds should be recognised in profit or loss. The Committee received nine comment letters on this tentative agenda decision. Some respondents disagreed with the tentative agenda decision because of the implications it might have for the extractive industry. In contemplation of these comment letters, the staff recommended to add the item to the Committee’s agenda.

One Committee member agreed with performing further work. However, she disagreed with the reference in the agenda paper that the availability of an asset for use was linked to the capacity.

 One Committee member agreed with the staff recommendation but wondered whether the scope should be broadened to include activities that were necessary to bring the asset in the condition required for its intended use. The Director of Implementation Activities said that staff had already thought about that and had therefore included a point into their recommendation about proceeds received on activities other than testing.

Another Committee member said that the problem was when an asset was available for use as intended by management and that this should be the question asked. She warned to not get into unit of account questions (e.g. some components might be ready for use earlier than others) as the Committee had decided before not to address those questions. The Chairman asked whether an asset was not ready for its intended use only because the market did not justify producing at capacity. A Committee member replied that the point at which the asset was available for intended use was in her view not the question at hand.

One Committee member said that the testing phase was either to refine the product or waiting for regulatory approval. All other phases would not be testing in his view. He was concerned that after clarifying IAS 16 the next question would be to clarify IAS 38. Therefore it should be carefully considered whether there should be an interpretation.

A Committee member suggested not focusing on the implications for the extractive industry and instead supported the focus on availability for use. Another Committee member warned not to go into very much detail in the agenda decision and instead focus on principles. One Committee member suggested an agenda decision that was based on the fact that diversity in practice had good reasons.

Another Committee member suggested liaising with the utilities industry as the comment letter from the International Energy Accounting Forum pointed out several issues in this industry as well. One Committee member added that transportation service concession arrangements also had significant issues in this area.

The Chairman asked whether the Committee wanted to reverse the previous position and ask staff to perform further work to pursue guidance of a kind that was yet to be determined. Twelve Committee members favoured this approach. The Director of Implementation Activities said that staff would add guidance on when an asset was available for use.

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