Comment on Exposure Draft ED/2017/4 - Proposed amendments to IAS 16

The Institute of Certified Public Accountants in Ireland disagrees with the Boards proposed amendment to IAS 16.17(e) to recognise the proceeds from selling items produced during testing as revenue. This may result in reporting larger revenue and gross profit which in turn will mislead users of the financial statements when assessing the performance of the entity. It might be a better option for an entity to disclose separately the gain/loss from the sale of outputs as other income. However, more consideration on clarifying several aspects is required.

IFRS Foundation
30 Cannon Street
London EC4M 6XH
United Kingdom
18th October, 2017
To whom it may concern,
The Institute of Certified Public Accountants in Ireland welcomes the opportunity to comment on:
Exposure Draft ED/2017/4 - Proposed amendments to IAS 16
Question 1
The Board is proposing to amend IAS 16 to prohibit deducting from the cost of an item of property, plant
and equipment 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 recognise the proceeds from
selling such items, and the costs of producing such items, in profit or loss.
Do you agree with the Board’s proposal? Why or why not? If not, what alternative would
you propose, and why?
We disagree with the Boards proposed amendment. The proposal requires the recognition of revenue for the
proceeds of the sales of the outputs and the associated cost of goods sold from the testing process. The issue that
the proposed amendment is attempting to address affects relatively few industries e.g.extractive and petrochemical
industries. Whilst the costs of materials to be used in that testing may generate by-products of testing which are
capable of sale but are ‘not directly attributable’ in the same way as income arising in the course of an entity’s
ordinary activities.
The focus of this amendment is on IAS 16.17(e). IAS 16.17(e) requires an entity to capitalise costs of testing
whether an item of PPE is functioning properly, after deducting the net proceeds from selling any items produced
while bringing that item of PPE to the location and condition necessary for it to be capable of operating in the
manner intended by management (i.e. before the PPE is ‘available for use’).
Revenue is defined by IFRS 15 as “Income arising in the course of an entity’s ordinary activities”. The net proceeds
of the sales of the outputs from the testing process is not an ordinary activity of the company. In addition, the outputs
during the testing process might not be the same to the products to be sold by the firm. This proposed amendment
may result in reporting larger revenue and gross profit which in turn will mislead users of the financial statements
when assessing the performance of the entity. In particular investors consider gross profit as a key profitability ratio.
In addition, since the item of PPE is not yet ready for the intended use, the firm will not yet depreciate the asset and
it would be contradictory to require the recognition of income from selling items produced during testing and at the
same time, not to recognise depreciation on the basis that the asset is not available for use. We also believe that the
resulting cost of goods sold and gross margin information will be misleading.
It might be a better option for an entity to disclose separately the gain/loss from the sale of outputs as other income.
This will separate the income of other activities from revenues of the main activities of the company. Gross profit will
be purely income from the normal activities of the company and as such for Investors and other users productivity of
the normal operations of the company will not be affected. This should still meet the Board’s objective of presenting
the overall revenues of the company.

However whilst maintaining the current requirement in IAS 16.17(e) it would not solve the specific issue for relatively
few industries as mentioned above, we believe that more consideration on clarifying several aspects is required.
In the light of the requirements of IFRS 15 Revenue from Contracts with Customers and IAS 2 Inventories we agree
with the Board proposal that no additional disclosure should be required as the existing requirements provided for in
IFRS 15 and IAS 2 are sufficient to require an entity to disclose relevant information about the sale of output
produced before an item of property, plant and equipment is available for use.
If you have any questions on the above please do not hesitate to contact me.
Yours sincerely,
David Roxburgh
Chairperson, Financial Reporting Sub - Committee