The Interpretations Committee received a request to clarify the accounting for the net proceeds from selling items produced while testing an item of property, plant and equipment (PPE) under construction, ie as part of the activities necessary to bring the item of PPE to the location and condition necessary for it to be capable of operating in the manner intended by management. The submitter has asked whether the amount by which the net proceeds received exceed the costs of testing should be recognised in profit or loss or as a deduction from the cost of the PPE.

In January 2015 the Interpretations Committee observed that the analysis should focus on the meaning of ‘testing’ the PPE, because the deduction of proceeds is stated only in relation to testing in paragraph 17(e) of IAS 16. On this basis, whether the proceeds should be deducted from the cost of the PPE would be determined depending on whether the activity that led to those proceeds was testing. The Interpretations Committee also observed that the disclosure about this issue is important and should be considered.

At this meeting, the Interpretations Committee discussed the analysis on the meaning of testing and whether disclosure requirements should be added.

Meaning of testing

The Interpretations Committee discussed whether the clarification of the meaning of testing should be made as an amendment to IAS 16 or by developing an Interpretation. The Interpretations Committee tentatively decided to develop an Interpretation on the meaning of testing, focussing on the meaning of ‘functioning properly’ in paragraph 17(e) of IAS 16. The Interpretations Committee considered that functioning properly reflects the technical/physical performance of the PPE, and is not the financial performance such as the level of operating margin or quantity of the output as intended by management.


The Interpretations Committee also discussed whether any additional disclosure requirements should be developed. The Interpretations Committee considered that, if material, the quantitative disclosure on the amount of proceeds that has been deducted from the PPE is important for users to understand the effect on the financial statements. The Interpretations Committee tentatively decided that this disclosure requirement would be included in the proposed Interpretation by referencing the existing disclosure requirement in paragraph 73(e)(ix) of IAS 16, which requires the disclosure of other changes in PPE. Some of the Interpretations Committee members expressed the view that other disclosures such as amounts recognised in profit or loss also need to be disclosed.

The staff will prepare the draft Interpretation and present it at a future meeting.

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