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Property, plant and equipment

Date recorded:

Proceeds before intended use (Amendments to IAS 16)

Finalisation of the proposed amendments

Background

The IASB published the Exposure Draft Property, Plant and Equipment: Proceeds before intended use (ED) in June 2017. The intention of the change is to prohibit deducting from the cost of an item of property, plant and equipment (PPE) any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, an entity would be required to recognise sales proceeds in profit or loss.

In November 2018 the board considered feedback on the exposure draft and decided to proceed with the amendments. This paper reviews the modifications and asks the board if it agrees with the recommendations. If the board agrees the next step will be a paper on due process and obtaining permission to begin the balloting process.

Proposed amendments

IAS 16:16 states that the cost of PPE includes costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. IAS 16:17 identifies examples of directly attributable costs, including the costs of testing if an asset is functioning policy, after deducting the net proceeds from selling any items produced.

The proposed amendments would prohibit deducting any proceeds from selling items from the cost of PPE, and require these sales and associated costs to be recorded in the P&L. The amendments would also clarify the meaning of testing, to be clear that this is when an entity is testing the technical or physical performance of the asset, and not its financial performance.

The Board proposed that entities apply the amendments retrospectively to items of PPE made available for use on or after the beginning of the earliest period presented when an entity first applies the amendments.

Summary of staff recommendations on amendments to IAS 16

Staff recommend that the Board amend IAS 16 as details above in the proposed amendments. With regards to presentation changes, staff recommend that Board not develop presentation or disclosure requirements for the sale of items that are part of an entity’s ordinary activities. However, for the sale of items that are not part of an entity’s ordinary activities (and to which the entity does not apply IFRS 15 and IAS 2), they recommend that the Board amend IAS 16 to require the entity to:

  • (i) disclose the amount of (a) sales proceeds and (b) related production costs recognised in profit or loss; and
  • (ii) specify the line item(s) in the statement of profit or loss that include(s) the sales proceeds and production costs.

Discussion in the paper on staff analysis has not been included in this summary as this was detailed in our November summary paper on this area.

Consequential amendments to other IFRS Standards

IFRS 6 specifies the accounting for exploration and evaluation (E&E) on mineral resources. IFRS 6 has no requirements with regards to proceeds from sale of assets during the E&E phase, and that some entities use IAS 16:17 by analogy. Some respondents to the ED asked the Board to clarify the requirements in IFRS 6. The staff consider that the application of IFRS 6 is outside the scope of the proposed amendments to IAS 16 and therefore propose no amendments or clarification.

The ED proposed amending paragraph 2 of IFRIC Interpretation 20 to specify that stripping costs are accounted for applying IAS 16. Some respondents asked the Board to clarify or modify that proposed amendments to IFRIC 20. The staff say that the proposed amendment was intended to be only editorial in nature and the Board did not intend to reconsider or alter the consensus included in this Interpretation.  The staff therefore propose that the Board not proceed with that amendment.

Staff recommendations and Board decisions

The staff recommend that the Board:

  • (a) Amend IAS 16 to:
    • (i) require that proceeds from selling items testing if an asset is functioning be recognised in income.
    • (ii) clarify the meaning of testing, to be clear that this is when an entity is testing the technical or physical performance of the asset, and not its financial performance.
    • (iii) require disclosure of the amount form the sale of items that are not part of an entity’s ordinary activities (and to which the entity does not apply IFRS 15 and IAS 2). [Approved: 31-1]
  • (b) Not proceed with the proposed amendment to IFRIC 20. [Approved: 13-1]
  • (c) Not amend IFRS 6. [Approved: 13-1]

Board discussion

Only a few Board members spoke to this paper. A member questioned why some specific disaggregation requirements are proposed when it is likely that the Primary Financial Statements project is likely to lead to the same outcome without having the need to for specific requirements in IAS 16. There was some concern about whether activities are ordinary. However, the staff and some Board members thought it was better not to go into what is ordinary. That is a term, already in the Standards and the Primary Financial Statements project should provide more guidance. Staff said that they are proposing disclosure requirements that are aligned closely with requirements in similar standards.

There were some concerns about not amending IFRS 6 and whether silence will mean that current practice, and diversity, will continue. The staff said this is beyond the scope of the project.

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