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 a previous meeting, 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 Property, Plant and Equipment. On this basis, whether the proceeds should be deducted from the cost of the PPE would be affected by 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 issues identified during the course of developing a draft Interpretation on this issue.
Issues relating to extractive industries
The Interpretations Committee discussed issues relating to the extractive industries. The Interpretations Committee noted that some entities in the extractive industries deduct the proceeds from the cost of the PPE asset until the point at which the asset is capable of operating in the manner intended by management. These proceeds are not necessarily received from testing activities, but could arise from the sale of products produced from other activities necessary to construct the asset (a mine). A number of Interpretations Committee members noted that, if the deduction of the proceeds from the cost of a PPE asset is limited to those from the testing activities, proceeds received from activities other than testing would need to be recognised in profit or loss. The Interpretations Committee also noted that recognising such proceeds in profit or loss raises a question as to the corresponding cost to be recognised in profit or loss.
A number of Interpretations Committee members suggested that the staff should consider developing an allocation model to allocate cost between the PPE asset and inventory. The Interpretations Committee noted that the issue in the extractive industries is that activities to create PPE could also result in the production of inventory. Accordingly, guidance could be developed on the allocation of costs between PPE and inventory. Some Interpretations Committee members noted that IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine deals with the accounting for a similar issue in the production phase of a surface mine and applies a cost allocation model. However, the Interpretations Committee also noted that the scope of IFRIC 20 was narrowly defined and it may not be applicable to other circumstances.
Guidance on the timing of when the asset becomes capable of operating in the manner intended by management
Some Interpretations Committee members suggested that the Interpretation should focus on the judgement about when a PPE asset becomes capable of operating in the manner intended by management as referred to in paragraph 20 of IAS 16.
Next steps
The Interpretations Committee did not reach any consensus and directed staff to work on the following areas:
- develop guidance that makes clear the narrowness of the scope of paragraph 17(e) of IAS 16 and the treatment of proceeds of testing in excess of the costs of testing;
- develop guidance on the timing of when an asset becomes capable of operating in the manner intended by management in paragraph 20 of IAS 16;
- consider the relevance to the issue of the guidance in paragraph 21 of IAS 16, which refers to income generated by operations that occur in connection with the construction or development of an item of PPE but are not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management;
- consider an allocation model for cost for circumstances in which PPE and inventory are produced concurrently, before the PPE becomes capable of operating in the manner intended by management; and
- develop a quantitative disclosure requirement for the amount of proceeds that has been deducted from the cost of PPE, in order to provide transparency of practice.
The staff will present a further analysis at a future meeting.
