Exposure Draft ED/2017/4: Property, Plant and Equipment—Proceeds before Intended Use

The International Accounting Standards Board (Board) has proposed amendments to IAS 16 Property, Plant and Equipment. The amendments would 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 those sales proceeds in profit or loss. Read the Exposure Draft ED/2017/4 for more information.

IFRS®Standards
Exposure Draft ED/2017/4
June 2017
Comments to be received by 19 October 2017
Property, Plant and Equipment—
Proceeds before Intended Use
Proposed amendments to IAS 16

Property,Plant and Equipment—
Proceeds before Intended Use
(Proposed amendments to IAS 16)
Comments to be received by 19 October 2017

Exposure Draft ED/2017/4Property, Plant and Equipment—Proceeds before Intended Use(Proposed amendments
to IAS 16) is published by the International Accounting Standards Board (Board) for comment only.The
proposals may be modified in the light of the comments received before being issued in final form.
Comments need to be received by 19 October 2017 and should be submitted in writing to the address
below,by email to [e-mail] or electronically using our ‘Open for comment’page at:
http://ifrs.org/projects/open-for-comment/.
All comments willbe on the public record and posted on our website atwww.ifrs.org unless the
respondent requests confidentiality.Such requests will not normally be granted unless supported by a
good reason, for example, commercial confidence.Please see our website for details on this and how we
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CONTENTS
from page
INTRODUCTION 4
INVITATION TO COMMENT 4
[DRAFT] AMENDMENTS TO IAS 16 PROPERTY, PLANT AND EQUIPMENT 6
[DRAFT] AMENDMENTS TO OTHER STANDARDS 8
APPROVAL BY THE BOARD OF EXPOSURE DRAFT PROPERTY, PLANT AND
EQUIPMENT—PROCEEDS BEFORE INTENDED USE PUBLISHED IN
JUNE 2017 9
BASIS FOR CONCLUSIONS ON THE EXPOSURE DRAFT PROPERTY, PLANT
AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE 10
ALTERNATIVE VIEW 17
PROPERTY, PLANT AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE (PROPOSED AMENDMENTS TO IAS 16)
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Introduction
In this Exposure Draft,the International Accounting Standards Board (Board)proposes to
amend IAS 16Property,Plantand Equipment. The amendments would 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 those sales proceeds in profit or loss.
Background
Paragraph 17 of IAS 16 specifies examples of costs directly attributable to bringing an item
of property,plant and equipmentto the location and condition necessary for itto be
capable of operating in the manner intended by management.One such example is the
costs of testing.Paragraph 17(e) of IAS 16 states that the cost of an item of property, plant
and equipment includes the costs of testing whether the asset is functioning properly, after
deducting the net proceeds from selling any items produced while bringing the asset to that
location and condition.
The IFRS Interpretations Committee (Committee)received a request asking two questions
about paragraph 17(e) of IAS 16:
(a) whether the proceeds referred to in that paragraph relate only to items produced
from testing; and
(b) whether an entity deducts from the cost of an item of property, plant and
equipment any proceeds that exceed the costs of testing.
When discussing the issue, the Committee identified a number of related questions about
the cost of property,plant and equipment. After exploring differentapproaches,the
Committee recommended that the Board propose an amendment to IAS 16 to prohibit
deducting sales proceeds from the cost of an item of property, plant and equipment.The
Board agreed with the Committee’s recommendations.
Invitation to comment
The Board invites comments on the proposals in this Exposure Draft,particularly on the
questions set out below.Comments are most helpful if they:
(a) comment on the question as stated;
(b) indicate the specific paragraph(s) to which they relate;
(c) contain a clear rationale;
(d) identify any wording in the proposals that is difficult to translate; and
(e) include any alternative the Board should consider.
The Board is not requesting comments on matters that are not considered in this Exposure
Draft.
EXPOSURE DRAFT—JUNE 2017
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Comments should be submitted in writing so as to be received no later than 19 October
2017.
Question for respondents
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 those 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?
How to comment
Comments should be submitted using one of the following methods.
Electronically
(our preferred method)
Visit the ‘Open for comment’ page, which can be found at:
http://ifrs.org/projects/open-for-comment/
Email Email comments can be sent to: [e-mail]
Postal IFRS Foundation
30 Cannon Street
London EC4M 6XH
United Kingdom
All comments will be on the public record and posted on our website at www.ifrs.org unless
the respondent requests confidentiality.Such requests will not normally be granted unless
supported by a good reason, for example, commercial confidence.Please see our website for
details on this and how we use your personal data.
PROPERTY, PLANT AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE (PROPOSED AMENDMENTS TO IAS 16)
姝 IFRS Foundation5

[Draft] Amendments to
IAS 16 Property, Plant and Equipment
Paragraph 17 is amended; paragraphs 20A, 80D and 81M are added. Deleted text is
struck through and new text is underlined.
Elements of cost
…
17 Examples of directly attributable costs are:
(a) …
(e) costs of testing whether the asset is functioning properly (ie assessing
whether the technical and physical performance of the asset is such that
the asset is capable of being used in the production or supply of goods or
services,for rental to others, or for administrative purposes),after
deducting the net proceedsfrom selling any items produced while
bringing the assetto that location and condition (such assamples
produced when testing equipment); and
(f) …
…
20A Items may be produced while bringing an asset to the location and condition
necessaryfor it to be capableof operating in the manner intended by
management,such as inventories produced when testing an asset.An entity
recognises the proceeds from selling any such items, and the costs of producing
those items, in profit or loss in accordance with applicable Standards.
…
Transitional provisions
…
80D [Draft]Property,Plantand Equipment—Proceeds before Intended Use,issued in [date],
amended paragraph 17 and added paragraph 20A.An entity shall apply those
amendments retrospectively only to items ofproperty,plant and equipment
brought to the location and condition necessary for them to be capable of
operating in the manner intended by management on or after the beginning of
the earliest period presented in the financial statements in which the entity first
applies the amendments.The entity shallrecognise the cumulative effect of
initially applying the amendments as an adjustment to the opening balance of
retained earnings(or other component of equity, as appropriate)at the
beginning of that earliest period presented.
Effective date
…
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81N [Draft]Property,Plantand Equipment—Proceeds before Intended Use,issued in [date],
amended paragraph 17,and added paragraphs 20A and 80D.An entity shall
apply those amendments for annual periods beginning on or after [date to be
decided after exposure].Earlier application is permitted.If an entity applies
those amendments for an earlier period, it shall disclose that fact.
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[Draft] Amendments to other Standards
IFRIC Interpretation 20 Stripping Costs in the Production Phase
of a Surface Mine
Paragraph 2 is amended. Deleted text is struck through and new text is underlined.
Background
…
2 During the development phase of the mine (before production begins), stripping
costs are usually capitalised aspart of the depreciablecost of building,
developing and constructing the mine accounted for applying IAS 16 Property,
Plantand Equipment.Those capitalised Capitalised costsare depreciated or
amortised on a systematic basis,usually by using the units of production
method, once production begins.
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Approval by the Board of Exposure Draft Property, Plant
and Equipment—Proceeds before Intended Use published
in June 2017
The Exposure Draft Property,Plant and Equipment—ProceedsbeforeIntended Use(Proposed
amendments to IAS 16) was approved for publication by twelve of the thirteen members of
the International Accounting Standards Board.Mr Zhang voted against its publication.His
alternative view is set out after the Basis for Conclusions on the Exposure Draft.
Hans Hoogervorst Chairman
Suzanne Lloyd Vice-Chair
Stephen Cooper
Martin Edelmann
Françoise Flores
Amaro Gomes
Gary Kabureck
Takatsugu Ochi
Darrel Scott
Thomas Scott
Chungwoo Suh
Mary Tokar
Wei-Guo Zhang
PROPERTY, PLANT AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE (PROPOSED AMENDMENTS TO IAS 16)
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Basis for Conclusions on the
Exposure Draft Property, Plant and Equipment—
Proceeds before Intended Use
ThisBasisfor Conclusionsaccompanies,but is not part of, the proposed amendments.It
summarisesthe considerationsof the InternationalAccounting StandardsBoard (Board)when
developing the proposed amendments.IndividualBoard members gave greater weight to some
factors than to others.
Background
BC1 Paragraph 16(b) of IAS 16Property, Plant and Equipmentexplains that the cost of an
item of property,plant and equipment includes costs directly attributable to
bringing that asset to the location and condition necessary for it to be capable of
operating in the manner intended by management.Paragraph 17 ofIAS 16
specifies examples of directly attributable costs.One example specified is the
costs of testing whether the asset is functioning properly,after deducting the
net proceeds from selling any items produced while bringing the asset to that
location and condition.
BC2 The IFRS InterpretationsCommittee (Committee)received a requestasking
whether:
(a) the proceeds specified in paragraph 17(e)of IAS 16 relate only to items
produced from testing; and
(b) an entity deductsfrom the cost of an item of property,plant and
equipment any proceeds that exceed the costs of testing.
BC3 The Committee noted that feedback from its outreach on the request indicated
that:
(a) the issue mainly affects a few industries,such as the extractive and
petrochemical industries.
(b) diverse reporting methodsare applied. Some entitiesdeduct only
proceeds from selling items produced from testing;others deduct all
sales proceeds until the asset is in the location and condition necessary
for it to be capable of operating in the manner intended by management
(ie available for use).For some entities, the proceeds deducted from the
cost of an item of property, plant and equipment can be significant and
can exceed the costs of testing.
BC4 In addition, feedback from outreach indicated thatentities use different
methods to assess when an item of property,plant and equipment is available
for use.
Prohibit deducting sales proceeds from the cost of an
item of property, plant and equipment
BC5 Having considered the Committee’s recommendations,the Board proposes to
amend paragraph 17 of IAS 16 to prohibit deducting from the cost of an item of
property, plant and equipment any proceeds from selling items produced before
that asset is available for use.As a consequence, an entity would recognise such
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sales proceeds in profit or loss.The Board views its proposals as a simple and
effective way of removing the identified diversity in practice in a manner that
would improve financial reporting.
BC6 The Board concluded that the proposed amendments would provide relevant
information to users of financial statements by requiring entities to recognise all
sales as income (including revenue) when they occur.The existing requirements
in IAS 16 make it difficult for a user to have a clear picture of an entity’s total
revenue in the period because some sales proceeds might be offset against the
cost of property,plant and equipment. Those requirementsalso make it
difficult to have a clear picture of the actualcost of some items of property,
plant and equipment.The cost of those assets can be distorted by deducting
sales proceeds before the assets are available for use.
BC7 During the development of the proposed amendments,the Board observed the
following:
(a) an entity would be required to identify the costs that relate to items
produced and sold before an item of property,plant and equipment is
available for use, and to distinguish those costs from other costs incurred
before that date.This is discussed further in paragraphs BC8–BC10.
(b) before an item of property, plant and equipment is available for use, the
costs of producing any inventories excludes depreciation of that asset.
This is because an entity depreciates an item ofproperty,plant and
equipment only from the date it is available for use.This is discussed
further in paragraph BC11.
BC8 The Board observed that an entity would have to apply judgement in identifying
the costs that relate to items produced and sold before an item of property, plant
and equipment is available for use,and to distinguish those costs from other
costs incurred before that date.However,the proposed amendments would
require little more judgementbeyond that already required to apply IFRS
Standards.For example, an entity is already required to identify and distinguish
the following:
(a) costs directly attributable to making an item ofproperty,plant and
equipment available for use, which the entity includes in the cost of the
asset;
(b) costs of bringing inventories to their presentlocation and condition
included as part of the cost of inventories(paragraph 10 ofIAS 2
Inventories), which it then recognises in profit or loss at the time that the
inventories are sold;
(c) costs excluded from the cost of inventories and recognised as expenses in
the period in which they are incurred,such as abnormalamounts of
wasted materials,labour or other production costs (paragraph 16 of
IAS 2);
(d) costs of stripping activity assets and cost of inventories produced during
the production phase ofa surface mine (IFRIC 20Stripping Costsin the
Production Phase of a Surface Mine); and
(e) costs that it recognises directly in profit or loss, for example:
PROPERTY, PLANT AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE (PROPOSED AMENDMENTS TO IAS 16)
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(i) administrative, marketing or staff training costs (paragraph 19 of
IAS 16);
(ii) costsof using or redeploying property,plant and equipment
(paragraph 20 of IAS 16); and
(iii) costs of incidental operations (paragraph 21 of IAS 16).
BC9 In applying the proposed amendments, an entity might need to assess whether
particular costs incurred are costs of inventories (applying IAS 2), costs of testing
(applying IAS 16) or costs the entity would be required to recognise in profit or
loss. The Board noted that the existing requirements in IAS 2 and IAS 16 on costs
are helpfulin this respect. For example,in assessing whether costs incurred
while an item of property,plant and equipment is being tested are costs of
inventories or costs of testing (included in the cost of the item of property, plant
and equipment),an entity would consider whether the items produced during
testing meet the definition of inventories in IAS 2.Similarly,an entity might
consider whether particular costs represent (a)abnormalamounts ofwasted
material (recognised in profit or loss); or (b) costs necessary to make the item of
property, plant and equipment available for use or to bring inventories to their
present location and condition.
BC10 In addition, to help when assessing costs,the Board decided to clarify the
meaning of ‘testing’,as specified in paragraph 17 of IAS 16. The Board
concluded that when testing whether an item of property, plant and equipment
is functioning properly, an entity assessesthe technical and physical
performance ofthe asset. The assessment offunctioning properly is not an
assessment of the financial performance of an asset, such as assessing whether
the asset has achieved the levelof operating margin initially anticipated by
management.
BC11 With respect to the exclusion of depreciation from the costof inventories
produced and sold before an item of property, plant and equipment is available
for use, the Board observed that any consumption of an item of property, plant
and equipment before it is availablefor use is likely to be negligible.
Paragraph 12 of IAS 2 states that the costs of conversion of inventories include a
systematic allocation of fixed overheads incurred in converting materials into
finished goods,such as depreciation of assets used in the production process.
However,for inventoriesproduced before an item of property, plant and
equipment is availablefor use, the costs of conversion do not include
depreciation of that asset because no such depreciation would exist.
Other approaches considered by the Board
BC12 The Board considered two other approaches to reduce the identified diversity in
practice:
(a) clarifying which proceeds an entity deducts from the cost of property,
plant and equipment; and
(b) clarifying when an item of property, plant and equipment is available for
use.
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Clarifying which proceeds an entity deducts from the cost of
property, plant and equipment
BC13 Paragraph 17(e) of IAS 16 implies that the sales proceeds an entity deducts from
the cost of an item of property, plant and equipment are proceeds from selling
items produced only when testing whether the asset is functioning properly.
This is because the reference within paragraph 17 of IAS 16 to deducting sales
proceeds is directly linked to the costs of testing.This is also supported by the
example in that paragraph of samples produced when testing equipment.
BC14 Paragraph 17(e) of IAS 16 also implies that the proceeds deducted from the cost
of an item of property,plant and equipment should not exceed the costs of
testing. Paragraph 17 of IAS 16 states that an example of directly attributable
costs is ‘costs of testing whether the asset is functioning properly, after
deducting the net proceeds…’ [emphasis added].Arguably, this implies that an
entity includes in the cost of an item of property, plant and equipment the net
costs of testing (after deducting related sales proceeds), but that the net costs of
testing could never be a negative amount.
BC15 Nonetheless,the Board acknowledged thatthe explanation in paragraphs
BC13–BC14 mightbe unclear because ofthe wording in the Standard. The
phrase within paragraph 17(e)of IAS 16 ‘proceedsfrom selling any items
produced’does not refer specifically to proceeds from testing.In addition,
IAS 16 does not specify any limit on the amount of proceeds an entity can deduct
from the cost of an item of property, plant and equipment.
BC16 Consequently,the Board considered whether to amend IAS 16 to require an
entity to:
(a) deduct from the cost of an item of property,plant and equipment
proceeds from selling items produced only when testing whether the
asset is functioning properly;
(b) limit the amount of proceeds deducted from the costof an item of
property, plant and equipment to the costs of testing; and
(c) recognise any other sales proceeds before property, plant and equipment
is available for use in profit or loss in accordance with applicable IFRS
Standards.
BC17 The Board decided not to proceed with the approach set out in paragraph BC16
because:
(a) this approach would have required an entity to distinguish proceeds
from testing from any other sales proceeds before an item of property,
plant and equipment is available for use.Consequently,this approach
would be more complicated to apply than the proposed amendments
would be.
(b) it would be difficult to understand why an entity would account for
proceedsfrom testing differently from other sales proceedsearned
before an item ofproperty,plant and equipment is available for use.
Similarly, if the proceeds from testing were to exceed the costs of testing,
PROPERTY, PLANT AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE (PROPOSED AMENDMENTS TO IAS 16)
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it would be difficult to understand why an entity would recognise some
proceeds from testing in the cost of an asset and other proceeds from
testing in profit or loss.
Clarifying when an item of property, plant and equipment is
available for use
BC18 Paragraph 20 of IAS 16 states that ‘recognition of costs in the carrying amount of
an item of property,plant and equipmentceaseswhen the item is in the
location and condition necessary for it to be capable of operating in the manner
intended by management’.Determining the pointat which that occurs is
important—it is at that point that an entity stops accumulating costs in the
carrying amount of the asset, and starts depreciating the asset.
BC19 During the development of the proposed amendments, the Board was informed
of diverse practices in some industries in determining when an item of property,
plant and equipment is available for use—the Board was informed that some
entities include costs within, and deduct sales proceeds from, the cost of an asset
for an extensive period of time.The Board observed that some think clarifying
when an item of property,plant and equipmentis available for use would
reduce the sales proceeds that entities deduct from the cost of property,plant
and equipment, and thus respond to a concern that may have led to the request
to the Committee.
BC20 Consequently,the Board considered whether to amend IAS 16 to include the
following as indicators of when an item of property,plant and equipment is
available for use:
(a) the physical construction of the asset is complete (asdescribed in
paragraph 23 of IAS 23Borrowing Costs).
(b) the testing ofthe technicaland physicalperformance ofthe assetis
complete (as described above in paragraph BC10).
(c) the asset is capable of producing items that can be sold in the ordinary
course ofbusiness (ie capable ofproducing inventories as defined in
IAS 2). Consistent with the meaning of testing,this assessment would
focus on the technical and physical performance of the asset, and not its
financial performance.
BC21 Such an approach would not have removed the need to apply judgement in
determining when an item of property,plant and equipment is available for
use—itwould just have provided some additionalinformation to help when
making that judgement.
BC22 The Board concluded that such an approach would be a much broader project
than the proposed amendments would be.This approach would have affected
the accounting for many items of property, plant and equipment and additional
research would have been required to assessany potential unintended
consequences.The Board also observed thatit was unclear whether the
indicators considered would be helpful in determining when an item of
property,plant and equipment is available for use,without raising additional
questions.For these reasons, the Board decided not proceed with this approach.
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BC23 When developing the June 2014 amendments to IAS 16 and IAS 41Agriculture
regarding bearer plants, the Board considered whether to clarify when an item
of property, plant and equipment is available for use, but decided not to do so.
Other matters
Disclosure requirements
BC24 The Board considered whether disclosures already required by IFRS Standards
are sufficientto provide usefulinformation in the contextof the proposed
amendments.The Board observed that the most common items produced by an
item of property, plant and equipment before it is availablefor use are
inventories produced during testing of the asset.If the asset is to be used in the
entity’s ordinary activities,there is no basis on which to conclude that
inventories produced by the asset before it is available for use would not be
output from the entity’s ordinary activities. Consequently,proceedsfrom
selling inventoriesproduced would representrevenue within the scope of
IFRS 15Revenue from Contracts with Customers.
BC25 If revenue and the cost of inventories produced before an item of property, plant
and equipment is available for use has a material effect on an entity’s financial
statements, the entity would disclose:
(a) the information required by IFRS 15.In particular, the entity might
consider revenue from sale of those inventories as a category of revenue
when disclosing information required by paragraph 114 of IFRS 15.
(b) the information required by IAS 2 regarding the costsof producing
inventories;for example,the accounting policy adopted,the carrying
amount of inventories (if any), and the amount of inventories recognised
as an expense.
BC26 In the light of the requirements in IFRS 15 and IAS 2,the Board proposes no
additional disclosure requirements.The Board concluded thatthe existing
requirements 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.
Transition requirements
Entities that already apply IFRS Standards
BC27 The Board considered the following in relation to transition:
(a) the proposed amendmentsto IAS 16 are narrow in scope and are
expected to mainly affect a few industries,such as the extractive and
petrochemicalindustries. For most entities,output produced before
property, plant and equipment is available for use is not expected to be
material. Consequently,there might be little need for transition
requirementsbeyond those in IAS 8 AccountingPolicies,Changesin
Accounting Estimates and Errors.
PROPERTY, PLANT AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE (PROPOSED AMENDMENTS TO IAS 16)
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(b) if an entity is required to apply the amendmentsretrospectively,it
would recalculate the carrying amount of property, plant and
equipment at the beginning of the earliest period presented when first
applying the amendments.In recalculating that carrying amount,an
entity would be required to go back to the initialrecognition of each
relevant item of property,plant and equipment to ascertain whether it
deducted from the cost of the asset proceeds from selling items produced
before the asset was available for use.
(c) entities affected by the amendments are likely to find it burdensome to
apply the amendments retrospectively,especially for items of property,
plant and equipment constructed many years ago.A less burdensome
approach would require application of the amendments only for items of
property, plant and equipment made available for use from the
beginning of the earliest period presented when firstapplying the
amendments.This approach would achieve consistent application of the
amendments for all periods presented, but limit the number of assets an
entity is required to reassess.
BC28 On the basis of the above factors,the Board concluded thatthe benefits of
retrospective application applying IAS 8 mightbe outweighed by the costs.
Consequently,the Board proposesretrospective application ofthe proposed
amendments only to items of property, plant and equipment made available for
use from the beginning of the earliest period presented when first applying the
amendments.An entity would not apply the proposed amendments to items of
property, plant and equipment made available for use before that date.
First-time adopters
BC29 In relation to transition for first-time adopters, the Board noted the following:
(a) IFRS 1 First-timeAdoption ofInternationalFinancialReportingStandards
provides a deemed cost exemption for property,plant and equipment
(paragraphsD5–D7 of IFRS 1). That exemption allowsan entity to
measure an item of property,plant and equipmentat the date of
transition to IFRSs atits fair value, and to use that fair value as its
deemed cost.Additionally,there are specific deemed cost exemptions
for entities with particular oil and gas properties (paragraph D8A of
IFRS 1), and for entities holding items of property, plant and equipment
used in operations subject to rate regulation (paragraph D8B of IFRS 1).
(b) apart from the exemptions described above,IFRS 1 does not exempt a
first time adopter from the requirements in IAS 16.Accordingly,if a
first-time adopter does not apply the deemed cost exemptions in IFRS 1,
it would apply all of the requirements in IAS 16 retrospectively.The
Board concluded thatthere would be little benefit in providing a
first-time adopter with relief from applying these amendments when it
would have to apply all the other requirements in IAS 16.
BC30 On the basis of these considerations,the Board proposes no further transition
relief for first-time adopters beyond the deemed costexemptions already in
IFRS 1.
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Alternative view
Alternative view on the Exposure Draft Property, Plant
and Equipment—Proceeds before Intended Use
published in June 2017
AV1 Mr Zhang voted against publication of the Exposure Draft.He disagrees with the
proposal to prohibit deducting from the cost of an item of property, plant and
equipment any proceeds from selling items produced during testing before the
assetis available for use. He thinks that the circumstances thatled to the
submission do not highlight the need to amend the requirements in IAS 16, but
instead highlight inappropriate application and enforcement of those
requirements.
AV2 Mr Zhang supports the Board’s decision to clarify the meaning oftesting as
explained in paragraph BC10.Applying that meaning of testing,he is of the
view that it would be rare for proceeds from selling items produced during
testing to exceed the costs of testing.Consequently, he thinks that clarifying the
meaning of testing, in isolation, would be helpful to ensure greater discipline in
the application of paragraph 17 of IAS 16.
AV3 Mr Zhang believesthat the issuesthe Board is attempting to solve in this
Exposure Draft affect all, rather than a few, industries in which property, plant
and equipment takes a long time to become available for use.He believes that
the testing period, as explained in paragraph BC10, might be quite long, and the
related expenditure might be significant.As a result,he is deeply concerned
about unintended consequences of the proposed amendments.
The cost and revenue recognition principles
AV4 One of the basic accounting principles that has prevailed for a century is the cost
principle. Applying this principle, the cost of acquiring or constructing an asset
is defined as the consideration paid and accumulated that is necessary to bring
the assetto the location and condition capable of meeting management’s
intended use. Therefore,if equipment is acquired or self-constructed and it
requires a test to prove that the equipment has reached the point at which it is
able to meet management’s intended use, then the test is a necessary process of
the acquisition or construction ofthe asset. The cost ofthe test,net of the
proceeds from selling items produced during testing, is added to the cost of the
equipment. Mr Zhang believes thatthe above principle has been generally
accepted worldwide for a long time,and the proposed amendments depart
sharply from the above time-honoured principle and related requirements in
IFRS Standards.
AV5 The proposed amendments would require an entity to recognise in profit or loss
the proceeds from selling items produced when testing equipmentapplying
IFRS 15Revenue from Contracts with Customers. IFRS 15 is established to account for
revenue from selling goods or providing services thatare an output of the
entity’s ordinary activities.Since testing is an integral part of the acquisition or
construction process to make equipment available for use,Mr Zhang is of the
view that testing by nature is not part of an entity’s ordinary activities, and the
products from the process are not an output of an entity’s ordinary activities.
PROPERTY, PLANT AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE (PROPOSED AMENDMENTS TO IAS 16)
姝 IFRS Foundation17

Hence,he questions the appropriateness of applying IFRS 15 to proceeds from
testing. He would like to point out that, in many cases,newly established
entities have not started ordinary production because all of their property, plant
and equipment is still under construction.If those newly established entities
are required to recognise revenue and profit in the manner required by the
proposed amendments,he is of the view that users of financial statements
would be confused to see that entities have revenue and profit even before they
commence their ordinary operations.To prevent possible misunderstanding,
Mr Zhang emphasises that this discussion of ordinary activities reflects his views
on the accounting principlesunderlying the IFRS Standardson revenue,
inventories, property, plant and equipment etc.This discussion does not reflect
his views on the conceptual debate on whether an income or expense is from
ordinary or extraordinary transactions.
AV6 Mr Zhang believesthat the requirementsin related IFRS Standardsare
conceptually consistent,and that the proposed amendmentswould create
inconsistencies between different IFRS Standards.For example, Mr Zhang thinks
that the proposed amendments would create an inconsistency between IAS 16
and IAS 23Borrowing Costs. For funds borrowed specifically to obtain a qualifying
asset,IAS 23 requires an entity to determine the borrowing costs eligible for
capitalisation as the actual borrowing costs less any investment income on the
temporary investmentof those borrowings. Mr Zhang viewsthe existing
requirements in IAS 16 as consistent with those requirements in IAS 23.
AV7 Similarly, Mr Zhang believesthat the proposed amendmentswould create
questions in relation to other IFRS Standards.For example,should an entity
charge to profit or loss the costs of knocking down an old building in preparing
a site instead of adding them to the costs of the land, and recognise the proceeds
from selling the scrap of the old building in profit or loss instead of offsetting
them against the costs of the land? If yes,how should the entity identify the
costs related to that revenue? Moreover, he believes that similar questions would
arise for extractiveindustries in relation to stripping costs incurred and
proceedsfrom selling lower grade ores and other materials during the
development stage.
Allocation of costs
AV8 Mr Zhang believes that depreciation forms an important part of cost of goods
sold for most extractive and manufacturing industries applying IAS 2Inventories.
In relation to this, paragraph BC11 says thatany consumption ofthe asset
during testing is likely to be negligible.Mr Zhang does not find the reasons for
saying so in this Exposure Draft.Paragraph BC11 also says that the Board noted
that for inventories produced during testing of an item of property,plant and
equipment,the costs ofconversion do not include depreciation ofthat asset
because no such depreciation would exist.Mr Zhang believes it is 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.He also believes that the resulting cost of goods sold and
gross margin information will be misleading.
EXPOSURE DRAFT—JUNE 2017
姝 IFRS Foundation 18

AV9 In determining the cost of items produced during testing, Mr Zhang
understands the Board’s considerations explained in paragraphs BC7–BC10.He
does not agree,however,with the Board’sobservation thatthe proposed
amendments would require little more judgement beyond that already required
applying IFRS Standards.
AV10 He agreesthat the exampleslisted in paragraph BC8 involve the use of
judgement, but in all those examples he thinks that there is a reasonable basis
to distinguish between the costs.However, the sales proceeds discussed in this
Exposure Draft arise from the testing process that is an integral part of making
an item of property, plant and equipment available for use.As a consequence,
Mr Zhang thinks there is no reasonable basisto distinguish the costs of
producing the items sold from the costs of testing.
Earnings manipulation
AV11 Mr Zhang agrees that it is judgmentalto determine the point at which the
process of making an asset available for use ends and the use of that asset to
produce goodsbegins. Mr Zhang is deeply concerned aboutwhether the
proposed amendmentswould result in more severe earningsmanipulation
among entitiesthrough allocating more or less cost to the proceeds,and
through changing the time to stop capitalising the related costs into property,
plant and equipment.The possibility that more severe earnings manipulation
could take place applying the proposed amendments arises from the earlier
recognition of revenue and profit from selling items produced during testing,
which is not currently permitted by IFRS Standards.
PROPERTY, PLANT AND EQUIPMENT—PROCEEDS BEFORE INTENDED USE (PROPOSED AMENDMENTS TO IAS 16)
姝 IFRS Foundation19

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