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IAS 16 — Accounting for proceeds and costs of testing of PPE: should net proceeds reduce the cost of asset

Date recorded:

The Project manager introduced the agenda paper. He said that the issue related to a request for clarification received by the Committee to clarify the accounting for the net proceeds from selling any items produced while testing an item of property, plant and equipment (PPE) under construction. 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 project manager said that in January 2015 the Committee observed that the analysis should focus on the meaning of ‘testing’ the PPE, because this term was used in paragraph 17(e) of IAS 16 Property, Plant and Equipment. The Interpretations Committee observed that the reference to ‘proceeds’ in IAS 16 was made only in relation to testing. He said that the staff proposed that the meaning of testing activity could be clarified as follows: (a) When the PPE produces more than de minimis sellable output, the rebuttable presumption should be made that the activity was no longer testing. If more than de minimis sale proceeds were received but the PPE was still being tested for whether it was functioning properly, the identification and componentisation of the PPE should be reassessed. The staff also considered that the above presumption would be rebutted when (i) the product was not sellable to the customers to whom the final products were planned to be sold; and (ii) the prices of the testing product and the final product that were planned to be sold were significantly different. He then opened the discussion to the Committee members.

One Committee member said that he was concerned about the outreach activities because it appeared that the amendment was only addressing the issue from mining companies’ perspective. He asked the staff whether there was outreach from other industries and whether there was also diversity in practice in other industries. He said that testing could have a huge impact depending on the industry; he also asked whether testing was only related to management intent to have a sellable output or whether it should also involve regulatory approval. He was also concerned about whether the rebuttable presumption was really necessary. The Project manager responded that they have contacted other industries and they understood that the issue was also applicable in other industries.

There were concerns expressed by the majority of the Committee members about the concept of ‘de minimis’ because they said that it would be difficult to apply as it was not defined in IFRSs. One Committee member also said that there would be difficulties in translation because it was an unclear term even in English.

One Committee member asked whether the focus was on proceeds from testing or the focus was the criteria to function properly.

There were concerns expressed by several Committee members because the staff were not proposing additional disclosures. In particular, the Committee members were concerned about not asking for quantitative disclosures about the assumptions made (if material). Some members also pointed out that regulators had requested additional disclosures on this topic.

Some Committee members were concerned because they believed that the main question requested by the submitter was not being answered. One Committee member said that the main question was what to do with proceeds. He said that instead the staff were focusing on expanding the scope to explain whether an asset was ready for use. He suggested that the approach should be simplified for example by following the USGAAP approach which required that the credits (when the proceeds exceed the cost incurred) should be recorded in P&L.

Some Committee members suggested that an interpretation would be preferable rather than amending the standard.

One observing IASB Board member said that the term minimis was used before (in IFRS 9); however, she said that the terms needed to be in the context of something. She also said that in relation to disclosures there was a recent discussion in the IASB about a proposed amendment to IAS 40 and the staff had recommended additional specific disclosures. She said that the Board rejected requiring additional specific disclosures on the basis that the Board was in the process of rationalising disclosures and focusing on having clearer objectives.

The Chairman concluded that there were different views within the Committee. He suggested setting aside the disclosure requirements for a moment and discussing the main proposal. He said that there seemed to be three possible alternatives which he put to a vote.

  1. First option would consider that all credits should be recorded in P&L (following the USGAAP approach) – This proposal was approved by 5 Committee members
  2. Second option would be to follow the staff proposal by pursuing an amendment- This proposal was approved only by 4 Committee members.
  3. Third option – Proceed with an interpretation- This proposal was approved by 6 Committee members. This proposal obtained the most votes and accordingly the staff will move forward on an interpretation rather than an amendment. The Project manager clarified that the focus would be on the interpretation of the concept of the asset functioning properly in the context of IAS 16.

In relation to the proposed disclosure requirements, the proposal was approved by 12 Committee members.

The observing IASB Board member suggested the staff focus on clarifying existing disclosure requirements rather than adding new ones.

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